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GENERAL INTRODUCTION TO CONTRACTUAL REMEDIES
1. Damages
Assume that a contract has been properly made (all formation elements are there), no interpretation problems, no
misrepresentation/illegality/mistakes present. One of the parties to the contract has failed to performed his/her
contractual obligations. Damages are the major remedy for breach of contract, and the court will award a sum of
money as compensation. General principle: to restore the person to the position that they would have been in if
the contract had been fulfilled (“substitutionary remedies”). Second principle: plaintiffs can recover, provided
that the special damages are not too remote. The courts will enforce a provision in a contract that is a genuine
attempt at pre-estimating the damages. Liquidated damages clause: specifies that a specific breach (like late
performance) will result in specific damages awarded. Even if these fail, there is still the implication that plaintiffs
will get compensation for breached contracts. Both parties have to agree to the liquidation clause—but it can still
get struck down by the courts, as the defendant may still argue that it was unconscionable even though he/she
agreed to it!
Hadley v. Baxendale (1854)
Decision: No recovery.
Reasons: There was a breach of contract, but the plaintiff could not recover the damages for loss profits, as they
were too remote to be foreseeable. Remoteness Rule: A plaintiff can recover for such damages as:
(1) may fairly and reasonably be seen as arising naturally, that is, according to the usual course of things, from the
breach of contract itself, or,
(2) such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made
the contract, as the probably result of the breach of it (special damages)
Notes: Does Hadley need a liquidated damages clause including this information about special damages? He’s
got to prove that this was agreed upon, although it doesn’t have to be in the contract, but it should be better than a
verbal agreement
Victoria Laundry Ltd. V. Newman Industries Ltd (1949)
Decision: Recovery. Damages granted for loss of regular business but not for extra contracts.
Reasons: part (2) of the damages rule in Hadley and says that he’s required to pay based on what he
reasonably should have known – here he should have known boiler was essential. This is an objective test—
what would a reasonable person, with the qualifications of THIS defendant (in this case, he was an engineer).
These damages can be under both branches--It is obvious to the defendant (an engineer) what its purpose would
be for the plaintiff (Laundromat), but it also had to be communicated to the defendant. So what I need to
determine is, based on what this defendant knew (2), and who this defendant was (1), is losses of profits
reasonably foreseeable? so the 2 branches aggregate together
So what is the difference compared to Hadley? This was a sale transaction, not a carrier/delivery. The defendant
was a firm of engineers (branch 1?). There is a communication of “I need this ASAP” (special information—
branch 2)
Certainty of Damages Test: it has to be a serious possibility/real danger to result
How does the court come up with the amount? You can recover loss of profits, but you can’t recover the profits on
the special dyeing contract, because these would not have been in the contemplation of the defendant
Can I put something in a contract that limits the amount of damages? Exclusion clauses/Limitation clauses:
courts have special interpretation rules over these: (1) People have to have reasonable notice of these things. (2)
It will always be construed against the party relying on it. (3)You can’t simply exclude liability for your definite
breach but must look at the clause in reference to the facts that have occurred
Mitigation of Damages
If somebody has breached a contract, you can’t just assume that you can claim an unlimited stream of loss profits
(close your business permanently and get damages). The plaintiff has a duty to take reasonable action to
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limit/mitigate the amount of damage. If you fail to do so, the defendant can claim that you didn’t mitigate the
damages, then your damages will be reduced by the amount that you didn’t mitigate and should have.
2. Specific Performance and Injunction
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Specific performance: compels the performance of positive stipulations (honour your contract)
Injunction: you are not allowed to breach the contract (negative stipulation)
these are extraordinary remedies and will only be available when damages are not effective remedies
If the court orders something specific, and the person does not comply with the court order, the plaintiff
can ask the court to issue a contempt of court, and as a result can be subject to imprisonment
Specific performance cannot be enforced if it has to do with personal service
So they cannot be told to perform, but they can be given injunctions not to perform
Warner Brothers v. Bette Davis (1937) – actress moves out of England, court orders injunction so she’s
employable, not SP.
Facts: Davis signed a contract that she would give her service as a motion picture and stage actress for Warners
and only. The contract requires her to give her services exclusively to Warner Brothers (+), and not to appear in
any production (stage/film) without the consent of Warner Brothers, or to take any other employment without their
consent (-). D breached the contract when she agreed to perform on the stage in England. P cannot be remedied
by damages, since it is too difficult to estimate how much D is worth. It is her performance that P wants to
continue with, not any financial remedies. Background: She thought that if she moved out of the jurisdiction of
the contract (to England), then she could breach the contract that she made in California, as the remedy is only
good in the jurisdiction in which the contract was made. In effect if you want a remedy, you have to bring it to
where the person is
Bottom line: Injunction and specific performance are personal remedies because the only way you can enforce
them is by a personal order, and that’s why they follow her to England to commence the action
Decision: Order an injunction. Cannot breach contract for 3 years.
Reasons: There’s an argument against compelling people to perform personal services-- like slavery, so this rules
out specific performance. Whole bunch of intangibles, and her services were of a unique, special, extraordinary,
intellectual nature that it would be hard to figure out damages. Courts CANNOT order an injunction that prevent
her from earning a livelihood unless she performs, because that is essentially like specific performance for
personal service which is forbidden. But this injunction essentially compels her to make movies for them if she
wants to stay in this line of work because she cannot perform for anyone else (without their consent). They
conclude that she is an intelligent and capable individual who can make a living in any other fashion. They order it
for 3 years, because the order should last for only so long as the court feels that the plaintiff in the action has a
real interest in enforcing the contract. Specific performance and injunction are equitable remedies, and the court
has discretion to do what’s fair and reasonable under the circumstances. They think that the remedy should be
granted in a way that is as inoffensive as possible to the parties involved, but yet will protect the minimum interest
that they think is deserving of protection
Notes: She is better at acting than at anything else, and this is what she’ll make the most money doing, so is the
court making a stupid decision? NO, because courts have an interest in compelling people to perform their
bargains. Since they also have a policy consideration saying they can’t force people to perform contracts of
personal services, if they can order something that ensures someone won’t be unemployed, then that gives
people a high inventive to perform the contract. Lumley v. Wagner is cited- Similar case, and the court says that if
they can order an injunction to stop the breach of contract and still leave this person as being employable in some
way or another, they have a pretty high incentive to do so
Final thoughts on Extraordinary Remedies:
 Extraordinary remedies are effective when it is impossible to calculate damages
 So when damages are available as effective remedies, they are awarded
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Interestingly, courts believe that real property, for example, each piece of land is special and unique, so
courts order specific performance/injunctions for breach of contracts for the sale of land (on the basis that
damages is not an effective remedy)
You can’t contract out of the law, so you should put these clauses onto contracts specifying the
incalculable nature of a breach of contract, which would result in extraordinary remedies being applicable
in the event of a breach
If we find that the statement is an illusion, it will not be enforced—but it helps to find that the parties looked
at the issue and agreed when they made the contract
FORMATION OF THE CONTRACT
1. Intention to Create Legal Relationships
Summary of Intention:
1) Before a court will enforce an agreement between parties, the parties must evidence an intention to be
bound by the agreement. Only when such an intention exists can there be a legally binding contract.
2) In ascertaining the existence of intention, the law provides a number of presumptions, depending on the
circumstances:
a. In domestic relationships, there is a presumption that the parties do not intend their agreements to
have legal consequences (Balfour v. Balfour)
b. This presumption extends as well to more distant relatives (Jones v. Padvatton, Parker v. Clark)
c. It also extends to more distant family circles and friends (Simpkins v. Pays)
d. Statements made in the course of conversation, advertising or excitement are also presumed not
to be intended to create contractual relationships (Carlill v. Carbolic Smoke Ball Company)
e. In business relationships, the presumption is that the parties intend to be bound (Rose and Frank
Ltd v. Crompton)
3) In each case, the presumption is rebuttable by leading evidence that shows an opposite intention.
4) The onus of proof to rebut the presumption is on the party against whom the presumption is taken
(Salmon L.J. in Jones v. Padvatton)
5) The test applied to determine if the presumption is rebutted is an objective test. The court does not ask
‘did these parties actually intend to contract?’. It will find the requisite intention if an ordinary reasonable
person, having considered all of the facts, would have come to the conclusion that the parties intended to
be bound (per Salmon L.J. in Jones v. Padvatton)
6) A number of factors are seen to be relevant to rebutting the presumption:
In domestic relationships
a. If at the time of the agreement the parties are not living in amity (Merritt v. Merritt)
b. Documentation or other formalities, such as the involvement of a lawyer, may also be important
(Merritt v. Merritt; Jones v. Padvatton)
c. The severity of the reliance placed on the promise (Salmon in J v. P, Parker v. Clark)
d. Whether the terms of the agreement are clearly set out and certain (Atkinson said they weren’t in
J.v.P)
e. Whether the nature of the agreement can be seen as having formal, or even informal commercial
implications (Roufos v. Brewster; Simpkins v. Pays)
FAMILIAL RELATIONSHIPS
 Cases deal with familial relationships and whether there was a contract between the parties.
 Court ruled that there was a binding, legal contract for:
o Merritt v. Merritt (husband/wife not living in amity),
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o Roufos v. Brewster (father/son-in-law engaged in a commercial relationship),
o Parker v. Clark (niece/aunt-uncle where the niece had a detrimental reliance to the contract).
Court ruled that there was NOT a binding, legal contract for:
o Balfour v. Balfour (husband/wife living in amity who made an agreement),
o Jones v. Padavatton (mother/daughter where judge decided it was a domestic agreement, not a
contract).
Balfour v. Balfour (1919)
Facts: While living in amity, Mr. Balfour agreed to give his wife £30 a month as maintenance for while he was
living in another city. Once he had left, however, they separated and Mr. Balfour stopped payments. Mrs. Balfour
brought an action to enforce the payments.
Decision: No recovery. This was simply a promise made by a husband, and if the courts were to uphold the
individual promise, they would be overrun with marital couples.
 Analysis:
o (1) Presumption of law that family members do not intend their bargains to have legal consequences
o (2) Rebuttable presumption
o (3) the onus is on the party that is trying to prove the contract (the plaintiff)
o (4) leading evidence that is consistent with an intention that the bargain was to be legally enforceable
 Writing/signed documents
 not living in amity (fighting)
 performance of an agreement that looks commercial
 reliance/dislocation based promises
o (5) The test here is objective: given all this evidence (#1-4), would a reasonable person conclude that
there was an intention?
Merrit v. Merrit (1970) –H agrees to pay monthly, signs agreement to transfer ownership once mortgage paid.
Decision: There IS a contract. Allow recovery.
Reasons:
o Rebuttable presumption that there was no intention to make it legally enforceable
o Evidence that there was intention is the piece of paper that they signed together, and they were not living in
amity
o Would a reasonable person have concluded that there was intent? YES
o It doesn’t matter that Mr. Merrit would say subjectively that he didn’t intend
o Mrs. Merrit was making an order of specific performance to make him give the house to her
o since they had a contract, the subject matter of it was unique, as it was special property—piece of land, and
she performed my end of the contract
o Gould v. Gould is cited by his lawyers: the husband was not sure if he could pay forever
o Denning says the facts are different here, as there was a level of uncertainty in that case, which makes the
agreement not a contract
o So we have to look at uncertainty—either of the terms or of the intention to perform
Parker v. Clark (1960) – aunt and uncle promise to give house to Ps, P’s move in and sell their house, kick them
out.
Family members were not fighting when the original agreement was made, they didn’t have a contract but they
have documented evidence about what their deal was in a series of letters
Decision: There was a contract.
Reasons: Apply the test
 (1) Presumption of law that family members don’t intend to make contracts (Balfour)
 (2) Rebuttable presumption
 (3) The onus is on the niece and her husband to rebut the presumption
 (4) Evidence:
o There was writing/signed documentation of the transaction
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Detrimental reliance (they sold their house to move in)
More remote relationship (niece v. Spouses/children)—the presumption will get weaker the more
remote the relationship
o More commercial in nature
(5) Reasonable person test: contract
Roufos v. Brewster (1971)-son in law borrows father in laws truck to get it repaired, agreed to pick up booze, truck
in crash
Decision: Contract. Commercial intention, even if they were family.
Reasons:
 Presumption, rebuttable, onus on who?
 Lead evidence:
o Looks like a commercial relationship
o No signed agreement
o A little bit of reliance
 Court says that it doesn’t matter where the onus lies—when you look at these things aggregated, they each
had a commercial interest, with little social/family nature
Jones v. Padavatton (1969)
 Facts: Mother convinces daughter to leave her good job in Washington, move to England, and try to qualify
for the Bar. The mother had promised to pay the daughter a living allowance, and then the deal changes
and the mom buys the daughter a house. 6 years later the daughter gets married, hasn’t yet qualified for
the Bar, and is still living in the house. The mother sues claiming possession of the house that she owns.
The daughter responds by saying that there’s a contract between them, and the contract allows her to stay
in the house, so she will rebut the presumption by leading evidence to show intent to contract.
 Mother (plaintiff) has 3 arguments:
o No intention to create a contract, terms of the contract are too uncertain to be enforceable, been
performed
 Lord Salmon (most informative judgment in this area): there is intent but contract was performed.
Mother should get house back.
o there were lawyers, daughter moved to England so there was detrimental reliance
o Fills in the terms to determine what the bargain is
o Has taken the daughter too long to qualify for the Bar, so you can’t assume that the mother has
wanted to perform the terms for longer than the 6 years that have passed.
 Lord Atkinson
o no intention, the terms were not certain enough to find an intention
o the daughter reacted so viscerally to the mother’s action, and that shows that there was no
intention to form a contract --weird argument, because the intention should typically be traced back
to the making of the contract)
 So it’s a reasonable person test, but people can still come to different conclusions!
Simpkins v. Pays (1953, English) – guy lives with old woman, play lottery in her name, win
This is a social situation as much as it is a boarder/landlord situation. Onus on the boarder to rebut. Objective
reasonable person test. Factors: He may argue that there was reliance, it was an informal business situation,
proximity. She may argue they were living in amity (Balfour), a fun activity, non-commercial uncertain terms
Decision: The boarder wins. There was a contract.
Ruling: The presumption was rebutted by showing an informal business relationship, and if asked before hand,
it is obvious that they agreed that if someone wins and they don’t share, they can sue.
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COMMERCIAL RELATIONSHIPS
Carlill v. Carbolic Smoke Ball Company (1893)
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lawyers are calling it a “mere puff”this wasn’t intended to be legally binding, it was a gimmick, and any
reasonable person would have realized that this wasn’t contractual
BUT, they add in the statement about their deposit to prove their sincerity
Apply the same analysis
o (1) Is there an intention to form a contract?
o (2) In business context there is a presumption that a contract is intended
o (3) Rebuttable presumption the onus is on the person claiming no contract
 And they argue that, applying the reasonable person test, no one would have thought that
this was a contractually binding obligation (it was just part of our advertising)
o (4) No intention—mere advertising
 But look at that additional statement that you made showing intention
Rose and Frank Company v. J.R. Crompton & Brothers, Limited (1923)
 Facts: Plaintiffs are merchants that buy carbon paper from the defendant manufacturers. These are 2
companies that have bought and sold products for years, and they continue this commercial relationship
with a signed document. Document explicitly states that their arrangement was not meant to be a legally
binding contract. The manufacturers refuse to continue the arrangement, and the merchants sue
 Decision: No contract
 Reasons:
o Go through the analysis
o every time you place an order and someone supplies the goods, there is a contract in place
o the clause rebuts the presumption that there was intent for contract, and negates any other
objective evidence of intention
o Generally courts accept these kinds of statements
 Forbes: In some circumstances it is so repugnant to the situation to say that this looks exactly like a
contract that it is so ridiculous to have a clause saying it is not intended to be binding, so they may not
always rebut the presumption of intention. Onus on person trying to say “no contract”, because there is a
presumption that a contract is intended in a business context.
Jones v. Vernon’s Pools, Ltd (1938, British).
 Facts: Vernon Pools runs a football pool, and you get a certain number of points for picking the winners on
certain games, they pay you. Mr. Jones say that he bought a ticket, filled it out, and got everything right. He
mailed in his form, and they won’t pay him. Vernon Pools says that they didn’t get his form. They also say
that on the foot of the coupon it says “this is not a contract”, so no legal intention is to be discerned from the
completion of this form
 Decision: No contract.
 Reasons:
o The court analyzes it right on the basis of Rose and Frank
o the clause on the ticket demonstrates that there was no intent
o if this was recognized as a contract it would snowball into millions of complaints
o problem is with acceptance—effectively you accept the offer when you perform the terms, so the
plaintiff argues that he accepted the offer
o BUT because of the explicit clause on the ticket, this proves it was not a contract
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Suppose the pool company said they got the ticket but too many people submitted won so they
won’t pay—they say this is the only way to ensure that people don’t cheat—they’d probably win but
this would hurt their business
o Principle: This is a very commercial context, and so the courts may recognize these clauses and
enforce them if there is good reason to  in this case, to deal with supposed cheaters, so it
protects the business.
Notes: The problem here is that the judges use the law to get to the conclusion, rather than using the facts
to determine if Jones actually was lying about submitting the ticket .
Final Thoughts on Intent in Commercial Relationships:
 It is often hard to rebut these presumptions, unless there is a specific statement in a document that says
that commercial parties don’t intend to have contracts in their bargains—these clauses will generally be
observed
2. Offer
A. Offer Mechanics
 To have a contract you need an offer, and a notice of acceptance of the offer
 A contract is made when you reach the point that a reasonable person would say that an offer has been
made, which is when that offer has been accepted
Pharmaceutical society of Great Britain v. Boots Cash Chemists (1953)
 Facts: Boots Cash Chemicals displays drugs in a self-serve area, including some drugs restricted under
Part I of the Poisons List. Chemicals on this list must be sold under the supervision of a registered
pharmacist. The Pharmaceutical Society is responsible for enforcing these rules, and has argued that the
self serve area is a violation because a sale takes place when the customer helps himself to the shelf.
Boots Chemical argues that there is no violation, because a sale has not taken place until the cash is
exchanged, and this does happen under supervision.
 Case distinguishes between an invitation to make an offer (to treat) and an actual offer—the relevance
of the case is that Boots would be guilty if a contract was formed at a place and time when there wasn’t the
supervision of a scientist
 Ruling: Appeal dismissed (in favour of Boots)
 Reasons:
o P’s argument is odd because it implies that every time you pick up an item you are obliged to buy it
o If we say that the contract is made at this time, we’d have to make some assumptions:
 Conditional upon you taking a reasonable amount
 Conditional upon you not changing your mind
o Maybe there are 2 contracts:
 (1) Contract to of sale
 (2) Collateral contract: in consideration of me allowing you to pick up and examine my
merchandise and you agree that if you drop it you’ll pay the price. (offer is in the
examination right, and the acceptance is the examination)keep this in mind for Satanita
o This accounts for policy considerations- person wants too much, changes mind
o But contract cases don’t deal with claims that happen from the time the person picks up the product
and goes to pay it—our law says those are tort problems
o technically store owners can change their minds about prices at the cash
o this legal analysis seems to be consistent with what we expect in a store: offer is made by
consumer at cash, acceptance is the cashier taking the money, and the display is an invitation to
treat—so there is appropriate supervision for the sale
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Boyer and Co. v. D. & R Duke (1905)
 Facts: The defendants send out a catalogue with items for sale and prices. When the plaintiff orders one
of the items, it is sold out. The plaintiff is suing for breach of contract – that an offer was made and revoked
 Decision: No contract
o Apply a reasonable person test: A quotation is an invitation to allow the person who gets that
price list to make an offer, and the offer is accepted when the owner of the property says he will fill
that order
o This protects the seller against too many people asking for the same item and being able to sue if it
is sold out
o The suppliers can be expected to bear some proportion to the orders the seller anticipates
o depends on how you phrase your presentation, and the more you make it look like you intended
this document to constitute an offer, the more likely it is that you will be expected to fulfill the
requirementsand you would be leaving this impression with a reasonable person
 Quebec Pharmaceutical v. T Eaton Co. (S.C.C)
o Obiter: this case is like Boots, but the question was whether Eaton’s catalogue to people living in
Quebec constituted an offer to sell to those people certain proscribed drugs, which under law in
Quebec that said these particular items can only be offered to be sold under the supervision of a
Pharmacist
o Ruling: Eaton’s not guilty. A catalogue is not an offer.
 But a catalogue could be an offer- full descriptions of the goods, order forms, no disclaimer
in the order form saying that they do not have the right to hand in a form and demand an
obligation to have the products be shipped
 It depends on how much it would look to a reasonable person as an offer goods for sale
so that a person could simple accept, and have that be binding
 So what happens if the company runs out of products after publishing the catalogue?
 They have to add a disclaimer in their catalogue, saying that if it’s an offer it has to be
written that acceptance does not make it binding
Summary about Price lists:
 A display is not an offer
 As a general rule a price list is not an offer, BUT could potentially be turned into an offer by
o completing the terms,
o describing the items properly,
o making it look like you’re committing yourself to sell a reasonable amount of the product,
o making it look like you were intending that people could say “I accept”
CORRESPONDENCE:
Harvey v. Facey (1905, HL) – P - telegraph lowest price. D - Lowest price is 900 pounds. P - Accepts. D - Was
only price quote.
Decision: No contract. Facey wins.
Reasons
 Apply a reasonable person test
 Harvey thinks a reasonable person would have thought he meant “Yes I’ll sell, and the price is 900
pounds”!
 But would a reasonable person have thought the sale of expensive land would take place across a brief
correspondence?
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The more complex and significant the contract, the more you expect to see the contract in clearly written
terms—so in this case, one could argue that since the medium is a telegram, a contract would not be
made in one or two sentences of a telegram
He addressed the second question by providing the lowest price, but the issue is whether his lack of
response to the first question of whether he would sell implied he was not selling
Under these facts, it may well be that if you just reply with a price quote, that is not an offer—the test
depends on all of the facts of the exchange (if H knew of F’s offer to the city, it would have been more
likely that he would not think it was an offer)
Since we can’t really conclude that Harvey knew about the outstanding offer (which would support the
decision more because then he shouldn’t have thought Facey was offering), we can’t really do anything
but aggregate the facts given and apply the reasonable person test—so because the first question was not
clearly answered (yes, he would sell), reasonable person would say there was no contract
AGAIN, a price quote is not an offer but an invitation to enter negotiations
Johnston Brothers v. Rogers Brothers (1899) – correspondence about flour delivery, price quote not an offer.
Facts: D: we will sell you flour for 5.40 is price quote. P accepts. Flour advanced, to 60 we accept the advance of
30 on yesterday’s quotations. P will only accept original offer. Demand damages if not fulfilled. Ruling: No
contract (in favour of Defendants). First statement was merely price quote, not an offer.
Reasons:
 trial judge thinks that there was intention to make an offer from defendant’s letter
 court of appeal says it was more that “if YOU (plaintiffs) want to make an offer, you better do it fast
because prices are advancing”.
 look at the words the parties use- it’s a little more sophisticated than a mere price list
 Apply a reasonable person test: this is a price quote on a commodity in an advancing/ volatile market, so
it is not reasonable to interpret this as an offer
 rely on Harvey for the defendant in this casethe person setting out the price has to accept the offer that
comes from the person wanting to buy
 General proposition: a price quote is NOT an offer, and even though here it is more complex, it is still just a
price quote
 In the defendant’s second letter—they say “they’ll accept 30 on their quote of yesterday”, showing that the
quote was not an offer from them
Harty v. Gooderham Plaintiff writes: let me know your price for 50 O.P. spirits. Defendant writes: I shall be happy
to have an order from you to which we will give prompt attention. (OFFER TO SELL). Plaintiff says :Sold
Ruling and Reasons: Plaintiff wins—contract upon the plaintiff’s acceptance. In this case they say the defendant
was OFFERING to sell at the price quote. As a rule it should not matter who starts the correspondence, but when
you look at it in aggregation it may matter
Court: facts are different, and here the language clearly shows an offer.
Conclusions from Cases of Correspondence: If we have an offer where it is reasonable to conclude that the
negotiations have reached the point for one of the parties so say “I accept”, then it is a contract—it is the
perception of the reasonable person of what was intended . It is almost the starting point that price quotes are not
generally concluded as being offers, they are only invitations to make offers (Harvey, Johnston), but clearly you
have to aggregate the facts and look at the language, the nature of the property (commodity in volatile market?)
and ask what a reasonable person would think?
Denton v. Great Northern Railway Company (1856)
 Facts: Railway Company posted times of trains, and when Denton arrived to take his train, it was not
available, and had not been available throughout the whole month. Sues for breach of contract and
damages in tort. This case seems to say a schedule may have an offer with some implications to it. He
says in this case that there is a 1) contract and a 2) through a fraudulent misrepresentation, made a
representation that they knew was wrong or they made it recklessly without any regard to whether it was
right or wrong and I made it to someone wo was reliant and they suffered damages.
 Decision: Plaintiff awarded damages.
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Reasons:
o Basis for contract claim:
 Offer: it is in the timetable (there will be a train, and you can buy a ticket)
 Consideration: Denton says that he came to the train station expecting a train to be
running, so he can get a ticket
 There was reliance on the offer
o This is a unilateral contract: It is a promise in exchange for performance, there are two contracts
 Offer: If you rely on our timetable, we promise that a train will run and maybe you
can get a ticket (1 contract).
 Offer: pay the price of the ticket, you can take the train and the judges can either
accept your offer or reject. (2 contracts)
o There is a spilt 2 Judges say there was a contract and 1 judge says there is no contract. All three
say tort.
o Principle: a schedule of this sort engages the provider in liability either in tort OR in contract (or
both), because it is an offer where if you publish a schedule, you have to have a ticket available for
a train that will run. When the person goes to pay the ticket, he accepts the offer (subject to certain
conditions that it’s not full and he is able to board), There is a violation of contract here because
there was no train at all. This is in contrast to our price list’s where if you publish a price list that it is
merely an invitation to treat rather than an offer. However, in regards to a schedule, people rely on
these times. You don’t rely on a price list the same way you would rely on a schedule. You have to
think of what is reasonable under the circumstances.
o Note: Wightman argues that the train station did not get anything of value from Denton showing up
to the station so there is no consideration. Carlill would also say that this was consideration, and
performance is acceptance.
o Different Example – If a flight has over sold a flight, they will usually make offers to buy a person
out of their contract.
Carlill v. Carbolic Smoke Ball(1893)
 Recall Facts: that there was an intention to create a contract.
 Defendant’s second argument: if there was an intention to create a contract, there is no offer, because
the contract was not made with anyone in particular.
 Decision: Contract. Plaintiff recovers.
 Reasons:
 you can make an offer to the public at large—unilateral offer
 acceptance is in performance of the terms which completes the contract
 they go so far as to offer compensation to anyone who performs the act and catches flu
 unilateral contract: instead of a “promise for a promise”, it is a “promise for performance”
 generally, advertisements are presumed not to be contracts, but actions/statements showing the
sincerity of the promise may rebut this presumption
 these offers do not require notification of acceptance, as it is in the performance
 Therefore, offer is in the ad, and acceptance and performance are in Carlil’s going out and buying
the ball and trying not to catch the flu
The Satanita (1895)
 Facts: Satanita is a yacht, and along with another yacht, has entered into a race agreement with a yact
club. They are getting ready to engage in a race, and the Satanita crashes into the other yacht and sinks it.
The owner of the other yacht sues for damages.
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So, The Yacht Club says “if you enter into the race and win, you get a prize, and if you race you abide by
our terms”. The Satantia accepts, as does the Valkeryie also agrees. This is an admiralty problem, courts
in England have specific provisions for damage between boats.
Decision: Contract with other yacht club members. Plaintiff wins
Reasons: COMMON CONTRACTS FOR COMMON BENEFIT,
 K1: contract between Santanita and Yacht Club
 K2: second contract between the boat owners that is collateral to the main contract
 (1) Offer: to everyone who enters the race, same terms
 (2) Acceptance by entering or racing –contracts between all boat owners
This is a unilateral collateral contract
 Because the acceptance of the offer is performance (abiding by the rules upon
entering the race)
 involves mutual benefit for everyone, which makes it more reasonable
Final thoughts on Offer mechanics:
 Unilateral contracts involve offers that can be made to the world at large/to a specific person
 It is a promise in exchange for a performance
 The second contract can be between the same people (Denton), or between people who have entered the
main contract on the same terms (Santanita)
 There can also be unilateral, collateral contracts
B. Duration of the Offer
What we are saying here is , assume there is an offer. The question is, how long is that offer capable of
acceptance. How long can we accept and/or perform. There are really four different circumstances,
1. Revocation of Offer – By Offeror
2. Rejection of the Offer  The law says that once the offer is rejected by the offeree, the offer is ended
3. Counter Offer  The making of a counter offer, is in effect an implied rejection of the original offer
4. Lapse of the Offer  At some point in time, the offer becomes to stale to be accepted. It could be a
stipulated lapse state (ex. End on October 1), an implied lapse state
To kill an offer: revoked, counter-offer, rejection (you are free to make your offer to someone else), lapse (at an
agreed lapse state, or the court shows rules for determining what is a “reasonable” period of time before the offer
lapses)
REVOCATION: If revoked before accepted, offer terminates. Perhaps this applies to unilateral offers even if the
performance has commenced. The offer is open for acceptance until it is revoked. Revocation has to be
communicated, and the communication has to be knowledge that the offer has been revoked, or
communication that the offer has been made to someone else. A rumour that may be reasonably reliable is
enough to constitute revocation. The offeror has to explicitly tell you, or all other parties waiting on the offer, that is
revoked.
Petterson v. Pattburg (1928)
 Facts: Pattburg owns the mortgage on Petterson’s house. Pattburg says if you pay the mortgage 5 years
early, I will offer you a reduced price and I will accept it. Petterson’s executor agrees to this and pays the
reduced price. Petterson shows up himself and offers to pay off the mortgage. Pattburg tells Petterson to
go away, as he’s sold the mortgage
 Decision: The offer was revoked by the sale of the mortgage, Plaintiff loses.
 Reasons:
 offeror can revoke an offer of unilateral contract right up until the time the performance is
completed
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Acceptance must be performance of the exact conditions of the offer (in this case – pay off the
mortgage)
 no need for formal notice, just need to tell the offeree it was revoked
 Leiman: it’s not fair when somebody relies on an offer of unilateral contract, to allow them to
revoke their offer, after the person has performed it.
 can someone, for example, refuse to take someone’s money, which would make it impossible for
them to perform the terms of the offer?
 Cannot simply tell someone you intend to perform and have that be binding, but you can give them
something to bind them to the promise
 This is a harsh case
What do we get from this case – Offer of unilateral contract – the acceptance is full performance (must be
complete) of the offer, and it can be revoked at any time before the offer is complete
Errington v. Errington, (1952)
 Facts: Father says to his son and daughter in law that he will buy a house, and if they make the mortgage
payments, he will transfer the house to them. He dies, wills the house to his wife. The son moves home
with the mom, and the daughter in law continues to make the mortgage payments. The mother brings an
action to terminate the arrangement.
 Decision: There was a contract. Plaintiff wins.
 Reasons (Lord Denning):
o Once a performance had commenced, the mother couldn’t revoke the offer
o Problems with acceptance occurring at beginning of performance is that you cannot sue someone
for not completing the unilateral offer
o BUT, if they leave it unperformed/incomplete, the offer would cease to bind the offeror
o Principle: an offer of a unilateral contract cannot be revoked once the offeree commences
performance, but it would cease to bind the offeror of the offeree left it incomplete and
unperformed.
o What is a reasonable time to wait for performance?
 Solution: Suppose we said there was:
o (1) Unilateral offer: If you pay, I’ll transfer title (the offeror can revoke the offer right up until
acceptance)
o (2) Collateral Contract: If you commence performance in reliance on my offer of unilateral
contract, I will not revoke the offer.
