Topic 1. Representations and Terms
(a) Representations and Warranties
McCamus
Categories of statements during negotiation:
1. Sales talk/mere puff
a. Not a part of the contract, there are no remedies if broken.
2. Mere representations
b. Not terms of the contract but have some legal consequences if broken
3. Contractual statements
c. Terms of the contract
Bentley (Dick) Productions Ltd. v. Smith (Harold) Motors Ltd. [1965] 1 WLR 623 (C.A.)
Facts: Auto dealer makes false statements about the mileage of a car but the contract
does not consider the subject matter of the statements
Issue: Are the statements regarding the mileage innocent misrepresentation or a
warranty?
Decision: The representation was a warranty and the defendant is liable for damages.
Ratio: When there is an imbalance of expertise or knowledge, a factual statement is a
warranty because the dealer stated a fact that should have been within his knowledge.
The person making the statement could escape liability if the misrepresentation is
innocent (i.e. an absence of fault).
A warranty occurs when:
1. A representation is made for the purpose of inducing someone to enter into a
contract.
2. The person does enter into the contract
These are prima facie grounds for inferring the representation was intended as a warranty
(and is binding).
Note: If the contract said that this agreement is only constituted of things written in the
agreement, then the defendant can go back to Symons and argue “collateral unilateral
agreement” (an agreement where parties had an unwritten agreement based on details that
aren’t in the contract.
Heilbut, Symons, & Co. v. Buckleton [1913] AC 30 (HL)
Facts: Plaintiff makes a representation to induce the defendant to invest in a company.
Issue: Is the false claim a warranty (a collateral contract)?
Ratio: A fact is a promise or undertaking, so when it is false it is breach of contract
(warranty).
Test for converting: What kind of contractual arrangement might exist?
 Unilateral contract: promise on one side, an act on the other.
 Bilateral contract: a promise for a promise.
Test for statements to be collateral contract (warranty):
o There was a misrepresentation
o Pre-contract warranty must exist
 based on promissory intent: parties must have animus contrahendi
(the spirit/intention of contracting; look to language, conduct,
circumstances). Without it, no contract
Redgrave v. Hurd (1881), 20 Ch D 1 (C.A.)
Facts: A solicitor made a misstatement of fact in a contract to sell his house and practice,
and the defendant, who did not do complete due diligence, brought a claim for recission
alleging he was induced to enter the contract by misrepresentation.
Issue: Does pre-contractual discussion constitute misrepresentation?
Decision: Innocent misrepresentation is sufficient grounds for recission, under unjust
enrichment doctrine.
Ratio: Test:
1. There must be statement of fact or promise made.
2. The misrepresentation must be concerning a material statement, relevant to
whether a party would enter into the contract.
3. The statement was intended or in fact induced reliance
 There is no obligation on the representee to do anything (check the facts etc);
negligence of representee is no defence.
Defense: Defendant must prove there was no reliance taken, or that the statement did not
induce the plaintiff to enter into the contract
 for example, the plaintiff has knowledge that the representation is untrue
An innocent material misrepresentation gives rise to the equitable remedy of rescission
(set aside the contract); the test is for legal sign of innocent misrepresentation and can
presume reliance as a matter of law.
Notes: Ordinary cases use Redgrave v. Hurd, but when dealing with securities it’s not
very helpful.
The plaintiff does not have to prove reliance (sometimes the plaintiff wouldn’t want to be
on the stand i.e. in class actions where the reliance is difficult to prove but fairly evident.
Infering inducement: Ontario courts: Trial level: you can’t infer as a matter of law that
inducement occurred.
OCA said – not so sure
Newbigging v. Adam (1886) 34 Ch D 582 (CA)
Facts: Because of an innocent misrepresentation, the plaintiff was induced to enter into a
contract of partnership that brought in about $10,000 cash. The plaintiff claimed
dissolution of the partnership, indemnification against claims, return of capital and
interest.
Issue: Can damages be claimed for innocent misrepresentation?
Decision: Damages can not be claimed for misrepresentation that is not fraudulent.
Ratio: The common law cannot give damages for misrepresentation which is not
fraudulent. Equity cannot give a remedy which corresponds with damages.
Status Quo ante: The objective is to put the parties back in the position they were in
before the contract.
Kupchak v. Dayson Holdings Ltd. (1965), 53 WWR 65 (BCCA)
Facts: The plaintiff was fraudulently induced to sell their land.
Issue: Can damages be claimed for fraudulent misrepresentation?
Decision: Damages can be awarded for fraudulent misrepresentation.
Ratio: Monetary equivalent of the status quo ante can be awarded. Courts of Equity did
not award damages, but the value of the property as well as after-acquired profits can be
awarded.
Note: Damages can not be awarded on a rescission claim: it is restitution, an unwinding
of the contract.
Redican v. Nesbitt [1924] SCR 135
Facts: Defendant saw a property he bought for the first time and ordered a stop-payment,
believing he had been misrepresented.
Issue: Was the misrepresentation enough to warrant rescission?
Decision: The contract was carried out so there is no misrepresentation possible.
Ratio: The property did not differ to that extent from the representations made about it.
The contract was executed (for innocent misrepresentation (i.e. non-fraudulent),
rescission is not possible where the contract has been executed).
Innocent misrepresentation (i.e non-fraudulent but such as renders the subject of sale
different in substance from what was contracted for), such as will support a demand for
rescission in equity… will serve as a good equitable defence to a claim for payment
under contract as well as afford ground for a counter-claim for rescission. However, in
this case, the contract was completed as represented.
A substitution of monetary award is appropriate. But this is not damages (because
damages are awarded for injuries sustained in reliance of contract)
Whittington v. Seale-Hayne (1900), 82 LT 49: A monetary award of damages is allowed
on a misreprentation to prevent unjust enrichment. A vendor misrepresented the
condition of property; municipality orders repairs prior to decree of rescission; municipal
taxes were paid, improvements made, poultry dies and profits are lost. The false
representation led to a decision of rescission. The court held that expenditures that confer
value on the other party are compensable and recoverable as monetary damages in
rescission.
Leaf v. International Galleries [1950] 2 KB 86 (CA)
Facts: Defendant represented a painting as by a particular artist in the terms of the
contract. The painting was discovered to be by another painter.
Issue: Is the buyer entitled to rescind a contract for misrepresentation on an executed
contract for sale?
Decision: The buyer is deemed to have accepted the picture and therefore cannot rescind.
Ratio: Clear case of animus contrahendi (the intention of the contract).
If the term of the contract is a condition, buyer can reject the contract for breach of
condition before accepting the consideration.
If the term of the contract is a warranty, buyer can not reject it but can claim damages.
On a contract for sale of goods, an innocent material misrepresentation may be ground
for rescission even after the contract is executed; but a claim for rescission on ground of
innocent misrepresentation is barred where a claim to reject for breach of condition is
barred (purchaser had ample time to examine the goods).
Notes: The significance is in the damages awarded:
Breach of contract: Damages are:
 Expectation damages: Monetary, to put purchaser in position would have been
had the contract been performed.
Tort for innocent misrepresentation (carelessly false statement):
 Reliance Damages: Monetary, to make the purchaser in the position they were in
before they contracted.
 Restitution: Rescission and Restitution (from Redgrave v. Hurd)
Court creatively drew the conclusion that the representation was in fact a breach of the
term of contract, a “collateral warranty”, i.e. an inducement to contract, not just a
representation.
Common Void contract:
Law
 no rescission or remedy as the contract does not exist.
Fraudulent misrepresentation: contract is voidable and rescission is available
if restoration is possible.
Equity
Mutual restitution through damages puts parties back where they were had the
contract been executed as agreed upon.
Notes: Defences to the Rescission claim:
 It may be possible to have mutual restitution
 Monetary awards coupled with restitution.
 Intervention of third party rights
o i.e. rescission can happen in any context:
 if there’s a transfer of assets induced by fraud/non-fraudulent sale,
and that asset is then sold to bona fide purchaser for value without
notice of plaintiff, then it is too late to rescind.
 Some new cases suggest giving the difference for price sold in the
contract and the subsequent sale.
 Carnegie: if you can’t physically make restitution, then it is too
late to rescind the contract.
 Equitable doctrine of Laches (can’t wait too long to bring a claim)
o Limitations Act RSO – 2 year limitation period coupled with
discoverability principle.
 Affirmation or Election:
o After discovery of a mistaken fact the parties mutually decide to affirm the
transaction even with knowledge of the mistake.


Or if the party behaves in such a way that signals to the
misrepresentor that you intend to affirm the contract.
o You’re not allowed to change your mind at will.
Execution doctrine
o Harsh application of this doctrine.
 In sale of land, sale of goods, rescission can disappear quickly.
 Delivery of goods: is this action that will preclude rescission or the
transfer of land.
 The mere execution of the deed (transfer of Common Law title of
property); if fact this occurs sufficient to bar rescission.
O’Flaherty v. McKinley [1953] 2 DLR 514 (Nfld, CA)
Facts: The plaintiff took possession of the defendant’s car and drove it for a while before
discovering that the car was a different model than represented.
Issue: Should you be able to rescind on basis of misrepresentation?
If the error is in substantialis – an substantial error – you should be able to rescind.
Where an error leads to a huge mistake, then it’s not too late to rescind the contract,
despite fact buyer has had the goods for awhile and used them.
Note: This is a homegrown Canadian exception to the Execution rule; here it is in context
of Sale of Goods.
Alessio v. Jovicka [1973], Alta. SCAD: Defendant bought property but found out that he
could only build on it if he upgraded the property. He then sold the property but didn’t
tell the plaintiff of the problem. The plaintiff asked if he could build and the defendant
truthfully said that he could but didn’t inform him of the upgrade requirement. Execution
doctrine kicks in and rescission not allowed, but the court held that this is a huge mistake:
this is not an economically viable purchase of property and it’s not too late to rescind the
contract. When it is not too late and the execution rule would be too harsh it is
acceptable to rescind the contract even after it has been executed.
Andrews v. Hopkinson [1957] 1 QB 299
Facts: Defendant sells a bus and claims it is “a good little bus”, but a defect only
detectable by a mechanic occurs.
Issue: Is the “good little bus” statement mere puffery or a warranty?
Decision: The statement is not mere puffery.
Ratio: The defect led to an accident and buyer was injured; the court was sympathetic.
“We think this is not a rep, that this is a warranty.”
Note: The Heilbut analysis applied in generous way.
Murray v. Sperry Rand Corporation (1979), 96 DLR (3d) 113 (Ont. HC)
Facts: Plaintiff purchased farm machinery for harvest, and machine performance had
been much worse than should have been expected given defendant’s warranty in
brochure.
Issue: Can the manufacturer’s warranty be a contract?
Decision: The court ruled that the supplier has fundamentally not met the obligations of
the contract, and because of the fundamental breach it could not be protected by the
exemption clause.
Ratio: A manufacturer’s warranty is not a part of a contract because there is no
consideration from the buyer to the manufacturer, therefore there was no contract
between the buyer and manufacturer, only between the seller and the manufacturer.
Bank of British Columbia v. Wren Developments Ltd. Supp
Facts: Defendant asks bank if his collateral on a loan he made was proper, and bank
manager says he is not sure and will look into it, and signed the guarantee. The collateral
was non-existent, and manager didn’t know at the time.
Issue: Is the bank making a misrepresentation by not disclosing the non-existence of the
collateral?
Decision: Defendant was induced by misrepresentation of the bank in failing to disclose
relevant information.
Ratio: Failing to disclose relevant information to the contract is a misrepresentation.
Note: Exceptions to the Rule that Silence is a misrepresentation:
 Half-truths:
o ie. brick company buys a company from Mr. butler: Is there any reason we
can’t use this land as a brickyard? Lawyer says I’m not aware of any
reason, but he hasn’t made any inquiry of any kind. Is this a misrep? This
is a half-truth, you didn’t disclose something that was important, which is
a half-truth and therefore misrepresentation.
 Conduct:



o Not saying anything but engaging in conduct that “actively concealed” the
truth. Active concealment is misrepresentation.
Silence that leads to misleading:
o i.e. if the property has a giant hole and its covered with a giant sheet, that
have you engaged in active concealment? It may not be material, but it
probably is considered “active concealment”
Changing circumstances:
o i.e. if a representation is made and before transaction is entered into,
substantial circumstances change, then the representor must inform the
other party or else it is a misrepresentation.
Uberrima fides contracts: Contracts which are considered to be considered in
utmost good faith
o Certain contracts are of such a nature that there must be full disclosure on
either side, i.e. insurance contracts.
o i.e. insurance holder didn’t tell us about all the health problems and this is
a misrepresentation. This is an uberrima fides.
o Some cases say family settlements ie. wills resolved by family members.
o No cases that firmly establish guarantees as uberrima fides either.
Restatement of Contracts 2d, Art. 161
Clearly recognizes a duty to negotiate, and confer remedies of contracing in a good faith
and reasonable matter.
US contract law embraces good faith in three different ways:
Duty to negotiate:
s.161: when does non-disclosure amount to, in effect, misrepresentation?
 Non-disclosure of fact amounts to an assertion that the fact doesn’t exist.
s.161(a): where it prevents previous statement from being inaccurate (that’s same as
changing circumstances)
 If it changes a basic assumption and amounts to a failure to act in good faith.
Martel Building Ltd. v. Canada
Facts: Defendant didn’t answer phone calls or disclose intention to make a tender call to
plaintiff landlord, and didn’t give plaintiff time to fix the problem, and tacked $60K onto
their bid.
Issue: Does the non-disclosure of the plans to tender amount to a misrepresentation?
Decision: The non-disclosure of the intentions to tender is some kind of
misrepresentation.
