CHAPTER 1. THE LAW AND THE LEGAL SYSTEM
Chapter Topics
Learning the Law
The Legal Environment of Business
The Nature of Law
Rights versus Privileges
The Role of Law
The Early Development of Law
The Rise of the Courts and the Common Law
The Sources and Components of Modern Canadian Law
The Constitutional Foundations of Canadian Law
The Canadian Charter of Rights and Freedoms
Classification of Laws
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
The rights and obligations of businesses and business persons stem from the
law and our legal system. After study of this chapter, students should be able to:
• Describe the sources, role and development of Canadian law.
• Distinguish between statute and Common Law, and describe the
significance of stare decisis.
• Recognize matters of federal versus provincial jurisdiction.
• Describe the fundamental rights and freedoms set out in the
Charter of Rights and Freedoms.
CHAPTER COMMENTARY
Chapter 1 is introductory in nature, and provides a general background concerning the nature of law, how
laws developed, the general need for some rules to govern the behaviour of individuals, and the establishment
of the various fundamental rights and duties of persons in society.
In class discussion, special emphasis should be placed upon both the sources of law and the
classification of laws in order that students may have a clear idea of what they are and where they may be
found. Many students fail to realize that the Common Law represents a large body of law, and the scope and
application of this source of law should be emphasized in class discussion of the chapter. The text
description of the development of the law and the rise of the courts is intended to be read as a historical
introduction to give students an appreciation of where our laws came from, and how they were developed. In
the context of the courts and the law, the doctrine of stare decisis should be noted, and its purpose and
application discussed with emphasis on the need for "predictability" in the application of the law to cases that
come before the courts. It would be worthwhile to note as well that some judges of the Supreme Court of
Canada have expressed the view that they, as judges of the highest court in the land, do not consider
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themselves bound by the doctrine, but would only change a common law rule where it had become
inappropriate in a modern social setting.
Chapter 1 also provides a general outline of the nature of a constitution and its function in a
democratic society. Reference is made to the "constitution" of the United Kingdom and the constitution of
the United States as a basis for discussion of, and comparison with, the Canadian Constitution. The role of the
courts as the chief interpreter of the constitution is also noted and should be emphasized in any class
discussion of the enforcement of rights under the Charter. On this point, the doctrine of judicial review should
be explained to illustrate how the rights of both governments and individuals set out in the constitution may
be enforced. As an approach to teaching this part of the chapter, a systematic examination of the fundamental
rights and freedoms may be made with the class requested to provide a fact situation related to a freedom or
right, and then have the class speculate as to how the Charter might be interpreted by the court as it relates to
the matter. With each fundamental right or freedom it is important to emphasize that the freedom or right
must be viewed in the light of s.1 which makes the right "subject only to such reasonable limits prescribed by
law as can be demonstrably justified in a free and democratic society," and not absolute. The
"notwithstanding" clause (s. 33) which permits legislatures or parliament to override the Charter rights should
be noted as well. On this point, reference may be made to the Court Decision in the Chapter (Ford v. Quebec
(Attorney General), 1988 CanLII 19 (SCC)) which held Quebec's Bill 101 unconstitutional with respect to
public signs. Students should note that the province of Quebec used s. 33 to override this decision of the
Supreme Court of Canada and passed Bill 178 to require "French only" signs on all Quebec businesses.
Students should also examine RJR-MacDonald Inc. and Imperial Tobacco Ltd. v. Canada, 1995 CanLII 64
(SCC) in the Chapter for an additional example of the views of the Supreme Court on the Government of
Canada's attempts to virtually ban advertising on tobacco products.
The organization of the Charter itself provides an orderly approach to discussion of the nature of the
rights and freedoms granted under it, as well as the method of enforcement. With respect to the latter, it is
readily apparent that most of the rights and freedoms are those which the framers of the constitution felt
should be enshrined to protect them from encroachment or interference by governments. If government
should do so, the individual has the right to bring the alleged infringement before the courts to have the
interference ruled upon as to its validity.
A final point to note and to emphasize in class is that the constitution includes more than the Charter
of Rights and Freedoms. It also includes the original British North America Act of 1867 (as amended over
the years) which establishes the structure of our government, and the legislative powers and jurisdiction of the
provincial governments and Parliament. Consequently, it is a lengthy and complex document which sets out
not only the rights and freedoms of the individual, but how Canada as a democratic society governs itself. On
this point it should be emphasized that legislative bodies may not exceed the powers granted to them under
the constitution, as the exercise of jurisdiction when none exists renders such an act ultra vires and a nullity.
Aboriginal and indigenous law concepts are introduced, and statute law is defined in the text, and the
process associated with this type of law-making is described very briefly. Students should be informed that
this process is legislative as distinct from judicial. The recording and organization of these statutes in the
form of revised statutes of a province (or federal government) should also be discussed in order that students
are made aware of where these laws may be found. Discussion may then lead into the topic of civil codes,
and students may be asked to discuss the pros and cons of a Civil Code system vs. the Common Law/Equity
system
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From the point of view of learning about the law, the chapter contains a description of the various
sources of the law, and the methods of classification. The importance of this part of the chapter should be
underscored, as it provides the basis for an understanding of the particular rules and principles covered in the
remainder of the text. It also represents an important first step in the examination of the law, in that it sets out
the system for classification.
It is essential that the difference between substantive law and procedural law be understood. As well,
students should learn the various sub-classes of substantive law. In this regard, the nature of public law as a
type of substantive law should be clearly understood. Public laws are laws which relate to the relationship
between the individual and the government (or its agencies), and as such, are usually laws which are enforced
by the Crown. They are generally prohibitive or regulatory in nature (e.g.: the criminal law, or provincial
liquor control laws), and are enforced by the Crown if they are violated by an individual. They are quite
different from private laws which normally establish the rights and duties of individuals in their dealings with
each other, and which must be enforced by the party whose rights have been violated.
The chapter outlines the sources of law, and provides a general explanation of the common law
(including equity) as a source. The nature of this body of law should also be carefully examined, as the law
described in a large part of the text is of this type. In particular, the Law of Tort in Chapters 4 - 6, the Law of
Contract in Chapters 7 - 14, the Law of Agency in Chapter 15, the Law of Bailment in Chapter 20, and a
number of other areas of the law are essentially part of the "Common Law".
Chapter 1 also introduces the first of many legal terms and definitions which must not only be
memorized, but understood. The various definitions of the term "law" along with definitions of "rights" and
"privileges", "Common Law", "equity", the doctrine of stare decisis, "statute", and "civil code" are explained,
and the material concerning these terms should be carefully reviewed, as the terms are frequently used
throughout the balance of the text. The various terms used to describe the different classifications of the law
should also be noted.
The Review Questions at the end of the chapter should provide a sufficient test of student knowledge
of the essential material and are reproduced with comments.
Review Questions
1. What impact does the Canadian Charter of Rights and Freedoms have on rights and freedoms not
mentioned specifically in the Charter? Could these "other rights and freedoms" be curtailed or
extinguished by governments?
Answer: The Charter recognizes the existence of other rights and permits them to continue except where
they conflict with Charter rights and freedoms. Rights outside the Charter do not have Charter
protection, and may be abolished or encroached upon by governments.
2. What is the difference between a "right" and a "privilege"?
Answer: A right is an act that may be done with impunity and with the support and recognition of the
state. The state recognizes a right as something which neither it nor others may deny. A privilege is
something which the state allows or permits under specific circumstances at the pleasure of the state.
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3. Why are "rights" and "duties" often considered together when one thinks of laws?
Answer: Because "rights" often permit a person to do something that interferes with others, laws
generally include obligations or duties on the person possessing a right to exercise the right in a
particular way to minimize interference with others. Laws may also include duties on those affected by
the exercise of a right to permit the right to be exercised.
4. Could a society exist without laws? If not, why not?
Answer: A complex society certainly could not exist without laws, as some means of regulating the
activities of people would be necessary to maintain order. Even in a primitive society, rules regulating
fairness in vengeance matters were necessary.
5. "Advanced civilizations are generally characterized by having a great many laws or statutes to control the
activities of the citizenry." Comment on the validity of this statement.
Answer: This is a valid observation. Advanced civilizations are characterized by persons engaged in
activities which involve a great deal of social contact and interaction. Historically, they have also
involved many people living in close proximity to each other (in cities). Each type of social interaction
usually requires some legislative control, hence, the more interaction, the more laws that are required.
6. On what basis are Charter fundamental rights and freedoms open to restriction by Parliament or the
provincial legislatures?
Answer: Fundamental rights and freedoms may be restricted under s. 1 if the restriction can be shown to
"be demonstrably justified in a free and democratic society." Rights and freedoms may be "temporarily"
overridden by the "notwithstanding" clause (s. 33) as well.
7. Why is the doctrine of stare decisis an important part of the Common Law system?
Answer: The doctrine of stare decisis is the theory of precedent. Judges are expected to apply previous
decisions to similar cases which come before them in order to maintain a degree of consistency in the
law. By following this doctrine, the law is not only consistent, but others can predict how the law may be
applied in similar.
8. How does the Common Law differ from the principles of equity? From statute law?
Answer: Common Law and equity have different roots. The common law was the product of the
common law courts. The principles of equity were originally principles or rules which the King applied
in settling disputes which did not fall within the jurisdiction of the common law courts. Later, the King's
Court (Chancery) used the same and other principles in order to provide fair and just results. At present,
the courts may apply both common law and equity, but where conflict exists, equity prevails. Equity
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differs from statute law in the sense that statute laws are written or codified laws, whereas the principles
of equity are found in the recorded judgments of the courts.
9. How does a legislature establish a new law? Explain the procedure.
Answer: The usual process is as follows:
a. A bill (essentially a proposed law) is presented to a legislative body (Parliament or
provincial legislature).
b. A motion is made (and passed) to have the bill 'read' a first time.
c. The bill is then printed and circulated to the members to study.
d. The bill is later brought forward for debate (second reading) in principle.
e. If the bill passes the second reading stage, it is sent to a Committee for study and amendment
on a clause by clause basis.
f.
Once passed by the Committee, the bill is reported in final form by the Chair of the
Committee for a third reading.
g. The bill is then debated for a final time by way of a motion to have the bill read a third time.
h. If passed by a majority vote, the bill at the federal level goes to the Senate where a similar
process is followed.
i.
Once a bill has been passed by the House of Commons and Senate (or a provincial
legislature) it goes to the Governor-General (or Lieutenant-Governor, if provincial) for royal
assent.
j.
The bill becomes a law on receipt of royal assent, and effective as a law when proclaimed in
force.
10. Define substantive law, and explain how it differs from procedural law.
Answer: Substantive law - law which sets out the rights and duties of individuals and corporations.
Procedural law - law which set out the procedure whereby substantive laws are enforced.
11. Describe the difference between the Common Law and the Civil Code of the Province of Quebec. What
are the relative merits of each system?
Answer: Common Law consists of the recorded judgment of the courts. The civil code is a written body
of law. Merits of civil code: laws are written down and may be consulted to determine what the law is.
The law can be changed by statute amendment and kept up to date by the legislature if change is
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warranted. Merits of Common Law: flexible, as judges may change it through interpretation, or by
distinguishing the case at hand from the precedent. Adaptable to changing social attitudes.
12. "The supremacy of the state was reached when it managed to exercise a sufficient degree of control over
the individual to compel him or her to use the state judicial system rather than vengeance to settle
differences with others." Why was it necessary for the state to require this of the individual?
Answer: When the state lacked the power to control its citizens, individuals used their own means to
resolve disputes, as it was the only method whereby a person could obtain redress. Vengeance, however,
often disrupted the entire community, and affected others not involved in the dispute. Once the state had
the power to compel citizens to obey its decrees, it could substitute orderly procedures for settlement
which caused less disruption to the community than vengeance.
13. How does a "regulation" made under a statute differ from other "laws"?
Answer: A regulation under a statute is a rule that is made to enable an administrative tribunal to carry
out duties assigned to it under a statute. Regulations govern the activities of administrative agencies or
boards, and are often administered by them. Regulations are subordinate to statutes, but in application,
have much the same effect on persons who engage in activities subject to the regulations.
14. Explain how the enforcement of a public law differs from the enforcement of rights under private law.
Answer: Public laws are enforced by the Crown against the individual. Private law rights are enforced
by individuals against other individuals.
15. The Canadian Charter of Rights and Freedoms has been described as being "supreme" law, or law which
is "entrenched." Why, or in what sense is this the case?
Answer: The Charter is "supreme law" in the sense that it overrides all other federal and provincial laws,
and all such laws must not conflict with it, except as permitted. It is "entrenched" in the sense that it is
difficult to change.
16. Explain the Common Law system, and how it relates to the function of the courts.
Answer: The Common Law system is a system where the laws are not codified, but may be found in the
recorded judgments of the courts. Courts maintain a degree of consistency in the law by following the
doctrine of stare decisis (precedent).
17. Does the Canadian Charter of Rights and Freedoms permit the Supreme Court of Canada to override the
will of Parliament or a provincial legislature? If so, in what way?
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Answer: The Supreme Court of Canada, as chief interpreter of the legislation, may override the will of
Parliament or a provincial legislature where the law violates the Charter. It may not override if the law is
passed pursuant to the s. 33 "notwithstanding" clause.
18. If changing social attitudes or values dictate a change in the Canadian Charter of Rights and Freedoms,
how would this be accomplished?
Answer: The Charter of Rights and Freedoms may only be changed by agreement of Parliament and
2/3rds of the provinces, provided that the provinces represent at least 50% of the population of all of the
provinces.
19. Why is the word "law" so difficult to define in a precise manner?
Answer: Law is difficult to define because in practice it is applied indiscriminately to rights, privileges,
rules, principles, and statements.
20. In what way does the Constitution Act, 1982 affect the legislative jurisdiction of the Parliament of
Canada and the provincial legislatures? How are questions of jurisdiction decided?
Answer: The Constitution Act, 1982 includes the British North America Act, 1867, as amended, which
sets out the legislative powers of the provinces and the Parliament of Canada. If legislation passed by
either a province or the federal government is alleged to have exceeded the legislative authority granted
to it under the Constitution, the Supreme Court of Canada has the power to decide if the body has the
authority to pass such legislation, and would decide if the law was ultra vires.
Mini-Case Problems
1. A freight train derailed, dumping dangerous chemicals into a small stream in British Columbia,
causing significant environmental damage. What jurisdictional issues are raised by this scenario?
Answer:
The jurisdiction of the province to regulate environmental matters may collide with the
federal government in regulation of railways (transportation).
jurisdiction of the
2. A coastal province passed a law prohibiting boats and ships from dumping waste along its shoreline.
A ship‘s captain was later charged with commission of such an offence. What defence may exist to
such a charge?
Answer:
The defence may be that the provincial law is ultra vires (beyond its jurisdiction), as
shipping is a matter of federal jurisdiction.
regulation of
3. Simone believes that genetically-modified foods are extremely dangerous for people to consume.
What paths can she take in fighting (legally) for her belief? Which one would be the most efficient?
Why?
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Answer:
While it may be possible for Simone to sue manufacturers of genetically-modified foods
for producing ―something dangerous‖ or seek injunctions against the sale of these goods
(details in later chapters), it would be far more efficient for her to champion a legislative
response, to see genetically modified foods regulated by government.
Case Problems for Discussion
Case 1
Mary applied for a job at the Millstone Restaurant. She was told her uniform would be a white blouse and
black skirt, with a hem three centimetres above the knee. She agreed, but when she started work, she
realized that female staff was dressed accordingly, but the men wore white shirts and black pants. At a
later date, Mary appeared at work also dressed in a white shirt and black pants. The manager of the
restaurant told her she was ―out of uniform,‖ words were exchanged, and Mary was fired. Is there a
Charter issue here?
Discuss.
Answer:
While a differential in dress requirements may or may not be an example of unreasonableness, unequal treatment,
discrimination, or harassment, the Charter addresses the individual and his or her treatment at the hands of
government, not matters between private individuals. Mary will have to look toward aspects of common law
(later chapters) or provincial labour or human rights legislation.
Case 2
FM 96 Tiger Radio wanted to set up a three-day live remote event in a provincial park for the Labour Day
weekend. The provincial parks commission approved the plan, subject to a payment of $4,100, comprised
of a park event permit ($1,000), a sanitation charge ($1,000), a broadcasting permit ($500), a beer/wine
premises special occasion permit ($1,500), and a fire inspection fee for the beer/wine consumption
premises ($100). How should FM 96 respond to the provincial commission?
Answer:
By requiring an application fee or fee for service, and issuing a permit to allow a particular activity, the
provincial authority is setting conditions or ―regulating‖ that behavior. All of the activities in the park
that are listed are matters that a province can regulate, except broadcasting. The regulation of
broadcasting is a federal matter, and ultra vires of provincial jurisdiction. The province has no right to
demand this payment, and its ―permit‖ is meaningless.
Case 3
In the year 1619, Maxwell was drunk, lost control of his horse and killed a child. No legal action was
taken by the Crown. In the year 1859, Edward purposely drove his master‘s wagon over a man in the
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street. He was executed for his crime. In the year 1959, Sharon was sober, lost control of her car and
killed a child. She was given a suspended sentence and ordered to pay a $100 fine, and was sued by the
child‘s parents for damages of $1000 in funeral costs. In the year 2019, Karl was drunk, lost control of his
car and killed a child. He was given one year imprisonment, a $1000 fine, a lifetime driver‘s licence
suspension and was sued for $2.5 million for emotional distress by the parents of the child.
In what way is the principle of stare decisis at work here, if at all?
Answer:
The principle of stare decisis is at work, despite the fact that the penalty has evolved over time. Recalling
that one of the strengths of the principle is that it can respond to the norms of a changing society, the fact
remains that causing death is wrong, and will attract a socially appropriate penalty. Each epoch of our society
has had different conceptions of capacity, incapacity, and degrees of responsibility and liability in the
operation of a mode of transport.
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CHAPTER 2. THE JUDICIAL SYSTEM AND ALTERNATIVE DISPUTE RESOLUTION
Chapter Topics
Introduction
Development of the Law Courts
The Structure of the Judicial System
The Judicial System in Action
Administrative Tribunals
Alternative Dispute Resolution (ADR)
The Legal Profession
The Role of the Legal Profession
Summary
Key Terms
Review Questions
Mini-Case Problems
Chapter Objectives
Knowing where and how to enforce rights and obligations is a key business
survival skill. After study of this chapter, students should be able to:
• Describe the development, content and structure of the judicial system.
• Explain the sequence of steps in court procedure, particularly civil court
procedure.
• Identify how and why alternative dispute resolution may be the best
option for the settlement of business disputes.
• Explain the role of barristers and solicitors, the range of services provided
by the legal profession, and the concept and limitations of court costs.
CHAPTER COMMENTARY
Chapter 2 represents a continuation of the material contained in the previous chapter, but focuses upon the
administration of the law. The text material includes the structure of the courts in Canada, and as a class
exercise, it might be useful to carry simple criminal and civil actions (based upon easily understood incidents)
through the various steps and appeals to their final resolution at the highest appeal levels. In this fashion, the
text material may be re-enforced, and the various limitations on appeal, etc., noted in the process.
The distinction between criminal and civil proceedings should be emphasized, as experience has
indicated that students frequently fail to realize that an incident which gives rise to both civil and criminal
proceedings (such as a "criminal negligence" incident) would follow two separate legal paths, one dealing
with the criminal act, and the second, dealing with the civil aspect.
Some time should be given to the procedure by which judgments of lower courts may be appealed.
The conditions under which a judgment may be appealed should be stressed (error of law, rejection of
important evidence in reaching a decision, etc.) and the appeal routes examined for both civil and criminal
cases. These are depicted on the charts which follow.
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Since alternate dispute resolution (ADR) is considered by many business firms as a more efficient
system of resolving disputes, the topic should be opened for class discussion as an alternative to the court
system. Discussion should note the particular advantages of ADR over the court system (speed of resolution,
lower costs, etc.) but it should also be noted that certain kinds of disputes still lend themselves to court
resolution.
Review Questions
1. Why is arbitration sometimes a more attractive means of settling contract disputes between business
persons?
Answer: Arbitration is a confidential process as well as a relatively low cost and efficient process
for resolving disputes. Often business people do not wish to destroy a business relationship if a
dispute arises, and arbitration will often allow them to obtain an answer or solution to their problem
that will allow them to continue to do business with each other.
2. Discuss the importance of an independent judiciary.
Answer: Important because:
(a)
not open to manipulation by political action.
(b)
free to resolve differences between individuals without fear of the consequences.
(c)
able to determine differences between governments without concern that the powers of the
court will be attacked.
(d)
permanent body to administer the law is vital in order to maintain continuity and
confidence in the system.
(e)
"independence" generally equated to "fairness".
3. If a provincial government should pass a law which prohibits any person from expressing any criticism of
any elected government official on penalty of imprisonment, how might the law itself be challenged?
Answer: A person accused may ask the court to review the law in the light of the Charter of Rights
and Freedoms or the jurisdiction of the province to make such a law. The court will then determine if the
law is enforceable.
4. Explain the differences between a Small Claims Court and a Magistrate's Court.
Answer: A Small Claims Court deals with civil disputes between individuals where the monetary
amount is small (limit varies from province to province, $3,000 - $10,000, and in some, up to $25,000).
Magistrate's Court is a court which enforces by-laws, provincial statutes and the Criminal Code (except
for the more serious offences). It does not deal with civil disputes.
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5. On what basis is it possible to justify the right of the court to declare unconstitutional legislation enacted
by a legislature?
Answer: The right may be justified because the court represents an independent, permanent body that
is made up of persons with the expertise to interpret the constitution and to oversee its application. No
political body is able to do so in an unbiased or fair manner.
6. How does a criminal case differ from a civil action?
Answer:
Criminal:
-
Crown brings the charge against the accused. A two-step process in many cases: (1)
preliminary hearing, (2) full hearing.
-
Crown obliged to prove the particular offence was committed by the accused, and that the
offence is one which is set out in the criminal code.
-
Crown must prove act, identity, and intent to commit the offence (subject to certain
exceptions).
-
must prove its case beyond any reasonable doubt in order to obtain a conviction.
Civil:
-
the party who alleges a violation of his or her rights brings the action.
-
onus of proof of facts alleged rests on the plaintiff.
-
case is outlined through "pleadings".
-
plaintiff not subject to the higher standard of proof of criminal courts.
7. In criminal proceedings, what obligation rests on the Crown in order to obtain a conviction?
Answer: Crown must normally prove beyond any reasonable doubt that the accused committed the
particular offence, intended to commit it, and was the person who committed it.
8. What is the purpose of "pleadings" in a civil case?
Answer: The purpose of pleadings in a civil action is to set out the facts of the case and the issues in
dispute in sufficient detail to enable each party to know the matters in dispute and prepare their respective
cases for the trial. They avoid surprise at trial, and minimize the time required by the courts to dispose of
the case.
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9. How does "direct" evidence differ from "opinion" evidence? How do these types of evidence differ from
"hearsay" evidence?
Answer: "Direct" evidence is given by ordinary witnesses who testify as to what they heard, saw, or
did. "Opinion" evidence is evidence given by experts who have special knowledge about the subject
matter of the evidence, and who express an opinion about the matter based upon their specialized
knowledge or expertise.
Hearsay evidence is neither direct nor expert evidence, but evidence given by a third party who was
informed by someone else (usually a person who would normally be an ordinary witness) of the facts.
Hearsay evidence is usually not admissible in a court of law.
10. Describe the role performed by legal counsel in the administration of justice.
Answer: Legal Counsel are learned in the law and advise others of their legal rights and duties. They
also carry out on behalf of their clients the job of processing an action through the courts or negotiating
legal matters on their behalf.
11. Distinguish between a "barrister" and a "solicitor".
Answer: A barrister is a lawyer who handles litigation matters on behalf of clients. A
―court-room‖ lawyer. A solicitor advises clients of their legal rights and duties, and normally prepares
contracts, deeds, wills, and other legal documents for clients.
12. On what basis might an appeal be allowed from a judgment of a court of original jurisdiction?
Answer: An appeal may be allowed where the judge improperly applied the law, (improperly
instructed the jury as to the law) or made an error in rendering a decision.
13. Where a judgment is reviewed by a Court of Appeal, what type of decision might the court make?
Answer: A Court of Appeal may:
(1) reverse the decision, if the trial judge erred.
(2) affirm the decision of the trial judge, or
(3) send the matter back to the lower court for a new trial.
14. What is a court of original jurisdiction? How does it differ from a court of appeal?
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Answer: A court of original jurisdiction (sometimes referred to a court of first instance) is a court
where a case is heard for the first time. A court of appeal is a court which reviews the decision of the
court of original jurisdiction to make certain that the judgment was fairly and properly made.
15. How does arbitration differ from a court action?
Answer: Arbitration is conducted much like a court action, but in a much less formal setting. While
the rules of evidence and procedure are usually followed, the process generally does not require
pleadings or discovery. The parties are usually responsible for the selection of the arbitrator, and the
arbitrator‘s fees. The hearing does not involve ‗court costs‘.
16. Explain the nature of mediation, and how it is used in the resolution of disputes.
Answer: Mediation is an attempt to resolve a dispute between parties prior to formal court or
arbitration proceedings by a third party through a discussion process. A mediator has no authority to
impose a dispute by suggesting ways in which the parties may reach agreement on a solution to their
problem.
17. "In a free and democratic society, the courts perform the important role of guardians of the rights and
freedoms of the individual. While important, this is far from being the only part they play in society."
How do the courts perform this important role? What other functions do they have in society?
Answer: Courts guard the rights and freedoms of the individual by acting as the medium through
which rights and duties are determined and enforced. They also act as a "check" on government action
which might improperly encroach on the rights and freedoms of individuals protected by the Charter.
Finally, they preserve peace and order by providing an obligatory process for dispute resolution
(replacing vengeance).
Mini-Case Problems
1. Michael, an otherwise well-behaved boy of 11, fell in with Gavin, 13, a repeat offender as a
delinquent. The boys were arrested by police while spray painting a school and breaking into a
portable outside classroom. Under the provisions of the Youth Criminal Justice Act, there was no
public disclosure of their names, and the Youth Court proceedings were sealed from public scrutiny
now and future.
Are the provisions of the law appropriate for both boys?
Whether yes or no, explain why.
Answer:
The fact situation calls for a reasoned opinion, rather than a yes or no answer. In most
instances students will provide an answer that in some measure provides a reflection of their
personal values, as well as their perception of the criminal justice system.
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2. Anne is unsuccessful in her suit at trial and on appeal to the provincial appeal court. If she wishes to
proceed, where must she go, and what burden will she face before her case will be heard again? What
factors may prevent her case from being heard again?
Answer:
The only remaining route of appeal for Anne is to the Supreme Court of Canada,
however this appeal is not a matter of right. She faces the burden of being successful in
seeking ―leave to appeal‖ before she can have her case presented. The Supreme Court of
Canada could give leave to hear any case it wishes, however it is doubtful that it will do
so unless it is in the public interest, and/or commonly, any of the following: errors at
appeal are evident such that a denial of fundamental justice would otherwise take place,
a significant Charter or other constitutional determination is at stake, or the lower ruling
employs outdated Common Law in need of reform.
3. Carlson invented a new valve for natural gas pipelines, and sold his drawings to Pipeco, a
manufacturer of such items. A dispute arose before production began, and both parties immediately
agreed to ADR. What would lie behind this mutual aversion to court proceedings?
Answer:
The most likely reasons behind the selection of ADR in this case are (in order of importance):
(a) Secrecy – the invention is new, which may have great value from a competitive standpoint.
(b) Speed – production is likely set up already and any delay is expensive.
(c) Cost – a cheaper proceeding producing a better result is in the interest of both parties.
Case Problems for Discussion
Case 1
A backhoe owned by Digger Ltd. was involved in the trenching for a water pipeline located along a city
sidewalk. In moving a bucketful of rock into a waiting truck, the backhoe operator accidentally struck and
cut an overhead power line. The cut power line fell to the sidewalk, injuring and electrocuting a
pedestrian who had been observing the trenching. The pedestrian required extensive hospitalization and
reconstructive surgery, and later commenced legal proceedings against Digger for the injuries suffered,
including six month‘s lost wages while hospitalized.
Outline the various steps the parties to the action would take to bring the case to trial, and briefly
describe the trial process.
Answer:
The case is quite straightforward, and students should not be thrown off by the causal chain of backhoe,
power line and passer-by. Although students have not yet been exposed to the principles of negligence
law, most will recognize the duty, breach, damage elements of this incident and as something more than a
simple and blameless accident. As to the substance of the question, the stages by which the case will be
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brought to trial, and the trial process itself, are described the sections entitled ―Civil Courts‖ and ―Civil
Court Procedure‖.
Case 2
As the Head of Information Systems at Equity Brokerage, you maintain the computer systems which
support all aspects of stock trading accounts at Equity, including access for trading purposes. Your firm is
being sued by a customer who alleges trading irregularities occurred on her account. When you testify at
trial as to the identity of the person who conducted the transactions and the actions that affected the status
of the account, what kind of witness are you, and what kind of evidence are you providing?
Answer:
Despite having some particular expertise, the witness would be considered to be only an ―ordinary witness‖.
As an employee of the defendant firm, the witness lacks the independence of opinion that is usually one of
the hallmarks of most ―expert witnesses‖. As the witness has direct knowledge of the events (regarding the
computer system itself), the witness is giving ―direct‖ evidence rather than ―hearsay‖.
Case 3
Farhan is personally injured and his home is badly burned by a toaster oven that, on first use, burst into
flame. With Farhan successful in an action for damages, what factors should a judge take into
consideration in determining the issue of costs?
Answer:
The issue of an award of costs is covered in the section entitled ―Court Costs‖. The judge would take into
account the behaviour of the parties, especially the defendant, in forcing the case to a judicial hearing. While
there may be genuine issues for trial, including the amount of damages claimed, the judge will be concerned
as to whether the defendant manufacturer was simply attempting to stall or bankrupt Farhan, thus perverting
justice rather than seeking it. Such efforts will be penalized in costs, in addition to disposing the court
toward generosity in the award in the first place.
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CHAPTER CHARTS
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Table 2–1
Trial Level
Jurisdiction
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland &
Labrador
Northwest Territories
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon Territory
Appeal Level
Alberta
British Columbia
Manitoba
Designation of Court
Court of Queen’s Bench of Alberta
Supreme Court of British Columbia
Court of Queen’s Bench of Manitoba
Court of Queen’s Bench of New Brunswick
Supreme Court of Newfoundland & Labrador (Trial
Division)
Supreme Court of the Northwest Territories
Supreme Court of Nova Scotia
Nunavut Court of Justice
Superior Court of Justice
Supreme Court of Prince Edward Island
Superior Court of Quebec
Court of Queen’s Bench for Saskatchewan
Supreme Court of Yukon
Designation of Court
Court of Appeal of Alberta
British Columbia Court of Appeal
Manitoba Court of Appeal
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New Brunswick
Newfoundland &
Labrador
Northwest Territories
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon Territory
Court of Appeal of New Brunswick
Supreme Court of Newfoundland & Labrador (Court of
Appeal)
Court of Appeal for the Northwest Territories
Court of Appeal for Nova Scotia
Nunavut Court of Appeal
Court of Appeal for Ontario
Court of Appeal of Prince Edward Island
Court of Appeal of Quebec
Court of Appeal for Saskatchewan
Court of Appeal of Yukon
CHAPTER 3. BUSINESS REGULATION
Chapter Topics
Introduction
Government Regulation of Business
The Hearing Process
Broad-Policy Administrative Law
The Appeal Process for Administrative Decisions
Summary
Key Terms
Review Questions
Mini-Case Problems
Chapter Objectives
Regulation can have more immediate impact on how we do business than either
legislation or case law. After study of this chapter, students should be able to:
• Describe the effect of regulation and distinguish it from legislation.
• Identify and describe the activities of administrative tribunals.
• Recognize matters of federal versus provincial jurisdiction.
• Describe the elements of natural justice.
YOUR BUSINESS AT RISK
Many businesses are tempted to gloss over or ignore seemingly burdensome administrative
rules and procedures. However, government regulation and administrative tribunals have more
power than most business persons realize. Failing to comply with administrative law provisions
can result in immediate and drastic consequences for businesses and their owners.
CHAPTER COMMENTARY
Chapter 3 examines the regulatory process that governments use to control business activities. It differs from
what students may view as a legal process in the sense that most of the ‗law‘ or the rules are made by
bureaucrats and enforced by them. Students should be made aware that administrative agencies and
commissions play a significant role in the business scene as they represent the means by which the
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government seeks to protect public health and safety, ensure fair competition in the marketplace, and
generally protect the consumer from unfair business practices. The regulation of the professions also ensures
that a level of competence is established and maintained through a licensing process.
Discussion of administrative agencies or commissions should also emphasize the fact that the usual
methods of regulating business and the professions is through a registration or licensing system. The
registration or license is the means by which control is maintained, since in most cases the failure of a
business or professional person to comply with the rules or requirements set down for the business or
profession could mean the loss of the registration or license to carry on the business or practice the
profession. Students should also be made aware that the termination of a registration or the lifting of a
license to practice a profession or carry on a business must be in accordance with the rules of natural justice,
and a hearing process, and perhaps an appeal process must be made available to the affected party to ensure
fairness in the decision.
Students should also be made aware that administrative tribunals set down rules and procedures to
carry out the policy objective of the government, and that these ‗rules‘ are usually set out in regulations made
under the particular statute. These regulations have much the same effect as statutes, but are subordinate
legislation in the sense that they do not follow the enactment process for ordinary legislation.
Review Questions
1. What are the rules of natural justice, and how do they apply to a board that acts quasi-judicially?
Answer: The rules of natural justice require the board or agency to give the affected persons notice of
the charges made against them, and to provide them with the opportunity to prepare and present their side
of the issue to the decision-makers. This usually takes the form of a hearing where evidence and
argument may be presented before the decision-makers.
2. Explain how an administrative law differs from other laws.
Answer: An administrative law establishes broad policy objectives then delegates the
enforcement to an administrative body to carry out the policy objectives. An ordinary statute will
normally state the policy objective(s) and require compliance under penalty for failure to comply. In
the case of an ordinary statute, the courts are used to obtain compliance.
3. Explain how governments regulate the professions. What type of body is usually created for this
purpose?
Answer: Governments usually regulate the professions by establishing a non-government body of
the profession to set standards for entry into the profession and the maintenance of the standards by
its members. To protect the public, the professional association is usually granted the right to license
practitioners of the particular profession and to revoke the license of those that fail to maintain the
standards of the profession.
4. What administrative controls are used to control or regulate business activities that offer services to
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the public?
Answer: The usual control method is by registration or license to carry on the particular business
activity, and to prohibit anyone from conducting the activity unless registered or licensed.
5. Outline the process that an administrative body must follow if it wishes to revoke an individual‘s
license?
Answer: An administrative body must usually establish a procedure whereby a hearing is held to
enable the affected party to appear and to defend against the complaint before a final decision is
made. In some cases an appeal may be made to an independent tribunal where a revocation of a
license takes place.
6. What is an administrative law?
Answer: An administrative law is a law that not only establishes the broad policy objectives of
the government but establishes an agency, board, or commission to carry out the policy objectives,
and includes the rules or procedures that the agency, board or commission may make to ensure that
the policy objectives are met.
7. Under what circumstances may a decision of a board or commission be appealed to the courts?
Answer: As a general rule, an appeal may only be made to the courts where the administrative
body has acted quasi-judicially, and either failed to follow the rules of natural justice, or made a
decision that is patently unreasonable, or where the decision-maker was biased.
Mini-Case Problems
1. Norman seeks a licence to operate a taxi in a major city and applies in writing to the City Taxi
Commission. Two days later, he receives a letter in reply: ―Dear Norman: Upon careful review of
your application, your request for a licence is denied. Signed: Chair of Taxi Commission."
Advise Norman of his rights.
Answer:
Although it may be difficult, Norman may feel that that the extremely rapid response to his application
suggests that it was not reviewed at all, despite the reply stating that a careful review had been performed.
While some municipalities may allow an appeal to the municipal council itself, it is likely no appeal route
exists, and his only recourse would be an application for judicial review before a court. He would allege that
such cursory treatment of his taxi application amounted to a denial of natural justice.
2. Janine is a herbalist, preparing certain natural tonics she believes to be ―beneficial to the human
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spirit.‖ Her activities are located in a province which does not regulate such matters. Carla is similarly
occupied, as a registered herbalist, in a province which does regulate the trade. Aside from federal
regulation of drugs, in what way would these two persons be differently affected if one of their
preparations turns out to have adverse effects?
Answer:
Janine will be liable to answer to the standard of common law liability only. Carla will have the same
responsibility, but other standards to meet as well. At minimum she must meet the standards set by her
provincial regulators, as well as those of any professional body in which she is a member. The profession
may be self-regulating (presently, herbalist are not), which replaces the provincial regulatory standards.
3. A provincial Liquor Control Agency discovers that a licensee tavern has sold liquor to minors on two
occasions and orders suspension of the tavern‘s licence for a period of seven days. A month later, a
different tavern is found in violation on essentially identical facts, and the Agency suspends its
licence for a period of fourteen days. Is there a ground for appeal of the harsher suspension?
Answer:
There is probably no ground for appeal of the harsher suspension. The principle of stare decisis does not
apply in any strict manner to administrative tribunals, and even so, at issue is the penalty, not whether the
violation was committed. Assuming there is no denial of natural justice in the handling of the case at hearing,
no real basis for appeal will exist.
Case Problems for Discussion
Case 1
A restaurant licensed to sell liquor served several bottles of wine to a couple who had visited the
restaurant for dinner. Both of the patrons had after dinner drinks, and when they were ready to leave, the
restaurant owner offered to send them home in a taxi, since they were, in his opinion, unfit to drive. The
patrons accepted the offer, and took a taxi home. Upon reaching home, they decided to return to the
restaurant and pick up their car. They called another taxi and were taken to the restaurant parking lot.
They picked up the car, and on their way home, the driver lost control of the car, and crashed through the
side of a wood-frame house, killing one occupant and injuring another. Investigating police charged the
driver with criminal negligence causing death (among other charges), and the provincial liquor authority
revoked the licence of the restaurant.
Discuss the issues raised in this case. What recourse might the restaurant have to restore its licence?
Answer:
The case does not suggest that a hearing preceded the revocation of the restaurant‘s liquor licence. Such an
administrative act without a hearing would amount to a denial of natural justice. Had a hearing been held, the
restaurant would have shown that the clients had been delivered home by the restaurant, surely answering all
of its responsibilities (and more) under the regulations that govern it. The restaurant‘s recourse would be an
application to a court for judicial review of the tribunal decision.
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Case 2
A radio station employed a program host that repeatedly made disparaging and often sexist remarks about
Canadian celebrities to the point where complaints to the Broadcast Regulator resulted in a cancellation of
the station‘s license to broadcast.
The station objected to the Regulator‘s decision on the basis that it had violated the station‘s right
to freedom of speech and expression.
Discuss the issues in this case. Would your answer be any different if the station had been
located offshore on a ship beyond the 12 mile limit? Using the Internet from an offshore location?
Answer:
Students may or may not realize that a licence to broadcast is a privilege, and thus subject to conditions or
particular standards of conduct. Breach of those conditions and standards and conditions may result in
loss of the licence. Whether students are aware of this or not, students should grasp that Charter rights are
subject to limits demonstrably justified in a free and democratic society, and as such, freedom of
expression and freedom of speech do not mean freedom of defamation, freedom of oppression and
freedom of opprobrium. (see: Genex Communication v. C.R.T.C. 2005 FCA 283, leave to appeal to SCC
denied. Regarding foreign ship and Internet broadcasts, these are physically beyond the reach of the
Canadian regulator. Without having a Canadian licence to lose in the first place, nor a Canadian
presence, very little leverage can be brought to bear against broadcasters located outside Canada in cases
of offensive content.
CHAPTER 4. INTENTIONAL TORTS
Chapter Topics
Tort Law Defined
The Development of Tort Law
Intentional Interference with the Person
Intentional Interference with Land and Chattels
Business-Related Torts and Crimes
Summary
Key Terms
Review Questions
Mini-Case Problems
Chapter Objectives
After study of this chapter, students should be able to:
• Identify intentional interference with a person that constitutes a tort.
• Explain the concept of vicarious liability.
• Explain how land and chattels may be the subject of intentional torts.
• Recognize business-related intentional torts and those that are crimes.
YOUR BUSINESS AT RISK
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This chapter is about civil wrongs: people and events that cause injury, and the rights of injured
parties. You and your business are capable of causing serious injury or you or your business
may be injured by others. When this happens, it is vital to know what sort of injury is
recognized by the law. You must know where responsibility for that injury begins and ends,
and what kind of compensation is available.
CHAPTER COMMENTARY
Chapter 4 introduces the first area of the law of torts and some of the more important (and common) acts of
intentional interference with persons or property. Since tort law represents one of the oldest areas of the law,
its development is one of the best examples of laws which were established in response to the needs of
society. Most of these principles were formulated long ago, and have been refined over the years as society
changed. The basic intentional torts and the principles associated with them are examined in the first part of
this chapter, and the concepts applied to business-related activities are found in the last part of the chapter.
Note that the business-related torts set out are those where the intention to injure competitors is an essential
component of the tort itself.
Chapter 4 also examines a number of the more common torts that involve intentional interference
with the rights, property, or person of another. These various torts rank among the oldest and, in many cases,
constitute crimes under the Criminal Code. For the purpose of re-enforcement, it might be a useful exercise
to note once again that torts (and in particular the torts covered in this chapter) may be subject to both civil
and criminal proceedings if they constitute crimes as well as civil wrongs.
Many of the torts described in this chapter in some instances have an a defence which may
constitute Many of the torts described in this chapter in some instances have an a defence which may
constitute justification for the act, and may wholly or partially absolve the actor from liability. These should
be discussed, along with their limits. Ex: assault/battery and the act of self-defence. Similarly, the tort of
defamation, and the defence of privilege should be examined.
Most of the torts described in the chapter are generally well-known to students, and class discussion
should perhaps be used to explore the various defences in detail, as well as the issue of damages or
compensation for the party injured by the wrongful act. Unlike the torts covered in the next chapter, those
described in Chapter 4 are not directly concerned with the concept of foreseeability, etc., but more with the
question of intent to injure. Because these torts tend to be deliberate acts, this aspect of the various torts
should be emphasized. Care should be taken, however, to note the exceptions such as battery situations,
where the 'touching' is without consent, but where the intention is not to injure. For example, a medical
practitioner performs a surgical procedure without the patient's consent. The medical practitioner may have
had the best of intentions, and performed the operation to improve the patient's health, but in doing so without
consent would have committed a battery.
The chapter also introduces a number of new legal terms that you will find described in the ext
material: assault, battery, false imprisonment, defamation, slander, libel, trespass, conversion, and punitive
damages. Definitions of these terms should be committed to memory and understood thoroughly by the
students. In addition to the text description, the Glossary at the back of the text might be consulted for brief
definitions of the various terms.
While the particular torts described in this chapter tend to be among the oldest, the very oldest are
perhaps the torts of assault and battery. It is important to note with these particular torts that the assault is the
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threat of violence, and the battery is the touching of the victim without consent. The quote from the case of
MacDonald v. Hees examines the act of assault, along with a few comments on how it is established in a
tort action.
Another very old tort, the tort of false imprisonment, is also described in the chapter, and it may
come as a surprise to students that actual physical seizure or restraint is not always necessary to constitute this
tort. As the text indicates, the mere threat of pursuit and the embarrassment of seizure if the person should
attempt to leave the premises is sufficient in certain circumstances.
The law as it relates to defamation (libel or slander) and the defences to defamation are set out in of
the text. While the tort is quite straight-forward, the defences often create some difficulty. The truth of the
statement, qualified privilege, absolute privilege, and public interest are four defences outlined in the text.
Persons speaking in Parliament or in court have absolute privilege in so far as statements they make
are concerned, and the statements do not constitute torts, even though the statements may seriously injure the
reputation of others. Qualified privilege, on the other hand, may be somewhat more difficult to understand,
because the law does permit persons under limited circumstances to make statements which they honestly
believe to be true at a point in time, and which later may prove to be false. The letter of reference mentioned
in the text is a good example of the type of situation where a qualified privilege may arise, as the law must
"balance" two interests: the protection of the individual's reputation on the one hand, with the bona-fide
interest of the person who receives the communication on the other.
In addition to questions of privilege, are matters of public interest. The Supreme Court of Canada
has ruled that responsible communication with attempts to verify sources may be raised as a defence in
matters that may be otherwise damage a person‘s reputation, but for some urgency of public interest.
Interference with land and chattels represent the torts of trespass to land and conversion. The quote
from Wiretap Reference, 1984 CanLII 31 (SCC), presents the position the courts take towards property and
the owner's right to exclude others. The judge in the case outlines the nature of trespass, and indicates
that a person who trespasses need not cause damage to the property to be liable at law for the act.
Business-related torts and crimes tend to be those torts designed to injure competitors by slandering
their goods or their business name. Students should be reminded that the reputation of a business and the
reputation of a product are important 'assets' of a business and entitled to protection under tort law. The
protection of a reputation of business (or product) is possible by way of an action for slander of goods or
slander of title, but it should also be noted that untrue statements about the reputation of a business person
would be actionable as defamation.
Breach of confidence is a tort often related to improper disclosures of business or trade secrets.
Where unlawful acts of one person consequentially interfere with the economic relations between another
person and a third party, this has been ruled as a tort by the Supreme Court of Canada. The interference itself
may be an independent crime, but its effect is a tort.
Certain business-related activities are actual 'crimes'.. Note that some of these activities are covered
in greater detail in other chapters of the text. For example, conspiracies to fix prices, etc., are covered in
Chapter 32 which deals with the Competition Act. Instructors teaching a one-term course may wish to
expand upon the material in Chapter 4 by reference to the material in Chapter 32 if they do not intend to
include the latter Chapter in their course material.
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The Court Decisions in this chapter illustrate two of the more common intentional torts, and two of
the defences. In the case of Bruce v. Dyer, the Judge explains the law of assault and the right of self-defence.
In your discussion take note that the right of self-defence arises when the defendant has reasonable grounds
for believing that he or she is about to be attacked and cannot safely avoid the attack. It should also be noted
that the use of force in self defence, as the Judge indicates, must only be the amount of force necessary to stop
the assault (i.e. it cannot be excessive).
Review Questions
1. Distinguish between the civil and criminal aspects of intentional torts such as assault and battery, or false
imprisonment.
Answer: The civil aspects involve compensation for the injury suffered and perhaps punitive
damages to deter the wrongdoer from repeating the act. Criminal aspects concern only punishment by
the state for the breach of the peace.
2. How does an "assault" differ from a "battery"? Must both have a violent element to them?
Answer: Assault represents a threat of violence. Battery involves the touching or striking of another.
Battery need not have a violent element, as it is the touching of another without his/her consent. E.g.:
a surgeon performing unauthorized surgery on a patient may constitute a battery.
3. Under what circumstances might a person accused of assault and battery raise self-defence as
justification?
Answer: Self-defence may be raised as a defence where a person had a genuine fear of injury to their
person as a result of a threat of violence (assault) and acted to prevent the battery. See Bruce v. Dyer for
example.
4. Explain the circumstances under which the tort of false imprisonment might arise.
Answer: Any unauthorized restriction on the freedom of an individual may constitute false
imprisonment. This may include a case where a shop-keeper apprehends a person stealing merchandise
from a shop, and requires the person to remain until the police arrive.
5. Distinguish between slander and libel. Why is libel generally considered to be more serious in the eyes
of the law?
Answer: Both constitute defamation. Slander is spoken defamation. Libel would be written
defamatory statements. Libel is the more serious as it is recorded, and others may read it over the years.
Slander may soon be forgotten.
6. Define qualified and absolute privilege, and explain the circumstances where each might be claimed.
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Answer: Absolute privilege - statements made in Parliament, before legislative Commissions, in
court, coroner's inquests, or in certain quasi-judicial proceedings. Places where it is in the public
interest to permit absolute freedom of comment. Qualified privilege - statements made in good faith and
without malicious intent where, on balance, it is in the interest of the public to have the statements
made on the basis of honest belief in their truth, e.g.: letters of reference.
7. How does the tort of trespass to land arise? Must damage occur for the tort to be actionable?
Answer: Trespass to land arises where a person enters on the land of another without authority or
permission to do so. No damage need occur for a trespass action to stand.
8. Explain the difference between the conversion and theft of goods.
Answer: Conversion is the willful refusal to deliver up goods to the rightful owner where the goods
came into the hands of the person either by lawful means (permission of the owner) or by unlawful
means. Theft is the unlawful taking of goods.
9. Explain slander of title. How does this differ from ordinary tort law related to defamation?
Answer: Slander of title arises where a person makes an untrue statement about the right of another
person to the ownership of goods.
10. Explain the rationale behind the law that condemns as a tort any third-party interference with the
performance of contracts made between other persons.
Answer: The purpose of the law is to support the rights of the parties under a contract, and to
discourage any third party from interfering with the performance of contractual duties.
11. Define: ―passing off‖, ―plagiarism‖, ―slander of goods‖.
Answer:
Passing off:
Selling goods represented as being the goods of another well known
reputable maker or seller.
Plagiarism:
The theft of the design, etc. of goods of another and presenting them to the
market as if they were the goods of that maker, such as using another
seller's trade name or mark.
Slander of goods:
A statement that alleges that the goods of a competitor are defective,
shoddy or injurious to the buyer's health or safety.
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12. Give an example of "involuntary entry on the lands of another."
Answer: An involuntary entry on the lands of another might occur where a person is pushed off a
road or sidewalk onto the lands of a property-owner, or where an aircraft experiences engine problems
and makes a 'forced landing' in an open field of a property owner.
13. Does false imprisonment always have a criminal aspect to it? Explain.
Answer: False imprisonment need not have a criminal aspect to it if it is done with the honest belief
that the person detained has committed a crime. This belief, however, may not permit the person to
avoid the tort consequences of the act.
14. To what extent, if any, is a publisher libel for the publication of a slanderous statement made by a person
other than the publisher?
Answer: Slander is the verbal publication of a defamatory statement. Libel is the written publication
of a defamatory statement. A person who publishes a defamatory statement made by another knowing it
to be untrue (such as in the case of a newspaper or magazine) would also be subject to a defamation
action for publishing the untrue defamatory statement.
Mini-Case Problems
1. A lawyer who was also a professional boxer was traveling by train from Winnipeg to Regina. He was
sitting next to a woman who, during the course of a conversation, said: ―Professional boxers should
be charged with assault and battery each time they engage in a prize fight.‖ As a lawyer, how should
he respond to her statement?
Answer:
With professional boxing, blows are struck with the tacit approval of the other fighter. Each voluntarily
assumes the risk of injury provided that the rules of the sport are followed. There is no assault preceding a
blow as both parties make no threats to injure the other. Volenti non fit injuria.
2. The house in which X resided was located on a busy street. From time to time, vandals had broken into
his garage and stolen tools and equipment he had stored there. One evening, just at dusk, he saw
someone enter his garage. He quickly rushed out to the garage, closed the door, locked it, then called
the police. When the police arrived, X discovered that he had locked the municipal building inspector
in the garage. Discuss the legal position of X and the building inspector.
Answer:
X, based upon past experience, had an honest belief that the person was a thief or trespasser. The building
inspector, while perhaps entitled at law to enter on the property and inspect it, by his actions of not informing
the property owner of his intention, gave X the impression that he was a thief. X's honest belief that he had
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caught a thief may be an excuse. X's failure to determine the identity and reasons for the inspector's entry on
the premises, however, may render him liable for the tort.
3. At a packed public meeting of town council, an irate taxpayer named Kilmer questioned the council
repeatedly, at length and in detail, about a proposed new sewer system. Exasperated with Kilmer‘s
domination of the questioner‘s microphone (but despite the audience‘s apparent contentment to let
Kilmer ask questions), one of the councillors blurted: ―Kilmer, you‘re an idiot. In fact, you come
from a long line of idiots. Can‘t you see we don‘t have all the sewer answers yet? It‘s just the early
stage of the planning process for this.‖ Embarrassed, Kilmer left the room. If Kilmer approached you
for advice, what would you offer?
Answer:
Kilmer may file suit for defamation, specifically, slander as the spoken form of defamation. The public
meeting extends the damage, rather than protecting the speaker, for it is neither Parliament nor a quasijudicial proceeding, which would give rise to absolute privilege. If qualified privilege is advanced as a
defence, it is unlikely to succeed, for the statements suggest a lack of good faith, and perhaps even malicious
intent. One possible defence may be truth of the statements, but even in the face of medical proof, the use of
slang and manner of delivery suggest the statements were made with the intent of humiliation.
4. You have decided to open a new nightclub in a university town and have decided to hire part-time
employees as ―security staff‖ for the dance hours of 7 p.m. – 1 a.m. Write a set of notes regarding the
policies you want your security staff to observe and the legal liability that may result if they fail to
adhere to those policies.
Answer:
Students should cover the essential elements of assault, battery, self-defence and false imprisonment. As a
matter of bonus, students may recognize that the employer will be vicariously liable for the torts of the
employees committed in the course of their employment.
5. Joe hits Bob. Discuss the legal issues raised as a result.
Answer:
Students should identify and discuss the situations of battery (Joe is a mugger), consent (Joe and Bob are
prize fighters), and self-defence (Bob has already hit Joe).
6. The Millport Trucking Company was under contract to Budget Foods Inc., a major grocery chain, for
the delivery of fresh dairy products and eggs to its supermarkets in western Canada. A competing
grocery retailer, FreshFood Stores Ltd., began posting comments and reviews on Budget Foods‘
website stating that its dairy products were overpriced and of poor quality. It blamed the quality
problems at Budget on its unreliable transportation suppliers such as Millport Trucking, claiming its
fleet of refrigerated trucks were always breaking down and aging the products. FreshFood‘s reviews
further warned customers of the health dangers of consuming dairy products purchased at Budget
Foods. Does Budget Foods have any recourse in this situation?
Answer:
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This situation raises several intentional torts. Defamation is at the heart of this situation and may be
actionable by both Budget Foods and Millport Trucking using different arguments. FreshFoods posted
libelous internet reviews that were intended to damage the reputation of Budget and to discourage customers
from shopping there. Budget may also make claims stemming from intentional interference with economic
relations, slander of goods and injurious falsehood. FreshFood‘s defamatory statements and actions targeted
Budget‘s business enterprise as a whole by attacking the quality of its dairy goods and implying that
customers may become ill if they consumed products purchased from Budget. Moreover, Millport may be
discouraged from dealing with Budget in the future as a result of alleged unsolicited and unproven statements
from FreshFoods. Millport Trucking‘s own reputation may have been harmed as a supplier to the grocery
industry and it may also claim damages. FreshFoods may attempt to defend any of these actions by claiming
its statements are true. It will have to satisfactorily prove its claims on the balance of probabilities.
Case Problems for Discussion
Case 1
Lukas owned a small factory of long-standing reputation, and bid successfully on a contract from Atlas
Aircraft. The aerospace manufacturer‘s contract was for Lukas to supply custom-made hydraulic
cylinders for landing-gear assemblies. To execute the job, Lukas required a heavy metal milling machine
capable of handling large pieces with high degrees of precision. He had heard of the impressive capability
of the Stormsen 1500 mill and placed an order for one, which in time was delivered and installed. Over a
period of months, Lukas found the machine was constantly working out of adjustment, causing much of
its output to fail quality control. Six times, Lukas caught as many as 2 faults in a job lot of 20 cylinders,
and on one early occasion Atlas Aircraft returned a cylinder as substandard. After consulting all the
Stormsen manuals, looking for an adjustment solution, Lukas called in the area distributor for
consultation. No long term solution to the wandering adjustment seemed apparent, and Lukas began
placing calls to the Stormsen Company itself. In the meantime more cylinders had been rejected by Atlas,
whose chief engineer (a personal friend of Lukas) wrote Lukas a letter wondering why ―suddenly [it] was
receiving crap.‖ Lukas‘ calls to Stormsen were fielded by an engineer/manager, Lewis Cranston, but
Lukas remained far from satisfied. Within another month, Lukas visited a tradeshow where Stormsen
machines were displayed, and in the display area was Cranston. The two, meeting for the first time,
exchanged words before the shouting began. In the end, they had drawn quite a crowd of factory owners
and two writers from a trade journal. The exchange ended with Lukas brandishing the Atlas letter before
the onlookers, shouting ―The 1500 produces crap, Atlas calls the 1500 crap, and I call the 1500 crap!‖
Discuss the tort issues that may arise from this situation.
Answer:
As the culminating events of this slander of goods case take place in a public place, there is little in the way
of defence, except truth. Unfortunately (for both parties – Lukas and Stormsen) the word ―crap‖ is a
somewhat vague adjective to describe a hydraulic cylinder. What is not vague however, is that it calls into
question the quality of the cylinder, and this then is a matter of fact, and in turn, truth. A ten percent failure
rate (2 of 20) may in fact be ―crap‖ for an industry demanding high performance standards, and truth will be
an absolute defence. Students may wish to consider the position of Atlas, who started the ball rolling with a
private letter, now being brandished and recited in a public place. The Atlas intent may not have been to
slander, and they could in turn sue Lukas for causing the damages with public disclosure if Atlas were found
liable, but again, truth of the statement may come to the rescue of Atlas.
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Case 2
The plaintiff, a nurse, was injured in a motor-vehicle accident and was taken to a local hospital. She was
examined by the defendant, who could find no physical injury other than a few minor bruises. She was
discharged from the hospital the next day when she admitted that she ―felt fine.‖ Within 24 hours after
her release, she returned to the hospital. She complained to the defendant of painful headaches and
remained in hospital for a month. During her second stay in hospital she was examined by three
neurosurgeons who could find nothing wrong with her.
On her release from the hospital, she instituted legal proceedings against the parties responsible for
her automobile accident, and her solicitor requested a medical opinion from the defendant to support her
case.
In response to the solicitor‘s request, the defendant wrote two letters that were uncomplimentary and
suggested that the plaintiff had not suffered any real physical injury. In addition, the defendant had
indicated on the plaintiff‘s medical records that the plaintiff was suffering from hypochondriasis.
After her discovery of the uncomplimentary letters and medical reports, the plaintiff brought an action
against the defendant for libel.
Examine the arguments that might be raised in this case and identify the defences (if any) to the
plaintiff‘s claim.
Render a decision.
Answer:
The facts of this case provide a basis for the discussion of the ingredients of a libel or slander action. Class
discussion should establish the grounds for such an action, and whether the written statements were
malicious. The defences noted in class discussion should perhaps deal with qualified privilege, the
presumption of good faith (where the plaintiff bears the burden to rebut by way of proof of malice), absolute
privilege, and the circumstances under which each might be raised. In the case of Foran v. Richman, 1975
CanLII 760 (ON CA) (on essentially the same facts) the court held that the circumstances were such that the
defence of absolute privilege would apply, and the plaintiff's action was dismissed. The case of Pleau v.
Simpson's-Sears Ltd., 1977 CanLII 1325 (ON CA) also provides a useful discussion of the law on the
question of qualified privilege.
Case 3
Gretel was shopping at a large shopping centre and, while walking through the crowded mall area, she
saw a youth pushing his way through the crowd in what appeared to be an attempt to escape from a man
in a dark-blue uniform, who was following him.
At that time, Gretel was standing near the exit from the building. When the youth finally broke
through the crowd and attempted to leave the building, she stepped in front of him to block his path. The
youth collided with Gretel, and the two parties fell to the floor.
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Gretel seized the fallen youth by the arm as he attempted to stand up and tried to pull him back down
to the floor. The youth then struck Gretel a blow on the side of the head with his fist, causing her to lose
consciousness.
The youth, as it turned out, was hurrying through the crowd in an attempt to catch a bus, and the older
man, who was following him through the crowd, was his father. The youth‘s father was employed as a
security guard at the shopping centre and was leaving work for the day.
Explain this incident in terms of tort law and tort liability.
Answer:
This case may be used to distinguish an assault and battery situation from false imprisonment. Was her act
one of disabling the youth in order that he might be apprehended, or was it an attempt to prevent him from
leaving the premises? To interfere with a person's freedom to go wherever he pleases (in this case exit the
building) would represent a violation of his rights, and represent a false imprisonment, although her actions
could also constitute an assault on the youth. Class discussion should identify the elements associated with
both torts in terms of duty not to injure, and the question of "justification" in the case of false imprisonment.
A question to ask here is whether the youth was justified in striking Gretel when she seized the youth by the
arm. Was his action self-defence? If so, did he use more force than necessary? Based upon Bruce v. Dyer in
the Judicial Decision, the youth may have been entitled to strike back, since he had no knowledge of why
Gretel acted in the manner she did, and had no other means of escaping from her. With respect to her own
injuries, Gretel would not likely recover damages from the youth, since it was she who deliberately stepped
into his path.
Case 4
A university operated a tavern on its premises for the benefit of its students. One student, who attended
the tavern with some friends for the purpose of celebrating the end of the fall semester, became quite
drunk. The tavern bartenders realized that the student was drunk around 11:00 p.m. and refused to serve
him any additional alcoholic beverages. They also asked him to leave the premises. The student, however,
remained and drank two additional beers that were purchased for him by his friends.
Some time later, around 12 a.m., one of the bartenders noticed the student drinking and instructed the
tavern bouncer to ask the student to leave. The bouncer did so, but the student refused, and the bouncer
took the student by the arm and escorted him to the door. Along the hallway to the door the student was
abusive and resisted leaving, but the bouncer managed to eject him from the building.
A few minutes later, the student returned to the tavern and slipped by the doorman for the alleged
purpose of obtaining an explanation as to why he had been ejected. About eight feet from the door, he
was apprehended by the bouncer and once again expelled from the tavern, but not without some
resistance in the form of pushing and shoving and abusive language on the part of the student. In the
course of ejection, the student fell against the door and smashed a glass pane in the door, which caused
severe lacerations to his hand. The injury to the student‘s hand required medical treatment and took
several months to heal.
The student brought an action against the university and the bouncer, claiming damages and claiming
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as well that the injury he received caused him to fail his mathematics course in the semester that followed
the accident.
Discuss the issues raised in this case and the various arguments that each party might raise.
Render a decision.
Answer:
The case deals with the rights of an occupier of property to eject a person from property, and the application
of force in the exercise of rights. Questions that might be raised in connection with these issues are: What is
the status of the drunken student once he was requested to leave the premises in the first instance? Did the
'bouncer' commit a tort by taking the student by the arm and ejecting him from the premises? Did the student
commit a trespass by returning for an explanation? Did the bouncer's actions on the second occasion
constitute a tort? Was the University and the bouncer responsible for the student's failure of the mathematics
course the next semester? Students should note that the drunken student had entered on the premises
lawfully, since he was of lawful age and a student at the University. The bartenders were entitled to ask the
student to leave when he became drunk. When he refused to leave, he became a trespasser, and the occupiers
(the bartenders and bouncer) were entitled to take reasonable steps to remove him from the premises.
However, when the student refused to leave, the police should perhaps have been called to deal with the
student, as any excess force on the part of the bouncer might be considered an assault and battery. As a
general rule, a person may eject a trespasser from property if the trespasser refuses to leave after being told to
do so, and the person in possession (owner or tenant) may use whatever force is necessary to eject the
trespasser. The student would probably be unsuccessful in his action against the university and the bouncer.
The injury to the student's hand was a result of the student's resistance to ejection rather than a deliberate act
on the part of the bouncer to injure the student.
Case 5
The Silver Sports and Recreation League was a women‘s hockey league that operated under Canadian
Amateur Hockey Association rules. Under the rules, no bodily contact was permitted by the players.
During the course of a semi-final playoff game between the Silver Lake Lions and the Calabogie Cats
in the Silver Lake Municipal Arena, April, the star centre of the Silver Lake Lions, was attempting to
regain control of the puck in her own end of the ice when Carol, a defence player of the Calabogie Cats,
collided with her from behind, driving her into the boards. As a result of the collision, April suffered a
serious injury to her neck and spine.
Immediately after the collision, the referee, who had witnessed the collision, stopped the game and
awarded a ―match penalty‖ against Carol on the basis that she had deliberately attempted to injure April.
According to the referee, Carol and April were both skating towards the puck, with April ahead of Carol.
Upon reaching the puck, April stopped abruptly. Carol, in the process of stopping, raised her hockey stick
to a horizontal position in front of her body just before she collided with April from behind. The blow
from the horizontally held hockey stick prevented Carol‘s body from striking April, but the impact of the
hockey stick propelled April into the boards.
The linesman, who also witnessed the incident, reported that from his point of view, Carol had pushed
April from behind either to move her away from the puck or to avoid a more violent collision. The
impact, however, in his opinion, only caused April to lose her balance and it was her loss of balance that
resulted in her fall against the boards.
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April subsequently instituted legal proceedings against Carol for her injuries.
Discuss the various legal arguments that each party might raise, and render, with reasons, a decision.
Answer:
The Silver Lake Sports case examines the tort of assault and battery and the defence of consent. April would
probably allege that she was injured as a result of Bertha's deliberate act (battery?). Bertha might raise the
defence of implied consent by April, by engaging in a game where some contact could be expected. Students
might be asked to consider whether a person engaging in a game that involves some bodily contact (even if
accidental) has assumed the risk of possible injury, or consented to the contact. Students might then be asked
to determine the 'limits' of the consent. Would it extend to deliberate contact? If so, how would this be
determined? Does the application of Amateur Hockey Association rule of no bodily contact negate consent
entirely or would it only be interpreted to exclude deliberate contact? The facts of the case are based upon
the case of Regina v. Leclerc (1991) 4 O.R. (3d) 788, where the Court of Appeal considered the facts in a
criminal law context. The court, however, stated that if a player participates in a sport such as hockey the
player must accept the risk that some bodily contact may occur, because it is incidental to the game. The
contact may result in some injury, and if not deliberate will fall within the implied consent. However,
deliberate acts that injure would be outside the orbit of immunity, and would attract liability.
Case 6
Jonas purchased a picnic basket at a hardware store in a nearby shopping mall. The basket was not
wrapped by the sales clerk at the conclusion of the transaction. Jonas carried his new basket with him to a
supermarket located in the same mall, where he intended to purchase a quantity of grapefruit.
At the produce counter he could not find grapefruit on display, and asked the clerk if the store had
any in stock. The clerk offered to check in the storage room for him. While he waited for the clerk to
return, Jonas picked a quantity of grapes from a display case and ate them. A few moments later, the clerk
returned to inform him that all the grapefruit had been sold.
As Jonas left the store, he was seized by the store owner and requested to return to the owner‘s office.
Jonas obediently followed him back inside the store. Once inside the owner‘s office, the owner accused
Jonas of theft; then, without further explanation, telephoned the police.
When the police officer arrived, the store owner informed him that Jonas was a thief and that he had
apprehended him just outside the store. Jonas admitted eating the grapes, then to his surprise, he
discovered that the owner had apprehended him because he (the owner) thought Jonas had stolen the
picnic basket.
Both the supermarket and the hardware store sold similar baskets; even on close examination, the
products appeared identical. With the aid of the sales clerk at the hardware store, Jonas was able to
convince the police officer that he had purchased the basket which he had in his possession.
He later decided to bring an action against the owner of the supermarket for false imprisonment.
Discuss the issues raised in this case and determine the respective arguments of the parties.
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Render a decision.
Answer:
This case concerns the question of false imprisonment and the theft of goods, although the detention of Jonas
was not for the theft of the goods actually taken (the grapes), but for what appeared to be the theft of the
shopping basket. Clearly the owner was in error by apprehending Jonas and requesting him to return to the
store while he telephoned the police without first determining how Jonas acquired the shopping basket.
However, in assessing the owner's actions, the matter of Jonas's taking of the grapes should be discussed.
Some of the questions that might be raised could include the following: What are the elements of a false
imprisonment? Was Jonas really detained against his will? Is this a case of false imprisonment, or did Jonas
consent to the detention in the belief that he was guilty of the theft of the grapes, and must give himself up to
the police officer? Was the store owner absolved from liability for false imprisonment when Jonas confessed
to the theft of the grapes? What was the position of the police officer in the case? Did the shop owner have
reasonable grounds for the detention of Jonas, and could he prove "justification"? In reaching a decision in
this case, two cases might be referred to: Cannon v. Hudson's Bay Co., [1939] 4 D.L.R. 465 in which the
court held that an employee who was detained without consent, searched, and found innocent of theft, was
entitled to damages for false imprisonment, and LeBrun v. High Low Foods Ltd., (1968 CanLII 609 (BC
SC)), 69 D.L.R. (2d) 433, in which the court held that the manager of a store who did not have reasonable
grounds for his belief that a customer has stolen goods was liable for false imprisonment when he detained
the customer until a police officer arrived to search the customer's vehicle.
Case 7
Justin and Therese met during his business studies and her electrical engineering studies. They lived
together and eventually both worked for Cosmic Star, a company producing Global Positioning System
navigation receivers. Justin worked in the marketing department and Therese worked in the design
department. With considerable in-house research, Therese developed an algorithm that reduced fuzziness
in the GPS signal, making the receiver ten times more sensitive and accurate. It was a fundamentally
simple equation, and with considerable pride she had explained it to Justin more than once. Not all that
long later, Justin left Cosmic Star to work for its competitor, NavDirect Industries. About a year behind
Cosmic Star and six months after Justin joined the company, NavDirect began producing a GPS that
contained an algorithm remarkably similar to the Cosmic Star model. Some months later, NavDirect was
prospering while Cosmic Star began showing signs of financial problems, and Therese joined Justin at
NavDirect. Her departure soon caused Cosmic Star to look closely at the technology in NavDirect
products. Upon finding the algorithm that Therese developed, Cosmic Star headed to its lawyers for
assistance.
Discuss the advice Cosmic Star would likely receive.
What advice would you give to each of Justin, Therese, and NavDirect?
Answer:
In advising the individual parties, students should recognize the essential elements of trespass to goods
(conversion) and the tort of breach of confidence. While students have not yet been exposed to the elements
of contract, they should sense that there may be requirements of non-disclosure and confidentiality that may
be part of the contract of employment. Students should not fail to realize that while the torts may be personal,
as NavDirect is employing Therese and Justin, NavDirect may bear responsibility for their torts (if any).
Cosmic Star faces the lways-present issues of proof, that in fact NavDirect gained its advantages through the
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torts of Justin and Therese. An issue of timing also affects what tort is provable on whom, for if Therese‘s
early disclosure was to Justin as a fellow Cosmic employee, and later offered nothing to NavDirect, then
Justin should be the focus of liability.
Case 8
Nico owned a strip mall development along a busy suburban city avenue. One of his tenants operated a
small shop selling new and used sewing machines. Over a period of six months, it was apparent to Nico
that his tenant was in trouble. Originally, the rent was paid in full and on time. Then the tenant paid in full
but late; then it was on time but short; then finally short and late, then for two months nothing at all was
paid. Realizing that this would only go from bad to worse, Nico called a locksmith who drilled out and
replaced the door lock. Nico moved the inventory of twenty sewing machines into the back storage room,
clearing away the stock from the shelves visible from the front window. He placed a ―For rent‖ sign in the
window, set the alarm, and left. When he returned the next morning, he found the door lock smashed, the
alarm disarmed, and the inventory gone.
Discuss the rights, responsibilities, and defences the parties may raise in this situation.
Answer:
Again, there may be elements of contract which students may wish to speculate on, however, strictly in
terms of tort, the issues are conversion of goods (which may fail as the landlord had colour of right to
seize the goods for unpaid rent), trespass, and willful damage. The tenant may allege trespass in
contravention of his lease, however, the lease would likely contain a clause allowing re-entry upon failure
in payment of rent. As the alarm was turned off, it appears the tenant was the person who broke in later,
and thus would be liable for the damage caused, as whatever lease rights he or she had, they did not
include a right to damage. Whether the tenant‘s actions are actually trespass is debatable, depending on
whether he or she is actually still the beneficiary of a commercial lease with unpaid rent. Students should
be reminded that the rights and remedies available in commercial tenancies fail to give tenants the
protection available under residential tenancy law.
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CHAPTER CHART
CHAPTER 5. NEGLIGENCE AND UNINTENTIONAL TORTS
Chapter Topics
Negligence
Occupier‘s Liability
Manufacturer's Liability
General Tort Defences
Tort Remedies
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Explain the chief elements of negligence: duty, breach, damage and
causation.
• Explain the relevance of foreseeability and the ―Reasonable Person.‖
• Explain the concepts of strict and vicarious liability.
• Describe instances of tort liability arising from product defects.
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• Describe the chief defences and remedies in unintentional tort cases.
YOUR BUSINESS AT RISK
Negligent acts and accidents happen. Businesses must be aware of when, how, and to what
degree they will be responsible for unintentional or careless acts, and to the extent that they
may recover for careless acts done to them. A single liability suit for an accident that could
have been avoided can run to millions of dollars and may bankrupt the dreams of the owner or
investors.
CHAPTER COMMENTARY
Torts associated with unintentional interference with persons or property are generally associated with
careless acts or a failure to act, and the concepts of duty not to injure, foreseeability, and standard of care
should be considered in their application to these types of torts.
It is important to note that the concept of strict liability has remained over the years as an important
determinant of liability in cases where persons keep in their possession something capable of causing injury if
it should escape. This must usually be something which is not normally confined, or something which, if
confined in a particular way, creates or has the potential of causing injury if it escapes. Examples would be
the confinement of a dangerous wild animal, or the storage of a large quantity of water in a reservoir. The
courts generally consider both of these activities to be inherently dangerous, and if the animal or water should
escape, the likelihood of injury to a neighbour is very great. Judges generally assume that the person who
engages in this type of activity is aware of the dangers involved, and of the potential for harm. As a
consequence, they are usually held responsible for any damage caused if escape occurs, regardless of the
precautions taken to prevent the escape. Students should be made aware that liability in these instances
would likely be determined on the basis of strict liability.
Apart from cases where strict liability might be imposed, tort liability is generally concerned with the
right of a person to live without interference or injury to their person or property by others. Tort law,
consequently, imposes a duty on persons not to injure others, or their property. This concept of a duty not to
injure forms the basis of a great many kinds of torts: negligence, nuisance, defamation, etc., as well as most
crimes of violence.
It is important for students to realize that the duty is not absolute, otherwise it would represent a strict
liability situation. In most cases, the duty will be subject to a standard of care, or the concept of
foreseeability. On these points, as the text indicates, the standard of care is usually the standard of the
―reasonable person‖, and the conduct of the person is compared to that standard. In a similar fashion, the
question of foreseeability is usually framed by the words ―would a reasonable person under similar
circumstances have foreseen the possibility of injury?‖
The chapter also provides a brief outline of a number of other tort concepts. These are the concepts
of circumstantial evidence and res ipsa loquitur (―the thing speaks for itself‖) as well as volenti non fit injuria
(voluntary assumption of risk). The former of these is used to shift the onus to the person causing the loss to
show no negligence in cases where it is impossible for the injured party to know exactly how the injury came
about, such as in an aircraft accident. The latter concept is used as a defence when a claim for injury is made.
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The doctrine of foreseeability, the standard of the ―reasonable person,‖ and their application to the
question of liability should be re-enforced by way of examples, such the narrative of the roofer, shingles and
the rainy-day accident raised in the text.
A series of incidents similar to the above, or the case problems may be used to discuss and illustrate
the various concepts covered in the chapter.
Note that in some provinces (such as Ontario) virtual strict liability may be imposed by statute upon
dog owners for injuries caused by their dogs (subject to certain exceptions). The Common Law standard is
consequently replaced by a higher standard in these instances. See: for example: Dog Owner’s Liability Act,
R.S.O. 1990, c. D-16. This statute, to some extent extends the principle of Rylands and Fletcher to dogs in so
far as their danger to the public is concerned.
Another useful approach might be to describe an incident, then have the class examine the incident
by raising the questions: Does the defendant owe a duty to the plaintiff? What is the duty owed? What
standard or care must be maintained? Did the defendant breach the duty, such that ―but for‖ the defendant‘s
actions the injury or damage not have occurred? Did the plaintiff suffer an actionable loss as a result?
In any class discussion, the standard of care, foreseeability of injury, and the reasonableness of the
actions of the defendant should be underscored as the important determinants of liability in order to avoid
giving the impression that once a duty is owed, any injury which follows is actionable.
The case of Burrough v. Town of Kapuskasing, 1987 CanLII 4236 (ON SC) may be used to illustrate
occupier‘s liability and the defence of volenti non fit injuria (voluntary assumption of risk). The case is
useful for class discussion purposes because the Judge not only discusses the defence in detail, but also
examines occupier‘s liability by reference to the duty of an occupier of land to invitees. The Judge does this
by reference to cases on this topic. (See for example, case reference to Such v. Dominion Stores Ltd. where
the general rule concerning occupier‘s liability as stated in Indermaur v. Dames is considered).
With regard to occupier‘s liability, a number of provinces have passed legislation to eliminate the
distinction between licensees and invitees, and to establish a statutory standard of care for occupiers. British
Columbia, Alberta, and Ontario are provinces that have taken this approach.
It might also be worth noting that the liability of occupiers of land, which in the past has been subject
to some codification in the form of petty trespass acts and other similar legislation, has been the subject of
more extensive codification in some provinces in recent years. This has tended to delineate the rights and
duties of landowners and other occupiers of land. See for example, Ontario, the Occupiers’ Liability Act,
R.S.O. 1990, c.0-2.
Product liability is a growing area of tort law as products become more complex. It is essentially an
ordinary negligence action, where the manufacturer may be held liable if the consumer is injured by a product
that was negligently made, or where the user was not warned of the dangers associated with the use of the
product. The case of M’Alister (or Donoghue) v. Stevenson which is described briefly in the text, and in the
Court Decisions outlines this liability, and the standard of care required of manufactures of products.
The More v. Bauer Nike Hockey case goes on to illustrate the ―but for‖ test in action. The plaintiff has the
burden to show that ―but for‖ the negligent act or omission of the defendant, the injury would not have
occurred. Even so, the standard required is not perfection, nor is the defendant an insurer from harm; in this
case it is to provide a reasonable level of safety for rear impacts.
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Classroom review of the chapter should also include a review of the defences which might be raised to a
claim in tort. Instructors should note, however, the limitations on waiver as a defence, since the
circumstances under which torts arise may have a significant impact on the concept as a defence.
Tort remedies are outlined in the text as they apply to unintentional torts. The topic of remedies is covered
elsewhere in the text as well with respect to other legal relationships. Some instructors advise students at this
stage that other remedies (such as injunctions) will be encountered later on in the text, and the remedies used
in tort actions, such as money damages will also be dealt with as they apply to other types of injuries.
Review Questions
1. Distinguish between a moral obligation not to injure and a duty not to injure. Why is this distinction
important?
Answer: A moral duty is established by individuals. A legal duty is established by the state. The
former is subjective, based upon the person‘s view of right and wrong; the latter is a clear standard which
must be met to avoid liability for tort.
2. Why do the courts impose strict liability for damage in certain instances?
Answer: Strict liability is generally imposed today where a person maintains an animal or thing
which is potentially dangerous if not confined. Since these things are known to be dangerous, the person
keeps them at his or her peril.
3. Explain the concept of duty of care as it relates to liability in a tort action.
Answer: Duty of care is based upon the premise that a person should not do anything to injure his or
her neighbour – hence the duty not to injure becomes an essential factor in establishing tort liability.
Note that some individuals may have the right to injure or take the property of others. See text for
examples.
4. Why are the concepts of duty of care and ―the reasonable person‖ important in a case where negligence is
alleged?
Answer: Duty of care is used to establish the relationship between the parties. A plaintiff must first
show a duty not to injure exists, then establish the standard of care attached to the duty (the ―reasonable
person‖). Finally, the plaintiff must satisfy the court that the defendant‘s conduct or actions fell short of
the standard.
5. Explain the concept or doctrine of proximate cause in tort law.
Answer: Proximate cause links the defendant‘s actions with the plaintiff‘s injury. The relationship
must be direct and without any intervening events that would break the links in the chain of events.
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6. How are the concepts of the reasonable man and foreseeability related?
Answer: The ―reasonable man‖ and foreseeability are related in the sense that the standard for the
latter is based upon whether a ―reasonable man‖ in similar circumstances would have foreseen the
consequences of the act. Tort liability is determined using this standard of foreseeability – it is not based
upon whether the tortfeasor had foreseen the likelihood of injury.
7. Identify and explain the essential ingredients of unintentional tort liability.
Answer: First, a duty of care must be owed to the party injured. Second, it is necessary to determine
if a breach of the duty occurred. This is done by determining the standard of care imposed – the test being
the conduct of a reasonable person in the circumstances. ―Would a reasonable person have foreseen the
likelihood of injury or damage to the party? Would a reasonable person have acted in a different
manner? Where the defendant fails to maintain the standard of the ―reasonable person‖, liability would
likely follow.
8. Does strict liability apply to manufacturers of goods where the goods are defective and cause injury or
damage?
Answer: No, although a very high duty or standard of care in manufacture is sometimes imposed at
common law in Canada, depending upon the product. In some U.S. states, strict liability is imposed upon
manufacturers of certain products.
9. What is the duty of care of an occupier of land to a trespasser?
Answer: The duty of care to a trespasser is normally a duty not to deliberately injure or set traps to
injure the trespasser. Note, however, the special position of children.
10. In some cases, the courts consider the public interest as an important aspect of a nuisance action. Why is
this so? Give an example.
Answer: In some cases the prohibition of a nuisance to protect one affected individual may have an
impact upon the public generally, which could be far more serious, and the courts must consider both
interests. For example, a ship-building firm makes a great deal of noise riveting sheets of steel on the
hull of a ship. This noise disturbs residents who live nearby. To stop the noise, however, would cause
the firm to cease operations and cause others to be unemployed. The courts must balance these two
conflicting interests.
11. Is nuisance simply another name for negligence? If not, why not?
Answer: Nuisance differs from negligence in that the nuisance is generally an on-going and
deliberate act that interferes (sometimes unintentionally) with a person‘s enjoyment of their property.
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Negligence usually involves an unintentional injury or interference with a person or their property, and
may have nothing to do with the enjoyment of property.
12. Define: ―res ipsa loquitur‖.
Answer: ―The thing speaks for itself‖ is a legal principle which shifts the burden of proof from the
plaintiff to the defendant in a tort action. If the plaintiff can show that the injury was caused solely by
that which was in the exclusive care and control of the defendant, and the plaintiff had no way of
knowing how the injury was caused, the burden of proving no negligence is then on the defendant. The
Supreme Court of Canada has now terminated the principle as a separate rule, but it lives on in
circumstantial evidence presented against a defendant, for which the defendant must offer some
explanation with evidence to the contrary.
13. Why was it necessary for the Common Law provinces to introduce contributory negligence legislation?
Answer: Contributory negligence legislation was necessary to fairly apportion liability in cases
where it was difficult to determine which party had the last opportunity to avoid the accident or injury.
14. Is the defence of volenti non fit injuria, in effect, the defence of waiver?
Answer: Voluntary assumption of the risk is similar to waiver in the sense that a proper waiver will
excuse the defendant from liability, as will a successful volenti non fit injuria defence claim.
15. Identify some situations in which an individual employee would not be protected by the “vicarious
liability‖ concept resulting in personal liability to that employee.
Answer: We have seen precedents in recent years, including from the Supreme Court of Canada,
indicating that an employee will be named personally in a negligence suit when it can be reasonably
expected that the employee personally owes a duty of care to his or her employer‘s customers. Examples
of this are likely to include employees who directly interact with or provide direct service to customers.
These could be employees in the hospitality industry and other service businesses. It may be reasonably
foreseeable that the individual employee‘s actions toward the customer are the cause of the injury and the
mere fact of employment should not protect him or her from liability under the vicarious liability
principle. Contrast this to a production line worker who negligently assembles a product that ultimately
harms a customer. In this case, the employee‘s actions do result in harm but the causation links are less
clear than a server who pours hot coffee in a customer‘s lap. In the production worker‘s case, the
employer would assume vicarious liability for the negligence of its employees as they do not directly
intersect with customers. Although the employee‘s actions harmed a customer, the foreseeability is much
lower and causation is several steps removed.
Mini-Case Problems
1. X, a trained and licensed plumber, carelessly installed a steam heater in Y‘s restaurant, and, as a
result, Y was seriously burned when a heater pipe exploded. Z, a qualified medical practitioner who
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treated Y at the hospital, prescribed an improper medication as treatment for the burn, which
aggravated the injury. This obliged Y to undergo an expensive skin-graft operation to correct the
condition.
Discuss the responsibility of X and Z to Y.
Answer:
X was negligent in the installation of the heater, and at law would be liable for the injury to Y when the pipe
exploded. This would include the damages for pain and suffering caused by the burn, and the lost wages, etc.
plus the expected cost of medical treatment for the burn had the treatment been properly given. Z would be
liable for the improper treatment, pain and suffering plus the costs associated with the expensive skin graft
operation. Note that X would not be responsible for any of the damages which resulted from Z‘s negligence.
2. At dusk one evening, as X was hauling a load of rock in his truck, he saw a large piece of rock fall
from the truck onto the traveled portion of the roadway. X continued on his way without stopping. Y,
who was traveling in her automobile along the same road some time later, collided with the rock and
damaged her automobile. Discuss the liability of X.
Answer:
X‘s liability would be determined by comparing his conduct to that of the ―reasonable man.‖ He owed a duty
not to injure others using the road after dark. If a reasonable man would have foreseen the likelihood of
someone else colliding with the rock in the dark and suffer an injury, then a reasonable man would have
stopped and removed the rock from the road. X‘s conduct fell short of this, and X may therefore be liable for
the injury to Y. Contributory negligence may apply here.
3. Would your decision in Question 2 be any different if:
(a) X was unaware that the piece of rock had fallen from his truck?
(b) Y was traveling along the road at a high rate of speed?
(c) Y noticed the rock in her driving lane and swerved to the other side of the road to avoid it,
thereby colliding with Z, who was traveling in the opposite direction?
Answer:
(1) If the truck was loaded and operated in the manner in which a reasonable man would load
and operate, then probably no liability would rest on X‘s part.
(2) If Y was traveling at a high rate of speed, he would also be negligent and partly at
fault for his own injuries.
(3) Y has a duty not to injure Z. A reasonable man would probably swerve to the
shoulder of the road to avoid the rock. Y may be liable for Z‘s injuries by his
actions. X may have some liability as well, however, since he may have contributed
to the accident by his negligence.
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4. Roger, a delivery driver with Golden Bakery, is driving a company van across town when he hits a
pedestrian who stepped from the curb in order to cross the street. Describe how Golden Bakery might
respond to a claim of vicarious liability.
Answer:
Roger may not be driving the van in the course of his employment, and thus vicarious liability will not
apply. The pedestrian may be crossing the street illegally, either against a light or mid-street, and thus be
liable for contributory negligence.
5. A factory stood near a self-storage facility, separated by a gravel parking lot owned entirely by the
factory. In the summer of one year, the factory paved its parking lot. Late the following spring, heavy
rains which formerly soaked into the gravel ran directly from the parking lot into the self-storage
facility, causing hundreds of thousands of dollars in damage to goods of the unit tenants.
Discuss the tort issues raised as result.
Answer:
The damages are not an Act of God, despite being caused by rain. The tort is negligence which has created a
legal nuisance on the neighbouring property. A duty existed not to allow the escape of the nuisance, that duty
has been breached in the occasion, and the occasion has caused damages to the neighbour. The occasion and
damages are in fact quite foreseeable by the reasonable person, for which reason surveyors and engineers are
a necessary part of commercial construction work, particularly for drainage in paving work. Damages
awarded will be compensatory. An injunction against a repeat of the discharge of water is possible, though
unlikely, as remedial work will preferably (and probably) be subject to a municipal property work-order.
6. Iron Engineering was engaged to design a bridge to be built by Gorge Construction. Upon internal
review, one of Iron‘s design team caught a fatal error in the design, and drafted a plan amendment
accordingly. The engineer placed the amended plan as ―version 2.0‖ in a second file, in front of the
first in the file cabinet, as was the practice. A young file clerk, trying to be helpful, reorganized the
cabinet, reversing the file order. Gorge Construction ultimately received version 1.0 of the plan and
built the bridge, which collapsed soon after completion.
Discuss the tort issues raised as a result.
Answer:
Gorge Construction will be named in the resulting liability action, however, it should be able avoid liability as
it was reliant on the work of the Iron Engineering experts in drafting the plans for the bridge. Iron
Engineering has essentially no defence to a classic case of negligence, as control and release of revised plans
are critical aspects to ensure public safety in resulting construction projects. Students should treat the
standard aspects of duty, breach, damage and foreseeability.
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Case Problems for Discussion
Case 1
Angus, a bicycle courier, picked up an envelope at a law office. It was addressed to ―City Works, Office
1212, For attention of: Janet Bari, Re: #2650/06.‖ Angus put the letter in his bag, making it the sixth
identical letter that he received for the same address while doing his afternoon rounds. He dropped the
letters off at City Hall before the office closed, and headed home. The next morning he realized that one
of the letters was still in his bag, stuck inside a fold in the nylon lining. Angus returned to City Hall, but
delivery of the letter was refused. The reference 2650/06 was a call for bids on city construction work,
and the competition for lowest bid closed when City Hall closed the day before.
Identify the legal issues raised between Angus, the law office, and the presumably irate client on
whose behalf the law firm had created the bid, and render a decision. Would it matter if the bid, in any
event, would not have been the lowest?
Answer:
The issue of whether the bid would or would not have won is a matter that speaks to the extent of the damage,
not whether negligence existed. Negligence exists where the standard elements of duty, breach, damage and
foreseeability are present. The largest question is whether a duty existed for ―same-day‖ delivery. While this
may be an assumed expectation in using a bicycle courier in a big city, it may not be a duty unless it is
specifically treated in the terms of the service. If a duty exists, it was breached, for it was delivered out of
time. Assuming that some damage has resulted, even if nominal, the question remains whether significant
damages were foreseeable by the parties. Certainly the sender could see the consequences of failure of timely
delivery. If these were not communicated to the courier Angus, how could Angus be aware of the liability he
was undertaking. In short, the case would fall down to contributory negligence by the sender for not advising
the courier of the significance of failure to deliver on time. In regard to the client, it will seek redress of its
losses (if any) from the law firm.
Case 2
Basil, aged 14, lived in a large metropolitan city, but spent his summer vacations with his parents at a
cottage in a remote wilderness area of the province. On his 14th birthday, his father presented him with a
pellet rifle and provided him with instruction on the safe handling of the weapon. The father specified that
the gun was only to be used at the cottage. Basil used the pellet rifle to rid the cottage of area rodents
during his vacation.
On their return to the city, Basil‘s father stored the weapon and the supply of pellets in his workshop
closet. He warned Basil that he must not touch the rifle until the next summer, but did not lock the cabinet
in which the weapon was stored.
One day, when Basil was entertaining a few friends at his home, he mentioned his summer hunting
activities. At the urging of his friends, he brought out the pellet gun for examination. Basil demonstrated
the ease with which the magazine could be filled, and how the weapon operated. He then emptied the
magazine and allowed his friends to handle it. The gun was returned to him and, as he was replacing it in
the cabinet, the weapon discharged. He was unaware that a pellet had remained in the weapon, and that he
had accidentally charged the gun when he handled it. The pellet struck one of his friends in the eye, and
an action was brought against Basil and his parents for negligence.
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Discuss the liability (if any) of Basil and his parents, and the defences (if any) that might be raised.
Render a decision.
Answer:
This case is based in part on the facts in the case of Floyd et al. v. Bowers et al. (1978, 89 D.L.R. (3d) 559;
affirmed, (1979) 27 O.R. (2d) 487. Class discussion of the case should deal not only with the question of
liability of the youth Basil (see case # 1 for the standard applied) but also the question of liability of Basil‘s
parents for their failure to instruct him in the safe handling of a potentially dangerous instrument, and their
failure to safely store the weapon and/or its pellets. The limits of parental liability should be discussed: What
would a ―reasonable parent‖ have done under similar circumstances? Was the accident foreseeable?
Suppose the gun had been locked in the cabinet, but Basil had found the key and unlocked it. Would this fact
have any effect on parental liability? In the case before the courts, the court held that the failure to control
access to the gun represented negligence on the part of the parent in view of the fact that the gun was a
dangerous weapon. Both the parents and child were held liable for the injury.
Case 3
Khalid lived in a residential area some distance from where he worked. One morning, he found himself
late for work because his alarm clock had failed to wake him at the usual time. In his rush to leave his
home, Khalid backed his automobile out of his garage after only a cursory backward glance to make
certain the way was clear. He did not see a small child riding a tricycle along the sidewalk behind his car,
and the two came into collision. The child was knocked from the tricycle by the impact and was injured.
The child‘s mother, at the front door of her home (some 70 metres away), heard the child scream and
saw the car back over the tricycle. She ran to the scene of the accident, picked up the child, and carried
him home. Khalid called an ambulance, and the child was taken to the hospital and treated for a crushed
leg.
The mother brought a legal action against Khalid for damages resulting from the shock of seeing her
child struck by Khalid‘s car. An action was also brought on behalf of the child for the injuries suffered.
Discuss the validity of the claims in this case, and identify the issues and points of law that are raised
by the actions of Khalid. How would you decide the case?
Answer:
This case involves two different claims for damages against Khalid:
(1) A claim in negligence for the injuries suffered by the child.
(2) A claim by the child‘s mother for the nervous shock suffered as a result of Smith‘s actions.
Class discussion should be directed in such a way that the two claims are discussed separately to avoid
confusing the two. This case provides an opportunity to once again re-enforce the concepts of foreseeability,
duty of care, and the standard to be applied. Some of the points that should be raised include: Should Khalid
have foreseen the likelihood of a small child being on the sidewalk? Was he aware of the existence of small
children in the neighbourhood? Was a backward glance sufficient, or should Khalid have continued to watch
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the road behind to make certain that the way remained clear? Would a ―reasonable person‖ have acted
differently? What obligations (if any) rest upon the child? Upon the parent who allowed the child to play in
the street unattended? With respect to the mother‘s claim for damages for nervous shock the question of
foreseeability on the part of the driver should again be raised. In the case of King v. Phillips, [1953] 1 All
E.R. 617, the test applied was: Did the driver owe a duty of care to the child‘s mother, and could he
reasonably have foreseen the possible damage to her? In that case, the court dismissed the plaintiff‘s claim.
In a Canadian case (Marshall v. Lionel Enterprises Inc. (1971), 25 D.L.R. (3d) 141) the test for liability was
also expressed to be foreseeability of nervous shock being caused to the plaintiff. The development of the
law relating to nervous shock is discussed at length in the case. See also: Fenn v. City of Peterborough et al.
(1976), 14 O.R. (2d) 137.
Case 4
Thompson operated an ice-cream truck owned by Smith Foods Ltd. During the summer months
Thompson travelled throughout the residential areas of a large city selling ice-cream products.
Thompson‘s principal customers were children, and Thompson would drive along the streets ringing a
series of bells attached to his truck to signal his arrival in the area.
Alberta, a five-year-old child, and her brother were regular customers of Thompson. On the day in
question the two children heard the bells that signaled the approach of Thompson‘s ice-cream truck.
Martha, Alberta‘s mother, was talking to her husband on the telephone at the moment that the ice-cream
truck arrived. In response to the cries of her two small children for money to buy ice-cream, she gave
them enough money to buy an ice-cream bar each. The children ran across the street to where the truck
was parked, and each ordered a different ice-cream product. Thompson served Alberta first, and then
turned to serve her brother. At that instant, Alberta ran into the street, with the intention of returning
home, and was struck by a car driven by Donaldson.
Alberta was seriously injured as a result of the accident and an action for damages was brought
against Thompson, the operator of the ice-cream truck, Smith Foods Ltd., the owner of the truck, and
Donaldson, the owner and driver of the automobile.
Discuss the basis of the action on Alberta‘s behalf against the owners and drivers of the vehicles, and
determine the basis of the liability of each party under the law of torts.
Render a decision.
Answer:
This case is based upon the facts set out in the case of Arnold et al. v. Teno et al. (1978), 83 D.L.R. (3d)
609. The case is a complex one in the sense that it involves many actors. The child was injured by darting
from behind the truck in front of a passing car. The negligence of the driver in causing the injury becomes
an issue for discussion. Duty of care, foreseeability, the ―reasonable person‖, etc., should be discussed. It
also raises the question of duty of care to the child, foreseeability of the accident, and the liability of the driver
of the ice cream truck (and the driver‘s employer). By enticing the child across the street to buy ice cream,
does the driver have a responsibility to see the child safely back across the road? The duty of a parent to
protect the child from injury is also a matter for discussion. Was the child‘s mother negligent by allowing
the child to cross the street alone? Even if the parents were not defendants, any negligence on their part
could reduce the damages which the child might receive. The court (on the facts) found the owner and driver
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of the automobile negligent, and the owner and driver of the ice cream truck liable as well. With respect to
the latter, the two were held liable for a 50% contribution to the damages awarded for their failure to protect
the child from injury once it had crossed the road.
Case 5
Marie-Claude operated a bowling alley in a commercial area that was adjacent to a residential area. Many
small children used the parking lot near the bowling alley as a playground, and Marie-Claude was
constantly ordering the children off the premises for fear that they might be injured by motor vehicles.
One young boy, about six years old, was a particular nuisance in that he would climb onto the flat
roof of the bowling alley by way of a fence at the back of the building. Marie-Claude ordered the child off
the roof on several occasions, but to no avail. The child continued to climb on the roof at every
opportunity in spite of Marie-Claude‘s instructions to the contrary.
On one occasion, when Marie-Claude was away from the premises, the child climbed to the roof and,
while running about, tripped and fell to the ground. The fall seriously injured the child, and an action was
brought on his behalf against Marie-Claude.