 If you commence and continue performance
 And if I can’t prove that you won’t succeed within a reasonable time
 And the offeror hasn’t made the performance impossible.
 This follows the legal principles we have looked at (offer stands until accepted, acceptance begins when
performance commences)
 Note : Denning’s argument isn’t very well argued, and there are competing judgments (Petterson for
example)
The American Restatement of the Law of Contract: Their statement: Where performance is tendered in
pursuance of an offer of a unilateral contract, the offeror is bound by a contract, to allow the performance, subject
to the condition that the whole consideration can be tendered within a reasonable time and the promisor, has not
made the performance impossible.
Dickinson v. Dodds (1876)
Facts: Dodds has made Dickinson an offer, and says that it will be open for a certain period of time. Dickinson
wants the house, but he doesn’t communicate the offer. Dickinson hears that Dodds has made his offer to
someone else. Dickinson seeks him out and even goes to Dodd’s mother in law to accept the offer, then follows
him to the train station but Dodds then says it’s too late.
Decision: No contract. Defendant wins.
Reasons:
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o
o
o
o
o
There is no contract to keep the offer open so the offeror can close at any time. A
stipulation of an offer is not in effect a contract because there has
An offer can be revoked at any time before it is accepted, even if there is a provision in the offer that says
it will be open for a period of time, because there is no acceptance making this offer binding
This is an option contract: a statement of an offer that the offer is open for a period of time is not binding,
but it can be turned into one that is binding by someone making a separate contract by paying a sum of
money for that promise(ex. A deposit)
It is enough of a revocation for the to offeree finds out that the offeror made another offer
There was no meeting of the minds, as Dickinson acted in a way inconsistent with how Dodds reasonably
thought since he made his offer to someone else
Main points:
 Revocation doesn’t have of be directly stated, as it can be knowledge of acts inconsistent with the
continuation of the offer
 You don’t even have to be told by the offeror, or have the offeror do anything, you can find out from
a third party—because the revocation here is telling Dickinson that Dodds is negotiating with other
people All it is, is a question of fact – did the offeree find out information that says that a reasonable
person would think
 the quality of information being relayed by a third party has to be the quality that a reasonable
person would consider to be enough information showing that the offer had been revoked
 So what do we get from this case – It can be revoked at anytime, something must be given to
secure the contract, and it does not have to be specifically stated – must be sufficient to make the
offerree reasonably think that the
Shuey, Executor v. United States (1875)
Facts: April 1865: reward is offered by US government for Surratt
November 1865: government publishes revocation of the offer in same paper in which offer was made
April of 1866: St. Marie finds Surratt living in Rome, and he informed the authorities. He escapes to Egypt and is
finally captured. St. Marie says he had no knowledge of the revocation. The government pays him 10,000 of the
25,000 reward. Shuey is the executor of St. Marie’s estate, and wants the other 15,000
Decision: No contract.
Reasons:
o the revocation is published in the EXACT way that the offer is made so it is valid, so you can revoke
o an exception to our rule that says the revocation has to be communicated
o it would be impossible to communicate a revocation to EVERYBODY who may have gotten notice of the offer
since it was made to the world at large in a newspaper
COUNTEROFFERS AND REJECTION
Livingston v. Evans (1925) –cannot reduce price serves as rejection of counteroffer and reinstates original offer.
Decision: There was a contract.
Reasons: You have to read the communications in the context in which they are made. “cannot reduce price” in
this context DID constitute a new offer (a counter-offer). If the defendant had said he cannot accept 1600, this
would constitute a rejection of the plaintiff’s counteroffer, but not a restatement of the original offer, so our plaintiff
would have nothing to accept
Main Points: Counteroffer terminates an offer. A rejection terminates an offer. A rejection of a counteroffer can be
made in such a way as to reinstate an original offer, but normally a rejection of a counteroffer terminates an offer
LAPSE:
Barrick v. Clark (1950)-acceptance sent before revocation received, vice versa.
Decision: No contract. In favour of defendant Barrick. Time lapsed.
Reasons:
 Reasonable Time Test: an offer is only going to last for a reasonable amount of time, and after a
reasonable amount of time it will have lapsed and not be available for acceptance.
o (1) Circumstances of the offer: It’s winter, tenant on the land, longer lapse period because no need
to hurry
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o (2) Type of contract : land, not a commodity in a fluctuating market, therefore longer lapse period
o (3) Conduct of parties: parties wanted to hurry it up, shorter lapse period
Looking at the first two elements, you would think the lapse date would be long, but in these
circumstances, specifically with the conduct of the parties, they wanted it to be fast
If there was a stipulated lapse date, the concept of a reasonable time would not matter
Traditional theory is that lapse is an implied term of the offer
If you’re implying a term of the offer, you look at the facts that exist at the time the offer was made
Doesn’t matter what the wife said, because that’s not what was agreed to when made
The extension was unreasonable
2 alternatives:
o (1) Is the theory of lapse an implied term of the contract? – would not matter what wife said
o (2) Or do offers lapse according to the reasonable time test: has the offeree had a reasonable
amount of time to accept the offer, or will the offeror be deemed to revoke it? – wife’s pleading for
an extension should be relevant (Manchester applies test)
Manchester D.C. v. Commercial & General Investments (1969)
Decision: No contract
Justice Buckley: term of offer can state lapse on specified date, or there is implied term of reasonable time for
lapse
Two views: (1) if an offer is not accepted within a reasonable time, it must be treated as withdrawn/revoked.–
Look at things that existed at the time of the offer. (2) if the offeree does not accept the offer within a reasonable
time, he must be treated has having refused it - involves an objective assessment of facts and the determination
of whether on the facts the offeree should in fairness to both parties be regarded as having refused the offer.
(Buckley J prefers this alternative).
LAPSE OF UNILATERAL OFFERS
Loring v. City of Boston (1837)
 Facts: Buildings being burned once a week
o (1) May 1837: City advertises that it will pay a reward for apprehension and conviction of people
committing the arson
o (2) Jan 1841:Loring secures the arrest and conviction of an arson, and wants reward
o Boston says offer lapsed, although it was not put into the paper and revoked
 Court: No reward.
o The offer of a unilateral contract, like any other contract, is subject to the test of a reasonable
period of time for an offer to lapse
o A reasonable time for lapse is going to depend on the circumstances on which an offer is made
3. Acceptance
A. Communication of Acceptance
 General Rule: it must be communicated
 Silence can’t be an acceptance
 Offeror can’t impose upon an offeree to act/respond or otherwise be bound by contract
 There are exceptions to the rule
o Maybe there are customs in industry that are known to both parties
o Maybe there are previous dealings between the parties where they’ve always acted in a certain
fashion
o Maybe there is conduct of the offeree leading to the conclusion of acceptance
o Terms of the offer, where the offeror says “I don’t expect an acceptance from you” (Felthouse)
Felthouse v. Bindley (1862)
Decision: No contract, judgment for defendant.
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Reasons: Nephew did not communicate acceptance of the uncle’s offer (this is odd because his conduct of telling
the auctioneer not to sell the horse shows that he accepted the uncle’s offer). Acceptance must be communicated,
and omission does not amount to acceptance. Exception: if an offeror stipulates that the offeror does not need an
acceptance communicated, then a contract could be formed that way. BUT an offeror cannot impose a duty to
“act or you’re bound by contract”. The court may suspect that the uncle is trying to recover money for the horse
from the auctioneer instead from the nephew, so to avoid this sneakiness they don’t let the uncle recover from the
auctioneer
1. Silence is not an acceptance
2. Offeror cannot place on an offeree a duty to act or by bound
Colemcintyre-Norfleet Co. v. Holloway (1919)
Cole goes further than felthouse and says that there are times where exceptions apply
Decision: There was a contract.
General Rule: Acceptance must be communicated
Exceptions to general rule of communication of acceptance:
 (1) Custom known to both parties: does not apply here
 (2) Previous dealings between the parties
 (3) Course of conduct = acceptance * applies here*
o There may be certain circumstances where you have the opportunity to reject and you didn’t, and
after a reasonable period of time, your course of conduct can be taken as an acceptance
o He was in the store multiple times, prices are advancing, the salesman says nothing, reasonable to
think it was accepted
 (4) Offeror states he doesn’t require acceptance
Wheeler v. Klaholt (1901) – D sends payment draft in wrong amount as acceptance, then sends shoes to wrong
location and the goods are damaged. Plaintiff says, you bought these and you take them back at the contract
price. Defendant argues that there is not a contract because they sent the shoes back as requested
Decision: There is a contract. Plaintiff wins.
Reasons: this is a case of the goods being in the defendant’s possession, with the defendant’s consent, he was
not a stranger. the way D acted, course of conduct, is consistent with an acceptance having occurred. took so
long to respond, sent a bank draft, all showing that there was acceptance. Sometimes the conduct of the offeree
will be taken as communication of acceptance making there a contract. D did not return the goods within a
reasonable time, and there was a neglect of the duty to return imported an acceptance.
s. 47 of the consumer protection act (CPA) - If you have unsolicited goods that are delivered to a CONSUMER,
the consumer has no legal obligation with respect to those goods, unless the consumer expressly accepts
agreement to pay. Unsolicited goods cannot be something that is sent by the state.
Household Insurance v. Grant (1879)- Offeree says they intended to accept the offer, and they mailed a letter of
acceptance, and the offeror says he didn’t receive it.
Decision: Postal Acceptance Rule: a posting of a letter of acceptance constitutes acceptance from the date of the
posting (not when it was received). There was a contract, the rule applies here.
Reasons: Formation of contracts has more commercial value, giving the plaintiff this advantage. (1) Postal
Acceptance Rule doesn’t apply in certain circumstances (next 2 cases). If we superimpose a fault analysis on the
postal acceptance rule, this would make the offeree at fault because they are to blame for the acceptance not
reaching the offeror. If you are proven to be at fault for the failure of communication, the rule will not apply and you
will be bound. Main point: So the postal acceptance rule is an artificial loss allocation rule, but it is subject to the
fault analysis, and if the offeree is at fault, then acceptance is only communicated when it is received by the
offeror.
If the offeree can prove that they have posted, and they offeror can prove that they never received, the offeree
wins, a contract is better than no contract.
There are, of course, exceptions to this rule, largely based on a fault analysis. The postal acceptance rule is that
this only applies when the mail was a reasonable form of acceptance in that case.
- So, acceptance is good when posted
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Fault analysis – can it be proved that the offeree messed up in someway (put the
letter in a flaming mailbox.) – Fault of the offeree = Good when received (Lord
Denning says this “you can’t be at fault and take advantage of theses rules)
Not when authorized  Either expressely or implied (Henthorn v Fraser)
INSTANTANEOUS COMMUNICATON -Examples:
(1) Person makes an offer over the phone, and the offeree accepts but the line goes dead. It is up to the offeree to
communicate his acceptance and call back.
(2) If the line goes dead but the offeree does not know that his message did not get through (the offeror doesn’t
hear, but doesn’t ask for repetition), then the offeror is bound because it his own fault for not getting the message
(3) If the offeror is not at fault for not receiving the message, and the offeree doesn’t know it didn’t go through,
there is no contract
Entores v. Miles (1955)-Contract made by telephone.Where did the acceptance occur? In what jurisdiction was it
made? The contract is going to be formed where the acceptance is formed.
General Rule: With instant communication, the acceptance is good when received by the offeror
Lord Denning says you must go a little deeper: If one is using a telex, where the machine types it out for you,
what if the offeror’s machine is out of ink so that the person who sends it assumes it go through
Principle: (1)with an instantaneous means of communication, the acceptance is only good when received by the
offeror BUT (2)if the failure of receipt is on behalf of the offeror (who let his machine run out of ink for example),
and the offeree has no idea it didn’t go through, there is a contract.
How far does the first rule apply? – telex, telephone, fax (Eastern Power v Azienda), Electronice Commerce
Act – Says it applys to email see below. An e-document is presumed received when sent when addressee
designated use of system -> Send by email  Offer by email  When capable of receipt
Eastern Power Ltd. v. Azienda (1999)-The D in Italy sent a letter of intent to the plaintiff in Ontario. P sent
acceptance from Ontario to Ital. ,The parties could not agree of a joint venture agreement.
Decision: Contract was formed in Italy (where received). Postal Acceptance doesn’t apply. The rule is in place to
account for the interval between actual acceptance and the receipt of acceptance, but fax is more like telex
examples
Principle: An acceptance by fax transmission should follow the general rule of contract formation, not the postal
acceptance rule
Electronic Commerce Act, 2000 (Not in readings)
S. 19: The acceptance of an offer or any other matter essential to a contract may be expressed by electronic
means, or act that is intended to communicate electronically, by pushing an icon on a screen for example.
S. 22(3) . If the offeror says to accept in a certain fashion, and the offeree does, then he accepts when he
attempts to respond. But if the offeror doesn’t specify, then there is only a contract when the acceptance is
received.
Note: “Presumed to be received” is a rebuttable presumption. The onus is on the offeror to prove that it was not
received and that it wasn’t his fault.
B. Time and Place
When and where can it be said that acceptance of an offer has occurred?
(1) Offeror has a right to stipulate in the offer the means that constitute acceptance and to be bound by
acceptance only in that fashion. (Eliason v. Henshaw)
(2) The offeror should be able to stipulate in an offer how he or she would like the acceptance, but it has to be
absolutely clear that those are the terms.
(3) If the terms have not been made absolutely clear, then the offeror has to accept in any other fashion
provided that the way that is chosen for acceptance is not prejudicial to the offeror. (Manchester D.C. v.
Commercial and General Investments Ltd)
(4) The postal acceptance rule does not apply to acceptances where the offeror specifies in the offer that the
acceptance must be given by notice in writing. (Holwell Securities Ltd. v. Hughes)
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(5) Where the circumstances are such that it must have been within the contemplation of the parties that,
according to the ordinary usages of mankind, the post might be used as a means of communicating the
acceptance of an offer, the acceptance is complete as soon as it is posted.
(6) The postal acceptance rules applies if
o 1) post is the specified means of acceptance,
o 2) post is used to make the offer, or
o 3) it is reasonable to use the post under the circumstances.
(7) Today it wouldn’t really ever be reasonable to use the post. (Henthorn v. Fraser)
Eliason v. Henshaw (1819)-Offeror impose an obligation on the offeree to return acceptance by the wagon by
which the letter was dispatched. The offeree doesn’t do this, and the acceptance is communicated at a different
place from that stipulated by the offeree as part of their proposal. The plaintiffs (offeror) sue.
Decision: No contract.
Reasons: The offeror has a right to stipulate the very means which will constitute acceptance, and to be bound
by an acceptance only in that fashion. It was clear where the acceptance was to be sent, even if unclear about the
time. Offeree did not accept in that fashion, so there was no contract binding the plaintiff. Reasoning for this rule It may have been important to them ie. they may have needed to know at Harper’s Ferry in order for the
acceptance.
Manchester v. Commercial and General Investments
The offeror should be able to stipulate in an offer that he will only be bound to accept an offer in a particular,
BUT if he hasn’t made it absolutely CLEAR that it can ONLY be accepted in this particular fashion, then the
offeree can accept in any other fashion, provided that the way he accepts is not prejudicial to the offeror. It is likely
that the offeror will have to prove how the offeree was prejudiced in his acceptance.
It must be clear, otherwise you can still stipulate and can be accepted alternatively, but must be no less
convenient to the offeror
Holwell Securities v. Hughes (1974)-Defendants make the offer saying that it must be completed by notice in
writing any time within 6 months from the date. Plaintiffs sent their letter accepting the offer. The letter was never
delivered.
Offerree got offer in the mail, accepted offer by the mail, but offerror never got letter
Plaintiffs rely on Household Insurance that there is a contract from the time it was posted.
Defendants said there can only be acceptance by “notice in writing” (similar to the stipulation in Eliason). They
have the right to stipulate one means of acceptance and in this case, the null the postal acceptance rule. So the
point here is that you should be as clear as possible.
Decision: No contract. No postal acceptance rule. In favour of defendant.
Reasons: The postal acceptance rule does not apply to acceptances where the offeror specifies that the
acceptance must be by “notice in writing”. So the acceptance is only good when received. The use of the word
“notice” indicates that the offerors must be informed of the acceptance, and posting it is not sufficient. If you are
less clear about how you want acceptance, then the suggestion would still be that Manchester governs (and you
can accept in any other fashion unless the offeror shows prejudice).
Henthorn v. Fraser (1982)-Offerror hand delivered offer, the offeror gets a better offer for the property, so at noon
the offeror posts the revocation by letter and this arrives at 4:30. At 4:00 this same afternoon, offeree post
acceptance letter. Acceptance arrives and 8:30. Revocation and acceptance each arrive.
Defendants (Offeror): Dickinson and Dodd shows that once an offeror intends to revoke, no contract. The court
says that is a wrong interpretation of that case, and once the offeree KNOWS the offer has been revoked, that’s
when there can’t be a contract. The post wasn’t the chosen means of acceptance
Decision: Contract. Postal Acceptance rule applies.
Reasons: Offeree can accept by post if he wants, as it was not unreasonable to accept by post, so acceptance
occurred when mailed, before revocation was received
Main point: the postal acceptance rule applies when:
 If I specify to “mail me a response”
 If I gave you the offer by post
 Usual course to use that means of communication If it is reasonable to accept in that fashion (from the
point of view of the offeree) under the circumstances
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 Parties have used the post before, so it is a custom between the parties
This case clearly shows that a revocation is not effective until it is received . And acceptance is good at the time of
posting. The defendants say that this does not apply because the offeree does not accept in the same method as
the offer was made  Courts Reject this. Because the parties lived in different cities, it was reasonable to use the
post. If you fail the postal acceptance rule, the acceptance will only be good when the acceptance is received.
This is an implied means of communication (see MAIN POINTS in this case – this is the test you have to use
when looking at the post)
C. Acceptance of Unilateral Offers
Carlill v. Carbolic Smoke Ball
Problem with acceptance being the performance of the offer is that we learned that we must communicate an
acceptance
(1) Before performing an offer of unilateral contract, do I have to inform of my intention to perform? Generally,
when an offer is made, the acceptance should be notified to make it a binding contract- in this case, if you need
notification of the performance/acceptance, the notification of the acceptance is not needed before the
performance
(2) Suppose the offeror doesn’t receive the notice of acceptance in my performance that’s required—do I have to
notify afterwards?- perhaps acceptance is one where the offeror need not find out at the time of the performance
(3) Is there an obligation to notify the performance if the offeror won’t know of it otherwise?
(4) Do I have to be motivated (perhaps by knowledge of the offer) in an offer of unilateral contract (R v. Clark)
Bishop v. Eaton-guy pays for friend’s son
Facts: A father says to a friend of his who lives in another city that his son Harry is coming to live in the friend’s
city. He asks the friend to lend Harry any money he needs while at school, and the father will pay him. The friend
says he wrote the father a letter saying that he had given Harry money for years, and the father said it’s too late
and the offer has lapsed.
The court has to answer the question is it necessary in performance of a unilateral contract, that the offeror get
acceptance of the performance.
Issues: (1) Does the friend have to notify his acceptance (performance) to the father? (2) Did the person, by
posting the notification, take advantage of the postal acceptance rule?
Decision: In favour of the friend. Postal Acceptance rule applied to the notification.
Reasons: If performance of an offeror of a unilateral contract will not provide notice through the performance
itself, must notify the offeror within a reasonable period of time. The postal acceptance rule would apply to
that notification—so the notification takes place where the letter was mailed, and the acceptance is in the
performance
The Crown v. Clarke (1927, Aus. H.C.)- guy helps with murder case for own gain
Facts: 2 police officers murdered. Clarke is co conspirator and arrested for the murders. He says he knew about
the offer for a reward to give information to lead to the conviction of the murderers, but his motivation was not to
get the reward, but it was so that he would not be charged with murder. He says he did everything required by the
offer (gave the information that would lead to the arrest and conviction), and he is entitled to the reward.
Issue: Is motive relevant?
 Did he perform the offer of unilateral contract with the intention of accepting the offer and getting the reward?
 Does it matter if there was a secondary motive which was to ensure he was not charged with murder
himself?
Decision: Clarke loses.
Reasons: Motive DOES matter. To claim an offer under unilateral contract, you have to know about the offer and
you have to be motivated by it (or at least partly motivated by it)
Questions: Can you have 2 motives? (your own motive, and one motivated by the offer) Was Clarke denied the
reward because of who he was? (it seems so)
 Williams v. Carwardine: the woman is entitled to her reward, but in this case Clarke is working the camp and
stealing gold nuggets—so perhaps the court bases its decision on who is claiming the reward. But this is not
how it should be. Facts: Women is aware of a murderer, and aware of the reward. Woman is beat up by
murderer and thinks she is going to die so reveals the murderer. She survives the beating and gets the
reward. She might have not been primarily motivated by the offer by she was in some part.
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Fitch v. Snedaker: At least you have to KNOW about the offer, otherwise you can’t claim an award for
performing/accepting the terms. Facts: Someone caught a person and then later realized there was a reward
Smirnis v. Toronto sun Publishing: Involves the Bernardo murders. Smirnis knows about the murders. He is an
unsavoury person, but approaches the police and tells them what he knows. The police investigate and do not
think it is Bernardo. They get more information, but don’t have enough to obtain a search warrant. They go
back to Smirnis for more information, get a search warrant, arrest him, and then the rest follows (Carla gives
the rest of the information). Smirnis wants to claim a reward, but the Toronto sun says he was not exclusively
responsible for the arrest that led to the conviction. They also say he didn’t do this out of any pure intentions,
but only out of greed for wanting the reward. Initial Reward - $100,000, Smirins gets $10,000
Court: Awarded $10,000.
Reasons: Character is not a reason to deprive someone of a reward; in fact, unsavoury people are likely to
know more information! Doing things out of civic duty as opposed to greed shouldn’t matter either, as long as
you’re interested in the reward at the time of performance. The information, that is in effect the
acceptance, has to be relevant, helpful, and effective, but it didn’t need to be the real, proximate cause of
the arrest, to satisfy the required acts. BUT we should be able to divide up the reward based on what we think
is fairForbes: this point does not make sense, as he should get all or nothing (either he accepted or he
didn’t), they should not give $10,000 arbitrarily.
Forbes think Clarke case is a little bit limited to its own facts. Conclusion
1. You have to know about the offer
2. You have to have it in your mind
3. You have to be motivated by the offer. You could have two motives
SUMMARY: Acceptance of Unilateral Offers
In general, it is not necessary to give notice of your intention to accept an offer of unilateral contract
(2) Carlill tells us that if notice is necessary, normally the offeror gets the notice at the same time they find out
about the performance, and that is fine
(3) Bishop v. Eaton says if you don’t get notice through the performance, than the offeree may have to give
notice of the acceptance within a reasonable period of time, and the postal acceptance rule applies to the
giving of that notice.)
(4) R v. Clarke tells us that motive may be relevant. It may be necessary to be motivated by the offer, and it is
certainly necessary to know about the offer at the time of performance.
(5) Smirnis tells us that you can be motivated by greed, be an unsavoury person, but you still have to at least
be interested in the reward at the time of the performance. This may not ‘overrule’ Clarke.
4. Consideration
Principle: A promise is not enforceable until the promisor obtains some benefit for the promise, or unless the
promisee incurs detriment at the request of the promisor. In order to be enforceable, both parties must get
something or the person must request something for the other person that the wouldn’t normally give (a detriment)
You must get something in exchange for your bargain—either you benefit, or the other person must act to their
detriment (which presumably would provide some benefit to you)
As consideration evolved it was more about saying, what sort of promises should we enforce, ie. there is
consideration for this promise.
 The courts began to look at which promises had good reasons to be enforced, which evolved into formal
rules about consideration (= worth enforcing)
 Exceptions: Documents under seal are binding, even if there is no mutuality - the thought here is that if
you go to the time and the effort to show your intention that it is worth enforcing and that it is binding, then
it should be enforced. A seal always works. There are cases that say if you have no seal, you can put an
“x” through the seal spot and then sign. There can be questions that arise based on when the document
was signed and sealed, so you have something saying, “Signed sealed and delivered” and have a witness
sign.
 For a contract to be enforceable:
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Each of the parties must have given something to bind each other to the promise (mutual
promises) , OR
o The giving of something in exchange for a promise, OR
o A requests the B to do something to B’s detriment, even if there is no direct benefit for A (the
request presumes there will be a benefit)
Will look at what is sufficient consideration
The courts do not look at the adequacy of consideration
The big problem with illusory consideration is that most of the time the consideration in these cases isn’t
flowing from the person trying to enforce the promise
A promise not to do what you have no legal right to do is no consideration (White v. Bluett)
A. General Consideration
Tobias v. Dick & T. Eaton Co. (1974)- Agreement to buy grain grinders.
Facts: The contract was drawn up by Tobias and says that Tobias can sell and organize territory and appoint his
own agents for Dick’s grain grinders, and at no time can there be more than five machines unpaid for, and all
machines must be paid for in cash unless with the consent of Dick. Tobias ordered a number of machines on two
separate occasions, took delivery of them, and paid for them. He was not able to sell some of them, but he has
not requested any more machines from Dick. There had been no refusal by Dick to live up to his offer to sell
machines to Tobias. It was only once he lost all hope of disposing his machines to Tobias that he decided to
ignore his agreement and sell his machines elsewhere. Tobias sues Dick for breach of an alleged contract and
Eaton for interfering with his rights under that contract. Plaintiff enters into contract with D to sell grain grinders
exclusively, P does not do well, D sells to Eatons, P sues for breach of contract.
Decision: No contract. No consideration, only an offer. Judgment for D (Dick).
Reasons: This contract is one sided and all the benefit goes to one side. Tobias gave himself the right to “sell”
Dick’s grain-grinders under a specified time and place, but he hasn’t found himself to do anything in exchange for
that promise to buy grain-grinders. Dick offers Tobias the right to place orders for the sale of grain grinders (offers
to sell to Tobias), so the offer will be accepted when Tobias comes back and places an order. This is a standing
offer,(it is nothing more than the offeror saying, “when you place orders, then I will supply grain
grinders”. Ie, a contract is formed when an order is placed). The offeror can revoke the offer at any time,
subject to revocation and lapse before acceptance, and is unsupported by consideration. Therefore it is not a
contract, but an agreement to sell at a fixed price. This is like our option contract (Dickinson v. Dodd)—give
something in exchange for keeping the offer open, effectively turning the offer into an option contract—but there
was no consideration given here, as Tobias could have paid money, agreed to buy a minimum number, recruited
a sales manager, entered into a marketing program, was all of that would have been some benefit to dick, at the
Dick’s request, to Tobias’ detriment.<-- This would have made it a valid contract. Must have benefits flowing to
both sides
Principle: When the promise is a bare promise, with no benefit to the offeror, there is no consideration and
therefore no good reason for enforcing it.
B. Sufficiency of Consideration: Consideration must
- be real, not illusory.
- Does not have to be adequate:
- Don’t ask, “did you get value”, you ask” did you get something”.  We don’t test adequacy under the law of
consideration.
Thomas v. Thomas (1842, Q.B.)- living in husband’s house out of respect for his wishes
Facts: Mrs. Thomas has been given the right to live in this property for the rest of her life as a life tenant. “In
consideration of a pious respect for the wishes of the testator, the document confers upon her a right to
live in the house for the rest of her life. She shall pay a nominal rent of 1 pound/year and she has to maintain
the property”. Later the executors kick her out, and she sues.
Executors: No consideration!
Mrs. Thomas: Document includes the words “in consideration”
Decision: Rent and Maintenance is consideration.
Reasons: “pious respect” for the wishes of Mr. Thomas is not tangible but is illusory. She did not give
anything to the executors. However, there is another obligation: nominal rent of 1pound/year, and the
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obligation to maintain/repairSo this is the consideration moving from her to them. As long as the
consideration is real, it does not have to be adequate
Principle: As long as the consideration is real, it doesn’t matter if it is a bad bargaincontract.
Notes: Even if the consideration was a peppercorn, it is REAL despite not being adequate.
 What if the consideration was a promise?
o Ex: I promise to pay you X dollars, and you promise to give your house to me.
o Principle: In order for a promise to be consideration, it has to be certain enough to be enforceable
 What if the promise was a moral obligation?
o Eastwood v. Kenyon: The plaintiff pays for the upbringing of the testator’s (who dies) children.
When the testator is about to marry, she and her husband promise to reimburse the plaintiff, and
they don’t. Is this a promise with consideration? A moral obligation may be binding in conscience
but is not binding in law, and it is illusory.
o Principle: A promise for a moral obligation is not supported by consideration.
 What about “in consideration of natural love and affection” (parent-child)Illusory.
- Consideration must be real and not illusory
- Doesn’t have to be adequate
- A promise can be good consideration as most contracts are. “I pay you x dollars for
car, you give me car”
White v. Bluett (1853, English)- son must stop bitching to dad to avoid paying. He stops, father dies, demanded to
pay.
Facts: Son is complaining to the father about not receiving as much money as his siblings. Father says “If you
stop complaining, I’ll make sure you don’t have to pay the money that you owe me under your promissory note”.
The father dies, and the executor sues the son to pay.
Decision: No consideration.
Reasons: The father can do whatever he wants with his estate, and the son had no right to complain In order for
a promise not to do something to be consideration, it has to be a promise to stop doing something that you have a
legal right to do. The son’s detriment is not consideration, because he had no reason to complain. “the natural
love and affection “ is illusory (like pious respect) because the father is saying “in consideration of MY natural love
and affection for you, I am bound by this promise”. But that is in the wrong direction. It is the son who has to give
something in exchange for the promise, not the recital of love by the father.
Principle: Agreement not to do something that you had no legal right to do is not consideration. An agreement not
to do what you have a legal right to do IS consideration (I won’t sue you if you pay me a sum of money).
Forbes is not so sure that this is exactly fair, ie. the son may have had the right to annoy the father for being
unfair. THE PRINCIPLE IS CORRECT, however, the application in this case may be unreasonable (Just Forbes’
thoughts)
Dutton v. Dutton – You have to ask whether the activity being engaged in is a crime or a tort, then it is not
consideration (tainted by crime or tort), they had no right to do that in any event.
A settlement agreement (if not based on frivolous legal action) would have made this a valid.
Stilk v. Myrick (1809, English)- seamen must get home safely
Facts: Partway through a voyage, 2 seamen jump off the ship. The captain says to the rest of the seamen “if you
work the ship back to London, I’ll increase your pay.” They sue for increased salaries.
Decision: No increase--they get what they originally bargained for.
Reasons: Captain says that there was no consideration, because the men were already under obligation to do
what was necessary in times of emergency. Under the interpretation of the contract, they had nothing more to
give, and were doing what they were already bound at contract to do, therefore not binding
Principle: An agreement to do what you were already bound in contract to do is not good consideration. (despite
how it appears, this is actually not limited in its application).
Notes: In the cases cited, the seamen had done something additional to their original contract, so there was
consideration.
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Hartley v. Ponsonby: For the ship to go to sea with so few hands was dangerous to life. If so, it was not incumbent
on P to perform the work and he was in the condition of a free man. Was consideration. Because of these
circumstances, a reasonable interpretation would show that there was a new contract.
Scottson v. Pegg: A (captain) C (third party who offers $500 for getting his cargo back to England); AB (the
seamen) Principle: An agreement to do an act which the promisor is under an existing obligation to a third party
to do, may amount to valid consideration. The promisee obtains the benefit of a direct obligation (originally from
New Zealand Shipping)
A has a contract with B for performance, A must perform, A enters into a contract with C to fulfil the original
contract with B and C will give A benefit because the fulfillment of the A-B contract is of value to C. A can now be
sued by two people for the failure to perform. Consideration valid.