Ratio: Tort analysis gives negligence giving rise to economic loss:
Anns Test: To recover economic loss arising from negligence, must meet a two part-test:
1. Is there sufficient proximity?
2. Could someone reasonably foresee damages arising from their actions?
978011 Ontario Ltd. v. Cornell Engineering Co.
Facts: Plaintiff businessman in a relationship to plaintiff signs an employment agreement
without looking at a specific termination provision, and is
Issue: Does the relationship require the plaintiff to point out the termination provision?
Decision: The judicial system emphasizes individual responsibility and self-reliance so
the plaintiff could not refuse to abide by the termination provision.
Ratio: First, one party relies on the other for information necessary to make an informed
choice and, second, the party in possession of the information has an opportunity, by
withholding (or concealing) information, to bring about the choice made by the other
party. If one party to a contract relies on the other for information, that reliance
must be justified in the circumstances.
Test: Reliance is justified when:
1. A past course of dealing between the parties in which reliance for advice, etc., has
been an accepted feature;
2. The explicit assumption by one party of advisory responsibilities;
3. The relative positions of the parties particularly in their access to information and
in the understanding of the possible demands of the dealing;
4. The manner in which the parties were brought together, and the expectation that
could create in the relying party; and
5. [W]hether “trust and confidence” knowingly [has] been reposed by one party in
the other.
Test for finding a fiduciary relationship:
1. Standard list of relationships
a. i.e. some relationships widely recognized: ie. solicitor-client
2. Circumstances:
b. a banker doesn’t owe a client a fiduciary obligation but if there is a special
relationship, there is a fiduciary obligation.
Notes: Hypothetical Scenarios
Bargaining with no intention of contracting?
 Global involved in negotiating a contract with a BC cable operation. Global
wanted to sell programs to the cable operation, who found that whenever they
thought they’d make a deal with Global it would go upstairs and they would say
“no deal”. Then BC guys found out that Global applied to CRTC to use them:
they were pretending to bargain with Global to strengthen a case for them to get
their own license with the CRTC (they’re bargaining with no intention of reaching
an agreement).
o A tort of breaching the duty to bargain in good faith should apply here.
Reneging on a contract:
 Hoffman v. Red Owl: Red Owl franchisor encourages X that he’ll give him a
franchise. X in reliance to these gratuitous undertakings is still negotiating the
contract, and Red Owl continues to promise a franchise. X sells his business and
moves to new state and then doesn’t get his franchise.
o Is it allowed that one person led on, moves over to new state, and then
reneged.
o This is a classic example of gratuitous promise action: there was a
promise, followed by detrimental reliance, but no consideration was given,
and thus no enforceable contract, unless we can argue that there was a
breach of a duty to bargain in good faith.
Bargaining with you but then you get someone who makes better deal:
 A party to negotiation gets a better offer and accepts it without giving the other
party a chance to match.
o Some people sign a “lock out agreement”: no other negotiations while the
current negotiation is still on the table.
o Lots of contracts are entered into during the negotiation process (i.e.
confidentiality agreement)
Failure to make reasonable efforts to negotiate?
 A deal could have been reached if effort was made
o i.e. Martel willing to do anything to keep important tenant. They didn’t
get back to Martel in a timely fashion, didn’t tell them what was needed,
didn’t tell them they wanted to tender the bid.
 There is lots more than simple non-disclosure if we recognized a
duty to bargain in good faith.
Note: Kronman: Courts shouldn’t interfere with economic incentives
Summary: Law of Misrepresentation:
1. Statements of fact not statements of opinion\
2. Commercial context
3. Right to rescind disappears very quickly
(b) Statutory Reform
McCamus
Ontario Consumer Protection Act, 2002, ss. 14-18 Supp
(c) The Relationship Between Contract and Tort
Hedley Byrne & Co. Ltd v. Heller & Partners Ltd. [1964] AC 465 (HL)
Facts: The bankers for the plaintiff hired the defendant to produce a credit record for a
customer who subsequently went bankrupt. The credit record carried a disclaimer, but
the plaintiffs relied on the report anyway.
Issue: Can tort liability be extended to a reliance taken?
Decision: Liability could be extended because of the relationship between the parties.
Ratio: Wilkinson v. Coverdale 1 Esp. 75: Plaintiff’s victim’s property is destroyed by fire
and defendant insurance agent said he would renew the insurance but didn’t. Court ruled
that if the agent undertook to renew the policy, if he doesn’t he is liable for negligence, if
it causes economic loss.
Possibility where agreement to provide service requires making statements, there is an
implied undertaking to exercise reasonable care and skill. A careless misstatement would
constitute breach of implied covenant and a tort.
Esso Petroleum Co. Ltd. v. Mardon [1976] QB 801 (CA)
Facts: Plaintiff’s representative overestimated the probable profits of an agreement and
the defendant was unable to honour its financial obligations.
Issue: Did the representation amount to a warranty or a negligent misrepresentation?
Decision: The representation was negligent and therefore the plaintiff is liable.
Ratio: The estimate was represented by the plaintiff’s conduct as reliable, which amounts
to an implied warranty and therefore a contract.
When there is a negotiation between two parties, their rights and duties are governed by
contract and not tort. However, if a man who professes to have special knowledge or
skill gives an opinion, it amounts to a statement of fact and therefore misrepresentation.
Damages:
Tort: entitled to the amount that he would have earned but for the economic loss.
Contract: Defendant is entitled to expectation damages, for breach of undertaking of
contract.
Notes: This is a landmark case allowing damages for opinion representations by someone
who should know and holds it out as fact.
Sealand of the Pacific Ltd. v. Robert C. McHaffie Ltd. (1974), 51 DLR (3d) 702 (BCCA)
Facts: Plaintiff firm hired defendant firm to design improvements to an oceanarium. The
company’s owner, recommended that the plaintiff use a third-party product that was
unsuitable and extensive repairs were required.
Issue: While the liability in contract is clear, is there a liability in tort for negligent
misrepresentation of the third-party product?
Decision: The defendant was not held liable.
Ratio: An employee's act or omission that constitutes his employer's breach of contract
may also impose a liability on the employee in tort. However, this will only be so if there
is breach of a duty owed (independently of the contract) by the employee to the other
party. Mr. McHaffie did not owe the duty to Sealand to make inquiries. That was a
company responsibility. It is the failure to carry out the corporate duty imposed by
contract that can attract liability to the company. The duty in negligence and the duty in
contract may stand side by side but the duty in contract is not imposed upon the employee
as a duty in tort.
Notes:
Remedies for misrepresentation:
Fraudulent
Misrepresentation
Common Law
tort claim in deceit
unenforceable (void?)
Equity
rescission
(voidable)
Innocent
Misrepresentation
(a) negligent
no rescission, no damages
(Redgrave)?
tort (Hedley Byrne)
rescission
(voidable)
(b) non-negligent
No remedy
rescission (unless too late)
(voidable)
BG Checo International Ltd. v. British Columbia Hydro and Power Authority
Facts: Defendant called for tenders to erect power lines and plaintiff issued a bid.
Plaintiff found the location of the job inaccessible and defendant promised to clear a path,
which was not done and the job could not be completed.
Issue: Can the plaintiff sue for both the tort of negligent misrepresentation and breach of
contract?
Decision: The plaintiff was allowed to sue both in contract and tort.
Ratio: Where a given wrong prima facie supports an action in contract and in tort, the
party may sue in either or both, except where the contract indicates that the parties
intended to limit or negative the right to sue in tort.
The Court considered three situations where a party can sue in tort and contract:
1. Where the contract stipulates a more stringent obligation than the general law of
tort would impose. In that case, the parties are hardly likely to sue in tort, since
they could not recover in tort for the higher contractual duty.
a. Though the right to sue in tort still exists, it is generally not practical.
2. Where the contract stipulates a lower duty than that which would be presumed by
the law of tort in similar circumstances:
b. This does not necessarily extinguish the right to sue in tort unless it is
explicit in the contract.
3. Where the duty in contract and the common law duty in tort are co-extensive.
c. In such cases, the plaintiff may seek to sue concurrently or alternatively in
tort to secure some advantage peculiar to the law of tort, such as a more
generous limitation period.
Notes: Changes to the law of misrepresentation:
Consumer Protection Act, 2002:
s.14(1): it’s an unfair practice for a person to make a false, misleading or deceptive
representation.
s.14(2): lists non-exclusive types of false, misleading or deceptive misrepresentation
 Most of these are covered by Common Law;
 it sounds like a series of consumer complaints:
o failing to state a material fact (omission)
o misrepresentation re: purpose of solicitation (i.e. we’re doing a survey)
s.15(1): It’s unfair practice to make an unconscionable representation
 Unconscionability involves inequality of bargaining power, other than that this is
unclear.
 Traditional unconscionability doctrine: someone who can’t protect their own
interest
 Consumer is subjected to undue pressure.
s.16: Change in price
s.17: No person shall engage in an unfair practice
 if you don’t follow statute it’s an offence.
s.18: An agreement entered into on basis of an unfair practice (includes failure to include
material facts may be rescinded by the consumer; the latter is entitled to any remedy
available at law including damages.
 Tort claims are currently the only available remedy outside of statute.
 Seem to be saying you have the normal remedies available.
Reason for Concurrency
Remedies available
Different Statute of
Limitations
Policy reasons
Course of Action
Analysis
Contract
Expectation damages
Reliance damages
 no recovery for personal
injury
better damages
Obligation arises out of contract
Freedom to contract out of
common law tort liability and
duty of care
 prove contract existed
 prove breach
 show extent of damage
Pre-contract misrepresentation:
 Ways in which precontractual
misrepresentation can be
incorporated into contract
so breach can be
demonstrated
 Collateral warranty: suing
on pre-contractual
statement
 Prove statement strictly
and show it induced
reliance
Tort
consequential damages – to
restore parties to position they
were in prior to incident
Longer limitation period
from Common Law

prove relationship giving
rise to duty of care
 prove breach of duty
 prove harm, not just the
amount of damages
Pre-contractual statement:
misrepresentation
 establish that party had a
duty of care
 duty: person must not
negligently tell you
something that could
bring harm to you.
 duty to act reasonably
 misrepresentation
becomes breach of the
duty, so plaintiff must
prove damage
 damage is that on basis of
a misrepresentation you
entered the contract, the
result of which is the
harm suffered
(d) Repudiatory Breach
McCamus
2 questions about when a contract can be deemed non-existent by the parties:
1. When do I get to fire employee?
a. i.e. Can I terminate this contractual relationship?
2. Who goes first?
b. I promise to pay you $85K and you promise to build me a house: We
didn’t say who would go first, I don’t want to pay until job finished, they
want payment first to buy materials to build.
Kingston v. Preston (1773), 2 Douglas 689; 99 R 437 (in argument in Jones v. Barkley)
Facts: The plaintiff and defendant contracted for the plaintiff to serve as the defendant’s
assistant in his silk business for 15 months. The defendant would pay the plaintiff £200,
and then at the end of the 15 months he would give the plaintiff his business to run with
the defendant’s nephew.
Issue: Does the employment contract require the security exchange or is that a separate
contract?
Decision: The contract required conditions to be performed at the same time and
therefore the defendant is liable.
Ratio: There are three kinds of covenants:
1. Mutual and independent covenants:
a. either party may recover damages from the other, for the injury he may
have received by a breach of the covenants in his favor, and where it is no
excuse for the defendant to allege a breach of the covenants on the part of
the plaintiff;
2. Covenants which are conditions and dependent:
b. the performance of one depends on the prior performance of another, and,
therefore, till this prior condition is performed, the other party is not liable
to an action on his covenant;
3. Mutual conditions to be performed at the same time:
c. if one party was ready, and offered, to perform his part, and the other
neglected, or refused to perform his, he who was ready, and offered, has
fulfilled his engagement, and may maintain an action for the default of the
other; though it is not certain that either is obliged to do the first act.
Notes: Courts are likely to manipulate the distinction to achieve favourable results. i.e.
court might say that the provision where the employee has to wear uniform is dependent
and you can sue him for damages but not dismiss him.
Rules of Civil Procedure, Ontario Superior Court of Justice, 1990, as am.
s.25.06(3): Allegations of the performance or occurrence of all conditions precedent to
the assertion of a claim or defence of a party are implied in the party’s pleading and need
not be set out, and an opposite party who intends to contest the performance or
occurrence of a condition precedent shall specify in the opposite party’s pleading the
condition and its non-performance or non-occurance.
Bettini v. Gye (1876), 1 QBD 183
Facts: Defendant singer contracted to sing in an opera and to attend rehearsals prior to
opening night. Due to illness she failed to appear until just before and was fired.
Issue: Was director entitled to recind the contract? Was the rehearsal term a condition or
a warranty?
Decision: The term was a subsidiary term of the contract. It was a warranty and the
director was only entitled to claim damages (if any).
Ratio: Must look to the intention of the parties by reading the terms and deciding which
terms should, in the eyes of reasonable people, be conditions or warranties.
If the term goes to the root of the contract, the breach of it results in the other party being
able to treat it as a end of contract.
Poussard v. Spiers and Pond (1876), 1 QBD 410
Facts: The plaintiff was engaged to appear in an operetta but fell ill and the producers
were forced to engage a substitute. The plaintiff later recovered and offered to take her
place, but the defendants refused to take her back.
Issue: Was the illness a breach of a warranty or a condition?
Decision: The term was a warranty and a dependent term of the contract.
Ratio: The breach of a dependent term will allow for repudiation, but not the breach of a
condition. Look at the nature of the breach;
The term was so important that it went to root of the matter. Look at the consequences of
the breach and go back to determine how important the term was.
Cehave N.V. v. Bremer Handelgesellschaft G.m.b.H [1976] QB 44 (CA)
Facts: A contract for the sale of an ingredient of animal food included a clause that said
the shipment was to be “in good condition”. On delivery, there was minor and major
damage. The defendant rejected the shipment and claimed the return of the price which
had already been paid.