Discuss the liability of Marie-Claude and her defences, if any.
Render a decision.
Answer:
This case concerns the liability of an occupier of land to trespassers, and may also be used to discuss the
question of ―attractive nuisances‖. The law is basically clear with respect to trespassers, and in general, the
occupier has only a duty not to deliberately trap or injure the trespasser. Discussion of the case should
explore the limits of this duty, and perhaps also deal with the premises as an ―attractive nuisance.‖ Does the
roof of the bowling alley, accessible by way of the fence, constitute an attractive nuisance? What
responsibility does Marie-Claude have to make the roof inaccessible to a small child? In a fact situation
similar to this case, where a child gained access to the roof by way of a fire escape, and later fell and was
injured, the court held that the landowner was not liable for the injuries sustained by the child. See:
Sfyras v.Kotsis et al. (1975), 10 O.R. (2d) 27.
Case 6
On a clear September day, Mario walked across a parking lot adjacent to his home to buy a newspaper at
a convenience store in a shopping plaza. He purchased the newspaper and left the store, but before he had
walked more than a couple of feet, his foot struck a raised portion of a sidewalk slab, and he fell heavily
to the concrete.
Mario was unable to work for a month as a result of his injuries, and he brought an action for
damages against the tenant who operated the convenience store and the owner of the shopping plaza.
When the case came to trial, the evidence established that the maintenance of the sidewalk outside the
store was the sole responsibility of the owner of the shopping plaza, but the owner had not inspected the
sidewalk for some months. The sidewalk, while not in disrepair, had been slightly heaved by the previous
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spring frost. It presented an uneven surface upon which the patrons of the plaza were forced to walk. Many
of the concrete slabs were raised from 1/2 to 1 1/4 centimetres, but some protruded above abutting slabs by
as much as 4 centimetres. The slab that caused Mario‘s fall protruded by approximately 3 centimetres.
The tenant who occupied the milk store was aware of a ―certain unevenness of the slabs,‖ but did not
realize that it was hazardous.
Discuss the liability (if any) of the defendant and render, with reasons, a decision.
Answer:
This case raises the question of liability of a landowner or occupier where the landowner or occupier fails to
keep premises open to the public in a state of good repair. It also raises the question of the duty on the
individual to keep a proper look-out for dangers that are open to view, and to avoid them. A third aspect is
the matter of responsibility for maintenance – and warning of the danger. This concerns the duty of the
landowner and the adjacent shop-keeper (who was aware of the uneven sidewalk slab) to allow a danger to
exist. In class discussion, the type of person entering on the property should be determined (trespasser?
Licensee? Invitee? Contractual entrant?). The duty of care and the person to whom it is owed should also be
established. The following questions should also be considered: Is there a duty to warn of the danger? A
duty to repair? Does the person entering on the property have an obligation to keep a sharp look-out for
obvious dangers? Is a raised concrete sidewalk slab an obvious danger? Was the fact that many of the slabs
were raised and uneven a clear warning of the danger? Would a ―reasonable man‖ have foreseen the danger
and either repaired the sidewalk or warned the user? The onus is generally on the landowner or occupier to
warn persons who enter on their premises of apparent dangers where the person enters on the premises for the
benefit of the landowner or occupier. In this case there is a duty on the landowner to maintain the sidewalk
in safe condition, and bearing in mind the length of time which the property remained in a dangerous
condition, the landowner may be negligent for failing to repair, or at least to warn persons of the danger.
The tenant of the shop, if the plaza was large and contained a number of shops, would probably only be
liable for injury caused within the confines of his shop, but where access can only be gained to a shop by way
of the sidewalk outside the door, a duty exists to ensure a safe entrance to the premises for patrons of the
shop, or for an appropriate warning to customers of the danger. For an example of a similar case see:
Snitzer v. Becker Milk Co. Ltd. et al. (1977), 15 O.R. (2d) 345, and also Fraser v. Ronsten Developments Ltd.
(1969), 4 D.L.R. (3d) 475.
Case 7
Kamikazi Ski Lodge Limited operated a ski resort in a mountainous area. While the company offered a
number of runs suitable for skiers of all levels of competence, it maintained one particularly fast and
adventurous run on a slope that required a relatively high degree of proficiency to successfully ski its
course. In its advertising brochure, the company warned potential patrons of the lodge that they should
not attempt the run unless they had considerable experience. The company also required all guests to sign
a guest registration form at the time of check-in at the lodge. The form provided as follows:
―Guests assume all risks associated with their use of the owner/operator‘s lodge and facilities. The
owner/operator, its employees, and agents shall not be liable for any loss or injury incurred by any
guest, however caused. Registration as a guest shall constitute a waiver of all claims that the guest
may have against the owner/operator or its employees for any injury or loss suffered while on the
premises.‖
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Each year the lodge held a special challenge competition on its most difficult slope that required the
contestants to travel down the slope in large rubber inner tubes rather than on skis. The competition was
appropriately described as the ―$500 Kamikazi Challenge Race,‖ and was open to all contestants on the
payment of a $15 race-registration fee. Contestants were also required to sign an entry form at the time of
payment, which provided: ―Contestant recognizes that the Kamikazi Challenge is a dangerous
undertaking that could result in injury. The contestant assumes all risk and responsibility for any or all
injuries suffered while engaged in the competition.‖
Two days before the competition, Crocker, a novice skier who was a guest at the lodge, paid his entry
fee and signed the entry form without bothering to read it. He had been drinking prior to the point in time
that he entered the contest, but did not appear to be drunk or unaware of his actions.
Later that day, the contestants (including Crocker) were shown a videotape of the previous year‘s
race. The tape described the race and provided footage of incidents that involved contestants being thrown
from their inner tubes, as well as those who managed to remain in their inner tubes to the end of the race.
On the day of the contest, Crocker appeared at the starting point for the race in an obviously drunken
state. His speech was slurred, and he had difficulty standing on the slope. Nevertheless, he managed to
obtain his inner tube from the lodge employees in charge of the race and prepared for the start of the race.
At the starting gun, he threw himself into the inner tube and managed thereafter to more or less
successfully navigate the slope. He placed among the five finalists, suffering only a cut above one eye
when he was thrown from his inner tube on one occasion.
Before the final run, he took a large drink of brandy that had been offered to him by a spectator. The
race operator noticed Crocker drinking brandy, and asked him if he was in any condition to compete in
the final race. Crocker replied that he was, and the final race began.
Partway down the slope, Crocker failed to negotiate a sharp turn, and was thrown from his inner tube
and into a rock gully. His injuries rendered him a quadriplegic, and he brought an action against the resort
for damages.
Discuss the liability of the lodge, and speculate, with reasons, as to how the case might be resolved.
Answer:
This case raises the issue of duty of care on the part of a ski lodge to protect its guests from injury. It also
raises the issue of volenti non fit injuria, and the use of a waiver. Discussion of the case might begin with a
general examination of the duty of the ski lodge operator towards its guests. From here, the specific nature of
the activities carried on might be considered. Are these activities hazardous in themselves? What is the
general obligation of the lodge operator towards guests that engage in ski activity? Would ordinary skiing be
a situation where volenti non fit injuria would apply? Would the waiver signed by the guests protect the
operator under normal circumstances? Once the general liability and duty of the lodge operator are
determined, students might be asked to consider the nature of the liability of the operator for the race activity.
Would the entry form protect the operator? Is this another volenti situation covered by the entry form?
Crocker did not read the form when he signed it. Does this matter? What responsibility did the lodge
employees have to protect Crocker when they discovered that he was in a drunken state? Did they have a
duty to protect him? In the case upon which this fact situation was based, the court held that the operator had
a duty to protect Crocker from injury by preventing him from engaging in the race while intoxicated to the
point where he was unable to recognize the risks involved. The court held the ski lodge operator liable for his
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injuries as the employees ought to have foreseen the likelihood that Crocker would be injured if he
participated while in a drunken state.
Case 8
Kevin and a companion spent most of a Saturday afternoon and evening drinking alcoholic beverages at
Kevin‘s home. Around 10:00 p.m., they decided to visit a local tavern, where they had arranged to meet
some friends. The two drove in Kevin‘s automobile to the tavern, which was located on a highway some
five kilometres away. Kevin was obviously quite drunk when he arrived at the tavern, and for the next
two hours he continued to drink beer.
At closing time, the bartender informed the group (who were all quite drunk by then) that they must
leave the premises. Kevin and his companion did so, and drove from the tavern parking lot, with Kevin
behind the wheel and his companion attempting to direct him into the traffic. When the way appeared to
be clear for Kevin to enter his traffic lane, his friend said: ―Okay! Clear to go!‖ Kevin accelerated into the
traffic, but was unable to control the automobile, and it careened across the centre line of the highway and
into the path of an oncoming vehicle.
The collision destroyed the two automobiles, killed the driver of the other vehicle, and permanently
crippled both Kevin‘s friend and the passenger in the other automobile. The estimated loss suffered by
those injured in the accident was $1,900,000. Apart from some cuts, bruises, and a broken arm, Kevin
suffered no serious effects from the accident. Blood tests taken shortly after the accident indicated that
Kevin‘s blood-alcohol level was almost three times the legal limit.
Advise the parties of their rights in this case and indicate how the liability, if any, would be
determined.
Answer:
The basic facts of the case are those in an unreported Ontario Court of Appeal decision in which the court
held the intoxicated driver 85% responsible and the tavern 15% responsible for the damages suffered by the
occupants of the other vehicle. The liability of the tavern was reduced from a 50% liability determined by the
trial judge. Issues to be raised in this case would include the liability of the tavern, and the extent to which
liability should be imposed on it for serving its patrons intoxicants. Students should note that taverns may
attract liability in those instances where they continue to serve alcoholic beverages to obviously inebriated
persons who later may be involved in highway traffic accidents. Students should also discuss the position of
the passenger in Kevin‘s automobile. Did he voluntarily assume the risk of injury by entering a vehicle
driven by a person who was clearly intoxicated? Could he make this type of decision, given his own drunken
state? Does legislation in the province preclude a gratuitous passenger from recovering damages? How
would provincial ‗no fault‘ insurance (if any) apply?
Case 9
Sayeeda operated a small food stand at an open-air market where farmers in close proximity to one
another had set up makeshift stalls or tables to display their produce. To protect themselves from the hot
sun, most had erected canvas or cloth canopies over their tables. The stand operated by Sayeeda was
located in the midst of the covered stalls.
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For the purpose of cooking a particular delicacy that she sold, Sayeeda had placed a tiny propanefuelled stove on her tabletop and used it to boil a pot of oil. While she was serving a customer, a youth
about 16 years old turned up the flame on the burner, and the oil immediately caught fire. In a frantic
attempt to put out the fire, Sayeeda seized the flaming pot and flung it from her food stand. The youth was
splashed with flaming oil and was seriously burned when his clothes caught fire.
The pot of burning oil landed in a nearby farmer‘s stall and set fire to the canopy that he had placed
over it. The farmer kicked the flaming pot out of his stall and into a neighbouring stall, where it set fire to
a quantity of paper that was used for food packaging.
Before the fire was finally extinguished, three stalls had been destroyed, and both the youth and
Sayeeda hospitalized with serious burns.
Discuss the rights and liabilities of the parties involved in this incident.
Answer:
This case represents a useful vehicle for the discussion of foreseeability, duty of care, and ―the reasonable
person‖. Some of the questions that should be asked might include the following: To whom was a duty not
to injure owed? Was there a breach of duty? Should Sayeeda have foreseen the possibility of someone
tampering with or upsetting her stove when she placed it upon the table in a position where it could be
reached by passers-by? Should the youth have foreseen the danger associated with his act of turning up the
heat on the stove? Did Sayeeda act as a reasonable man under the circumstances? What standard should
apply? Is the maintenance of an open fire under such conditions a situation where strict liability should
apply? Did Sayeeda owe a duty not to injure the youth or the farmer in the next stall? Should the farmer
have foreseen the consequences of his act when he kicked the burning pot from his stall? What standard
should apply to the farmer who was totally surprised by the event? On this point it should be noted that
where a person is expected to act in totally unexpected circumstances, that the choice of the wrong course of
action, even if it results in injury, may not result in liability for that person. (See for example: Hogan et al.
v. McEwan et al. (1975), 64 D.L.R. (3d) 37). It should also be noted that in fixing a standard for children (is
a 16 year old youth a child?) the courts usually consider the child‘s age, alertness, level of intelligence,
experience, and general knowledge. (See: Heisler v. Mooke [1972] 2 O.R. 446.)
Case 10
Zhao and Henry set out for a day of fun at ―Fearsome,‖ a white-water rafting attraction. They both signed
a waiver stating they ―release the operator and its employees from all liability however caused.‖ Halfway
through the course, their raft (piloted by one of the attraction staff) flipped over, an event considered as all
part of the ―extreme‖ factor. Both Zhao and Henry were wearing life-jackets. Henry was thrown to one
side from the raft, and broke his hip in collision with a submerged rock. Zhao was initially unhurt, and
both men were carried on the current to the lagoon at the end of the course. A Fearsome boat was waiting
for them, and its crew used a hooked pole to snare the loops of their lifejackets. In thrusting forward with
the pole, the crewman seriously sliced Zhao‘s hand. Henry spent three months in a cast before he could
work again, and Zhao missed six weeks of work.
Discuss the issues arising from this that will affect a legal action brought by Henry and Zhao against
Fearsome, and render a decision.
Answer:
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This case requires students to consider the issue of duty of care upon the attraction operator to protect its
participants from injury. Students will need to assess the degree to which volenti non fit injuria applies, and
the effectiveness of a waiver. Discussion of the case might begin with a general examination of the duty of
the attraction operator, and the way it executed its duty in two parts: during the ride, and the recovery
operation. It may well be that there is no liability for elements that were beyond the control of the operator
during the ride, but liability for the additional damages caused in the botched recovery attempt that sliced
Zhao‘s hand. The injuries on the river are in the contemplation of the parties, and thus within the scope of the
waiver, but these latter injuries in recovery may not be, and the operator may be liable accordingly.
Case 11
Sandra purchased a timer for her living-room lamp, so that it would come on in the evening while she was
out working night-shifts. One afternoon Sandra carried out her energy conservation routine of shutting off
lights and appliances, except for the living room lamp in the northwest corner. She set the lamp timer and
left for work. She returned home after midnight to find the fire department packing away its hoses, and
her home gutted by fire. The fire marshal told her the fire was electrical in origin, and that its spread
located the origin along the north wall of the living room.
Describe the case in tort that Sandra is now facing in order to receive compensation for her losses.
Answer:
Sandra is facing the launch of a product liability suit against the manufacturer of the lamp. The specific
aspects of this tort are covered in the text section on manufacturer‘s liability, most centrally that she need
not have direct contractual relations with the manufacturer in order to sue, and that she need not involve
the retailer if there is little advantage in doing so. Her central argument will be that the lamp was unfit for
the use intended, and that the lamp is the cause of her damages on the basis of res ipsa loquitor.
Case 12
A 45-year-old patient was under doctor‘s care for the past twenty years for chronic arthritis, trying many
different drugs without success. A new drug appeared, having been certified by Health Canada and the
doctor explained that like all the rest, the drug would have a range of side effects, among which was
possible depression. The patient took the drug, and within a week suffered a mood swing and Id suicide.
Concerned by this news and two other cases, Health Canada suspended the drug from Canada, pending
further review. The family of the deceased sued the pharmaceutical maker and Health Canada.
Aside from issues of the doctor‘s possible professional liability, discuss the issues of manufacturer‘s
liability and negligence raised in this scenario.
Answer:
The question requires discussion of manufacturer‘s liability and negligence, but also some assumptions on
drug testing and an opinion on the role of government in ensuring drug safety. In principle, there can be no
expectation that all ―certified‖ drugs will be safe for all persons. Ignoring the difficulties in suing the Crown,
the best that likely can be expected here, regarding Health Canada, is a review or Royal Commission into its
policies and practices, and perhaps government compensation thereafter. With respect to the manufacturer,
the question is the adequacy of its testing, and the extent and tenor of its side-effect warnings. If neither was
extensive, the possibility of a successful suit in negligence grows. The testing presumably was sufficient for
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Health Canada, which should be a defence in itself, so focus will fall upon the warnings. Were they clear?
Did they suggest how serious the side-effects may be? Were doctors warned against prescription for patients
of a certain predisposition? Without significant evidence against the manufacturer, this would be a difficult
case to mount in Canada, despite being much more common in the USA.
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CHAPTER CHARTS
CHAPTER 6. SPECIAL TORT LIABILITIES OF BUSINESS PROFESSIONALS
Chapter Topics
The Professional
Professional Standards and Professional Associations
The Professional–Client Relationship
Accountants
Lawyers
Engineers
Architects
Semi- Professionals and Other Skilled Persons
Summary
Key Terms
Review Questions
Mini-Case Problems
Chapter Objectives
After study of this chapter, students should be able to:
• Describe how and why the liability of professionals differs from the norm.
• Explain the nature and responsibilities of a fiduciary relationship.
• Explain the significance of informed consent.
• Describe the key aspects of professional liability in specific cases.
YOUR BUSINESS AT RISK
Professionals are not only held to a higher standard of care, but they tend to be even more
financially desirable targets of litigation. Professionals must understand the scope of their
additional responsibility and consider how they will conduct their professional practice to
reduce their risks. Wise professionals will obviously consider the advice of insurance
professionals as part of their risk reduction strategy.
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CHAPTER COMMENTARY
A professional is a person who possesses special knowledge or who exercises special skills not possessed by
the ordinary individual. Students should be made aware of how professional status is established (training,
education, standards of performance, professional association with powers to enforce standards, etc.) and the
responsibilities that this status places on the professional under tort law. The text outlines these
responsibilities for many of the older, established professions, but students should also be aware that many
new professions are also emerging, and are recognized at law.
The duty of care of professionals and their responsibility to their clients may be of particular personal
importance to students who intend to enter a profession at some point in time after graduation. This chapter
attempts to provide a broad view of the legal obligations of professionals, and how professional tort liability
may arise.
Some time should be devoted to a discussion of how a professional standard is established, as well as
the importance of a professional standard and its relationship to what constitutes performance of professional
duties. The fiduciary duty of certain professionals should also be discussed.
In the case of a professional person performing a service, (e.g. a medical practitioner) the standard is
normally that of an ordinary skilled member of the profession, and if the work is done in accordance with that
standard, there is usually no liability in the case of injury. Case comment on Kangas v. Parker and Asquith is
an excerpt from the judgment in which the standard of skill of a surgeon is examined, and illustrates how
liability is determined. The important point to note here is that the duty is not absolute. If the professional
exercises the degree of skill of the average member of the profession that is all that can reasonably be
required of the person, assuming that the profession has established a reasonable standard. It is only when the
performance is below the standard that liability normally will arise.
Some class discussion time should also be devoted to professional negligence in the form of
negligent misstatements and negligent misrepresentation by accountants, lawyers, etc., and the extent of their
liability. The court Decision of Hercules Managements Ltd. v. Ernest and Young deals with this issue.
Students should also be made aware of the fact that semi professionals and persons with special skill
may also have tort liability for their actions, if their services are performed negligently. See for example, the
text reference to insurance agents.
Classroom review of the chapter might be expanded to discuss the limitations on liability that
professionals may include in their contracts, such as in the case of an accountant or auditor‘s reliance on
client financial data in the preparation of their reports. Informed consent in the case of certain professions
should be noted where risks are associated with a proposed course of action. Some class time should also be
used to discuss the extended liability of some professionals to persons outside the contract (e.g.: Architects
and Accountants).
Review Questions
1. Does a professional person have any responsibility to a person other than the one who engaged the
professional services?
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Answer: Some professional persons such as accountants may have a responsibility to third parties if
they could reasonably have expected the third parties to rely on their professional work (such as financial
statements, etc.) to make decisions concerning the professional person‘s client. Architects and engineers
may also have a safety responsibility to users of property they design.
2. How is the standard of care determined for most professionals?
Answer: The standard of care of most professionals is based upon the skill standards set down by
their professional organizations for the performance of professional services.
3. Define ―negligent misrepresentation‖.
Answer: Negligent misrepresentation may be defined as negligent misstatements made by a
professional to his or her client.
4. Explain the role of a professional organization and the issue of professional responsibility to clients.
Answer: Professional organizations usually establish standards that the member must meet in the
performance of services to clients, and may discipline/expel members who fail to meet the standards.
5. How would the duty of care be determined for persons who are not members of a professional
association, but who hold themselves out as persons in possession of special expertise? Use an insurance
agent as an example.
Answer: In the case of non- professionals, the general standard of others in the business may be used
as a determinant of the ‗standard‘ of service to be provided, and a failure to meet the ‗standard‘ would
constitute negligence.
6. What is the ‗threefold test‘ and how is it applied in cases of negligent misrepresentation? In what way has
the Supreme Court of Canada changed the application of this test?
Answer: The three fold test is described as being:
(1) Whether harm was foreseeable.
(2) Whether there was a relationship of sufficient proximity.
(3) In terms of public policy, it would be just and reasonable to impose the duty on the party
making the statement.
See: Hercules Managements Ltd. case for Supreme Court comments.
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7. In what way or ways would a professional engineer have a responsibility to third parties?
Answer: In designing a structure, the engineer would be obliged to consider the safety of the persons
using the structure, and he/she would be liable for injury if he/she was negligent in this regard.
8. What are the courts reluctant to make auditors responsible to every person who obtained a copy of a
financial statement negligently prepared by the accountant? What limits do the courts apply to an
accountant‘s responsibility?
Answer: See text discussion of this topic.
9. Outline the responsibility of a surgeon to a patient. Is it limited only to the actual performance of the
medical procedure?
Answer: The responsibility of the surgeon to the patient is to perform the medical procedure in
accordance with the standard prescribed by the professional association. The surgeon must also explain
to the patient the need for the operation, and the risks associated with it in order to obtain informed
consent from the patient.
10. Outline the steps that an emerging profession must take in order to establish a recognized professional
status.
Answer: A ‗profession‘ would require a professional association to establish skill and education
standards, and to have the power at law to ensure that members maintain the standard. It must also have
the legal authority to impose the penalty of expulsion from the profession of a member who does not
maintain the standards.
11.Explain ―fiduciary duty‖.
Answer: A fiduciary duty arises in a relationship of trust where the professional has a duty to place
the client‘s interest above his or her own.
12. Should professional associations be responsible for the negligent acts of its members? What should be
the limits of its responsibility to the public-at-large?
Answer: This question should raise a discussion of the limits of responsibility for an association with
respect to maintenance of professional standards of its members – training, discipline of members, etc.
Mini-Case Problems
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1. A lawyer negligently prepared a deed of land for a client who was selling his property, and in doing
so described the wrong parcel of land in the deed. The lawyer acting for the purchaser failed to notice
the error, and registered the deed. The purchaser of the land later discovered that her deed was for the
wrong parcel of land.
Discuss the responsibility of the lawyers.
Answer:
In this case, both lawyers were negligent. However, the lawyer who accepted the deed on behalf of the
purchaser would probably be liable for all of the costs incurred to obtain a correct deed for the property
purchased.
2. An engineer designed an outdoor elevated patio that was expected to accommodate conference
meetings of up to 100 persons. The engineer considered the load bearing structure on the basis of the
weight of 200 persons as a safety factor. When the structure was completed, the owner decided to use
the patio for a rock concert, and sold 400 tickets. In actual fact over 400 patrons attended, and packed
the patio for a ‗standing room only‘ concert. The enthusiastic crowd at one point began jumping to
the music, and the additional load pressure caused the structure to collapse, injuring many of the
patrons
How would liability be determined in this case?
Answer:
The issue to discuss here is the obligation on the part of the engineer to design a safe structure as an elevated
outdoor patio. The expectation was that it would be used by up to 100 persons. The engineer used a capacity
of 200 as his safety factor. Was this reasonable? Should he have foreseen that 400 people might crowd on
the patio? The engineer in his defence might rely on the fact that the structural failure was due to the added
pressure of the crowd jumping on the patio, and that under normal circumstances the structure would have
supported as much as 400 persons without failing. It was probably unreasonable to expect the engineer to
foresee the event that was held and to have built accordingly.
Case Problems for Discussion
Case 1
Central Land Development Ltd. sold three commercial building lots to Commercial Builders Ltd. for the
sum of $400,000. As a part of the purchase price, Perros and Masson, the two principal shareholders of
Commercial Builders Ltd., and the corporation gave Central Land Development Ltd. a mortgage for
$250,000. The balance of the $400,000 selling price, in the amount of $150,000 was paid at the time of
the purchase.
A year and six months later, Commercial Builders Ltd., and its two shareholders wished to pay off the
mortgage, and requested Central Land Development Ltd. to provide them with a pay-out amount. Central
Land Development Ltd. requested its accountant, Hamilton, to calculate the balance owing on the
mortgage. Hamilton calculated the balance owing to be $172,459. Commercial Builders Ltd. paid the
amount and received a discharge of the mortgage.
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Several months later, Central Land Development Ltd. discovered that the amount calculated by
Hamilton was in error, and the correct balance was in fact $202,459. Central Land Development
requested payment from Commercial Builders Ltd. of the $30,000 difference, but Commercial Builders
Ltd. refused to pay the amount.
Discuss the issues raised in this case, and the arguments that might be raised by each of the parties.
Answer:
This case is based upon the case of Prevost-Masson v. General Trust of Canada, [2001 SCC 87] 3 S.C.R.
882 (CanLII).. Students should identify the negligence of the accountant as the source of the problem when
he calculated the pay-out amount in error. However, was there a duty on the other party to verify the pay-out
amount? Was it aware of the error (in its favour) when it paid the $172,459? Did it have an obligation to
inform Central Land Development Ltd. of the error?
In the above noted case, the accountant was held liable for professional negligence, and obliged to
pay Central Land Development Ltd. the amount of the loss.
Case 2
Road Builders Ltd. was the successful bidder for a contract with a provincial government to construct a 23
km. highway by-pass of a large city. As a part of its preparation for the contract bid, Road Builders Ltd.
engaged the services of Highway Engineering Corporation Ltd. to prepare engineering design and
specifications for the construction project. This was done, and Road Builders Ltd. submitted the
engineering design and specifications as a part of its bid for the contract. The bid was successful, and the
engineering design was incorporated in the contract by the government.
During construction of the roadway, errors were discovered in the design, and Road Builders Ltd. was
obliged to correct the design errors at considerable expense. As a result, Road Builders Ltd. suffered a
loss on the construction project, and demanded compensation for the loss from Highway Engineering
Corporation Ltd.
Highway Engineering Corporation Ltd. refused to pay for the loss on the basis that it was not
involved in the construction, and also that the province had accepted the design by including it in the
contract.
Discuss the arguments of Highway Engineering Corporation Ltd., and the arguments that Road
Builders Ltd. might raise if it took legal action against the engineering firm for its loss. Render a decision.
Answer:
Students should discuss the matter of acceptance of the engineering design and specifications by the parties to
the contract. Once the contract was accepted by the Province, did the duty of Highway Engineering
Corporation Ltd. end? It was not involved in supervision of the road building. Did this matter? Could the
parties change the specifications without the consent of the engineering firm? In the case of Edgeworth
Construction Ltd. v. N.D. Lea & Associates Ltd. 1993 CanLII 67 (SCC), the engineering firm was held liable
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for the errors in design, but the individual engineers that placed their professional seal on the drawings were
not liable. Applying this case to the facts in Case 2, Highway Engineering Corporation Ltd. would be liable
for the loss incurred by Road Builders Ltd.
Case 3
Alex carried on a relatively successful business as a manufacturer of a cleaning product that was well
received by the users. After several years of slow but steady growth in sales, his accountant suggested that
he expand the business by the incorporation of a company. This would permit the sale of shares to acquire
the capital necessary for a new plant and equipment.
A company was eventually incorporated, but instead of selling shares to acquire the necessary capital
to expand the business, Alex decided to arrange a $200,000 loan from his banker. To do so, however,
Alex needed the accountant to prepare financial statements for the company to deliver to the bank.
Preparing the financial statements, the accountant failed to notice that the existing land and plant
building were not acquired by the corporation, but retained by Alex, and simply leased to the company on
an annual basis. The accountant had included the land and building (which had a value of $250,000) as an
asset of the corporation on the financial statements, without checking with Alex to determine if the
property had been transferred. When the error was discovered later during negotiations with the bank, the
bank insisted that Alex guarantee the loan as a principal debtor, and use the land and building as
additional security for the loan.
A few weeks later, Alex decided that it would be necessary to acquire additional capital to complete
the expansion program. He contacted a private investor with a view to selling her a block of shares in the
corporation. The investor was interested in the financial status of the corporation, and Alex informed her
that the corporation had borrowed $200,000 from the bank for the purpose of expanding the business. He
also suggested that the investor contact either his accountant or the bank for information on the
corporation‘s assets and financial position. The investor contacted the bank and requested copies of the
financial statements that the accountant had prepared. A bank employee, who was unaware that the
statements were in error, gave them to the investor without comment.
On the strength of the financial statements, the investor invested $50,000 in shares of the corporation.
Some months later, she discovered that the corporation did not own the land or buildings, and that the
financial statements were in error.
Advise the investor of her legal position, and her rights (if any) against Alex, the accountant, and the
bank.
Answer:
This case deals with the responsibility of a professional and a banking institution to a third party. The
accountant was clearly negligent when he failed to notice that the building was not acquired by the
corporation when it bought the business from Alex. The error was discovered when the bank advanced funds,
and the bank acquired additional security to secure its loan to the corporation. However, did the bank owe a
duty to the investor to inform him of the error on the financial statements before releasing them? Was the
accountant liable to the investor on the negligently prepared statements? Professional accountants may be
liable when they have produced inaccurate financial statements that result in a loss for third parties that they
(the accountants) could reasonably have foreseen would be using them to make investment decisions
concerning their client. Should a "reasonable accountant" have foreseen the use of financial statements in the
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instant case? The statements were prepared at Alex's request for the bank, but the accountant should have
foreseen the possibility that they might be used by other investors as well, and corrected the errors contained
in them when discovered. By leaving the misleading statements in the hands of the bank, he should have
foreseen the possibility of others using them when they contained a known error. The bank was also negligent
in this instance by providing the investor with the misleading financial statements, although it is important to
note that the investor in the case requested financial information from the bank, and the financial statements
were given as a part of this opinion. (The facts of the case in the text are not entirely clear on this point, and
may give the impression that the bank employee simply delivered up the statements, and said nothing about
the corporation's financial position. The question remains much the same, however: did the bank have a duty
to warn the investor that the information in the statements was incorrect when it knew the use which the
investor intended to make of the information?). For cases, see: Hedley Byrne & Co. Ltd. v. Heller &
Partners Ltd. [1964] A.C. 465; Goad v. Canadian Imperial Bank of Commerce 1968 CanLII 321 (ON
SC). In the case of Haig v. Bamford 1976 CanLII 6 (SCC), the accountant was held liable for his negligence
in the preparation of financial statements which he ought to have foreseen might be used by other investors.
Case 4
Community Sportsplex Ltd. purchased a block of land from a small municipality for the development of a
sports facility consisting of an outdoor sports field, and an indoor arena with a standard ice surface with a
seating capacity for 3,000 spectators.
The municipality had zoned the area for ‗recreational use‘ and prohibited the construction of
residential housing on the land. This was so because a part of the land had been a former landfill site, and
the surface soil subject to some settling as the garbage buried below gradually decomposed.
Community Sportsplex Ltd. was unaware of the former use, but nevertheless, engaged the services of
Geo Engineering Corporation Ltd., a soil testing business, to determine the suitability of the surface and
subsurface to support the proposed arena building. The proposed location of the building was at the edge
of the landfill area, and soil testing indicated that the land was suitable for the construction of the
building.
Shortly after the soil had been tested, the architect that designed the arena building in consultation
with Community Sportsplex Ltd. decided to move the location of the proposed building some 10 metres
closer to the playing field. As a result, the new location placed one wall of the proposed building on the
landfill area.
A contract for construction of the building was given to a contractor who proceeded to excavate for
the footings of the building. In the area over the former landfill the contractor discovered the poor soil
conditions, and extensive work was required to stabilize the ground for the building footings. The
contractor determined that this added cost was approximately $50,000. Community Sportsplex Ltd.
refused to pay the additional cost.
Discuss the rights of the parties and the possible outcome, if the dispute should be taken to court for a
decision.
Answer:
This case raises a number of issues for class discussion. The municipality, while not a party to the
construction of the arena sold the land to the company knowing the purpose of the purchase. Did it have an
obligation to warn the company of the landfill? Did the soil testing corporation have an obligation to
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determine the former use of the property? Did the architect have a similar obligation? The architect relocated the position of the building to an area which had not been soil tested for construction, and was
presumably aware of this fact. This failure may render the architect liable for the loss. Geo Engineering
Corporation Ltd. would have no liability as it was not negligent – it tested only the area where it was required
to test the ground.
CHAPTER 7. AN INTRODUCTION TO CONTRACTS
Chapter Topics
Introduction
Historical Development of the Law of Contract
The Elements of a Valid Contract
The Intention to Create a Legal Relationship
Offer and Acceptance
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Describe and explain the first three elements of a valid contract: intention, offer, and
acceptance.
YOUR BUSINESS AT RISK
Almost all of your business activity will be governed by contracts, and you must learn how to
create contracts correctly. If a contract is not created correctly, it does not come into existence,
and this is a dangerous circumstance for your business. If the other party to your transaction
abandons the deal or falls short in performance, you will have incurred time and expense for
nothing. You will be left with little or no means to enforce your ―rights,‖ as no contract ever
existed.
CHAPTER COMMENTARY
Chapter 7 introduces the law of contract, and represents the first of a series of chapters concerning one of the most
important areas of the common law from the standpoint of business persons. A good grounding in the basic concepts
related to the law of contract is therefore essential for all students.
The chapter traces the historical development of the law, then presents the first of the essential elements of a
binding agreement: the intention to create a legal relationship. While this is a relatively simple element for the student to
grasp, its importance should not be ignored, and perhaps a few fact situations should be discussed to distinguish
situations where the intention is considered present (such as an agreement between strangers in a business setting) from
those where it is not (e.g: a family agreement of a casual nature). The test applied in these cases is generally that of the
reasonable person, and whether such a person would regard the agreement as binding.
The chapter also introduces the elements of offer and acceptance. Offers should be distinguished from mere
invitations to do business, and the distinction between an offer and an advertisement to sell goods should perhaps be
pointed out by way of example. A certain amount of drill concerning the rules for both offer and acceptance is often
useful to firmly fix the requirements for each in the minds of the students. A similar effort should be made to highlight
the rules for lapse and revocation. These topics are described in the text, but it should be emphasized that the acceptance
must be unconditional, and communicated to the offeror before lapse or revocation takes place, if the acceptance is to be
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valid. The case excerpt from Dickinson v. Dodds provides a general discussion of offer, acceptance, and the effect of
notice of revocation before acceptance is made.
The Court Decisions in Chapter 7 provide a number of useful illustrations of offer and acceptance. The first
decision, Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. distinguishes between an offer
and an invitation to do business. In that case the issue concerned the point in time when the contract was made. The
court hearing the case decided that in a self-serve setting it was when the customer reached the check-out counter and
placed the goods on the counter that the customer was, in essence, saying: "I offer to purchase these goods from you",
and if the shop-keeper accepted the offer, the contract was then made.
The Carlill v. Carbolic Smoke Ball Co. may be contrasted with the Boots Cash Chemists case, as it
distinguishes an invitation to do business (the usual nature of an advertisement of goods) with an offer to the
public-at-large. In the Carlill case, the advertiser, by the wording of the advertisement, was clear in his intention to be
bound by the terms of the advertisement, and the court concluded that the advertisement constituted a valid offer to the
public which could be accepted by the purchase by the use of the product. The decision in the case is important, not only
because it establishes the rule that an advertisement may be an offer if it is intended to be such by its expressed words,
but also because it stands for the rule that acceptance need not be communicated if the offeror makes it clear in the offer
that acceptance can be made by the performance of an act in accordance with the terms of the offer. If the case problems
for discussion are used to illustrate these various concepts, Discussion Case 7 provides a useful vehicle for the discussion
of the rules for offers, acceptance, lapse, and revocation.
The issue of offer and acceptance using electronic means is treated, as well as the important question of location
of the transaction, and the effect of the ‗click‘ as acceptance. These topics are worth some class time, given student
familiarity with on-line purchasing of products. The cases of Braintech v. Kosticik and Rudder v. Microsoft Corp. set
out in the text might also be discussed in this regard as well.
CONTRACT CASE PROBLEMS: A SUGGESTED APPROACH
Chapter 7 introduces the law of contract and the first elements of a valid contract. The case problems provide an
opportunity to analyze the dealings between the parties in each situation, and to determine if the parties have established
an enforceable agreement.
An approach that may be suggested to students for these cases might be to examine the facts of the case, first to
determine if the parties intended to create a legal relationship, then to identify the offer (or offers, as the case may be).
Once the offer has been identified, the next step should be to look for an unconditional acceptance of the offer. If an
acceptance can be found, check the conditions under which it was made to ensure that it was made in accordance with
the terms of the offer, and before lapse or revocation occurred. By following this approach, students are less likely to
overlook something in the case which would affect the creation of the agreement, or allow one party to avoid it. In the
chapters which follow, additional essential elements will be added to the three elements examined in this chapter. The
advantage of this approach to case analysis is that the examination may be expanded in a methodical way to cover each
new element as it is added to the "list".
Review Question
1.
Describe the burden placed upon an offeror by the courts where the offeror alleges that indirect notice of revocation
was received by the offeree.
Answer: The offeror must satisfy the court that the reliability of the source of the knowledge was such that a
reasonable person would accept the information as definite evidence that the offeror had withdrawn the offer.
2.
Why is an intention to create a legal relationship an important element of a valid contract?
Answer: Intention distinguishes those situations where enforceable rights are created from those where the
parties do not intend to be legally bound by their promises.
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3.
Explain why communication of an offer must take place before an offer may be accepted. Why is this important?
Answer: Communication must take place first because a party should not be bound by a offer of which he or
she is not aware. In addition, a party must be fully aware of the terms of the offer before acceptance may be made.
4.
Describe the ―rules‖ for acceptance, and explain why such ―rules‖ are necessary.
Answer: Acceptance must be unconditional - because it must be in accordance with the terms of the offer.
Acceptance must be communicated in accordance with the terms of the offer because the offeror determines how
acceptance should be made. See also rules for time and mode of acceptance in text.
5.
Under what circumstances would "silence" be acceptance?
Answer: Silence may constitute acceptance where there is a pre-existing agreement between the parties that
silence may be acceptance.
6.
Explain the term 'counter-offer' and how it might arise.
Answer: A counter offer may arise where a party makes a conditional acceptance of an offer. The 'conditions'
attached to the acceptance constitute a new offer.
7.
Is an advertisement containing an offer of a reward for a lost pet a valid offer? How does it differ from an
advertisement of goods for sale?
Answer: An advertisement of a reward is treated as a binding offer to the public at large. It is accepted by the
performance of an act. An advertisement of goods for sale is usually not considered as an offer because the seller is
not expressing an intention to be bound by the advertisement - only inviting offers based upon availability of stock,
etc.
8.
Describe four instances where an offer might lapse before acceptance.
Answer: An offer may lapse if:
(1) either party dies before acceptance.
(2) either party becomes bankrupt.
(3) no acceptance within the time period specified in the offer.
(4) no acceptance within a reasonable time, if no time of acceptance specified.
9.
Explain the rationale behind the rule that states that an offer by mail invites acceptance by mail, and that the
acceptance is complete when a properly addressed letter of acceptance is dropped in a mail box.
Answer: The rationale behind the rule is that the offeree has done everything possible to accept the offer when
the letter of acceptance is placed in the hands of the post office - hence that is the time of acceptance.
10. What condition must be met before revocation of an offer is effective?
Answer: Revocation of an offer is not complete or effective until it has been received by the offeree, or the
offeree has been clearly made aware of the revocation.
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11. ―The parties to a contract, if they do things right, create their own rights and duties." Is this a valid observation?
Answer: Yes. Rights and duties created by a valid contract are enforceable at law by the courts.
12. How does acceptance of a unilateral agreement differ from that of an ordinary agreement?
Answer: Acceptance of a unilateral agreement is made by the performance of an act specified in the offer itself.
No communication of acceptance is necessary.
13. Written forms often contain ―YES‖ OR ―NO‖ check boxes. Why should on-line forms go one beyond ―OK‖ and
―CANCEL‖ boxes to establish ―CONFIRM‖ checks?
Answer:
The ―CONFIRM‖ check is analogous to a ―last look‖ at a document we have manually signed. Even if
signed, we may tear up contract, for the last step lies in the tenet of ―signed, sealed and delivered‖.
―CONFIRM‖ checks allow that same right of ―tearing up‖ the deal before releasing it from our hands to those
of a would-be counterparty. Electronic means can only offer this dimension through such means.
14. What is a ―click-wrap agreement‖?
Answer: A click wrap agreement is on an on-line agreement presented to the recipient (usually a prospective
purchaser) where an acknowledgement of the terms and acceptance of the terms is signified by a mouse ‗click‘ in
the appropriate box related to a statement that the prospective purchaser understands the terms of the agreement,
accepts the terms, and intends to be bound by the agreement.
Mini-Case Problems
1. Potter, the owner of Industrial Castings Ltd., placed a for-sale ad in a trade paper. The ad read: ―HighSpeed Caster 750 for Sale, $25,000.‖ Yates and Zabel both arrive at the shop and wish to acquire the
machine. Yates is the first to meet Potter and says: ―I accept your offer. Here is my $25,000 cheque.‖
Zabel then states: ―Here is a $26,000 cheque. I will take your machine.‖
Must Potter sell the machine to Yates?
Answer:
If an advertisement is considered to be an invitation to do business (to invite offers) then Potter is free to accept which
ever offer he pleases.
2. D offered to sell his automobile to E for $5,000 cash. E responded to D‘s offer by saying: ―I will buy
your automobile for $5,000. I will pay you $2,500 now, and $2,500 in one week‘s time.‖
Have D and E formed a binding agreement?
Answer:
No. E has qualified his acceptance by stating the terms of payment. E has made a counter-offer which D may accept
or reject.
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3. The president of A Co. wrote a letter to B Co. offering to sell B Co. a large quantity of steel at a
specific price. B Co. did not respond to the letter, but A Co. sent a ―sample load‖ of one tonne that B
Co. used in its manufacturing process. A month later, A Co. sent the quantity of steel specified in its
letter along with an invoice at the price specified.
Is B Co. bound to accept and pay for the steel?
Answer:
The 'sample load' sent by A Co. may be treated as a gratuitous delivery, perhaps for testing purposes, etc. as this may
be a custom of the trade. Unless customs of the trade dictate otherwise, A Co. cannot argue silence as acceptance, unless
it can establish that the use of the steel in its manufacturing process constitutes an act of acceptance. See text for a
discussion of this topic.
4. Joe met Larry on the main street of their town. Both owned used car lots in the town, and were casual
acquaintances. Parked at the curb beside them was a vintage muscle-car Joe had long admired.
Pointing to it, Joe said ―I love that beauty. I‘d pay $40,000 in a heartbeat for that one.‖ ―Yeah?‖ said
Larry, ―Well, I accept your offer. That‘s a $5,000 profit for me. I bought it this morning for $35,000.
It‘s yours now, buddy.‖ Joe protested that he had not been serious about the car. Larry intended to
hold him to his word.
Advise the parties.
Answer:
The issue here is whether Joe intended to create a legal relationship. He was unaware that Larry was the owner when
he made the statement. Was it an offer to the world-at-large? Simply conversation? Probably conversation, unless it
could be established that Joe and Larry had previously bought and sold vehicles in that manner.
5. Alexandre attended an auction sale of the property of a bankrupt restaurant. Among the items for
auction was a stainless-steel food preparation table. The auctioneer commenced by asking for bids:
―Do I hear seven hundred dollars?‖ Alexandre raised his hand, and the auctioneer cried ―SOLD.‖
Is this a binding contract?
Answer:
At an auction sale, the offers usually come from the audience in attendance, usually by raising one‘s hand in response
to the auctioneer, and acceptance made by the auctioneer. In this case it might be argued that acceptance was made by
the auctioneer when he stated ―sold‘.
6. Ann‘s electric clothes dryer was unreliable, and she sought a replacement. She noticed an
advertisement in the newspaper for a used dryer, in like-new condition, at a price of $200. She visited
the residential address given, and was shown the dryer, sitting against the wall inside a garage. The
elderly lady who owned it had died, and her son was selling her possessions. Ann was delighted, paid
$200 and took the dryer home. When she tried to install it, she discovered it was designed to run on
natural gas rather than electricity, a fact that had not even occurred to her to check.
Does a contract exist in this situation?
Answer:
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In this case Ann entered into an agreement to purchase the dryer, the seller had also agreed, and a contract was
formed. Offer and acceptance requirements were satisfied, as was the intention to create a legal relationship. Ann is
probably bound by the contract on this basis as she had the opportunity to examine the goods before purchase.
7. Alphatech, an Ontario firm, employs Jane. She sends an offer by e-mail on behalf of her company to
Fayeed, to purchase equipment. Fayeed replies by e-mail three days later, accepting the offer, but in
the interval Jane leaves her job at Alphatech. Her e-mail account is closed, and Fayeed‘s reply is
bounced back as undeliverable. After a cumbersome effort of some days to find out who replaced
Jane, Fayeed is informed that the offer has lapsed as Jane‘s replacement found an alternate supplier
for the equipment.
Was there an enforceable contract between Fayeed and Alphatech?
Answer:
Like other instant electronic means, email is valid on receipt as opposed to sending (as is the case for postal
mail), subject further to the provisions of provincial legislation. The legislation is becoming quite uniform
regardless of province, but in Ontario, the standard common law concept of receipt is refined for email as
―when it becomes capable of being retrieved and processed by the addressee‖. As Fayeed‘s acceptance was
never valid, the offer is capable of lapsing or being revoked. As this appears to be the case, there never was
an enforceable contract created between Fayeed and Alphatech.
Case Problems for Discussion
Case 1
Ming‘s home was located on a rural residential lot overlooking a pretty ravine, and he thought that he
might enjoy a small terrace behind his home for a patio. He placed a sign at the road in front of his home
with the words ―Clean Fill Wanted‖ and his telephone number. While Ming was at work one morning, a
caller rang about the sign, and Ming‘s teenage son answered. He told the caller that his father wanted fill
in the ravine, at which the caller was delighted. Dump trucks began arriving non-stop through the
afternoon, bearing the logo of Rock-kut Highway Excavators Ltd. When Ming returned from work, he
was aghast at the sight before him.
Discuss the issues raised in this situation.
Answer:
The central issues in this case are offer and acceptance. Did the words ―Clean Fill Wanted‖ represent an offer? Was
it an unilateral offer? Did Ming‘s son bind him in contract with his statements to the contractor? No quantity was
discussed, but did the son establish this by his comment to the contractor? No price was mentioned for the fill, but the
contractor was apparently providing it without charge. On the facts, the parties may have established offer, acceptance
and the intention to create a legal relationship (assuming Ming‘s son could bind him in the contract) and the contractor
would appear to, or did perform the agreement according to the terms stipulated by the son.
Case 2
McKay operated a large farm on which he grew a variety of vegetables for commercial canners. He also
grew a smaller quantity for sale to local retailers and wholesalers as fresh produce. On August 5th, Susan
Daigle of Daigle Wholesale Foods Ltd. approached McKay and offered to purchase 5,000 5-kilogram
bags of carrots from him at a fixed price per bag. McKay stated that the price was acceptable to him, but
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he was uncertain as to whether his crop would be sufficient to make up the 5,000 bags. He told Daigle he
could definitely supply 4,000 bags, and that he would be in a position to tell Daigle Wholesale Foods Ltd.
by the next week if the additional 1,000 bags would be available. Daigle nodded approval and left.
A few days later, McKay discovered that crop failures in other parts of the province had pushed carrot
prices substantially above the price offered by Daigle Wholesale Foods Ltd. McKay‘s crop, however, was
abundant, and he discovered that he had 6,000 bags when the crop was harvested.
At the end of the week, Susan Daigle called to determine if McKay could supply her with 5,000 bags,
or only 4,000. McKay refused to supply Daigle Wholesale Foods Ltd. with any carrots, and informed her
that it was his intention to sell the crop elsewhere.
Discuss the negotiations between the parties, and determine the rights (if any) and liabilities (if any)
of the parties. Assume that Daigle Wholesale Foods Ltd. brought an action against McKay.
Discuss the nature of the action and render, with reasons, a decision.
Answer:
This case requires identification of the offer, and its acceptance, as well as the nature of the offer. Did the parties
establish a contract to buy/sell 5,000 or 4,000 bags? Was there actual acceptance by Daigle, or merely an "agreement' to
wait until the next week, when McKay could make a firm commitment? In the negotiations, Daigle's offer to purchase
was not accepted by McKay, but McKay may have made a counter-offer to sell 4,000 bags. If this should be the case,
Daigle's approval could be interpreted as acceptance of the offer to sell 4,000 bags, and an agreement to wait until the
next week with respect to the remaining 1000 bags. If a contract can be established, McKay would be obliged to deliver
the 4,000 bags. As to the remaining 1,000 bags, if the agreement could be interpreted to mean that McKay would sell the
additional 1,000 bags if the crop was sufficient, then McKay might also be obliged to deliver up the additional amount
(See: H. R. and S. Sainsbury Ltd. v. Street, [1972] 1 W.L.R. 834). The extension of the agreement in this fashion may,
however, be difficult unless the facts could be so interpreted.
Case 3
Armstrong Aggregates Co. wrote a letter to Bishop on May 2nd offering to sell him 200 tonnes of scrap
mica at $180 per tonne. Bishop received the letter on May 3rd. A few weeks later, Bishop checked the
price of mica, and discovered that the market price had risen to $185 per tonne. On May 22nd, Bishop
wrote Armstrong Aggregates Co., accepting the offer. Armstrong did not receive Bishop‘s letter until
May 30th. Armstrong refused to sell the mica to Bishop at $180 per tonne, but expressed a willingness to
sell at the current market price of $187 per tonne.
Bishop instituted legal proceedings against Arm-strong for breach of the contract that he alleged
existed between them.
Discuss the rights (if any) and the liabilities (if any) of the parties, and render a decision.
Answer:
In this case, the question of lapse of an offer must be considered. Armstrong's offer was made on May 2nd, and no
acceptance was made until May 22nd. As a general rule, a written offer will normally lapse after a reasonable time, and it
is necessary to determine if a reasonable time had elapsed, before the acceptance took place. Where non-perishable
goods are sold, a reasonable time is not usually short (hours, or a few days) but a longer period of time, depending on the
volatility of the price, etc. If mica should be normally subject to wide fluctuation in price, then nineteen or twenty days
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may be too long a period of time, and the offer could have lapsed before the acceptance date. See: Shatford v. B.C. Wine
Growers Ltd., [1927] 2 D.L.R. 759.
Case 4
The Clear Fruit Juice Company purchased a quantity of a special variety of apple that Ely grew in his
orchards. The apple was of a type that kept well in winter storage, and the company would market a
portion of the apples purchased as fresh fruit and process the remainder into apple juice that it sold under
a private brand name. The company purchase represented approximately 50 percent of Ely‘s total harvest
each year.
Initially, the Clear Fruit Juice Company and Ely entered into a formal, written purchase agreement for
each year‘s crop. However, over time the agreement became less formal. Eventually it consisted at first of
a telephone order for the ―usual supply,‖ and later to an arrangement whereby Ely would deliver the
normal quantity to the company each year, and in due course would receive payment at the going market
price for the crop. This latter arrangement carried on for a period of about ten years.
In the last year, the president of the Clear Fruit Juice Company fell seriously ill and retired. He had
been responsible for the original contracts with Ely, and had made the later informal arrangements for the
supply of apples. For many years, the two men had been good friends. The new president of the company
moved to the area from a subsidiary corporation and was not aware of the arrangement between Ely and
the company. He decided that for the current year he would purchase the company‘s apple requirements
from another orchard.
Over the course of the summer, Ely heard rumours that an orchard some kilometres distant had
acquired a contract to supply his variety of apple to the company, but he did nothing to investigate the
matter further. In the fall of that year, he delivered his usual supply in large pallet boxes to the company
and placed them in the storage yard. No employees were in the yard at the time, but Ely did not find the
fact unusual, as that was typically the case when he made his deliveries in the past. He was not concerned
about identification of the crop as each pallet box bore his name and address as well as the variety and
quantity.
The yard foreman noticed the apples in the supply yard some time later on the day of delivery, and
informed the plant manager. The plant manager did nothing about the apples until the next day, when he
informed the company president. The company president decided to write a letter to Ely requesting him to
take back his apples, but it was Friday, so he left the letter until Monday of the next week. Ely received
the letter on the Wednesday, some six days after delivery of the fruit to the company.
During the six-day period the apples had remained in the hot sun and had deteriorated from the
exposure. Ely refused to take back the apples, and the company refused to pay for them.
Advise the parties of their rights in this case, and determine the probable outcome if Ely should bring an
action against the company for the value of the goods.
Answer:
This case involves the effect of a long-standing practice on the contractual rights of the parties. Does the practice
established by the parties over the years constitute a standing offer which requires withdrawal by the offeror in order to
be terminated? The conduct of the parties in the case would obviously be important. The facts may be considered to raise
two separate areas for discussion: (1) the "standing offer," and (2) the conduct of the Plant Manager and Company
President, when they discovered that the apples had been delivered. If the delivery constituted an offer to sell on the
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implied condition that if the Company did not wish to accept the goods they should return them promptly - did the action
of placing the apples in a position where they would deteriorate expose the Company to liability for the loss? Did the
delay in reaching Ely extinguish the Company's right to reject the goods? These matters should be discussed in class.
The past practice of the parties (for some twenty years) may have created a situation where the courts might infer a
standing offer, and an obligation on the Company to revoke the offer before acceptance by Ely, or in the alternative, an
obligation on the Company to promptly return the goods before they deteriorated. Should a standing offer be determined,
then a failure to revoke the offer before acceptance would mean that the Company was bound by a contract when
delivery was made by Ely. If the offer is treated as a conditional offer, the Company would be obliged to promptly return
the goods. (See: for example, Wheeler v. Klaholt (1901), 59 N.E. Rep. 756). As to the price, the Company would only
be obliged to pay a reasonable price for the goods, that is, an amount equal to the usual price for that type of apple on the
market at the time.
Case 5
The Garden Book Company advertised in a local newspaper the publication of its latest book on flower
growing. The advertisement indicated that orders would be taken by mail at a price of $30 per copy, but
the book would be available at all book stores as well.
In response to the advertisement, Laurel Bush sent her cheque for $30 to the Garden Book Company,
and requested in her letter that the company send her a copy of the book by return mail. Laurel mailed her
letter on February 19th. On February 21st, Laurel noticed the same book on sale at a local book store at a
price of $9.95. She purchased a copy, then went home and immediately wrote a letter to the Garden Book
Company revoking her offer to purchase the book, and requested a return of her $30 cheque. Laurel
mailed her letter at 4:20 p.m. on February 21st.
The Garden Book Company received Laurel‘s letter of February 19th on February 22nd, and mailed
her a letter the same day that acknowledged her order and advised her that the book would be sent to her
by courier within a few days. The Garden Book Company received Laurel‘s letter of February 21st on
February 23rd. The company ignored her second letter, and delivered the book to the courier on February
25th.
Discuss the rights of the parties in this case. Identify and explain the legal principles and rules
applicable, and indicate in your answer how the case would be decided if the matter came before the
court.
Answer:
This case raises the issues related to acceptance of an offer, and the application of rules concerning acceptance and
revocation. Students should note that Laurel Bush made an offer by mail to purchase a book. The nature of this offer
might be examined by asking the question. Was this an offer that required acceptance by an act? Was the letter of
acceptance by the Company a valid acceptance of the offer? Was the acceptance complete when the letter was mailed?
Laurel's letter of revocation would only be effective when received by the Company, and was received by it on February
23rd. The Company, aware of the revocation, completed its part of the 'contract' on February 25th. Students may be
asked if the revocation was effective on February 23rd. Under the terms of Laurel's offer, acceptance was to be made by
sending her the book by return mail. The offer did not require acknowledgement, but rather, the performance of an act.
The Company's letter of acceptance, therefore, would probably not be effective acceptance when mailed, but only
effective when received. The mailing of the book after receipt of the letter of revocation would probably not be effective
acceptance of the offer.
Case 6
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The Golden Lake Mining Company decided to dispose of two of its undeveloped mining properties (A
and B) and authorized the company president to find a buyer. On September 10th, the president wrote a
letter to the East Country Exploration Corporation offering to sell the properties ―en bloc‖ for $500,000.
On September 16th, East Country Exploration Corporation replied by mail to the letter in which it
expressed an interest in the purchase of property A at a price of $275,000 if Golden Lake Mining was
prepared to sell the properties on an individual basis.
On September 22nd, the president of Golden Lake Mining replied by fax that he would prefer to sell
both properties, but if he could not find a buyer for the two parcels within the next few weeks, the
Company might consider selling the properties on an individual basis.
On September 30th, the East Country Exploration Corporation made an inquiry by fax to determine if
Golden Lake Mining had decided to sell the properties on an individual basis. The president of Golden
Lake responded with a fax that stated: ―Still looking for a buyer for both properties.‖
Following this response, East Country Exploration decided to examine property ―B,‖ and sent out its
two geologists to do a brief exploratory evaluation. On October 6th they reported back to say that they
had examined property B and found some surface evidence of what might be a potentially economic or
body worth between $5 million and $15 million. East Country Exploration then prepared a letter
accepting the offer of Golden Lake Mining to sell properties A and B for $500,000. The letter was mailed
on October 9th.
On October 10th the president of Golden Lake Mining Company found a buyer for the B property at a
price of $300,000, and signed a sale agreement the same day. He then wrote a letter to East Country
Exploration in which he accepted their offer to buy the A property for $275,000. The president of Golden
Lake Mining received the October 9th letter of East Country Exploration on October 11th.
Discuss the issues raised in this case, and indicate in your answer how the case might be decided if it
was brought before the court.
Answer:
The facts of this case concern the timing of offers and their acceptance. Students should identify the September 10th
offer by Golden Lake and the response by East Country as what might be considered a counter-offer (or perhaps an
inquiry and offer to purchase property 'A'). In any event, the response of September 22nd probably revived the original
offer of September 10th, which East Country could then accept or reject. The letter, however, may have kept open the
offer to purchase property 'A'. The September 10th offer was again confirmed as 'open' on September 30th by the
President's response. East Country accepted the offer on October 9th (applying the rule that an offer of mail invites
acceptance of mail, etc.) even though it was not received until October 11th. If this reasoning was followed by a court,
Golden Lake would be bound in contract to sell both properties 'A' and 'B' to East Country when it 'sold' property 'B' on
October 10th to another buyer.
Case 7
Tamiko lived in Calgary, Alberta, and owned a river barge moored on the Fraser River in British
Columbia. Percy was among a group of mutual acquaintances who knew Tomiko‘s barge was ―for sale‖.
On September 10th, he wrote a letter to Tamiko offering to purchase the barge for $270,000. Tamiko
received the letter on September 15th, and she sent Percy a reply by email agreeing to sell the barge for
$300,000.
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Percy did not respond to the email immediately, but on a business trip to Calgary on September 22nd,
he spoke to Tamiko about the barge in an effort to determine if Tamiko might be willing to reduce the
price. Tamiko replied that her price was ―firm‖ at $300,000.
When Percy returned to Vancouver, he replied to Tamiko‘s email saying he was willing to pay the
$300,000. The email was timed at 11:40 a.m. on September 23rd, but Tamiko did not see it in her email
inbox.
Having not heard from Percy, on September 26th, Tamiko offered to sell the barge to Johnson, who
had previously expressed an interest in purchasing it. Johnson accepted the offer on the morning of
September 27th.
Later that day, Tamiko discovered Percy‘s email reply in her ―deleted items‖ email box.
Identify the various rights and liabilities that developed from the negotiations set out above.
Answer:
This case is a useful fact situation for the discussion of offer, acceptance, lapse, and counter-offer. An approach that
may be taken would be to deal with the case in a sequential fashion, asking in turn the questions: Is there an offer?
Identify it. Was the offer accepted? If not, did it lapse? Did it constitute a counter-offer? etc. An analysis of the facts on
this basis should determine that Percy's offer of September l0th was not accepted, and instead, Tamiko made a
counter-offer to sell the barge for $300,000 by email on September l5th. Percy's inquiry of September 22nd should be
identified as an inquiry, and Tamiko's comment as an affirmation of the offer at $300,000. The question should be
explored of whether Tamiko‘s affirmed offer lapsed on September 22nd, when not instantly accepted by Percy. Percy
wrote the email of acceptance on September 23rd. If the affirmed offer lapsed immediately, then Percy‘s email becomes
an offer, not an acceptance. It would seem to most people that Tamiko‘s affirmed offer would be available for
acceptance for at least a day, and most reasonably, Percy‘s email constituted an acceptance of the affirmed offer. For the
email to appear in Tamiko‘s ―deleted items‖ it had to first arrive in her ―inbox‖ and was thus received shortly after
having been sent on the 23rd. Unless facts support a belief that the email had not been received (due to a computer or
communications problem) prior to the September 26-27 exchange between Tamiko and Johnson, there was a binding
contract between Tamiko (the September 22nd offeror) and Percy, having accepted on the 23rd. (See also: Adams v.
Lindsell (1818), 1 B. and Ald. 250; 106 E.R. 250).
Case 8
Tom was tired of running his business and was looking for a buyer so he could retire before the winter.
Bill wanted to buy the business, but needed another month to raise the necessary finances. Tom said to
Bill: ―Look, for $5,000, I will give you an option to purchase in 30 days, but if you are not ready to buy at
that time for fifty thousand, I am going to sell it to Dan.‖ Bill paid Tom the $5,000. Thirty days later, Bill
appeared at Tom‘s door with $45,000. Tom said: ―Sorry, I am going to sell it to Dan. I said the price was
$50,000.‖ Bill was confused, and sought legal advice.
What advice would the lawyer provide to Bill?
Answer:
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The option to purchase in this case was a promise by Tom to hold open the promise to sell the business for a 30 day
period. Offer and acceptance in the option agreement was finalized when Bill paid over the $5,000. The issue here for
students to consider is whether the $5,000 was to be a part of the purchase price of the business. Was the option a
separate contract? No mention was made of the $5,000 being a part of the purchase price. Was the offer to sell the
business for $50,000 a separate contract offer? It could be argued that it was, in which case Bill did not properly accept
the offer when he met with Tom in 30 days and presented him with $45,000 instead of the $50,000 stated in the offer.
Case 9
Janine owned a shop selling fine bone china. After a customer dropped an expensive bowl and shattered
it, Janine made a new policy by posting a sign reading ―Lovely to look at, lovely to hold, if you break it,
consider it sold.‖ In time, another customer broke a vase she was examining but refused to pay for it.
Discuss the legal position of both Janine and her customer.
Answer:
The sign in this case may be considered in terms of a contract, but does it constitute an offer? Does a prospective
purchaser ‗accept‘ the offer by picking up a piece of china? It is important to decide who the offeror and offeree would
be. Would the prospective purchaser be bound if he or she did not see the sign? Should the sign simply be considered a
notice to prospective customers that they would be responsible for the price of the china if they break it while handling
it? This may be the case, as a careless handler would likely be liable for any breakage in tort.
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CHAPTER CHARTS
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Note: Additional Chart for Instructor‘s use. Not in 12th edition textbook
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CHAPTER 8. THE REQUIREMENT OF CONSIDERATION
Chapter Topics
Consideration
Quantum Meruit
The Debtor-Creditor Relationship
Equitable or Promissory Estoppel
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Illustrate how contracts are intended to exchange a mutual benefit.
• Explain how ―consideration‖ represents this mutuality.
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• Identify exceptions to the rule requiring ―consideration.‖
• Explain how estoppel prevents injury from reliance on a gratuitous promise.
YOUR BUSINESS AT RISK
To earn a profit, a business cannot operate as a charity. It expects something in return for its
actions. As simple as that sounds, there are times when one-way relationships exist, and these
create problems in enforcing contractual rights and obligations. You must understand the rules
of ―consideration‖ to avoid inadvertently creating these difficult business law traps.
CHAPTER COMMENTARY
Chapter 8 adds a new element to the requirements introduced in the previous chapter, and one which is
sometimes difficult for students to fully understand. Because consideration represents the "something" that
the promisor receives for his or her promise, examples are often useful methods of explaining the concept.
For example, the following statements might be put forward: "I will sell you my car for $30,000." What is the
consideration that an offeror would receive in return for such a promise? From whom would it come? Similar
questions may be asked in connection with an offer of this nature: "I will give you two dollars if you will
deliver this parcel to the post office for me."
Promises for which consideration is received and gratuitous promises should be distinguished, and in
addition, the effect of a seal on the requirement of consideration should be discussed. As well, the question of
adequacy of consideration and the question of its legality should be explored.
The importance of the seal as consideration as it relates to a tender is explained in this Chapter. The
nature of a tender, and the effect of a tender made under seal should be discussed in class. As to the former,
the courts have held that a tender is an offer, and constitutes an irrevocable promise to hold the offer open for
a period of time if made under seal. If no seal is present, a tender would probably be subject to revocation at
any time before acceptance.
As the text indicates, whether a contract is under seal or not, the courts will not go into the adequacy
of the consideration in a contract, as long as it contains some valuable consideration in the eyes of the law.
Apart from situations where a party has made a mistake in stating the amount of consideration, the courts are
not concerned about adequacy or whether proper value is received for a promise. Students should note that
the important thing is whether consideration is present. In the analysis of any contract case, the existence of
consideration is essential, unless it falls within one of the exceptions, or the agreement is made under seal.
An area where confusion sometimes arises is where a contract is not performed by a party who has a
duty to perform. In this instance, if the terms of the agreement should be altered, it is necessary to ask the
question: What consideration does the party receive in return for the promise to compensate a party to carry
out an obligation which the party has a duty to perform? If the answer is "nothing", then the promise is
merely gratuitous. In the United States, the courts have sometimes held a gratuitous promise to be binding,
but as a general rule, the common law courts in Canada and the United States will not enforce such a
promise. This is so because past consideration is not treated as good consideration for a present promise.
The application of the doctrine of consideration to the debtor-creditor relationship raises a problem
where a gratuitous promise is made to reduce a debt. The text also provides a number of illustrations of the
"exceptions" which the courts have established to limit the application of the rule. The fact that many
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provinces have dealt with this situation through legislation should be emphasized (eg: the Western provinces,
Ontario) as students frequently overlook this change.
Included in the chapter is a discussion of quantum meruit and promissory estoppel which may
require class time to review. Both of these concepts are frequently a source of difficulty for some students,
although quantum meruit normally should not be difficult to understand. For promissory estoppel, a
discussion of the quotation from the judicial decision of Lord Denning in the text might provide a useful
springboard to expand upon the topic.
Students should be aware that where a person by words or conduct has led another to believe that a
certain state of affairs exists, and the person so informed acts upon the representations to his or her detriment,
the person making the statements cannot later repudiate them, even though no consideration was given for the
promise contained therein. It should be noted, however, that as a general rule promissory estoppel does not
constitute a cause of action, but only a defence.
Review Questions
1. In what way does agreement on the price for services made after the services have been performed
affect the right of the person who performed the service to claim quantum meruit?
Answer:
An agreement as to price after the services have been performed would be binding upon the parties and
would fix the price of the services.
2. Must consideration always be present to render a promise enforceable?
Answer:
Generally yes, the major exception being a contract or promise made under seal, where a person endorses
a bill of exchange without receiving consideration, or in certain cases where a promise of a donation to a
charity is made.
3. Does a contract under seal require consideration? If not why not?
Answer:
A contract under seal does not require consideration for historical reasons. The act of sealing the
agreement was indicative of the person's intention to be bound by the promise made after giving the matter
considerable thought. This type of contract derives its validity from its form rather than from the presence of
consideration.
4. Consideration may be "present" or "future". How do these forms of consideration differ?
Answer:
Present consideration would involve an immediate act (giving a person goods in return for a promise of
payment). Future consideration would involve something given in the future, for example, the promise of
delivery of goods at a later date in return for a promise of payment).
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5. A creditor's promise to accept a lesser sum as payment in full for a larger debt is considered gratuitous
at Common Law. Why is this so?
Answer:
The promise is considered to be gratuitous at common law because the promisor receives nothing in return
for the promise. There is no consideration given for the promise to forego the balance owing. See question
10 for exceptions.
6. Explain promissory estoppel. What are its uses in a contract setting?
Answer:
Promissory estoppel may arise where a person states a material statement of fact as being true, and another
relies upon the statement to his or her detriment. If the person making the untrue statement brings a claim
against the other party, the truth of the statement cannot be denied, and may be raised as a defence to the
claim of the party who made the statement.
7. In what way does the Mercantile Law Amendment legislation in some provinces alter the Common
Law rules for gratuitous reduction of debt?
Answer:
Mercantile Law Amendment laws state that where a person accepts a lesser sun in full settlement of a
debt, the creditor cannot later claim the balance.
8. What conditions must be established to put forward a claim of quantum meruit?
Answer:
A person who claims payment, quantum meruit must establish that a request was made for the services,
and the service was performed without the price for the service established in advance.
9. Explain the nature of ―consideration‖ as it applies to a contract.
Answer:
Consideration is something which a person receives in return for a promise.
10. How have the Common Law courts in some cases permitted a debtor to enforce a creditor's gratuitous
promise to reduce a debt?
Answer:
Three exceptions to the common law rule concerning gratuitous reduction of a debt:
(1) payment before due date,
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(2) payment of the debt by someone other than the debtor, and
(3) payment in kind (e.g.: giving of a chattel as payment.
Mini-Case Problems
1. X offered to deliver a parcel for Y to a downtown shop, as he would pass the shop on his way to
work. Y agreed and gave X the parcel. The next day, Y told X he would give him $5 for delivering
the parcel. X accepted Y‘s offer, but, later, Y refused to pay the $5.
What are X‘s rights?
Answer:
X made a gratuitous offer to deliver the parcel for Y. The promise was fully performed by X. Y made a
gratuitous promise to X to pay $5 because there was no consideration for the promise. X cannot sue Y
because he cannot show present or future consideration for Y's promise of the $5.
2. A, a wealthy widow, was approached by a women‘s group for a donation that the group intended to
use to construct a women‘s centre in the community. A offered to donate an amount that would cover
25 percent of the cost of the proposed building.
If the group commenced construction based upon A‘s promise, could A later refuse to pay?
Answer:
If the women's group could satisfy a court that it undertook the construction on the strength of A's pledge, the
group might succeed if it took legal action to enforce A's promise. A promise of a donation of 25% of the
construction cost may not be sufficiently large enough (as a percentage) to support this argument, however,
since the group would be obliged to collect most of the cost (75%) from others. See: Governors' of Dalhousie
College v. Boutilier reference in the text.
3. Markus owed Landers $5,000, and since Markus had fallen on hard times, Landers cut the debt in
half. Some months later, Markus was successful in getting a good paying job, and wrote a cheque
payable to Landers for $2,500 with his thanks. Landers wrote back suggesting that Markus now pay
the remaining $2,500. What is Markus‘ obligation?
Answer:
Landers promise to cut the debt in half (to $2,500) would be a gratuitous promise. If Markus acted on the
promise to his detriment, Landers would be bound by it under promissory estopppel. But did Markus act to
his detriment? If Markus cannot establish this, then Landers may be able to revoke his promise, since there
was no consideration for the promise given by Markus. The old English case of Foakes v. Beer may apply
here, or a later case, Tool Metal ManufacturingLtd. v Tungsten Electric Co. Ltd. [1955] 1 W.L.R. 761.
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4. A municipality called for tenders for the construction of a recreation centre. A construction firm
submitted a bid of $8 million, under seal. The municipality accepted the bid. Shortly thereafter, the
construction firm realized it had made a simple but serious error in calculation and refused to
complete the contract, unless the award was increased by $500,000. The municipality refused.
Discuss the rights of the parties.
Answer:
The tender was under seal, and constituted an offer, and the offer was accepted by the municipality, creating a
binding contract. The construction firm would be bound by the contract, and must perform. The municipality
could sue for breach of contract if the construction firm refuses to perform the contract work.
Case Problems for Discussion
Case 1
Jane and Henry were married and Jane‘s father, a farmer, told her and Henry that he had no use for the
old pasture north of the meadow. He suggested that they could build a house on the property, saying, ―It
will be all yours anyhow when I‘m gone.‖ Jane and Henry did so, and five years later, Jane and her father
had a terrible falling out. Her father changed his will to give all of his property to the Humane Society,
and within the year he died. When the executor of the will read its terms, he began proceedings to evict
Jane and Henry from the property and to sell their house.
Discuss the legal issues raised in this scenario.
Answer:
The facts of this case raise the issue of promissory estoppel, since Jane and Henry clearly acted to their
detriment by building a house on the property in reliance on her father‘s promise of the property on his death.
One question may be the extent of the property Jane and Henry may claim. Would this be only the ―old
pasture north of the meadow‖or the father‘s entire estate? A court might decide that their claim would be
limited to the property where the house was located, as their reliance on the father‘s promise (by building a
house) was limited to ‗the old pasture‘.
Case 2
Hansen and Dhafir owned cottage lots that abutted each other along a line at right angles to a lake front.
Nothing marked the boundary between the two lots, and neither landowner could recall with any degree
of accuracy where the lot line actually lay. The parties had mentioned a survey of the lots on several
occasions, but nothing had been done to fix the boundaries.
One summer, when both Hansen and Dhafir were vacationing at their respective cottages, Dhafir
noticed a large diseased limb on a tall tree that was growing at a point approximately equidistant from
each cottage. As he was concerned that the limb might fall on his cottage, Dhafir suggested to Hansen that
he do something about the situation. To this suggestion Hansen replied: ―That tree is growing on your lot,
and it is up to you to cut the limb. If it should fall my way and damage the roof of my cottage, I would
look to you for the repairs.‖
Dhafir decided to cut down the entire tree instead of just the diseased limb. He did so with some
reluctance because the elimination of the tree would remove the only protection Hansen had from the hot
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afternoon sun.
Hansen did not object to the cutting of the tree at the time. Some time later, however, when a survey
that he had requested revealed that the tree had been entirely on his side of the property line between the
two cottage lots, he brought an action against Dhafir for damages.
Identify the defences that might be raised by Dhafir and explain how the courts might decide this
case.
Answer:
The facts of this case illustrate a potential promissory estoppel situation, where Dhafir relied on the statement
of fact by Hansen, and in doing so, acted to his detriment. The question raised by the case, however, is
whether the statement which Hansen made concerning the limb of the tree would be sufficient to enable
Dhafir to raise promissory estoppel as a defence when he proceeded to cut down the entire tree, and not just
the diseased limb. One argument might be that Hansen's implied threat of legal action (if the tree should
cause damage to his cottage), might justify Dhafir's actions.
Some general questions which could be put forward for discussion might run as follows: Since
neither party knew for certain where the property line was, did Dhafir have an obligation to make this
determination before cutting down the entire tree? What was the effect (if any) of Hansen's inaction after the
tree was cut down? Should he have objected immediately? Could Dhafir rely on Hansen's statement when he
knew that Hansen was unaware of the exact location of the lot line, and hence the ownership of the tree?
A helpful case might be the following: Shupe and DeSutter v. Rural Municipality of Langenburg
No. 181, 2009 CanLII 92492 (SK QB).
Case 3
On a cold evening in January, the furnace in the Bisrams‘ home failed to operate properly, causing the
water pipes to freeze and later burst, flooding their basement. Mr. Bisram made a hurried telephone call to
Brown‘s Plumbing when he discovered the water in his basement, and asked Brown if he could come
over immediately and fix the leaking pipes.
Brown agreed to do so, and arrived about an hour later, only to find that Mr. Bisram had discovered
the leak and fixed it himself. Brown left immediately, and the next day he submitted an account to the
Bisrams for $95 for services rendered. The Bisrams refused to pay Brown‘s account.
If Brown should sue the Bisrams on the account, explain the arguments that might be raised by each
of the parties and indicate how the case might be decided.
Answer:
This case deals with the question of quantum meruit. Students should identify the request for services on
Bisram's part, and Brown's compliance with the request by his attendance at Bisram's residence and being
prepared to fix the plumbing. The fact that Bisram received nothing in the agreement should also be
discussed, but Brown's loss (in terms of his travel time) should be noted, along with Bisram's obligation to
compensate him for his lost time. A question that should also be raised is: Does $95 represent a reasonable
price for Brown's services? Bisram would only be obligated to compensate Brown in terms of a reasonable
price for the time lost in travel to his home. See: De Bernardy v. Harding (1853), 8 Ex. 823; 155 E.R. 1586
for a discussion of similar issues.
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Case 4
Nuptial Creations carried on business as a custom manufacturer of wedding dresses and accessory
products. The company offered a standard line of dresses that it sold through its own retail establishments.
The prices for the basic dress line were available to prospective purchasers, but the final price was
dependent upon the amount of lace, beading, and changes that a customer requested in the product.
For her wedding, Marie selected a particular dress design that carried a basic price of $1,200. She
requested a number of changes in the design that included a great deal of beadwork, requiring timeconsuming hand application. No price was quoted by the company for the custom dress at the time that
Marie requested that it be made for her.
Some time later, when the dress was finished and ready for delivery, Marie went to the shop and
enquired as to the price. She was informed by a salesperson that the completed dress would probably cost
―around $2,000.‖ Nevertheless she accepted the dress, with the complaint that she was surprised at the
cost.
Two weeks later, the company submitted an account to Marie for $2,368 for the dress. Marie refused
to pay it.
Advise the parties of their rights and, if legal action should be taken, discuss the way in which the
case might be resolved.
Answer:
Case 4 concerns quantum meruit/quantum valebant claim for the value of the custom made dress. Marie Day
requested the basic dress with changes which the retailer proceeded to add to the basic design. Since no price
was discussed, the retailer was entitled to a ―reasonable price‖ for the services rendered. If the difference in
price between the $1,200 basic design and the ―additions‖ is the ―going price‖ charged by retailers for this
type of work, the retailer would probably be successful in claiming the $2,368 price. Students should
consider the statement of the salesperson that the dress would probably cost ―around $2,000.‖ Does this fix
the price? Probably not, since it is not a specific sum, and perhaps close enough to the final price to be
considered only an estimate. The quote, however, might be considered by the court in the determination of a
reasonable price if $2,368. is slightly higher than the price charged by competitors in the area.
Case 5
A service club in a small community decided to raise funds for the purchase of a special wheelchair that it
intended to donate to a disabled child. The wheelchair was of a special design and made only on special
order. The estimated purchase price was $5,600.
Donations were solicited throughout the community, and a total of $2,100 was raised toward the
purchase price. The club, unfortunately, found it difficult to solicit further donations, as the $2,100
represented the contributions of nearly every family in the community.
A meeting of the club members was held to discuss ways and means of raising the further $3,500.
After some discussion, one member stood up and promised to ―match dollar for dollar every additional
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contribution received, if the club can raise a further $1,750.‖
The next day, the local newspaper reported the club member‘s pledge, and the publicity produced a
large number of donations to the fund. By the end of the week, the donations totaled $3,700, of which
$1,600 had been donated that week. The club immediately placed an order for the special wheelchair,
confident that the additional $150 could be raised by the club members.
A few weeks later, the club was advised that the wheelchair was ready for delivery, and that the price
would be $5,300 instead of the $5,600 originally quoted. The club was delighted to receive the news that
the wheelchair would only cost $5,300, and it immediately notified the club member who had promised to
match the contributions.
When the member was advised that the $1,600 donated, together with his matching pledge, would be
sufficient (along with funds previously collected) to pay for the wheelchair, he responded: ―I promised to
match dollar for dollar only if the club could raise a further $1,750. Since it did not do so, I have no
intention of matching the donations.‖
Discuss the position at law of the parties in this case and explain how this matter might be determined
if each party exercised his (or its) legal rights (if any).
Answer:
Case 5 illustrates a situation where a charitable organization acted to its detriment on the strength of a
gratuitous promise of payment. However, the nature of the promise should be discussed. How important is
the proviso (attached to the promise) of the words "if the club can raise a further $1,750"? Does the failure on
the part of the club to do so release the promisor from his obligation? Can it be assumed that the intent was
that the club raise one-half of the balance required for the wheel-chair, and the actual amount was
unimportant, since the essence of the promise of the member was to match the donations? Text comments on
the Sargent v Nicholson case, and the Governors of Dalhousie College v.Boutilier should be examined by the
students in dealing with these issues.
Since the club proceeded with the purchase only when it honestly believed that it had complied with
the member's offer, the court might very well find that the club, by raising one-half of the balance of the
funds for the wheel-chair, had provided sufficient consideration for the promised donation. See also the case
of Y.M.C.A. v.Rankin 1916 CanLII 382 (BC CA).
Case 6
Great Adventures Ltd. offered white-water rafting trips involving a relatively short 50-kilometre journey
down a swift river. The price of the trip, including overnight hotel and meals, was advertised at $450.
Jack and Jill, in response to the advertisement, entered into a verbal arrangement with the operator of the
tour to join in on a journey, and they agreed to appear at the designated hotel the evening before the date
of the excursion.
At the hotel, they met the president of the tour company and paid him the tour price. The next
morning, as Jack and Jill assembled their gear with the nine other passengers, a representative of the
company spoke to the participants and instructed each of them to sign a form entitled ―Standard Release.‖
The form stated that the operator of the tour was ―not responsible for any loss or damage suffered by any
passenger for any reason, including any negligence on the part of the company, its employees, or agents.‖
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Jack and Jill were reluctant to sign the release, but when they were informed by the tour
representative that they would not be allowed on the raft unless they signed it, they did so. When the
release was signed, the representative gave each of them a life jacket with a 10-kilogram buoyancy rating.
After they donned the life jackets, they were allowed to climb aboard the raft.
During the course of the journey, the raft overturned in very rough water, and Jack and two other
persons drowned.
An investigation of the accident by provincial authorities indicated that the life jacket Jack had been
wearing was too small to support the weight of a person his size. The investigation also revealed that, due
to the swiftness of the river at the place where the accident occurred, a more suitable life jacket would
probably not have saved Jack‘s life.
Jill survived the accident and brought an action against the tour company under the provincial
legislation that permitted her to institute legal proceedings on behalf of her deceased husband.
Discuss the issues raised in this case and indicate the arguments that might be raised by each party.
Render a decision.
Answer:
The case raises a number of contract issues as well as the tort of negligence. Some contract points to note are:
the "release" to exempt the tour operator from any breach of contract, etc.? Did the tour operator negligently
perform the contract? Was the tour operator in breach of the contract by providing an inadequate life jacket to
Jack? If it was a term of the agreement to provide a life jacket could the tour operator argue that he had done
so? Could Jill argue no consideration for the signing of the waiver? What would be the response of the tour
company to the argument?
The facts of the case are essentially those found in Delaney v. Cascade River Holidays Ltd., 1983
CanLII 387 (BC CA), where the court found that the consideration for the waiver was the company allowing
the deceased to continue on the trip. The release as a result was valid and enforceable.
Case 7
Speedy Delivery Service Ltd. had been engaged by the Commercial Bank as its regular courier for
documents and other bank correspondence for both local and long-distance deliveries. The parties had an
ongoing agreement for services under which Speedy‘s maximum liability to the bank for any matter
arising out of their relationship was limited to $100,000. Speedy also held business insurance in the
amount of $10,000,000, from which it could claim indemnification should any claim be made against
Speedy by the bank or by any other party with which Speedy did business. A term of its insurance policy
required Speedy to make an immediate report to the insurer if it suspected that there may be a claim made
against it.
A few days after Speedy had made a delivery of documents to one of Commercial Bank‘s branches, a
letter arrived from the bank stating that the documents had been lost. Apparently the Speedy driver had
placed the documents in the usual outside receptacle at the branch, which was used for deliveries after the
branch has closed, but he could not remember whether he had properly secured the receptacle afterwards.
The bank‘s letter stated that bank employees were trying to locate the missing documents and that they
related to an important mortgage transaction that was to have been finalized that week. The letter further
stated that there would be losses to the bank if the documents could not be found, but, in any event, the
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bank would further advise Speedy at a later date of its progress.
Speedy heard nothing more from the bank about the documents and assumed that they had been
located. Almost three years later the bank wrote to Speedy stating that it was suing for its damages for the
lost documents in the amount of $100,000. When Speedy refused to pay, the bank threatened to bring
legal action.
Discuss the legal issues raised in this case and the arguments that all of the parties, including the
insurance company, will rely on.
Answer:
The case raises the issue of estoppel. Students may be asked to decide if the bank had caused Speedy to act
to its detriment by waiting 3 years to notify it of the loss. The questions here might be: Was the Bank aware
of the obligation to advise the insurer of any potential claim that might be made for Speedy's negligence?
Did Speedy have an obligation to notify the insurer in any event? The statement in the Bank letter that it
would notify Speedy at a later date of its progress in its search for the letter could probably be relied upon by
Speedy as an estoppel to the claim 3 year's later. Since Speedy heard nothing more from the Bank after its
receipt of the letter, Speedy might reasonably assume that the documents had been found, and on the strength
of this, did not inform the insurer. By failing to notify Speedy of the loss for 3 years might prevent the Bank
from recovering its loss from Speedy (and the insurer).
Case 8
Levine‘s car stopped running on the highway, and a passing motorist called a service station for him on a
mobile phone. The service station called an independent tow truck operator, who soon towed the car to
the service station, some 5 km distant. A mechanic examined the car, and realized that a wire had come
loose from the distributor cap. He snapped the wire back into place, and wrote up a bill. Levine was
charged $5 for the repair and $175 for the tow. Levine was outraged and refused to pay.
What would be the nature of the claim, and what factors would the court consider in deciding the
case?
Answer:
This case concerns quantum meruit. The passing motorist made the call to the service station at Levine‘s
request. The request for service was probably broad enough to authorize the service station operator to tow
Levine‘s vehicle to the service station – a reasonable expectation, but was it also reasonable for Levine to
believe that the service station operator might come to where Levine‘s vehicle was located to make the
repairs? Probably not. Under quantum meruit, the service station operator would be entitled to charge a
reasonable price for his services. The $5 was probably reasonable. The tow truck operator charged $175 for
a 10 km. round trip. Was this a reasonable charge? If this was the usual charge by other operators in the
area, then the charge would stand, and Levine would be obliged to pay both of the charges.
Case 9
Able and Laryssa had been good friends for many years. Able wished to make a gift to Laryssa of a house
he owned that was subject to two mortgages held by a third party. In order to avoid the tax legislation in
force at the time, the parties agreed that Able would convey the property to Laryssa and take back an
interest-free mortgage equal to the difference between the two existing mortgages and the value of the
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property. The third mortgage would be forgiven each year in an amount equal to the permissible tax-free
gift allowed under the legislation. The gift transaction at the time was a lawful method of disposing of the
property, and Laryssa accepted the gift of the property. Laryssa moved into the house and made the
payments on the first two mortgages for a number of years; then, after a difference of opinion on another
matter, Able demanded payment of the third mortgage. Laryssa refused to pay, and Able sued Laryssa for
the amount owed.
Discuss the respective positions of the parties to the transaction and render a decision.
Answer:
This case was prepared to reflect the facts of the case of Bojtar v. Parker, 1979 CanLII 2029 (ON CA). The
case may be discussed from the point of view of the promise being a gratuitous promise to make a gift of the
property to Laryssa, or from the point of view of it being the gratuitous reduction of a debt. The key issue in
the case is the determination of the consideration for the promise to give Laryssa the property, either in terms
of the overall promise, or the reduction of the mortgage. Students in each case should attempt to find
consideration for the promise. For example, did Laryssa's payment of the installments on the two prior
mortgages constitute consideration sufficient to make Able's promise binding? Had he not done so, Able
would have been obliged to make the mortgage payments himself. Could the payment made by Laryssa of
the prior mortgages be considered rent for the use of the premises? What effect would this have on the
enforceability of the promise?
The case also raises the question of estoppel. Since Laryssa moved into the premises on the strength
of Able's promise, and paid the prior mortgages, should Able be later permitted to act in a manner contrary to
his promise? The issue of Laryssa's reliance on Able's promise should be discussed.
In the Bojtar case, the court held that sufficient consideration was given by the 'donee' in the form of
payment of the prior mortgages, etc., and the donor was bound by his promise to release the property to him.
On appeal, the court indicated that the donor was estopped from enforcing the mortgage.
Case 10
Devon, a contractor, checked out the yard of Adams Equipment Sales and noticed a backhoe that looked
to be in good shape. Beside it was a set of buckets and a rock breaking point. Adams noticed his customer
and yelled across the yard ―Seventeen-five takes it away.‖ Devon nodded and waved, and returned later
with a certified cheque for $17,500. Adams accepted the cheque, but when Devon started to load the other
buckets on his flatbed, Adams stopped him. ―They‘re not in the deal,‖ he said, ―They are worth $2,500 on
their own.‖ Devon agreed on the value, but said the backhoe wasn‘t worth $17,500 on its own, because
the going rate for similar models was $15,000.
What position will the court support, if Devon and Adams proceed to litigation over the agreement?
Answer:
The issue in this case is the consideration for the buckets and the rock breaking point. Cases of this sort tend
to turn on the statements of the parties, and their respective understanding of the transaction. Was there a
‗meeting of the minds‘? What would be the significance of the word ‗it‘ in the offer? Was this an expression
limiting the price to only the back hoe? Adams would certainly take this position on the offer. Note that the
courts normally do not take into consideration whether the price ‗is a good deal‘ – they are only concerned
about the existence of consideration. Devon may have some difficulty in convincing the court that the extra
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buckets and rock point were a part of the deal, since as an experienced contractor, he should perhaps have
queried what ‗it‘ meant in the offer.
In an unreported case concerning the word ‗it‘ in the offer, the court concluded that the offer did
not include the additional equipment, but only the one piece of machinery, since the machinery was fully
operational without the extra equipment.
CHAPTER 9. LEGAL CAPACITY TO CONTRACT AND THE REQUIREMENT OF
LEGALITY
Chapter Topics
The Minor or Infant
Drunken and Insane Persons
Corporations
First Nations Bands
Labour Unions
Bankrupt Persons
The Requirement of Legality
Legality Under Statute Law
Legality at Common Law: Public Policy
Contracts in Restraint of Trade
Summary
Key Terms
Review Questions
Mini-Case Problems
Chapter Objectives
After study of this chapter, students should be able to:
• Explain and illustrate the various situations where capacity to contract is
absent or diminished, and its effect on the contractual relationship.
• Explain and illustrate what types of contracts would be illegal contracts.
• Demonstrate situations where business activities may be illegal as
contracts in restraint of trade.
YOUR BUSINESS AT RISK
Public policy makes some transactions voidable and others illegal. The consequences of failing
to appreciate these risks are serious, unnecessary and avoidable.
CHAPTER COMMENTARY
Chapter 9 introduces the elements of capacity and legality. As the text indicates, not everyone who enters into
an agreement may be bound by it, as the law attempts to protect some individuals, such as minors, who lack
experience in business matters, and whose inexperience might therefore be taken advantage of by others.
Care should be taken, however, to emphasize that the protection granted to such persons is not absolute, but
rather, balanced by the need for those individuals to contract for necessaries such as food, clothing, and
shelter. To do otherwise would work a hardship on the very group that the law attempts to protect. The
balance of the common law is a key point to discuss in class.
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The ratification of contracts made during minority should be noted, and also the implications of the
right of repudiation of contracts made by minors where the goods used or acquired by the minor are
damaged. The rental car situation is an example which might be used to illustrate the latter, where the rental
agency may not sue a minor in tort to get around the fact the minor is not liable under the contract for damage
to the goods. This is also illustrated by the case quote from Noble's Ltd. v. Bellefleur. In that case, the seller
attempted to hold the minor liable for damage to the automobile by way of a tort action, but failed, since it
was damaged by the minor while using it as contemplated under the terms of the contract. The judge held that
tort law could not be used against a minor to enforce a matter which was a part of the repudiated contract.
Case 4 of the discussion cases would also be a suitable case problem for discussion of this point. The Court
Decision, Gregson v. Law and Barry illustrates a situation where a minor sold property at market value after
representing that she was of full age and had capacity to contract, then later attempted to recover the property.
In that case, the judge found that while she could not be made liable on the contract under ordinary
circumstances, because she had committed a fraudulent act in the course of the contract, the court would not
later allow her to acquire back the property which she had sold. While the court acknowledged the right of an
infant or minor to avoid a contract, the court also made it clear that it would not provide such relief to a minor
that was, in effect, asking the court to assist her in the fraud.
While minors are the largest and most important group to consider with respect to capacity, enemy
aliens, mentally impaired and drunken persons, undischarged bankrupts, labour unions, and corporations may
also be subject to limitations on their capacity in particular circumstances.
To the elements of intention, offer and acceptance, capacity, and consideration, Chapter 9 also
introduces the additional requirement of legality. The chapter deals first with the question of enforceability,
then examines the requirement of legality under both statute law and common law. Students are occasionally
surprised at the number of different types of agreements that they believed were lawful, when in fact the law
renders them unenforceable. In particular, the unenforceability of an agreement between a dishonest
employee and an employer which involves the employee's promise to return the stolen goods in exchange for
the employer's promise not to press criminal charges, appears to be difficult for many to comprehend. So too,
are contracts where an unreasonable restriction on the employee is contained in a contract of employment.
For contracts in restraint of trade between businesses, a brief examination of Chapter 32 on
Restrictive Trade Practices might be useful if additional information on restrictive trade practices or examples
are desired.
The case quotes in the chapter, in particular the quote from Archbolds (Freightage) Ltd. v. S.
Spanglett Ltd. provide good examples of the judicial view of legality and the effects of illegality on an
agreement. In the case quote from Stephens v. Gulf Oil Canada Ltd. the judge explains the conflicting public
policies and freedoms which are touched by the element of legality. The Court Decisions also provide a
number of examples of the extent of the law. In the J. G. Collins the case concerned a mix of the sale of a
business with an employment contract. Since it did not fit neatly into either of the two categories, the judge
in that case was obliged to establish some sort of protection for the plaintiff who was able to justify the
non-competition clause, and the need to enforce it. In the decision the judge decided that the two contracting
parties were experienced and competent businessmen, with approximately equal bargaining power, which
distinguished them from the ordinary employer and employee. Further, the covenant was reasonable and
necessary, and therefore, in the circumstances, enforceable against the defendant.
The case quote from Sherk v. Horowitz deals with a restrictive covenant as it applies to medical
practitioners, and how public policy is considered.
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Review Questions
1.
Why are courts reluctant to enforce restrictive covenants in contracts of employment? Under what
circumstances would such a covenant be enforceable?
Answer: A restrictive covenant could prevent a person from earning a living if it was enforceable
under all circumstances, hence, the limitation on its applicability.
2. Discuss the application of public policy or the "public interest" to contracts of employment containing
a covenant that would limit the ability of an employee to compete with the employer in a given area
for a period of time.
Answer: Public policy dictates that the freedom of the employee to work and earn a living should
only be fettered where it can be demonstrated that the employer's business would suffer serious
damage if the restriction was not enforced. Consequently, a restriction under those circumstances
would be enforceable if it can be demonstrated that both the time and area were reasonable for
protection of the employer.
3. If an adult entered into a contract with a minor without realizing that he was dealing with a minor, would
the adult be in a position to enforce the agreement? Would your answer to this question apply under all
circumstances?
Answer: Regardless of the impression which the adult had, an executory contract for non-necessaries
would generally be voidable by the minor at the minor‘s option. If the contract was for "necessaries" it
would be enforceable by the adult person.
4. Where a minor is engaged in business, how are the courts likely to view business contracts entered into
by the minor?
Answer: A minor engaged in business is engaged in "non-necessary" activity, and consequently, the
agreement between the minor proprietor and another would likely be voidable at the minor‘s option.
5. Identify the three major classes of contracts considered to be in restraint of trade.
Answer:
3 classes of contracts in restraint of trade:
(1) agreements contrary to the Competition Act.
(2) contracts between vendors and purchasers of businesses where the
vendor's future actions are restricted unduly.
(3) employment contracts where the employee's future employment right is unduly
restricted.
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6. How does the capacity to contract of a minor differ from the capacity to contract of those who are drunk
or of diminished mental capacity?
Answer: A minor‘s contracts and those negotiated by mentally impaired or drunken persons differ in
the sense that an mentally impaired or drunken person will normally be bound by all contracts unless
they can show that:
(1) they were drunk or mentally impaired at the time,
(2) the other contracting party was aware of this, and
1.
the contract was repudiated promptly on returning to a sane or sober state.
7. What are the limits on the powers of a "special act" corporation to bind itself in contract?
Answer: The powers of a "special act" corporation are limited to those given to it by the special
act. Any contract which falls outside the corporation's powers would be unenforceable and a nullity.
8. How does the law limit the capacity of a bankrupt person to enter into a binding contract?
Answer: A bankrupt person may not enter into contracts (except for necessaries) until discharged.
The bankrupt must reveal that he or she is an undischarged bankrupt before entering into any contract
which involves more than $500.
9. Distinguish between "illegal" and "void" with respect to contract law.
Answer: An illegal contract is a contract for an unlawful purpose. A void contract is a contract
which in unenforceable, but not necessarily illegal.
10. What is the basis upon which the requirement of legality of a contract is determined?
Answer: Legality is based upon public policy. A legal contract does not offend public policy; an
illegal one does.
11. Explain the risk assumed by an unlicensed tradesperson when entering into a contract to perform a
service that may only be performed by a person possessing a license.
Answer: An unlicensed trades person cannot enforce a contract entered into to perform "licensed"
work. In effect, the unlicensed person cannot take action on the contract to obtain payment for the
services rendered.