Dalhousie v. Boutilier Estate(1934, SCC)- guy died before donating to university
Facts: Boutilier promises to donate to the university, and fills out a pledge form for the purpose of maintaining and
improvement of efficiency and teaching as well as in the consideration of subscription of other people (mutual
pledges), but he dies before he can pay. His estate refuses to pay (because they argue there is no consideration).
The university sues.
Dalhousie’s 3 arguments:
 (1) Spent money in reliance on his promise  They are saying consideration need not be a detriment to
the promissory, reliance could be a detriment. Court
 (2) “In consideration of the subscriptions of others...”— he’s bound to the contract (ie. in consideration of
others pledges, I will also pay)
 (3) “In consideration of the maintenance and the improving of the efficiency of teaching”—he’s bound to
the contract
Decision and Reasons: No consideration
 (1) no detrimental reliance on HIS promise alone, there were others
o no request for them to incur detriment; no benefit to him as he had no personal attachment to this
project. No request and no personal interest (“you may have incurred a detriment but, I did not ask
for it)
 If he had said, I will pledge the money for so you can dig a hole for a building then there
may have been a detriment \,
o Note: this will resurface under promissory estoppel (not consideration, but there’s an element of
fairness in considering detrimental reliance)
 (2) wrong direction
o The subscriptions of others doesn’t move from the college (offeree) to B (offeror)it’s coming from
others! Court says this is illusory.
 (3) for promises to be consideration for promises, must be certain enough that it could be enforceable. He
could never prove (if the money was given) that the purposes of the money was used properly.
o Could infer an enforceable obligation if the university had actually promised to do something
concrete if the university had said they would spend $5000 to hire a new person for the teaching
department in consideration of B’s agreement to give $5000, maybe it would have been
enforceable
Note: Some organizations say that they don’t want pledges to be enforceable, because they don’t want to
discourage people from making donations. Others say that in order to ensure that they can follow through with
their plans, they have to make pledges enforceable. There are a number of ways to make sure that the promisor
(donator) gets a benefitname a building after him, a classroom, a plaque.
The Seal
 This is a practical solution to many problems
 If somebody is serious enough about the promise that they made, that they put it under seal, even though
it’s a bare promise and unsupported by consideration
 this is the type of promise that we should enforce, because the person has demonstrated their sincerity in
the promise
 Historically we talked about sealing rings –heated wax and stuck the family emblem seal in the wax, and
sealed an instrument in that fashion—that wasn’t really necessary
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If you went through the formalities of sealing but you didn’t do it properly/didn’t have a sealing ring, you
could still have an enforceable promise (King Edward bites his wax to show the sincerity of the promise—
he intends this instrument to be binding upon him)
Today we have red wafer seals as a formal sealing
Signature line; “signed sealed delivered in the presence of”_______, and the witness signs beside a red
wafer sticker
When would you do this?
If you recognize in the course of a transaction that you have a problem with making your bare promise,
put the contract under seal—it is an easy solution
This is just an exception to the law of consideration—the problem still is that you have to recognize that
there is an issue with the contract being unsupported by consideration
Bottom line: if you see that you may lack consideration to perform a bargain, even under writing, put it
under seal
C. Past Consideration
 There is a principle here that consideration has to co-exist with a bargain/promise
 General rule: If something is done in the past, and you make a promise to pay in exchange of what was
done, the courts say this is not consideration
Roscorla v. Thomas(1842, English)-guy buys evil horse
Facts: Plaintiff pays defendant for horse. After the exchange, the plaintiff asks what the horse was like, and the
defendant says he’s “free from vice”. Later, the horse is proven to be very vicious. The plaintiff sues, and the
defendant says the second promise about the horse’s good qualities had no consideration, as the consideration
had passed for the original promise (paying for the horse).
Ruling: No consideration. Plaintiff loses.
Principle: Moral obligations that might be owed are past and are not consideration, and the present promise
must have consideration.
Notes: Mills v. Wyman: there are great interests of society which justify the court’s decision not to enforce moral
obligations (imperfect for this reason). In the 18th and 19th centuries it was thought that moral obligations should be
sufficiently enforceable, but this view has since been overruled. Still, promises to pay prior debts may be
enforceable.
Lampleigh v. Brathwait (1615, English)-plaintiff works hard to get King’s pardon
Facts: The defendant criminal required the plaintiff to work hard to obtain a pardon for the defendant from the
King, and said he would give him 100 pounds. Once the plaintiff did this, the defendant refused to pay. The
plaintiff sued.
Decision There was consideration. Plaintiff wins.
Reasons: The courtesy exercised by the plaintiff was moved by the request of the defendant—so the defendant
criminal requested that the plaintiff do something to benefit himself. The promise that was to follow (the payment)
is not naked, but is coupled with the actions of the plaintiff.
When can we attach a promise to a past consideration?
 There’s the element of fairness under these circumstances
 There is a circumstance where the person who make the subsequent promise REQUESTS a performance,
and the circumstances are such that you would expect the performance to be compensated (like in this
case where P put in a lot of effort and should be compensated), so the subsequent promise of
compensation can attach itself to consideration
Notes:Webb v. McGowin:
Facts: W saved M’s life and was severely injured that he could no longer work. In consideration of this act of
bravery, M promised to pay W for the remainder of his life. After he died, M refused to pay, and his estate sued.
Court: The court found that M’s promise was enforceable as his material benefit of being saved implied that his
express promise to pay affirmed what W had done, and raised the presumption that the services rendered were
at M’s request.
The general rule is Roscorla, (no past consideration) but you should expect compensation when you have:
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(1) a request made by the promisor
(2) under circumstances where you expect compensation
(3) after the performance a promise to pay an amount
D. Performance of Existing Duty
Principle: If an agreement to do what you’re already obligated in contract to do is with the person from the original
agreement, then it’s not consideration for a new promise. The reason is that you have nothing more to give,
because you’ve already agreed to your original promise (Stilk v. Myrick)
Stilk v. Myrick – see above under “sufficiency of consideration”.
Williams v. Roffey Bros. & Nicholls. (1991, English)-fixing the problems of performance of existing dutiescarpenter
works too slowly for underpriced contract
*Looks like Stilk v. Myrick—but hinges on what the interpretation of the contract is
Facts: Plaintiff (sub-contractor) entered into a contract with defendant (head contractor) to renovate a number of
flats for 20,000 pounds. The plaintiff made a dumb contract, as he has underpriced the contract, and has not
supervised his workmen properly. The defendant has entered into the main contract with the owner. The owner
has a provision in his contract with the defendant that says if the work isn’t prepared on time, there is a damage
clause for the defendant to pay. Defendant realizes the plaintiff is getting further behind in performance, and
recognizes that part of the problem is that the plaintiff is complaining that he can’t make money under this
contract, so why would he put all his effort in? So the Defendant says, if you renovate these last 15 flats in a
timely fashion, instead of the original 20,000 pounds, I’ll give you another 10,300 pounds, or 585 pounds per flat.
Plaintiff agrees, completes another 8 flats, and goes to claim some money and the defendant refuses. Plaintiff
sues and says he is owed a higher sum of money for the 8 flats completed.
Defendant: P was already bound in contract to complete those flats for 20,000 pounds, no consideration. (would
cite Stilk).
Plaintiff: There was a practical benefit for D, which was the performance on time, which saved him having to pay
the owner the late fee from the damage clause.
Defendant: We got a practical benefit, but it’s not a benefit recognized in law as being consideration, because it’s
kind of illusory.
Decision: There IS consideration for new bargain. In favour of P.
Reasons:
 If there is a practical benefit for the person who has an obligation to perform out of the new promise, then we’ll
treat that as being good consideration
 Why would D enter a second agreement with the same person to pay them a sum of money if there wasn’t a
practical benefit for D to do this?
 Almost like extortion for the plaintiff to refuse to perform until he gets paid more—courts say this was not like
that (not economic duress)
 This is creating an exception to Stilk: To have a new contract, it should be bi-lateral, so that both parties
get something out of it (in this case the P gets more money, D gets the original performance, but he should get
something else—quicker performance, better, etc...)
But how is this different from Stilk? The captain expected to get home, just like Roffey expected to get flats
completed. Perhaps you could argue that in Stilk if those seamen worked harder than they would have
otherwise—then there would be consideration. Recall that the interpretation of the Stilk contract was to do
“whatever it took to get home”, so maybe their performance was just their original contract, and there was no
additional benefit
 Roffey decision could be fairly broad, because unless the P is under economic duress, the promisor would
only get his end to the new agreement if he got a practical benefitWhen people enter into a new bargain for
valid reasons, they’re only going to do it they’re getting a practical benefit
 For the performance of existing duties to be consideration:
o (1) There has to be a practical benefit. (2) Can’t be an agreement made under duress – the facts have
to show that there was a real reason for the performance not occurring in a proper fashion (in this
case, it was materially underpriced), causing the second agreement to be formed
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If you can show that something ADDITIONAL is given (the promisee performs better for example), then you
probably don’t even need Williams v. Roffey Bros. BUT, If there is evidence for extortion, this will not apply
and there’s no consideration.
Note: This is not Canadian law, but it would likely be applied here. This seems to override contract law.
Commentary on this case: with this concept of practical benefit the court widened the scope of consideration
making it easier to satisfy, as long as consideration moves from the party seeking to enforce the additional
promise. The doctrine of consideration is inappropriate in this case to determine enforceability. The reason for
the court’s reluctance to enforce additional promises are policy-related (to make sure that the promisor is not
unfairly pressured to make an added promise)
Glidewell: the presence of economic duress would negate a finding that a particular practical benefit could
constitute good consideration (later English cases moved from his approach)
Foakes v. Beer(1884, H.L.) –woman promises not to sue for interest
Facts: Foakes owes Beer money, and Foakes can’t pay. They enter into an agreement where he’ll put down 500
pounds, and then pay her regularly every 6 months. For this she agrees not to sue him, and promises not to
enforce post-judgment interest. He pays off his debt, and she sues for post-judgment interest. Beers argues:
Pinnel’s Case: Defendant owed money to plaintiff. Plaintiff accepted a lesser sum prior to the due date of the debt,
and said that was all he had to pay. The lesser amount was paid, and the plaintiff subsequently sued for the rest
of the debt.
Pinnel’s Principle: An agreement to accept a lesser sum in satisfaction of a greater sum is not binding unless
there is a new accord (agreement) in satisfaction (the tendering and receipt of something different). Sir Edward
cook said that if she accepted the payment early in satisfaction of the whole payment, that’s fine and there is an
accord in satisfaction, because the early payment is something different, and the value of the payment would be
immaterial.
Decision: Beer can recover. Her acceptance of the lesser sum was not binding.
House of Lords: Apply Pinnel’s: Foakes didn’t do something different to satisfy the interest he already had an
obligation to pay. An agreement to pay a lesser sum in satisfaction of a greater sum is not good consideration,
unless Beers would get something different (payment early, at a different place, get a horse/hawk...). Otherwise,
the agreement to accept the lesser sum is not binding, because the defendant already had an obligation to pay a
greater sum.
Consider: There is a separate area where this Pinnel’s rule applies. Why can’t we apply Williams here, and say
that there is a practical benefit in getting the lesser sum over time, and saving Beers the heartache of having to
sue?
Notes: Payment of a debt or part of one by a third person has been held to operate as a discharge of the original
debtor. Where several creditors agree with the debtor to accept a proportion of their claim in satisfaction, such
composition agreements are held good, and it is usually stated that the promise of each creditor is consideration
for the promise of every other creditor
Mercantile Law Amendment Act (R.S.O. 1990) – Fixes a Foakes v. Beer type of problem
 Part performance of an obligation, either before or after a breach thereof, whether expressly accepted by
the creditor in satisfaction, or rendered in pursuance of an agreement for that purpose, though without any
new consideration, shall be held to extinguish the obligation.
 If I accept the lesser sum of money, which was rendered pursuant to an agreement, it extinguishes the
obligationFoakes would have been saved by this.
 Even if there’s no agreement, but I accept the part performance, I may be bound
 Example:
o I sent out an invoice for $100,000 and he sent me $85, 000 with a letter saying “if you cash the
money then my obligation is terminated”— I should cash the cheque and write back saying “thanks,
but I expect to see the $15,000 in due course”
o If you cash the cheque but don’t say anything, then that can be considered that you expressly
accepted the part performance in satisfaction, so you write the letter requesting the rest of it, and
rely on Foakes v. Beer that you can get the whole sum
 This is a statutory provision and overrules Foakes v. Beer only if you fit into the statute:
o “rendered an agreement which is expressly accepted” or
o “rendered in pursuant to the agreement”
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A bare agreement to accept a lesser amount in satisfaction of a greater amount is not binding because
there is no consideration
The thinking by the courts is that Stilk v. Myrick (and Foakes v. Beer) are unfair cases!
So they and the Legislature are trying to find resolutions with Williams v. Roffey and this Act
E. Promissory Estoppel
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In these cases, these are agreements that fail for lack of consideration
Where this comes at you is a situation where you have an exisiting contract, you bargain for an
amendment (so not as much as before) with no consideration, the offeror says well there was no
consideration, this is where the law comes in and says there has been equity that arises that will stop you
from going back
 One of the parties had a reasonable assumption that there was a contract, resulting in detrimental
reliance, and the person throws in fairness to make it enforceable
 The parties are not saying there was a contract, but that in these circumstances it’s unfair to hold a person
to their original bargain when they thought there was an amendment to the bargain/they thought they had
a new deal
 In some special circumstances, we may say that a person is estopped (is not allowed, precluded) to
consider themselves not bound by a contract/agreement even though it’s unsupported by consideration
 In effect we have a concept that says it’s not a contract that we’re forming, but with certain fact patterns,
one is not permitted to deny the existence of an agreement (so you are bound)
 “Estoppel at law/ “Estoppel in pais”
 Someone, by their contract, is being told by the court that their conduct forbids them from saying that there
was no contract (Colemcyntyre- conduct of not rejecting when he had many opportunities is )
 We have always seen this, that sometimes, by your conduct, you have stopped yourself from saying there
is no contract. In this case, by your conduct, you have accepted.
Steps for effective promissory estoppels
1) We have to have a promise related to existing legal relationship
2) W.O. consideration but intended to be acted upon
3) Estoppel from insisting strict legal rights
4) Cant be unequitable to grant remedy (Dand C Builders)
5) Promise results from negotiations or arises in reasonable circumstances
6) Reliance on the promise to detriment of D
7) Estoppel is a shield, not a sword. (Combe v Combe) ie. Estoppel’s do not create new contracts
8) If it is related to a proprietary estoppels -> when it relates to an agreement to a transfer in land
Lets go back to the beginning
1) An amending agreement, that is changing the original performance (in all of these cases, we have a prior
agreement and an amendment that changes the agreement Stylk or Foalkes)
a. You are not bound at this point because there is no new amending agreement
2) Unless the promisor, gets something different, the new amendment is not enforceable (no consideration)
3) So then you say, Did I get a practical benefit and no duress, then you treat it as the equivalent of
consideration (Roffey Bros) 
a. Questions apply to if this applies to lesser sums of money
4) If it is a payment case, does the Mercantile Laws Amendment Act apply (see above)?
5) If I have no new contract and MLA act does not apply, then we have estoppel (subject to all of the
specifications that we just put into estoppels above).
Jordon v. Money (1854) – cited in High Trees
The whole concept of estoppels only relates to a representation of present fact, does not apply to a
representation of future contract (if you say ‘we will have a contract in the future”, this does not form an
estoppel) or, of course, unless it is supported by consideration, . You can’t plea a common law estoppel if a
person promises to do something in the future. We have promissory estoppels and equitable estoppelswhen
does it fill in the gap with promises unsupported by consideration. The cases effectively say, if you have a promise
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of future intention/activity, the only way that promise can be binding is in a contract supported by consideration.
Cannot be bound in an estoppels as to future activity, but I may be bound by my conduct to a present statement.
Central London Property Trust Ltd. v. High Trees House Ltd (1947)- landlord promises to accept ½ rent
Facts: High trees were told that there’s a landlord who has rented a block of flats. The landlord tells the head
tenant, during the course of the war, that he’ll only take half the rent from them. Landlord’s receiver looks at the
lease in 1945 and says that he’s entitled to double the rent, and he sues for 6 years of full rent. We have a head
lease which says “pay full rent”. We have a substitute agreement for the landlord to take half rents Landlord
should cite Stilk v. Myrick, as he is not bound to accept half rents; this is an agreement to pay less for no
consideration. Landlord cites Jordon and says it was a promise for the future not to insist on full rents, but it is not
binding by estoppel.
Decision: In favour of defendant (not the landlord). IS promissory estoppel.
Denning: Finds an equitable/promissory estoppels from these facts, and in light of this, the landlord can’t go back
and demand full rent for the time of the war. Note that this is not a contract—no suggestion of a contract to
accept the lesser rent. We have an equitable principle that says “even though there’s no contract, you’re not
allowed to insist upon your contractual rights”. So there is an equitable right that stops you from insisting on your
original contractual rights (meaning the landlord cannot insist on his original agreement to get full rent)
The person who makes the subsequent promise is estopped from insisting on their original contractual rights
when:
 When there is an existing contract – (1) promise related to an existing legal relationship
 There has been a promise intended to be binding , but unsupported by consideration so it’s not binding,
which is to modify the contract or not insist on your original contractual rights - looks like an agreement in
which there is a pre-existing contractual duty – (2)W.O consideration but intended to be acted upon
 Intended to be acted upon, and in fact acted upon - (3) Estopped from insisting on your strict legal rights
At the time of this case, these were the elements that were needed to give an equitable right
Contract in Jordan and Money that said there was a representation of present fact. In this case there was a
representation of future, so not a new contract, but there is an equitable principle
Limitation 1: Ajayi v. RT Bristol (1964)
Principle: In order to have real promissory estoppels, the person to whom the promise is made has to rely on the
promise to his detriment (= detrimental reliance) must have been acted upon to the detriment of the defendant
(you have to be able to show, not just there was a promise, but also that there was reliance on the problem to the
detriment of defendent [ex. “Oh, so I only owe you 5 g’s instead of 20, ok, I will go buy that new car now). This can
include spending money, or anything showing that they acted differently based on the promise
When one party to a contract, in the absence of fresh consideration, agrees not to enforce his rights an equity will
be raised in favour of the other party when the other party has altered his position. The promisor can resile from
his promise on giving reasonable notice, which need not be formal notice, giving the promisee a reasonable
opportunity for resuming his position. The promise only becomes final if the promisee cannot resume his position
The court says, if you don’t rely to your detriment, there is no strict legal rights. The thought here is
that this is not a new contract, simply equity.
Limitation 2: John Burrows Ltd. v. Subsurface Surveys Ltd. (1968, SCC). Goes back to though that there has to
be a promise related to existing legal relationship and has to be INTENDED TO BE ACTED UPON. The new
promise has to result from negotiation or arise in circumstances where it is reasonable to be acted upon. What
you can’t have is a “friendly forebearance” to create an estoppels. It must be REASONABLE that it is intended to
be acted upon.
Facts: The creditor made an agreement with the debtor that the debtor would pay interest monthly. The creditor
has allowed the debtor to pay interest late on a number of occasions. The creditor says he wants all his money
now. Debtor argues: “promissory estoppel”, and so by his conduct, the creditor said that he was not enforcing his
strict legal rights and was not demanding all his money. So the debtor proves detrimental reliance!
SCC: In favour of the plaintiff creditor. No promissory estoppel.
Reasons: To prove promissory estoppel, you have to show that the representation for the “new” promise is made
as a result of negotiation that results in a promise intended to be binding. A friendly forbearance does not give rise
to an estoppel, otherwise people are constantly going to insist on their strict legal rights or face the argument that
they are going to be estopped from enforcing them later on (policy consideration).There has to be an agreement
where there is an obvious intention that a party is not going to insist on their strict legal rights. Estoppels don’t
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arise simply because someone is acting in an agreeable fashion. There is a clear new legal principle coming out
of High Trees. It’s just a matter of the courts coming up with determining how broad it is.
Principle: To prove promissory estoppel, you have to show that the representation is made as a result of
negotiation that results in a promise intended to be binding.
Limitation 3: D & C Builders v. Rees(1965, English)- mean couple forces builders to accept less
Facts: the builders do some work for Rees and he agrees to pay them for it. They complete the work, and the
contract is at an end, and Rees doesn’t pay. Mrs. Rees calls the builders and offers to pay a lesser sum, and if
they accept, it’s payment in full. If they don’t accept, they’ll get nothing (she does this fully knowing that the
company is in desperate need of the money). The builders sign a document that says “paid in full”, as per Mrs.
Rees’s insistence.
Decision: In favour of plaintiffs.
Denning: This is not a promissory estoppel, as a promise cannot result from economic duress. The second
agreement is a transaction which is extorted by economic duress, as Rees knew that the builders desperately
needed the money.
Principle: This is equitable/promissory estoppel. You can’t come to a court of equity with dirty hands. If you want
equity, you have to have acted in an equitable fashion. You can’t extort a promise.
Lord Denning (1) A cheque for a lesser some of money is not a new consideration. (2) If you have extorted
the bargain of the promise related to the existing legal relationship  can’t use promissory estoppels to
get out of the rest of the sum of money. Only give the equitable remedy to people who have acted
unfairly.
This also would have worked in Roffey Bros.
Limitation 4: Combe v. Combe(1951, English)
Facts: A wife divorced from her husband claims maintenance from him, at the King’s Bench (not Divorce Court).
He never paid anything. She held that the promise was enforceable on the grounds in Hightrees.
Decision: In favour of defendant husband.
Denning: Promissory estoppel cannot create a cause of action, a contract or substitute consideration. “Estoppel is
a shield and not a sword”. Promissory estoppel defends you when somebody is insisting on their strict legal rights,
but it doesn’t give you the right to sue someone based on the estoppel. You can’t create a contract with an
equitable estoppel, but you need an existing contract (like he said in High Trees). Promissory estoppels do not
create contracts, they simply defend you from someone insisting on their strict contractual rights
Principle: Promissory estoppel cannot create a cause of action.
Limitation 5: Crabbe v. Arun District Council (1976) – complex diagram. No pre-existing contractual duty being
modified.
Decision: In favour of plaintiff. He has a right of action. (not defence).
Reasons (Denning): “There are estoppels and there are estoppels”. When does an estoppel create a legal right?
Estoppels do not create causes of action/contracts, but this is a different type of estoppel, and this type does
create a right to allow Crabbe to have access to his property. It’s a representation in an interest to use land—it is
proprietary estoppel. This seems to be the courts making stuff up as they go!
Principle: Because it’s a land interest there is an exception to Comb that estoppels do not create a cause of
action, and here the estoppel does create a legal right.
Notes: Loranger v. Haines: the D should be estopped from claiming to title to and taking possession of the land
upon which, not only by his knowledge, but at his request, the P expended so much money on the faith of his
promise to convey it to the plaintiff. In cases of propriety estoppel the courts have shown a willingness to limit a
claimant’s remedy to one that undoes detrimental reliance rather than one that meets the claimant’s expectations,
but not the same in promissory estoppel.
Walton Stores v. Maher (1988, Aus. H.C.)- storeowners back out once construction begins
Facts: Walton Stores rents property from Maher. Lease is about to expire. Plaintiffs say they may be prepared to
extend the lease, but if they are going to continue to lease they need a better building like a big box store. The
defendants express some concern about knocking down their old building and building a new one, unless the
plaintiff signs a new lease. They negotiate for a new lease, and the plaintiffs mark it up, defendants make
changes, sign it, and send it to the plaintiff’s solicitors. The plaintiffs say it’s probably going to be acceptable—we’ll
let you know. Nothing happens for 30 days. If the building is to be built, the defendants have to start construction.
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They do this, and the plaintiffs are aware of this. 60 days later, the plaintiffs say “our marketing plan has changed,
we have no lease”. The D now have a half-built store and no tenant.
Plaintiffs: “we never accepted your offer, we just made you think we accepted”. This resembles
Colemcyntireyou made them think there was a contract. This is how the case was argued in the lower court
Issues: “What was the representation that we had a contract or that we might have a contract in the future”?
Decision: In favour of the defendant. Each member of the high court has a different decision in this case
Reasons: Here an estoppel can effectively create a cause of action (equivalent of a contract).This is a
representation of the future, not a representation of the present. This is a promissory issue. They promised it in
the future that there would be a contract, and now they’re saying there’s not
Note: This case has never been followed in Canada or the U.K., but it works reasonably well. This can be
considered a snapshot of where this area of law can go in the future
The court is clearly saying, that there is not a new contract, there has been equity that has arisen that says you
can’t enforce the old contract (you have been stopped)
5. Certainty or Ascertainability of Terms
1) Certain of Ascertainable
a. Complete but there are problem with interpretation
2) Complete or completable
a. Agreements to agree  Create a mechanism that fail
b. Agreement to negotiate in good faith
3) Memorandums of Understanding (MOU) or Letter of Intent (LOI)
a. The question is, is this document complete on its own, in which case there is a contract
b. Or are they simply subsets of (2) being an agreement to complete
In order to have a contract
- Terms have to be certain
- And have to be complete or completable
o Courts do not create bargains for parties, they simply interpret language. So if the parties can not complete
the language, there is no contract
In order to have a contract the terms have to be certain or ascertainable to a mechanism which doesn’t fail, and
the terms have to be complete or completable, pursuant to a mechanism which doesn’t fail. There are cases
where the contract looks complete but the language the parties use has some interpretational difficulties, and the
parties ask the courts to enforce the bargain. Often the courts say that the language of the bargain doesn’t allow
us what the bargain was for
Three groups of cases:
(1) Complete Contract with uncertain terms (Scammell; Hillas)
(2) Incomplete contract- intention/agreements to negotiate later on: (Empress; Walford; Edper)
o agreements to agree/agreements to negotiate in good faith
o consider whether there’s anything enforceable or anything more than a mechanism which failed.
o Often the problem in these cases is that the parties have created a mechanism to agree to agree at
a later date and the parties can’t agree.
(3) Heads of agreements/letters of intent: where the parties have laid down their terms of agreement, but
one of the parties fails to complete. Is there a contract/agreement to have a contract later on? (British
American; Bawitko; Calvin)
GROUP 1: COMPLETE CONTRACT WITH UNCERTAIN TERMS
Scammell & Nephew v. Ouston (1941, H.L.)- sale of van, agreed on “hire purchase term” (this is something like a
lease)
Facts: Transaction for the purpose of a van. The plaintiff has a van, and the idea is that he’ll trade in his van and
get a new van. The problem is that he’s not paying all his money for it, and their agreement is that the transaction
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will be done on “higher purchase terms”. This is a lease transaction that’s purchased when all of the lease
payments are made. The bargain says we will “mutually agree the terms” (this starts to move into category 2—
incomplete contract and agreements to negotiate).
Decision: NO contract
Reasons: The court finds that there is no precision in the language that the parties use. What are higher
purchase terms? How much are the monthly payments? Who will have an obligation to ensure, to repair?. There
are too many things left uncertain. There aren’t past dealings, and there isn’t an industry precedent that both
parties were aware of. The parties agreed to mutually agree on the higher purchase contract—if they set
themselves an agreement to agree in the future, and they can’t agree, then there is no contract. If there’s any
uncertainty about one’s terms, you can let an arbitrator decide OR, if they can’t mutually agree to the terms in the
future, and can develop a mechanism for how the terms will be set (arbitrator), but the mechanism must work.
(What if the arbitrator dies? Keep this in mind when using that as a mechanism).
Principle 1: If the terms are too uncertain, there is no contract (upholds Scammell).
Principle 2: An agreement to agree is only binding if the parties accept to agree, unless you set up a mechanism
for filling in the blanks later on (i.e. arbitration or industry expert if we can’t agree- see Calvin v., Manning).
The terms have to be (1)certain, (2)complete or complettable pursuant to a mechanism that works. Essentially,
the parties here have made and agreement to agree to future terms. Here a simple agreement to agree fails when
the parties to agree. Perhaps looking at Calvin, we would see that referring to an arbitrator would have made the
mechanism more plausible (still, this mechanism could have failed and the arbitrator could have refused or been
unable, this is why corporations now say, if “x” arbitrator fails, then we will refer to “y” arbitrator, if “y” fails, then we
will refer to “W” etc etc
A simple agreement to agree only works if the parties subsequently agree.
Hillas v. Arcos (1923, H.L.)- when language shows contractual intention, courts figure out intention
Facts: This about the sale of timber, and they had dealt with each other in the past (“for next year, we’ll have
terms similar to last year”).
Reasons: There is an implication that what is just and reasonable is to be ascertained by the Court as a matter of
machinery where the contractual intention is clear but the contract is silent on some detail. In contracts for
future performances over a period, the parties may be neither able to nor desire to specify many matters of detail,
but will leave them to be decided in the working out of the contract. With the above implication these contracts
may not be incomplete or uncertain (meaning if the court can find contractual intention). If the court finds that
parties intended for there to be a contract in the language they put together, it will do whatever it can to figure out
what the parties really meant. So they consider surrounding circumstances, prior history between the parties,
industry custom that might be known to both parties to fill in the gaps, because they intended a deal. But, if it still
can’t find precision as to what the parties meant—there is no contract. If what is meant is that the parties agreed
to negotiate in the hope of effecting a valid contract, there is no bargain except to negotiate, unless a jury think
that the opportunity to negotiate was of some appreciable value to the injured party. The court effectively
constructed a contract between the parties based on their past dealings
GROUP 2: AGREEMENT TO AGREE IS NO CONTRACT, AGREEMENT TO NEGOTIATE IN GOOD FAITH?
The courts said there was a contractual obligation on parties to negotiate in good faith. Many cases after this
questioned what this means, especially in light of the fact that an agreement to agree is no contract, as per
Scammel.
Empress Towers v. Bank of Nova Scotia (1990)-agreement to agree on rental rate for lease extension
Facts: E is the landlord, and has a lease for a second 5-year term. The lease may be extended for an additional 5
year term as mutually agreed between the landlord and tenant, and if they don’t agree, either party can terminate.
The Bank goes to the landlord before the lease is to expire and proposes to extend the terms for another 5 years,
and they propose a rate of rent. E says they’ll get back to them, the bank says it’s prepared to negotiate, and E
says we’ll get back to you. E says they want a bonus and the rent on the terms that the bank suggested. The
bank says no, so E commences eviction proceedings.
Decision: In favour of defendant bank. Empress Towers had not negotiated in good faith.
Reasons Three categories of options: (1) An agreement to agree is not enforceable, (2) no machinery is
provided so courts provide it, (3) Formula is set out but is defective and the machinery is provided to produce the
rental rate
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Bottom line is that the courts will try to give proper legal effect to any clause that the parties understood and
intended was to have legal effect. In this case there was an agreement to agree, and the parties could not agree.
HOWEVER, the landlord is in a breach of an implied obligation to negotiate in good faith (to reach their
agreement on the rental rate in good faith)
Consider: Where does it get you to impose an obligation to negotiate in good faith, if someone never intended to
negotiate at all? How long does the obligation last to negotiate in good faith?
EdperBrascan Corporation v. 117373 Canada Ltd. – Says that this case stands alone – it is confined to its own
facts.
Walford v. Miles(1992, H.L.) – Keep empress towers in mind but forbes says that this is a much better case for
understanding good faith.
An agreement to agree is unenforceable because it lacks necessary certainty, and they think an obligation to
negotiate in good faith is the same thing. An English court wonders what will happen when one tries to enforce an
obligation to negotiate in good faith. Each party is entitled to pursue his own interest as long as he doesn’t
misrepresent himself
They don’t want to be involved in trying to determine whether someone has actually negotiated in good faith. The
parties can either agree (contract) or not (no contract)
Facts: The parties agree that (1) they won’t negotiate with anyone else (no shop clause) (2) The parties will
negotiate in good faith for the sale of the business. The defendant ends up finding a better deal and takes it,
plaintiff sues saying that the defendant never negotiated. The court rejects this argument, “good faith” is too much
of a subjective term for courts to enforce. It is simply a mechanism that fails if the parties don’t agree.
