Law 108A – Contracts
LAW 108A – CONTRACTS ............................................................................................................................................................. 1
GOING TRANSACTION ADJUSTMENT ..................................................................................................................................... 4
DOCTRINAL REQUIREMENTS ............................................................................................................................................................ 4
Harris v. Watson (1791) (English) ............................................................................................................................................. 4
GTA not enforced to avoid extortion/duress in an emergency situation – compromises voluntariness ...................................................... 4
Stilk v. Myrick (1809) (English).................................................................................................................................................. 4
A promise to do what you are already obliged to do under K is not good consideration ............................................................................ 4
POSSIBLILITIES FOR ENFORCING A GTA .......................................................................................................................................... 5
RESCISSION ...................................................................................................................................................................................... 5
Raggow v. Scougall (1915) (English K.B.) ................................................................................................................................. 5
K enforcable since not variation but recission – old K terminated, consideration for new K ..................................................................... 5
CONSIDERATION .............................................................................................................................................................................. 6
Duress ........................................................................................................................................................................................ 6
FORBEARANCE ................................................................................................................................................................................. 6
Stott v. Merit Investment Corp. (1988) (OCR) ............................................................................................................................ 6
Forebearance on right to sue good consideration if claim given up was real cause of action (irrelevant if might not ultimately succeed) 6
SPECIAL SITUATION: DEBT SETTLEMENT ......................................................................................................................................... 7
Gilbert Steel v. University Construction (1976) (Ont. C.A.)....................................................................................................... 7
No rescsission since only price changed (rest intact) – unenforcable since no fresh consideration ............................................................ 7
Williams v. Roffey Bros. (1991) (English C.A.) .......................................................................................................................... 8
English decision: enforcable since no duress; consideration = mutual practical benefit (maintain good relations) .................................... 8
PROMISSORY ESTOPPEL ............................................................................................................................................................. 8
Central London Property Trust v. High Trees House (1947) (English K.B.) ............................................................................. 9
Promissory estoppel: intent for legal relation, promisor knew promisee would act, and did act ................................................................ 9
D&C Builders v. Rees (1966) (English C.A.) ........................................................................................................................... 10
Promissory estoppel not available if duress / intimidation (beyond normal business pressure) ................................................................ 10
SWORD VS. SHIELD ........................................................................................................................................................................ 10
Combe v. Combe (1951) (English C.A.) ................................................................................................................................... 10
Promissory estoppel: only a shield, not a sword, so it cannot create a new cause of action ..................................................................... 10
PRIVITY ........................................................................................................................................................................................... 11
Tweddle v. Atkinson (1861) (English Q.B.) .............................................................................................................................. 12
Doctrine of privity: third party cannot enforce even when benefit to third party is essence of K ............................................................. 12
AVOIDING PRIVITY ........................................................................................................................................................................ 12
Greenwood Shopping Plaza v. Beattie (1980) (S.C.C.) ............................................................................................................ 14
Negligent employees personally liable – third parties so cannot take advantage of subrogation clause ................................................... 14
Agency – exclusion/limitation clause........................................................................................................................................ 14
London Drugs v. Kuehn and Nagel (1992) (S.C.C.) ................................................................................................................. 15
Privity relaxed to allow employees in where clear intent in K and acting within scope of employment .................................................. 15
Laing Property v. All Seasons (2000) (B.C.C.A.) ..................................................................................................................... 16
Intention the employees can take benefit of K found where share identity of interest and known that work carried out by employees
(now assumed) .......................................................................................................................................................................................... 16
Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. (1999) (SCC) .............................................................................. 17
Extends 3rd party liability principle developed in London Drugs: it is the intention of the party that is important................................... 17
REPRESENTATIONS AND WARRANTIES .............................................................................................................................. 17
INNOCENT MISREPRESENTATION ................................................................................................................................................... 19
Redgrave v. Hurd (1881) (Ch.D.) ............................................................................................................................................. 19
Limitations on innocent misrepresentation: must be able to give back what was taken, only get back what is paid and must be partially
executory .................................................................................................................................................................................................. 19
WARRANTIES ................................................................................................................................................................................. 20
Heilbut, Symons v. Buckleton, (1913) (English A.C.) ............................................................................................................... 20
A statement is a collateral warranty if the parties intended it to be so ...................................................................................................... 20
Dick Bentley Productions v. Harold Smith (Motors) (1965) (English) .................................................................................... 21
Provided gloss / clarification on when a representation amounts to a warranty: intention = objective test – what would a reasonable
person in the circumstances believe .......................................................................................................................................................... 21
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Oscar Chess v. Williams (1957) (English)................................................................................................................................ 22
Innocent misrepresentation since unsophisitcated parties – no reasonable reliance on knowledge .......................................................... 22
Carman Construction v. Canadian Pacific Railway (1982) (S.C.C.) ....................................................................................... 22
To show warranty, both parities must intend a legal effect; warranty cannot contradict written K .......................................................... 22
Fraser-Reid v. Droumtsekas (1980) (S.C.C.) ........................................................................................................................... 23
Written warranty since failed to dislose “all outstanding infractions” as required in K ............................................................................ 23
Murray v. Sperry Rand (1979) (Ont. H.C.) .............................................................................................................................. 24
Advertising created a collateral warranty by means of a unilateral contract ............................................................................................. 24
NEGLIGENT MISREPRESENTATION: TORTS VS. CONTRACTS ..................................................................................... 25
Candler v. Crane, Christmas (1951) (K.B.) .............................................................................................................................. 25
Early case showing wall between tort and contract .................................................................................................................................. 25
Hedley Byrne v. Heller (1964) (English H.L.): ......................................................................................................................... 26
For the first time in tort, recognized claim for false or negligent statements, but only in special relationships where there was duty of
care between the speaker and the listener ................................................................................................................................................. 26
Esso Petroleum v. Mardon (1976) (English C.A.) .................................................................................................................... 26
Allows for Possibility of concurrency in tort and contract; reliance damages from tort can include lost opportunity (almost equal to
expectation damages) ............................................................................................................................................................................... 26
V.K. Mason Construction v. Bank of Nova Scotia (1985) (S.C.C.) ........................................................................................... 27
Negligent misrepresentation since should have known there would be reliance = duty of care ............................................................... 27
BG Checo International Ltd. v. British Columbia Hydro and Power Authority (1993) (SCC) ................................................ 28
Can sue in both tort and contract, but can only receive a single set of damages ....................................................................................... 28
MISTAKE ......................................................................................................................................................................................... 29
POLICY CONSIDERATIONS: ............................................................................................................................................................. 30
MISTAKE AS TO TERMS .................................................................................................................................................................. 30
Raffles v. Wickelhaus (1864) (English Exch.)........................................................................................................................... 31
Early subjective test: contract void if true ambiguity, important term and no reason to prefer one party’s understanding ....................... 31
Hobbs v. Esquimault & Nanaimo (E&N) Railway (1899) (S.C.C.) .......................................................................................... 31
Adopted objective test: focus on what reasonable person would understand from words/acts ................................................................. 31
Staiman Steel v. Commercial & Home Builders (1976) (Ont. H.C.) ........................................................................................ 32
Accepts objective test; however, subjective test where impossible to determine what reasonable person would have concluded ........... 32
MISTAKE AS TO RECORD ................................................................................................................................................................ 33
Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. (2002) (SCC) ............................................................... 33
Requirements for rectification: “convincing proof” of prior oral agreement; must povide precise wording and show D ought to have
known of the mistake ................................................................................................................................................................................ 33
MISTAKEN PAYMENT ..................................................................................................................................................................... 34
Budai v. Ontario Lottery Corporation (1982) (Ont. Div. Ct.) .................................................................................................. 34
MISTAKEN ASSUMPTIONS .............................................................................................................................................................. 34
Smith v. Hughes ........................................................................................................................................................................ 35
Demonstrates general rule for mistaken assumption: no recovery due to caveat emptor; if important, should have specified in contract35
Sherwood v. Walker (1887) (Mich. S.C.) .................................................................................................................................. 35
Recovery where mistaken assumption goes to the essential nature of the subject matter ......................................................................... 35
Bell v. Lever Brothers (1932) (English H.L.) ........................................................................................................................... 36
Expands Sherwood to allows mistaken assumption for quality where bilateral or essentially different ................................................... 36
Solle v. Butcher (1950) (English C.A.) ..................................................................................................................................... 37
Equity allows voidable K where common misapprehension, fundamental issue and P not at fault .......................................................... 37
FRUSTRATION .............................................................................................................................................................................. 38
Paradine v. Jane (1647) (Common Pleas)................................................................................................................................ 39
Historical rule of absolute promises: no frustration due to caveat emptor ................................................................................................ 39
Taylor v. Caldwell (1863) (English Q.B.)................................................................................................................................. 39
Frustration since destruction of subject matter – may be express (force majeur) or implied limitation .................................................... 39
Krell v. Henry (1903) (English C.A.) ........................................................................................................................................ 40
Frustration where substance/purpose of contracts depends on circumstances that have changed ............................................................. 40
Amalgamated Investment Property v. John Walker (1976) (English C.A.) .............................................................................. 41
Frustration less likely where express discussion of risk allocation – consider trade practice, sophistication of parties............................ 41
Aluminium Company of America (ALCOA) v. Essex Group (1980) (U.S. Penn) ..................................................................... 41
Frustration possible where risk foreseeable, but turns out to be excessive – like mistaken assumption ................................................... 41
Re Westinghouse Electric (1981) (US) ..................................................................................................................................... 42
No frustration for huge cost increase based on poor guaranteed price ...................................................................................................... 42
Eastern Airlines v. Gulf Oil (1975) (US) .................................................................................................................................. 42
FRUSTRATION AND LAND............................................................................................................................................................... 42
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Capital Quality Homes v. Colwyn construction (1975) (O.C.A.) ............................................................................................. 43
Weak authority – frustration granted when land sold rezoned = radical change in circumstances ........................................................... 43
Victoria Wood Development v. Ondrey (1977) (O.C.A.) .......................................................................................................... 43
Leading authority – no frustration when land rezoned: knowledge of purchasers intention not sufficient ............................................... 43
KBK Ventures v. Canada Safeway (2000) (B.C.C.A.) .............................................................................................................. 44
Frustration must: occur after K formation, not be self-induced, not reasonably foreseeable .................................................................... 44
Must be: More than mere inconvenience, be radical/fundamental change, and permanent ...................................................................... 44
Fibrosa Spolka Akcyjna v. Fairburn Lawson Combe Barbour (1943) (English H.L.) ............................................................. 45
Restitution damages where frustration eliminates contract – limited to money, not work/reliance; overruled by Frustrated Contracts Act
.................................................................................................................................................................................................................. 45
CONTROL OF CONTRACT POWER ......................................................................................................................................... 46
INTERPRETATION: HOW TO DETERMINE CONTRACTUAL OBLIGATIONS ......................................................................................... 46
Federal Commerce & Navigation v. Tradax Export (1978) (English H.L.) ............................................................................. 47
Example of legal formalism: contract should be interpreted in a consistent manner - fast, efficient ........................................................ 47
Scott v. Wawanesa Mutual Insurance (1989) (S.C.C.) ............................................................................................................. 48
Where meaning clear/unambiguous, use plain meaning approach; may depart in cases where interpretation unreasonable/contrary to
intent ......................................................................................................................................................................................................... 48
Dissent: contrapreferentum – where ambiguity, resolve in favour of non-drafting party ......................................................................... 48
PAROLE EVIDENCE RULE ......................................................................................................................................................... 49
Exceptions to the rule ............................................................................................................................................................... 50
REPRESENTATIONS AND WARRANTIES ........................................................................................................................................... 51
Bauer v. Bank of Montreal (1980) (S.C.C.) .............................................................................................................................. 51
Exception to parole evidence rule if representation = collateral warranty; no exception if contradicts written agreement ...................... 51
Gallen v. Allstate Grain (1984) (B.C.C.A.) .............................................................................................................................. 52
Recasts parole evidence rule as presumption (not absolute rule) – strongest when there is contradiction ................................................ 52
Zippy Print (1995) (B.C.C.A.) .................................................................................................................................................. 53
Discredits parole evidence rule in favour of parties’ intent; misrepresentation should be avoided through exclusion clause .................. 53
STANDARD FORM CONTRACTS .............................................................................................................................................. 54
TICKET CASES ................................................................................................................................................................................ 54
Parker v. South Eastern Railway (1877) (English C.A.) .......................................................................................................... 54
Lord Mellish test: only bound by unsigned document if knowledge of some conditions or reasonable steps taken to inform of some
conditions ................................................................................................................................................................................................. 54
Bradshaw .................................................................................................................................................................................. 55
Under Mellish rule, more unreasonable the caluse, more notice that is required ...................................................................................... 55
Thornton v. Shoe Lane Parking (1971) (English C.A.)............................................................................................................. 55
Signs posted after ticket bought not binding since after K formation; requires knowledge of actual conditons (not some) ..................... 55
SIGNED CONTRACTS AND FUNDAMENTAL BREACH ....................................................................................................................... 56
Avoiding the Signature Rule ..................................................................................................................................................... 56
FUNDAMENTAL BREACH ................................................................................................................................................................ 56
Karsales (Harrow) v. Wallis (1956) (English C.A.) ................................................................................................................. 56
Hunter Engineering v. Syncrude Canada (1989) (S.C.C.) ....................................................................................................... 57
Fundamental breach remains as rule of construction, but unconscionability usually preferred ................................................................ 57
Tilden Rent-a-car v. Clendenning (1978) (Ont. C.A.) .............................................................................................................. 58
Signed contract not binding if condition unreasonable or reliance unreasonable – often distinguished on the facts ................................ 58
Karroll v. Silver Star Mountain Resorts (1988) (BCSC) .......................................................................................................... 59
Tilden not general principle – only applies in special circumstances ....................................................................................................... 59
E-COMMERCE ............................................................................................................................................................................... 59
Radin Article: Humans, Computers and Binding Commitment ................................................................................................ 60
Specht v. Netscape Communications Corp. (2001) (NY) .......................................................................................................... 60
Mere notice insufficient, must provide way to consent to terms ............................................................................................................... 60
Rudder v. Microsoft (1999) (Ont. Superior Court) ................................................................................................................... 60
Clicking “I agree” makes a K enforcable.................................................................................................................................................. 60
Kanitz v. Rogers Cable Inc. (2002) (Ont. Sup Ct) .................................................................................................................... 60
Agreement variations posted on website binding - controversial ............................................................................................................. 60
UNFAIRNESS .................................................................................................................................................................................. 61
DURESS .......................................................................................................................................................................................... 61
Economic Duress ...................................................................................................................................................................... 61
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Port Caledonia (1903) (English) .............................................................................................................................................. 61
D&C Builders v. Rees (1966) (English C.A.) ........................................................................................................................... 61
UNDUE INFLUENCE VS. UNCONSCIONABILITY................................................................................................................................ 62
UNDUE INFLUENCE ........................................................................................................................................................................ 62
Bank of Montreal v. Duguid (2000) (OCA) .............................................................................................................................. 63
Going Transaction Adjustment
Doctrinal Requirements
Relational contract (not discrete contracts) - parties expect that the contract will be
performed over a period of time
Changes/Adjustments/Amendments – changes to the original contract
Mutual agreement – one party cannot unilaterally decide to make a change to the contract –
all parties must agree to the change
One party pays more or gets less than in the original contract
Party benefiting from the change does no more than they would have done under the
original contract and often does less
Both parties have unfulfilled obligations from the original contract (if all the obligations
had been fulfilled, the contract would be completed)
Harris v. Watson (1791) (English)
GTA NOT ENFORCED TO AVOID EXTORTION/DURESS IN AN EMERGENCY SITUATION – COMPROMISES VOLUNTARINESS
Facts: Captain of ship promises increased wages to crew to get ship through emergency
situation, but later refuses to pay increase.
Change happened in the middle of the voyage after the sailors had agreed to a particular
employment situation – sailors claimed for greater wages
Decision: Promise not enforceable due to policy reasons – to avoid extortion/duress in an
emergency situation
Comments:
Decision made entirely on policy reasons
In an emergency situation, don’t want one party to be able to engage in extortion or duress
in order to get more
Contracts are voluntary, and if you agree to something in an emergency situation, the
voluntariness of this agreement is compromised
Court ignored fact that it was the captain who had in fact offered the increased wage and
not the sailors who demanded it – however, the court wanted to set a certain precedent
Stilk v. Myrick (1809) (English)
A PROMISE TO DO WHAT YOU ARE ALREADY OBLIGED TO DO UNDER K IS NOT GOOD CONSIDERATION
Facts: While ship in port, two crew members desert. Captain promises to spread their wages
amongst remaining crew (i.e. promised wage increase) if rest of crew take over their duties.
Captain later refuses to pay increase.
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Decision: Desertion is an emergency situation and remaining crew already under contract and
obligated by it work as necessary through an emergency, and they cannot leave the ship. Thus
no fresh consideration here for the promised wage increase, so not enforceable.
A promise to do what you are already obliged to do is not good consideration
Comments:
Emergency here not as obvious/immediate as in Harris v. Watson (since promise made on
shore here), and could argue by not paying promised increase Caption gets unjust
enrichment (since saves the wages of the two crew), and remaining crew perhaps relied on
promise in working harder
Also some unfair surprise for the crew, who were expecting a larger wage
Crew in fact did more work than they were required to under their original contract –
otherwise, why would the captain make the promise to spread the wages?
Possiblilities for Enforcing a GTA
Seal – removes the need for consideration
Consideration – implied or actual
Rescission – old contract is dead and a new contract is formed
Forbearance – giving up a legal right; usually not pursuing a right to which you are entitled
The actual value of the legal right is irrelevant, as long as it is voluntarily given up
Rescission
Raggow v. Scougall (1915) (English K.B.)
K ENFORCABLE SINCE NOT VARIATION BUT RECISSION – OLD K TERMINATED, CONSIDERATION FOR NEW K
Facts: Contract of employment, due to changed circumstances (the war) business conditions
became difficult and employer considered closing business. Instead, employees agreed to accept
lower wages (till end of war) and they put this in writing.
Claim: after some time, one of employees claims original wages, suggesting there was no
consideration for his promise (so should not be enforceable as in Stilk v. Myrick)
Decision: Enforceable, since not a variation of original contract, but rather terminated
original contract and entered a new one (which was enforceable bargain with consideration).
Court here felt employee was being dishonest, so needed some way to make his promise
enforceable.
Rescission – the old employment contract was terminated and the employees entered into a
new one for lower wages
Consideration = mutual exchange of promises to accept lesser wages
Comments:
Any contract can be cancelled by mutual agreement at any time (whether or not there
were cancellation terms in contract). Cancellation itself is a contract – an agreement to
release each other from the original contract obligations
What is the difference between terminate/new contract and variation?
Parties here had in fact torn up the old agreement, and written out a new one
(although note there is nothing magical about putting things in writing). Generally
court will have to decide upon parties’ intent and the circumstances.
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Another possible argument in favour of enforcement in this case: employer had
considered closing the business (which they had the right to do) but did not do this (i.e.
consideration = forbearance) in exchange for employees agreeing to lower wages (this
differs to Stilk v. Myrick where crew did not have legal option of quitting)
Consideration
Anytime parties make a change to an existing contract, the court will uphold the GTA if
the court can find fresh consideration
There is no new consideration if you are doing something you are already legally obligated to
do – modification fails (Stilk)
Duress – no contract is valid if it’s entered into under duress – invalidates the concept of
consent
Types of duress:
Physical
Psychological
Economic – problematic since the essence of the marketplace is that some parties will profit
more than others
Doctrinal Requirements for Establishing Duress – From Pao On v. Lau Yiu Long (1980)
At the time the contract is signed, the disadvantaged party has to make some sort of
protest
Was there an alternative to signing the contract?
If there was no alternative, more likely to be duress
Did the disadvantaged party have access to independent legal advice?
