(Note: This Summary covers post-midterm material only. See “Midterm Summary” for the first half of the course. -Ethan)
Contract Formation Cont’d
Going Transactional Adjustments
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Where parties want a contract to continue, but circumstances have created the need to make a change. The big hurdle is
‘fresh consideration’.
Five doctrinal requirements to enforce a change to the contract:
o 1. Must be an original contract.
o 2. All parties to the contract must agree to the change.
o 3. One party must pay more, or receive less, than was originally agreed.
o 4. At least one party must have something left to perform (i.e. contract is not fully performed yet.)
o 5. The party benefiting from the change must do no more (or do less) than was agreed. (Such as paying less, or
getting better quality for the same price.)
How to make a GTA enforceable:
o 1. Put the adjustment under seal (seals don’t require consideration)
o 2. Fresh consideration
 A. Forbearance: forego a legal right or defence. Bar for this test is set low to encourage settlement.
Counts as good consideration where three conditions are met:
i.
The claim is reasonable, not frivolous or vexatious.
ii.
The person surrendering the right to sue has a bona fide belief that the suit would succeed.
(Though they don’t have to be right about this.)
iii.
There must be no concealment of material facts.
 B. Recission: ‘ripping up’ old contract and making new one; consideration is based in the mutual promises
exchanged.
 C. Pay more/take less
 D. Other (such as the type of consideration used in the main contract)
Fresh consideration may sometimes be found in ‘commercial advantage’, such as not having to hire a new subcontractor, or
not having to pay damages due to breaching a contract with a third party. (Willaims v. Roffey) But this is shakey in Canada –
see below.
Cases:
o Harris v. Watson: Captain offers sailors more wages for doing extra work. Court says promise not enforceable
(policy grounds – wartime, worries about duress).
o Stillk v. Myrick: Captain offered to split deserter’s wages among other sailors if they picked up the slack. Court says
unenforceable, because no fresh consideration – sailors’ contract already obliged them to provide any extra
service necessary.
o Raggow v. Scougall: Employer signs new employment contract with employee, whereby business will stay open
during WWII if they agree to take less wages. Employee changes mind and argues no consideration, but court
finds recission.
o Stott v. Merritt: Stott, an employee of Merritt, has a client buying shares on margin. Share prices fell, client paid
loss but check bounced. Stott’s was pressured to sign agreement putting him on hook for this $; later he quits and
sues, claiming variation w/o consideration. Merritt argues forbearance; Stott says can’t forbear because they
didn’t have a good suit (Stott’s boss had pressured him to keep supporting the impecunious client); court says a
legal defence doesn’t have to be good so long as it is not frivolous and belief is bona fide, so Stott loses out.
o Gilbert Steel: Price of steel goes up, but Gilbert had contract with University Construction to supply it at fixed price.
Gilbert negotiates new price orally, to be obtained by ‘rounding up’ invoices, then realizes this isn’t covering the
difference and asks for balance. University refuses, arguing Gilbert was already obliged to provide steel, so no new
consideration. Gilbert argues recission, but court says a change in price alone isn’t enough for recission. Gilbert
also argues consideration in the promise to give University a ‘good price’ on future contracts, but court says this is
too vague. Gilbert also argues acquiescence and estoppel, and that by giving 30 days credit for a now increased
price they were effectively giving more credit, but court rejects these too. (Gilbert was in best position to allocate
risk of price increase, should have used an escalator clause. There was also some concern about economic duress
– Gilbert was threatening to stop steel shipments, causing University to breach its other contracts.) This case is
still the authority in Canada.
o Williams v. Roffey: Roffey hires subcontractor Williams for carpentry work. William severely underestimates cost
and might not finish, so Roffey offers $10k bonus and Williams keeps going. Then Roffey refuses to pay, arguing no
fresh consideration. Court finds consideration to Roffey in ‘commercial advantage’ of not having to hire a new
subcontractor, and not breaching their contract with third parties waiting on the work.
o
NAV Canada v. Greater Frederickton Airport Authority: Recent Canadian case which endorses Williams v. Roffey,
but not a high court case so it’s persuasive power is unclear. Says that a GTA unsupported by consideration is fine,
so long as there is no economic duress. (Policy: protect reasonable expectations of parties that changes they have
agreed to will be enforceable.)
Promissory Estoppel: Reliance as a Basis for the Enforcement of Promises
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Estoppel: when one party makes a promise, and another party relies on it (esp. to their detriment), equity should enforce it.
Elements of Estoppel:
o 1. A promise
o 2. An intention that the promise be binding
 Objective test: would an objective, disinterested viewer come to the conclusion that the promise was
intended to create legal relations/obligations/benefits?
o 3. Reliance
 Must be reasonable, and actual.
o 4. No other reason not to enforce the change.
 Leaves it open to the other party to argue for special reasons why the promise should not be enforced.
Note: the promise still requires consideration to be enforceable; generally the courts will ‘find’ consideration if they want to
enforce.
Sword/Shield: estoppel can be used as a ‘shield’ (to enforce a promise) but not as a ‘sword’ (to make a promise
unenforceable).
Cases:
o Hightrees: Central London creates subsidiary company Hightrees to manage a block of flats. The agreement leases
the building to HT for 99 years at set rate, under seal. WWII hits, HT can’t rent to full capacity and thus can’t meet
agreed price. CL agrees to halve price until HT can rent all flats, backdating the rent reduction to the start of the
agreement. Later CL goes bankrupt, and their trustee claims back-rent from HT arguing no consideration for
change. Denning allows estoppel argument, up to a certain date.
o Coomb v. Coomb: Brings in the sword/shield distinction.
Third-Party Beneficiaries and Privity of Contract
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Where A contracts with B for the benefit of C, C has given no consideration and does not have privity, which complicates
their ability to sue if they don’t get the benefit for which the contract was made.