Courts don’t want to get involved in all these “good faith” shenanigans. An agreement to negotiate in good faith is
nothing more than a mechanism that fails.
The courts says that the enforceable obligation here is the first statement that the parties will not negotiate with
anyone else.
Edper Brascan Corporation v. 117373 Canada Inc(2000) -Questions Empress decision, suggests it’s peculiar to
its facts.
Note: There are often phrases in contracts like “use reasonable commercial efforts” to come to an agreement on
things. The courts say they think this means that you’ve agreed to try, which is essentially the same as negotiating
in good faith.
Forbes’ Principle: An agreement to negotiate in good faith, in spite of Empress, is no more than an agreement to
agree.
GROUP 3: HEADS OF AGREEMENT/ LETTERS OF INTENT
Sample Situation: The parties have a fight, and so the agreement is incomplete. It is only an agreement to agree
to the terms of the completed agreement later on. Problem: often people will not bring the negotiated terms until
later on.
Reasons for Heads of Agreements: Once I give someone confidential information (about finance, processes,
etc...), I can’t take it back, so before I do this, I need to know that we can settle essential terms, and I need to
know that there’s a confidentiality agreement built into my contract. For many reasons, these heads of
agreements get put together, and they are brought to lawyers and people ask if they are contracts
It is somewhat uncertain as to whether heads of agreements/letters of intent will be binding. You must educate
clients to bring you these things before they sign them. Did they want it to be binding? If so, why? Maybe the
client’s already given up confidential information
To make them binding:
(1) Put a provision in the agreement clearly expressing the intention for it to be a formal agreement.
(2) Be more complete than the terms that are in the letter of intent
(3) You can put a condition that says X is not bound until board approval is received, and board approval will
be received by whatever date.
To NOT make them binding; Now you argue that British American is not applicable. Could’ve said “this agreement
is not binding until the parties negotiate and settle a form of contract”. Can argue both sides: you can take British
American, and compare to Bawitko.
To make PART of it binding: There are also the letters of intent where one does not want it to be a contract until
there is a formal agreement, but they want parts of it to be binding right now (like when you give confidential
information).
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You can have a clause that specifies “provisions about confidential information are agreed to be effective as of
now”:
We agree that there’s no contract here, so it’s not a promise in exchange for a promise. If the same person gets
the benefit out of both provisions, there may be a problem because there is no consideration (Tobias v. Dick). So
to make something like this binding, put it under seal!
Two things to remember: (1) These are important to tell clients (2) Know whether the client intends it to be
binding or not
British American Timber co. v. Elk river Timber Co (1933, B.C.C.A)-contract for purchasing timber
Facts: There is a negotiation to enter into an agreement for the purchase of timber rights. The parties document
various things, and the document says that once the survey of the land is done, the parties will enter into formal
contract. So we have our heads of agreement (parties’ rights, description of property) and a provision that says
we will have a formal contract(LOI or MOU). The price of Timber falls, and the purchaser wants out of the deal.
Issue: When is a letter of intent a formal contract
Decision: Contract. Essential terms included.
Reasons: Principle: If all essential terms are included, there is a contract even though there’s no formal
document, and even if the letter says there will be a formal document. The more complex or technical the
contract, the less likely it is that there is a contract. This may be limited to cases where it is a simple contract, and
there is a standard form that has been used before, so there is not much more detail needed to be settled. The
more complex, the more you move to something like Scammell, where the terms must be certain.
One way to deal with this is a Rose and Frank Clause or you could say, this agreement is subject to the condition
of a formal contract
Trawl Industries
-
The simpler the contract the more likely a LOI will be binding, the more complex.
The more likely the LOI is simply an agreement to agree and the less likely you will
have a contract until you agree all of the formal terms
Bawitko Investment v. Kernels Popcorn-letter of intent to grant franchise
Facts: Agreement involving a franchise putting up a kernels popcorn stand in Burlington. The parties agree to a
bunch of terms on which the franchise will be granted (fee, term renewal rights, transfer rights, personal guarantee
of performance required of the franchisee) and they document them in a letter of intent. The plaintiff then gets
from the franchise company a form of franchise agreement, is told to look at the form, write his comments on the
document, and get a lawyer. P takes 5 months to do this so D says here’s money back I’m giving to someone
else. P says there was contract and all terms were there (British American)
Decision: NO contract. There is much left to be negotiated on the terms of the contract, and until that there was
no contract.
This really solidifies the notion that the more complex a contract is, the more likely the letter of intent will not be
binding.
Calvin Consolidated v. Manning (1959, SCC)- agree on good mechanism for when unable to agree
Facts: Plaintiff and defendant contemplate a formal agreement (not to be binding now) to be mutually agreed
between them. If they can’t agree, an arbitrator will settle the terms. If the circumstances change, and one of the
parties wants to develop the land as an oil well, then we’ll agree to a separate agreement entirely, and if we can’t
agree to those terms, we’ll send that to an arbitrator.
Decision: IS a Contract.
Reasons: It was intended that the contract would be a formal agreement if they could mutually agree on the
terms. There is an incomplete agreement, but there is a mechanism for setting out the terms of the agreement
Principle: As long as the mechanism works, there is a formal contract. This is the most bare bones of an
agreement with an arbitration clause in it to fill in all the details
Purposes of Arbitration Clauses: settle disputes under agreement (usually the main purpose), OR settle the
terms of an incomplete agreement
6. Capacity to make a Contract
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In order to have a contract both parties must have what the law regards as legal capacity to enter into a contract
This comes out in two separate ways two types of capacity : (1) contracts with minors (anyone under 18 years
of age) , (2) contracts with persons lacking capacity
Principle: A minor does not have the legal capacity to enter into a contract. A contract with a minor is voidable by
the minor but not by the other person. Contract is voidable by the minor even after the minor reaches the age of
capacity, provided that the minor hasn’t confirmed the contract upon being an adult or acted in a manner that’s
consistent with the terms of the contract. Although a contract with a minor is voidable if the minor sets the contract
aside, there still may be an obligation on the minor to pay a reasonable price for goods that are necessities.
S. 3 of the sale of goods act – if the goods are necessities, the minor still has to pay a reasonable price for the
goods (not the contract price, but a reasonable price). Two requirements for something to be a necessity
1) Suitable condition for the life of the infant.
2) Must be a necessity at the time aka must be the desperate need of the infant at the time.
MINORS:
Nash v. Inman (1908)-minor signs contract with clothing vendor.
Facts: Inman was an infant when the agreement was made for Nash to sell him clothes. Inman goes off to
university and is spending money wildly. Nash supplies clothes to Inman, who refuses to pay for them.
Issues: Is he compelled to pay? Not contract price, because he can void the contract
Is he required to pay a reasonable price( note this would not be enforcing the contract)? Yes, if what was supplied
to him was a necessity
Decision: Inman doesn’t have to pay.
Reasons: Look at the nature of the good to see if it is a necessity. To be a necessity, it has to fit his station in life,
and he has to require it at the time. His father shows up and says that he had lots of clothes in university, so what
Nash is selling is not a necessity
Lesson: Don’t give minors credit, because they can set the contract aside, they don’t have to return the goods,
and unless it’s a necessity they don’t have to pay anything, and you can’t force a bargain.
Toronto Marlboroughs hockey Club v. Tonelli(1976)- minor signs contract with hockey league
Facts: Tonelli is a good junior hockey player. At 16 he signs a contract to develop his skills so he can become a
professional hockey player. He agrees to pay for a junior league team until he’s 20, and agrees to give the club a
percentage of his salary under his first contract when he becomes a professional player, and agrees that the club
can trade him (they went back and forth about his consent to being traded). Tonelli turns 18, is very good hockey
player, and it’s right at the point where there is a second professional hockey league coming wanting to recruit
him. They can only sign him if his contract doesn’t require him to play junior hockey until he’s 20 years old. He
stops playing at 18 because he doesn’t want to be seen as confirming the contract when he becomes an adult,
and he signs a contract with WHL. Junior club sues.
Decision: In favour of defendant Tonelli. NOT binding.
Reasons: Contract is only binding if it can be shown that it is beneficial to the minor through the whole of the
term of the contract. This contract may have been good when he was 16, but when he was 19 or 20 it couldn’t
have been beneficial to him because someone else was willing to pay him a million dollars a year to go
somewhere else. The club later had to go back to these contracts to show that they could be beneficial for the
whole term of the contract, so that they wouldn’t be voidable once the person turns 18
Principle: If you make a performing contract with minor, the minor can set it aside unless you can prove it’s
beneficial to the minor through the whole of the term of the contract. Otherwise it’s voidable by the minor, even
after turning 18, unless it’s been approved or confirmed either directly/ by the minor’s actions.
TERMS OF CONTRACT
If you have a contract, how do courts interpret the contract?
What’s the general rule of interpretation?
When will a court imply a term into the contract when it wasn’t there originally?
Special interpretational rules for exclusion of liability clauses?
1. Interpreting Written Contracts
IF the contract is not in writing, you have to prove to the court on a BoP that may facts that I am alleging give rise
to a contract. Assume now that you have a written agreement ->
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Parole Evidence Rule: If the writing is agreed to be the terms of their contract, the general rule is that you bind
the terms of the agreement within the four corners of the document, and you interpret the contract according to
the language that’s in the contract (four corners doctrine) look exclusively to the document to affix the terms. .
First group of cases: hard time arguing “but there was more” to the written agreement – strict adherence to rule.
Second group of cases: there’s a contract, one party says I’ll tell you what we meant by using the words, in spite
of the written terms. Begin with the thought that the terms are to be found in the document, and you construe the
contract by the strict grammatical meaning of the words in the document.
Two things to keep in mind: (1) The thought that only the words can be used to determine the meaning is
actually an interpretational tool that is in the substandard contract law, it is not a rule of evidence (don’t be fooled
by the name of the rule). (2)The rule doesn’t only apply to parole (oral) evidence, but it also applies to documents
that are extraneous and which one party says is an indication of the intended meaning of the contract
Exceptions: In order for the rule to apply, the writing has to be a memorialisation of the agreement, so you can
always argue that a particular document was not what you had agreed to. The court asks: what would be the best
evidence of the contract that the parties intended? If the document appears to have been agreed upon, there is a
presumption or a rule of law that the document is the contract (removes the burden of choosing the most credible
evidence)
Example: If I send you this, and hear nothing from you, I’ll assume you agree to the terms
This may not be acceptance, but it can probably attract the Parole Evidence Rule, and the court will assume that
this was a memorialisation of the bargain. If a document was never agreed to be the terms of the contract, but is
simply one party’s understanding of what he thought had been agreed upon, it will not be binding
The parole evidence rule is a rule of substantive contract law not a rule of evidence, it also excludes any
discussions/correspondence that went on before the document was formed.
Exceptions
1) Document isn’t the agreement – the paper is not an agreed memorialisation of a contract.
a. If you can prove that the paper was an agreement (even if it wasn’t signed) then it is a contract
2) You can always prove that the document isn’t a contract of that the contract has been compromised
Exceptions Summed Up:
(1) You can always prove that the document wasn’t agreed to be the terms - I never confirmed directly/indirectly
that I agreed to those terms.
(2) You can always prove that a written document, even a signed one, was never intended to be a contract
because there was a condition precedent to its effectiveness (Pym)
(3) You can lead evidence to show that there was a collateral contract (one in writing or an oral one) (Morgan)
(4) You cannot prove a collateral oral (or written) contract, if the terms that you’re alleging from the oral contract
conflict with the terms of the written document (Hawish)
(5) Patent ambiguity will let one lead evidence clarifying the intended meaning of the terms of the contract.
(Southern)
CONDITION PRECEDENT
Pym v. Campbell(1856, English)- invention must first be approved by A before sale is complete.
Facts: The plaintiff inventor and defendant investor enter into a contract which they both signed. Under the
contract the defendant should create interest into an invention that the plaintiff has made. Nothing in the contract
more than that. It was agreed that if the engineers who were supposed to inspect and approve of the invention
could be found, the sale might be arranged. One of them was found and approved the invention, but Abernathe
could not be found. The defendant drew up a paper that was signed by both parties saying that if Abernathe
approved the invention the paper would be an agreement, but if not, it will not be an agreement. Did not approve.
Decision: No contract (in favour of defendant), because there was a condition precedent (oral or written).
Reasons: There’s a signed document, and there is nothing written about Abernathe. But the court accepts the
evidence that there was a condition precedent. The document was never supposed to be binding unless
Abernathe approved. Interpreting the terms of the contract, there was more to it than the document itself. There
were terms voiding this document because there was a condition precedent that was agreed upon and was not
met.
COLLATERAL CONTRACT
Morgan v. Griffith (1871)- landlord must get rid of rabbits first
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Facts: Lease is about to be renewed and the tenant says the property is overrun with rabbits. Tenant won’t renew
the lease unless landlord gets rid of the rabbits. Landlord agrees to get rid of the rabbits, and signs the lease.
Landlord doesn’t get rid of rabbits, tenant walks away from lease, and the landlord sues. Tenant argues that there
was a collateral contract (lease to pay rent, get rid of rabbits)
Decision: In favour of tenant (plaintiff). There was a collateral contract.
Contract One – The Lease
Collateral Contract – In consideration of me signing the lease, you will get rid of the rabbits.
Reasons: Parole Evidence rule doesn’t stop collateral contracts, it simply says the terms of a deal are bound in
the document. Doesn’t stop you from saying there were two deals—one in the document and one outside the
document (even if it is oral and collateral).
Condition precedent: we never intended to have a contract until something happened.
Collateral contract: there was a contract present, but there was a second contract that we made at the same time
You may not be able to always prove the collateral contract, if the terms of the collateral contract conflict with the
written one. See Hawish Case
CONFLICTING COLLATERAL CONTRACT
Hawish v. Bank of Montreal(1969, SCC) –Guarantee for existing and continuing debt, told only for existing debt,
not released
Facts: Hawish is a lawyer for a company, and he signs a guarantee for the bank for all existing and continuing
debt of the company, which it will effectively continue until the debt is fully paid. Hawish says he signed the
guarantee didn’t read it, but at the time he signed it the bank manager told him that it was only for the present debt
of the company. The bank then would not release him from the contract.
Decision SCC: No collateral contract. Parole Evidence Rule applies. In favour of defendant bank.
Reasons: Cannot plea collateral contract if the terms of the collateral contract that you’re alleging conflicts with
the terms of the written contract. If it does conflict, we apply the Parole Evidence Rule and only enforce the
original contract
Note: Entire Agreement clause: there are no other representations or warranties, documents or other
instruments that are intended to modify the intended terms except for the terms of the written document. These
statements are now often found in clauses. The cases are starting to say that if the parties really wanted to agree
to the collateral contract, then that is enforceable
If you take Hawish too far and void all collateral contracts because of an entire agreement clause, then it could
really create an unjust result
Principle: The court won’t allow you to prove the second oral contract, if the terms that you’re alleging from the
oral contract conflict with the terms of the written document. The written document must contain the agreement of
the parties, and if you’re arguing that there’s a second agreement, why make one that conflicts with the written
agreement?
Things to Consider:
(1) What if, instead of adding terms, one party asserts that they intended the words to have a different meaning?
(2) The Parole Evidence Rule, as a general thought, says that you construe a contract within the four corners,
and give the words their normal grammatical meaning.
Forbes’ Remedy – Puts into all of his agreements a statement to say that there are no other collateral contracts
- A clause like this is presumptive not prescriptive, if someone can say “inspite that
this clause is buried in the contract, there was a collateral contract that should be an
enforceable obligation
- If the collateral contract conflicts with the substance of the main agreement,
Southern Resources Ltd. v. Technomin Australia (1990) -guy tries to qualify terms like “minerals”
Facts: Contract: plaintiff is to get a 3% net smelter interest from minerals produced from ore on the property. In
exchange for that, he must pay a sum of money. Defendant: the words “3% net smelter interest” were meant and
agreed to say that it was that much interest for one process, and when we said minerals, we agreed to exclude
gold.
Decision: Cannot lead evidence like this. Parole Evidence Rule applies.
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Reasons: The terms have to be ambiguous before you can assign specific/ unusual meanings
(a) Patent (pay-tent) ambiguity: ambiguity that is natural, on the face of the document. The language that the
parties use has to be certain enough for the court to figure out what they meant- you get into questions from
Scammell where the courts can try very hard to see what the parties intended, used words without natural
grammatical meaning,
(b) Latent ambiguity: on its face, document appears to have a normal grammatical meaning – prove diff. meaning
intended?
With this type of ambiguity, you can lead evidence to identify the subject matter of the contract, but if adding
qualities to the contract/ subject matter, then they apply the Parole Evidence Rule and exclude this type of
evidence. So when they say minerals, that does mean gold, and you can’t convince the court of otherwise,
because as a matter of substantive contract law, any evidence to the contrary is irrelevant. It will be much harder
with this type of ambiguity to try to say that the terms actually meant something different than what was written.
Cases taken together:
All of the evidence that was supposed to be excluded by the Parole Evidence Rule can go in when the D argues
there was an exception. Evidence from the party relying on the contract serves to uphold the Parole Evidence
Rule. Evidence from the party trying to enforce another agreement serves to apply an exception. There is a
presumption that the written document is the contract, and then the courts listen to all of the evidence. The
courts will almost always find an exception once they listen to evidence from those trying to prove one.
Recap of Exceptions:
(1) You can always prove that the document being subjected to the rule wasn’t a contract.
(2) You can prove a condition precedent, a collateral contract (one in writing, one not), but the terms of the
collateral contract can’t conflict with the terms of the written contract.
(3) You can show that the words used are ambiguous, and then you can lead evidence to prove what was
intended (prove the certainty of ambiguous terms).
2. Implied Terms of Contract
We are putting a term in that must have been contemplated by both parties
The courts do not make bargains for parties, so if they can’t interpret what the parties intended with certainty, then
the contract fails. They can’t add terms to the document that it is in writing, so how do they imply terms?
Rarely imply terms, especially when the contract is in writing b/c:
(1) This would fly in the face of the parole evidence rule.
(2) The more formalized the document is, the more questionable it will be that the document is not in writing.
Questions for the court:
(a) In interpreting the parties’ intention, do the courts add an extra term?
(b) Is it necessary to add this additional term to the contract?
(c) Again, the more formalized, the less likely they are to imply terms, and the harder the test will be to imply
terms.
There are really three different types of implied terms, which will determine the test used:
(1) Implied in fact: what can we do to find out what the parties intended or should have intended? With this type
of term if has to be obvious. A reflection of the intent of the parties
(2) Implied in law: it’s so standard by its very nature that certain terms have to be implied as a matter of law into
the contract (Liverpool); so this does not look to what is intended, but what the law implies (minimum terms of
contract with this type). It may not have to be obvious but it has to assume what the law has to be. Reflecting the
terms of contract of a type, dipute what the parties intended.
(3) Terms implied by Statute: Forbes thinks this is really commercial law. This is where you refer to the Sale of
Goods Act (which says that the following terms are deemed to be included for any contract for the sale of goods)
Sale of Goods Act
TERMS IMPLIED IN FACT
The Moorcock (1988)- D leased jetty to P to unload cargo ships. Tide goes out, ships brought in, jetty hits bottom,
damaged.
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This case set the rules for implied terms of contract. After this people were saying that a law of contract was a law
of bargain, which gives you the right to only enforce the terms you bargained for. This case says that sometimes
the court will assist you by adding terms to the bargain that you didn’t bargain for yourself. But they don’t create
terms.
Facts: Defendants leased out a jetty to the plaintiff for unloading cargo ships. Both parties were away so when the
tide went out the ships brought into the jetty would take bottom. The plaintiff is now in possession of the jetty, the
first large boat comes in, the tide goes out, and the boat hits the ridge and is damaged. The defendant says he
merely agreed to a lease and he followed through so it’s up to the plaintiff to determine what’s on the bottom of
the river on a reasonable basis.
Issue: Is there an implied term of that contract. Owner’s view is that there must be a safe riverbed to rest on. The
parties did not think about it at the time, but if they had, it would have been put in.
Decision: In favour of plaintiff.
Reasons: We are trying to figure out what the parties intended or would have intended if they turned their minds
to it.
(1) Figure out the presumed intention of the parties: implied in fact –what the transaction was.
This case: Both parties knew that the jetty could only be used by the ship taking ground, so the ground had to be
safe. The owners could easily figure out if the riverbed was safe, but the plaintiff could not.
(2) Imply the minimum term that is necessary for there to be business efficacy to the transaction (makes
business sense) (IOW, the contract does not make sense without this term.)
This case: The term they imply is that “the riverbed would be free of obstruction”. The P could not have used the
dock to unload ships if it was not free of obstruction. The court has to ask what the nature of the contract is, and
what is the absolute minimum term that would make the contract make sense? This contract would not make
sense if it was dangerous to do exactly what it is that the parties intended to have done.
Codelfa Construction v. State Rail Authority( 1982, Aust. H.C.)- P builders claim injunction required implied terms.
Facts: State Rail authority is looking for people to build tunnels. They solicit tenders for the building of these
tunnels. People come in and they effectively take the railway standard form contract. They fill in the part about
salary and how quickly they think they can perform the contract. The statute rail authority looks through the forms
and picks somebody to build the tunnels. The plaintiff is the lowest bidder. The parties admit that they both
assumed that the plaintiff would be covered by immunity for injunction available to the state in performing the
contact, and it’s also agreed that the parties understood/thought that the plaintiff would be able to work many
hours a week, and he’d be protected from immunity for injunction. The residents from the surrounding area get an
injunction because of the loud construction continuing. The plaintiff says this is a problem because he can’t get
the job done as quickly, and he has all his construction equipment sitting on the site for longer than intended, and
so he can’t complete other jobs. So the plaintiff demands more money, and he also says that there is a
termination date in this contract. If the contract is not complete by that date the plaintiff has to pay penalties. To
the plaintiff thinks he needs to imply terms into the contract to give it business efficacy.
Issue: What is the Implied Term: In this case the term they wanted would say: “in the event of an injunction higher
contract price and a longer term to completion, and not liable if not completed on time”
Most likely implied in fact, because this is an extreme type of term, and it is supposed to be reflecting the intention
of the parties if the parties had directed their minds to this kind of issue.
When do you imply a term into a contract:
(1) Reasonable and equitable to add the term
(2) Necessary to give business efficacy to the contract- meaning that the contract only makes sense if this term is
in it (Moorcock test) – contract does not work without it.
(3) Term must be so obvious as to go without saying
(4) Capable of clear expression _ If you can’t clearly express with the term is that you want to imply, it fails this
test. You can’t just say “well this contract doesn’t work”. You need to be able to articulate.
(5) it must not contradict any express terms of the contract (BP Refinery- only applies if there is a written contract)
Decision: Plaintiff loses. Fails to meet requirements for implying a term.
Reasons: Only satisfies the condition that it is fair and reasonable, but even still it is inconsistent with the express
terms of the contract. The parties made a common assumption that an injunction would not happen, which
masked the need to explore what provision should be made to cover the event which occurred (an injunction).
They cannot be presumed to have agreed upon a term (specifying what would happen with an injunction) that is
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inconsistent with their common belief that an injunction would not happen. Fails #2: Term is not necessary to give
business efficacy to this contract. It is just as likely that the contractor assumes the risk of the contract. Failed #5:
because there’s already a completion date and a salary in the contract, so there is a conflict with the implied term
to extend the time and salary. Failed #3: it is not the obvious terms that they would have come to if they had
turned their minds to it. If you think about the nature of this contract, the necessary implication is that people were
agreeing to bid a price to assume the risks inherent in that contract, it was not negotiated. The state is effectively
saying, build the tunnels, here is the contract, fill in the price. The calling of tenders upon its own standard form of
contract suggests that it only contains those terms to which it is prepared to contract. If they intended otherwise
they would not have told people to make their bid and assume the risks. Probably fails #4: not capable of clear
expression. This case shows that it is seldom for the courts to imply terms in a completely documented
reasonably sophisticated contract
Point: It is really hard to imply terms of contract, this is a very hard standard to meet.
Canadian Case: Tony Gabriel
Facts: He was in his last term of his contract with the Hamilton Wildcats and he wants to get paid. They tell him
that they still want him to play with them, and they increase the number of games in the season. He had agreed to
get paid X games for the whole season, and if they are adding games he wants to get paid more. This is kind of
like Codelfa.He wants an implied term that says: A complete season of X games, and if you have a greater
number of games, you’ll pay me a higher price.
Decision: No implied term.
Reasons: He agreed to play the whole season, and there was nothing in there that specified how many games a
season would be. No need for business efficacy. If you have a written contract, it will be rare to meet the 5 tests.
The more negotiated the contract, the harder it will be to imply a term.
TERMS IMPLIED IN LAW
What are the essential terms of certain types of contracts?
Doesn’t really ask what the parties intended, but asks what the law provides for certain central terms of contracts.
Liverpool City council v. Irwin (1977, HL) –D refuses to pay rent b/c poor condition, wants to imply obligation to
repair.
Facts: City council is a landlord in a council flat developed in Liverpool. Defendant tenant refuses to pay rent
because it says the lifts don’t work and it’s a 15 story building, it’s dirty, and there’s no lighting on the stairs. The
plaintiff landlords seek to evict the defendant tenants, and the defendant counterclaims to have an implied term
into the lease to impose an obligation on the plaintiffs to repair the property. There is no fully signed fully
documented contract, but there is a partially documented contract with some obligations for the tenant, with some
oral terms.
Issue: What are the minimum terms for a contract of residential tendency? What does law intend for this type of
contract?
Decision: Plaintiff wins. There is an implied obligation on the landlords, but the they did not breach it.
Wilberforce (Majority): Where there is an apparently complete bargain, the courts are willing to add a term on
the ground that without it the contract will not work. In this case they’re trying to figure out what must have been
implied?
(a) What is the nature of the obligation being implied here? The nature of the contract implicitly requires a test of
necessity (essentials of tenancy, like using the stairs, lifts, chutes) and imposes this obligation on the landlord.
This is not a question of implying a term for business efficacy, but is called for by the nature of the contract. No
absolute obligation for the landlord to make repairs, as this would go beyond necessity. Minimal implied term
in the nature of the tenancy contract is for the landlord to take reasonable care, to keep in reasonable repair
and usability. This involves a recognition that the tenants have their own responsibilities.
(b) Different from implication in fact: There’s not as strict a requirement for it to be absolutely obvious to go
without saying, because it’s not what the parties must have themselves intended, but what, as a matter of
implication of law, did the law intended (still need business efficacy, clear expression, cannot conflict with any
terms of written contract)
Salmon: Disagrees with Denning and does not think the court could imply a term simply because it seemed
reasonable, but agrees with Wilberforce that the law imposed an obligation to take reasonable care. Without the
term the whole transaction becomes absurd (term of necessity).
Edmund Davies: As a legal incident of this type of contract, a standard of reasonable care was applicable, but
not breached.
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Note: Liverpool is a case where only certain terms are in writing, and it is not a fully negotiated, fully written
contract (like Codelfa, Gabriel). In those cases, it’s hard to imply terms.
TERMS IMPLIED BY STATUTE: Sale of goods Act
(1) Vendor has Title - Implied term that seller has good title and the ability to deliver a good product.
(2) Implied term that the seller warrants that the goods are of “merchantable quality” – Has to work.
(3) Implied term that good is fit for purpose – Ex. You go into a store and tell the owner what you want, the sale of
goods act implies a term that the product that is sold to you
S. 31 of the CPA – any attempt to eliminate the application of the implied terms of contract from the sale of goods
act (must be a consumer transaction), that application is null and void.
3. Exclusion Clauses
(1) Exclude Liability: “X is not liable for any damages...”This clause excludes liability for breach of
contract/negligent performance of the contract/intentional failure of performance of contract (McBrain)
(2) Limitation clause “In the case of a breach the liability for failure to perform is limited to the following amount”
(Parker)
(3) Limit types of remedies for breach: In the event of a breach, one party will not be entitled to bring an
injunction...”
(4) Exclusion of a Remedy – injunction , SGA liability, I am excluding your right to pursue a remedy)
(4) Excludes statutory rights: There are implied terms in the sale of goods act- The parties agree that the implied
terms of the sale of goods act shall not apply to this contract
Commonality: a clause where one of the parties is trying to get the other to agree that in the case of a breach,
one party is trying to limit the other’s ability to hold the other party liable, or to get a remedy..
Analysis:
(1) Is the exclusion clause part of the contract?
(2) If it is, how do you construe it?
(3) Is it reasonable to enforce the exclusion clause?
Depending on how clause operates, it is conceivable that the party’s reasonable expectations of the contract are
frustrated by the exclusion clause itself. This is a broad statement that may or may not always apply but can be
destructive (McCutcheon). Then you have other cases where the courts see who has access to insurance.
Harbutt’s Plasticine v. Wayne Tank (cited in Securicor) - W enters into a contract to put a new piping system into
the H’s factory. H has insurance, so it makes sense for him to be responsible for the risk. Exclusion clause is put
into the contract removing W’s liability. Factory burned down. Wayne Tank installs piping, it fails, plasticine factory
burns down.
Denning: If there’s a fundamental breach the exclusion clause should NOT apply. In effect the insurer can claim
against W. We see in Securicor the courts overruling this decision because it frustrates the parties’ intention by
saying “in a commercial context you can’t reasonably allocate risk and then apply an exclusion clause”.
Sometimes these will be unfair, but sometimes they will be commercially negotiated and can easily reflect exactly
what the parties intended.
Before we look at the exclusion clause we have to look at
1) Is the exclusion clause part of the contract.
2) How do we construe the clause.
a) Sign Document – Bound
b) Unsigned document but agreed – bound
c) No document this time but in the past there has been a document which contained an exclusion clause. –
Not bound (McCutcheon)
a. It depends here though, previous dealings of the parties are only relevant if they prove that they
knew about the exclusion clause, then it is part of the contract. McCutcheon – gets out of this
because he says it would take forever to read the document and it is the only way off the island.
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d) Knew the document contained an exclusion – you are bound – even if unread (Harris v GNR)
e) Don’t know that the document contains an exclusion – Two Part Test applies – See Below
1.On the evidence is it likely that you can claim no knowledge – Given the nature of the document and given your
experience
2.If you pass this test, the second part is, whether the person has taken reasonable steps to bring the conditions
to the knowledge of the party
Olley v Marborough Court
- If the exclusion becomes apparent after the contract has been formed – it does not apply
A. IS THE EXCLUSION CLAUSE PART OF THE CONTRACT
General Rules:
(1) “I didn’t know”: A and B sign a contract that contains an exclusion clause. B didn’t read it/was unaware. Is it
included?
 McCutcheon: the law is clear without any recourse to estoppel that a signature on a contract is conclusive
of the terms of the contract be final (L’Etronge), if the document is signed, you are bound.
 Parker: where an action is brought on a written agreement which is signed by a defendant, the agreement
is proved by his signature, and in the absence of fraud, it doesn’t matter if he didn’t know about the clause
(2) “Unless I hear from you”: A and B have a contract. B prepares it and sends it to A saying this is what I think
our contract is, and unless I hear from you I will assume this is our contract. The document has an exclusion
clause in it. Is it included?
o If the evidence shows that they adopted the writing as part of their agreement, if clause is in it, it will be
included.
o Parker: if in making the contract one party delivers to the other a paper in writing, and the receiver knows
that the paper contains conditions which the deliverer intends to be part of the contract, the receiver, by
receiving and keeping the document, is assenting to the conditions contained, although he does not read
them/know what they are.
o To prove it’s included, you must prove that the person did in fact receive the contract
o Principle: If you have a piece of paper including an exclusion clause, and it appears to be a
memorialisation of a contract between the parties, even though unsigned, the parole evidence rule will
apply, and the exclusion clause will be part of the contract.