If no legal aid, more likely to be duress
Subsequent to entering into the contract, the disadvantaged party must take steps to avoid
performing the contract
Forbearance
Compromising on a right to take legal action (giving up right to sue) is good consideration
where:
Claim or defence is reasonable – not frivolous or vexatious
Person giving up the claim or defence has a bona fide belief in its chance of success – not
simply blackmail
There is no concealment of material facts
Stott v. Merit Investment Corp. (1988) (OCR)
FOREBEARANCE ON RIGHT TO SUE GOOD CONSIDERATION IF CLAIM GIVEN UP WAS REAL CAUSE OF ACTION
(IRRELEVANT IF MIGHT NOT ULTIMATELY SUCCEED)
Facts: P was broker for D. P had customer that fell below necessary collateral level, so in accord
with policy, P closed accounts. P’s boss forced him to reopen accounts. Customer didn’t have
money, loss of $66K. Stott acknowledges debt and makes payments on debt and then signs 2 nd
paper acknowledging the debt. When Stott signed the initial agreement, Merit acknowledged
that the document would not hold up in court. Stott leaves Merit and sues.
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Issue: Is there consideration for Stott’s agreement?
Decision: There was valid consideration:
Forbearance: D promised not to sue (which they were legally entitled to do) and allowed
Stott to keep his job – compromise agreement
Forbearance on right to sue is good consideration if the claim given up were a real cause
of action – irrelevant that the claim might not ultimately succeed
Forbearance need not be explicit, but can be implied
Court finds that there is no duress:
Didn’t complain after the first contact and then even entered into a second disadvantageous
contract
Stott didn’t attempt to access independent legal advice or take adequate steps to avoid the
contract
Special Situation: Debt Settlement
Gilbert Steel v. University Construction (1976) (Ont. C.A.)
NO RESCSISSION SINCE ONLY PRICE CHANGED (REST INTACT) – UNENFORCABLE SINCE NO FRESH CONSIDERATION
Facts: plaintiff agreed to deliver steel bars to defendant who was building apartment buildings.
Due to increase in price by steel mill, plaintiff sought price increase from defendant who agreed
(i.e. passed on price increase to defendant). Defendant later changed mind and refused to pay
higher price. No duress was found in this case (defendant could have found another supplier,
albeit with some inconvenience). Perhaps some dishonesty by defendant since they tried to hide
that they were not going to pay increase till after bids on second building came in (and realized
plaintiff hadn’t given lowest bid).
Claim: defendant claimed no consideration for their promise of higher price, as in Stilk v.
Myrick. Plaintiff claimed there was: provided increased credit to defendant due to increased
price, and promised to give defendant a good price on next contract. Alternatively claimed not a
variation but instead termination / new contract.
Decision: found no fresh consideration (increased credit flowed from increased price, and the
“good price” promise was too vague and unenforceable – again note difference between law and
reality, since this is perhaps exactly why the parties agreed to up the price). Since only price
changed and all other terms left intact, no termination / new contract, but rather variation.
Hence not enforceable.
Comment:
This case has been widely criticized since price fluctuations are common in the marketplace,
and what should be done is risk allocation. By setting a price in the contract, the risk is
allocated between the parties. It may also be common to have a price escalator clause, which
further allocates risk. There are steps that Gilbert could have taken to protect themselves.
However, in this case the university really lucked out because they were paying substantially
below market price for the steel – it could be argued that this was unjust enrichment.
Gilbert is still the leading Canadian case, but it is routinely overridden
Policy reasons for enforcing the contract:
Was very specific – there was no uncertainty
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Sophisticated commercial actors who knew what the market is like
Strictly commercial contract – certainty and efficacy highly valued
Williams v. Roffey Bros. (1991) (English C.A.)
ENGLISH DECISION: ENFORCABLE SINCE NO DURESS; CONSIDERATION = MUTUAL PRACTICAL BENEFIT (MAINTAIN
GOOD RELATIONS)
Facts: plaintiff (sub-contractor) agrees to undertake renovations for defendant (maincontractor). Plaintiff realized had seriously underbid, and combined with their poor supervision
of their work crew, would lose serious money on the project. Defendant agreed to increased
price, but later refused to pay it.
Claim: defendant claims no consideration as in Stilk v. Myrick, Gilbert Steel v. University
Construction (not really any distinction between this case and Gilbert) Gilbert argues that there
was rescission - argues that price was the essence of he new contract so changing it was more
than just a variation.
Decision: Enforceable, since no duress, and consideration = mutual practical benefit
(defendant gets the building finished, plaintiff gets the higher price). No duress since no
inequality in bargaining power and other sub-contractors could be hired (but there was pressure,
since defendant had penalty clause and had to pay owner if project overran). Although court
says it is not overruling the rule from Stilk that there has to be fresh consideration, it virtually is
since will consider any practical benefit (provided no duress).
Consideration was provided by the practical benefits of renegotiation – didn’t have to
undertake any new search and negotiation to find another carpenter – saved money. He also
didn’t have to pay the penalty for not finishing his contract on time. Also benefited from the
maintenance of good relationships.
Comment: in Canada Gilbert Steel still binding, and Williams only persuasive. But likely
Canadian courts might change since Williams is in jurisdiction where fresh consideration rule
originally invented in the first place.
Williams tends to be the preferred authority – but must deal with Gilbert Steel first,
usually by finding a way to distinguish it.
In England, the courts are much more willing to find fresh consideration
If the promisee can show as a matter of fact that the promisor received some benefit, then
the promise to pay will be enforceable
If there are good reasons to enforce, we should look beyond the four doctrinal views of
consideration
Promissory Estoppel
Although the general notion of estoppel had been discussed in previous court decisions, the
principle was concretely developed by Lord Denning in High Trees in 1947.
Estoppel: Where one person who made a statement of fact and another person relied on
those facts, the first person will not be allowed to deny the truth of the statements.
Estoppels are often found in GTAs because changes are made informally and aren’t always
put in writing.
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Consideration began as simply “are there good considerations (i.e. reasons) for enforcing this
promise?” but became rigid rule creating problems with, for example, unilateral contracts
and ongoing transaction promises i.e. contracts that should be enforced were not, and
especially hurts those without lawyers who don’t know the rules
In response courts have:
Invented consideration e.g. effectively a gift, but nominal consideration such as £1 in
Thomas for life estate
Construed an apparently unilateral offer as a bilateral contract e.g. Dawson
Exception to requirement of consideration carved out by courts: promissory estoppel =
reliance as basis for enforcement
Estoppel generally confined to subsidiary promise within an existing legal relationship (as
in High Trees below, where parties already had a lease, and new promise was to vary a term
of that lease)
This basis of reliance would solve some of our earlier problem cases. E.g. debt compromises
without duress (e.g. Foakes) would be enforceable even without legislative reform
But would not solve all problems, even when there was an existing legal relationship. E.g.
promised price increase without duress (as in Gilbert Steel) since estoppel cannot be used as
a sword, but only as a shield i.e. plaintiff cannot use estoppel as a basis for an action, rather
it can be used as a defence (see Combe below)
Further, courts will not use estoppel if there are no equitable reasons to do so e.g. in High
Trees below it would have been inequitable to not enforce the promise, but in D&C Builders
would be inequitable to enforce it
Central London Property Trust v. High Trees House (1947) (English K.B.)
PROMISSORY ESTOPPEL: INTENT FOR LEGAL RELATION, PROMISOR KNEW PROMISEE WOULD ACT, AND DID ACT
Facts: long term agreement between owner of flats (plaintiff) and defendant who would manage
the building on a 99 year lease (executed under seal), paying monthly rent to plaintiff. Due to
trouble filling flats (due to war) agreed to cut the monthly rent in half – classic GTA. Owner now
suing for full amount (they were going bankrupt).
There was no rescission of the original contract, and there were no arrangement made for
fresh consideration when Central London agreed to the lesser amount
Central London relied on the rule from Foakes v. Beer (1884) (English H.L.)
The promise to pay less when you owe more is not a good promise – there is no
consideration
Rule:
By doctrine of consideration, no fresh consideration for promise here, and contract
variation rather than terminated old contract and created new one, so not binding.
But, it’s a voluntary business arrangement thought out by both parties, so common sense
suggests enforceability.
Hence new doctrine of promissory estoppel - promise is enforceable if:
Must be a promise
Promise intended to create legal relations (i.e. is binding) - subjective
Promisor intends the promisee to act on that promise
Promisee did in fact act on that promise (i.e. reliance e.g. by trying to carry on with
the arrangement, rather than breaching original contract)
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Decision: Here the promisee did rely on the promise by sticking with the lease arrangement (at
the lower rent) and satisfies the conditions. So promise of lower rent binding (during war).
Fifth element added later by Combe v. Combe (1951) (England) to “do justice in the
circumstances”
There is no other reason not to enforce the promise
In other words, estoppel must increase enforceability – estoppel never makes promises
unenforceable!! (positive aspect)
D&C Builders v. Rees (1966) (English C.A.)
PROMISSORY ESTOPPEL NOT AVAILABLE IF DURESS / INTIMIDATION (BEYOND NORMAL BUSINESS PRESSURE)
Facts: plaintiffs did work on defendant’s house, but defendant did not pay. Eventually, when
plaintiff in financial difficulties (bankruptcy) defendant offered to pay smaller amount in
satisfaction of the whole debt, and plaintiff felt no option but to accept. Plaintiff now seeks the
remaining amount.
Looks like High Trees: a party agrees to less in order to get more
Rule:
Accord and satisfaction: parties have agreed that there will be a lesser payment and that this
payment will be in full satisfaction of the debt – used to get around Foakes
General rule: if you accept less than the amount you are owed, this is not good consideration
Payment of a lesser sum is no discharge of the greater sum – from Foakes
Where a creditor agrees to accept a lesser sum in satisfaction of the debt the agreement to
accept less must be voluntary – no economic duress
Must go beyond ordinary commercial pressure – but may be difficult to draw this line
Relies on Pao On to define duress
Decision: there was certainly no fresh consideration for the promise to accept less. Promissory
estoppel is not available to enforce the promise to accept less since would be inequitable
due to duress / intimidation i.e. creditor here did not accept the lesser amount voluntarily
Defendant took advantage of her knowledge of the plaintiff’s impending bankruptcy
Comment: Strong policy reasons to get rid of the rule in Foakes:
In business, its normal practice for a creditor to accept less in order to reach a
settlement
Sword vs. Shield
Combe v. Combe (1951) (English C.A.)
PROMISSORY ESTOPPEL: ONLY A SHIELD, NOT A SWORD, SO IT CANNOT CREATE A NEW CAUSE OF ACTION
Facts: Parties getting divorced, husband promised to pay £100 a year maintenance to wife. He
didn’t pay, and she then sues.
Claim: Wife claimed promissory estoppel since the promise was seriously made (with intent for
legal relationship), and apparently wife acted upon it by not suing.
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Rule: Rejected by court since “promissory estoppel does not create new causes of action
where none existed before. It only prevents a party from insisting on his strict legal rights
when it would be unjust to allow him to do so”.
Promissory estoppel can only be used as a shield and not as a sword.
In High Trees, Lord Denning notes that the cases he references are not about estoppel, but
about promises that are binding and intended to be acted upon i.e. reliance
Reliance and/or estoppel may be sufficient to establish a contract – don’t need to look at
consideration if you can establish a particular reliance. Through estoppel, will not let you go
back on your promise
However, Denning soon retreated from this stance
Estoppel can be used only as a shield and never as a sword (from Combe v. Combe)
Cannot rely on estoppel to support a promise and then sue on it – can only use estoppel
as a defence to prevent the party who made that promise from relying on their strict
legal right because it would be unfair
Must still have consideration – narrowed the use of estoppel to defense and reiterated
that it did not replace consideration.
Particularly important in the area of GTAs
In order for promissory estoppel to work as a shield, the variation in the contract has to be a
concession or a promise to accept less – never a promise to provide more!
Use of promissory estoppel is often quite arbitrary – sword / shield distinction somewhat
illogical:
In High Trees owner was suing for full rent, defendant could use promissory estoppel as a
shield to deny that strict legal right due to promise to reduce.
In Gilbert Steel the plaintiff was trying to use promissory estoppel to enforce defendant to
pay agreed higher price i.e. trying to use it as a sword, and so court dismissed in that case.
But suppose the higher price had been paid by University construction to Gilbert Steel, and
then University construction tried to get the higher amount paid back – Gilbert Steel probably
would then have been able to use promissory estoppel to avoid paying anything back since
then using it as a shield. So not too rational is it – turns on whether the promise had been
kept or not.
In many ways, promissory estoppel can screw up the regular course of business in the
marketplace – somewhat arbitrary about who can use estoppel as a defense.
US Position
Restatement of Contracts: a promise which is intended to be relied upon and is indeed relied
upon is binding if injustice can be avoided only by enforcing the contract.
Canadian courts in particular do allow estoppel to be used as a sword, but instead they
frame it as consideration
Privity
Answers two major questions:
Who can enforce a promise? – only the parties to the contract
Who can receive benefit from a contract? – only the parties to the contract
Parties to the contract have privity to the contract
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Third parties (strangers to the contracts) have neither rights nor obligations under the
contract – cannot bring legal claim to a contract.
Doctrine of privity of contract developed in Tweddle v. Atkinson:
Tweddle v. Atkinson (1861) (English Q.B.)
DOCTRINE OF PRIVITY: THIRD PARTY CANNOT ENFORCE EVEN WHEN BENEFIT TO THIRD PARTY IS ESSENCE OF K
Facts: Tweddle has a son and Atkinson has a daughter. Atkinson and Tweddle enter into contract
to each pay £100 on marriage of their son and daughter. Both fathers die before they make
payment. Tweddle’s son then sues Atkinson’s estate for the dowry.
Decision: son has no right to enforce contract since he is a stranger to the contract
Third party cannot enforce even when benefit to third party is essence of the contract.
Court found it would be wrong to allow someone to enforce but not to be liable – i.e.
there would be no reciprocity (so doctrine of privity one aspect of bargain theory of
contracts)
Further son did not pay for promise i.e. no consideration
Comment:
Can be justified somewhat by:
Considering that it is an executory contract (i.e. to be performed in future) and if the fathers
had fallen on hard times, both might agree to reduce the amount they will pay, but if third
party beneficiary (the son) could enforce, it would take away their chance to modify the
contract by mutual agreement
Would greatly expand liability on the contracting parties to possibly numerous third
parties
However, arguments against the decision:
Possible that a contract could have been found here, but not argued – could have argued that
since there was reliance by son on contract (got married), as has daughter, and their
marriage could be thought of as consideration, and there would be no unfair surprise or
unjust enrichment if son could enforce.
Avoiding Privity
Find/invent a contract
Trust (not a contract, but an equity relationship):
The “settler” settles legal title of property to A (the trustee) who holds in trust for C
(beneficiary) – transfer agreement is a contract.
C (beneficiary) can then enforce contract between A (trustee) and another B e.g. A
might hold money for benefit of C, and invest it with a bank B.
Even though C is not a direct party to the contract, they still have privity
In Greenwood no trust found since a trustee would not have been able to amend contract
without beneficiaries consent
Assignment:
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e.g. contract between B (debtor) and A (creditor), A wants money now, so will assign
(sell) the debt to C creating a second contract (discount: usually for 80 or 90 cents on the
dollar). C can then enforce the contract on B.
C has no direct privity on the contract between A and B, but does by extension
through the second contract
For public policy reasons, cannot assign contracts for personal services (e.g. employment
contract), custody agreements, or public pension plans (i.e. future beneficiary of pension
wants money now, but by legislative ban not allowed to assign the benefits to another
since the beneficiary may then end up without funds on retirement and become burden
on state)
Agency
A (principal) arranges for B (agent) to contract with C (still has to be consideration)
e.g. A asks B to find a boat and buy it, B buys boat from C.
Usually results in a binding contract between A and C, even if C wasn’t aware of A at
the time. So can sometimes argue for implied agency between a contracting party and
the third party
E.g. in Langridge v Levy, father bought gun (which turned out to not be as described
and dangerous) for sons, and claimed he was unconscious agent for his sons (so that
sons could sue vendor).
Doctrinal Requirement for Agent to Bind the Principle (New Zealand Shipping)
Was there an intention for the third party (principal) to benefit from the contract?
Was the contracting party (B) contracting as A’s agent?
Did B have the authority to contract on behalf of A?
Does the consideration flow from the principle (A) to the third party (C)?
If these requirements are met, even though there is not privity between A and C, they
still have a binding contract.
Employee: exception to doctrine of privity from London Drugs
Can an outside party who happens to be an employee claim benefit to a contract that
their employer is engaged in?
Often occurs with cases involving insurance – can an employee (agent) acting for their
employer (principle) access insurance held by the principle?
Subrogation: refers to a situation where one party assumes the legal right of another – one
party “stands in the shoes” of another
Occurs most often in insurance contracts and leases
E.g. car insurance subrogation clause – ICBC will stand in for the insuree and sue in their
name in order to recover damages
Lease – will agree that only one of the parties will take out insurance – prohibition clause
Party that takes out the insurance will agree that they will not attempt to stand in –
agreement not to subrogate
Issue: can a third party claim the benefit of the no subrogation clause?
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Greenwood Shopping Plaza v. Beattie (1980) (S.C.C.)
NEGLIGENT EMPLOYEES PERSONALLY LIABLE – THIRD PARTIES SO CANNOT TAKE ADVANTAGE OF SUBROGATION
CLAUSE
Facts: Greenwood leased out part of mall to Canadian Tire, and the contract between them
included (in attempt to avoid dual insurance premiums, and get cheaper property insurance
compared to negligence/liability insurance that Canadian Tire would need):
Greenwood will take out replacement insurance (e.g. for fire)
Greenwood will not subrogate rights to sue to insurance company
Greenwood breaches the contract - fails to do either of these (only gets construction
insurance, and doesn’t avoid subrogation). Due to negligence of Canadian Tire employees
(welders), there is a fire, and the insurance only partially covers damage. Greenwood seeks
additional amount to cover rest of damages, and Greenwood (really the insurance company)
seeks recovery of it’s payout. Unable to sue Canadian Tire due to it’s breach of contract, so
it sues the employees
Decision:
Employees are liable personally since they were negligent, and since employees are third
parties (no consideration) cannot take advantage of the contract (and the fact that it was
breached).
Court found no evidence to suggest Canadian Tire was trustee for the employees (if there
was a trust relationship trustee Canadian Tire would not be able to amend lease without
consent of the employees (who would be beneficiaries) and this clearly was not the case),
nor was it contracting as an agent on their behalf.
Despite no legal duty to do so, Canadian Tire stepped in and indemnified its employees –
however, strong business reasons to do this – reputation at stake
Comment:
Problems with this decision is that it is unfair by just applying the doctrine, resulting in:
Unfair surprise on employees – not fair for them to be personally liable (especially since
Canadian Tire is a corporation and cannot itself start a fire)
Unjust enrichment for an insurance company (suppose it charged higher premiums due
to no subrogation, but could then go after employees for recovery of payout)
Unjust enrichment for Greenwood since leasehold payments by Canadian Tire probably
higher since Greenwood meant to be paying insurance premiums
Unjust enrichment for Canadian Tire since they would probably pay employees less if
they had to take out negligence insurance for employees
Inefficient since requires employees to take out employee liability insurance and so will
have multiple insurance premiums being paid
Note the Canadian Tire did cover the damages awarded against the employees – possible
sense of moral obligation, and also to maintain employer-employee relations (employees
unionized) – so again inefficient since Canadian Tire ended up paying higher lease
payments and paid damages
S.C.C. vilified for this decision and subsequent London Drugs (below) case, although it
distinguished Greenwood so Greenwood is still good law, effectively partially overruled this
decision
Agency – exclusion/limitation clause
Exclusion clause - excludes liability completely
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Limitation clause – limits liability
Proportionality – prevents claims of extraordinary damages for minor business contracts
London Drugs v. Kuehn and Nagel (1992) (S.C.C.)