12. Under what conditions or circumstances would an "agency of necessity" arise?
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Answer: A minor may pledge the credit of his or her parents for necessaries of life, although parents
are not otherwise liable at common law for debts incurred by their children.
13. Explain the rationale behind the passage of the Competition Act.
Answer: The Competition Act was designed to protect competition by restricting practices which
interfered with open competition.
14. Under what circumstances would a restrictive covenant in the contract for the sale of a business be
enforceable? Why is this so, when contracts in restraint of trade are contrary to public policy?
Answer: A restrictive covenant may be enforced where the restriction is reasonable in terms of
geographic area and time. The reasoning behind this is that the purchaser is buying the vendor's
goodwill, and the purchaser should be given time to create a relationship with the vendor's clientele
without interference by the vendor, otherwise the vendor would be taking unfair advantage of the
purchaser.
15. Explain the reasoning behind the Common Law rules that limit the capacity of certain persons to bind
themselves in contract.
Answer: Public policy dictates that certain persons, due to their inexperience (or immaturity) or their
inability to appreciate the nature of their acts should be protected, and are thereby not held to their
contracts except where it is in their interests to be bound.
16. Indicate the purpose of a devotion to business clause in a contract of employment, and explain the
conditions under which this type of clause would be enforceable.
Answer: A devotion to business clause is sometimes used to ensure that an employee devotes the
required time to the employer's business, and to prevent an employee from engaging in other
activities which might be in competition with the employer's business. Such clauses are usually
enforceable because an employer is normally entitled to the time and energy of the employee as long
as it does not unnecessarily affect the employee's personal freedom.
17. Why do the courts make certain exceptions to the general rule concerning the capacity of minors to bind
themselves in contract?
Answer: The exceptions to the general rule concerning minors are related to contracts where the
subject matter is essential or necessary for the minor. If persons could not enforce contracts for
"necessaries" (food, shelter, clothing etc.) no credit would be extended for these, and as a
consequence, would work a hardship on the minor.
18. An employee is caught stealing money from her employer, confesses to the theft, and agrees to repay
the money taken. The employer, in response, promises not to report the incident to the police.
Discuss the validity or enforceability of the employer's promise.
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Answer: The theft of money is a criminal offence. The agreement not to report the
crime by the employer and the employee would be unenforceable since its purpose
would be to interfere with the system of justice.
14. Explain the requirements for First Nations bands to achieve an enforceable contract.
Answer: First Nations bands are not recognized as legal entities or as persons at common law. The Indian
Act provides that a band must exercise its powers, such as entering into contracts with outside parties, through a
majority resolution of its band councillors. This can be a practical impediment to obtaining meaningful contracts
for the goods and services needed by First Nations communities.
19.
Mini-Case Problems
1. X, aged 17, purchased a bicycle on credit for the purpose of transportation to and from her place of
employment. She made no payments on the bicycle, and the seller brought an action against her for
the debt.
Discuss the issues raised in this case and render a decision.
Answer:
X is a minor, and must establish that the bicycle is a non-necessary item in order to avoid the contract. If
the seller can establish that the bicycle was a necessary, the contract would be enforceable. If the minor is
successful, she would be obliged to return the bicycle, but would not be responsible for any wear and tear
due to its use.
2. A and B agree to carry on a business in partnership as hardware merchants. A and B agree that if
either party wishes to end the partnership he must not carry on a similar business within 80 kilometres
for a period of ten years. A leaves the business a year later and sets up a competing hardware business
across the street from their old shop, which B continues to operate. Advise B and A.
Answer:
A could probably set up the competing business with impunity because the restrictive covenant is
unreasonable and therefore unenforceable. The business probably draws customers from a much smaller
radius, probably no more than a few miles if in a city, and an 80 km. radius is excessive. 10 years is
probably too long a time period in view of the nature of the business (frequent customer purchases, etc.).
3. A and B are rival salespersons in the same firm and each have earned 2 tickets to the Grey Cup based
on last quarter‘s sales. Each wants to take two friends to the game, and thus A and B agree to compete
for the top sales position in the next quarter, winner taking the Cup tickets of the other.
If B takes top spot in sales, and A refuses to hand over the tickets, can B sue successfully?
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Answer:
The "bet" between A and B represents a wagering contract and would be unenforceable as contrary to
public policy. However, if the tickets represent a prize to the winner, it might be argued that the
agreement was not a wager but a prize for the effort of the successful participant.
4. Monica, at age 16, is an Olympic silver-medal swimmer. A swimwear company wishes to engage her
to endorse a line of new racing suits. The endorsement package will require her to make public
appearances, and appear for photo-shoots and in advertising copy.
Discuss the difficulties that the firm may face in holding Monica to her commitments in the future.
Answer:
Monica is a minor, and may at any time repudiate the contract, as it is not a contract for necessaries.
5. On the above facts, if it is later found that Monica won her medal using banned performanceenhancing drugs, what challenges will the company face in terminating the endorsement
arrangement?
Answer:
The difficulty that the company may face is that they are bound by the contract, assuming that Monica
wishes to enforce it. They may, however, be able to avoid the contract on the grounds that she won her
medal by using banned drugs, and the purpose of entering the contract was based upon the legitimacy of
her win. Note that the law relating to these grounds are not covered until a later chapter, but students may
be able to guess at the laws that might apply.
6. Fred purchases a vibrant nightclub from Amin. Amin is a dynamic impresario with a track record of
success in being able to gauge the pulse and tempo of entertainment tastes of young people, and being
able to build clubs and bars suited perfectly for university students. Fred‘s club is located in a
university town with a population of 350,000.
What terms might be appropriate for a non-compete agreement between Fred and Amin?
How dependent on population is your answer — if at all?
Answer:
Fred may wish to protect himself with a no competition clause, but he must be careful to limit the area on
a geographic basis to the area where the club would draw its target patrons. Given Amin‘s skills, Fred
may wish to make the time frame a little longer than usual, perhaps 5 years, to ensure that Fred had plenty
of time to establish himself with the students without a ‗come-back‘ from Amin to the area.
7. The parents of 5-year-old Amelia gave her an iPad to keep her entertained during a long car trip.
They had loaded the iPad with numerous games and Amelia kept herself busy for hours. At the end
of the trip, her parents received an email from their mobile provider that there were new charges of
$700 for In-App purchases of gems and princess clothing. Apparently, these had been bought by
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Amelia for the characters in her games. What arguments do the parties have in this case to either
enforce or avoid payment?
Answer:
It is important to determine who the parties to the contract are in this case. If the parents purchased or
downloaded the game Apps onto the iPad (tablet) for Amelia, she, as the minor, was not involved in the
formation of the contract for use of the App. She would not have accepted any of the contract terms, one
of which was surely the option to make In-App purchases on the promise of the existing payment terms.
Nonetheless, it ought to be foreseeable to the vendors of such games targeted at young children that the
temptation to click on shiny objects to enhance their play is irresistible. If these vendors lured the minor
into making the subsequent In-App purchases, arguably, they should not be able to enforce payment
under the contract for such non-necessary goods. It should be equally foreseeable that young children
will not be constantly supervised by an adult while playing such games and purchases by a minor who
cannot comprehend the consequences of their actions are inevitable. This may constitute a questionable
business practice on the part of the game vendor. There is, however, a compelling argument that
Amelia‘s parents, as the contracting parties, were negligent in their supervision of her use of the game and
should not be able to avoid payment under the contract.
Case Problems for Discussion
Case 1
A major manufacturer of advanced electronic game play units agreed with an equally large international
retailer on certain terms for the production and distribution of the newest such game units. It was agreed
that the manufacturer would provide the retailer with the first 1 million units to the exclusion of all other
retailers. The retailer would receive its units for an exclusive product launch week, before any other units
would be sold wholesale to other retailers. In turn, the retailer agreed to sell the units at precisely $599.99,
this price being ideal, according to the manufacturer‘s market research. Every purchaser would also
receive a T-shirt with the manufacturer‘s logo and $20 in gift coupons for the retail store.
If the business relationship later fell apart, which party could enforce which parts of this
agreement?
Could it be attacked by others?
Answer:
Students should attempt to identify the restrictive trade practices in this case, as well as the agreement to
maintain prices. Note however, that the agreement concerns an international retailer, and students should be
made aware that agreements concerning foreign sales may not be caught by Competition legislation as the
Act is for the most part concerned only with domestic competition, and the domestic market. This distinction
is not covered in this chapter, and student should be either directed to Chapter 32 (Restrictive Trade
Practices) where it is covered, or the instructor should explain this fact to the class. Students should
recognize that the agreement is unfair to other retailers who will carry the product, and given its restrictive
nature, the resale price may not be enforceable by the manufacturer against the large retailer.
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Case 2
Ilsa Sharp had operated Sharp‘s Wholesale Grocery for a number of years with limited success.
Eventually, she found herself seriously in debt as a result of a number of unfortunate purchases of goods
that spoiled before she could find a market for them, and she made a voluntary assignment in bankruptcy.
A few weeks later, while still an undischarged bankrupt, she purchased $1600 worth of farm produce
on credit from a farmer who was unaware of the fact that she was an undischarged bankrupt. Sharp sold
part of the goods at a profit to a friend, and kept the remainder of the food for her own use.
When Sharp failed to pay the farmer, the farmer instituted legal proceedings to collect the $1600.
Explain the rights of the farmer in this case, and render a decision.
Answer:
Sharp in this case, is subject to the statutory duties related to her position as imposed by the Bankruptcy Act.
As an undischarged bankrupt, Sharp has a duty to disclose that she is undischarged if the amount of the credit
extended exceeds $500. The reasons for the purchase are material in this case, as it is the purchase of goods
on credit for the $1600 which places Sharp in violation of the Bankruptcy and Insolvency Act. R.S.C. 1985
c.B-3 (as amended) See: Allard v. The King, [1949] 3 D.L.R. 232. The position of the farmer under the
contract, however, is different. Sharp would be liable for the goods purchased for her own use as necessaries.
Sharp may also be liable for the value of the goods acquired for resale, since they were acquired fraudulently
when she concealed from the farmer the fact that she was an undischarged bankrupt.
Case 3
Tuma entered into a rental agreement with Cross-Moto-Cycle for a one-year lease of a motorcycle by
misrepresenting his age as being 20 when, in reality, he was only 17. The agreement that Tuma signed
prohibited the use of the motorcycle in any race or contest, and required Tuma to assume responsibility
for any damage to the machine while it was in his possession.
A week after Tuma acquired the machine, he made arrangements to enter a motorcycle race that was
to be held in a nearby city. On his way to the race, he lost control of the motorcycle on a sharp turn in the
road, and the machine was badly damaged in the ensuing accident.
Tuma refused to pay for the rental and the damage on the basis that he had not attained the age of
majority and he was not liable on the contract.
Discuss the rights of Cross-Moto-Cycle, and comment on its likelihood of success if it should take
legal proceedings against Tuma.
Answer:
This case raises the questions of misrepresentation of age, repudiation, minority, and the damage to goods
which may not be necessaries. The first question to consider should deal with the nature of the goods: Is a
motorcycle a "necessary"? If so, Tuma is clearly bound by the contract, and his repudiation would entitle the
lessor to bring an action for damage to the goods if they were damaged due to Tuma's negligence. However,
if a motorcycle is not a necessary item, then the position of the parties may be quite different. Even though
Tuma misrepresented his age, if the contract is voidable at his option, he will not be bound by it if he chooses
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to repudiate the agreement. His only obligation on repudiation would appear to be the obligation to return the
wrecked motorcycle. Cross-Moto-Cycle would not likely succeed if it framed its action for damages in tort
rather than contract, since Tuma was using the machine at the time in the manner contemplated by the
contract, and the courts will not usually permit enforcement of the contract, where the contract is voidable at
the option of the minor. See: Noble's Limited v. Bellefleur (1963), 37 D.L.R. (2d) 519; Dickson Bros.
Garage &. U. Drive Ltd. v. Woo Wai Jing (1957), 11 D.L.R. (2d) 477.
Case 4
Linda and John, aged 17 and 18, respectively, entered into a partnership agreement to carry on business as
a local parcel-delivery service. The business was to be operated under the name ―L & J Parcel Delivery.‖
In order to conduct the business, the two partners purchased a small truck on credit from a local truck
dealer. The purchase agreement for the truck was signed ―L & J Parcel Delivery‖ by John, who negotiated
the purchase.
Linda purchased a motorcycle on credit from a local dealer for the twofold purpose of (1) delivering
parcels, and (2) transportation to and from her home to the place of business of L & J Parcel Delivery, a
distance of some eight kilometres. She had informed the seller that the motorcycle would be used by L &
J Parcel Delivery and for personal transportation, but signed the purchase agreement in her own name
only.
A few days before Linda‘s 18th birthday, John and Linda decided to cease their business operations.
A substantial part of the purchase price remained owing to the sellers of both the truck and the
motorcycle, and, with the intention of avoiding liability on the two purchase agreements, Linda
repudiated the contracts and the partnership agreement. Over the next few months, John and Linda
retained possession of the truck and motorcycle, while they argued between themselves and with the two
sellers as to responsibility for the payment of the balance of the purchase price on each vehicle. Finally,
after three months of fruitless discussion and argument, the sellers each brought an action against John
and Linda for payment of the debts.
Discuss the rights of the parties and the issues that might be raised in the case. Render a decision.
Answer:
Assuming that 18 is the age of majority in the province, in the case of a partnership, a 17 year old minor
partner may bind the partnership in contract. However, the partnership agreement itself may be voidable at
the option of the minor. The purchase of the truck should be first considered. The contract to purchase was
made by John in the partnership name. The partnership is thus bound by the contract. Linda's purchase of
the motor-bike is a different type of contract. Linda‘s purchased it in her own name, and it would appear that
she alone had a contract with the seller, even though she informed the seller it would be used part of the time
by L & J Parcel Delivery. Would this latter fact make the partnership liable? Perhaps not, because Linda
indicated that it would be for personal use as well. This would oblige the seller to probably show that the
motor-bike was a necessary for her to travel back and forth to her work - something which might be difficult
since she is in business, and the motor-bike was also used for that purpose. Since partners have unlimited
liability (a point not covered until Chapter 16) (Law of Sole Proprietorship and Partnership) John is liable to
the seller of the truck, and the Seller would probably be successful in his claim. If John and Linda
successfully argue that the motor-bike was a non-necessary purchase by Linda (and not the partnership) John
would avoid liability on the contract, and Linda would be able to successfully repudiate it, her only obligation
being to return the machine to the seller.
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Case 5
A company owned a parcel of land upon which it wished to have a commercial building constructed. An
architect was engaged to design the building, and a contractor was contacted to carry out the construction.
Contracts were signed with both.
Before the construction was completed, it was discovered that the building violated a municipal bylaw that required certain safety features to be included in the building. Neither the architect nor the
contractor were aware of the by-law at the time they entered into their respective agreements with the
company.
The safety features required by the by-law could be incorporated in the building at a cost of
approximately $10,000, but the contractor refused to do so unless he was paid for the work as an ―extra‖
to the contract price. The company refused to do so, and it withheld all payment to the contractor on the
basis that the construction contract was illegal. The contractor then instituted legal proceedings against
the company.
Explain the nature of the contractor‘s claim, and explain the defence raised by the company. Discuss
the issue of responsibility in the case. Render a decision.
Answer:
The contract for the construction of a building in itself is not illegal, but the failure of the building to
conform with the municipal building code suggests the questions: Is the contract illegal because it
violates a local building code? What is the significance of the fact that neither the architect nor the
building contractor were aware of the law? Is ignorance of the law an excuse in the case of the architect?
The contractor? The property owner? What are the ramifications of illegality in this case? If the
contract is illegal, and the contract unenforceable, the property owner would acquire a building perhaps at
no cost to him. Would this then be "unjust enrichment"? Are not all parties expected to be aware of the
law? As a general rule, if a contract cannot be performed without violating a law, the contract will be
considered void, regardless of whether the parties were aware of the law or not. According to One
Hundred Simcoe Street Ltd. v. Frank Burger Contractors Ltd., 1969 CanLII 918 (SCC), a case with
similar facts to the case here, the fact that the design incorporated an error which violated the law, and
which was unknowingly made by the architect, would not necessarily render the entire contract illegal,
and therefore unenforceable. The cost of changing the building to comply with the building code,
however, would fall on the negligent party or parties. The property owner, therefore, would likely be
bound by the contract, but would be entitled to compensation for the negligence in an amount which
would be required to bring the building in conformity with the building code. The liability of the
contractor would depend upon whether the nature of the design error was one which the contractor
would likely be aware.
Case 6
The Suburban Medical Centre was founded in 1981 as a medical clinic by eight physicians and surgeons.
In 2008, the clinic advertised in the medical press for an obstetrician. Umesh, a medical specialist,
answered the advertisement. Following an interview, Umesh was employed by the clinic and signed an
employment contract that contained the following clause:
Should the employment of the Party of the Second Part by the Parties of the First Part terminate for
any reason whatsoever, the Party of the Second Part COVENANTS AND AGREES that he will not
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carry on the practice of medicine or surgery in any of its branches on his own account, or in
association with any other person or persons, or corporation or in the employ of any such person or
persons or corporations within the said City of Suburbia or within ten kilometres of the limits thereof
for a period of five (5) years thereafter.
Umesh proved to be a difficult, but hard-working employee, and after some years an argument arose
between Umesh and one of the founders of the clinic. As a result of the argument, Umesh resigned. He
immediately set up a practice in the same city. The clinic continued to operate without the services of
Umesh and later brought an action for damages and an injunction against him.
Discuss the factors the courts should consider in deciding this case.
Render a decision.
Answer:
This case is based upon the case of Sherk v. Horowitz, [1972] 2 O.R. 451, an excerpt from the same being
reproduced in the text. The case illustrates a very common form of restrictive covenant found in employment
contracts. The first question to be decided is whether the "10 km, 5 year" limitation is "reasonable". The
nature of the protection required by the employer should be examined in this light, and the issue of public
policy should be raised. What effect (if any) would the fact that the medical profession itself supports a
policy of universal access to medical care have on the public policy considerations in the case? What attempt
would the courts make to balance the need for protection from competition for the employer with the "right"
of the public to medical care? Would it have any effect on the public policy aspect if the employer had hired
a replacement for Harvey immediately after he resigned? Would this have been adequate protection for the
public? An essential part of the plaintiff's case clearly must be to satisfy the court that the public would be
protected if the covenant was enforced. In the Sherk v. Horowitz case, this was not done, and the plaintiff
was unsuccessful.
Case 7
In 2015, Herbert entered into the employ of TOPE Limited as an electrical engineer. He was employed to
design electronic testing equipment, which the company manufactured. At the time he was hired, he signed
a written contract of indefinite hiring as a salaried employee. The contract contained a clause whereby he
agreed not to disclose any confidential company information. The contract also required him to agree not
to seek employment with any competitor of the company if he left the employ of TOPE Limited.
Some years later Herbert was asked to develop a dwell tachometer suitable for sale to home
mechanics through a particular hardware store chain under the chain‘s brand name. He produced a
prototype in less than a week, and then he went to the president‘s office to discuss the development and
production of the equipment.
During the course of the discussion, Herbert and the company president became involved in a heated
argument over manufacturing methods. At the end of the meeting, the president suggested that Herbert
might begin a search for employment elsewhere, as his job would be terminated in three months‘ time.
The next morning, Herbert went to the president‘s office once more, ostensibly to discuss the dwell
tachometer. Instead, Herbert informed the president as soon as he entered the room that he no longer
intended to work for the firm. He complained that the company had never given him more than a twoweek vacation in any year, and that he often worked as much as 50 hours per week, with no overtime pay
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for the extra hours worked. In a rage, he smashed the dwell tachometer prototype on the president‘s desk,
breaking it into a dozen small pieces. He then left the room.
The following week, Herbert accepted employment with a competitor of TOPE Limited to do a type
of work similar to that which he had done at his old firm. He immediately developed a dwell tachometer
similar in design to the previous model; he then suggested to the management of his new employer that
they consider the sale of the equipment through the same hardware chain that TOPE Limited had
contemplated for its product. The competitor was successful in obtaining a large order for dwell
tachometers from the hardware chain a short time later.
TOPE Limited presented its new product to the hardware chain a week after the order had been given
to the competitor, and only then discovered that Herbert had designed the equipment for that firm. The
hardware chain had adopted the competitor‘s product as its own brand and was not interested in
purchasing the product of TOPE Limited, in view of its apparent similarity in design.
TOPE Limited had expected a first year‘s profit of $65,000 on the dwell tachometer if they obtained
the contract from the hardware chain.
Discuss the nature of the legal action (if any) that TOPE Limited might take against Herbert, and
indicate the defences (if any) that Herbert might raise if TOPE Limited should do so.
Answer:
The facts of this case raise the question of the use of confidential information by an employee after he leaves
the employ of his employer. The nature of the information must, however, be considered: that which is truly
confidential may not be used by the employee to the prejudice of the employer. The onus rests on the
employer to prove that the disclosed information was confidential, and was first disclosed to the employee as
such. See: Consolidated Textiles Ltd. v. Central Dynamics Ltd. et al. (1974), 18 C.P.R. (2d)1. Students
should be encouraged to identify the confidential information. The restrictive covenant with respect to
employment should also be examined. Since the covenant contains only a restriction "not to work for a
competitor" is it too wide? Would the courts likely strike it down since it contains no time limit? What
obligation rests on the plaintiff in the enforcement of the covenant?
The dwell tachometer, from the
facts of the case, would appear to be a relatively standard electronic device, and one which would unlikely
contain anything of a confidential nature such as a "trade secret," or use a secret production process in its
manufacture. The identity of the customer in this case, however, might be confidential if the "contact" for the
purchase had been made only between the two companies. While the restrictive covenant on employment
might not be enforceable, the action for the breach of confidentiality might be successful.
Case 8
Lui was a qualified journeyman electrician who was employed by a municipal public-utilities commission
on a full-time basis. On weekends and evenings, he occasionally assisted friends who were constructing
their own homes by installing their electrical wiring for them. In most cases he did the installation work
gratuitously, but from time to time he would be given a sum of money in appreciation of his services.
One day, while on vacation at his summer cottage, a neighbouring cottage owner who was renovating
his cottage approached Lui and inquired if he might be interested in taking on the job of rewiring the
cottage. Lui thought about the offer, then agreed to do so, and a price was agreed upon. Lui would do the
work and supply the materials (estimated at $1950) for $2,800.
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A few days later, Lui purchased the necessary materials and proceeded to rewire the cottage. Upon
completion of the job, Lui presented his account for $2,950, which represented the cost of materials at
$2,100 and his labour at $850.
Lui‘s neighbour refused to pay the account, insisting that the agreed price was $2,800. Lui‘s argument
was that the $1,950 price quoted was only an estimate, and subject to change. The only firm part of his
quote, he maintained, was his labour charge of $850.
The two parties continued to argue over the price for several months, and eventually Lui instituted
legal proceedings to collect the account.
Identify and discuss the legal issues that might arise in this case that could affect Lui‘s right to
recover payment.
If you were called upon to act as counsel for the defendant, what inquiries would you make?
Answer:
The issue in this case concerns the legality of the electrician to perform work if the electrician must be
licensed to do so. From the facts of the case, the electrician is employed by the public utilities
commission. The question is silent on the need for a licence from the municipality to perform installation
work. If a license is required, the contract concerning his labour is unenforceable by him, and he may
only collect for the materials, and that amount can be determined by the court. If a licence is not required,
then the issue is whether the contract was for the entire amount of labour plus materials. Students may be
left to decide this question, based upon the facts of the case.
Case 9
Mala Anand was a computer scientist with over 25 years of experience in the computer field. For the last
five years of her 12 years with a large computer manufacturer, her mandate was to develop ―nextgeneration‖ computer hardware. She was, in essence, responsible for most of the ―high-tech‖ research in
the area of data-reading technology in the company. She was also a recognized international authority in
this highly specialized area of research.
A competitor offered Mala a position in its firm to carry out the same type of research, as it, too, was
interested in producing next-generation data-reading equipment. Mala accepted the position and began
working for her new employer.
Mala‘s previous employer then sought an injunction to prevent Mala from engaging in any work for
the competitor that was similar to the work she had carried on at her previous place of employment.
The above employment scenario raises a number of significant legal and public policy issues.
Identify and discuss these issues. In your answer, indicate how the courts attempt to deal with them.
Answer:
This case illustrates the problem facing the court when there are equally compelling reasons put forward by
each party to the dispute. In this instance the employer would be seriously affected if the employee was
permitted to reveal the 'secrets' she had developed for the employer to the new employer. The employee, on
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the other hand would be restricted in her employment, and career if she was denied the opportunity to work
for the new employer. Students should identify and discuss these issues on the basis of facts set out in the
case. Given the critical knowledge that Mala possessed, the court might agree with the employer in this
instance, and prevent Mala from working at any research at the new employer related to her previous
research. The case upon which this text problem is based is a U.S. Federal Court unreported decision in
which a preliminary injunction was granted to the plaintiff to prevent the employee from working in a similar
position for the new employer pending the outcome of the trial. International Business Machines Corp. v.
Seagate Technologies Inc. and Bonyhard.
Case 10
Alice, a young woman who was 17 years of age, saw an advertisement by Silver Flatware Ltd. in a
magazine that offered a 24-piece set of silver flatware for sale on the following terms: ―$100 payable with
order, and monthly payments of $50 each, payable over a three-year term.‖
The advertisement was accompanied by a coupon setting out the terms of payment and requiring the
purchaser to provide his or her name and address and signature in the space provided.
Alice completed the coupon and mailed it, together with a cheque for $100, to the company. A few
weeks later, the 24-piece set of silverware arrived by post.
Alice made a number of payments according to the terms of the agreement, then decided that she did
not wish to continue with the agreement. A week before her eighteenth birthday, she wrote to the seller
and repudiated the contract, but did not offer to return the silverware because she had lost several of the
teaspoons.
The company and Alice then engaged in a protracted round of correspondence in which the company
demanded a return of the silverware and the retention of all money paid as the price of her release from
the agreement. Alice refused to return the silverware. She maintained that she was entitled to a return of
the payments as she was a minor at the time she entered into the agreement.
The company, some 10 months later, brought an action against Alice for the balance of the purchase
price.
Discuss the defences (if any) that Alice might raise in this case and render a decision.
Answer:
This case deals with a number of different issues concerning the capacity of a minor, the nature of
"necessary" goods, the effect of repudiation by the minor, and the law related to recovery of goods in the
hands of a minor. Alice clearly entered into a contract during her minority, but the binding effect of the
agreement is dependent upon the nature of the goods purchased. Is a set of silver flatware a necessary item for
a seventeen year old? If she is living at home, perhaps not. However, if she is living apart from her parents,
in her own apartment, would the flatware possibly be a necessary item, considering her "status"? If the goods
are not necessaries, the contract is voidable, but her ability to recover any monies paid will depend to a
considerable degree on her ability to restore the seller to his former position. See: Bo-Lassen v. Josiassen,
[1973] 4 W.W.R. 317; Sturgeon v. Starr (1911), 17 W.L.R. 402. On the basis of these cases, the seller should
be able to recover the goods through his legal action, but Alice may not be able to recover all of her
payments, due to the fact that she lost some of the silverware.
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Case 11
A company produced a line of sophisticated toys using a secret special plastic and process. The company
hired a chemist to work on the special plastic, but before she was allowed out into the lab, she was
obliged to sign a confidentiality agreement with respect to all aspects of her work. Some years later, she
left the firm and joined a competitor, and in time, that competitor began producing toys with plastics of
very similar properties. The first company commenced legal action against her and her employer on the
basis that she had revealed confidential information to her new employer.
Discuss the issues raised in this case, and how it may be decided if it reached the courts.
Answer:
This case concerns the enforceability of a confidentiality agreement intended to protect the employer‘s
trade secrets. Class discussion should consider the restrictiveness of the agreement. Is it too restrictive if
it covers all aspects of her work? No time limit or geographic limits are covered. Would she be barred
from discussing any aspect of her work forever? Is the agreement unenforceable for this reason? Note
that some ‗secrets‘ must be kept secret for very long periods of time, e.g.: the formula for Coca-Cola.
Note also that any restrictive agreement must be reasonable since it may affect the employee‘s ability to
find other work. The facts of the case are somewhat similar to the case of Reliable Toy & Reliable
Plastics Co. Ltd. v. Collins [1950] 4 D.L.R. 499, where the court held that the employer was entitled to
protection of its secret processes. The employee was restrained from revealing the information after
leaving the employ of the employer.
Chapter 10. The Requirements of Form and Writing
Chapter Topics
Formal and Simple Contracts
The Statute of Frauds
Requirements for the Written Memorandum
Reduction to Writing
Sale of Goods Act
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Identify situations in which the Statute of Frauds (or similar legislation)
applies.
• Explain the importance of a written memorandum of a contract at
Common Law and under the Sale of Goods Act.
YOUR BUSINESS AT RISK
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Some contracts may be verbal, but others must be in writing, or in a certain form to be
enforceable. Business persons must respond to these differences to secure their rights and to
limit their obligations.
CHAPTER COMMENTARY
Previous Chapters 7 through 9 inclusive have been concerned with the various elements which must be
present to establish a binding agreement at Common Law. To some extent these have been altered by statute.
For example, in the area of legality and capacity, statute law has imposed a number of restrictions, but apart
from these alterations, the requirements are essentially those established by the courts. In addition to these
basic elements, it is necessary to now examine two additional requirements that affect only certain types of
contracts.
Formal contracts, which usually require a seal, derive their validity from the form which they take,
and they must of course, also be in writing to be enforceable. The Statute of Frauds and the Sale of Goods
Act, however, have expanded the writing requirement to cover a number of different kinds of contracts which
were not formal agreements in the past.
The Statute of Frauds, in particular, is unusual in its application with regard to writing, as it does not
render the contract void, but merely unenforceable by the courts. This point should be emphasized in class
discussion. So, too, should the methods employed by the court to overcome the hardships that the statute has
produced. Some emphasis should be placed upon the doctrine of part performance, and the exceptions to the
parol evidence rule under the Requirements for the Written Memorandum.
Because the courts have established certain exceptions to the statute, these should be carefully
reviewed. Among these are the rules for part performance of a contract concerning land, and the exception for
contracts which may be performed by either party in less than one year.
The guarantee, in particular, is a special type of agreement, because it involves three persons: the
creditor, the debtor, and the guarantor. Students should be aware that to have a guarantee situation, a
debtor-creditor relationship must exist, or be created. This in turn, will be supported by the guarantee, thus
creating a secondary relationship between the creditor and the guarantor. Emphasis should be placed upon
the fact that the guarantor does not have primary liability for payment of the debt. The debtor is primarily
liable for the payment. Where the guarantor becomes liable is when default occurs on the part of the
principal debtor. This is explained in case excerpt from: Western Dominion Investment Co. Ltd. v.
MacMillan. In the case, the judge explains the nature of the liability of the debtor and the guarantor, and sets
out the conditions under which the guarantor may be absolved from liability. It is important to note as well
that payment of the debt by the guarantor does not release the debtor from all obligation on the debt. When
the guarantor has paid the debt, the guarantor is entitled to a transfer of the security, and the creditor‘s claim
for payment. The guarantor then becomes entitled to claim payment from the debtor.
The Gallen et al. v. Allstate Grain Co. Ltd. Court Decision provides an illustration of the parol
evidence rule, and how a court views its application in a specific contract setting. The case might be used to
discuss this particular rule and the various fact situations where it might arise.
The Manulife Bank of Canada v. Conlin et al. decision illustrates the position of a guarantor of a
mortgage debt and the importance of including the guarantor in any changes to the debt repayment or security
underlying a debt. In the case, the parties failed to obtain the consent of the guarantor, and when default later
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occurred on the mortgage, the court held that the guarantor was released from liability because no consent to
the changes had been given by the guarantor.
Review Questions
1. Explain the rationale behind the general Common Law rule which states that an agreement in writing
may be terminated by a subsequent verbal agreement. Is this always the case, or is it subject to
exception?
Answer: The rationale behind this rule is that the new agreement has as its subject matter the existing
agreement which the parties intend to alter or terminate. An exception to this rule would be an
agreement under seal which would require a subsequent agreement under seal to alter it.
2. What are the legal implications of failing to comply with the requirements of writing under the Statute of
Frauds or other equivalent provisions?
Answer: The failure to comply with the writing requirements of the Statute of Frauds renders the
contract unenforceable in a court of law.
3. Distinguish a guarantee from an indemnity.
relationships?
How does the Statute of Frauds affect these two
Answer: In an indemnity the third party becomes a principal debtor. A guarantee creates a contingent
liability for the debt on the part of the guarantor: Only if the principal debtor defaults does the guarantor
become liable. The Statute of Frauds requires the guarantee to be in writing to be enforceable.
4. Explain the doctrine of part performance and the rationale behind the establishment of the doctrine as a
means of avoiding the Statute of Frauds.
Answer: The doctrine of part performance may be used to avoid the Statute of Frauds in a verbal
contract concerning land if a party can establish that the verbal contract is otherwise valid, and evidence
is available to establish it, that there was a reliance on the agreement by the party attempting to enforce
the agreement, the party would suffer a loss if the agreement was unenforceable, and that the statute
would constitute a fraud on the party if it was not enforceable. The injured party must also show that the
acts of part performance relate, and could relate only to the agreement in question.
5. Describe the minimum requirements for a written memorandum under the Statute of Frauds or other
equivalent provisions?
Answer: To meet the requirement of writing, the agreement need not be formal, but it must:
(1) identify the parties,
(2) contain the terms of the agreement, and be signed by the party to be charged.
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6. What exceptions to the Statute of Frauds have the courts established for contracts that do not require
immediate performance?
Answer: Where the Statute of Frauds includes a one year writing requirement, the courts have stated
that if either party can fully perform the contract in less than one year, the contract need not be in writing
to be enforceable.
7. How does the parol evidence rule affect evidence related to a contract in writing?
Answer: The parol evidence rule limits evidence pertaining to a written contract to evidence which
explains the terms of the agreement. Evidence may not be admissible if it would have the effect of
adding to, changing, or contradicting the terms of the agreement.
8. Explain the effect of a collateral agreement and the doctrine of implied term on a written agreement
subject to the parol evidence rule.
Answer: Collateral agreement is an exception to the parol evidence rule. If a separate agreement
(with separate consideration) can be established the collateral agreement may alter the terms of the
original agreement. The doctrine of implied term states that the courts will recognize certain terms as
being a part of the agreement even if they are not included, if the terms are those that by custom or
practice the parties normally include, and the terms were omitted due to an oversight.
9. Explain the effect of the Statute of Frauds or other equivalent provisions on the law of contract.
Answer: The statute imposes a requirement of writing on certain informal contracts.
Mini-Case Problems
1. X enters into a verbal agreement with Y to purchase Y‘s farm for $750,000. X pays Y a deposit of
$10,000 cash.
What are X‘s rights if Y later refuses to go through with the agreement?
Answer:
X may not enforce the agreement as it concerns land, and must be in writing to be enforceable. X would be
entitled to a return of his deposit.
2. How would your answer to the problem in question 1 differ if X refused to fulfill his part of the
agreement?
Answer:
If X refused to perform, he would not be entitled to a return of his deposit, because it was money properly
paid under the contract which continues to exist. X cannot treat the contract as at an end because Y is not in
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default.
3. A offers to buy B‘s sailboat for $10,000, provided that he can obtain a loan of $5,000 from his
banker. A and B put the agreement in writing, but the agreement does not mention the loan.
If A cannot borrow the $5,000, can B sue A for failing to comply with the agreement of purchase?
Answer:
A may be able to argue the loan was a condition precedent to the agreement. Since he could not obtain the
loan, the agreement is ineffective.
4.
Alex agreed to purchase a used light aircraft for $180,000 (as is) from Aeroventure Aviation
Company. On the day agreed for transfer, Alex appeared with his certified cheque for $180,000 and
was met with an invoice for $203,400 being the price plus harmonized sales tax.
Discuss the issues raised as a result.
Answer:
The agreement between Alex and the company was for the purchase of the aircraft for $180,000. The
contract was subject to taxation, and Alex would be expected to know the law, and include the tax even
though the contract was silent on the matter, as Alex would be liable for the tax as a purchaser. The tax
payment might be considered an implied term in the contract.
5. Tom agreed to sell his car to George for $11,000 and the two exchanged e-mails to that effect. Later
meeting at a party, George asked if Tom would throw in his boat trailer along with the car. Tom
agreed. A week later, George brought an $11,000 certified cheque to Tom‘s home and received the
keys to the car. The boat trailer remained locked in Tom‘s garage. In response to George‘s protest,
Tom said: ―We had no agreement about a trailer.‖
Advise George.
Answer:
The written agreement was for the sale of the car. The verbal agreement was to include the boat trailer. This
may be caught by the parol evidence rule. Since no consideration was given for the promise, George could
not argue collateral agreement, however, he may argue subsequent agreement. See: Johnson Investments
Ltd. v. Pagritide [1932] 2 D.L.R. 985.
6. Zhao, the owner of a thriving drug store, discusses the trade with Victor, the son of a friend. Victor
decides to open a drug store, and Zhao loans him the money. As matters turn out, Victor purchases a
franchise that is as much a general store as it is a drug store. Zhao considers this venture much more
risky and demands that Victor find another investor willing to buy out Zhao.
What argument in law can Zhao raise to suggest that Victor must do so?
Answer:
Zhao and Victor apparently made a verbal agreement that Zhao would finance the purchase of a drug store.
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The funds advanced were not used for this purpose. Zhao might argue that this was a condition of the verbal
agreement, and Victor in breach (perhaps using the Gallen v. Allstate Grain Co. Ltd. case).
Case Problems for Discussion
Case 1
Maria intended to open a store in a major mall. She invited Yasmin to join her through investment
and management of the operation. Yasmin agreed on the condition that she could raise the money and
work it into her schedule as an assistant in an accounting firm. She did raise the money, and sent it to
Maria, and on the strength of that, Maria signed the shopping centre lease agreement. When Yasmin‘s
employer discovered her plans, it informed her that ―no moonlighting‖ was a condition of her
employment contract.
Discuss the implications of this for Maria and Yasmin.
Answer:
This case discusses the matter of a condition precedent and its effect on business arrangement
between Maria and Yasmin. From the facts, the intention was that Yasmin would play an active part in the
management of the business, and her offer of the investment was based upon the condition that she could
raise the money and work it into her schedule. This would be a condition precedent to the agreement. When
Yasmin‘s employer refused to allow her to work elsewhere under her employment agreement, the condition
was probably unfulfilled. Yasmin would be entitled to a return of the money she gave to Maria, and their
agreement would terminate Maria, however, signed the shopping centre lease, and would likely be bound by
it.
Case 2
Habitation Apartments Ltd. borrowed $5,000,000 from the Good Times Bank and secured the loan by
way of a three-year mortgage on its apartment building. The bank demanded additional security for the
loan, and Simple, the president of the corporation, personally guaranteed repayment of the loan.
Several years later, as a result of a dispute between shareholders, Simple was voted out of office as
president along with most of the Board of Directors, and a new president and Board of Directors were
selected by the shareholders. During the months that followed, the new president and Board of Directors
reorganized the corporation‘s operations. As a part of the reorganization, it was necessary for the
corporation to rearrange its mortgage loan with the bank. The bank agreed to extend the loan for a further
three-year term but at a higher interest rate. Simple, who was still a shareholder of the corporation, was
unaware of the new refinancing arrangement the corporation had made with the bank.
A year later, as a result of tenant problems and a high vacancy rate, the corporation was unable to
meet its mortgage payments, and the mortgage went into default. When the corporation failed to pay the
mortgage, the bank turned to Simple and demanded payment under the guarantee.
Discuss the rights of the parties in this case and explain the possible outcome if the bank should take
legal action against the corporation and the guarantor.
Answer:
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The guarantee of the mortgage by Simple was in writing (although the question does not specifically
indicate that it was), and accordingly would comply with the requirements of the Statute of Frauds. The issue
raised in the case, however, is whether the corporation, by changing the terms of the original security
(extension of term, and a higher interest rate) without Simple's consent released him from his guarantee.
Since Simple was unaware of the changes, he would be in a position to argue that he was discharged from
any liability as a result of the corporation's action, and would probably be successful. See: Manulife Bank of
Canada v. Conlin et al. Court Decision.
Case 3
Clement entered into a verbal agreement with Calhoun to purchase Calhoun‘s farm for $440,000. In
the presence of his friend Saunders, Clement gave Calhoun $1000 in cash ―to bind the bargain.‖ The farm
adjoined the farm that Clement already owned. Immediately after the deal was made, both he and
Saunders proceeded to remove an old fence that separated the two farms.
A few days later, Clement plowed a large field on his ―new‖ farm, and Saunders cut down a few
trees. Later that day, he prepared a cheque in the amount of $339,000 and took it to the farmhouse where
Calhoun was still living.
Calhoun met Clement at the door and said that he had changed his mind. He did not wish to move off
the land and had decided not to sell the farm.
Discuss Clement‘s rights (if any) in this case. Explain the possible outcome if Clement should decide
to take legal action against Calhoun.
Answer:
Contracts concerning interests in land are caught by the Statute of Frauds, and this point should be
identified by the students as relevant to this case in class discussion. If the contract would normally be
unenforceable because it is not in written form, the doctrine of part performance should be examined as a
means of avoiding the statute. The requirements for part performance, however, should be determined in the
course of the discussion. The four criteria are set out in the text. Would the enforcement of the statute
perpetrate a fraud on the buyer? Were the acts of part performance ones which would refer to the agreement
alleged and to no other? Obviously, the payment of $1000 cash in itself would not be adequate as part
performance. Would the removal of the fence, the plowing of fields, or the cutting of the trees be adequate?
Possibly they would represent the acts of an owner of property, and support the existence of a contract. All
four criteria however, must be satisfied in order for Clement to succeed in his enforcement of his rights by
way of the doctrine of part performance. See: Haskett v. O'Neil, [1939] 4 D.L.R. 598; Deglman v. Guaranty
Trust Co. of Canada and Constantineau, [1954] 3 D.L.R. 785. The Haskett case has a particular application
here, where the acts of part performance such as working the land, etc., were considered by the court to be
sufficient to enable the purchaser to enforce the contract.
Case 4
Slippery Silica Mining Corporation entered into a contract with Highgrade Transport Company to
haul its ore from its mine to a railway terminal, a distance of some 50 kilometres. The contract called for
the hauling of approximately 60 tonnes a week for a one-year period. Because Slippery Silica Mining
Corporation was a very small company, Highgrade Transport requested that Wilson and Rose, its two
principal shareholders, personally guarantee the payment required under the terms of the contract.
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In due course, Wilson and Rose provided a written guarantee of payment. It bore their signatures and
that of their witness, Sheila Drew, a young woman who worked in their office as a receptionist and typist.
The guarantee was not under seal, so the owner of the transport company immediately drove down to the
mine office to have the two owners affix seals to the document.
At the mine office, the owner of the transport company met Sheila, who informed him that both
Wilson and Rose were away for the day. When he told her the purpose of his visit, she took a box of red
legal seals from her desk and offered them to him with the comment, ―I don‘t think they would mind if
you put on the seals yourself.‖
The owner of the transport company took two red seals and affixed them next to the signatures of
Wilson and Rose on the guarantee. Then he left the office with the document.
Some time later, the mining company fell into arrears in its payments under the contract. The
transport company notified Wilson and Rose that it intended to look to them for payment under their
guarantee.
Discuss the issues raised in this case and determine the legal position of the parties.
Answer:
A guarantee must be in writing to be enforceable, and consideration must be present if the creditor
expects to enforce the guarantee. The Statute of Frauds is met if the guarantee is in writing and signed
(assuming it meets the requirements for the written memorandum). The question might be asked: Why did
the owner of the transport company wish to have this guarantee under seal? The answer would be that a
guarantee under seal would not require him to prove consideration was given in return for the guarantee.
Note, however, that the owner of the transport company affixed the seals himself. His act would clearly not
make the promises of the mine owners promises under seal unless they had authorized the secretary to
instruct him to affix the seals. He would, therefore, be obliged to prove consideration in order to enforce the
guarantees unless this was the case. For an example of such a case: See: Bank of Nova Scotia v. Spear
(1973) 6 N.B.R. (2d) 377. See also: New Brunswick v. Olsen (1984) 57 N.B.R. (2d) 321, where the court
stated that unless there is a clear intention in the wording of the document to indicate the agreement is under
seal, the court will not make it so. A similar fact situation may be found in Petro Canada Exploration Inv. v.
Tormac Transport Ltd., Torgerson and McConnell (1983) 4 W.W.R. 205, where the court dismissed an
action brought on the personal guarantee.
Case 5
Karl and Wilbur were older men who each owned small apartment buildings in the same city. Karl
renovated his buildings in his spare time, and he was owed $2,000 by Wilbur for a job. Karl‘s health was
poor and he told Wilbur he wanted to retire. He told Wilbur that he had a mortgage on his building for
$300,000, and that he was prepared to sell it to Wilbur for $500,000. Wilbur did not have access to such
money, but by the end of the conversation, Karl and Wilbur agreed that Wilbur would make Karl‘s
mortgage payments, and in four-and-a-half years, when $250,000 in GICs that Wilbur owned came due,
Wilbur would pay Karl $245,000 (the $200,000 balance plus some interest) in cash.
Wilbur made the next three monthly trips to the bank, at the end of December, January, and February,
paying the appropriate $1,750 on each trip. During that time, the men had discussed Karl‘s impending
retirement. In the first week of March, Karl died, and Karl‘s executor told Wilbur he knew of the deal, but
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that it was ―off.‖ He offered Wilbur a cheque for $3,250, which represented a refund of Wilbur‘s
payments to the bank, less the money Wilbur owed to Karl for renovations. Wilbur refused the cheque,
wrote his own cheque to the executor for $2,000 in payment of his repair bill, and told him that he would
sue to enforce the deal as ―the deal was really good for me, and you want to hold out for more cash.‖ The
property, independently appraised, was worth $670,000.
Assess the likelihood of Wilbur succeeding in obtaining an order of specific performance, compelling
the sale on the agreed terms.
Answer:
Students should recognize that the subject matter of the arrangement between Karl and Wilbur was
the purchase of land and a long-term contract concerning payment. The impact of the Statute of Frauds on
the arrangement should be examined. If the transaction is examined from a 'land' perspective Wilbur might
argue that the doctrine of part performance would allow him to enforce the agreement, given his act of
making mortgage payments, but this would probably be a weak argument given the fact that Karl was still in
possession of the land. Karl's executor, while aware of the agreement might characterize the mortgage
payments as simply payments made on the debt owed by Wilbur to Karl for tractor repairs. He might also
argue that the transaction was caught by the statute as it could not be fully performed within the period of 1
year. Wilbur's response might be that Karl could fully perform his part in less than 1 year by giving up
possession. The payment aspect, however, would continue to exist as an obligation on Wilbur's part. In the
unreported case upon which these facts were based, the Court held that the transaction was caught by the
Statute of Frauds as Wilbur's acts of part performance were insufficient to bring his case under the doctrine of
part performance exception.
Case 6
Reid owned a car and travel trailer that he wished to sell. The trailer was outfitted with a stove and
refrigerator as built-in equipment. Reid had added a small plasma television set as a part of the
equipment, but the television set was not built into the trailer.
Calder expressed an interest in the car and trailer, and also examined the equipment. Reid advised
Calder that the price was $21,000 and that the television set would be $1,000 extra if Calder wished to
buy it as well. Calder indicated that he wished to do so.
Reid prepared a written purchase agreement that itemized the car and trailer, but simply referred to
the appliances as ―equipment.‖ The contract price was $21,000, and the agreement called for a deposit of
$1,000. Both parties signed the agreement, and Calder gave Reid a deposit cheque in the amount of
$2,000.
Reid changed his mind about the sale of the television set. Shortly before Calder was due to return for
the car and trailer, Reid telephoned to say that he was selling only what was specified in the written
agreement.
Explain Calder‘s rights (if any) in this case.
Answer:
The parol evidence rule and its application is central to the discussion of this case, consequently, its
effect on the contract should be highlighted. One of the exceptions to the rule is the argument that a collateral
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agreement exists, but to be successful, Calder would be obliged to satisfy the requirements for a separate
contract concerning the T.V. set. The fact that he paid a $2,000 deposit instead of $1,000 could be raised by
Calder in this regard. Was the additional $1,000 to be applied to the purchase price of the trailer, or was it
payment in full for the T.V. set? In this light, should Reid's telephone call be considered as repudiation of the
agreement to sell the T.V. set? If the Sale of Goods Act is applied, the contract for the sale of the T.V. set
should be in writing, but the fact that the $1,000 was paid (Calder's argument) would bring the contract
within the exception, and make the verbal agreement binding. For discussion purposes the case may be used
to examine and review a number of previously treated concepts, for example, executory contracts,
consideration, and revocation, etc. From the evidence of the extra $1,000 payment, Calder might be
successful with his argument that a collateral agreement to purchase the T.V. set exists. It might also be
possible to establish that the agreement to purchase the T.V. set was a subsequent agreement and outside the
parol evidence rule. If he cannot, the parol evidence rule will restrict him to the terms of the written
agreement. For a discussion of the law related to collateral agreements. See: Hawrish v. Bank of Montreal
(1969), 2 D.L.R. (3d) 60.
Case 7
Marcus and his father Louis visited Megabank, where Marcus borrowed $25,000 to purchase a car.
The manager was satisfied with Marcus‘ ability to repay the loan, but in closing added to Marcus: ―if you
start getting into financial trouble, be sure your father knows, because I don‘t want to be forced to look to
him to pay your debts.‖ Louis spoke up and said, ―Not to worry, I‘ll keep things on track and keep my
boy out of trouble.‖ In time, Marcus did face financial difficulties, after having a falling out with his
father. Louis refused to assist Marcus, and ignored the Megabank demand that he pay the debt of his son.
Discuss the resolution of this case.
Answer:
From the facts of the case, students should consider whether the father was a guarantor or principal debtor
on the loan to Marcus. Is the father‘s response to the manager‘s comment a guarantee? The manager
appears to be saying that he would look to the father for payment if Markus defaulted on the loan. If this
is the case, then it would be a guarantee situation and a written agreement would be required to render the
father liable. Since no writing exists, the promise (guarantee) would not be enforceable. If on the other
hand it is concluded that the discussion created a situation where the father was a principal debtor, then
the promise of the father would be enforceable, as it would be outside the Statute of Frauds and no written
agreement required.
Case 8
When approached by Norman, Ivan decided to sell him a 250-acre parcel of farm land. Ivan intended
to retire and move into the city, leaving his home located on a lake within the parcel. After the paperwork
went to their lawyers, Ivan discovered that Norman intended to use the house as a summer home only,
and would be absent for the rest of the year. Ivan, an avid hunter, called Norman and asked if it would be
OK if he continued to hunt on the land for one week in each November. Norman agreed, and in time the
lawyers completed the deal and Ivan received his payment. That November, Ivan found the fencing
posted with ―No Hunting‖ signs, and called Norman again to assure himself that their deal still stood.
Norman told Ivan that his wife did not want hunting on the land, and when Ivan protested, Norman
pointed out that the paperwork showed no mention of their telephone discussion.
Advise Ivan.
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Answer:
The issue raised on this case is whether the hunting agreement is enforceable. The verbal agreement was
made prior to the preparation of the written agreement. Ivan had an obligation to check the written agreement
prior to signing, and lost the opportunity to correct the written agreement to include his hunting rights. He
could not argue collateral agreement, as there was no consideration for the promise of Norman. Nor would
the MacLean v. Kennedy case in the text appear to apply to the situation.
Case 9
Evelyn is delighted at the engagement of her niece Anne. She writes to her niece, ―Kevin is such a nice
fellow. I want you to have a nest-egg for your future, so on your wedding day I will give you $50,000.‖
Anne breaks her engagement to Kevin, and marries Philip.
Is the letter enforceable?
Answer:
This case illustrates a written promise of a gift. Discussion should consider the question of enforceability on
the basis of both consideration and promissory estoppel. Since the promise referred to Kevin, was the
promise ‗person specific‘ in the sense that it was approval of Kevin as the reason for the offer? How should
the term ‗your‘ in the promise be interpreted? Is it reference to both Anne and Kevin or Anne only? Note
that the promise is not under seal, and raises the question of consideration for the promise. Is the
consideration Anne‘s promise to marry Kevin? If not, what is the consideration, if any? Is the promise
gratuitous, and unenforceable on that basis? Given the reference to Kevin in the letter, Anne may have
difficulty enforcing the promise.
CHAPTER CHART
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CHAPTER 11. FAILURE TO CREATE AN ENFORCEABLE CONTRACT
Chapter Topics
Introduction
Mistake
Misrepresentation
Undue Influence
Duress
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
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Chapter Objectives
After study of this chapter, students should be able to:
• Explain how the legal doctrine of mistake may result in the failure to
create an enforceable contract.
• Distinguish between different kinds of misrepresentation, and the results
of each.
• Explain the difference between undue influence and duress, and the
effect of these factors on enforceability of a contract.
YOUR BUSINESS AT RISK
Having brought a contract into existence, some events (by accident, neglect or malice) can
easily create a contract that a court will not enforce. You must learn to identify these dangers so
that you do not create a situation where you cannot enforce your rights. Equally, you must learn
how these enforcement rules protect you from being a victim, if someone attempts to take
advantage of you via a flawed contract.
CHAPTER COMMENTARY
The failure to create an enforceable contract may arise when the parties have formed an untrue view of the
agreement which they have made.
The different forms of mistake should be examined, and its effect on the contractual rights of the
parties. The implications of void and voidable contracts as a result of mistake should also be reviewed.
For example, the mistake of law and mistake of fact should be noted, and the limitations of non est
factum should be explained. The Marvco Color Research Limited v. Harris establishes the limitations on this
type of defence. It is important to note and stress the limitations, as the courts have said basically that any
carelessness on the part of the party claiming non est factum will result in rejection of the defence.
With respect to unilateral and mutual mistake the remedy of rectification should be discussed, and
particularly its limitations. It may not be used to revise an established agreement, but only to correct obvious
typographical errors, or to save the agreement by correcting terms which through error or oversight were
omitted or wrongly inserted. The example illustrates the type of error which rectification may be used to
correct.
The case of McMaster University v. Wilchar Construction Ltd. illustrates the different forms which
mistake might take, and the effect of each. While it is a lengthy excerpt from the case, it does outline judicial
thinking on what is often a difficult concept to grasp, and provides a careful review of each form of mistake.
In particular, mutual and unilateral mistake are discussed in some detail.
Misrepresentation, in its two forms which render a contract voidable, should also be noted. In
particular, the fact that fraudulent misrepresentation gives rise to a tort action (deceit) as well, should be
emphasized. The Siametis v. Trojan Horse Court Decision might be used as a example of fraudulent
misrepresentation as it illustrates judicial thinking on the issue.
The case excerpt from Charpentier v. Slauenwhite contains the classic statement on the proof of
fraudulent misrepresentation as stated by Lord Herschell in the famous case of Derry v. Peek.
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The brief paragraph from Re Gabriel and Hamilton Tiger Cat Football Club Ltd. illustrates the
circumstances surrounding a contractual arrangement which required full disclosure because it was
considered by the court to be one requiring "utmost good faith". The case comment sets out the kinds of
contracts uberrimae fidei.
The Court Decision, Siametis et al. v. Trojan Horse (Burlington) Inc. et al. concerns a sale of a
business where the financial information presented to substantiate the sales, etc. of the business were altered
by the seller to indicate a higher profit than the business actually produced. The purchaser bought the
business, but did not discover the fraud until quite some time later. The judge hearing the action concluded
that the seller had acted fraudulently, then proceeded to examine the law as it relates to the measure of
damages to be awarded. The difficulty was due to the fact that the purchaser had expended a substantial
amount of his own money to improve the property, and therefore, rescission as a remedy would not be
adequate. The damages awarded by the judge for the tort deceit were substantial as a result, (See the final
paragraph of the judgment).
The Court Decision, Vukomanovic v. Cook Bros. Transport Ltd. and Mayflower Transit Co. Ltd.
provides an example of mistake in the terms of a written agreement and a failure to inform the other party of
the errors. The conclusion reached by the judge was that if a party is aware of errors in an agreement and fails
to have them corrected at the time, the party can't later object if the other party performs the agreement
according to its terms.
Undue influence and duress, while less common grounds for rendering a contract voidable, should be
reviewed, and some attention given to the conditions under which the rights arise. In this regard, the need for
prompt action on the part of the party subject to the influence or duress to avoid the contract once free of the
influence should be underscored.
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Review Questions
1. In what way or ways would mistake in its legal context differ from what one would ordinarily consider to
be mistake?
Answer: Mistake at law refers to a situation where the parties have entered into an agreement in such
a way that it does not express their true intentions. It does not mean a simple "oversight".
2. How does unilateral mistake differ from mutual mistake?
Answer: Unilateral mistake arises where only one party is mistaken as to the agreement. Mutual
mistake occurs where both parties are mistaken as to the agreement or its subject matter.
3. What effect does mistake, if established, have on an agreement which the parties have made?
Answer: Mistake renders the agreement voidable or void depending upon the nature of the mistake
(e.g.: mistake as to the existence of the subject matter would render the agreement void. Mistake as to
the identity of the party may render the agreement voidable when the error is discovered).
4. Explain the difference between mistake and misrepresentation.
Answer: Mistake is a failure of the parties to make an agreement that expresses their true intentions.
Misrepresentation is a statement of a material fact by one party which induces the other party to enter into
the agreement.
5. Distinguish innocent misrepresentation from fraudulent misrepresentation.
Answer: Innocent misrepresentation is a statement of a material fact which the person who makes the
statement believes to be true, and which is later discovered to be false. Fraudulent misrepresentation is a
statement of a material fact which the person knows is false (or made recklessly) and which is made with
the intention to deceive. In both cases the other party must be induced to enter into the agreement on the
basis of the statement.
6. What obligation rests upon a person who made an innocent misrepresentation when he or she discovers
the error?
Answer: A person who makes an innocent misrepresentation, upon discovering the error, must advise
the other party to the contract of the error, otherwise the misrepresentation becomes fraudulent.
7. Why do the courts consider non-disclosure to be misrepresentation under certain circumstances? Identify
the circumstances where this rule would apply.
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Answer: Non-disclosure applies to the narrow range of contracts called contracts of utmost good
faith. With each of these, there is a duty to disclose all material facts. (e.g.: insurance, partnership, etc.).
8. Explain the rationale behind the rule that a person who applies for insurance from an insurer must
disclose all material facts concerning the subject matter of the insurance.
Answer: The insurer, in order to assess the risk and set a premium (or decide whether to take on the
insurance) must have all relevant information in order to make the decision. Only the prospective insured
has that information, and hence, must disclose it.
9. The presumption of undue influence applies to contracts made by individuals in specific types of
relationships. Why is this so?
Answer: The relationships are generally those where the weaker party is generally dependent upon
the dominant party due to the special relationship (e.g.: doctor-patient, etc.).
10. What obligation rests on the "dominant party" in a contract where the presumption of undue influence
applies, if the other party alleges undue influence?
Answer: The obligation is to show that no undue influence existed, and that the contract was "fair" to
the weaker party.
11. How does undue influence differ from duress?
Answer: Undue influence involves persuasive means of influencing a person to enter into a contract.
Duress involves violence or the threat of violence to force the person to enter into the contract.
12. Identify the situations where duress as a legal means for avoiding a contract may be raised.
Answer: Duress may be raised as a legal defence if a person enters into a contract as a result of
threatened violence (or actual violence) to the person or a member of his/her family or a close relative.
Mini-Case Problems
1. A and B entered into a verbal agreement whereby A would sell an automobile to B for $6,500. B
drew up a written agreement (which A and B signed) that set out the price as $6,000. A failed to
notice the change at the time of signing the agreement.
What advice would you give A?
Answer:
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A may be bound by the written agreement, as the courts assume that a person reads the agreement and intends
to be bound by it. The court would have no way of knowing if it was an error in the price unless A could
present evidence to support the verbal agreement and satisfy the court that the "0" instead of a "5" in the price
was a typographical error. If A could satisfy the court that it was simply a typographical error, A may be
entitled to rectification to bring the written agreement into conformity with this verbal agreement.
2. How would your answer to question 1 differ if A was illiterate and B read the contract aloud to him,
stating the price to be $16,500 instead of the $16,000 price set out in the written agreement?
Answer:
A might be able to avoid the agreement on the basis of fraudulent misrepresentation if A could establish that
B's statements were made with the intention of deceiving A. Note, however, that A cannot claim non est
factum because the nature of the document was not misrepresented to him.
3. At a sports bar, Martin offers to sell an authentic Wayne Gretzky Edmonton Oilers hockey jersey to
his friend Alfred for $1,400. Unknown to both, Martin‘s dog at home has just finished shredding the
jersey. Carl arrives at the bar, and hearing of the deal, tells Alfred he has previously seen the jersey,
and that it is not ―game-worn‖ by Gretzky, but rather a current authorized production official replica
jersey, made by an NHL-licensed supplier.
What legal principles apply to this deal?
Answer:
Mistake as to the existence of the subject matter would apply here, as the jersey was destroyed before the
transaction was made. The contract would be void: If the jersey was not ‗game worn‘ but an official replica,
Martin‘s statement may constitute innocent misrepresentation, if he was unaware of the nature of the jersey,
or fraudulent misrepresentation if he was aware that it was not ‗game worn‘ and he made the statement with
the intention to deceive Alfred.
4. An industrial bakery agrees to supply one hundred thousand loaves of bread monthly to a major
Canadian grocery chain at a price of $1.00 per loaf. Before deliveries begin, the baker rethinks the
deal, feeling it should have charged more. On review, it discovers that the contract recites ―one
hundred‖ loaves of bread monthly at $1.00 per loaf.
What recourse will the grocery chain have if the bakery refuses to honour its price beyond 100
loaves?
Answer:
If the grocery chain could establish that the original agreement was for 100,000 loaves per month, then it may
apply to the courts for rectification of the written agreement to state its true meaning, and then enforce it as it
was intended to read. This would be on the basis that the 100 loaves per month would make no sense for
such large business entities.
5. Eric, at age 80, owns a large property of about 100 forested acres, half of which is covered with
walnut and butternut trees he had planted as a boy. Eric is approached by a real-estate agent who tells
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him he has a client who is looking for land with trees where a new house can be built. Eric severs the
treed half of his property and sells it, and the new owner builds a family home. In talking with his
new neighbour, Eric discovers to his horror that the buyer is the owner of a custom sawmill, and
intends to cut down all of the hardwood trees for furniture and veneer.
Does Eric have any recourse?
Answer:
Eric probably does not have any recourse in this case, as he sold the land aware of the fact that it contained
the trees. The new owner built a family home on the land as represented by the real estate agent. No mention
was made of the trees, and the new owner would be free to do as he wished with them. The new owner had
no obligation to reveal the fact that he owned a custom sawmill.
Case Problems for Discussion
Case 1
An industrial firm purchased a rivet-making machine from a distributor whose advertising materials claim
that the machine will produce up to 300,000 rivets per day. After purchase and installation the firm
discovers that the machine, at maximum settings, will produce only 100,000 rivets per day. After an
exchange of e-mails, the distributor asked if the firm was running three 8-hour shifts, or just one. The firm
was running only one production shift, and could not afford to consider 24-hour operations.
Discuss the legal issues that apply here, and what factors might influence a judge to decide the case in
favour of one party over the other.
Answer:
This question raises the issues of mistake and misrepresentation. Were the parties talking about different
meanings for the word ‗day‘? Did it mean a typical 8 hour shift or 24 hours (3 shifts)? The court might be
interested in the ‗customs of the trade‘ concerning the sale of manufacturing equipment such as the machines
in question. Is it normal to operate this type of equipment on a continuous (24 hours) basis? On the question
of misrepresentation was the advertisement misleading? If so was it deliberately so? Was the manufacturer
of the equipment aware that from the wording it might be misinterpreted by a prospective purchaser? A
decision may well hinge on the interpretation of the advertising material, and if so, may entitle the purchaser
to rescind the contract.
Case 2
Chamberlain of Chamberlain‘s Antiques carried on business as a used-furniture dealer. He would
occasionally purchase all of the furnishings in a person‘s home if the person was leaving the country or
moving a long distance.
Mrs. Lyndstrom, an elderly widow, indicated to Chamberlain that she intended to sell her home and
furniture, as she was planning to move into her daughter‘s home to live with her. Chamberlain expressed
an interest in purchasing her furniture, so an appointment was arranged for Chamberlain to examine the
contents of her home.
When Chamberlain arrived, Mrs. Lyndstrom took him to each room and indicated the furniture that
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she intended to sell. Chamberlain listed the different items by groups, such as ―all chairs and table in
kitchen,‖ or ―bedroom suite in front bedroom.‖ When they reached the living room, Mrs. Lyndstrom said,
―all the furniture in here,‖ and Chamberlain recorded, ―all furniture in living room.‖ Chamberlain offered
$3,500 for the lot when the list was complete. Mrs. Lyndstrom agreed, and Chamberlain added to the
bottom of the list: ―Agreed price of all above furniture, $3,500.‖ Both signed the document.
The next day, Chamberlain arrived with a truck to pick up the furniture and a cheque for $3,500. As
he was about to have the grand piano moved from the living room, Mrs. Lyndstrom informed him that he
was to take only the furniture, not the piano. Chamberlain protested that the piano was included.
However, Mrs. Lyndstrom argued that a piano was not furniture, but a musical instrument.
Explain how this matter might be resolved.
Answer:
This case raises a problem similar to the problem in Case 10, where the parties failed to agree upon the same
thing. In a sense, it hinges on the classification of the grand piano. Is it a piece of furniture as well as a
musical instrument? What would it be considered in the case, where most other household goods were sold
regardless of classification? What is the effect of the execution of the document by Mrs. Lyndstrom? Is this
a case of mutual mistake? Where the evidence is conflicting, how would the court likely decide? In the case
of Industrial Tanning Co. Ltd. v. Reliable Leather Sportswear Ltd., [1953] 4 D.L.R. 522, the court stated that
in the face of contradictory evidence, the proper method to take is the "reasonable man" approach, where all
of the evidence is considered, and not simply the conflicting evidence of the two principal witnesses. If this
test is applied, a number of different factors may be considered, such as the value of the grand piano
vis-a`-vis the rest of the furniture. If the grand piano in itself is worth several thousand dollars, then a
"reasonable man" would not expect it to be included as a part of the furniture. On the other hand, if its value
is very low, say, a few hundred dollars, then the reverse might be true on this point.
Case 3
Corgi was the breeder of prize-winning pedigree dogs that often sold for very high prices. Reynolds, a
wealthy businessman who had recently retired, decided to purchase one of these dogs. His intention was
to enter the animal in the various dog shows that were held from time to time across the country.
Reynolds knew very little about dogs. He explained to Corgi that he wished to purchase a young dog
that was already a prize-winning specimen of the breed. Corgi took Reynolds to a fenced run where
several young dogs were caged. He pointed to one dog that he said, in his opinion, had the greatest
potential, and that it had already won a prize at a local dog show. Corgi pointed to a red ribbon pinned to
the opposite wall of the kennel building and explained that it was a first-prize ribbon that the dog had
won. Reynolds did not bother to examine the ribbon.
Reynolds purchased the dog for $1,000 and took it home. His neighbour later saw the dog in
Reynolds‘ backyard. He instantly recognized it as the dog that had recently won the first-prize ribbon in
the children‘s pet show at the neighbourhood park. When he told Reynolds where he had last seen the
dog, Reynolds telephoned Corgi immediately and demanded his money back.
Corgi refused to return Reynolds‘ money or take back the dog, and Reynolds threatened to take legal
proceedings against him. Reynolds was unable to do so immediately, however, as he was called out of
town on a family matter the next day. He was obliged to leave the dog with his neighbour during his
absence. Reynolds advised the neighbour to take care of the animal as if it were his own.
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Reynolds was out of town for several weeks. During that time, his neighbour entered the dog in a dog
show sponsored by a kennel club. The dog won first prize in its class for its breed. On Reynolds‘ return,
the neighbour advised him of his success. The two men decided to enter the dog in another dog show that
was scheduled to be held in a nearby city.
At this second show, the dog placed only third in its class, and Reynolds was disappointed. He
returned home and immediately took legal action against Corgi..
Discuss the basis of Reynolds‘ claim and the defences (if any) of Corgi. Render, with reasons, a
decision.
Answer:
A number of issues are raised in this case. The first to explore is the nature of the statement by Corgi that the
dog had already won a prize at a local dog show. Did the statement constitute misrepresentation? Fraudulent
misrepresentation? To establish fraudulent misrepresentation the untrue statement of fact must be made
knowingly and with the intention of deceiving the other party, or it must be made recklessly, without regard
to its truth or otherwise. Would Corgi's statement fall into this category? Probably not, but perhaps it did
contain an element of deception since the dog show was not of the type that Reynolds would be expected to
contemplate. A second point to note is the expression of opinion by Corgi that the dog in question had the
greatest potential. As a general rule, the statement of an opinion carries little weight except when given by an
acknowledged expert. Would Corgi be considered an "expert"? Would his opinion be considered along with
the statement of fact as a part of a deception? Does the fact that the dog won a first prize in its class vindicate
Corgi? It should certainly support his opinion as to the dog's potential. A third issue raised in the case
concerns the actions of Reynolds after he discovered the nature of the dog's initial prize ribbon. He continued
to keep the dog and entered it in another dog show. Would this act constitute confirmation of the contract
notwithstanding the misrepresentation (if any)? See: Campbell v. Fleming et al. (1834), 1 A.D. & E. 40, 110
E.R. 1122 for an example of a case where a person induced to purchase an article as a result of
misrepresentation, continued to deal with the article only to find that his subsequent dealings with the article
precluded him from obtaining his money back.
Case 4
Silica Mining Ltd. acquired a lease from the province that would allow it to mine mineral rights under a
large block of land. The surface rights were owned by McCarthy. Silica Mining Ltd. assigned the mining
rights for $250,000 and certain tonnage royalties to Granite Exploration Ltd., which intended to mine the
silica deposits lying beneath the surface of the land. Both parties assumed that silica was a mineral that
was reserved by the province and that the lease of mineral rights would allow the silica to be mined.
When Granite Exploration Ltd. entered on McCarthy‘s land to begin mining operations, McCarthy
ordered Granite Exploration Ltd. employees off the land. He informed them that silica was not a mineral
reserved by the province and that he owned the silica under the surface. Granite Exploration Ltd.
contacted the provincial ministry and was advised that McCarthy was correct. Silica was not reserved by
the province, and McCarthy owned the deposits.
Granite Exploration Ltd. demanded a return of its $250,000 payment from Silica Mining Ltd., and
when Silica Mining Ltd. refused to do so, Granite Exploration Ltd. took legal action.
Explain the nature of the Granite Exploration Ltd. claim and indicate the probable outcome of the
action.
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Answer:
This case is based upon the facts of McCarthy v. Godin Mining & Exploration Ltd. (1978) 20 N.B.R. (2d)
676; affirmed (1979) 34 N.B.R. (2d) 96. (C.A.). The parties here believed that silica was a mineral that could
be granted by the Crown for mining purposes, and the owner of the land could not object to the mining. The
parties were in error, and the owner did own the rights to the mineral. The court in reviewing the issues held
that the agreement should be rescinded because the agreement was founded upon a mutual mistake.
Case 5
A general contractor invited subcontractors to submit bids for mechanical work in the construction of a
large office building. Several written bids were received by the contractor, as well as a telephone call
from a subcontractor who responded with a bid about 12 percent below the lowest bid price of the written
submissions. All written bids were within one percent of each other.
The subcontractor who submitted the telephone bid checked his estimates the day following the telephone
call. He discovered that he had made an error in his calculations, and immediately called the contractor to
withdraw his bid. Unfortunately, the contractor was out of town, and the subcontractor could not reach
him at his office. However, he left a message with the contractor‘s secretary to the effect that his bid was
in error, and that his bid price for the contract would be 13 percent above the figure quoted on the
telephone.
The contractor, while out of town, prepared his contract price for the construction of the building,
using the original telephone bid price for the mechanical work. He was awarded the construction contract.
When he returned to the office, his secretary informed him of the subcontractor‘s error.
The subcontractor refused to enter into a written contract or to perform the mechanical work at the
original price. The contractor was obliged to get the work done by the subcontractor who had submitted
the next lowest bid. When the contract was fully performed, the contractor brought an action against the
telephone bidder for the difference between the contract price quoted on the telephone and the actual cost
incurred in having the work done.
Discuss the arguments that might be raised by the parties in this case. Render a decision.
Answer:
This case is based upon the facts of Northern Construction Company Ltd. v. Gloge Heating & Plumbing Ltd.
[1984] 3 W.W.R. 63 where the court found the defendant liable for reasonable damages that the general
contractor had suffered as a result of the breach of contract by the defendant. In arriving at this conclusion
the judge observed that an invitation to tender is essentially a request for an option, leaving it open to the
subcontractor to set a price, which if accepted, would constitute a binding contract. The points to note in
Case 5 would hinge in part on acceptance of the bid. Was the "bid" by the subcontractor binding? Could he
withdraw it? Did the general contractor have any constructive notice of the subcontractor's mistake? Would
this render the contract voidable? In the Northern Construction case the judge held that the bid was an
irrevocable option which the subcontractor was bound to perform if called upon to do so by the general
contractor. The judge found no constructive notice of the error because so many variables affect price, and
noted that the 12% difference was not sufficient to render the error obvious.
Case 6
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Fatima attended an auction sale of race horses at a well-known and respectable racing stable. Prior to the
sale, Fatima, who was interested in acquiring a particular horse, examined the animal‘s lineage, breeding
history, and veterinary records, as well as the horse itself. At the time of the sale, the horse appeared to be
ill, and Fatima asked the vendor‘s veterinarian about its health. The veterinarian replied that she thought
the horse was suffering from a cold. On the basis of this information, Fatima entered the bidding on the
sale of the horse, and she was the successful bidder at a price of $9,000. The conditions of the sale were
that the purchaser assumed all risks and responsibility for the horse from the instant of the sale, when the
title to the animal was deemed to pass.
Fatima took the horse to her own stable and informed her veterinarian that the horse was ill with a
cold. Without examining the horse, the veterinarian prescribed some medicine for it. The medicine did not
appear to help the horse. It remained ill for two weeks, becoming increasingly more feeble, as the time
passed. Sixteen days after the horse had been purchased, it died. An autopsy revealed that the cause of
death was rabies.
Fatima brought an action for a return of the purchase money paid for the horse. At the trial, expert
witnesses for the plaintiff and defendant disagreed as to when the horse might have contracted the
disease, but both agreed that it could possibly have had the disease at the time of the sale. Both also
agreed that rabies was a disease most difficult to detect in its early stages of development. Neither the
purchaser nor the vendor had any suspicion that the horse had contracted rabies, because of the rarity of
the disease among horses vaccinated against it. For some reason, the horse Fatima had purchased was not
vaccinated against rabies.
Identify the issues raised in this case. Indicate how it might be decided.
Answer:
The most important issue in this case is the matter of misrepresentation by the seller. Was the statement that
the "horse had a cold" a statement of fact, or simply an expression of opinion? The vendor's veterinarian was
an "expert" in the sense that he was a professional person. A second question might be: Was Able entitled to
rely on this opinion? Could he hold the vendor responsible for the statement? How would it affect his right
to avoid the contract? The purchaser assumed all risks after the sale. Would this preclude a claim for a
disease contracted by the horse before the sale? Would this be grounds for avoiding the contract? Even if
neither party was aware? The case is based upon the facts of Gallant et al. v. Hobbs (1982) 37 O.R. (2d) 1,
where the judge concluded that neither the defendant nor the plaintiff had considered the possibility of the
horse having rabies, but if they had, the loss would lie on the defendant. The plaintiff recovered his purchase
price.
Case 7
Mary McDonald was an 86-year-old widow who lived in her own home. She complained frequently about
the high cost of maintenance of her house and the high property taxes she paid. Mrs. McDonald
eventually felt it was necessary to cancel her fire insurance to reduce her household expenses. However,
she handled all her own business affairs, and maintained herself in her home.
Mary‘s daughter, a real-estate agent, was aware of her mother‘s concern about her property. On a
summer‘s day, she drove to her mother‘s home and informed her that she had some papers at the lawyer‘s
office, which would protect her. The two women went down to the lawyer‘s office, where he advised
Mary McDonald that the document was the deed to the property and required her signature. Mary briefly
glanced at the document and said: ―Where do I sign?‖
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Some months later, the municipal tax bill arrived and Mary McDonald was surprised to see that the
property was in her daughter‘s name. She immediately brought a legal action against her daughter to have
the property transferred back into her own name.
Discuss the arguments that the parties might raise in this case and render a decision.
Answer:
This case raises the issues of mistake/non est factum, and undue influence. One approach to the case might
be to examine each of these issues in turn. If mistake as to the nature of the document is suggested, the
problems which must be met to successfully claim non est factum should be assessed. Was the elderly
woman aware of what she was signing? Did she have a legal obligation to ask how the paper she was signing
would "protect her"? Did her failure to enquire constitute carelessness? The 86 year old woman had no
apparent infirmity, and her failure to enquire as to the nature of the document would probably be considered
carelessness, consequently, her claim of non est factum would probably fail. Undue influence might be raised
in view of the relationship between the parties (parent/child). In this instance there would be a presumption
which the daughter would be obliged to rebut. The question might be raised: Was the mother so dominated
by her daughter that her actions were not her own? Should the daughter have urged her mother to obtain
independent legal advice to avoid such a claim? The facts of the case are those of an unreported Nova Scotia
case: MacDonald v. Creelman Nova Scotia Supreme Court, May 1988. In that case the court rejected the
claim of non est factum because the claim was only available where there was no carelessness and a mistake
as to the nature of the document. The court found that the plaintiff was aware of the fact that she was signing
a deed. The claim of undue influence also failed, because the court found that the mother had signed the deed
of her own free will.
Case 8
Tower Installation Co., by way of a newspaper advertisement, learned of an invitation to bid on the
engineering work for an electric-power transmission-tower line that a hydro-electric corporation wished
to have erected in a remote area of the province. The advertisement indicated that the right-of-way had
been laid out, and preliminary site preparation was in the process of completion. Engineers from Tower
Installation Co. visited the site before making a bid. They noticed that many downed trees and branches
cluttered the right-of-way throughout the entire length of the proposed line. The engineers assumed that
the downed trees and branches were part of the preliminary site preparation.
The proposed contract stipulated that the successful bidder would be ―responsible for the removal of
standing trees and brush in those areas where they had not been cleared, and the final site preparation.‖
The proposal also stated that the bidders must inform themselves of all aspects of the site and the work to
be done. Tower Installation Co. submitted its bid to perform the required work based upon its
examination of the site and the proposed contract terms.
Some three months later, the contract was awarded to Tower Installation Co. It immediately sent its
engineers and work crews to the construction site to begin work. To the surprise of the engineers, the
downed trees and branches still remained on the site, as no further work had been done since the site was
visited before. The company engineers complained to the hydro-electric corporation, but were told that
they should have enquired about the logs and downed trees before making their bid on the work.
Tower Installation Co. proceeded with the contract and completed it in accordance with its terms. The
company, however, lost $2 million as a result of the extra work required to clear the downed trees and
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branches from the right-of-way.
Tower Installation Co. took legal action against the hydro-electric corporation for the amount of its
loss on the contract.
Discuss the basis of the claim in this case and the possible defences of the corporation. Render a
decision.
Answer:
This case raises the issue of mistake as to the terms of the agreement. The proposed contract included a
clause to the effect that the successful bidder would be "responsible for the removal of standing trees and
brush, and final site preparation". The proposal also required bidders to inform themselves of all work to be
done. Could the contractor in examining the site assume that the downed trees would be removed as a part of
the preliminary site preparation - since the advertisement referred to "removal of standing trees and brush"?
Does this removal form a part of the "final site preparation"? How should "preliminary site preparation" (the
responsibility of the power corporation) be interpreted? Would it be reasonable to assume that the cut trees
and brush would be removed? Was there a duty to enquire about these elements of the contract? In the case
upon which this case problem was based, the court held that the terms of the proposed contract were clear,
and the successful bidder had an obligation to examine the site and verify the work to be done before entering
a bid.
Case 9
Efficient Management Inc. offered to purchase the shares of Clean Management Ltd. from its
shareholders, Andrews and Beatty. Efficient Management Inc. also agreed to lease premises from
shareholder Andrews under a long-term lease.
Under the share-purchase agreement, Efficient Management Inc. agreed to purchase all of the
outstanding shares, which were owned 50 percent by Andrews and 50 percent by Beatty. The total price
payable for the shares was $2, $1 for all of the shares of Andrews and $1 for all of the shares of Beatty.
Efficient Management Inc. also agreed to repay to Andrews and Beatty loans that they had made to their
corporation, Clean Management Ltd., in the amount of $450,000. The purchase agreement provided that
Clean Management Ltd. had accounts receivable outstanding in the amount of $350,000, which Andrews
and Beatty warranted were all in good standing and could be collected by Clean Management Inc. from
its customers within 60 days.
Under the terms of the agreement, Efficient Management Inc. agreed to pay $100,000 as a deposit on
the signing of the agreement and the balance of the money in 90 days. The shares of Clean Management
Ltd. were to be delivered at the time of signing on payment of the $1 to each shareholder. The agreement
was signed on May 1 and the $100,000 paid. Andrews and Beatty signed over their shares on the same
day and each received $1 as payment in full.
By June 30, Efficient Management Inc. had collected only $225,000 of the accounts receivable, and
the balance had to be considered uncollectible. At that time they informed Andrews and Beatty that they
expected them to provide the company with the remaining $125,000 that Andrews and Beatty had
warranted were collectible accounts. Andrews and Beatty did not pay the balance owing.
On July 31 the accountant at Efficient Management Inc. inadvertently sent Andrews and Beatty a
cheque for the $350,000 balance owing under the agreement. When the error was discovered, the
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company claimed repayment for Andrews and Beatty of the $125,000. Andrews and Beatty refused to do
so, and Efficient Management Inc. instituted legal proceedings against Andrews and Beatty to recover the
$125,000, or, alternatively, to set off rent owing to Andrews against the amount unpaid.
Outline the nature and basis of the claim against the shareholders, and any defences that Andrews and
Beatty might raise. Render a decision.
Answer:
Students should carefully examine the facts of this case before attempting to consider the legal aspects.
Students should note that the transaction involved not only the purchase of shares from Andrew and Beatty,
but included a lease of the premises from Andrew. The transaction also included a warranty by Andrew and
Beatty that the purchaser would be able to collect $350,000 in accounts receivable within 60 days. The
purchaser was unable to collect $125,000 of these accounts in the end. Efficient Management as a result,
could look to Andrew and Beatty on their warranty that the accounts receivable were collectable and should
have been a set-off from the $350,000 balance owing to Andrew and Beatty. Efficient Management would,
therefore, claim payment made under a mistake of fact. Efficient Management could also argue that it was
entitled to deduct the amount from rent payments owed to Andrew, as Andrew and Beatty jointly warranted
the accounts receivable. The facts of Case 9 are essentially those of Ferrum Inc. v. Three Dees Management
Ltd. et al. (1992) 7 O.R. (3d) 660. In that case the court held that the purchasers were entitled to recover the
money under mistake of fact or set-off the $125,000 from the rental payments owed to Andrew as an
equitable set-off.
Case 10
Schuster & Co. owned two volumes of a rare edition of Geoffrey Chaucer‘s Canterbury Tales. One
volume was in excellent condition. The second volume was in poor shape, but nevertheless intact.
Schuster & Co. sold both volumes to MacPherson, a rare book merchant.
MacPherson loaned the two volumes to a local library for a rare-book display. Unknown to
MacPherson, only the volume in excellent condition was put on display with a collection of other rare
books. The second copy was placed in a display designed to show how rare books might be repaired, but
the book was placed in such a position that neither its title nor its contents could be determined.
A week after the books had been returned to their owner, Holt, a collector of rare books, telephoned
MacPherson to determine if he had a copy of the Canterbury Tales for sale. MacPherson replied that he
did, but it was ―not in top shape.‖ Holt then asked if the copy had been on display at the library, and
MacPherson said, ―Yes.‖
Holt informed MacPherson that she had seen the display of books at the library and would be
interested in purchasing the volume. A price was agreed upon, and Holt sent a cheque to MacPherson for
the agreed amount.
MacPherson sent the volume that was in poor condition to Holt by courier. On its receipt, Holt
complained that the volume was not the same one that had been on display at the library. MacPherson
maintained that it was and refused to return Holt‘s money.
Holt brought an action against MacPherson for a return of the money that she had paid MacPherson.
Indicate the nature of Holt‘s claim and express an opinion as to the outcome of the case.
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Answer:
This case concerns a mistake as to the subject matter of the contract. The purchaser was clearly thinking
about the copy of the book that was in excellent condition, and the seller, the copy in poor shape. Questions
that might be raised are: Did MacPherson's statements constitute innocent misrepresentation? From the
evidence, when MacPherson explained that the book he had for sale was "not in top shape", should Holt not
have been aware that it was the volume in poor shape that was offered for sale? Does the case represent an
example of mistake as to the subject matter? What kind of mistake might it be? From the facts, there was no
attempt on the part of MacPherson to deliberately mislead Holt. The parties were clearly thinking about
different books, and the discussion simply fitted the impression that each had formed with regard to the
subject matter of the contract. A possible outcome of the case might be to treat the case as one of mistake,
and as such, Holt would be entitled to a return of his payment, and MacPherson would receive back his book.
For a case example, see: Cancilla v. Orr (1914), 16 D.L.R. 115.
Case 11
Bob and Jane are looking for an older home with ―character.‖ Their real-estate agent shows them a
number of properties, and the one most suitable is described by the agent as a ―real heritage home,‖ an old
stone rural farmhouse. Bob and Jane purchase the property and complete extensive modern interior
renovations. With the interior complete, they embark on restoring the exterior, but are stopped by a
township building inspector who informs them that the property is a ―designated heritage site,‖ and that
no alterations are permitted without town council approval. Moreover, when the interior modern
improvements are discovered, Bob and Jane are charged a significant fine for their ignorance.
Discuss the aspects of misrepresentation that apply in this case.
Answer:
The first issue to consider is the real estate agent‘s description of the property as a ―real heritage home‖. Is
this misleading? Should it be interpreted to mean a ‗designated heritage site‘? Was this a deliberate
misrepresentation by the agent? Did the agent have an obligation to obtain clarification of their request to see
an older home with ‗character‘? Did the agent have an obligation to advise the couple of the restrictions
imposed upon the owners of ‗designated heritage sites‘ if he was aware of the designation of this particular
property? Note that the real estate agent may not have been made aware of the intentions of Bob and Jane to
extensively change both the interior and exterior of the house. This may be a case of ‗buyer beware‘.
Case 12
Gavin is a real-estate agent, and suggests to his dentist, Ravi, that he should invest $250,000 in
commercial condominium real estate in a distant city. Gavin provides Ravi with legal papers to sign, but
in the end the property address is not a commercial development, but rather a residential condominium.
Ravi claims ―non est factum.‖
Discuss the nature of Ravi‘s claim against Gavin.
Answer:
This is a case where Ravi may not succeed in a claim of non est factum. In order to succeed in this claim,
Ravi would be required to establish that he was not careless in signing the legal documents. Clearly he
was, as he did not obtain legal advice on the documentation he was signing. Gavin had obviously given
him the documentation, and at that point he could have sought advice on the nature of the documentation.
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See: Marvco Colour Research Limited v. Harris [1982] 2 S.C.R. 774.
CHAPTER CHART
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CHAPTER 12. THE EXTENT OF CONTRACTUAL RIGHTS
Chapter Topics
Privity of Contract
Assignment of Contractual Rights and Obligations
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Explain how the rule of privity establishes who may have rights or
obligations under a contract.
• Illustrate the exceptions to the rule of privity.
• Explain how rights and obligations in a contract may be transferred to
others who were not a party to the original contract.
• Illustrate the advantages and flexibility such transfers offer to business operators.
YOUR BUSINESS AT RISK
While a simple contract may be between two persons, the law often allows third parties into the
picture. Business persons must know when and how their rights and obligations can be
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extended to others. Without understanding this process you may retain responsibilities you may
have wished (or paid!) to transfer to someone else, or you may be expecting benefits under a
contract which you no longer have a right to receive.
CHAPTER COMMENTARY
The extent of contractual rights deals essentially with the concept of privity of contract and how a third party
may perform or acquire rights under the contract. The basic rule for performance of a contract by the parties
should be emphasized before branching out into the different ways that a third party might be introduced to
the contract. In this fashion, the privity of contract rule might be highlighted, as well as the methods used to
circumvent the effects of the rule (such as formal contracts, and the doctrine of constructive trust). One
approach might be to examine the various statutes which provide exceptions to the privity of contract rule,
(such as the Insurance Act) and then some examples of common law exceptions, such as the exception set out
in the Shanklin Pier Ltd. case. The various methods for the assignment of contractual rights might next be
considered, beginning with novation, and then on to equitable and statutory assignments. With respect to the
latter type of assignment, a review of the requirements for a statutory assignment and in particular, the
requirement of notice would probably be a useful exercise.
Students sometimes have difficulty understanding how a third party may obtain rights under a
contract. Instructors might explain that these are generally acquired by assignment, or by a second contract
which relates to the initial contract. Novation, for example, is such a method. By novation, the contracting
parties agree with the third party that the third party may replace one of the original parties to the contract.
The essential elements of novation are explained in the case excerpt from Re Abernethy-Lougheed Logging
Co. where the Judge identified the three requirements, then added that the agreement by which the novation is
established need not be by a formal agreement, but one which may be inferred from an exchange of letters,
etc. or even from the conduct of the parties. The important point to note is that the intention of the parties to
create a novation must be shown from either the writing of the parties, or their actions.
Students should be informed that novation is not necessary in order that a third party might perform a
contract. In many cases, the actual performance of a contract is done by a person other than the contracting
party, but the difference here is that the original contracting party remains liable for the performance if it is
done improperly. Performance of a contract of this type is called vicarious performance, and the most
common situation where it occurs is where an employee of a contracting party actually performs the work
required under the agreement. If the employee does the work negligently, the employer is liable. This is due
to the contractual relationships and the privity of contract rule. Eg.:
A and B have a contract which requires performance by B. Under a contract of employment, C does
the actual work, but B is vicariously liable for C's actions. The arrangement does not violate the
privity of contract rule unless the contract required B to perform personally because of B's special
skill or talent. This might arise, for example, where B is a musician or a skilled surgeon.
Some time might also be given to the assignment of a debt, where performance is usually in the form
of payment of a sum of money. In the past, this was initially quite cumbersome, but with the development of
the statutory assignment, the process was streamlined. Students should be made aware that the law requires
only that the assignment be in writing and signed by the assignor, be absolute, and with notice in writing to
the party charged with performance. Under these circumstances, the assignee takes the contract as it stands
between the assignor and the other party. The assignee, as a result, is exposed to a certain amount of risk, but
the benefits of the simplified process make such transactions attractive to business persons.
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Review Questions
1. What risk does an assignee take when a contract assignment is made?
Answer: The assignee takes an assigned contract as it stands between the parties at the time of the
assignment.
2. What are the major exceptions to the privity of contract rule? Why were these exceptions necessary?
Answer: The main exceptions involve partnerships, land transactions/ goods subject to restrictions,
vicarious performance situations, constructive trusts, and statutory assignments. These exceptions are
necessary to recognize standard business practices or cases where statute or public policy dictates
enforcement of such contracts.
3. Define novation, and explain its role in the assignment of contractual rights.
Answer: Novation is a process whereby the parties to a contract agree to a change in the parties by
allowing one of the contracting parties to drop out of the agreement, and another to step into the
agreement. In effect, the old agreement terminates, and a new one is established. It is a useful way to
confer benefits on the third party and allow the third party to perform.
4. Under what circumstances would a debtor be entitled to "set off" a debt against a claim for payment
which the debtor has against another debtor?
Answer: Since the assignee takes the contract as it stands between the debtor and assignor, if the
assignor is indebted to the debtor at that time, the debtor may deduct the debt from the payment made to
the assignee.
5. Discuss vicarious performance as an exception to the assignment of contractual rights. Why is this the
case?
Answer: Vicarious performance recognizes trade practices where employees of an employer perform
work under contracts negotiated by the employer. The employer, nevertheless, is liable for any short-fall
in performance.
6. Explain the requirements which must be met in order to make a proper statutory assignment of
contractual rights.
Answer: A proper statutory assignment requires that the assignment be in writing and signed by the
assignor. It must be absolute, and notice of the assignment must be given in writing to the party charged.
7. Explain the importance of the privity of contract rule in contract law.
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Answer: The rule prevents parties to an agreement from imposing liability on others not party to a
contract.
8. Indicate the rights and duties of a debtor when notice of the assignment of the debt is received.
Answer: The debtor is obliged to make payment in accordance with the notice.
9. How is and equitable assignment of a contract made?
Answer: An equitable assignment is one which requires all parties to be before the court in order to
enforce the agreement.
10. Must a person always consent to a statutory assignment before it is effective?
Answer: No. Because it represents an absolute assignment of a money amount, no consent is
necessary.
Mini-Case Problems
1. C, a contractor, enters into a contract with D to construct a house for him. C engages E, a plumber, to
install the plumbing in the house.
If E installs the plumbing negligently, what are D‘s rights?
Answer:
The contract between C and D is one of a type where personal performance is not expected of C. C,
nevertheless, is responsible for proper performance, and would be vicariously liable for E's negligent
performance.
2. X owes Y $500. Some time later, X sells Y her canoe for $200, but Y makes no payment for it. Y
assigns the $500 debt that X owes him to Z. Notice is given by Z to X that Z is now the assignee of
the debt, and Z is to be paid the $500.
What are X‘s rights? What are Z‘s rights?
Answer:
At the time of the assignment, X owes Y $500 and Y owes X $200. Z takes the assignment as it stands
between the parties when the assignment is made, consequently, X is entitled to "set off" the $200 from the
$500, and pay Z only $300. Z must look to Y for the balance.
3. Each year since he was born, Aunt Mabel has sent Dan $1,000 toward his future education. The
money is always in the form of a cheque payable to Dan‘s father.
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Explain the legal principle which will allow Dan to claim these funds when he goes on to higher
education.
Answer:
Dan may claim that the money sent by Aunt Mabel was intended for his education, and represented a
constructive trust, with his father as trustee. As beneficiary of the trust Don would be entitled to have the
money applied to his higher education.
4. Thompson ran an auto service shop and bought certain parts directly from the automobile
manufacturers. He bought such a transmission to repair a customer‘s vehicle, installed it, and soon
after went out of business. Should that transmission fail, the customer may be able to claim under a
warranty given to Thompson.
Explain how that would be possible under the Common Law.
Answer:
The manufacturer‘s warranty, while given to Thompson, would follow the transmission to the customer‘s
vehicle, and when it failed, the customer would be entitled to claim under the warranty on the basis of the
Shanklin Pier Ltd. v. Detel Products Ltd. case.
5. Angelo sells his flower shop business to Carla for $60,000 including the inventory, equipment and the
balance of his lease. When the landlord hears of this, she draws up a new lease for Carla, and gives
Angelo a release.
What has happened regarding this lease arrangement, at Common Law?
Answer:
The replacement of the lease, and the issue of a release to Angelo would have the effect of releasing
Angelo from his lease. The new lease with Carla would bind her as a tenant. Carla would have no
obligations under the old lease.
Case Problems for Discussion
Case 1
On January 20th, the Morrison Manufacturing Company assigned a block of its receivables to Acme
Finance Company. On January 21st, it assigned a second block to Zenith Finance Company. One of
Morrison‘s accounts assigned to Zenith — that of Jenkin — had already been assigned to Acme. Jenkin
received notice of the assignment to Zenith on January 27th, and that of Acme on January 28th.
To whom should Jenkin‘s next payment be made, and why?
Answer:
This case concerns statutory assignments. The rule here is that the debtor on receipt of notice of the
assignment of the debt is obliged to pay the assignee named in the notice. Jenkin would be obliged to pay the
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assignee named in the first notice received, namely Zenith. This would be the case, assuming that Zenith had
no knowledge of the prior assignment of Acme.
Case 2
Personalized Performance Garage advertised ―personalized service‖ for its customers. A large sign at the
front of the garage depicted the owner of the establishment placing a check mark in a box on a work order
that read ―personally inspected and repaired by a certified A-1 Mechanic.‖
Rita Morales was impressed with the advertisement and the prospect of obtaining careful repair of her
expensive automobile. She delivered the automobile for a minor engine adjustment and inquired if the
owner did provide personal service. In response to her question, the owner replied, ―I look at every one.‖
Rita left the car at the garage and returned home. About an hour later, she received a telephone call
from the garage owner who informed her that he had fixed the engine, but the automobile had a leak in its
radiator. Rita requested that the leak be repaired as well.
Some time later, Rita went to the garage and was informed that the car was ―ready.‖ She paid her
account and drove away in the automobile. A few blocks away the vehicle broke down, because the
radiator had not been filled with coolant after it had been repaired.
The garage refused to repair the damage. They informed Rita that the radiator had been repaired by
another repair shop that specialized in radiator repairs. It was apparently not a custom of the trade for
ordinary mechanics to repair radiators in view of the special skill and equipment involved.
Discuss the rights of the parties in this case.