(3) Past Dealings: A and B don’t have a contract, there have been contracts in the past between them, which have
included exclusion clauses. One party says he never knew there was an exclusion clause and this time there’s no
document at all (McCutcheon – got lucky because this time he didn’t sign and failed to prove knowledge of the
terms it so it was excluded)
 Principle: Past dealings are ONLY relevant if it shows knowledge of the exclusion clause and assent to it.
 Delaney: Even if there’s writing on the document, if the writing is taken from you in a way that shows how
you weren’t really able to read it, it won’t apply. It must be reasonable to assume that the exclusion clause
was made known to you (objective test, and exception to L’Etronge)
it reasonable to enforce the exclusion clause?
McCutcheon v. MacBrayne Ltd. (1964, HL) – after past dealings, shippers didn’t sign contract that contained
exclusion clause
Facts: Due to the negligence of the shipping company and the ferry operators, the boat sank and P’s car was lost.
An exclusion clause existed, but on this particular occasion, after many past dealings, the P did not sign the
contract. D tried to have the exclusion clause enforced in light of the previous dealings, tries to import terms of
previous contracts.
Issue: Should it put into effect the implied contract by law?
Decision: Not enforced because it was not signed on this day, and appellant failed to prove knowledge of the
terms.
Reasons: Devlin says that wherever there is writing that reduces the terms of any agreement, the terms are to be
regulated by that writing, even if one of the parties had not read the term. Signature is conclusive. However, if
unsigned there can be no honest belief that the person made himself acquainted with those terms (L’Estronge).
Parker v. South Eastern R.Y.(1877, English) – ticket case, see if D gave sufficient notice of exclusion clause.
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Facts: Parker is a “ticket case”. Parker shows up, checks his baggage with valuables in it, and gets a ticket. He
thought it was a receipt so he didn’t bother reading it. His bag was lost, and he never found it. The back of the
ticket read that the company will not be lost for any package exceeding 10 pounds.
Decision: New Trial. Exclusion clause should be enforced. Didn’t know, but reasonable notice given.
Mellish: Bound if they did what was reasonably sufficient to give P notice of the conditions. Whether the railway
company is entitled to assume that the P, who deposited luggage and received a written ticket, would understand
that the writing contained conditions of the contract depends on whether people would in fact and naturally draw
that inference. Here the writing was clear so the exclusion clause should stand.
Proper direction to the jury is:
 Did not see or know there was writing  NOT BOUND.
 Knew there was writing, and knew/believed that the writing contained conditionsBOUND
 Knew there was writing on ticket, but did not know/believe it contained conditionsBOUND if he could
see writing.
Bramwell: Judgment for D. There is an implied understanding that it is not unreasonable to the knowledge of the
party tendering the document and not insisting on it being read. In good sense and good reason the document
must be supposed to relate to the matter at hand. By knowing that there was writing on the document, it’s just
like D pointing out that the writing concerned the matter at hand.
Principle: You get a document with an exclusion clause on the it, but you didn’t read it. Bound if you know the
document contained the exclusion clause, or if you didn’t know, but reasonable attempt was made to bring the
exclusion clause to the attention of the party
On the evidence is it likely that you can claim no knowledge – Given the nature of the document and given your
experience
If you pass this test, the second part is, whether the person has taken reasonable steps to bring the conditions to
the knowledge of the party
Union Steamship v. Barnes: - guy falls down stairs on ship, ticket contained exclusion clause,
Facts: P goes in the morning with his family, buy a ticket, doesn’t, read it, and put it in picket. Later they fall on
the stairs due to poor lighting on the ship, and they want the boat owners to be liable for negligence. The boat
owners say here was an exclusion clause on the back of the ticket in bold letters, everything was done to bring
this to your attention, and if you didn’t see it, it’s your own fault. This may or may not have been the same as
Delaney.
Decision: The clause applies. Judgment for boat.
Reasons: If a reasonable attempt was made to bring it to your attention before the contract was made, then it
applies.
Denning’s battle with HL to limit exclusion clauses.
Disability does NOT make a difference unless you KNOW about it, in which case you have to take reasonable
care under the circumstances to bring the exclusion clause to their attention.
Thompson v. London Midland and Scottish Railroad (cited in George Mitchell): The clause applies, because D
had no knowledge of the persons’ blindness, and had done what was reasonable for the general population
(Denning thinks this is a bleak winter case) – under the circumstances, the railroad company had no way of
knowing that the ticket was bought for a blind person.
Thornton v. Shoe Lane Parking: A goes into a parking lot, and on the way there is a sign that says B, parking
owner, is not liable for any damages. A comes back and sees that his car is stolen, as the parking attendant gives
the keys to someone else. No different than Parker. If you said you didn’t know, has the other party done what’s
reasonable to bring this to your attention?
Olley v. Marlboro court (Denning): Olley family checks into hotel, and they walk into the room that says “we are
not responsible for any damage, theft that occurs”. A break-in occurs, and Olley’s property is stolen. Judgment for
P.
Principle: This is like any contract, and you can’t attach any new terms to the contract after its formation, so
knowledge of the exclusion clause has to be contemporaneous with the formation of the contract, and here it
wasn’t.
Dillon v. Boltic Shipping: Dillon goes on a cruise, the boat hits a reef, sinks, she is in a lifeboat for a few days,
finally picked up, lost all of her goods, and sues them. She says she booked the trip, paid her money, got her
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ticket, and then after the cruise line sent her the exclusion clause. Decision: Exclusion clause did NOT apply,
because it wasn’t negotiated or brought to her attention at the same time as the contract. Not contemporaneous.
Generally, the courts don’t like exclusion clauses! You have to give proper notice of it (contemporaneous with the
contract)
Example: Never been on an airplane. Get your ticket. There’s a sign that says “terms of carriage include the terms
of the Warsaw convention and the Haig protocol”. You get to the other end and your luggage is gone, worth
$3000. The airport says the Warsaw convention says the maximum liability is $300. In spite of all of this, you’re
bound by the statutory provision, so technically you should only get the $300, but in reality they’d give you more to
keep your business.
Rule for Statutes: When it’s a matter of statute, these rules don’t apply and you’re bound by the statutory
provision.
B. How do you construe an Exclusion clause?
Assuming that you conclude it’s part of the contract, the next interpretational tool is “Confra Properentum”: You
construe an exclusion clause strictly against the party that’s relying on it, and it only applies if there’s clear
language used to imply that it is to apply under these circumstances. People found ways to make them effective
in all sorts of situations which Denning didn’t like. Denning proposes that exclusion clauses should only apply
where the clause is fair (battle with HL).
Karsales Harow v. Wallace (1956, HL) Principle: if a party has fundamentally breached a contract, that party
cannot rely on an exclusion clause. (Denning).
Suisse Atlantique (1967, HL): overruled Karsales-Principle: You have to construe the exclusion clause in the
context of the contract as a whole, and if in doing so you determine that the parties bargained for it to apply in
this exact situation, then it applies. If you determine that the clause was not meant to apply, then it doesn’t. Matter
of construction to determine applicability. (Reid)
Harbutt’s Plasticine: Denning focused on Reid in Suisse Atlantique: Of course an exclusion clause doesn’t apply if
the contract is brought to an end as a result of a fundamental breach of the contract. So Suisse is like what he
said in Karsales!
Photo Production Ltd. v. Securicor Transport Ltd.(1980, HL) – Securicor employee deliberately sets fire to Photo
company.
Facts: Securicor provides security service for commercial operations, and for a small sum of money, they provide
someone to come to the building and make sure everything is ok. The contract says “under no circumstances is S
liable for the acts of its employees unless their activity could have been foreseen and avoided by due diligence
(i.e. if we hired bad people)”. One of the guards goes into the photo production plant and deliberately starts a fire.
HL: Judgment for D. Clause applies even when the harm was caused intentionally.
Wilberforce: Denning would have said this was a fundamental breach and the clause won’t apply. Overrules
Denning in Harbutts and says the question of whether an exclusion clause is to be applied to a fundamental
breach is a matter of construction of the contract. You must read and construe the contract in its entirety and ask
“did the parties intend the exclusion clause to apply in exactly the circumstances that have occurred in
this case”? – it is a matter of the parties’ intentions whether and to what extent the clause can be applied after a
deviation (Suisse). On these facts, the charge to P was fairly modest for the assumption of a modest risk (periodic
visits by employees), it would have no knowledge of P’s equipment, so that seems to be construing the exclusion
clause reasonably under the circumstances. It’s reasonable that Securicor should only carry a modes risk. If
Securicor had no basis for seeing that he was a bad employee, they are not responsible for anything he does. The
words “under no circumstances…” are very clear words which limit liability.
George Mitchell Ltd. v. Finney Lock Seeds Ltd.(1983, HL) – limited liability on defective cabbage seed
Facts: D sold P 30 lbs of cabbage seed. Upon delivery an invoice was sent with two limits: (1) liability limited to
any defective seeds sold and (2) liability excluded for loss /damage /consequential loss/damage from use of seed.
63 acres of crop failed and P sued for loss of production.
Issue: Was limit reasonable under Unfair Contract Terms Act?
Denning: He gets told in Securicor that his rule of law is not right, and the HL is acting along the lines of “sanctity
of contract”: the parties are entitled to agree whatever they want in their contract. The more it looks like a party
intentionally breached the contract, the less likely it will be that we find it to be fair --this isn’t really what the HL
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said in Securicor. In 1969 the Law Commission’s Exemption Clauses in Contracts held that the courts could and
should only enforce exclusion clauses if they were fair and reasonable in themselves and if it was fair and
reasonable to allow the big concern (higher bargaining power, able to say take it or leave it) to rely on them.
“Freedom of contract” shattered, and in consumer contracts any exemption clause was subject to the test of
reasonableness. In the first Securicor case the HL held that the doctrine of fundamental breach was no longer
applicable, and it was replaced by the test of reasonableness, as it was a reasonable way to apportion the risks
between insurers on both sides (so it was unreasonable to place the risk on the owner of the business just
because they had the insurance for fire damages). As a practical matter it seems that Denning has it right it..
Denning has been adopted in Ontario.
Principle: Courts construe the exclusion clause in the context of the contract: “Is the clause fair”?
Test Whether it is fair or reasonable to allow the clause to enforced in the circumstances.
Fairness may result from the following sorts of factors:
 Was it a standard for contract that was biased in favour of one party?
 Is there a lack of equal bargaining power?
 What are the risks and rewards of the contract?
 What are the circumstances of the contract or the circumstances of the breach?
Fraser Jewellers v. Dominion Electric Protection (1997, Ont. C.A.) – P did not read limitation clause for alarm
system.
Facts: P entered into a contract with D for the supply of an alarm system. The contract contained a clause that
limited the liability in the event of loss or damage. P did not read the agreement and was unaware of the limitation
clause, and was not apprised of the clause by D. D failed to respond promptly to the alarm activation during a
robbery, and P sues for damages.
Decision: Judgment for D. Clear language, not unfair/unreasonable clause. Onus was on P to read the contract.
Robins: Fundamental breach: failure by one party to perform a primary obligation which as the effect of depriving
the other party of substantially the whole benefit of the contract. This was NOT a fundamental breach. It was not
deliberate or a wilful refusal to perform, but a lapse or error on the part of the employee. Regardless, an exclusion
clause of this kind should prima facie be enforceable according to its true meaning, unless, in light of the entire
agreement, is unconscionable, unfair or unreasonable. In the absence of fraud/misrepresentation, a person is
bound by an agreement to which he has put his signature whether or not he read the document. This contract was
on one sheet, was highlighted in bold, and the language was clear and unambiguous. The reader was not misled.
No special relationship between the parties that imposed any obligation for D to bring the clause to the specific
attention of P and to explain its effect. This is an ordinary commercial contract
Principle: Exclusion clause will NOT apply if reliance on it is unfair, unreasonable, or unconscionable (So they
adopt Denning’s decision in George Mitchell)
DEFECTS IN CONTRACTUAL RELATIONS
Recall: Formation of a contract, Interpretation of a contract (including exclusion clauses). Now assume we have all
building blocks, certain things can happen to make the contract fail: Rescinded for misrepresentation, void for
mistake, unenforceable for illegality, void for unconscionability.
1. Misrepresentation
One possibility is that a representation turns out to become a term of the contract, in which case a false
representation would mean a breach of contract. The other possibility is that the representation is very material to
the contract, but it is not actually a term of the contract, in which case the representation induces the formation of
the contract, and when it turns out to be false, generally there is no breach of contract. Must first identify the type
of representation that was made to determine a remedy
3 types of misrepresentations:
(1) Fraudulent: person to whom representation statement, known to be wrong, or made recklessly, without any
care as to whether it was true and without a belief that it was true. (Redgrave)
representation must have been an inducing factor in the formation of the contract. Not necessarily the
inducing factor but an inducing factor. If the representation would have induced a reasonable person then we
presume it was an inducing factor for this particular person and the defendant has to then prove either that the
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other person knew that the represenation was false or clearly didn’t rely on it. No defence to say I lied but you
were negligent in not finding out.
a) has to be material, has to be an inducing factor (to the reasonable person)
 Remedy: Rescission i.e can void contract or bar contract(subject to bars) or Tort damages.
(2) Negligent Misstatement - person having special knowledge or skill, gives advise in the area of expertise, to an
individual or group of which the plaintiff is a member, knowing/should have known that the advise will be acted
upon
 Remedy: Rescission (subject to bars) or Tort damages (Esso Petroleum)
(3) Innocent misrepresentation: any representation that is not fraudulent or negligent. (not a term to contract
unless term of collateral)
 Remedy: Rescission (subject to bars). Generally no damages because there are no tort damages, and no
contract damages because the misrepresentation did not become a term of the contract, unless the
representation can be converted to a term of a collateral contract (Esso Petroleum).
 This does not become a tort
1. Varieties of Misrepresentation
FRAUDULENT MISREPRESENTATION
Redgrave v. Hurd (1881) - solicitor buys worthless law firm based on fraudulent representation
Decision: There was fraudulent misrepresentation. Rescinded, but no damages awarded.
Reasons: To give a remedy, the representation had to be material, meaning that it has to be an inducing factor
in the formation of the contract. When we have a presumption that it induced the person who relied on it, D must
either show that the person relying on it knew the representation was false, or, under these facts, that the person
didn’t rely on it. No defence that the plaintiff had the ability to find out the truth – D must show P knew it was
false/did not rely on it. If pleaded properly (that the representation was made without the belief that it was true),
could have gotten damages, because part of the damages claim is that the representation was made without
regard for the truth and without the belief that it was true (fraudulently)
Principle: The basis for fraudulent representation is that the representation was knowingly false, or else it had to
have been made recklessly/carelessly (without regard for the truth), and without a belief that the representation
is true
NEGLIGENT MISREPRESENTATION
D has a duty of care to make sure that the representation is correct. Failure to do so constitutes negligent
misrepresentation.
The representation must be made:
(1) by someone with training, who professes special skills
(2) in the area in which they have that skill
(3) to the plaintiff or to a group of which the plaintiff is one
(4) in circumstances where you would expect reliance
Esso Petroleum Co. v. Mardon (1976) – gas station tenant can’t keep business running after relying on
representation
Facts: Esso Petroleum buys land for their service station. Their experts do a study that determines the company
should pump 200,000 gallons a year. They’re told they have to build the station back to front (with the pumps on
the side of the street). Esso then hires Mardon to be the tenant of the service station. Esso tells him the station will
pump 200,000 gallons of gas a year, making it a good service station. People don’t use the service station. He
does everything that he possibly can, but the service station won’t perform. He then gives up. There is nothing in
the contract that specifies the number of gallons. The law of misrepresentation says Mardon can set the contract
aside, but Mardon lost tons of money and wasted years of his life, and he wants damages, not a rescinded lease.
Decision: Damages awarded to Mardon for entering into a contract that was disastrous to him. Esso made “fatal
error”. No damages for “loss of bargain” that it would amount to 200,000 gallons.
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Reasons (Denning): could have won on collateral warranty, but trial judge didn’t find it so go to negligent
misrepresentation.
This is negligent misrepresentation - Esso set themselves up as the experts, the representation/forecast was
made in their area of skill, made to Mardon, who they expected to rely on it ( “you can rely upon it as being a
sound forecast of what the service station should do”). This is not contract damages, but rather tort damages
resulting from his reliance . He does not get the money he would have gotten if the station could have pumped
200,000 gallons of gas. He could have had damages for collateral contract as well, but he leaves that alone. He
has two options: (1) sue for tort damages, or (2) sue for contract damages (collateral contract remedy). 2 ways to
get tort damages: Fraudulent and Negligent misrepresentation.
PREREQUISITES OF ANY MISREPRESENTATION
(1) Representation must be a material inducing factor to the formation of the contract (but they don’t show up as
parts of the contract)
(2) Representation must be a positive representation (failure to state/silence is not enough)
 Exception when there is a fiduciary relationship (the receiver is a trustee)
 Exception with contracts of the utmost good faith (i.e. contracts of insurance, the insurer has an obligation
to state all material facts)
(3) Representation must be a statement of fact, not one of opinion (can’t rely on opinions)
 Unless the representor is in possession of all of the facts (Esso Petroleum), in which case he cannot hide
behind a statement of opinion
 A statement of law by a lawyer does count as misrepresentation, since it is a statement by a qualified
person it is considered to be a statement of fact
2. Remedies (if there IS a misrepresentation)
Rescission is an equitable remedy that allows the innocent person to say “I no longer wish to be bound by this
contract’. It is a good contract until it is brought to an end by one party saying he doesn’t want to be bound. Note
that this is different from void contracts (which happens when there is mistake). Property can pass from an owner
to a third party purchaser under a voidable contract that is subject to rescission. Mistake means there NEVER was
a contract. The contract is void, therefore no property ever passed. With misrepresentation you can rescind a
contract, as long as there is no bar to rescission
Example: B sells to A. A sells to C. B makes a representation as to the quality of the car. In many cases, B
disappears. Did property pass to A? If it’s a voidable contract, then property did not pass. BUT if it is voidable
subject to rescission, the property passed, and A can contract with C.
BARS TO RESCISSION:
(1) Inability to make restitution; but you can make restitution with compensation in the case of fraudulent
misrepresentation, and probably in other cases where the plaintiff can make substantial restitution. Inability to
make restitution if the person does not want the property back or the product is defective or has been
consumed/destroyed in some way.
O’Flaherty v. McKinley – D sells defective car to P under misrepresentation. P argues rescission, innocent
misrepresentation.
Facts: Plaintiff is told it is a 1950 car, but it was actually a 1949 car. The 1949 cars were defective. P later found
out it was not a 1950 model she asked for rescission. D said “you drove the car for months you can’t make
restitution and put me back into the position I was in as if the contract never occurred”.
Decision: Rescission. Judgment for P. P can make restitution, not substantially devalued.
Reasons: The car wasn’t substantially devalued by the bit of use over the course of the summer, so it’s close
enough to its original condition, and P can make restitution. Once the buyer has definitely accepted the goods, he
is taken to have elected to rely upon any claim he may have for damages if any condition is afterwards proven to
have been broken. At a certain critical time, before he finally accepts the goods, he has 2 choices: (1) Can rely
entirely upon his right to recover losses and accept goods. (2) Can reject the goods altogether if they are not what
they should have been under the contract.
NOTE: Dissent contrast this with Leaf (no rescission b/c of time lapse) in exam.
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(2) Intervening third party rights : If the third party acquires rights to the subject matter of the contract (if the
property is sold to a third party) by the time the contract is completed, and you discover the misrepresentation,
you cannot make restitution. (1) and (2) usually go together. If there’s a third party who has acquired the rights to
the product there will likely be an inability to make restitution.
(3) Affirmation: Once you discover the misrepresentation, if you want rescission, you have to act as if you’re
going to assert your right to rescission. If you expressly/impliedly seem to have affirmed the contract after you
found out about the misrepresentation, there is a bar to rescission
Leaf v. International Galleries: if you find out later on that a painting is not a Constable and it was represented as
one, and you keep it anyway, you can’t later say that you want to rescind the contract.
(4) Fully-executed contract for an interest in land, but not as will defeat fraud (if fraud, no bar to rescission).
An executed contract is a contract that is closed, as opposed to simply being an executor contract, which means
the contract is there (you have agreed) but you haven’t yet closed.
Redican v. Nesbitt – false representations made as to the quality of real estate but P didn’t find out until after the
deal closed.
Decision: Bar to rescission. Plaintiff lost because land transactions must have certainty. Not fraudulent.
Reasons: Once the transaction is closed, you are taken to have done your own investigation, searched the title,
and bargained for the right to bring in an inspector of the property. Once a land transaction closes, any
representations that have been made “merged in the deed”, meaning that they are no longer actionable, and the
only remedy available is damages. This bar does NOT apply to fraudulent representation, because the second
overriding policy issue is that we shouldn’t allow people to profit from their own wrongdoing. If the contract was
made fraudulently, rescission will be granted even if the contract has been executed.
(5) Passage of a reasonable period of time after receipt of property under a sale of goods contract
Principle: An innocent material misrepresentation in a sale of goods contract might be grounds for rescission even
after the contract has been executed, unless there was acceptance of the contract and the passage of a
reasonable period of time.
Leaf v. International Galleries -P buys a painting that was represented as being by Constable, which was a term in
the contract. Five years later P goes to auction it, and finds out it was not by Constable. P wants money back.
Decision: Too much time passed. Bar to rescission.
Rule: Under the Sale of Goods Act, if the painting had been described as being a Constable in the term of the
contract, you lose the right to repudiate the contract if (a) you have accepted the goods/are deemed to have
accepted, and (b) a reasonable time has passed for your inspection of the goods, you lose your right to repudiate
and rescind the contract if it was a term (which is harder to do), then doesn’t it
make sense that you lose the right to rescind if it wasn’t even a term (in the case of misrepresentation)
(6) “Dirty hands”
COLLATERAL CONTRACT TO OBTAIN DAMAGES FOR INNOCENT MISREPRESENTATION
(1) Must be able to show a real intention to create two contracts (i.e. rep. must be clear & separate).
 The collateral contract must be strictly proven (Heilbut, Symons)
 Must be probable that, even if it’s not in writing, the parties entered into 2 contracts
 The representation must be the REAL inducing factor
 How do you get this “collateral warranty” that Denning refers to?
 Can’t imply collateral contract because of parole evidence rule forbids implied terms of contract
 Dick Bentley v. Harold Smith Motors – Denning: include the representation as a main warranty
 Leaf did not ask for damages, he asked for rescission, so it is unlikely that he can prove collateral contract
(2) Must not conflict with a main contract in writing.
 Hawrish v. Bank of Montreal – lawyer did not read the contract, bank manager told P it was a limited
guarantee, but the guarantee said it was continuing for such amounts as the bank would owe from time to
time. SCC said you can’t prove a collateral contract if it conflicts with the main terms of the written contract.
(3) Easier to prove collateral contract if the representor is a different party than the party to the main contract
(Shanklin Pier)
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Heilbut, Symons & Co. v. Buckleton -Similar to Morgan v. Griffin – P argues fraudulent representation, not term to
collateral.
Facts: P sought damages against D based on the allegation that the P had been induced to enter into these
contracts by the fraudulent representation that D that the said company was a rubber company. P argues the
statement was in a collateral contract, but that it wasn’t in the terms of the contract. Judge disagrees.
Decision: Contract binding, judgment for D. No evidence of collateral contract. Parole evidence rule forbids
implying terms. Legal Rule: A person is not liable in damages for an innocent misrepresentation; no matter how
the attack is made.
Shanklin Pier Ltd. v. Detel Products Ltd. – D recommended paint to P’s architect, damages pier. P wants
damages from D.
Facts: Ps were owners of a demolished pier, contracted with contractors to have the necessary repairs effected
and to have the whole pier repainted. Director of the D company told the Ps and their architect that the certain
paint manufactured by the Ds, known as DMU, would be suitable. It doesn’t end up working properly Ps incurred
extra expense over 4000 pounds.
Decision: Judgment for P. Enforceable since representation caused one party to enter into contract with another
party.
Reasons: D argued no warranty can arise between parties other than parties to the main contract and no
warranty was ever given to the Ps. However, Ds gave to the Ps the warranties substantially in the form alleged in
the statement of claim. I see no reason why there may not be an enforceable warranty between A and B
supported by the consideration that B should cause C to enter into a contract with A, or that B should do some
other act for the benefit of A. Ps are entitled to recover against the defendants for breach of the express
warranties alleged.
There was a collateral contract here – “In consideration of you telling your painters to use DMU, I can tell you that
the paint will be the best”
2. Mistake
In effect mistake is a situation where there is a fundamental term of the contract, but there is
some type of mistake that has been made so that the parties realize this isn’t the deal they
thought they were making (misrepresentation is when it is outside the terms of the contract). The
courts have continuously said (except Denning), if you have a mistake the contract is void,
because the parties never agreed to anything. In the first 4 types, the contract is almost always
void. Denning says that maybe mistake renders a contract voidable in the same way
misrepresentation does (set it aside subject to the bars to rescission). Property passes under
voidable contracts, but under a void contract, property never passed.
Types of Mistake
(1) Common Mistake – both parties share the same fundamental mistake (think the same thing).
So under what circumstances is the contract void?
 Bell v. Lever Bros. Ltd.
 Solle v. Butcher
 Great Peace Shipping v. Tsavliris Salavage.
 Frederick Rose. V. W.H. Prim & Co.
(2) Mutual Mistake – the parties have different understandings of the terms, and neither is aware
of the other’s understanding. Neither party has forced his view on the other, or is responsible
for the mistake. Both views are reasonable, and it will be rare when a contract is void in such
a case.
 Raffles v. Wichellhaus
 Smith v. Hughes
(3) Unilateral Mistake – one party is mistaken, and the other knows it. Usually the other party is
guilty of fraud. These are termed “snapping up the mistaken offer” cases. Did the party who
accepted had to have known of the mistake, so in effect the mistake is unilateral?
 Hartog v. Colins & Shields.
 Cundy v. Lindsay
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 Ingram v. Little (rogue)
 Lewis v. Avery (rogue)
(4) Mistaken documents (non est factum) – one party is fundamentally mistaken as to the
purport of signed documents. When, if you sign a document without reading it, can you set
the contract aside because there is a fundamental mistake as to the obligation you thought
you were entering into? These are mistakenly-signed documents.
 Saunders v. Anglia Building Society
 Marvco Colour Research v. Harris
(5) Frustration – the parties are mistaken as to some future assumption. When the assumption
is untrue, performance of the contract may be excused. The parties are in agreement about
the contract (and assume that it is initially right), but are mistaken about some future event,
which makes the performance on the contract impossible. When will the court say, there has
been such a change in what the parties intended in the future, that we will allow one of the
parties not to have to perform?
COMMON MISTAKE (AT COMMON LAW)
Both parties are equally mistaken at the time they enter into the contract, and the mistake must
be as to the substance of the thing contracted for, not a quality. At common law the conclusion is
clear that common mistake  void contract. Under equity common mistake voidable contract
(according to Denning)
After Bell v. Lever Brothers, what is a mistake as to substance?
1.
When you have a fundamental mistake, you have a void contract. But there is a big
difference, it has to be fundamental as to the substance of the contract, and not a
mistake as to the quality of the subject matter of the contract.
2.
Non-existence of the subject matter?
3.
Purchase of one’s own property? Bell v. Lever Bros. says that this is simply a case of an
unenforceable contract, because the vendor can’t make the promised title ( it doesn’t
exist).
4.
If a common mistake exists, it renders the contract void.
Bell v. Lever Bros. Ltd. (1932, HL) – mistake must go to the substance for it to be a common
mistake
Facts: Lever Brothers entered into an agreement with Bell to pay him 30,000 pounds in
satisfaction of all Bell’s claims against them, and his employment was terminated. They later
found out that Bell had been making profits secretly and had been breaching his fiduciary
relationship with the CEO of the company. They brought an action claiming the money, alleging
fraudulent misrepresentation and breach of the employment contracts. Lever Brothers say there
is a common mistake: they both believed that they were entering into a contract to terminate a
5-year employment contract, which required them to pay Bell. In fact, they could have terminated
him for cause, in which case they would not have had to pay him anything. So they claim that is a
mistake as to the substance of the contract
Decision: Judgment for P. Contract binding because mistake was to quality only.
Reasons (Atkin). The contract was to terminate Bell’s employment, which was the substance,
and that’s what it did. It was only the quality of the contract that was mistaken, which was to
terminate at notice as opposed to a 5-year employment contract. That is not a fundamental
mistake as to the substance. So it is hard to find a mistake of substance...(like Leaf: artist was a
quality , sale of painting was substance). No misrepresentation because he was silent in the
contract, and you need positive action (except for exceptions). He had no duty to speak up
because his contract was with Lever Brothers, not the one he was a fiduciary of.
How often do you have a common law mistake (substantial mistakes)?
Buying something you already own: Cooper v. Phibbs (cited in Bell)- Lawyers see that the
plaintiff actually owned the fish house that he bought. The courts say that is a mistake as to
substance, because it goes right to the heart of the consideration (you paid for what was yours)
Buying something that doesn’t exist: Coutourier v. Hastie (cited in Bell) - Parties agreed for the
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sale of a boatload of corn. Without their knowledge, when they entered into the contract, the corn
had gone bad and the boat had to be unloaded at another port and was disposed of. The court
said this contract must be set aside and there is a mistake of substance as to the subject matter
of the contract
EQUITABLE COMMON MISTAKE
Contract is voidable if it is made subject to a fundamental mistake, the person asking to set it
aside is not responsible for that mistake, and it would be unfair to hold the parties to the bargain
(Solle v. Butcher). Executed leasehold is not a bar to rescission. Executed conveyance of an
interest in land, not induced by fraud, acts as a bar to rescission. Also apparently the inability to
make restitution?
But Great Peace Shipping v. Tsavliris suggests (in England):
(a)
Solle v. Butcher was wrongly decided. There is no room for equitable common mistake;
(b)
Slightly expand the test for common law mistake: the mistake may be the existence, or a
vital attribute of the subject mater of the contract, or the existence of circumstances that
are necessary to make performance possible, and one party cannot be seen to have
assumed the risk of the existence or performance.
Solle v. Butcher (1950, K.B.) – Denning’s new precedent. Equitable common mistake renders
voidable.
Facts: P rents from D for 250 pounds/year, and they both believed that there was no rent control
legislation. D moves into one of the apartments for himself, and rents out the others. Turns out
the apartment was controlled by the Rent Acts, and the maximum rent chargeable was 140
pounds. P argues that there was a common mistake, as they both believed that this property was
not subject to rent control, when in fact it was, so they were fundamentally mistaken, and P wants
to pay 140 pounds –
Decision: P can pick. Either pay the higher rent, or the contract can be set aside.
Denning: Bell would say no common mistake, as the a quality of the flat was that it was subject
to rent control, but the substance was the lease, which was not mistaken.
(a) With common law common mistake, the contract is void. The contract is good unless and
until it is set aside for the failure of some condition on which the existence of the contract
depends, or for fraud, or on some equitable ground.
(b) Denning thinks there is a second jurisdiction, the courts of equity, which create equitable
results where the common law is not working properly. If you have equitable common mistake,
the contract is voidable, so it can be set aside by a court of equity if it is fair under the
circumstances. In this case, D made a fundamental mistake of thinking the property was not rent
controlled so it would be fair to set it aside.
Principle: A contract will be set aside if the mistake of the one party has been induced by a
material representation of the other, even though it was not fraudulent/fundamental. P can either
rescind or pay full rent (no good deal off this mistake).
Since this sounds like rescission under misrepresentation, are there bars to rescission?
So when/when does equitably common mistake about?