Original rule: no stranger to consideration can take advantage of a contract or sue on it. (Tweedle v. Atkinson)
Ways of getting around the rule:
o 1. Trust: settlor transfers property to trustee for the benefit of the beneficiary. Beneficiary can then directly
enforce the contract.
o 2. Assignment: an assignor transfers (usually by sale) their rights under the contract to an assignee. Assignee can
then sue on the contract. (E.g. debt collectors ‘buying’ debts)
o 3. Agency: a principal gives their agent authority to enter into contracts on their behalf.
 Four doctrinal requirements: (New Zealand Shipping)
 A. An intention that a third party will benefit from the contract.
 B. The agent must contract as an agent; i.e., within the authority granted by the principal.
 C. The agent has authority to act and consideration.
 D. Consideration must flow from the beneficiary (i.e. the principal) to the third party.
 Agency and employee liability: two main problem areas:
 Subrogation clauses: where one party assumes rights of the other, esp. the right to sue. (E.g.
insurance contracts – company pays for your harm, then sues party responsible.)
 A ‘no subrogation’ clause indicates that they cannot do this.
 Employees cannot take advantage of subrogation clauses unless they can successfully
argue agency. (Greenwood v. Beady) Note: today the court might take a more London
Drugs approach.
 Exclusion/limitation clauses:
 Employees can take advantage, so long as they were i. an intended beneficiary of the
contract (explicitly or implicitly), and ii. were acting within the scope of their
employment when they caused the damage. (I.e., they were providing ‘the very
services’ contemplated by the contract.) (London Drugs)
 In determining the above, court will look at the ‘nature of the relationship’ and ‘identity
of interest’; if the work was such that it must be done by employees, court will move
towards rebuttable presumption that they are covered (unless a contrary intention
appears). (Lang Property)
 Court has also extended this test beyond employees, such as to corporate entities so
long as they still meet the test (i. intended beneficiary, ii. their services were those
contemplated by the contract.) (Fraser River Pile & Dredge)
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Cases:
o
o
o
o
o
o
Tweedle v. Atkinson: T contracted with A such that if T’s son marries A’s daughter, A will pay T’s son a dowry. The
kids get married, but before money is paid, both fathers die. Court says tough luck.
Greenwood v. Beady: Greenwood is mall owner, takes out blanket insurance for all stores including Canadian Tire.
Contract includes ‘no subrogation’ clause. CanTire employees start fire; court says insurer can sue employees
directly since they aren’t privy to contract, and no evidence employer was signing as agent. Courts have since
backed off this position.
London Drugs: Two employees negligently handle expensive equipment, and break it. Court stretches term
‘warehouseman’ in contract to imply the employees, and extends limitation clause to them. Greenwood is
distinguished because that was a contract for ‘space’.
Lang Property: All Seasons manufactures Santa’s Castle; mall owner has employees set it up, but they start a fire.
Mall tenants’ contracts said to get their own insurance, and to waive their subrogation rights in them. Insurance
company sues All Seasons, so All Seasons sues employees. Court implies coverage to employees because tenantowner contract included clause about ‘promotional activities’, which must be carried out by employees, so there is
an ‘identity of interest’ which All Seasons should have known.
Fraser River Pile & Dredge: Extends the foregoing beyond employer-employee relationships, in this case to a
corporate third party. Court says they will relax privity to reflect ‘commercial realities’.
New Zealand Shipping: Stevedores unloading ship are sued. Formulates four-step agency test. Court says i.
limitation clause clearly supposed to benefit them, ii. K expressly said carrier acted as agent for independent
contractors, iii. met, iv. by unloading P’s goods stevedores gave consideration.
Contractual Undertakings: Determination, Range and Remedies
Representations and Warranties
 The focus here is risk allocation; who bears the risk of misrepresentation? As this is a remedy-focused area of law, courts
will often pick the remedy they want, then reason back to what kind of representation it is.
 1. The Condition: an essential term of the contract. A misrepresentation causes recission and ability to sue for expectation.
 2. Fraudulent Misrepresentation: a false representation made knowingly or recklessly. Difficult to prove, and failure may
make you liable in defamation. Remedy is recission and reliance damages.
 3. Innocent Misrepresentation: A statement which precedes the contract, but is not part of it; yet it induces entry to the
contract. Remedy is recission, (restitution is possible, if payment was made and court can be convinced that letting them
keep it would be unjust enrichment); no reliance or expectation damages.
o A. Must be representation of fact (not opinion) which turns out, after contract formation, to be false.
o B. Representation must concern an important matter (though it doesn’t necessarily have to go to the root of the
contract)
o C. Misstatement must have induced other party to enter contract, and/or been relied on by them. (This tends to
be a rebuttable presumption.)
o D. At time of misstatement, the party making it did not know the correct facts.
o Note: Cannot use recission on a fully performed contract, so this can be used as a possible defence. Can also argue
‘doctrine of substantial performance’ for a contract that is fully performed but for a few odds and ends, to get
same result.
o Restitutio in Integrum: if P claiming recission wants to get anything from promissor, the promsisor must be in a
position to give it back – which they often aren’t (e.g. b/c money has been spent.
 4. Warranties: representations made orally at time of formation, or within the contract itself. Considered part of the
contract, but not a central term. Breach gives rise to damages, but not the right to repudiate or rescind the contract.
o ‘Collateral warranty’: a representation made outside the ‘four corners’ of the main contract, that is elevated to a
term of the contract.
 ‘Two contract’ theory: collateral warranty is a second contract made alongside main contract, for which
consideration is entry into main contract.
 Motivating factors for courts to find collateral warranty:
 Party making representation was in best position to determine its truth.
 Problem was latent, thus circumventing Caveat Emptor
 There was already a positive obligation to disclose.
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o
o
o
Not enforceable if they contradict a term of the main contract. (Though see discussion in CPR – court
suggests they might be willing to relax this if the person making the representation had authority to alter
contract and was in a good position to balance their party’s interests.)