PRIVITY RELAXED TO ALLOW EMPLOYEES IN WHERE CLEAR INTENT IN K AND ACTING WITHIN SCOPE OF EMPLOYMENT
Facts: Contract for services of storage. Similar fact pattern as in Greenwood: London Drugs
owned transformer (worth $40,000), had contract with K & N to store it, and contract had a
limitation clause limiting liability of “warehouseman” to $40. Employees of K & N negligent and
damage the transformer. Insurance company for London Drugs cannot sue K & N, so go after the
employees (by subrogation). London Drugs employees argued they are protected by limitation
clause in contract
Rule: Employees not mentioned in contract so agency doesn’t apply. Based on unfair surprise,
unjust enrichment, and inefficiency (i.e. the critiques of Greenwood) decide doctrine of privity
must be relaxed so employees (who are not party to the insurance contract) can take
advantage of limitation clause if:
Clear intent of contract (either express or implied) to include employees
Employees were acting within scope/course of their employment
Decision: employees protected by limitation clause:
Contract only said “warehouseman”, so no express intent in contract to include employees,
but it was implied. Argument against was that later in contract said “warehouseman or
employees” and by rule of effectivity warehouseman should therefore not include
employees. However, court decided should include employees (and so “warehouseman”
means “warehousemen”) because of:
Nature of relationship between employees and employer (perhaps means power
relationship)
The identity of interest with respect to contractual obligations (i.e. employers act
through employees)
The fact that London Drugs knew employees would be involved
Absence of clear intent in contract to the contrary (i.e. that employees should not be
protected) – if there is to be such an exclusion, there must be express language
Negligence / damage occurred within scope of employment
But what if they had been having forklift races during lunchtime? - probably not, but not
decided yet)
Comment:
Distinguishes from Greenwood, but doesn’t deny that it is still good law
Note the first 2 reasons for implying the contract to include employees are more to do
with policy than intent (i.e. employees should be protected, and indeed most think they
are). Only real intent was to protect the “warehouseman” i.e. the employer, but S.C.C.
extended it to include employees
Apparently, after London Drugs, Greenwood is history in Ontario but not in B.C.
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Laing Property v. All Seasons (2000) (B.C.C.A.)
INTENTION THE EMPLOYEES CAN TAKE BENEFIT OF K FOUND WHERE SHARE IDENTITY OF INTEREST AND KNOWN THAT
WORK CARRIED OUT BY EMPLOYEES (NOW ASSUMED)
Facts: All Seasons sends Santa’s Castles to Guilford mall where they are set up by Laing’s
employees. There is a fire and some of the Santa’s Castles get burned. Sues All Seasons, arguing
that they were faultily constructed with a tendency to burn. Almost identical to Greenwood –
lease, obligation to take out fire insurance, employees negligent resulting in fire
Third party proceedings:
The insurer, on behalf of Laing Property, sues All Seasons in tort
All Seasons then bring third party proceedings against Laing Property’s employees – arguing
that it was the employees that were negligent in improperly setting up the castles
Argued that they owed a duty of care to the mall tenants to set up the castle properly –
legal effect is the same as though the tenants had sued Laing
Then if All Season’s is found to be negligent, they will argue that Laing’s employees had
contributory negligence – will split the liability and reduces the damages that All Seasons has
to pay
Issue: Court applies Greenwood and allows All Season’s to sue the employees. The question
then becomes: can the employees take advantage of the subrogation clause in the insurance?
Two-part test:
Is there an express or implied term in the contract that the employees can take the
benefits? If yes then 
Were they acting within the scope of their employment? (providing the very services that
were in the employment contract?)
Part 1
Turns to the lease – states that the tenant shall pay the costs of promotion and maintenance
and that Laing will keep the property in good tenantable condition
All of these are relied on by the court to show that the landlord did have obligations and that
these obligations could only be carried out by the landlords employees – implicit that the
agreement should extend to cover the employees
BCCA sets out a couple of factors on how we might discover implied intention
Identity of interest: If the employer is to provide a service and that service is to be
performed by employees, than the interest of the employers and the employees is identical
Should the customer (plaintiff) have known that the performance of a contract would be
done by employees?
If it’s a corporate entity, than the work can only be performed by employees!
If yes to the second factor, then there will be an implied intention to extend the benefit of
the contract to a third party (in this case the employees)
In subsequent cases, part two of the test has evolved into a presumption – we now
presume that every customer will presume that the contract will be performed by the
employer’s employees.
Held: Employees were absolved from liability by the terms of the lease. Third party proceedings
against them were struck down.
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Comment: Policy Factors
There is an implied mutual intention that the land lord employees would have the benefit of
any contractual protection obtained by the employer
Makes commercial sense – need to allocate risk: employer is in a better position to take
out insurance – more economically efficient and prevents unfair surprise to the employees
Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. (1999) (SCC)
EXTENDS 3RD PARTY LIABILITY PRINCIPLE DEVELOPED IN LONDON DRUGS: IT IS THE INTENTION OF THE PARTY THAT
IS IMPORTANT.
Facts: Boat owner contracts with an insurance company to insure his boat. The boat owner’s
boat was sunk due to the negligence of Fraser River. The insurance company had a clause
preventing subrogation. Insurance company paid out the boat owner and then directly sued
Fraser River.
Decision:
The two conditions that are set out in London Drugs can be applied in broader circumstances
- moving beyond the employer-employee context to allow other third parties.
In this case, an insurer tried to argue that it was not bound by a waiver of subrogation rights
against a 3rd party. The court held that the important factor was the party’s intention, that
intention was that the 3rd party be protected. It extended the limited liability waiver
outside the strict employee context.
If any third party was to benefit from the contract, we will look at the third party and
make a decision about whether or not they were intended to benefit.
Look at activity performed by the third party – if those activities are the very activities that
are contemplated by the contract, then the second part of the test will be met.
The Doctrine of Privity is not dead, but it may certainly be relaxed when the court wants to
do justice in the circumstance.
Greenwood has not been officially overruled, but is falling into disuse
Test developed in London Drugs has been significantly relaxed.
Representations and Warranties
Representations are always statements made in the negotiations of a contract – they are not
part of the contract, but are an inducement to enter into the contract
Often to the surprise of the parties, a representation that one party didn’t intend to be in
the contract will be found by the court to be a part of the contract – concerns about unfair
surprise
Who ought to bear the risk of the statement?
More specifically, if the statement is wrong, who ought to bear the risk of loss for the
misstatement?
Tend to take a remedial approach – start from the remedy you want and look backward
Classification
Remedy
Interest Protected
Mere puff
None
Caveat emptor
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Innocent misrepresentation
Rescission
Restitution (prevent
unjust enrichment)
Negligent misrepresentation
Reliance damages
Reliance
Fraudulent misrepresentation
Rescission and
reliance damages
Expectation damages
Reliance
Warranty
Condition
Rescission and
expectation damages
Reasonable
expectation
Reasonable
expectation
Every contract has some essential terms and some non-essential terms – a condition is an
essential term of a contract
Fraudulent misrepresentation – lying to induce someone to enter into a contract
The courts didn’t want to make every misrepresentation blameworthy, so there is a fairly
high threshold to qualify as fraudulent misrepresentation
Coupled misrepresentation (contract concept) with a criminal concept (fraud)
Very difficult to prove, and the party will be penalized if they fail in establishing the fraud
Policy Approach
Caveat emptor – buyer beware – parties are expected to look after their own interests as best
they can - court won’t get involved
Risk allocation: Who has the best and cheapest access to the knowledge about the information?
I.e., who could have avoided the most cheaply the incorrect statement?
Doctrinal Approach
For each category, there are doctrinal elements which provide the rationale for the
characterization – what makes something into a warranty as opposed to an innocent
representation?
Cases may be very difficult, if not impossible, to reconcile
Remedial approach: Looks at what would do justice in the circumstance, namely the remedy,
and then look back and manipulate the reasoning in order to give rise to the desired outcome.
Start from the end and work backwards
Conditions
Goes to the root of the contact – essential terms (essence) of the contract
Essential terms may be express or implied
If that condition is broken, the contract goes into rescission and the wronged party may seek
expectation damages (best type of damages from perspective of wronged party)
Conditions make up the core of a contract, so if they are destroyed, the contract is
breached
Fraudulent Misrepresentation
Must be some standard of behaviour that prevents one party from lying to another in order to
enter into a contract
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This idea has long been found in tort – could historically bring a tort of deceit for
misrepresentation in contract negations
Has evolved into the legal claim of misrepresentation. However, fraud remains very difficult
to prove due to its quasi-criminal nature – can have devastating effects in the marketplace
Even today, fraudulent misrepresentation is very difficult to prove. If you are unable to prove
your claim, the other party may turn around and sue you for libel – risky business!
Courts generally want to keep this very high threshold
Innocent Misrepresentation
Developed by the courts of equity – therefore unable to grant damages, but could grant
rescission. However, may still receive reimbursement for any money paid out to obtain that
condition (restitution damages)
Relates to a party that makes a false statement, but wrongly believed that the statement
was true
Caveat emptor – shouldn’t the onus be on the party that relies on the statement to ensure
that it’s true?
Doctrinal Requirements for Innocent Misrepresentation (Redgrave)
Must be representation of fact that turns out to be false (differentiate between fact and
opinion)
Misrepresentation must apply to a material (important) matter – not an essential matter
(something less than a condition)
Must induce the party to enter into the contract – generally presumed by the court, but
rebuttable
Innocent party (listener) didn’t know the correct facts – positive duty on the listener to
correct the speaker (cannot simply stand by and claim misrepresentation later)
Redgrave v. Hurd (1881) (Ch.D.)
LIMITATIONS ON INNOCENT MISREPRESENTATION: MUST BE ABLE TO GIVE BACK WHAT WAS TAKEN, ONLY GET BACK
WHAT IS PAID AND MUST BE PARTIALLY EXECUTORY
Facts: Solicitor trying to sell his home and his legal business. Told potential buyer the average
income of the business is about £300, and shows him financial statements. Buyer enters into two
contracts: one to buy the home (pays deposit with balance outstanding) and the other to buy the
business. Buyer later looks at financial statements and discovers income of business to be
significantly less, so refuses to go through with both deals. Solicitor sued for specific
performance (equitable remedy) of the home purchase, whereas buyer claims relied on the
misrepresentation to enter into both deals. There is no evidence of fraud.
Trial court rules caveat emptor – the purchaser should have taken the time to go over the
financial statements before entering into the contract
Decision:
Accepts innocent misrepresentation as relevant to home purchase deal and orders
remedy of rescission
First effort at definition of innocent misrepresentation:
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Need a material representation (i.e. important in decision to enter contract) concerning a
matter of fact that turned out to be false (but representor didn’t know it was false at the
time i.e. not fraud)
Which induced the representee into the contract (i.e. reliance), and
Representee did not know it was false (although it is no defence to say that the representee
could have discovered the error had they checked more carefully)
Rescission limited (and still is):
Must be able to give back what was wrongfully taken – restitution must be available
Promisee can only get back what they paid to the promisor – no unjust enrichment
Must seek rescission before there has been full performance of the contract – part of the
contract must remain executory
In Redican v. Nesbitt (1924) (S.C.C.) vendor made innocent misrepresentation that “house
has electicity” but purchaser only discovered it 2 days after contract completed, so
rescission not available – contract has been fully performed
Although courts might get around this: E.g. in Ennis v. Klassen (1990) (Man. C.A.) car turned
out to be inferior model of BMW than vendor said it was (innocent misrepresentation), and
although the money had been paid, keys turned over, and car registered to new owner, court
found contract was not fully discharged by implying a term of “reasonable inspection”
(court didn’t want to call this a warranty since that would lead to expectation damages
which were considered too high)
May allow rescission by implying a term the contract remained partially executory
Comment: Some evidence that the court was influenced by wanting to justice in the
circumstances and give the buyer a chance to get out of the contract – therefore they worked
backwards.
Warranties
Taking a statement that was made before the contract was entered into and then
elevating this statement to become part of the contract
Statement = collateral warranty
Original contract = prime contract
Prime contract + collateral warranty = new contract
Considered to be a breach of the prime contract, so expectation damages may be awarded
Courts invented the concept of collateral warranty in order to allow the recovery of more
than reliance damages
When will the statement made be treated as a mere innocent representation and when will
it be treated as a warranty?
Balancing act between unjust enrichment and reliance
Heilbut, Symons v. Buckleton, (1913) (English A.C.)
A STATEMENT IS A COLLATERAL WARRANTY IF THE PARTIES INTENDED IT TO BE SO
Facts: Brokerage firm (which has a good reputation) is underwriting shares of a company
purporting to be a rubber company. P calls broker firm and has the following conversation: P: “I
understand you are bringing out a rubber company”. D “we are”. P “is it all right?”. D: “we are
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bringing it out”. P: “That is good enough for me”. Turns out the company had only relatively few
rubber trees and was involved in other business as well. P bought shares, but company
subsequently did very poorly, shares became worthless. P sues brokerage firm.
Claim: P claimed broker firm warranted it was a rubber company
Decision:
Fraudulent misrepresentation: no evidence of fraud in this case.
Innocent misrepresentation: no use to the plaintiff in this case since the contract is no
longer executory, so rescission not available
Obiter dictum: So P tried for collateral agreement/warranty: legal test created – statement is
a collateral warranty if parties intended it to be so at the time of sale (i.e. subjective test –
the 2 particular parties), and such statement can lead to breach of warranty with remedy
expectation damages
“An affirmation at the time of sale is a warranty provided that it appears on the evidence
to be so intended”
In this case, it was ruled there was no such intention and so the statements were an innocent
misrepresentation (speaker had little knowledge of the company, he didn’t make a
positive/express affirmation, there was unreasonable reliance by P on his words, P really relying
on the reputation of the firm bringing it out, casual conversation, highly risky endeavour, etc) so
no remedy
Comment: Should there not have been a caveat emptor onus on the plaintiff to investigate
the statement further before making a significant investment?
Dick Bentley Productions v. Harold Smith (Motors) (1965) (English)
PROVIDED GLOSS / CLARIFICATION ON WHEN A REPRESENTATION AMOUNTS TO A WARRANTY: INTENTION =
OBJECTIVE TEST – WHAT WOULD A REASONABLE PERSON IN THE CIRCUMSTANCES BELIEVE
Facts: Dick Bentley bought a car from Harold Smith. Harold said car had been refitted with
replacement motor and gear box and had only done 20,000 miles since then. This turned out to
be false, car fails
Issue: Was statement a warranty?
Rule:
Comments on the intention test from Heilbut:
Dictum in Heilbut said “an affirmation at the time of sale is a warranty, provided it appears
on the evidence to be so intended”.
The difficult question is what does the word “intended” mean.
Does not mean subjective intention of the parties, but rather means an objective test i.e.
look at the conduct and words of the parties from the perspective of what “an intelligent
bystander would reasonably infer” taking into account all the circumstances (so if clear
evidence of subjective intent, a warranty will be found).
So, perhaps oversimplifying, test for warranty = was the reliance reasonable.
So to determine if there was a warranty, should ask:
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Was there a false or erroneous representation? If yes 
Timing: Was the representation made in the pre-contractual stage? If yes 
Purpose: Was it made to induce the other party into the contract i.e. was it a material
representation? If yes 
Actual inducement: Did it in fact induce the other party into the contract? If yes 
Reliance: Was the reliance reasonable?
Decision: No fraud in this case, but the representation was important, the car dealer was in a
position to know the car’s history (easy for dealer to find out), and reliance was found to be
entirely reasonable, hence the statement was found to be a collateral warranty.
Oscar Chess v. Williams (1957) (English)
INNOCENT MISREPRESENTATION SINCE UNSOPHISITCATED PARTIES – NO REASONABLE RELIANCE ON KNOWLEDGE
Facts: private individual sells car (Morris Minor), both P and D look at registration and misread it
as a 1948 car, whereas it really is 1939
Decision: this is only an innocent misrepresentation, since (comparing with Dick Bentley):
Misrepresentation here (difference in year) less significant than number of miles in Dick
Bentley
Individuals here, whereas professional dealer in Dick Bentley. So big difference between
the two cases since buyer didn’t rely on the sellers knowledge
Carman Construction v. Canadian Pacific Railway (1982) (S.C.C.)
TO SHOW WARRANTY, BOTH PARITIES MUST INTEND A LEGAL EFFECT; WARRANTY CANNOT CONTRADICT WRITTEN K
Facts: CPR wanted rock moved out of the way in a hurry (only a 48 hour tender process) for a
railway siding. Carman was invited to submit a tender. In trying to figure how much needed to
be removed, Carman spoke to an unknown employee at CPR’s engineering department and was
told between 7 and 7.5 thousand cubic yards of rock (CPR had performed their own test). Based
on this, Carmen submits bid and it wins. Turns out there is 11,000 cubic yards of rock to be
removed.
In the signed agreement, clauses that Carmen acknowledges it didn’t rely upon any
information provided by CPR, and Carmen read and understood this
Claim: Carman sues, claiming negligent misrepresentation and collateral warranty
Rule:
To prove a representation amounts to a warranty, must show both parties intended a
legal effect, and
Cannot have such a warranty if it contradicts the terms of the written contract
Decision: both claims rejected
On negligent misrepresentation, Carman did not rely on the statement in light of the
contractual clause. Carman knew that if they obtained the information from the CPR
employee they would be relying on it at their own risk.
On collateral warranty: There was no intention by the parties to warrant the accuracy of
the estimate of the rock, evidenced by:
Carmen didn’t even get the employees name or position (so perhaps S.C.C. saying no
reasonable reliance in these circumstances, and Carmen were experts and they had
visited the site)
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Carmen signed the contract with the clause saying they didn’t rely on such
representations. The collateral warranty, even if it did exist, would contradict the
express terms of the written contract.
Fraser-Reid v. Droumtsekas (1980) (S.C.C.)
WRITTEN WARRANTY SINCE FAILED TO DISLOSE “ALL OUTSTANDING INFRACTIONS” AS REQUIRED IN K
Facts: P purchased newly built house from builder D. Basement flooded seriously in spring and in
every subsequent rainfall because builder didn’t install drain weeping tile around perimeter of
house (it’s a conduit to take water away from house, an elementary building element and a
building code requirement). Exclusion clause in the contract said there were no representations
or warranties other than the ones expressed in written contract. Cost to fix it about $4,500
Courts will often stretch the circumstances to do justice in the circumstances when dealing
with consumer purchase of a house - hugely important purchase, not sophisticated party
Claim / Decision: P had a number of options of claims:
Legislation – Home Warranty Act only came into force after contract (and no retroactive
application)
Fraudulent misrepresentation – no fraud here
Innocent misrepresentation – no use since no apparent misrepresentation, and contract said
no representations, and contract executed. Further, didn’t want rescission.
Implied warranty – more appealing, since could provide damages to fix the house.
Written warranty – even though no express warranty, contract did have a disclosure clause
that said “vendor has disclosed all outstanding infractions”
Held: S.C.C. said this is a warranty (really a condition since it’s in the written contract)
Implied Warrant – accepted but requirements not met
Adopted a British approach that there is an implied warranty for fitness of habitation, but this
only applied to sale of incomplete houses where buyer doesn’t have possibility of inspection to
find defects.
Rejected argument that drain tile problem meant the house was incomplete
In US, this has been extended to completed but unoccupied houses, but S.C.C. rejects saying
legislation should make this extension
Thus, caveat emptor is still the basic rule.
Also consider British approach – implied warranty for “fitness of habitation”
Oral contract – “I build good houses” - rejected
Quickly rejected by the courts since this is the kind of statement that every vendor makes
about their goods
Written Warranty - succeeds
Took “outstanding infractions” to mean any building code infraction
Drain tile is a requirement of building code and was not installed, which was an infraction.
Thus the disclosure clause was breached since the vendor had not “disclosed all outstanding
infractions”
Comments:
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S.C.C. tries to help distinguish innocent misrepresentations from warranties:
A term that goes to the root of a contract is a condition, whereas a warranty is a
representation (that induces into the contract) that is a lesser obligation.