Denning was highly criticized for this decision because there is no predictability. This mistake is
subject to the question of fundamental/substantial mistake (because under Bell this would not
work). Denning – there are big problems with void contracts because property doesn’t pass
under them. Under common law, there must be an awfully big mistake for a party to be able to
walk away (like contracting for something that’s yours or doesn’t exist). He thinks it is wrong for
someone to be able to take advantage of such a mistake, and says he can fix these problems by
making contracts voidable. He is not very specific, but applies it when he thinks it’s appropriate
Forbes: Denning makes sense and will eventually prevail. There must be something less than
“buying your own property” that allows you to set a contract aside if both parties are mistaken.
Denning did not clearly set out a test, but perhaps you say: There never would have been a
contract if the parties had not been mistaken as to this term. Thus a contract is voidable.
BUT...Great Peace Shipping overruled this decision…
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Great Peace Shipping v. Tsavliris Salavag (2002, English) – contract to save damaged vessel,
realize it’s far so contract with another vessel without cancelling and paying for 5 days work.
Facts: D offered salvage services to a vessel that had suffered structural damage. D sought P
vessel to assist, which was believed to be 35 miles from the damaged vessel. Hire contract was
developed for a minimum of 5 days to escort and stand by the damaged vessel to save lives. The
agreement contained a cancellation clause giving a right to cancel on payment of five days’ hire.
When it was discovered that the vessels were farther apart, D did not immediately cancel the
contract but sought a nearby vessel to assist. D then cancelled their contract with P and refused
to pay for hire. P claimed damages under contract or for wrongful repudiation. D argued
common law common mistake, and both parties had proceeded on the fundamental assumption
that the two vessels were in close proximity. Thus the contract was either void in law or voidable
and D was entitled to rescission in equity.
Decision: Judgment for P. No common mistake, so contract is enforceable and D must pay
cancellation fee.
Reasons: Look to Solle, and rule that there is no separate jurisdiction for the law of equity. Bell
tells us the law for common mistake, so they apply Bell – all or nothing (void or not). This is a
mistake in quality only, and is not a mistake in substance (not impossible to perform the
contract). The quality was how far the ship was, but in substance it was the same contract
Test for common law common mistake:
(1) It must be a mistake as to a “vital attribute of the subject matter” -so diff. from
quality/substance?
(2) It must be a mistake that “renders performance impossible” – go to the heart of
consideration
(3) It must not be the fault of the party pleading it
(4) On the construction of the contract, neither party can be seen to have accepted the risk of the
mistake (there must be no warranty that this state of affairs exists)
Forbes: He would have thought that, before this case, a Canadian court would follow Denning as
the Australians did, but he thinks they would follow the English in Great Peace Shipping. This
case has taken an awful lot of heat from academic writers who say Denning was onto something
good and they’ve killed it
McCrae v. Commonwealth Disposals: - P bids to save ship that wasn’t even there – common
mistake
Facts: Australian commonwealth disposals were giving contracts to people to salvage ships that
had been damaged in WWII. Commonwealth offer a contract, McCrae bids and gets his crew out
there, but there was no tanker boat. McCrae wants damages, as he relief on there being a ship
as he was told. Commonwealth says they were mistaken.
Would this have been common mistake?
 Vital attribute: YES, NO SHIP!
 Renders performance impossible: YES, NO SHIP!
 Not Commonwealth’s fault: IT WAS THEIR MISTAKE, SO PERHAPS IT WAS
You have to look at the rest of the contract and see if one of the parties can be seen to have
assumed the risk of there not being a ship. Was it McCrae who took the chance? Or the
commonwealth’s responsibility for saying there was a ship out there? If one party doesn’t say “I
represent that the tankers exist”, and the contract is for the salvation of a tanker, then a mistake
situation arises. RARE.
Sherwood v. Walker (wasn’t going to teach this!) – fundamental mistake when cow turns out to be
breeding
Facts: Sherwood says he raises prized cattle, and offers one with the best bloodlines around to
Walker, who buys it. A few months later the cow gets pregnant! Sherwood wants the cow back
now because it is actually a breeding cow rather than for slaughtering.
Michigan court: This IS a fundamental mistake! Different from Bell.
Consider Bell: Is Bell a misrepresentation case: Recall that a contract in the utmost good faith is
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an exception to the rule that misrepresentation has to be a positive action
So Bell did not have an obligation to speak because the contract was with Lever Brothers and not
with the company that he was a fiduciary of, in which case he would have had an obligation to
speak because that would have been a contract of good faith. So there is a blurred relationship
between misrepresentation and mistake The difference is whether or not the misrepresentation
gets included as a term in contract.
Fredrick Rose v. W. H. Pim & Co. (1952, HL) – P contracts to supple feverolies, told by D horse
beans
Facts: P has a contract with parties in Egypt to supply them with feverolies. P says he has no
idea what these are, and D suspects they are horse beans. D supplies horse beans to P, P takes
them to Egypt, who says they are not feverolies. P comes back to England and says: We thought
that horse beans were feverolies, based on that mistake, we put horse beans into our contract,
we would like the court to agree to rectify the contract to substitute the word feverolies with the
word horse beans, and then we want to sue D for breach of contract for not having provided
feverolies.
Decision: Judgment for D. Contract binding. No rectification.
Reasons (Denning):You can get a contract rectified under the parole evidence rule but you
cannot supply other information outside the contract under the rule. P would have to prove there
is ambiguity as to what horse beans are, and having said this the court would have to look at the
surrounding circumstances to prove that when they said horse beans they thought those were
feverolies. The idea of rectification is if you can show by evidence that the parties meant X and
wrote Y, you can ask a court of equity to rectify the contract to substitute X instead of Y. But that
does NOT apply here.
Rule of Rectification: You can rectify if the parties meant X and wrote Y, but you can’t rectify if
you can show that the parties intended X but thought that X was Y, because then they intended to
write Y! You cannot rectify a contract for a mistake in assumption. Again, there has to be a REAL
mistake
Can this contract be set aside for equitable mistake? NO, can’t set the contract aside for
rescission if you had the product for long enough that you lost the right to repudiate it. P had the
product, had the chance to examine it, accepted the delivery, so he can’t set it aside for mistake
(Leaf)
Problem: What bars to rescission are applicable to equitable mistake?
Main Points of Fraser:
 You can’t rectify a contract to fix a mistake, unless you are rectifying a typo (which they
weren’t)
 This might have been an equitable mistake case, but Leaf applies here
 Could have argued collateral contract, saying that D represented that horse beans were
feverolies! And then could have sued for damages of breach of that warranty.
MUTUAL MISTAKE
If both parties have different views of the fact, neither is aware of the other’s position, and both
views are reasonably held, the contract is void (Raffles v. Wichelhaus)
However, if one party has so conducted himself so as to reasonably convince the other that they
are contracting on the same terms, then that person’s perception of the terms is not reasonable,
and the contract will stand, on the terms so apparently agreed. (Smith v. Hughes).
Raffles v. Wichelhaus (1864, English) – the Peerless case, Mutual Mistake.
Facts: P sold to D 125 bales of cotton. The goods arrived by the Peerless, but D refused to
accept or pay for them. D argued that the ship in the agreement was meant to be called Peerless
that sailed from Bombay in October, and that P was willing to deliver the cotton which arrived by
another ship called Peerless which sailed from Bombay in December. P sues for breach of
contract. According to parole evidence, the contract just said cotton was to be shipped on the
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Peerless. D wants to find an exception to the Parole Evidence Rule, which is that there was never
any contract (like Pym v. Campbell- condition precedent).
Decision: Judgment for D. Contract void. Mutual mistake. No consensus ad idem.
Reasons: Each had a different view, each did not know of the other’s position, each view was
reasonable, so contract void. The question about what they meant by the Peerless would only
arise if the contract was for the sale of a ship called the Peerless, but it was for the sale of cotton.
To award damages to P is imposing on D a contract different from that which he entered into. D
does not impute misrepresentation/fraud, but only says that he intended for another ship at the
time of the contract. Nothing on the contract to show that any particular ship called the Peerless
was meant, but from the moment when two Peerless ships were sailing from Bombay, there is
latent ambiguity. This parole evidence may be given showing that D meant one Peerless and P
meant another.
Smith v. Hughes(1871, Q.B.) –no mutual mistake b/c D’s belief that it was old oats was
unreasonable.
Facts: P (farmer) took a sample of oats to D (manager of horse owner) and offered 40-50
quarters at 35s/quarter. D took a sample, and later wrote to say that he would take the oats at
34s. P sent 16 quarters, which D complained were new oats. P denied having any old oats.
Dispute about whether or not P offered good “old” oats.
Decision: Judgment for P. D’s belief that they were agreeing to the same thing wasn’t
reasonable. Contract.
Reasons: If one of the parties intends to make a contract on one set of terms, and the other party
intends to make a contract on another set of terms, there is no contract, unless the
circumstances are such as to preclude one of the parties form denying that he has agreed to the
terms of the other. If a reasonable person in such a situation would have thought that they were
both assenting to the same terms, then the other person is bound. If you act in a way that makes
the other party reasonably think that you are agreeing to their terms, then you can’t later say “I
didn’t intend that”. Mutual mistake will only be actionable if the parties have different beliefs in the
terms, and each of the beliefs is reasonably held. If you accept to buy something you are shown,
that is essentially you agreeing to the terms of the contract
If P had specified “old oats”, it would have been misrepresentation (rescission) or unilateral
mistake if it was included in the contract (breach of contract)
If P only said “oats” and D said “aaah old oats” there may be unilateral mistake if P doesn’t
correct him.
Unilateral Mistake
(1) If one party is aware, or should reasonably have been aware, of the other party’s mistake in
making an offer, then the contract is void for unilateral mistake, and the offeree cannot “snap up
the mistaken offer” (Hartog v. Collins & Shields)
(2) Unilateral mistake as to real identity of the other party to the contract will make the contract
void, if the facts indicate that the mistake is fundamental (Cundy v. Lindsay).
(3) In cases of face to face negotiations, the same result may be reached, as long as the
appearance is still that the mistake is fundamental, and the innocent party has undertaken some
level of diligence to so indicate. The presumption is that the parties aren’t fundamentally
mistaken, but that presumption can be rebutted (Ingram v. Little).
(4) Perhaps, based on Denning in Lewis v. Avery, the contract may only be found to be voidable,
not void, but question whether this conclusion is still right after Great Peace Shipping v. Tsavliris.
Hartog v. Colins & Shields(1939, English) – P must have known D was mistaken in offering per
pound
Facts: P and D entered a contract for the sale of Argentine bare skins. D offered them at a price
per pound, and P accepted. Negotiations were always based on a price per piece, as that’s the
trade custom (3 pieces in 1 pound). P claims he accepted D’s offer to buy skins per pound. D
claims that there was no contract, because P knew that the document went forward in the form of
an offer, contained a material mistake. D claims that, in realizing there was a mistake, P
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“snapped up the offer”. P must have realized that a mistake occurred as per pound was well
below the industry standard.
Issue: Is it so obvious that the quote is a mistake? If so, contract is void.
Decision: Judgment for D. Unilateral mistake. P must have known the offer was mistaken.
Reasons: If you know the other party is mistaken/must have known, then you cannot snap up a
mistaken offer. So the question is: Is the offer so obviously wrong/low, so that the only way you
could have accepted the offer was if you knew that there was an error? If yes, then there was a
unilateral mistake. – like Smith.
UNILATERAL MISTAKE - MISTAKEN IDENTITY:
There are two types of mistaken identity cases:
(a) Someone was fundamentally mistaken as to the identity of the person making the contract
(the person who sends the correspondence).
 Did you mean to make the contract with the person who sent you the letter or with a
reputable person who carries on business? (Cundy)
(b) Personal contact cases:
 Did you mean to make the contract with the person in front of you, or with the person
who they are alleging to be? (Ingram) – presumably harder to make the argument that
it was mistaken identity.
distinguish this from the other cases -Cundy v. Lindsay (1878, H.L.) correspondence with rogue
Facts: B signed his letters making it look like a highly respected firm. Lindsay, who knew of the
firm, sent the goods addressed to B’s house under the perception that it was the firm. B sold the
goods, which were fraudulently obtained from Lindsay, to Cundy, an innocent third party
purchaser. Lindsay brought an action against Cundy for unlawful conversion of the handkerchiefs.
 If arguing this as a misrepresentation, there is a bar to rescission—inability of to make
restitution, third party rights (rights of Cundy). Mr B has bought all the handkerchiefs, and
Cundy can’t get them back, rescission no longer available. He can sue for damages for
fraud, but the rogue is in jail and has no money.
 So Lindsay alleges unilateral mistake, because the contract would be void and he can
make a property claim against the new owner, or a tort claim in conversion of the
handkerchiefs to the person who sold the property. This is what he does.
Issue: Was there a mistake that will set the contract aside? If so, Lindsay owns the
handkerchiefs.
Decision: Judgment for Lindsay (original P). No contract. Fundamental mistake.
Reasons: The mistake is material, because it is about who the other party was (he thought it
was the business). The mistaken identity was through correspondence, not face to face. If there
was an association between the rogue and Cundy, rescission would be more likely because you
could argue misrepresentation (as there’d be no intervening third party right because Cundy
would not be innocent).
Principle: Unilateral mistake as to the identity of the other party will make the contract void, as
long as the facts indicate that the mistake is fundamental (reasonably mistaken in some
fundamental way – show that the ID of the person was important to you).
So you have to ask:
(a) Is one party mistaken, and are they fundamentally mistaken?
(b) Did they mean to contract with the rogue or with the reputable company?
o You have to be able to say you were reasonably mistaken in a fundamental way (the
party you were mistaken about was important)
o Must look at more than simply “he didn’t get what he expected”- it was in this case, a
crook!
Ingram v. Little (1961, English) (face to face) – Hutchinson rogue sells car to third party.
Facts: Ingram sold her car to Hutchinson and accepted his cheque. Hutchinson then
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disappeared and was not heard from under that name or the other name he gave her. A man
called Hardy (Hutch) then sold the car to Little. Little then sold the car to another dealer. Ingram
sued Little for the return of the car or for damages for its conversion. An innocent third party
purchaser has property (bar to rescission), Hutch disappeared, therefore Ingram must argue
unilateral mistake
Issue: Can I be mistaken when dealing with someone right in front of me? Did I mean to contract
with the person in front of me, or with someone reputable?
Decision: Judgment for P (Ingram). Contract void. Unilateral Mistake.
Reasons: P was under the belief he was dealing with an honest Hutchinson. There was no offer
which Hutchinson could accept, and therefore there was no contract. This shows how third
parties who deal in good faith with a fraudulent person may be prejudiced.
Lewis v. Averay (1972, English) (face to face) – guy pretends to be Robin Hood actor.
Facts: Lewis sold his car to a rogue who claimed to be a famous actor. He took his cheque and
before waiting to see if it cleared he let the rogue take the car after seeing what appeared to be
proof of his identity. The next day Lewis deposited the cheque and learned that it was worthless.
Meanwhile the rogue sold the car to Averay for 200 pounds. Avery’s parents wanted the logbook,
so they wrote to Lewis, after which the story came to light. The rogue cashed the cheque and
disappeared, and was untraceable by the police. Lewis is suing Avery claiming that the car is still
his, claiming damages for conversion.
Issue: Who is entitled to goods that have been acquired in good faith due to another’s fraud? The
original seller or the ultimate buyer?
Decision: No remedy. Judgment for D (Averay). Bar to rescission (third party rights).
Reasons (Denning): Unilateral mistake makes a contract voidable, subject to the existence of
bars to rescission (not void). Here there was a bar to rescission—the intervening third party rights
of Averay)
Therefore no remedy (other judges say no remedy because there was no fundamental mistake).
Principle: When two parties have come to a contract – or what appears to be a contract- the fact
that one party is mistaken as to the ID of the other does not mean there is no contract or that it is
null and void from the beginning. It only means the contract is voidable so long as he does so
before third parties have in good faith acquired rights under it.
Compared to Ingram:
Ingram: Contract is void for unilateral mistake.
Lewis: 2/3 judges say there is no fundamental mistake. Denning says unilateral mistake, but no
remedy because of bar to rescission (voidable, not void). Lewis could have taken more positive
action to find out who he was (more than just taking his ID). Merely mistake to attribute
(creditworthiness) of rogue, and L did nothing to show that ID of purchaser was important.
In Ingram, he took more positive action to figure out who Hutchinson was
Principle: If you take action to verify the truth of the statements that were made, the court may
say that is evidence that the mistake was material.
Note: Unless Lewis really thinks that the third party knew about the fraud, then the courts always
go with the innocent third party rights (and bar rescission) because the person tricked by the
rogue is more at fault. One party is always more responsible for the loss than another. Great
Peace overturns this, however by saying that there is not mistake under equity, and so the bars to
rescission don’t apply with mistake.
NON EST FACTUM (MISTAKEN DOCUMENTS)
(1) Can be pleaded if the nature of the document is fundamentally different than what was
believed. The class vs. content distinction now seems to be dead, at least in England – said that
you could set contract aside if you were mistaken as to the class and character, but not content.
Question appears to be still open in Canada, as it was not addressed in Marvco v. Harris.
(2) Can only be pleaded by someone who hasn’t been careless in not reading the document,
meaning someone with a disability.
(3) Can only be pleaded against a third party, and as against the person who knows
about/caused the, the contract is voidable. – hard to plead because subject to bars to rescission.
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Thoroughgood: T signed a document that he was releasing to Chicken, his tenant, to kick him off
the land. Turns out the document was actually a deed for the land giving it to Chicken. Chicken
then sends it to a third party. Court: T is not bound by this deed and he can plead non est
factum. If T did not understand the document he had to have made an attempt to understand it
Principle: You can set the document aside, but not if you’ve been careless/negligent in signing it:
 (1) Mistake of class or character as opposed to content is not right
 (2) Can plead non est factum if you seem to be signing a document that was a negotiable
instrument.
 (3) Carelessness disentitles one to plead non est factum
Saunders v. Anglia Building Society/(Gallie v. Lee)(1971, H.L.) – woman gets tricked by
nephew’s partner
Facts: P, old woman Gallie wants to give her house to her nephew, Parkin. Parkin plans with Lee
to sell the house to him to make money. She doesn’t have her glasses on and is tricked by his
business partner, Lee when she signs it. Lee mortgages the house but drafts false statements in
the application, and the company, in reliance on the deeds, lent money to Lee on security of the
house. Lee failed to pay Parkin, so Gallie’s execution of the deed did not confer any benefits to
Parkin.The contract is binding because there was no fundamental mistake – the nature of the
document is not radically different than what she intended.
Gallie: claimed against the defendant building society a declaration that the assignment of the
house to Lee was void as she had made a fundamental mistake. Saunders, her executor, says he
tried to make the case for the beneficiary of her estate (Parkin).
Decision: Contract Binding. Judgment for Building Society. No fundamental/radically different
mistake.
Denning:
Broad principle: if one does not take the trouble to read a document, but signs it as is, relying on
the word of another as to its character or contents or effect, he cannot be heard to say that it is
not his document. No man may take advantage of his own wrongdoing.
(1) Test that mistake of class or character as opposed to content is not right
 Test: Is the nature of the document fundamentally different than what was intended?
 If not, NO plea for non est factum.
 NO, there is no material mistake as to the nature of the document that she signed,
because she intended to benefit Parkin, and Lee had just committed fraud – no
fundamental mistake.
 This is a voidable contract, subject to rescission and the bars to rescission (intervening
third party rights. You can’t plead non est factum in the face of an innocent third party
intervening purchaser. So the mistake has to be discovered before the title is transferred
to the third party (the building society)
(2)Carelessness disentitles a party from pleading non est factum.
 Gallie was not careless, and might have been able to plead non est factum (old, not
sophisticated, broken glasses, faced with crooks whom she asked to read the document)
 Can’t plead non est factum in face of an innocent third party, mistake must be discovered
before title is transferred to third party. This is voidable subject to the bar of rescission.
 HL does not have/want to answer whether the contract is void or voidable, because here
there is NO plea non est factum.
 Case goes to HL after Gallie is dead, her executor is trying to make the case for nephew
to set aside the contract.
Marvco Colour Research v. Harris (1982, SCC) – daughter’s fiancée makes mistake, sign second
mortgage
Facts: Dispute between Harris and their daughter’s fiancée. He is buying out his business
partner. Daughter asks parents to mortgage their house to give him the money to buy out his
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partner. Harrises agree, deal is in negotiation. His partner wants out of the debt. Fiancee says he
made a mistake, and there was a typo in the document, so he asks them to sign a fixed
mortgage. Mortgage turns out to be a second mortgage on the house, securing amounts payable
on the covenant from the time the business was bought. Fiancee defaults, and holder of
mortgage tries to enforce debt against H’s. Harrises say “non est factum”, had no intention to
give a second mortgage on their house, were frauded.
Decision: Saunders applies, contract is legally binding.
Reasons: Agree with Saunders, that a person who signs a document carelessly, and if the nature
of the document is not fundamentally different than what was intended, is not entitled to plead
non est factum. H’s were careless, they did not read the document but relied on the fiancée. No
need now to answer about whether they agree with Saunders about the class v. character
distinction.
Forbes thinks Denning makes sense in Gallie v. Lee, because, if the nature of the document is
different, but the financial impact is the same, why is that a fundamental mistake? Yet, if the
nature of the document is the same, but the financial impact is different, why is that not a
mistake? Unfortunately SCC doesn’t answer that question, and you follow Saunders. Competing
issues between wanting to grant relief to those whose consent to signing is genuinely lacking and
not wanting to intervene with innocent third party rights.
Conclusion- Rare that someone can plead non est factum – not careless, fundamentally different
in nature. There is always a bar to rescission, so people always go after innocent third parties
(Gallie/Saunders)
3.
Illegalit
y
When is
a
contract
going to be unenforceable (not using void/voidable) because it is illegal?
Two Basic types of illegality;
(1) Common law illegality: based on public policy, including restraint of trade as a special issue;
(2) Statutory illegality: based on prohibitions in statutes.
Two concepts to consider:
(1) What is the effect of the illegality on the contract?
(2) What happens to property delivered under an illegal contract?
(A) CONTRACTS ILLEGAL AT COMMON LAW
1.
Contracts to commit a crime or a tort.
2.
Contracts to defraud the revenue authorities
(a)
Andrews v. Rayson: Landlord wants rent and maintenance fees. There’s a fight between the
landlord and tenant, and the tenant says it’s an illegal contract. Court agrees because the way they
constructed the contract was meant to withdraw revenue from the taxing authority. Took money
that would have gone to taxes and put them in a services contract.
3.
Agreements that promote corruption in public office
(a)
Parkinson v. College of Ambulance: P wants a knighthood, and promises to pay the college if they
give it to him. He doesn’t get knighted and sues for his money back. Court said this contract was
illegal!
4.
Agreements for an immoral purpose (Andrews v. Parker - prostitution)
5.
Other agreements contrary to Public Policy?
(a)
Denning in Enderby Town Football Club v. Football Association cites the statement from
Richardson v. Mellish about policy being an unruly horse – saying that public policy is closed
categories, it does not change.
(i)
In response to “Public policy is a very unruly horse, and when once you get astride it you
never know where it will carry you”, Denning said “I disagree. With a good man in the
saddle, the unruly horse can be kept in control. It can jump over obstacles…and come down
on the side of justice” Denning is saying that public policy should not be looked at as being
closed.
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(b)
(ii)
In the matter of Baby M.
PUBLIC POLICY INTRODUCTION
Test for public policy: “some defined and governing principle which the community as a whole has already
adopted either formally by law or tacitly by its general course of life” (Wilkenson v. Osborne).Contracts may be
illegal as to public policy
Consider: If you say contracts of this sort are not supposed to be enforceable contracts because they offend
some standard of public morality--is it what the judge thinks is obscene/ what the public thinks
The “paramount public policy”—the policy that courts usually assume without discussion: if there is one thing
which public policy requires it is that men of full age and competent understanding shall have the utmost liberty of
contracting and that their contracts when entered into freely and voluntarily shall be held sacred and shall be
enforced by Courts of justice”
Policy is often used to denote the residual overriding sense of justice between the parties and “public policy” often
indicates enlargement/restriction of liability because of anticipated salutary effects on the future behaviour of other
In the Matter of Baby “M”(1988, American) – surrogate bailed after child was born.
Facts: Couple couldn’t conceive so they signed a contract with a surrogate mother, and agreed to pay her in
return for her giving up the child when it was born. Once it was born she refused to give it up and left the
jurisdiction
Trial: Plaintiffs won. Although no law regulated such an agreement, it was not illegal, and there was no fraud/
unconscionability so it was enforceable. Granted specific performance because it was in the best interest of the
child for it to go to the Sterns. This is an equitable remedy, and judge not sure that the law of equity should require
specific performance.
Court of Appeal: Contract void because it was contrary to state laws which included prohibiting money being
used in adoptions, requiring proof of parental unfitness before termination if rights, making surrender of custody
revocable in private placement adoptions (contrary to public policy of state)
Decision: Contract void because it violated public policy but custody to Sterns b/c best interests of child.
Reasons: Surrogacy contracts create principles that are directly contrary to objectives of our law. The harmful
consequences are too palpable. Will there be contracts to buy a kidney or to clone people? IT is a matter of a
social more- when the society is supposed to look and say this is not appropriate.
Forbes: is the judge applying his own standard or a social moral standard? This is a matter of public policy but it
is looked at through the eyes of the judge who makes the decision
CONTRACTS IN RESTRAINT OF TRADE
1. Employment contracts (Gordon v. Ferguson)
2. Non-Competition clauses in sale of a business
o Often deemed invalid. You may not be associated with anybody in this business or start up your own
business in a certain geographic area for a certain amount of time.
o If we hire you, and you find out all our trade secrets, we don’t want you working with a competitor for
some time after you leave.
o Business purchase agreements - when someone owns a business and wants to sell it. The
purchaser says he’ll pay a certain amount, but will not pay that amount if the seller will set up
competition down the street. So he makes the seller enter a non-competition agreement.
3. Tied Selling Agreements
o You buy a new pub, you need money to redevelop it, one of the breweries comes and says I’ll loan you
$200,000 to refurbish your pub, and here are the terms in which you will repay me and for the next 20
years you agree you will not sell anything but my brand of beer in your pub.
o these things are usually too broadly drawn because the person cannot sell any other product for such
a long time. This may be common law illegality, and it is a restraint of trade.
4. TEST:
o (A) Must be reasonable to have a non-compete clause as between the parties, in that it protects
a valid interest of the employer or business purchaser
 Character of the work done is this the sort of position where they deal with customers? Are
the clients attracted to the skill? Are they going to deal with trade secrets? If they do, clause is
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o
o
reasonable. Or if the person would take the clients with them if they compete. Does the person
asking for the restraint have a valid business reason for putting it in?
(B) Must be no broader drawn than necessary to protect the interest of the party relying on it
 It’s not reasonable to say the restraint is to never practice law again unless you work with me.
That’s a restraint of trade, and it is contrary to public policy to make someone unemployable
subsequent to a job with the person making the clause.
 You ask if the restraint itself is reasonable, not “what’s being done” in breach of a reasonable
restraint.
(C) Must not be contrary to the public interest
 You can’t make it so there aren’t proper medical services in the community or create a
monopoly.
 This is rarely raised, and the analysis is the same in a business purchase agreement.
In these cases, the contract itself that has this clause in it is not an illegal contract, but the clause itself may be
illegal, and so the courts will say that the contract stands but the clause may fail if it is not properly done. If it fails
the test, the clause will be severed, even if the breach was within an area under valid protection
Gordon v. Ferguson – G forbids F from opening up medical practice in town of Dartmouth for 5 years after
termination
Facts: Gordon employed Ferguson in his practice as a physician and surgeon in Dartmouth, which is near Halifax.
Contract stated “the employee shall not…engage in the practice of medicine…or engage to work for any person,
firm, or association of medical practitioners in the vicinity within the Town of Dartmouth…for a period of five years
from the time the employment under the agreement ceases”. Gordon lawfully terminated the agreement.
Ferguson then opened a practice on his own a year later. Gordon seeks an injunction to restrain the breach of the
clause of the agreement
Decision: Not every restraint for trade clause is illegal at common law. No injunction granted because the clause
is illegal contrary to public policy because it’s a restraint of trade clause.
Reasons: Apply the test
o (1) Clause is reasonable to assume that patients would become attached to Ferguson and it’s reasonable to
have such a contract.
o (2) Fails at how broadly drawn the restraint is—the clause prohibits certain types of activity in a local area for a
specific period of time. 25 miles is a long spread, as Gordon doesn’t draw patients from the whole area. If
Ferguson breached the agreement and opened a practice next door, even though this would warrant
protection, the clause fails. There was no valid interest that Gordon had in excluding Ferguson from practicing
in areas where he himself never eve attracted patients.
Avoiding this test: Up until a few years ago, people used to say that you have to draw these clauses with the
maximum protection that you can. Pauget v. Goubin: the court will adopt the red pencil rule and will strike out the
provisions in the clause which are offensive and will leave the clause in place having the maximum constraints. An
Ontario case rejected this, as people should figure out for themselves what is a proper restraint. – the court will
almost always cancel out most of the items for being too broad. Want to encourage people to specify what they
REALLY need, and if they are too greedy and the clause gets challenged in court it will be struck down. Forbes
tells clients that his opinion is limited as to what the courts will determine, but he tells them the test that the court
goes through. Too hard to tell how a court will exercise its discretion.
(B) STATUTORY ILLEGALITY
To begin the analysis, you have to see if the illegality is in formation/performance
1. If the statute expressly prohibits the contract, the contract is void (i.e. any contract of this type is void or
unenforceable).
2. If the statute impliedly prohibits the contract, the contract will also be unenforceable.
a. It will impliedly prohibit the contract if the statute makes an offence out of entering into the
contract
b. Otherwise, whether the contract is impliedly prohibited must be determined by construing the
statute, by asking what is the intention of’ the statute, and whether it was intended to protect the
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person asking to have the contract set aside, and whether there was a penalty for breach, and
whether it relates to the making of the contract (Yango Pastoral Co. v. First Chicago Australia).
3. If the statute expressly or impliedly prohibits the contract, the intention of the parties to breach the statute
is irrelevant. (St. Johns Shipping v. Joseph Rank).
4. If the contract is not expressly or impliedly prohibited, but an illegality occurs in the performance, the
party who performs illegally may be able to enforce, unless that party intended the illegal performance at
the time that the contract was negotiated (St. Johns Shipping v. Joseph Rank) – contract itself is not illegal
5. But neither can enforce if the parties agree to the illegal performance, or must have known that the
contract had to be performed illegally (Ashmore Benson Pease & Co. v. Dawson Ltd.)
St. John Shipping Corp. V. Joseph Rank Ltd. (1957, Q.B.) – P illegally overloads ship, D won’t pay. Contract still
good.
Facts: The statute in question says it’s illegal to load a ship so that it sinks down below the load mark. There is
nothing illegal about this contract, but the ship-owner performs the contract illegally by overloading the ship.
When the load is taken on, the ship is above the load line. But when the ship goes to get the necessary goods
(bunkering), and the ship moves below the loadline. The people who ship goods on the ship say they’re not going
to pay the portion of the shipping fee so that people do not take advantages of their own breaches of the law, so
they pay a smaller amount.
Issue: Is a contract with an illegality in its performance illegal? Does it disentitle the person who performed from
enforcing?
Decision: Contract is enforceable even though the ship-owners overloaded it. Did not intend performance.
Reasons: Two different types of illegality:
(1) Illegality in the formation of the contract
 Does a statute expressly prohibit this contract (in which case the contract is dead), or is the illegality simply in
an illegal performance of an otherwise legal contract? A statute will prohibit a contract to varying degrees.
 Some statutes say that a particular type of contract is void (i.e. Planning Act)
o Example: Any contract for the sale of land where the vendor of the land owns an interest in the
property and the property is not a separate planned unit is a void contract according to the statute.