Answer:
This case raises the question of whether a contract to repair automobiles must be performed personally. It
also introduces "custom of the trade" as a basis for vicarious performance. Some of the questions that might
be raised from the facts are: Does the sign, which states "personalized service," imply personal service by the
proprietor? Would Rita's inquiry restrict the right of the proprietor to assign the work to another mechanic in
his garage? Would the contract to repair the radiator, which was made subsequent to the first contract, be
subject to any different limitations on the proprietor's right to sub-let the repair work? If the garage is a large
establishment, is personal performance by the proprietor something which is reasonable to anticipate in any
event? In the case, the repair of the radiator is something that is usually done by experts at that type of work,
and represents a type of repair which most repair shops, by custom, do not perform themselves.
Nevertheless, the Personalized Performance Garage will be liable for the damages caused by the negligence
of the radiator repair shop, since it is vicariously liable on the repair contract to Rita. Breach of contract on
the basis of the proprietor's failure to personally perform the contract may not be grounds for damages,
however, since at no time did the proprietor confirm that he alone would do the repair work. For a
contrasting decision, see: Martin v. N. Negin Limited, (1945) 172 L.T. 245.
Case 3
Sly operated a used-car business. He sold Fox an automobile that he indicated was in good condition and
suitable for use by Fox as a taxi. In the course of this discussion, Sly stated that, in his opinion, the
vehicle was ―hardly broken in,‖ as the odometer registered only 26,000 kilometres.
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Sly suggested that Fox test drive the car to satisfy himself as to its condition. Fox did so and, on his
return from a short drive, agreed to purchase the automobile for $32,000. Fox signed a purchase
agreement whereby he would pay for the car by monthly installments over a three-year period.
On the completion of the transaction, Sly immediately sold the purchase agreement to the
Neighbourhood Finance Company for $30,000. Fox was duly notified in writing of the assignment.
A week later, the automobile broke down. When the vehicle was examined by a mechanic, Fox was
informed that most of the running gear and the engine were virtually worn out. Unknown to both Sly and
Fox, the previous owner had driven the automobile 226,000 kilometres and the odometer, which
registered only six digits (including tenths of kilometres), was now counting the third time over.
When Fox discovered the condition of the automobile, he refused to make payments to the finance
company.
Discuss the rights of the parties in this transaction.
Answer:
This case is complex in the sense that it involves opinion statements, innocent misrepresentation (with
respect to mileage), and the statutory assignment of the contract to a third party. From the facts given,
Sly's opinion, while based upon the evidence at hand, probably would not be fraudulent
misrepresentation, since his statement constituted only an opinion. If he was considered an "expert," it
might also be difficult to determine fraud, since his opinion was based upon the facts as he knew them.
However, the question might be asked: Was his failure to inquire as to the use by the previous owner, a
reckless act of negligence that would render him liable? Bear in mind that his statement was still in the
nature of an opinion. A further point to raise is the act of Fox test-driving the car. Would this create a
caveat emptor situation where the "buyer must beware"? He had the opportunity before purchase to take
the car to a mechanic for examination, but failed to do so. How should this affect Fox's rights? The
assignment of the consumer purchase contract to Neighbourhood Finance Company introduces the third
party aspect of the case. The assignment is a statutory assignment from the facts, and the students might
be asked to determine this. It is also important to establish that the assignee takes the contract as it stands
between the assignor and the other party, and the innocent misrepresentation of the mileage might be
raised by Fox to resist a demand for payment by the finance company. If he continues to use the vehicle,
however, his right to avoid the contract on the basis of Sly's misrepresentation would be affected. For an
example of a case involving third parties see: Mayer v. Baird Ranch and Company Ltd. (1919), 48 D.L.R.
724.
Case 4
Carlos sold his business inventory to Avi for $10,000. Under their agreement, Avi was to pay Carlos
$1,000 per month over a 10-month period, commencing on March 1st of that year. Before the first
payment was due, Carlos became indebted to Avi for $5,000. Carlos then assigned the $10,000 debt
agreement to Malcolm. Notice of this assignment was given to Avi. When he discovered that he was to
make all payments under the agreement to Malcolm, he informed Malcolm that he would not make a
payment until August. He would then make only the five remaining payments under the agreement and
consider the debt fully satisfied.
Discuss the rights of Avi and Malcolm and the reasoning behind Avi‘s response to the notice.
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Answer:
The issues raised in this case include assignment and set-off. The instalment debt was originally for $1,000,
but when assigned to Malcolm, the indebtedness of Malcolm to Avi in the amount of $500 would entitle Avi
to claim set-off of $500 of the debt. This represents a well-established rule of law. The question raised in the
case, however, is the way in which Avi has set-off the debt. Should he be allowed to apply the set-off to the
first five payments, or should the set-off constitute the last five? The assignee would of course be liable for
immediate payment of the $500 if the debt was due or past due, but this would not be the case if the $500 was
not payable until some future time. Since the $1,000 debt does not bear interest, it would clearly be to Avi's
advantage to postpone payment as long as possible - hence the delay in payment of the remaining $500 for
five months. A court however, would probably require Avi to make the payments as required under the
agreement, but delete the remaining five on the basis of set-off.
Case 5
Yolanda Adams was a naturalist who made a wildlife film that she hoped to use in conjunction with
lectures to be given to conservation and hiking groups throughout the country. She engaged Basso, a
well-known musician in her community, to prepare the musical background for the film. Adams paid
Basso $5,000 for his work. However, unknown to Adams, Basso had given the work to another musician,
Smith, and paid him $1,000 for his efforts.
Adams used the film on one of her lecture tours, and the newspaper reviews without exception
declared the film to be the highlight of her performance. Many of the reporters commented favourably
about the beautiful musical background to the film.
Some months later, while on a second lecture tour, a musician in the audience recognized Smith‘s
musical style. He mentioned to Adams how much he enjoyed listening to the musical accompaniment that
the musician had provided. Adams was annoyed when she discovered that the background music had not
been played by Basso, but by another. On her return home, she confronted Basso with the evidence.
Basso admitted that he had been too busy to do the musical background.
Discuss the outcome of the case if Adams should decide to take legal action against Basso.
Answer:
This case highlights the privity of contract rule, and the requirement of personal service by a contracting
party. The important matter to determine in this case is the type of performance expected of Basso. Is the
contract one which requires personal performance, or is it one which might be performed vicariously? As
a general rule, a contract for the services of a musician would normally be one which would be performed
on a personal basis, since the essential ingredient in the performance is the special skill or ability of the
musician. Some judges have stated that the law is well established on this point. See for example:
Sullivan v. Gray, [1942] 3 D.L.R. 269. From the case, the musical performance by the musician
contracted by Basso may have been of better quality than Basso could have produced, but the fact that the
contract was not of a type that could be performed vicariously would probably render Basso liable to
Adams for breach of contract
Case 6
On August 4, Anchor Service Company entered into an agreement with Rolston Products Company. By
this agreement, Rolston Products Company would assign to Anchor Service Company its right to
payment under a contract it had with Werner Supply Company. This would settle its indebtedness for
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certain services rendered by Anchor Service Company.
Under the terms of the contract between Werner Supply Company and Rolston Products Company,
Werner Supply Company was obliged to make monthly payments in the amount of $5,000 over a threeyear term. Johnson, a trustee, would collect the payments and forward them to Rolston Products
Company. Rolston Products Company assigned the right to these payments to Anchor Service Company
on August 4th. On the same day they gave written notice to Johnson that, as trustee, he was to make all
future payments to Anchor Service Company.
On August 10th, Rolston Products Company gave a general assignment of its accounts receivable to its
bank as security for a loan. The bank notified Werner Supply Company in writing on December 27th that it
held a general assignment of the accounts receivable of Rolston Products Company, and that all future
payments of the company should be made to the bank. Included with the notice was a written request from
Rolston Products Company for payment in full to the bank if Werner Supply Company could possibly
manage it, even though the contract only called for monthly payments.
When Werner Supply Company received the notice, the president of the company contacted Rolston
Products Company by telephone, and asked if payment should not be made to Johnson, rather than to the
bank. The response of Rolston Products Company was: ―Pay the bank.‖ On this advice, Werner Supply
Company paid the balance of the money to the bank.
A month later, when no payment had been received, Johnson contacted Werner Supply Company and
was informed that the money had been paid to the bank. He immediately notified Anchor Service
Company of the fact. Anchor Service Company then instituted legal proceedings against Werner Supply
Company for payment under the contract.
Discuss the legal issues raised in this case and the respective arguments of the parties. Render a
decision.
Answer:
The contract between Werner Supply Company and Rolston Products Company was assigned by Rolston
Products Company to Anchor Services Company. Notice was given to the trustee Johnson. Was this
notice to the debtor? Since Johnson was authorized to collect the money from Werner Supply Company
under the agreement, is it important that Werner Supply Company be aware of where the payments are
directed? Strictly speaking, the debtor must receive written notice under a statutory assignment. When
the bank acquires a general assignment of the Rolston Products Company's accounts receivable it is
unaware of the assignment of the Werner Supply Company assignment by Rolston Products Company to
Anchor Service Company. Notice is given to Werner Supply Company as required, and obligates Werner
Supply Company to pay the bank. Rolston Products Company‘s answer when Werner Supply Company
queried whether payment was to be made to Johnson or the bank, was that Rolston Products Company
directed the debt to the bank. Since to Werner Supply Company's knowledge, Rolston Products Company
had only assigned the debt to the bank, it complied. The question should be asked: Can the parties change
the agreement terms to eliminate Johnson? If the trustee, Johnson, had no duty to inform Werner Supply
Company of the assignment to Anchor Service Company, then the notice given to Werner Supply
Company, would be the first notice, and the obligation would be on Werner Supply Company to pay the
bank. See for example, Pettit and Johnston v. Foster Wheeler Ltd. (1950) 2 D.L.R. 42.
Case 7
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Maya Black wished to purchase Seamus Green‘s farm. After lengthy negotiation, the two parties drew up
and signed an agreement of purchase and sale for the farm with the assistance of and in the presence of
Green‘s real-estate agent, Simms. The agreement that the parties signed was a standard, preprinted form
used by all local real-estate agents that contained a clause which was an irrevocable direction by the
vendor of the land, Green, to the purchaser, Black, to deduct from the sale price and pay the real-estate
agent‘s commission directly to Simms, on the closing day of the transaction. The preprinted form had
printed on it a black circle that looked like a seal and had the word ―Seal‖ written under it. Also, above
the line for Green‘s signature were printed the words ―In witness whereof I have hereunto set my hand
and seal.‖ Beside Green‘s signature line was a place for a witness to sign the agreement. Immediately
above this place appeared the preprinted words ―Signed, sealed and delivered in the presence of.‖ Green
and Black each had lawyers looking after the details of the transaction and each gave a copy of the
agreement to their respective lawyers. Shortly before the closing of the sale, Green‘s lawyer prepared
some final paperwork and had Green sign several important documents. Among them was a direction to
Black and Black‘s lawyer to make the cheque for the full amount of the purchase price payable to Green.
On closing, Black‘s lawyer presented to Green‘s lawyer a cheque made payable to Green for the full
purchase price of the farm. Green‘s lawyer later turned over the cheque to Green.
After the closing, Simms contacted Green to request delivery of his commission cheque. Green replied
that neither he nor his lawyer had received a cheque for Simms from Black‘s lawyer on closing and
suggested that Simms contact Black himself since that was the arrangement. When Simms called Black,
Black stated that as far as she was concerned she had paid for the farm and didn‘t owe anyone any more
money.
Discuss the legal issues raised here and the respective arguments, rights, and liabilities of the parties.
Render a decision.
Answer:
Under the terms of the written agreement, Simms was to be paid his commission as a real estate agent for
arranging the sale of the property to Black. This part of the document was essentially an irrevocable direction
by Green to Black to deduct Simms' commission from the money payable to him (Green) and to pay it to
Simms. More simply described, Green owed Simms money, and he directed Black to pay this debt to Simms
from the money Black owed him (Green). Green's lawyer inadvertently prepared a second direction to Black
to make the entire amount of money payable to Green. The facts of this case may be considered in terms of
an assignment of contractual obligations in which the debtor Black is directed (or given notice in the
document) to pay money to Simms. This is a direction that Black would be obliged to follow, as he has
written notice to do so. The second notice to Black directed all of the proceeds to Green. Black complied
with the second notice. If the assignment is characterized as an equitable assignment, then in any action on
the assignment, all parties must appear before the court. In this instance Black might argue that since his
contract was with Green he complied with the second notice. Simms would argue that Black was obliged to
comply with the first notice because it was an irrevocable direction to Black, and Green could not revoke
(change) the direction. Green would be unjustly enriched in this case if he was entitled to keep the full
amount and Black was obliged to pay Simms' commission. The court might find Black at fault for failing to
pay Simms, but allow Black to recover the payment from Green on the basis of payment by mistake. In
terms of the obligation of the lawyer for Black to pay the money to Green directly, it might be argued that the
lawyer is not a party to the agreement, but only a stakeholder, and not bound by the irrevocable direction, as
no consideration flows to the lawyer. See: Family Trust Corporation v. Morra (1987) 44 R.P.R. 250. Note,
however, that another (Ontario) case appears to suggest to the contrary: Re/Max Realty Garden Inc. v. 828294
Ontario Inc., Louras and Fleming (1992) 8 O.R. (3d) 787. Because of the case law confusion, the Law
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Society of Upper Canada (Ontario) suggests to its members that the money under these circumstances be paid
into court, or held in trust until the parties resolve their differences.
Case 8
Vivian carried on business as a plumber for many years; she used the Home Bank for her businessbanking needs. In 2017, Vivian incorporated the business as Vivian‘s Plumbing Inc., and she asked the
bank to change the bank accounts to the new corporation. The bank did so and accepted all deposits and
payments made in the corporation‘s name. Some time later, the corporation requested a line of credit from
the bank in the amount of $50,000. This was granted, provided that Vivian personally guarantee the credit
extended. Vivian agreed and signed a guarantee.
The line of credit was never used, but the bank did lend $75,000 to the corporation on the security of
a large contract that the corporation had obtained. Unfortunately, the contract proved to be virtually
worthless for the corporation when the other contracting party became bankrupt, and the corporation was
unable to repay the loan. The bank then took legal action against Vivian personally for payment.
Explain the nature of the bank‘s claim and indicate the defences (if any) that Vivian might raise.
Render a decision.
Answer:
This case problem is based upon the case of Emco Supply v. Vivian (1984) 46 Nfld. & P.E.I.R. 257. The
question in the case was: did a novation occur that would make the corporation the principal debtor and
release Vivian from any indebtedness incurred by the bank? The court in this instance concluded that the
bank had accepted the corporation as its debtor, and the novation was complete. When the bank borrowed
the money it was a direct loan and not an extension of credit under the line of credit, and consequently Vivian
as guarantor of the line of credit only, was not liable when the corporation defaulted on the loan. The court
dismissed the action against Vivian.
Case 9
Morgan was visited by a travelling salesperson who talked him into buying a machine that produced pin-on
buttons suitable for selling in bulk as advertising gimmicks, novelty slogans, and political party campaigns. A
number of good contracts would produce enough money to cover the five instalments of $1000 owed for the
machine. Morgan agreed to the deal, and the machine was delivered. It took much more skill to operate than
Morgan could muster. The salesperson had effortlessly demonstrated the machine, but clearly had skills
borne of long practice. The guide to operation was sketchy at best, and the machine consistently produced
buttons with off-centre or crumpled graphics. Morgan tried to find the salesperson without success. Morgan
was, however, soon found by the finance company to which the salesperson had assigned the debt.
Advise Morgan.
Answer:
This case concerns a statutory assignment, and if the entire contract was assigned, Morgan may be
obliged to deal with the finance company. Discussion of this case should consider any claim that Morgan
might have concerning the contract with the machine manufacturer based upon representations made by
the salesman. If misrepresentation can be established, and the whole contract was assigned, the assignee
would be subject to any claim in this regard that Morgan might be able to raise. If only the promissory
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note covering the debt was assigned the situation may be different, but consumer protection in most
provinces may also assist Morgan, if Morgan could establish that the machine was a ‗‖consumer
purchase‖. Students should be directed to Chapter 29 (Law of Negotiable Instruments) on this matter.
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CHAPTER CHART
CHAPTER 13. PERFORMANCE OF CONTRACTUAL OBLIGATIONS
Chapter Topics
The Nature and Extent of Performance
Discharge by Means Other Than Performance
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Explain the significance and effect of tender.
• Recognize how a contract may be discharged other than by performance.
• Explain the significance and effect of a condition precedent.
• Recognize and explain the effect of a frustrated contract.
YOUR BUSINESS AT RISK
Contract disputes often centre on whether the parties have performed as they have promised
and, if not, whether they can be excused from their obligations. This becomes a risk
management decision for a business faced with a lawsuit. If you are certain your actions or
rights fall within the legal interpretation of your contract, you may want to go ahead with a
lawsuit. Any uncertainty should be a consideration in favour of settlement, knowing that the
party on the other side will be weighing the same issues.
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CHAPTER COMMENTARY
The performance of contractual obligations must always be exact and precise, and until such time as the
performance is complete, the contract remains in existence, unless discharged by some other means
(such as frustration, etc.). As tender is an important part of performance, the two forms of tender should be
examined, particularly in terms of their effect on the performance of the contract.
Of the various other forms of discharge, the doctrine of frustration is perhaps the most difficult for
students to understand. In addition to an examination of the legislation, and examples of frustrating events,
the Cahan v. Fraser case excerpt might be reviewed as additional re-enforcement for the doctrine and its
implications with respect to discharge.
The Court Decision of Farnel v. Main Outboard Centre Limited [1987] 50 Man. R. (2d) 13, is a
useful case for a discussion of the performance of a contract, and the issue of what constitutes 'performance'.
In the case, the judge concluded that to 'winterize' the motor meant just that, and even though the company
followed the usual procedures, it did not properly perform the contract.
The concept of condition precedent might be reviewed using the excerpt from the case of Turney et
al. v. Zhilka. This case underscores the concept, and in particular, the point that until the condition is satisfied,
there is no right available to either party to demand performance by the other. The various other forms of
termination, which include discharge by agreement, and by operation of law are also important, and a review
of the examples of each of these in the chapter would be useful to set the stage for Chapter 14, which deals
with the consequences when a contract is not properly performed. The following chart may be used to
review the different forms of discharge other than performance.
Review Questions
1. What are the implications at common law where an unanticipated event renders performance of a
contract impossible? Has this been altered by Frustrated Contracts legislation in some provinces?
Answer: At Common Law, where performance is rendered impossible, the courts generally treat
the contract as being at an end, and the parties are discharged from further performance. Any
money paid for which a person received no benefit may be recoverable, but otherwise it may not.
Frustrated contracts legislation permits the courts to apportion the loss in a more equitable fashion.
2. Does performance by one party terminate a contract?
Answer: No. Performance by both parties is necessary to fully terminate a contract.
3. Describe the effect of a valid tender of payment of a debt.
Answer: A valid tender of payment of money as payment of a debt causes interest to cease running,
and ends the debtor's obligation to make further attempts to pay the debt to the creditor. The debt
remains, however, but the creditor must seek out the debtor for payment.
4. Distinguish performance from specific performance.
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Answer: Performance means the effort a person makes to carry out a contract obligation. Specific
performance is a discretionary court order requiring a person to perform a contract obligation.
5. What are the usual consequences which flow from a failure or refusal to perform a valid contract?
Answer: A failure or refusal to perform a contract at the time required for performance constitutes
a breach of the contract, and would entitle the injured party to seek redress through the courts.
6. How might "custom" affect the performance of a valid contract?
Answer: Customs of the trade often establish recognized conditions subsequent that the courts may
"read into" a contract as implied terms. Those may have the effect of terminating a contract if the event or
conditions arise. E.g.: Act of God, etc.
7. Explain the nature and purpose of a force majeure clause in a contract, and illustrate your answer with an
example.
Answer: A force majeure clause in a contract usually set out conditions under which performance
may be excused or the agreement terminated. For example, an Act of God may be set out as grounds to
termination, should such an event occur.
8. Other than by performance, in what other ways might a contract be discharged?
Answer: Contracts may also be discharged by: operation of law, agreement, condition subsequent,
condition precedent, frustration, implied terms, express terms, and by breach.
9. Describe the effect of material alteration on the enforceability of a contract.
Answer: Material alteration affects the enforcement of an agreement where the parties have in effect
substituted different terms for those in the original agreement, and essentially replaced it with a new
agreement.
10. What is meant by "performance" with respect to contract law?
Answer: Performance in contract law means that a party must carry out a promise exactly and
precisely in order to discharge the contractual obligation. Anything less is a breach.
11. Distinguish between a void and a frustrated contract.
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Answer: A void contract is a contract that is unenforceable, and in effect, never comes into existence
A frustrated contract is a contract that is otherwise enforceable, but which becomes impossible to
perform as a result of unforeseen circumstances.
12. Outline the nature of a valid tender. How does it relate to performance?
Answer: A valid tender is a demonstration by the party obliged to perform an act or make a payment
of money that he or she was ready, willing, and able to make the exact payment or perform the act at the
time and place for performance.
13. Explain the effect of a condition precedent on the obligation of the parties to perform a contract subject to
the condition.
Answer: A condition precedent is a condition which must be fulfilled before a contract comes into
existence. No performance is necessary until the condition is met.
Mini-Case Problems
1. X agreed to lease her automobile to Y for the month of July in return for the payment of $300. Before
the end of June, X was involved in an automobile accident and the automobile was severely damaged.
What are the rights and obligations of X and Y?
Answer:
The destruction of the automobile may be considered an event which frustrated the performance of the
contract and relieved X of her obligation to perform. If so, Y would have no right of action against X, but
would not be required to pay the rental fee.
2. A agreed to purchase B‘s snowshoes from him for $100 on the Saturday of the next week. On the
specified date, A went to B‘s home with 10,000 pennies and demanded the snowshoes. B refused to
deliver them.
Discuss the rights and obligations of the two parties.
Answer:
Tender of payment must be exact, and at the required time and place for performance. The tender of
payment of 10,000 pennies, while totaling the $100 price was improper because the seller is not required to
accept more than 25 cents in pennies.
NOTE: Students may not be aware of the maximum number of pennies that may be payable, as the text
does
not state this explicitly. It only mentions "currency" as legal tender.
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3. A Canadian exporter sends goods to an importer in Phantasia. While the goods are at sea, the United
Nations declares a trade embargo on Phantasia, and the ship is prohibited from entering Phantasian
waters.
What has happened to the contract between the Canadian and Phantasian business persons?
Answer:
The trade embargo would be treated as a frustrating event that would have the effect of terminating the
agreement between the two parties. Under the Frustrated Contracts Act, the court may apportion the loss if a
deposit was paid by returning the deposit less any expenses incurred by the exporter in shipping the goods. If
no deposit paid and no benefit received by the importer, the exporter may have to assume the costs incurred
to recover the goods from the carrier.
4. Through their lawyers, Wilson agreed to buy Jackson‘s business for $500,000. On the date fixed for
closing the transaction, Wilson‘s lawyer gave Jackson‘s lawyer a certified cheque for $550,000,
drawn in error.
Describe whether Jackson can keep the $50,000 extra, is obligated to return the $50,000, or can avoid
the transaction altogether.
Answer:
The tender of payment must be exact, otherwise it represents an improper tender. Assuming, in this case that
a certified cheque was specified as the method of payment, the tender of the larger amount would constitute
an improper tender and could be rejected by the seller. See: Blanco v. Nugent in the text.
5. The manufacturing supplier of electronic components, Techco, destined for lightweight laptops
delivered the components to the laptop manufacturer, ComputerCo., four months after the scheduled
delivery date. ComputerCo. accepted the components, inserted them and sold the laptops in the
consumer market. Unfortunately, the delay resulted in ComputerCo.‘s laptops arriving in the market
later than their major competitor and market share was lost. During a shareholders‘ meeting five
years later, management was questioned about the inability of ComputerCo. to regain its market share
and profitability. What rights does ComputerCo. have against Techco for its failure to perform
according to the contractual terms?
Answer:
The doctrine of laches or, if applicable, a provincial Limitations Act, will likely prevent ComputerCo.
from seeking any remedy from Techco due to the delay in bringing any claims. The underlying contract
remains valid but the disadvantaged party will be prevented from receiving a remedy. If there were an
ongoing contract for supply of the components from Techco, there may be an opportunity for
ComputerCo. to revive a right of action and acknowledge the liability of Techco, perhaps with reduced
payments as a set-off for damages.
Case Problems For Discussion
Case 1
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The Ebert Electrical Company contracted and paid for 80 air-conditioners at a special discount price made
by the Kool-Air Equipment Company. The units were to be installed by Ebert in a new condominium
development planned by Carson Developments Ltd. Delivery of the air-conditioners was to take place
within 7 days of Carson‘s architects confirming that final electrical inspections were complete. Carson
eventually went bankrupt and the confirmation was never issued.
What is the legal position of Ebert and Kool-Air?
Answer:
In this case, Ebert Electrical Company bought and paid for 80 air conditioners. Only the delivery was
delayed. Discussion should address the contract itself. Is Ebert the owner of the air conditioners at this
point in time? If so, what is the significance of the architects approval? Does it matter? Could Ebert
Electrical Company ask for delivery at any time since it has paid for the units? Does the bankruptcy of
Carson Developments Ltd. constitute a frustrating event? Were the air conditioners standard models, or
of a specific design for installation in the condominium? Kool-Air may take the position that the sale was
complete (assuming standard design units) and argue that Carson‘s bankruptcy had no effect on the
transaction with Ebert. Ebert Electrical Company may not wish to have 80 air conditioners on its hands,
and may argue frustrating event. The court however, may side with Kool-Air, since the units had been
purchased, and only the delivery date was in issue.
Case 2
Hamish, an experienced painting contractor, entered into an agreement with Mr. McPhail to paint the
McPhail residence both inside and out for $8,200. Mrs. McPhail selected the colours, and Hamish
proceeded with the work. During the time Hamish was painting the interior of the house, Mrs. McPhail
constantly complained that he was either painting too slowly and interfering with her housecleaning, or
painting too fast and splattering paint on the wood trim. Hamish never responded to her remarks.
By the fifth day, Hamish had painted all of the house except the eavestroughs and down-spouts. As he
was climbing the ladder to begin painting the eavestroughs, Mrs. McPhail appeared and warned him not
to drop paint on her prize azaleas.
At that point, Hamish turned and, without a word, climbed down from the ladder and left the
premises.
The next day, he presented his account for $8,200 to Mr. McPhail. When Mr. McPhail refused to
make payment, Hamish instituted legal proceedings to collect the amount owing.
Discuss the nature of the claim and indicate the defence (if any) which Mr. McPhail might raise.
Render a decision.
Answer:
This case raises the issues of substantial performance, abandonment, and performance rendered
impossible by interference from a third party. The degree to which each of these affect the rights of
Hamish and McPhail should be explored by way of questions such as: At what point would the
contract be completely performed? Would completion, except for the eavestroughs, constitute
substantial performance? Did Hamish abandon the contract? Or was his performance rendered
impossible by the actions of Mrs. McPhail? If performance was in fact rendered impossible, would
Hamish be entitled to bring an action quantum meruit? As a general rule, the contractor would be
entitled to payment quantum meruit unless the work done was of no value to the property owner, the
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contractor had refused to complete the work, or the work done was completely different from what
the party had contracted for. (See: H. Dakin & Co. Limited v. Lee, [1916] 1 K.B. 568). On this
basis, the question of abandonment becomes important. Later cases, however, indicate that
abandonment where the work is substantially complete would entitle the contractor to payment, less
a deduction for the incomplete work. (For example, See: Hoenig v. Isaacs [1952] 2 All E.R. 176).
Case 3
Gina Potter owned a farm that had a rather odd-shaped land formation at its centre. Gill, a road contractor,
suspected that the land formation might contain a quantity of gravel. He entered into a purchase
agreement with Gina to purchase the farm for $280,000. On the offer to purchase Gina deleted the words
―or cheque‖ and insisted that she be paid only in cash.
Before the date fixed for Gill and Gina to exchange the deed and money, Gina heard rumours that Gill
wished to buy the farm because it contained a ―fortune in gravel.‖ Gina accused Gill of trying to steal her
land by offering her only a fraction of its true worth. She instructed her lawyer not to prepare the deed. In
actual fact, the $280,000 was slightly more than the value of most similar farms in the area.
On the date fixed for closing, Gill arranged with the bank for $280,000 in cash. He drove to Gina‘s
farm with the money in a brief case. At the gate, he met Gina who refused to allow him entry. Pointing to
the brief case, Gill said that he had the money and wanted the deed. Gina refused, so Gill returned to the
city.
Discuss the actions of Gill and Gina in this case. Determine the rights and obligations of each if Gill
should institute legal proceedings to enforce the contract. Render a decision.
Answer:
This case deals with the requirements for tender, and the issue of repudiation by a party. An approach
to the case might be to review the requirements for a valid tender by a series of questions such as:
What are the requirements for a valid tender? What would Gill be obliged to do to comply with these
requirements? Did his actions constitute a valid tender? When the tender was refused, what were
Gill's rights? His duties? Tender must be exact, and in accordance with the terms of the contract.
This would mean that Gill must show that he was ready, willing, and able to complete his part of the
contract at the required time, and at the required place. By having the cash in hand (as required by
the contract) and tendering it to the vendor at the vendor's farm on the required day, he established a
valid tender, which would in turn entitle him to apply to the court for an order for specific
performance of the agreement. Case 3 is based upon an unreported case in which the author acted as
counsel for the purchaser, but a number of other reported cases deal with the same type of problem.
See: O'Neil v. Arnew (1976), 78 D.L.R. (3d) 671 as an example.
Case 4
Hansen admired a sports car that Sports Motor Sales Ltd. wished to sell. Hansen informed the company
salesman that he would buy the automobile if he could obtain a loan from the bank to cover part of the
$27,000 asking price. The salesman agreed to hold the car until Hansen could check with his bank.
Hansen discussed a loan with his bank manager. The manager stated that he would be prepared to
make a $10,000 loan, but, due to the nature of the purchase, he must first get approval from the regional
office. He indicated that this was usually just a formality, and he did not anticipate any difficulty in
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obtaining approval for the loan.
Hansen then entered into a written agreement with Sports Motor Sales Ltd. to purchase the sports car,
with payment to be made in 10 days‘ time. Both parties signed the agreement, and Hansen paid a $1,000
deposit. The company retained the sports car pending payment of the balance.
A few days later, the bank manager telephoned Hansen to say that he had encountered a problem with
the loan approval. The most he could lend would be $54,000. As a result of the reduction in the loan
amount, Hansen found himself $5,000 short.
Advise Hansen of this position at law. Indicate how the case might be decided if Sports Motor Sales
Ltd. wished to enforce the agreement.
Answer:
This case initially involves two separate agreements, one being conditional upon the other. Hansen
made an agreement with Sports Motor Sales Ltd. which was conditional upon Hansen obtaining a
loan from the bank. In a sense, this agreement was also conditional upon approval as to the amount
by the Bank's regional office. However, on the strength of the bank manager's representation,
Hansen entered into a written agreement with Sports Motor Sales Ltd. to purchase the sports car.
The written agreement made no mention of the condition. Query: Would this mean that Hansen
waived the condition, and is now bound by a firm contract? Does the fact that payment is not due
until ten days indicate or imply that the agreement is subject to the condition? Hansen has a problem
when the amount of the loan available is limited to $54,000, as he has failed to include the condition
in his contract with Sports Motor Sales Ltd. One approach might be to argue condition precedent or
oral collateral condition (See: J. I. Case Threshing Machine Company And Oster v. Welsh, [1918] 3
W.W.R 57) to avoid the agreement. If successful, Hansen would be free of any obligation under the
agreement, and entitled to a return of his $1,000 deposit, otherwise, he would likely be bound by the
agreement. The loan agreement is conditional upon approval, and consequently does not come into
effect unless Hansen agrees to accept the lesser amount as a loan.
Case 5
The Metro Mallards Baseball Club was concerned about the practice of ―reselling‖ tickets to its games by
persons who would appear at the entrances of the baseball stadium just before game time and offer tickets
for sale to ticketless patrons at premium prices. These persons, known as ―scalpers,‖ would purchase a
quantity of tickets in advance of the games with the intention of selling them at a profit, a practice that the
club wished to curtail. The practice was also prohibited under provincial laws.
In an effort to stop the resale of tickets (except through authorized agents) the club printed the
following terms on the back of each ticket:
This ticket is a personal, revocable license to enter the stadium and view the game described on
the front side hereof, and shall not be resold to any other person without the express consent in
writing of the issuer or its authorized agents. Management shall have the right to refuse
admission to the stadium to anyone in possession of this ticket on return of the stated purchase
price.
The issuer, on notice to the person in possession of this ticket, may revoke at any time the
license represented by this ticket and recover the same without compensation if the person in
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possession attempts to resell the ticket.
The notice was included in very fine print on the back of each ticket, along with the usual clauses
related to liability for injury and cancellation-of-game matters.
John and Jane Doe purchased a number of tickets with the intention of reselling them at the stadium
before a game. They were not aware of the change in the printed information on the back of each ticket.
At the stadium, an employee of the club noticed John and Jane attempting to sell their tickets. She
immediately confronted them and demanded that they turn over their tickets to her. John and Jane refused
to do so, and a nearby police officer was called over to the scene. John and Jane denied that they were
attempting to sell at a profit the tickets they had in their possession. The club employee then pointed out
the terms on the back of the tickets to the police officer; after reading the notice, the police officer
suggested to John and Jane Doe that it might be advisable for them to surrender their tickets. John and
Jane did so, but only on the condition that the police officer hold the tickets until they could obtain legal
advice. The officer agreed to do so.
Advise John and Jane Doe. In your answer clearly identify the legal principles that would be applied
in this case to determine the rights of the parties.
Answer:
Students should consider the terms and conditions of the contract imposed upon buyers and holders.
The issuer of the tickets changed the nature of the agreement to a revocable license, and added
restrictions on resale, and the right to confiscate the ticket without compensation if a person attempts
to resell the ticket. These restrictions were on the back of the ticket and not brought to the attention
of buyers. If notice is not given, would the conditions be enforceable as a part of the contract?
Could a condition such as confiscation without compensation be enforceable, or would it be contrary
to public policy? The facts of the case are those in Toronto Blue Jays Baseball Club v. John Doe,
Jane Doe, et al. (1992) 9 O.R. 3d 622 with a minor change. In that case the court held that where the
ticket conditions are changed to include onerous terms, the terms must be brought to the attention of
buyers to be enforceable. Since they were not, the terms were not a part of the contract, and
unenforceable. The court also held that the right to revoke the license without compensation to the
ticket holder had no basis in the case law.
Case 6
Community Clipper Airlines Ltd. was a small airline that operated a scheduled service to a number of
remote northern communities in the province. In addition, it operated a charter service that consisted for
the most part of flying hunting and fishing enthusiasts to tourist camps located on otherwise inaccessible
northern lakes.
On a day in late September, the dispatcher received a radio telephone request from the operator of a
remote tourist camp, requesting an aircraft to fly in and pick up two late-season fishermen who had to
return to their offices for work the next day. The dispatcher passed the flight instructions to one of the
charter pilots, ―Red Baron.‖
The pilot checked the aircraft, a four-passenger, single-engine, wheel- and float-equipped craft, then
called the weather office for a weather briefing. The weather office reported marginal flying weather until
4:00 p.m. that day. The forecast for the period after 4:00 p.m. indicated rain and fog conditions in the area of
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the airport, and in the area generally. The weather was expected to close all of the neighbouring airports as
well, but remain clear in the area of the tourist camp.
The tourist camp was approximately two hours flying time from the airport, and given that the time
was then 11:00 a.m., Red Baron decided to make the flight. She arrived at the tourist camp at
approximately 1:00 p.m., but the fishermen had not yet packed their bags and fishing tackle for the trip.
Red Baron warned the two fishermen that the weather was deteriorating, and that they must leave
immediately, otherwise they would be unable to land at the airport. One of the fishermen was particularly
slow at getting his equipment and clothes packed, and in spite of the pilot‘s urging, the fisherman was not
ready to leave until almost 2:00 p.m. At 2:05 p.m., the plane flew from the camp with the two fishermen
and their gear.
The weather, which was still appropriate for flying, held until the aircraft was within approximately
20 minutes‘ flying time of the airport. At that point the aircraft encountered rain and deteriorating
visibility. The pilot advised the two passengers that she might not be able to proceed to the airport if the
weather became worse. Undaunted, the passengers urged her to proceed on rather than fly back to the
camp, as they were obliged to make flight connections at the airport in order to be at their offices the next
morning.
With some misgivings and warnings about the weather, Red Baron continued on. She contacted the
airport and was informed that rain and fog had closed the runways, but that the lake approach might still
be possible since a very slight on-shore breeze was keeping the lake from being totally closed in.
Red Baron elected to try the lake approach rather than turn back. Visibility was poor in the rain, and
fog patches obscured parts of the lake. Due to the weather, she decided to land some distance out in the
lake, then taxi to the dock area. She made a careful approach, but after successfully landing on the water,
collided with a floating log. The log damaged the aircraft and caused it to flip forward and begin to sink.
A rescue boat was dispatched to the aircraft immediately, and the pilot and passengers were rescued
from the cold water. While not seriously injured, the passengers suffered bruises, some minor lacerations,
and exposure. After being kept in hospital overnight, they were released the next day to return home.
If the passengers instituted legal proceedings against the airline, discuss the possible arguments and
legal principles each side would raise.
Render, with reasons, a decision.
Answer:
The issues raised in this case include terms and conditions, alteration of terms, and performance.
The case also includes a number of other issues such as voluntary assumption of risk, and negligent
performance of a contract. Students should determine the performance of the contract required by
Red Baron. Was the contract frustrated by the deterioration of the weather? Was it a force majeure?
Act of God? An implied term in the contract would be that she could safely land at the base airport.
Was this term changed when the passengers insisted that she attempt the landing? Did this alter her
obligation under the contract to deliver them safely to the airport? Given the facts of the case, Red
Baron may have been negligent in attempting to land on the lake when poor visibility prevented her
from examining the lake for floating objects such as the log. A preferable course for her might have
been to turn back to the lodge and wait for the weather to clear, as the contract could be considered
frustrated by the weather. However, she did not avail herself of the right.
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Case 7
Taylor owned and operated a large gravel truck. He entered into a contract with Road Construction
Contractors to haul gravel for them at a fixed price per load for a period of six months, commencing May
1st. On April 24th, he appeared at the construction site with his truck. When he examined the distance he
would be required to haul the gravel, he realized that he had made a contract that he could only perform at
a substantial loss.
He approached one of the partners of the firm with which he had contracted, to inform him that he
could not perform the agreement. The partner persuaded Taylor not to be hasty in his decision, but to wait
until the next day, when he could discuss the matter with the other partners. Taylor agreed to wait and left
his truck in the contractor‘s garage overnight.
During the night, a fire at the garage destroyed Taylor‘s truck and some of the contractor‘s equipment
that had also been stored in the garage.
Analyze the events that occurred in this case and discuss the legal position of both parties.
Answer:
The first issue raised in the case is the issue of express repudiation of the contract by Taylor. The
repudiation by Taylor would entitle the contractor to treat the contract as being at an end, but from
the facts of the case, the partner in the firm did not accept Taylor's repudiation, but instead urged him
to reconsider, and this might be taken as a decision to keep the contract alive pending performance
by Taylor. This is due to the fact that Taylor was not required to perform until May 1st. The events
that followed the attempted repudiation, however, altered the rights of the parties substantially. The
fire at the garage, which destroyed Taylor's truck, might release Taylor from performance on the
basis of frustration. This might raise the question: Should Taylor be expected to replace the truck
(if it is insured) and be ready to perform by May 1st? Does the event constitute frustration if
performance is really not rendered impossible on this basis? How far does the doctrine extend? In
the cases dealing with this type of problem, the courts have generally treated destruction of
equipment by fire as a frustrating event, since it is something not usually contemplated by the parties
at the time the contract was made. See: Reid v. Hoskins (1856), 6 E.R. & B.L. 953; 119 E.R. 1119
where the repudiation was not accepted, and the contract subsequently ended by operation of law,
and in Cromwell v. Morris (1917), 34 D.L.R. 305, which also dealt with a refusal to accept
repudiation, where the court decided that the refusal to accept repudiation kept the contract alive for
the benefit of both parties.
Case 8
A shipment of liquid milk in refrigerated tank cars was sent by rail from Toronto to Edmonton. At
Winnipeg, an electrical connection from the locomotive‘s generator to the tank car‘s cooling equipment
was found to be faulty. Three of six tank cars of milk had spoiled, and the remainder was sold by the
railway company to a creamery in Edmonton.
Discuss the legal positions of the Toronto seller, the Edmonton buyer, and the railway company.
Answer:
In this case, the cause of the loss was the responsibility of the railway. The Toronto seller may look
to the railway for its loss on the tank cars of milk on the basis of carelessness on the part of the
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railway to ensure that the cooling equipment was operating properly. Note that the remaining three
tank car loads were sold by the railway at their destination. This may raise the question: Did the
recipient in Edmonton refuse to take the milk, since it consisted of only three tank car loads? If so,
the railway may act to sell the milk in order to mitigate its loss. If this is the case, the Edmonton
buyer would get a good title to the milk. The railway would not be able to argue frustration, since
the faulty electrical connection would unlikely be classed as an unforeseen event, but rather a failure
on the apart of the railway to ensure the proper operation of its equipment.
Case 9
Francis Building Co. contracted in January with Lomas Warehousing Inc. to install a new steel roof in
April on the Lomas structure. As matters turned out, the price of steel quadrupled within two months, and
Francis advised that it would not proceed on the existing terms. Lomas answered that it would commence
legal action against Francis.
Discuss the law upon which each of Francis and Lomas base its argument.
Answer:
The issue in this case is the nature of the price increase in steel in the two month interval after the
contract was made. Is the price increase a frustrating event sufficient to terminate the contract?
Francis Building Co. was probably argue that it was. Lomas Warehousing Inc. would probably
argue that it was not, on the basis that the price of steel may very well drop over the remaining two
months before the contract was to be performed. Lomas might also argue the price of steel should
not be a factor to consider, as Francis was in a position to buy the steel in January when the contract
was made. If the four times increase in the price of steel is such an exceeding large increase that has
been unknown to take place in the past, the event may constitute a frustration of the contract.
However, in a similar case where the price of steel doubled in a short period of time after the contract
was made, the court held that the contract was not frustrated, as the contractor could have purchased
the steel for the roof shortly after the contract was made, and thereby avoided any increase in the cost
of the roofing material.
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CHAPTER CHART
CHAPTER 14. BREACH OF CONTRACT AND REMEDIES
Chapter Topics
The Nature of Breach of Contract
Remedies
Remedies for Particular Situations
Enforcement of Judgements
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Distinguish between the types of breach of contract.
• Explain the principles of compensation for loss.
• Describe the remedies available at law to an injured party.
 Describe the means for enforcement of those remedies.
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YOUR BUSINESS AT RISK
Not every contract will have a happy ending. Business persons must understand the elements of
breach and the extent to which they may recover or be liable, as the case may be. This is
essential in order to be able to know whether you can walk away from your remaining
responsibilities. It is also essential to know these elements in order to assess the cost of
pursuing or settling a lawsuit. If you do not understand the remedies the court has available you
may overestimate or underestimate the power of your opponent, or you may miss out on
options if your lawyer fails to set them out clearly.
CHAPTER COMMENTARY
Chapter 14 is perhaps one of the most important chapters on the law of contract in the sense that it brings
together the various remedies available to a party to a contract when breach occurs. Some of these remedies
have been dealt with briefly in preceding chapters, but many are introduced in chapter 14 or the first time.
The chapter lay-out, which deals first with express repudiation, includes the concept of anticipatory breach
and the doctrine of substantial performance, with the latter doctrine further explained by way of judicial
comment in the case of Bolton v. Mahadeva. Implied repudiation, which is by far the most difficult to
determine, is outlined in the text.
Fundamental breach, and the attendant problem of exemption clauses deserve particular emphasis, since
most purchase agreements contain clauses of this nature, and their implications to the buyer should be fully
understood. Because the courts employ the doctrine of fundamental breach to provide relief from onerous
exemption clauses, the Tercon Contractors Court Decision might be used to review these clauses and the
doctrine itself. Of particular note is the clarity of the Supreme Court of Canada on exemption clauses where
fundamental breach exists: is the exemption clause inapplicable to the facts? Is it unconscionable to apply?
Does it otherwise offend public policy? A heavy burden of proof lies upon the party seeking to avoid its
application.
The concept of compensation for loss as a result of breach of contract, and the determination of the limits
of liability are also discussed in the Court Decision of Hadley v. Baxendale. This should, however, be
considered in connection with the duty imposed on the injured party to mitigate his loss, and the various
remedies available. Judicial comment on the duty to mitigate loss and liquidated damages are also covered in
Case excerpts in the chapter. In the case quote from Asamera Oil Corp. Ltd. v. Sea Oil & General Corp. et
al. the judge examined the limits on the duty to mitigate when a breach occurred, and concluded that the
standard to be applied would normally be that of the "reasonable and prudent man" in similar circumstances.
The Hadley et al. v. Baxendale et al. Court Decision represents the classic statement of the quantum of
damages that flow from a breach of contract. The case is short, in the sense that the judge moves directly to
the rule. Here, the judge considered the special circumstances surrounding the delivery of the part, and the
fact that the carrier was unaware of the urgency associated with it. He then suggested that the jury ought to
be guided by this information in the determination of the damages which resulted from the carrier's neglect.
Many losing parties in a court action will voluntarily pay up the award of damages and costs for which
they have been found liable. Regrettably though, getting a judgement of the court for damages and costs
is not a guarantee of actual payment. Some judgement debtors refuse to pay unless forced to do so, and
enforcement measures must be brought to bear upon them. Most frequently, a return to court is required
to obtain a judge‘s order (a writ), instructing the local Sheriff to seize goods, money or land belonging to
the judgement debtor, or a garnishment against future income from a specific payor or employer.
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Review Questions
1. What tests are applied by the courts to determine the remoteness of a damage claim for breach of
contract?
Answer: The principal test may be stated as one which provides that the party in breach would be
liable for any damages actually caused by a breach of contract, provided that when the contract was
made, such damage was reasonably foreseeable as liable to result from the breach.
2. What are the rights of one party to a contract when informed by the other party to the contract that
performance will not be made?
Answer: The party informed of the express repudiation may treat the contract as at an end and sue
for damages, or may refuse to accept the repudiation, then wait until the date for performance and take
action for non-performance.
3. In a situation where a contract is expressly repudiated, what are the dangers associated with waiting for
the time for performance to determine if breach will actually occur?
Answer: By waiting until the date for performance, some event may take place that will discharge the
agreement. E.g.: an Act of God, etc.
4. Explain why mitigation of loss by the injured party is important where a breach of contract occurs.
Answer: Mitigation of loss is necessary by the injured party, because as a reasonable person, an
injured party would be expected to take all necessary action to limit the loss once breach occurs. A
failure to do may result in the defendant avoiding responsibility for the loss which could have been
avoided if the plaintiff acted to mitigate it.
5. Explain the doctrine of fundamental breach as it applies to a contract situation.
Answer: Where the performance of a party is so far below that required by the terms of the contract,
the performance may be treated as a fundamental breach, and will release the injured party from the
agreement.
6. Does repudiation of a subordinate promise permit the party affected by the repudiation to avoid the
obligation to perform contract itself?
Answer: The breach of a subsidiary promise does not permit the party injured by the breach to avoid
the agreement. The party must perform, but a deduction may be made for the cost of the breach by the
other party.
7. Describe the concept of damages as it applies to common law contracts.
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Answer: The concept of damages in contract law means that the court will attempt to put the
injured party in the same position following a breach as he or she would have been had the contract been
fully performed.
8. What does restitutio in integrum mean?
Answer: "Restitutio in integrum" means (to-day) "to make the party whole" or compensate for the
loss suffered.
9. Explain the difference between express and implied repudiation of a contract, and give an example of
each.
Answer: Express repudiation occurs where one party informs the other that he/she will definitely not
perform the contract at the required time. E.g.: where A writes B informing her that he will not perform
his obligations under the agreement. Implied repudiation occurs where one party, by his or her actions
gives the other the impression that performance will not take place at the original time. E.g.: where a
person contracts to haul goods for another, then just before the date for performance, sells his only truck.
10. Apart from money damages, what other remedies are available from the courts in cases which involve a
breach of contract? Under what circumstances would these remedies be granted?
Answer: Other remedies include: specific performance (to enforce contracts concerning land)
injunction (to enforce negative covenants) and quantum meruit (in quasi-contract situations, where a
reasonable price may be awarded for services rendered).
11. How does the doctrine of substantial performance affect the rights of a party injured by repudiation when
the contract is not fully performed?
Answer: The doctrine of substantial performance does not permit a party injured by the failure to
complete the contract to avoid payment. The injured party must pay the contract price less the cost of
having some third party complete the work.
12. Under what circumstances would a contractor be entitled to partial payment where the work was not fully
performed?
Answer: Under the doctrine of substantial performance, if the work is substantially completed, then
the other party may not avoid paying for the benefit actually received.
13.
Describe the main types of writ available for the enforcement of judgements, indicating
circumstances where each would be used appropriately.
Answer: Judgements are most frequently enforced through writs of seizure and sale (against
land and personal property), sequestration (against income-producing property), possession (land), or
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delivery (personal property other than money), or by notice of garnishment (debt owing from a third
party to the judgement debtor.
Mini-Case Problems
1. X engaged Y to repair his lawn mower. Y dismantled the machine. However, before Y had time to
carry out the repairs, X informed him that he had purchased a new mower and did not require the
repairs on the old machine
Discuss the rights and duties of the parties.
Answer:
X expressly repudiated the contract he had with Y. Since Y has not fully performed, he may treat the contract
as at an end, and take action quantum meruit for his services.
2. D agreed to make certain alterations to an expensive dress that E had purchased. A violent storm
caused the roof of D‘s shop to leak, and the dress was stained by the rain entering the building. D
offered to have the dress professionally cleaned to remove the water stains, but E refused and
attempted to remove the stains herself. Her attempt was unsuccessful, and the dress was ruined.
Advise D and E.
Answer:
D may have been liable for the damage to the dress initially, provided that the leak in the roof was due to D's
neglect to repair. If the storm damaged the roof, D might avoid liability on the basis of an "act of God." If
dry cleaning would remove the stains, D would be liable for the cost of cleaning. E's attempt to clean the
dress herself ruined the dress, and D would not be responsible for the loss which resulted from her actions.
3. Eduard purchases an expensive coffee-maker from a store, advertised as an ―end-of line,‖ ―all sales
final‖ special. The coffee-maker leaks constantly, sending most of the coffee to the countertop.
What kind of breach of contract does this represent?
Answer:
This would probably be a fundamental breach of the contract, as the coffeemaker would be unfit for the use
intended. If ‗all sales final‘ and end-of-lease special sale are considered exemption clauses, they would not
protect the seller. The seller would be obliged to return the purchase price paid to Edward.
4. James is contracted to build a cedar deck and fencing around Albert‘s newly installed pool. James
completes the carpentry but fails to finish applying a coat of weather-protecting varnish as per the
agreement. How would a dispute of payment owing to James be resolved by the court?
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Answer:
Since most of the contract work was completed by James, James could argue the doctrine of substantial
performance. He would be entitled to payment of the contract price, less the expense Albert incurred to have
the coat of varnish applied by some other person.
5. Robyn is an elderly man living entirely on social assistance. One night, his careless smoking burned
down the rooming house he lived in. Do you have cautionary advice to provide to the property owner
that wants to sue Robyn?
Answer:
Since Robyn has little or no money or other assets, it may prove impossible to meaningfully recover any sum.
While the action may be undertaken to establish facts and liability, the high probability of no recovery raises
the question of whether the action should even be commenced.
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Case Problems for Discussion
Case 1
Megamalls Inc. is known for its ability to create ―retail experiences‖ for customers visiting any one of its
six malls in major Canadian cities, with each mall being in the 80-120 store range. To further its
reputation, Megamalls specially selects its qualifying tenant stores for a very particular mix of goods and
services it feels will create the greatest customer draw. Moreover, it draws up tenant contracts to ensure
that retail offerings are in accordance with its wishes. Recently one chain of stores with tenancies in each
of the six Megamalls began changing its own retail image by altering its line of goods and marketing
tactics. Megamalls feels that this is in contravention of the tenant contract.
What remedy or remedies should Megamalls seek and why?
Answer:
This case concerns the performance of contractual obligations by the tenant. If the lease specifically
describes the particular mix of goods and services, including the marketing approach permitted, then
the tenant would have an obligation to comply with the terms of the lease agreement. If the proposed
changes represent a substantial charge, the changes may constitute a breach of the lease, and entitles
the landlord to obtain an injunction to prevent the tenant from making the changes, as damages
would not represent a satisfactory remedy. As an alternative, Megamalls Inc. may seek termination
of the lease as a remedy for the breach in order to protect its marketing image, and the interests of its
other tenants.
Case 2
Ms. Field listed her home for sale with a local real-estate agent. The agent introduced Mr. Smith to Ms.
Field as a prospective purchaser. After Mr. Smith had inspected the house, the agent obtained a written
offer to purchase from him. The offer provided that he would purchase the house for $460,000 if Ms.
Field could give him vacant possession of the premises on September 1st, some three weeks hence. The
offer was accompanied by a deposit in the amount of $1,000.
Ms. Field accepted the offer in writing, then proceeded to lease an apartment under a two-year lease.
She moved her furniture to the new premises immediately and vacated her home in preparation for
closing. A few days before the date fixed for delivery of the deed, Ms. Field was informed by one of her
new neighbours (who was a friend of Mr. Smith) that Mr. Smith‘s employer intended to transfer him to a
new position in another city some distance away.
Discuss the rights and obligations (if any) of the parties in this case. Suggest a course of action that
Mrs. Field might follow.
Answer:
The problem which Ms. Field faces in this case is related to the uncertainty associated with
performance of the contract by the purchaser. After she moved out of her house and leased an
apartment, she was informed that the purchaser might not proceed with the transaction. Should, she
accept the word of a third party to this effect? Probably not, as there is nothing to indicate that he
might not proceed with the purchase. Related to the problem of possible repudiation is the question
of the money paid by the purchaser. Does it represent a deposit? - or is it part payment for the
house? If the purchaser should repudiate, would Mrs. Field be entitled to keep the $1,000 paid?
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Only if it represented an honest estimate of her loss. (See: Stevenson v. Colonial Homes Ltd., [1961]
O.R. 407). Another remedy available might be specified performance, since the contract involves
the sale of land, but to obtain this remedy Mrs. Field must show that she was ready, willing, and able
to perform her part of the contract on the date fixed for closing. (See for example: Blanco v.
Nugent, [1949] 1 W.W.R. 721.)
Case 3
Trebic was a skilled cabinetmaker of European ancestry. Moldeva, who had emigrated to Canada from
the same country, requested him to build a set of kitchen cupboards ―in the old-country style.‖ The two
men discussed the general appearance desired, then Trebic drew up a list of materials that he required to
construct the cupboards. Moldeva obtained the necessary lumber and supplies for Trebic, then took his
family on a vacation.
On his return, Moldeva found the work completed, and admired the craftsmanship and design that
Trebic had exhibited in the making of the cabinets. Trebic had carefully carved the ―old-country designs‖
on the trim boards. He had skillfully constructed the drawers and cabinets using wooden dowels, rather
than nails, again in accordance with ―old-country‖ tradition. In the execution of this skill he had used only
hand tools, and then only the tools used by ―old-country‖ craftsmen in the cabinet-making trade. In every
detail, the cabinets were ―old-country style.‖
When Moldeva indicated that he was completely satisfied with the cabinets, Trebic submitted his
account in the amount of $154,000. The sum represented 200 hours work at $75 per hour, the normal rate
charged by skilled cabinetmakers in the area.
Moldeva, who was a building contractor himself, objected to the amount of Trebic‘s account. He
stated that carpenters in his shop could manufacture kitchen cabinets of the general size and shape of
those made by Trebic in only a few days‘ time. He offered Trebic $3000 as payment in full.
Trebic refused to accept the $3000 offer and brought an action against Moldeva on the $15,000
account.
Discuss the possible arguments of the parties.
Render a decision.
Answer:
The case, on the surface, appears to be one of quantum meruit in which Trebic would be entitled to a
reasonable price for his services. This would appear to be the $15,000, the normal rate charged by
skilled cabinetmakers in the area. The argument raised by Moldeva, however, would appear to be
an indication that the parties had failed to fully agree upon the meaning of the words "old country
style". Trebic interpreted the phrase to mean construction detail, while Moldeva interpreted it to
mean appearance only. Is it a case of mistake? Should Moldeva, who was a building contractor,
have been aware from the material list that Trebic was building the cupboards in the old country
style? No nails or other modern fasteners were ordered on the material list. The decision facing the
judge is clearly a difficult one - and the question should be posed: How should the judge decide and on what basis should the decision be made? The facts of the case are based upon an unreported
case in which one of the authors acted as counsel for the plaintiff. The judge decided on the basis of
quantum meruit, but concluded that some consideration should be given to the defendant's argument
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that modern tools and fasteners could reasonably be contemplated by the parties, and the plaintiff's
claim was partially reduced to reflect the time that would have been saved had some tools, such as
power drills, etc. been used in the basic construction of the cabinets.
Case 4
Awwad, a skilled carpenter, agreed to construct a garage for Henderson for a contract price of $12,000.
Henderson was to supply the plans, foundation, and materials.
Awwad constructed the garage according to the plans. When the building had been framed, he
discovered that the siding boards that Henderson had purchased were of poor-grade lumber. The boards
could only be made to fit with a great deal of hand labour and cutting.
Awwad complained to Henderson and de-manded that he provide siding boards that were of
―construction-grade‖ lumber. Henderson refused to do so. An argument followed in which Awwad
refused to complete the work until Henderson provided suitable materials.
At the time of the argument, the foundation, the roof, and the walls had been erected. The work that
remained included the installation of the wall siding, the doors and windows, and the trim.
Discuss the rights of the parties, and the nature of the claims and defences of each. Indicate the
possible outcome, if the case should come before the courts.
Answer:
This case raises the question of responsibility for breach, and the rights and obligations which flow
from it. Does the failure on the part of Henderson to provide suitable materials constitute a breach of
the contract on his part? Does this entitle Awwad to refuse to complete his part of the agreement? Is
it a custom of the trade to use "construction grade" lumber for all new construction? Could this term
be implied in the agreement? If the obligation on Henderson to supply "construction grade" lumber
can be implied, then his breach of the term might entitle Awwad to cease work, and take action
against him on the basis of quantum meruit for work done, since Henderson's actions may have
rendered performance impossible for Awwad. Awwad, however, would only be entitled to a
reasonable price for his services, and he would not be entitled to the full $12,000, as the latter amount
would represent payment for the completed contract.
Case 5
The 18 Wheel Trucking Co. purchased a new truck from C.K. Motors Ltd., a firm that specialized in the
sale of large tractor-trailer vehicles. In the six months following delivery, 18 Wheel Trucking found the
new truck to be the subject of numerous breakdowns, both major and minor. The truck was out of service
on 18 occasions, usually for minor problems such as headlight or brake light failures. On five occasions,
the breakdown was serious and required major parts replacement, causing the vehicle to be out of service
for several days. All of the repair work was done under warranty by the manufacturer‘s dealer, at no cost
to 18 Wheel Trucking Co.
At the end of the six months, on the 19th breakdown, 18 Wheel Trucking Co. left the vehicle with the
dealer and demanded that the purchase price be returned. C.K. Motors Ltd. refused, and 18 Wheel
Trucking Co. decided to take legal action against C.K. Motors Ltd. for a return of the purchase price.
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Indicate the nature of the claim of 18 Wheel Trucking Co. and the defences (if any) of C.K. Motors
Ltd.
Render a decision.
Answer:
Students should recognize that the numerous break-downs of the truck raise the issue of fundamental
breach of the contract. Did the purchaser get what was contracted for? Is a reliable vehicle an
implied term in the contract? The repairs were done under warranty and cost the purchaser nothing.
Would this preclude the purchaser from taking legal action? Students should recognize that the time
lost while the vehicle was out of service may well result in lost business and revenue for the
purchaser. The case problem is based upon the case of Rosseway v. Canada Kenworth Ltd. (1978) 6
Alta L.R. (2d) 177. In that case the court found fundamental breach of the contract as the purchaser
received something other than what was bargained for, and entitled to a return of the purchase price.
The judge did not grant compensation for time lost while the truck was out of service, because the
purchaser had use of the truck prior to the date of rescission of the contract.
Case 6
Valentino entered into a contract with TV Production Co. to perform the leading role in a television play
the company wished to produce. The contract called for the actor to devote his time exclusively to the
play until taping was complete, a period of some four weeks. His compensation was to be $20,000. Three
days after the contract was signed, Valentino notified the company that he did not intend to perform the
role, and that the company should find a new leading actor for the production.
The company attempted to find a substitute for Valentino, but after an exhaustive search could find no
one suitable. As a consequence, they were obliged to abandon their plans for the production. During the
three-day period after signing Valentino, the company incurred liability of $36,500, under contracts they
had entered into for services and commitments made in anticipation of his starring in the production.
They also incurred the sum of $2,500 in expenses paid to find a substitute, when Valentino refused to
perform.
The company instituted legal proceedings against Valentino to recover the total expenses incurred as
a result of his repudiation. In response, Valentino offered a settlement of $2,500 to cover expenses
incurred in their search for a substitute actor.
Discuss the arguments of the parties and render a decision.
Answer:
This case raises the question of damages where express repudiation of a contract takes place. Note in
the case that the contract was one for personal service and Valentino should have been aware at the
time that he would be difficult to replace in the role in the play. Valentino could argue that his
liability should only be for the $2,500 expended to find a replacement for the part in the play.
However, his repudiation caused the company to abandon the project when a substitute could not be
found. The question should be asked: Was this a reasonably foreseeable result of the breach? Was
it something which could reasonably be contemplated at the time the contract was entered into?
According to the case of Anglin Television Ltd. v. Reed [1972] 1 Q.B. 60, the plaintiff succeeded in
claiming the full costs of the abandoned production.
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Case 7
Kenja Marshall wished to purchase an automobile that would not only provide her with basic
transportation to and from her home to her place of employment, but would have a sporty appearance.
She also wanted a vehicle with sufficient power to enable her to engage in rally racing.
She visited a local dealer in imported automobiles and enquired about a sports sedan displayed on the
premises. The salesman on duty informed her that the vehicle was a used car that had been driven only
12,000 kilometres. It had been purchased the year before as a new car by a customer who then traded it in
for a similar model of the current year‘s production. To the salesman‘s knowledge, it was a ―good car.‖
Since it had a turbo-charged engine, the policy of the company was to sell it ―as is,‖ without a warranty of
any kind.
After a careful inspection of the car, Kenja asked the salesman to start the engine, in order for her to
determine the condition of the turbo-charger. The salesman did so, and, after running the engine for a few
moments at various engine speeds, he shut it down. He offered Kenja a test drive, but at that point she
noticed a coolant leak at the engine water pump. The salesman examined the pump. He then stated that
the water pump would be repaired or replaced if necessary, if she wished to buy the car. Kenja said she
would think about the purchase overnight and contact the salesman the next day if she was still interested.
Kenja returned the next day. She informed the salesman that she was prepared to purchase the
automobile if the dealer would repair the water pump and take $500 less than the advertised price of
$24,000. With some reluctance, the dealer agreed to sell the car to her, and a written agreement of sale
was prepared that contained the following terms:
9.
It is expressly agreed that used goods are not warranted by the dealer as to year, make, model, or
otherwise, unless so stated in writing.
10. The dealer agrees to make the following repairs to the vehicle as a part of this sale:
(1) repair or replace water pump, as necessary.
Kenja was anxious to use the car in a local car rally the following day. She enquired if she might take
the car immediately, then return it early the next week to have the water pump dealt with at that time. The
dealer agreed, but cautioned her not to drive the car too hard until the pump was fixed. He also told her
not to worry if she heard a slight ―popping‖ noise from the pump.
Kenja paid for the car, then drove it home, a distance of some 16 kilometres. Along the way she heard
what she described as a ―clangy‖ or ―tinny‖ noise from the engine. However, she was not concerned
about it, believing it to be the noise the dealer had described to her.
The next morning, when she attempted to start the car, the engine made a number of ―clangy‖ sounds,
then stopped. A mechanic who came to her home in response to her call examined the engine and
informed her that the noise came from the engine bearings. He indicated that the engine had been
seriously damaged and could cost up to $2,000 to repair.
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Kenja immediately informed the automobile dealer that she wished to have her money back. When
the dealer refused, she brought an action for rescission of the agreement. At the trial, an expert testified
that the problem was indeed a breakdown of the engine bearings, something that could occur in only a
few minutes if insufficient oil was supplied to them. There was no evidence to indicate that the damage
was in any way related to the water pump.
Discuss the nature of Kenja‘s claim, as well as the possible defences to it.
Render a decision.
Answer:
The facts of this case are essentially those of Gafco Enterprises Ltd. v. Schofield (1983) 25 Alberta L.R. (2d)
238. In the case, the purchaser agreed to purchase the car in an "as is" condition. However, the purchaser
might raise fundamental breach, since the car engine was defective. Was this defect sufficient to amount to a
breach going to the root of the contract? The court held that it was not, since the damage was repairable
(although expensive). As a result, the court held that the contract was binding on the purchaser, and she was
bound by the exclusionary clause and her acceptance of the vehicle "as is". Caveat emptor. Note that this
case was chosen because it appears to at variance with many other prior cases which have held that serious
defects in goods constitute fundamental breach. However, the Alberta Court of Appeal in this instance felt
that the purchaser was fully aware that she was purchasing a vehicle that was not warranted as to fitness, etc.
Compare this decision with the Court Decision Borg-Warner Acceptance Canada Ltd. v. Wyonzek in the text.
Case 8
On September 1st, Rothwell entered into an agreement to purchase Andrea‘s Restaurant. The purchase
price was $375,000, with a down payment of $75,000. The balance was payable December 1st, when
Rothwell was to take possession of the business. In anticipation of his start in the restaurant business,
Rothwell quit his job and enrolled in a three-month community-college course on restaurant management.
On November 1st, the owner of the restaurant notified Rothwell that she had received another offer to
purchase the restaurant for $450,000, and she intended to sell the business to the offeror. Rothwell
objected to the restaurant owner‘s actions and threatened to take legal action against her if she proceeded
with the proposed sale.
A few days later, the restaurant owner did in fact enter into an agreement to sell the business to
Polonek, the new purchaser, for the purchase price of $450,000. The closing date of the transaction was to
be December 1st. She then mailed a cheque to Rothwell for the $75,000 she had received from him
previously as his deposit.
Rothwell immediately returned the cheque and insisted that the restaurant owner proceed with the
sale of the restaurant to him in accordance with their agreement.
On November 28th, the local newspaper contained an announcement of the opening of a new
restaurant in a large office building across the street from Andrea‘s Restaurant. The office building
housed most of the customers of Andrea‘s Restaurant, and the new restaurant could be expected to take
about 70 percent of the lunch customers and 40 percent of the dinner customers from Andrea‘s
Restaurant.
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The announcement came as a surprise to all parties. Polonek immediately wrote a letter to the owner
of Andrea‘s Restaurant, in which he indicated that he did not intend to proceed with the transaction unless
the owner reduced the purchase price to $150,000. Rothwell was out of town on other business on
November 28th, and he did not become aware of the new competitor until December 1st, the proposed
closing date for his purchase of the restaurant.
Advise each of the parties of their legal position in this case. Assuming that each party exercised their
rights at law, indicate how the issues raised in the case would be resolved by a court.
Answer:
The actions of the parties in this case raise issues of breach, alleged damages, and performance.
Students should note that a binding contract was established between Rothwell and Andrea‘s
restaurant on September 1st. The restaurant owner then sold the restaurant to Polenek, and advised
Rothwell of the sale. At this point Rothwell would be entitled to treat his contract as at an end and
sue the restaurant owner for damages. He did not do so, and insisted that the transaction proceed in
accordance with the agreement. The second role to Polenek was repudiated by Polenek on
November 28th, when the new competitor was discovered. This would allow the restaurant owner to
treat the contract at an end, and complete the transaction with Rothwell on December 1st, as
provided in the agreement. Rothwell under the circumstances would be obliged to complete the
purchase on that date as he lost the opportunity to avoid the agreement earlier. For a case with
different issues and varied facts, See: Williams and Gnettler v. Copperfields Hotels Ltd. and Ward
(1992) 6 O.R. (3d) 557.
Case 9
A commercial vegetable grower decided to grow a variety of open-pollinated cabbage as a market garden
crop, based upon the success that his relative (who was also a commercial grower) had had with the
variety several years before. He purchased seeds for the cabbage variety from the catalogue of a
commercial seed supplier.
The seeds were planted according to proper planting instructions and cultivated in accordance with
accepted agricultural practices. Weather conditions were ―normal‖ throughout the growing season, but, in
spite of this, the seeds produced a very poor crop.
The grower informed the seed supplier that the crop had failed, even though he had used proper
growing techniques. He demanded that the seed company compensate him for his loss. The seed company
rejected his complaint and noted the seed purchase contract term which stated:
The vendor warrants seeds only as to variety named and makes no warranty express or implied as to
quality or quantity of crop produced from the seed supplied. Any responsibility of the vendor is
limited to the price paid for the seed by the purchaser.
When the seed company refused to entertain his complaint, the grower decided to take legal action to
recover his loss.
Discuss the basis for the grower‘s action and the defence, if any, of the seed company. Render a
decision.
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Answer:
The facts of this case are essentially those in Kordas v. Stokes Seeds Ltd. (1992) 11 O.R. (3d) 129.
The case concerns the application of an exculpatory clause and the doctrine of fundamental breach,
when the seeds failed to provide the crop results the buyer expected. The buyer alleged fundamental
breach when the crop was unsatisfactory, but the court held that the buyer did not receive seed that
was fundamentally different than what he had ordered, and the defendant seed company was entitled
to rely on the exculpatory clause.
Case 10
Complex Software Corporation produced sophisticated software programs for computer-assisted product
development. Complex Software was engaged by Turbine Engines Ltd. to develop software that would
enable its engineers to develop the most efficient blade design and angles for its large turbines, which
were used in hydro-electric power generators. Turbine Engines provided the engineering data necessary to
develop the program, and Complex Software prepared the software.
The software was tested by both Complex Software and Turbine Engines using a simple turbine with
known design and performance characteristics as a model. The software appeared to work properly, and
Turbine Engines used the program to design a new multi-stage turbine engine.
Unknown to Turbine Engines, the striking of certain computer keys in a particular sequence had the
effect of cancelling out the safety factor to be built into the turbine blades. The key sequence was not the
sequence used in the test, but a technician used the particular key sequence in designing the new model
turbine blades. As a result, when the new turbine was tested in a high-speed operational mode, the blades
disintegrated and destroyed the engine.
Turbine Engines brought a legal action against Complex Software claiming $850,000 in damages as
its loss in the construction of the faulty prototype turbine.
Discuss the various arguments that may be raised by the parties in this case, and prepare a decision as
if you were the judge. Outline your reasoning in reaching your decision.
Answer:
The issue raised in this case concerns the alleged breach of an agreement to produce a software
program for the development of turbine blades. Questions that might be raised include: Would a
skilled software producer be aware of the problems the key stroke sequence would produce? Did it
have a duty to warn the user? Given the facts of the case, the Complex Software Corporation should
have forseen the possibility of the key stroke sequence, and its failure to do so would perhaps
constitute breach of contract. The damages that would flow from the breach would be those
damages reasonably forseeable at the time the agreement was entered into, and might include the full
value of the turbine and engine.
Case 11
The Canada Tea Co. entered into a contract to purchase 400 wooden chests of tea from an off-shore tea
merchant. On receipt, it was discovered that some of the tea chests had insects in the wood, but not in the
tea, which was enclosed in sealed plastic bags inside the chests. Canada Tea Co. warned the supplier that
it would refuse acceptance of any future shipments that were infested with insects.
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A second order for 400 wooden chests of tea was placed. On arrival, the tea chests were examined.
Evidence that insects had been in the wood was revealed, but no insects were found in the shipment.
Canada Tea Co. rejected the shipment. The off-shore tea merchant then took legal action against Canada
Tea Co. for the value of the shipment.
Discuss the nature of defence (if any) that Canada Tea Co. might raise. Indicate the possible outcome
of the case.
Answer:
Students in this case should identify the issue raised by the plaintiff as a basis for rejection of the
shipment of tea. Was it based on the warning concerning insects in the wooden container? If so,
could this justify rejection? Since no insects were found in the second shipment, the warning would
not be applicable. This case problem is based upon the case of General Commodities Ltd. v.
Murchie's Tea & Coffee Ltd., a 1988 decision of the B.C. Count of Appeal. (see: Doc. No.
CA007800). In that case the Court of Appeal held that fundamental breach of the contract had
not occurred, and the Defendant was not entitled to reject the shipment.
Case 12
Hatfield owned a large farm on which he grew grain. His combine was inadequate in relation to the
acreage of grain that he harvested annually. As a result, on several occasions his crops had been adversely
affected by rain and poor weather conditions. He reasoned that a larger machine could reduce the time
spent harvesting by as much as two-thirds and, thereby, reduce the chances of bad weather affecting his
harvest.
At an agricultural exhibition, he examined a new self-propelled combine that was advertised as
capable of harvesting grain at three times the speed of his old equipment. The machine was much larger
and more powerful than his old combine and appeared to be of the correct size for his farm.
On his return home, he contacted the local dealer for the combine. After explaining his needs, he was
assured by the dealer that the size he was considering would be capable of harvesting his crop in one-third
of the time taken by his older model. He placed an order for the combine, with delivery to be made in
early July, well before he would require the equipment.
The machine did not arrive until the beginning of the harvest, and Hatfield immediately put the
machine into service. Unfortunately, the machine was out of adjustment, and Hatfield was obliged to call
the dealer to put it in order. The equipment continued to break down each time Hatfield operated it at the
recommended speed. In spite of numerous attempts by the dealer to correct the problem, the equipment
could not be operated at anything more than a very slow speed without a breakdown. Hatfield found that
despite the large size of the equipment, his harvest time was no faster. When the harvest was completed,
he returned the machine and demanded his money back.
The equipment dealer refused to return his money. He pointed to a clause in the purchase agreement
that Hatfield had signed, which read: ―No warranty or condition, express or implied, shall apply to this
agreement with respect of fitness for the use intended or as to performance, except those specifically
stated herein.‖
The only reference in the agreement to the equipment stated that it was to be a ―new model XVX selfWilles, Contemporary Canadian Business Law, 12e
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propelled combine.‖
Advise Hatfield of his rights (if any).
Answer:
This case is based upon the facts of Murray v. Sperry Rand Corporation (1979), 5 B.L.R. 284, in
which the court determined that the failure on the part of the manufacturer to provide a machine that
would perform at its rated capacity constituted a fundamental breach of the agreement,
notwithstanding the exemption clause which referred to performance. A number of other cases also
deal with similar situations where the equipment fails to perform as expected. See for example:
Cain v. Bird Chevrolet Oldsmobile Ltd. (1976), 12 O.R. (2d) 532. The questions which might be
raised with respect to the fact situation should perhaps include those related to the representations
made by the seller with regard to performance, and the need for frequent adjustment or service by the
dealer in an attempt to meet the performance warranted. Some of these might be: What are the
implications of the assurance given by the dealer that the size of the combine selected would harvest
at three times the speed of the farmer's existing model? How important was the delivery date? Was
it a warranty or condition? What effect does the exemption clause have on the purchaser's rights?
What effect, if any, would the delay in the return of the equipment have on the purchaser's right to a
return of his money? Would your answer be any different if he had not notified the dealer promptly,
but attempted repairs himself?
Case 13
One summer, Gianni visits an All-Terrain-Vehicle dealer, and, thinking about the autumn hunting season,
signs a contract to purchase a $7,500 ATV, not putting the slightest effort to reading or understanding the
terms of the deal. He puts down the requested 10% deposit of $750 and sets about to finding the balance,
which is due a week prior to hunting season. As the date approaches, Gianni admits financial failure to the
dealer, who tells him, ―You had better keep trying to find the money. Your deposit will be forfeit as
liquidated damages if you do not come up with the balance. Did you not read your copy of the contract?‖
Advise Gianni, and explain the likely outcome of the situation. What facts would have to change to
reverse your opinion of the outcome?
Answer:
Gianni in this case is in breach of contract, as he is unable to pay for the ATV as provided in the
contract. Students should discuss the amount of the $750 deposit paid, and decide if it represents a
part payment or a reasonable estimate of the damages that would flow from a breach of the contract
by Gianni. If it is a reasonable estimate of liquidated damage, then the ATV dealer would be entitled
to keep the deposit. Change of outcome: The $750 is perhaps a reasonable estimate, and in order to
change the outcome, the ‗deposit‘ would probably need to be much larger, in which case Gianni
would be entitled to a return of the excess over the actual damages the seller suffered as a result of
the breach. As a second change of outcome, Gianni would be obliged to pay the balance of the
purchase price in order to change the basic outcome of the case.
Case 14
Roland Exploration and Drilling Co. purchased mobile two-way radios for use by its crews at outlying
natural gas wells. One day a small fire broke out in a storage shed near one such well, and the crew called
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for help on its radio. The radio failed internally, and made no transmission. As a result, what was a small
fire burned continuously and grew until it enveloped the wellhead, while a member of the crew drove
forty kilometres to the nearest telephone. Once the call got through to an aerial fire crew, it was only ten
minutes before a firebomber dropped chemical smothering powder onto the well and extinguished the
flames. Damage to the shed amounted to $2,000. Damage to the wellhead amounted to $1.5 million. The
purchase agreement between Roland and the radio dealer stated: ―Damages limited to cost of replacement
radio. Not responsible for consequential damages of any kind, regardless whether caused by defect in
materials or manufacturing.‖ The same terms appeared on a card inside the packing box in which the
radio was originally delivered.
Advise Roland.
Answer:
The contract for the purchaser of the mobile two-way radios contain in exemption clause, limiting
the liability of the radio dealer. Students should consider this limitation on liability. Is it
effective in limiting liability to the replacement cost of the defective radio? Was the fire loss
foreseeable when the contract was made? Was the purpose of the radios stated when the purchase
was made? Was the limitation on liability reasonable? Contracts made between business persons
are more likely to be interpreted more strictly than consumer agreements, and the courts are
willing in many cases to enforce exemption clauses in agreements of this nature. In the case,
Roland might argue that the total failure of the radio represents a fundamental breach, but given
that this is only one of the many radios purchased under the contract, the court may reject this
argument, and let the exemption clause stand, limiting damages to the replacement cost of the
unit. Roland may be unsuccessful in its claim for the $1.5 million and $2,000 damages to its
property. According to Borg-Warner Acceptance Canada Ltd. v. Wyonzck (1981) 4 W.W.R. 193,
these would be considered consequential damages, and excluded in the contract as a result of the
breach.
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CHAPTER CHARTS
CHAPTER 15. LAW OF AGENCY
Chapter Topics
The Role of an Agent
Historical Development of the Law of Agency
The Nature of the Relationship
Ratification of Contracts by a Principal
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Third Parties and the Agency Relationship
Liability of Principal and Agent to Third Parties in Tort
Termination of the Principal–Agent Relationship
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Understand the nature of the agency relationship.
• Know the duties of an agent.
• Explain the relationship between agents and third parties.
• Recognize the liability of all parties in tort.
YOUR BUSINESS AT RISK
An agent may be useful and even essential for certain jobs, but when an agent acts on your
behalf, you become responsible for the actions of that agent. Aside from just good outcomes, an
agent can bind you or your business to impossible promises, create huge financial liabilities, or
tarnish your reputation. Proceed with caution in using agents!
CHAPTER COMMENTARY
The agency concept is very important, for apart from the extensive use of agents to carry out specific
activities for principals, (such as real estate agents, manufacturer's agents, etc.) the concept represents an
essential part of many other business relationships. For example, in a partnership, which is covered in
Chapter 16 (Law of Sole
Proprietorship and Partnership), every partner is the agent of every other partner, and can bind the partnership
in contract where the contract falls within the ordinary scope of partnership business. Similarly, in the case of
corporations covered in Chapter 17 (Corporation Law) the corporation can only act through the concept of
agency. Agency, consequently, must be fully understood by students before moving on to the next two
chapters in the text.
An approach to the topic might be to spend some time on the duties of the agent, with special
emphasis on the duty of the agent to act in good faith, and always in the best interests of the principal. This is
desirable, since the type of agent that most mature students are familiar with is the real estate agent. Real
estate agents, and their particular duties are covered in Chapter 25 (Commercial and Residential Real-Estate
Transactions), but if the instructor so desires, the duties of this type of agent may be examined in conjunction
with this chapter.
The ability of a principal to ratify the act of an agent is also a matter for classroom review. The law
in this area, unfortunately, is not as clear as it might be, as explained in the text, but apart from the particular
issue as outlined, the principles for ratification are relatively well established.
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The entire area of third parties and agency should be clearly examined to establish the position of the
parties in those situations where an agent acts for a disclosed and an undisclosed principal. Since students
sometimes find it difficult to imagine a third party would contract with the agent for an undisclosed principal,
the topic should be fully examined.
Termination of the agency relationship is relatively clear, but the effect of failure to notify customers
of termination, and the question of apparent authority are worth examining in class. The Freeman & Lockyer
v. Buckhurst Park Properties Court Decision might be used to illustrate the concept of apparent authority,
although the case was not one which concerned an agency relationship terminated before the contract was
made.
Review Questions
1. List the various ways that an agency relationship may be terminated.
Answer:
Agency may be terminated by:
(1) death of agent or principal,
(2) by agreement,
(3) completion of the task,
(4) incapacity,
(5) bankruptcy of the principal,
(6) on notice.
2. What types of agency relationships may arise or be formed?
Answer: Agency relationships may be established by: express agreement, by conduct, by operation of
law, and by necessity.
3. If an agent exceeds his or her authority in negotiating a contract, under what circumstances would the
agent alone be liable?
Answer: If the agent acted alone without disclosing that he was acting as an agent, the agent alone would
be liable.
4. Why do the courts sometimes recognize the existence of an agency relationship based upon the conduct
of parties?
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Answer: Where a person by words or conduct gives others the impression that another is the agent of
that person, the courts will consider that an agency is created by estoppel.
5. How does the implied authority of an agent differ from express authority? Give examples of each.
Answer: Implied authority may arise where the principal has expressly withheld certain authority of
the agent which agents of that type normally possess. E.g.: leaving goods with a selling agent but
denying the agent authority to sell. Since agents of this type normally have authority to sell, if a third
party buys the goods, the principal would be bound by the contract. The principal, however, would have
a right of action against the agent for breach of the agency agreement.
6. Define an "agent of necessity," and explain how the agency might arise.
Answer: An "agent of necessity" arises where there is a pre-existing contractual relationship between
the parties, and an emergency arises which requires the agent to do something to prevent total loss of
goods, etc. of the principal. E.g.: a carrier may be an agent of necessity for the sale of goods if delivery
cannot be made and the goods are perishable.
7. Describe briefly the duties of an agent to his or her principal.
Answer: An agent's duties are: act in best interests of his/her principal, obey all lawful instructions
or directives of principal, keep confidential information given by the principal, report all information
to the principal, account for funds received, and maintain the standard of the skill he possesses.
8. Explain "agency by estoppel".
Answer: Agency by estoppel arises where the principal by words or conduct gives a third party the
impression that a person is his or her agent. If the third party enters into a contract with the person as
agent, the principal is estopped from denying that the agency exists.
9. Under what circumstances would a principal be entitled to ratify a contract made by an agent?
Answer: A principal may ratify a contract if the principal was capable of making the contract at both
the time it was made by the agent and when it was ratified, if it is ratified with a reasonable time.
10. Is a written document setting out the terms of an agency relationship always necessary? If not, why
not?
Answer: A written agency agreement is not necessary unless the relationship cannot be carried out
within the space of one year.
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11. When would a principal be liable for the acts of an agent who exceeded his authority?
Answer: A principal would be liable for the act of an agent in this case where the agent had apparent
authority to bind the principal.
12. What is the role of an agent?
Answer: An agent is usually used to bind his or her principal in contract with a third party.
13. Is a principal liable for the torts of his or her agent? Under what circumstances would the principal not
be liable?
Answer: A principal is liable for the torts of an agent if the tort is committed during the course of the
agency work. A principal would not be liable if the tort committed by the agent was outside the scope of
the agency business of the principal.
Mini-Case Problems
1. Alice engaged Kelly as her agent to negotiate a contract for the purchase of a large quantity of china
for her shop. Before Kelly completed his negotiations, Alice became insolvent and was declared
bankrupt. Kelly completed the transaction for the purchase of the supplies some days later.
What are the supplier‘s rights?
Answer:
An agent is obliged to keep in constant touch with the principal. Kelly failed to do so, and when Alice was
declared bankrupt the agency terminated. Kelly had no authority to negotiate the purchase, and would be
liable to the supplier personally on the basis of breach of warranty of authority.
2. The Acme Co. frequently sold goods through B Co., as its agent. The Acme Co. terminated the
agency agreement, but failed to pick up goods at B Co.‘s warehouse. B Co. later sold the goods to D
Co. However, before D Co. took delivery, Acme Co. demanded return of the goods from B Co.
Discuss.
Answer:
Company has placed itself in a difficult position. Knowing the agency agreement to be at an end, it has still
behaved as though it was Acme‘s agent. Acme, as first mover, may be successful in recovering its goods
from B Company, but will face a challenge from D Company. D Company will argue that it is entitled to
rely on the former agent‘s apparent authority to enforce delivery of the goods from either B Company or
Acme. Aside from an Acme action against B Company for breach of warranty of authority, if D Company is
successful against Acme, Acme may maintain an action against B Company for any loss it suffers.
Presumably Acme wants return of the goods because they are unique, have increased in value, or D Company
has paid or would pay only part of their worth. In any event, B Company would be required to account to
Acme for any funds it receives from D Company. The Acme action against B Company would be better
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framed as a tort action for conversion (the taking of the goods) than as a breach of contract (having been
terminated). Finally, if the price obtained from D Company is actually advantageous, Acme may also simply
consider ratifying this contract rather than demanding return of the goods.
3. Realty Limited employed Louis as a salesman. Martine listed a building lot with Realty Limited for sale
at $178,000. Louis found a buyer, Jeanne, but Jeanne could not raise the full purchase price. Louis and
Jeanne agreed that Louis would purchase the lot personally and to sell it to Jeanne once Jeanne had
finally raised the necessary $178,000. Louis then purchased the lot from Martine for $170,000 and six
months later resold it to Jeanne for $178,000.
Discuss.
Answer:
Whatever the motives of Louis (even if originally well-intentioned to create an early sale) the arrangements
with Jeanne, if undisclosed to Martine, are a breach of the agent‘s duty of utmost good faith owed to his
principal. The damages would include the $8,000 secret profit, a refund of commission paid, and any
punitive damages. Realty Limited will further be vicariously liable for the tort of its employee.
4. Chantal held herself out as a principal while negotiating the purchase of a large stock of cosmetics and
perfume from Radiance, a retailer that had run into financial difficulty. In fact, Chantal was making the
purchase on behalf of her employer, Salon. Radiance was unaware that Chantal was employed by its
competitor Salon; however, Chantal gave the Salon address as the delivery address. Upon delivery, Salon
changed its mind about buying the goods and refused to pay and rejected the goods.
Advise Radiance.
Answer:
Chantal is acting on behalf of an undisclosed principal, and has not disclosed even the fact that she is an
agent. As a result, Radiance is entitled to hold either Chantal (agent) or Salon (principal) liable for payment
under the contract. In all probability, Salon is in a better position to pay for the goods, and Radiance will
make its election accordingly.
Case Problems For Discussion
Case 1
Custom Conveyor Ltd. was a manufacturer of conveyor systems for use in warehouses and shipping
facilities. Most systems were custom designed to customer specifications, but used standard components
or units manufactured by the company. Conveyor systems were sold locally by authorized dealers, who
assisted the customer in the design of the system for the customer‘s needs.
Custom Conveyor Ltd. advertising brochures stated:
―The design of the conveyor system is a team effort between us and our local dealer to ensure that the
conveyor system will perform efficiently and trouble-free in your facility.‖
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Max Warehouse Ltd. contacted Ace Conveyor Installations Ltd., a local dealer for Custom Conveyor
Ltd. systems with a view to replacing its existing conveyor system with a new system. Ace Conveyor
examined the warehouse facility, and designed a new conveyor system for the warehouse. Ace Conveyor
advised the president of Max Warehouse Ltd. that the proposed system would be 50% more efficient than
its existing system and would be trouble-free. The cost was $175,000, and included installation.
Max Warehouse Ltd. signed an Ace Conveyor Ltd. purchase order form for the conveyor system
which contained a banner across the top of the order form that read: ―We work for you to ensure your
success.‖ The conveyor system was eventually delivered and installed in the warehouse by Ace Conveyor
Ltd., but failed to work in a satisfactory manner. Break-downs were frequent, and the system required
constant servicing to operate as was intended.
Discuss the nature of the relationships established by the parties. If Max Warehouse Ltd. should
decide to take legal action, speculate as to the arguments of the parties, and the possible outcome of the
case.
Answer:
Although there are suggestions of a relationship and teamwork between Custom Conveyor and Ace
Conveyor, the latter remains a dealer, and not an agent of Custom Conveyor. The order form was an Ace
form, and the contractual dealings were between Max and Ace as a reseller. The law relating to the sale of
goods is dealt with in later chapters; however students should sense the responsibility for goods to perform in
accordance with representations made at the time of sale. Thus Max Warehouse will make much of the
statement of ―team effort‖ to imply the existence of some form of agency relationship between Ace and
Custom, to tie responsibility of Custom Conveyor (and its presumable deep pockets) to statements made by
Ace.
Case 2
Alex was the agent for a number of professional dancers. As agent for the dancers, he would seek out
work in local musical stage, television and movie productions. For his efforts, Alex received a percentage
of the earnings that the dancers received for their performances. During a particularly slow season, a local
theatre owner approached Alex, and suggested that they organize a special ‗theatre night‘ to promote local
talent in the municipality. Alex and the theatre owner agreed that admission would be charged to the
public, but the performers would donate their services, since it would be a mixed amateur/professional
event to promote local theatre and local talent. Alex and the theatre owner would share the proceeds from
the ticket sales as payment for their efforts in the promotion of the event. Alex arranged for his clients to
perform at the event, but did not tell them that he would be sharing in the ticket sales. Alex and the theatre
owner worked very hard to promote the special theatre night, and it was a success. Alex and the theatre
owner shared ticket sales of $20,000. Some time later, one of Alex‘s dancers discovered that Alex had
shared in the proceeds from the special theatre night.
Advise the dancers.
Answer:
Alex is liable to his clients, having taken a secret profit. The transaction is perhaps one-off and out of the
ordinary for both Alex and the dancers, however it is entirely of the genre in which Alex routinely acts as
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agent for the dancers. Thus, though he might even be making his own sacrifice to promote an event and
receive only his share of $20,000 he is obligated to have disclosed this fact to his principals, who may have
then seen the event (and their own contributions) in a different light.
Case 3
Amin was interested in the purchase of the shares of Holt Manufacturing Ltd., which was in financial
difficulties due to a high debt load. He contacted Jones, a business consultant, to provide him with an
assessment of the firm. Jones was to negotiate the purchase on Amin‘s behalf if his investigation
indicated that the purchase of the shares represented a good investment.
Jones suggested that Brown, a consulting engineer, be engaged to assess the condition and value of
the manufacturing equipment. Brown was also to provide some advice on what might be done to improve
the profitability of the operation. Amin agreed, so Jones and Brown proceeded with their assessment of
the firm.
During their examination, Jones and Brown realized that the firm represented a good investment if the
equity-to-debt ratio could be altered and some manufacturing processes changed to improve efficiency.
The two then established a corporation. They indicated to the present owners of the manufacturing firm
(whom they had met through Amin) that they also represented a corporation that might be interested in
the purchase if Amin should decide against the investment.
Jones and Brown completed their assessment of the business that in their written opinion to Amin was
worth approximately $1.1 million. They submitted accounts of $3,000 and $3,500 respectively, which
Amin promptly paid.
A few days later, Amin presented the owners of the manufacturing firm with an offer to purchase the
shares for $1 million. The offer was promptly rejected. Before Amin could submit a new offer, the
corporation that Jones and Brown had incorporated made an offer of $1.1 million for the business. The
second offer was accepted, and the shares transferred to the corporation for the $1.1 million.
When Amin discovered that Jones and Brown were the principal shareholders of the corporation that
had made the $1.1 million offer, he brought an action against them for damages.
Describe the nature of Amin‘s action. Discuss the possible arguments that might be raised by both the
plaintiff and the defendants. Identify the main issues and render a decision.
Answer:
The issues raised in this case concern the duties of an agent to his principal. The first involves the duty
of Jones to Amin. What was his duty in this case? When did the duty end? Was Jones free to use the
information gained as Amin's agent for his own benefit? The same questions may be raised with respect
to Brown. Further questions raised by the case might include: Would Jones and Brown be obliged to
reveal the incorporation of their company for the purpose of competing with Amin? Did they have the
right to suggest to the owner of the manufacturing firm that they were interested in a possible purchase if
Amin should decide against the purchase? Amin's action would probably be based upon the failure of
both Jones and Brown to act in good faith and in his interest in their dealings with the owner of the firm.
In the case of Sinclair v. Ridout and Moran, [1955] O.R. 167, which was, in part, a similar situation, the
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court held that the agents had violated their duty to their principal not only by the use of their position as
agent, but by competing with their principal through the corporation without revealing their conflict of
interest to their principal.
Case 4
Chelsea Pets Ltd. engaged Kent to act as its agent in the sale of 3,000 live rabbits. Without disclosing the
fact that he was only an agent, Kent offered the rabbits to Somerset Pet Shops Ltd. at $7 each. Somerset
agreed to purchase the lot, but at the conclusion of the discussion, reminded Kent that he owed them
$5,000. Kent responded, ―When this sale is completed you will get your $5,000.‖
Kent advised Chelsea Pets Ltd. of the sale. Chelsea Pets Ltd. delivered the rabbits to Somerset‘s Pet
Shops Ltd. and informed them that it was delivering the rabbits in accordance with the sale that Kent had
negotiated on its behalf.
Somerset Pet Shops Ltd. took delivery and transferred $16,000 to Chelsea. Chelsea demanded the
full $21,000. Chelsea Pets Ltd. threatened to sue Somerset if it did not pay the purchase price in full.
Advise Chelsea Pets Ltd. and Somerset Pet Shops Ltd. in this case. Offer a possible outcome if
Chelsea Pets Ltd. should carry out its intention to institute legal proceedings against Somerset Pet Shops
Ltd.
Answer:
This case illustrates the rights of the third party that deals with the agent for an undisclosed principal where
the agent has failed to disclose that he is acting only as an agent. Here, the third party may have assumed
that Kent was acting as a principal in the sale, and did not discover the agency until Chelsea came forward
with the goods under the contract. In an action for breach of the contract, the third party would be obliged to
select the party to sue, and if Chelsea refused to deliver the rabbits, Somerset could treat the refusal to deliver
as a breach. The undisclosed principal, unfortunately, is in a difficult position here, as adoption of the
contract may mean that he took it as it stood between Kent and Somerset, in which case Somerset might set
off the debt owing by Kent (See: Campbellville Gravel Supply Ltd. v. Cook Paving Co., [1968] 2 O.R. 679).
Chelsea in that case would be obliged to look to Kent for the remaining $5,000.
Case 5
Johnson used Birkett as his stockbroker for most of his investments. Occasionally, when Johnson had
spare funds, he would seek the advice of Birkett as to investments he should make. On one such occasion,
Birkett recommended two companies as investments with potential for profit. At the time, Birkett
indicated that he personally preferred stock B over stock A and intended to purchase some shares on his
own account. Johnson ignored his advice, however, and purchased stock A.
During the next few weeks, stock A dropped in value as a result of unexpected political upheaval in
an unstable country where the company had extensive holdings. Stock B, on the other hand, gradually
increased in value during the same period. It had reached a price approximately 20 percent above what its
value had been when Birkett recommended it as a possible investment.
Johnson discussed his investment with Birkett, and Birkett suggested he sell stock A. Johnson did so
and requested Birkett to invest the proceeds in stock B. Birkett cautioned Johnson that the stock had
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already climbed in price and might not be as attractive an investment as it was some weeks earlier.
Johnson, nevertheless, insisted that he buy the shares. Birkett then transferred some of his own shares to
Johnson at the current market price, without disclosing the fact to Johnson.
The shares almost immediately declined in value for reasons unknown to both Johnson and Birkett.
A month later, Johnson discovered that the shares that he had acquired had been transferred to him by
Birkett. He immediately brought an action against Birkett for the amount of his loss.
Explain the nature of the claim that Johnson might make against Birkett. Indicate how the case might
be decided.
Answer:
This case raises the duty of an agent to disclose to the principal all information which might affect the
principal. Did Birkett comply with this duty when he cautioned Johnson not to buy stock "B" because it had
already increased in value? At what point would his duty be complete? Did it matter what the source of the
shares would be once Johnson decided that he wanted the shares? Did Birkett violate his duty when he failed
to disclose that he would be selling Johnson his own shares? The onus is on the agent to prove good faith and
full disclosure of all material facts to the principal in cases where a principal suffers a loss. The failure to
make a full disclosure generally constitutes a breach of duty by the agent, and Birkett failed to do so in this
case. See: Johnson v. Birkett (1910), 21 O.L.R. 319.