However, tenuous distinction – but courts like this ability to manipulate the principles to do
justice in the circumstance
Policy
Purchaser were unsophisticated parties, so they reasonably relied on the builder who had
better knowledge
Missing drain tile was a latent defect – would not have been discovered by a prudent
purchaser. Thus, cannot rely on caveat emptor.
A reasonable builder ought to have known that drainage tile was not installed.
Effect was really an implied warranty as to fitness, so are essentially adopting the American
position.
No new houses have zero building code infractions, and “outstanding infractions” is used in
standard forms across Canada. So although S.C.C. said didn’t want to expand law as in the US
(rather said leave it to the legislature), but they ended up expanding the law enormously
Murray v. Sperry Rand (1979) (Ont. H.C.)
ADVERTISING CREATED A COLLATERAL WARRANTY BY MEANS OF A UNILATERAL CONTRACT
Facts: farmer (Murray) bought a harvester from dealer (Church Farm Supplies CFS). Dealer
bought the harvester from Sperry Rand, the US manufacturer. Farmer asked the dealer if the
harvester would perform the way the brochure indicates, and the dealer said yes, it will do
everything you want to. The harvester never performs up to that level.
Oral representation by the dealer
Written representation from the manufacturer through the brochure
Decision:
Dealer liable to farmer because statement was a warranty – clearly made to induce
farmer into contract, important, reasonable reliance, etc.
Manufacturer also liable because of representations in sales brochure, even though there
was no contract between the manufacturer and the farmer (the dealer sat between them).
How did the court get around the privity to contract problem: said that the advertising
created a collateral warranty by means of a unilateral contract: “if you buy our
harvester it will do XYZ”, and farmer accepted this offer when he purchased it –
acceptance through performance
Adopted from British decision Shankland Pier
Damages
Plaintiff claimed that he lost $8500 in reselling the harvester – reliance damages
Also claimed expectation damages for lost profits and inability to board cattle – but too
speculative
Eventually awarded $20,000, but no reasoning given by the judge
Comment:
Agency was never argued in this case, although the dealer was acting as an agent for the
manufacturer – would likely have been a simper argument
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Court went quite far in stretching the principles to do justice in the circumstance – invented
a unilateral contract
Manufacturer had the deepest pockets, so most likely to be able to pay damages
Negligent Misrepresentation: Torts vs. Contracts
Traditionally, there was a wall between negligent misrepresentation in tort and breach of
warranty in contracts. However, this wall was finally broken down in the famous case of
Hedley Byrne.
Now there are cases where a person may sue both in tort and for breach of contract.
Negligent misrepresentation in tort requires:
There must be a misstatement
Speaker must owe the listener a duty of care
Listener had to reasonably rely on that misstatement – foreseeable to the speaker that the
listener would rely on that statement
Warranty relies on intention:
Objective measure – would a bystander reasonably believe that the listener would
reasonably rely on the misstatement – Bentley
In fraudulent misrepresentation, the threshold was raised very high – balance of probabilities
Historically there was a gap in that there was no remedy for misrepresentations that fell
between innocent (no damages, only rescission) and fraudulent (which required dishonesty
and not just negligence). But then came along collateral warranties but this required intent
by the parties to form a warranty. So there was still a gap.
There is often a gap in compensation – under-compensation for innocent representation,
over-compensation for warranty
Candler v. Crane, Christmas (1951) (K.B.)
EARLY CASE SHOWING WALL BETWEEN TORT AND CONTRACT
Facts: Company owner made a contract with an accountant to audit the books. Candler, before
investing in the company, wanted a measure of its financial status. The accountant was
negligent in showing that the company was profitable when in fact it was not. Candler invests in
the company and loses his investment.
Held: Candler could get no recovery because the accountant was not dishonest or fraudulent,
just merely incompetent – no fraudulent misrepresentation.
No privity of contract, so he could not sue for breach of contract. Attempted to claim a
sort of trust relationship in that he was a third party beneficiary – but there was no
consideration, so this argument failed.
Attempted to sue in tort – but the court would not recognize that the tort of negligent
misrepresentation could arise out of a contract – wall still in tact at this time.
Two floodgate arguments:
Cannot allow torts in this kind of contractual situation
Many statements in contracts are very informal and the effects of these statements may
create ripples – the potential for others to hear statement and then rely on them
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would be unlimited, even if the statement had not been aimed at them. Once words are
spoken in a negotiation, they can never be taken back – when will it all end?
Court was concerned about broadening the number of potential claimants
Economic loss – in torts, don’t compensate for pure economic loss that is not tied to
physical or mental injury; however, in contracts, pure economic loss is widely recognized –
expectation damages.
Wanted to keep these two areas of law very separate – in tort, not prepared to
compensate for pure economic loss.
Note: in 1951, there was no law of agency. These days, agency would likely have been the best
line of argument.
Hedley Byrne v. Heller (1964) (English H.L.):
FOR THE FIRST TIME IN TORT, RECOGNIZED CLAIM FOR FALSE OR NEGLIGENT STATEMENTS, BUT ONLY IN SPECIAL
RELATIONSHIPS WHERE THERE WAS DUTY OF CARE BETWEEN THE SPEAKER AND THE LISTENER
Facts: P advertising company (puts ads in papers, TV etc. to advertise client’s products). Before
entering into a contract with one client, P asks their bank if the client is solvent, which in turn
calls the client’s bank. Client’s bank says the client has the money, although they added a
disclaimer that the information was only “for your private use and without responsibility”.
Decision:
Court recognized tort of negligent misrepresentation – there may be a duty of care in
special relationships where providing information, opinion or advice
Relationship arises upon reasonable reliance and duty of care - no need for a contract
between the parties
Special relationship between the client and the bank. In this case found negligent
misrepresentation, but no liability due to disclaimer.
Breakthough because tort recognized compensation for pure economic loss that was not tied
to a physical or mental injury.
However, very narrow circumstances, so door is only opened a little
Esso opened the doors a little wider by allowing negligent misrepresentation even where a
contract existed between the parties.
Esso Petroleum v. Mardon (1976) (English C.A.)
ALLOWS FOR POSSIBILITY OF CONCURRENCY IN TORT AND CONTRACT; RELIANCE DAMAGES FROM TORT CAN INCLUDE
LOST OPPORTUNITY (ALMOST EQUAL TO EXPECTATION DAMAGES)
Facts: Esso wanted to build a new gas station fronting onto a busy street. With this design, they
estimated 200,000 gallons would be sold per year. Planning organization would not allow
accessibility from busy street, and required that the tanks not be visible from the street. Esso
leased the station to Mardon for 3 years, and Mardon questioned the 200,000 gallons estimate
thinking it high but is convinced by Esso’s expertise. He enters into a tenancy agreement at a
rent of £2,500 per year. Mardon puts all his available capital into the business, and suffers a
serious loss selling only 78,000 gallons in the first year, and even less in the second and third
years.
Claims: Mardon defaults on lease payments, and in response Esso sues Mardon to regain
possession. Mardon files a counter claim in both contract and tort (i.e. claiming that the 200,000
gallons per year estimate was either a collateral warranty or a negligent misrepresentation).
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Esso says the estimate was simply an opinion, and that tort of negligent misrepresentation
should not be available if there is a contract between the parties.
Opinion is not a warranty since its not a statement of fact
Decision Denning:
Contracts: collateral warranty
Although estimate was clearly not a guarantee, it was a forecast made by Esso who had
special skill/knowledge, were in a better position to know, and with the intention that
Mardon would rely on it and enter the contract, and Mardon did reasonably rely on it and
enter the contract (i.e. seems to pass the Dick Bentley tests, which would suggest breach
and expectation damages).
It’s not the content of the statement, but rather the context of the statement that
form the collateral warranty
However, the trial judge said there was no collateral warranty and this is a finding of
fact, so Denning said he could not overturn the decision
Torts: negligent misrepresentation (from Hedley Byrne):
Esso clearly owed a duty of care to Mardon (once layout had changed, they should have
reassessed the estimate)
Esso had special knowledge/skill
Induced Mardon to enter contract i.e. reasonable reliance
Thus should also be recovery in tort for negligent misrepresentation
Concurrency i.e. overlap of contracts and torts:
Concurrent liability is possible i.e. the presence of a contract does not oust the tort of
negligent misrepresentation (so can pursue claim under either contract or tort) since:
Concurrent liability had been found in other circumstances e.g. with professionals
If representor has duty of care when no contract (i.e. to a stranger) surely there
should be at least this level of duty of care when make representations to someone
about to enter into contract with i.e. otherwise would be absurd situation that
representee would be worse off if they paid for the information
Damages
Since Esso found negligent in tort, measure of damages for negligent misrepresentation is
to put person back to their original position as normal in torts i.e. reliance damages i.e.
not to where they would have been if the warranty was true i.e. not expectation damages
i.e. not lost profits
To calculate reliance damages, consider if Mardon had not entered contract: would not have
spent the capital, would not have gained overdraft charges, and Mardon would have invested
the capital so also entitled to interest would have got on the capital and also the earnings
(i.e. wages) he would have got by working somewhere else (i.e. includes limited opportunity
costs to narrow the difference between reliance and expectation damages)
Opens the door to allow opportunity costs to be essentially equal to lost profits i.e.
expectation damages!
Puts a Canadian spin on tort/contract distinction:
V.K. Mason Construction v. Bank of Nova Scotia (1985) (S.C.C.)
NEGLIGENT MISREPRESENTATION SINCE SHOULD HAVE KNOWN THERE WOULD BE RELIANCE = DUTY OF CARE
Facts: Developer negotiating with Mason to build a building. Mason wanted to be sure that
developer had adequate financing – concerned that their current loan was inadequate and
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wanted to ensure that their bank (the Bank of Nova Scotia) would make further financing
available. Bank manager sent letter to Mason with the assurance that they would provide
developer with financing “sufficient” to cover the project. As a result, Mason signed the
construction deal, but the oil crisis hit, developer runs out of money, the bank refused to
advance more funds to developer, and unable to pay Mason. Mason sues the bank on the basis of
negligent misrepresentation
Decision Wilson J:
S.C.C. said there was no contract between Mason and the bank since:
Too uncertain/complicated to figure out the terms of such a contract – too much is implied
or inferred
Such a contract would have promised to provide sufficient funds no matter what (e.g.
earthquake) and S.C.C. couldn’t believe the bank would make such a guarantee
Negligent misrepresentation found:
The bank knew (or should have known) that Mason would rely on the information they
provided, so clear duty of care
Bank claimed they would have provided sufficient funds but the oil crisis hit etc, so it was
not their fault. But they knew the Mason knew how much the loan, and that Mason was
looking for some kind of guarantee for funding no matter what i.e. the bank should have said
we will make sufficient funds available up to some maximum amount
Damages – choice between damages in contract or damages in tort
Normally damages for tort (negligent misrepresentation) is reliance = actual costs +
opportunity costs but not lost profits (Denning in Esso)
But court says reliance damages includes lost opportunity costs which on the facts of this
case is effectively lost profits since it was reasonably foreseeable that if the bank had not
made the representation that they did, Mason would have put his funds/time into another
project that was available and would have made similar profit as expected here. Thus
opportunity costs here renders reliance damages = expectation damages (so irrelevant
whether sue in tort or contract)
Normal measure will be actual loss, so will technically be preference for damages in tort
Same quantum of damages received, regardless of whether found through torts or
contracts.
In commercial contracts, may collapse the difference between the damages. But the
courts have not been as generous in non-commercial contracts.
BG Checo International Ltd. v. British Columbia Hydro and Power Authority (1993)
(SCC)
CAN SUE IN BOTH TORT AND CONTRACT, BUT CAN ONLY RECEIVE A SINGLE SET OF DAMAGES
In a contractual situation where a wrong occurs and that wrong supports an action in tort
and in contract, the innocent can sue in tort or contract or both.
Now quite commonplace to see people sue for the same wrong act in both tort and
contract concurrently.
Where there are concurrent claims, the contract will govern if there are any limitation
clauses - may be a limitation clause that they will only sue in contract / will not sue in
tort. Therefore the terms of the contract become very important.
Very common to provide for allocation of risk in the contract
If you win in both contract and tort for that single wrong, you only get a single set of
damages.
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When suing in contracts, will sue under breach of warranty
Under tort, will sue for negligent misrepresentation
Breach of warranty requires:
A false or incorrect statement
Inducement to enter a contract
Actual inducement
Made in the course of dealing
Unlike tort:
Misrepresentation must be a term of the contract
Remedy: expectation damages = cost and lost profits – want to place plaintiff in the
position they would have been had the statement been true (i.e. fully performed)
Negligent misrepresentation requires:
A false or incorrect statement
Negligently made statement
Relationship of care
Reliance  foreseeable
Unlike contract:
Statement made be made within OR outside the contract
Remedy: costs (and opportunity costs) – want to place the plaintiff in the position they
would have been in had the statement never been made (essentially reliance damges)
May not meet the doctrinal requirement for both or have a stronger case for one or the other,
which may influence the legal claim you make
Quantum of Damages
Although damages under tort and contract are formally different, in practice they are actually
quite similar
Easier to underestimate opportunity costs and overestimate profits – therefore, usually
will get higher damages if you sue under contract.
Other considerations:
Apportionment – In torts, may divide damages up between multiple defendants – not available
in contract
Contribution - In torts, the plaintiff can be held partially responsible (contributory negligence) –
not available in contract
Limitation period – in contracts, runs from the date of breach, whereas in tort runs from date
where a reasonable person would learn about the possibility of tort action
Generally, limitation period in torts is significantly longer
Mistake
A situation where one or both of the parties are under a mistaken impression about the
nature of the contract or the effect of the contract
Often occurs when the subject matter of the contract turns out to be different
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Is a residual category – NEVER argued as primary grounds of claim
Often only used as a last resort
Catchall category – tends to be picked up by courts when they want to do justice in the
circumstance – possible for there to be a mistake in almost any contract
Void - If a contract is found to be void, even if the parties attempted to perform, the contract is
treated as if it had never been made – never existed at all at law
Damages = restitution damages
Voidable – contract is said to have existed for a period of time before coming to an end
Damages = reliance damages
THERE IS NO SUCH THING AS VOIDABLE FOR MISTAKE
Consider: who ought to bear the risk / consequences of the mistake?
Policy Considerations:
Reliance, unfair surprise, reasonable expectations, unjust enrichment/windfall
Reluctance to find mistake since:
Caveat emptor – parties are the authors of their own mistakes, not duty of the court to fix
their mistakes, so generally difficult to obtain relief based on mistake
Certainty of contract – want contracts to meet parties’ expectations and don’t want courts
to destroy this by finding mistake too often, giving easy out to second thoughts
Protection of innocent third parties – suppose A sold to B, then B sold to C, but if find
mistake in sale from A to B so that contract was void ab initio, then B had no title to pass on
to C
Risk allocation – contracts allocate risk (or at least they should) and courts really having to
decide whether to re-allocate it when deciding whether or not to call it a mistake
Courts have looked at the following factors in finding mistake:
Price e.g. Hobbs, price of land with minerals v. price without, and compare to actual price
Knowledge / skill of the parties e.g. Hobbs was a farmer but railway often sold land so
ought to have known better
Ease of avoidance – who was in the best position to avoid the mistake
Common usage in trade i.e. custom i.e. how do people in the business usually do things
(Hobbs); e.g. Staiman – auction of used steel unlikely to include new steel
Knowledge of ambiguity and concern over “snapping up” i.e. not fraud, but one party is
aware (or ought to have been aware) of the other’s mistake and is trying to snap up their
offer to benefit from it (Staiman Steel) - essentially using a mistake to get unfair
advantage = unjust enrichment
Mistake as to Terms
Mistake as to Terms (or formation) - can’t agree on the meaning of term in the contract
Have an apparent contract, but due to disagreement over a mistaken term in the contract,
its not enforceable.
Doctrinal Requirements (from Raffles):
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Must be a TRUE ambiguity
Must be an important or fundamental term of the contract
Court must have no reason to prefer one parties version over the other
If all these elements are present, then the contract is void for mistake
Raffles v. Wickelhaus (1864) (English Exch.)
EARLY SUBJECTIVE TEST: CONTRACT VOID IF TRUE AMBIGUITY, IMPORTANT TERM AND NO REASON TO PREFER ONE
PARTY’S UNDERSTANDING
Facts: Vendor P to sell cotton to buyer D at a specified price per pound, and contract says will
arrive on a ship named “Peerless”. But there were two ships named Peerless, one sailed in
October and one in December. Buyer said he expected cotton on earlier sailing. But vendor sent
the cotton from that ship to another buyer and when cotton arrives on later sailing, buyer
refuses to accept it. By this time price of cotton had dropped below contract price (due to
abundance of cotton from end of blockade from southern US after civil war)
Decision: no recovery for vendor since no contract:
No contract here because there was no consensus between the parties due to the
mistake i.e. the parties were not ad idem (“at one”) – contract was void
This is a subjective test – one party thought Peerless 1, the other thought Peerless 2
Thus a contract will be void ab initio if:
True ambiguity
Goes to important term
No reason to prefer one party’s understanding than the other’s
Comment:
If had applied an objective test here i.e. would a reasonable person conclude there’s a
material mistake here, probably not a mistake:
Could have said no true ambiguity (buyer really just looking for a way out of the contract
because the price had fallen and could now buy cheaper elsewhere)
Could argue not an important term (the name “Peerless” was probably only mentioned for
insurance purposes so vendor would have a record if the ship sunk and their property was
lost, and no evidence to show that timing of arrival was indicated by the ship’s name or was
of the essence to the buyer)
Vendor said relied on the contract and shipped cotton based on it. No evidence of buyers
reliance neither on early arrival, nor on unfair surprise if enforce contract for later sailing.
So, although this case lays the foundation for mistake of terms, some say it’s a bad decision
and would be decided differently today.
Hobbs v. Esquimault & Nanaimo (E&N) Railway (1899) (S.C.C.)
ADOPTED OBJECTIVE TEST: FOCUS ON WHAT REASONABLE PERSON WOULD UNDERSTAND FROM WORDS/ACTS
Facts: Contract for sale of land. Prior to payment of last instalment, railway (D) wants to keep
mineral rights and claims “land” exclusive of mineral rights. Hobbs (P) sues for specific
performance of sale including mineral rights.
Issue: what does “land” mean – surface only or minerals as well. The railway argued Raffles: no
contract because there was a true ambiguity with parties not ad idem, it was important, and
there’s no reason to prefer one party’s understanding over the others
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Majority decision King J:
When looking at mistakes, rejected subjective test, but rather objective test – what would a
reasonable person think it meant i.e. which of the two parties’ understanding is the more
reasonable
Objective test is preferable to promote contractual certainty – with subjective test, any
party, after have second thoughts about a contract they entered into, could fraudulently
claim a different understanding of an important term
Focus on the meaning of the parties through their words (written or oral) and their acts
So in this case, would a reasonable person conclude “land” includes mineral rights.
Reasoning to choose between competing claims (Hobbs expectation that price included
mineral rights v. railways unfair surprise):
Perhaps obligation should be on the party that made the offer of sale (the vendor i.e.
railway) to make sure it was clear
Ordinary meaning of “land” includes mineral rights – unambiguous language
Ease of avoidance: railway could have easily written “land without mineral rights”
Price: if the price had been too low to include mineral rights, perhaps “land” would be taken
to exclude them, but not so here
So concludes railway’s mistake was unreasonable and careless, hence contract includes
mineral rights and it is to be enforced by specific performance.
Dissent: followed the subjective approach (from Raffles): company thought they were selling
the land without the minerals, whereas Hobbes thought he was buying the land with the
minerals, therefore no contract
Comment:
Timing a little suspicious here since railway only brought up the issue after coal was
discovered
Thus contemporary approach is objective, but note Raffles and Hinkel still referenced
today when a judge thinks a subjective mistake is so serious contract should be void for
equitable reasons
Staiman Steel v. Commercial & Home Builders (1976) (Ont. H.C.)
