Contracts Table of Contents
CONTRACT FORMATION ................................................................................................................................................................................................................. 3
OFFER....................................................................................................................................................................................................................................................... 3
ACCEPTANCE ........................................................................................................................................................................................................................................ 3
Postal acceptance rule ................................................................................................................................................................................................................ 3
CONSIDERATION ................................................................................................................................................................................................................................ 3
Going-Transaction Agreements .............................................................................................................................................................................................. 4
UNCERTAINTY IN CONTRACT FORMATION .......................................................................................................................................................................... 4
BIDS/TENDERS.................................................................................................................................................................................................................................... 4
POLICY FACTORS ................................................................................................................................................................................................................................ 4
REMEDIES FOR BREACH ................................................................................................................................................................................................................. 5
Reliance Damages ......................................................................................................................................................................................................................... 5
Expectation Damages (Wertheim) ........................................................................................................................................................................................ 5
Non-Pecuniary Damages............................................................................................................................................................................................................ 5
Aggravated Damages ................................................................................................................................................................................................................... 5
Punitive Damages ......................................................................................................................................................................................................................... 6
Diminution in market value ..................................................................................................................................................................................................... 6
Cost of performance..................................................................................................................................................................................................................... 6
Consumer Surplus ........................................................................................................................................................................................................................ 6
Economic waste ............................................................................................................................................................................................................................. 6
Supply and demand ...................................................................................................................................................................................................................... 6
Loss of a chance ............................................................................................................................................................................................................................. 6
REMOTENESS AND COMMUNICATION OF SPECIAL CIRCUMSTANCES .................................................................................................................... 6
General factors for remoteness of damages ...................................................................................................................................................................... 7
MITIGATION .......................................................................................................................................................................................................................................... 7
DOCTRINE OF ELECTION ................................................................................................................................................................................................................ 7
EQUITABLE REMEDIES .................................................................................................................................................................................................................... 7
Specific performance ................................................................................................................................................................................................................... 7
Injunction ......................................................................................................................................................................................................................................... 8
RESTITUTION ....................................................................................................................................................................................................................................... 8
CONSIDERATION ................................................................................................................................................................................................................................ 8
Compromises .................................................................................................................................................................................................................................. 8
Charitable gifts ............................................................................................................................................................................................................................... 8
Intention............................................................................................................................................................................................................................................ 8
Seals and Deeds ............................................................................................................................................................................................................................. 9
Past consideration ........................................................................................................................................................................................................................ 9
RELIANCE AND ESTOPPEL ............................................................................................................................................................................................................. 9
UNILATERAL CONTRACTS .......................................................................................................................................................................................................... 11
Contemporary illustration of unilateral contract: government programs ....................................................................................................... 12
Revocation before performance complete: how to protect reliance? ............................................................................................................... 12
Approach #1: Two Contract Approach............................................................................................................................................................................. 12
Approach #2: Bilateral contract .......................................................................................................................................................................................... 12