Issue: To what extent can a party in breach call upon the other party to perform their
part?
Decision: The defendant is not liable since the goods were still usable even if not in a
good condition, so the breach was of a condition, not a warranty.
Ratio: The Sale of Goods Act, 1893 used the language of condition and warranty but it
cannot have been intended to rule out the intermediate terms. The Act expressly
preserved the rules of the common law which were inconsistent with the Act.
Hong Kong Fir Shipping [1962] 2 QB 26: If there is a breach which goes to the root of
the contract, the other party may consider they are discharged, but otherwise not. In my
opinion, those cases apply to Sale of Goods. Buyers cannot reject goods unless the defect
is serious and substantial. A term may be intermediate, and the facts and circumstances
will determine whether a breach of that term may entitle a party to repudiation.
If one party in advance indicates that they will not perform in a vital matter, the other
party may consider themselves discharged. This clause is like one as to quality. If a
small portion of the goods were not up to scratch then commercial people would deal
with it by an allowance off the price. Buyers cannot reject goods unless the defect is
serious and substantial.
The Sale of Goods Act, RSO 1990
s.30(2): Where there is a contract for the sale go goods to be delivered by stated
instalments that are to be separately paid for and the seller makes defective deliveries in
respect of one or more instalments or fails to deliver one or more instalments or the buyer
neglects or refuses to take delivery of or pay for one or more instalments, it is a question
in each case depending on the terms of the contract and the circumstances of the case
whether the breach of contract is a repudiation of the whole contract or whether it is a
severable breach giving rise to a claim for compensation but not to a right to treat the
whole contract as repudiated.
 Payment of the price and delivery are mutually dependent provisions: you can’t
recover the price unless you’ve offered the goods to other party.
 Condition: A term so important that it goes to the root of the contract, and
therefore its performance is something that must occur before the other party’s
promise is enforceable.
 Warranty: A term that is incidental to the performance of the contract, its
performance allows for damages but not repudiation of the contract.
L Schuler A.G. v. Wickman Machine Tools Ltd. [1974] AC 235
Facts: Plaintiff contracted with the defendant and included a term that was agreed to be
“a condition of this agreement”. The defendant failed to honour the term, so the plaintiff
terminated the contract.
Issue: Is the term a condition that allows for repudiation or a warranty that only allows
damages?
Decision: The contract can not be repudiated because it did not go to the root of the
contract.
Ratio: Court of Appeals: Contracting that a term is a condition is evidence that it is in
fact a condition, but the evidence is rebutable.
Condition:
 Proper meaning: a provision in legal document on which its legal force or effect
depends.
 A term is only a condition if the breach of the provision would:
o void the contract; and
o is a prerequisite to the right to recover on the contract.
 The world condition in English does not always mean a legal common law
condition.
House of Lords: A breach that has provisions for remedy can not allow for repudiation
i.e. choosing to ignore the right to remedy.
Dissent: The word “condition” is fundamental to a term: a clause calling itself a
condition must allow the aggrieved party to treat the contract as at an end.
Notes: Remedies for Repudiatory Breach


You have an option to terminate the contract
o Terminating party can sue for damages or restitution.
 Restitution usually is best when the contract would have resulted in
a loss.
Have right to sue for damages for breach
Repudiatory breach is a common law remedy that allows the innocent party to terminate
the contract and bring action for restitution, whereas in recission is an equitable remedy
allows both parties to get back what they put in.
(e) Waiver and the True Condition Precedent
McCamus
Condition Precedent: Contractual arrangement that a certain set of affairs must exist
before one or both parties promises become enforceable.
The existing contract between the parties, but it’s subject to a condition that must exist
before the contract or a particular clause becomes enforceable.
For example: I will buy your property only if you have it rezoned as commercial.
Two kinds of Condition Precedent:
 Non-promissory condition precedent: No obligation may be fulfilled until the
condition is met.
 Promissory condition precedent: In order to enforce one obligation, another must
be fulfilled.
Condition Subsequent: Contractual arrangement that a certain set of affairs will
terminate the obligations of a contract.
For example: an obligation to terminate if one party is insolvent.
Two kinds of Condition Subsequent:
 Promissory: The condition being absolves the other party of the obligation.
 Non-promissory: To enforce an obligation, the condition must not be met.
Concurrent Conditions:
Mutually Dependent terms: The obligation to deliver goods is not a condition precedent
to pay. The obligations are at the same time, and a party can’t order performance until
they have fulfilled their obligations.
Hypothetical: A case may occur where: until the condition precedent is fulfilled, there is
no contract: At Common Law, where there is no agreement yet between the parties, that
is a condition precedent to the very existence of a contract
For example:
 A contract for sale of land where the purchaser’s representative says that they
only sign the contract if the board of directors approves of it.
Panoutsos v. Raymond Hadley Corporation of New York [1917] 2 KB 473 (CA)
Facts: Greek Plaintiff contracts with American defendant to buy flour, with each
shipment in a separate contract, on the condition that payments were confirmed by a
banker’s credit facility. The plaintiff used a different method of payment and the
defendant shipped some of the goods before notifying the plaintiff that they were
cancelling the contract for breach of condition.
Issue: Did sellers waive the contractual term requiring payment by confirmed bankers
credit?
Decision: The defendant could not cancel the contract because he had waived rights and
not given notice of the enforcement.
Ratio: It is open to a party to a contract to waive a condition which is inserted for her
benefit. If they later want to avail themselves of the clause, they can do so if they give
reasonable notice. If they give reasonable notice that they will enforce condition and
buyer fails to comply, the buyer would be in default, and sellers would be entitled to
cancel contract without being subject to any claim by the buyer for damages.
Turney and Turney v. Zhilka (1959), 18 DLR (3d) 497 (SCC)
Facts: Plaintiff entered a contract for the sale of land to defendant that contained a
condition saying that “provided land can be annexed and plan for subdivision approved”.
The plan was not approved and the buyer decided he would waive condition, but the
vendor refused to sell. The defendant sued for specific performance.
Issue: Does the condition’s non-fulfilment allow the plaintiff to waive it?
Decision: There is no right to waive the condition.
Ratio: A condition that depends on the will of a third party is a true condition precedent.
A non-promissory condition precedent can not be waived because neither party has the
When a condition does not depend on the will of the parties, to allow waiver would be to
re-write terms of contract.
Barnett v. Harrison (1975), 57 DLR (3d) 225 (SCC): Turney and Turney v. Zhilka allows
us to avoid two problems: whether the condition is for the benefit of one or both parties,
and allowing a party to essentially allow them to breach when a condition they know is
impossible will not be fulfilled.
(f) The Position of the Party in Breach
McCamus
Under certain situations, the party in breach can enforce the contract. Even when there is
no claim available to the guilty party, they may be entitled to some restitution.
Jacob & Youngs Inc. v. Kent 230 NY 239 (CA 1921)
Facts: Defendant buyer drafted for precise specifications for construction of his house
and the plaintiff builder did not follow specifications, but sued for enforcement.
Issue: When should a guilty party be able to enforce a contract?
Decision: The plaintiff can enforce a contract because the term was inconsequential.
Ratio: Test: The question is one of degree, to be answered, if there is doubt by the triers
of the facts…and if the inferences are certain, by the judges of law…
We must weigh the purpose to be served, the desire to be gratified, the excuse for
deviation from the letter, the cruelty of enforced adherence. Then only can we tell
whether literal fulfillment is to be implied by law as a condition.
Party in breach: They have remedies and can enforce the contract: not every breach of a
stipulation would prevent enforcement of a contract. Breaching party of an innominate
term, in inconsequential way, can enforce a contract.
Hoenig v. Isaacs
Facts: Plaintiff was employed by the defendant for a flat fee, with terms of “net cash, as
the work proceeds, balance on completion.” The payments were made on time but the
defendant refused to pay the balance because the work was defective and the final
payment was a condition precedent on the obligation to pay the balance.
Issue: Can one party repudiate in a contract for a lump sum payment at the end?
Decision:
Ratio: A contract must be honoured but if there are some minor problems then the
contract should still be enforceable. The court must ask: How serious a breach is this?
“when a man fully performs his contract in the sense that he supplies all that he agreed to
supply but what he supplies is subject to defects of so minor a character that he can be
said to have substantially performed his promise, it is, in my judgment, far more
equitable to…” order that the price must be paid subject to set-off or counterclaim if there
was substantial compliance to the contract (from H. Dakin & Co. Ltd. v. Lee).
Note: Where there’s lump sum contract, we infer that what the parties intended was that
no payment given until performance is fulfilled. The buyer must pay the lump sum. He
can sue for damages but not repudiation.
Fairbanks Soap Co. v. Sheppard [1953] 1 SCR 314: If a party abandons the work, then
he is not entitled to substantial performance and has no right to enforce a contract
Cutter v. Powell (1795) 6 TR 320, 101 ER 573 (KB)
Facts: In the course of the work, the plaintiff died and could not complete the contract.
Issue: Can the deceased plaintiff in breach enforce the contract or at least sue for
restitution?
Decision: The plaintiff can not bring action.
Ratio: The work is a condition precedent on the payment and the plaintiff can not
recover.
Note: Stubbs v. Holywell Railway Company (1867) LR 3 Ex 311: Only the instalments
for which the work has been done are enforceable.
Sumpter v. Hedges [1898] 1 QB 673 (CA)
Facts: The plaintiff contracted with the defendant to build two houses and stables, but
could not afford to finish the job, and sued for partial payment.
Issue: Can the plaintiff recover for work partially done (quantum meruit)?
Decision: The plaintiff can not recover because there is no obligation for work partially
completed.
Ratio: Quantum meriut can only be awarded where there is true choice of whether to
complete or not. A partially completed house is not fungible and therefore a person left
with a partially completed piece of property should not be required to pay.
If money is paid as a deposit it is not recoverable; it is forfeited because a deposit
considers the possibility that it will not be finished.
Howe v. Smith (1884) 27 ChD 89 (CA)
Facts: A contract to sell real estate included a deposit from the plaintiff buyer; that also
qualified as part payment of the purchase money, with a condition precedent on the
plaintiff to pay the rest by a certain date. The plaintiff didn’t pay and sued to recover the
partial payment.
Issue: Can the plaintiff recover money paid as a deposit?
Decision: The plaintiff can not recover part of the money.
Ratio: There is an implied term with respect to the money paid as deposit: in the event
that the contract is performed, money shall be brought into account; if the contract is not
performed money the shall remain property of payee.
The deposit is not merely partial payment; it is also an object to bind the parties and
motivate performance. Where money is both “deposit and partial payment, it is a deposit
if in default and partial payment if completed.
The purchaser loses right to recover, including both right to specific performance in
equity and the right to sue for damages for non-performance.
Stevenson v. Colonial Homes Ltd. [1961] OR 407 (CA)
Facts: The plaintiff made a down payment for the purchase of a defendant-fabricated
cottage; The plaintiff refused delivery and the defendant rescinded the contract.
Issue: Can the plaintiff recover the down payment?
Decision: The plaintiff can recover the partial payment.
Ratio: Money that is a partial payment is subject to claim for damages in a breach of
contract.
Test: Considering the words, circumstances, and evidence, is the payment intended by the
parties to be a deposit or a partial payment?
The general rule is that the payment is a partial payment and the purchaser has right to
recover where the language in the contract is ambiguous.
(g) The Parol Evidence Rule
McCamus c6 D
The Parol Evidence Rule:
 “If there be a contract which has been reduced into writing, verbal evidence is not
allowed to be given of what passed between the parties, either before the written
instrument was made, or during the time that it was in a state of preparation, so as
to add to, or subtract from, or in any manner to vary or qualify the written
contract”.
o Hard Rule: Collateral parol agreements (contracts) that contradict, vary,
add to or subtract from the terms of a contract that have been reduced to
writing are inadmissible for the purpose of construing the meaning of
contractual documents.
o Soft Rule: Where parties intend the writing to be the exclusive record of
their agreement, their intentions will prevail and evidence that
adds/subtracts from writing is inadmissible
A common situation: A document contains contractual terms between parties but one
party alleges a further oral term was agreed upon either before or contemporaneously
with the written agreement.
Legal Effect: A statement made prior to the written agreement is reduced to a mere
representation. Any promise/representations not contained in writing of no contractual
effect. A representee will be entitled to rescission in equity, but no damages unless the
representation was fraudulent.
The Rule is evidentiary in nature and converts utterances made prior to the contract into
inadmissible statements.
Justification:
 Stability and judicial certainty.
 Convenience & ease of administration
 Controls juries: Appellate courts can overrule a jury decision if the decision is
based on inadmissible evidence (i.e. if jury’s sympathies cause legal effects.
Federal Commerce & Navigation Co. Ltd. v. Tradax Export SA [1978] AC 1 (PC)
Facts: A standard form contract was used by the defendants for the charter of their ship
by the plaintiffs. The plaintiffs added some extra instructions that the defendants agreed
to but did not honour.
Issue: Are extra instructions outside a standard form contract included in the legal
contract?
Decision: The instructions can be included and the defendants are liable.
Ratio: Standard Form Contracts:
 Are necessary: Customers can’t negotiate every purchase; life would be
impossible.
 In certain commercial contexts, buying the good/service includes buying the
contract. Standard contracts acquire a uniform pattern so people cannot think
about each particular contract, but focus instead on price and comparison
shopping.
 Standard form contracts get an overlay of judicial interpretations
Because Standard form contracts are so important, the Parol Evidence rule can not be
admitted.
Note: The Parol Evidence Rule allows trials to be shorter without the worry of perjury or
examining evidence in too great detail, to determine its validity.