ACCEPTS OBJECTIVE TEST; HOWEVER, SUBJECTIVE TEST WHERE IMPOSSIBLE TO DETERMINE WHAT REASONABLE
PERSON WOULD HAVE CONCLUDED
Facts: Commercial (D) auctioned off its inventory of used steel in its fenced yard. They
separated items into 383 numbered lots, tagged and catalogued. Also in yard was a pile of newly
fabricated steel, piled separately from the rest, not tagged, freshly primed. At one point
auctioneer said “I’m selling all the steel in the yard”.
Claims: Buyer (Staiman) claimed this included the new steel, and that by the objective test a
reasonable person would agree that “all the steel in the yard” was unambiguous, and that the
seller should bear the risk since they set up the auction and should have been more clear. Seller
argued Raffles and Hinkel (subjective test) they meant it to be “all the used steel”
Decision:
Court accepts objective approach (Hobbs), but still finds for the seller, since the proper
test is: what would a reasonable person understand as the meaning taking into account all
the circumstances
In this case should have been obvious that auctioneer was not including new steel as it was
piled separately, not tagged, not listed in the catalogue. Court held a binding contract was
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created for the purchase of the used steel but did not include the new steel, but by refusing
to deliver any steel to Staiman the defendant had breached the contract
Distinguishes and narrows Raffles (subjective test) – will only be able to apply Raffles
when the circumstances are so ambiguous that a reasonable person would not be able to
infer any common intention between or amongst the contracting party
In Raffles it was impossible (not simply difficult or challenging) to impute any common
intention – will only use a subjective test where it is impossible to determine what a
reasonable person would have concluded, otherwise use the objective test
Comment:
This case is perhaps more about “snapping up” i.e. buyer is just short of fraud in their
unreasonable claim that the sale include the new steel
Seller didn’t “tender” the used steel to the buyer after the auction (lawyer probably
recommended they do nothing that might make contract look solid)
Mistake as to Record
Commonly found when there is an oral agreement and when it is reduced to writing, there is
some inconsistency.
However, the courts tend to favour written over oral evidence.
Parole evidence rule – court doesn’t want to import into a written document oral statement
that have a different meaning.
Caveat emptor – if you take the time to formalize an agreement in writing, then should have
taken the time to review the written document before signing – especially where it is a
serious or important document
Exception Rectification – where there is a mistake in writing, the courts have discretion to go
into the contract and “rewrite” the mistake – bringing something from outside of the contract
and making it a term of the contract
Equitable remedy – all the rules of equity apply
Discretionary remedy – court has discretion to allow or deny
Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. (2002) (SCC)
REQUIREMENTS FOR RECTIFICATION: “CONVINCING PROOF” OF PRIOR ORAL AGREEMENT; MUST POVIDE PRECISE
WORDING AND SHOW D OUGHT TO HAVE KNOWN OF THE MISTAKE
Facts: There was an option agreement for the purchase of land that was adjacent to a golf
course. The land was to be used to develop houses. There was an oral agreement that a 480 by
110 yard piece of land would be subject to the option. The written agreement mistakenly
referred to 110 feet. Defendant insisted on the written terms despite knowing terms did not
accurately reflect prior oral agreement.
Rule:
Plaintiff must prove the existence and content of the prior oral agreement
Must be “convincing proof” of the oral agreement (above a balance of probabilities but
less than beyond a reasonable doubt)
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Higher threshold than civil standard of proof - want to make it difficult for a party
alleging mistake to establish this claim - don’t want parties to allege mistake simply
because they got a bad deal
Plaintiff must provide the precise wording for the rectification
Plaintiff must show defendant knew or ought to have known of the mistake in written
document.
Standard of proof required: must show that the refusal of the court to grant rectification
would be tantamount to supporting equitable fraud – will produce an unconscionable result
(unfair advantage/unjust enrichment).
Held: Mistake - court rectified the contract by replacing feet with yards. Granted expectation
damages. Denied punitive damages since defendant’s conduct was not sufficiently egregious.
Comment:
No due diligence requirement on the part of the plaintiff, but if they did not sufficiently look
after their own interest, the court may reduce or entirely deny damages for the mistake
Mistaken Payment
One party may pay too much or too little
General rule – when one party pays too much, repayment will be ordered on the basis of
unjust enrichment
Exception: Won’t be repayment if the person who is mistakenly paid in significant reliance
on that money has changed their position such that it would be unfair to require full or
partial repayment.
Focus on the unfairness aspect
Budai v. Ontario Lottery Corporation (1982) (Ont. Div. Ct.)
Facts: Budai won lottery but only for $5, but by computer error received cheque for $835, and
he immediately went out and spent it on a trip
Decision: Only ordered to pay back the money that remained unspent, since although mere fact
of spending a mistaken payment is not enough to justify not paying it back, but can keep
what has been spent “if there has been a change of position” i.e. can convince judge it would
be unfair to repay it, and perhaps it was reasonable to assume it was your money to spend
Mistaken Assumptions
General Rule: relief is rarely granted (residual argument)
Refers to mistake regarding facts existing before or at time of contract, regarding the
motives or reasons for party to enter into the contract
Raises strong Caveat Emptor argument that the party should have taken precautions (e.g.
better investigated the facts, taken out insurance, etc). But on the other hand can
sometimes lead to staggering unjust enrichment if don’t give a remedy.
34
Basic question is really a matter of allocation of risk – which party should be deemed to have
taken on the risk for this kind of mistake
Smith v. Hughes
DEMONSTRATES GENERAL RULE FOR MISTAKEN ASSUMPTION: NO RECOVERY DUE TO CAVEAT EMPTOR; IF IMPORTANT,
SHOULD HAVE SPECIFIED IN CONTRACT
Facts: Contract to buy oats for a stable. One party assumed should buy old oats, the other new
oats. Upon delivery, stable refused to buy them because they were the wrong kind. Supplier
then sued stable owner.
Decision: Refused to grant relief because the substance of the contract was to provide oats.
If the type of oats was so important, should have specified this in the contract.
Comment: Not as though they were contracting for two separate things, say oats and barley.
Policy Reasons:
Caveat emptor – if the quality of the oats was so important should have specified the quality
of the oats.
Caveat emptor is the starting point for mistaken assumption. So if you want to protect
yourself, you should investigate the quality of the substance and more importantly,
should specify it in the contract. Modern courts would even recommend purchasing
insurance for the eventuality that the other party is unable to deliver – risk allocation.
Four exceptions to the general rule:
Res extincta – the subject matter of the contract didn’t exist at the time of formation
Res sua – purchaser already owns the item in question
Mistaken assumptions re: identity – identity of the purchaser is not their true identity;
mistakes the identity of the other party to the contract
Nature vs. quality – mistake as to the nature (not mere quality) of the item – major common
law exception
Sherwood v. Walker (1887) (Mich. S.C.)
RECOVERY WHERE MISTAKEN ASSUMPTION GOES TO THE ESSENTIAL NATURE OF THE SUBJECT MATTER
Facts: Farmer/breeder (D) agrees to sell cow (“Rose the 2nd of Abalone”) and says “she is
probably barren”. Sold to banker (P) for $80 (= value of the cow for beef, if cow were a breeder
would be worth 10 times as much). When banker goes to collect the cow, breeder refuses since
cow now in calf.
Majority decision: Contract is void for mistake
Contract is void since the thing they contracted for (a “barren beef cow”) didn’t exist – instead
there was a “breeder cow” – this was a mistake as to the nature of the cow, not the quality
So can rescind if mistaken assumption goes to the essential nature of the subject matter
(i.e. the thing contracted for) as opposed to just being a mistake concerning the quality of
the thing
Dissent:
35
Accept the nature v. quality distinction, but the nature of the thing contracted for here was
a cow – Rose the II of Arbarlone in particular! So mistake in this case went to quality, not
nature
Both parties knew that this specific cow was the subject of the contract – so mere mistake in
quality
Risk analysis: neither party knew if she could breed, although they made assumptions i.e.
both parties took their chances
Comment:
Nature v. quality test mostly just rhetoric – judges can characterize something as nature or
quality according to the desired result
This case really decided to avoid unjust enrichment (purchaser would have got $850 cow for
$80 because of mistaken assumptions)
Dissent generally favoured, especially due to knowledge imbalance between seller
(farmer/breeder) and purchaser (banker)
Bell v. Lever Brothers (1932) (English H.L.)
EXPANDS SHERWOOD TO ALLOWS MISTAKEN ASSUMPTION FOR QUALITY WHERE BILATERAL OR ESSENTIALLY
DIFFERENT
Facts: Two senior executives of Lever Brothers, both with 5 year contracts, half way through
their positions are no longer needed, but under employment law redundancy not sufficient to
terminate fixed term. Employer (since legally required to) gives severance package of 2 ½ years
salary plus bonus. Later discovered that during their employment, they had been insider trading,
and this breach of their employment contract meant employer could have summarily dismissed
them with no severance.
Claim: employer claims severance money back i.e. severance contract void since based on
mistaken presumption there was a valid employment contract to be terminated (i.e. arguing the
mistake went to the fundamental nature of the contract).
Decision Atkin: no legally operative mistake in this case
Legal effect of a mistake is to nullify consent to the contract, so the contract would be void
ab initio (contrast with Solle v. Butcher below where in Equity contract is voidable at time
frustrating event occurs)
Mistakes may nullify consent – if your mistake is sufficient, cannot give full and informed
consent = contract not voluntary  void ab initio
Mistake as to nature will void a contract
Mistake as to quality will void a contract when (Lord Atkins Test):
Both parties are mistaken as too the quality – mutual/bilateral/common mistake AND
The subject matter of the contract is essentially different from what the parties
believed it to be at the time of formation i.e. the subject matter of the K has become
something essentially different from what the parties believed it would be at the time of
formation
Gives the courts significant flexibility in determining that the quality of the subject
matter has changed sufficiently (essentially different) – so set criteria for making this
assessment – highly manipulative
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On the facts of this case: an agreement to terminate an invalid employment contract is not
fundamentally different from an agreement to terminate a valid contract.
Comment:
The employment contract was not invalid on severance, since by employment law it doesn’t
become so until employer learns of misconduct and fires you – so perhaps H.L. here saying
even a mistake over valid v. invalid still would not be sufficient to make contract void
Perhaps this case is really about risk allocation – whenever an employer gives severance
pay, it takes the risk that it might find out later it didn’t have to
Employer is in the best position to estimate how long employment should go on, as well as
in the best position to prevent the loss
The Atkins Test has been very narrowly construed by subsequent courts
Solle v. Butcher is an example of mistaken assumption in EQUITY
Solle v. Butcher (1950) (English C.A.)
EQUITY ALLOWS VOIDABLE K WHERE COMMON MISAPPREHENSION, FUNDAMENTAL ISSUE AND P NOT AT FAULT
Facts: Solle (P tenant) rented one of the apartments with a 7 year lease from Butcher (D
owner). Tenant told owner he would find out if the rent control act applied (the rent control act
limits rent and rent increases). However, the rent control act does in fact apply and the rent is
disallowed as too high. Tenant seeks reimbursement for overpayment and continuance of lease
at lower level.
Decision Denning: contract here is not void:
Common law remedy of void ab initio may be fair in some cases, but not here:
Mistake here was over whether or not could have a higher rent than allowed in the statute,
and this does not seem to fundamentally change the nature of the thing contracted for. So by
Bell v. Lever Brothers, would seem contract is not void.
Even if found it void, would be void ab initio, but this would have bad policy implications
since landlords could kick out tenants on finding the Act applies, and subsequently re-lease
at higher rent
So looked to Equity for relief instead: notwithstanding mistake doesn’t fall within common law,
if it would be unconscionable or unjust to allow contract to stand then it’s voidable (i.e. has
full force and effect up until this point of time, but void from then on). Equity can intervene if:
There is a common (mutual) misapprehension either to facts or to rights, and
Goes to a fundamental issue, and
Party seeking relief is not at fault (and could not have found out by exercising due
diligence)
In this case, parties were given option to work out new terms for the lease
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Comment: today might claim negligent misrepresentation by tenant, but not available in 1950
Mistaken assumptions
Judge can
choose path to do
justice
Void ab initio
(common law)
Sherwood v. Walker, Bell v. Lever Brothers
Mistake characterized as going to “nature”
or “essential quality” rendering the thing
contracted for entirely different
Voidable
(Equity)
Solle v. Butcher
Common misapprehension on
fundamental issue and party
seeking relief not at fault
So the process is:
If mistake legally significant at common law, then contract void ab initio
Otherwise, if common misapprehension on fundamental issue and party seeking relief not at
fault, then at Equity contract is voidable
Factors a court will consider in deciding whether or not to enforce a written contract:
Importance of the assumption and effect on the economics of the transaction
Has the risk been allocated risk?
How obvious is the risk?
Who is the best risk avoider?
Price is sometimes used as a risk premium
Bona fides and reasonableness of the expectations
Great Peace Shipping
English courts stated that there is no such thing as an equitable remedy for mistaken
assumption. Reaffirmed that Bell is the leading case in Britain. However, Great Peace Shipping
has not been adopted in Canada, but Butcher has. Thus, in Canada there are two chances for
a remedy in mistaken assumption: one in common law and one in Equity.
Frustration
Really a subcategory of mistake
Frustration = mistake with respect to future event
If frustration is found, contract is voided as of date of frustrating event, but doesn’t void
performances already made
As always, question is: bad stuff has happened, who should bear the loss i.e. risk allocation
Courts generally resistant to applying frustration since contract should have allocated risks
of possible future events already. Waddams suggests the future event must be so far beyond
the reasonable contemplation of risk in the contract that it fundamentally changes the
bargain
Categories:
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Contract becomes impossible to fulfill
E.g. contract to hire music hall, but hall burns down
Enforcement of contract would result in undue hardship
Some unforeseen future event renders performance inordinately expensive to one of the
parties
Requires a radical change in the circumstances, not merely becoming more expensive
(which is common and such risk should have been allocated by the contract)
General rule: Rule of Absolute Promises
When a contract is formed, its expected that you will abide by your promises – general
rejection of the concept of frustration. Should have contemplated risks and allocated them.
Historically the rule was absolute promises, so no relief for frustration:
Paradine v. Jane (1647) (Common Pleas)
HISTORICAL RULE OF ABSOLUTE PROMISES: NO FRUSTRATION DUE TO CAVEAT EMPTOR
Facts: 3 year lease, English civil war, Prince Rupert takes occupation of leased land, tenant
doesn’t get use of property and can’t pay rent
Decision: tenant is liable for the rent
Caveat emptor (parties should assign all risks in contract), no doctrine of frustration.
Court said since lessee had benefit of casual profits (e.g. land turns out to be more fertile
than thought) so too should they take the risk of it being less advantageous i.e. notion of
reciprocity
Distinction between public and private obligations – in private obligations, when a party is
bound by a voluntary agreement, they must be prepared to bear the risks of this contract
Problem with this approach is it assumes parties are omniscient. After 150 years, absolute
rule is relaxed:
Taylor v. Caldwell (1863) (English Q.B.)
FRUSTRATION SINCE DESTRUCTION OF SUBJECT MATTER – MAY BE EXPRESS (FORCE MAJEUR) OR IMPLIED LIMITATION
Facts: P rented music hall for 4 nights, but hall burns down beforehand through no fault of the
parties. P sues for damages for breach of contract
Decision: Contract is void since frustrated (destruction of subject matter). Starting point is
absolute obligation, but subject to:
Express limitations in contract (anticipation of future risks written in, e.g. in event of war,
insurrection, labour dispute, has provision)
Force majeur clause – event which is beyond the reasonable control of the party (e.g.
act of god, war, insurrection, strike) other than a failure caused by the negligent or
deliberate action or inaction of one of the parties
Modern: An event which could not be controlled or reasonably foreseen and against
which the parties could not have taken precaution
Implied limitation: presumed intent test – where parties must have known that contract
could not be performed unless the specified thing continued to exist (as in this case)
From the beginning, the parties must have known that the K could not be performed
unless some particular specified thing continued to exist, so that when entering the
contract they must have contemplated this
Conditions subsequent – new condition that arises subsequent to the formation of the K
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Comment: this subjective presumed intent test has been replaced by an objective test i.e. a
term can be implied (if reasonable and fair in the circumstances) from what reasonable persons
would have done if they had turned their mind to the matter
Presumed intent is a much lower standard than implied intent
If reasonable parties had turned their minds to this issue, what would have been their
response?
Consider number of factors:
Caveat emptor – still the starting point (from Paradine) – other cases have simply carved out
exceptions
Undue hardship – if one party suffers inordinately, may grant relief
Risk allocation – are the risks fairly balanced?
Doctrine of frustration was then expanded beyond only destruction of the subject matter to
where future event has adverse impact on the contract:
Krell v. Henry (1903) (English C.A.)
FRUSTRATION WHERE SUBSTANCE/PURPOSE OF CONTRACTS DEPENDS ON CIRCUMSTANCES THAT HAVE CHANGED
Facts: room leased for £75 to view the coronation, £25 deposit paid. But parade is cancelled
since Prince Edward is sick, Lessor sues for the extra £50.
Decision:
Test: does substance/purpose of the contract depend on a particular circumstance that is
a foundation of the contract
If yes, than will frustrate contract since fundamentally different from what was originally
contemplated
In this case: this is not a contract for a lease of a room as a room, but rather is a contract for a
lease of a room to view the procession, and both parties knew this, so foundation of the
contact frustrated by cancellation of the procession
D not required to pay £50, but doesn’t get return on deposit – seems to balance the risk
Comment:
Court said the analogous situation of someone taking a cab to the horse races, but then races
cancelled, would be different (so cab contract would be binding) since the cab has no special
qualification i.e. every cab is the same, so no particular significance of the particular cab,
but in Krell the room was special due to it’s vantage point. Perhaps not such a convincing
distinction however.
Reasonably foreseeable risks will generally be held on the lessee / purchaser (since could
have put express clause in contract to assign risk elsewhere)
E.g. if the risk of cancellation of parade had been reasonably foreseen (e.g. parties knew
Edward was sick) can argue this would imply assignment of risk of cancellation had been
assigned to the lessee.
This is not a mistake case, but unlike many cases there was an explicit discussion of risk
allocation:
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Amalgamated Investment Property v. John Walker (1976) (English C.A.)
FRUSTRATION LESS LIKELY WHERE EXPRESS DISCUSSION OF RISK ALLOCATION – CONSIDER TRADE PRACTICE,
SOPHISTICATION OF PARTIES
Facts: Parties reach agreement for sale of £1.7 million property, “subject to contract”
(condition precedent, so no agreement until in writing, contrast with condition subsequent
which can void an existing contract). Purchaser writes to seller asking if property has historic
designation and seller says no. Contract written, then next day property gets historical
designation and value drops to £200,000.
Decision: Contract is binding.