Approach #3: Implied promise not to revoke offer once performance has started .................................................................................... 12
THIRD-PARTY BENEFICIARIES AND PRIVITY OF CONTRACT.................................................................................................................................... 12
AVOIDANCE OF THE PRIVITY PROBLEM: AGENCY, ASSIGNMENT, TRUST .......................................................................................................... 13
Agency ............................................................................................................................................................................................................................................. 13
Employees as 3P Beneficiaries to Limitation of Liability Clauses ........................................................................................................................ 14
London Drugs Criteria Not Limited to Employee Context ....................................................................................................................................... 15
Assignment ................................................................................................................................................................................................................................... 15
Legislation regarding 3P beneficiaries ............................................................................................................................................................................. 15
MISTAKEN IDENTITY OF VOID AND VOIDABLE CONTRACT ...................................................................................................................................... 15
The common law non-solution: void and voidable contracts ............................................................................................................................... 16
NON EST FACTUM ........................................................................................................................................................................................................................... 16
CONTRACT INTERPRETATION.................................................................................................................................................................................................. 18
THE PAROL EVIDENCE RULE ..................................................................................................................................................................................................... 19
How to avoid the parol evidence rule: The two-contract approach .................................................................................................................... 19
Exceptions ..................................................................................................................................................................................................................................... 19
Factors influencing application of the rule ..................................................................................................................................................................... 20
Parol Evidence Rule Overridden in consumer context ............................................................................................................................................. 20
FUNDAMENTAL BREACH............................................................................................................................................................................................................. 20
The Rule of Law Approach ..................................................................................................................................................................................................... 20
The Rule of Construction Approach ................................................................................................................................................................................... 20
Canadian Approach to Fundamental Breach ................................................................................................................................................................. 21
STANDARD FORM CONTRACTS AND REASONABLE NOTICE ..................................................................................................................................... 22
SIGNED WAIVERS: RISKY ACTIVITIES ................................................................................................................................................................................... 22
REPRESENTATIONS AND WARRANTIES .............................................................................................................................................................................. 22
Categories of Statements ........................................................................................................................................................................................................ 23
Distinguishing between innocent misrepresentations and warranties ............................................................................................................ 25
MISREPS AND THE RELATIONSHIP BETWEEN CONTRACT AND TORT ................................................................................................................ 26
DRAFTING CONTRACTS – A SHORT CONSIDERATION OF PRACTICAL ISSUES .....................................Error! Bookmark not defined.
UNCONSCIONABILITY, UNDUE INFLUENCE AND DURESS .......................................................................................................................................... 26
PENALTIES AND FORFEITURES ............................................................................................................................................................................................... 31
COMMON LAW ILLEGALITY ....................................................................................................................................................................................................... 31
STATUTORY ILLEGALITY ............................................................................................................................................................................................................. 33
MITIGATING THE CONSEQUENCES OF ILLEGALITY ....................................................................................................................................................... 33
MISTAKE .............................................................................................................................................................................................................................................. 34
MISTAKE ABOUT CONTRACTUAL TERMS ........................................................................................................................................................................... 36
MISTAKE IN ASSUMPTIONS........................................................................................................................................................................................................ 36
RECTIFICATION OF DOCUMENTS ............................................................................................................................................................................................ 36
FRUSTRATION................................................................................................................................................................................................................................... 36
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CONTRACT FORMATION
o Doctrine of consideration: a valid K must have an offer, acceptance and consideration to be enforceable
o Purpose: balance the reasonable expectations of the parties and to avoid unfair surprise of liability
OFFER
o Must be an intent to be bound (compare to an invitation to treat or non-binding gift promise)
 This is an objective test (Smith v. Hughes)
o An advertisement, invitation to treat, or statement of price is generally not considered an offer (Johnston Bros) because lack of
intent to be bound and limited supply problem
 Exception: can be an offer if very clear/specific as to terms which amounts to a unilateral contract (Lefkowitz)
o Was the offer conditional?
o Standing offers can be revoked (GNR)
 In the case of a standing offer where no consideration is provided (i.e. no minimum purchase), generally it is only when
orders are placed that a K is formed (GNR)
 Remedy: enter into an option contract
o Unilateral contract: performance is the acceptance and consideration
 Courts may imply a promise not to revoke (i.e. if partial performance has occurred) (Errington)
 Denton: Train schedule = offer, going to the station to buy the ticket = acceptance/consideration. (unilateral contract) Note
this case is hard to reconcile with other cases because usually giving money to cashier is considered offer.
o Ceases to exist if it is rejected or expires after a reasonable time (Manchester Diocesan Council)
o Can be revoked anytime before being accepted (Dickinson v Dodds)
o However, unless the offer has expired, effective revocation requires notice of revocation.