Prenn v. Simmonds [1971] 3 All ER 237 (HL)
Facts: A contract for the defendant’s purchase of a stake in the plaintiff was conditioned
on “the profits of RTT” of the plaintiff’s corporation amounted to more than $300,000.
Issue: Can the court examine the evidence of the negotiations to determine the meaning
of the condition?
Decision: The court can examine the negotiations.
Ratio: When interpreting a written contract, the Court will not look at the negotiations to
show the objectives of one of the parties. Evidence is permitted to show the factual
background and the general nature of the objectives of the agreement (i.e. the commercial
context). The time has long passed since agreements were construed in isolation from
“the matrix of facts” in which they were set.
Farah v. Barki [1955] 2 DLR 657 (SCC)
Facts: The plaintiff was unaware that the contract stated that he would be buying shares
outright, not merely holding them as an intermediary for a third party, as the negotiations
had suggested.
Issue: Can the negotiations be used as evidence to cause the anticipated outcome of the
contract?
Decision: The defendant was liable because he had tricked the plaintiff into purchasing
the shares.
Ratio: If somebody fraudulently misrepresents the nature of the document then evidence
should be admitted to cause the intended outcome of the contract.
Note: Here the fraudulent misstatement relates to the substance of the contract. A
fraudulent misstatement inducing a contract would be different.
Remedy: Put the fraudulent party to the choice:
 Recission of the doctrine
 Submitting to a rectification in accordance with the innocent party’s
understanding.
Curtis v. Chemical Cleaning and Dyeing Co. Ltd. [1951] 1 All ER 631 (CA): A party that
misrepresents the contents or effect of a clause inserted by him into a contract can not
rely on the clause in the face of his misrepresentation.
Hawrish v. Bank of Montreal [1969] S.C.R. 515 (SCC)
Facts: The defendant made a guarantee on a third party’s existing debt via a standard
form contract with the defendant. In an oral agreement, the defendant agreed to
additional provisions such that the plaintiff would be released when another guarantee
from the company directors was obtained, which contradicts the standard agreement.
Issue: Does the Parol Evidence Rule apply to an oral agreement that both parties admit
existed?
Decision: The plaintiff is liable because the agreement included a clause claiming to be
the complete agreement.
Ratio: If a document agrees on its face to be a complete agreement, then other evidence
contradicting that is inadmissible.
Collateral Contract: Byers v. McMillan (1887) 15 SCR 194: The limitation on the
plaintiff’s guarantee may be considered a separate contract and not parol evidence to the
basic contract. However, a collateral agreement cannot be established where it is
inconsistent with or contradictory to the written agreement.
Interpretation argument: Agreement ‘continues’ until such time that the thing in the other
contract occurs. Parol evidence will help determine until what point the guarantee lasts.
Note: The Parol Evidence rule is generally given the hard application in Canada.
Morgan v. Griffith (1871) LR 6 Ex 70
Facts: The plaintiff was a tenant of the defendant, with a lease that was signed on oral
condition that the defendant eliminated a rabbit infestation on the property. While the
defendant orally promised to destroy rabbits, he refused to write it into the lease and he
later did not fulfill the promise.
Issue: Was the promise a collateral agreement or a condition of the lease?
Decision: The defendant is liable as the elimination of the rabbits is a collateral
agreement.
Ratio: If there’s evidence of a separate collateral unilateral contract, then the Parol
Evidence Rule allows it to be admissible.
Note: If you want a contract to be safe from a unilateral collateral contract then draft a
Zipper Clause into the written contract: i.e. “there are no representations or warranties
other than those contained in this contract, or unilateral collateral contracts”
Pym v. Campbell (1856) 6 E & B 370; 119 ER 903
Facts: An agreement for a purchase was conditioned on the approval of two third-party
engineers. One was temporarily unavailable but the other gave his approval, and the
contract was signed on the verbal condition that the second engineer would give his
approval. The engineer later did not give his approval.
Issue: Does the contract include the additional verbal agreement?
Decision: The contract is null and void because the second approval was not obtained.
Ratio: If the evidence relates to an understanding that this contract will not be effective
to something happening, that’s an exception to the Parol Evidence Rule.
 Evidence relating to a condition precedent to the effectiveness of a contract is
admissible.
Corbin on Contracts 24.7
A court must consider “surrounding circumstances” before it gives meaning to the words
of a contract.
Long v. Smith (1911) 23 OLR 121
Facts: Defendant wants to have a piano, he is buying from plaintiff dealer, appraised.
The dealer promises to accept it back if the price is too much, but refuses it, arguing the
zipper clause prevents the promise from being enforceable.
Issue: Does the zipper clause still apply to fraudulent or unconscionable contracts?
Decision: The defendant is liable because the contract was fraudulent.
Ratio: The law cannot be used to further a fraud. There is no reason why enforcement
can’t be suspended. An “Entire Agreement” clause can’t be an instrument of fraud.
Note: City and Westminster Properties (1934) Ltd. v. Mudd [1959] 1 Ch 129: Defendant
is living in a retail shop leased by the plaintiff, and the landlord allows him to live there
outside of the written lease. The court found a unilateral contract that contradicted the
written contract and allowed it as evidence.
Francis v. Trans Canada Trailer Sales Ltd. (1969) 6 DLR (3d) 705 (Sask CA): Before the
plaintiff agreed to buy a trailer from the defendant, the defendant orally told him that the
trailer had been used only 3 months and carried the same warranty as a new trailer.
However, the printed document later signed by the plaintiff contained a zipper clause.
The court held that the oral statement of the defendant constituted a warranty collateral to
the written contract: “where, as here, the collateral agreement is consideration for the
entering into the written agreement, the exclusionary clause cannot prevail against it.”
Tilden Rent-A-Car Co. v. Clendenning (1978) 83 DLR (3d) 400 (Ont CA)
Facts: Defendant rented a car from plaintiff and took added coverage, contrary to his
normal practice. He signed it without reading terms and it was apparent to clerk that he
never read the terms. A clause in the contract said that the customer is liable if he
consumes any alcohol, and defendant was in an accident after a single drink.
Issue: Was the contract enough to bind to the defendant?
Decision: The defendant is not liable because he was not aware of the terms.
Ratio: Generally, a party is bound by a K that they have signed regardless of whether
they have read it or not. When a defendant habitually does not read or know of an
onerous provision, the plaintiff must take reasonable measures to draw attention to them
and in the absence of such it is not necessary for the party to prove fraud or
misrepresentation.
Reasonable notice depends on what an ordinary person would expect conditions to be and
if it’s different from that, then attention must be drawn to it.
Test for reasonable notice:
 For signed documents: has the vendor given reasonable notice of the terms not
normally expected?
 For unsigned agreements: Has reasonable notice been given?
Note:
 Even if you sign, signature is not decisive.
 Failure to disclose is a basis for misrepresentation.
 Test of reasonable notice regarding unsigned documents is transported into signed
documents (when transaction conducted in a hurry)
To use this principle, must show:
 Limit over and above what is reasonably expectable.
 You did not know about it/it was not drawn to your attention
Gallen v. AllState Grain Co. Ltd. (1984) 9 DLR (4th) 496 (BCCA)
Facts: Defendant promised via oral agreement to the plaintiff that weeds would not grow
on his land. The plaintiff agreed to buy seed from the defendant through a standard form
contract, but weeds grew and the plaintiff suffered loss. The plaintiff brings action for
breach of warranty, collateral contract and negligent misrepresentation.
Issue: Is the parol evidence rule admissible if there is a warranty that adds to, subtracts
from or varies the signed contract?
Decision: The evidence was allowed because there was a possibility of fraud.
Ratio: If oral representation is a warranty, try to interpret it harmoniously with the main
contract. If an oral representation was intended and understood to form a part of the
contractual relations between parties, then it is a warranty. If it contradicts main contract
there is a strong presumption in favour of the main contract but this is not absolute where
it is clear that intent was to have oral warranty prevail.
1. “Two-contract” or “collateral contract” doctrine are exceptions to the rule.
2. The Parol Evidence Rule cannot be absolute: it is not a tool for the unscrupulous
to dupe the unwary.
3. By the attention given to the evidence, it is clear that the principle is not an
absolute one.
4. If the contract is induced by an oral misrepresentation that is inconsistent with the
written contract, the contract would not stand and could not bind the party.
5. The rationale of the principle does not apply with equal force where the oral
representation adds to, subtracts from, or varies the written agreement, as it does
where the oral representation contradicts the written agreement.
6. The rule is a presumption only: it presumes that there was an antecedent express
stipulation not intended by the parties to be excluded, but intended to continue in
force with the express written agreement.
7. The Rule is less applicable when a Standard Form contract is utilized.
8. The Rule is less applicable where the contradiction is between a specific oral
representation, on the one hand, and a general exemption or exclusion clause, on
the other, than it would be in a case where the specific oral representation was
contradictory to an equally specific clause in the document.
Note:
One-contract principle: If the contract is drawn sufficiently broad and there is no
contradiction between the terms of the oral and written agreement, one can establish that
oral representation was essentially part of the contract-the oral representation and written
documentation will be viewed as part of the same contract and thus avoid Parol Evidence
Rule.
Two-contract principle: If the oral representation constitutes a separate contract from the
main contract but is equally binding so long as it is not a direct contradiction to the
written document, a direct contradiction will run up against Parol Evidence Rule.
However, there are so many exceptions to the latter, particularly with collateral contracts,
that a defendant should be able to find a way around it.
Topic 2. Mistake
1. Introduction
Types of Mistake:
Misunderstanding: Also called “mutual” or “unilateral mistake”: There was not really any
offer and acceptance because the parties were offering and accepting different things.
 This is a formation issue
 Mistakes as to terms, identity, documents mistakenly signed
 Raffles v Wichellhaus: Contract for cargo on HMS Peerless, and there are two
boats with the same name and one party thought it one and the other thought it
was the other.
 If you can prove that everyone uses the term in a certain way in the industry, etc,
then the party that used the term will be successful.
 Also called “mutual” or “unilateral mistake”—analytically confusing
Mistaken Assumption: Also called “common mistake”: The contract was formed on false
assumptions about a relevant fact.
 Mistake as to the underlying facts.
 As to accuracy of calculations: snapping up a mistaken offer
 Offer was matched by acceptance, the terms were understood, but some
ambiguous key element was not okay and if that was known the contract would
not have been agreed to.
Mistake in Integration: The contract was made in full understanding, but the consensus
was not correctly written down in the signed contract.
 Easy to spot as a problem if it is clear that parties did have an agreement.
 The parties will seek an order of Rectification to remedy the document (exception
to parol evidence rule): If a party argues that the document doesn’t accurately
record what we agreed to, extrinsic evidence is admissible and the document will
be rectified.
Mistake in Performance: The contract is right but some mistake was made in its
performance i.e. paid for the goods twice.
Smith v. Hughes (1871) LR 6 QB 597
Facts: The defendant purchaser assumed the oats were old and therefore suitable for the
purpose they were bought for, but they turned out to be new, and demanded the plaintiff
take the oats back.
Issue: What type of mistake will void a contract?
Decision: The court found that there was never a contract to provide old oats.
Ratio: In the absence of a mistake of the terms of the contract of which the buyer is
aware, there is no duty to disclose information which may be relevant to the other party
because of caveat emptor doctrine.
Notes: When Common law courts will void a contract because of mistaken assumption:
 res extincta: “in existence”: contract for the purchase and sale of non-existent
goods
o i.e. Sale for goods on a ship, but the ship had sunk: mistaken assumption
case because the contract was good, but there was a mistake as to
existence of ships.
 res sua: “in your own thing”: buying something that is already the buyer’s
o i.e. mistake is on the fact that you already own it. – no problem with the
terms.
 Bell v. Lever Brothers Ltd. [1932] AC 161 HL: A mistake as to the existence of
the subject matter of the contract: broader because the definition of subject matter
is more flexible. The court should have asked what questions were asked with
respect to the severance package such as the performance of the defendants.
2. Mistaken Assumptions
Anthony Duggan: “Silence as Misleading Conduct: An Economic Analysis”
Economic Analysis: Policy:
Two basic concerns:
1. A rule that would prevent mistakes in contract:
d. means inefficiency for one party who would not want to contract (the rule
wants to discourage mistakes).
2. Economists likely to be concerned with preserving incentives for discovery of
socially useful information.
Tension: full information and disclosure to avoid mistakes vs. incentives to search for
information to discover socially useful information.
So you’re allowed to keep productive facts secret but distributive facts shouldn’t have to
be disclosed. To avoid problems, information held by parties with the most access to it
must be disclosed, but information held by parties who accidentally found out should not
be disclosed.
Laidlaw v. Organ 15 US (2 Wheat) 178 (1817)
Facts: The plaintiff purchaser wants to buy tobacco, which has more value in open
market in peace, which has already been signed unbeknownst to the plaintiff. The
defendant seller retook the tobacco upon learning of the peace.
Issue: How should the court treat the cancelling of the contract after discovery of the
change in circumstances?
Decision: The cancellation of the contract was allowed.
Ratio: Information accidentally acquired cannot be considered an unfair advantage or
fraud.
Note: There should not be incentives for people to create that information. Therefore, the
contract was not induced by fraud.
Bell v. Lever Brothers Ltd. [1932] AC 161 (HL)
Facts: Plaintiff Senior executives reorganize structure of defendant company, then they
are terminated with a severance package. The defendant discovers that the plaintiff
breached a fiduciary duty and they could have fired them with cause and not paid them
the package.
Issue: Is the later discovery of an option enough to breach a contract?
Decision: The contract can not be breached because of late discovery.
Ratio: Test: Is there a complete difference in substance between the subject matter of the
nature of the contract from the contract that was made?
Caveat Emptor: Defendant should inform themselves and they can’t take it back as a
mistake now. Did the party enter into the contract on the basis of a contractual
assumption that was mistaken?