Case 6
John Rowe had been a successful businessman during his lifetime. When he died, he left his business
to his son and daughter and, under the terms of his will, left his widow, Florence, a life annuity that paid
her $40,000 per year. Florence was quite elderly at the time of her husband‘s death. Her son and daughter
concluded that the $40,000 annuity might not be sufficient for her to maintain her home and cover her
living expenses, since she required a housekeeper to look after the premises. To provide her with
additional income, the two children placed $400,000 in the hands of the family stockbroker in their
mother‘s name.
The funds were placed with Margaret Lawson, an investment advisor with the brokerage firm. She
was instructed to invest the money in the shares of Canadian corporations only, in order to provide
Florence with income and dividend tax credits. No part of the funds was to be placed in bonds or the
securities of foreign corporations.
Florence had no investment experience, and so advised Margaret. She informed Margaret that she
intended to leave the choice of investment with her, as she did not wish to have ―the worry of making
investment decisions.‖
During the next two years, Margaret invested the funds in the shares of Canadian corporations. The
investment income was approximately $40,000 per year. Florence was pleased with the results and, at the
end of the second year, wrote a note to Margaret that read: ―Many thanks for your hard work and success
to date. Invest as you see fit, until further notice from me.‖
During the third year, Margaret switched most of the Canadian shares to bonds, foreign currency
holdings, and speculative issues, at a very high investment turnover rate. The high trading activity
resulted in very high sales commissions for Margaret, but very little in earnings for Florence. By the end
of the third year, Florence‘s income was down to $15,000, and the net worth of her investment fund had
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diminished to $220,000.
At the end of the third year, Florence notified her son that ―something seemed to be wrong‖ with her
investment income. Her son immediately contacted the investment firm. At that point, Margaret‘s trading
practices were discovered, and the value of the investment fund was determined. On the advice of her son,
Florence brought an action against the stockbroker and Margaret, an employee of the firm.
Discuss the nature of the action that Florence might bring, and the issues involved. Render a decision.
Answer:
The brokerage firm was engaged to buy and sell securities on behalf of the principal, Florence. Margaret was
an employee of the firm, and the firm would be liable for any breach of her duty towards the firm's principal.
Margaret's instructions were clear initially: to invest only in shares of Canadian corporations in order to
provide dividend income eligible for dividend tax credits. Due to Florence's lack of knowledge of
investments, should Margaret have followed these instructions? Did Margaret put her own interests before
those of Florence in her choice of investments? From the facts of the case, Margaret began trading in
securities on behalf of Florence in speculative issues which could not provide the type of income required.
Since it was made known to Margaret by both Florence (and her children) that she had no knowledge of
investments or the stock market, her comments to Margaret could not be taken as instructions concerning
investments to make. Margaret (and her employer) were consequently in breach of their duty to (1) carry out
the principal's directives and (2) to put the principal's interests above their own. The facts of this case are
based upon the facts in the case of Ryder v. Osler, Wills, Bickle Ltd. et al. (1985) 49 O.R. (3d) 609 where the
court held the brokerage firm liable for the losses suffered due to the employee's breach of her duty.
Case 7
The Rockland Corporation carried on business as a representative for investor groups that wished to
acquire active business firms. Peter Rockland, the President of Rockland Corporation, met with a group of
business people who had recently established a small brewery, and who wished to purchase some of the
assets of another brewery business, the Best Brewery Ltd.
At the direction of the investor group, Peter Rockland met with the president of the Best Brewery Ltd.
and negotiated a purchase price of $4.5 million for the assets. Peter Rockland then prepared a ―letter of
intent,‖ which set out the purchase price of the assets and the terms of payment. The letter called for the
payment of a deposit of $450,000 within 48 hours of the signed acceptance of the offer by Best Brewery
Ltd. The ―letter of intent‖ was signed: ―Rockland Corporation on behalf of an investor group. per Peter
Rockland.‖
Peter Rockland delivered the letter to the president of Best Brewery Ltd. On receipt of the letter, the
president inquired as to the identity of the group of investors, and Peter Rockland arranged for Graham, a
member of the investor group, to telephone the president and assure him that Rockland Corporation had
authority to sign the letter on the investor group‘s behalf. Graham telephoned the president of Best
Brewery Ltd. to assure him, but did not reveal the fact that he was a principal in the group that had
established the competitor brewery. The president then wrote to Peter Rockland advising him that the
company would accept the offer.
The investor group was unable to arrange financing and decided to abandon the purchase. When the
investor group did not pay the deposit within the 48-hour period, Best Brewery Ltd. delivered a written
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notice of termination of the agreement to Rockland Corporation. Peter Rockland felt, however, that he
could assemble another group of investors to acquire the assets, so he decided to enforce the agreement.
Rockland Corporation then instituted legal proceedings against Best Brewery Ltd., claiming for breach of
the agreement and damages.
Explain the basis upon which Rockland Corporation might bring the claim; indicate the defences, if
any, that the Best Brewery Ltd. might raise. Render a decision.
Answer:
The facts of this case are drawn from the case of Rothwell Corporation v. Amstel Brewery Canada Limited
(1991) 6 O.R. (3d) 651. The case raises the matter of the undisclosed principal (agent contracting on behalf
of the undisclosed parties) and the rights/duties/liability between an agent and a third party. As the case
indicates, the agent entered into an agreement with a third party on behalf of a group of investors who were
undisclosed principals. Assurance was given by one of the undisclosed principals that the agent had authority
to act on their behalf, and an agreement was made between the agent and the third party. When the
transaction was terminated, the agent attempted to 'revive' the agreement with a view to finding a new group
of investors and brought an action in court. The question raised here is: Could the agent do so? The court
held that the agent could not do so, because as an agent, the agent had no contractual standing between the
principal and the third party. He had no rights under the contract as he was only an agent, and not a party to
the agreement.
Case 8
The Clear Cut Lumber Company engaged the services of Timber Harvesters Ltd. to selectively cut certain
hardwood species of trees on an extensive acreage that it owned. The contract provided that Timber
Harvesters Ltd. was free to cut any access roads required, and it was required to remove and stack the cut
timber at certain collection points in the area. Timber Harvesters Ltd. was provided with survey maps of
the lands owned by Clear Cut Lumber Company, and the boundaries of the property were shown to
Timber Harvesters Ltd. supervisors.
Timber Harvesters Ltd. began cutting logging roads immediately thereafter, in order to gain access to
the particular stands of hardwood required by Clear Cut Lumber. In doing so, Timber Harvesters Ltd.
inadvertently entered into neighbouring lands with its road, and cut a stand of trees that belonged to the
property owner.
The property owner immediately took legal action against Clear Cut Lumber Company for trespass
and the cutting of the trees. Clear Cut Lumber denied liability on the basis that it had informed the
contractor of the boundaries of the property, and it was not responsible for the actions of the contractor.
Discuss the arguments that may be raised in this case, and discuss the possible outcome if the court is
required to determine the issue.
Answer:
In this case, students should first determine the relationship between Clear Cut Lumber Company and Timber
Harvesters Ltd. Students should conclude from the facts that the relationship is one of agency. A second
issue should be the acts of the agent vis-a-vis the property owner. When the agent entered on the property
was it carrying out its duties as agent? Clearly it was in breach of the directive of the principal not to trespass
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on the lands of the adjacent landowner. A trespass occurred by the agent, and since it was carrying out its
duties for the principal, the principal is liable. The principal, however, would have a right of action against
the agent for a breach of their agency agreement. See: Harris v. Brunette (1893) 3 B.C.R. 172 for a similar
case.
Case 9
A property owner listed her property for sale. She provided the agent with authority to sell the property on
her behalf if the terms of any offer received met the terms set out in the listing agreement. A prospective
buyer inspected the property during the period of time that the property was listed for sale, but did not
make an offer to purchase.
After the agency agreement had expired, the prospective buyer made an offer to purchase the property
that corresponded with the terms of the listing agreement. The agent accepted the offer on behalf of the
property owner.
When the buyer discovered that the agency agreement had expired, he brought an action against the
agent.
Explain the nature of the buyer‘s action and indicate how the case may be decided. Could the
property owner ratify the agreement? What factors would affect the ratification?
Answer:
One cause of the action would be against the agent for breach of warranty of authority to sell the property.
The case, however, concerns the question of the seller's ability to ratify the contract, and this issue should be
discussed as well, since the buyer's action would only arise if the principal refused to proceed with the
transaction. For the latter, the "rules" for ratification should be reviewed, and the question of whether the
principal could satisfy them should be determined. In particular, the question should be asked: Does an
action against the agent for breach of warranty of authority constitute repudiation of the agreement, and if so,
would it at that point be too late for the principal to ratify? If the case is viewed as a situation where the
principal has refused to ratify the agreement, then the question of the agent's authority becomes a key issue.
If the agent had the authority to sell the property at the time of first negotiation with the buyer, then the buyer
would be aware of the agent's authority. Later, however, the authority would not be present, but the question
which might be raised here is: If the authority was for a specified time, was the buyer aware of the expiry
date? Was it incumbent upon him to determine if the authority had been extended? The authority to sell, and
the authority to convey are two distinct authorizations under real property law. While an agent may bind a
principal in contract under ostensible authority, the expiry of authority to convey the property would
terminate the agent's authority to convey, and any conveyance given after the expiry of the authority would
not convey the principal's interest. See: Taylor v. Wallbridge (1879), 2 S.C.R. 616 at 678-679. If the agent
lacks the authority to bind the principal, then an action by a third party for breach of warranty of authority
might lie against the agent. See: Wickberg v. Shatsky (1969), 4 D.L.R. (3d) 540.
Case 10
The Acme Company, which frequently acted as agents for sea food processors and buyers, was contacted
by the Gourmet Fish Company to find a supply of a particular fish for its new product line. Under the
terms of the agreement, the Acme Company was entitled to a flat commission rate based upon the
quantity of fish purchased. The Acme Company contacted several fish-processing plants and arranged for
each to supply a quantity of the fish species required by the Gourmet Fish Company. In each case, the
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Acme Company charged the processing plant a $3,000 fee for arranging the supply contract. In due
course, the fish were delivered to Gourmet Fish Company, and the agreed-upon commission was paid to
the Acme Company, based upon the quantity of fish supplied.
Some time later, when the Gourmet Fish Company discovered that the Acme Company also charged a
fee to the processing plant for arranging the supply contracts, it took legal action against the Acme
Company.
Discuss the nature of the claim that would be made by the Gourmet Fish Company and the defences,
if any, of the Acme Company. Render a decision.
Answer:
The claim that Gourmet Fish Company would make would be based upon the agent's failure to make a full
disclosure to the principal of the contract arrangements it had made with the processing plant. The collection
of a commission on the supply contracts by the agent would be a breach of the agent's fiduciary duty to its
principal Gourmet Food Company, and would entitle Gourmet Fish Company to receive from the agent the
secret commissions made on the transactions. For a similar case: See: Moores v. Sequeira (1983) 41 Nfld.
& P.E.I.L.R. 129, affirmed (1985) 55 Nfld. & P.E.I.L.R. 128 (Nfld. C.A.).
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CHAPTER CHARTS
Additional Charts for Instructor Use (not appearing in text)
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CHAPTER 16. LAW OF SOLE PROPRIETORSHIP AND PARTNERSHIP
Chapter Topics
Forms of Business Organization
Historical Development of Partnership
Nature of a Partnership
Liability of a Partnership for the Acts of a Partner
Liability of a Partnership for the Acts of its Employees
Rights and Duties of Partners to One Another
Dissolution of a Partnership
Limited Partnership
Limited Liability Partnerships
Advanced Business Applications for Partnerships
Registration of Partnerships
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Recognize a sole proprietorship.
• Explain the nature of a partnership.
• Understand the rights and duties of partners to one another.
• Know how a partnership is dissolved.
• Recognize special types of partnerships such as LLPs.
• Understand the importance of registration of partnerships.
YOUR BUSINESS AT RISK
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Sole proprietors go it alone with absolute control but limited access to resources. Two partners
have double the personal assets and skills, but the human factor of sharing responsibilities and
rewards can introduce a minefield of potential problems. Be careful in choosing the partner you
select in your commercial marriage!
CHAPTER COMMENTARY
The sole proprietorship is obviously one of the oldest forms of business organizations, and may be compared
to the partnership as a means of examining the differences between the two entities. Students should note
that while the sole proprietorship appears to be simple in form, it must nevertheless comply with the many
regulatory requirements imposed by governments on businesses in general.
The partnership relationship employs the law of agency in the determination of some of the rights
and liabilities of partners with respect to each other, and to third parties. The chapter, as a result, will provide
a good review and re-enforcement of agency law while the topic is still fresh in the minds of the students, as
well as deal with the law of partnership. As the text indicates, the law relating to partnerships is for the most
part settled, due to the age and maturity of the relationship. This was recognized almost a century ago in
England, and permitted the clear codification of a large part of the law relating to partnerships. The result of
this maturity has been limited change in the law since the introduction of the statute, excepting the more
recent developments refining the rights and responsibilities of Limited Liability Partnerships.
As with the agency relationship, some emphasis should be placed upon the "good faith" aspect of
partnerships, and this should be explained in conjunction with the rule that each partner may bind the
partnership in contract in the ordinary course of partnership business. The topic may also be included with a
discussion of the conduct of business by a partner in competition with the partnership where no consent to do
so is granted.
The liability of partners in general, and in particular the liability of retiring partners, might be
discussed along with the registration requirements, and the importance of giving notice of a change in a
partnership to third parties. The Court Decision of Garner v. Murray might be a useful case to examine in
detail. Garner v. Murray discusses the effect of the insolvency of one partner on the liability of the others
when the partnership is dissolved. As the case indicates, the loss would not be borne on an equal basis, but
distributed according to the ratio of their capital accounts at the time of dissolution. Students could work
through Case 4 as an application of the rule in Garner v. Murray using the words of the Judge in that case as
a guide to reaching a decision on the liability of each individual partner to the others.
Review Questions
1. Why is registration of a partnership important in some provinces?
Answer: Registration is important to inform the public of the identity of the partners and to provide
information concerning the business.
2. If one partner should become personally bankrupt, and the partnership is dissolved, how is the liability of
each remaining partner for the debts of the partnership determined?
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Answer: If one partner should be personally bankrupt, the remaining partners are liable for the debts
of the partnership in accordance with the ratio of their capital accounts at
the time of dissolution. (See: Garner v. Murray).
3. Why is a simple sharing of gross profits not conclusive as a determinant of the existence of a partnership
relationship?
Answer: Sharing of gross profits is often a method of compensating employees. Such sharing does
not indicate whether a loss is shared as well.
4. How does a partnership differ from co-ownership?
Answer: Partnership differs from co-ownership in a number of ways: each is subject to a different
statute; a share of co-ownership may be reality or personality, while a partner's share is always
personality; a partner may bind other partners in contract, a co-owner may not; a co-ownership share may
be sold or pass to others by will, while a partner may not transfer the interest without the consent of other
partners to the admission of the new partner.
5. Under what circumstances may a minor be a member of a partnership? What is the extent of the minor's
liability?
Answer: A minor may be a member of a partnership, but the agreement is voidable at the option of
the minor. If the minor repudiates the agreement, the minor may not recover his/her share until the
creditors have been paid.
6. Explain how agency and partnership are related in terms of the operation of a partnership.
Answer: In a partnership, every person is an agent of the partnership, and may bind it in contract.
7. Under what circumstances would a partnership be liable for a tort committed by a partner?
Answer: The partnership would be liable in tort for the act, provided that the partner committed
the tort in the course of partnership business.
8. What is the extent of the liability of the partners for the tort of a partner, or for contracts entered into by a
partner?
Answer: All general partners have unlimited liability to third parties.
9. Under what circumstances may a partnership be dissolved?
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Answer: A partnership may be dissolved on the death of a partner, on notice, at the end of the
project (if for a profit), at the end of a term, if for a specific term, if for an unlawful purpose, if a
partner becomes mentally incompetent, or by the courts for a number of reasons.
10. Is it possible for a partner to sell his or her interest to another person? What is the status of the purchaser
of the interest if it should be sold?
Answer: Yes. The person does not become a partner, however, but only acquires the partner's share,
which is determined on the dissolution of the partnership. The purchaser may not participate in the
business.
11. Explain the rights of creditors of a partnership when the partnership is dissolved.
Answer: The creditors are entitled to payment of these debts from the assets, then any surplus is
divided between the partners. If the assets are insufficient to pay the creditors, the partners must pay the
creditors from their personal funds.
12. How is a partnership formed?
Answer: A partnership may be formed by two or more persons entering into an agreement to
carry on business for profit, on the understanding that they would share losses as well, and would
participate in its management.
13. What essential characteristic distinguishes a partnership from other associations of individuals?
Answer: A partnership is a relationship which carries on business with a view to profit.
14. What is a retiring partner obliged to do in order to avoid liability for future debts incurred by a
partnership?
Answer: A retiring partner is obliged to notify all customers and suppliers at the time of his
retirement and also notify the public-at-large through an advertisement in the Provincial Gazette. A
dissolution of partnership document should also be filed to correct the registration of the partnership.
Mini-Case Problems
1. A and B purchase a sailboat (which is in poor condition) with the intention of refurbishing it together
and selling it when the work is completed.
Are A and B partners?
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Answer:
Close, but still likely not partners. As either individual‘s interest is freely alienable (absent any other
contractual agreement), the relationship is co-ownership rather than a partnership, despite being conducted
with a view to profit.
2. X, Y, and Z agree to carry on business in partnership under the firm name XY Plumbing. Y, in the
course of partnership business, carelessly injures T. T intends to take legal action against the
partnership for the injury, but is unaware that Z is a partner, since his name is not included in the
partnership name.
Is Z liable if T sues only X and Y?
Answer:
If T sues only X and Y as individuals, only X and Y would be liable to T. However, X and Y would be able
to recover from Z for his share of the claim against the partnership.
3. Albert, Charles and Emily carry on business under the name ACE as a registered partnership. Emily
wishes to retire from the partnership and allow Albert and Charles to carry on the business.
What advice would you give Emily?
Answer:
Emily should notify all customers and suppliers at the time of her retirement and also notify the
public-at-large through an advertisement in the Provincial Gazette. A dissolution of partnership document
should also be filed to correct the registration of the partnership.
4. Alexander and Betty carry on a partnership business. Carter is an employee of Alexander and Betty.
Alexander informs Delbert, a supplier of the business, that Carter is authorized to purchase goods on
credit for the partnership. Carter is later discharged by the partnership, but purchases personal goods
on credit from Delbert, as Delbert is unaware that Carter is no longer employed by the partnership.
Is the partnership liable for payment for the goods purchased by Carter? Explain.
Answer:
Yes, the partnership would be liable. Carter‘s explicit authority to make purchases on behalf of the
partnership was communicated by a partner (Alexander) to Delbert. The termination of that authority should
have been communicated as well, the failure leaving Carter cloaked with apparent authority. The act of the
partner Alexander in creation of the authority and the inaction of all partners in rescinding it binds the
partnership.
Case Problems for Discussion
Case 1
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Earl, Louise, and Erik carried on business in partnership for many years under the firm name ELE Sales.
The partnership was registered under the provincial partnership registration legislation. Earl and Louise
were the two partners that dealt with customers and suppliers, and Erik worked for the most part out of
sight of everyone in a back office where he did the bookkeeping for the business.
Erik eventually retired, leaving the business without informing either customers or suppliers. Earl and
Louise carried on the business for another few years, but without the management skills of Erik, the
business ran into financial difficulties. Earl and Louise decided to close the business, and paid most of the
creditors. The remaining creditors now wish to take action to recover their debts.
Advise the creditors.
Answer:
The creditors may look to Erik as a general partner for settlement of their debts just as they may look to Earl
and Louise. Erik‘s out-of-sight contribution while active in the business does nothing to save him from
liability, and he took no steps upon his retirement to terminate his liability. Even if he had originally been a
limited partner, his active participation in the business renders him as a general partner.
Case 2
Granite Gold Mine Ltd. and Diamond Drilling Ltd. entered into an agreement whereby Granite Gold
Mine Ltd. would provide its mining claims for exploration, and Diamond Drilling would provide drilling
services at no cost to Granite Gold Mine Ltd. in an effort to determine the extent of an ore body within the
claims area. The two companies agreed to form a third corporation that would operate the mine once the
quantity of ore was determined. The third company, to be called Mine Operators Inc. would be jointly
owned by Granite Gold Mine Ltd. and Diamond Drilling Ltd. Each would own 50% of the shares of the
corporation, each corporation would pay 50% of the start-up cost of the mine.
The two corporations agreed that ownership of the mining claims would remain with Granite Gold
Mine Ltd., but all gold mined by Mine Operators Inc. would be owned by Mine Operators Inc. subject to
a royalty to Granite Gold Mine Ltd. of 10%.
Exploration by Diamond Drilling Ltd. revealed a large ore body, but before a mine was started,
Diamond Drilling Ltd. ran into financial difficulties. Several of its creditors who had supplied services
and goods to the mine exploration project decided to take legal action against both Granite Gold Mine
Ltd. and Diamond Drilling Ltd. to recover their debts.
Discuss the issue raised in this case, and the arguments each party might raise. Render a decision.
Answer:
As is often the case in issues such as this, the public face that was put on the operation will carry some weight
in its resolution. If the parties (Granite and Diamond) held out Mine Operators as a partnership, then they
risk it being treated as such, much to the detriment of Granite who will be liable for debts incurred by its
partner. It is just for reasons such as this that there should be complete administrative separation of ventures
like this from the parent enterprises. If the parties were careful to display Mine Operators as a separate
corporation (more on this in the next chapter) then only Mine Operators will be liable for the goods supplied
to it, and neither of its owners (Granite and Diamond) would be liable for the debts. This arrangement is coownership, not partnership, and the debts properly belong to the subsidiary enterprise.
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Case 3
Harold Green and Herbert Green, who were unrelated persons with the same surname, carried on parcel
delivery businesses in the same city. Each operated as a sole proprietor, under the name Green Delivery,
and carried on business from the same warehouse building. The two men were good friends. They
frequently assisted each other by carrying parcels for the other in deliveries in outlying parts of the city.
To complicate matters further, the two proprietors would sometimes use the spare truck owned by the
other when their own vehicles had breakdowns or required service. Apart from the fact that each had a
different telephone number, it was impossible to distinguish between the two firms. Over time, regular
customers often referred to the two firms collectively as ―Green Brothers Delivery,‖ even though the two
men were not related to each other.
Fiona, an antique dealer who frequently used the delivery services of both men, requested Harold
Green to deliver an expensive antique chair to her country home. Harold Green, at the time of the request
for pickup, advised Fiona that he would send his truck out to pick up the chair. However, Herbert Green
picked up the chair at Fiona‘s place of business and took it to the warehouse for delivery. That day a fire
of unknown origin destroyed the warehouse and its contents. The charred remains of the chair were found
in the jointly used part of the warehouse after the fire.
The chair had a value of $3,000. Each of the sole proprietors denied liability for the loss.
Advise Fiona as to how she might proceed in this case.
Answer:
This case provides a review of agency as well as partnership, and might be examined in that light for the
purpose of determining the liability of the parties. The particular issue to be explored, however, is the
creation of an apparent partnership by the two businessmen as a result of their actions. Did the constant
assistance that each provided the other create some sort of partnership by holding out? Did they have an
obligation to the public and their customers to clarify their business relationship? Why? An important point
to decide is the knowledge of Fiona. If she knew that the two men were not partners, then she would
probably be obliged to view the pick-up of the chair by Herbert as the act of an agent on behalf of the
principal, since the contract was made with Harold Green. On the other hand, if she did not know that the
two men carried on separate businesses, she would be obliged to tie the two men together in order to establish
their liability as partners. This might be done by establishing the existence of a partnership by holding out,
even though the partnership in fact did not exist. If a partnership by holding out could be established, then
Herbert Green might also be liable for the loss. For a case on this point see: Rush & Tompkins Construction
Ltd. v. Vieweger Construction Co. Ltd. (1964), 45 D.L.R. (2d) 1.22.
Case 4
Williams, Oxford, Ogilvie, and Lennox carried on business in partnership for many years as wool
merchants. The widespread use of synthetic materials, however, adversely affected the fortunes of the
business. Eventually the partners found that the business could no longer be carried on at a profit. Before
anything could be done to sell the business, Lennox became insolvent. It was then necessary to wind up
the business in accordance with the partnership agreement.
The partnership agreement provided that the parties share losses and profits equally. On dissolution,
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the capital accounts of the partners were as follows:
Williams
Oxford
Ogilvie
Lennox
$50,000
$30,000
$20,000
—
Creditors‘ claims at dissolution amounted to $350,000, whereas the total assets of the firm were
$250,000.
Explain the nature of the liability of the firm. Calculate the liability of each of the partners as between
themselves with respect to creditor claims.
Answer:
This case is based upon the facts in Garner v. Murray. The case raises the question: How are losses to be
dealt with where one of the partners becomes insolvent, and partnership debts exceed assets? The partners are
liable to the creditors for the full amount of the claims, and the creditors are free to look to any one partner to
satisfy their claims. That partner, in turn, may look to the other partners to contribute their share of the
creditors' claims. In this case, the partners have agreed to share profits and losses equally. Lennox,
unfortunately, cannot make any contribution towards the $100,000 loss suffered by the firm ($250,000 assets,
but $350,000 creditors' claims). The three remaining partners must therefore bear the loss. Should this be
shared equally? Each partner would ordinarily be liable for one-quarter of the loss, or $25,000. Lennox,
however, has no funds. Garner v. Murray indicates that the solvent partners bear the loss of the insolvent
partner in the ratio of their capital accounts at dissolution. This would mean that the share of the loss which
Lennox would be expected to pay ($25,000) would be paid by the other three partners (in addition to the
$25,000 that each must pay) in the ratio of their capital accounts, viz: Williams 5/10, Oxford 3/10, and
Ogilvie 2/10 ($12,500, $7,500 and $5,000 respectively).
Case 5
Baker, Felice, and Toby carried on business for many years as clothing retailers under the firm name of
Family Clothing Market. The store premises were large and consisted of three separate smaller shops
located side by side in the downtown shopping district of a large city. Different clothing lines were sold in
each shop, and each shop was managed exclusively by one of the partners. Baker managed the children‘s
clothing shop; Felice, the women‘s clothing store; and Toby, the men‘s clothing store. Each shop had its
own distinctive name displayed on its shop window and entrance door.
Toby eventually grew tired of the business and decided to retire. He did so on March 1st. The two
remaining partners purchased Toby‘s interest in the partnership and placed an employee (who had
previously been the buyer for men‘s clothing) as manager in charge of the men‘s clothing store. This
employee continued to act as the buyer for men‘s clothing and to deal with the clothing suppliers, without
informing them of the change in the partnership. Nor was any notice of change in the makeup of the
partnership filed under the provincial partnership registration legislation.
On April 1st, Baker died. Following his death, the auditors discovered that he had been systematically
concealing the true state of the children‘s clothing operation from the other partners by creating fictitious
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assets to offset the losses. When the overall loss was calculated, the business was determined to be in
serious financial straits.
News of the discovery soon leaked to the suppliers. When all of the creditors‘ claims were presented,
the liabilities of the business exceeded its assets by some $250,000.
Rogers, a supplier, brought an action against the partnership for payment of his account in the amount
of $15,000.
Discuss the status and liability of the partners, indicate any defences that might be raised, and render a
decision.
Answer:
The remaining partner, Felice, would clearly be liable to Rogers on the partnership debt. Baker's estate
would also be liable, but from the facts of the case it would appear that Baker may have few if any assets, due
to his actions. Since partners have unlimited liability for the debts of the partnership, any assets which Baker
had at the time of his death might be subject to his liability for his share of the partnership debt, and perhaps
more, due to his act of concealing the true state of the business from the other partners. Toby may also be
liable for the creditor's claim, since the creditor, Rogers, was unaware of Toby's retirement. To protect
himself, Toby should have informed all suppliers directly and the public at large (by advertisement) of his
retirement. His failure to do so may entitle Rogers to claim against him for the debt.
Case 6
Sandra is a successful real-estate agent with HomeBase Realty Inc. (HBRI). She acts for, among many
other people, a struggling small contractor, Herbert Homes Limited (HHL). HHL buys land, builds a
home on it in the hope of attracting a buyer, and uses Sandra and HBRI as its agent to list the property
and make the sale.
HHL was short on cash when a desirable, vacant acre of land came on the market. Sandra was to loan
HHL $130,000 (the full price of the lot). Rather than take a mortgage on the land for security, as that could
interfere with HHL‘s ability to borrow bank funds to finance construction, Sandra and HHL agreed that her
name would go on the deed as well as that of HHL. They further agreed that when the property was sold
with a house on it, she would get her usual 6 percent commission on the sale, together with her original
$130,000 loan, plus interest of 12 percent to the sale date.
The property was purchased, Sandra carried on with her other commitments, and HHL built a house,
which two months after completion was sold for $400,000. On the sale, Sandra and HHL signed off on
the deed to the new owners, and payment was made directly to the lawyer for the vendors. The lawyer for
the vendors split up the money: $24,000 to HBRI, $137,800 to Sandra, and the balance to HHL.
As matters turned out, HHL had not built the house up to standard. The roof leaked, costing the
purchasers $22,000 in damages. The purchasers sued HHL and Sandra as the vendors. Conclusive
evidence was presented that they received a faulty house from the vendors. The Provincial Government
New Home Warranty Board was advised of the matter, and its investigation showed that while HHL was
a registered builder, as one must be under the law to sell a new home, Sandra was not. She has now been
charged with a violation of the law. Such an offence usually results in a $500 fine for a first offence.
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Consider the aspects of partnership law as they may apply, and advise Sandra as to how she should
proceed. Consider how she is exposed to risk, and what defences or claims she may raise in civil court
against HHL or the purchasers, and against the Crown in Provincial Offences Court.
If you were in a position to advise the judge in Provincial Offences Court, what would you do?
Answer:
The liability of Sandra hinges to some extent on how her relationship to Herbert Homes Limited (H.H.L.) and
HomeBase Realty Inc. (H.B.R.I) may be characterized. Students should note that Sandra in reality is
employed by HomeBase Reality Inc. (H.B.R.I) and HomeBase Reality Inc. (H.B.R.I.) is the "agent" that sells
the property, even though Sandra is described as an agent. Sandra's involvement with Herbert Homes
Limited (H.H.L.) is a different matter, as she would appear to be a co-owner of the property when her name is
placed on the deed with Herbert Homes Limited (H.H.L.). When the property was sold, HomeBase Reality
Inc. (H.B.R.I.) received the commission on the sale ($24,000) and Sandra received $137,000 as her part of
the proceeds of the sale. The purchaser would be unaware of the agreement between Herbert Homes Limited
(H.H.L.) and Sandra and consider the two parties to be co-owners. On this basis the purchaser could look to
Sandra for damages for the poor construction of the house. Sandra, would argue that the property was not
held as partnership property. While partnership would not affect her liability to the purchaser (as both
Herbert Homes Limited (H.H.L.) and Sandra would still remain liable as partners) it might help her in the
Provincial Offenses case. There, she could argue that her name was on the deed only to secure her loan, and
she was accordingly not an 'owner' or builder that required registration under the Act.
Case 7
Sarah, aged 17 years, and Jane, aged 19 years, had been shopping in a large shopping mall. Jane wished to
purchase a lottery ticket, but had only $1 in her purse. She turned to Sarah and said, ―Do you have $4?
They are selling lottery tickets here.‖ Without a word, Sarah took the money from her pocket and gave it
to Jane. Jane purchased a ticket that she and Sarah agreed bore a lucky number. The next week, the ticket
that Jane had purchased was the winner of $75,000.
When news of the win reached Jane, she immediately visited her friend Sarah and attempted to pay
her the $4 that she said she had borrowed. Sarah, who had also heard the good news, refused to accept the
$4 and demanded her share of the winnings.
If the above dispute should be brought before a court, describe the arguments that might be raised by
each of the parties in support of their respective positions. Indicate how the case might be decided.
Answer:
The purchase of the lottery ticket in this case raises a number of issues associated with the partnership
relationship. An initial approach might be to determine the nature of the relationship which the two young
ladies established by their words and actions. Did the fact that Jane asked Sarah to contribute $4 represent a
loan or a contribution of capital to a proposed partnership relationship? What would the significance of the
discussion and joint selection of the ticket have on the determination of the type of relationship? Could
Sarah, a minor, age 17, be a partner? What effect, if any, does her minority have on the business relationship?
What is the significance of the fact that June held the ticket? Was there an intention on the part of the two
parties to establish a legal relationship? This latter question is clearly one of the key determinants of the
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nature of the relationship. While most of the cases dealing with lottery tickets do not specifically treat the
relationship as that of partnership, they place considerable emphasis on the intention of the parties at the
time of the purchase: See for example, Re: Wozney and Wozney et al. (1974), 44 D.L.R. (3d) 637; and
Simpkins v. Pays, [1955] 3 All E.R. 10, where the court in each case decided that where the intention of the
parties was to share the proceeds, the proceeds of the win were subject to the agreement. It should also be
noted that while the agreement was one which might be voidable at the option of Sarah, Jane was not in a
position to avoid the agreement, since she was of the age of majority.
Case 8
In 2014, Tareq, who operated a business under the name Downtown Grocery, employed Marcus as a clerk
in his store at a weekly salary of $450. Marcus received regular annual salary increases in the years 2015
to 2019. By 2019, he was earning $700 per week.
Early in 2019, Marcus approached Tareq with a request for a further increase in his wages. Tareq
refused on the basis that low business profits limited his ability to pay more than $700 per week. A
lengthy discussion followed and the two parties reached the following agreement.
Marcus would receive $700 per week and, in addition, would receive 20 percent of the net profits. He
would continue to perform the duties of clerk, but would also assume responsibility for the meat
department. He would make all management decisions concerning meat purchases and pricing.
Tareq would continue to handle the general management of the business. He would draw the amount
of $1,000 per week and would be entitled to 80 percent of the net profits.
Marcus would be permitted to examine the business account books, and he would be consulted in all
major business decisions by Tareq.
A few weeks after the agreement was reached, Tareq discovered that Marcus was purchasing
groceries (for his personal use) at a competitor‘s store. In a rage, he barred Marcus from entering the store
and told him that he would send him his severance pay by mail.
Shortly thereafter, Marcus instituted legal proceedings for a declaration that he was a partner in
Downtown Grocery.
Discuss the merits of the action taken by Marcus and discuss the arguments that might be raised by
the parties.
How would you expect the matter to be decided?
Answer:
The facts of this case may be used to review the requirements for the establishment of a partnership. Since
a partnership relationship usually requires something more than the mere sharing of profits, questions asked
should attempt to identify these additional requirements. Would responsibility for the Meat Department in
the store be enough participation in the management decision-making process to make Marcus a partner?
What about the right to examine the account books? What significance would you attach to Tareq's promise
to "consult" Marcus on all major business decisions? Is this the same as participating in the
decision- making? Would Tareq be obliged to agree with Marcus (or vice versa) before a decision could be
made? Is only Tareq responsible for losses? Could a sharing of losses be inferred? What was the intention
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of the parties in entering into such an agreement? The intention of the parties is obviously of importance in
this case. However, an agreement to share profits in itself would not make Marcus a partner. If the parties
intended by the agreement to give Marcus full rights to participate in all major decisions concerning the
business, and that the consent of Marcus was necessary before a major decision was made, then the
relationship could be that of a partnership, and Tareq would not be entitled to bar Marcus from the store.
The arguments raised by the parties would, of course, be related to the purpose of the agreement, with Tareq
arguing that it merely gave Marcus greater responsibility in his job, along with additional compensation for
assuming the additional responsibility. An important part of Tareq's argument would be based upon the
reservation of general management, and his limited obligation to "consult" with Marcus on major decisions.
The fact that only profits, and not losses, would be shared would be strong evidence of an employment
relationship, and an important part of Tareq's argument. Marcus, on the other hand, would argue that the
agreement established a partnership in that it gave him a share of profits and the participation in the
management of the business. The question of the purchase of groceries elsewhere by Marcus should be raised
as a part of the discussion of the nature of the relationship. Would such a purchase violate the obligation on
Marcus to act in good faith? Does his duty in this regard extend to personal purchases? The sharing of
profits and not losses, if this should be the case, would tend to indicate an employment relationship rather
than a partnership. See: Bussieres v. Canadian Exploration Ltd., [1938] 1 D.L.R. 257.
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CHAPTER CHART
Additional Chart for Instructor’s use (not appearing in text)
CHAPTER 17. CORPORATION LAW
Chapter Topics
Introduction
Historical Development of the Corporation
The Nature of a Corporation
Methods of Incorporation
The Incorporation Process
Shareholders‘ Agreements
Corporate Securities
The Taxation of Corporations
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Division of Corporate Powers
Considerations in the Purchase and Sale of a Corporation
Factors Relevant to Choosing the Corporate Form
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Understand the nature of a corporation and its formation.
• Recognize the different forms of incorporation.
• Explain the duties and responsibilities of directors.
• Explain how corporations may be sold or dissolved.
YOUR BUSINESS AT RISK
Conducting business through a corporation is common, and you will probably find yourself
doing business with a corporation in future, or investing in one. Even so, it is not the best
form for all purposes. It has significantly different operating mechanisms and you must
properly manage its responsibilities toward its owners, managers, customers and regulators.
CHAPTER COMMENTARY
The corporation, as the text points out, is a very different type of legal entity when compared to the
partnership. The various forms of incorporation (General Act, Special Act, Letters Patent, and Royal Charter)
are worthwhile topics to review. In addition, the separate legal existence of the corporation and its powers
should be examined, perhaps by way of comparison to the partnership. Since a partnership is a relationship
subject to the "utmost good faith" duty for partners, an approach to the rights and duties of shareholders and
directors might be to chart each as a part of classroom discussion.
For example:
ACTIVITY

Personal interest in
contract with firm
Interest in competing
business entity
DUTY
Director
Partner

full disclosure
full disclosure and
consent required

full disclosure
refrain from
discussion and vote on
matter
 full disclosure
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
Shareholder
(public company)
no duty to disclose

no duty to disclose
The duties which might be charted in this manner are found in this and the next chapter for directors, and
for partners in Chapter 16 (Law of Sole Proprietorship and Partnership).
Corporation law includes a number of doctrines, principles, and rules which should also be reviewed.
In particular, the doctrine of corporate ultra vires, constructive notice, corporate opportunity, and the indoor
management rule should be covered in classroom discussion.
The Court Decisions included in the chapter represent two important aspects of corporation law. The
Salomon case established the nature of the corporation at law, and its existence as an entity separate and apart
from its shareholders. The case is interesting in that the court dealt with the corporation-shareholder
relationship from the "agency" point of view, the "trustee" point of view, and the corporation as an
"instrument of fraud on creditors". It rejected all of these views in favour of the separate legal existence of
the corporation, and the consequences which flow from it.
The Gluckstein v. Barnes Court Decision provides an analysis of the duty of disclosure on the part of
promoters and directors of a corporation, and the consequences of a failure to make a complete disclosure. An
analysis of this case and the Salomon case should provide students with a relatively clear idea of some of the
most important fundamental concepts of corporation law.
Review Questions
1. Describe briefly the relationship between a corporation and its shareholders. How does a shareholder's
relationship with the corporation change if the shareholder should become a director?
Answer: A shareholder may not bind the corporation in contract. A shareholder may engage in
activities in competition with the corporation, such as own shares in a competing corporation. If a
shareholder becomes a director, then the shareholder becomes liable for certain acts (such as improper
declaration of dividends) and must act in good faith and put the best interests of the corporation before
his/her own.
2. What "drawbacks" commonly associated with partnerships are overcome by the use of the corporate
form?
Answer: Shareholders of a corporation have limited liability, share interests are easily transferred,
and control is limited to elected directors.
3. What is a Special Act corporation? For what purpose would it be formed? Give two examples.
Answer: Special Act corporations are created by the state to do specific things, usually of a public
nature. For example: A provincial hydro-electric corporation, or the Canadian Broadcasting
Corporation.
4. Explain the term letters patent. In what way or ways would a letters patent corporation differ from a
general act corporation?
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Answer: Letters patent is a government document which grants special rights or privileges. In the
case of a corporation, the letters patent create it, and confer upon it powers. A General Act corporation
is created by filing proper documents pursuant to a statute.
5. Define corporate ultra vires, and explain why most provinces have attempted to eliminate the doctrine as
it applies to third parties dealing with a corporation.
Answer: Corporate ultra vires refers to an act by a corporation which is beyond its powers to
perform, and consequently, a nullity. To avoid this, most provinces have given corporations all of the
powers of a natural person in their dealings with third parties.
6. How does a corporation differ from a partnership?
Answer:
A corporation differs from a partnership in a number of significant ways:
(a) It has a separate existence.
(b) Shareholders have limited liability.
(c) The shareholders do not actively manage the corporation.
(The directors manage).
(d) Share interests are readily and easily transferred.
(e) Corporations have a theoretical unlimited term of existence.
7. What is the legal nature of a corporation?
Answer: A corporation is created by the state and possesses a legal existence separate from those
who from time to time possess shares in it, or who are responsible for its direction and control.
8. Explain the doctrine of corporate opportunity.
Answer: The doctrine of corporate opportunity arises when a director becomes aware of an
opportunity to acquire property through his position as a director. He may not use the opportunity for his
own benefit because the opportunity to acquire must be given to the corporation.
9. Define the indoor management rule, and by way of example, explain how it is applied.
Answer: The indoor management rule is a rule that provides that a third party in dealing with a
corporation need not inquire into the internal operation of the corporation to determine the authority of
the corporation officer with whom the third party is dealing. Authority to enter into the contract may be
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presumed. For example: A person entering into a contract to purchase goods may presume that the
officer of the corporation selling the goods has the authority to bind the corporation in the contract.
10. What are the obligations of a director of a corporation in an instance where the director has a financial
interest in the firm with which the corporation wishes to do business?
Answer: The director must reveal the interest in the other corporation, must not take part in the
discussion, and not vote on the proposal.
11. Indicate how the principle of "majority rule" is applied in the decision-making process of a corporation.
What protection is available to a dissenting minority shareholder where a fundamental change in the
corporation's objects is proposed?
Answer: "Majority rule" applies for most decisions, but for some, which involve a fundamental
change in the corporation, a larger majority is required (usually 2/3). A dissenting minority of
shareholders may apply to the courts for relief, and the corporation may be obliged to purchase the
shareholders interest.
12. Distinguish a "public" corporation from a "private" corporation. Why is this distinction made? What
other terms are used for each of these types of corporations?
Answer: A public corporation is a corporation which offers its shares or securities for sale to the
public. A "private" corporation is a corporation which does not offer its shares or securities to the public.
"Private corporations" are sometimes called "Closely-Held Corporations."
13. If a corporation wishes to sell its securities to the public, what requirements are imposed upon the
promoters, directors, and others associated with the sale and distribution of the securities?
Answer: Promoters, directors, etc. involved in the sale of a corporation's shares to the public are
subject to the securities legislation of the jurisdiction. Under this legislation they must issue a prospectus
to potential customers before any sale of securities is made. They must also certify that the information
contained in the prospectus is correct. The prospectus must be approved by the regulating body before it
is issued.
14. In what circumstances would a management buyout be a good option for ownership change of a
corporation? Discuss the considerations and options in this type of transfer.
Answer: A management buy-out will be an attractive option for shareholders of a private, closely
held corporation who wish to transfer the business to individuals with proven interest and aptitude for
running that business. These individuals could include managers and key employees. Often when family
members have neither the interest nor skill to carry on the business, a MBO will be considered. The
transfer of business interests can be completed through an asset or share sale. The timing of the payments
will also be critical. If the employees can get financing an immediate cash buy-out is possible. More
likely, the purchase of the business interests will need to be paid out over time, either through stock
options or installments to the vendor. If the payments will be spread out over time, the continued success
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of the business is critical for the selling shareholders to receive their payments. A MBO may be ideal for
this purpose by maintaining stability and continuity of the business in all areas.
Mini-Case Problems
1. A, B, and C are the directors of ABC Corporation. At a directors‘ meeting, B suggests that the
corporation consider the purchase of a block of land owned by the RST Corporation. C is a principal
shareholder in the RST Corporation.
What are C‘s obligations to B, A, and the ABC Corporation?
Answer:
C, has an obligation to reveal his or her interest in RST Corporation, refrain from taking part in the discussion
of the purchase, and not vote on any motion related to it.
2. X, a director of the DC Corporation, is informed by the corporation‘s accountant that the decline in
the corporation‘s sales has resulted in a large fourth-quarter loss. Before the corporation‘s financial
results for the year are announced to the public, X sells a large block of his shareholding in the
corporation. When the news of the corporation‘s loss is announced, the price of the shares on the
stock exchange falls by $10 per share.
What are the rights of Z, who purchased 1,000 shares from X at the higher price?
Answer:
X was using "insider" information when he made the sale to Z. Z may take action against X for the loss in
the share price if he can prove that X knew of the Corporation‘s loss and used it to sell the shares.
3. Continuing from the facts in (2), would your answer be different if director X had not sold his shares,
but had informed shareholder Y of the expected loss, and shareholder Y (who owned 15% of the
corporation‘s shares) sold his entire shareholding just before the news was released?
Answer:
This topic is fully explored as part of insider trading in the next chapter, however students should recognize
that while the director is not profiting personally, his or her disclosure still represents an abuse of the office,
to the detriment of Z. For these purposes, the fact that Y is also an insider is irrelevant; however this will
take on greater significance in the next chapter.
4. The directors of B Corporation wished to purchase a vacant property adjacent to their office building. An
offer to purchase was made at a price of $4120,000. The offer was rejected by the property owner.
Director D of the corporation then immediately made a personal offer to purchase the lot for
$125,000430,000, and the offer was accepted.
What is the position of D? What is the position of B Corporation? If Director D is willing to sell it to
B Corporation should the position change if she demands $430,000 or $435,000 or $735,000?
Answer:
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Director D will argue that the doctrine of corporate opportunity should not apply as she refrained from
offering until the corporate offer had been rejected. Corporation B may well see this differently, as D now
owns the property. Perhaps such a plan may even have tainted D‘s input into the board deliberations which
resulted in the $420,000 offer. In all probability this still represents the appropriation of a corporate
opportunity as B Corporation might have been interested in continuing the bidding process, which is now
derailed and redirected toward a director who would certainly now, if not prior, be in a conflict of interest.
The simple resolution which would prove the bona fides of the director in securing the property would be for
her to offer to sell it to B Corporation at $430,000 proving that D‘s intent was simply to ensure that the
property did not slip away. Selling at $435,000 might recognize some direct personal expenses in the
purchase. Demanding $735,000 would clearly be an attempt to extort based on corporate foreknowledge of
the utility of the property in the eyes of the corporation: a conflict of interest.
Case Problems for Discussion
Case 1
The Board of Directors of Speedy Roofing Ltd. directed the corporation president to draw up and enforce
site safety rules for the performance of work at the various kinds of construction sites where the
corporation would likely bid for roofing work. In accordance with the directive, the president set out job
equipment requirements for three types of projects: small residential home roofing work, apartment and
commercial building roofing work, and large industrial and high rise building roofing work. In each case,
the Site Manager was expected to select the proper equipment to perform the work (scaffolding, portable
elevators, material handling equipment, etc.) and enforce the safety rules dictated by provincial
government work safety regulations. The directors made no further inquiries after the president advised
them what rules were in place.
Site managers at small residential roofing jobs frequently used only ladders and minimal scaffolding
on the job, and most roofing materials were moved to the roof by manual labour. The reasoning here was
that the roofing work was usually completed in only a day or two; and the roof surfaces were usually
gentle slopes or relatively flat. Safety equipment was considered unnecessary, and only a rope safety
harness was used on the steeper roof surfaces. On a small residential roof repair project on a two-storey
home, a worker slipped on some loose shingles and fell over the side of the roof.His safety harness
arrested his fall, but in the process he was thrown against the brick wall of the house and suffered a
serious head injury. Provincial workplace safety inspectors investigated the accident, and may charge the
corporation and management with a violation of the provincial workplace safety legislation.
Advise the directors of the corporation and consider the possible outcome, if the corporation was
charged with a violation of the Act.
Answer:
While the directors recognized their responsibility to have site safety rules created, they may have failed to
exercise sufficient due diligence as to implementation to avoid being held liable under the workplace safety
legislation. To their further credit, the directors did receive a report on the rules implemented and they are
entitled to place some reliance on this. However, the fact would presumably also have been reported that
safety equipment was considered unnecessary for residential work. This may be enough to call into question
whether the president‘s report had really been considered by the board, or simply accepted and rubberWilles, Contemporary Canadian Business Law, 12e
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stamped. If the position is justified that a harness was sufficient, based on ―reasonable reliance‖ and industry
standards, this was an unforeseeable accident and the corporation and board may escape liability. However,
if due consideration of the report would have revealed deficient rules, or the industry would find such practice
clearly deficient, the corporation and the board can expect to be found liable. The board would have failed to
fulfill its due diligence requirements as imposed by the legislation.
Case 2
Ludwig carried on a machine shop business for many years under the name Ludwig‘s Machine Shop. On
advice from his accountant, he transferred the shop and all of its equipment to a corporation that he
incorporated with himself as the sole shareholder.
As payment for the shop and equipment, the corporation issued Ludwig 10,000 common shares, and a
debenture in the amount of $250,000. The corporation carried on the business as Ludwig‘s Machine Shop
Ltd., with Ludwig as the corporation‘s president. The large advertising sign on the front of the shop,
however, was not changed, and continued to read: Ludwig‘s Machine Shop. Ludwig continued to operate
the business as he had done prior to incorporation, and did not inform his customers or suppliers of the
change of ownership of the business. Business invoices nevertheless were issued in the corporation‘s
name and all correspondence was on corporation letterhead.
Several years later, the corporation experienced a loss of business to new competitors, and was soon
in financial difficulty. When the corporation found that it could no longer carry on profitably, the
corporation ceased operations. Business assets were liquidated for the amount of $175,000. Ludwig, who
held the $250,000 debenture, claimed payment in priority over the creditors‘ claims of $100,000. The
creditors claimed priority of payment over Ludwig on the basis that they were unaware of the change of
ownership.
Discuss the issues raised in this case, and how the dispute might be resolved.
Answer:
As a number of years have passed between the issuance of the debenture and the creditor‘s claims, we can
reasonably assume that the debenture transaction was not designed to defeat creditors, but to pay for the
assets that were in fact transferred to the company. This and other aspects of bankruptcy law are considered
in later chapters. Ludwig has a reasonable claim to priority, which could be strengthened had he changed the
sign and advised the suppliers of the change of ownership. Despite this, as he did change the corporate
stationary (which presumably included his orders and payments), most if not all of his creditors would have
had quite some time to become familiar with his true status. Since they were willing to carry on business
with him under these circumstances without inquiry as to who his secured creditors may be (if any, and
including Ludwig himself), there seems to be little basis to give any greater priority to unsecured creditors
over Ludwig. One wonders whether to even give credence to the notion that they did not know of the change
to a corporation, or understand its significance.
Case 3
A corporation owned a parcel of vacant land on which it stored its construction equipment. The land was
not large enough for the requirements of the company. When the adjoining landowner expressed a desire
to purchase the property from the company, the directors informally considered the offer and agreed to
sell the land for $150,000. No directors‘ meeting was held to formally deal with the matter. However, the
secretary-treasurer, on the basis of the informal agreement amongst the directors, contacted the offeror
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and advised him of the price. The price was acceptable to the purchaser, so the secretary-treasurer then
drew up a written purchase agreement that he signed on behalf of the corporation in his capacity as
secretary-treasurer. The purchaser also signed the document.
The directors later decided not to carry through with the sale, and the purchaser brought an action
against the corporation for specific performance of the contract.
What defences might be raised by the corporation in this case? What legal principles are involved?
Render a decision.
Answer:
One of the most important points to deal with in this case is the ability of the corporation's secretary-treasurer
to bind the corporation in contract. The question might be asked: Does the purchaser in this case have an
obligation or duty to enquire in order to determine if the directors have given the secretary- treasurer authority
to act? At this point the indoor management rule might be discussed. The normal process would clearly be
for the directors to meet and discuss the proposed sale, then on a motion duly made, seconded, and given
majority support, authorize the secretary- treasurer to enter into the agreement on behalf of the corporation.
This would clothe the officer with authority, and enable him to bind the corporation. Since the directors did
not do so, the next question might be: Did the secretary- treasurer have apparent or ostensible authority to
bind the corporation? In McKnight Construction Co. v. Vansickler (1915), 24 D.L.R. 298, which was
decided on a similar fact situation, the court held that where the particular officer of the corporation has
apparent authority to transact business on behalf of the corporation, it is not necessary for the purchaser to
ascertain if the proper steps have been taken to clothe the officer with authority. The secretary-treasurer,
however, may be liable to the corporation where he acts without authority, and this aspect of the case might
also be discussed.
Case 4
Juana owned 13 shares of the Vermilion Mining Co. Three other shareholders held four shares each. The
remainder of the 2,400 shares of capital stock was held by the three directors of the company. The
company owned certain mining claims on which some preliminary exploration work had been done, but
that required the investment of a large amount of capital in order to establish a mine. Because the
company had not been in a position to proceed with the development of the properties, the company faced
the prospect in the near future of forfeiture of the mining claims as a result of their forced inaction.
The directors, who were shareholders in another mining company, entered into an agreement to sell
the mining claims to that company in exchange for shares in the second company. The share exchange for
the mining claims would give Vermilion a 10 percent interest in the other company.
A meeting of shareholders was called to approve the transaction. At that time the directors declared
their interest in the other mining company. The directors explained that, in their opinion, the transfer
represented fair market value for the claims and they urged approval of the transaction. The directors
voted in favour of the sale over the objections of Juana, who was the only dissenting shareholder.
She accused the directors of attempting to confer a benefit on a company in which they had an
interest, to the detriment of the company in which they were directors. She eventually brought an action
to restrain the directors from completing the sale of the mining claims to the other company.
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Discuss the issues raised in this case and render a decision.
Answer:
This case deals with the duty of directors to act in the best interests of the corporation in their dealings with
assets of the corporation. It also raises the question of the proper procedure for the resolution of matters
where the directors have a personal interest in a contract which involves the disposition of corporate assets.
The possibility of forfeiture of the claims if the corporation did not proceed with the development of the
properties was the reason for the director's decision to have the shareholders consider the sale of the
claims in return for the 10% interest in the other company. Placing the decision in the hands of the
shareholders was the correct approach, since all of the directors had an interest in the other corporation. This
was also the case with the declaration of their interest at the meeting of shareholders. The matter, however,
should have been left with the shareholders to decide, and the directors may be considered in breach of their
duty by urging the agreement on the shareholders, and by voting on the motion. Juana may be successful in
his action as a result of the actions of the directors. See: Ritchie v. Vermillion Mining Company (1902), 4
O.L.R. 588.
Case 5
Cinema Ltd. owned a theatre that it wished to sell. To make the property more attractive to a prospective
purchaser, the directors decided to acquire a second theatre in the same city and offer the two properties
as a ―package deal.‖
Some inquiries were made as to the purchase price of a second theatre, and a price of $3,000,000 was
determined for the property. A subsidiary company was incorporated to acquire the second theatre, with
the intention that the shares in the subsidiary would be wholly owned by Cinema Ltd. Unfortunately, the
lending institutions would only advance Cinema Ltd. $1,800,000 on its assets. In order to effect the
purchase of the second theatre, the three directors of the corporation and a lawyer (who frequently acted
for the corporation) each agreed to invest $300,000 to make up the necessary $1,200,000. The subsidiary
corporation issued 3,000,000 shares valued at $1 each to the parent company and the four investors in
return for the $3,000,000 in cash. It then proceeded with the purchase of the second theatre.
Some time later, a purchaser was found for the two theatres, and a purchase agreement completed. The
purchaser, however, insisted on acquiring the second theatre by way of a purchase of the shares in the
subsidiary company. The share price was determined at $1.25. This netted Cinema Ltd. a profit on the
sale of $450,000, and each of the four investors a profit of $7,5,000. When details of the sale were
revealed to the shareholders, one shareholder demanded that the four individuals pay over their profits to
the corporation. When the three directors and the lawyer refused to do so, the shareholders instituted legal
proceedings to have the funds paid to the corporation.
Discuss the various legal arguments that might be raised in this case by the parties. Indicate how the case
might be decided.
Answer:
The facts of this case were adapted from the facts in the case of Regal (Hastings) Ltd. v. Gulliver and
others, [1942] All E.R. 378. The case raises the important issue of the duty of directors towards the
corporation, and the question of whether the directors should be permitted to make a personal profit as a
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result of a transaction negotiated in their capacity as directors. Since the directors used their own funds for the
purchase of shares, are they entitled to the profit made on the transaction? Does their duty extend beyond
their dealings with corporation's assets to deliver up any profits earned by the use of their own funds? Was
the profit made by virtue of the fact that they were directors (i.e., the doctrine of corporate opportunity)? It is
perhaps best to deal with the position of the lawyer in the case first. He is not a director, and hence, he has no
duty to the corporation as such. In the Regal (Hastings) Ltd. case, he was permitted to keep his profit. The
directors, unfortunately, were obliged to pay over to the corporation their profits on the basis that they were in
a fiduciary relationship with the corporation. It should be noted here that had the directors obtained the
sanction of the shareholders for the scheme beforehand, the situation might have been different. Had they
received prior approval, they probably would have been entitled to keep the profits earned.
Case 6
High Rise Apartments Ltd. expressed an interest in the purchase of a large block of land suitable for
development as an apartment site. The board of directors asked Sheldon Harris, one of the directors who
was also a real-estate broker, to investigate the possibility of the corporation purchasing the land for a
reasonable price.
Harris, without revealing that he was a director of High Rise Apartments Ltd., contacted the president
of Land Assembly Ltd., the corporation that owned the land. He inquired as to the price the corporation
was asking for the property. The president replied that the price was $500,000. Harris then offered to sell
the land for Land Assembly Ltd. for his ―usual commission‖ as a real-estate broker. The president of the
corporation agreed to have Harris attempt to sell the property on its behalf, so Harris reported back to the
board of directors at High Rise Apartments Ltd. that the land was for sale at $525,000.
Unknown to the remaining members of the board of directors, the following events occurred before
discussion took place as to whether the corporation should purchase the land at the price of $525,000.
(1) Jeremiah Black and Rodney Jones, both directors of High Rise Apartments Ltd., became
interested in the land as a site for a shopping centre. They had incorporated a company for the
purpose of buying the land if High Rise Apartments Ltd. should decide not to purchase the
property.
(2) Nyssa Green, a director of High Rise Apartments Ltd., was urged by her spouse, who was a
minority shareholder in Land Assembly Ltd., to speak and vote against the purchase because he
felt that Land Assembly Ltd. was selling the land for less than its true worth.
(3) Sonya Patel, a director of High Rise Apartments Ltd., who was also a principal shareholder in
Condominium Construction Company (a corporation interested in the parcel of land as a
condominium site), was busy attempting to make an offer to purchase the property. When she
heard of the offer from the president of Land Assembly Ltd. to sell the property for $525,000,
Patel slipped out of the directors‘ meeting and telephoned the president of Condominium
Construction Company, urging him to call Land Assembly Ltd. with a higher offer.
A meeting of the Board of Directors of High Rise Apartments Ltd. was called for the purpose of
considering the purchase of the property at a price of $525,000. Isaac Davis, the Chairman of the Board,
called for a vote on the purchase. Only Davis and Harris voted in favour. The remaining members of the
board (Patel, Green, Black, and Jones) voted against the motion.
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After the purchase was rejected by the Board of Directors at High Rise Apartments Ltd., both the
company incorporated by Black and Jones and Condominium Construction Company attempted to
purchase the land. When they contacted the president of Land Assembly Ltd., he advised them to contact
Harris, who was the real-estate broker engaged to sell the property. Eventually, the property was sold to
Condominium Construction Company for $560,000. Harris received a real-estate commission on the sale
of $26,000, which was paid to him by Land Assembly Ltd. After the sale was completed, Davis
discovered the facts surrounding the sale and the actions of the directors of High Rise Apartments Ltd.
Advise Davis of the legal issues raised in this case and the course of action he might follow. Indicate
the arguments that might be raised if the matter came before the court, and render a decision.
Answer:
The directors of High Rise Apartments Ltd., except for Davis, all had direct or indirect conflicts of interest
due to their actions, relationship, or interests. Black and Jones had an interest in a corporation that was
prepared to buy the land if High Rise did not. They, however, voted against the purchase - a clear conflict
since they would benefit if High Rise did not purchase the land. Green, whose spouse was a shareholder in
Land Assembly Ltd., the owner of the land, should have revealed her husband's interest in the vendor
corporation. By concealing this fact she violated her duty to High Rise. She should not have voted on the
motion. Olsen, a principal shareholder in a competitor corporation, used her information as a director in High
Rise to benefit her interest in the competing corporation, and was in violation of her duty to High Rise.
Harris used his position as a director in High Rise to confer a benefit upon himself by attempting to obtain
(and later obtaining) a commission from Land Assembly for selling the property. He had a duty to disclose
his position to Land Assembly, and High Rise. High Rise would probably be entitled to claim the
commission he earned due to his actions. Davis, upon discovering these facts might be able to bring an
action against the remaining directors for the loss the corporation suffered.
Case 7
Henri Boucher and his son, Gaetan, lived in the same city, where Gaetan ran a small business, an
unincorporated restaurant. Henri had operated a small strip plaza comprising a convenience store, a gas
station, and a pizzeria/arcade. Under pressure from creditors, Henri had sold the plaza for the amount of
his debts, and he began anew with his son‘s assistance.
They formed a corporation to develop a roadside piece of land into a ten-unit commercial plaza near a
residential area.
Otherwise unemployed, and with Gaetan busy in his restaurant, Henri looked after contracting the
majority of the work. This included considerable construction work to build the plaza. As construction
progressed there were disturbing signs of discontent among the contractors who were building the plaza.
On occasion, they would call the restaurant, asking Gaetan for payment. Gaetan would call his father,
who would in turn pay them. Often, however, the calls persisted and Gaetan would find himself paying
bills out of his own pocket and keeping a tally of the bills he had paid on behalf of the company.
Eighteen months after incorporation, and 15 months after breaking ground on the project, the plaza
had acquired a bad reputation in the town, and suppliers were unwilling to deliver materials. It quickly
foundered when the bank called for repayment of the $290,000 that had been borrowed (on demand) by
the company. The land had been bought with bank funds for $175,000. Invoices totalling $87,000 had
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been paid, but the company had no more money in its account. Gaetan‘s tally showed that he had paid
bills out of his own pocket totalling $11,000. Unfortunately, with a half-built plaza and a bad reputation,
the only offers for purchase of the site were in the order of $145,000. Henri was despondent and soon left
the province, leaving behind Gaetan with the restaurant.
The company lawyer showed Gaetan a letter that had been sent to him a month before, in which Henri
had resigned as an officer and director of the company, and had turned in his shares. This left Gaetan as
sole officer, director, and shareholder. The lawyer thought Gaetan had known of his father‘s resignation.
Advise Gaetan with respect to the issues that the company creditors will raise. Discuss Gaetan‘s
rights and/or liabilities and explain any steps he could have taken to protect himself.
Answer:
Students should note that the development of the plaza and the money borrowed was in the name of the
corporation. Students should also note that the construction contracts were probably with the corporation and
not with the individuals concerned (Henri and Gaetan). On this basis, Gaetan may be able to maintain that
the corporation was indebted, and he was personally not liable. He might also take the position that he was
an unsecured creditor of the corporation. Gaetan would probably be successful in avoiding personal liability
for the debts of the corporation (unless he had guaranteed them in some fashion, but the case does not
indicate that he had done so). To avoid the loss of funds that he personally advanced, he would have been
wise to seek reimbursement from the company as each account was paid rather than wait until the point in
time when the bank called its loan and brought the project to a halt.
Case 8
The directors of Claridge Supply Company Ltd. approached the Business Bank for a loan. One of the two
directors of the corporation attended at the bank and, in the presence of the branch manager, signed the
loan application. He then took the documents with him in order to have the corporate seal affixed and to
obtain the signature of the other director on the documents. A few days later, the director returned with
the signed loan application and documents that purported to be directors‘ resolutions authorizing the
pledging of the corporation‘s assets as security for the loan. Attached to the resolutions were the
secretary‘s certificates confirming that the resolutions were duly passed by the directors.
Some months later, Claridge Supply Company Ltd. was declared bankrupt, and the trustee in
bankruptcy refused to recognize the bank‘s secured loan on the basis that the corporation‘s minute books
contained no record of any resolutions authorizing the pledging of securities for the loan. The bank then
took legal action for a declaration that it was a secured creditor.
Discuss the basis of the bank‘s claim and the likely outcome of the action.
Answer:
This case is based upon Toronto-Dominion Bank v. Coopers & Lybrand Ltd. (1982) 19 Alta. L.R. (2d) 387.
The issue here is the application of the indoor management rule to the facts. In the case, the documentation
appeared to be regular and proper, and neither the second director or the company objected to the transaction
after its completion (and the company had received the funds from the bank). The court held the bank was
entitled to rely on the documentation, and its security was valid.
Case 9
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Acme Forwarding Company leased docking and warehouse facilities at a harbour. The lease gave the
company exclusive use of the pier and the buildings, but held the company responsible for the
maintenance and repair of the pier.
Tyrone, a director of the Acme Forwarding Company, was responsible for the authorization of use of
the pier by ships bringing cargo for off-loading at the company warehouse. The company policy was that
only ships handling goods destined for the company warehouse were to use the pier. No authorization
would be given unless the ship owners carried adequate insurance to cover any damage that might be
done to the pier by careless docking.
Tyrone also held an interest in a shipping firm that wished to off-load a small cargo at the city where
the Acme Forwarding Company pier was located. The shipping company, however, wished to place the
cargo directly onto two trucks, rather than use the facilities of Acme Forwarding Company. Tyrone, with
the intention of accommodating the shipping company, authorized the docking of the ship at the pier.
When the ship attempted to dock with its cargo, it collided with the pier, causing extensive damage to
both the ship and the pier. Under the terms of the lease that Acme Forwarding Company had with the
property owner, it was obliged to repair the pier. Acme Forwarding Company did so, at a cost of
$120,000. Then it looked to the shipping company to recover the cost of the damage caused by the ship.
The shipping company, which had suffered damage to its only ship, was unable to pay for the damage
to the pier. Its insurance would cover only a part of the $120,000 cost of the pier repairs. When the
directors of Acme Forwarding Company were informed of the shipping company‘s inability to pay for the
damaged pier, they were also informed that Tyrone was a shareholder in the shipping company.
Discuss the rights of the parties in this case and explain how these rights might be enforced.
Answer:
This case involves a director of a corporation that uses his position as a director in one corporation to confer a
benefit upon another corporation in which he a financial interest. Tyrone had no authority to permit the
shipping company to use the pier, and consequently, placed his own personal interest above that of the
corporation. The shipping company was clearly liable for the damages which it caused, but when it cold not
cover the total cost, the Acme Forwarding Company would be entitled to look to Tyrone for the balance, due
to his breach of duty to the corporation. Tyrone would be liable for the balance. For a similar case see:
Eastern Shipping Company Limited v. Quah Beng Kee [1924] A.C. 177.
Case 10
Model T Motors Ltd. was indebted to Simple Finance for a substantial sum of money. The finance
company held a number of mortgages on the corporation‘s assets, but pressed the corporation for a
blanket demand chattel mortgage as additional security. Under pressure from the finance company, one of
the principal shareholders, who was also one of the signing officers of the corporation, executed a blanket
chattel mortgage to the creditor. The mortgage was not made under the corporation seal, and only one of
the two signatures required by the corporation‘s by-laws was placed on the document.
Some time later, the finance company obtained the corporate seal of Model T Motors for another
purpose and affixed it to the chattel mortgage. A few weeks later, when a payment on the loan was
overdue, Simple Finance seized the assets of Model T Motors under the blanket chattel mortgage.
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Advise Model T Motors of its position in this case. If the matter came before the courts, how would
you expect the case to be decided?
Answer:
The facts of this case are essentially those set out in the case of West City Motors Ltd. and Leslie v. Delta
Acceptance Corp. Ltd., [1963] 2 O.R. 683. The principal issue raised by the case relates to the execution of
the blanket security document. The question might be asked: How valid is the document executed by only
one of the two officers of the corporation? Does an outsider have constructive notice of the by-law which
requires two signing officers? Is this a case where the indoor management rule might apply? Is the
document enforceable without the corporate seal affixed? Was it given in the ordinary course of business?
To be enforceable, the corporate seal would be required, as this, in effect, was a required part of the
corporation's "signature." Since the seal was affixed without the consent of the corporation, the act of
unauthorized sealing rendered the document void.
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CHAPTER CHARTS
Additional Charts for Instructor‘s use (not appearing in text).
CHAPTER 18. SECURITIES REGULATION
Chapter Topics
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Introduction
Historical Development of Securities Regulation
What is a Security?
Purpose and Administration of Securities Regulation
Mechanics of Regulation
Registration
Disclosure
Conduct of Trading
Insider Trading
Proxy Voting and Proxy Solicitation
Takeover Bids
―Going Private‖ Transactions
Investigation and Enforcement
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Explain the policy and structure underpinning securities regulation.
• Describe the disclosure obligations imposed upon issuers of securities.
• Identify situations involving illegal securities market activity.
• Explain the use of proxies and the conduct of takeover bids.
YOUR BUSINESS AT RISK
In creating and issuing securities you are giving away rights related to your business — up to
and including complete ownership of it. These exceptionally powerful rights can be traded
among strangers to your business who may have widely varying intentions in exercising their
rights over your company. Keep in mind that security regulators expect a sophisticated
understanding of your corporate legal obligations in this advanced field and will hold you to
that standard.
CHAPTER COMMENTARY
After learning about forms of business organisations, most students will naturally consider the problem of
financing the growth of a venture. This chapter relates to corporate finance (with a focus on equity)
beyond the capital contributed by principals and that available through bank financing. Securities
regulation governs the nature of securities, the method of their distribution and trading, and obligations to
disclose information as to their riskiness, in order that investors may make informed purchase decisions.
While the chapter clearly focuses on shares of a corporation, students must bear fully in mind that
―securities‖ are broadly defined and can include not only shares and debt instruments, but many ―nontraditional‖ investment vehicles as well. The definition of a security includes any document commonly
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known as a security, typically evidence of title to or interest in the capital, assets, property, profits,
earnings or royalties of any person or company. The regulation of securities is, constitutionally, an area of
provincial responsibility, and the paramount policy goal behind regulation is to balance the twin needs of
capital market efficiency and market integrity. Students must understand that both policy objectives are
important, and require balanced achievement. The consequence of failure is capital market failure; either
a market that is not trusted, or one so encumbered by regulation that it has no liquidity.
Disclosure requirements are the chief means of informing investors and are the chief
responsibility of reporting issuers. With a few important exceptions, securities are subject to the
obligations of true, full and plain disclosure within a prospectus, and to continuous disclosure thereafter
on a timely basis. Students should recognise these measures as being the most straight-forward means to
achieving the policy goals. By the same token, there are special times when increased protection for
investors is required. These occur when owners of securities are solicited for their voting rights (proxies),
in the case of take-over bids and issuer bids, and in cases of insider trading.
Students should recognize that this is the first chapter where powerful administrative tribunals
arise, in the form of the provincial securities administrators. The provincial securities administrators have
considerable powers to act on specific matters and even more generally in the public interest, and the
consequences of enforcement action can be extremely serious for those found in violation of the
legislation, including imprisonment, fines and civil liability.
Review Questions
1.
Under what circumstances and on what condition would a take-over bidder not purchase all the shares
tendered by a shareholder in response to a bid?
Answer: In all cases where the bid was made for less than all of the outstanding issue, and more
shares were tendered than the offeror wishes to purchase, what is taken up and paid for must be done
so on a pro-rata basis from all those who tendered into the bid. No preference can be made to buy the
shares of one shareholder over another.
2.
What is meant by continuous disclosure?
Answer: The timely release to the public of all material information that would significantly
affect the valuation of a reporting issuer‘s securities.
3.
To be registered as an Investment Advisor, what criteria must an individual meet?
Answer: The individual must complete the Canadian Securities Course on market and investment
knowledge, a Conduct and Practices course on ethical professionalism and account operation, and
must work under close supervision for six months.
4.
What is an SRO and what does it do?
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Answer: SRO-Self Regulatory Organization(s). Non-governmental bodies engaged in industry
and charged with the creation and execution of rules and discipline among constituent members. In
the context of securities regulation, these are the Investment Dealers Association, each of Canada‘s
stock exchanges and the Mutual Fund Dealer‘s Association.
5.
Describe the two chief exemptions to the requirement of producing and filing a prospectus for a new
issue of corporate shares.
Answer: Choose two of the three below. A prospectus is not required where:
6.
-
Accredited Investor - the purchaser belongs to one of the 15 designated classes of
investors (for individuals, principally those with financial assets exceeding $1,000,000,
or net assets of at least $5,000,000 or income in excess of $200,000).
-
Private Issuer - The issuer‘s securities have transfer restrictions and whose shares are not
owned my more than 50 persons, which may then be issued to persons close to the
issuer and to accredited investors.
-
Minimum Investment Amount of $150,000 per purchaser.
What are the twin policy goals of provincial securities legislation?
Answer: To balance the twin needs of capital market efficiency and market integrity.
7.
Describe what a proxy is, and why it is important.
Answer: A ‗proxy‘ is a transfer of voting privilege by a shareholder to an agent on the basis of a
trust, being either particular instructions to vote, or conversely, the right of the agent to vote as the
agent sees fit. It is important because a block of solicited proxies, voted as one, can be very
influential in the outcome of votes held at a meeting of shareholders, particularly in determining the
directors of a corporation.
8.
What is the expected standard of prospectus disclosure?
Answer: True, full, and plain disclosure of all material facts relating to an issuer is the expected
standard, mandated by both statute law and the Supreme Court of Canada.
9.
Compared to other bodies of law, why is securities regulation so late in developing?
Answer: At the beginning of 20th Century, few members of the general public had much concern
with anything that would fit into the category of ‗securities‘, and the body of contract and tort law
could serve their needs. Prosperity and the ‗Roaring Twenties‘ led to assets that were more broadly
held across the social spectrum, much of which was later wiped out in the Great Depression. Only
this eventuality gave rise to the need for reform and regulation of the financial sector.
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10. What is a tippee, and what are the consequences of being one?
Answer: A tippee is the recipient of a tip, such a tip being undisclosed material facts about a
reporting issuer. A tippee therefore may liable for trading on that undisclosed information, and
subject to imprisonment and/or fines of 1 million dollars or three times profit made or loss averted.
11. Under what circumstances might a reporting issuer enter into a going private transaction? In what
ways could it be structured?
Answer: A reporting issuer might entertain a going private transaction when the cost and logistics
of public reporting requirements become too onerous. Other reasons may include moving
management decisions out of the public spotlight to focus on important long term objectives or
merging capabilities with another corporation that is opposed to being a publicly listed company. A
going private transaction may be structured as an amalgamation between one or more companies, a
take-over bid or a plan of arrangement.
Mini-Case Problems
1. The senior management of Consolidated Moosepastures Mining has discovered errors in their
geological reports for their principal mining-claim property. Corrected estimates indicate an ore-body
quality revised downward from 9.7 grams of pure unobtainium per ton of rock to 3.5 grams per ton of
rock.
What should management do, in accordance with the law of securities regulation?
Answer:
This question requires an assumption before answering. To be subject to a requirement of doing anything
at all, Consolidated Moose Pastures must first be a reporting issuer. If it is a reporting issuer, the
management must consider whether the ore-body figures represent material information which would
significantly affect the value of its securities. Given that this is the principal mining claim of the firm and
the factor is diminished to almost one-third, the information almost certainly fits the definition. If CMM
is a reporting issuer, management would therefore be required to file a Material Change Report and make
a press release on a timely basis.
2. Victoria owns 7.5 percent of the shares of Harmony Publishing Corporation, a publicly listed
company. On Wednesday, in the locker room of her country club, she overhears one woman telling
another that ―We‘ve signed Angelica to three, and I‘ve just got to get a dress for Saturday‘s launch
party.‖ Victoria is certain that the speaker is Fran Collins, wife of Harmony‘s managing editor, whom
she had seen at a shareholders‘ meeting, and that ―Angelica‖ could only refer to Angelica ConstanceSmythe, the current diva of romance fiction.
Would Victoria be in violation of the law if she bought more shares in Harmony between now and
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Saturday?
Have any laws been broken already?
Answer:
Again, for the question to have any relevance, students must first assume that Harmony Publishers is a
reporting issuer. Students should recognise that Victoria is not an insider of Harmony Publishers by
virtue of her 7.5% shareholding; a 10% holding would be required. It is however possible to conclude
that she may be in a ―special relationship‖ with the reporting issuer, as she has obtained information from
someone (spouse of an insider) who she knows or ought to know is in an enumerated ―special
relationship‖. Thus the question turns on whether the information is in fact material and undisclosed to
the public. Student‘s interpretations and assumptions may well vary, that printed and distributed
invitations constitute public disclosure, through a spectrum to a surprise party and announcement intended
to catch the publishing world off-guard. Students must also address the materiality of the announcement,
perhaps by making reference to thoughts of the relative scale of the notoriety of the author in relation to
that of the publishing house itself. As long as students elaborate on these thoughts, they are answering
correctly. Those who believe that both aspects of materiality and undisclosed nature are met would be
correct in concluding that further purchases by Victoria would contravene the relevant securities act. As
to whether an offence as already occurred, based on the above assumptions, the answer is yes, for the act
of tipping does not need to be followed by dealing in the security. Disclosure before public disclosure is
the essence of the offence.
3. Alex and Bohumir carried on business in partnership for several years, and on the advice of their
accountant, decide to incorporate. To grow their business, however, they would require additional
capital, and they decide to incorporate as a public company in order to attract investors.
What steps must they take in order to offer their shares to the public?
Answer:
The pair will be obliged follow the steps necessary to become a reporting issuer offering securities for
sale via prospectus (see Checklist) or otherwise Alex and Bohumir‘s company must ensure that it finds
prospectus exemptions for each trade it proposes to make: Accredited Investor, Private Issuer, Minimum
Investment amount of $150,000.
4. Alicia purchased 1000 shares of ABC Corporation on the basis of a prospectus issued by the
corporation. A few months later, the corporation discovered an error in its reported sales and profits
reported in the financial information in the prospectus. Following the corporation‘s announcement,
share prices fell, and Alicia suffered a loss of $12,000.
Discuss.
Answer:
On the assumption that the error is not a wilful fraud on the market (which would entail penalties of its
own), the question remains whether the error is material. It appears to be material since its correction
caused such a large loss, assuming Alicia is a small investor at a modest share price – her shares dropping
$12,000 on the news. While redress for loss in the past may have been difficult, litigation surrounding
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misstated financial statements is now much more probable given Canadian legislative and policy changes
akin to the US Sarbanes–Oxley.
5. Carla, the president of a small corporation, wishes to raise $500,000 in new investment money for the
firm. What are her options to do so without the requirement of filing a prospectus?
Give examples.
Answer:
Carla must find any combination of:
Accredited Investors – banks, investment dealers, or individuals with financial assets exceeding
$1,000,000, or individuals with net assets of at least $5,000,000, or individuals with income in excess of
$200,000 in this and the past two years.
Private Issuer trades- Carla‘s firm‘s securities must have transfer restrictions and the firm‘s shares may
not be owned my more than 50 persons, which may then be issued to persons close to the issuer
(directors, officers, employees, relatives, close friends, founders and control persons, existing securities
holders) as well as to accredited investors.
Purchasers willing to purchase a minimum investment amount of $150,000 each.
Case Problems for Discussion
Case 1
PR Plastics Inc. was a small publicly traded corporation that manufactured outdoor furniture. Brown and
Smyth, a professional accounting firm was for many years their auditors. During most of this time,
demand for outdoor furniture remained high, and the corporation experienced significant growth. Because
of their knowledge of the corporation‘s operations, both Brown and Smyth purchased shares in the
corporation in the names of their parents and family members. Neither Brown nor Smyth owned any
shares in their personal capacity.
During a recent audit, Brown noted a number of irregularities in the firm‘s invoicing practices and the
recording of sales. The firm reported the irregularities in its audit report to the corporation, but prior to the
delivery of the report, Brown advised his parents and family members to sell their shares in the
corporation.
The corporation in due course issued a news report concerning the accounting irregularities, only with
a president‘s statement that the practices had been corrected on the advice of its auditors. The price of the
shares nevertheless dropped by $10.00. An investigation revealed that Brown‘s parents and family
members had sold their shares in the corporation prior to the announcement by the corporation.
Discuss the issues raised in this case.
Answer:
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Brown is in a ―special relationship‖ with the issuer, as he is an auditor of the firm. Brown‘s family
members are also in a ―special relationship‖ with the issuer as they are in a ―special relationship‖ with one
whom they know or ought to know is in a ―special relationship‖ with the issuer. As a result, Brown is
tipping and the family members are tippees, being Criminal Code offences. By not refraining from
trading until the information had been made publicly available, the family has traded on the basis of
undisclosed information, a further offence under the Securities Act.
Case 2
Mammoth Corporation Ltd. set out a goal to become the dominant firm in the widgets market, and in an
effort to reach this goal, decided to make a takeover bid for its principal rival, Widget Corporation Inc.
Mammoth Corporation Ltd. expects that the directors of Widget Corporation Inc. may oppose the
takeover bid. Discuss the steps that each party must take in order to comply with relevant securities
legislation.
Answer:
The steps applicable to the execution of a contested takeover bid are listed in some detail in the text.
These include the bid itself, the target‘s management circular, the deposit window for tender of shares,
expiry of the bid, and takeup of the deposited shares.
Case 3
Henrick Alfredsson was employed as an investment advisor with a stock brokerage. His wife, Jane
Martine, was employed as a wholesale sales agent by a small Canadian private corporation engaged in the
manufacture and distribution of automobile-care products, namely wax coatings and polishes. The private
corporation engaged Alfredsson to place $200,000 worth of its shares among a small group of investors.
To assist him, the corporation gave Alfredsson promotional documents containing its sales projections for
the next three years, and advised him that the firm intended to ―go public‖ within another three years.
Neither Alfredsson nor Martine had ever seen the manufacturing facility, which they were told was
located in the United States, nor did Alfredsson make any further inquiries into the financial health of the
company. He duly sold the shares to interested clients who were already customers of his brokerage
house. As matters turned out, the Canadian firm did not own a U.S. factory and had only rights of
distribution. Moreover, the sales projections were wildly optimistic and, in time, the rights to distribute in
Canada were lost altogether. The shares in the Canadian company became worthless as a result, and the
investors sought redress from Alfredsson personally, as well as his employer, the brokerage.
Comment on the issues raised in this situation. If this was brought before you as the provincial
securities regulator, which issues stand out the most, and what redress or penalty (if any) would you
impose?
Answer:
This case is loosely based on a BC Securities Commission decision in settlement of In the matter of Brian
Paul Kuhn, 2002 BCSECCOM 786 (BCSEC). The first issue raised is whether there is a duty upon an
investment advisor to inform him or herself as to material facts relating to the proposed distribution of
shares (exercising due diligence), particularly where these shares are in the capital of a private
corporation. The answer is clearly yes, that such a duty of due diligence exists, requiring verification of
the representations made by the corporation, particularly where the investor is unlikely to be able to
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obtain information from any source other than the advisor. The issue of Alfredsson‘s wife Jane is largely
a red herring, but certainly suggests that Alfredsson could well have had sources of information at hand,
had he attempted to exercise due diligence. In terms of redress, the Kuhn case decision imposed, on
similar facts, a fine of $10,000, costs of $5,000, and a prohibition for seven years from becoming or
acting as a director or officer of any issuer and from engaging in investor relations activities in British
Columbia for that period.
Case 4
Julia, a registered investment advisor, was employed at a stock brokerage in a junior capacity as a
telemarketer of unlisted shares, making cold sales calls to prospective clients. Once she had made a sale,
she passed the client on to a more senior advisor, who finished the paperwork and collected the payments
for the shares. Where these shares were sold from the brokerage‘s own holdings of unlisted shares, she
received a commission of 20 percent, and the senior advisor received some further amount, but that
percentage was unknown to her. Her firm directed her to verify that prospective clients had an income of
at least $50,000 per year, and also that each client possessed a personal net worth of at least $50,000. Julia
made this verification in every case. After three years, Julia moved to another brokerage house and
applied to the provincial regulator for authorization to sell shares on behalf of the new employer.
Imagine that you are the provincial regulator, and have been made aware of the circumstances of
Julia‘s previous employment. Would you grant or refuse the application? Why?
Answer:
This case is loosely based on an Ontario Securities Commission decision In the matter of Chateram
Ramdhani, an unreported decision dated March 29, 2002. The first issue raised is whether Julia is
displaying an understanding of her responsibilities as a registered salesperson and of the ―Know-YourClient and Suitability‖ provisions that are the duty of an investment advisor. In her telemarketing efforts
it appears that her selling from inventory did not involve real steps to inquire into the investment
objectives of her clients. Merely working from two tests, income of $50,000 and net worth of $50,000,
does not live up to her obligations as a registered salesperson. This failure in performing acceptable due
diligence is sufficient to support a suspension of registration and a refusal to transfer an existing
registration of the employee from one firm to another. Such a suspension is not likely to be for a fixed
period, but rather confined to requiring her re-enrollment in and successful completion of the Canadian
Securities Institute‘s Conduct & Practices Handbook Course, and then any other remedial conditions
placed on her future registration.
CHAPTER 19. EMPLOYMENT AND LABOUR RELATIONS
Chapter Topics
Contract of Employment
Nature of the Relationship
Form of the Contract
Duties of the Employer
Duties of the Employee
Termination of the Contract of Employment
Dismissal for Just Cause and Wrongful Dismissal
Cyber-Law Aspects of Employee Management
Employer Misrepresentation (Wrongful Hiring)
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Employer Liability to Third Parties
Employer Liability for an Employee‘s Injuries
Labour Relations
Development of Labour Legislation in Canada
Collective-Bargaining Legislation
The Union-Member Relationship
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Understand the nature of the employment relationship.
• Explain how the relationship is established.
• Identify the duties of the employer and employee.
• Understand how employment may be terminated.
• Understand the unionized employment relationship.
• Explain how collective bargaining rights are established and maintained.
YOUR BUSINESS AT RISK
No relationship is more important to a business enterprise than its relationship with its
employees. Without these individuals there is no production, management or service. They are
entrusted with judgment, trade secrets and finances, yet so often this is the most neglected
relationship. The majority of employment-related problems can be avoided or provided for
early on — in recruiting, employment contracts, job descriptions and appropriate discipline
programs. The consequence of management failure here goes directly to the firm‘s bottom line.
CHAPTER COMMENTARY
The contract of employment at common law is now subject to a great deal of legislation in each province that
dictates minimum wages, hours of work, notice of termination, and working conditions. Other legislation, at
both the federal and provincial levels, mandates benefits, etc. for employees. This cannot be adequately
covered for all provinces in an ordinary text, and consequently, the legislation of a particular province may be
examined in class if the instructor has such material available.
A helpful approach to the examination of the employment relationship might be to compare it to the
agency and partnership relationships, and in this fashion, highlight its differences. An alternate approach
would be to begin with the basic element of control, and then expand on this by reference to the excerpt in the
text from the Montreal v. Montreal Locomotive Works Ltd. case. The organization test might then be
examined to distinguish the employment relationship from the position of the independent contractor. The
Mayer v. J. Conrad Lavigne Ltd. Court Decision may be reviewed as a part of the discussion of this topic.
The rights and duties both of the employer and the employees may next be considered, together with
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some additional emphasis placed upon the duties of employees, particularly where the employee signs a
restrictive covenant concerning competition with the employer. This latter aspect of the employment contract
was dealt with in Chapter 9 (Legal Capacity to Contract and the Requirement of Legality) but may be
reviewed to place it in the context of the entire employment relationship.
Dismissal and unjust dismissal have been subject to a certain amount of judicial re-thinking,
particularly in recent years. This has been especially true with respect to the matter of reasonable notice.
While in the past, notice of termination could be quite short (a day or two, or even a few hours in the case of
an unskilled, hourly paid employee), this is no longer the case. It is not uncommon for long service, unskilled
employees and persons in low level management positions to be entitled to lengthy periods as notice of
termination. Recent cases have calculated the reasonable notice requirement for a long service senior
management employee to be in the neighbourhood of a year, but notice periods of up to two years have been
determined as "reasonable." The Pilon case footnote is a further example of this trend towards longer notice
requirements on termination. The Bardal v.The Globe & Mail Ltd. Court decision explains the duty of the
employee to mitigate loss in the case of wrongful dismissal, a requirement that should be discussed along
with the topic of reasonable notice.
The Court Decisions outline two important areas of employment law: The determination of the
existence of the employment relationship, and the matter of wrongful dismissal. The case of Mayer v. J.
Conrad Lavigne Ltd. provides an example of the test for the employment relationship, in which the judge
outlines the four fold test, and how it has been applied in other cases. He then proceeds to discuss and
examine the organization test. The Bardal v. The Globe & Mail Ltd. Court Decision illustrates the factors
considered by the court in determining wrongful dismissal, and outlines the consideration given to the various
factors that constitute reasonable notice in the particular circumstances. Each component of the employee's
remuneration was considered, as well as the employee's attempt to mitigate his loss. The court then
calculated the amount of the damages based upon the period of reasonable notice.
One issue in termination of an employee is the difficult question of what constitutes ‗just cause‘ for
dismissal. The general considerations are outlined in a very general way in the text, but it should be noted
that trial judges or arbitrators must determine this issue based upon the information or evidence placed before
them. The Supreme Court of Canada attempted to provide some direction in the case of McKinley v. B.C.
Tel[2001]2 S.C.R. 161, where Justice Iacobucci set out some examples of situations where the employer
could establish that the employment relationship was irrevocably damaged, but again, no absolute test was
provided. The case is not mentioned in the text, but instructors may wish to look at the case for class
discussion purposes.
Students should be made aware of legislation which applies to the employment area. Class
discussion should perhaps include an examination of Human Rights legislation, particularly the duty to
accommodate employees with disabilities, age discrimination, and workplace discrimination, as well as
workplace safety obligations of employers.
The text also deals with the liability of an employer for the torts of an employee, and where the
employee fails to properly perform the employer's contracts with third parties. The liability of the employer in
tort is illustrated in the diagram in this chapter of the guide.
Review Questions
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1. How is an employment relationship established? What elements of the relationship distinguish it
from agency or partnership?
Answer: The employment relationship is established by a person called an "employee" entering into
an agreement with another called the "employer", whereby the employee agrees to perform services for
the employer in return for the payment of a wage or other remuneration. The employment relationship is
distinguishable from agency or partnership on the basis that the employer has the right to direct the work
to be done and the manner in which it is done.
2. Explain the "four fold test" for employment. Why did the courts find it necessary to establish this
test?
Answer: The four fold test was established because "control" as a test was inconclusive in the
determination of the employment relationship, given the complex relationships which modern business
developed for employment. The test involves not only "control" but also (2) ownership of tools, (3) risk
of loss and (4) chance of profit.
3. Distinguish a contract of service from a contract for services.
Answer: A contract of service relates to the employment relationship. A contract for services is
usually a contract made of the services of an independent contractor.
4. If an employee is wrongfully dismissed, explain how a court would determine the money damages
which should be paid by the employer for the wrongful act.
Answer: Damages are determined on the basis of what the employee would have earned during a
period of reasonable notice, had it been given, less any earnings of the employee during that time period.
5. Outline the general or implied duties of an employee under a contract of employment.
Answer: An employee has the implied duty to carry out the reasonable orders of the employer,
provided that they are made within the scope of the employment. The employee must use the employer's
property in a reasonable manner, and must keep confidential any information given during the course of
employment. There is also a duty to devote the required hours to the employer's work.
6. Why are employers under certain circumstances vicariously liable for the torts of their employees?
Identify the circumstances under which vicarious liability would arise.
Answer: Because employees are considered to be carrying out the orders of their employer, if a tort is
committed during the course and scope of their employment, the tort is considered to be a tort of the
employer, and the employer liable. For vicarious liability, the tort must be committed during the course
of the employee's work.
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7. Identify the conditions or circumstances under which an employer would be justified in terminating a
contract of employment without notice.
Answer: An employer would be justified in terminating an employee without notice if the employee
is incompetent, grossly negligent in the performance of his duties, or concurs in a crime against the
employer. The right would also exist where the employee's actions constitute a serious breach of the
employment contract.
8. What factors must be considered in determining reasonable notice if an employee or employer should
decide to give notice of termination of a contract of indefinite hiring.
Answer: Reasonable notice would take into consideration the employee's length of service, position
within the firm (responsibility), opportunities for other employment, age, customs of the trade, and any
representations made at the time of hiring concerning the employment.
9. Why must an employee mitigate his or her loss when wrongfully dismissed?
Answer: The courts expect an employee to mitigate his or her loss on the basis that a reasonable
person would attempt to find employment immediately to reduce the loss resulting from the breach.
10. Define a collective agreement.
Answer: A collective agreement is a written agreement made between an employer and a union
recognized or certified as the bargaining representative of the employees' employer, which establishes the
terms and conditions of employment of the employees, and the rights and duties of the employer, the
union, and the employees.
11. What effect does collective bargaining have on the Common Law employment relationship?
Answer: The collective agreement would appear to override many aspects of the common law
employment agreement and fix the terms and conditions of employment.
12. Explain how a union acquires bargaining rights.
Answer: A union may acquire bargaining rights either by voluntary written recognition of the
bargaining agent by the employer, or by certification of the union by a Labour Relations Board.
13. What is a bargaining unit? How is it determined?
Answer: A bargaining unit is a group of employees determined to be appropriate for collective
bargaining by a Labour Relations Board (or voluntarily determined by the employer and the union).
14. Outline the steps in the negotiation process and its purpose.
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Answer: The negotiation process begins with a notice to bargain given by one party (usually the
union), following which the parties are obliged to meet and bargain. If they cannot reach an agreement,
the next step is to follow through a conciliation process, whereby a third party conciliator (or board)
assists the parties. If the conciliator (or board) fails, the parties are then free to strike or lock-out after a
short "cooling-off" period. The purpose of this process is to postpone the use of a strike or lock-out until
after all efforts (including third party assistance) have failed to produce an agreement.
15. Explain briefly the role of a union in collective bargaining.
Answer: Labour unions act as bargaining agents for employees in their dealings with their employer
on matters concerning working conditions and the employment relationship.
16. If a collective agreement is negotiated, what method may be used to resolve disputes that arise out of
the collective agreement?
Answer: Disputes which arise while a collective agreement is in effect must be resolved by way of
compulsory arbitration.
17. Describe the legal obligations which a union has towards its members.
Answer: A union has the duty to fairly represent its members, and to permit all persons that it
represents to join the organization. It may not expel a member except in accordance with its constitution
and the rules of natural justice.
18. How are disputes between the parties resolved during the negotiation process, if third party assistance
fails?
Answer: If third party assistance fails, the parties may use the force of a strike or lock-out. In the
public sector, compulsory arbitration is sometimes imposed in lieu of a right to strike or lock-out.
Mini-Case Problems
1. Marie was employed by Rigney Construction Company as bookkeeper and office manager for over
ten years. Without notice or explanation, Rigney informed Marie that her services were no longer
required and requested her to leave the premises. At the time, Marie was earning an annual salary of
$60,000. What additional information would you wish to know if Marie were to ask your advice as to
whether she should take legal action against Rigney Construction for wrongful dismissal?
Answer:
Additional information: Opportunities for similar employment elsewhere, Marie's age, any customs of the
business or trade as to notice, any representations as to her concerning the employment at the time of hiring,
and any agreed upon notice period. You might also inquire if Rigney had any grounds for immediate
dismissal.
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2. Jones, who was earning an annual salary of $80,000, was summarily dismissed by Smith, his
employer. A week later, Jones obtained a new position with another firm at an annual salary of
$80,000. If Jones took legal action against Smith for wrongful dismissal, what would his damages be
if he were able to prove his claim successfully?
Answer:
Since Jones found a new position and the same salary a week later, his loss would be equal to 1 week's wages
($1,538) unless benefits received at the new place of employment were less than before.
3. Helga was employed for many years as a material handler in an automobile parts warehouse. Her
work involved filling orders from auto repair shops for parts weighing from a few grams to as much
as 40 kilograms. In a non-work related accident, Helga was permanently injured and unable to walk
without a cane. Her employer terminated her employment, giving her two month‘s wages in lieu of
notice.
What are Helga‘s rights in this case?
Answer:
Since Helga‘s injury was not work related, and she is no longer able to do her job, her employer may have
grounds for termination of her employment. Students, however, should note that under Human Rights
legislation, an employer has a duty to accommodate employee with a disability, and if she was capable of
doing some other work, the employer may not be in a position to terminate her. As a long term employee,
Helga may be entitled to a longer period of notice than the 2 months offered, but note that the fact that she
cannot work may be a factor in the notice period.
4. Apex Company is a supplier of goods for the DYNO Company. A lawful strike takes place at the
DYNO Company plant, and the picketing employees refuse to allow a truckload of goods sent by
Apex Company to enter the DYNO Company plant gates.
What are the rights of Apex Company?
Answer:
Pickets may not interfere with the Apex Company contract with Dyno Company. Apex would be entitled to
an injunction to prevent the pickets from blocking entry to the Dyno plant. It might also be entitled to claim
damages against the pickets if they caused any monetary loss to Apex Company.
5. Suppose that, the next day, the Apex Company finds striking employees of the DYNO Company
picketing the Apex Company plant because it is a supplier of DYNO Company.
What are the rights of Apex Company?