 (a) Contract which is expressly illegal under the statute  contract VOID.
 (b) Contract which is impliedly illegal  the contract is prohibited by a PENALTY.
o Example: Any person who sells a handgun is subject to a fine or to imprisonment. This is not expressly
illegal but it’s impliedly illegal, because the statute says the making of the contract is illegal.
Yango Test:
(1) Must first ask what the purpose is of the statute, and what contracts it is meant to protect?
(2) The next question to ask is the statute meant to protect a particular group of people of which the D is one?
(3) Is there a penalty for breach of a statute, and does the penalty apply to the making of the contract? Is the
illegality the exact making of the contract, or is the penalty for something else? (Yango). Maybe the statute wasn’t
meant to catch the contract – for example, in order to protect people who are licensed to sell goods from public
property, those who do so without a license are subject to fines.
(2) Illegality in the performance of the contract – THIS CASE
General Rule: An illegal performance does NOT render the contract unenforceable (St. Johns)
(a) Contract is unenforceable by the party who intends an illegal performance at the time that the contract was
formed (and that intention was held by the person who is enforcing the contract). Otherwise, simply because there
is an illegality, doesn’t make the contract unenforceable. (St. Johns)
St. Johns was pleaded that the shipper did not intend an illegal performance, and so the contract was
enforceable.
(b) If you know or if you should reasonably know that the contract is going to be performed illegally, then you
can’t enforce the contract (Ashmore). If you agree to an illegal performance of an otherwise legal contract, the
contract is unenforceable.
Ashmore, Benson, Pease & Co. v. Dawson Ltd. (1973, C.A.) – tube bank being carried to Poland without license,
damaged.
Facts: The company that was going to ship the tube bank doesn’t have the right license to ship it. A very heavy
tube tank was being carried on an articulated lorry to Hull where it was to be shipped to Poland. Halfway to Hull it
tipped over, and damage was done to the load costing 2225 pounds to repair. The manufacturers claim damage
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from the hauliers. The hauliers respond that the load was too heavy for the vehicle, and that the contract or the
performance was illegal. Relevant regulations are the Motor Vehicles (Construction and Use) Regulations 1966,
which were made by the Road Traffic Act 1960.
Decision: Judgment for D. P knew/had to have known it was to be performed illegally (objective test).
Denning: This person was very knowledgeable about shipping contracts, and so this person may say they didn’t
know that the contract had to be performed illegally, but they must have known. If you know or if you should
reasonably know that the contract is going to be performed illegally, then you can’t enforce the contract
Yango Pastoral Co. v. First Chicago Australia Ltd. (1978, High Court of Australia) – bank illegally loans, Y defaults
on loan
Facts: Statute says anyone who carries on the business of banking must be licensed. First Chicago has not yet
been granted their license, and they make a loan to Yango, which is guaranteed by a number of other associated
companies. The license is then granted, Yango then defaults on the loan, and First Chicago attempts to enforce
the contract. Yango says it is illegal, because the loan contract was made before they had their license, contrary
to statute.
Decision: Judgment for D (bank). Contract not impliedly prohibited by statute but stands. Case-by-case
application of test.
Reasons: ILLEGALITY IN FORMATION:
(1) What is the purpose is of the statute, and what contracts it is meant to protect?
 Purpose is to regulate banking in Australia (and Canada which has the same statute), to make sure that
banks carry on business prudently, and the bank shouldn’t waste the depositor’s money.
(2) Is the statute meant to protect a particular group of people of which the P in this case is one?
 NO –if Y doesn’t pay back the loan, the bank must be solvent
 If we allow this contract to be illegal, and these people don’t pay back the loan, we may hurt the exact
people that this statute is meant to protect (people relying on bank loans)
(3) Is there a penalty for breach of a statute, and does the penalty apply to the making of the contract? Is the
illegality the exact making of the contract, or is the penalty for something else?
 If the penalty is not for the making of the contract, it looks like the contract not supposed to be prohibited
 In this case the contract doesn’t say that the bank is subject to a penalty if it makes loans without a
license, but it says there is a certain fine per day if it does so
 That’s a factor to consider in determining if the contract is impliedly prohibited (penalty for making contract)
 If you say that the contract is meant to protect P, the court will likely say that the contract is impliedly
illegal, as the statute is meant to stop this sort of contract.
 The question we’re asking is, reading the statute and looking at what happened, was the statute impliedly
meant to prohibit the contract ( in which case it’s illegal) or was it intended to do something else?
Result of Illegality
(1) Contract is unenforceable. Problem is that a secondary rule that says in effect the courts will not lend a hand
to anyone that engages in an illegal contract (harsh rule with exceptions). Don’t want to help those who give
property under illegal cont.
(2) Property cannot be recovered back; Unless:
(a) The party attempting to recover repents, but isn’t merely frustrated in the illegal intent (Bigos v.
Boustead-Goes to Rome to convert pounds into Lira, comes back and repents, wants money back. Party
who is screwed over tries to repent after failed performance, may have been successful if he repented
before non-performance.)
 Only get money back if you can show that before the performance was intended, I changed by
mind. You can’t go through the performance and then complain that you want your money
back.
(b) The parties are not equally blameworthy (Andrews v. Parker)
 If one of the parties is not equally blameworthy, that person could maybe get his property back
if it’s transferred under an illegal contract.
(c) In the case of statute, the statute puts the onus of compliance on the D, and is for the protection of
the P (Kiriri Cotton v. Dewani), then the P should be able to get his money back
 This is a Privy Council case on appeal from Uganda. The statute says it’s illegal for a landlord
to accept a deposit for providing a lease. This is meant to stop landlords from gauging tenants
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in a market where there are limited leaseholds. In this case the P paid D a deposit just like this.
P then complains he wants his deposit back. The general rule would say that the property
transferred under an illegal contract can’t be recovered. Denning says he agrees that this is an
expressly illegal contract and the statute prohibits it. If the person before the court is the person
that that statute is meant to protect, that person is less blameworthy in the illegality. It is
possible that if you can prove that you’re less blameworthy in the illegality, then you can
recover your property.
(d) The plaintiff can prove a legal entitlement separate from the illegal contract (Singh v. Kulubya).
 This case is on appeal to Privy Council out of Uganda again. The statute prohibits a nonAfrican from occupying land without permission from the Governor General, and both sides
are liable to a fine if anyone disobeys the prohibition (landlord and tenant)
 P leased land to non-African D, and now he wants an action for recovery of the land and
payment. Defence is that this is an illegal contract, and he can’t get his property back. Court
says P cannot get the rent because that would be enforcing an illegal contract, but because
P is still the title owner and because his action to return the land can be taken without
reference to the illegal contract, P should be able to assert that property right.
 If you can enforce a separate legal right you are entitled to get your land back.
4. UNCONSCIONABILITY
Older Forms of Action
1. Lack of Capacity: Marshall(old man who was taken advantage of in a sale of land) - Two part test for
unconscionability:
1) was the party capable of protecting their own interest
2) was the transaction fair (onus on party seeking to uphold contract)
2. Duress
 Had to be threats of physical violence to the dependant or members of the family
 Economic duress insufficient
3. Undue Influence
 Needs a special relationship; clergy, doctor, parent, spouse, fiancée, fiduciary advisor;
 If the special relationship exists, undue influence is presumed, and the contract is only good if you can
show that the defendant could exercise a free judgment, or if the contract is not disadvantageous (Royal
Bank of Scotland v. Etridge).
Unconscionability Test
1. An inequality of bargaining power resulting from some “special disadvantage”
2. Knowledge of the other party, either actual or presumed
3. Abuse of the inequality of bargaining power, to drive an advantageous bargain.
Contexts
1. Elderly man, with limited capacity and a drinking problem sells farm (Marshall v. Canada Permanent)
2. Injured person, on pain killers, who signs a wavier and settlement agreement (Pridmore v. Calvert;
Canadian)
3. Husband gets an emotionally distraught wife, on sedatives, to sign a disadvantageous separation
agreement (Mundinger v. Mundingers; Canadian)
4. Young musician/performer, with significant cash needs and unrepresented, signs an improvident contract
(Macauley v. Schroeder Music).
The Guarantee Cases
Probably special cases because the transactions are so entirely improvident, and the direct benefit of the
guarantor is often totally lacking and the result of lack of house so significant.
Needs a person who can reasonably claim that they didn’t know about guarantees, because of language or age
problems, combined with a bank that knew, or should have known about the lack of sophistication, and did not
take the time to give advise, or insist on outside advise. (Lloyds Bank v. Bundy)
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But perhaps it now requires nothing more than a guarantee given by a person who receives no direct benefit,
and under such circumstances, independent legal advice is required, and that advice must involve a satisfactory
description of the risk in a face-to-face meeting (Royal Bank of Scotland v. Elridge), and creditor must advise of
any unusual features of the obligation being guaranteed.
Marshall v. Canada Permanent Trust Co. (1968, Alta. S.C.) – old man with limited capacity and drinking problem
sells farm
Facts: Walsh (D) was an old man in a rest home and was taken advantage of by P in selling his farm land at an
extremely low rate. D seeks a declaration of rescission of the agreement on the grounds that the consideration
proposed was grossly inadequate and the agreement entered was not fair and reasonable, and P took advantage
of Walsh by reason of inequality of their positions. The plaintiff seeks specific performance and claims grounds.
Decision: Judgment for D. Contract rescinded. No costs for P because he did not know of the incapacity.
Reasons:
 In these types of cases the courts intervene to rescind a contract whenever it appears that one of the
parties was incapable of adequately protecting his interests and the other has made some immoderate
gain at his expense.
 If the bargain is fair/ no party was preyed upon, the fact that the parties were not equally vigilant of their
interest/inadequate consideration is immaterial. It is the combination of inequality and improvidence which
alone may invoke this jurisdiction.
 P will fail if the court finds that
o (1) Walsh was incapable of protecting his interests and
o (2) it was an improvident transaction for Walsh/ was the transaction fair (onus on P to show the
prices corresponded with fair value)
 Walsh was incapable of protecting his interests – he was an elderly man with a limited capacity and a
drinking problem (even though he could give the impression of a reasonable understanding/was not
suffering of mental capacity), and was not capable of business transactions
 The price agreed upon by Walsh was actually less then the actual value of the land, and it was thus an
improvident transaction for him
Mundinger v. Mundinger (1968, Ont. C.A.) –husband sedates wife to get her to sign separation agreement
Facts: Wife who had been a victim of an abusive marriage with an adulterous husband suffered a nervous
breakdown during which she had to be given sedatives. When she returned home from the hospital her husband
prepared a separation agreement for her to sign. After her own solicitor prepared one with demands in her favour,
the husband threatened and induced her to agree to his terms.
Decision: Appeal allowed with costs. Contract null and set aside. Judgment for Wife.
Reasons: Onus was on the husband (who was seeking to uphold the contract) to prove that she was capable of
consenting to the terms, and he failed to do this. No proper ground for ignoring the doctors’ evidence and taking
that of the other medical witnesses. Her husband was in a position of dominance and control over her of which he
took full advantage by exercising undue influence upon her to carry off this improvident and nefarious transaction.
Combination of (1) and (2) from test. She lacked capacity and the terms were unfair.
Note:Williams v. Downey-Waterbury (1995, Man. C.A.) – did not sign separation agreement under influence
Facts: separation agreement provided for the equal decision between husband and wife of all assets and shares
held by the husband in a family corporation. Husband challenged agreement as unconscionable and brought by
undue influence of wife
Decision: Wife had been dominant during the marriage, but they rejected his claim, holding that it was necessary
to focus on the circumstances of the execution of the separation agreement rather than those of the
marriage, and when he signed he was not within her orbit of influence. He signed because he thought it was right
to do so.
Macaulay v. Schroeder Music (1974, H.L.) – songwriter wants out of agreement b/c unequal power
Facts: Unknown songwriter entered into an agreement with music publishers in their standard form whereby the
publishers engaged his exclusive services during the term of the agreement (5 years). The songwriter brought an
action claiming a declaration that the agreement was contrary to public policy and was void
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Decision: Judgment for P. Contract set as void.
Reasons: Did not inquire whether the public have been deprived of the fruit of his talents by the restrictions, nor
whether the likelihood that they would be deprived in the future if the contract were permitted to run its full course.
The public policy concern is actually about bargaining power and unconscionability. This applies to contracts in
restraints of trade
The test of fairness: Whether the restrictions are both reasonably necessary for the protection of the legitimate
interests of the promisee and commensurate with the benefits secured to the promisor under the contract. All
provisions of the contract must be considered, and bargaining positions at the time of formation.
This contract is unenforceable, however it was a standard form of its kind
Standard form of contracts are of two kinds:
(1) Contracts of sale in commodity markets. Those which set out the terms upon which common transactions are
to be carried out (bill lading, contracts of sale in commodity markets). These have been widely adopted because
experience/years of negotiation shows that they facilitate trade. These affect the parties and others who have
commercial interests. There is a strong presumption that their terms of fair and reasonable, as the bargaining
power is evenly matched.
(2) Modern standard form contracts: Tickets. Generally not subject to negotiation between parties or approved by
any organizations representing the interests of the weaker party. Strong party can take a “take it or leave it”
approach. Will not carry with it the same presumption. If one can adopt this take it or leave it attitude then clearly
they are in a superior bargaining position. This would seem to be the case with music publishers and song writers.
Same presumption of fairness does not apply to those contracts that have been dictated by the party with the
bargaining power (the one who can say take it or leave it)
Ratio: Distinguishes between two kinds of standard form contracts, and delineates the latter type as being
susceptible to unconscionability challenges. Parties in a stronger bargaining position must be careful not to drive
an unconscionable bargain on those in the weaker positions.
Techform Products Ltd. V. Wolda (2001, Ont. C.A.)
Facts: Independent contractor and transferred his rights and inventions while he was in the plaintiff’s employ. He
said he signed it out of fear that he’d lose his job.
Court: discussed difference between a lack of choice and the illegitimacy of pressure, requiring that both be
present to find economic duress. It was decided that there was NO economic duress.The pressure was not
illegitimate, as the employer genuinely thought he was the owner of the inventions. Also, the contractor had ample
time to seek independent advice, and he did not. Thus, there was no illegitimate pressure and no economic
duress.
Consider: What should be the determining factors:
o Employer’s sincere belief in the contractual terms?
o Plaintiff’s actual lack of choice?
o Contractual terms themselves?
Lloyd Bank Limited v. Bundy (1975, Q.B.) – man mortgages his farm for son under bank’s advice
Facts: D was a farmer in a village in England, and he mortgaged his farm to the bank for the sake of his son, and
the farm was his only asset. The bank have now foreclosed on him and want him to sell his farm, and have
brought an action on him for possession. His lawyers put forth the defence that when he executed the charge to
the bank he did not know what he was doing, or the circumstances are such that he ought not to be bound by it
Decision: Judgment for Bundy.
Denning: wants to find a uniting principle for bargains where the parties are unequal. In most cases a customer
who signs a bank guarantee or a charge cannot get out of it. There are exceptions in which the court will set
aside a contract, or a transfer of property, when the parties have not met on equal terms/unequal bargaining
power
 Category 1: duress of goodstransaction voidable
o Stronger demands more from the weaker than is justified
o “Colore officii” cases can be added, where a man is in a strong bargaining position by virtue of
his official position/ public profession
o In such cases the stronger may honestly believe he is entitled to his demand, but the unequal
bargaining power makes the transaction voidable and the money to be paid back
 Category 2: Unconscionable transactiontransaction set aside
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o
A man is in need of special care and protection yet his weakness is exploited by another stronger
person to get is property at a gross undervalue (i.e. expectant heirs)
 Category 3: Undue influence
o the stronger has been guilty of some fraud/ wrongful act to gain advantage from weaker
o the stronger has not been guilty of a wrongful act but has gained an advantage for himself through
his relationship with the weaker
o Sometimes there is a presumption of undue influence (parent /child, solicitor /client, doctor
/patient), other times a relationship of confidence must be proven
 Category 4: Undue pressure
o Williams, in which a son forged his father’s name to a promissory note, and by means of it, raised
money from the bank of which they were both customers. The bank said to the father “give us
security for your son’s debt, or we shall be bound to exercise pressure|.” H.L. held that the charge
was invalid because of undue pressure. A contract to give security for the debt of another should
be based upon the free and voluntary agency of the individual who enters into it (like D & C
Builders)
 Category 5: Salvage agreementsenforceable unless it is unfair and unjust, (it’s disregarded)
o When a vessel is in danger of sinking and seeks help, the rescuer is in a strong bargaining
position. The vessel is in urgent need, so the parties are not equal.
 Unifying principle: inequality of bargaining power.
o Courts will give relief to those who, without independent advice, enter into a contract upon unfair
terms or transfers property for a consideration which is grossly inadequate, when his bargaining
power is grievously impaired by reason of his own needs or desires, or by his own ignorance or
infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of
the other
o undue does not mean there has been wrongdoing
o absence of independent advice may be fatal to a transaction, even if getting it may not save the
transaction
Present case:
(1) consideration moving from the bank was grossly inadequate (asked the father to charge his only asset to the
uttermost)
(2) father trusted the bank and placed confidence in it (bank knew the father relied on it to advise him about the
transaction yet they failed the trust)
(3) relationship between father and son was one where the natural affection had influence on the father (he
trusted his son)
(4) there was a conflict of interest between the bank and the father (yet the bank did not realise it, nor did it
suggest that the father get independent advice)
Royal Bank of Scotland v. Etridge (2001, H.L.) – wives mortgage house and claim undue influence
Facts: Eight appeals, all involving a transaction in which a wife charged her interest in her home in favour of a
bank as security for her husband’s indebtedness or that of his company. Wife later asserted she signed the
charge under the undue influence of her husband. The eighth appeal concerns a claim by a wife for damages
from a solicitor who advised her before she entered into a guarantee obligation of this kind.
Reasons: Objective of court is to ensure that the influence over another person is not being abused. Equity
governs this area. If the intention was produced by an unacceptable means, the law will not permit the transaction
to stand b/c of improper undue influence’ consent not an expression of a person’s free will. Undue influence
arises out of (1) improper pressure/ coercion such as unlawful threats, and (2) a relationship between two persons
where one has acquired over another measure of influence/unfair advantage. Test: whether one party has
reposed sufficient trust and confidence in the other, rather than looking for categories, as relationships are
infinitely various. Issue will arise when transaction was disadvantageous from the outset or as matters turned out
Burden of proof is on the person asserting a wrong. Evidence is a question of fact, and depends on the nature of
the influence, personalities, relationship, etc...
Evidence Requires:
 Independent Advice: importance of this depends on particular case.
 Manifest disadvantage in the agreement of the vulnerable person will require greater explanation needed
to rebut the presumption of undue influence
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

Caution: husband’s exaggerations shouldn’t be treated as misstatements automatically
trust and confidence in the other party and a transaction which calls for an explanation, will allow one to
infer undue influence (unless there’s another explanation)
 Where a husband, in whom a wife has reposed trust and confidence for the management of their financial
affairs, prefers his interests to hers and makes a choice for both of them on that footing, he has abused his
influence.
 At this point the evidential burden shifts to the other party to counter the inference of undue influences
 The Bank: on one side, there is a need to protect a wife against a husband’s undue influence, and on the
other side, there is need for the bank to be able to have reasonable confidence in the strength of its
security. Otherwise is would not provide the required money.
 The threshold: when the bank is put on inquiry: low level threshold: Two factors : a) transaction does not
appear to be beneficial to the wife and (b) substantial risk in the transaction. Court takes this to mean “that
a bank is put on inquiry whenever a wife offers a stand surety for her husband’s debt”.
Traditional view of equity is that the wife will only be relieved of her bargain if the other party in the transaction
(the bank) knew of the conduct which led to the wife’s entry into the transaction or if he ought to have known. The
bank does not have to make inquiries, but has to reduce or even eliminate the risk of the wife entering into the
transaction under any misapprehension/undue influence.
Steps of the bank to make sure it is not affected by claims of undue influence:
 take reasonable steps to satisfy that the wife’s eyes are as open as can be
 must bring home to the wife the risk she is running; advise her to get equitable advice
 does this by insisting that the wife attend a private meeting with its representative in which she is told the
extend of her liability as surety, warned of her risks, and urged to take independent legal advice
 Reasonable for bank to rely on confirmation from a solicitor acting for the wife that he advised the wife
properly. If the bank knows the solicitor has not advised her properly ,or ought to have realized she has not
received the appropriate advice, the bank will proceed at its own risk.
Content of legal advice:
 nature of the documents and the consequences of her signing them
 Seriousness of the risk (her financial means, value of the property)
 State that she has a choice and it is her decision alone
 Check whether she wants to proceed
 face-to-face meeting, without the husband.
 Obtain any information from the bank that it needs
 Can act for the couple but must make it clear that his professional duties are for the wife
Solicitor not automatically an agent of the bank, and the bank can proceed on the assumption that a solicitor
advising the wife has done his job properly. Bank should inform wife that it will require written information from the
solicitor, and it must provide the solicitor with whatever he needs to know about the wife’s financial situation. Wellestablished that a creditor is obliged to disclose to a guarantor any unusual feature of the contract between it and
the debtor which makes it potentially disadvantageous compared to what the guarantor might expect. They need a
full and clear explanation of the risks. No rational cut-off point for which relationships this applies to, because
undue influence can arise anywhere. So the bank is put on inquiry in every case where the relationship between
the surety and the debtor is non-commercial.
Ratio: Explains the components of undue influence and the principles and practices to be considered in surety of
wife cases:
1) the issue as between the surety wife and the lender bank is whether the bank may rely on the apparent consent
of the wife to the suretyship transaction.” (626)
2) if the bank knows that the consent is the result of undue influence or misrepresentation then it can’t rely on this
consent.
3) If the consent has in fact been procured by undue influence, etc, then the bank can’t rely on this unless it has
good reason to believe the wife understands the nature and effect of the transaction
4) unless there is some special feature, knowledge that the wife ahs independent advice qualifies as good reason
under (3).
5) sufficient explanation of the transaction to the wife by a banking official will satisfy 3.
6) If they suspect undue influence may require the wife seek independent advice, before they can rely on the
consent.
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7) if the bank didn’t take reasonable steps to ensure the wife understands the transaction then the wife will have
the opportunity to set it aside if her consent was procured by undue influence
8) subject to special instructions, the duty of solicitor to the wife is to ensure she understands the nature and effect
of the transaction.
9) Bank needs to disclose to the wife and her solicitor the amount of existing indebtedness of the principal debtor,
and the amount of the new loan
10) subject to (9) creditor has no greater duty to disclose to a surety wife than to any other surety. (627-7)
ENFORCEMENT, BREACH, and REMEDY
1. Privity of Contract
Introduction:
 if you identify the problem in privity, you can always find a way to deal with the problem
 the problem is that you don’t identify the privity issue and then along the line someone tells you can’t enforce
an obligation because you don’t have privity
 consideration is one of the elements you need before the formation of a contract
 privity assumes there is a good contract, but someone is trying to enforce the contract who isn’t giving
consideration for the formation of the contract (different from consideration issues, in which case there was
never a good contract if there was no consideration)
 we have a problem in contract law enforcing third party benefits, because if you haven’t given consideration,
you don’t have the right to enforce provisions in the contract, even if they’re made for your benefit
 the issue here is who can enforce the provisions in the contract
Tweddle v. Atkinson (18961, English) –father and father-in-law agree to benefit son and daughter. In law doesn’t
pay.
Facts: Father and father-in-law agree in a contract to provide benefits to their son and daughter for their marriage.
Father offers money, father-in-law offers money, and the document says the money is for the son and he is
entitled to enforce the agreement. Father dies, father in law doesn’t pay, son sues.
Decision: Judgment for D. Son cannot enforce the contract even though it’s made for his benefit
Reasons: It is a monstrous proposition to say that a person was a party to the contract for the purpose of suing
upon it for his own advantage, and not a party to it for the purpose of being sued – only parties who have given
consideration for the contract can sue for its performance. Even if the father was the agent of the son, that would
still make the son liable on it
General rule: On its own, third party beneficiaries cannot enforce the contract
Tie this to problems: It’s fully intuitive that a party entering into an agreement can expect to give benefits to a
third party under the contract, because there’s a relationship between contracting parties and third parties. Very
common. So how do we deal with this?
Exceptions to Privity
1. Trust; and perhaps implied trust where the contract indicates that the third party is intended to be able to
enforce. Where the third party is a beneficiary of a trust.
2. Enforcement by the other party. But what are the damages? Specific performance, because damages is an
ineffective remedy
3. Employer/employee: protection of exclusion clause can extend to employees if: 1) the limitation of liability
clause must, either expressly or impliedly extend its benefit to the employees (or employee) seeking to rely on it;
and 2) the employees or (employee) seeking the benefit of the limitation of liability clause must have been acting
in the course of their employment and must have been performing the very services provided for in the contract
between their employer and the plaintiff (customer) when the loss occurred” (407 London Drugs)
4. Use of Trust:
5. Use of agency (New Zealand Shipping v. Satterthwaite)
(a) Contract makes it clear that the third party is to be protected;
(b) The contract stipulates that the one party is acting in two came, as principal under the main contract
and as agent for the third party in negotiating a separate contract;
(c) The third party is aware, or ratifies;
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(d) The third party is gives separate consideration.
Why can’t third party beneficiaries enforce contracts?
(1) Get the counter party to sue/enforce directly.
a. Problems -They may be unavailable
b. Lack of damages issue.
i. If the intention was to benefit a third party, what are YOUR damages if the other party
breaches the contract?
ii. There are a line of cases that say if there is such an issue, and I want to enforce the obligation,
and the other party throws up no damages as a defence, in that circumstances, maybe
specific performance should be available because damages is not an appropriate remedy
(equitable remedy).
(2) Agency
a. A contracts with B. The law of agency has always said A can act as agent for C in forming a contract
with B. (A contracts with B on C’s behalf). The intention all along is the beneficiary is C and not A, and
so C should be able to enforce against A, and B should be able to enforce against C. So there is also a
contract between A and C.
b. The law says an agent can form a contract for the his principal. The principal can then enforce the
contract directly. (New Zealand).
c. The law of agency may under certain circumstances allow contracts to be made directly between a
third party and a party to the contract, and be enforceable under the law of agency.
(3) Trust
a. Example: A( settler of trust) –B (trustee). A confers property on B in trust, and B administers the trust to
benefit A’s children and grandchildren (D, E).
b. Trust law always said D and E can enforce the terms of the trust made for their benefit against the
trustee (B).
c. It’s not much of a leap to see people wanting to apply this trust law to contract/privity concerns.
d. You can use agency/trust, but the document has to say which you’re using- “And it’s agreed
between the parties to the contract that the benefit that’s supposed to flow to the subsidiaries and to
the directors and officers of one of the contracting parties is being obtained and held by the contracting
party in trust with the intention that those people, as beneficiaries of the trust, shall be entitled to
enforce the contract for their benefit.”
The courts have been using these two concepts as ways of getting around privity problems, and we see if a bit in
New Zealand Shipping.
New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd. (The Eurymedon) (1975) - carriers of drill press
(A) contract with owners (B) to ship it to NZ dock, where the stevedores (S), who had contracted with A,
negligently damage the drill. S argues that they were the agents of A to benefit for the limitation clause in A’s
contract with B.
Facts: A is a shipper of a drill press, which belongs to B. The contract between A and B says “You will ship this
drill press and deliver it on the NZ dock, and I’ll pay you.” There is an exclusion clause which limits the liability of A
to a certain sum of money. The exclusion clause applies to A, and the employees and agents of A. A gets to NZ
and S (Stevedoer) unloads the goods. So S had contracted with A. S drops the drill press and it’s damaged. B has
a limitation clause limiting A’s liability, and he wants out of it because his drill press was damaged. B then sues S
for negligently damaging his drill press, and sues for his loss in tort, as S and B and no contract.
In the contract it says A and B have a limitation of liability, not only to A but to their subcontractors, agents, and
employees. B sues directly in tort, as S and B had no contract. S has recoursed to the law of agency to in effect
say that S has entered into a contract directly with B, through it’s agent A.
S is arguing that there were two contracts:
B and A, and B and S – not documented in any contract that S signed.
Decision: Appeal allowed. Judgment for S. Agency doctrines applies
Reasons: If the document is set up properly, this works.
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4 tests must be met before arguing agency in the circumstance that allows the 3rd party to benefit from the
exclusion clause
(1) The contract makes it clear that the third party is protected.
(2) The contract makes it clear that the carrier is contracting in 2 capacities – both as principal and agent. Must
“ring the agency bell” in your contract!
a. You have to identify the privity problem. If you do that, the document can talk about trust, agency, and
a second contract (b/w the other party and the third party beneficiary).
(3) The contracting party (A) has to have the authority to act as agent. But if you didn’t have authority, maybe
it’s good enough if the third party subsequently ratifies your authority to act as their agent (even if they weren’t
in the contract from the beginning).
a. Problem: How can A have the authority to acts as S’s agent, when S hasn’t even been identified as
the third party in the contract? There isn’t going to be someone standing there telling S to give a
ratification of the agency that A made on your behalf. People don’t think to do this when they make
contracts.
b. Advice is to use agency when you have a pre-existing relationship with the third party, so that the third
party will ratify the authority in light of the relationship. If a third party didn’t exist at the time/wasn’t
identified, how can A obtain authority? And how does this third party even ratify the authority after the
fact?
c. Forbes advice is to use trust law, which gives agents a lot more authority to acts as an agent for
people who may not even be alive yet! So again, if you identify the privity problem when you make the
contract then these things can be fixed.
(4) (4) S gave separate consideration for the contract.
a. In order to have a contract, there has to be consideration moving from both parties to the contract. If
the principal (A) entered into two contracts – on his own behalf and on behalf of S, then the court says
it’s an axiom of contract law that S had to have given consideration for the agency contract.
b. So what did S give to the owner (to B) as consideration?
i. They performed a service for B. BUT, isn’t performance of an existing duty NOT good
consideration, and didn’t S already have a contract for unloading the ship? NO, S did not
contract with B, they had the contract with A. And we learned that someone could agree with a
second person to do exactly what he had already agreed to do with the first person, and that
can be good consideration. (Scottson v. Pegg) – I can have a contract to do the same thing
with two different people, and if I fail to perform, there will be 2 people that can sue me for that
non-performance.
c. So here, the contract between S and B – In consideration of S’s performance of the service, B agrees
that S is entitled to the benefit of the exclusion clause. This is a collateral contract (collateral to the
main shipping contract), and it’s unilateral, because it is completed when the performance is done.
London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992, SCC) – Owner of transformer sues employees of
warehouse
Facts: Warehouse company (K) is going to take possession of and store a transformer for the owner. Contract of
storage has a limitation of liability. Owner is aware of the limitation of liability, and doesn’t take out its own
insurance from K (arranges for its own all-risk coverage). Owner knew, or assumed to have known, that K’s
employees would be responsible for moving and keeping up the transformer. Contract itself says the limitation of
liability shall be available strictly to the warehouse company (the employer). Transformer gets damaged by the
employees’ negligence. Owner sues employees of the warehouse company.
Limitation of liability clause included in the contract (bad contract):
“Responsibility of a warehouseman in the absence of written provisions is the reasonable care and diligence
required by the law. The warehouseman’s liability on any one package is limited to $40 unless the holder has
declared in writing a valuation in excess of $40 and paid the additional charge specified to cover warehouse
liability.”
History: Superior court held that the employees were personally responsible for the full amount, limiting K’s
liability to $40 and dismissing the claim against the manufacturer. Court of Appeal reduced the respondents’
liability to $40 (including them in the contract).
Issues: (1) The duty of care owed by employees to their employer’s customers. Employees argue no duty of
care owed.
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(2) The extent to which employees can claim the benefit of their employer’s contractual limitation of liability clause.
Employees say even if they did have a duty of care, they should be able to take the benefit of their employer’s
limitation liability clause in the main contract.