Four requirements for warranty: (Dick Bentley)
 1. A false/erroneous misrepresentation
 2. Made in the course of dealings
 3. For the purpose of inducing listener to act (i.e., speaker intended that statement be reasonably relied
on – this is the most important step!)
 4. That in fact induces entry into contract (i.e., actual reasonable reliance.)
 Note: meeting test creates prima facie inference that statement was intended as warranty, but D can
rebut by showing they were without fault and it would be unreasonable in the circumstances to hold
them to the statement.
 Other defences: ‘mere puffery’, or else negligent misrepresentation.
Negligent Misrepresentation vs. Warranty: “An affirmation at the time of the sale is a warranty, provided it appear
on the evidence to be so intended.” (Heilbut)
 ‘Objective’ test: what would a third party, viewing the proceedings, think about the nature of the
representation? (Dick Bentley)
 Factors to consider:
 ‘Objective’ test: what would a third party, viewing the proceedings, think about the nature of the
representation? (Dick Bentley)
 1. Timing: earlier in negotiations = more likely innocent misrep.
 2. Importance: to what extent did it induce entry?
 3. Foreseeability of reliance: did speaker know how important representation would be, or would
reliance come as unfair surprise?
 4. Relative skills/knowledge: was listener relying on speaker’s expertise? How knowledgeable
was listener?
 5. Content of statement: vague or specific? Opinion or fact?
 6. Context: formal or informal? Was statement central or incidental to negotiations?
 7. Was there a written contract? If yes, listener should have gotten statement in writing if it was
important to them.
 8. Disclaimers: did speaker disclaim statement, either orally, or via exclusion clause?
 9. Price: should price have been ‘red flag’? (E.g. $5.00 diamond ring)
Cases
 Heilbut, Symons & Co. v. Buckleton: investor calls up company and asks if they are bringing out a new
rubber company; they say yes, but this is inaccurate. Court calls this innocent misrep, not warranty, as
investor was sophisticated and ‘phone call’ is less formal.
 Dick Bentley: Car salesman incorrectly says car has only 20k miles on it, in order to induce sale. Salesman
didn’t know he was in error, but court says warranty b/c he made a statement of fact about something
that should be within his knowledge, which he could easily have verified and was in best position to do so,
and which he knew would be a strong inducement for plaintiff to enter contract.
 Oscar Chess: Car salesman misread logbook; held to be innocent misrep, b/c although test for warranty
was met, he was able to rebut it by showing it was a wholly innocent mistake.
 CPR: CPR invites tenders to remove rock. Carmen speaks to employee, is given a figure for amount of rock
to be removed, bid is accepted, turns out there was a lot more rock. Contract clause says bid is made w/o
reliance on anything CPR has said. Court says can’t rely on collateral warranty if it contradicts the terms
of the contract, though if Carmen had spoken to someone like a lead engineer who had authority to alter
contract, court might have been more willing to consider his statements a warranty.
Concurrent Liability in Contract and Tort: Negligent Misrepresentation
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See above for analysis of ‘warranty’. Courts will usually look at negligent misrepresentation before moving to warranty.
Negligent Misrepresentation: remedy is tort measure, which is close to ‘reliance’, possibly plus ‘lost opportunity costs’
which is close to ‘expectation’.
o 1. A false or incorrect statement
o 2. The statement is provided negligently
o 3. There is a relationship in which there is a duty of care
 Relevant factors seem to be whether party making statement had “special knowledge and skill”, whether
they knew the statement would be relied on for the purpose it was relied on, and esp. if they knew the
specific plaintiff would be relying on it for that purpose (‘proximity’).
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Mistake
o 4. Actual reasonable reliance, which was foreseeable to the party making the statement.
Where a wrong supports an action in either tort or contract, pltf may sue in either or both, subject to any conditions in the
contract itself. If you sue in both, you don’t get “double damages”; court will still award minimum level necessary to
compensate.
Summary: Suing in Contract vs. Tort:
o 1. Liability in Contract
 Breach of warranty: statement can become a warranty where four conditions are met:
 1. False/incorrect statement of fact
 2. Made in the course of dealings
 3. Intended inducement into contract
 4. Actual inducement
 Remedies: Can get one of the following, subject to remoteness and mitigation:
 1. Expectation
 2. Reliance
 3. Restitution
o 2. Liability in Tort
 Negligent misrepresentation: statement may be inside our outside contract. Four requirements:
 1. False/incorrect statement of fact
 2. Statement was made negligently
 3. A relationship of care (proximity), usually the result of special skills or knowledge.
 4. Foreseeable reliance.
 Remedies: can get any or all of the following:
 1. Compensation
 2. Costs (essentially reliance damages)
 3. Lost opportunity costs (may be closer to reliance or expectation damages, depending on
judge’s mood.)
o How to choose:
 Expectation damages are often higher than lost opportunity costs
 Tort ‘apportionment’ is difficult in contract situations; if there are multiple defendants and one or more
are impecunious, you might prefer to sue in contract and get a global award of damages, rather than
apportionment.
 Contributory negligence isn’t a problem in contract; it may make it more difficult to prove your reliance
was reasonable, but if you can pass that hurdle, you get full damages.
 Different limitation periods in contract and tort.