In discussion of risk assessment, court felt risk should fall on purchaser since:
Risk of historical listing was foreseeable (clearly – the purchaser even asked about it)
Purchaser is professional property developer and should know of such risks (parties
equally experienced here)
Thus loss should lie where it falls (i.e. on the purchaser)
Purchaser should have guarded against the risk e.g. contract could have provided for it
Comment: Reasonableness of unforeseeability is always in the eye of the beholder i.e. the
court! Courts will often consider:
Practices of the trade – where do risks usually fall in the marketplace
Sophistication of the parties – who is in the best position to avoid the risk
Today, insurance may also play in
But what if some amount of risk is foreseen, but it actually goes way beyond that:
Aluminium Company of America (ALCOA) v. Essex Group (1980) (U.S. Penn)
FRUSTRATION POSSIBLE WHERE RISK FORESEEABLE, BUT TURNS OUT TO BE EXCESSIVE – LIKE MISTAKEN ASSUMPTION
Facts: long term contract for sale of aluminium, with escalator clause i.e. so that ALCOA would
continue to get 4¢ per pound profit, price will be determined by formula including:
Production charge increases – tracked industrial composite index ICI (a wholesale price index
equivalent of the consumer price index), but problem was although it had a component for price
of electricity it was a much smaller percentage than electricity made up in ALCOA’s overall
expenses. After oil embargo (which no one anticipated) price of electricity went way up, so ICI
went up a little, but ALCOA’s expenses went up a lot i.e. parties chose a poor price index for
aluminium industry
Labour charge increase – price would also go up based on collective bargaining increases
Decision: contract void for mistaken assumption and for frustration (analysis almost identical
for both):
Both parties assumed the escalator clause would keep uncertainty for ALCOA within 3¢ per
pound i.e. thought they had narrowly confined risk for ALCOA
Both parties had agreed that purchaser should bear the risk of increased production and
labour charges
Mistaken assumption (similar to Solle v. Butcher):
Mistake was fundamental ($60 million in damages at stake here for ALCOA)
Would be extreme and undue hardship for ALCOA
Would not cause serious harm to plaintiff’s reliance because they expected price increases
No other policy reasons to make D bear risk (e.g. D not at fault)
Can characterize mistake as error in escalator pricing formula which was meant to constrain the
risk to within 3¢ per pound, but bilateral mistake in thinking chosen price index would reflect
ALCOA’s costs
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Remedy = reformation (i.e. court rewrites contract in accordance with what the parties
intended). Note this is a US remedy and has not yet been applied for frustration in Canada –
extremely rare remedy
Rewrote the escalator clause
Comment:
Trade practice was to constrain such risks, and court wanted to encourage this, and also to
support long term contracts
ALCOA could have taken out insurance against such an occurrence, or bought futures in
electricity to guard against the risk (both standard trade practices), although if court
accepted this and didn’t grant ALCOA relief might suggest no mistakes should be entertained
by courts because there could always be insurance
Just because a contract becomes more expensive, this doesn’t necessarily provide grounds for
frustration. Contrast ALCOA with the following 2 which show the old absolute obligation /
caveat emptor rule (i.e. you enter into contracts at your own peril) is still alive and well in
some cases:
Re Westinghouse Electric (1981) (US)
NO FRUSTRATION FOR HUGE COST INCREASE BASED ON POOR GUARANTEED PRICE
Facts: Westinghouse sold nuclear reactors and included in contract sale of uranium for fixed
price over some time, but uranium price went way up (resulting in claim for $1 billion damages)
Decision: Westinghouse not given relief for huge cost increase
Distinguished from ALCOA on the basis since there was only a guaranteed price and not a
misunderstood escalator clause
Westinghouse was the consumer and not the supplier
Possibility of unjust enrichment if Westinghouse was able to reform the contract – had
already made significant profits
Eastern Airlines v. Gulf Oil (1975) (US)
Facts: Gulf oil had contract to supply oil with objective formula to calculate price based on the
domestic price of oil, but Gulf Oil bought their oil from overseas and the price of that went way
up.
Decision: no relief for cost increase
Frustration and Land
Historically no frustration with land since “land is land” i.e. caveat emptor applied strictly to
purchaser, regardless of future changes.
No longer true (Capital Quality Homes) but still hard to get finding of frustration for land –
cases that have given relief have concerned intended use of land, or when zoning has
changed
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Capital Quality Homes v. Colwyn construction (1975) (O.C.A.)
WEAK AUTHORITY – FRUSTRATION GRANTED WHEN LAND SOLD REZONED = RADICAL CHANGE IN CIRCUMSTANCES
Facts: vendor sold land to purchaser, deposit paid. By express condition of contract, vendor was
to subdivide land into 26 lots and then convey title to the 26 separate lots. But change in zoning
disallowed such a subdivision, and purchaser wants deposit payment back
Decision: deposit should be repaid, basing judgement on frustration (so as to avoid expectation
damages):
Unanticipated event,
Radical change in circumstances, and
Vendor knew intended use to which purchaser would put the land, and that use was
frustrated.
Comment:
Clearly at odds with Amalgamated and Victoria Wood, which both said frustration was not
available (so loss should lie with purchaser)
This case criticized not only for going against doctrine, but also on policy grounds since if call
this frustration, what are consequences for all other cases where vendor has knowledge of
purchasers intended use (which is then frustrated)
Doctrine of frustration only applied to land in the rarest of circumstances
Buying a piece of land is fraught with risks – values may fluctuate widely; risk falls
where it may – on the purchaser
The leading decision (as specified in KBK) is:
Victoria Wood Development v. Ondrey (1977) (O.C.A.)
LEADING AUTHORITY – NO FRUSTRATION WHEN LAND REZONED: KNOWLEDGE OF PURCHASERS INTENTION NOT
SUFFICIENT
Facts: vendor selling land zoned for industrial use, knows purchaser intends to use it for
industry. After completion of sale, legislation puts land into the agricultural reserve, thus
prohibiting industry. Value of land drops significantly
Claim: purchaser argued Krell applied (should characterize sale here not just for land, but for
industrial land) and also Taylor (destruction of subject matter). Vendor argued purchaser
confusing subject matter / foundation of the contract with motive, or alternatively that
contract was for profit and gambled since rezoning was foreseeable (and so could have included
something in the contract to allow for such an occurrence)
Decision:
Disappointed expectation does not frustrate a contract
Mere knowledge on part of vendor of purchaser’s intended use of land is not sufficient
for finding of frustration (i.e. if that use then becomes impossible)
The date of closing was irrelevant, only the date of contract matters
Comment:
Similar to result from Amalgamated (historical designation day after sale, foreseeable risk,
knowledgeable purchaser, loss should lie where it falls i.e. on purchaser)
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KBK Ventures v. Canada Safeway (2000) (B.C.C.A.)
FRUSTRATION MUST: OCCUR AFTER K FORMATION, NOT BE SELF-INDUCED, NOT REASONABLY FORESEEABLE
MUST BE: MORE THAN MERE INCONVENIENCE, BE RADICAL/FUNDAMENTAL CHANGE, AND PERMANENT
Facts: vendor (Safeway) owned land and advertised it as prime development property. KBK
became purchaser (price = greater of $8.5 million of $38/square foot × area allowed by
development permit, which wasn’t yet known), and make first payment of $150,000. City, on
it’s own (which is very unusual) then announces re-zoning, which would result in allowed square
footage dropping by 90% (both parties objected to city by failed to change City’s mind). Value of
land drops form $8.5 to $5.4 million. KBK sought return of the $150,000
Under the BC Frustrated Contracts Act, KBK is entitled to restitution damages
Decision: confirmed B.C.S.C. finding of frustration (so $150,000 should be returned):
A finding of frustration requires:
Frustrating event must take place after contract formation
Can’t be self induced
Not reasonably foreseeable
If these three requirements are met, consider the impact:
Impact of frustrating event must be more than mere inconvenience
Must be a radical/fundamental change in the contract, making it totally different (look at
the nature/meaning/purpose/effects/consequences of the change)
Change must be a permanent one
Cites Victoria Wood as leading decision (mere knowledge of intended use insufficient to find
frustration). But frustration here since vendor (Safeway) had more than mere knowledge of
intended use, and cited the following factors (but no discussion as to how these factors led
the court to this decision)
Event in question (rezoning by City on it’s own) was highly unusual, although re-zoning
alone is quite common (i.e. unforeseeable in this case) – allows exception to be narrowly
read
Advertisement by vendor referred to zoning by designation “prime development
opportunity, zone C2”
Clause in contract said buyers intention was to develop
Purchase price calculated based on floor space allowed i.e. on development potential of the
land
Contract was silent on allocation of risk, and did not explicitly assign to purchaser (but it
did say “vendor made no representations or warranties regarding zoning or obtaining a
development permit”, and “agreement not conditional on buyer obtaining a development
permit” – might think this assigns risk for re-zoning as well to purchaser, but court didn’t
think so, saying they were just general clauses)
Comment:
Not clear why court deviated from Victoria Woods (only $150,000 at stake here), unless
advertisement seen as a warranty (but then why not call it warranty instead of frustration)
Barrage of criticism since it represents a fundamental shift in where the risk lies (so B.C.C.A.
might back away from this decision)
Question as to why Safeway didn’t try to enforce the contract (and so get $3.1 million
difference from KBK)
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Perhaps fact that price was based on floor space was taken as Safeway taking on the risk, and
also Safeway went as intervener to support KBK to have re-zoning stopped so perhaps court
saw this as a joint venture
When frustration found, contract voided at time of frustrating event, but problem of partial
performance i.e. what happens about losses/performance/work done by one of the parties
prior to the frustrating event? Historically, no relief, loss lies where it falls (criticized since left
losses to happenstance)
E.g. Krell: lease was for £75, and £25 paid as deposit, so when frustrated £25 is not returned
E.g. Chandler v. Webster (1904) (English K.B.) another coronation case but lessee had paid
the whole amount, so although contract frustrated no return of money paid
Fibrosa Spolka Akcyjna v. Fairburn Lawson Combe Barbour (1943) (English H.L.)
RESTITUTION DAMAGES WHERE FRUSTRATION ELIMINATES CONTRACT – LIMITED TO MONEY, NOT WORK/RELIANCE;
OVERRULED BY FRUSTRATED CONTRACTS ACT
Facts: English company sells machine to Polish company for £5000, with £1000 deposit paid by
Polish company. But World War II frustrates the contract, and Polish company wants deposit
back.
Decision: may have recovery on restitution basis where frustrating event entirely eliminates
contract
Comment:
Problem with this is that restitution is limited to money payments and not for work/reliance
e.g. if English company had started work building the machine, would be no set off against the
£1000
Statutory response: Frustrated Contracts Act
Across Canada except B.C.: reliance losses recoverable but only as a set-off against money
paid (so up to at most £1000 for reliance in Fibrosa)
In B.C.: goes further, and allows independent claim for reliance losses
E.g. $1000 deposit (paid purchaser to vendor), suppose vendor spends $2000 building
machine, then both parties out $1000 so no need to exchange any further (can apportion
other than 50-50 split if appropriate, but prima facie parties should equally bear the
loss)
Recap: Frustration Factors
Frustrating event must be fundamental
Must produce substantial hardship – much more than a mere increase in expenses or drop in
profit (one of the parties must be deprived be deprived of a substantial intended benefit of
the contract)
Risk must be unanticipated – cannot be risk addressed and allocated, or which ought to have
been addressed and allocated. Consider:
Sophistication and relative knowledge of the parties
Where risk usually falls in the industry
Whether there is allocation of risk, or whether allocation is incomplete
Party claiming frustration must not be at fault
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Control of Contract Power
Interpretation: How to Determine Contractual Obligations
APPROACH: Just look at express bargain
e.g. written contract (recognizes
effort/time to write it down)
Federal Commerce:
Consistent interpretation
Efficient, easier administration
Scott v. Wawanesa (Majority):
Literal interpretation, unless goes
against intent or if unreasonable
If sign it, stuck with it
Price may have been set differently
otherwise
But:
Language is inherently ambiguous
Can be inequitable/unjust, since
ignores reality of unequal bargaining
power, maintains class divisions, etc.
APPROACH: Contextual
McNeil / Renner:
Should also look at context: class,
gender, race, relative bargaining
power, past dealings, etc.
Scott v. Wawanesa (Dissent):
Contrapreferentum if ambiguity
Recognizes inequality of bargaining
power and reasonable expectations
But:
Inconsistent
Determining the obligations that flow from a contract, will have to consider:
Interpretation of the contract
The sources of obligations e.g. just from a written document if there is one, or also from
previous oral statements (parole evidence rule)
Representations that amount to warranties
Mistakes and frustration (i.e. obligations that are frustrated by external events)
The unfairness or unconscionablility of obligations
Mensch, Freedom of Contract
Freedom of contract is a legal construct – the boundary between decision that are free and
voluntary and those that are not is only defined by law
What are freedom of choice paradigm is really an ideological construct
Coercion lies at the heart of every bargain
Aboriginal Perspective: Anishnabe
Rule of giving: the closer you are in kin, the more you will rely on both the giving and
receiving of gifts. When you are kin, this exchange is seen to balance out over a long
period of time
System of reciprocity: taking another view, the Anishnabe perspective is almost like a life
insurance policy – as food becomes scarce, the Anishnabe are more anxious to give it
away. Storing food in the stomach of their relatives – social value leading to return in
times of hardship.
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To what extent should a court look beyond the 4 corners of a contract to determine the
obligations that flow from it?
MacNeil, The New Social Contract
Argued that historically the search for obligations was too narrow looking only at the
express bargain (i.e. positivist, looking only at what was said or written down), but this fails
to meet the general expectations of the commercial world since there are always some nonexpress bargain obligations - over influenced by the classic laissez-faire attitude
Should instead use contextual approach – look at surrounding circumstance such as who
are the parties, what are the circumstances, what is the context (e.g. past dealings), what
public/social considerations are there, etc.
Thus contract law is just one aspect of what may govern exchanges between human beings –
also influenced by custom, status/class, habit, hierarchical command structures, markets,
maintaining goodwill and future relationship, etc. So to do reasonable justice to the issues
raised by contractual relations must include aspects of anthropology, sociology, economics,
political theory, and philosophy.
All contracts are accompanied by non-promissory exchanges – promises, understanding or
expectations that the parties know will form part of the relationship between them, of which
the contract is only part
By not bringing in the contextual side of the contract, argues that this produces a
jurisprudence that will ultimately fail to capture our real life contractual obligation  Will
lead to unfair results
Renner, The Institutions of Private Law and their Social Function
Similar concern about positivist, narrow doctrinal approach, since it is asocial and
acontextual.
Similar to MacNeil, argues should look at class, gender, race, economic circumstances, etc.
Renner more extreme in that the failure of judges to ‘look beyond the end of their nose’ and
look at context was, although not necessarily a conspiracy, the method behind the madness
to sustain capitalism
If we ignore the contextual component of law, we run the risk of having outcomes or legal
principles that will be unfair.
Problem with broad/contextual approach suggested by MacNeil and Renner is interpretation will
be idiosyncratic, depending on particular context, with the same words/phrases meaning
different things in different contracts i.e. contextual approach sacrifices certainty of
contractual obligations, and certainty may be better in some cases
Legal formalism: approach to legal interpretation where rules are held to be important –
rules prevail regardless of other circumstances – bound by the four corners of the contract.
Federal Commerce provides a prime example of legal formalism:
Federal Commerce & Navigation v. Tradax Export (1978) (English H.L.)
EXAMPLE OF LEGAL FORMALISM: CONTRACT SHOULD BE INTERPRETED IN A CONSISTENT MANNER - FAST, EFFICIENT
Facts: notorious case involving standard form contracts. Contract for carriage of goods, delay in
loading goods at the dock. Issue over allocation of risk when ships are tied up – many associated
costs.
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Decision: It is essential to interpret in a consistent/coherent manner, since bargaining will
then be faster and more efficient (i.e. people will know what things mean) and administration
of the contract will be easier since everyone will agree on the obligations
Court quite adamant that rules prevail and that court are consistent with standard risk
allocation clauses
Reasons:
Efficiency in bargaining - everyone knows the rules
Faster – reduce transaction costs
Encourage competition and shopping around
Facilitate administration of contract – understand their rights and obligations
Fairness will be achieved by setting out clear rules that produce clear results
Criticisms:
Assumes parties have equal knowledge/awareness of the law
Such certainty may be illusory, since language is inherently ambiguous and dependent on
context
Can lead to inequitable/unjust results
Scott v. Wawanesa Mutual Insurance (1989) (S.C.C.)
WHERE MEANING CLEAR/UNAMBIGUOUS, USE PLAIN MEANING APPROACH; MAY DEPART IN CASES WHERE
INTERPRETATION UNREASONABLE/CONTRARY TO INTENT
DISSENT: CONTRAPREFERENTUM – WHERE AMBIGUITY, RESOLVE IN FAVOUR OF NON-DRAFTING PARTY
Facts: Insurance contract, standard form, included two clauses: 1) the insurance coverage
includes relatives (father is home owner and named insured) and 2) nothing would be paid out if
loss caused by a criminal act of any insured person (e.g. to avoid arson). Son starts fire and
house burns down (arson).
Issue: should the insurance have to pay out?
Majority decision (4-3): No recovery since:
Terms are clear and unambiguous – takes a plain meaning or literal approach
When the meaning in the contract is unambiguious, should not give it meaning other than
in its express term – adopting legal formalism
In this case the clear, literal meaning of the clauses should be used (i.e. son is covered so
is an insured person, but son committed criminal act). In other cases may depart from the
clear/plain/literal meaning where it is contrary to the intent of the parties or where it is
unreasonable (neither occur in this case).
Reasoning:
You are responsible for your own contracts i.e. don’t sign unless you understand i.e.
general rule: if you sign it, you are stuck with it – caveat emptor
Not fair to hold insurance company liable due to other parties failure to understand
There was even a clause that said no payout for vandalism/malicious acts by members of
the household – what more could the insurance company have done
Insurance company would have calculated different premium if included fire by criminal
acts of relatives
If need express notification of every clause, why bother writing anything down
Dissent: Thought majority decision unfair
Made a joint v. several distinction: insurance covers both fathers and son’s property, and if
son destroys his own property not covered, but felt if son destroys fathers property (as here)
should be covered i.e. several (each is obligated not to destroy his own property) rather than
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joint (i.e. multiple obligations – each obligated not to destroy their own nor each others
property).
Reasoning:
Found ambiguity in the clauses (as to whether it was meant to be joint or several)
To resolve ambiguity, use contrapreferentum i.e. where ambiguity leads to 2 reasonable
interpretations, should resolve in favour of the party who did not prepare the contract
i.e. the drafter loses out since they are responsible for the ambiguity (the insurance
company here which prepared the standard form, and this problem is common with standard
forms)
Significant inequality in bargaining power due to differing knowledge (MacNeil / Renner
might suggest looking at other people who have used this standard form and ask if they were
aware of the clauses)
Reasonable expectation of parties i.e. a person unversed in insurance law would assume
coverage in this case
Individuals (father) should not be responsible for wrongdoings of another (son)
Parole Evidence Rule
Parole evidence rule only concerns contracts that are written down (writing a contract
down is not the agreement itself but just evidence of it, but the parole evidence rule, at
least historically, gave tremendous deference to the written contract)
An agreement can be infected/obscured/contradicted or alternatively illuminated by the
sometimes murky background facts out of which it arose, both before, during and even after
the negotiations for the contract. “Parole” refers to any potential source of the terms of
the contract that is not part of the written contract, and includes both oral and written
documents
Integration clause and/or Exclusion Clause
States that the entirety of the contract is what has been written down
General Rule: the written contract is what counts; surrounding statements are irrelevant
Parole evidence rule:
A court must first ask: was it the parties’ intent that the written contract be the
complete expression of their agreement
If so, what the parties may have said during negotiations or in other writings is
irrelevant
General deference to written contract, especially when signed – as a general rule, will not
stray outside the written contract
Signing is taken to be evidence of careful deliberation of the document that you are
signing
Where there is a written contract, parole evidence is not admissible to add to, subtract
from, vary or contradict the written agreement
Strength of the presumption that written contract is the entire deal:
Strong  Add – Subtract – Vary – Contradict  Weak
Issue: can produce unfair surprise – while written evidence may be more reliable, that is not
always the case
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Taking a narrow interpretation, a clear intention from both parties to the contract may
be defeated if we only look at the writing
Especially true with standard form contract
Perjury – deference to the written word may encourage people to lie
May also frustrate reasonable expectation and reliance
Rationale for the Rule:
Parties took the time and effort to write it down – should give weight to this
Avoid injustice through perjured evidence – juries might be swayed by witnesses and not
capable of assessing relevant weight of oral vs. written evidence, therefore don’t let them
hear evidence contrary to written (not as relevant since juries rarely used in modern civil
trials)
Certainty – other evidence has subjective elements which could undermine the predictability
of the written evidence
Court efficiency – trials would be long with high costs if admitted all previous evidence
To control and restrict misrepresentations by agents/employees – e.g. agent/employee says
something at odds with the written contract which will be between the employer and the
other party
Problems with the rule:
Promotion of perjury and injustice – allows promisor to recant (without penalty) their
previous promise (which they made sure was not in the written contract) e.g. one party says
“I assure you it’s like this …” telling the other party about the written contract or “I promise
you …”, but the written contract says no such thing
Promotes unfair surprise, uncertainty, can defeat intentions and reliance – promisee may
rely upon oral promise which is not in the written form e.g. common in “battle of the forms”
cases where one party never looks at the standardized form
Exceptions to the rule
Extrinsic evidence is admissible to show the following:
It was not both parties’ intention that the written agreement be the whole contract (in
which case the rule does not apply at all)
Tends to be the starting point
Interpretation of an ambiguous clause – may try to bring in extrinsic evidence to champion a
specific meaning
Misrepresentation, either innocent, negligent or fraudulent – extrinsic evidence can be
brought in to show that there was a misrepresentation
Mistake – use extrinsic evidence to show that there was a mistake in the written contract
Rectification (i.e. court rewrites part of contract) if agreement simply written down wrongly
and so didn’t reflect the parties agreement
To establish condition precedent – (i.e. contract only comes into being if X happens) so need
extrinsic evidence to show whether X did or did not occur
Unconscionability – show that contract was brought about by unconscionable means = void
ab initio
Statutory override e.g. in consumer contracts the Trade Practices Act says if signer is in a
rush, or has no time to read the contract, rule does not apply
To prove modifications or discharge (i.e. all obligations satisfied) – GTAs
Collateral contracts/warranty/agreement – extrinsic evidence brought in to show that there
was a separate agreement along with and in addition to the written agreement
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Most common exception
Representations and Warranties
Misrepresentation can give rise to an independent action leading to rescission
But if the statement doubts amount to misrepresentation, then may argue in the
alternative that there was a collateral warranty.