Answer:
This is a secondary picketing situation. Pickets may lawfully be there, but cannot interfere in any way with
the Apex operations. The picketing constitutes freedom of expression, but the union is limited to that. See:
RWDS Union Local 550 v. Pepsi Cola Canada (West) Ltd. [2002] 4 WWR 205 for details of limitations
imposed by the court on picket activity. Note, however, that if the pickets cause any damage to the property
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of Apex, the pickets may be liable for the damage.
6. A union was involved in a legal strike, and picketed the employer‘s plant. Archie, a union member,
crossed the picket line and went to work. What might the union do? What are Archie‘s rights?
Answer:
Archie has the right to freely cross the picket line, and the union has no right to interfere with his entry to the
workplace, The union, however, may discipline Archie for doing so, but may only do after a ‗fair hearing‘
where Archie may plead his case.
Case Problems for Discussion
Case 1
Creative Advertising Ltd. employed Igor as a copy design editor for many years. The work was very
stressful, but Igor enjoyed the work, as it required a great deal of originality and creativity on his part. In
particular, he enjoyed the ‗presentation to clients‘ aspect of his job, as it gave him the opportunity to
explain his work to clients, and the results he expected from it in terms of product sales.
Unfortunately for Igor, at age 49 he suffered a stroke which left him with a serious speech defect, but
otherwise unaffected. The stroke made verbal communication with clients impossible, but he was still
able to carry on with his creative work. His employer, however, decided that Igor‘s services were no
longer necessary, and gave Igor notice of termination along with a cheque equivalent to 6 months salary.
Discuss the issues raised in this case, and advise Igor of his options.
Answer:
This case concerns the human rights issue of the duty of an employer to accommodate an employee with a
disability. Igor developed a speech defect, but this did not affect his ability to do the creative aspects of his
work, and his employer may be obliged to change his work assignment to accommodate his speech
impediment. If the employer could make this accommodation, then Igor may insist that he be retained as an
employee. How should this accommodation be addressed by the employer? Students should consider how
this disability may affect Igor‘s ability to perform his work. Was the presentation to clients of critical
importance? How should this be considered?
Case 2
CD Transport & Delivery Ltd. engaged the services of Lisa to assist with local delivery of packages to
businesses and residents. Lisa was expected to provide her own delivery vehicle, and was paid on a per
hour wage basis and a per mile basis for her truck. CD Transport provided magnetic signs that Lisa was
expected to attach to the sides of her truck. Lisa was expected to work exclusively for CD Transport and
for no other delivery service in the area. Lisa billed for her work hours and services on a monthly basis.
After several years, CD Transport advised Lisa that they would no longer require her services. The
notice of termination was to be effective in one month‘s time.
Lisa objected to the short notice, and claimed that she was an employee of CD Transport.
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Outline the position of each of the parties in this dispute, and the arguments each may raise if the case
came before the court.
Render a decision.
Answer:
The issue raised in this case is the relationship that exists between Lisa and CD Transport & Delivery Ltd.
Is Lisa an independent contractor? CD Transport & Delivery would certainly argue that this was the case,
since Lisa provided her own truck and billed for her services. Lisa, however, might argue that the restrictions
placed on her created an employment relationship, since she could work for no other delivery service, and
was expected to display CD Transport & Delivery Ltd. signs on her truck. She might also argue that CD
Transport controlled her work in the sense that they directed where she was to deliver their goods. The fact
that Lisa was restricted from working for any other business might tilt the relationship in favour of an
employment relationship, and Lisa may be entitled to a longer period of notice.
Case 3
McKenzie was a qualified and licensed driver of tractor trailers and other heavy types of trucks. He
was first employed by FMP Company in 2003, and was steadily employed by the company as a truck
driver until 2020. At that time he was voluntarily placed ―on loan‖ to Timber-Hall Trucking under an
agreement that provided as follows:
(1) Timber-Hall will provide and maintain trucks and equipment to haul logs from FMP Company
logging sites to the FMP Mill.
(2) FMP Company will provide any qualified truck drivers required by Timber-Hall. Drivers will
continue to be paid their regular wage rates and benefits by FMP Company.
(3) Timber-Hall will have the right to direct and supervise the work of the drivers, but will not have
the right to discharge or discipline drivers provided by FMP Company.
Timber-Hall operated a fleet of 36 trucks used for hauling timber from various logging sites to the
FMP mill. Of the drivers, 32 were employees of Timber-Hall and four were ―on loan‖ from FMP
Company. All drivers were under supervision of Timber-Hall management at both the loading and
unloading points, and the drivers were directed to specific locations by Timber-Hall supervisors.
McKenzie was directed to a particular loading area by Timber-Hall and told to deliver the load to the
FMP Company mill some 100 kilometres away. McKenzie picked up the load of timber and set out for
the FMP mill. En route, McKenzie encountered icy road conditions as he descended a long hill. Before he
could bring the heavy truck under control, it careened from the road and collided with a road-side cabin
owned by McGee.
The cabin was demolished, and McGee brought an action against McKenzie, Timber-Hall, and FMP
Company for damages. Both Timber-Hall and FMP Company alleged in their defence that they were not
the employer of McKenzie.
Discuss the arguments that may be put forward by the defendants and the issues raised by the case.
Render a decision.
Answer:
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The facts of this case are adapted from the facts in the case of McKee et al. v. Dumas et al., Eddy Forest
Products Ltd. et al. (1975), 8 O.R. (2d) 229. The case is concerned with the employment relationship in the
sense that the party injured by the driver's negligence wished to recover from the driver's employer. The
arguments of each corporation would be directed at the relationship which they had with McKenzie. Some of
the points which they might raise can be obtained from the students by way of such questions as: Who has
the right to direct the work which McKenzie is to perform? Who controls the manner in which it is
performed? Who owns the tools? (i.e.: the truck?) etc. The case is complex in the sense that the ordinary
rights of the employer are split between the two companies. For example, Timber-Hall has the right to direct
the work of McKenzie, but not discharge or discipline him (two important rights of an employer). The two
employers cannot both be vicariously liable for the acts of the employee, and while the general employer
has the burden of proof, if it can establish that the temporary employer had complete control of the
employee at the time of the accident, then the temporary employer will be vicariously liable. In the
McKee case, the court expressed the above reasoning, and if it is applied to this case, Timber-Hall would be
liable for the negligence of McKenzie.
Case 4
Lynne and Leroy were employed as commissioned salespersons by a large computer and electronic
company. Each received a basic salary of $900 per week and a commission on gross sales they made on
behalf of the company. In addition, the company paid their reasonable travel and living expenses on all
authorized business trips involving travel of more than 25 kilometres from the head office building where
their own offices were located.
Both Lynne and Leroy were highly productive sales representatives, and earned substantial sales
commissions that placed their average earnings close to the $100,000 mark each year. While each was
responsible for a specific territory, the two of them took on a proposal of the company concerning a new,
remote-community computerized communications system that a government agency had opened to
tender. The particular tender required extensive research and preparation, as well as presentation of the
proposal for review and approval by several related government agencies before it could be submitted. A
number of companies were interested in the project, and Lynne and Leroy put in long hours at their
offices to prepare their presentations to the various agencies. Eventually, after much work and effort, they
managed to obtain approval for the company project from each agency. A tender on the project was then
prepared for submission to senior management for approval. Both Lynne and Leroy were optimistic that
their tender would be successful, in spite of the fact that four other manufacturers were preparing tenders
as well.
During the two weeks before Lynne and Leroy submitted the tender for senior management approval,
the company initiated a minor reorganization of its marketing department. Then, several days after the
submission was in the hands of senior management, both Lynne and Leroy were advised that they would
each be promoted to the position of regional manager, a position carrying with it an annual salary of
$100,000.
Regional managers were responsible for a number of salespersons who reported to them and were also
expected to negotiate some of the larger contracts with customers. However, they received no
commissions, since their salaries were designed to cover their efforts as well as their responsibility.
The two employees were initially delighted with the thought of promotion. However, on reflection,
they decided that, by accepting it, they would perhaps deny themselves the large commission they would
earn if their tender was accepted by the government agency. To clarify their position, they met with the
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vice-president of marketing, who informed them that the company intended to include their old sales
territories with those of other salespersons and that, if they refused to accept the promotions, no sales
territory would be open for them. The rationale was that, since, as a result of the reorganization, the sales
force would consist of persons with greater service with the company, those salespersons with less service
would be terminated or moved to positions of less responsibility and lower salary rates. The vicepresident urged both to accept the promotion, since they each had only three years‘ service with the
company, and the company was anxious to retain them. The vice-president also stated that he believed
that the two employees would likely have a bright future if they remained with the company.
At this point in the discussion, Leroy demanded to know if they would be entitled to the commission
on the government sale if the tender was accepted. The vice-president responded that they would not be
entitled to commissions in their new positions. Both Lynne and Leroy then became angry and accused the
company of robbing them of what was rightfully theirs. The discussion quickly degenerated into a
shouting match, until Lynne ended it by striking the vice-president with her heavy handbag. Both
employees were then told to leave the office and ―clean out their desks,‖ as they were terminated.
Discuss the possible arguments of the two employees and the employer if the employees were to bring
an action for wrongful dismissal.
Render a decision, and in it consider the effect of the success or failure of the company to secure the
government contract.
Answer:
This case raises a number of issues concerning employment relationships: Is the employer entitled to
unilaterally change the employment relationship by promoting the employees against their will? Would a
promotion constitute a breach of the employment relationship by the employer? Is the situation analogous to
a "demotion" or constructive dismissal? Was the action of the employer in giving the promotion an attempt
to avoid paying the employee the substantial commission if the sale was made? Did Lynne's action
constitute ground for immediate dismissal? From the facts of the case, Leroy might successfully argue that
the unilateral change in the employment relationship constituted breach on the employer's part if he was not
prepared to accept the promotion. The employer's actions of placing him in the position where he was
obliged to accept it or be terminated might be considered notice of termination if he chose not to accept the
promotion. The argument between Leroy and the Vice-President would not constitute grounds for dismissal,
and Leroy would probably succeed in an action of wrongful dismissal. Lynne, on the other hand, struck the
Vice-President, and her actions, if treated as an assault, would perhaps entitle the company to terminate her
without notice. The facts related to Leroy are similar in part to those set out in Prozak et al. v. Bell Telephone
Co. of Canada (1984) 10 D.L.R. (4th) 382, where the court held the employer liable for wrongful dismissal,
and established the notice period at eighteen months. The employee, however was a long-service employee
in that case, and in this case Leroy had been employed for only a few years. The notice period would likely
then be a much shorter period, and would perhaps include the commissions earned on the large contract if the
bid was successful.
Case 5
Mall Merchandising Co. operates a department store in a shopping centre located near the outskirts of
a large metropolitan city. The store employs a permanent and part-time staff of approximately 120
persons, and is open to the public from 10:00 a.m. to 10:00 p.m. on a six-day-per-week basis. The store is
closed on Sundays. Full-time employees work on a shift basis that requires each employee to work on two
Saturdays each month, with an equivalent day off during the week that a Saturday shift was scheduled.
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Mary K. was first employed by Mall Merchandising Co. in 2010. She was a good employee and had
worked in the giftwares department since 2011. Her attendance record was above average, and she
seldom lost time due to illness, until very recently, she willingly worked her Saturday shift.
Some months ago, Mary K. joined a religious denomination that considered Saturdays as their holy
day. Saturdays were devoted to religious activities at the denomination‘s place of worship, and Mary K.
refused to work her scheduled Saturday shifts. The store manager was made aware of Mary K.‘s refusal to
work, and she informed Mary that no employee could be excused from the Saturday work, as it would be
unfair to all of the other employees who were required to work. When Mary K. refused to comply with
the manager‘s direction to work on Saturdays, the manager discharged her for insubordination. Mary K.
was paid her wages and benefit entitlement up to and including her last day of work.
Advise Mary K. of her rights at law and the course of action (if any) that she might take. If she should
decide to take action against her employer, what defences (if any) might the employer raise? How would
you expect the case to be resolved?
Answer:
The issue in this case concerns human rights legislation. Most provinces prohibit employers from
discriminating against employees for their religious beliefs. In this case the employee joined a religious sect
which treated Saturdays as a holy day. The question here is: Must the employer change its work schedule to
accommodate Mary K's new-found religious belief? Does her refusal to work on Saturday's constitute
insubordination? These issues should be discussed. The broader issue of human rights and whether an
employer should accommodate all employee rights of this sort should be considered. Does an employer have
a right to expect accommodation on the part of the employee as well? In the case upon which this problem
was based, the employer was held to have violated the employee's rights by discharging the employee. As a
general rule, employers are expected to make reasonable efforts to accommodate an employee's religious
belief. In this case it failed to do so.
Case 6
Jim and Emmanuel were engineers with a mining company that frequently sent employees to remote
job sites for long periods of time while a new property was being developed. Because of the time during
which employees were required to stay at the remote sites, the company paid its employees extremely
well and attracted a large number of unmarried young men to both its professional and labouring
positions.
The company had discovered, however, that it had difficulty attracting and keeping more senior and
experienced personnel at the job sites. These employees were always in demand for the supervisory tasks
and inevitable problems that required the expertise of experienced professionals. After discovering that
one of the main factors that discouraged senior employees from accepting such positions was their
reluctance to be absent from their families, the company offered to pay all costs of a return flight home
once each month for married staff at remote sites.
When Jim and Emmanuel were interviewed for positions with the company they were told of this
policy for married staff. Neither man was married and, when both were offered positions a short time
later, they understood that they would not be eligible to receive the travel allowance.
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One evening Jim and Emmanuel were talking with some of the other employees at the job site about
the travel policy. A colleague said that he would like to be able to get home to see his ill father more
often, but that he could not afford the cost of a commercial flight on a regular basis and, since he was not
married, he was not entitled to the company allowance. Overhearing this, one of the more senior
employees commented, ―I don‘t think that policy is very fair. Come to think of it, isn‘t there some law
against that? You guys should go talk to management about it. They‘re pretty good guys and might make
some changes.‖
Discuss the legal issues raised in this case and the arguments that the respective parties might raise.
Explain the factors that a court would consider and what its decision might be.
Answer:
Students should recognize that this case raises a human right issue - discrimination between person on the
basis of their marital status. While the employer might argue that the special benefit for married employees
was necessary to attract them to the remote work site, the benefit was discriminatory on a basis prohibited by
the legislation as it was not a bona fide qualification for the job, and not related to the discharge of their
duties. The employer would accordingly be in violation, and obliged to offer the same benefit to all
employees regardless of their martial status. See: Ontario Human Rights Commission v. London Monenco
Consultants Ltd. et al. (1992) 9 O.R. (3d) 509 for a similar case.
Case 7
Calculators Inc. required the services of a bookkeeper for its operations. While it was a very small
company, the president believed that the company would grow quickly, and the appropriate employee for
the job would be someone who was a qualified professional accountant. He engaged the services of
Headhunters Inc., an executive-placement firm, to find a suitable candidate for the position. In describing
the position, however, he tended to describe the work and responsibility of the position in terms of what it
might be in the near future, if his view of the firm‘s growth materialized.
Headhunters Inc. staff advertised the position as it was described to them. They received a response to
the advertisement from Ms. Take, a chartered accountant, who was currently employed by a large public
accounting firm located in a nearby city. The parties met in the nearby city and, following the interview,
Ms. Take accepted the position with Calculators Inc. She resigned her position with the accounting firm,
paid out the balance of her lease of her apartment, then moved the 90 kilometres to the city where
Calculators Inc. was located.
On arrival at her new job, Ms. Take discovered that Calculators Inc. had a workforce of only 40
employees, and her job as head of the accounting and finance department was essentially that of a
bookkeeper, since she was the only employee in the department.
Discuss the issues raised in this case and advise Ms. Take of her rights (if any) at law. If you would
advise legal action, comment on the possible outcome of the case.
Answer:
The facts of this case are designed to raise the issues dealt with in Doug Queen v. Cognos Corp., a 1993
Supreme Court of Canada decision. The central point for discussion is the misrepresentation of the position
to the potential employee. The employer here essentially committed a tort by deliberately misrepresenting
the position, and if the applicant for the position relied on the misrepresentation to her detriment, then the
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employer may be liable for the loss she incurred. To be successful, however, Ms. Take must establish that
the misrepresentation was fundamental to her decision to terminate her prior employment, and also that she
incurred a loss in doing so. The payment of the balance of her old apartment lease and her costs incurred to
move to the new city would be examples of the latter.
Case 8
Mario had been well known as a racing-car driver on the provincial stock-car circuit for many years.
He had driven a number of different types of racing cars during his racing career, either under the
sponsorship of auto parts stores or as an ―independent.‖
Following a spectacular race in which Mario had won first prize, a major auto parts distributor offered
him a position in its organization as director of marketing. The offer included a starting salary of $80,000
per year, participation in a profit-sharing plan open only to senior management, a generous pension plan,
and a variety of other benefits including the use of a company-owned car. The position also gave him a
place on the board of directors of the company.
As a part of his duties, Mario was expected to enter and drive stock-cars advertising the company in a
number of highly publicized race events held each year.
During his first year with the company, Mario won four of the five races that he had entered and
worked hard at all other times to boost sales for the company. As a result of his efforts, sales increased by
20 percent. Mario received a year-end bonus of $10,000 in addition to his salary and share of profits, and
was advised by the president of the company that his salary for the next year would be raised to $100,000.
The second year of Mario‘s employment did not match the previous year. Mario won only two of the
five races, and, in spite of spending extra time promoting the employer‘s brand, sales decreased by 3
percent. At a year-end directors‘ meeting, a bitter argument occurred between Mario and the company
president over the poor sales performance of the company. The president blamed the drop in sales on
Mario‘s poor showing on the race circuit, and Mario blamed the unreliability of the car he had been
provided for his poor performance. The argument ended with the president dismissing Mario.
The next day, Mario received a cheque from the company to cover his salary to that date, along with a
formal notice of his termination.
Prior to his dismissal, Mario had arranged for a two-week holiday in Europe. He decided to follow
through with these plans, then look for other employment on his return.
Mario searched diligently for a similar position when he returned from his holiday, but could find
nothing. Eventually, some six months after his termination, he found a position as a staff writer for a
sports car magazine at an annual salary of $50,000.
Under the terms of his employment at the time of his dismissal, Mario was entitled to receive (in
addition to his salary of $100,000 per year) pension contributions by the company on his behalf of $6,000
per year, director‘s fees of $5,000 per year, a profit-sharing plan payment of approximately $6,000, and
the use of a company car.
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He eventually brought an action for wrongful dismissal against the company and, in addition, alleged
damage to his reputation as a professional driver as a result of his summary dismissal by his employer. He
claimed $100,000 for damage to his reputation.
Indicate the arguments that might be raised by the parties to this action. Discuss the factors that would
be taken into consideration by the court.
Render a decision.
Answer:
The case raises three issues concerning wrongful dismissal:
(1)
(2)
(3)
What constitutes wrongful dismissal?
How are damages determined in wrongful dismissal cases?
What steps must a wrongfully dismissed employee take on dismissal?
Unless the employer has grounds for immediate dismissal, and no notice requirement is set out in the
contract of employment, reasonable notice must be given of termination. Clearly, Mario did nothing
wrong, as grounds for immediate dismissal would require something more than a mere disagreement over
his poor performance on the race circuit. The damages which are granted for wrongful dismissal are
usually limited to the earnings and benefits that the employee would have received had he been given
reasonable notice of termination. See the Bardal v. The Globe & Mail Ltd. Judicial Decision for the
method used to determine this amount. These figures might be identified or calculated by the students as
responses to the question: What amounts would be included in the calculation of the damages? If a year,
say, is considered reasonable notice (since Mario holds a fairly senior position in the firm) he would
probably be entitled to a year's salary, pension contributions for the year, his share of profits, the value of
the other benefits associated with his position (such as the use of the car), but not including the bonus if it
is entirely discretionary. He would be obliged to immediately look for other work, and any earnings
made in his new employment would be deducted from the amount of damages. Query: Would he be
penalized for taking the two-week holiday? For cases on this topic: See: McNamara v. Price Wilson
Limited (1979), 12 B.C.L.R. 300 and Delano v. Atlantic Trust Co. (1977), 24 N.S.R. (2d) 53.
Case 9
Import Cars Ltd. employs a work force made up of the following employee groups:
6 new car sales staff (New Car Department)
3 used car sales staff (Used Car Department)
3 customer service advisors (Service Department)
8 technicians (Service Department)
4 service employees, unskilled (Service Department)
2 maintenance employees (Building Maintenance Department)
4 collision repair technicians (Auto Body Shop Department)
3 office staff (Office Department)
Each department has a manager, who along with the corporation‘s president and secretary-treasurer,
make up the ‗management team.‘ All of the departments are located in and operate out of a main building
except for the auto body shop, which is located in another part of the city about a kilometer distant from
the main building.
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Representatives from the Auto Technicians Union are currently attempting to interest the 8 technicians
in joining a union, and an Auto Employees Union also wishes to organize all of the employees as a local
union. Only 3 of the technicians and none of the auto body shop technicians or office staff are interested
in joining a union. The new and used car staff, however, has expressed an interest in joining a union.
Outline the steps that the unions must take if they wish to form a union at Import Cars Ltd. What
opposition might each union encounter in its membership drive? What steps might the employer lawfully
take?
Discuss.
Answer:
This is essentially a discussion case concerning union organization campaign. The facts of this case also
provide an opportunity for students to consider the make up of suitable bargaining unit for collective
bargaining. Students should note that the body shop employees work in a distant location, and may not be
interested in workplace issues at the main building. Note also the office/plant division of the workforce and
the fact that the office employees are not interested in being a part of the union. Reference to the text material
on employer rights and duties should also be discussed.
Case 10
Nigel was employed as a taxi driver by the Rapid Cab and Cartage Company. On May 23, 2011 while
driving his taxi, he was involved in a serious collision with a train at a level crossing. The taxi was
demolished as a result of the accident, and three passengers riding in the rear seat of the taxi were
seriously injured. Nigel, by some miracle, escaped injury.
An investigation of the accident revealed that Nigel had been racing the train to the level crossing and
had collided with the side of the engine when the train and the vehicle reached the crossing at the same
instant. As a result of the investigation, Nigel was charged with criminal negligence and released on bail
pending his trial.
The employees of the company worked under a collective agreement and were represented by a truck
drivers‘ union. The company manager and the union representatives met on May 27 to discuss Nigel‘s
accident. At the request of the union, the company agreed to allow Nigel to continue to drive until his
trial.
Nigel had been employed by the company for five years prior to the accident, and had an accident-free
driving record until April of that year. During April, Nigel was involved in four minor accidents that were
clearly his fault. On May 9 (only two weeks before the accident on May 23) he had crashed his vehicle
into the side of the taxi garage, causing extensive damage to both the vehicle and the building. On that
occasion, and the two previous occasions, he had been given verbal warnings by the supervisor that he
would be dismissed if he continued to drive in a careless manner.
Nigel‘s case came before the courts on June 10. He was convicted and given a six-month jail term. His
driving privileges, however, would be reinstated on his release. Following his conviction, the union, on
his behalf, arranged for a six-month leave of absence from the company, subject to the right of the
company to review the matter on his return to work.
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Before Nigel was released from jail, several large damage claims were made against the company as a
result of the accident, and the insurer expressed concern over Nigel‘s accident-frequency rate. The
company management thereupon notified the union of its intention to dismiss Nigel, and advised Nigel
that his services would no longer be required on his release.
Upon receipt of the notice of dismissal, Nigel immediately filed a grievance through the union,
requesting reinstatement. The grievance was filed in accordance with the time period and procedure
outlined in the collective agreement.
The collective agreement contained the following clause:
12.01 The company shall have the right to establish reasonable rules of conduct for all employees, and
shall have the right to discipline or discharge employees for just cause, subject to right of grievance as set
out in this agreement.
The company had posted the following rule on the office bulletin board in September 2010:
Rule 6 Any failure on the part of a driver to place the comfort and safety of passengers before his (or
her) own convenience shall be cause for discipline or dismissal.
As the sole arbitrator in this case, how would you deal with this grievance?
Prepare an award and give reasons for your decision.
Answer:
The role of an arbitrator in collective bargaining is essentially that of an interpreter of the collective
agreement. Where a violation is alleged, the arbitrator is usually called upon to determine if the agreement
has been violated or improperly interpreted by the accused party. In the case of dismissal, as is this situation,
the arbitrator would be called upon to decide if the company had just cause to dismiss Smith. Under the
terms of the collective agreement, the company has the right to make reasonable rules of conduct (clause
12.01). The company did so pursuant to this right, and posted Rule 6 in September of 2010. Arbitrators,
however, generally assess the rules in terms of "fairness" and require the employer to prove that the rule is
necessary, reasonable, brought to the attention of the employees before enforcement, consistently enforced,
and the penalty appropriate for the violation. The employer is also expected to establish that the employee
could reasonably expect the enforcement of the rule if the employee acted contrary to it. An arbitrator would
require the employer to prove just cause for the dismissal, and if the employer is unable to do so, the
arbitrator may re-instate the employee or (where permitted) vary the penalty to fit the violation. The students
should carefully examine the actions of the employer, and in particular, the act of allowing Nigel to continue
to drive after the accident, and in spite of his record of accidents. Is this consistent with the purpose and
intent of Rule 6? If the employer was concerned for the safety of passengers, why was Nigel not dismissed
immediately? Why did the company wait until after his trial? In what ways might these factors affect "just
cause"? Students may reach the conclusion that the employer's actions were inconsistent with its rule and the
serious consequences attached to its violation. If so, some lesser penalty might be substituted for the
discharge.
Case 11
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Haden Manufacturing Ltd. was a large producer of automotive parts and supplies and employed a
workforce of over 400 employees. The employees had been represented by the local of a large
international union for several years.
An unexpected upturn in consumer demand forced Haden to schedule additional production shifts to
meet backlogged orders. This necessitated most employees working at least one overtime shift per week,
on either Saturday or Sunday, for which the collective agreement provided that employees be paid timeand-a-half wage rates. When the new work schedule was posted, Susan, who was a parts painter, found
herself scheduled to work the overtime shifts on Saturdays. Susan belonged to a religious order that
observed Saturday as its day of worship and, as a result, Susan did not wish to work this particular shift.
She went to see the production scheduler to explain her situation and to suggest that he schedule her
for the Sunday shift but at the normal, non-overtime rate of pay. Susan felt that her offer was a fair
compromise and would be accepted by management. Her suggestion was, in fact, quite acceptable to
management, which promised to accommodate her request. The union shop steward was informed of
Susan‘s request and the arrangement which she had made with management. Shortly thereafter the union
sent a memo to management stating that it would not permit management to schedule Susan for the
Sunday shift without paying her the time-and-a-half rate stipulated by the collective agreement. When
management approached Susan about the memo, she stated that she knew nothing about it and that it had
not been sent at her request. She also stated that her offer still stood since that arrangement worked out
very well for her.
Management took the position that if the union would not waive the overtime pay provision for Susan
on Sunday, thereby effectively barring her from that shift, it would have no choice but to require her to
work on the Saturday shift. Susan refused to do this and was subsequently dismissed by Haden.
What recourse and rights, if any, does Susan have against the parties in this case? Discuss the
arguments each might employ and what remedies might be imposed by a court or arbitrator.
Answer:
This case concerns the right of an employer and an employee to negotiate an employment arrangement
that is outside the collective agreement, and in conflict with it. The agreement provides for time and one-half
pay for Sunday as well as Saturday work hours, and the union must consent to any change in these
provisions. The union was probably correct in objecting to the agreement between Susan and the employer
as it represented a change in the collective agreement. Susan's unwillingness or refusal to work on Saturday
was for religious reasons, and the employer was expected to make reasonable efforts to accommodate her (as
required by Human Rights legislation). Her dismissal was similarly based upon her religious belief for not
working the Saturday shift. Since Susan worked under a collective agreement at the time of her discharge,
she could grieve the employer's actions, and an arbitrator (or Board) would hear the case. Given the facts, the
arbitrator would probably re-instate Susan in her job and require the employer to schedule her overtime on
Sunday.
Case 12
Gear Manufacturing Company carries on business in a part of a factory building in an industrial park
located at the outskirts of a large municipality. The remainder of the building is leased by Gear
Warehousing Company, a wholly owned subsidiary of Gear Manufacturing Company. Gear Warehousing
Company is essentially the storage and marketing subsidiary of Gear Manufacturing Company. It
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purchases and markets all standard types of gears manufactured by the parent company, even though it is
a separate entity.
The employees of Gear Manufacturing Company are represented by the Gear Makers‘ Union. In the
previous year, the union negotiated a collective agreement that expired some months ago. Collective
bargaining took place before the expiry of the old agreement, but Gear Manufacturing Company and the
union could not agree on the terms of a new collective agreement. They requested conciliation services
offered by the Ministry of Labour (which were required before a strike or lockout could take place), but
the services failed to produce an agreement. Eventually, the employees went out on strike and set up
picket lines at the entrances of the plant of Gear Manufacturing Company. They also set up picket lines at
the entrance to Gear Warehousing Company to prevent the shipment of goods from the warehouse.
A few days later, the employees set up a picket line at Transmission Manufacturing Company, an
important customer of Gear Warehousing Company, even though the company‘s only connection with
Gear Manufacturing and Gear Warehousing was as a purchaser of Gear products. The pickets prevented
Transmission Manufacturing from shipping a large truckload of transmissions to another manufacturer.
As a result, the company suffered a loss of $30,000 through its failure to make its delivery on time.
Advise Gear Warehousing Company and Trans-mission Manufacturing Company of their rights (if
any). Suggest a course of action that they might take.
Answer:
The facts of this case raise the issue of secondary picketing. Assuming that the employees may legally
engage in a strike (i.e., the required "cooling off" period after conciliation has elapsed), picketing may
take place at the employer's place of business. Since picketing is for information purposes only, the
pickets may not block the entrances to the plant nor interfere in any way with the employer's property or
persons entering or leaving the premises. Can the striking employees picket Gear Warehousing
Company, a subsidiary of Gear Manufacturing Company? If the two corporations are closely related both
in a functional and physical proximity to one another, then the picketing may not be prevented by an
injunction. See: Canadian Pacific Ltd. v. Weatherbee et al. (1979), 26 O.R. (2d) 776. The picketing of
the customer, however, is probably a different matter. Since the customer had no direct connection with
the labour dispute, the picketing of the customer would be a secondary picketing instance, and subject to
an injunction because of the interference by the pickets in the operation of the company. Note however,
that had the picketing been peaceful and did not interfere with the operation of the company no action
could be taken by the company to stop the picketing. Peaceful picketing is permitted of a customer, but
any actions by pickets that cause damage are still subject to action in the courts. See: RHDS Union
Local 550 v. Pepsi Cola Canada (West) Ltd. [2002] 4 W.W.R. 205.
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CHAPTER CHART
Additional Chart for Instructor‘s use (not appearing in text)
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CHAPTER 20. THE LAW OF BAILMENT
Chapter Topics
Nature of Bailment
Types of Bailment
Innkeepers
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Understand the nature of the bailment relationship.
• Identify the various forms of bailment.
• Describe the responsibilities of the parties to a bailment.
• Explain the special status of carriers and storage facilities.
YOUR BUSINESS AT RISK
The business world is filled with grey areas of uncertain responsibility — times when your
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business owns assets held by someone else (goods given over to a carrier, or to a warehouse),
or when you hold goods owned by others — for repair or storage or resale. Before you sell
unclaimed items in your hands, or sue to recover goods that may no longer be yours, your
business must understand the law of bailment.
CHAPTER COMMENTARY
The law of bailment generally raises considerable classroom discussion, since most students readily identify
the concepts and their application. Everyone, on occasion, has either loaned a chattel, or placed his or her
coat on a coat rack in a restaurant or other establishment, and, as a result, can identify personally with the
activity. Because of this familiarity with the concept, a possible approach to the discussion of the topic might
be to employ the restaurant coat rack situation as a means of determining the nature of a bailment, the actual
and constructive possession of the chattel by the bailee, and the question of liability for loss. Case 9 of the
case problems for discussion which resembles this situation, might be used in this regard.
The diverse forms that a bailment might take frequently present problems for students in the
determination of the standard of care required of the bailee. Statements of the courts to the effect that the
bailee must care for the goods "as a skilled shopkeeper" or use "ordinary care" or "reasonable care," are often
difficult for students to comprehend, unless concrete examples are used to illustrate the standard. The case
excerpts from Longley v. Mitchell Fur Co. Ltd. might be of assistance to establish the procedure employed by
the courts to determine the standard of care in particular sets of circumstances.
At this point it might be useful to emphasize that the rules for determining the liability of a bailee are
based upon the standard of care which the courts have established for the various kinds of bailment. As the
text indicates, these tend to vary according to the benefit received by the bailee, with a higher standard
normally applicable where the bailee receives a benefit from his or her possession of the goods. A high
standard is also likely to apply where the bailor receives little or no benefit from the relationship. In certain
cases, the bailee is virtually an insurer of the goods, but this is generally limited to cases where the bailee has
complete control over the goods, and the goods are removed from the area where the bailor might inspect
them from time to time. The common carrier is an example of this type of bailee. Carriers of goods and
innkeepers are subject to standards of care that have developed over many years, and which have historical
roots that date back to a time when both shippers and travellers were to some extent at the mercy of carriers
and innkeepers. For both of these relationships, the historical basis for the liability should be stressed, and
perhaps applied to the present by way of the question: Has the situation really changed over the years? In
what way (if any)? The Court Decision in the chapter, Samuel Smith & Sons Ltd. v. Silverman deals with the
storage of automobiles under the ordinary parking lot situation where the bailment is subject to the usual
disclaimers of liability.
Because bailees for reward are subject to a high standard of care, it is not uncommon for them to
limit their liability by way of a disclaimer clause in the contract, or by fixing a specific standard of care
limitation on the liability assumed. Except in cases where a statutory liability is established, a disclaimer or
agreed standard will be enforced, provided that the limitation on the bailee's liability has been brought to the
attention of the bailor and agreed upon at the time that the bailment was made. The Samuel Smith & Sons Ltd.
v. Silverman Court Decision provides a discussion of the general liability of a bailee for reward, and the
importance of providing notice of any limitation on the liability of the bailee before the bailment is made. As
the court indicates, if the bailor is made aware of the circumstances under which the bailee is prepared to
accept possession of the goods, and if the bailor is willing to enter into an agreement under those conditions,
then the limitation on the liability of the bailee will apply. The notice to the bailor, however, is the key
point, as the case turns on that question.
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The Court Decision, Bear Mountain Logging Ltd. v. K.A.T. Lowbed Service Ltd. may be a useful
case for a discussion of the duty of care in a bailment situation where a transport service (a common carrier)
was negligent in the carriage of the plaintiff‘s equipment.
The Bexley v. Salmon’s Transfer Ltd., Court Decision provides an example of the duty of a
warehouse operator to take all reasonable care to protect the bailor‘s goods from damage.
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Review Questions
1. In what way or ways is the responsibility of an innkeeper for the safekeeping of the goods of guests
similar to that of a bailee for reward?
Answer: The responsibility would be the same where the guest places the goods in the hands of the
innkeeper for safe-keeping.
2. Explain the term constructive bailment.
Answer: A constructive bailment arises when goods are invited to be placed in the care of the bailor,
but no physical transfer takes place between the parties.
3. Explain:
(1) fungible
(2) pawn
(3) pledge
(4) sub-bailment
Answer:
(1) fungible:
An unidentifiable, interchangeable commodity (eg. grain).
(2) pawn:
A bailment of goods with a pawnbroker or security of a loan.
(3) pledge:
A bailment of securities, shares, etc. as security for a debt.
(4) sub-bailment: A further bailment of bailed goods by a bailee to another bailee.
4. What rights over a bailed chattel does a bailee possess? Why are these rights necessary?
Answer: The bailee has a right to take legal proceedings against any third party who interferes with
his/her possession of the goods.
5. Why should an innkeeper be responsible for the goods of a guest which are brought into the guest's hotel
room?
Answer: The purpose of the rule is to establish the innkeeper's responsibility to protect the guest's
belonging while the guest is away from his or her room (such as in the hotel dining room).
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6. Indicate the defences available to a common carrier in the event of loss or damage to goods in the
carrier's possession.
Answer: The major defences of a common carrier are: Act of God, goods packed by shipper, goods
improperly described, goods of a type that self-destruct, damage caused by the Queen's enemies.
7. What standard of care is imposed on a bailor in a hire of a chattel?
Answer: A bailor in the hire of chattel must provide the bailee with goods that are reasonably fit for
the use intended.
8. What essential element distinguishes the rental of space in an automobile parking lot from a bailment of
the vehicle? How does this affect the liability of the owner of the parking lot?
Answer: The rental of space in a parking lot leaves the vehicle in the possession of the owner, as the
owner has the keys. A bailment gives the bailee possession, and responsibility for the care of the
vehicle, as the bailee parks it where he sees fit.
9. Define a bailment.
Answer: A bailment is the delivery of possession of goods by the owner (bailor) to another person (a
bailee) on the condition that the goods be returned or dealt with according to the bailor's instructions.
10. Why do the courts impose a greater responsibility for the care of goods on a common carrier than upon a
gratuitous carrier?
Answer: The common carrier is a carrier for reward and may make a sub-bailment of the goods to
other carriers. The bailor loses possession and control of the goods once delivered to the carrier, and
hence the carrier may be held responsible for any loss or damage.
11. Indicate the effectiveness of an exculpatory clause in a bailment contract for the storage of an
automobile. How do the courts view these clauses?
Answer: Exemption clauses limit or exclude liability of the bailee while the goods are in the bailee's
possession. The clause would only be effective if made a part of the bailment contract and the bailor
was made aware of the clause at the time that the bailment was made.
12. To what extent is a bailee for reward entitled to claim a lien for the storage costs against the goods?
Answer: A bailee for storage does not have a common law right of lien, but this is provided by
statute. If the storage is related to repair, a right of lien at common law exists for the repair costs.
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13. How is the standard of care of a gratuitous bailee determined?
Answer: The standard of care of a gratuitous bailee ranges from taking reasonable care of protecting
them from foreseeable harm (when the bailee receives no benefit from the bailment) to a very high
standard (where the bailee receives a benefit from the bailment).
Mini-Case Problems
1. Simple took his power lawn mower to a repair shop to have it repaired. At the shop he signed an
―authorization to repair‖ sheet that directed the repair shop to ―repair the engine.‖ The shop did so,
but apparently found it necessary to replace most of the internal parts of the engine. The repair bill
was $450, almost the price of a new machine. Simple refused to pay the account when he realized the
cost of the repairs, and the repair shop refused to release the mower to him.
Discuss the rights of the parties.
Answer:
The repair shop would be entitled to a lien on the goods for the repair costs, provided that the costs were
reasonable. If Simple fails to pay a reasonable price for the repairs, the shop may sell the mower to cover its
repair bill.
2. Smith entered a clothing shop to purchase a new coat. The clerk was busy, and Smith placed her
purse on a table located near the coat racks while she examined several coats for size and fit. Her
purse was stolen while she was examining the coats.
Discuss the question of liability for the stolen purse.
Answer:
The act of placing the purse on the table did not create a bailment, because there was no 'constructive
possession' of the purse by the shop owner. Had a sales clerk told her to place her coat and purse on the table,
a bailment may have been created, but from the facts of the case Smith acted without direction, and
consequently the shopkeeper would have no liability because no bailment was created.
3. Carol checked into the City Hotel, left her suitcase and computer case in her room, and proceeded to
the hotel restaurant for lunch. On her return to her room she discovered that her suitcase and
computer had been stolen. Advise Carol and the hotel of their rights and responsibilities.
How would this case likely be resolved?
Answer:
Under the innkeeper legislation of most provinces, the innkeeper may be liable for Carol‘s loss, but the statute
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usually limits the loss payable to a relatively small amount ($40.00 -$200.00). If the goods were stolen by an
employee or through employee negligence, the monetary limit may not apply. If the loss was due to Carol‘s
negligence, the innkeeper may not be liable for her loss.
4. Daniel was obliged to go abroad on a 6-month work assignment, and arranged with his friend Harry
to store his sports car in Harry‘s garage. One evening, thieves entered Harry‘s garage (which was
never locked) and made off with the sports car. When Harry discovered the theft, he immediately
notified the police. A week later, the police found the vehicle in a seriously damaged condition.
Advise Daniel and Harry.
Answer:
This would be a gratuitous bailment. Harry would not be liable for the damage, as he was under no
obligation to take special care of the sports car. The standard of care would probably be how Harry cared for
his own goods.
Case Problems for Discussion
Case 1
Sleeman had just purchased a new luxury automobile, and decided to use it that evening to drive his wife
to a new theatre production in the city centre. As he approached the parking lot adjacent to the theatre, he
noticed a long line of vehicles waiting to turn into the lot entrance. The exit lane, however, was clear, and
he made the instant decision to enter the lot by the exit lane. Once inside the lot, he stopped his car in
order to obtain a parking ticket. An irate lot attendant came over to him, complaining that he was not to
enter the lot by the exit lane. Sleeman apologized, and attempted to back out into the street, but at that
point, both he and the attendant realized that it would be impossible to do so, given the heavy road traffic.
Exasperated, the attendant took Sleeman‘s money, obtained a parking ticket from the attendant in the
office, and handed it to Sleeman without comment. He then slipped into the driver‘s seat in order to park
the vehicle.
The time of year was late winter, and patches of ice were on the paved lot. The attendant who was
now annoyed with Sleeman, accelerated the vehicle down the lot, but was unable to stop the car on the
ice. He collided with another vehicle parked on the lot, and seriously damaged Sleeman‘s vehicle. When
the parking lot owner refused to accept responsibility for the damage, Sleeman instituted legal
proceedings.
At trial, the parking ticket was introduced as evidence. The ticket contained the following words
printed on the back: NOT RESPONSIBLE FOR LOSS OR DAMAGE TO VEHICLES HOWEVER
CAUSED.
The lot owner also testified that on the side of the office where vehicles enter, a large metre square
sign provided the same message.
Discuss the arguments that each of the parties might raise in this case, and render a decision.
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Answer:
Sleeman would argue that a bailment for reward existed. He would also argue that the parking lot
owner was responsible for the employee‘s negligence, and the damage to his vehicle. His evidence would
be that he did not see the large disclaimer sign, and that the disclaimer on the ticket was not brought to his
attention. See: Spooner v. Starkman [1937] 2 D.L.R. 582. The parking lot owner, would argue that
Sleeman had an obligation to read the ticket (contract) and he should have been aware of the wording on
the back. The owner might also argue that a reasonable person would not enter the lot as Sleeman did,
and had he entered properly, he would have been aware of the disclaimer sign. The facts of this case are
based upon a case where one of the authors acted as counsel. The court held in that instance that the
parking lot operator had failed to notify the plaintiff of the limitation on liability, and was liable for the
damage to the plaintiff‘s vehicle. Note, however, the Court Decision Samuel Smith & Sons Ltd. v.
Silverman in the text which reaches a contrary conclusion on different facts.
Case 2
Local Air Ltd. operated a charter airline service that specialized in flying small groups to specified
locations. Their fleet consisted of three small eight passenger twin-engine aircraft. While on a charter to a
nearby city, one of its aircraft developed a problem with one of its engines, and the pilot, on the
authorization of the company, took it to an aircraft repair facility located at the airport.
A second aircraft was dispatched to retrieve the passengers and the pilot when it appeared that the
repair would require parts that had to be ordered from the aircraft manufacturer. The parts arrived in due
course, but before the engine was repaired, a government air worthiness directive was received by the
repair facility that required aircraft owners to make an engine modification in order to receive an
airworthiness certificate. In response to the directive, the repair facility made the modifications to both of
the engines, then signed off that the aircraft was now airworthy. The repair facility informed Local Air
Ltd. of the work done and invoiced Local Air Ltd. for the repair that amounted to $19,825.
When Local Air Ltd. was advised of the repair invoice, they informed the repair facility that in their
view the amount was excessive, as the airworthiness repair could have been made at their own shop for
half the cost. At this point in the discussion, the repair facility refused to release the aircraft unless the
repair account for the aircraft was paid in full.
Advise the parties. What are the issues in terms of the law? Speculate as to the outcome.
Answer:
Students should recognize that the facts indicate a bailment for repair or service was created when the pilot, at
the company‘s direction, authorized the repair facility to make the repairs. However, did the authorization
extend to the additional work required by the air worthiness directive? Note that the aircraft cannot be flown
without an airworthiness certificate. Note also that in a repair situation where the price is not agreed upon in
advance, that the bailor would be required to pay a reasonable price for the work done. Can a comparison be
made with the bailor‘s own shop to determine what is a reasonable price? The bailee is usually entitled to a
lien on the aircraft until the repairs are paid for, failing which, the aircraft could be put up for sale at public
auction. Given the facts of the case, the bailor would be obliged to pay a reasonable price for the repairs,
which, in this case may be the bailee‘s invoice of $19,825.
Case 3
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Yusef Ali parked his automobile in a parking lot owned by the Dumas Corporation. At the request of the
parking-lot attendant, he left his keys at the attendant‘s office and received a numbered ticket as his receipt
for the payment of the parking fee. Before leaving his keys with the attendant, he made certain that the doors
of the vehicle were securely locked, as he had left a number of valuable books on the rear seat of the car.
Unknown to Ali, the attendant closed the lot at midnight. Then he delivered the keys to the cars on the
lot to the attendant of the parking lot across the street. This lot was also owned by the Dumas
Corporation, but it remained open until 2:00 a.m.
Ali returned to the parking lot to retrieve his automobile shortly after midnight, only to discover no
attendant in charge and his vehicle missing. By chance, he noticed the attendant on duty at the lot across
the street. Ali reported the missing vehicle to him, and found the attendant in possession of his keys.
The police discovered Ali‘s automobile a few days later in another part of the city. The vehicle had
been damaged and stripped of its contents, including Ali‘s rare books.
Ali brought an action against the Dumas Corporation for his loss. However, the company denied
liability on the basis that the ticket (which Ali received at the time of delivery of the keys) read: ―Rental
of space only. Not responsible for loss or damage to car or contents however caused.‖ Dumas also alleged
that the attendant‘s office had a sign posted near the entrance that bore the same message.
Identify the issues in this case and prepare the arguments that Ali and the Dumas Corporation might
use in their claim and defence respectively.
Render a decision.
Answer:
This case requires the student to determine the nature of the relationship between the owner of the motor
vehicle and the parking lot. Is it for "the rental of space only" as the ticket states? Bear in mind that the
ticket, in effect, is the written contract between the parties. Does it represent the entire agreement? What
effect does delivery of the keys to the attendant have on the relationship? Does it change it from rental to a
bailment? How does the notice in the form of a sign affect the liability of the lot owner? Does the removal of
the keys to a lot across the street alter the relationship? Does the exemption clause in the contract allow the
parking lot owner to avoid liability for loss of the car and contents? In Heffron v. Imperial Parking Co. et al.
(1974), 3 O.R. (2d) 722, a somewhat similar situation to this case, the court held that the relationship became
a bailment on delivery of the keys, and that the failure to return the car and contents when required
constituted a fundamental breach of the contract - hence the exemption clause was ineffective, and the
parking lot owner liable for the patron's loss.
Case 4
The Sakuras considered moving to Western Canada from the city of Toronto after Mr. Sakura‘s
retirement. In order to determine an appropriate community in which to reside, they visited a number of
west-coast cities by automobile.
On their visit to one community, which appeared to be a delightful place to live, they met the owner
of a warehouse business. The warehouse owner suggested that he would be prepared to receive their
household goods if they wished to ship them to him. He would hold them in storage until such time as
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they found a permanent residence.
On their return to Toronto, the Sakuras decided to move immediately. They dispatched their
household goods to the warehouse operator that they had met on their visit to the city. Instead of taking
up residence immediately, they planned an extensive vacation that would take them across the United
States and eventually to that particular community.
While the Sakuras were on vacation, the household goods arrived at the warehouse. The owner issued
a warehouse receipt, which he mailed to the Sakuras at the temporary address that they had given him.
The warehouse receipt set out the terms and conditions of storage, one item being a condition that read:
―All goods stored at owner‘s risk in case of fire (storage rates do not include insurance).‖
On their return from their vacation, the Sakuras found the warehouse receipt in their mail, but did not
read the document. They proceeded to obtain a new home. However, before they could retrieve their
goods from the warehouse, the building was burned by an arsonist who had apparently gained entry to the
building by way of an open rooftop skylight. The household goods that belonged to the Sakuras were
totally destroyed by the fire.
When the warehouse operator refused to compensate the Sakuras for their loss, an action was brought
claiming damages for the value of the goods.
Discuss the nature of the plaintiff‘s claim and the defences that the warehouse operator might raise.
Render a decision.
Answer:
The facts of the case establish a bailment for reward situation. A bailee for reward, where the bailment
involves the storage of goods is subject to a duty of care that is much lower than that of a carrier of goods,
and of course, higher than that of a mere gratuitous bailee, where the bailee receives no benefit from the
bailment. The general rule is that a bailee for reward for the storage of goods must take "reasonable care of
the goods. The standard that is usually applied is that of skilled shopkeeper (Brabant & Co. v. King, [1895]
A.C. 632). The liability, however, would normally not extend to include loss or damage that could not have
been foreseen by a careful and vigilant shopkeeper (Bowert v. Parks (1964), 50 D.L.R. (2d) 313). In this
case, the Sakura's would argue that the failure to block the skylight window would constitute carelessness,
and a breach of the bailee's duty to take reasonable care of the goods. The warehouseman would argue that he
could not have foreseen the entry of the arsonist and the burning of the building. He would also argue that his
liability did not extend to loss by fire, as this was specifically excluded by the contract of storage. In the case
of Mason v. Morrow's Moving & Storage Ltd. (1978), 87 D.L.R. (3d) 234, the court held:
(1) the warehouseman has no duty to warn the bailor that the goods were not
insured against fire.
(2) the warehouseman is only obliged to take reasonable care, and could not have
foreseen the entry of the arsonist and the burning of the building.
Case 5
The members of an investment club arranged for a banquet and overnight accommodations for their
members at the Municipal Hotel. Most of the members arrived early for the dinner in order to check into
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their rooms. One member, however, arrived late and, instead of checking in at the desk, went directly to
the banquet room where the dinner was about to be served. Before entering the room, she noticed a coat
room adjacent to the dining room that contained a number of coats. She hung her fur jacket on a hanger in
the coat room. No attendant was in charge of the coat room, although a person wearing a hotel porter‘s
uniform was standing near the doorway to the room.
The club member spent the evening in the banquet room, and at the end of the dinner meeting went to
the coat room to retrieve her jacket. The jacket was missing.
As compensation the hotel offered her the sum of $40, the amount that an innkeeper was obliged to
pay under the Innkeeper‘s Act of the province. The hotel explained that as a guest in the hotel, this was
the extent of its liability to her. The hotel manager pointed out that the club member was aware of the
limited liability of the hotel by virtue of the notice to that effect that was posted in all hotel bedrooms.
The club member refused to accept the sum offered as payment. She brought an action against the
hotel for $2,800 an amount that she alleged was the appraised value of the fur jacket.
Discuss the issues raised in this case and indicate how the courts might deal with them. Would your
answer be any different if the club member‘s jacket had been stolen from a locked hotel room?
Answer:
This case is similar to the case of Hansen v. 'Y' Motor Hotel Ltd., [1971] 2 W.W.R. 705. For class discussion
purposes, the question might be asked: Does this case concern an ordinary bailment, or does it involve the
liability of an innkeeper for the goods of a guest? Bear in mind that the liability of an innkeeper differs from
that of the ordinary bailee. The club member would obviously wish to hold the innkeeper liable for the value
of the jacket, and may argue that the relationship was that of bailor-bailee. In this case, however, it would
be necessary for the bailor to show that the innkeeper had taken constructive possession of the coat. This
might be established using the Murphy v. Hart case mentioned in the answer for Case 9. In the Hansen case,
the court applied Murphy v. Hart, and found that by providing a coat room, the innkeeper had invited the
bailment, and was liable for the loss. If the club member was a guest in the hotel, and had left the coat in her
room, the answer would be different. As a guest in the hotel, the innkeeper's liability for the loss of goods
from the room would be limited to the amount specified in the Act, unless the loss was due to the negligence
or the deliberate acts of the innkeeper's servants, etc.
Case 6
Lacey inherited a large brooch from her grandmother. The brooch contained what appeared to be a
number of large precious stones. She was curious as to the value of the piece of jewelry and took it to the
B & S Jewelery Shop for examination. The jeweler was busy at the time. She asked Lacey to leave the
brooch, saying she would examine it when she had a moment to do so. Lacey filled out a small claim
check that required her to set out her name and address. She did so, and was given a portion of it bearing a
claim number.
Lacey placed the claim check in her jewelery box when she returned home. She paid no further
attention to the matter, believing that the jeweler would notify her when he had completed his appraisal of
the brooch.
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Some five years later, while cleaning out her jewelery box, Lacey noticed the claim stub in the bottom
of it and remembered that she had left the brooch at the jewelers. She immediately went to the jewelery
shop with the ticket to claim her jewelery, but the jeweler was unable to find the brooch. The shop records
indicated that Lacey was sent an email three weeks after she had brought the brooch in, to advise her that
its value was $6,500. Lacey had not received the email, however, and, until her return to the jewelery
shop, was unaware of its value.
When the shop could not produce the brooch, Lacey brought an action for damages against the shop
for the value of the piece.
Indicate the nature of Lacey‘s action, and discuss the various arguments that both Lacey and the B &
S Jewelery Shop might raise.
Render a decision.
Answer:
Lacey in this case has created a bailment for reward by delivering up possession of the brooch to the jeweler.
Once a bailment is determined, it would be necessary to establish the standard of care which the courts would
likely impose on the bailee. As a bailee for reward, this would probably be the case where the standard of
care would be that of a skilled shop-keeper. See: Brabani & Co. v. King [1985] A.C. 632. Since the bailer
is a jeweler, the standard would consequently be very high, as jewelers are considered to be extremely careful
in the protection of their own goods. Lacey would therefore argue that this standard should apply to the
jeweler, and the onus would be on the jeweler to show that the brooch was lost through no fault of his. The
jeweler might argue Lacey's failure to return to pick up the brooch following its email to her represented
abandonment of the goods, and it had no obligation to protect them or care for them after the expiry of a
reasonable time. The question of application of any Limitations Act period also arises. Since Lacey ―ought
to have known‖ she had a claim against the jeweler for return of the piece, waiting five years (even if
inadvertently) to commence an action, likely means her action would not be permitted. See: Chaing v.
Heppner et al. (1978) 85 D.L.R. (3d) 487, as noted in the case excerpt in the text, and Davis v. Henry Birk &
Sons Ltd. (1982) 41 B.C.L.R. 137.
Case 7
Central Ceramic China Ltd. was an importer of various lines of dishes and tableware that it sold in
quantity to hotels and restaurants. Approximately 70 percent of its sales consisted of hotel-grade dishes,
20 percent of fine bone china dishes, and the remaining 10 percent consisted of cutlery and eating
utensils.
For many years the firm used the services of Able Transport Co. to deliver its goods to customers
who were located in various parts of the country. All goods were shipped in cartons marked: ―FRAGILE.
CONTENTS BREAKABLE IF ROUGH-HANDLED.‖ The contents were normally packed in a strawlike
material to provide some protection in the event of impact or careless handling. This reduced breakage of
the shipped china to a minimum acceptable level. Only occasionally would a customer report breakage,
and this usually consisted of only one or two pieces in a shipment of perhaps many hundreds.
Central Ceramic recently tested a new type of foam packing material, and decided that its use would
permit the contents of a case to withstand a reasonable amount of impact if the case should accidentally
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be dropped. Management then decided to use the new packing material in cartons that were not marked
with a ―fragile‖ label in order to obtain a lower shipping rate. The company informed Able Transport of
the removal of the ―fragile‖ notice on the containers and requested a lower shipping rate. Able Transport
agreed to handle the goods at a lower rate.
During the month that followed, management of Central Ceramic monitored the breakage rate and
noted that it was approximately the same as when the other marked containers were used. The next month
the company shipped a very large quantity of china to a distant hotel customer in the new containers. The
china was shipped in 36 cases. When it was received by the hotel, almost half of the china was found to
be either cracked or broken. An investigation by the carrier revealed that road vibration during the long
trip had caused the packing material to shift, allowing the pieces of china to come in contact with each
other and break, if the carton received any impact.
Central Ceramic took legal action against Able Transport for damages equal to the loss. Able
Transport denied liability.
Discuss the arguments (if any) that the parties might raise in this case.
Render a decision.
Answer:
This case is concerned with the liability of the common carrier of goods, and hence a bailment situation. The
issue is whether the carrier should be liable for the breakage of the china. Central Ceramic would probably
argue that the carrier was aware of the contents of the cases, and failed to properly handle the goods. The
carrier would have two lines of defence: (1) The goods were packed by the shipper (2) the shipper changed
the designation of the goods from 'fragile' to ordinary in order to obtain the lower shipping rate, and in doing
so, was not entitled to the extra care required to handle fragile goods. The key issue here is the fact that the
carrier agreed to handle the goods at the lower rate knowing that they were in fact "fragile". This point
should be discussed to determine its impact (if any) on the defences which the carrier has raised. The
knowledge might affect the carrier's second defence but not the first one. Since the carrier had no control
over the way in which the goods were packed, it would probably avoid liability, particularly in light of the
evidence that ordinary road vibration caused the protective packaging material to shift, leaving the china
vulnerable to breakage if normally handled by the carrier.
Case 8
Universal Paper Products Ltd. of Vancouver consigned three-and-a-half boxcar loads of goods to
RapidMovve Transport Co. to take the goods from Vancouver to Le Havre, France. RapidMovve would
normally have made direct arrangements with Canadian Atlantic Railways (CAR) for the Vancouver–
Montreal leg, but because there was a half-carload involved, they engaged Railshippers Inc. to put
together the Vancouver–Montreal leg. Railshippers could get a better rate from CAR as they specialized
in making up full carloads from an assortment of partial carloads. RapidMovve engaged Maritime
Containerways to ship from Montreal to France, and a French trucking firm for local delivery in France.
All would have gone well, had it not been for a derailment of the CAR train in Northern Ontario.
Unseasonable rains had washed out a section of track and, in the dark, the train was derailed. Most of the
product was probably in good shape after the accident, but unfortunately one of the welding crew pressed
into service by CAR to clear the blockage of the main line in the emergency ignited the contents of one
car as he cut away wreckage. The flames spread to the other cars, destroying $60,000 of paper products.
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Three weeks later, Universal Paper became frustrated that RapidMovve could still only provide a
garbled, contradictory explanation of what had happened. A newspaper account noted that there had been
no salvage of any freight from the wreck. Universal Paper, knowing only that they had delivered goods to
RapidMovve, and that none had arrived in France, sued RapidMovve for the value of the goods.
Identify and discuss the legal issues raised in this case and the liability (if any) of the parties.
Render a decision.
Answer:
Students should recognize the type of bailment in this case as one of carriage of goods by a common carrier.
The general rule here is that the common carrier is essentially an insurer of the goods and will be liable for
loss or damage except for those circumstances that would allow it to avoid liability, such as Act of God,
goods that self-destruct, etc. The train wreck might be considered an Act of God, however, but it did not
damage the goods. The goods were destroyed as a result of the fire caused by the negligence of an employee.
On this basis, the carrier might be liable for the loss, subject to any limitations on the dollar amount of
liability that the legislation might have fixed for common carriers.
Case 9
Hart operated the Riverside Restaurant and Bakery Shop, which was located on a busy downtown street.
The front portion of the premises contained the bakery shop, and the rear part of the building housed the
restaurant. Patrons entering the building were required to pass through the store portion to reach the
restaurant. In the store area, near the entrance to the restaurant, the owner had installed a number of coat
hooks in a recess in the wall of the building. Employees of the shop and restaurant used the alcove to
store their overcoats and hats.
Wallinsky, a stranger to the community, entered the shop for the purpose of dining, and proceeded
through the shop to the restaurant area. Along the way he noticed the clothing in the alcove and placed his
overcoat and hat on one of the unused hooks. He then entered the restaurant and ordered a meal. Some
time later, when he was about to leave the restaurant, he discovered that his overcoat and hat were
missing.
Hart denied responsibility for the loss. Wallinsky brought an action against him for the value of the
hat and coat.
Discuss the arguments that the parties might raise in this case, and identify the legal issue involved.
Render a decision.
Would your decision differ in any way if the coat hooks were located in the restaurant beside
Wallinsky‘s table?
Answer:
The first and perhaps most important point to be discussed in this case is the matter of possession of the
overcoat and hat. In order to have a bailment, possession must be transferred to the bailee, and the bailee
must be prepared to accept possession of the goods. Here, there was no actual physical taking of the goods
by Hart. However, was the provision of a coat rack in the alcove an invitation by Hart to Wallinsky to hang
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his coat in that area? Was the coat rack there for public use - or for use by the employees only? Would this
affect the relationship? The only way that Wallinsky would succeed against Hart would be by establishing
that the presence of the coat hooks constituted an invitation for him to place his hat and overcoat in that area,
and by doing so, Hart acquired constructive possession of the goods. If additional coat hooks were located in
the restaurant beside Wallinsky‘s table, and Wallinsky had placed his coat on the hooks, his chances of
recovery would be greater, as the presence of the coat hooks in the restaurant area would likely be considered
by the court as an invitation by Hart to accept the chattels as a bailment. See: Murphy v. Hart (1919), 46
D.L.R. 36, where the bailee was held liable for the patron's loss of his overcoat and hat on the basis of
constructive delivery to the bailee of the goods by placing them on the coat hooks placed for that purpose in
the alcove.
Case 10
Harriet, a licensed pilot, rented an aircraft from Aircraft Rental Services at a local airport. The purpose of
the rental was to fly a friend to a large metropolitan city some 500 kilometres away and return before
nightfall. At the time that she arranged for the use of the aircraft, she assured the owner that she would
leave the city in ample time to return the aircraft before dark. She paid a deposit for the use of the aircraft
and, accompanied by her friend, made an uneventful flight to the distant city. Before returning home,
however, she spent some time shopping and lost track of time. Eventually, she realized that she was
behind schedule and hurried to the airport.
The weather report for the return trip was not promising, but she nevertheless decided to chance the
flight. She took off at 4:45 p.m., some two hours before official nightfall on that particular January night.
En route, she discovered that the weather had deteriorated and that visibility was decreased by the
combination of sundown and low cloud conditions.
At 7:05 p.m., some 20 minutes after official nightfall, she found that she could proceed no further, as
the poor weather and semi-darkness made recognition of her route on the ground virtually impossible. To
avoid further difficulties, she made a forced landing in a farmer‘s field, which resulted in damage to the
airplane‘s undercarriage.
Harriet assumed that the aircraft owner‘s insurance would cover the cost of the repairs. However, she
was surprised to hear that the insurance covered only public liability and not damage to the aircraft itself.
The cost of repairs amounted to $11,165. When Harriet refused to pay for the damage, Aircraft Rental
Services brought an action for damages against her for the amount of its loss.
In her defence, Harriet alleged no negligence on her part, as the landing was made in accordance with
accepted forced-landing procedures and skillfully executed on her part. She argued that in any forced
landing, some damage to the undercarriage could be expected, and that the mere fact that damage
occurred was not an indication of negligence.
The plaintiff brought out in the evidence that Harriet was licensed to fly under daylight conditions
only. She did not have what was called a ―night endorsement‖ on her licence that would permit her to fly
after dark. The plaintiff alleged that her act of flying after official nightfall was a violation of Air
Regulations under the Aeronautics Act.
Discuss the nature of the plaintiff‘s claim in this case, and the various other arguments that might be
raised by the parties. Indicate the issues that must be decided by the court.
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Render a decision.
Answer:
The facts of this case are similar to those in the case of Townsend Air Services Ltd. v. Hansen (1974), 54
D.L.R. (3d) 205. The plaintiff's claim would be based upon bailment, as the rental of the aircraft would be
the "hire of a chattel." With the hire of a chattel, the liability of the bailee should be ascertained by asking
what standard of care is imposed upon the bailee. Was the damage to the aircraft due to her negligence in
flying after official nightfall, when she was not trained to fly under night conditions? If she executed the
forced landing properly, and in accordance with accepted forced landing procedures, would this nevertheless
be negligence? What significance (if any) should be attached to the fact that she violated the air regulations
by flying after official nightfall without a "night endorsement" on her licence? In the Hansen case the court
held that the onus was on the bailee to show no negligence. Had the pilot not been flying after dark, the need
for the forced landing would not have arisen and the damage not occurred. The bailee's negligence in
violating the air regulations resulted in the loss suffered by the bailor, and the bailee was liable for the loss.
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CHAPTER CHART
Additional Chart for Instructor‘s use (not appearing in text) book.
CHAPTER 21. THE SALE OF GOODS
Chapter Topics
Codification of the Law
Nature of a Contract of Sale
Contractual Duties of the Seller
Contractual Duties of the Buyer
Remedies of the Buyer
Remedies of the Seller
Electronic Sale of Goods
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
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Chapter Objectives
After study of this chapter, students should be able to:
• Explain the nature of the contract of sale and the Sale of Goods Act.
• Identify the rights and duties of the seller and the buyer.
• Describe the remedies available to the buyer or seller in the event of
breach of the agreement.
YOUR BUSINESS AT RISK
Selling goods should be easy — payment is made and goods are delivered. Unfortunately, the
vast majority of trade does not work that way. Commercial sales tend to be on credit terms,
production is agreed for the future, and delivery dates rarely correspond to payment dates.
Beyond that are the problem cases — strikes, disasters, accidents, delays, misunderstandings
and mistakes. Businesses could plan every eventuality into their sales contracts, but each one
would fill a book of its own. The law of the sale of goods fills in the gaps that businesses fail to
cover.
CHAPTER COMMENTARY
The sale of goods, which is covered in this chapter and in the Chapter 27 (Consumer- Protection Legislation),
represents an area of law that has been subject to much codification and legislative activity. This originated
with the general codification of the law pertaining to sale of goods at the end of the 19th Century, and now
includes the original legislation supplemented by "consumer protection" activity of the past two decades. As
a result, much of the law pertaining to the sale of goods is now found in the statutes, rather than in the
common law. The codification of the law was a beneficial change in many ways, the most important being:
(1)
It clarified and simplified the law;
(2)
It established the circumstances under which title passed, and when;
(3)
It established the rights and duties of the buyer and seller under a contract of sale, and
(4)
It outlined the various remedies available to the parties in the event of breach.
For classroom purposes, the nature of the contract of sale should be examined, and the rules for the
transfer of title (and hence, risk of loss) should be reviewed. In addition, the distinction between a condition
and a warranty should be emphasized. The duties of both the buyer and the seller are worth noting, and may
be reviewed using the case problems. Case problems 1 and 2 may be useful in this regard, as they not only
raise the issue of the seller‘s duty, but deal with the remedies available to the injured buyer.
On the topic of breach or failure to perform, the Foley v. Piva Contracting Ltd. [Douglas Lake New
Holland] Court Decision provides an example of fundamental breach, and the right of a party to damages for
loss.
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The Pihach v. Saskatoon Diesel Services Ltd., Court Decision illustrates the application of the term
‗merchantable quality‘ in the Sale of Goods Act to a sale contract, and the consequential loss arising under
the warranty.
Consumer protection legislation is not covered in this chapter, but reserved for Chapter 27
(Consumer-Protection Legislation). The principle of caveat emptor, however, is briefly examined in this
chapter, and provides an outline of the position of the parties under the Sale of Goods Act with respect to
those contractual activities that have been subject to much legislative activity under the guise of consumer
protection.
Review Questions
1. Under what circumstances would the skill and judgment of the seller give rise to an implied
warranty or condition upon which the buyer might rely?
Answer: The warranty or condition would arise where the seller was made aware of the use intended
for the goods and the buyer relied upon the seller‘s selection.
2. Why is the time of passage of title important in the sale of goods?
Answer: Risk of loss follows title. Hence, the time of passing of title is important.
3. Under what circumstances would a buyer of goods be entitled to rescind the contract? Give an
example.
Answer: The buyer could rescind the contract if the seller is in breach of a condition. Example:
Where the seller is in the business of selling a particular line of goods, and the buyer makes it known that
he requires goods for a particular purpose, or relies on the skill of the seller to supply suitable goods, there
is an implied condition in the agreement that the goods will be reasonably fit for the use intended.
4. Indicate the significance of "notice" in the sale of goods.
Answer: "Notice" applies in those cases where the seller must do something to put goods in a
deliverable state. When the buyer is given "notice" that this is done, the title passes. (Rule 2-3).
5. Outline the contractual duties of a seller under the Sale of Goods Act.
Answer: Seller must deliver the required quantity of goods to the buyer in accordance with the
contract at the required time and place for delivery. (Note also that seller makes certain implied
conditions and warranties).
6. What implied warranties are part of a sale of goods?
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Answer:
Implied warranties are:
(1) goods are free from incumbrances.
(2) buyer will have quiet possession of the goods.
7. Distinguish between a "warranty" and a "condition." Why is this distinction important?
Answer: A condition is a fundamental or essential term of the contract, which if broken, would entitle
the innocent party to treat the breach as a discharge. A warranty is not an essential term of the contract,
and would not entitle the injured party to treat the contract as at an end. It would only entitle the injured
party to claim damages.
8. Explain the significance of "caveat emptor" in the sale of goods.
Answer: Caveat emptor places the onus on the buyer in a transaction to satisfy himself/herself that
the goods will be satisfactory for the purpose intended, without recourse against the seller if they are not.
9. What are the implications of an unconditional contract for the sale of specific goods in a
deliverable state?
Answer: Title passes immediately. (Rule 1)
10. Outline the remedies available to a seller of goods if the buyer fails to comply with the
contract.
Answer:
Remedies of a seller are:
(1) lien
(2) action for the price,
(3) damages
(4) retention of deposit,
(5) stoppage in transitu
(6) resale.
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11. Explain stoppage in transitu.
Answer: Stoppage in transitu is a procedure whereby the seller may stop delivery of the goods by a
carrier if the buyer becomes insolvent.
12. Distinguish a "sale" from an "agreement to sell." Why and when is this distinction important?
Answer: A "sale" refers to a transaction where ownership is transferred to the buyer. An
"agreement to sell" refers to goods not in existence or subject to some condition before transfer of
ownership can take place.
13. If goods that are the subject matter of a contract for sale are stolen by a thief during the
"cooling off" period, who bears the loss: the buyer or the seller?
Answer: Since the contract does not become effective until the "cooling off" period expires, and the
goods are in the possession of the seller, title and possession would be with the seller. Loss follows title,
and the seller would therefore bear the loss.
14. With so much consumer commerce now conducted online, describe how the risk of loss or
damage to goods might apply for an online seller and buyer.
Answer: In online contracts, in the absence of terms explicitly agreed upon by the parties, the risk of
loss and passage of title to the goods will still be governed by the Sale of Goods Act. Specifically Rules 4
and/or 5 may apply to an online transaction for consumer goods. If a buyer receives goods ordered
though an online retailer and retains them past the specified return date or beyond a reasonable time, if no
return date is specified, the title to the goods will pass to the buyer at the expiry of that time. Similarly, if
the seller needs to produce the goods before shipping them to the buyer and subsequently deposits them
with the carrier for delivery to the buyer, the risk and title will pass at the time of delivery to the carrier.
Note: these rules are applied in the same manner for online contracts for the sale of goods as for offline
ones.
Mini-Case Problems
1. Andrew wished to buy paint for a dock he had built at his cottage, so he visited Sheldon‘s Paint Store
to obtain something suitable. He asked the clerk for dock paint that would not peel under damp
weather conditions. Andrew mentioned that he had heard Brand X was good, but wished to have the
clerk‘s opinion as to its suitability for use on a dock. The clerk said it was ―Okay as a paint,‖ and
Andrew purchased a quantity.
Several months after the paint was applied to the dock, it began to peel and fall off the surface.
If the paint supplier refused to accept responsibility for the suitability of the paint, outline the
rights of Andrew.
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Answer:
The clerk‘s answer was not a strong endorsement, and can even be taken as a negative opinion. Even so,
Andrew could opt to take action against Sheldon‘s Paint Store for breach of the implied condition that the
paint was suitable for the use intended, with a modest chance of success. Andrew might argue that he had
raised the name brand X for an opinion, and since he had made Sheldon‘s aware of the purpose intended, the
statement by the seller that it was "O.K." implied that it was suitable for the use intended. Andrew might
argue that if it was unsuitable the seller was obliged to state that it was not. He would argue that he was
relying on the skill of the seller to supply a suitable paint. Conversely, the fact that the clerks reply hardly
satisfies the question should have been a trigger for Andrew to ask for more detail.
2. Fresh Fruit Juice Co. agreed to supply 100 250-litre drums of concentrated apple juice to the
Institutional Food Produce Corporation, with delivery not later than October 31st.
On October 30th, the seller delivered 125 200-litre drums of the concentrate to the purchaser‘s
plant. The purchaser rejected the goods because they were in the small drums rather than the 250-litre
size.
Discuss the rights of the parties.
Answer:
The seller in this case may be in breach of the contract, since the contract specified 250 litre drums.
Performance of contracts must be exact, and in this instance the seller failed to comply with the terms of the
agreement. The 'reason' for the 250 litre specification may have been related to the product mixing facilities
of the buyer, and hence an important term of the agreement.
3. Basil Supply Co. shipped on credit twelve cases of goods to Able Wholesale Corporation on June 1st.
On June 15th, Able Wholesale Corporation was declared bankrupt and its assets taken over by a
trustee in bankruptcy. At that time, the trustee was in possession of eight cases of the goods that were
shipped by Basil Supply Co.
Discuss the rights of the parties.
Answer:
Under the Bankruptcy Act, Basil Supply Co. may submit a written demand to the trustee for the return of the
goods w/in thirty days of the Corporation's bankruptcy. If the goods are unsold and still in the delivered
condition, Basil Supply Co. may be able to recover the eight cases.
4. Early on a Monday, Nora agrees to purchase a big-screen TV from a major chain home-electronics
store, to be ordered in from a central warehouse. The purchase order did not specify a delivery date,
but the salesperson assured her verbally that ―it will be here in a couple of days.‖ Nora left a $100
deposit and her credit card number. On Friday, Nora saw the same model TV offered at another store,
with a $500 cheaper sale price, and purchased it. She then called to cancel her order with the first
store. Does the Sale of Goods Act affect Nora? Will she likely lose her deposit, or should it be
refunded? Will she likely end up with two TVs or one?
Explain why in each case.
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Answer:
Nora would have an agreement to purchase a TV from the electronics store. Her deposit and credit card
number (assuming authorization to charge the balance) would ‗bind the contract‘. Her cancellation would
perhaps represent express repudiation of the contract and she may be in breach of the agreement. Query:
does the salesperson‘s promise of delivery represent a binding condition that if breached, would allow Nora
to avoid the contract? On the facts, Nora may lose her deposit unless the delivery condition and its breach
applies.
5. Morgan owned logging equipment, which was then working in a forest in a remote area. While in the
city, Morgan met and discussed business with Henri, and wound up selling the logging equipment to
him. Their agreement stated that payment would be made at the end of the month. A forest fire
destroyed the equipment two days before the end of the month.
Discuss the rights of the parties.
Answer:
This case illustrates the occurrence of a frustrating event while the goods are still in the possession of the
seller. If this should be the case, the contract would be terminated. However, if Henri had taken possession
of the equipment, then title would have passed, and Henri would be liable for the contract price. One would
hope, in this case, that Henri had insured the equipment.
6. An online retailer offers a page with its contract conditions for its online customers to read before
they check out. There is wording on the checkout page of the retailer‘s website stating that ―by
placing your order you agree to the conditions of sale‖ although this warning does not pop up as a
prompt at the time of placing the order. The link to the conditions is at the bottom of the checkout
page in light blue type font. If customers click on the link they will find the following terms:
Risk of Loss: For online items purchased from our site the risk of loss and title to the items
passes to the customer when we deliver it to a carrier for delivery to the customer. If the items
must cross an international border, risk and title will pass to the customer when the items clear
customs.
Returns: We welcome returns if you are not happy with your item. All returns must be
received by us within 90 days of your order. If you return an item to us within the stated return
period, we will not take title to any returned item until it is documented as received in our returns
warehouse in Halifax NS.
Discuss this in terms of risk to the buyer and recommend any actions a buyer should consider.
Answer:
The buyer may not be aware of the online seller‘s terms regarding passage of title unless he sees the
warning and discovers the faint link to the contract terms page at the bottom of the checkout screen. As
the checkout process can be completed without ever forcing the buyer‘s attention to address the issue of
additional contract terms, they can easily be overlooked. These terms alter the provisions of the Sale of
Goods Act by shifting the risk of loss or damage to the buyer before the goods are in the possession and
control of the buyer and long before the return period has expired. Moreover, it requires the buyer to bear
the same risks if the goods are returned until the seller has positively received them. Buyers may wish to
mitigate this latter risk with insurance and tracking when shipping the goods for return. The greatest
concern may be the lack of knowledge of the contract terms on the part of the buyer which may prevent
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the buyer making an informed decision about accepting the risks under the contract.
Case Problems for Discussion
Case 1
Benjamin owned and operated a dollar store, and decided that adding a full line of greeting cards and
party supplies would be desirable. He contacted a wholesaler and placed an order for greeting cards,
supplies and display racks. The wholesaler advised him he would receive the manufacturer‘s ―late year
package,‖ which would cover Christmas and New Year‘s theme merchandise. As it was a first order, the
wholesaler required payment in full by cash or credit card, and Benjamin provided his credit card number
for a payment of $4,000. The delivery date was projected as November 15th. When the goods did not
arrive by November 17th, Benjamin called the wholesaler, who apologized and revised the delivery date
to December 1st. Benjamin accepted this and waited. December 1st passed without delivery, and
increasingly agitated calls resulted in nothing but the wholesaler blaming the manufacturer. Christmas
Day came and went, and on December 31st, a truck full of goods arrived. The card boxes were sealed and
appeared in good order. The Christmas decorations were in good condition. The racks and equipment
were sturdy and of high quality. Benjamin reluctantly accepted delivery, reasoning that he could sell the
party merchandise anytime, and could sell the decorations and cards next year. After the truck drove
away, Benjamin began opening the boxes. Every piece of the New Year‘s decorations and cards was
printed with the current year.
Advise Benjamin.
Answer:
This case concerns the sale of goods by description where the delivery in time for the season was an
essential term of the contract. Did Benjamin waive the term of delivery by accepting the numerous
delays? Students should discuss the rules under the Sale of Goods Act that may apply here. Note that
Benjamin would be entitled to examine the goods to ensure that they were of merchantable quality. In
this case they were not, and Benjamin may be able to reject the shipment, as the delay rendered them
unsaleable.
Case 2
Hightower Industries produced 20kg bags of dry dog food, and shipped them on wooden pallets. The firm
required an industrial process that could be integrated into its production line that would wrap each loaded
pallet in a protective plastic wrap. The firm approached an engineering design firm, Tech-Solutions which
agreed to develop such a machine for a fixed price. In the course of its design work, Tech-Solutions found
two routes to such a machine. The more costly approach used stretch wrap and a pallet-spinning platform.
The less costly way employed shrink wrap with pallets passing under a heater unit. Both options were
offered to Hightower, who chose the less-expensive shrink wrap machine. When the machine was
delivered, installation testing revealed that the bags became wet, as the heater condensed water out of
trapped air under the shrink wrap, degrading both the bags and the dog food. Hightower rejected the
machine. Advise both parties.
Answer:
The Court Decisons in the chapter address the issues of evidence of a contract as required under the
Sale of Goods Act, (N. M. Patterson & sons Limited v. Lowenburg), what constitutes ―merchantable
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quality‖ (Pihach v. Saskatoon Diesel Services Ltd)., and the enforceability of limitation clauses (Foley v.
Piva Contracting Ltd. [Douglas Lake New Holland]). These cases may be discussed in class to illustrate
the application of the Sale of Goods Act to various sale contract situations.
Case 3
Small Parts Manufacturing Co. entered into an agreement with Foremost Forging Co. to have an
automated stamping press made for it. The agreement called for the construction of the press and its
preparation for pickup by a carrier that Small Parts Manufacturing would designate, not later than March
1st. Payment terms were 50 percent payable at the time of signing the agreement, with the balance of the
price payable on March 1st.
On February 25th, the construction of the press was complete. Foremost Forging informed Small
Parts Manufacturing that the press was now ready for pickup by the transport company. The parties
agreed that the press would be turned over to the carrier as soon as pickup could be arranged.
The press was placed in Foremost Forging‘s warehouse for the carrier to pick up. However, on
February 26th, the press was destroyed when an unknown arsonist set fire to the warehouse building.
Discuss the rights (if any) and the liability (if any) of the parties in this case. Indicate the possible
outcome of the case if legal action should be taken.
Answer:
This case is concerned with risk of loss when the subject matter of a contract of sale is destroyed. A
discussion of this case should involve the transfer of title, and a determination of when the title in the goods
passed. When the press was completed and ready for delivery the seller notified the buyer as required under
the rules (Rule 5) for the transfer of title. The question here is: was the press unconditionally appropriated to
the contract at this point? Did the buyer assent? Probably yes. The buyer was to arrange for the pick-up, and
the seller's obligation under the sale was probably complete when the press was moved to the warehouse.
The loss was probably not due to the negligence of the seller, since the fire was caused by an arsonist.
Consequently, the seller may not be liable for the loss. The buyer, however, would be liable to the seller for
the contract price of the press.
Case 4
A wholesaler in Toronto agreed to sell 2,000 5-kilogram cases of walnut pieces to a buyer in Vancouver.
The wholesale price was to be $7.70 per kilogram with delivery F.O.B. Toronto. The goods were paid for
and shipped by common carrier in accordance with the buyer‘s instructions.
The goods were subject to moisture and freezing during transit, and the buyer, on inspection of the
goods, found them unfit for his purposes. The goods were then sold by the buyer for $4.62 per kilogram
in Vancouver, while the goods were still in the hands of the carrier. In the meantime, the carrier had found
a buyer willing to purchase the 10,000 kilograms of walnuts at $6.16 per kilogram. However, the carrier
was unable to complete the sale because of the buyer‘s actions.
The Vancouver merchant later brought an action against the Toronto wholesaler and the carrier for his
loss, calculated at $3.08 per kilogram, or $30,800.
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Indicate the nature of the plaintiff‘s claim in this action and the defences that might be raised by the
defendants.
Render a decision.
Answer:
This case raises a number of issues that might be discussed concerning the formation of the contract, and
the risk of loss. When did the title pass under the contract? Did it pass when the goods were delivered to
the carrier? When received in Vancouver? Who is responsible for the loss? The fault was primarily that
of the carrier, since he allowed the goods to freeze during shipment. Should he be liable for the full loss,
when he was prevented from selling the goods (at only a partial loss) by the buyer's actions? On what
basis could the buyer claim the full loss from the seller? In this case, if the goods were in merchantable
condition when delivered to the carrier, the title probably passed at the moment when the buyer was
notified. (See: text). Responsibility for the loss would normally be that of the carrier, since it was due
to his negligence that the value of the goods was diminished, but the actions of the buyer may have
limited his right to recover the full loss from the carrier. The seller, however, would be entitled to
payment in full, if the goods were of the proper quality, etc., at the time the title passed, as the risk of loss
passed with the title. See: Donald H. Bain Ltd. v. Beaver Specialty Ltd. et al., [1970] 2 O.R. 555, for a
slightly different fact situation, but one which included a number of similar issues.
Case 5
Davy Crockett, a northern Alberta farmer, ordered a set of logs for the construction of a log home from a
lumber company that advertised log houses for sale in a back-to-the-land magazine. The magazine
advertisement stated that the house was in kit form, and claimed that any qualified builder could construct
it in less than ten days. The advertisement recommended hiring a qualified builder. However, it indicated
that any person who had experience in house construction could probably do the work, but the result
would be his or her own responsibility.
Crockett ordered the log kit early in March for delivery in the second week of April. The logs did not
arrive until late May, however, when Crockett was busy planting his crop. He was unable to begin
construction during the summer months, due to an injured hand; and during the fall months he was busy
with his harvest. When Crockett was ready to build in late October, he unwrapped the logs and discovered
that a large number of them were warped and unsuitable for construction. The lumber company normally
instructed buyers to construct the house promptly on delivery to avoid warping. However, they had failed
to do so in Crockett‘s case because of the late delivery. The company refused to refund Crockett‘s money
or take back the log kit.
Crockett continued to correspond with the company concerning the logs. Eventually, some months
later, the company agreed to replace the logs that had warped. When Crockett was finally able to begin
construction a few weeks later, he discovered that because the replacement logs had experienced a
different drying or seasoning time, they would not fit properly with the remainder of the logs in the kit.
He then brought an action for rescission against the lumber company.
Discuss the arguments that might be raised in this case.
Render a decision.
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Answer:
The agreement between the parties stipulated delivery in mid-April but the seller did not deliver until late
May. Crockett could probably reject the goods at the time, but accepted delivery. The failure to inform
Crockett to build promptly would perhaps entitle Crockett to replacement of the warped logs, and the seller
did so. However, did this agreement (offer and acceptance) prevent Crockett from claiming fundamental
breach of the first agreement when he discovered that the new and old logs did not fit? The seller would
certainly argue that this was the case. Crockett's position would be that the logs were useless for the
construction of a home and that he had agreed to the replacement on the understanding that the seller was
providing materials fit for the use intended. They were not, and the seller's breach went to the root of the
agreement. The court in this case might find in favour of Crockett on the basis of fundamental breach, or
breach of a condition that the goods were reasonably fit for the use intended. However, in the case of Miller
v. Pine Log Homes Ltd. (1984) 50 A.R. 106, the court held that by delaying construction for an unreasonable
time that by implied condition of fitness no longer applied.
Case 6
A Swiss corporation entered into a contract with the Canadian Dairy Commission to purchase anhydrous
milk fat for the production of condensed milk. The contract was executed in Canada by a New York agent
of the corporation, who provided that the goods be shipped to Algeria. The Commission was advised that
it was to meet the import conditions of the Algerian government, and payment was to be made on
presentation of a clean bill of lading and proper certificates of analysis of the goods.
While they met the contract stipulations in Canada, the goods were rejected by the Algerian
authorities because the caps on the drums had not been sealed and some of the caps had loosened during
shipment, allowing the contents to spoil.
The Swiss corporation then brought an action against the Commission for rescission and
reimbursement of the contract price.
Discuss the arguments that the parties might raise, and render a decision.
Answer:
The important questions raised in this case are: Did the seller meet the terms of the agreement? Did the buyer
have the right to reject the goods? When did the title pass? The seller would argue that the sale was
complete and the title to the goods passed when the goods and their certificates etc. were placed in the hands
of the carrier. (Rule 5). The goods, therefore, belonged to the buyer when the Algerian authorities rejected
them. The buyer would argue that one of the stipulations of the contract was that the goods meet the import
conditions of the Algerian government, and until such time as they did, the title would not pass. In the
alternative, the buyer might argue that the careless packing by the seller resulted in the rejection, and the
seller was liable for the loss the buyer suffered. If the stipulation that the goods meet the import conditions
of the Algerian government was a term of the contract (express or implied) then the seller may be in breach of
the contract, as the seller would be obliged to pack the goods as required to meet the import conditions. In
the case of Agrex S. A. v. Canadian Dairy Commission et al. (1983) 24 B.C.L.R. 206, on similar facts, the
court found that the title had passed, but the seller was liable for breach of warranty concerning the improper
packaging. The court awarded the plaintiff lost profits as damages.
Case 7
Stubert operated a produce brokerage, buying agricultural produce and reselling it to any of 30 smaller
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independent regional distributors. Each distributor served an area no greater than a city, and some
competed with one another. The distributors generally sold to independent convenience stores, and they
vied for institutional sales such as hospital kitchens.
Stubert visited a farmers‘ co-operative in an agricultural area, and after some discussion secured a
truckload of tomatoes at the wholesale market price for Number 1 Grade Hothouse Tomatoes.
Three weeks later, a commercial-freight company truck arrived in Stubert‘s part of the province with
the tomatoes. Stubert had the driver open the van, and he looked at the frames of cello-packed tomatoes
visible from the door. They appeared fine, so he handed over his $4,400 bank draft to the driver in return
for the bill of lading.
He endorsed the bill of lading and gave it back to the driver with instructions to him to carry on, as
was often the case, to one of his bigger customers, a distributor in the next town. The driver was to turn
over the bill of lading against a payment of $6,700.
When the driver returned to Stubert‘s premises, he had no payment to deliver, but he still had the
entire load of tomatoes. The distributor had insisted on unloading the tomatoes before payment. He had
found that while the tomatoes near the doors were Number 1 Hothouse, those beyond the doors were at
best Number 3 Hothouse, or perhaps even Field Grade. The distributor rejected the shipment, packed it
back on the truck, and sent the driver back to Stubert. Stubert demanded a return of his bank draft and
ordered the tomatoes to be returned to the co-operative. The driver said his company rule was that a driver
is to always leave the load with the last person who pays, and that one never returns money once it is
received. Accordingly, he off-loaded ―Stubert‘s‖ tomatoes despite the protests of Stubert, and drove
away.
Advise the parties, including a commentary on the trucking company‘s policy.
Render a decision.
Answer:
Students should determine that Stubert entered into a contract for the produce by description as the goods
were not in existence at the time. According to the Sale of Goods Act for goods sold by description there is
an implied condition in the contract that the goods will conform to the description. In this case the goods
were to be Number 1 Grade Hothouse Tomatoes. On delivery, the buyer is entitled to a reasonable time to
inspect the goods to determine if they meet the description. Did Stubert's careless examination represent that
opportunity? Did his endorsement of the bill of lading constitute acceptance of the tomatoes? Students
should consider these questions. Normal practice of the trade was to confirm that the goods meet the
description before signing the title over (bill of lading) for delivery to the customer. Stubert may have
accepted the goods and it may be too late to later object to the seller about the quality. Signing the bill of
lading would be an act of the 'owner' of the goods, and this might constitute acceptance of the goods. Caveat
emptor. However, if the packing of the tomatoes could be considered a deliberate misrepresentation of the
goods to induce Stubert to accept them without examining the entire shipment, Stubert may be able to avoid
the contract on the basis of misrepresentation.
Case 8
Maria Henderson contacted Cool Air Contracting Ltd., a local refrigeration contractor with a view to
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obtaining an air conditioner for use in the beverage room of her hotel. She explained to an employee of
the company that she wished to install a device that would not only cool the room, but remove tobacco
smoke as well. The employee described a number of room air conditioners (for which the company was
the local distributor). He recommended a particular model that he indicated was adequate for a room the
size of Henderson‘s beverage room. Henderson entered into a contract for the model suggested by the
contractor and had the equipment installed.
After the equipment was put into operation, Henderson discovered that the equipment did an adequate
job of cooling the room, but did not remove the smoke to any significant extent. She complained to the
company, but the company was unable to alter the equipment to increase its smoke-removal capacity.
When the company refused to exchange the air conditioner for a larger model, Henderson refused to pay
for the equipment. The company then brought an action against her for the amount of the purchase price.
Discuss the issues raised in this case and indicate how a judge might decide the matter.
Answer:
The action by the seller for payment of the purchase price would be based upon the rule that the goods were
sold and delivered, and the seller therefore entitled to payment. The resistance to the action by the buyer
might be based upon a number of defences related to the Sale of Goods Act. For example, the defendant
might argue that he made known his requirements to the seller, who was in the business of selling air
conditioning equipment, and he relied upon the seller to select the proper equipment for the purpose. Since
the device did not remove the smoke as required, the seller had failed to provide goods that were reasonably
fit for the use intended (the seller accordingly being in breach of a condition). See: Sale of Goods Act (Ont.),
s. 15 (a) and Canada Building Materials Ltd. v. W. B. Meadows of Canada Ltd., [1968] 1 O.R. 469. A
second defence might be to argue that the requirement that the equipment satisfactorily remove smoke was a
condition precedent, and until satisfied, the property in the goods did not pass to the buyer. Since the buyer
did not signify approval of the goods, the seller was free to remove the goods, but had no right to bring an
action for the price. See: Polar Refrigeration Service Ltd. v. Moldenhauer (1967), 61 D.L.R. (2d) 462.
Case 9
Grant planned to spend his winter vacation at a ski resort in the Rockies. In preparation for the holiday, he
purchased a new ski outfit from a local sports-clothing merchant.
The first time he wore his new ski outfit, he noticed that his wrists had become swollen and irritated
where the knitted cuffs of the jacket contacted his skin. He wore the jacket the second day, but found that
after skiing for a short time, he had to return to the lodge because his wrists had again become badly
irritated and had blistered.
Grant required medical treatment for the injury to his wrists. The cause of the injury was determined
to be a corrosive chemical that had been used to bleach the knitted cuffs of his jacket. The chemical was
one that was normally used to bleach fabric. However, from the evidence, the chemical had not been
removed from the material before the cloth was shipped to the manufacturer of the jacket. Neither the
manufacturer nor the retailer was aware of the chemical in the cloth, and its existence could not be
detected by ordinary inspection.
The injury to Grant‘s wrists ruined his holiday and prevented his return to work for a week following
his vacation.
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Discuss the rights (if any) and liability (if any) of Grant, the sports-clothing merchant, the
manufacturer of the jacket, and the manufacturer of the cloth.
Answer:
This fictional situation raises the question of liability to the buyer for the injuries he sustained as a result of
the chemical in the fabric used to manufacture his ski jacket. Grant purchased the jacket after examining the
material, but the defect was hidden in the fabric. On a strict interpretation basis, the buyer would be bound,
but this is not the case where the defect is not apparent to the eye. The buyer is not obliged to perform
extensive tests on the fabric in order to determine suitability, but employ only those tests that might be
performed by a "reasonable person." The seller would be liable in this case for the sale of goods that were
not merchantable if the buyer acted promptly on discovery and rescinded the contract. Where the seller and
the manufacturer of the clothing could not detect the chemical, the manufacturers of the cloth could be held
liable in tort for Grant's injuries. See: Grant v. Australian Knitting Mills, Ltd., [1935] All E.R. 222.
CHAPTER CHART
Additional Chart for Instructor‘s use (not appearing in text).
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CHAPTER 22. INTERESTS IN LAND
Chapter Topics
Introduction
Historical Development
Estates in Land
Registration of Property Interests
Lesser Interests in Land
Fixtures
Title to Land
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
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Chapter Objectives
After study of this chapter, students should be able to:
• Identify and understand the various estates and interests in land.
• Describe the ways in which interests in land are obtained, transferred and
protected.
• Explain the registration system used to identify property interests and their ownership.
YOUR BUSINESS AT RISK
In many cases, the most valuable asset that a business owns is its interest in land. Short of
ownership, there are rights of possession that can be just as important, remembering the
business maxim of ―location, location, location.‖ Failing to understand where those rights begin
and end places a critical business asset in constant jeopardy of being lost to competing
claimants.
CHAPTER COMMENTARY
Chapter 22 (Interests in Land) introduces the law of real property, and with it, the legal terminology
associated with land law. The distinction between real and personal property should be pointed out when
dealing with this topic, as students often tend to consider property in a very general sense, without realizing
that in some cases things that would normally be chattels become realty when attached to land in the form of
fixtures, etc. The significance of a chattel becoming a fixture is examined in the case quote from Stack v. T.
Eaton Co. et al. where the judge noted five points of law concerning chattels and fixtures, and what
distinguished one from the other. While fixtures are explained in the text, the case provides a good
description of the nature of a fixture in the words of the judge, as well as an example of a situation where the
issue might arise.
The nature of land holding in Canada is sometimes a revelation to students, as most have considered
land ownership to be absolute, without realizing that the "owner" simply holds an estate from the Crown, and
it is the Crown that is the true owner. A useful approach in dealing with the different estates in land might be
to start with the Crown, show the Crown patent grant in fee simple, then work from there for each different
type of estate. In this fashion, the reversion to the owner of the fee where a life tenancy has been granted may
be highlighted as well. (See Chart) Lesser interest in land and the use of restrictive covenants to control the
use of land, etc. are also concepts to review in class, either by way of example, or using the case problems at
the end of the chapter. Case 9, for example, deals with possessory interests in land, and Case 3, is concerned
with easements and rights-of-way. Both of these cases may be used, either for review or teaching purposes.
The Court Decision, Dube v. Philbrick provides an example of the application of restrictive
covenants, and the importance of clearly stating the property to which they would apply.
Of some importance in any discussion of real property law is the difference between the two major
land registration systems. Under the Registry System for example, a possessory title to land may arise by way
of adverse possession, but this may not be the case under Land Titles (in Ontario). Consequently, these
differences should be emphasized in any review of the topic. The differences in determining a 'good title'
under each system should also be noted.
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Review Questions
1. How are condominiums normally established?
Answer: A condominium is usually established by a developer who buys the land, constructs the
building, follows the necessary steps for creating the condominium (declaration, etc.) and forms the
corporation to manage the operation. The developer then sells the individual units.
2. Explain the term freehold estate, how does this term apply to land?
Answer: A freehold estate is an estate in land where the land may pass on by intestacy or by will to
the heirs of the grantee if the grantee should die. It may also be sold by a grantee during his or her
lifetime.
3. What lesser estates may be carved out of an estate in fee simple?
Answer: Lesser estates would include (1) life estates (2) leasehold estates.
4. Indicate how a condominium organization deals with the problem of a unit owner who fails to contribute
his or her share of the cost of maintaining the common elements of the condominium.
Answer: If a unit owner fails to pay common expenses, the corporation is usually entitled to claim
the expenses as a lien against the unit, and if necessary have the unit sold to cover the unpaid amount.