Cases:
o Fraser Reed: Latent defect causes basement to flood. Contract had been fully performed, so they didn’t want
recission. Instead, they needed to establish some kind of warranty. (Also because an exclusion clause disclaimed
any warranties outside the contract.) SCC rejects “implied common law warranty of fitness”, as legislature should
step in if they want that kind of protection. However, they accept an express warranty, as contract represented
that the builders had “disclosed all outstanding infractions”. (Building code requires drain tile, so failure to put it in
was an infraction.)
o Candler: Company owner hires accountant to prep books; accountant negligently shows company to be profitable
when it isn’t; investor, based on this report, invests and loses a lot of money. No fraud, and investor wasn’t privy
to contract with accountant; court rejected idea of importing ‘negligent misrepresentation’ into contract.
o Hedley Byrne: Another negligently prepared financial statement, and a third party not privy to the contract. Court
allowed importation of negligent misrepresentation this time; of key importance was ‘duty of care’ arising from
accountant’s knowledge that third parties would use the statement to invest, as well as ‘close proximity’ as they
knew which third parties would use the statement.
o Esso v. Mardin: Esso pitches gas station to Mardin based on estimated profits; then they are forced to move gas
pumps to a less busy street, but don’t update the estimate. Mardin loses money, argues estimate was a collateral
warranty; Esso says it was just a statement of opinion. Denning says it was a warranty: there was a duty of care,
the statement was made with special knowledge and skill (Esso was expert in this area), and there was reasonable
reliance (the figure induced entry into contract). So, duty of care was breached when Esso negligently didn’t revise
their estimate. Esso argues that unlike Hedley Byrne, there is a contract between them here so only contract
principles should apply; Denning says plaintiff can pick, but if they choose to sue in tort, they can only get tort
damages. (Usually equivalent to ‘reliance’ damages.) Though, as here, you can get ‘lost opportunity costs’.
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Where contract is fully formed, but one or more parties are mistaken about the nature of the contract or its effect. Tends
to be a ‘last ditch’ argument. Four general categories.
1. Mistake in Formation (aka Mistake as to Terms):
o A misunderstanding as to what a term means. If test is made out, contract is void for mistake, so remedy will be
restitution.
o Three requirements:
 A. “True” ambiguity
 B. Ambiguity relates to an important or fundamental term.
 C. The courts do not prefer one party’s version of the term over the other’s.
 Considerations: expert testimony, reasonable reliance, etc.
o Policy factors: whether parties already allocate risk in contract, reasonable reliance, unjust enrichment, unfair
surprise, marketplace efficiency/certainty, caveat emptor, consequences on third parties.
o Cases:
 Raffles: Two ships of same name leave Bombay carrying cotton. Vendor sells first shipment to other
parties; when second shipment arrives, price of cotton has dropped, so buyer refuses it, and argues
contract is void for uncertainty due to ambiguity over which ship was meant. Court agrees, says parties
were not ad idem; one thought it meant first ship, the other thought it meant second. (Subjective
approach)
 Hobbes: Railway sold land to Mr. Hobbes through agent, w/o reserving mineral rights to itself. Before the
last payment, coal is discovered on the land, so railway refuses payment and won’t convey title. Court
here rejects subjective approach; parties may have had different ideas about what was being conveyed,
but contract itself is clear, and a reasonable person would think a land conveyance included subsurface
rights. (Court also ‘preferred’ Mr. Hobbes’ version b/c railway was in best position to avoid mistake.)
 Staiman Steel: Dodgy purchaser buying used steel at auction asked if it included ‘all steel in the yard’, then
claimed this included new steel in a separate area. Court is unsympathetic; buyer was sophisticated
party, knew about ambiguity and that others had asked for clarification, unfair surprise to seller, harm to
third parties (who had already bought the new steel).
2. Mistaken assumptions
o A mistake in the subjective reasons why a party entered into the contract.
o Courts don’t like this b/c of its subjectivity, so relief is very rare unless you can fit yourself in as a ‘textbook case’ of
one of four exception categories:
 1. Res Extincta: the subject matter of the contract didn’t exist at the time of formation. (E.g. the horse
was dead but neither party knew this.)
 2. Res Sua: A party mistakenly buys something they already owned.
 3. Mistaken Identity: a party mistakenly sells to or buys from someone they didn’t mean to. (E.g.
purchaser turns out to be an agent for a competitor.)
 4. Nature vs. Quality:
 Mistake of nature: parties are mistaken as to the very nature of the goods contracted for.
Nullifies consent, and thus voids the contract.
 Mistake of quality: normally no remedy, except in special circumstances:
 Common law (Atkins test): mistake of quality voids contract where two conditions are
met: the mistake is mutual, and the subject matter of the contract is substantially
different from what the parties believed at formation. (Court don’t like this and won’t
invoke it unless situation ‘cries out for justice’.) (Bell v. Weaver Bros.)
 Equity: equitable mistake of quality makes contract voidable (allowing court to decide at
what point it actually became void). Three requirements: a mutual misapprehension,
about a fundamental term, and the party seeking to have the contract set aside is not at
fault. (Note: this line of argument has never been specifically endorsed in Canada, but it
also has not be ruled out.)
o Remedy: usually void ab initio, but the party suffering losses may be able to argue the court up to some form of
restitutionary measure.
o Cases:
 Smith v. Hughes: A contract to sell ‘oats’; farmer had new oats, but stable-owner assumed they were old
oats, which are better for horses. Court called this a mistake of quality, not nature; parties were ad idem
in contracting for oats. (caveat emptor, buyer was in best position to specify what kind of oats he
needed.)
 Sherwood v. Walker: A ‘nature vs. quality’ case. Seller contracts to sell cow they say is “probably barren”,
but it turns out to be pregnant, at which point price agreed on becomes way too low. Majority says this
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was a mistake of nature; a fertile cow is totally different from a barren cow. Dissent says contract was to
sell a specific cow, which still exists, and parties had allocated the risks of the quality varying. Dissent has
become the more popular view over time. Real argument seems to have been ‘unjust enrichment’ vs.
‘seller was in best position to know quality of cow’.
 Bell v. Weaver Bros.: Nature vs. Quality in common law. Employer lays off two employees, giving
reasonable notice pay. Then it finds out they were engaged in illegal insider trading, so it could have
terminated with ‘just cause’ and not paid notice. Sues under ‘mistake of nature’ as they thought they
were terminating a valid contract, not a breached one. Court lays out Atkins test for mistake of quality.