Generally concerns an oral representation made during negotiations, and one party claims it
gives rise to legal obligations
If contract written down, then parole evidence rule suggests can’t introduce evidence of
such representations. Further, written contract will often contain clauses expressly saying no
such representations were made or relied upon.
However, there is an exception to the parole evidence rule if can show the
representation amounted to a warranty. Two ways of looking at it:
“One contract theory” says the oral agreement is part of the overall agreement, and the
parole evidence rule does not apply because the written part is not the entire agreement
“Two contract theory” says there is a main (written) contract and a separate collateral
contract consisting of a promise given by one party in exchange for the other party
entering into the contract i.e. a contract to make a contract
Lambert in Gallen v. Allstate Grain says makes no difference which way look at it –
result must be the same in either case
Bauer v. Bank of Montreal (1980) (S.C.C.)
EXCEPTION TO PAROLE EVIDENCE RULE IF REPRESENTATION = COLLATERAL WARRANTY; NO EXCEPTION IF
CONTRADICTS WRITTEN AGREEMENT
Facts: Bank made loan to company and took security interest (a kind of collateral) which was
the accounts receivable of the company (i.e. assignment of debts owed by customers to the
company, so that in event of company not repaying load, customers would pay to bank instead
of to company). In case of company going bankrupt, the priority of creditors would be that bank
would get the customers money before anyone else, provided the security interest was
registered (i.e. perfected)
Bauer goes into the bank to guarantee the loan from bank to company, and one of clauses in
guarantee says bank doesn’t need to perfect the security. However, Bauer claims the bank
manager promised that the bank would do so, but it did not
Company went bankrupt, since didn’t perfect the bank couldn’t collect on the accounts
receivable, and so went after Bauer for the whole load. Bauer said: “but you promised you’d
perfect the security interest” (i.e. sues claiming misrepresentation and a collateral warranty)
whereas bank said “look at the written guarantee you signed – we have no obligation to
perfect” (and claimed the parol evidence rule made the bank manager’s promise
inadmissible)
Rule McIntyre:
There is an exception to the parole evidence rule if the representation was a collateral
warranty
However, this collateral agreement exception does not apply where the collateral
agreement would clearly contradict the written agreement
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Decision McIntyre: both claims rejected
Found no evidence of a misrepresentation
Found that the oral representation contradicted the written contract, so cannot rely on
the collateral warranty exception
Comment:
So collateral warranty can add to the written agreement but not contradict it
Perhaps McIntyre didn’t really believe that the bank manager made the representation as
claimed by Bauer, but couldn’t say this since this is a matter of fact and there is a strong rule
of practice that matters of fact should be left for the trial judge – Lambert J. in Gallen felt
would have been better to break this rule than to create this bad law, since problem now is
even if the bank manager had promised to perfect in front of witnesses, then because it
contradicts written still would not be allowed – Gallen below is response to this absurd result
Gallen v. Allstate Grain (1984) (B.C.C.A.)
RECASTS PAROLE EVIDENCE RULE AS PRESUMPTION (NOT ABSOLUTE RULE) – STRONGEST WHEN THERE IS
CONTRADICTION
Facts: Gallen were farmers, Allstate was grain dealer. Grain dealer agreed to sell buckwheat
seed to farmer and buy the crop when harvested. Grain dealer’s manager assured farmer that
there would be no problem with weeds. Signed contract had an exclusion clause which said that
grain dealer gives no warranty as to productiveness of seed and will be in no way responsible for
the crop. Crop was total failure because it was choked with weeds. Farmer sued for profit.
Rule Lambert J:
Determine whether the oral representation is a warranty i.e. did the parties intend it to
have legal effect
The oral warranty and the written document should be read together if possible i.e.
representation can add to the written document. As shown in this case, can get around
contradiction rule if can re-characterize/harmonize the representation and/or clause so
they do not contradict and can stand together.
Lambert commented on the Bauer/Carmen rule that there can be no collateral warranty if it
contradicts the written: If cannot harmonize i.e. there really is a contradiction then the
principle from Bauer/Carmen is only that there is a strong presumption in favour of the
written document, but it is not an absolute rule and so can still conclude on the facts
that the collateral warranty should supersede the written document (says even Bauer
decision recognized that it is not absolute, for if the rule were absolute, McIntyre would not
have bothered to look at the evidence to determine it was invalid).
Recasts the parole evidence rule as a presumption! The strength of the presumption
depends on the circumstances:
Less strong if the representation adds or interprets the written, more strong if it
varies the written, and stronger still if it contradicts the written (but can still be
ousted if clear and unequivocal evidence)
Less strong with standard forms than for negotiated agreements (parties may have
made oral arrangements without being aware of a standard form contract)
Less strong with a specific oral representation but more general written clause
Decision Lambert J:
Intention test – yes, clear intention in this case that farmer should rely on statements and
reasonable to do so (went to the heart of reason for buying the seed)
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Contradiction test: the oral representation/collateral warranty (Buckwheat will choke out
weeds) was not contradictory to the exclusion clause in the written agreement (no warranty
for productiveness of crop, which was interpreted as meaning if you don’t get the yield you
expected, but has nothing to do with weeds). I.e. said the representation adds to the written
document rather than contradicts it.
Comment: Lambert J. thinks the parole evidence rule is nonsense, but note the B.C.C.A. does
not overrule the S.C.C., and all comments regarding contradictions creating only a presumption
for the written document (rather than a strict rule) were obiter dicta since Lambert concluded
this case as non-contradiction. However, some think it likely S.C.C. will follow Lambert in the
future.
Zippy Print (1995) (B.C.C.A.) confirms Gallen (again, Lambert J)
DISCREDITS PAROLE EVIDENCE RULE IN FAVOUR OF PARTIES’ INTENT; MISREPRESENTATION SHOULD BE AVOIDED
THROUGH EXCLUSION CLAUSE
Facts: Plaintiff was unable to pay franchise fees because they could not meet sales volumes.
Claimed that the defendant has misrepresented potential sales volume. Defendant had an
exclusion clause removing liability for failure of a franchise.
Decision: Lambert J. makes 5 points:
To exclude evidence on the parole evidence rule is absurd
Rule should be what underlies the parole evidence rule – did the parties intend the written
document to be the entire agreement
Absent an exclusion clause, one party cannot make a representation designed to
persuade someone to enter into the written contract, and then hide behind the parole
evidence rule when that representation was not included in the written
But where you have a properly drafted exclusion clause, liability for misrepresentation
may be avoided - not on the basis of the parole evidence rule, but on the basis of the
exclusion clause
However, exclusion clauses in standard form contracts will not exclude liability for
representations made
Unless the effect of the exclusion clause has been brought home to the party to whom
the representation was made by being specifically drawn to the attention of the party
or by being specifically acknowledges by that party
Signed document are still considered to be the best evidence of both the parties’ intention
for the agreement. Therefore, still hard to get around the deference for written agreement.
In particular, when there is a contradiction between an oral collateral warranty and a
contract, will generally adhere to the parole evidence rule.
In summary, written documents still the best evidence of contractual terms, but may look
beyond them. To decide whether to do so, relevant factors include:
General intent (how strong was the intent to be bound by representation), reliance (on
the representation), unfair surprise (on other party if representation made a warranty)
Nature of the change: does representation add/vary/contradict the written (how serious
a contradiction is it)
Nature of the document: was it intended to be exhaustive, are there exclusion clauses,
clarity of wording, knowledge of parties (e.g. was it read), standard form contract (more
likely to allow representation)
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Nature of the representation: quality/credibility of evidence (e.g. unknown employee in
Bauer), was it clear, significance (was it at core of reason to enter contract as in Gallen)
Nature of bargaining power: equality/inequality, standard form document, past
relations, sharp practice (e.g. lies, unconscionability, unscrupulous making promises
duping the unwary when not in written
Construction and Contracts
Is there an implied common law warranty?
General rule: caveat emptor
Exception: can a warranty be implied?
Qualification: unfit for habitation (Fraser-Reid) – house must be incomplete!
Lead to expectation damages
Rationale: if house is complete, purchaser should be able to inspect it
Is the building incomplete?
Is there a latent defect?
Would the fixtures that are incomplete prevent the purchaser from adequately
inspecting the house
Standard Form Contracts
Signature Rule – where a document is signed, then except in exceptional circumstances, the
party that signed is bound regardless of whether they actually read the contents of the
contract
Has been extended to include clicking “I Accept” for electronic media
Ticket Cases
Unsigned Documents
Two general perspectives: who has the onus of making sure that there is knowledge?
The party seeking damages (wants to avoid limited liability clause) – this person ought to
have known about the limitation clause or ought they to have made the inquiries?
This policy accords with caveat emptor, strong business efficacy considerations
The party seeking to rely on the contract should bear the onus for ensuring that the party
entering into the contract is aware of the limitation clause
Parker v. South Eastern Railway (1877) (English C.A.)
LORD MELLISH TEST: ONLY BOUND BY UNSIGNED DOCUMENT IF KNOWLEDGE OF SOME CONDITIONS OR REASONABLE
STEPS TAKEN TO INFORM OF SOME CONDITIONS
Facts: P left bag with railway cloakroom, paid 2d and got ticket back, bag was lost.
Rule:
Lord Mellish test: with an unsigned document, only bound by exclusion clause if party
assented to it, and 2 ways to assent:
If party had actual knowledge document contained some conditions (but actual knowledge
of the specific conditions themselves not required), or
Party seeking to rely on conditions took reasonable steps to provide adequate notice
document contained some conditions (but notice of actual conditions themselves not
required) – so other party ought to have known document contained conditions
Rule justified:
With a signed document, assent is deemed by the signing
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Reasonable expectations
Encouragement of self protection / caveat emptor (i.e. given sufficient notice should enquire
further)
To protect party trying to rely on conditions from other party turning a blind eye to the
conditions i.e. fraud
Decision:
In this case, knew ticket had writing on it but thought it was just a receipt for giving money
and didn’t read it, so no knowledge it contained conditions
However, reasonable steps were taken: railway gave ticket, ticket on front said “see back”,
on back said “no liability for items exceeding value of £10”, and sign near cloakroom said the
same
Comments: One problem with the Mellish test is that the condition may itself be very
unreasonable, but will be accepted as long as reasonable notice was given
At a common understanding, people are now assumed to be aware that standard from contracts
contain certain conditions.
However, terms printed in a contract must not be unreasonable – an implied term that the
condition of the ticket will be reasonable
Bradshaw
UNDER MELLISH RULE, MORE UNREASONABLE THE CALUSE, MORE NOTICE THAT IS REQUIRED
Facts: Contract with a warehouse for sale of orange juice. Juice was improperly stored and
spoiled as a result. Client sued warehouse for negligence. However, warehouse claimed
protection of an exclusion clause that state that the warehouse was not liable for negligence.
Decision: Exclusion clause was upheld
What constitutes reasonable notice under the Mellish rule varies depending on the
reasonableness of the clause – the more unreasonable the clause it, the more notice of its
existence that will be required
Denning: When faced with a highly unreasonable clause (e.g. exclusion of all liability)
Should be in red ink
Should be on the face of the document
Should be a red hand pointing to the clause
Decided that the condition in this case was not so unreasonable, so lower onus for providing
notice.
Clause was on the face of the agreement and was written in plain English
There was then a retreat from Parker (Mellish Rule):
Thornton v. Shoe Lane Parking (1971) (English C.A.)
SIGNS POSTED AFTER TICKET BOUGHT NOT BINDING SINCE AFTER K FORMATION; REQUIRES KNOWLEDGE OF ACTUAL
CONDITONS (NOT SOME)
Facts: Thornton parked car then suffers personal injury in D’s parkade. Sign at entrance read
“cars parked at owner’s risk” and machine gives out ticket when light changes to green and
barrier raises. The ticket said “subject to posted conditions” and posted signs said “no liability
for personal injury”. Thornton said he read the ticket but only to see what his time of entry was,
and saw some other writing but didn’t read it
Decision: parkade operator not able to rely on exclusion clause:
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Contract was formed (offer/acceptance) when light turned green or when ticket came out
of machine, so subsequent exclusions on ticket and signs invalid since not present at the
time of formation
Even if conditions/posters had been present at time of formation, exclusion would still not
be binding since (expands Mellish test):
Requires not just actual knowledge that it contains some conditions (as specified in
Parker) but rather requires actual knowledge of the actual conditions themselves
Reasonable steps for notice had not been taken: such an extreme term would require very
explicit notice: red ink plus a red hand pointing at it in this situation i.e. proportionality
between required notice and onerousness of the clause
Comment: illustrates another way that courts can avoid unfair exclusion clauses: the sign at
entrance that read “cars parked at owner’s risk” could have been understood to mean personal
injury instead of just property damage as it was here, so technique of interpretation
Signed Contracts and Fundamental Breach
Avoiding the Signature Rule
General Parker signature rule: absent fraud, conditions in a signed document are binding:
knowledge of conditions is irrelevant, whether or not read the document is irrelevant i.e.
assent to exclusion clause deemed by mere act of signing
To avoid this rule in unfair situations:
Fraud
Courts can interpret exclusion clause so as not to include the circumstances in the case:
contrapreferentum construction = ambiguity in document will be interpreted against the
party who prepared it
Duress: forced to sign, not voluntary (e.g. gun to head). Requires more than just
inequality in bargaining power
Might be able to argue other party made misrepresentations
Document is not mine: non es factum. I.e. signed it, but mistaken about fundamental
nature of the contract. Document must be of a wholly different character. e.g. signed a
lease thinking it was a birthday card.
Fundamental breach
Fundamental Breach
Historically, a breach of contract by one party does not relieve the other party from
completing their obligations under the contract (so should perform then sue for damages)
unless breach is so fundamental (e.g. breach that deprives the other party of substantially
the whole bargain) that don’t have to perform (and can sue for breach).
Rationale: almost every complex contract will be breached in minor / de minimus ways, and
could be used by other party to get out of it. This doctrine was extended in 1950’s to strike
down exclusion clauses:
Karsales (Harrow) v. Wallis (1956) (English C.A.)
Decision Denning: if there is a fundamental breach:
Innocent party need not continue performance, and can sue
Exclusion clause not binding
Rationale: although an exclusion clause is ok for normal breaches, exclusion clause should not
relieve a party for not performing the very thing the contract is about, thus depriving the
innocent party of substantially their whole benefit.
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Following this ruling two problems emerged:
Malleability and hence uncertainty over big breach (fundamental) v. small breach (not
fundamental) distinction
Some exclusion clauses were not unfair e.g. when made between corporate parties with
equal bargaining power
The Unfair Contract Terms Act was passed in England, saying that exclusion clauses for
liability for negligence are void unless reasonable in the circumstances. To determine if
reasonable, take into account bargaining power, inducements, availability of being able to
contract elsewhere without such clauses, and knowledge of the clause at the time for
formation
In Canada, we do not have such an act and the doctrine of fundamental breach perhaps
remains as a rule of construction:
Hunter Engineering v. Syncrude Canada (1989) (S.C.C.)
FUNDAMENTAL BREACH REMAINS AS RULE OF CONSTRUCTION, BUT UNCONSCIONABILITY USUALLY PREFERRED
Facts: Syncrude contracted with third part for 14 conveyor belt systems (for use in Alberta tar
sands project), for $300,000 each to total of $4 million. Syncrude contracted with Hunter for the
gear systems, which cost the third party $450,000 (part of the $4 million). Both contracts had
exclusion clauses saying no liability except for repair/replacement of any parts that break in the
first 12 months. 15 months later the gear system fails, costing $400,000 in repairs
Trial: concluded this was not a fundamental breach (so exclusion clause remains binding) since
by economic impact assessment: cost of breach = $400,000, total cost = $4 million, so only 10%
impact, not fundamental
On Appeal at C.A.: cost of breach = $400,000, cost of gears = $450,000, so 90% impact, yes,
fundamental, so exclusion clause falls and Hunter is liable for repair
S.C.C.:
Fundamental breach doctrine is not a rule of law but, according to one judgement,
remains as a rule of construction. Unanimous that exclusion clause remains binding in this
case, but for different reasons:
Dickson J:
Discussed problems arising from applying the fundamental breach doctrine as a rule of law:
Uncertainty and characterization games (what is a big / fundamental breach v. what is
small)
Exclusion clauses are fair and reasonable in lots of cases
In many commercial cases exclusion clauses are reflected in the price so would be
unfair surprise / unjust enrichment to say they are not binding
If allow exclusion clauses to fail, why not other unfair terms
Result is to hide the real inquiry, i.e. fairness / unconscionability
Concludes should abolish the doctrine of fundamental breach (even as a rule of
construction) and apply law of unconscionability in deciding whether to uphold an
exclusion clause
When we are looking to see if a clause is unconscionable, consider: was there duress, an
inequality of bargaining power, unfair or unreasonable clauses, etc. at the time of
contract formation
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In this case upheld the clause since equality of bargaining power (both parties had lawyers,
both knowledgeable, no undue pressure to enter contract, etc)
Wilson J:
Agreed with Dickson on problems, but should retain doctrine of fundamental breach as a
rule of construction, since using test of whether unconscionable at time of contract
formation is itself problematic:
Too complicated / subjective – parties negotiated for 18 months in this case, huge
paperwork, impractical for courts to wade through it all to determine if there was a
trade off between price and exclusion clause
Ignores fact that exclusion clause might have been fair at time of formation but
became unfair later on (e.g. consider employee contract that says can terminate with
just 4 weeks notice, but then employee works there for 20 years – is termination provision
still fair and reasonable)
Even if equality of bargaining power, doctrine of fundamental breach still guards against a
party abusing the protection of an exclusion clause by intentionally breaching contract, so
would want to make clause unbinding in some cases (comment: this is perhaps just
unconscionability however)
Comment: thus not settled whether doctrine of fundamental breach (as a rule of
construction) is still with us – subsequent cases have applied both judgements (note it is
certainly not a rule of law).
Although the doctrine has fallen out of favour, still open to be argued
Tilden Rent-a-car v. Clendenning (1978) (Ont. C.A.)
SIGNED CONTRACT NOT BINDING IF CONDITION UNREASONABLE OR RELIANCE UNREASONABLE – OFTEN DISTINGUISHED
ON THE FACTS
Facts: Clendenning signed standard form contract for rental car plus coverage, but exclusion
clause said would still be liable for any damage if a result of illegal act or after any drinking.