5. Define the terms: fee simple; escheat; life estate; seisin; tenants-in-common; prescriptive right.
Answer:
fee simple:
- The highest estate in land that an individual may
hold. The equivalent of absolute ownership.
escheat:
- The vesting or reversion of land in the Crown which
occurs when a person possessed of land dies
intestate without heirs at law.
life estate:
- An estate in land which a person may hold for their
life-time or the lifetime of another person.
seisin:
The right to possess land.
tenants-in-common:
- The holding of an undivided interest in land by two
or more persons.
prescriptive right:
- A right of easement over land acquired by long use of the
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easement without interruption by the owner of the land.
6. How does a life estate differ from a leasehold estate?
Answer: A life estate is an estate in land which runs for an indefinite period of time. A leasehold
estate is an estate in land for a fixed term.
7. Describe briefly how land holding developed in Canada, and identify the system upon which it is based.
Answer: Land holding in Canada was based upon the system in England, which in turn dates back to
the feudal system introduced by the Normans in 1066. Under this system, all of the land is owned by the
Crown, and estates are granted to individuals.
8. What method is generally used to determine the unit owner's interest in the common elements?
Answer: Unit owners' interests in the common elements are usually calculated on the basis of the
cost of each unit as a percentage of the total unit cost divided into the cost of the operation of the
common elements.
9. Once land is granted by the Crown, how is it recovered?
Answer: The Crown recovers granted land by way of expropriation, if the land is required for public
purposes.
10. In what way (or ways) would an easement arise?
Answer: An easement may arise by (1) express grant (2) prescriptive right (3) by necessity.
11. Under what circumstances would a restrictive covenant be inserted in a grant of land? Give three
common examples of this type of covenant.
Answer: Restrictive covenants are used to control the use of land conveyed to another. For example:
restrictions on the size of a house or building that may be built on the land, restrictions as to the type of
use made of the property (residential, commercial, etc.), or alteration of landscape (cutting of trees,
excavating, etc.).
12. What characteristic distinguishes a fixture from other chattels brought onto real property?
Answer: A fixture is a chattel brought on the property which when affixed to the property is for the
better use of the property, and becomes a part of it. (e.g.: storm windows or window screens).
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13. Explain the term adverse possession, and describe how it might arise.
Answer: Adverse possession is open occupation of property for a lengthy period of time with the full
knowledge of the actual property owner, and in defiance of his or her rights. It might arise where a
"squatter" moves onto the lands of another and lives there for 10-20 years without the lawful owner
taking steps to eject the trespasser.
14. What is the purpose of a land registry system?
Answer: The land registry system is a public registry system where deeds and other interests in land
may be recorded.
15. Explain how the Land Titles System differs from the Registry System.
Answer: The Land Title System differs from the Registry System in that the Crown certifies the title
of the registered owner under the Land Titles System, while under the Registry System, the individual
must determine the validity of a registered owner's claim to the land.
16. What special advantages attach to the Land Titles System?
Answer: Under the Land Titles System the title of the present 'owner' of the land is confirmed and
warranted by the province as it is represented on the land register. There is no need to search the title to
establish ownership. It provides greater certainty of title.
17. Why is a "good chain of title" important under the Registry System?
Answer: A good claim of title is the establishment of an unbroken line of registered owners of the
property for a lengthy period of time. In Ontario the time period is 40 years. It determines the right of a
person to claim absolute ownership of the property.
18. Distinguish joint tenancy from tenancy-in-common.
Answer: A joint tenancy is the ownership of an individual interest in common in land whereby if one
tenant should die the surviving tenant becomes the absolute owner in fee simple of the interest. Under a
tenancy in common the interest of each tenant passes to his/her heirs by will or intestacy on his/her death.
Mini-Case Problems
1. Southside Land Development Corp. offered to sell Trend Contracting Ltd. a small block of vacant
land in a large city for $950,000. Southside Land Development Corp. presented a deed describing the
property and showing Southside Land Development Corp. as the owner in fee simple.
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What information should Trend Contracting Ltd. obtain before delivering the $50,000 to Southside
Land Development Corp.?
Answer:
Trend Contracting Ltd. should search the title to the block of land to make certain that Southside Land
Development Corporation is the registered owner of the land, and that the deed of Southside Land
Development Corporation is supported by a "good chain of title". Trend Contracting Ltd. should also check
for any encumbrances (mortgages, etc.) or other registered claims against the land.
2. A conveyed a parcel of land to his daughter B and son C. The deed recited, in effect: to B for life, and
then to C in fee simple. C would like to sell the land to D. Advise C.
Answer:
C holds the remainder interest in the land. B has possession for B's lifetime. C may only sell the right to
future possession of the land. The only way that D could obtain the property in fee simple would be for both
B and C to convey the land to D.
3. Able acquired a condominium unit that included a parking space on a surface lot facing a sidewalk
and street. Able leased the space to his friend Samantha, who parked her chip wagon in the space. She
sold french fries and soft drinks to the public from the location. The other residents of the
condominium objected.
Advise Able of his rights (if any).
Answer:
The parking place may be part of the common elements or it may be described as part of the property
conveyed to Able. Regardless, it is within the competence of the condominium corporation to make bylaws
as to the activities that may be conducted in units or in common elements.
4. Lot ‗A‘ was a lot that had attached to it a 5 metre wide right-of-way over Lot ‗B‘ to enable the owner
of Lot ‗A‘ to reach a lake front beach where the owner could launch a canoe. The owner of Lot ‗A‘
decides to leave his canoe on the right-of-way at the beach rather than carry it back to Lot ‗A‘ after
each use.
What are the rights of the parties in this situation?
Answer:
The rights of A are for passage only. He is not entitled to store his property on the right of way. The owner
of Lot B may properly demand its removal.
5. A lumber company for over 50 years had owned a 3,000 hectare tract of forested land. In a far corner
of the tract an old fur trapper had built a cabin, where he had lived for 40 years.
Discuss.
Answer:
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There can be no claim by the trapper unless the property lies in a Land Registry jurisdiction. Even so, despite
being present for more than the qualifying period, he has not taken any steps to exclude the true owners, and
thus a claim for adverse possession is likely to fail. His claim (to at least the footprint of the cabin and a right
of way) would be strengthened if the forestry company had been aware of his presence during the whole of
the qualifying period and did not take steps to assert their ownership.
Case Problems for Discussion
Case 1
Iron Mining Corporation held the mineral rights to a large area of land in a municipality where the surface
rights were owned for the most part by cottage property owners. In fact, Iron Mining Corporation had the
mineral rights to all of the land around a lake where 30 surface rights land owners had built large,
expensive cottages. Several years after the cottages had been built, a geologist at Iron Mining Corporation
examined some recent mineral surveys of the area, and decided that the area warranted further
investigation. He accordingly sent out a drilling crew to drill some core samples ―to see what was under
the land by the lake.‖ The drilling crew arrived at the lake, and made an effort to find a cottage owner
present, but because it was early April, no cottage owners were at their cottages. The drilling crew then
proceeded to drill a large number of drill holes in the yards of the cottages. While little evidence remained
of their drilling work, the cottage yards were torn up by the heavy machinery and trucks. When the
cottage owners arrived in May to open their cottages, they discovered the extensive damage to their
former manicured lawns, ornamental trees and gardens.
Advise the parties.
Answer:
At law, the owner of the mineral rights has an obligation to compensate the surface rights owner for all
interference. In practice, the owner of the mineral rights would probably seek to purchase the surface rights,
rather than risk this kind of developing situation.
Case 2
Dillon and Alexei owned a 20 hectare parcel of farm land as tenants-in-common. For many years they
operated a vegetable growing operation, each farming and harvesting a 10 hectare part of the parcel. Each
made his own decisions as to crops planted and harvested. They shared equally the cost of property taxes,
the only expense related to their ownership of the land. Each kept the profits earned from their respective
farming operations, but Alexei usually earned double the profits of Dillon because he specialized in
growing unusual and high value vegetables. Just before one harvest season, Alexei was killed in a traffic
accident. To save the crop, his widow and only heir-at-law, helped Dillon harvest both of the 10 hectare
crops. When the crops were sold, Alexei‘s widow asked Dillon for the proceeds from the sale of the crop
from Alexei‘s 10 hectare parcel. Dillon offered her half of the net proceeds from the total 20 hectares
after the deduction of his production expenses.
Discuss the rights of the parties. How would a court likely decide the issue?
Answer:
As this was a tenancy-in-common, Alexi‘s widow inherits all the rights and title that Alexi had at the time of
his death. This is not a joint tenancy in which Dillon would take title to the entire property. Given the
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historical separate farming practices, Alexi‘s widow would be entitled to half the value of the entire property,
and the entire value of Alexi‘s crops.
Presumably a quantum meruit claim by Dillon for his work in harvesting Alexi‘s crops would be set off by
a similar claim by the widow for aiding Dillon to harvest his own crops.
Case 3
Maya and Louis were unit owners in the Happy Times Condominium complex, along with 95 other unit
owners. Both Maya and Louis considered themselves to be creative cooks and bakers. Their cooking
odours or the smoke from their burnt baked goods constantly filled the hallways and common elements,
because both insisted on leaving the doors to their units open during the baking or cooking process to
allow the air to circulate through their units.
The remaining unit owners objected to their cooking activities and demanded that the Happy Times
Condominium Corporation prohibit Maya and Louis from engaging in their hobbies on the premises. The
solicitor for the corporation, however, advised that cooking or baking, as long as it was not for
commercial purposes, could not be prohibited in the complex without affecting everyone else as well.
When the unit owners discovered that the cooking could not be stopped, a number of the unit owners
suggested that the condominium be terminated by selling the complex to a buyer who was interested in
operating it as a rental apartment building. Maya and Louis objected vigorously to the suggestion of
terminating the condominium. However, in the end, all unit owners except Maya and Louis agreed that
steps should be taken to do so.
Advise Maya and Louis of their rights. Describe the procedure that must be followed to terminate the
condominium.
Answer:
This case raises two important points concerning condominium occupancy. Control of unit owner activity is
limited in the sense that control is exercised largely over activities that involve the use of common elements
or uses of the units which apply to all. In this case, cooking cannot be controlled or prohibited unless it
applies to all, and the condominium as a result is helpless to control the activities of the two unit occupants.
The selling of a condominium is essentially a last resort means of ending an unpleasant state of affairs, but
effective, as long as a large majority are in favour. If 93 of the unit owners wish to sell, and only Maya and
Louis object, if the percentage in favour meets the provincial number required to approve the sale, then the
unit owners may sell. Maya and Louis (depending upon the provincial legislation) may have their units and
interest appraised, and if the price received is less than the appraised value, the other unit owners will be
obliged to compensate them for any loss.
Case 4
Winston County Condominium Corp. No. 221 (WCCC #221) was formed just over a year ago, with all
the usual condominium documentation. Contained in its declaration was a reference that common
expenses included municipal water charges, unless the same were separately metered for each unit. There
were 91 units in the building, one of which was a ground-floor restaurant unit. The restaurant represented
10 percent of floor space, and therefore 10 percent of common expenses. Each of the other 90 dwelling
units would bear 1 percent of common expenses.
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After examination of the accounts for the first year of operation, WCCC #221 found that the
restaurant accounted for 47 percent of water charges, and the amount budgeted by the corporation of
$50,000 would fall short of actual costs by $18,500. The directors passed a motion for a special levy on
the restaurant unit, and a motion that a meter be installed on the pipes to and from the restaurant unit. The
action was ratified by the unit holders 90 to 0, with one abstention in protest.
The owner of the restaurant unit came before the courts for relief, stating that water rates had figured
into her calculations on whether to purchase the unit, and that the same calculations must have figured
into WCCC #221‘s decision to sell the unit to her. WCCC #221 had the power to write what it wished
into its declaration, and she now holds it to what it has written. The corporation had set the price for her
commercial unit, knowing it would contain a restaurant. The restaurant owner acknowledged she was
prepared to suffer her fate, should WCCC #221 on a vote decide to install meters to all units.
Elaborate on the issues in the arguments and render a decision on behalf of the court.
Answer:
The operation of the condominium is subject to the charges set out in the declaration, and the system of
allocation of all expenses was determined on a floor space basis. The actions of the corporation to assess the
restaurant extra may be argued as discriminatory in the sense that only the one unit would be metered and
subject to a special levy. The corporation would probably be obliged to place all units on meters to fairly
apportion the charges. However, this may not make economic sense where only one user was responsible for
the excessive use. In the case upon which this case was based, the court held that the existing system of
charges represented unjust enrichment for the restaurant owner and imposed an undue hardship on the rest of
the unit owners. The court then went on to decide that the metering of the one unit would fairly apportion
expenses. See: York Region Condominium Corporation No. 771 v. Year Full Investment (Canada) Inc.
(1992) 10 O.R. (3d) 670 (Ont. Ct. Gen. Div.).
Case 5
Baxter owned a large block of forested land that surrounded a small lake. The lake was fed by a small
stream that crossed the property, and another that drained the lake into a larger body of water several
kilometres away.
With the intention of eventually constructing a resort on the lot, Wilson purchased from Baxter a
parcel of land fronting on the lake. On the payment of the purchase price he received a deed to the land
from Baxter. Without examining it, he placed it in his safety deposit box.
Wilson used the property as a personal campsite for several years while he searched for financial
backers for his resort. Because the lake was several hundred metres from the road, each time he visited
the lake he would leave his automobile parked at the roadside and carry his camping equipment through
the woods to his property.
Five years after he purchased the land from Baxter, he was in a position to build the resort on his lot.
No road access was available to the land, but Wilson assumed that the pathway that led to his property
was his access route. He engaged a logger to cut trees to widen the path in order that a truck carrying his
building materials could reach his lot. No sooner had Wilson‘s logger cut the first tree than Baxter
appeared and ordered him to stop cutting. When Wilson arrived, Baxter ordered him to leave the property.
Wilson protested that he was entitled to clear the trees from the access route to his land, but Baxter
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replied that he had sold him only the lot and not a roadway. According to Baxter, Wilson had water
access by way of the stream if he wished to enter or leave his property. The surrounding land belonged to
Baxter.
Wilson had travelled the stream with his canoe on a number of occasions. While it was possible to
gain access to his lot in that fashion, it would not be possible to transport the heavy building materials
into the property as the stream was too shallow to allow the use of larger watercraft. Rather than continue
his argument with Baxter, Wilson decided to examine his deed to determine if Baxter was correct in his
position on the access route. Wilson returned home and read the description of the property contained in
the conveyance. It described the lot only and made no mention of a roadway to the property. According to
the deed, Baxter owned all of the land surrounding Wilson‘s property. His only access appeared to be by
way of the small stream to the lake.
Examine the rights of the two parties in this case. If either party should decide to take legal action to
enforce his rights, explain the nature of the action and indicate the probable outcome.
Answer:
The principal issue in this case is the right of Wilson to establish a reasonable access route to his land-locked
property. His deed did not contain an express grant of right-of-way, but he might claim a right-of-way of
necessity. To have this type of right-of-way, however, no other access route must be available to the parcel
of land. Does the water access represent an alternative route to the lot? A right of easement of this nature is
founded on necessity, rather than convenience, and where alternative access is available, even though
inconvenient, a right-of-way of necessity may not be granted. See: Fitchett v. Mellow et al. (1897), 29 O.R.
6.
Case 6
Suburban Land Development Ltd. owned a block of land that it wished to develop as a residential housing
subdivision. The land was heavily treed and bordered the shore of a lake. To preserve the woodland
setting of the area as each house lot was sold, the corporation inserted in the deed the following clauses:
The grantee agrees:
(1) to construct a house on the premises with a floor space of not less than 237 square metres and a
construction value of not less than $200,000.
(2) that construction shall not begin until the grantor approves in writing the architectural drawings or
plans for any proposed dwelling.
(3) that no trees shall be cut on the property without the express consent in writing of the grantor.
(4) that no pigs, chickens, or other domestic animals may be kept on the property.
(5) that the above covenants shall run with the land for a period of 20 years, and shall be binding on
the heirs, executors, and assigns of the grantee.
Casey purchased a large, heavily wooded lot in the subdivision. She received a deed to the lot in fee
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simple that was registered in the Land Registry Office and contained the above covenants. Without
constructing a house or dealing in any way with the property, she sold it to MacGregor, who received a
deed to the lot that did not contain the covenants. He registered that deed in the Land Registry Office
without examination of the title to the property.
Some time later, MacGregor attempted to cut some of the trees on the property to clear a place where
he intended to build a small building to house his racing pigeons.
When Suburban Land Development Ltd. became aware of MacGregor‘s activity, it immediately
informed him that he must stop cutting the trees until approval was given, and also that the company
would not permit the construction of any building on the property except a dwelling-house.
MacGregor decided to ignore the prohibition, on the basis that he was unaware of the restrictions and
had not agreed to them.
Advise MacGregor and Suburban Land Develop-ment Ltd. What might be the possible outcome, if
legal action was taken by Suburban Land Development Ltd. to enforce the restrictions?
Answer:
Covenants which are included in a registered deed are open to examination by the public since they are
registered in the Land Registry Office. Legislation pertaining to the registration of documents in all
provinces provides that registration constitutes public notice of documents and their contents. As a
consequence, MacGregor would be deemed at law to have constructive notice of the restrictions which
are attached to the lot which he purchased. He is therefore bound by the restrictions and Suburban Land
Development Ltd. may enforce them. If legal action was taken, and the court decided that the restrictions
were reasonable, and for the protection of the adjacent land-owners, McGregor would not be permitted to
build his pigeon house. McGregor would have no right of action against Casey for failing to disclose the
restrictions, as McGregor would be deemed to be aware of them.
Case 7
The Golf and Country Club owns a large block of land at the edge of a municipality that the club uses as
an 18-hole golf course. A small stream runs through the property and eventually drains into a lake some
distance away. The stream also passes through the municipality that is located upstream from the Golf
and Country Club property.
The municipality installed new storm sewers in an area of the city and constructed them in such a way
that, in a heavy rain, overflow from the sewers would drain into the stream.
Shortly after the construction of the new sewers, several days of heavy rains resulted in a large
quantity of water from the storm sewers being discharged into the stream. This in turn produced flooding
of the stream and serious erosion of the banks of the stream where it passed through the golf course.
Damage was estimated at $350,000.
The Golf and Country Club instituted legal proceedings against the municipality for the damage.
Discuss the arguments that might be raised by each of the parties, and render a decision.
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Answer:
This case is concerned with riparian rights, as the club owns land that is adjacent to the watercourse. The
issue here is can an upstream user (the municipality) introduce additional water into the stream in such
quantity that it damages the property of the downstream user? The municipality might argue that it was
simply directing the natural flow of water (rain water) into the stream. It might also argue that the
downstream user may object to actions that decrease the flow of water. Would these be valid arguments?
The club would probably argue that the upstream user may not do anything with the water flow to damage
the downstream users enjoyment of the stream. The club might also argue that the municipality should have
foreseen the likelihood of downstream damage by its actions of directing the additional water into the stream.
In the case upon which this fact situation was based, the court held that the municipality was liable for the
damage to the downstream user. See: Scarborough & Gulf Country Club v. City of Scarborough et al.
(1986), 55 O.R. (3d) 193.
Case 8
Samuels, an elderly widower, conveyed his farm land to his son Peter for life, then to his grandson Paul in
fee simple. In the deed, he reserved to himself the right to continue to live on the farm and to receive 50
percent of the income from the farm during the rest of his lifetime.
Peter operated the farm with the assistance of both Samuels and Paul for a number of years, during
which time he paid his father 50 percent of the farm income. Eventually, Peter decided to seek
employment in industry and took a job in a nearby manufacturing plant. At that point he decided to cease
farming. A short time later, the barn was accidentally destroyed by fire and the farm machinery destroyed.
Samuels, Peter, and Paul each claimed to be entitled to the proceeds of the fire insurance on the barn and
the farm machinery.
Discuss the rights (if any) of each of the parties to the insurance funds in this dispute.
Answer:
This case illustrates a situation where the owner of the property in fee simple conveys a life estate and the
remainder to his two sons, while retaining for himself a right in the property. Students might be invited to
assess the nature of the estate which Samuels retained for himself. Is his interest a life estate? How could it
be if he granted a life estate to his son Peter? Did he reserve for himself something less? If so, what type of
interest? The loss of the barn, and the demand for the proceeds of the insurance by all parties raises the
question: To whom should the proceeds be paid? Are all three named insured? Do all three have an
insurable interest? Does any one have a greater claim against the proceeds, considering the different interests
in land? The case is designed to explore the special interests of each of the parties in the land. Samuel's
interest is limited to the right to live on the property, and to a portion of the income (if any). Peter has only a
life interest, and is obliged to pass the land along to the remainderman in substantially the same condition as
he received it. Paul has the reversion in the property, and would have the greatest interest in maintaining the
value of the property. The logical solution would be to use the proceeds to rebuild the barn.
Case 9
Smith owned a large farm. Part of the farm, which consisted of a woodlot, fronted on an unimproved
township road. In 1995, Crockett, a middle-aged bachelor, constructed a small log cabin in the woodlot
for use as a fishing and hunting camp, with Smith‘s permission. For several years Crockett occupied the
cabin on weekends, while fishing in the area in the summer months, and for a few weeks in the fall of
each year during the hunting season.
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During the summer of 1998, Crockett took a month‘s vacation and spent the time at the cabin. He
planted a small vegetable garden and constructed a fence around both cabin and garden to keep animals
away from his flowers and vegetables. During the hunting season of the same year he cut down a number
of small trees and extended the fenced-in area to a parcel of land 23 metres by 30 metres, and he built a
gate in the fence where it faced the roadway.
Smith noticed the fence and gate shortly after it was constructed and asked Crockett why it was
necessary. Crockett replied that the animals in the area were damaging the flowers that he had planted
around the cabin, and he felt that the fence would probably keep them out.
The next year, Crockett decided to accept early retirement from the firm where he was employed. He
spent the period from May 1st to November 30th at the cabin. Crockett planted a vegetable garden, fished,
and helped Smith with the planting of his crops and his fall harvest. At the end of November, he left his
belongings in the cabin and spent the winter in a warmer climate.
He returned to the cabin the next April, only to be met by the local tax assessor, who asked him if the
cabin was his. He replied in the affirmative, and, some time later, received a municipal tax bill issued in
his name. He paid the municipal taxes for that year (2000).
Crockett continued to live in the cabin, spending only the coldest of the winter months away from the
premises. He paid the taxes on the land and building each year. In 2011, he moved the fences to include
an area 30 metres by 45 metres in order to enclose a larger vegetable garden. Smith did not object to the
new location of the fence, but warned Crockett not to cut down two large hickory nut trees in the enclosed
area. Crockett agreed to leave the trees standing.
In the summer of 2019, during a thunderstorm, lightning struck and damaged one of the large hickory
trees. Without consulting Smith, Crockett cut down the damaged tree.
Several months later, Smith noticed that the tree was missing. In a rage, he ordered Crockett from the
property. Crockett refused to leave, claiming he was the owner of the parcel of land.
Discuss the rights of the parties. Evaluate the arguments and evidence that each might raise if the
matter should be brought before the courts to determine the rights of the parties in the land. Does the
answer depend on Registry or Land Titles registration?
Render a decision.
Answer:
This case is concerned with a claim of adverse possession by Crockett. If the land is located in a Land
Titles registration area, then a claim of adverse possession is not possible. Only if the land is located within a
Registry System area can a claim for adverse possession proceed. Adverse possession requires the open,
notorious, continuous, exclusive, possession of property (with the true owner aware of the possession) for a
10 year period of time. The first question might be: When did the time period begin to run? The original
parcel of land was fenced by Crockett in 1998, and he began payment of taxes on the property in 2000. Both
of these acts are important in establishing adverse possession, as they are acts normally performed by an
owner of property. It would also indicate an 'animus possidendi' on the part of Crockett. Possession was
essentially continuous from 1995 on. The second parcel was fenced in 2011, and again, Smith did not
object - but he warned Crockett not to cut down a tree in the fenced-in area. Was this the exercise of
ownership rights by Smith? Did time start to run on the second parcel in 2011? When did it end? Smith
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attempted to exercise his rights in 2019. Since the first parcel had been occupied exclusively by Crockett
since 1995, by 2019 Crockett had probably acquired adverse possession of the property (no
acknowledgement of the true owner's right was made in the interval). On the second parcel, however,
Crockett would only be able to establish an 8 + year period of possession, not enough to give him a
possessory title to the second parcel of land. See: Keefer v. Arillotta (1976), 13 O.R. (2d) 680, and Re St.
Clair Beach Estates Ltd. v. MacDonald et al. (1974), 50 D.L.R. (3d) 650 as examples of cases concerning
adverse possession.
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CHAPTER CHART
CHAPTER 23. THE LAW OF MORTGAGES
Chapter Topics
Introduction
Historical Development
The Nature of Mortgages
Priorities Between Mortgages
Rights and Duties of the Parties
Special Clauses
Discharge of Mortgage
Assignment of Mortgage
Sale of Mortgaged Property
Default, Foreclosure, and Sale
Business Applications of Mortgage Security
Summary
Key Terms
Review Questions
Mini-Case Problems
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Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Describe the nature of a mortgage.
• Identify the rights and duties of the parties under a mortgage.
• Explain the effect of assignment of a mortgage.
• Outline the default, foreclosure and sale provisions of mortgages.
• Identify the business uses of mortgages.
YOUR BUSINESS AT RISK
While land and buildings are often the most valuable assets of a business, mortgages are just as
often the largest liabilities. If mortgages are not well understood, or entered into without regard
to their technical provisions, a default may trigger immediate repayment obligations. If the
mortgage cannot be refinanced, the usual result is insolvency, and cascading difficulty in paying
other trade debts may lead to bankruptcy proceedings.
CHAPTER COMMENTARY
The law of mortgages in Canada is complicated to a degree because the two land registration systems (in
addition to the system in the Province of Quebec) affect the nature of the instrument. In addition, each
province has altered the rights of the parties to some extent, with the result that much provincial variation
exists.
From a conceptual point of view, the creditor, in return for the loan of money, either takes title to
the debtor's land by way of the mortgage, or obtains a claim or lien on the land in the case of a charge
under the Land Titles System or the hypothec (used in Quebec). Using the mortgage as an example, the
transaction may be graphically displayed in this manner:
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Mortgage
Transfer (charge) of legal title to B, but A retains possession of land
Party A
Party B
Mortgagor
Mortgagee
B loans money to A with land
as security
Discharge of Mortgage
A repays the loan
Party A
Party B
Mortgagor
Mortgagee
B reconveys title of land to A
by way of discharge
In the case of a charge, the creditor has only a secured interest in the debtor's land, and on repayment
of the loan, the cessation of charge, given by the creditor as receipt of payment, extinguishes the claim against
the debtor's land.
The difference between first and second mortgages may also be explained by way of diagram:
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Transfers (charges) legal title to B, but retains possession of land
Party A
Mortgagor
Party B
Mortgagee
(holds legal mortgage)
B loans money to A with land as security
C loans money to A with right of redemption as security
Mortgage of equity
(right to redeem from B)
Party C
(Equitable mortgagee, or Second Mortgagee)
The terminology used in connection with mortgages is important and should be stressed in class
discussion. In particular, the terms mortgagor and mortgagee should be properly used to identify the parties
to the transaction.
The Court Decision, Omista Credit Union Ltd. v. Bank of Montreal examines the assignment process
for a mortgage, and the importance of determining the responsibility for payment where the mortgagors have
separated, and only one mortgagor continues on with the mortgage payments.
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Review Questions
1. What is the normal procedure used to re-vest the legal title of a property in the mortgagor when the
mortgage debt is paid? Does this differ in the case of a charge?
Answer: The normal procedure is to deliver a discharge, which is a statutory re-conveyance, and
receipt for payment. A charge is extinguished by a cessation of charge, which removes the charge from
the title of the property.
2. In what way does a mortgagee's interest differ from that of a person who holds land in fee simple?
Answer: A mortgagee holds only the title to the property, and does not have possession.
3. In what way (or ways) does a mortgage differ from a charge?
Answer: A mortgage involves a transfer of title to the property; a charge simply encumbers the land
with the debt.
4. Explain the relationship that exists between a mortgagee and a person who acquires the mortgaged
property from the mortgagor. Does the original relationship of mortgagor-mortgagee continue as well?
Answer: The mortgagee and the third party have privity of estate between them. The relationship
between the mortgagee and the mortgagor continues to exist, however, and the mortgagee may still look
to the original mortgagor for payment if default by the third party occurs.
5. How does a "first" mortgage differ from a "second" mortgage?
Answer: A first mortgage is the "legal" mortgage in the sense that the legal title to the property
passes to the mortgagee. A second mortgage is an equitable mortgage in the sense that it is a mortgage of
the equity of redemption.
6. What factors must be considered by a person who wishes to extend a loan of money to another on the
security of a second mortgage?
Answer: The lender must be aware that there is a risk that the mortgagor may default on the first
mortgage, in which case the second mortgagee would be obliged to put it in good standing.
7. What is the nature of the covenants that a mortgagor agrees to in a mortgage?
Answer:
The covenants include:
(1) payment.
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(2) insure the premises.
(3) pay taxes.
(4) not commit waste.
8. Why do mortgages usually contain an acceleration clause? What is the effect of the clause if default
occurs?
Answer: If a mortgage is repayable by instalments, default on each instalment would require separate
legal action for payment. An acceleration clause renders the entire balance due an owing when default
first occurs.
9. Outline the nature of a mortgagor's interest in the mortgaged land.
Answer: A mortgagor of land retains an equity of redemption, which entitles him to a reconveyance
of the title when the debt is paid.
10. Indicate what the rights of a mortgagee would be if a mortgagor defaulted on the payment of the
mortgage.
Answer: On default, the mortgagee may take action against the mortgagor on the covenant for
payment, or may institute foreclosure or sale proceedings. As well, the mortgagee may demand
possession.
11. Outline the rights of an assignee of a mortgage from a mortgagee. What steps must be taken to ensure
that the mortgagor makes payment to the assignee after the assignment takes place?
Answer: An assignee of a mortgage takes the mortgage as it stands between the mortgagor and the
mortgagee. To ensure that the mortgagor makes payments properly, notice must be given to the
mortgagor to make future payments to the assignee.
12. What are the rights of a mortgagor if, on default of payment, the mortgagee commences foreclosure
proceedings?
Answer: The mortgagor may request the right to put the mortgage in good standing by payment of all
arrears and costs, or ask for the right to redeem. The mortgagor may also ask that the foreclosure be
changed to a judicial sale of the property.
13. How does a sale under a power of sale differ from a sale action?
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Answer: A sale under a power of sale is a sale of the mortgaged property by the mortgagee in
accordance with the right and procedure set out in the mortgage itself. A sale action represents a sale of
the property by the court.
14. What rights, if any, are available to a mortgagor after foreclosure takes place?
Answer: Where the mortgagee is still in possession of the foreclosed property and during the period
for redemption, the mortgagor may still redeem the property by making payment.
15. Define the term "mortgage" as an interest in land.
Answer: A mortgage is an instrument whereby an owner of land pledges the title or interest in land
as security for the debt, but remains in possession of the property until such time as default occurs.
16. If the original mortgagor sold the mortgaged lands to a purchaser, and the purchaser failed to make
payments or the mortgage, explain the possible courses of action which the mortgagee might take.
Answer: Causes of action open to the mortgagee would be: foreclosure, sale and possession of the
mortgaged premises, or action against the original mortgagor on the covenant for payment.
Mini-Case Problems
1. B mortgages ―Blackacre‖ to A for $100,000. Some time later, B defaults on payment, and A begins
foreclosure proceedings.
If Blackacre has a value of $500,000, what should B do?
Answer:
B has an equity of $400,000 in the property and should ask for the right to redeem or put the mortgage in
good standing. If B has no money, he could ask that the foreclosure be changed to a sale.
2. If B did nothing in the above case until after foreclosure proceedings were completed, then wished to
pay the amount owing, could B still do so to re-acquire the property? Would your answer be any
different if A had sold the land to C?
Answer:
If A still has the property, B may request the right to redeem if payment could be made. The court may allow
this. However, if A has sold the property to C, it would be too late for B to redeem.
3. Rosa gives a mortgage on Green Acres to Shelley, and it is duly registered. Rosa later gives a
mortgage to Tina, and it is registered. Rosa, a year later, defaults on the mortgage to Shelley.
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What is the position of Tina and Rosa?
Answer:
Rosa is in jeopardy of losing her property, whether by sale or foreclosure. It is advisable for Tina, as second
mortgagee, to put the first mortgage back into good standing. If Tina does not, she will face loss of her rights
if a) foreclosure proceeds without being converted to a sale, or b) the proceeds of sale are insufficient to cover
the amounts owing on the first mortgage (first) and her mortgage (second). Of course, if Tina pays out
Shelley, then Tina will take over as first mortgagee.
4. William owns a house and lot, and gives a mortgage on the property to Wallace. William later sells
the house and lot to Black, with Black assuming the mortgage. A year later, Black defaults on the
mortgage.
Advise Wallace.
Answer:
Wallace may foreclose on his mortgage and take the property. Since William is personally liable on the
mortgage, Wallace could, in the alternative, sue William on his personal covenant for the amount owing on
the mortgage.
5. Sunset Financing Corporation assigned its first mortgage rights to a major Canadian bank for 10 parcels
of land being developed for industrial/commercial purposes by Urban Developers Limited. Due to a
postal service disruption, the written notice of Sunset‘s assignment to the bank was not received by
Urban Developers until after the next scheduled payment was sent by Urban to Sunset. The bank has
contacted Urban Developers claiming it is in default under its mortgage financing agreement and is
seeking accelerated payment in full of the entire mortgage debt. Advise the parties.
Answer:
Sunset took the required steps to notify the mortgagor, Urban Development of the assignment of the
mortgage to the bank. However, given the postal service disruption, it ought to have been foreseeable to
Sunset that the notice of assignment may not reach Urban in a timely fashion and that it should take other
steps to notify Urban of the assignment and its new obligation to make payment to the bank. Urban has a
valid defence to the bank that it had no actual notice of the assignment and made its proper payment in
satisfaction of its obligation under the mortgage to the first mortgagee. The bank may be able to recoup
payment from the assignor, Sunset, for the mortgage payment plus any damages it has incurred as a result of
Sunset‘s failure to provide notice to Urban Development prior to its payment obligation
Case Problems for Discussion
Case 1
Smith, Jones and Davis carried on business in partnership as SJD Building Contractors. They arranged for
the purchase of 3 adjacent lots in a subdivision at a price of $80,000 per lot, financing the transaction with
a mortgage on the three lot parcel for $180,000, and the partnership supplying the balance of the funds.
The mortgage was in the name of the three partners carrying on business as SJD Building Contractors.
Smith signed the mortgage on behalf of the partnership.
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A month later, Davis decided to retire from the partnership, but wished to build a home for himself
and his family on one of the lots. The partnership approached the mortgagee and requested a release of
the lot from the mortgage on payment to the mortgagee of $60,000, being approximately one third of the
amount of the mortgage. The mortgagee agreed, and Davis personally paid the $60,000 for a release of
the lot.
The housing market, however, took a downturn, and Smith and Jones found themselves shortly
thereafter in financial difficulty. Unable to make mortgage payments, the mortgage fell into arrears. The
value of the two lots, unfortunately, had fallen in value and were worth approximately $50,000 each. The
mortgage at this point, with arrears, was $118,000.
Advise each of the parties (including Davis) of their rights and obligations (if any).
Answer:
The two lots under mortgage are now worth a total of $100,000 and with the mortgage at a balance of
$118,000 there is an $18,000 shortfall to be repaid. As Davis‘s lot was released (discharged) from under the
mortgage, there is no direct attachment of the debt to his property. However, the mortgagee may look to the
personal assets of the individual partners to satisfy its claims. Unless Davis retired from the partnership by
giving all required notices to creditors and making appropriate public filings (see partnership chapter), he will
remain liable for the debts of the partnership. Thus, indirectly, the mortgagee may turn to Davis‘s home and
lot to satisfy its claim. Smith and Jones are likely to encourage this approach, however they will be obligated
to account with their former partner in due course.
Case 2
Headrick owned a house and lot in a very desirable residential neighbourhood of a large city. In order to
purchase a new luxury motor vehicle, new boat, and pay for a luxury vacation, he arranged for a mortgage
on the house and lot for $330,000. The property at the time had an appraised value of $375,000. Once in
funds, Headrick left on his vacation. While on vacation, he decided to extend his travels, even though his
vacation time had ended. A month later, he returned home, only to find that he had been terminated by his
employer. At this point in time he had spent all of his money on the automobile, boat and vacation, and
was unable to make payments on the mortgage. Over the next number of months, Headrick searched for
employment without success. He ignored letters from the mortgagee demanding payment, and eventually,
the mortgagee decided to sell the property under its power of sale.
The mortgagee contacted an appraiser and requested an appraisal of the property ―at a fire sale price‖
as it was anxious to get rid of the property. The appraiser gave an appraisal at $300,000, well below the
value of the property if it was offered in a normal real estate listing. The mortgagee proceeded with the
sale under the power of sale, and quickly sold the property at the appraised value of $300,000. The
mortgagee then demanded the difference between the sale price and the amount of the mortgage, which
was still at $330,000.
Headrick had protested the listing of the property in the power of sale advertisements at such a low
price, and had advised the mortgagee that his friend Esson was prepared to purchase the property for
$345,000, but his objections had been ignored by the mortgagee, who simply wanted to get rid of the
property. He is now angry and upset that the mortgagee is demanding payment of the additional $30,000
from him.
Advise Headrick.
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Answer:
The mortgagee selling under power of sale has an obligation at law to take reasonable precautions to obtain
the true value of the property. Accordingly, the mortgagees reasonable precautions would include obtaining
multiple appraisals (two or three) or similar evaluations of market price, refraining from poisoning the mind
of an appraiser with words like ―fire sale price‖, and generally conducting the sale in a proper commercial
manner. See: Canada Trustco Mortgage Co. v. Casuccio, 2005 CanLII 25887.
Case 3
Agricola sold his farm to Ambrose for $300,000. In addition to $40,000 of his own funds, Ambrose
arranged for a purchase-money mortgage from the Agricultural Loan Company for $200,000, and
Agricola agreed to take back a mortgage in the amount of $60,000 in order that Ambrose could acquire
the property. On the date fixed for closing, Agricola gave Ambrose the deed to the property and received
a cheque from Ambrose in the amount of $40,000. He also received a cheque from the loan company for
$200,000 when the company registered its mortgage immediately after the registration of the deed to
Ambrose. Agricola then registered his mortgage for $60,000. At the time, Agricola transferred the fireinsurance policy (which covered the buildings) to Ambrose. The policy transfer named Ambrose as the
new owner, subject to the interest of Agricola as mortgagee. Through an oversight, Agricultural Loan
Company was not named as an insured on the policy.
Some time later, Ambrose defaulted on the mortgage to Agricola, and it was necessary for Agricola to
foreclose on the mortgage. Agricola continued to make the mortgage payments each month to
Agricultural Loan Company and allowed Ambrose to remain on the property to work the farm on a cropsharing basis.
Not long after Agricola had foreclosed on his mortgage and taken back the property, a serious fire
destroyed a large barn on the premises. The barn had a value of $50,000. The insurer noted that the fireinsurance policy listed Ambrose as the owner of the property, and Agricola as the mortgagee. However,
before the insurance company made payment, all three parties — Agricola, Ambrose, and the Agricultural
Loan Company — claimed the insurance proceeds.
Discuss the nature of the rights that each party might raise. Discuss the possible outcome.
Answer:
While this case concerns the rights of the parties to the insurance proceeds, the rights are to some extent
determined by the relationships established through the mortgage transactions. Students should determine the
priorities of the mortgages. Is Agricola's mortgage a second mortgage? Agricultural Loan Company was
presumably aware of its existence. Can the parties agree to priorities? In the case, Agricola had a second
mortgage, and found it necessary to foreclose. This gave him the interest of Tenant, and the land was subject
only to the mortgage to the Agricultural Loan Company. Does the fact that Tenant is still living on the
property give him any right to the insurance proceeds? Would the crop-sharing agreement constitute an
interest? As a general rule, a person not named as an insured has no claim to the proceeds under the policy.
Can Agricultural Loan Company claim the funds under a mortgage that requires the mortgagor to insure the
property against loss? According to Re Clovis King & Sons Ltd. (1971), 5 N.B.R. (2d) 493, the execution of
a mortgage that contains a covenant to insure by the mortgagor is an equitable assignment of the proceeds of
the policy to the mortgagee, and effective on the date of issue of the policy. On the basis of this case,
Agricultural Loan Company might have a claim against the funds. Agricola, although a named insured as
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mortgagee "as his interest may appear" may find this case helpful, but some older cases indicate that where
the mortgagee acquires the interest of the mortgagor, he cannot claim for the loss because he is no longer a
mortgagee. See, for example, Pinhey v. The Mercantile Fire Insurance Co. (1901), 2 O.L.R. 296; Gaskin v.
The Phoenix Insurance Company (1866), 11 N.B.R. 429. Quaere whether the courts would take such a strict
approach to-day. The matter is perhaps academic in this case if the Agricultural Loan Company can claim
the entire proceeds.
Case 4
An elderly woman who could only read with difficulty operated a rooming house for students. Her home
was large and in close proximity to the college. As such, it was a valuable piece of residential property.
Her nephew, Herman, had on numerous occasions urged her to retire and suggested that she sell the
property. For many years she refused to consider the idea. However, as a result of Herman‘s insistence,
she eventually agreed that she would list the property with a local real-estate agent to see what the market
might be. A few days later, Herman appeared at her home with some papers that he said were the forms
that he had obtained from the real-estate agent for the listing of her property. In reality the forms were
mortgage forms. Herman represented the forms as ―only a formality, to let the real-estate agent have
authority to show the house to prospective buyers.‖ His aunt signed the forms, believing them to be
copies of the real-estate listing agreement.
Herman later registered the mortgage, which was drawn for $50,000, and assigned it to a finance
company for $45,000. He intended to use a part of the money to make the payments on the mortgage
himself; he planned to use the balance for a trip to Las Vegas, where he expected to make a fortune by
employing a new system for placing bets at the gambling tables in a casino.
Herman‘s scheme failed, however, and he returned to Canada penniless. He soon spent the funds,
which he had originally set aside to make a few payments on the mortgage, and again found himself
without funds. The mortgage, as a result, went into default, and the finance company instituted
foreclosure proceedings against the property. At that point his aunt suddenly became aware of the
mortgage.
Indicate the action that the aunt might take in this case.
Discuss the position of the finance company. What might be the outcome of its foreclosure
proceedings?
Answer:
The first point to consider in this case is the validity of the document. Could the Aunt claim non est factum
and avoid the document? Was the nature of the document completely different from the one which she
believed she was signing? Was it necessary for her to rely on her nephew to determine its nature? If the
Aunt could successfully claim non est factum, what effect would it have on the finance company's right to
foreclosure? What would the rights of the assignee be in this case? Does it take the mortgage as it stands
between the Aunt and Herman? There is a chance that the Aunt may be able to establish non est factum as a
defence in this case, and if so, the mortgage would be unenforceable. See: Brown and Brown v. Prairie
Leaseholds Limited (1953), 9 W.W.R. (NS) 577; Michels v. Miner, [1949] 2 W.W.R. 269. The finance
company may be able to claim against Herman for the amount owing, due to Herman's actions in acquiring
the mortgage, and his subsequent dealings with it.
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Case 5
Zalinski was the owner in fee simple of a house and lot. She mortgaged the property to the Home Bank
for $500,000. Then she sold the house and lot to Steele for $750,000, of which $500,000 represented the
mortgage Steele assumed and the remaining $250,000 was payment to Zalinski for her equity.
Shortly after that, Steele borrowed $100,000 from Gray, giving Gray a $100,000 second mortgage on
the property as security for the loan. Steele then sold the property to Allen for $800,000, of which
$500,000 was the first mortgage to the Home Bank, $100,000 the mortgage to Gray, and $200,000 cash
payment for Steele‘s equity.
The house caught fire and burned to the ground a few days after Allen acquired the property. The
house was insured for $450,000. The policy named Allen as the insured, the Home Bank as first
mortgagee, and Gray as second mortgagee. After the fire, Allen abandoned the property and left the
country.
Advise the Home Bank and Gray as to their legal rights. Speculate as to how the parties might
proceed toward protecting their respective interests.
Answer:
From the facts of this case, the fire insurance proceeds would be applied first to the first mortgage, then the
second (if any surplus existed), with the balance (if any) to the insured, Allen. Since the policy was for only
$450,000, the entire proceeds would go to the bank as first mortgagee. To acquire the remaining $50,000
owing on the mortgage, the bank has several options open:
(1) foreclosure on the lot,
(2) sale of the property under the power of sale
(3) take legal action for the balance on the covenant against the mortgagor
(Zalinski). If the bank follows this last route, Zalinski would be entitled to take
an assignment of the bank's mortgage and proceed with options (1) or (2).
The second mortgagee (Gray) would be able to:
(1) pay the balance owing on the first mortgage then proceed with the courses of
action open to the bank, or
(2) take action against Steele on his covenant to pay.
Case 6
Penfield owned property that he mortgaged to The Bank of Regina for $100,000 on a term of three years,
amortized over 25 years, at a rate of 8 percent per annum.
At the end of one year he sold the property to Carson, who assumed the Bank of Regina mortgage. At
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the end of two more years, when the mortgage came up for renewal, Carson renewed the mortgage for
another three years, at the going rate of 9 percent per annum, amortized over 25 years.
Two years later, Carson defaulted on the mortgage, and the bank sued not only Carson (who was
penniless) but Penfield as well. In defence, Penfield claimed novation.
What is the source of the bank‘s claim against Penfield, and how does Penfield construct novation as
a defence?
Who is likely to be successful?
Answer:
The bank in this case is attempting to recover the balance outstanding on the mortgage because it was
originally placed upon the lands by Penfield. If the 'renewals' were of the same mortgage the bank might
argue that Penfield was still liable under it on his personal covenant to pay as contained in the mortgage.
Penfield's argument of novation is put forward on the basis that the purchaser (Carson) and the bank changed
the terms of the mortgage without his consent and he would no longer be a part of the mortgage agreement as
a result. On the basis of the judgement in Cabot Trust Co. v. D'Agostino et al. (1992) 11 O.R. (3d) 144 on
which this case was based, the changes to the mortgage did not constitute novation, and Penfield was liable
on his covenant to pay in the original mortgage. The reasoning of the court was that novation must be clearly
shown to be effective. Since the original mortgage was still in effect, and had not been discharged or
replaced, the mortgagor was still liable on his covenant.
Case 7
Hambly was the owner of a block of land in fee simple. He arranged a mortgage on the property with
Blake for $500,000, and the mortgage was duly registered in the appropriate Land Registry Office.
Hambly used the funds for the renovation of an existing building on the premises, but discovered that he
had insufficient funds to complete the changes he wished to make.
A few months later, he borrowed the sum of $100,000 from his friend Clark and gave a second
mortgage on the property as security. Clark did not register the mortgage; instead, she placed it in her
safety deposit box, with the intention of registering it at some later date.
When the renovations to the building were completed, Hambly decided to install a swimming pool on
the grounds. He borrowed $50,000 from Simple Finance Co. to pay the pool contractor for the
installation. Simple Finance, as security for its loan to Hambly, took a mortgage on the property. The
mortgage was registered the same day that the funds were given to Hambly.
Shortly thereafter, Hambly arranged a party to celebrate the completion of the swimming pool and
invited his many friends to attend. At the party, Clark mentioned to Anderson, another friend of Hambly,
that she held a mortgage on Hambly‘s property, and that she would like to dispose of it in order to have
the funds available for another more attractive investment.
Anderson expressed an interest in the purchase of the mortgage and, after some discussion, agreed to
give Clark $90,000 for it. The next day, Anderson paid Clark the $90,000 for the mortgage (on which the
full $100,000 principal was owing) and received an assignment of the mortgage. When Anderson realized
that the mortgage itself had not been registered, he had the documents registered immediately.
Unfortunately, he failed to notice the mortgage to Simple Finance in his examination of the title to the
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property.
Hambly was killed in an automobile accident a few days before he was scheduled to make his first
payments on the mortgages. His only asset was his interest in the property. Blake instituted foreclosure
proceedings when the first payment required under the mortgage became overdue. An appraisal of the
property indicated that it had a market value of approximately $600,000.
Discuss the position of the parties in this case. Indicate their rights in the foreclosure action.
Comment on the possible outcome of the case.
Answer:
The key points illustrated in this case are concerned with the priorities of the mortgages, and the rights of the
mortgagees. The case also illustrates the position of the assignee of a mortgage where problems are attached
to the mortgage assigned. Students should identify the $500,000 mortgage to Blake as a first or legal
mortgage. The mortgage was properly registered under the Registry System to establish its priority over any
subsequent encumbrances. The mortgage to Clark should be identified as a second (or equitable) mortgage
(at least in terms of the order given), but the failure on the part of Clark to register it affected its priority over
subsequent mortgages. The mortgage that was (in terms of time) a third mortgage, was given to Simple
Finance Co. The finance company registered its mortgage without knowledge of the mortgage given to
Clark. Since the mortgage to Simple Finance was for value and without notice of the Clark mortgage, under
the Registry Act, it takes priority over Clark's mortgage, and becomes the "second" mortgage. The
assignment of the Clark mortgage to Anderson transfers the rights of Clark under the mortgage to Anderson,
but Anderson also takes the mortgage as it stands. Registration by Anderson only protects its priority as
against mortgages given subsequent to the registration. In this case there were none. The institution of
foreclosure proceedings clearly illustrates the importance of priority. The value of the property was
$600,000. Blake's mortgage was for $500,000; Clark's mortgage was for $100,000; and Simple Finance Co.
held a mortgage for $50,000. The mortgages total $650,000. Subsequent encumbrances may ask to have
Blake's foreclosure changed to a sale, and the subsequent encumbrancers would undoubtedly do this to
prevent Blake from acquiring the property free of encumbrances. This assumes that neither Simple Finance
Co. nor Anderson wish to pay out the Blake mortgage. If the foreclosure is changed to a sale, some of the
questions that might be asked are: How is this done? Does it affect the priorities of the parties? What
happens if there is a deficiency? How should the money be divided? On the last point the priorities would
be:
Blake - lst mortgage - gets the full $500,000.
Simple Finance Co. - 2nd mortgage - gets the full $50,000.
Anderson - 3rd mortgage - gets the remaining $50,000 plus a judgment against Hambly's estate for the
remaining $50,000.
Since Hambly has no other assets, Anderson's judgment is essentially worthless, and he has lost the
remainder. For a case on priorities: See: Gray v. Coughlin (1891), 18 S.C.R. 553, or, for a more recent
case, Ocean Park Securities Ltd. v. Foulkes and Schlesiger (1978) 9 B.C.L.R. 64. The latter case is
concerned with a situation where the parties were aware of the two mortgages.
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Case 8
Parker Construction Co., a building contractor, constructed a convenience store on a building lot in a
suburban area. To obtain the necessary funds to build the house, Parker Construction Co. entered into a
mortgage with Green Mortgage Co. for the principal amount of $800,000.
Some time later, Parker Construction Co. sold the property subject to the mortgage to Baker at a
purchase price of $1,500,000. Baker paid Parker $700,000 cash and assumed the mortgage. He continued
to make payments on the mortgage while he possessed the store, but two years after he had purchased the
property, he moved abroad. He sold the property at that time to Brown, who assumed the mortgage and
paid Baker $750,000 for the property. The mortgage had a principal balance outstanding of $750,000 at
the date the property was sold.
Unfortunately, Brown found herself overextended financially soon after she had purchased the
property. She was forced to let the monthly mortgage payments fall into arrears in order to pay more
pressing debts. In spite of repeated requests for payment by the mortgage company, Brown refused to do
so. Eventually, Green Mortgage Co. was obliged to take action. Instead of foreclosure, however, it
brought an action against Parker Construction Co. for payment.
Discuss the possible reasons why the mortgage company decided to take action against Parker
Construction Co. rather than institute foreclosure proceedings. On what basis could it do so?
Discuss the rights and obligations of the parties in light of this action by the mortgagee.
Answer:
This case concerns the rights of mortgagees on default, and the obligations of both the original mortgagor and
the person in possession of the property at the time of default. The important points to raise in this case
are the rights against Parker Construction Co. on its covenant to pay, and the obligation on the mortgagee
if Parker Construction Co. does so. What must the mortgagee do? It must be prepared to assign the
mortgage to Parker Construction Co. in order that it has the security and the right to recover against Brown.
The rights acquired by Parker Construction Co. on payment would be those of Green Mortgage Co., as the
assignee takes the mortgage as it stands. The question might be asked: Should Green Mortgage Co. be
obliged to proceed against the property first? What effect would it have on its rights? For a discussion of the
rights and duties of the mortgagee: See: Bank of Nova Scotia v. Dorval et al. (1979), 25 O.R. (2d) 579.
Note, however, that the facts and issues in this case are quite different.
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CHAPTER CHARTS
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CHAPTER 24. LEASEHOLD INTERESTS
Chapter Topic
Leasehold Interest
Historical Development
Creation of a Tenancy
Rights and Duties of the Landlord and Tenant
Rights of a Landlord for Breach of the Lease
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Rights of a Tenant for Breach of the Lease
Termination
Shopping-Centre Leases
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Understand the legal nature of a tenancy and the rights and duties of
the landlord and tenant.
• Explain the effect of a breach of a lease agreement.
• Understand shopping-centre leases.
YOUR BUSINESS AT RISK
There are times when owning the perfect business location is impossible because the owner will
not sell, or it is financially unworkable for cash-flow or taxation reasons, or in cases where
ownership would mean taking on unwanted responsibilities. In these situations, possession
without ownership may be the preferred (or only) option, and the mechanism that will achieve
this goal is the leasehold interest. All other options would be less than optimal.
CHAPTER COMMENTARY
The leasehold interest has been subject to a certain amount of legislative change during the past decade as a
result of organized tenants groups and their supporters seeking greater security of tenure, and the right to safe
accommodation. The pressure from these groups has resulted in rent controls in a number of provinces, and a
greater obligation on the landlord to maintain leased premises in not only a safe, but habitable condition. The
law varies from province to province, and the particular jurisdiction should be consulted for these matters
before class discussion of the law takes place. The nature of a tenancy is readily understood by students, but
the sub-tenancy and the assignment of a lease is often confused. Some time might be spent discussing these
differences in class. The position of fixtures brought on the property under a lease might also deserve review.
Leasehold interests are basically concerned with the landlord-tenant relationship. It is a very old type
of land relationship that should be distinguished from a license, where the licensee does not acquire exclusive
possession of the property.
Leases are always for a specific term, under which the tenant acquires exclusive possession of the
property for the term, provided that the rent is paid, and the other conditions of the lease met. In the event of
default under a lease by the tenant, the landlord may re-enter, or take steps to have the tenant evicted,
depending upon the jurisdiction, and the type of tenancy.
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The Court Decision 1163133 Ontario Ltd. v. Lazer Mania Inc. provides an illustration of a
commercial lease, and the importance of a careful review and understanding of the terms by the tenant. The
lease in question would appear to be a lease of premises in a shopping centre, and may be examined along
with the text topic on Shopping Centre Leases, since they represent a specialized form of commercial lease.
Review Questions
1. What remedies are available to a landlord where a tenant fails to comply with the terms of the lease?
Answer:
The landlord may:
(1) take action on the covenant to recover unpaid rent.
(2) distrain against the goods of the tenant (commercial leases).
(3) re-enter the premises.
For minor breaches of the lease the landlord may only take legal action for the damages and for an
injunction.
2. In what way (or ways) does a tenancy differ from a license to use property?
Answer: A tenancy differs from a license in that a tenancy entitles the tenant to exclusive possession
of the land, whereas a license entitles the licensee the use of the land in common with others.
3. In a commercial lease in most provinces, landlords may distrain against the chattels of the tenant for
non-payment of rent. What does this mean, and how is it accomplished?
Answer: To distrain means to seize the chattels of the tenant for rent due and owing, and to have the
chattels sold if the rent is not paid.
4. What is a "reversion" in a lease?
Answer: Reversion is the right to possession held by the landlord when the lease terminates.
5. Explain how the term of a tenancy may be determined where the tenancy agreement is not specifically set
out in writing.
Answer: The term of a tenancy when unspecified is usually determined from the periodic payment of
rent. If rent is paid monthly, the term is considered monthly, etc.
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6. Define or explain the term tenancy at will, and indicate how it differs from a tenancy at sufferance.
Answer: A tenancy at will is created when a person allows another to occupy the premises for an
express purpose, usually connected to another transaction. A tenancy at sufferance arises where a
landlord allows the tenant to stay on in the premises after notice to quit has been given and the lease
expired.
7. How does a sub-tenancy differ from an assignment of a lease by a tenant? What rights are created in the
sub-tenant by the granting of a sub-tenancy by the tenant?
Answer: A sub-tenancy is a tenancy created by a tenant and a sub-tenant and may be for a term less
then the tenant's lease. An assignment of a lease brings a third party (the assignee) into possession of the
property and releases the tenant from the lease. Under a sub-tenancy the tenant is liable for the property,
rent, etc.
8. Distinguish privity of estate from privity of contract, and explain how the rights of the assignee and the
tenant are affected when an assignment of lease is made by a landlord.
Answer: Privity of estate is created by a lease, because both the tenant and the landlord each have an
interest in the same land. Privity of contract is created by the agreement between the landlord and the
tenant which is contractual in nature, and sets out the rights and duties of the parties. An assignee takes
the estate of the assignor, creating a privity of estate with the tenant, but the original contract remains
between the tenant and the landlord.
9. Outline the covenants which a tenant makes in an ordinary lease. Explain the effect of the tenant's
non-compliance with these terms.
Answer:
The ordinary express covenants which a tenant makes are:
(1) to pay rent
(2) to repair
(3) not to sub-let without permission
(4) insure
(5) pay taxes
(6) not to commit waste.
A breach of any covenant would entitle the landlord to take action on the covenant.
10. What are the rights of a landlord if a tenant abandons the leased property?
Answer: If a tenant abandons the property, the landlord may accept the abandonment as surrender,
and the lease would be treated as at an end.
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11. What is the legal nature of a leasehold interest, and how does it arise?
Answer: A leasehold interest is an estate in land whereby the lessee acquires possession of the
property for a fixed period of time.
12. How do residential tenancies differ from commercial tenancies in most provinces? Why was this change
in the law necessary?
Answer: In most provinces, residential tenancies are subject to special legislation which obliges the
landlord to maintain the premises in a safe, habitable condition, and which severely restricts the
landlord's right to re-entry. The change in the law was necessary to provide tenants with greater security
of tenure. Commercial leases are not affected by this type of legislation as commercial landlords and
tenants are considered to have equal bargaining power.
13. Explain the legal significance of "surrender of a lease." How is this effected?
Answer: Surrender of a lease is the formal termination of the lease where the parties agree to
termination in writing (and perhaps under seal).
14. Explain the legal nature of a covenant of quiet enjoyment as it pertains to a leasehold, and give an
example of a case where breach of the covenant would arise.
Answer: Quiet enjoyment means a right to "legal entry and enjoyment without the permission of any
other person." Interference with this right usually takes the form of interference with the tenant‘s use of
the land by the lessor or persons acting under him.
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Mini-Case Problems
1. X entered into a verbal monthly tenancy with Y, on June 1, to rent Y‘s shop. X paid Y the first
month‘s rent and also moved into possession on the same day. Some months later, on November 1, X
gave Y notice of his intention to vacate the premises on November 30 and paid Y the November rent.
Y demanded an additional month‘s rent in lieu of notice.
Is Y entitled to the additional rent?
Answer:
In commercial leases in most provinces, notice to terminate a monthly lease must be given on or before
the last day of the month preceding the month in which the notice is effective. In this case, notice must be
given on or before October 31st to be effective November 30th. Notice given after October 31 would not be
effective until December 31st. Y is entitled to the extra month's rent because the notice was given too late
for a November 30th termination.
2. The Regal Co. leased a large commercial building for its business. The lease called for monthly
payments of $5,000 per month on a two-year lease. At the end of the first year, the Regal Co. fell into
arrears on its monthly rent payments. Three months‘ rent is now due and owing.
What action might the landlord take against the Regal Co.?
Answer:
Since the lease is a commercial lease, the landlord may:
(1)
take legal action for the arrears of rent owing.
(2)
distrain against the goods of the tenant for the rent owing or
(3)
re-enter the premises.
If the landlord exercises its right of re-entry, the lease terminates.
3. A tenant rented a small store from the owner of a commercial building under a five-year lease. The
tenant vacated the premises at the end of the first year, and refused to make any further lease
payments. The owner of the building did nothing to find a new tenant for over two years, then finally
rented the property again.
What are the rights (and liabilities) of the parties?
Answer:
The only amount in question is the unpaid rent for the two-year period in which the property was vacant. As
the landlord did nothing to accept the tenant‘s abandonment as surrender, the lease remains in force, and the
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tenant therefore remains liable to the landlord for the unpaid rent during the gap of occupancy.
4. A landlord rented office space in a building to a commercial tenant under a five-year lease. Two years
later, the tenant vacated the office space, and stopped rental payments. The landlord immediately rented
the space to a new tenant at a higher rent. The landlord then took legal action against the former tenant
for the rent owing on the balance of the lease.
Advise the parties.
Answer:
The general rights and obligations of contract law continue to apply to leases. In the circumstances described,
it would be unjust enrichment for the landlord to receive an increased stream of rent from its new tenant as
well as succeed in its claim for rent against its former tenant.
Case Problems for Discussion
Case 1
Basic Warehousing Inc. leased a 300 square metre warehouse building to Fabrics & Lace Inc., a cloth and
fabric wholesaler, under a five year lease. The lease provided for an annual rental of $15,000, payable
monthly, with the tenant responsible for all costs related to the maintenance of the building except taxes.
During the course of negotiations, the president of Fabrics & Lace Inc. mentioned that it would be
necessary to have insurance of goods on the premises, and the president of Basic Warehousing Inc.
commented that in his opinion the tenant would probably be able to obtain insurance coverage for the
goods. Fabrics & Lace Inc. moved its goods into the warehouse, and shortly thereafter, applied for
insurance coverage. An inspector from the insurer examined the building and concluded that it could not
accept the risk of insuring the type of goods stored by the tenant. When insurance coverage was refused,
Fabrics & Lace Inc. immediately moved its goods out of the warehouse, and ceased making its monthly
rental payments.
Advise the parties. What would be the nature of the claims and arguments if the case came before the
court?
Render a decision.
Answer:
Commercial leases freely negotiated often force grave results upon unwary tenants. However, those same
leases are subject to all the rules generally applicable to contracts. In this case, both parties specifically
averted their minds to the need for insurance, and expected that it would be available. They have learned that
they were mistaken as to an essential element of their contract, which renders (at least to the tenant) a tenancy
which is materially different than what they had bargained for. The lease is therefore unenforceable against
the tenant. Alternatively, again as a result of the specific discussion, the requirement of insurability of the
business activity may be seen as a condition precedent for the existence of the lease, in which case the
contract is void, for it never came into being.
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Case 2
Down Country Mall Ltd. owns a small shopping mall that consists of eight small, leased shops offering
various products and services to the public, and one large shop that it had leased to Mini Department
Store Ltd. The lease to Mini Department Store Ltd. was for a ten-year term, with no provision for
termination or notice. Mini Department Store Ltd. initially found business at the location to be good, but
after a few years, it noticed that the suburban neighbourhood was becoming more affluent, and less
interested in its array of goods. Sales were gradually declining during this period, and by the end of the
sixth year, the store experienced a loss. Revival of sales appeared to be unlikely, and Mini Department
Store Ltd. vacated the premises without giving notice of its departure to Down Country Mall Ltd. Down
Country Mall Ltd. immediately set out to find a new tenant, but was largely unsuccessful. Eventually,
after much searching, it found a new tenant, but at a rental that was 30% less than the rent amount paid by
Mini Department Store Ltd. The lease with the new tenant was for a five-year term. Down Country Mall
Ltd. has decided to take action against Mini Department Store Ltd. for breach of its lease, and seeks
damages for its loss. It also claims for the rent owing for the four remaining years of the lease. Discuss the
position and arguments of each party.
Render a decision.
Answer:
Among the landlord‘s options, where premises are abandoned, the landlord may re-enter and elect to seek
prospective damages arising from the unexpired portion of the term of the lease (see the Supreme Court
of Canada in Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd., [1971] S.C.R. 562). The rent which
is later generated by a new tenant serves to mitigate the losses of the landlord for the balance of the
original rental period, and reduces the liability of the former tenant accordingly.
Case 3
Bingham leased a small shop from Wright under a tenancy agreement that provided for a three-year term
at a monthly rental of $800 per month. The lease did not contain an option to renew, but following the
expiry of the lease on October 31, 2017, Bingham continued to pay the monthly rental of $800 to Wright.
The term of the tenancy was never discussed between the parties, nor was the lease arrangement
discussed until June 2018, when Wright gave Bingham a written notice that read: ―I have sold the
property in which you presently occupy space, and the purchaser will require vacant possession on
December 31, 2018. This letter gives you written notice to vacate in six months‘ time.‖
In response, Bingham wrote Wright and advised her that he was in possession under a lease that did
not expire until October 31, 2020, and that the notice given did not apply to his present tenancy.
Wright gave Bingham a second written notice on October 25, 2018, now demanding vacant
possession of the premises by November 30, 2018.
When Bingham refused to vacate the shop, Wright brought an action for a writ of possession.
Outline the arguments that might be raised by the parties in this case.
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Render a decision.
Answer:
The term of the lease in this case expired on October 31, 2017, and was renewed by the payment of rent by
the tenant, Bingham. The key issue is the nature of the tenancy created by the "renewal". Was a lease from
year to year created, or was it a periodic tenancy of a monthly kind? What notice would be required of each?
These are some of the questions that might be asked. If the lease is silent, and there is no agreement to the
contrary, the renewal of an annual tenancy is also an annual one, and would require the proper notice of
termination based not upon the date the notice is given, but prior to the termination date of the lease, as the
notice may only relate to that date. Wright's argument was that initially six month's notice at any time would
terminate the tenancy. The second notice, however, viewed the tenancy as one of month-to-month. Bingham
argues that it is an annual tenancy that would not expire until October 31, 2020, and (for the jurisdiction)
required six month's notice be given prior to the termination date. On the basis of Re Sons of England
Benefit Soc. & Ezrin, [1962] O.W.N. 42, there would be a presumption of a tenancy from year to year (unless
evidence could establish the contrary) where a tenant on an annual lease continues to occupy the premises
and pay the rent. If this case is followed, Bingham would have been entitled to remain in possession until
October 31, 2020.
Case 4
Quinn leased a small retail shop from Chaplin for the purpose of establishing a fruit and vegetable market.
The lease was drawn for a three-year term, commencing May 1, 2011, and provided for a total rental of
$36,000, payable at $1,000 per month. The first and last months‘ rent were due on May 1. Quinn paid the
two months‘ rent and moved into possession.
A month later, and a few days after the rent for the month was due, Chaplin discovered that Quinn
had sold the business to Rizzoto. The sale was contrary to the terms of the lease, which permitted
assignment of the lease only on consent. Chaplin immediately went to the shop and, when Rizzoto
arrived, told him that he was not willing to have anyone but Quinn operate a shop on the premises.
Chaplin advised Rizzoto that Quinn was in breach of the lease by assigning it without his consent and
suggested that Rizzoto seek out Quinn to get his money back.
Chaplin then contacted a licensed bailiff and gave him authority to collect the rent owing. The sheriff
went to the store and made an inventory of the stock and equipment, which he valued at $5,000 and
$6,000 respectively. He then changed the locks on the door and posted a notice on the premises that
informed the public that the landlord had taken possession for non-payment of rent. The next day he
notified Quinn and Rizzoto that he had distrained the chattels in the shop on behalf of the landlord. He
advised the two parties that they had five days to redeem the chattels by payment of the arrears of rent,
otherwise the chattels would be sold. Quinn and Rizzoto made no attempt to pay the rent.
The bailiff later attempted to sell the business, but was unsuccessful. Eventually his services were
terminated by Chaplin.
Chaplin did not attempt to rent the premises and retained the stock and equipment. In December
2011, he brought an action against Quinn for damages for breach of the lease.
Discuss the particular issues that are raised by this case and indicate the arguments that the parties
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might present with respect to each.
Render a decision.
Answer:
The first issue to be considered in this case is the nature of Quinn's liability as a tenant. Could Chaplin
distrain for rent when it was only a few days overdue? Was Chaplin entitled to withhold consent when Quinn
transferred the business to Rizzoto? Can Chaplin retain the chattels and stock and still claim damages? Does
it make any difference if he made no attempt to lease the premises after evicting Quinn? According to the
case of Fuda et al. v. D'Angelo et al. (1974), 2 O.R. (2d) 605, when Chaplin evicted the tenants, changed the
locks, and attempted to sell the goods and equipment of the tenants "as a going concern", his actions
constituted a termination of the lease. In order to collect the unpaid rent, Chaplin would be obliged to show
that he had given notice to the tenant that he intended to hold him responsible. This he would be obliged to do
if he expected to recover from Quinn.
Case 5
Sheila verbally agreed to lease Beverly‘s furnished apartment from her for the months of May through to
August, while Beverly would be in another city attending a university summer program. Under the
agreement, Sheila would pay the rental payments to the landlord at the beginning of each month and ―take
good care of the apartment‖ in Beverly‘s absence. Sheila was expected to vacate the apartment on August
30.
Sheila moved into the apartment on May 1 and lived in it until July 30, when she found a new
apartment located closer to her place of employment. On July 30, she permitted several of her friends to
move into Beverly‘s apartment on the condition that they pay the August rent and vacate before the end of
the month, when Beverly was expected to return to the city.
The new tenants did not pay the rent as they had agreed to do. On August 25 they held a party at the
apartment that resulted in $2,000 damage to the premises and $800 damage to Beverly‘s furniture. The
new tenants vacated the apartment the next day, leaving no forwarding address.
When Beverly returned to the city on August 31, she discovered her apartment in ruins. A few days
later, she received a notice from her landlord demanding the overdue rent for the month of August.
Advise Beverly of her rights and outline a course of action for her to follow.
Answer:
Assuming that the landlord has given the right to sub-let the premises, Sheila and Beverly have created a
sub-tenancy for the period May through August. The sub-tenant in turn created a further sub-tenancy with
her friends for the month of August. While each sub-tenant was responsible to their respective lessor
(Beverly and Sheila), the responsibility to the landlord for rent payment rests on Beverly. She must pay the
rent, and in turn, look to her sub-tenant for payment (in this case Sheila). Sheila in turn must look to her
friends for the money. The damage to the apartment is another matter. A tenant is not strictly liable for the
negligence of a sub-tenant, and Beverly may be able to argue that the conduct of the sub-tenant was not
contemplated and so alien to the conduct of a sub-tenant that it could not be contemplated. By this agreement
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the court might consider the sub-tenants liable for the damage (See: Gallo et al. v. St. Cyr et al. (1983) 144
D.L.R. (3d) 146). However, a more persuasive counter-argument might be that since the tenant is liable for
the damage caused by guests and others on the premises, the tenant will also be liable for damage caused by a
sub-tenant. See: Warren v. Keen [1945] 1 Q.B. 15. Beverly would probably be liable as well under the
landlord and tenant legislation (in most provinces) which usually states that a tenant is liable for any
damage caused by the tenant or the tenant's guests. Beverly of course, would be entitled to take
action against Sheila, who is her sub-tenant, for the damage to the premises, and Sheila in turn would
be obliged to take action against her friends to recover the damages. With respect to the furnishings,
Beverly, in effect, gave Sheila possession (a bailment), and the unauthorized bailment of the furnishings to
the sub-tenants by Sheila would render Sheila strictly liable for the $800 damage. Sheila would, of course,
be in a position to take action against her friends for this damage as well.
Case 6
The Acme Co. leased the second floor of a three-storey office building to the High Finance Company for
a three-year term. The lease contained a clause in which the tenant acknowledged that the building was in
a good state of repair. The lease made no mention, however, of responsibility to repair subsequent
damage to the rental premises.
Before moving into the premises, the High Finance Company made extensive changes to the leased
premises by adding several partition walls, special electrical wiring for its computer operation, and an airconditioning system. Three months later, a fault in the electrical wiring caused a serious fire that
destroyed the interior of the High Finance Company‘s rental premises, and caused serious damage to the
third floor of the building and water damage to the first-floor tenant‘s equipment and merchandising
business.
The High Finance Company agreed to pay for the damage to the part of the premises that it had
leased, but refused to pay for the general damage to the building on the basis that the landlord had agreed
to the changes in the electrical wiring that had resulted in the fire. The High Finance Company also
refused to pay rent for its part of the building until the premises were again fit for occupation.
Discuss the rights of The Acme Co., the third-floor tenant, and the first-floor tenant. On what basis, if
any, might the High Finance Company refuse to pay its rent?
Answer:
High Finance Company would be liable for the damage to the building, assuming the electrical fault was due
to the negligence of the electrical contractor who installed the wiring. High Finance would have a right of
action against the contractor for negligence. High Finance would probably be liable for the damage caused to
the third floor tenant and the first floor tenant as well. Unless the lease provides to the contrary, rent is not
normally payable by an upper floor tenant during the repair period if the upper floors of the premises are no
longer accessible due to a fire. The case is different here because the fire was caused by the tenant, and High
Finance may be liable for the payment of rent during the repair period.
Case 7
New Tomorrows Inc. is a registered, non-profit charitable corporation that runs a group home allowing
ex-convicts, homeless persons, and others who are ―down on their luck‖ a chance to ―get on their feet‖ in
an understanding environment. Applicants sign a rehabilitation agreement and receive the use of a
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bedroom and common kitchen space. Failure to pay any month‘s modest fee on time was to be taken,
under the agreement, to be notice by the resident of his or her intention to leave the home in five days‘
time. This point was reiterated each month, as those who had given their notice were quickly replaced by
other people.
After residing for three months, Henry was late in the payment of his fees on the first day of the new
month. Five days later, he and his belongings were ―helped‖ to the street and, as was so often the case, he
was replaced by someone else. Henry went to the provincial ministry responsible for tenancies to
complain.
Discuss the legal issues in this case, and the arguments and principles that the parties may rely upon.
What rights, if any, does Henry have?
Answer:
The basic issue in this case is whether Henry was in fact a tenant. Students might be asked to decide if the
relationship is one of landlord-tenant. The crucial point here is exclusive possession. Henry has exclusive
use of the bedroom, but is obviously only a licensee with respect to kitchen use. His occupancy is also
related to the 'rehabilitation agreement' and it might be argued that the use of the room was a part of that
agreement rather than a lease of the bedroom. The case is based upon Keith Whitney Homes Society v. Payne
(1992) 9 O.R. (3d) 186 where the court held that a tenancy was created because he had exclusive use of the
bedroom, and this constituted 'residential premises' under the Landlord and Tenant Act.
Case 8
In 1989, Relax Retreat Inc. leased a 20-hectare parcel of land for use as a recreational ―park‖ from Land
Holdings Co. on a 30-year lease. During the term of the lease, the corporation constructed a number of
small one- and two-room cabins on the property, and eventually installed an inground fibreglass
swimming pool. The cabins were of wood construction and set on concrete blocks, in order that they
could be occasionally moved as the site was developed. In 1992, a concrete-block building was
constructed on a reinforced concrete pad to house shower and washing facilities and an office for the park
manager.
When the lease expired in 2019, Relax Retreat Inc. informed Land Holdings Co. that the cabins, main
office/shower building and pool, and all of the facilities would be removed. Land Holdings Co. objected
to the removal of any structure from the property.
Advise the parties of their respective rights and, assuming that the case came before the court, render
a decision.
Answer:
This case deals with leased premises and structures placed thereon by the tenant. The tenant in this instance
viewed the structure as chattels that could be removed, and expressed the intention of removing them on the
expiration of the lease. The facts of the case problem are essentially the facts in Boxrud v. Canada, a 1996
Federal Court Trial Division case in which the court held that the swimming pool and the buildings on the
concrete pad were permanently attached to the land, and could not be removed, but the other moveable
structures were not fixtures, and were removeable by the tenant.
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Case 9
The Washa-Matic Company carried on business as the owner of coin-operated washing machines. The
company entered into an agreement with 108 Suite Apartments to provide washing machines for use by
tenants of the apartment building.
The agreement was entitled ―Lease Agreement‖ and provided that the landlord ―demise and lease the
laundry room on the ground floor of the building to the tenant for a monthly rental equal to $1 per
machine installed.‖ The agreement was drawn for a five-year term and provided for free access to the
room by all tenants. The agreement also allowed employees of Washa-Matic the right of access to the
premises ―at all reasonable times‖ to repair or service the machines.
Some time after the machines were installed, the owner of the building sold the premises to a new
owner, and the new owner asked Washa-Matic to remove the washing machines. Washa-Matic refused
and argued that it was the lessee of the laundry room under the lease agreement.
The new owner removed the washing machines owned by Washa-Matic and installed new equipment.
Washa-Matic Company then brought an action against 108 Suite Apartments for damages for breach of
the lease and for lost profits.
Discuss the legal issues raised in this case.
Render a decision.
Answer:
The issues in this case are similar to the issues raised in Metro-Matic Services Ltd. v. Hulmann (1974), 4 O.R.
(2d) 462. In a discussion of the facts of the case, it is first of all necessary to determine the nature of the
agreement made between the parties. The agreement uses the terminology found in leases, yet is it a lease
simply because it uses such language? What else might it be? Is it a licence to install machines in the room,
and to use it along with all others? What rights and duties are necessary to render the relationship that of
landlord and tenant? In the case cited above, the court held that unless a contrary intention could be
established, the use of the language of a lease and the rights conferred by that language rendered the
relationship that of landlord and tenant. In particular, the court noted that the agreement gave the tenant
exclusive possession of the laundry room, subject only to the rights of the tenants in the building to enter and
use the machines. Had the landlord retained the right to use the premises for other purposes, the outcome
may have been different, as exclusive possession is a key factor in the relationship.
Case 10
The Chens leased an apartment suite from Broughton Road Apartments for a one-year term, commencing
July 1. The Chens were particularly attracted by the location of the apartment building, since it was a
long, low building of Tudor design, surrounded by rather spacious grounds. The grounds were important
to them because they required a place where their two-year-old child might have a safe place to play.
A few weeks after the tenants moved into their apartment, the owner of the building decided to
remove the roof of the building and replace it with new roofing boards and shingles. The noise of the
construction work, which was carried on from approximately 8:00 a.m. to 4:00 p.m., interfered with the
normal sleeping hours of Mr. Chen, who worked a second shift as a night security guard at a nearby
industrial plant. It also interfered with their child‘s customary afternoon nap.
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In addition to the noise of the construction, the Chens discovered that another tenant in the building
owned a large pet snake, which was permitted to roam at will over the lawns of the property.
The Chens protested to the landlord that the noise of the roof repairs interfered with Mr. Chen‘s sleep,
and the presence of the snake made the use of the grounds impossible, since they both feared the reptile,
even though it was of a harmless species.
When the landlord refused to limit the construction and failed to control the snake, the Chens moved
from the apartment. They had been in possession for less than two weeks. The landlord then brought an
action to recover apartment rent and other expenses that were alleged to be owing as a result of the breach
of the lease by the tenants.
Discuss the arguments that the defendants might raise in this action and determine the issues that the
court must deal with before a judgment might be given.
Render a decision.
Answer:
This case raises for discussion the requirement of the landlord to not interfere with the tenants' use and
enjoyment of the leased premises. Does the construction interfere with the tenant unduly? Is the landlord
obliged to stop the construction or repair of the roof to permit Mr. Chen to sleep? Is the landlord obliged to
do the work in order to maintain the building in a water-tight condition? Construction or repair of the roof is
presumably a necessary and temporary inconvenience for Mr. Chen to bear, and would probably not entitle
him to treat the lease at an end. The important factor here would probably be the nature of the interference
with the tenants' enjoyment of the property. If it was physical interference with their enjoyment, then there
would be breach by the landlord, but a temporary, personal annoyance would probably be insufficient to
constitute a breach of the lease. Nor would the landlord likely be obliged to control the pet snake owned by
another tenant, as he may be unaware of the true owner. If the snake was annoying Mr. Chen, action might
be taken by them against the particular tenant. The extent of a landlord's obligation to a tenant is discussed in
Greenbranch Investments Limited v. Goulborn and Goulborn (1972), 3 O.R. 532.
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CHAPTER CHART
Chapter 25. Commercial and Residential Real-Estate Transactions
Chapter Topics
Introduction
Modern Real-Estate Transactions
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Describe the steps encountered in a real-estate transaction.
• Identify the tools available to shift or mitigate risk in real-estate transactions.
• Describe the role of an agent, surveyor, appraiser, and the legal
professional in the conduct of a real-estate transaction.
• Recognize aspects of real estate law that are unique to commercial transactions.
YOUR BUSINESS AT RISK
Without certainty in land-ownership rights, major business assets (and personal assets securing
business debt) are exposed to risk. Complex rights of ownership have led to complex processes
to secure those rights. You will engage professionals to navigate these processes, but it is
important for you to be aware what services and performance you can expect in return for the
professional fees you pay.
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CHAPTER COMMENTARY
The purpose of this chapter is to explain some of the more important searches, checks, and activities that are
carried out in conjunction with the purchase or sale of real property. The chapter is not designed as a
do-it-yourself guide, but rather, to provide a brief outline of some of the complexities of the transaction, and
the purpose of the many searches, etc. The historical background is for information purposes only, since the
modern transaction is quite different. The role of the real estate agent is worthwhile to examine, however, as
it points out the importance of the agent, and also the fact that the agent in the transaction is the agent of the
vendor in almost every case. The agent cannot act for both parties without their express consent - a point that
should be emphasized in class. See text on this point.
The duties of the legal profession in real estate transactions are of major importance, due in part to
the many searches, legal considerations, etc., required. The text helps explain the numerous activities of the
lawyer to ensure that the transaction is properly carried out. These are usually quite straight forward, but may
be emphasized by way of an example of a typical purchase of residential property. This following fact
situation might be used for discussion purposes using the various steps in the transaction as described in the
text:
Smith listed his house and lot with a real estate agent named Jones. The listing price was
$480,000. The property was subject to a mortgage in the amount of $290,000. Brown has
expressed an interest in the purchase of the property. What procedure would follow from
this point? What steps would each party take, assuming the transaction proceeded to
closing?
The various steps may be summarized for an ordinary residential sale as follows:
1.
Offer to purchase is made by the prospective purchaser.
2.
Acceptance of the offer by the vendor to form a binding contract, subject to
the proviso that the title to the land is good, etc.
3.
Purchaser engages a surveyor to determine the boundaries of the land.
4.
Purchaser engages a solicitor to undertake the necessary searches to ensure
that the vendor has a good title to the property, and that no charges are
attached to the land. These searches include:
(a)
search of the title to the property in the Land Registry office.
(b)
tax search for arrears of taxes.
(c)
search for utility charges or liens (such as hydro, etc.).
(d)
search for outstanding work orders of the municipality.
(e)
search to confirm property meets zoning requirements.
(f)
check to determine that any existing mortgage on the property is in good
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standing, if it is to be assumed by the purchaser.
(g)
any tenancies are confirmed, and rent change arrangements made.
(h)
search for encroachments, etc. by adjoining property owners, based
upon survey.
(i)
search for any judgments or liens against the property in the hands of
the Sheriff.
5. In some provinces, when all searches are completed, the solicitors for the purchaser and vendor
meet at the Land Registry Office, and the deed and keys are exchanged for the purchase price of
the property. In most provinces, however, the exchange may take place in one of the solicitor‘s
offices, and the deed registration, etc. done electronically by computer.
6. Registration of the deed transfers the title to the purchaser.
The Court Decision in the chapter provides an illustration of an alleged condition precedent in an
agreement to purchase land, and how a court would consider ‗standards of the trade‘ in determining if work
has been properly done under the agreement. In any discussion of the case, students should perhaps review
the nature and impact of a condition precedent on a contract, as well as the difference between a warranty and
a condition in the agreement. In the end, the judge concluded that the demands of the purchaser were not a
condition precedent, and did not entitle the purchaser to refuse to perform the contract.
Review Questions
1. Why must a purchaser make certain that no writs of execution are attached to the property which is to be
purchased?
Answer: Writs of execution against a person who holds property attach to the land, and if a purchaser
buys the land, it would be subject to the writ. The property could be sold to satisfy the execution even
though it was transferred to the purchaser.
2. Explain the significance of the vendor providing vacant possession at the time of transfer of ownership.
Is this also important to-day?
Answer: Vacant possession is as important to-day as it was in the past, because it permits the new
owner to enter on the property with exclusive possession - a right of an owner. It also completes the
―livery of seisin.‖
3. What role does a real estate broker or agent play in a modern real estate transaction?
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Answer: The role of the real estate agent in a modern real estate transaction is to seek out
prospective buyers for the vendor, and to bring the buyer and vendor together in a contract for the
sale of the property.
4. How is the agency relationship established?
Answer: The agency relationship is established by a "listing agreement."
5. Why is a survey important in a land transaction? What does it establish?
Answer: A survey is important in order to determine if the vendor's deed actually corresponds with
the boundaries of the land described in it. It may also identify encroachments, etc. and show the location
of buildings.
6. Explain the purpose and use of an exclusive listing agreement.
Answer: An exclusive listing agreement entitles the agent to a commission regardless of who sells
the property while the listing is in effect. It also obliges the agent to use his/her best efforts to find a
buyer for the property.
7. In what way (or ways) does an appraiser assist in a real property transfer?
Answer: An appraiser determines the value of a property based upon zoning, value of similar
properties, rental potential, present rate of return, condition of building, etc., and converts this into an
opinion of its value on the market. This enables the prospective purchaser to make a realistic offer to
purchase.
8. Outline the role of a land registration system in modern real estate transactions.
Answer: The land registration system records all interests that might affect land, and enables a person
to protect his or her interest by registration of the deed, etc.
9. How does the land registration system aid a prospective purchaser of real property?
Answer: The land registry system enables the prospective purchaser to identify the registered owner
of the property, and to determine any encumbrances, restrictions, etc. that might attach to the property.
10. What constitutes a good and marketable title to real property? How is this determined under the
Registry System?
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Answer: A good and marketable title would consist of continuous forty year chain of title dating back
from the deed of the present registered owner, with no encumbrances registered against it. (Ontario).
11. In what way or ways does the Land Titles System simplify the determination of the vendor's title to lands
offered for sale?
Answer: Under the Land Titles System, the province certifies the title in a particular registered
owner, and the purchaser or his/her solicitor need not search behind the name stated as the registered
owner.
12. What are the duties of a real estate agent? Do they differ in any way from that of an agent in an ordinary
principal-agent relationship?
Answer:
The duties of a real estate agent include:
(1) inspect and value the property (or arrange for the valuation).
(2) actively seek out prospective purchasers.
(3) arrange for purchasers to view the property.
(4) prepare a written offer to purchase.
(5) hold all deposits pending closure of the transaction.
(6) act always in the best interests of the vendor.
13. Describe the role of a lawyer or solicitor in a land transaction.
Answer: A lawyer not only reviews all documents related to a transaction, and draws others, but
attends to a number of very important searches if acting for the purchaser. These searches include: search
of title, taxes, zoning, building standards/ safety, sub-dividers and developers obligations under
sub-division agreements, payment of services (such as hydro), searches for executions and liens against
the property, chattel searches, and attendance to the registration of the land.
14. What other searches in addition to a title search are necessary in a land transaction in order to protect the
purchaser? How are these searches usually made?
Answer:
Other searches are:
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(1)
search for tax arrears at Municipal office.
(2)
search for zoning, etc. at Municipal office.
(3)
search for service liens (hydro) at Public Utilities office.
(4)
search for judgments and executions at Sheriff's office.
(5)
search for chattel liens, etc. at County offices (for chattel mortgages, etc.).
(6)
search of unpaid corporation taxes (some provinces) at the Provincial
Government tax office.
15. Explain the significance of the process whereby a deed of land is "signed, sealed, and delivered."
Answer: In some provinces a deed must be made under seal and be signed by the grantor to be
effective. Delivery completes the transfer of the property to the grantee. Most provinces, however, have
moved away from the requirement of a seal on the deed.
16. Why were the ceremonial aspects of the transfer of land important in early real estate transactions in
England?
Answer: The formal ceremony of transfer of possession (in the presence of witnesses) was conducted
to demonstrate to the community that a transfer of the land had taken place, and was particularly
important in a time of widespread illiteracy and a lack of written records.
Mini-Case Problems
1. A agreed to sell B a building lot for $250,000. Without searching the title, B gave A the $250,000 and
received a deed to the property in fee simple. B then discovered that the property was registered in
A‘s wife‘s name and not in A‘s name.
What are B‘s rights?
Answer:
B's only right is against A for a return of the purchase price. Since the property is in A's wife's name, B has
no claim to the land.
2. The ABC Co. intends to offer to purchase a large parcel of vacant land from D, a farmer. The
company plans to erect a manufacturing plant on the land after the purchase is completed.
What conditions or provisos should the company include in the offer to purchase, and what searches
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should it make to ensure that it may use the land for its intended purpose?
Answer:
ABC Co. should include a proviso that the farmer D has good title to the property free from encumbrances,
and that the zoning of the property be proper for the erection and operation of a manufacturing plant
(industrial zoning of the land). The company should not only search the title to the land, but should check
with the local municipality to determine if the zoning is appropriate for its intended use of the property.
3. Rudolf owned a house and lot. He engaged the services of Victoria, a real-estate agent, to sell the
property for him, and signed a 3-month listing agreement with a commission of 4% payable if she
sold the property. A month before the listing agreement expired, Victoria took George, an interested
buyer to see the house. While Victoria was adjusting a ‗for sale‘ sign on the lawn, Rudolf told George
that if he was interested in buying the property, he could sell it to him in a month‘s time after the
listing agreement had expired. Rudolf indicated that he would sell it ‗less commission,‘ which would
save George about $30,000. A month later, George returned, and Rudolf and George arranged for the
sale of the property at the listed price, less $30,000.
What are Victoria‘s rights in this case?
Answer:
Victoria may well have included a term in her listing agreement to cover just this sort of eventuality. In that
case, her right to a commission would be protected simply by virtue of the contractual term. If she did not
include such a term in her listing agreement, she may still have a right to compensation as a matter of
quantum meruit, presumably based on what she would have earned in the normal course of the transaction.
Rudolf‘s actions may also amount to the tort of deceit.
4. Jason purchased a building at an intersection of two highways that had once been a service station and
gasoline storage facility. Haggard, the seller, assured Jason that the property was ‗clean‘ and there
were no environmental problems. A year after the purchase was completed, the owner of the land
next to Jason‘s property complained to Jason that his well water was now contaminated with gasoline
and oil.
Advise Jason.
Answer:
As the owner of the property, and regardless of his lack of blameworthiness for creation of the pollution,
nuisance or interference, Jason will be primarily liable for the cleanup of the property and either restoration or
compensation owed to his neighbours.
Case Problems for Discussion
Case 1
Albert, a real-estate agent, entered into an exclusive listing agreement with Amelia whereby he agreed to
find a buyer for a block of development land owned by Amelia. The property had a listed value of
$1,750,000, an amount that Albert had indicated was a reasonable price for the property. Amelia, who
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was inexperienced in business matters, accepted Albert‘s appraisal as being a fair market value for the
land. In actual fact the fair market value was approximately $2,000,000. Albert made no effort to put the
parcel of land on the market, but instead, incorporated a company for the purpose of purchasing the
property. When the new corporation was operational, Albert prepared an offer on behalf of the
corporation, and presented it to Amelia. At the time of presentation of the offer, he told her that he knew
the president of the corporation. Since the price was exactly $1,750,000, Amelia readily signed the
agreement to complete the contract. The sale was completed in due course, and Amelia gave her deed to
the property in return for the payment of the purchase price. At that time, she also paid Albert the 5%
commission that the listing agreement had specified as the agent‘s commission. A few months after the
sale of the land had been completed Amelia discovered that Albert was the president of the corporation
that had purchased her property.
Advise Amelia. If Amelia should take legal action against Albert, what would be the nature of her
claim?
Render a decision.
Answer:
The actions of Albert are a complete breach of the agent‘s duty of utmost good faith owed to his principal.
From the first moment of contriving a price below market value, through misrepresentation by non-disclosure
regarding the ―president of the corporation‖ to earning a fraudulent commission on a sale to himself, Albert
has not only breached his duty but committed the tort of deceit as well. Amelia should be able to recover the
commission paid, and either the $250,000 secret profit or a reconveyance of the property from the
corporation.
Case 2
A municipality owned a large tract of land that had been a municipal landfill site many years before.
Custom Construction Inc., a land development corporation, moved into the municipality from another
city, and was anxious to establish itself in the community as a quality developer. When it discovered that
the municipality had a tract of land for sale, it approached the municipality to determine if the land could
be purchased for residential development. The municipality was anxious to dispose of the property, and
agreed to sell to Custom Construction Inc. A price was agreed upon, and the purchase was completed
after the lawyer for Custom Construction Inc. had examined the title to the property, and found that the
municipality had a good title to the tract of land. During the preparation of the land for house building,
Custom Construction Inc. employees noticed that a methane gas smell was rising from the excavations for
house basements, and also that a coloured liquid was seeping into a small stream that crossed the
property. When Custom Construction Inc. queried the methane gas smell, and seepage into the stream at
the municipal office, it was advised at that time that the land had previously been the municipal landfill
site. The revelation that the property had been a landfill site in the past effectively precluded Custom
Construction Inc. from proceeding with its housing development.
Discuss the issues raised in this case, and advise Custom Construction Inc. Speculate as to the
outcome of this case if Custom Construction Inc. should decide to take matters to court.
Answer:
This is (perhaps) not a case where environmental contamination is currently affecting neighbours, however, it
is certainly impacting negatively on the plans of the current owner, Custom. For the most part, the
environmental problems associated with a particular piece of land belong to the owner, but the question arises
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here whether there is any shared or exclusive liability in the municipality, the vendor to Custom. Indeed,
Custom should have done more in its due diligence searches; however, not all features of the property may be
readily apparent from public records. Still, one may argue that a major development requires extraordinary
research on the part of the buyer. On the other hand, the argument can be made that much of the liability for
Custom‘s loss should be borne by the municipality. The municipality knew the precise history of the use of
the property as a landfill; it knew that Custom was from out-of-town and was unlikely to know the history of
the land; it knew that Custom intended to build houses on the property and that contamination would prevent
this. With this in mind, the actions (or inactions) of the municipality can be seen as misrepresentation by
non-disclosure. From this perspective of assigning liability, we can ask the question: would Custom have
bought the property at any price had it known the facts the municipality should have disclosed? As a vendor
in the public interest, the municipality may even have an extraordinary duty to disclose this information; it
knows the purchaser‘s development lies in the near future, which may expose many future homeowners to
needless hazard and toxicity – a breach of public trust of the first order.
Case 3
In December of 2018, Fanshawe agreed to purchase a house and lot from Miovsky for a purchase price of
$358,000. The property was in an area under the Registry System, and Fanshawe determined from the
registry office that Miovsky had what appeared to be a good title to the land. Unfortunately, he had failed
to notice a mortgage that had been registered against the property to secure the indebtedness of Williams,
Miovsky‘s predecessor in title. The mortgage had been assumed by Miovsky as a part of his purchase
from Williams, but that fact had not been revealed to Fanshawe at the time that the offer was drawn.
The offer to purchase that Fanshawe had accepted contained the following clause that read in part:
―The purchaser shall have 10 days to examine the title at his own expense …. Save as to any valid
objections made to the vendor‘s title within that time, the purchaser shall be conclusively deemed to have
accepted the title of the vendor.‖
Without knowledge of the existing mortgage, Fanshawe proceeded to pay over to Miovsky the
$358,000 and received a deed to the property. He registered the deed on January 6, 2019. Some time later,
Fanshawe was contacted by the mortgagee and advised that the sum of $85,000 remained due and owing
on the mortgage. As Fanshawe was the new owner of the property, the mortgagee would look to him for
payment.
To compound Fanshawe‘s problems, a finance company that had obtained a judgment for $120,000
against Miovsky in October of 2018 had filed a writ of execution with the sheriff of the county where the
property was located. Fanshawe had not searched in the sheriff‘s office at the time of closing the
transaction. He was surprised to discover that the finance company now claimed that the execution had
attached to the land that he had purchased.
Advise Fanshawe of his legal position in this case. What are the rights of the mortgagee and the
execution creditor?
What action could they take against Fanshawe or the property?
Answer:
The importance of a careful search of title is illustrated by this case. Had a careful search been made, the
registered mortgage would have been discovered. Under the offer to purchase, the title was to be considered
accepted by the purchaser if no objection was raised within the time period specified. Does this permit the
vendor to escape his duty to reveal the encumbrance? Does the registration of the deed by the purchaser end
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the vendor's duties under the purchase agreement? The offer to purchase would be subject to the general
rules of law which apply to contracts, and the innocent or fraudulent misrepresentation on the part of
Miovsky would ordinarily allow Fanshawe the right to avoid the agreement. Once the deed was registered,
however, Fanshawe's rights against Miovsky change. The deed contains an assurance that the lands are free
from the encumbrances, and Fanshawe may be obliged to go back against Miovsky on his covenant for
compensation. The rights of the mortgagee and execution creditor are established by statute. The mortgagee
may look to Fanshawe for payment of the balance of his mortgage, since Fanshawe is now the registered
owner of the property subject to the mortgage. The change of ownership does not affect the mortgagee's
right to payment. The execution creditor is in a similar position. By filing the writ of execution with the
Sheriff of the county where the judgment debtor's land was located, the writ attaches to the property. Any
subsequent purchaser would take the land subject to the execution, and would be liable for payment as the
owner of the property.