 Solle v. Butcher: Nature vs. Quality in equity. Friend rents flat to plaintiff; neither is sure if rent controls
apply, but plaintiff says they’ll find out, then says they don’t, so a higher rent is agreed to. Later discovers
rent controls do apply, and sues for overpayment. Denning invents equitable mistake of quality test:
mistake was mutual, term (price) was fundamental, defendant was not at fault. Denning says contract
was valid for two years, then void after that.
3. Mistaken payments
o General rule: must pay back a mistaken payment. (Policy: unjust enrichment)
o Change in Position: an exception may be made where the recipient significantly relied on the payment. (Budai)
o Budai v. Ontario Lottery Corp: Won $5, but computer error gave him $800, and he’d spent half of it. Court said it
would be unfair to make him pay back what he’d spent, so just had to give remaining $400 back.
4. Frustration
o While other categories concern mistakes at the time of formation, ‘frustration’ concerns mistaken assumptions
about future states of affairs, affecting the object or value of the contract.
o Remedy varies; at common law it is voidability – usually, contract is ended as of the date of the frustrating event.
If parties have partially performed by that date, the loss falls where it may. In equity, courts may try to imply a
clause dealing with the event, based on an objective consideration of “what would the parties have decided had
they turned their minds to this at formation?”
o Today these sorts of events are usually dealt with through certain protective clauses:
 Force majeur: ‘act of God’ clauses assigning risks for unforeseeable events.
 Conditions subsequent: a stipulation that performance is not required unless and until a specified
occurrence happens (such as a zoning change being approved).
 Escalator clauses: describe a formula to vary the price according to prevailing conditions.
o Because of strong caveat emptor, frustration usually not available for land sales, except in exceptional
circumstances (e.g. KBK)
o Five requirements to establish frustration:
 1. The frustrating event affects a basic underlying assumption
 It must affect something so fundamental that it constitutes a ‘precondition to performance’.
 Categories recognized in the past have included the continuance of a state of affairs, the
continued existence of the goods, or that a particular event would occur.
 2. There must be substantial hardship
 A high threshold; it is not enough that performance simply be inconvenient or very expensive.
 The change must be permanent, and must deprive at least one party of the substantial intended
benefit of the contract.
 3. The risk must be unanticipated
 The risk must occur post-formation and must be so unforeseeable that it is not something the
parties should have addressed at formation.
 This competes with strong caveat emptor, as courts want parties allocating risks in their own
contracts.
 4. There must be no risk allocation provided for in the contract
 Courts will often ‘look for’ risk allocation clauses to try to uphold the contract, unless they don’t
want to.
 5. The frustrating event must be entirely beyond the control of the parties
 That is, it must not be either party’s “fault”, especially the one claiming frustration.
o Cases:
 Paradign v. Jane: States the historical rule that the contract is absolute and post-formation events are
irrelevant.
 Taylor v. Caldwell: Music hall is rented but burns down before the event. Tenant sues landlord for return
of deposit. Court finds frustration based on assumption of continued existence of music hall; voids for
mistake.
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Krell: Owner rented rooms to renter for three days to watch the coronation ceremony; king got sick and
ceremony didn’t happen. Renter refused to pay balance, owner sued. Court held that the occurrence of
the coronation ceremony was a ‘foundational circumstnace’; renter wanted rooms for the view, not
accommodations, and owner knew this as he’d advertised on that basis. Court voids contract, but renter
loses L25 he’d already paid.
John Walker v. Amalgamated: Day after a contract for sale was signed, building was redesignated a
heritage building, drastically reducing its value b/c it could no longer be refurbished as purchaser
intended; purchaser refuses to close. Court said risk was reasonably foreseeable, especially for a
sophisticated party like the purchaser.
Alcoa: OPEC embargo made cost of electricity shoot up, which wasn’t adequately covered by an escalator
clause in a long-term contract. Court finds both mistake and frustration, and invokes equitable remedy of
reformation to rewrite escalator clause (a US remedy; differs from ‘rectification’ which only ‘corrects’ a
clause) – real and substantial hardship to plaintiff, relief would not harm reasonable expectations of
defendant, neither party at fault.
Westinghouse: Similar to Alcoa; company agreed to provide uranium at fixed price, then value shoots up.
Court refuses to grant relief; contract should have provided for the risk.
Victoria Wood: A rezoning of land from industrial to farmland did not count for frustration.
KBK: Rare case where frustration was allowed for land, because ‘floor space ratio’ was rezoned in a
sudden and totally unexpected move, and vendor knew purchaser had planned to develop property;
indeed, the ad had specifically mentioned the former zoning and had laid out what uses the land could be
put to under that zoning.
Control of Contract Power
Interpretation
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Contract privity promotes certainty an lowers transactional costs, but there are issues: the presumption of equal bargaining
power is often unrealistic, and standardized clauses can become entrenched and end up creating unfairness. Thus, some
have argued for a more ‘contexutal’ approach, taking the context in which the signing occurred into account.
Federal Commerce & Navigation Co: Court refuses to reinterpret standard shipping clause, emphasizing importance of
certainty; though here both parties were sophisticated commercial actors.
Scott v. Wawanissa: Insurance contract said no coverage for damage resulting from an ‘insured’, which another part of the
contract said included other household members. Scott’s son committed arson on home, insurer refused to pay. Majority
takes ‘certainty’ approach, choosing to give effect to “clear and unambiguous language”. Minority take ‘contextual’
approach, looks at ‘joint vs. several’ interests, concludes each insured was only promising to care for their own property.
Also invoke contra preforentem – where there is ambiguity, resolve against person who drafted contract.
The Parol Evidence Rule
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Parol evidence rule: as a standard presumption, any evidence extrinsic to the contract itself is not admissible.
o Rationales: administrative ease of being able to rely on written document; avoids fraud/perjury; promotes
certainty; enhances efficacy of standard forms; avoids unfair surprise; prevents agents from carelessly altering
contract.
o Problems: possible unfair surprise, esp. in standard form contracts with an unsophisticated party; in reality people
often do rely on representations made outside the contract, such as by a salesperson.