A contract can be voided only when a mistake as to the quality of the subject matter that
is so fundamental to the subject matter than it is not in fact the same subject matter.
Solle v. Butcher [1950] 1 KB 671
Facts: Plaintiff rented a flat from the defendant, both believed that it was not covered by
the rent control statute but it was. Plaintiff sues to pay lesser amount and says contract is
void for mistake.
Issue: Is the mistake fundamental and therefore within Bell v. Lever Brothers Ltd?
Decision: Under equity the contract should be set aside.
Ratio: There are two kinds of mistake:
1. One that renders a contract void at Common Law.
2. One that is valid at Common Law but voidable in equity and can be set aside on
such terms as the court thinks.
A contract is liable to be set aside, in equity, if parties were under common
misapprehension as to facts or as to their respective and relative rights, provided
misapprehension was fundamental and that the party seeking to set it aside was not
himself at fault.
The Common Law is restricted to res extincta and res sua to protect third parties. The
contract is not voidable under Bell v. Lever Brothers.
Plaintiff must elect between rescission and staying at the full rent.
Magee v. Pennine Insurance Co. [1969] 2 QB 507 (CA)
Facts: Plaintiff entered into contract with defendant car insurance agency but violated a
signed declaration that he had a license. Plaintiff’s son was in an accident and made a
claim. If plaintiff accepted the settlement, he gave full release of its obligations under the
insurance contract.
Issue: Is an agreement to cancel a contract vitiated by mistake?
Decision: A common mistake even on a most fundamental matter, does not make a
contract void at law: but it makes it voidable at equity.
It is not equitable that a claim on the agreement made under a fundamental mistake
should be honoured.
Test:
1. Is there a common mistake in assumption?
a. If yes, then liable to be set aside in equity.
2. Is this the type of case that ought to be set aside? Look at what is fair and
equitable.
Great Peace Shipping Ltd. v. Tsavliris Storage (International) Ltd. [2002] 4 All ER 689
(CA)
Facts: A vessel sank and the defendant hired the plaintiff’s “nearest boat” for savage
contract, the agreement has a 5 day minimum hire, turns out the plaintiff’s boat is too far
away to help. The defendant doesn’t cancel the contract right away but contracts with the
next closest boat and cancels with Great Peace.
Issue: Can the defendant argue common mistake and void the contract?
Decision: The plaintiff is awarded 5 days worth of fees.
Ratio: The Common Law doctrine is not so narrow and the Bell v. Level Brothers
Limited doctrine is correct. Equity is a supplement to the Common Law, not a
replacement. Consecutive tests:
1. Risk allocation test: look at who bears the risk. If there is no risk:
2. Determine if there was a fundamental mistake.
Impossibility Test (to void a contract):
1. There must be a common assumption as to the state of affairs.
2. There must be no warranty by either party that the state of affairs exists.
3. The non-existence of the state of affairs must not be attributable to the fault of
either party.
4. The non-existence of the state of affairs must render performance of the contract
impossible.
5. The state of affairs may be the existence, or a vital attribute of consideration t be
provided or circumstances which must subsist if performance of the contractual
adventure is to be possible
Note: The court argues that Bell v. Lever Brothers Limited is wrongly decided, because
the Common Law is more important to uphold than equity. If so, then the fundamental
mistake test comes first.
Toronto-Dominion Bank v. Fortin et al (No. 2) (1979), 88 DLR (3d) 232 (BCSC):
Defendant company is going insolvent, receiver appointed, someone intended to purchase
the business from the receiver, but chose not to and paid damages, but the receiver had no
authority to sell the business. The Court held that on the basis of the risk analysis, this is a
fundamental mistake test situation. The mistake was so fundamental that the contract
must be set aside in equity.
Scott v. Coulson [1903] 2 Ch. 249
Facts: The plaintiff sold a life insurance policy to the defendant on the life of a man who
neither party knew, but the defendant had reason to suspect, was already dead.
Issue: Does the common belief in a circumstance that doesn’t exist allow a party to void
the contract?
Decision: The contract was voided.
Ratio: If both parties entered into this contract upon the basis of a common affirmative
belief… but as it turned out that this was a common mistake, the contract was one which
cannot be enforced. This is so at law; and the plaintiffs do not require to have recourse to
equity to rescind the contract, if the basis which both parties recognised as the basis is not
true.
McRae v. Commonwealth Disposals Comm. (1951) 84 CLR 377 (Aus HC)
Facts: The defendant sold the plaintiff an oil tanker that had been wrecked on “Jourmand
Reef”. The plaintiffs carried out their salvage operation but there was no tanker or
Jourmand reef.
Issue: Which party assumed the risk in the non-existence of the tanker/location?
Decision: The contract exists and the defendant can not benefit from its own negligence,
so the plaintiff is awarded damages.
Ratio: The sale of goods brings with it an implied promise that the goods exist; if the
goods don’t exist then the seller is negligent.
Only if the contract is found to be essentially different from that which the parties
thought they were entering into then the contract is void ab initio for “common mistake”.
Test for damages and not a void contract:
1. A party can not rely on mutual mistake that consists of a belief that was
entertained by him without reasonable grounds (relying on rumour is
unreasonable).
2. Where the party who has made the mistake deliberately induced mistaken belief
in other party.
Note: US Restatement of Contracts
s.152(1): A basic mistaken assumption, which has a material effect on the agreed
contract, is voidable, unless the mistaken assuming party bears the risk as stated in s.154.
 Sounds like Solle: must have a fundamental mistake which materially affects the
exchange unless someone’s assumed the risk.
s.154: A party bears the risk of a mistake when
(a)
the risk is allocated to him by contract of the parties, or
(b)
he is aware, at time of the contract is made, that he has only limited knowledge
with respect to facts to which the mistake relates but treats it as sufficient
s.154(c): the risk is allocated to him by the court on the ground that its reasonable in the
circumstances to do so.
Wood v. Boynton 64 Wis 265, 25 NW 42 (1882)
Facts: Plaintiff woman sold a diamond to the defendant without being aware that it was
worth far more and brought action to recover the diamond.
Issue: If the value of the good being sold is unknown can a contract be rescinded?
Decision: The contract can not be rescinded unless there is fraud or mistake.
Ratio: The only reasons we know of for rescinding a sale and revesting the title in the
vendor so that he may maintain an action at law for the recovery of the possession against
his vendee are:
1. that the vendee was guilty of some fraud in procuring a sale to be made to him;
2. that there was a mistake made by the vendor in delivering an article which was
not the article sold – a mistake in fact as to the identity of the thing sold with the
thing delivered upon the sale.
If a party is unaware of the intrinsic value of the thing sold, they can not repudiate the
sale because it is afterwards ascertained that they made a bad bargain.
R. v. Ron Engineering & Construction Eastern Ltd. (1981) 119 DLR (3d) 267 [1981] 1
SCR 111
Facts: Plaintiff contractor submits a bid of $2m to construct a project as well as a deposit
cheque for $250K. The bids are opened, the plaintiff realizes he’s way under the next
highest bid ($632K below next highest bid) so he checks his math and realizes he’s made
a terrible mistake, missing about 20% of bid.
Issue: Is a contract revocable and deposit returnable because of a mistake, or is a
defendant entitled to snap up a bad offer even if notice is given to withdraw the offer?
Decision: The tender is not revocable and the bid not returnable because it is a
contractual relationship.
Ratio: The underlying concern is for integrity in the tender process, so the bid is
considered its own contract.
Two contracts:
 Contract A: unilateral: an act for a promise
o If a tender is submitted, the inviter promises to be bound by terms of
process, in exchange for the deposit as consideration.
o The contract comes into existence upon submission of the tender; before
inviter was aware of mistake.
o Contract A is binding and the deposit is forfeited.
 Contract B: mutual: the subsequent contract for the project
o Contract B can be negotiated afterward.
Notes: Factually many innocent misrepresentation cases are also mistaken assumptions
cases:
Innocent Misrepresentation
Mistaken Assumption
Any incorrectness in subject matter
Both parties misunderstand a relevant fact.
Remedy only available to misrepresentee
Any party can set aside contract.
Execution bar prevents setting aside unless Can be set aside even after execution.
there is error in substantialis.
3. Misunderstandings
(a) Mistake about Contractual Terms
Hobbs & Esquimalt & Nanaimo Railway Company (1899) 29 SCR 450
Facts: Plaintiff bought land “without reservation” from railway, but the defendant
company claimed their employee did not have the right to convey the minerals
underneath the land.
Issue: Is the contract valid despite the alleged mistake by one party?
Decision: The contract is valid and must be performed.
Ratio: A contract requires a meeting of the minds.
Test for whether a contract exists despite one party’s mistake: What would a reasonable
person in the other party’s position think the terms meant?
 If the person would think the terms included everything, then the contract cannot
be voided because of a mistake.
A mistake by one party will not suffice to invalidate contract.
Usually specific performance is too harsh a remedy, but in this case it is not unreasonable
or unconscionable to require specific performance.
Dissent: A contract requires a meeting of the minds. The defendant thought they were
selling lands without minerals and the plaintiff thought he was buying land with minerals.
Neither party would have entered the contract under the terms the other party intended.
Raffles v. Wichelhaus (1864) 2 H. & C. 906, 159 ER 375
Facts: Plaintiff sold cotton to the defendant that were arriving on a ship called the
“Peerless” in Liverpool from Bombay. The ship arrived but the defendant refused to
accept delivery because there were two ships called “Peerless” and he believed it was the
other one, set to arrive two months later.
Issue: Is a contract enforceable when the misunderstanding is not an element of the
contract?
Decision: The contract is not enforceable.
Ratio: Objective Theory of Contract Formation: When there are two different
understandings about what the term means, the person with the objective view of the term
is able to enforce. However, unless there is an objective way of establishing which ship
was meant, the contract is fatally ambiguous and can’t be enforced.
Staiman Steel Co. v. Commercial & Home Buildings Ltd.
Facts: Plaintiff bought, at auction, a bulk lot of steel, but the defendant wanted to sell
only the used steel portion. The plaintiff refused to sign waiver to effect that the lot did
not include building steel. The seller normally wants to enforce the contract, but here he
wants it non-enforceable.
Issue: Is there a contract when a buyer believes he is getting something different than is
offered?
Decision: The defendant is liable for damages.
Ratio: Restatement of Objective View of Contract formation. If there is an objective
way to figure out the reasonable view, then the contract is binding on both buyer and
seller.
Note: This case is weird because the seller refused to honour the contract that in fact was
mistakenly agreed to by the buyer, over a different issue (a waiver).
Henkel v. Pape (1870) LR 6 Ex 7
Facts: Plaintiff gun manufacturer negotiated to sell 50 guns to defendant. A telegram
was sent but mistyped as saying send “the guns” instead of send “three guns”, and the
defendant refused the whole order except for 3.
Issue: Is a previous negotiation enough to form an objective view of the contract
formation?
Decision: The contract was not valid.
Ratio: Subjective Test: When there is no meeting of the minds, there is no contract.
An accident for which neither party is responsible, prevents consensus ad idem (meeting
of the minds.
Note: This case is probably wrong because the mistake of one party is not sufficient to
void a contract.
It should have objectively been obvious to other party that there was a mistake and a
party can’t snap up an offer when they know someone is misspeaking.
Smith v. Hughes (1871) LR 6 QB 597
Facts: The plaintiff took a sample of oats for horses to the defendant, who then ordered
some. When new oats arrived, the defendant claimed he wanted a contract for old oats
and the plaintiff said they were old, but the plaintiff denies making the representation.
Issue: Will the silence or self-deception by seller entitle the buyer to void the contract?
Decision: The contract is invalid because there is no meeting of the minds.
Ratio: A mistake as to the nature of the goods is irrelevant even if it is known by the
seller, but a mistake as to the terms is not since there is no consensus ad idem therefore
no contract and no obligation.
(b) Mistake of Identity
3rd party cases: Innocent third party purchaser for value without notice, after the sale of
the subject matter when there’s a mistaken identity.
Formation problem: the contract is void at common law because property right did not
pass to the intermediary.
Boulton v. Jones (1857) 2 H & N 564; 157 ER 232; 27 LJ Ex 117
Facts: The defendant sent a written order for goods to a shopkeeper, but the shopkeeper
had sold and transferred his business to the plaintiff, who fulfilled the order. After
accepting the goods, the defendant refused to pay because he thought he was dealing with
the original owner, which whom he had a set-off agreement.
Issue: Is the contract enforceable despite being addressed to another party?
Decision: The contract is not valid for the price.
Ratio: If a person intends to contract with one person, the offerree cannot snap up that
offer and purport to enter into that contract knowing that the other party was not
intending to deal with him.
Note: The set-off agreement with the original shopkeeper was a key issue. There should
have been a restitution claim because now the customer gets the goods for free.
Cundy v. Lindsay (1878) 3 App Cas 459 (HL)
Facts: Defendant gets an order from a customer who fakes his name to make the plaintiff
look like another party. The customer then sells it to the innocent plaintiff and the
defendant brings action to recover.
Issue: Is a contract induced by identity fraud valid?
Decision: The contract between the fraudulent customer and the plaintiff is invalid.
Ratio: When there is mistaken identity, there is no consensus ad idem (meeting of the
minds).
King’s Norton Metal Co. Ltd. v. Edridge, Merritt, & Co. Ltd.
Facts: Plaintiff gets a fraudulent order from a third party they have never done business
with, but is carrying on fraudulent activity. K has never heard of HCo., the latter is a
party who is carrying on fraudulent activity. The third party then sells the goods to the
defendant.
Issue: Is the contract void at common law or equity because of the fraudulent
misrepresentation?
Decision: The contract is not voidable.
Ratio: A mistake as to the attributes but not the identity will not void a contract.