Decision: Dismiss the appeal. Reduced damages upheld. Judgment for K (employees).
Reasons:
(1) There was a duty of care owed to their employees’ clients, and they were negligent and breached it, so they
should be responsible for tort damages.
(2) BUT, there is a clear identity of interest between the employer and employee, so far as performance for the
contractual obligation is concerned, and there is no valid reason to deny the employees the benefit of their
limitation of liability clause. The contract says the court impliedly had to have protected the employees’ interest
as much as the employer’s.
Forbes: This doesn’t work with the law of agency! The law of privity is very firmly ingrained in the law of contracts,
so don’t expect the court to change the law of privity, as this requires legislation. However, courts will give a
principled exception to the law of privity.
Under these limited circumstances, they will allow a third party to benefit from an exclusion clause:
(1) The clause limiting liability must expressly or impliedly extend to the employees.
a. Does it? How can a company perform a contract except through its employers?
b. SCC: exclusion clause had to impliedly protect the employer.
(2) The employee must be acting in the direct course of employment and must have been providing the
very service that was intended to be provided under the contract.
Note:
 Before, we were using trust and agency to get the results we want. In this case, the SCC says you can’t do
that, and this is a principled exception to the law of agency. In very careful terms they say this is rare for them
to develop exceptions
 This is limited to employees, directors, or officers to a contracting party who are performing EXACT services
that their employer contracted to be provide, and for which the exclusion clause was made.
 This takes a step further from New Zealand in enforcing these exclusion clauses.
 The owner of the transformer wanted the employer (who has deep pockets) to stand behind the employees,
which is why they didn’t go for a tort claim against the employees.
 There are floodgate concerns with providing an exception to the law of privity. They have to articulate it so that
everyone can figure out what this principle is/ when it applies
2. Frustration
The contract is good when formed (no mistake), but something happens after the contract is put together.
Frustration results from a mistake as to future matters. The contract is not void or voidable for mistake when
made. Instead, performance may be excused when the future unanticipated event occurs. No person can be
held to a contract if, since acceptance, there has been a radical change which makes performance
impossible/illegal. Under certain conditions, a person can be relieved of their duties under a contract under the
common law heading of “frustration”. However, frustration cannot be invoked just because the contract has
suddenly become more difficult or expensive for one of the parties, if the party was partly responsible for the
intervening event which destroyed the object of the contract, or if the event was foreseeable (Davies Contractors)
(1) Frustration is not a matter of an implied term of a contract, asking whether the parties intended an implied
condition of excused performance under the circumstances (Davis Contractors v. Fareham UDC).
(2) Instead, the question is one of a reasonable construction of the contract, in light of surrounding
circumstances as at the time of the contract. Thus, matters outside of the terms of the contract can be taken
into account (fire, war, etc…)
(3) Frustration can amount as much from a mistake of law as from a mistake of fact.
(4) TEST: Whether, on a construction of the contract, in light of surrounding circumstances at the date of the cant
reasonable to assume that one party accepted the risk of the future event, or whether the required
performance is so different from what was contemplated that the parties should be excused?
(5) In order to have frustration, the performance under the new circumstances has to be fundamentally or
radically different than what was contemplated by the parties at the time of contact.
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Result of Frustration:
(1) Generally, a party cannot recover property passed under a contract that has been frustrated, absent a total
failure of consideration. (Fibrosa v. Fairbairn).
(2) Results of a frustrated contract are set out in the Frustrated Contracts Act, but this statute does not deal with
when a contract is frustrated.
Taylor v. Caldwell (1863, English) – P claims money for fire in concert hall he rented
Facts: P claims money for the concert hall he rented from D after there was a fire the night of the first concert, not
caused by either party.
Issues: Does the loss the P suffered fall upon D, which resulted from circumstances out of anyone’s control?
Decision: D not bound.
Reasons: There is an implied term of contract that, where performance becomes impossible, the parties are
excused from performance (not void, the contract is good). The parties contracted on the basis of the continued
existence of the music hall at the time when the concerts were to be given; that being essential to their
performance.
Krell v. Henry (1901)
Facts: Edward about to be crowned. P rents balcony to D, so that D can have a party an watch the coronation
parade. Edward gets sick, coronation parade is cancelled. P says, here is the balcony and give me the money!
Decision: Contract not binding, it is frustrated by a future event.
Reasons: In this situation, you must assume that it is an implied term of the contract that if the coronation parade
didn’t occur on that date, the contract became in effect impossible to perform, and D is not bound. Almost an
implied term of contract that the contract can’t be binding (not a mistake, but a future event)
Questions:
 How far does this go?
 When can a change in circumstances allow you to set a contract aside?
 Does the contract put the risk of non-performance in the hands of the parties, even if the reason for the
non-performance was a future event?
Davis Contractors v. Fareham U.D.C. (1956, H.L.) – P can’t find enough skilled workers so work takes longer than
planned.
Facts: P tendered for the construction of 78 houses within a period of 8 months for 92,000+ pounds. Contract has
a penalty cause for late performance. In a letter accompanying the tender “our tender is subject to adequate
supplies of material and labour being available as and when required to carry out the work within the time
specified”. P can’t find enough skilled workers within 8 months so it ends up taking 22 months to compete, with
the delay being caused mainly by the lack of skilled labour. P incurs the penalty.
P argues the contract has been frustrated by an intervening event, as workmen could not be found to do the
building. Because it is frustrated, they are not subject to the contract and performance is excused and he wants
to be paid the fair market value for the services performed in building the services.
History: Arbitrator awarded damages of 17000 pounds, but C of A held that the letter was not incorporated, not
frustrated.
Decision: Appeal dismissed. Judgment for D (contract not frustrated).
Reid: Frustration is not an implied term of the contract. An implied term of contract has to be something that the
parties must have intended. Frustration is suppose to be about something that the parties never would have
intended, and it has to involve a material intervening act. TEST: Given the way the contract reads, do we believe
that the intention was that one of the parties was to be responsible for this sort of risk (in which case there is no
frustration)? Or do we believe that this is such an unexpected consequence that no one was supposed to be
responsible for this sort of risk, and therefore the performance should be excused? Was the contract intended to
continue under these circumstances?
In this case, the events causing the delay were not wholly unforeseeable, but even if they were, it looks like
Davies agreed to perform them so there is no frustration, and Davies should be responsible. It’s a misuse of legal
terms to call in frustration to get Davies out of his predicament. Even if he was dumb and contracted the
impossible, it was intended.
Note: Impossibility of performance does NOT mean frustration. People can contract to do the impossible, as long
as that’s what the contract looks like what was intended
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What happens when contracts get frustrated?
Appleby v. Myers (1867)- P entered to complete construction; they were almost done when a fire broke out (noone’s fault)
Facts: Ps entered into an agreement with the D ‘for the sum above named respectively, and to keep the whole in
order, under fair wear and tear, for two years from the date of completion. All brickwork, carpenters and masons
work and materials are to be provided for us’. Total cost of the above works, if they had been completed under the
contract, would amount to 459 pounds. However, three months later a fire accidentally broke out on the premises
of the D. Works contracted for had not been fully completed yet, but a lot was done.
Issue: Are Ps entitled to recover the whole or any portion of the contract price for which they started?
Decision: No recovery for part performance, judgment for D.
Reasons: As per Taylor, the plaintiffs are excused from completing the work, but they are not entitled to any
compensation for what they have done. The Ps, having contracted to do an entire work for a specific sum, can
recover nothing unless the work be done, or it can be shown that it was the defendant’s fault that the work was
incomplete, or that there is something to justify the conclusion that the parties have entered into a fresh contract.
Principle: When contract is frustrated due to an intervening, unforeseen event, the parties cannot recover work
that has already been done toward the completion of the contract.
Fibrosa Spolka v. Fairbairn Lawson Ltd.(1943, H.L.) –WWII prevents delivery of textile machinery to P.
Facts: D’s, in the business of manufacturing textile machinery, contracted with P’s, a Polish company. They were
to produce machinery for P, and clause 7 stated: should dispatch be hindered or delayed by your instructions, lack
of instructions, or by any clause whatsoever beyond our reasonable control including strikes, war, fire
accidents…a reasonable extension of time shall be granted.” WWII started, preventing D from delivering the
machinery to P.
P ‘s claim: Damages for breach of contract, specific performance/return of the money with interest, and further
relief
D’s claim: Contract was frustrated by the German occupation in Poland and the appellants had no right to get the
money back
Trial dismissed action. Appeal dismissed action.
Decision: Contract was frustrated by WWII but P can get money back because failure of consideration.
Reasons: The happening of this event WAS so unusual that it wasn’t contemplated by the contract. P can get his
money back only if there has been a total failure of consideration (if D had done nothing under the contract except
take the money). If a contract is frustrated where there has been partial performance, you get nothing. If the
performances are so discrete, then you may be able to get payment for a completed unit. Clearly there are
problems with this, but note that this is common law...
Principle: Generally, a party cannot recover property passed under a contract that has been frustrated, absent a
total failure of consideration.
Frustrated Contracts Act, R.S.O. 1990 – tells us what happens when a contract IS frustrated (not when frustration
occurs)
s.3 (1) The sums paid or payable to a party in pursuance of a contract before the parties were discharged
a) in the case of sums paid, are recoverable from the party as money received for the use of the party by
whom the sums were paid
b) in the case of sums payable, cease to be payable
Kind of fixes Fibrosa– if you pre-pay under a contract and make a deposit, you can get your money back but the
person who has started performance may be able to deduct expenses.
 (2) If a benefit has been conferred on any party, that party has to pay the fair value of the benefit received.
(note that that’s not the contract price, as the contract has been dissolved because of the frustration)
 (3) This part tries to get around the other problem of where there is a severable performance and part of the
whole has been performed. Treat that as a separate contract, and pay the contract price. This is the problem
of 3 machines to be delivered under contract, and 1 is delivered, 2 are to be delivered and the factory burns
down (frustration occurs). Look to statute for the solution--The statute says if the performance is divisible, you
get the contract price for the divisible portion of the performance. That is very different from the common law.
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3. Remedy
GENERAL RULES FOR DAMAGES
1. Courts will generally grant a money award (damages) for breach of contract.
2. The general principle is that damages will put the plaintiff in the same situation as if the contract had
been performed. Generally, this is the difference in value between the contracted performance and the
actual performance. But where the requested performance is personal/ unique, damage is not limited to
the difference in value, but you can obtain the actual cost of a full performance (Ruxley Electric v. Forsyth;
Groves v. John Wunder). And can also be compensated for a lost chance, even if actual loss is uncertain
(Howe v. Teefy).
3. The right to damages is implied by law. The parties can stipulate for damages in the contract (liquidated
damages), as long as it is found to be a genuine attempt to pre-estimate damages. A penalty clause
agreed damage amount is not enforceable.
4. Punitive damages are not awarded in contract. However the courts will award damages for intangible
losses (like lost holidays – Jackson)
5. Damages are subject to the remoteness test set out in Hadley v. Baxendale. Damages must (i) fairly and
reasonably arise naturally form the breach, or (ii) be within the contemplation of the parties at the time of
the contract.
6. Both of the Hadley v. Baxendale tests are objective, not subjective.
7. Contract damages don’t have to be certain to arise, but there must be a serious possibility or a real
danger of the damage (Victoria Laundry)
8. Plaintiff must take reasonable steps to mitigate (or reduce) losses.
A. Damages
1. INTERESTS PROTECTED
There are 3 principle purposes in awarding contract damages:
(1) Restitution interest. Force D to pay the value he received from P. Objective is the prevention of unjust
enrichment
(2) Reliance Interest: May award damages to P to undoe the harm which his reliance on D’s promise has caused
him. Objective is to put him in as good a position he was in before the promise was made.
(3) Expectation Interest: May impose specific performance or make D pay the money value of his performance.
Objective is to put P in as good a position as he would have occupied had D performed the promise
 It may be said that there is not only a policy in favour of preventing and undoing the harms resulting from
reliance, but also a policy in favour of promoting and facilitating reliance on business agreements
 If you limited recovery to reliance interests only, then this would threaten the advantages of having people act
on their business agreements to stimulate economic activity
2. Measurement
Ruxley Electronics Ltd. v. Forsyth (1994, English CA) – guy complains that pool wasn’t deep enough
Facts: Forsyth obtained quotations from D to build a pool in the garden of his house. The contract included an
express term that said the maximum depth of water should be 7 feet 6 inches. The progress of the work was not
smooth at all, and it was discovered that the depth was only 6 feet 9 inches, and the maximum was at exactly one
end of the pool, which was not good for diving purposes. The failure to provide the required depth was a breach of
contract on the part of D. Forsyth appealed on the grounds that there should have been an award of special
damages
Decision: Judgment for P. Award 21,560 to F , but set aside the general damages award.
Reasons: 2 methods for recovering damages where a building does not have the requirements specified by
contract because of a breach: difference in value and cost of restoration.
(1) Difference in value: available when the damaged building/chattel is commonly available, and can be
easily replaced. This seeks to reflect the financial consequences of replacing it, whether or not the person
actually chooses to replace it (no obligation to do so). But this may be inadequate when the product is
unique and cannot be replaced, in which case you turn to the cost of reinstatement.
o one view is that they should take the difference in value of the pool as built and the pool as
contracted for, but there is no difference in value
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(2) Cost of rectification - F would have to show that (1) he intended to carry out reinstatement work and that
(2) it was reasonable to do so.
o he should recover for rectification, and sees no reason why he wouldn’t rebuild the pool, as that
would put him back in his position had the contract been performed – but if he doesn’t spend on
rebuilding the pool, that’s not the court’s concern
o The question of reasonableness is unclear--would a reasonable plaintiff spend the money on repair
or reinstatement, if that were a condition of his being paid? The answer almost always yes, unless
he could not afford to do the work.
o If there’s an alternative cheaper remedy (to repair) that would provide what he contracted for, then
it would be reasonable to pursue that. In the absence of such a remedy, he is entitled to the cost of
repair.
General Rule: Where a party sustains loss by reason of breach of contract, he is, so far as money can do it, to be
placed in the same situation, with respect to damages, as if the contract had been performed (Robinson v.
Harman) - #2 in General Rules.
Dillon (Dissent): No damages for reinstatement. Trial judge not satisfied that F intended to build a new pool with
the awarded sum, and it was disproportionate to the disadvantage of having a pool with a shortfall of depth, and it
would be unreasonable for him to fix the depth at such a cost –AGREES with this approach. If it was found that
the pool was now devalued, the obvious course would have been to award the lost value, if the pool was still safe
to drive into, based on reasonableness. He has no absolute right to be awarded the cost of reinstatement,
shouldn’t be automatic award just because there is no loss in value –would be unreasonable.
Howe v. Teefy (1927) – D leases horse to P for racing, takes it back before lease is done.
Facts: P approached D, who knew nothing then about horse racing, and suggested that she should buy a horse
for him that he could not afford. She said he told her that he wanted to have him for a racing proposition. The
horse was bought by D and she immediately leased him to P for a term of 3 years. The following January she took
the horse away from him. He brought the action to recover damages. The jury awarded him damages. The judge
had told the jury that the question of damages might consider P’s advantages in betting the horse himself or in
supplying information for reward to other people. Appeal is brought on the grounds that they should have been
directed that P’s prospective winnings are too remote and contingent to be recovered as damages, and there
was no evidence on which they could assess winnings, should only get nominal damages.
Decision: Trial decision upheld. Judgment for P.
Reasons: Does not think winnings are too remote to assess. Sole object of the agreement was to give him a
chance to make money with the horse, and both parties were aware of this when they made the agreement.
Thinks it is too wide a principle to only award nominal damages for contingencies, as everything in the future
depends on some contingency. It’s P’s right to obtain damages for breach of contract. If a plaintiff has been
deprived of something which as a monetary value, a jury is not relieved from the duty of assessing the loss merely
because the calculation is difficult to do with certainty. TEST: whether the plaintiff was possessed of something
which had a monetary value, and of which he was deprived by D’s breach of contract. In this case the they don’t
calculate how much he would have made, but they are to price the chance of profit from training/racing horse.
Do we value a chance? In this case, yes. How do you put value on a chance? You take as much
information as you can and basically put a value on it. Another example, you bring someone on your land
to
Groves v. John Wunder Co. (1939, American) – D deliberately did not excavate the remaining overburden –
incomplete perf.
Facts: P owned 24 acres of suburban real estate, and could be reached by railroad and had ad a plant on the
premises for excavating and screening the gravel. Nearby D owned and was operating a similar plant. August
1927 the parties made a contract. It was primarily a lease from P to D for 7 years. D agreed to remove the sand
and gravel and to leave the property “at a uniform grade, the same as now existing at the roadway, and that in
stripping the overburden it will use it to maintain and establish the grade”. The transfer and the right to remove
sand and gravel was consideration that moved from P to D, except that D got rid of P as a competitor. D paid P’s
part on the contract was executed except for D’s right to continue using the property for the stated term. D
deliberately breached the contract. The reasonable cost of excavating the remaining overburden was $60,000,
but if D left the premises at the uniform grade, the reasonable value of the property was only $12,400. The
judgment at trial was for the latter sum.
Decision: Judgment reversed. New trial ordered.
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Reasons: The court looked at the difference between the market value of P’s land in the condition it was in when
the contract was made, and what it would have been in if D had performed. Considerations in determining if D
should have to pay the cost for finishing performance Breach was wilful. Principle: Where the contractor wilfully
and fraudulently varies from the terms of a construction contract he cannot sue thereon and have the benefit of
the equitable doctrine of substantial performance. The correct doctrine is that the cost of remedying the defect is
the proper measure of damages. The owner is entitled to compensation for what he has lost, that is, the work
which he was promised and was deprived of by the breach. In Restatement, Contracts it says: sometimes defects
in a completed structure cannot be physically remedied without tearing down and rebuilding, at a cost that would
be unreasonable. That would be economic waste. Restatement (physical remedies for some defected structures
are unreasonable and economic waste) does not apply in this case, in which the rule is that the cost of remedying
the defect is the amount awarded as compensation for failure to render the promised performance.
Olson (Dissent): Should not give more than compensation. If the contract had been performed, he would have
had property worth $12,000, and if he gets money for the performance value he gets a lot more than what the
parties contracted for. There is showing that this property was unique. The rule to be applied is that damages
recoverable for breach of contract to construct is the difference in market value of the property in the condition it
was when delivered to P and what its market value would have been if D had fully complied with its terms.
Contracts between public parties permits no application of the market value doctrine, and so there can be only
one rule of damages, which is the cost of completion contracted to be done.
Sale of Goods Act
Damages for non-acceptance of buyer:
 Estimated loss directly and naturally resulting in the ordinary course of events from the buyer’s breach of
contract
 Where there is an available market for the goods in question the damages is the difference between the
contract price and the market price at the time when the goods ought to have been accepted, or at the time of
the refusal to accept.
Damages for non-delivery of seller:
 Estimated loss directly and naturally resulting in the ordinary course of events from the seller’s breach of
contract
 Where there is an available market for the goods in question, the measure is the difference between the
contract price and the market price at the time when they ought to have been delivered, or at the time of
refusal of delivery
Thompson Ltd. V. Robinson Ltd. (1955) – D refuses to accept car, argues for nominal damages b/c market, rule
not applied.
Facts: D had contracted to buy a car from car dealer P. D refused to accept delivery of the car, and P returned it
to their suppliers who took it back. P claims that they lost profits from D not buying the car, D relied on Sale of
Goods Act.
Decision: Judgment for P-gets lost profits.
Reasons: D submits that there is an available market in which the price of the car is fixed by the manufacturers,
so the damages must be little more than nominal. Available market simply means the cars were in demand and
could be freely sold. But on the facts circumstances changed in relation to these cars, and in March of that year
there was not a demand which could readily absorb all these cars available for sale. If the purchaser defaults, the
sale is lost, and there is no means of readily disposing of the car that was contracted to be sold . Furthermore,
even if D’s argument stands, this is only a prima facie rule, and if one finds that it is unjust to apply the rule, it is
not to be applied.
3. Mitigation
Payzu v. Saunders (1919, English)- D won’t deliver silk b/c of P’s delayed cheques, demands cash. P wants diff in
prices.
Facts: D contracted to sell P silk. P’s first cheque didn’t get received, and the second cheque, because of delay in
getting P’s signature, was sent late. D refused to make any further deliveries under the contract, unless P paid
with cash with each order. P refused, and claims damages for breach of contract, which were the diff. b/w the
market price and the contract price.
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Decision: Appeal dismissed. Damages awarded for serious/substantial business inconvenience.
Reasons: D’s letter was an unjustifiable refusal to carry out contractual obligations. Market price of goods was
rising. P did not purchase goods asserted that the market was so bare of goods as to render purchases
impractical. Mitigation Rule: In assessing damages for breach of performance, a jury will take into account
whatever P has done, or has had the means to do, and, as a prudent man, ought in reason to have done,
whereby his loss has been or would have been diminished. In commercial contracts it is generally reasonable to
accept an offer from the party in default, but always a question of fact. P could have paid cash but instead of
accepting D’s bona fide offer, P permitted themselves to sustain a large measure of loss which as prudent and
reasonable people, they ought to have avoided. There was no breach, and D was always ready and willing to
abide by the contract, and it was unreasonable for P not to accept that offer and should accept no more than
what they would have lost by paying with cash. Nothing justifies P in refusing to accept D’s offer
4. Remoteness
Hadley v. Baxendale (1854)
Decision: No recovery.
Reasons: There was a breach of contract, but the plaintiff could not recover the damages for loss profits, as they
were too remote to be foreseeable. Remoteness Rule: A plaintiff can recover for such damages as:
(1) may fairly and reasonably be seen as arising naturally, that is, according to the usual course of things, from the
breach of contract itself, or,
(2) such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made
the contract, as the probably result of the breach of it (special damages)
Notes: Does Hadley need a liquidated damages clause including this information about special damages? He’s
got to prove that this was agreed upon, although it doesn’t have to be in the contract, but it should be better than a
verbal agreement
Victoria Laundry Ltd. V. Newman Industries Ltd (1949)
Decision: Recovery. Damages granted for loss of regular business but not for extra contracts.
Reasons: part (2) of the damages rule in Hadley and says that he’s required to pay based on what he
reasonably should have known – here he should have known boiler was essential. This is an objective test—
what would a reasonable person, with the qualifications of THIS defendant (in this case, he was an engineer).
These damages can be under both branches--It is obvious to the defendant (an engineer) what its purpose would
be for the plaintiff (Laundromat), but it also had to be communicated to the defendant. So what I need to
determine is, based on what this defendant knew (2), and who this defendant was (1), is losses of profits
reasonably foreseeable? so the 2 branches aggregate together
So what is the difference compared to Hadley? This was a sale transaction, not a carrier/delivery. The defendant
was a firm of engineers (branch 1?). There is a communication of “I need this ASAP” (special information—
branch 2)
Certainty of Damages Test: it has to be a serious possibility/real danger to result
How does the court come up with the amount? You can recover loss of profits, but you can’t recover the profits on
the special dyeing contract, because these would not have been in the contemplation of the defendant
Can I put something in a contract that limits the amount of damages? Exclusion clauses/Limitation clauses:
courts have special interpretation rules over these: (1) People have to have reasonable notice of these things. (2)
It will always be construed against the party relying on it. (3)You can’t simply exclude liability for your definite
breach but must look at the clause in reference to the facts that have occurred
Compared to Hadley: was a sale transaction—not a carrier/delivery. The defendant was a firm of engineers
(branch 1?). There is a communication of “I need this ASAP” (special information—branch 2)
There has to be a certain probability for what damages would result—TEST for certainty of damages: it has to
be a serious possibility/real danger/liable to result. Some think this is extension of Hadley, others think it’s
inconsistent.
You can recover loss of profits, but you can’t recover the profits on the special dyeing contract, because these
would not have been in the contemplation of D.
Exclusion clauses/Limitation clauses: courts have special interpretation rules over these: need reasonable
notice of these, always construed against the party relying on it, can’t simply exclude liability for your definite
breach, must look at the clause in reference to the facts that have occurred
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Koufos v. Czarnikow (1961, H.L.) – D’s vessel delayed, causes P charterers to sell sugar for a lower market price.
Facts: P chartered D’s vessel to proceed to Constanza, to load a cargo of sugar, and carry it to Basrah.
Reasonable prediction of travel time was 20 days. D’s vessel had in breach of contract made deviations which
caused a nine-day delay. P knew there was a market for sugar at Basrah. It was sold there but the market price
had fallen, and if there had been no delay the sugar would have sold for more. P: entitled to recover the difference
as damage for breach of contract. D: liable to pay interest for nine days value of the sugar and minor expenses
but refuses to pay for the fall in market value.
Issue: Can P recover for a breach a loss which D, when he made the contract, ought to have realised was not
unlikely to result from a breach causing delay in delivery (not unlikely connotes a degree of probability less than
foreseeability). Would the reasonable man have realised that such a loss was likely?
Decision: Judgment for Respondents (original Plaintiffs). D ought to have known loss was not unlikely.
Reid: Trial judge ruled in favour of D and thought this kind of loss suffered by the delay was not foreseeable.
Court of appeal revered the decision (in favour of P) and thought that Hadley and Victoria Laundry applied, and
the loss in market price was not too remote to be recoverable. P intended to sell the sugar in the market in
Basrah, and they knew nothing about the date of arrival or expectations about market prices, but they knew there
was a market there. D only knew there was a market in Basrah, but if he had thought about it, he must have
realized that the sugar would be sold there at market price on arrival, and he must know that market prices
fluctuate all the time. But he had no reason to know it was probable that during the relevant period such
fluctuation would be downwards rather than upwards. Reasonable foreseeability is confusing contract with tort
damages. It has never been sufficient that the loss was foreseeable as a serious possibility or a real danger to
make someone liable in contract. There is a difference between saying that an event is not unlikely or quite
likely to happen and saying that it is a serious possibility/a real danger. If the Victoria tests are to prevail than we
should not rely on Hadley, as these tests would extend liability for breach of contract beyond what is reasonable
or desirable.
Morris: This loss would have been contemplated in the minds of the parties if they thought about it. He should
not escape liability by saying that he would only be aware of a possibility of loss but not a probability or certainty of
it. As a practical businessman he would not have paused to reflect on the possible nuances of meaning of any
one of these phrases (likely, very likely, not be unlikely...)
Pearce: The expressions used in Victoria Laundry were right in his opinion, and inconsistent with Hadley. The rule
in Hadley limits damage to that which may be regarded as being within contemplation of the parties, and is
confined to knowledge of losses arising naturally. Outside that knowledge, the extension does not always increase
the damages, but it may introduce knowledge of particular circumstances which show that P would in fact suffer
less damage than a more limited view of circumstances might lead to expect. The loss of market arose naturally,
according to the usual course of things, from D’s deviation. The sugar was being exported to a place where the P
knew there was a sugar market. It was sold at a lower price than it would have been sold at had it not been for the
D’s delay, and the market fall was not due to any unusual factor.
5. Intangible Injuries
Jackson v. Horizon Holidays (1975, English) – HH recommended substitute hotel, did not meet promised
expectations.
Facts: Jackson arranged with Horizon Holidays for a vacation, and wrote them a letter specifying that he wanted
everything of the highest standard. The hotel rep led him to believe his expectations would be met, and she wrote
the booking form which he sent in. In mid January it was discovered that the hotel would not be ready on time, so
HH recommended a substitute and assured him it would meet his expectations, so he accepted it. HH reduced the
charge. The room was a mess and did not have anything that was promised to them. The children had to sleep in
one single bed and in a sitting room when they were upgraded to one of the best suites. Brought an action for
damages against HH in respect of the loss of his holiday for himself, his wife, and the two small children. HH
admitted liability but contested the action for damages.
Decision: Appeal dismissed. Judgment for Jackson from trial upheld.
Reasons: In Jarvis it was held that damages for the loss of a holiday may include not only the difference in value
between what was promised and what was obtained, but also damages for mental distress, inconvenience, upset,
disappointment, and frustration caused by the loss of the holiday. Trial judge divided the cost of the holiday, 1200
pounds, into 600 for what the value of their holiday was, and 500 for mental distress. Judge said he could only
consider Jackson’s mental distress, but Jackson says that damages should be awarded for his family’s distress as
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well, as the contract was made by the father for the benefit of third persons. Present law says that the only who
can sue is the one who made the contract (privity).
He thinks Jackson should be able to recover for his family. (Lloyd’s v. Harper). If would have been an excessive
amount if it was awarded only for the damage suffered by Jackson himself, but it was extended to his wife and
children, so it is not excessive.
B.SPECIFIC PERFORMANCE
Falke v. Gray (1859) – P accepted to buy jars from D in the house he rented. G sold them to someone else for a
higher price.
Facts: F rented a house from Gray and had accepted to buy some furniture including china jars, which were
valued by agreement at 40 pounds. Later Gray was offered 200 pounds by Watson, to whom she sold them. Gray
stated the jars were left by a lady who had been offered 100 pounds for them by Kong George. Falke was a
dealer in the same trade as Watson, and should have known the actual value of the jars.
Decision: Contract enforceable. Specific Performance could be enforced. Judgment for P.
Reasons: D argues that specific performance cannot be enforced for a contract relating solely to chattels. There s
no difference between real and personal estate in the performance of a contract. Court of equity says that in
many cases mere compensation is not sufficient—and that is applicable to real estate. With contracts for the
purchase of ordinary articles the court will not enforce specific performance because you can go to the market and
get adequate compensation by buying an equally good article. But here these articles are unusual and it is
doubtful what price they will go at, so D must sell them to P.
C.INJUNCTION
Warner Brothers v. Bette Davis (1937) – actress moves out of England, court orders injunction so she’s
employable, not SP.
Facts: Davis signed a contract that she would give her service as a motion picture and stage actress for Warners
and only. The contract requires her to give her services exclusively to Warner Brothers (+), and not to appear in
any production (stage/film) without the consent of Warner Brothers, or to take any other employment without their
consent (-). D breached the contract when she agreed to perform on the stage in England. P cannot be remedied
by damages, since it is too difficult to estimate how much D is worth. It is her performance that P wants to
continue with, not any financial remedies. Background: She thought that if she moved out of the jurisdiction of
the contract (to England), then she could breach the contract that she made in California, as the remedy is only
good in the jurisdiction in which the contract was made. In effect if you want a remedy, you have to bring it to
where the person is
Bottom line: Injunction and specific performance are personal remedies because the only way you can enforce
them is by a personal order, and that’s why they follow her to England to commence the action
Decision: Order an injunction. Cannot breach contract for 3 years.
Reasons: There’s an argument against compelling people to perform personal services-- like slavery, so this rules
out specific performance. Whole bunch of intangibles, and her services were of a unique, special, extraordinary,
intellectual nature that it would be hard to figure out damages. Courts CANNOT order an injunction that prevent
her from earning a livelihood unless she performs, because that is essentially like specific performance for
personal service which is forbidden. But this injunction essentially compels her to make movies for them if she
wants to stay in this line of work because she cannot perform for anyone else (without their consent). They
conclude that she is an intelligent and capable individual who can make a living in any other fashion. They order it
for 3 years, because the order should last for only so long as the court feels that the plaintiff in the action has a
real interest in enforcing the contract. Specific performance and injunction are equitable remedies, and the court
has discretion to do what’s fair and reasonable under the circumstances. They think that the remedy should be
granted in a way that is as inoffensive as possible to the parties involved, but yet will protect the minimum interest
that they think is deserving of protection
Notes: She is better at acting than at anything else, and this is what she’ll make the most money doing, so is the
court making a stupid decision? NO, because courts have an interest in compelling people to perform their
bargains. Since they also have a policy consideration saying they can’t force people to perform contracts of
personal services, if they can order something that ensures someone won’t be unemployed, then that gives
people a high inventive to perform the contract.
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