Applicable where:
o 1. There is a written contract
o 2. There is an ‘integration clause’ (“this written agreement constitutes the entire agreement...” or an ‘exclusion
clause’ (“no other representations or warranties...”) indicating that written document is the whole agreement.
o 3. There is a dispute in which one party claims, notwithstanding the clause, that the written contract is not the
whole agreement.
The strength of the PER presumption varies depending on how the representation in question would affect the written
contract:
o Adds a term: weak presumption
o Varies the contract: ‘standard’ presumption
o Contradicts the contract: very strong presumption
Techniques for getting around PER: attack the clause as ambiguous, then bring in evidence supporting one or more of the
following arguments:
o
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Interpretation: usually the starting point. Courts will try to interpret the clause in the contract, invoking contra
preforentem if need be. But if that doesn’t work, the party will need to twin their argument to another form of
argument.
o Collateral warranty: usually one of the more successful arguments.
o Invalidity
o Mistake
o Misrepresentation
If court finds a collateral warranty, they will first try to harmonize it with the written contract; only if that doesn’t work will
they turn to PER and consider whether it adds to, varies or contradicts the written contract.
Per BC Business Practices and Consumer Protection Act, the parole evidence rule does not apply to consumer contracts.
Cases:
o Bauer: Bauer puts up collateral for loan; bank is required to ‘perfect’ entitlement to collect, but they don’t. Bauer
argues they can’t sue because the manager’s representation that they would perfect is a collateral warranty; court
agrees, but says it contradicts written contract, so tough luck.
o Gallen: Farmer buys seeds, gets representation that weeds won’t grow among them. Weeds grow. Written
contract had strong exclusion clause disclaiming any warranties wrt seeds. Farmer claims oral representation was
a collateral warranty. Court uses ‘warranty’ test, agrees, gets around Bauer by saying warranty merely varies the
exclusion clause.
o Zippy Print: Contract had strong exclusion clause disclaiming any representations about sales, volume or profit.
Many such representations had in fact been made; enough that court decided there was a misrepresentation, so
there never was a valid contract and PER need not be considered.
Standard Form Contracts
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The default position: your signature indicates assent to all terms of a contract.
‘Ticket’ cases:
o Problematic because they aren’t signed.
o The ‘Melish’ rule: With an unsigned written document, if the party receiving it can show they did not have actual
knowledge of the specific condition, the onus shifts to the party seeking to rely on the document to show that the
recipient assented to the condition.
 Evidence of assent:
 Evidence showing the recipient was aware there were some terms; or:
 Evidence showing reasonable steps were taken to make them aware of this.
 ‘Reasonable steps’ will vary depending on how onerous and/or unusual the clause is.
 Contextual factors: how long is document? What page is clause located on? Is it in plain
English? Was there a ‘Denning red pointing hand’? Were there posted signs that were
easily accessible? Had parties engaged in previous dealings on the same terms?
 These days, limitation clauses are so ubiquitous that people are generally expected to
look for them or at least to know they’re probably there.
o Parker: an early case which developed the ‘Melish’ rule. Court held that large posted signs alerting customers to
terms and conditions constituted notice.
o Sperling: Contract to store orange juice in warehouse. Ticket said warehouse not responsible for stored goods
even if negligent. Court says reasonable steps were taken, as it was a standard clause, stated twice (once on
front), plaintiff was sophisticated and had received this kind of receipt before.
o Thornton: Gets parking ticket; posted sign says “park at owner’s risk” and “subject to posted conditions”, but he
doesn’t get a chance to read the posted conditions (including ‘no liability for personal injury’) until after taking
ticket. Falls down elevator shaft and is injured. Denning says reasonable steps not taken; term was unusual and
draconian, so explicit notice of that particular term (and not just ‘some terms’) was needed.
Signed Standard Form contracts:
o Courts may be inclined to move away from the “you signed it, you’re bound” rule when it comes to SF contracts,
because of concerns about ‘rushed’ transactions that offload all the risk onto the consumer.
o Ways of getting around the signature rule:
 Interpretation: courts may ‘interpret’ their way out of an exclusion clause.
 Contra preforentem: ambiguities will be construed against the drafter.
 Duress: May cause contract to be voided, including exclusion clause.
 Non est factum: “it is not my act”; refers to where someone puts a stack of papers in front of you to be
signed, but ‘slips’ a different one in the middle.
 Fundamental breach: where a party has breached a ‘fundamental term’ of the contract, courts may be
willing to void it, including exclusion clauses.
o
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Fundamental Breach:
 Usually invoked only when there is a substantial inequality in bargaining power.
 Note: Because of Hunter v. Syncrude, you would argue unconscionability first, then in the alternative
argue that courts should adopt Wilson’s views on FB (see below).
 If courts want to get around an exclusion clause, they may look closely at the term breached. If it is held
to be fundamental, they will say that the essence of the contract has been destroyed, and so it ceases to
exist. (Courts don’t like parties contracting out of the very obligations the contract was intended to
create.)
 ‘Rule of Law’: if FB is found, contract is automatically void. (Old rule.)
 ‘Rule of Construction’: even if FB is found, contract is not immediately voided. Courts will engage in
interpretation and construction of exclusion clause and contract as a whole, considering various factors:
how specific is exclusion clause; what would be result of voiding it; did parties appropriately assign risk;
was risk assignment reflected in contract price; was there unequal bargaining power; did a party use their
superior knowledge of some aspect to their advantage; was that knowledge withheld from other party?
(modern rule)
 Karsales: Purchased car delivered as a wreck. Substantial inequality of bargaining power, and essentially a
total failure to perform. Court voids contract.
 Beaufort Realties: Canadian case which adopted the ‘rule of construction’ approach.