Note: Phillips v. Brooks [1910] 2 KB 24 (Eng HC): Fraudster impersonated a famous
rich person and bought jewellery and gave it to a third party. Did this person think he
was dealing with someone he knew? The contract is then void because you’re not
dealing with person you actually know or believe to be trustworthy. The jeweler
intended to contract with person standing in front of him in the store, which renders the
contract valid at Common Law, but voidable in equity.
Ingram v. Little [1961] 1 QB 31 (CA)
Facts: Non-businessmen plaintiffs advertise a car for sale, and an imposter claims to be a
rich individual whose identity is confirmed in a directory. Imposter sells car to
defendant.
Issue: Is the contract formed in person voidable for identity fraud?
Decision: The contract is voidable.
Ratio: Checking a directory causes a mistake as to identity, not attributes. A mistake as
to identity and not attributes is voidable at common law.
Note: This is a direct contrast to Phillips v. Brooks. In that case, the parties entered into
the binding contract before they discussed the type of payment. A fraudulent
misrepresentation after the contract is entered into is not grounds for voiding the contract;
In this case the payment was part of the contract. This is not really a good explanation.
Lewis v. Averay [1972] 1 QB 198 (CA)
Facts: Plaintiff sold his car to a fraudster, with a weak identification, who paid by cheque
that bounced. The fraudster then sells car to the defendant, posing as the plaintiff.
Issue: Is there a contract between the fraudster and the plaintiff?
Decision: The contract is not voidable because the mistake was on the attributes of the
buyer, not the identity.
Ratio: A mistake as to identity means that the contract is voidable and liable to be set
aside at the instance of the mistaken person, so long as he does so before third parties
have in good faith acquired rights.
In most circumstances, a mistake by one party is irrelevant. If reasonable offeree knows
offer is not made to them, offer can’t be accepted.
Note: This is the generally accepted rule for contracts on mistaken identity.
Doctrine of Correspondence: If you’re dealing with someone across the counter you’re
intending to deal with that person (thus, the contract is enforceable at common law and
voidable in equity.
(c) Documents Mistakenly Signed
Non est factum: Someone executes a document by signing an agreement having been
fraudulently told that the contract is not something that it actually is.
 Doctrine originated in context of deeds of sale signed by illiterate people
(widespread in the past).
Foster v. Mackinnon (1869) LR 4 CP 704
Facts: The defendant, an elderly gentleman, signed a bill of exchange on being told that
it was a guarantee similar to one which he had previously signed.
Issue: Is carelessness enough to render a contract valid?
Decision: No decision and further investigation is required.
Ratio: Thoroughgood’s Case (1582) 2 Co Rep 9a; 76 ER 408: Fraudster does not tell
illiterate landlord that he’s assigning the property to himself through the contract and
landlord agrees. Doctrine of non est factum (it is “”not my deed”).
Carelessness is at least relevant in the context of parties signing negotiable instruments,
but its effect should be limited (restricting voidability at common law).
Note: If you’re careless signing a negotiable instrument the contract will not necessarily
be voided.
 If a blind man or a man that cannot read (illiterate person) or for some reason
cannot be held to be negligent did not read (the contract), then there is no contract
at common law provided that it wasn’t negligent.
Howatson v. Webb [1907] 1 Ch 537
Facts: Solicitor invites elderly defendant, his employee, to sign transfer of property, but
in fact the contract was a mortgage for which the liability would fall upon the plaintiff.
The plaintiff never gets money and the lawyer pays the interest on mortgage for some
time, but the plaintiff brings action against the defendant.
Issue: Can the defendant invoke non est factum as the non-signer of the mortgage?
Decision: The contract is not voided.
Ratio: There’s a difference between a deed of transfer and a mortgage but it’s not a big
enough difference. In both cases you’re transferring ownership rights in the property.
Therefore, even though there was a misrepresentation as to contents of the document (and
the contract is voidable at equity), it is not voidable at common law.
Note: This case infamously draws a distinction between a contract that is void at
common law because the nature of document is misrepresented and a contract that is
voidable because of its contents.
Saunders v. Anglia Building Society (Gallie v. Lee) [1971] AC 1004 (HL)
Facts: Plaintiff wanted to transfer a lease to her nephew and was induced without being
able to read it to sign it over to a third party. The third party pledged the property to the
defendant after agreeing with the nephew to do so.
Issue: Can the plaintiff invoke non est factum to void the contract?
Decision: The contract could not be voided.
Ratio: The plea of non est factum can only rarely be established by a person of full
capacity and although it is not confined to the blind and illiterate any extension of the
scope of the plea would be kept within narrow limits. In particular, it is unlikely that the
plea would be available to a person who signed a document without informing himself of
its meaning.
 Onus is on the party pleading non est factum.
Test: The burden of establishing a plea of non est factum falls on the party seeking to
disown the document and that:
1. The party must show that in signing the document he acted with reasonable care.
a. Carelessness (or negligence devoid of any special, technical meaning) on
the part of the person signing the document would preclude him from later
pleading non est factum on the principle that no man may take advantage
of his own wrong.
2. In relation to the extent and nature of the difference between the document as it is
and the document as it was believed to be, the distinction formerly drawn between
the character and the contents of the document is unsatisfactory and it is essential,
if the plea is to be successful, to show that there is a radical or fundamental
distinction.
a. There must be a radical or fundamental distinction between the document
the party thought they were signing and the actual document they signed.
Marvco Color Research Ltd. v. Harris et. al. (1982) 141 DLR (3d) 577 (SCC)
Facts: Defendant, without reading the document, signed what they thought was an
amendment to the date on their existing mortgage agreement, but it was later discovered
that it was actually 2nd mortgage. As a result of their negligence an innocent 3rd party
was implicated when the 3rd party bought the house.
Issue: Was the actual document fundamentally different enough to invoke non est
factum?
Decision: The mortgage was valid.
Ratio: A defendant can use non est factum only where the document was fundamentally
different as to content or character from what you thought you signed and you show you
were not negligent. If the contents of the contract were different than anticipated, non est
factum won’t apply.
Policy: Mistake is an issue, but it is really about the interest of third parties. The real
issue is protecting reliance by third party on signed documents.
Note: Leading Canadian case.
Rules:
1. The scope for void for non est factum has been restricteded to where the signor
shows they were acting carefully when signing the contract.
b. i.e. the argument “we trusted them” is not enough anymore.
c. Does the doctrine of class/content exist?
2. Doctrine of functional difference in class/content of document.
These matter most in third party cases; it’s the 3P who wants to say this is an equitable
problem and therefore voidable.
4. Mistake in Integration
Rectification: The judicial alteration of a written contract to make it conform to the true
intention of the parties when, in its original form, it did not do so.
 Equitable doctrine based on notion of relief from unjust enrichment.
 The principle is limited to narrow circumstances where the contracting parties
agreed to all the terms but had made a mistake when putting these terms into
writing.
Issues:
 Standard of proof to show intentions
 Subsequent conduct of the parties
 Is relief available in the context of a unilateral mistake?
 What are the remedies?
U.S.A. v. Motor Trucks, Limited [1924] AC 196 (Ont PC)
Facts: Defendant contracted to manufacture equipment for plaintiff government, with a
termination clause that stipulated that the contract was over if the war ended. Post-war
settlement as per the original contract included a new contract for plaintiff to recover
property listed, but some was not included in the list.
Issue: What can the court do to rectify the mistake?
Decision: The contract was rectified to include the land transfer.
Ratio: The intention of the parties determines, via word and actions, what is to be
included in the contract.
The Statute of Frauds requires written agreement for transfer of lands. If a clause
excluded because of mutual mistake, rectification can be ordered.
Note: This is the classic rectification case. The second contract only existed to determine
the price of the lands transferred by the first contract, so the clear intention is that they
were to be included.
The agreement does not have to be complete, but the provisions that were agreed upon
must be ascertainable if they weren’t included.
Bercovici v. Palmer (1966) 59 DLR (2d) 513 (Sask CA)
Facts: The plaintiff claims rectification for a contract to transfer business assets as well
as a cottage, which he claims he did not intend to include. Letter from the lawyer only
refers to commercial properties.
Issue: What evidence must be included to determine intentions?
Decision: The court ordered the rectification to remove the cottage.
Ratio: The Court must be satisfied beyond a reasonable doubt of the intentions.
Subsequent events are applicable evidence when a aparty is trying to establish existence
of different prior agreement.
The M.F. Whalen v. Point Anne Quarries Ltd. (1921) 63 DLR 545: There has to be some
documentary evidence as to the agreement, but entire agreement doesn’t have to be in
writing.
Note: Parol Evidence Rule vanishes when there was a prior oral understanding that was
incorrectly written down in contract.
Sylvan Golf & Tennis Club Ltd. v Performance Industries Ltd.
Facts: Agreement to sell 125 ft. wide land plot was fraudulently reduced by defendant in
writing to 110 yd. wide, and the president of the plaintiff corporation signed the
agreement without realizing it.
Issue: Can a court order rectification in a case of unilateral mistake?
Decision: The agreement could be rectified.
Ratio: If there is a prior agreement or fraud a unilateral mistake can be rectified.
When there is a prior agreement and the non-mistaken party signs a written document
with a mistake, the test for whether rectification is possible is: Whether the non-mistaken
party knew or ought to have known the mistake to which the other party was labouring.
Due diligence by the signer is not a requirement.
Paget v. Marshall (1884) 28 Ch D 255
Facts: Defendant proposes to lease the upper stories of a complex and the plaintiff
landlord wants to reserve the ground floor and the upper commercial floor. He
mistakenly writes up upper floor to defendant. Defendant does not notify plaintiff and
signs contract.
Issue: Can a rectification fix a mistake by the author of the contract to his benefit?
Decision: The contract can either be set aside or rectified with prior understanding at the
choice of the defendant.
Ratio: Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries: With respect to a
fraud: If the defendant knew of the mistake then he is subject to rectification.
When there is no fraud or negative intention, there is no reason to require rectification if
the defendant agrees to void the original contract.
Topic 3. Frustration
1. Introduction
Some contracts are valid but a supervening event frustrates performance i.e makes
performance impossible.
Issue:
 Identifying what circumstances allow a release from obligations under the initial
contract owing to mistaken assumptions as to future courses of events.
 How courts should fill the gaps.
2. Theoretical Perspectives on the Doctrine of Frustration
George Triantis, “Contractual Allocations of Unknown Risks: A Critique of the Doctrine
of Commercial Impracticability”
Concerns:
 The allocation of a risk at a lower (broader frame) level rather than to a specific
party may not be optimal.
 Even though the unanticipated risk may be more efficiently managed at a broader
level, the failure to foresee the specific contingency increases the uncertainty of
the more broadly framed risk.
Richard A. Posner and Andrew M. Rosenfield, “Impossibility and Related Doctrines in
Contract Law: An Economic Analysis”
Discharge should be allowed when the promisee is the superior risk bearer.
Superior Risk Bearer:
 Better position to prevent the risk from materializing
o Discharge would be inefficient in any case where the promisor could
prevent the risk from materializing at a lower cost than the expected cost
of the risky event.
 The superior insurer
o Lower risk-appraisal cost
o Lower transaction cost
3. The Rule of Absolute Promises
Paradine v. Jane (1647) Aleyn 26; 82 ER 897
Facts: Defendant rented the land from plaintiff to use it for certain purpose, but the use
of the property was prevented due to a civil war.
Issue: Should the mitigating circumstance allow the defendant to avoid performance?
Decision: The circumstance cannot prevent performance of the contract.
Ratio: When the party by his own contract creates a duty or charge upon himself, he is
bound to make it good, if he may, notwithstanding any accident by inevitable necessity
(act of God), because he might have provided against it by contract.
There is no justification for getting out of a contract, because you voluntarily assume the
risk. Subsequent unforeseen events have no effect on the contract.
4. Relaxation of the Rule of Absolute Promises
Taylor v. Caldwell (1863) 3 B & S 826; 122 ER 309
Facts: Plaintiff rented a concert hall that was then destroyed by fire and brought a claim
for the use of the hall.
Issue: Who bears the loss when neither party could foresee the preventative event?
Decision: The defendant does not need to pay damages.
Ratio: Paradine v. Jane: contractor must pay or perform even if unforeseen accidents
occur, unless there are implied or express terms to alter that presumption.
Where from the nature of the contract there is an implied condition of the continued
existence of the life of the contractor, the executors of his estate are not liable if he dies.
Test for whether the duties can be cancelled: By the nature of the contract, is there an
implied excusing where is it apparent that the parties contracted on the basis of the
continuing existence of a particular person or chattel?
 If yes: both parties are released from obligations from the time of the frustrating
event (not before).
Note: The entire contract is considered. The party must identify some physical object or
state of affairs that when it does not exist his obligation can’t be performed.
If you have contracted to do something that subsequently becomes illegal: that is the
same as impossible and you’re relieved.
Amalgamated Investment and Property Co. Ltd. v. John Walker & Sons. Ltd. [1977] 1
WLR 164 (CA)
Facts: Plaintiff vendor contracts to buy land from the defendant for the purpose of
development. The site is then deemed a historic site.
Issue: Can the contract be voided if the intended use is impossible?
Decision: The contract is still valid and must be honoured.
Ratio: The purchaser bears the risk of the decrease in value of the land.
Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975) 9 OR (2d) 617 (CA)
Facts: Parties structure land transaction to avoid subdivision laws, so vendor sells 26
separate lots of land to seller. The province wants to control subdivision of land and so
creates legislation which is enforced before the contract is to be performed.
Issue: Does the doctrine of impossibility apply to land transactions?
Decision: The contract is voided and it is cancelled, with a return of payment.