Clendenning pleads guilty to impaired driving, but later claims only did this because didn’t want
to travel to court and would be cheaper to simply plead guilty. However, as a result was hit with
the costs of the damage to the car because of the exclusion clause
Majority decision:
Two part test to determine when clause in signed standard form should not be binding:
If condition unreasonable, and
If reliance on signature unreasonable
In this case exclusion clause not binding since:
Clause unreasonable since was regardless of amount that had been drunk or illegal e.g. even
a tiny sip of wine or driving 1km over speed limit
Reliance on this clause unreasonable since Clendenning had no knowledge of it and
probably would not have entered contract if he had, and Tilden did not take reasonable
steps to point it out. Discussed the rationale for the signature rule:
A signature is evidence of a willingness to be bound, just like consideration or putting
something under seal
However, in this case not a formal indication of assent (so not reasonable to rely on
signature) since document was not intended to be read, as evidenced by:
Speed of transaction (and this is part of the idea – to get your car as quickly as
possible)
Length of document
Use of fine print
Thus signature was meaningless as concerns an intention to assent to the terms
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Further, Tilden employee had actual knowledge than Clendenning did not read (so had no
knowledge what was in the written contract) but signed anyway. Thus signature further
devalued.
Comment:
This was seen as a momentous decision, and people asked if this was the end of standard
form contracts (i.e. when is a standard form not signed hastily, without fine print, and
without reading). It at least suggested the signature rule is rebuttable
But, although Tilden has been applied, there have been an equal number of cases that
have distinguished it on the facts. Thus it is not the panacea that consumer rights groups
thought it would be.
Court narrows the application of Tilden
Karroll v. Silver Star Mountain Resorts (1988) (BCSC)
TILDEN NOT GENERAL PRINCIPLE – ONLY APPLIES IN SPECIAL CIRCUMSTANCES
Facts: Woman signs a waiver to enter a ski race at Silver Star which contains an exclusion of
liability clause. She breaks her leg because some random dude gets in her way. She claims that
Silver Star was negligent in allowing that other skier to be on the slope while she was racing
down to the bottom.
Held: Court holds that the Tilden principle of reasonable notice is not a general principle. It
is only applicable in special circumstances.
Holds that a reasonable person in Silverstar’s position would have thought Karroll was consenting
by signing:
Entire purpose of K was a release from liability (unlike Tilden where purpose was to rent a
car)
Skiing is inherently a risky activity and you engage in it at your peril
Release was only one page, short, easy to read Karroll had signed such releases before and
should know what they contain (VS. McCutcheon) – a reasonable person would expect to sign
such a waiver
And if I’m wrong and this is an exceptional case, were reasonable steps taken:
“Release to indemnity – please read carefully”
Short process to read the waiver
Karroll sued the ski club (who provided set up and volunteers) as well as the mountain. The ski
club is a third party beneficiary of the mountain’s release form. Ski club is an agency.
McLachlin cites Scruttons v. Midland in how to find agency.
E-Commerce
General Rule: By clicking an “I Agree” button on an e-contract, one is deemed to consent to
all its terms, regardless of if they’ve been read (Rudder)
Mere use of a website does not entail consent to its terms of use (Specht)
Mere notice of a license agreement is insufficient to form a binding K if there is no way to
consent to its terms. (Specht)
Great deal of deference to sanctity of K and caveat emptor, as in Kanitz.
BC’s Electronic Transactions Act provides that one can provide consent by electronic
means.
In e-commerce Ks, courts will use the reasonable notice argument from the Ticket cases.
Terms displayed, format, significance of clicking ‘I Accept’ made clear, etc.
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Radin Article: Humans, Computers and Binding Commitment
Contrasts two ideas: contract as consent and contract as product
K as consent  doctrinal model of K law
K as product  terms of K are not bargained in any significant way, they are as much a
part of the product as any of its components
With the preponderance of e-contracts, the traditional idea of contract as consent where
there is bargaining over terms becomes less realistic. Where one is forced into a view of K as
a product, i.e. where one has no choice but to buy a product and its contractual terms, the
concept of choice is curtailed.
In the context of K as product, we need to bring the product + terms to the attention of the
buyer. It is up to the regulatory powers to decide which terms should be brought to a buyer’s
attention in such circumstances.
To deny the value of this because one is supposedly opposed to regulation is misguided since
regulation provides the infrastructure within which the market economy operates.
Specht v. Netscape Communications Corp. (2001) (NY)
MERE NOTICE INSUFFICIENT, MUST PROVIDE WAY TO CONSENT TO TERMS
Facts: Considered whether a person who downloaded free computer software was bound by a
License Agreement that was merely posted on the site and did not require one to press on an “I
Agree” button.
Claim: Netscape claimed that the mere act of downloading signified consent.
Held: Court held that mere notice of a license agreement was insufficient to form a binding
K since there was no way to consent to its terms.
Rudder v. Microsoft (1999) (Ont. Superior Court)
CLICKING “I AGREE” MAKES A K ENFORCABLE
Facts: Online sign up procedure for the membership agreement. After the terms of the
agreement came up, at the bottom you had to select the ‘I Agree’ box. This case involved a
forum selection agreement - an agreement that if you’re going to sue Microsoft, that you can
only do it in Washington State.
Held: Court held that the forum selection agreement was enforceable.
Found that the terms were not unreasonable:
Court observed that users were required to click on the "I agree" button to accept the
terms, and that the impugned clause was no harder to read than any of the others.
The sign-up procedure itself required users to click "I agree" twice, where the second time
the user was told that they would still be bound to the terms even if they do not read
them all.
Kanitz v. Rogers Cable Inc. (2002) (Ont. Sup Ct)
AGREEMENT VARIATIONS POSTED ON WEBSITE BINDING - CONTROVERSIAL
Facts: Customer signs the Rogers agreement, which provides that Rogers may
change/add/remove portions of the agreement at any time without your consent or
authorization. Also provides that they will provide notice of such changes by email, post, or
posting changes on the website.
Held: Court holds that amended agreement is binding since notice was given in accordance
with K.
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Obligation is on consumer to check the website for amendments from time to time.
Ps continued use of the service after amendments were made is seen as acceptance
The Court also upheld the arbitration agreement itself, as well as a "no class actions" clause. In
other words, the parts of the contract that forbade Rogers customers from going to a regular
court (forcing them instead to seek redress from an arbitration panel) and from suing as a class
were deemed valid.
Unfairness
Courts have invented many mechanisms to manipulate contract enforcement in order to do
justice in the circumstances – tend to complicate doctrinal rules.
Some judges argue that we need doctrinal rules that allow the court to decide up front whether
contract enforcement is fair. Thus, developed three specific rules:
Duress
Undue influence
Unconscionability
Duress
Long standing rule developed in the courts of equity
Economic Duress
Port Caledonia (1903) (English)
Facts: one ship had floated dangerously close to another, and requested a tug. Tug boat master
demanded £1000 instead of the usual £200. Owner of tug sued to get the £1000
Decision: Only £200 to be paid – agreement for £1000 was inequitable, extortionate, and
unreasonable – clear economic duress
D&C Builders v. Rees (1966) (English C.A.)
Facts: D employed P to do some work, P partly paid D but P still owed £500 to D. P offered to
pay £300 in settlement (or nothing), and D, who was on the verge of bankruptcy (P knew this),
felt they had no choice but to accept.
Decision: there was no true accord here since P held D to ransom. “No person can insist on a
settlement procured by intimidation”. Thus P has to pay remaining £200
Definition: Occurs when someone in a stronger position demands of the weaker position more
than he is justly due.
General Rule: Duress vitiates consent because consent was not given voluntarily
 2 types of duress: physical threats, economic duress (Port Caledonia, D&C Builders)
 Fairness of K is irrelevant to duress, only important that K was entered into voluntarily
 Commercial pressure in and of itself is not enough to conform to economic duress
4 criteria for assessing whether a court should find economic duress: (Pau-On)
1. Consent done under protest (was there protest at formation?)
2. No alternative course of conduct available
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3. No independent legal advice prior to signing the K
4. After signature, prompt steps taken to avoid the consequences
5. Unfairness (policy, not doctrinal requirement)
Remedy for Duress:
 Party can elect to void K OR
 Continue on with it which ratifies the K (as occurred in Stott)
Duress vitiates the concept of consent to the contract:
Because we concentrate on consent, the fairness of the bargain becomes irrelevant.
If the court finds that duress has vitiated consent, this is the end of the inquiry.
Remember, K’s are voluntary obligations – doctrine of duress is centred on lack of
consent, when consent not freely given
Undue Influence vs. Unconscionability
Courts often use the terms undue influence and unconscionability interchangeably. However,
still considered to be two separate legal doctrines.
Doctrinally, the test are very similar:
Undue Influence
Unconscionability
Relationship of power and/or influence over
Unfairness in formation
the weaker party
But look for a disparity in bargaining
Improvident bargaining
power
Unfair bargaining
Really boils down to one determination: is the transaction, seen as a whole, sufficiently
divergent from community standards of commercial morality that it should be rescinded?
Undue Influence
General Rule: A finding of undue influence will result in the court setting aside the K against the
wrongdoer
Remedy: Voidable contract
Two requirements for finding undue influence:
1. Improvident bargain of manifest disadvantage to one party or to the undue benefit of
another AND
Doesn’t have to be so unfair as to be divergent from community standards of commercial
morality
But, just because the bargain is not in the BEST interests of the weaker party, doesn’t
mean that it is improvident
2. Unequal relationship where one has influence over other (but not enough for duress). Two
Categories of Relationship of undue influence (Duguid):
Class 1 Relationship: Actual Undue Influence
Circumstance where there is a disparity in bargaining power arising out of relationship
and the stronger takes advantage of the weaker
Claimant (weaker party) must prove on the facts that the other party exerted UI (on a
BOP)
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Class 2: Category of relationship presuming Undue Influence
Class 2A – De jure: Certain relationships, as a matter of law, raise the presumption
that undue influence has been exercised
Rebuttable if obtained consent/entered K voluntarily
If you fall into one of these enumerated relationships, then the presumption kicks in
automatically (onus shifts to defendant to show consent/voluntariness):
Solicitor-client
Doctor-patient
Trustee-beneficiary
Fiduciary – by virtue of the relationship, one has power over the other
Banker-client (Lloyd’s)
Religious advisor-worshipper (convent cases)
Family relationships – a bit controversial in this area, this category tends to move in
and out (husband/wife, parent/child etc)
Class 2B – De facto: Relationships of trust and confidence (residual category)
By demonstrating the existence of a relationship under which the complainant placed
trust and confidence in the wrongdoer, the complainant raises the presumption of UI.
Onus on the person claiming the relationship to prove it
More likely to include marriage relationships if: (Duguid)
 Trust and confidence placed in partner wrt to $ OR
 Sexual & emotional ties between parties provide ready weapon for finding of UI
(scared relationship will break up)
Presumption will be rebutted if complainant was told to seek legal advice by a third
party
Onus on P to prove either a 2A or 2B relationship, at which point, onus shifts to
person trying to uphold the transaction to prove transaction entered into freely.
Can show transaction entered into freely if complainant had independent legal advice.
Lack of recommendation by third party that P seek ILA strengthens presumption of UI.
Where a third party has constructive knowledge of a wrongdoing AND they are in a
relationship of trust and confident with weaker party, it is their duty to set aside the
transaction if they can. Failure to do this can be seen as UI.
Bank of Montreal v. Duguid (2000) (OCA)
GIVES US THE CURRENT DOCTRINE OF UNDUE INFLUENCE
Facts: Mr and Mrs Duguid co-sign for a loan and the bank doesn’t tell them to seek independent
legal advice, as it should have by law done. Bank had concerns about financial viability of the
project the Duiguid’s were entering into but they didn’t tell them that. Mr Duguid goes bankrupt
and bank comes after Mrs.
Held: Majority found that there was no relationship of trust and confidence and that Mrs
Duguid made her guarantee with a free and independent mind. So guarantee stands and Mrs
Duguid responsible for it.
Unanimously agree that it is not a class 1 or 2A relationship. Make an important statement to
show 2B is the operative class – “when we are looking at husband/wife relationships, we
ought not to presume that as a matter of law, there is a presumption of UI” even though
husband/wife was a historical category
Not a relationship of trust and confidence as it relates to financial concerns – no evidence
brought that Mrs. D relied on Mr. D to make financial decisions.
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Mrs. D. was a real estate agent and had knowledge of financial affairs.
Recognized that emotional ties work in intimate relationships, but the court assumes that
only leads to UI when relationship is in peril (majority). (Court differed on how much
jeopardy the relationship must be in)
Although the marriage was rocky, court felt that would not be imperilled by Mrs. D’s
failure to sign the loan
Mrs was a guarantor so bank had to wait until Mr stopped paying before they came after her
– basically, being a guarantor means that if he doesn’t pay, she will
Mrs challenges her signature of a guarantor on the basis that she was subject to UI by her
husband
How to analyze whether a court will set aside a transaction for UI or UnC in situations where
a bank or other party wants a guarantee signed when there is no allegation of UI or UnC
against them:
Was the bargain improvident? The property that Mr purchased was in his name alone. She
guaranteed it, but to no benefit to herself. However, don’t find it so improvident as to
declare it void
(a) Was the bank/third party on constructive notice of the possibility of undue influence?
It will be if two criteria are met:
transaction not for the financial benefit of the person signing; and
the parties are in a relationship that raises the suspicion of undue influence unless
bank/third party takes reasonable steps to assure the signature of P is valid.
(b) If the answer to (a) is yes, then the issue is whether the relationship is one of actual
or presumed undue influence or UnC
Onus on guarantor of loan/debt (P) to demonstrate relationship or trust of confidence
(UI 2A or 2B) or inequality of bargaining power (UnC)
If cannot prove that it was inequality of bargaining power or 2B (as was the case for
the majority in Duguid) then the matter ends there.
If she proves that it is 2B or inequality of bargaining power, then the onus is on the
bank to rebut the presumption of undue influence or UnC by showing that they took
reasonable steps to ensure no UI or UnC. The bank can do so by:
Make inquiries about the relationship
Recommended they obtain independent legal advice
 Where very risky investment, should insist they get independent legal advice
Showing that P’s transaction was one of a "free and independent mind" (i.e. a mind
with commercial knowledge, experience, independence and sophistication)
Meeting with P privately to explain the extent of liability
Warn P of risk  the more improvident the bargain, the more warning required
 HOWEVER, bank need not disclose its view on the quality of the investment.
The mere failure of the bank to provide the above information and advice does not
make the guarantee signed by P invalid. It simply means that the bank does not have
a defence where it turns out there was actual or presumed undue influence.
Wegger’s Article
Our economic model of contracting has at its heart coercion, which lies at the heart of every
bargain. Can come from poverty, discrimination, lack of knowledge of Eurocentric system,
etc.
Idea of freedom of contract is really just an ideological construct. Should instead have a
moral dimension.
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Unconscionability
Two part test – must have unfair bargain and inequality in bargaining power.
Factors:
1. Substantive (Bargain) Unfairness: May involve comparing the contract price with the prevailing market
price and the value of the consideration provided
2. Degree of need and the availability of options: Is there a concern about duress because of the
circumstances surrounding the deal?
3. Capacity: To what extent does the buyer understand the transaction? To what extent is it reasonable for
the seller to assume that the buyer understands? To what extent is the buyer able to protect his or her
own interests.
a. Personal Incapacity: age, intelligence, illiteracy, infirmity, drug dependency
b. Transactional Incapacity: the nature of the transaction and the relative abilities of the parties
(experience, knowledge)
4. Nature of Relationship: Are parties at arm's length or is there a relationship of trust, confidence, reliance
or dependence?
5. Awareness/Consent/Informed Consent/Understanding: Is the buyer aware of the existence of terms
defining rights and liabilities? Is it reasonable for the seller to assume that the buyer is aware?
a. Nature of the document ‐ is it obviously contractual?
b. Was there an opportunity to read the terms ‐ access, speed of transaction?
c. The prominence of terms and notices?
d. Are the terms intelligible and in plain language? Are the terms misleading?
e. Nature of terms: are they usual or unusual?
f. Has the buyer obtained independent legal advice?
g. Does the buyer appreciate the risks?
6. Reasonable Expectations: Whose expectations are the more reasonable in the circumstance. Whose
reliance is more reasonable?
a. Are the terms usual or unusual?
b. Are the terms consistent with the core and purpose of the contract in light of the parties’ motives
and expectations?
c. To what extent will efficient transactions be enhanced/hindered by allowing parties to contract on
the basis of unread terms?
d. Has one party said or done anything that would create false expectations in the other?
e. The experience and bargaining ability of the parties.
7. Assignment of Risk (Best insurer): In the case of a provision that limits or excludes a liability that would
otherwise attach to one party, which party is better able to safeguard against the loss? Is insurance
available to that party or other measures that reduce the risk of loss? Has some advantage or inducement
(price reduction) been received in exchange for the allocation of that risk?
Lloyds Bank v. Bundy (1975, Q.B.)
Denning creates unconscionability. Important for how 3rd party protects themselves so that they
can ensure that the agreement is enforced.
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Facts: Father mortgaged farm to get loan for his son to start a business. Ends up mortgaging
more than the total value of the farm. Company fails and the bank comes after the farm.
Issue: Father claims that the circumstances were so exceptional he should not be bound. He did
not know what he was doing/signing.
Held: The agreement was unconscionable.
Unfair bargain - dad got nothing for guarantee because the bank had already lent the 11000
pounds.
Takes formalistic approach - Bank tries to argue that forbearance in calling in the loan was
consideration.
Denning finds it wasn't meaningful, there was either no consideration, or the consideration
was grossly inadequate
Bank knew the company not likely to make it – so sought protection
Inequality in bargaining power – you can rely on de facto and de jure relationships from undue
influence. The emotional relationship between the father and the son also put the father at a
disadvantage with the bank. Bank knew or ought to have known son would be very influential tog
et father to sign loan guarantees.
Father trusted the bank – they had lots of influence over him. He didn’t get any hint he should
be asking more questions, be suspicious. Also, he had been relying on the bank for his financial
matters for years.
Father did not get ILA.
Important: Court imparts constructive knowledge on what the bank ought to have known. It also
establishes that the weak party should get ILA in these situations.
Other majority judge uses undue influence, puts the relationship into 2b class.
Lidder v. Munro (2004, BCSC)
Facts: Plaintiff was injured in motor vehicle accident. Signed a release to settle, but medical
problems persisted beyond what was anticipated.
Issue: Should the release be upheld or set aside?
Decision: The agreement was set aside as unconscionable – ICBC sacrificed fairness to efficiency.
Inequal Bargaining Power
1. language barrier
2. ICBC more sophisticated party
3. At first meeting, he had a friend for translation and support – short notice made it
impossible for him to come with the friend
4. No ILA
5. Meeting was on short notice
6. Substantial deference to ICBC adjudicator – analogize to a bank, in a fiduciary relationship
with Lidder (2b classification). It was under obligation to act for benefit of Mr. Lidder.
Unfair agreement – yes, likely would have got more for non-pecuniary damages and wage loss.
ICBC failed to get up to date medical records before making the deal.
Henningsen v. Bloomfield Motors Inc (1960, N.J. Sup Ct)
Facts: Mr and Mrs buy car, has a defect, while she is driving she is injured because of it. The
purchase agreement said that there was only a 90 day warranty and everything else was
excluded
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Rushak v. Henneken (1991, BCCA)
Facts: P bought Mercedes Benz for 17,000. Couldn’t drive standard, so put it in storage for a
year. When she took it out to sell it, it had rusted so badly it would cost $10,000 just to repair.
Before purchase, she had been told she should have the car inspected by a Mercedes Benz
dealership. She failed to do so, bought it anyway.
Decision: Finds for the purchaser. Cites s. 8 of BCIA.
seller knew that car was from Germany, where they used salt on roads – led to rust
seller knew car had been worked on, painted to look good, hide potential rust problems
court notes that there is no positive obligation on the part of car dealers, but there is a
negative obligation not to make statements about the car that he knew were likely false
Illegality
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