 Hunter v. Syncrude: Hunter sold gearboxes to Syncrude, which broke down after 15 months; warranty
only covered them for 12, and there was an exclusion clause. Syncrude argued statutory warranty under
Sale of Goods Act, but court rejects this as both parties were sophisticated and could contract out of
legislation if they wanted to. Syncrude also argues fundamental breach. Court splits 2-2; Dickson says
ignore FB, the real question is unconscionability; Wilson says yes, but keep FB for situations where
contract starts out fair but becomes unfair later. So, unclear if FB still relevant in Canada.
o The signature rule is now a rebuttable presumption; the party seeking to rely on the signature must show that it
was reasonable in all the circumstances for them to do so. (Tilden) However, note that Tilden is not widely
followed, and often distinguished on its facts.
o Tilden v. Clandenning: Clandenning rents car, buys extra coverage; clause says no coverage if intoxicated or
breaking any law. Clause was on inside page in small print. Court says that the condition was unreasonable
(violates reasonable expectations of someone buying insurance to cover exactly that situation), and that reliance
on the signature was unreasonable in the circumstances (no actual knowledge, no reasonable steps taken, fine
print, hurried transaction, clerk knew for a fact that Clandenning didn’t read it.)
Waivers of liability:
o Almost always enforced, unless there is fraud, unconscionability or duress.
o ‘Exceptional circumstances’ test: an objective test. Would a reasonable person, looking at the transaction,
conclude that the signer of the document was not agreeing to the clause? (Carroll)
 Was the waiver consistent with the kind of activity being undertaken? (Such that a reasonable person
would expect such a clause)
 What was the form like? (long, small print, etc)
 Did the signer have previous experience with this kind of activity?
o Carroll: Skier tries to get around exclusion clause for injuries, claiming she didn’t read it. Contract was short,
standard and she’d signed them before, so court is unsympathetic. (There was also a second argument over
whether the club hosting the race was privy to the contract, but court nixes this by applying the rules of agency.)
E-commerce:
o Humans can make contracts with machines, and machines can make contracts with each other.
o Clicking on ‘I agree’ is held to be equivalent to a signature.
o Spect v. Netscape: Netscape’s free software included spyware. Spect sues, Netscape tries to rely on arbitration
clause. When DLing software, it just said “please read this other page”; court says this wasn’t strong enough to
bind Spect to those terms.
o Rudder v. Microsoft: similar situation; clause required all disputes to be resolved in Washington (a ‘forum selection
clause’). Rudder had to click ‘I agree’, which court said counted as signature. Moreover, term was not
unreasonable; it was a common clause and was clearly displayed; having to scroll down several pages was the
equivalent of a multi-page document.
o Kanitz v. Rogers Cable: Clause in contract allowed Rogers to amend agreement at any time, providing notification
via e-mail, mail or posting on website, and that continued use of service was deemed acceptance of those terms.
Due to service interruptions, a class action suit was brought; Rogers amended agreement to include arbitration
clause. Plaintiffs argued no reasonable notice; court rejects this, as notice was posted in a specified manner, i.e.
on the website. The fact that it wasn’t on the main page didn’t eliminate customer’s duty to keep themselves
informed, and there was a note on the main page that there had been an amendment, with a link to it.
Unfairness
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Courts may refuse to enforce a patently unfair contract in three general situations: duress, undue influence, or
unconscionability. (These considerations will still be counterbalanced by unfair surprise, reasonable expectations, and
contract theory of voluntariness.)
Concern is less with the consequences of the bargain, than with whether there was really consent at formation.
1. Duress
o A. Physical Duress: inducing someone to enter a contract via physical threats.
o B. Economic Duress: taking advantage of the financial situation of the other party. Rarely invoked.
o Note that even if there was duress at formation, parties may still be held to have ‘ratified’ the contract via their
subsequent behaviour.
o DNC Builders v. Rees: Mrs. Rees knew DNC was on verge of bankruptcy; forced them to accept lesser payment.
They then sued for remainder. It is possible to make an ‘accord’ (an agreement to accept less, the payment of
which is called ‘satisfaction’), in which case equity normally protects the paying party from being sued, but court
says this defence is only available when the party claiming it has ‘clean hands’.
o Port of Caledonia: Ship comes loose; tug rescue captain demands L1000 to throw rope. Captain agrees, then
refuses to pay. Court will not enforce contract; awards the standard going rate for a tow.
2. Undue Influence
o Where a stronger party abuses their position to coerce consent from weaker party.
o Requirements (Duguid):
 1. An improvident bargain: must be ‘grossly unfair’, ‘manifestly disadvantageous’, or give ‘undue benefit’
to the stronger party.
 2. A ‘relationship of influence’.
o Two categories (Duguid):
 1. Actual undue influence: weaker party must establish a formal relationship of ‘trust and confidence’, and
a manifest disadvantage.
 2. Presumed undue influence:
 A. Relationships of trust and confidence by operation of law: historically recognized categories.
(E.g. solicitor/client). If weaker party can show there was such a relationship, and an
improvident bargain, contract is automatically voided.
 B. Residual categories: anything else. Weaker party must establish a relationship of trust and
confidence, and an improvident bargain. This creates a rebuttable presumption of undue
influence. (Stronger party could argue, for example, that weaker party did not repose trust and
confidence in them.) Courts like the benefit of the rebuttable presumption, so they tend to try to
categorize relationships under this heading.
 Duguid: Mrs. Duguid signs a guarantee on husband’s risky investment. Her marriage is on the rocks, and
bank knows that the contract is not to her benefit, as investment is in husband’s name only. They break
up, husband goes bankrupt, bank tries to collect. Court analyzes under ‘residual categories’ (not a
‘traditional husband-wife relationship’ in the sense recognized by the ‘operation of law’ category, as she
was a breadwinner). Majority says no undue influence, as marriage was not obviously doomed at the
time; alternately, she was a real estate agent and sophisticated in financial matters. Minority says
emotional or sexual ties can lead to undue influence, guarantee was signed in home, and bargain was very
improvident as the bank should have known.