Ratio: If the factual situation is that there is a clear “frustration of the common venture”
then the contract, whether it is a contract or the sale of land or otherwise, is at an end and
the parties are discharged from further performance and an adjustment of the rights and
liabilities of the parties are left to be determined under the Frustrated Contracts Act.
Victoria Wood Development Corp. v. Ondrey (1977), 14 OR (2d) 723 (HC)
Facts: Defendant contracted to sell land to the plaintiff and subsequent legislation says
that it had to be used for farmland, and the plaintiff did not want it used for that purpose
so brought a claim for the deposit cheque back.
Issue: Can the subsequent change in legislation void the contract?
Decision: The contract must be honoured.
Ratio: If the foundation of the agreement has not changed, and performance is still
possible, it must be honoured.
A party’s intentions are not a condition to the contract. If it was they should have
contracted to void the deal if the law changes.
The purchaser of land can foresee and bear risk and is in better position to deal with
zoning and similar changes that may make his intentions for a property impossible.
Howell v. Coupland (1876) 1 QBD 258
Facts: Defendant farmer sold potatoes from his farm to plaintiff potato merchant. A
disease in the potato crop killed his farmland and the plaintiff wants to sue for the
difference in price between his potatoes and potatoes he had to buy to replace them.
Issue: Can frustration discharge the duty to sell the potatoes?
Decision: The contract is frustrated.
Ratio: Res extincta: Unless the contract otherwise provides, the duty is discharged if the
goods no longer exist at time the contract must be honoured.
Note: This rule is now a part of the Sale of Goods Act.
Canadian Industrial Alcohol Company, Ltd. v. Dunbar Molasses Company 258 NY 194
(1932)
Facts: Plaintiff undertook to buy molasses from the defendant from Yonkers, NY.
Defendant’s supplier of molasses cannot honour the contract and he did not get
replacements, which were available in the same location.
Issue: Is the contract void because the product was unavailable from the usual supplier?
Decision: The contract must be honoured and damages awarded.
Ratio: Howell v. Coupland: A contract can be voided if the goods do not exist.
However, an intermediary is required to bring product regardless of source, unless he
contracts with a specific supplier. Impossibility is not an excuse when a supplier fails to
exhaust all possible means to meet the contract.
Parrish & Heimbecker Ltd. v. Gooding Lumber Ltd. (1968) 67 DLR (2d) 495 (Ont CA)
Facts: Defendant trucker contracts with plaintiff to purchase and buy grain from farmers
and deliver it to plaintiff. Both parties understood orally that the grain is coming from a
particular location, but the location could not grow any grain that year.
Issue: Must a contract for goods be honoured when the goods are not available?
Decision: The contract must be honoured.
Ratio: A change in circumstances cannot void a written contract that had additional oral
discussion attached to it. The defendant could have honoured the contract by supplying
the goods from a different location.
Dissent: Laskin would have excused his non-performance by including oral
representations in the contract.
Note: Construction of contract is all-important; it depends on how the court construes it.
Krell v. Henry [1903] 2 KB 740 (CA)
Facts: Plaintiff rented a room to the defendant for the purpose of viewing the King’s
coronation. The defendant agreed to take the room and gave £25 deposit. The
coronation was cancelled and the defendant refused to pay balance owing.
Issue: Is the contract to view the ceremony or to rent the room?
Decision: The contract is voided because it was to see the coronation.
Ratio: Where the reason for entering the contract has been defeated (the purpose of K is
frustrated, but performance is still possible, the contract is frustrated.
In addition to the Doctrine of Impossibility, the Doctrine of Frustration of Purpose allows
the court to look around the contract to see what the parties intended, in order to
determine if it has been frustrated.
Test for discharge of duties under contract:
1. What, having regard to all the circumstances, was the foundation of the contract?
2. Was the performance of the contract prevented?
3. Was the event which prevented the performance of the contract of such a
character that it cannot reasonably be said to have been in the contemplation of
the parties at the date of the contract?
 If yes to all three, parties are discharged from further performance of the contract.
Note:
Frustation: if the contract was entered into before the preventative event.
Mistake: if the contract was entered into after the preventative event.
Aluminum Co. of America v. Essex Group, Inc. 499 F Supp 53 (WD Pa 1980)
Facts: Plaintiff corporation entered into a contract to supply aluminum but price of
power rose faster than expected and defendant could not afford to keep paying.
Issue: Can an unanticipated change in price frustrate a contract?
Decision: The contract cannot be frustrated but the parties must renegotiate the terms.
Ratio: A mere change in price range does not amount to impracticability. Frustration
must be so severe that it is not fairly to be regarded as within the risks that the parties
assumed when making the contract.
Doctrine of Commercial Impractibility: A severe frustration of purpose of making the
contract (mutual profit from agreement) can force the parties to renegotiate the terms.
Note: Doctrine of Commercial Impractibility is part of Uniform Commercial Code in
United States and adopted by most states. It has not been affirmed in Canada but is
accepted by courts as a consideration.
Also to be considered is that a change of price can force a company to go bankrupt, but
they have bankruptcy protection.
Eastern Air Lines v. Gulf Oil Corp. 415 F Supp 429 (SD Fla 1975)
Facts: Defendant has a long-term contract for supply of gas to plaintiff. Defendant is
aware of violence in the Middle East but claims they are surprised at government
legislation preventing use of the canal to transport oil.
Issue: Despite knowing of the risk, can the defendant claim Impossible Performance?
Decision: The defendant is liable for either damages or specific performance.
Ratio: An event a party knows the risk of happening exists but did not bother to contract
out of is a basis for saying the doctrine of Impracticability of Performance does not apply.
Uniform Commercial Code s.2-615: for the Doctrine of Frustration to exist there must be
a failure of a pre-supposed condition, which was an underlying assumption of the
contract.
Note: This decision sounds like Solle v. Butcher: Was this an assumption of a
fundamental nature? A strong emphasis is placed on whether the particular loss is one
that is foreseen by Gulf Oil Corp. and which they could have contracted out of if they
chose to do so.
Tsakiroglou & Co. Ltd. v. Noblee Thorl G.m.b.H. [1962] AC 93 (HL)
Facts: Defendant contracts to sell Sudanese groundnuts to plaintiff and everyone
assumes the shipment will travel through the Suez Canal, which subsequently shuts down
due to war. Seller wants to argue frustration on account of large freight surcharges by
going an alternate route.
Issue: Can the assumption by both parties and resulting surcharge cause frustration?
Decision: Surcharges are not a frustrating event.
Ratio: A buyer who does not contract the route is not concerned with how the goods
arrive, so long as they arrive.
The mere fact that there’s an increase in cost is not in itself a frustrating event.
Transatlantic Financing Corp v. United States 363 F 2d 312 (DC Cir 1966)
Facts: Defendant government contracted with plaintiff to bring cargo to Iran. War in
Suez canal caused additional cost to sail around Africa. US government employee,
though unauthorized, informed the plaintiff to change the route, and plaintiff brings
action for compensation.
Issue: Was the contract frustrated with the change of route?
Decision: No damages are awarded and the contract was as agreed.
Ratio: That a party may have foreseen something doesn’t mean that it can’t be
considered unexpected for these purposes. Just because something is foreseeable does
not mean it is impossible. If the consideration existed but the parties did nothing about it,
the doctrine of impossibility of performance doesn’t apply.
3 Steps to Doctrine of Commercial Impracticability:
1. A contingency – something unexpected must have occurred.
2. The risk of the unexpected occurrence must not have been allocated either by
agreement or by custom.
3. Occurrence of the contingency must have rendered performance commercially
impracticable.
Note: The plaintiff should have insured itself against the possibility of extra cost due to
various scenarios i.e. war.
Davis Contractors Ltd. v. Fareham Urban District Council [1956] AC 696 (HL)
Facts: Plaintiff contracted with defendant to build a certain number of houses within a
specified time period, but due to a war the number of workers was reduced and the
plaintiff was delayed and costs increased. The plaintiff claimed that the price agreed
upon was not valid (and the contract therefore frustrated) and brought action to recover
extra costs on a quantum meruit basis.
Issue: When do changed circumstances are a radical departure from contractual promise?
Decision: The contract is not frustrated.
Ratio: Test for Frustration: Frustration occurs whenever the law recognizes that without
default of either party a contractual obligation has become incapable of being performed
because the circumstances in which performance is called for would render it a thing
radically different from that which was undertaken in the contract: Non haec in fodera
veni. It was not this that I promised to do.
All that anyone, arbitrator or court, can do is to study the contract in the light of the
circumstances that prevailed at the time when it was made and, having done so, to related
it to the circumstances that are said to have brought about its frustration.
Note: Parties do not have implied intentions with respect to events that they don’t foresee
happening; the judge will impute implied intentions in certain circumstances.
5. Relief on Terms: Restitution and Reliance
Appleby v. Myers (1867) LR 2 CP 651
Facts: Plaintiff contracts with defendant but a fire destroys partially completed work.
The plaintiff makes a quantum meruit claim for the value of the work done, but the
contract requires all of the work to be done for payment.
Issue: Can a plaintiff recover partial value for a contract that has been frustrated?
Decision: Partial value cannot be recovered in a frustrated contract.
Ratio: A plaintiff can’t recover value of the partial performance because under the
contract he is entitled to recover for the price only if the work is completed, unless there
are some circumstances from which you can imply a fresh contract.
Where the benefit of goods or services are conferred under a contract that has been
frustrated, recovery is not available for partial performance of an entire (lump sum)
contract.
 This is because recovery for part performance is inconsistent with the premise of
entire contract, which is: make me something useful, get paid.
Note: If some useable material had been left on the premises, there would be an implied
contract created by the court to deal with the lost value to the plaintiff.
Fibrosa Spolka Akcyna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32 (HL)
Facts: Plaintiff contracted with defendant and paid the initial payment, but the contract
was frustrated by war. The defendant refused to refund the money because they had done
considerable work already and wanted to renegotiate after the war.
Issue: Does a frustrating event after a contract is partially complete allow recovery of
payments already made?
Decision: Partially complete contracts can be frustrated so the money was returned.
Ratio: Chandler v. Webster [1904] 1KB 493: Up until the moment the frustrating event
occurs, the contract is enforceable. Therefore, if you were required to make a payment
under the contract, and you did so, that money is not recoverable. Once the frustration
event occurs then no one is obliged to do anything.
The promise to do a thing may often be the consideration, but when one is considering
the law of failure of consideration and of the quasi-contractual right to recover money on
that ground, it is, generally speaking, not the promise which is referred to as the
consideration, but the performance of that promise.
Therefore, if the promise cannot be kept (i.e. performance cannot be completed), then
there is no consideration and the contract is frustrated.
The Frustrated Contracts Act (Ont.) RSO 1990
s.2(1): Any contract that has become impossible of performance or otherewise frustrated
and the parties have been discharged.
s.2(2): The act does not apply to insurance or contracts for goods that unbeknownst to the
seller did not exist.
s.3(1): If before the parties are discharged, the party to whom money was paid partially
completed their obligations, the court can require recovery of the payment if it considers
it fair to do so in respect of overhead expenses and work or services performed.
 The Act changes the restitution rules with respect to money already paid, the
discretion of the court to require some payment to offset his losses, and other
valuable benefits if the court thinks it’s fair.
 s.3 overrules Chandler v. Webster: sums paid or payable were enforceable under
contract at time so claim can be brought for it so no restitution claim for payments
already made.
s.3(2): if, before the parties were discharged, the party to whom they were paid if that
party incurred expenses the court if it considers it just to do so may allow them to recover
the whole or any part with with respect to the reliance losses of the performer to the
extent to which sums paid or payable. If court considers it fair to do so can be deducted
(i.e. so pre-payment can be seen as some protection for defendant).
The Frustrated Contracts Act (B.C.) RSBC 1996
s.5(1): A “benefit” is something done in the fulfillment of the contractual obligations,
whether or not the person for whose benefit it was done received the benefit.
s.5(2): Every party to a frustrated contract is entitled to restitution for benefits they
provided.
s.5(3): If a contract is frustrated neither party is required to fulfil any more obligations but
may be entitled to damages for obligations unfulfilled.
s.5(4): If the circumstances that gave rise to the frustration caused a total or partial loss to
the value of the benefit the loss should be apportioned equally.
 Where the value of the thing so created has been destroyed: these aren’t random
parties, but parties that entered into contractual relationship (some sort of joint
venture) and something devastating happens so they should share that loss.
Topic 4. Illegality and Public Policy
1. Statutory Illegality
McCamus c.12
Two kinds of illegality:
 Common Law illegality: Contract is unenforceable.
o Agreements to commit a tort or another illegal act.
 i.e. selling product for an illegal act, unlawful conduct in the
course of performing the contract, indemnification for the
perpetrator of an illegal act
o Contracts facilitating moral conduct
 i.e. undermining marriage, to separate, contracts relating to
immoral services, contracts to live together.
o Undermining the administration of justice
 i.e. contracts to share the proceeds for law suit, contract to provide
false evidence, to mislead revenue authority
o Doctrine of restraint of trade
 i.e. non-competition agreements
 Statutory illegality: if a contract offends in any way a statutory scheme then it’s
an illegal contract at the very least by the person who is offending the statutory
scheme.
Kingshot v. Brunskill [1953] OWN 133 (CA)
Facts: In a contract to sell apples, statute requires them to be graded. Plaintiff sold
ungraded apples to defendant and defendant refused them.
Issue: When the illegality is not a fundamental part of the transaction is it enforceable?
Decision: The contract is unenforceable.
Ratio: When a contract is made with an illegal provision, the making of the contract
itself is an offence and no restitution or damages are available.
Note: This decision seems very harsh
Archibolds (Freightage) Ltd. v. Spanglett, Ltd. [1961] 1 QB 374 (CA)
Facts: Defendant were prohibited by their license from carrying the goods of others, but
plaintiffs were able to. The plaintiff hired the defendant to carry part of a load for them,
and their negligence caused a loss of the goods.