Case 4
Samuel Reynolds was the registered owner of a 200-hectare farm. In July 2011, he retired from farming
and gave his son Jacob a deed to the farm property. Jacob did not register the deed, but instead placed it in
a safety deposit box that both he and his father rented at a local bank.
Samuel Reynolds died in 2019. His will, dated, May 3, 1998, devised the farm to his daughter, Ruth,
who was living on the farm at the time, and who maintained the house for her father. The will also named
Ruth as the sole executrix of his estate. When the contents of the will were revealed, Jacob announced to
Ruth that their father had given him a deed to the farm some years before, and that he was the owner of
the property.
No further discussion of the farm took place between the brother and sister. However, after the debts
of the estate were settled, Ruth had a deed to the farm prepared and executed in her capacity as the
executrix of her father‘s estate. Then Ruth delivered the deed to the registry office. The deed conveyed
the farm property to her in her personal capacity.
Some months later, Jacob entered into an agreement of purchase and sale for the farm with Smith.
Smith made a search at the registry office and discovered that the title to the property was not registered
in the name of Jacob, but in the name of his sister, Ruth. Smith refused to proceed with the transaction.
Discuss the rights of the parties in this case. Indicate, with reasons, the identity of the lawful owner of
the property. If Jacob should show his deed to Smith and insist that he has title to the property, what
argument might Smith raise to counter Jacob‘s claim?
Answer:
This case raises a number of questions concerning the registration of conveyances and of notice of prior
unregistered conveyances of the property. The Registry Acts of those provinces where the Registry System is
used usually provides that an unregistered instrument is void as against subsequent registered instruments
unless the subsequent purchaser, etc. had actual notice of the prior unregistered instrument. (See for example,
Ontario, Registry Act R.S.O. 1990, c.R-20, s.65 (1)). In the case, the question might be asked: Did Ruth have
actual notice of the conveyance made by her father to her brother? Does notice require something more than
the assertion of the fact by Jacob? Would it be any different if he had presented Ruth with the deed for
examination? When Ruth prepared the deed as executrix, she was acting with knowledge of Jacob's claim
that he had in his possession a prior deed to the property. Jacob's statement may be notice sufficient to put
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Ruth on inquiry, where she could have ascertained the true facts. Her failure to do so may affect her right to
claim priority over Jacob's unregistered instrument. To claim priority, Ruth would also be required to show
that valuable consideration was given for her deed (See: Barber et al. v. McKay et al. (1890), 19 O.R. 46.)
The actions of Ruth in making the conveyance to herself is also open to question. The purchaser, Smith need
not proceed with the transaction unless Jacob can establish a good title to the property (See: Re Mountroy
Limited and Christiansen, [1955] O.R. 352). Jacob, however, might be in a position to have his deed given
priority over the instrument registered by Ruth, and have Ruth's deed removed from the title. (See:
Winchester v. N. Rattenbury Ltd. et al. (1953) 31 M.P.R. 69.)
Case 5
Abner, who was quite elderly, owned a large number of vacant building lots in different parts of a city. He
was approached by Drossos to purchase a particular lot that Abner agreed to sell for $250,000. After
making certain that Abner had a good title to the property, Drossos paid over the purchase price to Abner
and received a deed to the land in fee simple. Drossos didn‘t register the deed, but placed it in his safety
deposit box instead, as it was his intention to sell the lot himself at a later date.
A year later, Abner was approached by Carol‘s Construction Corporation with an offer to purchase
the lot he had sold to Drossos. The price was $350,000, and Abner, who had forgotten that he had
previously sold the lot to Drossos, agreed to sell it to Carol‘s Construction Corporation.
The solicitor for Carol‘s Construction Corporation made the appropriate searches in the land registry
office and, from the records there, determined that Abner was the owner of the land in fee simple. The
money was then paid to Abner, and Abner delivered a deed to the property, which the lawyer registered at
the land registry office.
Some time later, Drossos entered into an agreement with Davis to sell her the lot for $380,000. When
Davis searched the title to the property, she discovered that the lot was registered in the name of Carol‘s
Construction Corporation. Davis then demanded that Drossos obtain a conveyance of the land from
Carol‘s Construction Corporation to enable him to provide her with a good title in fee simple.
If Davis brought an action for specific performance against Drossos, discuss the arguments that the
parties might raise.
Explain the respective positions of Abner and Carol‘s Construction Corporation in relation to the
claim. Speculate as to the ultimate outcome of the situation.
Answer:
This case illustrates the peril associated with delay in the registration of conveyances of land. The first point
to note here is that Carol's Construction Corporation was unaware of the prior conveyance and Drossos's
unregistered deed. Since the corporation was a bona fide purchaser for value without notice of the prior
conveyance, the registration of its deed in the Land Registry Office would render Drossos's deed void as
against it. The agreement for sale entered into between Drossos and Davis requires Drossos to provide a
valid deed in fee simple to Davis, and Drossos has no valid title to the property. Drossos, consequently, must
either obtain a deed to the land from Carol's Construction by negotiation, or pay damages to Davis for breach
of contract if he is unable to acquire the lands. Since Drossos does not have title to the lot, the court would not
grant Davis specific performance of the agreement. Drossos, of course, would have a right of action against
Abner for selling the lot which he, Drossos owned, and could probably recover the value of the lot from
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Abner. Carol's Construction Corporation is the innocent party in the case, and the lawful owner of the lot.
Case 6
For 50 years, Metal Plate Inc. manufactured metal signs in a manufacturing plant located in the industrial
area of a city. In 2005, a large container of used cleaning solvent that was stored behind the plant leaked
into the soil. At the time, the solvent was not classified as hazardous waste material under the provincial
Environmental Protection Act, and nothing was done to retrieve the solvent, except to dispose of the
leaking container. Several years later, the solvent was classified as a registerable hazardous material.
In 2008, traces of the solvent were found in the surface-water drainage sumps in a neighbouring
property, and the source was identified on the Metal Plate land. The company notified the Ministry of the
Environment, and, as a compliance method, the company drilled several collector wells and installed a
pumping system to monitor and collect the contaminant as it moved through the soil. The system was
approved by the Ministry, although the Ministry could require the removal of the contaminated soil at any
time, if it should be necessary to do so.
In 2019, the owner of a business in the area offered to purchase the plant and land for $4,500,000, and
Metal Plate Inc. agreed to sell the property. The purchaser was given a full opportunity to inspect the
property before the closing of the transaction, but did not do so at the time. The purchaser intended to
rezone the property as a residential property and build a large condominium there, but did not disclose his
plans at the time of purchase.
Some months after the new owner had purchased the property, soil tests were made to assess the
suitability of the property for the construction of the residential condominium complex. The test engineers
reported that the soil structure would permit the construction of the proposed building, but noted in their
report the contaminated soil and the monitoring system. They estimated the cost of removal of the
contaminated soil at $1,000,000.
The new owner did nothing about the reported problem and proceeded with his proposed plans to
construct the condominium. His efforts were in vain, however, as the municipality refused to rezone the
land to residential use because of the location in an industrial area. Several years later, the new owner
abandoned his plans. He demanded a return of his money from Metal Plate Inc., on the basis that the lands
were contaminated and useless for his purposes.
Metal Plate Inc. refused to return the purchaser‘s money, and the purchaser instituted legal
proceedings against Metal Plate Inc.
Discuss the issues raised in this case and render a decision.
Answer:
This case is adapted from the facts in Tony's Broadloom & Floor Covering Ltd. v. N.M.C. Canada Inc.
(1997) 31 O.R. (3d) 481 (C.A.), and illustrates the importance of an environmental audit of a property before
purchase, particularly in an industrial area. In the case, the purchaser did not disclose his intended use of the
property, nor did he take steps to inspect the property to ensure its suitability for his intended use. It was only
after the municipality had rejected his rezoning request that he complained about the contaminated soil.
Students should note that the property was not useless, as it could continue to be used for industrial purposes,
although the Ministry could at any time require a clean up of the contamination. These reasons formed the
basis of the court's dismissal of the plaintiff purchaser's claim.
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Case 7
Ibrahim was the registered owner of several adjoining parcels of vacant land that he had purchased some
12 years earlier. During that period of time, the property had appreciated substantially in value.
Recently, Ibrahim was approached by a real-estate agent who suggested that the property might be of
interest to a number of developers who had just begun construction in the immediate area. After some
discussion, Ibrahim entered into a listing agreement with the agent, and the agent agreed to seek out
prospective purchasers for the property. Ibrahim established $400,000 as the selling price he would accept
for the land.
For several months, the agent attempted to find a buyer for the property, but without success. When
the developers in the area were not interested in the property, the agent returned to Ibrahim and suggested
that a corporation in which he had an interest might be willing to purchase the land. To this suggestion
Ibrahim replied that it did not matter to him who the purchaser was, so long as the purchaser was prepared
to pay his price for the land.
A week later, the agent returned with an offer to purchase from the corporation in which he had an
interest. The offer price was $400,000, and was described by the agent as a ―clean deal — all cash.‖ The
offer was prepared on a standard real-estate offer-to-purchase form and contained a clause that read: ―Any
severance or impost fee plus any expenses for water and sewer connections to be included in the purchase
price.‖ Ibrahim queried the clause, and the agent explained that it meant that the cost of obtaining
permission to use the three parcels of land as separate building lots, and the hook-up costs of water and
sewer lines to them, would be deducted from the purchase price. He added that this ―usually did not cost
much.‖
At the agent‘s urging, Ibrahim signed the offer. Some weeks later, Ibrahim discovered to his sorrow
that the severance fees and the water and sewer connections would cost close to 10 percent of the sale
price. The municipality required the payment of 5 percent of the value of the property as part of the
severance fee, and the water and sewer connections accounted for the remainder. When Ibrahim refused
to proceed with the transaction, the purchaser instituted legal proceedings for specific performance, and
Ibrahim, on the advice of his solicitor, settled the action. As a result, he received only $360,000 for the
property, from which the real-estate agent demanded a selling commission of 5 percent based upon the
$400,000 selling price.
Ibrahim refused to pay the agent and demanded that the agent compensate him for the $40,000 loss
that he had suffered. Eventually, the agent brought an action against Ibrahim for the commission that he
claimed was due and owing. Ibrahim, in turn, filed a counterclaim for payment of the $40,000 loss that he
had suffered.
Discuss the arguments that might be raised by the parties in this case. Render a decision.
Answer:
This case concerns the duty of an agent to his principal. The agent's duty to his principal should be reviewed
as a part of the analysis of this case, perhaps by way of such questions as: Should the agent have explained
the cost of the severance in terms of dollars, rather than simply saying that it usually did not cost much?
Since the agent revealed his interest in the purchaser corporation - does it permit him to act in his own interest
alone, or must he still act in the best interests of his principal? Where an agent fails to explain the high cost
of a severance to his principal he runs the risk of being in breach of his duty as an agent. In this situation,
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his failure to remove the offending clause from the agreement might also be treated as a breach as well.
Breach of duty on the part of the agent would probably prevent him from recovering his commission on the
sale. See: Len Pugh Real Estate Ltd. v. Ronvic Construction Co. Ltd. (1973), 41 D.L.R. (3d) 48, for a case in
which these rules were set out.
Case 8
Justin Abernathy was the registered owner of a building lot in a residential area of a large city. He entered
into an agreement of purchase and sale with Karina Giltay, who wished to build a house on the land.
Following the execution of the agreement, Giltay engaged a land surveyor to prepare a survey of the
property. When the survey was completed, it disclosed that the building lot had a frontage of only 18.15
metres. The agreement of sale stated that the lot had ―frontage of approximately 18.46 metres and a depth
of 38.46 metres, more or less.‖ Abernathy‘s deed described the lot as being 18.46 metres by 38.46 metres.
The discrepancy between the two measurements was apparently due to the fact that the owner of the
adjacent lot had erected a fence that encroached on Abernathy‘s property. The fence had been erected
some 15 years before and was taken by the surveyor as the property line.
Determine the rights of the parties in this case. Indicate how the problem might be decided if Giltay
should refuse to proceed with the agreement.
Answer:
The amount of land in the offer to purchase is the matter for determination in this case. Does "more or
less" mean something less than 0.31 metres? If so, by how much less falls within the limits? The vendor in
the offer to purchase must deliver the land as described, and if he cannot do so, the purchaser may either
avoid the agreement, or demand a reduction of the purchase price to compensate for the loss. The right of the
purchaser to decline an imperfect title is discussed in Re Mountroy Limited and Christiansen, [1955] O.R.
352. As to an abatement of the purchase price: See: Harley v. Roy (1921), 50 O.L.R. 281. "More or less"
may mean a certain amount of flexibility in the amount of land which the vendor must convey. A difference
of a third of a metre might fall within the "more or less" limits. See for example, Hunter v. Kerr (1912), 7
D.L.R. 829. A contrary decision is Zender v. Ball (1974), 5 O.R. (2d) 747.
Chapter 26. Intellectual Property, Patents, Trademarks, Copyright and Franchising
Chapter Topics
Introduction
Trade Secrets and Non-Disclosure Agreements
Patents
Trademarks
Franchises
Copyright
Industrial Designs
Licence Agreements
IP in a World of Technological Change
Summary
Key Terms
Review Questions
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Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Describe the unique nature of intellectual property.
• Distinguish between patents, trademarks and copyrights.
• Explain the legal protection offered to each of these types of property.
• Describe the chief elements encountered in license and franchise agreements.
YOUR BUSINESS AT RISK
Intellectual property — whether a trade name, secret process, design or a manuscript —
represents a very important business asset. This property must be properly protected to ensure
your ownership rights are enforceable. To commercialize your intellectual property (IP), you
may wish to transfer a right to use the property without selling it outright — after all, you may
wish to concurrently use the IP yourself. In these cases, a licence agreement will be required in
order to transfer a right to use the IP while retaining ownership and control over it.
CHAPTER COMMENTARY
Chapter 26 with the four principal methods available for the protection of industrial and intellectual property.
Patent law is designed to encourage and protect inventions, while copyright law (and to some extent Trade
Mark legislation) is designed to encourage and protect intellectual creation. Industrial design legislation is
similar in its objects.
This area of the law is for the most part statutory, since the rights of inventors, authors, etc., were
either unclear, or did not exist at common law. It should also be noted that at the time of writing of this
chapter of the text, some of these statutes were undergoing revision, and the current law should be consulted.
These statutes represent a highly specialized area of the law, particularly in the case of patents and trade
marks, and the purpose behind the incorporation of material on these topics in the text is to provide a general
outline of the law only. For this reason, the chapter simply provides an overview of each topic, to acquaint the
student with the general nature and purpose of the law, rather than an in-depth examination. The chapter may
be deleted from a business law course, if the instructor so desires.
Patent law deals with the right to a new invention. It is important to note that a patent will only be
granted for something which is new and different, and not already subject to a patent application or an
existing patent. The grant of a patent is essentially a reward in the form of a 20 year monopoly from the date
of filing for the efforts of the inventor to produce something new and different, because its purpose is to
encourage invention. The justification for this type of legislation is discussed in the case quote from Barter v.
Smith.
Registered design legislation is similar to both patents and copyright in the sense that an original
artistic design of a industrial product may be protected from copy by others for a period of time, if the design
is registered. It is similar to a patent in the sense that a search must be made to determine the originality of the
design. Once the design is registered, it may be protected by an action for infringement.
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The Court Decision, A & W Food Services of Canada Inc. v. McDonald’s Restaurants of Canada
Ltd. provides an example of a trade mark dispute concerning the use of the words ―Chicken Grill‖ and
―Chicken McGrill‖ and the alleged infringement by the latter name on the registered trade mark ―Chicken
Grill‖ that was registered some 4 or 5 years prior in time. Note the authors‘ suggestion at the end of the case
concerning other possible words. These may be used for class discussion based upon the comments in the
case.
The cases at the end of the chapter illustrate a number of common situations that arise under the
legislation.
Franchising is also covered in this chapter because it is a contractual matter largely concerned with
intellectual property rights. Students should be made aware that the franchise agreement is essentially a
licensing agreement whereby the franchisor permits the franchisee to use trade names, trade marks and
copyrighted material to operate a similar business to that of the franchisor and other franchisees. Much of the
agreement is concerned with maintaining the integrity of the goodwill attached to the intellectual property
rights.
Review Questions
1. Explain the meaning of ―patent pending‖.
Answer: Patent pending simply means that a patent has been applied for by the maker. It has no legal
significance.
2. Outline the steps that a Canadian inventor must follow to obtain patent protection for an invention in a
foreign country.
Answer: To obtain foreign patent protection, a Canadian inventor must make an application for a
patent in the foreign country within 12 months of his/her application in Canada. (Assuming the country is
a member of the convention).
3. How is the public interest protected under patent legislation?
Answer: The public interest is protected by (1) requiring the inventor to reveal how the invention
works and (2) requiring the inventor to ―work‖ the patent.
4. What steps must an inventor follow in order to acquire patent protection for an invention?
Answer: Patent procedure involves the filing of a petition for a patent together with specifications
and a claims statement which describes how it works and why it is "new."
5. For what public purpose did the Crown originally grant monopolies for certain products?
Answer: The crown granted monopolies for certain products to foster trade.
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6. If an inventor had reason to believe that someone was producing a product which infringed on his or her
patent, what would the inventor's rights be? What remedies are available for infringement?
Answer: The inventor may take action for infringement. The remedies would be an injunction and an
accounting for damages.
7. Under modern patent legislation, what is the purpose of granting a patent for a new product?
Answer: The purpose of granting a patent is to give the inventor of a new product, etc. exclusive
rights to control its manufacture for (20 years from filing of the patent application). The purpose is also
to encourage invention of new and different things, and to reveal how they work.
8. Describe briefly the purpose of trade mark legislation. Why has it been necessary?
Answer: Trade mark legislation is designed to protect the distinctive marks of makers of goods, etc.,
and to protect them from others who might be tempted to copy the mark for the purpose of passing off
their goods for those of the owner of the mark.
9. How does a trademark differ from a trade name?
Answer: A trade mark is a mark used to distinguish the goods of a particular maker. It must be
"distinctive". A trade name is the marker's name for a product, etc., and is usually a "coined word" to
identify the maker or the product.
10. Distinguish between a service mark and a certification mark.
Answer: A service mark is a mark used to identify a service or the provider of the service e.g.: the
mark of an air line. A certification mark is a mark used to distinguish goods of a certain quality or
service performed by a certain class of persons, etc. The owner of the mark does not manufacture the
goods.
11. Explain the term ―distinguishing guise‖.
Answer: A distinguishing guise is a form or shape of a product or its container to distinguish it from
similar products of others. E.g.: Coca-Cola bottle.
12. What must a person who has a proposed mark do in order to establish rights to the mark?
Answer: A person with a proposed mark need only use the mark to establish rights to it.
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13. What constitutes infringement of a trade mark? What steps must the owner of a trade mark take in order
to prevent further infringement?
Answer: Infringement would consist of copying the mark or distinctive guise, or using a mark or
name which resembles the mark so closely that it would be confused with the original, and constitute
"passing off". The owner of the trade mark would bring an action for infringement to obtain an
injunction and an accounting for damages. Note: that "passing off" may also have criminal implications
as well.
14. Outline the purpose of copyright legislation. What type of work is it intended to protect?
Answer: Copyright legislation protects the author's sole right to a creation, be it written works, music,
art, etc. from unauthorized copy by others. It is intended to protect all original works of this nature.
15. How is notice of copyright usually given?
Answer: Notice of copyright is usually given by marking the work with a ©, the date (year) of first
publication and the name of the author.
16. What defences may be available to a person who is accused of infringing on a copyright work?
Answer:
Defences to infringement include:
(1)
"fair dealing" for purposes of personal research, study, etc.
(2)
performance by charitable bodies of plays, etc.
(3)
person claiming infringement does not own the copyright.
17. Where infringement is established, what remedies are available to the owner of the copyright?
Answer: If infringement is established, the owner of the copyright would be entitled to an injunction,
an accounting, and damages.
18. What is an industrial design? How does it differ from copyright?
Answer: An industrial design registration is used to protect an original design produced by an
industrial process. It differs from copyright in the sense that the original design would be subject to
copyright protection, but copyright protection is lost where it is reproduced by an industrial process.
19. Explain the protection that an industrial design offers the owner of the design. How is this enforced?
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Answer: The registered design gives the owner the exclusive right to produce the design for a period
of 10 years. Infringement entitles the owner of the registered design to an injunction and an accounting
for damages against the person copying the registered design.
20. What licences might be given for a franchisee to successfully operate a fast-food restaurant?
Answer: These necessary licences will likely use of trademarks and patented processes and possibly
industrial designs. These may be signs and names of products, the attributes of the products, advertising
jingles, uniform designs, cooking apparatus, processes and recipes and restaurant architectural design.
Mini-Case Problems
1. A engaged the services of B, a professional photographer, to take a series of photographs of his power
boat. B did so and was paid $200 for his services. Some time later, A discovered that B had sold the
negative of one of the pictures to a boating magazine for the cover of one of its issues. B received
$500 from the magazine for the picture.
Is A entitled to the $500?
Answer:
If A hired B to take photographs of his power boat, the right of ownership in the photos may belong to A. B's
subsequent sale to the boating magazine may be an infringement of A's copyright, and A would be entitled to
the $500.
2. X produced a cola beverage that he sold for many years under the trade name Krazy Kola. If Y
decided to produce and sell a cola beverage in the same area under the name Crazy Cola, would Y‘s
actions constitute a violation of X‘s trade name?
Answer:
Y's selection of a similar name with only a minor change in spelling may constitute infringement if the two
cola products would be confused. This would particularly be so if Y used a similar shaped bottle or container.
3. Kitchen Products Inc. produced a unique design utensil that would peel, core and slice apples. It
applied for a patent, but before the patent could be issued, a competitor copied the design and flooded
the market with its copy of the product.
Advise Kitchen Products Inc., assuming that its application for a patent was valid, and a patent
would eventually be issued.
Answer:
The first inventor to file the patent is entitled to its eventual protection, which is dated from the time of
application. Once the patent is issued, the entire period of production of the second firm will be considered to
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be an infringement of Kitchen Products Inc. patent rights. To help prevent this situation from developing in
the first place, KPI should mark its own production pieces with the warning ―patent applied for‖.
4. Furniture Design Ltd. produced a modified French Provincial chair. It was concerned that competitors
might copy it once it was put on display at an upcoming furniture trade show.
How could Furniture Design Ltd. protect its product?
Answer:
Furniture Design Ltd. should protect its product by registration of the design under the Industrial Designs
Act. The chair qualifies as an artistic work produced through an industrial process, and is an object which,
aside from its utility as a chair, would solely be judged on the basis of its eye appeal.
Case Problems for Discussion
Case 1
Karen wrote a novel that she self-published. She offered her novel for sale using an advertisement in a
literary magazine. The advertised price of the novel was $9.95, providing her with an after-cost profit of
$2.00 per copy. The novel sold well, and had received favourable reviews by book critics. A year later,
she noticed that sales of the novel were falling rapidly, and she decided to investigate. To her surprise, she
found a small website that was offering her novel for sale in a downloadable form for $5.00 a copy. The
website proudly announced that it had sold over 10,000 copies of the novel to date.
Advise Karen. What would be the nature of her claim, and how would the court likely decide the case?
Answer:
Karen‘s claim against the website owner is based on her claim to copyright in her literary work. It is not
necessary for her to have registered her copyright. It would have been wise of her, however, to have marked
her copies of the novel with the © symbol to indicate copyright. If she did not, all is not lost for there would
be a presumption that the website owner knew, or ought to have known, that the copyright did not belong to
them to permit their reproduction of the novel. In the absence of the © mark, the presumption would be
rebuttable (the web publisher thought copyright had expired, etc.), which might be a reason for it to avoid
punitive damages, however it will in any case be responsible to account for its ill-gotten revenues of $50,000
in general damages.
Case 2
Dimitri carried on business as an independent consulting engineer. In addition to providing the usual
engineering work for firms, he also designed a number of production processes and unique production
equipment used in the production processes. He obtained patent protection on both the production process
and the equipment. He arranged with a manufacturer to produce the ‗package,‘ which he would supply
and license users to use in their production of goods.
Several years later, the manufacturer of Dimitri‘s equipment carefully examined his design, and
developed a new and more efficient type of machinery that would perform the same work as that of
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Dimitri‘s equipment. The manufacturer applied for a patent on the equipment, and when Dimitri
discovered that the manufacturer had designed a new product, he contacted the manufacturer and
informed him that he would not permit the manufacturer to use the new design with his production
process.
Discuss the arguments of the parties. How is the dispute likely to be resolved?
Answer:
To the extent that the improvements are themselves patentable, the manufacturer has come up with a
marketable product of its own. This new product may replace a product of Dimitri‘s own, but it appears it
can function in the production processes that Dimitri sells (a circumstance Dimitri wishes to prevent).
Perhaps Dimitri should reconsider this position; he may be overlooking a commercial opportunity. The
production process systems he sells may sell even better, or more profitably, if he incorporates the new
product, under licence from its manufacturer. He may even consider cross licencing his own designs to the
manufacturer. With Dmitri focusing on process design, and the manufacturer focusing on the technical
products, more profit may be generated by the two of them working in co-operation and specialization, rather
than by conflict.
Case 3
Grigori Denton, an electronics engineer, worked on the development of a miniature hearing aid in his
spare time. After much experimentation, he was successful in developing what he wanted. Denton was a
member of a local service club that frequently assisted persons with hearing problems. For a special
meeting of the club, he was invited to give the members a short lecture on hearing aids and a
demonstration of how his device operated. At the meeting, he described how the device was constructed
and demonstrated its effectiveness even though it was still in the experimental stage. The meeting was
later reported in the local newspaper, along with some general information on Denton‘s presentation at
the meeting. Another member of the club, who was also an electronics engineer, wrote a brief note on
Denton‘s presentation and submitted it to a scientific journal that subsequently printed the note in its
―New Developments‖ section.
Several years later, Denton finally perfected his hearing device and applied for a patent. He then set
up facilities for its production, marking each unit produced with the words ―patent pending.‖ The product
sold well in all parts of the country except British Columbia. When Denton investigated the market in that
area, he discovered that a west-coast manufacturer was producing hearing aid units that incorporated the
particular design that he had developed. His competitor had been selling the similar models for almost a
year before Denton had gone into production. Unknown to Denton, the manufacturer had apparently
developed his own hearing aid model from information that he had read in the scientific journal report of
Denton‘s presentation to his service club.
Denton had the Patent Office expedite his patent application. On its issue, he instituted legal
proceedings against the west-coast manufacturer for infringement.
Discuss the arguments that might be raised by the parties in this case. Render a decision.
Answer:
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The difficulties that face Denton are related to his disclosure to the public, of information concerning his
invention, and his long delay in preparing the product for market. The facts raise a number of questions: Did
his demonstration of how the device worked constitute disclosure to the public, or publication? Was the
report of his demonstration publication? The west coast competitor would certainly argue that disclosure had
been made several years before he applied for the patent. Denton, in turn, might argue that the demonstration
was to a restricted audience, and did not constitute disclosure. The publication of the information was done
without his consent, and he was unaware of it. Denton will have difficulty enforcing his patent rights, as his
competitor had been marketing a similar device for almost a year before he applied for his patent, and this
evidence may invalidate his patent.
Case 4
Pia Myers, a part-time news writer for a local newspaper, attended an air show at a local airport. While
watching two aircraft performing synchronized aerobatics, she noticed that the wings of the two aircraft
were exceptionally close to each other. She photographed the aircraft at the instant that the two aircraft
collided and took a second photograph of the pilots as they parachuted to the ground. Myers wrote a brief
description of the accident and submitted the two pictures and the written material to the local newspaper
for publication. The pictures and the report were published in the next edition of the newspaper, in which
she received credit for the pictures and the story in a byline. She was paid her regular rate for the written
material, and $50 for each picture. Myers later submitted the same pictures and story to an aviation
magazine, and the material was subsequently published. Myers was paid $300 for the pictures and story
by the magazine.
When the newspaper discovered the magazine article it instituted legal proceedings against the
magazine and Myers, for copyright infringement, claiming that the copyright belonged to it.
Discuss the arguments that might be raised by the parties. Indicate how the case might be decided.
Answer:
This case concerns the ownership of copyright material. The general rule is that the creator of the work has
the copyright, but where the creator is employed by another under a contract of service for the purpose of
producing the work, the copyright may belong to the employer. Was Myers in the employ of the newspaper
when she took the pictures, and wrote the report of the accident? If not, did she sell her rights in the pictures
and the report to the newspaper? As the creator of the work, is she entitled to sell the same material to others?
These are some of the questions that might be raised concerning this case. Myers might argue that she sold
only the right to publish the material in the newspaper, and retained all other rights to the material. She
would, however, be met with the argument that she was employed by the newspaper to do precisely this type
of work, and the work belonged to the newspaper. The aviation magazine published the material unaware of
the prior publication and claim for copyright. Should it be held liable for Myers' actions? Unless the
newspaper can establish ownership of the work under a contract of service, it may have only acquired the
right to reproduce it as a news/photograph item. The fact that Myers retained the negative may indicate that
she retained the right to reproduce the work. See: Bobran v. Bier (1958), 15 D.L.R. (2d) 595, for a case
dealing with reproduction of photographs, etc.
Case 5
Holtzkopf, the President of Holtzkopf Furniture Design Ltd., a furniture manufacturer, engaged the
services of Adrienne, a professional photographer, to attend a furniture exhibit and take a number of
photographs of a particular chair that Larsen, a competitor, had on display. Adrienne did so and delivered
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the photographs to Holtzkopf, along with her invoice for $500. Holtzkopf paid the invoice and began the
production of a chair that was very similar in appearance to the competitor‘s chair, but that had a different
structural design beneath the fabric outer cover.
Holtzkopf advertised his chair in a trade magazine. He used several of Adrienne‘s photographs
(which were black-and-white prints) because, although the chairs were similar in appearance, the exact
design and colour of the fabric could not be ascertained from the photographs to identify the chair as
Larsen‘s.
Larsen noticed Holtzkopf‘s advertisement and brought an action against him for violation of the
industrial design that he held on the chair. Holtzkopf‘s defence was that he did not copy the design, he
only used Adrienne‘s photograph of the chair, which was too small to permit him to make an exact
reproduction of the design. He also argued that the structural design of his chair was completely different
as well.
When Larsen discovered that Adrienne had photographed his chair, he included her as a co-defendant
with Holtzkopf, claiming that she was a part of a conspiracy to infringe on his industrial design.
Adrienne had also noticed the advertisement in the trade magazine and determined that Holtzkopf had
used her photographs of the chair in the advertisement. She immediately brought an action against
Holtzkopf for infringement of her copyright in the pictures that she had taken of Larsen‘s chair.
Discuss the issues raised by the facts and the arguments that the parties might raise. Indicate how the
court might decide the matter.
Answer:
Industrial design legislation was introduced to permit the owner of a registered design to protect it by legal
action against those who would copy it. The question also raises the law related to copyright with respect to
the use of the photograph by Holtzkopf. Did Holtzkopf "own" the photograph or did it belong to Adrienne,
who took the picture? The law with respect to the ownership of the photograph depends upon the relationship
between the parties at the time the photograph was taken. If Holtzkopf hired Adrienne to take the
photograph, then he is probably the owner of the copyright in it, and is free to do as he wishes with the work.
If Holtzkopf copied the design of the chairs which was subject to registered design protection to such a
degree that a person examining both models would be unable to distinguish them, then Holtzkopf may be
liable for infringement. (The test would be "confusability" based upon how a customer or consumer would
view the two articles. See: Kevi A/S v. Suspa-Verein U.K. Ltd. [l982] R.P.C.l73). Holtzkopf's argument that
the chairs were structurally different would probably not be a defence to the claim of infringement if the
appearance was identical. However, if Holtzkopf could establish that the design was not original, he might
successfully avoid liability.
Case 6
For several years, the residents of Smallville had been served by one prominent pizza franchise, Lotza
Pizza, which had operated in Smallville with the telephone number 456-1010. This telephone number
corresponded to that of the parent company, which was 123-1010 and was a registered trademark of the
company. The telephone number figured prominently in the company‘s advertising and jingles.
A rival franchise of a competing pizza company then moved into Smallville and established a similar
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operation. That company, Better Pizza, also had a trademarked telephone number, which was 222-0234.
Just like Lotza Pizza, the telephone number played a large role in the company‘s promotions and was one
of the major factors of customer recognition. In Smallville, Better Pizza had obtained the number 4570234. Smallville had only two exchanges, 456 and 457.
Quon, a resident of Smallville, who had the telephone number 456-0234 for almost 15 years, began to
receive a large number of inadvertent calls intended for Better Pizza. Quon soon tired of receiving these
calls and approached Better Pizza about taking on his number. Better Pizza was content to let matters
stand, rather than tak eon the additional expense, so Quon approached the local Lotza Pizza franchise. He
told the manager about his telephone number and the recurring problem. Shortly thereafter, the Smallville
Lotza Pizza franchise acquired Quons‘ telephone number 456-0234 and used it in its business.
The local franchise of Better Pizza, upon discovering the use by Lotza Pizza of the number 456-0234,
brought legal action against both the Smallville Lotza Pizza franchise and its parent company.
Discuss the nature of the action and the rights and liabilities, if any, of the various parties involved.
What arguments and/or defences may be used, and what would be the likely outcome?
Answer:
The issue raised in this case is 'confusability' of the trade-marked numbers, and whether the acquisition of a
similar telephone number of Lotza Pizza was an attempt to 'pass-off' their goods for those of Better Pizza.
The facts of the case are similar to those in the case of 241 Pizza Ltd. v. Pizza Pizza Limited et al. (1992) 10
O.R. (3d). In that case the court held that a telephone number was a valid trade mark, and since it was
heavily advertised, it was an important source of its business revenue. Consequently, the acquisition and use
of a very similar number by a competitor caused confusion and irreparable harm to the owner of the trade
mark. An injunction was granted by the court to prevent the use of the similar number by the competitor.
Case 7
Natasha Holdsworth produced a beautiful drawing of a French Provincial loveseat at the request of
Classical Furniture Manufacturing Company. Classical Furniture paid Holdsworth $500 for the drawing
and used it as the design for its loveseat in a current furniture collection. Six months after it acquired the
drawing, and several months after it produced its first production models of the loveseat, the company
applied for registration of the design.
Shortly after Classical Furniture registered its design for the loveseat, it discovered that Antique
Furniture Co. had a similar loveseat on display in its collection at a furniture exhibit. Classical Furniture
immediately accused Antique Furniture of copying its design.
As a defence, Antique Furniture Co. argued that the design was not original. It also came out in the
course of discussion that it had acquired its own design by purchasing it from a designer by the name of
Holdsworth.
If Classical Furniture should institute legal proceedings against Antique Furniture, what arguments
might the parties raise on their own behalf. What is the position of Holdsworth, and what are her rights (if
any) or liability (if any)?
Speculate as to the outcome of the action.
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Answer:
Industrial design legislation applies to artistic works produced by industrial processes. The design, however,
must be original, and not simply a copy of an old creation, or a composite of others. In the case, Holdsworth
produced the design at the request of Classical Furniture, and was paid for his services. The design was
registered within the time specified in the Act. (1 year). If in fact the design was original and registered, the
proprietor of the design could take action for damages against any person who imitates the design. In
addition, penalties are provided under the Act for fraudulent imitation and infringement of the design. The
right to proceed for offences under the Act is limited, as the proceedings must be instituted within twelve
months of the offence. The question of intention to infringe should be considered. Is intention to deceive or
use the design of another an element of the offence? Should Antique Furniture be responsible in damages for
Holdsworth's actions? If Holdsworth sold the same design to Antique Furniture, then Antique Furniture
might have a cause of action against him for selling it a design that was the property of Classical Furniture.
For case examples: See: Canadian Heating and Ventilating Co. Ltd. v. T. Eaton Co. Limited and Guelph
Stove Co. Limited (1916), 10 0.W.N. 439; and David Findlay et al. v. The Ottawa Furnace and Foundry
Company (Limited) (1902), 7 Ex. C.R. 338.
Case 8
The Cod Oil Drug Company produced a concentrated vitamin product that it sold in capsule form to its
customers. To identify its products, it produced its capsules with three broad red bands — the first bearing
the letter ―C,‖ the second, an ―O,‖ and the third, a ―D.‖ Each letter was printed in white against the red
background to identify the company and its product that was derived from cod liver oil. The centre red
band, bearing the letter ―O,‖ also acted as a seal that held the two parts of the capsule together. The Cod
Oil Drug Company applied for a patent on the method of sealing the two parts of the capsule together, and
for registration of the three bands with the letters imprinted as a trademark for its product.
In the course of its application for a trademark, Cod Oil Drug Company was faced with an objection
to its use of the trademark by Careful Drug Company, a competitor that produced its product in capsule
form and bearing two blue bands, one on each part of the capsule, the first bearing a white ―C‖ and the
second, a white ―D‖ against the blue bands. A thin blue band was used to join the capsule together, but it
bore no letter. The design had been used by Careful Drug for many years before Cod Oil Drug developed
the marking of its capsules.
On what basis would Careful Drug argue that the trademark should not be issued?
What might Cod Oil Drug argue in response?
How successful would the patent application likely be?
Answer:
This case raises the issue of confusion with respect to a trade mark. Trade marks must be distinctive, to
distinguish the wares of the user from the goods of others. Careful Drug had used its mark for many years
before the design created by Cod Oil Drug, and might argue that it was a prior user. It might also argue
that the centre band which held the capsule together was a utilitarian feature which could not be protected.
On the question of confusion, the Coca-Cola case in the Judicial Decisions might be useful to apply to the
facts of this case, as many of the arguments that arose in that case might be raised in this case as well.
Could blue be confused with red? Does the letter on each band represent a distinctive mark? Would three
broad red bands be confused with two broad blue bands and a narrow blue one? Cod Oil Drug may have
difficulty obtaining a patent on its method of closure, since it has been in use by Careful Drug for some
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time. It would appear that the idea is not original, or perhaps too late, as the method of closure seems to
be in the public domain. In addition to the Coca-Cola case: See also: Mysterious Chemical Co. v. Protex
Corp. of Canada Ltd., [1940] 2 D.L.R. 681; and Battle Pharmaceuticals and The British Drug Houses,
Limited, [1946] S.C.R. 50.
Chapter 27. Consumer-Protection Legislation
Chapter Topics
Introduction
Historical Development
Modern Development
Consumer Safety
Consumer Information
Consumer-Product Quality and Performance Protection
Consumer Protection Related to Business Practices
Credit-Granting Consumer Protection
Credit-Reporting Consumer Protection
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
Chapter Objectives
After study of this chapter, students should be able to:
• Describe consumer safety, information, and product quality/performance
protection.
• Explain consumer protection related to business practices.
• Discuss credit-granting and credit-reporting consumer protection.
YOUR BUSINESS AT RISK
In an effort to balance the commercial playing field, our governments have armed consumers
with significant legal rights. Business owners must recognize and accommodate these rights.
If the firm fails in its responsibilities, or takes advantage of consumers, it will be called to
account with significant remedies and penalties available to both consumers and government.
Moreover, breaches of consumer-protection legislation are usually well-publicized, creating a
severe penalty: damage to the public image of the firm, which is sometimes irreparable.
CHAPTER COMMENTARY
Consumer protection legislation to some extent reflects the reluctance on the part of the public to seek redress
from the courts in cases where unscrupulous merchants pass off shoddy goods, or use deceptive trade
practices in the sale of goods. The courts have always provided a degree of "consumer protection" through
the common law, but as a general rule, they have been reluctant to provide much in the line of relief for the
careless shopper or foolish user of credit. This has not been the case with governments in the preparation of
consumer protection legislation. In some instances, consumer protection legislation has imposed strict
requirements or obligations on sellers and those whose extend credit to buyers. See, for example, the position
of the assignee of a promissory note in a consumer purchase transaction, or the position of the used goods
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seller in Saskatchewan. In many cases, nevertheless, the legislation was necessary to deal with practices that
could not adequately be dealt with by the courts, such as credit reporting, and itinerant sellers.
The variation from province to province in consumer protection legislation dictated a broad survey
approach to the topic in the text, and for classroom purposes, the chapter may be examined in this fashion.
As an alternative, provincial legislation for a particular province may be presented to the students to
supplement the text, if detailed information on the legislation of the province is necessary. Some of the more
important federal statutes are noted in the footnotes, as are some of the typical provincial laws.
The problems facing a manufacturer operating under consumer protection legislation are illustrated
in the Court Decision of Buchan v. Ortho Pharmaceutical (Canada) Ltd. In the case, the manufacturer had
taken a considerable number of precautions, but failed to include a detailed health warning on the package
and failed to provide adequate information to the medical profession. The manufacturer complied with the
notice requests under the Food and Drugs Act, but the court held that the manufacturer also had a duty to
provide adequate notice to the users as well.
The case may be used as a vehicle to discuss product liability and consumer protection generally.
The Court Decision, R. v. St. James International Academy Ltd. provides an example of misleading
statements that are caught by The Business Practices Act (Ontario).
Review Questions
1. Why was it necessary for provincial legislatures to introduce comprehensive consumer protection laws
during the post World War II period?
Answer: The need for consumer protection legislation arose because the manufacturing and the
distribution systems for consumer goods changed. Manufacturing was no longer localized, and goods
were no longer serviced by local retailers, nor were the goods easily repaired by the users. Warranties
were also limited by the sellers, leaving the consumer unprotected.
2. What form did the consumer protection laws take?
Answer: Consumer protection generally took the form of changes in the law pertaining to the sale of
goods which prevented manufacturers from excluding the implied warranties under the act. It also
imposed an obligation (in some provinces) on manufacturers to provide parts and services for their
equipment in that province, and established laws which protected consumers from hazardous products
and false advertising claims. Disclosure requirements and contents were imposed on credit granting and
credit reporting agencies as well.
3. What practices of some collection agencies led to legislation controlling the collection of debts generally?
Answer: Collection agency practices of harassment of debtors, contacting their employers,
pressuring their families to pay, and the use of documents similar to court forms led to legislation
prohibiting or controlling their activities.
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4. Describe the impact of much of the consumer protection legislation on exemption clauses in the sale of
goods.
Answer: Exemption clauses in consumer good contracts were not permitted to exclude the implied
warranties as to fitness, etc.
5. Assess the statement: "consumer protection legislation has increased the cost of selling, and in turn, the
price which the buyer must pay for the goods purchased. It does nothing to protect the negligent or
careless buyer."
Answer: Compliance with consumer protection laws adds to the price of goods and this cost is
passed along to the consumer. Overall, however, it probably protects the buyer by providing better
service and perhaps better quality goods. Apart from this, it probably does very little to protect the
careless buyer.
6. Why was it necessary for the Province of Saskatchewan to introduce its Consumer Products Warranties
Act?
Answer: The legislation was introduced because manufacturers of goods had failed to provide
adequate service for their goods in that province, and because sellers had attempted to avoid obligations
to persons who received goods or gifts, etc. and had no right of action if the goods were defective.
7. Has consumer protection legislation carried consumer protection too far in terms of the onus it places on
the seller? Does this not simply increase the cost of goods to the buyer?
Answer: The cost of compliance with the legislation becomes a cost which the manufacturer or
seller will pass along to the buyer as a part of the purchase price. However, compliance with the
legislation may increase sales, as buyers will be less hesitant to purchase goods knowing that the
warranties, parts, etc. are available, and redress is available under the legislation.
8. Explain the need for legislative control over the selling practices of door-to-door sellers.
Answer: The control of high-pressure selling practices of door-to-door salespersons was found
necessary because persons were vulnerable when sold goods in their own home, as the lacked the
opportunity to simply "walk away" from the seller.
9. What is the purpose of the "cooling-off period" which the consumer protection legislation frequently
imposes on contractual relations between buyers and door-to-door sellers?
Answer: The "cooling-off" period enables persons who purchased goods from a door-to-door
salesperson to review the purchase at their leisure then make a decision as to whether they should
proceed with the sale.
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10. Describe some of the practices of credit reporting agencies which resulted in legislative control over their
activities.
Answer: Credit reporting agencies tended to collect a great deal on information of a personal nature
about persons, some of it inaccurate, and stored it in large computer data books. Concern over the use
made of this information and the inability of persons to examine and correct information concerning
them led to the control of the agencies and their use of the information.
11. What controls were generally imposed on sellers of durable goods?
Answer: Sellers of durable goods were (in some provinces) expected to provide parts and service,
and required to warrant that the equipment would last for a reasonable time in use. The goods were also
required to meet certain safety standards.
12. The general thrust of consumer protection legislation has been to provide accurate information or
disclosure of essential terms to the buyer. Has consumer protection legislation generally met this goal?
Answer: Yes. In general, the information provided by most sellers is accurate and does disclose the
essential terms of the sale to the buyer. The number of convictions for violation of consumer protection
laws is relatively small in Canada at present.
13. How has consumer protection legislation addressed exaggerated advertising claims?
Answer: Exaggerated advertising claims are now subject to the false or misleading advertising
prohibition in the Competition Act Investigation Act. Provincial legislation in some provinces also makes
sellers liable for any statement made about the goods which proves to be untrue.
Mini-Case Problems
1. An automobile owner purchased a container of cleaning solvent that was designed for removing rust
and dirt from corroded metal parts. The directions indicated that it should be dissolved with 10 parts
water to 1 part solvent, and stated that it should not be used full strength. The label bore the symbol
for corrosive material and the words: ―For Industrial Use Only.‖ The automobile owner diluted the
solvent and applied it as directed but, in doing so, accidentally splashed the chemical into his eyes,
causing him to lose the sight of one eye. He brought an action for damages against the manufacturer
for his injury.
Discuss and render a decision.
Answer:
Under the Hazardous Products Act dangerous goods must be so marked with a warning, and the first aid
remedy, etc. provided on the label. The goods in this case were marked with corrosion symbol which should
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be an adequate warning to the user that care must be taken in use. The manufacturer would argue that the
product was not intended for use by ordinary consumers, hence, the words: "For Industrial Use Only", where
only qualified persons would use the chemical. The seller, however, may be liable for selling the goods to a
consumer without providing adequate instructions as to its use and hazards. The case would turn on whether
adequate warning of the hazard in use was given, as industrial users need not be given as detailed a warning
as ordinary consumers, since they are presumably skilled in its use and aware of any dangers associated with
the product.
2. Clarissa purchased a new Super 8 Sedan from Super 8 Motors Ltd., a licensed dealer of the
manufacturer of the automobile. The vehicle developed a number of problems after delivery, each
requiring extensive repairs by the dealer under warranty. After the twelfth breakdown of the vehicle,
Clarissa approaches you for advice as to what she should do.
Advise Clarissa.
Answer:
Since the vehicle is a new vehicle, purchased from an authorized dealer, Clarissa my apply for arbitration
under the CANVAP plan, and request either replacement of the vehicle or a return of her purchase price.
See text.
3. A magazine salesperson called at Angela‘s home and offered to sell her a ‗package‘ of 6 magazines at
a special 1 year subscription price of $360. Angela gave the salesperson credit card authorization for
$30, being the first of the 12 payments under the agreement. The next day, Angela discovered that the
price she would be paying was equivalent to the regular news stand price for each issue.
Advise Angela.
Answer:
Angela may rescind the contract to purchase the magazines if she acts promptly. Since this is a ‗door to door‘
salesman situation, a ‗cooling off‘ period is provided under most consumer protection statutes, and the
contract does not become binding until after the expiry of a statutory period of time. If Angela notifies the
seller (usually by registered letter) within the time period, the contract is cancelled, and she would be entitled
to a return of her deposit.
4. Max purchased a used motor vehicle from Used Cars Inc. on a time payment arrangement where he
paid the seller $300 per month. The vehicle broke down shortly after the purchase, and when Used
Cars Inc. refused to make repairs, Max stopped making payments. A few months later, Max was
turned down on a credit purchase because he was a ‗bad credit risk.‘ Apparently, Used Cars Inc. had
reported his default to the Credit Bureau.
Advise Max.
Answer:
Students should use this case to discuss the position of the buyer of an used vehicle. Did the creditor have
the right to report the default by Max? What steps should Max have taken to deal with the automobile?
Was the seller obliged to make repairs? If the automobile was sold to Max without a warranty or ―as is‖,
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the seller may have no obligation to repair the vehicle. If this should be the case, Max would be in
default, and the seller entitled to report this to the Credit Bureau.
Case Problems for Discussion
Case 1
Selma purchased a home entertainment system from a local TV and electronics store. A part of her
purchase included a large 60 inch TV. Selma paid the store in full with her credit card. The store
delivered the system to her rural home, and an employee of the store hooked it up. Picture quality,
however, was poor at the time, and the employee suggested that the poor quality signal was due to issues
with her internet service provider. Selma disregarded this and complained to the store owner. A qualified
technician came out to Selma‘s home, and adjusted all that could be adjusted, but the change only
marginally improved picture quality. A series of email complaints by Selma followed, eventually a senior
technician advised Selma that she would never get full performance out of her system, as the internet
service provider‘s technology in that rural area ―had no chance of ever living up to the capabilities‖ of her
entertainment system. The picture quality that she had seen in the urban store display could not be
achieved in her home.
Advise Selma.
Answer:
The issue here is whether the goods were reasonably fit for the use intended. Was the seller under any
obligation to determine if her house was suitably located to receive good picture quality? Did Selma rely
on the seller‘s advice initially? Students should consider how picture quality might be decided. If it was
inadequate by reasonable standards, then the equipment was not suitable, and the seller should have been
aware of this fact at the time of installation. If the home entertainment system is otherwise satisfactory
(perhaps for music from other connected device), query if Selma would be able to establish that the
system was unfit for the use intended.
Case 2
Black‘s Furniture Ltd. was a high-end home furnishings establishment in a large city. Hilary, a mid-level
executive in a large corporation, visited the showroom, and saw an expensive bedroom suite that she felt
would fit well with her other furniture in her town-house. Hilary enquired to determine if Black‘s
Furniture Ltd. offered a time-payment plan for purchases, and was advised that the company did so for
‗good customers.‘ She was also advised that purchases on the time-payment plan required a 10% first
payment, with the balance payable over the next 12 months in equal payments plus interest at 12% per
annum. Hilary signed a purchase agreement for the $16,000 bedroom suite and provided a cheque for the
10% deposit. The agreement included authorization for a credit report.
Later in the day, while at work, Hilary was informed by the receptionist for her department that the
furniture store had called wanting a mailing address to return her cheque, saying that they would not sell
her the bedroom suite due to a ‗bad credit report.‘
Hilary was embarrassed by the news, and immediately called the store. She was then advised by a
store employee that the credit report had revealed that she had defaulted on a car loan, and was delinquent
in payments on a personal loan. No other information was provided, but Hilary recalled that on the car
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loan, she had returned the vehicle to the car dealer due to defects, and the loan had been cancelled. She
also recalled that while she had missed a few payments on the personal loan, it was eventually paid in
full.
Discuss the issues raised in this case, and the rights and responsibilities of all parties.
Answer:
The case provides a platform for the discussion of credit reporting agencies and the use of credit checks by
business firms. Students should note that the facts indicate that Hilary gave the retailer the authority to obtain
a credit report on her from the credit bureau. The report presumably included information on the car loan and
her poor performance on the personal loan. This led the retailer to conclude that she was a poor credit risk.
Did the purchase contract permit the retailer to refuse her credit on the basis of a credit report? Students
should also discuss the actions of the retailer in calling Hilary‘s receptionist and advising her that Hilary was
a ‗bad credit‘ risk. Students should note that Hilary has the right to provide explanatory information to the
credit bureau concerning the loans in question. This, however, may not help her with the present purchase.
Case 3
Harvey purchased 1 kilogram of ground meat from Alice‘s Meat Market. The package was labelled ―lean
ground beef‖ and had been located in a freezer under a sign that advertised ―Special sale: $10.99 per
kilogram.‖
Harvey‘s friend, who was a meat inspector at a local packing house, dropped by for a visit while he
was preparing to barbecue patties made from the ground meat. His friend examined the meat and advised
Harvey that in his opinion the meat was not lean ground beef, but ordinary ―hamburg‖ that contained
close to 40 percent fat.
Harvey checked with Alice‘s Meat Market and was told that a clerk had mislabelled the meat as lean
ground beef, and that the meat was actually standard-fat hamburger. The special sale, however, was for
standard-fat hamburg at $10.99.
Discuss the issues raised in this case, and discuss the legal position of Harvey and of Alice‘s Meat
Market.
Answer:
The facts of this case are adopted from those of the R. v. Steinberg's Ltd. case footnoted in the text. Some
questions might be: To what extent was the error made? Was this an isolated incident? Did a clerk
accidentally mislabel the one package, or a large number? What difference would this make (if any)? What
steps did the management of the market take to prevent errors of this sort from happening? Note the
importance placed upon this activity in the Steinberg's case. What corrective action should the seller take?
Was there an intention to deceive the public? Does this matter fall under the legislation? See: Regina v.
Standard Meats Ltd., [1973] 6 W.W.R. 350 for a case which states that strict liability is imposed under the
Food and Drugs Act for misleading or false advertising in the selling of food - hence mens rea is not
important. Compare this with the position of the seller under the Consumer Packaging and Labelling Act in
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the Steinberg's Ltd. case where the defendant had used 'due diligence' to avoid error, and the charge of the
Crown failed.
Case 4
Carter carried on a part-time business of lending money to his friends to enable them to purchase
consumer goods. He would also lend money to strangers who had been directed to him by his friends. The
loans were generally for a short term and were written up in a casual way. Usually the document set out
the name of the party and referred only to the principal amount borrowed and the lump-sum interest
amount payable on the due date.
On March 1st, Jerry Messier approached Carter in order to borrow $800 for the purchase of a stereo
system. Carter loaned him the money and had him sign a document that read as follows:
March 1, 2020
I promise to pay S. Carter on the first day of each month the sum of $200 until the total amount of
$1,000 has been paid.
$ 800
$ 200
$1,000
principal
interest
Value received
―J. Messier‖
A few weeks later, Messier advised Carter that he had no intention of paying him the money, as the
paper he signed was worthless and the debt unenforceable.
Advise Carter and Messier. What issues (if any) might arise if Carter should decide to institute legal
proceedings against Messier?
Answer:
The problem faced by Carter is one which has arisen due to his casual manner in the documentation of the
loans which he has made. If the loan to Doe is used as an example, the loan fails to provide for a rate of
interest, but instead states the interest as a lump sum amount. For discussion purposes, the rate of interest
might be calculated as an annual percentage rate. (Depending upon the method used, the annual rate would
be in excess of 60% and a violation of the Criminal Code [R.S.C. 1985 c.C-46 s. 347]). Some questions that
might be raised to determine the positions of Carter and Doe might include: Is Carter a money-lender
subject to any licensing requirements? Would the fact that he considered it a part-time business make any
difference? Was the document intended to be a formal legal document i.e., a promissory note? An I.O.U.?
Would it make any difference if it was a simple I.O.U.? If the loan fails to comply with the Interest Act,
R.S.C. 1985, c.I-15, could Carter collect the $200 interest? What interest rate would apply? (5% ?) Note
that an interest rate in excess of 60% is defined as a "criminal rate", and constitutes a violation of the Criminal
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Code. Carter's non-disclosure of the interest rate would also violate consumer protection legislation requiring
disclosure of the interest rate in loans for consumer purchasers. If Carter attempts to collect the amount
owing, Doe may apply to the court for relief under the Unconscionable Transactions Relief Act, R.S.O. 1990,
c. 514 in Ontario (and similar legislation in other provinces) to have the court review the transaction, and
revise or relieve the debtor from payment.
Case 5
John Smith lived at 221 Pine Avenue in a large city. He had no debts and had never previously purchased
goods on credit. He did, however, wish to purchase a particular power boat, so he entered into
negotiations with the owner of a marina to obtain the boat on credit. He consented to the marina owner
making a credit check before the transaction was completed, and was dismayed when the marina owner
refused to proceed with the transaction because he was a ―poor credit risk.‖
The credit-reporting agency apparently had provided a credit report on a John Smith who some
months before had resided at 212 Pine Street in the same city, and who had defaulted on a number of
substantial consumer debts. John Smith knew nothing of the other John Smith, nor had he resided at 212
Pine Street.
What avenues are open to John Smith in this case to rectify the situation?
Answer:
This case concerns credit reporting agencies, and the use of credit reports in business transactions. A point to
note in the case is that John Smith consented to the credit check. The problem was due in part to the
carelessness of the credit reporting agency in failing to carefully check the street address. While it was a rare
coincidence that persons with the same surname lived at the same house number, but on different streets (one
was Pine Avenue, the other Pine Street), the mistake was nevertheless made by the reporting agency. Under
the laws of most provinces, where credit is refused or the charges adjusted to reflect a poor risk, the purchaser
is entitled to know the name of the agency and to examine his file. If an error exists, the individual can have
the agency correct the error, or if a conflict of opinion exists, the individual can have an explanation added to
the file to reflect his view of the matter. See text for a discussion of credit agencies, and provincial
legislation such as the Consumer Reporting Act, R.S.O. 1990, c. C-33.
Case 6
Mary Dwight purchased a vacuum cleaner from a salesperson at a ―home show‖ booth who represented
himself as a sales agent for Speedy Vacuum Cleaners. The salesperson gave a demonstration of the
vacuum in Mary‘s living room, and the machine appeared to do an excellent job of cleaning dust and dirt
from her carpets. At the conclusion of the demonstration, the salesperson produced a form contract that
called for a deposit of $100, and monthly payments of $100 each until the full purchase price of $800 was
paid. Mary paid the $100 deposit and signed the contract. Later that day, the salesman delivered the new
vacuum to her residence. On his departure, he stated that he was certain that Mary would find the vacuum
satisfactory, as the particular model was ―the finest model that the company had produced.‖
The machine did operate in a satisfactory manner for some seven months. Then one day while Mary
was using the vacuum to clean her automobile, she noticed a wisp of black smoke seeping from a seam in
the casing. She immediately unplugged the machine and threw it in the children‘s inflatable swimming
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pool beside her driveway.
A few minutes later she retrieved the machine from the pool and returned it to the Speedy Vacuum
Cleaner depot in her city. The repairer examined the machine and explained to her that the smoke had
been caused by the melting of a small electrical part in the machine. He offered to replace the part free of
charge even though the six-month written warranty had expired, but refused to provide free replacement
for several other electrical parts that had been damaged by the machine‘s immersion in the swimming
pool. The cost of repairs amounted to $120, and Mary paid the account. At the end of the month,
however, she refused to make the final $100 payment under the purchase agreement, because she felt that
the company should cover at least a part of the cost of the repairs to the machine.
Eventually, the company sent her a demand letter for payment of the final $100 owing under the
purchase agreement.
Discuss the defences (if any) that Mary might raise in this case. Indicate the possible outcome.
Answer:
The two issues raised in this case are related to Mary's conduct. From the facts of the case, the warranty on
the vacuum had expired, and the vendor's express obligation to repair under contract was past. The seller was
prepared to repair the defective part free of charge, and did so, but charged her for the repairs caused by her
action of throwing the vacuum in the pool. Were these repairs also a liability of the seller? Were her actions,
based upon the belief that the smoke was a result of a defect in the machine, reasonable under the
circumstances? Did Mary have the right to withhold payment of the last payment on the purchase? To do so
she would be obliged to establish some legal right similar to set-off. Could she argue that the salesperson's
statement that the machine was "the finest model that the company had produced" constitute a more
extensive warranty than the contract warranty? Would consumer protection legislation give her the right to
raise this claim? If she cannot establish the right to withhold the last payment, an action by the seller to
recover the remaining $100 would probably be successful.
Case 7
Wily Willie sold kitchen gadgets door to door. One of his products was a tomato slicer that he stated
would slice tomatoes ―paper thin.‖ His sales display included a picture of a tomato cut into slices of a
uniform one-millimetre thickness. The caption on the picture stated: ―Look at what our slicer does to a
firm ripe tomato!‖ The photograph was of a very firm variety of tomato, noted for its uniformity. The
instruction sheet that accompanied the gadget stated that the user should ―select only firm tomatoes that
have not fully ripened.‖ Users were cautioned against using fully ripe or over-ripe tomatoes.
Charlie purchased one of the tomato slicers at a price of $19.95 and attempted to slice a tomato for his
lunch. He ignored the instruction sheet and simply selected a tomato from his refrigerator. The gadget
mashed the tomato instead of slicing it. Charlie tried to slice a second tomato and, when the machine
mashed the second tomato as well, he became angry and smashed the slicer. He then sought out Willie,
who was at the next house, attempting to sell his products to Charlie‘s neighbour. Charlie threw the
smashed slicer at the salesman‘s feet and demanded his money back. When Willie refused, Charlie turned
to the neighbour and said: ―Don‘t buy anything from this crook! The junk he sells doesn‘t work!‖
Discuss the legal issues raised in this case and advise Charlie and Willie of their rights.
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Answer:
A number of different consumer protection and other issues are raised in this case. The first point to note
would be the statement Willie makes that his device will slice tomatoes "paper thin". Is this a false
representation of fact or merely a statement to illustrate the comparative slicing ability of his machine vs. the
ordinary kitchen knife? If this is a written statement, does it violate the Competition Act, false advertising
provisions? If the machine truly works on a firm tomato, the courts might view the statement as simply
a comparative one, with "paper thin" to be considered a 1 mm. thickness as shown on the advertisement.
The remainder of the advertising copy might also be considered as a definition of "paper thin" as well.
Willie's statement, consequently, may not constitute a violation of the provisions of the Competition Act. The
next issue is whether the purchaser was given sufficient notice of the limitations of the machine. Was
adequate notice or warning given before or at the time of the sale? If it works when used as directed, then it
is unlikely that it was misrepresented as to it performance. If it was, then Charlie would be entitled to his
money back. In the case, however, Charlie destroyed the device, and in doing so also ended his opportunity
to recover the price paid. His statement to his neighbour might very well be a slander of goods or actionable
slander by Willie, since he called Willie a "crook".
Case 8
Adrienne had been annoyed with the paint peeling from the iron railing on the stairs of her front porch.
She had purchased some inexpensive paints in the past, and each time, after two or three months, rust had
bubbled up from beneath the paint.
Exasperated, she returned to the hardware store. On this occasion, the store had a glossy cardboard
end-of-aisle display of a premium-priced paint made by Protecto Paints Ltd. Printed on the display were
the words ―stops rust,‖ and on the labels of the cans were the words ―prevents rust.‖
Adrienne bought the paint and set out to apply it to the railing. The directions called for the removal
of all prior paint and primer. For the most part, she was successful in removing the prior paint, but not the
primer beneath.
After two years, the rust returned, flaking the paint. Adrienne informed the consumer ministry, who
brought suit against Protecto Paints.
An internationally recognized expert on paint gave evidence that no paint known to the industry can
stop rust indefinitely. The ability to stop rust ends when the seal is broken, and some paints keep a seal
better than others. The expert advised the court that the Protecto formulation was the finest known to the
industry, using the finest possible ingredients.
Render a decision on behalf of the court.
Answer:
This case may be considered in terms of product labeling. Were the statements false? In what context should
they be taken? Under what circumstances, and for how long? The legislation under which the complaint
may have been brought would probably be the Consumer Packaging and Labeling Act. If the label
information was in fact false, the manufacture might be guilty of false labeling. The label stated that the paint
'prevents' rust, but also sets out instructions that must be adhered to for the paint to prevent rust. Based upon
the expert evidence the paint would prevent rust as long as the paint seal was not broken, the manufacturer
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might, therefore, successfully argue that the statement was accurate provided the paint surface was properly
prepared and not damaged.
Case 9
Luther Green was employed by an aircraft maintenance and repair company to repair and modify aircraft
airframes and interiors. Green possessed the necessary Department of Transport licences to perform the
type of work for which he was engaged. Since much of the work involved metal repair and refinishing, a
certain amount of the work consisted of grinding and polishing, using power grinders and finishers.
While engaged in the grinding of a metal seat bracket in a large jet aircraft, Green decided to change
grinding wheels on his power grinder in order to speed up the shaping of the part. He replaced the fine
grit wheel on his grinder with a coarse grit wheel that bore the following warning on the package: ―DO
NOT USE AT MACHINE SPEEDS IN EXCESS OF 6,000 RPM.‖
Oliver Brown, a fellow employee, picked up the grinder after Green had completed the grinding work
on the seat bracket, and began the grinding of a part of the wing assembly. He set the machine speed first
at 5,000 rpm, but later increased the speed to 9,000 rpm, a common grinding speed. No sooner had the
speed increased then the grinding wheel disintegrated, causing injury to Brown and a nearby worker.
What consumer-protection issues are raised by this incident? What rights (if any) would Brown have
at law?
Answer:
From a consumer protection point of view, this case concerns the duty of the manufacturer to warn the user of
any inherent dangers associated with the product. The duty must, however, be considered in light of its
contemplated use. Grinders and other devices of a similar nature are, to a degree, inherently dangerous and
some knowledge and skill in their use is necessary, otherwise danger and injury may result. The question that
might be asked is: Is a warning necessary to the user of the grinding wheel? If so, what type of warning
should be given? Is a warning on the package sufficient, or should the grinding wheel also bear the same
warning? In this case, the manufacturer did provide a warning on the package. Was this adequate notice to a
skilled workman? Brown was a user of a machine without notice of the warning on the package. As a skilled
craftsman, was he on notice to determine the maximum safe speed for the grinding wheel before using it at
high speed? To what extent does the skilled user have a duty of care where he knows that the likelihood
of disintegration of a grinding wheel increases with the speed? How might the courts "balance" the duty of
the manufacturer and the user in this case? Goods which possess inherent danger must bear warnings as
to their hazards, and the manufacturer may be held liable if the goods are not marked in such a way that the
warning reflects the degree of danger associated with the normal use. See: Lambert et al. v. Lastoplex
Chemicals Co. Ltd. et al. (1971), 25 D.L.R. (3D) 121. Where the product is designed to be used by a skilled
workman who is expected to be familiar with the hazards of using the product, the warning need not be as
detailed or explicit. See: Austin v. 3M Canada Ltd. (1974), 7 O.R. (2d) 200.
Case 10
Jean Hamilton admired a used car that Honest Harry had on display at his car lot. Hamilton took the car
for a test drive and found the vehicle to be ideal for her purposes. When she inquired about the previous
owner, the salesman told her that it was his understanding that the last owner had been an elderly
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schoolteacher, who usually used the automobile only on weekends. The odometer on the automobile
indicated that the vehicle had been driven only 80,000 kilometres.
Hamilton purchased the automobile, but discovered a few months later that the vehicle had been used
as a taxi before it was purchased by the schoolteacher. The automobile, in effect, had been driven 100,000
kilometres further than the odometer indicated, as it registered only five digits before returning to zero —
the true distance that the vehicle had been driven was 180,000 kilometres.
The automobile had given Hamilton no trouble during the time she had owned it, and she had driven
the vehicle over 5,000 kilometres. She was annoyed, however, that the vehicle had had so much use, even
though it still had a ―like-new‖ appearance.
Hamilton brought an action for rescission of the contract when Honest Harry refused to take back the
automobile and return the purchase price.
Discuss the argument that each party might raise in this case. Render a decision.
Answer:
This case illustrates a common consumer type transaction where the parties lack accurate information
concerning the previous history of the goods. The goods are used goods, which the seller offered as such,
and which the seller accurately described insofar as his knowledge of the product was concerned. He was
not aware of the extensive use of the vehicle by the owner prior to the school teacher. On this point, the
question might be raised: To what extent does the seller have a duty to determine the past history of the
used goods sold? The odometer registered 80,000 km., but unknown to both parties the device was on its
second time around. Should the seller be obliged to warrant the accuracy of the equipment? Is the
purchase a caveat emptor situation? What obligation does the buyer have to satisfy himself that he is
obtaining value for his money? If the mileage on the vehicle was miss-stated, the seller may be guilty of
innocent misrepresentation, and the contract open to rescission by the buyer when the true facts were
discovered. The right to rescission, however, would depend to some extent on the circumstances
surrounding the representation as to the mileage. If it was set out in the contract, it may be a warranty.
See: Routledge v. McKay et al., [1954] 1 All E.R. 855.
Chapter 28. Law of Negotiable Instruments
Chapter Topics
Introduction
Historical Development of the Law
The Bills of Exchange Act
Bills of Exchange
Liability of the Parties to a Bill of Exchange
Cheques
Promissory Notes
Defences to Claims for Payment of Bills of Exchange
Consumer Protection and Negotiable Instruments
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
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Chapter Objectives
After study of this chapter, students should be able to:
• Differentiate among the various kinds of negotiable instruments.
• Explain the Bills of Exchange Act.
• Discuss claims for payments and the defences to certain claims.
• Explain consumer protection related to negotiable instruments.
YOUR BUSINESS AT RISK
Negotiable instruments are paper promises creating rights and duties, and can represent
enormous sums of money. Since our markets and transactions demand both efficiency and
integrity, a full set of rules has been developed to govern them, and because certainty is an
equally important market concern, these rules are not flexible or open to much interpretation.
As a result, failure to understand rules of negotiable instruments can cause significant and
irretrievable losses, sometimes for just a technicality. It is up to you to know the rules, not for
the system to make special exceptions for ignorance.
CHAPTER COMMENTARY
The law of negotiable instruments has a long and interesting history, which explains in part many of the
special features that attach to certain kinds of notes, and the reasons why special rights are sometimes
vested in the holder. For this reason, as a part of the review of this material, the various instruments might
be discussed in terms of their original purpose and present day use. For example, the cheque, which is a
bill of exchange, is now widely used as a result of the growth of the banking system and commerce in
general. While virtually everyone to-day is familiar with this type of negotiable instrument, prior to the
middle of the 19th Century, only business persons used them regularly.
The excerpt from the Federal Discount Corp. Ltd. v. St. Pierre and St. Pierre case provides a
further review of the historical background of the bill of exchange, and in particular, the development of
the special rights of a holder in due course. Because the law relating to negotiable instruments has its
roots in the Law Merchant, it has associated with it a legal vocabulary of its own. Such terms as drawer,
drawee, endorser, holder in due course, sight drafts, restrictive endorsements, bearer, and 'without
recourse' have special meanings in connection with bills of exchange, and their significance should be
committed to memory.
A systematic approach to the topic might be to suggest that the students read the chapter, then
prepare a list of definitions of the new terms. The text material may then be read again, using the list of
definitions where necessary, as each of the different negotiable instruments are discussed.
Most students are familiar with the cheque, which is a type of bill of exchange. It differs from the
ordinary bill of exchange in that it is always drawn on a bank, and is payable on demand (except, of
course, where the cheque is post-dated). The bank upon which the cheque is drawn is a special type of
drawee, however, and need only make payment when it has sufficient funds on hand in the drawer's
account to pay the face amount of the cheque. The significance of a certified cheque is discussed in the
case excerpt from Centrac Inc. v. Canadian Imperial Bank of Commerce.
The general lay-out of a cheque is as follows:
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The bill of exchange resembles the cheque in many respects, as a comparison of the above lay-out with the
illustration of a bill of exchange in the text will attest. Comparing the two illustrations, the similarities should
become apparent. For example, the drawee in the bill of exchange is "Retail Co. Ltd. instead of the bank
above, and the order of payment is similar as well. In the text illustration, the bill has provision for
acceptance in the upper left hand corner, but this would not be necessary with a demand bill (such as a
cheque), since payment would be expected on presentation.
The promissory note is also covered by the Bills of Exchange Act, and differs from the bill of
exchange in that it is a promise to pay, and it does not require acceptance, since the maker is the party who
prepares and signs the promise. As the text indicates, it must meet the essentials of negotiability if it is to be
treated as a negotiable instrument. These essentials are set out on the chart that accompanies this chapter. A
promissory note, however, must be delivered before the maker becomes liable on it.
The defences to the payment of a bill of exchange should be noted, because there are many reasons
why a bill may not be legally enforceable against a party. These defences may be divided into the three
categories set out in the text:
(1)
real defences.
(2)
defect of title defences.
(3)
mere personal defences.
The Court Decision in the chapter may be helpful in understanding the nature of negotiable
instruments. Re Maubach and Bank of Nova Scotia examines the cheque as a bill of exchange, and in
particular the nature and effect of certification. While not a simple case to follow or understand, the law is
stated by the judge as it applies to certification.
The emphasis in the chapter is placed upon those negotiable instruments covered by the Bills of
Exchange Act, but any class discussion should include a brief examination of the more recent developments
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in the field of finance to settle debts. The "credit card," for example, might be a worthwhile instrument to
examine in this regard, in view of its wide spread use in consumer purchases. Consumer protection legislation
and its effect on transactions that involve negotiable instruments should also be discussed, to illustrate the
general trend of the law toward the restriction of the special rights of holders in due course to non-consumer
situations.
Review Questions
1. Why is acceptance of a bill of exchange important?
Answer: Acceptance is important because it is the "signing" of the bill by the drawee that renders the
drawee liable on it.
2. How does a cheque differ from the usual type of bill of exchange?
Answer: A cheque is a bill of exchange that is always drawn on a bank and is payable on demand as
a demand bill.
3. Define a bill of exchange, and indicate how it is determined to be "negotiable."
Answer: A bill of exchange is an unconditional order in writing, addressed by one person to another,
signed by the person giving it, and requiring the person to whom it is addressed to pay either on demand
or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person
or bearer. The bill must meet these requirements to be negotiable.
4. What is the purpose of a bill of exchange in a modern commercial transaction?
Answer: A bill of exchange in a modern commercial transaction is used to ensure payment by the
buyer of goods, and to enable the seller to use the promise of payment (the bill of exchange) as a means of
financing his own business by way of endorsement to others. It also reduces risk by replacing the need to
exchange money.
5. Distinguish a sight bill from a demand bill.
Answer: A sight bill has 3 days grace added for payment. A demand bill is payable on presentation.
6. Define a holder in due course, and explain how a holder in due course differs from an ordinary
holder of a bill of exchange.
Answer: A holder in due course is a person who in good faith, takes a bill of exchange complete and
regular on its face, for value, before maturity, and without notice of any defect or prior dishonour. A
holder in due course of a bill of exchange is subject only to real defences in any claim for payment.
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7. Outline the procedure to be followed when a bill of exchange is dishonoured by non-payment.
Answer: When a bill of exchange is dishonoured, the holder must give notice to the drawer, payee
and any other prior endorser not later than the business day next after the dishonour occurs.
8. When a holder in due course of a promissory note attempts to enforce payment, what types of
defences might be raised by the maker named in the note?
Answer: Only a real defence (forgery, minority of maker, etc.) may be raised against a holder in due
course.
9. Define a promissory note, and distinguish it from a bill of exchange.
Answer: A promissory note is an unconditional promise in writing, signed by the marker of the note,
to pay to, or to the order of, a specific person or bearer on demand, or at a fixed or determinable future
time, a sum certain in money. It differs from a bill of exchange in that it is a promise rather than an order
to pay.
10. Explain how an endorsement in blank differs from a restrictive endorsement, and the
circumstances under which each might be used.
Answer: An endorsement in blank turns the instrument into a bearer document. A restrictive
endorsement restricts the negotiation to the person named in the endorsement. The former permits
anyone in lawful possession of the instrument to negotiate it, the latter may be used to restrict negotiation
to one person, or to prevent negotiation to anyone if the endorsement is restricted to read "for deposit only
to the credit of _______."
11. Promissory notes which call for instalment payments often contain acceleration clauses. Why is
this so, and what is the purpose of such a clause?
Answer: If a promissory note calls for instalment payments, default on one payment would only
entitle the holder to take action to recover the single payment. An acceleration clause causes the balance
of the debt to become due and payable immediately on the default of a single payment.
12. Indicate the different treatment at law which is given a cheque certified at the request of the holder
as opposed to a cheque certified at the request of the drawer.
Answer: In both cases the bank becomes liable on the instrument, but in the case of a cheque certified
at the request of the drawer, the drawer may return the cheque for cancellation at any time before
delivery.
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13. What is a defect of title defence? What type of holder of a promissory note or bill of exchange
would this type of defence be effective against?
Answer: A defect of title defence may be raised against a holder (but not a holder in due course).
Defect of title defences include fraud, duress, undue influence, illegal consideration, total failure of
consideration, etc.
14. Outline the various mere personal defences available. Indicate the type of holder that they might be
raised against.
Answer: A mere personal defence is a defence that may be raised against an immediate party. These
include: set-off, absence of consideration, release, or payment before maturity.
Mini-Case Problems
1. X gave Y a post-dated cheque for $3,000 as payment for a well that Y drilled on X‘s farm. The
cheque fell due in 30 days‘ time. Y negotiated the cheque to Z for $2,800, a few days after it was
given as payment for the well drilling. Before the end of the month, the well ran dry, and X stopped
payment on the cheque.
Advise Z of his rights as the person in possession of the cheque.
Answer:
Z is a holder in due course if he took the cheque complete and regular on its face before dishonour, for value,
and in good faith without notice of any defect. Z as a holder in due course may give notice to Y not later than
the business day next after dishonour and hold Y liable for payment. Z would also have the right to sue X on
the cheque for payment.
2. B purchased an automobile from C for $5,000. B gave C a cheque for $5,000 that C, a minor aged 17,
endorsed to D as payment for D‘s motorcycle that C had purchased. D presented the cheque for
payment, only to discover that B had insufficient funds in the bank for payment, and the cheque was
dishonoured.
Advise D of the law in this instance.
Answer:
Assuming B is not a minor, B would not have a defence to an action for payment by D. Since C is a minor, D
could not hold C liable on the cheque. D's only recourse is against B for the $5000.
3. McMullan opened an account at a bank and received a box of personalized cheques bearing his name
and address. Later, he closed the account. Several months after he closed the account, he wrote a
cheque on the account and gave it to a friend as payment of a loan he had received from the friend.
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Discuss the issues raised in this case.
Answer:
The cheque in this case would not be honoured by the bank. As McMullen no longer had the account open,
the cheque would be returned to the friend. The friend would then be obliged to collect from McMullen.
Note the possible criminal consequences if McMullen wrote the cheque knowing that he no longer had an
account at the bank.
4. Duarant purchased a new automobile, giving a cash down payment and a promissory note for the
balance. The automobile dealer assigned the note to a local finance company. The vehicle proved to
be totally unreliable, and when the dealer was unwilling to take back the vehicle, Duarant stopped
making payments on the promissory note. The finance company sued him for the balance owing.
Discuss the issues that will be raised at trial.
Answer:
The purchase is probably a consumer purchase, and the note should be marked accordingly. If it is not so
marked, it may be void as against the purchaser. If a consumer purchase, any defence that Durant may raise
concerning the unreliability of the automobile may also be raised against the finance company.
Case Problems for Discussion
Case 1
Subdivision Construction Ltd. was a developer of residential construction projects. Much of its
construction work was contracted out to specialty firms. Joseph Walters Co-Carpeting Ltd. was one of the
subcontractors and for many years supplied and installed all of the flooring and carpeting in the houses
built by Subdivision Construction Ltd. Joseph Walters Co-Carpeting Ltd. billed on a per house basis, and
in most months billed for perhaps a dozen houses. Harvey, the Accounts Payable Clerk at Subdivision
Construction Ltd., prepared the cheques to pay the accounts, and had them signed by an authorized
signing officer for the corporation. Because of the length of the corporate name of the flooring contractor,
everyone in the office referred to the contractor as ‗Co-Carpeting Ltd.,‘ and Harvey used that abbreviated
name on its payment cheques.
Many months later, Harvey realized that he could defraud his employer. He registered a business
name as ‗Co-Carpeting Sales,‘ and opened a bank account at his own bank in that name. From time to
time thereafter he would prepare a cheque payable to Co-Carpeting Sales and include it in the group of
cheques for Co-Carpeting Ltd. The cheque always fell within the mid-amount of the billing by CoCarpeting Ltd., and the signing officer signed the pile of cheques without noticing the different payee
name. Harvey would deposit the cheque in his Co-Carpeting Sales account, and when the paid cheque
was returned to Subdivision Construction Ltd. by its bank, Harvey would remove the cheque and destroy
it. Several years later, an audit discovered Harvey‘s scheme, but by this time Harvey had spent all of the
money and was virtually penniless. Subdivision Construction Ltd. then decided to take legal action
against Harvey‘s bank for return of the money, which was calculated to be $200,000.
Discuss the arguments of the parties, and render a decision.
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Answer:
Students should note that in each case the cheque was signed by the authorized signing officer of the
corporation. What are the positions of the two banks? Did either bank have a duty to query the cheques
to Co-Carpeting Sales? Students might also attempt to find a basis for the case against Harvey‘s bank.
Does one exist? The bank would be aware of the name of Harvey‘s employer and the fact that it was
regularly issuing cheques to Harvey‘s company. Harvey‘s bank would argue that it received and
deposited cheques properly made out to the account and deposited them in the account. The corporation
might argue that the bank should have been alerted by the circumstances, and in failing to act, become a
co-conspirator to the conversion acts of Harvey. Based on the facts, it may be difficult to find against the
bank, but in a case with slightly different facts (the cheques were simply made payable to Co-Carpeting‘
and not Co-Carpeting Sales) the court found the bank liable, as it accepted cheques with a name slightly
different, and deposited them in the ‗Sales‘ account. See: Westboro Flooring and Décor Inc. v. Bank of
Nova Scotia et al. (2004) 71 O.R. (3d) 723.
Case 2
Custom Canoe Ltd. offered canoes for sale by way of a newspaper advertisement. Carlo, age 17,
responded to the advertisement, and visited the Custom Canoe showroom. There, he saw a canoe that
fitted his needs, and he wrote a cheque for the full amount of the canoe. He took immediate delivery, put
the canoe on the roof of his car, and drove home. The next day, he set out on a whitewater canoe trip that
would take up his full two weeks vacation. In the meantime, Custom Canoe Ltd. deposited Carlo‘s cheque
in its bank, and its bank duly presented it for payment at Carlo‗s bank. Because Carlo had insufficient
funds in his account, the bank returned the cheque ‗NSF.‘ After Carlo had set out on his vacation, he
realized that he had insufficient funds in his account to cover the cheque, but decided to leave the matter
until his return home. While on vacation, the canoe did not perform as well as expected, and on several
occasions was damaged by rocks in the river. Carlo pondered what he should do about his purchase that
was now seriously damaged.
Advise the parties.
Answer:
Students should note that a minor cannot be liable on a negotiable instrument. Custom Canoe Ltd.
accordingly cannot sue Carlo on the negotiable instrument. It also faces the contract problem concerning the
nature of the goods. A canoe is clearly not a necessary, and Carlo would be free to repudiate the contract. He
must, however, return the canoe. He would probably not be responsible for the damage to the canoe, as the
damage that occurred would likely be treated as expected ‗wear and tear‘.
Case 3
Casey purchased a used four-wheel-drive truck from Sam‘s Off-Road Vehicles for $26,000. The vehicle
was licensed as a commercial vehicle, but Casey intended to use it primarily as transportation to and from
his employment at a local manufacturing plant. Apart from this type of driving, he expected to use it
occasionally in his part-time work as a fishing guide.
He signed a promissory note to Sam‘s Off-Road Vehicles for $25,000 that called for payments of
principal and interest of $1,000 per month over a 30-month term. Sam‘s Off-Road Vehicles immediately
sold the note to Easy Payment Finance Co. for $24,000. A few days later, Casey was notified by letter to
make all payments on the note to Easy Payment Finance Co.
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Before the first payment was due, Casey discovered that the truck was in need of extensive repairs
and returned it to Sam‘s Off-Road Vehicles. The company refused to take back the truck and return
Casey‘s $1,000 down payment. Casey then refused to make payments on the promissory note.
Some months later, Easy Payment Finance Co. brought an action against Casey for the amount owing
on the note.
On what basis would Easy Payment Finance Co. claim payment? What defences might be available to
Casey?
Render a decision.
Answer:
An important question that must be answered in this case is whether the purchase of the truck represents a
consumer purchase. What effect does the fact that it is licensed as a commercial vehicle have on the type of
purchase? Does it matter if it is used in his part-time business as a fishing guide? The determination of the
nature of the purchase has important implications to Easy Finance. If the truck is not a consumer purchase,
then Easy Finance Co. may successfully claim that it is a holder in due course of the note, and enforce it
regardless of the contract dispute between Casey and Shady Sam. Casey's only recourse in that case would
be to take action against Shady Sam for breach of contract (unless the purchase was a caveat emptor
situation). The only way that Casey might bring the Easy Finance Co. into the matter would be by showing
that it was not a holder in due course because of its close association with the seller. (See: Federal Discount
Corporation Ltd. v. St. Pierre and St. Pierre (1962), 32 D.L.R. (2d) 86.) If the truck was a consumer
purchase, then Easy Finance Co. would not be a holder in due course, and any defence to payment which
Casey could raise against Shady Sam would apply to Easy Finance Co. as well.
Case 4
Hanley Supply Co. sold Roberts Retail Inc. a quantity of goods for $10,000 on 30 days‘ credit. As agreed
by the parties, Hanley Supply Co. drew a bill of exchange on Roberts Retail Inc., naming itself as payee.
The bill was payable in 30 days‘ time. Roberts Retail Inc. accepted the bill and returned it to Hanley
Supply Co. Hanley Supply Co. then endorsed the bill to Smith Manufacturing to cover its indebtedness
for goods purchased from the company. Smith Manufacturing, a small firm, endorsed the bill in blank to
Brown, the company‘s office manager as a retirement gift, rather than wait until the bill became due to
obtain the funds. Brown, on receipt of the bill, delivered it without endorsing it to her friend, Jones, whom
she owed a sum of money. Jones, in turn, endorsed the bill and sold it to Doe for $9,000. On the due date,
Doe presented the bill for payment, and it was dishonoured.
Advise Doe of his rights. Explain the liability (if any) of each of the parties.
Answer:
The acceptance of the bill of exchange by Roberts Retail Inc. rendered it liable for payment to the holder.
When the bill was presented for payment by Doe, who was a holder in due course, and dishonoured by
Roberts Retail Inc., Doe must give notice of dishonour to all other endorsers by the business day next after
the dishonour. See: Bills of Exchange Act, s. 97). Prior endorsers must follow the same procedure. Note,
however, that Brown is not an endorser as he received the bill endorsed in blank and delivered it to Jones
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without endorsing it. Since all prior endorsers, the drawer, and the drawee are liable on the bill, Doe may
look to them for payment. All of the parties (except Brown, who was not an endorser) gave value for the bill,
and each may hold the prior endorser liable if they should be obliged to pay. In the end, if this process is
followed, Hanley Supply Co. will be obliged to pay, and must look to Roberts Retail Inc. for payment. (See:
Bills of Exchange Act s. 95-101.
Case 5
Carla bought a number of products from Scoville Limited in a single mail order, and enclosed a cheque
for $130 with the order, drawn on the Bank of Hamilton. In the interval between mailing the order and the
arrival of the products, Carla noticed a few of them (totalling $65) were available locally at a much lower
price.
On the day the products arrived, she visited her bank and was pleased to see that her cheque had not
yet been cashed. She placed a stop-payment order on her cheque. In filling out the request slip, she placed
the words ―goods unsatisfactory‖ in the box allotted for the reason for the request. She decided she would
send back the half of the order that she had now bought more cheaply elsewhere, and assumed that
Scoville would send her a new invoice for $65.
The Bank of Hamilton failed to immediately enter the request into its computer system, and as a
result, on the arrival of the cheque a day later, it paid Carla‘s cheque out of her account in the normal
manner. Carla discovered this error in the course of using an automated cash machine a few days later,
and asked the bank to correct the error. The bank put $130 back into Carla‘s account and told her that
they would collect back the $130 that they had paid Scoville‘s bank, The Bank of Manitoba. The Bank of
Hamilton returned the cheque in the clearing system, now marked ―Payment Stopped,‖ and demanded
$130 from the Bank of Manitoba.
The Bank of Manitoba refused the stopped cheque and would not make payment back, stating that by
accepted banking convention, too much time had elapsed between acceptance by The Bank of Hamilton
and the return of the item. While this had been going on, Scoville Limited had received the goods
returned by Carla and had mailed her a refund cheque for $65, for as far as they knew, they had been paid
in full.
Carla was pleased. Clearly a computer error had sent her a $65 cheque rather than a $65 invoice, and
she ignored the whole matter.
Assume another week passes. Discuss the events that follow, and the positions of the parties, with
respect to the law of negotiable instruments as it is written. In advising the banks, what would you
suggest that they add to their standard form account-operation agreements?
Answer:
Students should note that Carla's cheque is a promise of payment only, in the sense that if honoured by her
bank the holder will receive the money. When Carla stopped payment on his cheque the debt remained
unpaid. Under the Bills of Exchange Act, if payment is stopped, it is a dishonour of the cheque when it is
presented for payment by the holder. However, in this case the cheque was honoured, and it was not until
several days later that the Bank of Hamilton realized that it had failed to comply with its stop payment order.
Since the Act provides that notice of dishonour must be given not later than the next business day, it was too
late for the Bank of Hamilton to give notice of dishonour to the Bank of Manitoba and all prior endorsers
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(Scoville Limited) were free of liability. The Bank of Hamilton in this case could not look to Carla for
payment as it had failed to comply with his stop payment order.
Case 6
Transport Corp. entered into an agreement to purchase three trucks from a competitor, Delivery Inc.
Payment was made by way of a cash payment and a promissory note for $120,000, bearing interest at 6
percent, and due in ten months from the date of issue. The note provided that the principal was repayable
in 12 monthly payments of $10,000 each, with the interest payable at the end of the 12 months. The note
did not contain an acceleration clause in the event of default.
Transport Corp. made the first monthly payment of $10,000. At that time, Delivery Inc. suggested
that the note be replaced by a new promissory note that contained an acceleration clause, as this proviso
had been discussed during negotiations, but omitted in error when the transaction was finalized. Transport
Corp. agreed to do so, and a week later they forwarded by mail a new promissory note for $110,000 on
the same repayment terms and containing the requested acceleration clause. A covering letter stated that
the new note was given in accordance with an agreement to have it replace the existing promissory note.
Before the next monthly payment became due, a dispute arose over the condition of some of the
purchased vehicles, and Transport Corp. refused to make the monthly payment when it became due and
payable. During the course of the discussion that followed, Delivery Inc. threatened to implement the
acceleration clause and sue for the balance of the debt owing. Transport Corp. replied that the second
promissory note had been signed by the office receptionist in error, so the note was not enforceable, as it
was not signed in the corporation‘s name, nor was it signed by an officer of the corporation. It also
informed Delivery Inc. that the receptionist was a 17-year-old minor.
Discuss the issues raised in this case. Advise Delivery Inc. as to its rights (if any) and its position on
the debt owed by Transport Corp.
Answer:
The second promissory note, if signed in error by the receptionist (who was a minor) would clearly not be
enforceable against her in her personal capacity. It would not be enforceable against the corporation if it was
not signed by the corporation or by an officer of the corporation, but this would not relieve the corporation of
its payment obligations. If the original note was still in existence, the note might still be enforced, but only in
accordance with its terms. Transport Corp. may be entitled to a claim under the contract if (for example)
the vehicles were misrepresented or if there was a breach of warranty, but this would not entitle Transport
Corp. to withhold payment under the promissory note.
Case 7
Sugar Confectionery Ltd. borrowed a sum of money from its banker, the Big Business Bank, to purchase
certain production equipment. The promissory note that the bank prepared and that James Anawak, the
president of the corporation, signed, reads as follows:
April 1, 2020
I hereby promise to pay on demand to the Big Business Bank, Metro Branch, the sum of Fifty
Thousand Dollars ($50,000) together with interest thereon at 10 percent per annum calculated from
April 1st, 2020, until the date of payment.
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Value Received
James Anawak
President
The bank placed the $50,000 in the Sugar Confectionary Ltd. bank account, and the corporation drew
a cheque on the amount to pay the equipment supplier.
Some months later, the shareholders of Sugar Confectionary Ltd. removed James Anawak as
president of the company and elected Jane Bellamy in his place. Shortly thereafter, the Big Business Bank
endorsed the note to Big Finance Company in return for the sum of $48,000.
On September 1st, Big Finance Company contacted Sugar Confectionery Ltd. and demanded
payment. Sugar Confectionery Ltd. refused to pay and stated that it was not indebted to Big Finance
Company or, for that matter, to any other creditor.
Discuss this situation, evaluate the claim of Sugar Confectionery Ltd., and outline the nature of the
arguments the parties might raise if the matter should come before a court.
Render a decision.
Answer:
From the promissory note, the only person liable on it would appear to be John Smith, since the company
name appears at no place on the instrument. The Big Business Bank was aware of the fact, however, and
placed the funds in the company bank account. The question that may be raised here is: Was Big Finance
Company aware of the fact as well? After all, it made its demand for payment to the company. If it was
aware of the transaction, could it claim to be a holder in due course? Sugar Confectionery Company is
attempting to avoid liability by arguing that it did not sign the note. It was the intention of the parties,
however, that the loan be a loan by the company from the bank, and the company received the proceeds. Big
Finance would probably argue that both the company and the bank were aware of the transaction which was
evidenced by John Smith's signature, even though the company name did not appear on the note. John Smith
would probably argue that to hold him personally liable on the note would be a gross injustice to him, since
he received no personal benefit, and the company would be unjustly enriched if it was able to avoid payment.
The Bills of Exchange Act s. 131 provides that a person (or corporation) who does not sign a bill of exchange
incurs no liabilities under it. This section would be referred to by the company to avoid liability, and on a
strict interpretation of the Act, the company would not be liable. Some cases, however, have looked at the
intention of the parties, and have held that where it was clear that the parties intended the company to be
liable, then extrinsic evidence could be introduced to establish this fact and hold the company liable for the
debt. See for example: Allprint Co. Ltd. v. Erwin (1982) 38 O.R. (2d) 13. Many cases, however, run to the
contrary, and have held the signer personally liable on the note. See for example: Holz v. G. & G. Parkdale
Refrigeration (1980) 117 D.L.R. (3d) 185. If only Smith is held liable, he may be able to claim against the
company for the money advanced to it by the bank.
Case 8
Ascot was in the process of negotiating the purchase of an oil painting from The Macey Art Gallery. As a
result of a number of telephone calls to the gallery owner, he eventually convinced the owner to sell the
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painting to him for $1,000. He prepared a cheque in the amount of the purchase price and signed it.
However, because he was uncertain as to the exact spelling of the gallery‘s name, he left that part of the
cheque blank. He placed the signed cheque in his office desk drawer, with the intention of making a
telephone call to the gallery later in the day for the information necessary to complete it.
Ascot determined the gallery‘s name while at lunch, but when he returned to the office, he discovered
that the cheque had been stolen.
Hines, a fellow employee of Ascot, had taken the cheque, filled in the cheque payable ―to bearer,‖
and used it to purchase items at a store where Ascot frequently shopped. The store owner accepted
Ascot‘s cheque without question, as he was familiar with his signature, and later presented it to Ascot‘s
bank for payment.
Within minutes after the bank had paid the cheque, Ascot telephoned to have the bank stop payment.
Advise the parties of their respective rights (if any) and liability (if any).
Answer:
The cheque in this case was incomplete, but signed by Ascot before it was stolen. The cheque
appeared to be complete and regular on its face when presented for payment. Both the shop owner and
the bank recognized the signature as genuine. Ascot did not notice the cheque missing until after the bank
had made payment. The question is: what should be done? The bank paid the cheque as a genuine
instrument. Should it suffer the loss? Should the shopkeeper? Hines was the culprit in the case - should
he not be liable? Absence of delivery of an incomplete instrument is a real defence, good against all
holders, but was Ascot negligent in leaving the cheque in his desk? Probably not. Does it make any
difference that payment had been made? Ascot would be entitled to recover the amount from the
shopkeeper, who in turn, could look to Hines for payment. For a example of a case where a bill was
stolen and negotiated: See: Baxendale v. Bennett (1878), 3 Q.B.D. 525.
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CHAPTER CHARTS
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Chapter 29. Security for Debt
Chapter Topics
Introduction
Forms of Security for Debt
Statutory Protection of Creditor Security
Summary of Priorities between Security Interests
Summary
Key Terms
Review Questions
Mini-Case Problems
Case Problems for Discussion
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Chapter Objectives
After study of this chapter, students should be able to:
• Distinguish between the various forms of security for debt.
• Describe the statutory protection available to creditors.
• Explain the chief rules that establish priority between competing interests of creditors.
YOUR BUSINESS AT RISK
A credit relationship may be an essential term in a sale or service contract, or it may be a
contract in itself, fundamental to the capital structure of your firm. As is the case in many
advanced areas of the law, technical rules often prevail, and the equity (fairness) argument is
difficult to make if you have not made the effort to learn the rules. Given the power of
compound interest, firms can quickly find that they have either committed to too much debt, or
too little security, and they are caught by repayment obligations they agreed to without full
knowledge of their scope or limit. By the same token, prudent firms that know their rights as
debtor or creditor are in a position to use this knowledge to their competitive advantage.
CHAPTER COMMENTARY
In addition to the land mortgage described in Part 5 of the text, this chapter explains a number of other
commonly used legal instruments to secure debt. Most of these instruments use chattels as the subject matter
of the security interest, and are in widespread use to finance consumer and business purchases. One of the
most common forms of security, and one of the oldest, is the chattel mortgage, which is often employed by
finance companies and banks to secure personal loans. Any discussion of the instrument, however, should
emphasize the importance of registration in accordance with the provincial registration procedures in order to
protect the mortgagee and his or her priority over subsequent encumbrances or purcha sers of the chattels.
The conditional sale agreement is also worth examination in class, as it is a common method of
selling goods on an instalment basis. The simplicity of this form should be noted, but again, the importance
of adherence to the provincial registration requirements should be stressed, as these establish the seller's rights
on default or on disposal of the goods by the buyer. Bills of sale, and the assignment of book debts, represent
two other forms of security that are used to secure debt, but to a lesser degree than the chattel mortgage or
conditional sale agreement. The assignment of book debts naturally has a use limited to business
orga