3. Unconscionability
o Brought up for ‘gross deviations from the standard of conduct expected of commercial transactions.’ Harder to
prove the
o Two requirements:
 1. A substantial or ‘gross’ unfairness in the bargain
 2. Substantial inequality in bargaining power.
o Remedy: contract is voided (the equitable remedy – void ab initio is the common-law remedy).
o Contextual factors:
 Economic need of the parties.
 Education level of the parties.
 Sophistication of the parties.
 Systemic factors (e.g. gender/race/ethnicity)
o
o
o
o
o
o
Often arises in cases of people cosigning or indemnifying a loan with a bank. Courts may imply constructive
knowledge on the part of the bank that the contract was not being entered into freely, which implies that they
should have taken more steps to ensure the contract was being entered into freely.
‘Two contract’ model: courts will often treat the cosigned guarantee as a separate contract, even though it may
appear on the same document.
Duguid: Minority argues bank knew Mr. Duguid could not cover the loan, and that Mrs. Duguid got no benefit from
the investment, so their suspicions should have been alerted.
Lloyds Bank v. Bundy: Bundy, whose farm is worth ~L10k, has signed guarantee of L7.5k for his son’s loan of L11k.
Bank, getting nervous about gap, goes to his house with pre-completed forms and gets another guarantee bringing
total up to L11k. Bank had suggested (and Bundy got) outside legal advice on first guarantee, but not second.
Son’s business fails, bank sells farm for L7.5k, but Bundy refuses to move out. Majority calls this ‘undue influence’,
not ‘unconscionability’; bank had constructive knowledge of Bundy’s reliance on them; bank could have rebutted
consequent presumption of undue influence by advising Bundy of effect of guarantee and suggesting he get legal
advice, but they didn’t. Denning in minority calls it unconscionability: gross unfairness b/c the second guarantee
didn’t get Bundy anything he didn’t already have (bank’s forbearance of legal right to foreclose didn’t count, b/c
they didn’t agree to forebear for any specified time and they knew the business was likely to fail); unequal
bargaining power b/c of pre-existing relationship of trust and reliance, and bank ought to have known of the son’s
influence on Mr. Bundy.
Lidder v. Munroe: Lidder signed away rights to some compensation for injuries through ICBC. Court says it is
unconscionable; Lidder was unsophisticated, poor education, poor English, didn’t have a friend with him to
translate at the meeting in question, cultural deference to ICBC adjustor, fiduciary duty of ICBC to get him best
settlement possible.
Henningson: car malfunctions, injuring Mrs. Henningson. Contract disclaimer disclaimed liability apart from
narrow parts liability. Court struck clause down as unconscionable. Unfairness: against reasonable expectations of
buyer; cars inherently dangerous if defective; defect was latent; manufacturer cannot contract out of statutory
warranty of merchantability; clause was in small print. Inequality of bargaining power: standard form contract was
imposed, and used by all manufacturers, so essentially this was a non-negotiated contract; car is a near-necessity
offered on a take-it-or-leave-it basis; car dealer had far superior knowledge.
Consumer Protection Legislation
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Often a response to systemic factors that courts have not addressed well or quickly enough. More concerned with
consumer than commercial contracts.
Business Practices and Consumer Protection Act: among other things, gives statutory definition of unconscionability, and
broadens the range of remedies available to courts.
o Generally, all a consumer need show is that there was a transaction (as defined by the act), and that there was a
problem; onus then shifts to seller to show that there was no deceptive act.
o Act defines a deceptive practice broadly: a practice having the “capability, tendency or effect of misleading”.
Ruschach: Plaintiff buys old Mercedes, then leaves it in garage for a year; it rusts, due to problem made undetectable due
to undercoating of paint. Court says vendor engaged in deceptive practice; he characterized car as ‘a good car, etc’ when
he knew it was from a part of Europe with frequent rust problems, and that the undercoating made it impossible to check
visually, so he was careless as to the truth of his statements. Vendor did tell her to get it checked, but that’s not enough by
itself – purpose of act is to protect consumers, which includes credulous consumers, not just alert ones, and
notwithstanding the independent assessments, court says Ruschach was still relying on vendor’s words. (Price is probably
also important - $17k was a lot at the time; had she paid ‘beater’ price, court probably would have invoked caveat emptor.)
Illegality
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The idea is that the courts should not be used as a tool to enforce contracts arising from ‘immoral acts’.
Where a contract falls into this category, courts will first try to sever the offending clause; if not, contract may be void ab
initio and the loss falls where it may. Occasionally courts will rectify clauses, particularly in the case of ‘agreements in
restraint of trade.’
1. Contracts contrary to public policy (aka “common law illegality”)
o May be invoked wherever a judge decides a contract is contrary to ‘prevailing public sentiment’ and refuses to
enforce it.
o Three general situations:
 i. Contract requires the commission of a tort
 ii. Agreements wherein one or both parties will attempt to defraud a third party.
 Iii. Agreements concerning tax evasion.
o
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Usually invoked in cases of ‘contracts against public morality’, which is contextual and changes with the times, but
often involves prostitution or illegal gambling. (For example, courts won’t enforce a rental agreement if the
premises were being rented for one of these purposes.)
2. Contracts contrary to statute
o Where the type of contract is prohibited by statute (e.g. contract killing), or where performance violates statute
(e.g. paying contract by stealing funds).
o Easy where the Criminal Code is violated, or where there is a direct statutory prohibition; but this area grows more
contentious where a minor or incidental statutory provision was violated.
o Rogers v. Leonard: a contract for sale of a cottage is held void ab initio because the agreement was signed on a
Sunday, in contravention of the Lord’s Day Act.
o Sidmay: Plaintiff gives mortgage security for $300k loan, then claims lender cannot enforce contract because they
aren’t registered to give that kind of loan. Nowadays courts would probably just sever the offending clause, but
back then they had to get clever about interpreting the clause about registration, saying it didn’t specifically say
that the consequence of not being registered was void ab initio agreements. (Court is obviously very concerned
about unjust enrichment here.)