Issue: Can the defendant claim the contract was void for illegality?
Decision: The contract was valid despite the illegal provision.
Ratio: The purpose behind the statute must be violated for a contract to be void for
illegality.
Fundamental Case: St. John Shipping Company v. Joseph Rank Ltd.: Plaintiff overloads a
boat contrary to UK legislation. When the boat arrives in England, the person that
receives the goods claims he does not have to pay because it is illegal. Against a
backdrop of Common Law policy to enforce agreements, the analysis of
objectives/structure of the relevant statutory scheme to determine whether the
unenforceability of transaction necessary/desirable common law complement to state
scheme.
Still v. The Minister of National Revenue [1998] 1 FC 549
Facts: The plaintiff was working illegally while waiting for her immigration papers, and
was denied employment insurance for that time because she was not engaged in insurable
employment because of violation of Immigration Act.
Issue: Should the benefit be allowed when it is not contrary to the policy of the
provision?
Decision: The benefit was allowed.
Ratio: Where a contract is expressly or impliedly prohibited by statute, a court may
refuse to grant relief to a party when, in all of the circumstances of the case, including
regard to the objects and purposes of the statutory prohibition, it would be contrary to
public policy, reflected in the relief claimed, to do so.
Note: In similar cases, ask:
1. Is the contract enforceable?
a. (Kingshot v. Brunskill), reformed by (Archbolds (Freightage) Ltd. v.
Spanglett Ltd.)
2. Even if its’ unenforceable can I recover for benefits rendered?
a. The modern view says to apply a purposive view to restitutionary claim.
Look at the public policy behind the statute.
Topic 5. Interpretation of Contracts
1. General Principles
McCamus c.19
3 issues:
1. What sources can you look to when you have a problem of contractual
interpretation?
a. The contract itself
i. Parol Evidence Rule prevents other evidence.
b. Dictionary meanings of words in the contract.
c. Trade customs/technical meanings
d. The parties’ anticipated definitions
e. Government regulations
f. Commercial setting of the transaction
2. If there are gaps in the contract, the contract doesn’t really apply to the problem at
hand: how do you fill that gap? (i.e. the law of implied terms)
3. How do I resolve inconsistencies, ambiguities in the contract itself? (i.e. canons of
construction).
Implied terms of a contract:
 Terms are implied to give effect to commercial custom.
o If people in the business understand what contractual arrangment was
intended to mean, or if they have a particular way in which they use a bit
of terminology, or if there’s an expectation that everyone in the business
understands, the law of implied terms says you can imply a term to give
effect to that shared custom.
o Look at how familiar the contracting parties are; imply the trade custom
where the parties were likely to understand it.
 Imply terms to the contract to give effect to the actual intention to the parties.
o Business Necessity Test: Is it necessary to give business efficacy to the
agreement to imply the term (if this is the only way to make the contract a
workable arrangement).
o The Officious Bystander Test: Would an officious bystander standing
beside the negotiating parties have said “they must have meant this”?
Prenn v. Simmonds [1971] 3 All ER 237 (HL)
Facts: A contract for the defendant’s purchase of a stake in the plaintiff was conditioned
on “the profits of RTT” of the plaintiff’s corporation amounted to more than $300,000.
Issue: Can the court examine the evidence of the negotiations to determine the meaning
of the condition?
Decision: The court can examine the negotiations.
Ratio: When interpreting a written contract, the Court will not look at the negotiations to
show the objectives of one of the parties. Evidence is permitted to show the factual
background and the general nature of the objectives of the agreement (i.e. the commercial
context). The time has long passed since agreements were construed in isolation from
“the matrix of facts” in which they were set.
Principles:
 Forget about the Parol Evidence Rule, you’re entitled to look at commercial
context, aim, genesis when trying to interpret contract.
 Evidence of subjective intention is irrelevant.
Note: Investor’s Compensation Scheme, Ltd. v. West Bromwich Building Society [1998]
1 WLR 896 (HL): Can a court look at subjective intentions? The background of facts
includes absolutely anything which would have affected the way in which the language
of the document would have understood by a reasonable man.
Simmonds would want to argue contractual interpretation as well as rectification.
G. Williams, Language and the Law




Ordinary meaning: the commonly accepted meaning
Special meaning: assigned by the person who uses the word
Intended, comprehended and ordinary meaning: the distinction: the meaning
intended by the speaker, meaning attached by an ordinary reader vs. meaning
actually attached by the reader.
Literal and Ulterior meaning: literal or primary meaning of words vs. ulterior
meaning.
Fragiliment Importing Co. Ltd. v. B.N.S. Int. Sales Corp. (1960) 19 F. Supp. 116 (NY
Dist. Ct)
Facts: “Chicken” in a contract for the sale of chickens was intended by the plaintiff to
mean “stewed” chickens only, the defendant sent boiled chickens.
Issue: Which party’s interpretation should be followed?
Decision: The general English meaning of chicken should be used.
Ratio: Plain meaning rule: The plain meaning should govern unless term is ambiguous.
The party with the more specific interpretation has the burden of proving that the term
was used in the more narrow sense.
Trade custom will be used to infer interpretations.
BG Checo International Ltd. v. British Columbia Hydro and Power Authority
Facts: Defendant called for tenders to erect power lines and plaintiff issued a bid.
Plaintiff found the location of the job inaccessible and defendant promised to clear a path,
which was not done and the job could not be completed.
Issue: Can the plaintiff sue for both the tort of negligent misrepresentation and breach of
contract?
Decision: The plaintiff was allowed to sue both in contract and tort.
Ratio: Standard principles of interpretation:
1. Looks at the particular issue in light of the entire agreement
a. What’s purpose of whole contract, and interpret provision in that.
2. If there appears to be inconsistencies between different terms of contract, try to
find interpretation that gives meaning to all of the provisions.
a. Assume, even though you know that a contract is often cobbled together
from different prior contracts between different people, and they leave
things in the contract that shouldn’t be there.
b. Principle: Assume the parties knew what they were doing, and read the
inconsistencies in light of an interpretation.
i. i.e. this clause is an exception to general provisions of contract
3. Parties don’t intend to contract for commercial absurdities
a. i.e. extremely inefficient behaviour.
Assume the drafter knows what they're doing: interpret plain meaning of language, and
try to make sense of the agreement where the terms are contradictory.
Guarantee Co. of North America v. Gordon Capital (1999) 178 DLR (4th) 1 (SCC)
Facts: Defendant had a bond, as a result of malevolent conduct of one of their employees
they were exposed to horrible liability. The defendant tried to enforce an insurance
policy from plaintiff insurance company, but they filled out the insurance form wrong,
and the form claimed that “if any of this (the form) is untrue the remedy is recission”
Issue: Can a contract be rescinded merely because of an exculpatory clause?
Decision: The 24 month clause survived and the contractual limitation period expired.
Ratio:
Rescission: “Where one party to a contract expresses by word or act in an unequivocal
manner that by reason of fraud or essential error of a material kind inducing him to enter
into the contract he has resolved to rescind it, and refuses to be bound by it, the
expression of his election, if justified by the facts, terminates the contract, puts the parties
in status quo ante and restores things, as between them, to the position in which they
stood before the contract was entered into.”
Repudiation: Words or actions of intention not to be bound by the contract. The effect of
repudiation depends on election made by non-repudiating party. The innocent party can
choose specific performance or damages.
When a contract is not actually rescinded and therefore in breach, the innocent party may
treat the contract as at an end (i.e. repudiated). All clauses, including exculpatory
clauses, survive and contractual limitation period expired.
Note:
1. The contract is to be interpreted against the interest of drafter, but this won’t
apply where both parties involved in drafting terms; if you’re going to say you’re
not liable it has to be absolutely clear.
2. Expression of one thing means you’ve excluded another.
3. Parties draft a contract; if you can construe agreement so as to be valid you should
do so.
4. What about handwritten notations on contracts: if it’s something in handwriting
that you can’t reconcile with typed up contract, give strength to handwriting.
5. If interpreting a contract, and one way requires unlawful performance and another
way lawful performance: interpret it as the lawful performance.
6. A contract doesn’t require interpretation where performance is impossible.
2. Interpretation and the Duty of Good Faith Performance
McCamus c.21
Duty to bargain in good faith: if you don’t disclose certain circumstances, it is bad faith
and you have a duty to act in good faith.
Most so-called duty of good faith cases are just cases where the contract requires
cooperation.
Three situations in which good faith is required:


Contractual discretionary powers are inferred in a contract
o Greenberg v. Meffert (OCA): these powers must be exercised in a fair and
reasonable way.
A condition precedent

o Dynamic Transport Ltd. v. O.K. Detailing Ltd. (1978) SCC: If a party
wants to rely on the non-performance of a condition precedent, it must be
acting in good faith.
Manoeuvring to evade contractual obligations: there is duty of good faith not to
evade one’s obligation.
Arton v. Gateway Realty (1991), 106 N.S.R. (2d) 180 (S.C.)
Facts: Zeller is the anchor tenant in one mall, but a neighboring landlord aggressively
persuades them to leave their lease and go to another mall. Z assigns its lease to the
second mall. The first mall then gets competitor who is assigned to it.
Issue: Does the bad faith assignment alone allow for damages?
Decision: Good faith is a requirement.
Ratio: The law requires that parties to a contract exercise their rights under that
agreement honestly, fairly and in good faith. This standard is breached when a party acts
in a bad faith manner in the performance of its rights and obligations under the contract.
The insistence on a good faith requirement in discretionary conduct in contractual
formation, performance, and enforcement is only the fulfillment of the obligation of the
courts to do justice in the resolution of disputes between contending parties.
Restatement, Contracts 2d s.205




Recognizes a duty to negotiate and confer remedies if a party is contracting in
good faith and in a reasonable manner.
US contract law embraces good faith in three ways:
o Duty to negotiate: s.161: non-disclosure may amount to, in effect,
misrepresentation
Non-disclosure of fact amounts to an assertion that the fact doesn’t exist.
o s.161(a): where it prevents previous statement from being inaccurate
(that’s same as changing circumstances)
If a term changes a basic assumption and amounts to a failure to act in good faith.
3. Interpretation and Exculpatory Clauses
McCamus s.20
If you have a horrible breach of contract, then an exculpatory clause does not apply.
Rule of law: it doesn’t matter what the parties intended when corporations only insert
such terms in contract to harm the “little guy” who never reads it.
UK Law:
If there is a horrible breach of contract, then exculpatory clauses do not apply.
 The clauses are not simply eliminated, but they can be interpreted narrowly,
contra preferendum, but beyond that there’s no special doctrine relating to
exculpatory clauses.
Photo Production Ltd. v. Securicor Transport Ltd. [1980] AC 827 (HL)
Facts: Plaintiff hired defendant security agency to secure its property with a provision
that absolved the defendant from any liability for an “injurious act or default by any
employee of the company.” The defendant’s employee intentionally started a fire that
destroyed the building.
Issue: Does the exclusion clause absolve the defendant of liability?
Decision: The defendant was not liable because of the clause.
Ratio: Rule of Construction: Exemption clauses are to be interpreted the same as any
other term regardless of whether a breach has occurred.
Unfair Contract Terms Act, 1977 took under the control all disputes between the parties
with unequal bargaining power. Commercial matters when risks are normally borne by
insurance were purposely left alone by Parliament to let the contracting parties apportion
“the risks as they think fit and for respecting their decisions”.
The doctrine of fundamental breach is a doctrine sui generis with special rules and does
not always apply.
It is up to the Court to interpret the clauses, and it is possible to interpret them narrowly,
contra preferendum, but beyond that there is no special doctrine relating to exculpatory
clauses.
Hunter Engineering Co. Inc. v. Syncrude Ltd. [1989] 1 S.C.R. 426
Facts: The defendant contracted with the plaintiff and a third party to design gear boxes.
Due to design flaws, the boxes were not useable for their intended purpose and the
defendant spent over $1 million to repair the boxes. Hunter sought protection under a
limitation of liability cause within the contract.
Issue: Is the limitation clause valid?
Decision: The limitation clause protects the plaintiff from liability.
Ratio: Dickson J: The doctrine of fundamental breach is not appropriate. Instead, the
issue should only be dealt with as a matter of contractual unconscionability such as where
parties have unequal bargaining power. If one part of the contract can be repudiated, the
rest of the contract should remain valid.
Wilson J: Limited liability clauses are normally enforceable, unless in the particular fact
situation the effect of the clause leads to an unfair/unreasonable result. If it does, even
though the clause is enforceable, it will not apply to this fact situation.
Fraser Jewellers (1982) Inc. v. Dominion Electric Protection (1997) 148 DLR (4th) 496
(Ont CA)
Facts: The plaintiff hired the defendant to install an alarm system under an agreement
that provided that the liability was limited to the value of the services offered, not the
value of the property protected. The exclusion provision applied to any loss, damage or
injury irrespective of cause or origin, resulting directly or indirectly to a person or
property from the performance or non-performance of obligations imposed by the
contract or from negligence of the defendants, its agents or employees.
Issue: Can the exclusion protect against loss caused by the defendant?
Decision: The agreement was valid and the defendant was not liable for more than what
the contract stipulated.
Ratio: Fundamental breach occurs when the failure by one party to perform a primary
obligation has the effect of depriving the other party of substantially the whole benefit of
the contract.
However, whether a breach is fundamental or not, an exclusionary clause, in my opinion,
should, prima facie, be enforced according to its true meaning. Relief should be granted
only if the clause, seen in the light of the entire agreement, can be said, on Dickson's
C.J.C.'s test, to be “unconscionable” or, on Wilson J's test, to be “unfair or unreasonable”.