o The sale/contract in a store occurs when the offer is accepted by the cashier. (Boots)
ACCEPTANCE
o Acceptance has to be communicated
o Offer can be revoked if acceptance hasn’t been communicated (Larkin)
o The offeror may make conditions for the means of acceptance (Eliason v Henshaw) Here the means of acceptance (the specific
wagon) was not important but the time and place was. A reasonable/equally efficient means of accepting is ok unless clearly
stated otherwise (Manchester Diocesan)
o Generally a court will try to find an exchange of mutual promises/bilateral contract (Dawson)
o Must be clear intent to be bound
o Must sufficiently correspond to the offer (mirror image rule)
o Silence is not acceptance (Felhouse)
o Acceptance in unilateral contracts:
 Performance is acceptance and consideration. There is no binding obligation to do anything
 Carlill v Carbolic Smoke Ball: P has no contractual obligation to use the smokeball, but her performance in accordance with
the offer was the acceptance and the consideration of the offer and thus it is binding. The ad was an “offer” to the world,
and those who met requirements had accepted.
 Courts may imply a term that the offeror will not revoke an offer until the other parties have had a fair opportunity to
perform
POSTAL ACCEPTANCE RULE
 If acceptance is mailed, acceptance occurs/K is created when you put the acceptance letter in the mailbox
 Instantaneous form of communication should follow the general rule that the K is created when and where acceptance is
received. (Eastern Power)
 Emails/Faxes: the contract is formed once the information has entered the information system of the receiving
party and is capable of being accessed (Electronic Transactions Act)
 Does not apply to the revocation of offers. (Henthorn) Revocations must be communicated. (Byrne v. Leon Van Tienhoven)
 Does not apply when the contract states that the acceptance “must be received by the offeror” (Holwell Securities)
CONSIDERATION
o Each party needs to get something (benefit) and give something up (detriment)
o Can dress up a gift to look like a contract by finding a nominal exchange, i.e. “peppercorn” (Thomas)
o For a standing offer/grant of exclusive distribution - you generally need to agree to some minimum purchase or pay something
for the right to exclusive distribution for it to be enforceable (GNR, Tobias)
 BUT in Lady Duff Gordon, the court implied the promise/consideration even though A was not obligated to sell any Lady
Duff Gordon clothing, i.e. she gives up her right to endorse other lines and in return she gets the reputational benefit of her
name on X’s clothes
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GOING-TRANSACTION AGREEMENTS
 Giving up a legal right can be consideration (Hamer)
 Seamen cannot quit when onboard a ship, so no consideration for promise to be paid more (Stilk)
 Gilbert Steel: higher price midway through a contract is agreed to but not enforced because no consideration
 Counter: consideration could have been the business value of maintaining the relationship, or continued supply
 Counter case: Roffey Bros, where the continued work provided by the hired carpenter was his consideration for
the higher price
 New direction: “a post-contractual modification, unsupported by consideration, may be enforceable so long as it is
established that the variation was not procured under economic duress” Not binding in Canada yet.
o Acceptance of a lesser sum in satisfaction of a larger debt is not binding (Foakes)
 Counter: This has been overridden by statutes almost everywhere (Law and Equity Act)
o Past consideration is not good consideration
 Courts may imply a request to save (i.e. doctor case) to find consideration, making the promise to pay an annual sum
enforceable…
 The common law traditionally has not enforced these types of gratuitous promises, particularly where there was no
reliance or unjust enrichment
 Evidentiary function, cautionary function, channeling function (everyone knows what it is, easier for judges to enforce
something with a seal and for parties to know they have a legally binding obligation)
UNCERTAINTY IN CONTRACT FORMATION
o Court will generally not enforce an agreement that is missing an essential term or too vague/uncertain
 Note: principle of effectiveness - court will generally try to find that K is not too vague but will not make a contract for the
parties (Hillas)
 Contract to enter into a contract is OK, different from a contract to negotiate (not OK) (Hillas)
o 3Ps – parties (must know who they are), property (subject matter of K, specific model, time and method of delivery) and price.
(May and Butcher v. The King)
 Note: If key item missing, such as price, but there is a 3rd party enforcement mechanism, then court may enforce (Foley)
o Courts will not enforce a mere “framework agreement” (GNR) or agreement to agree/negotiate
 Exception: Long-term supply relationships or strong reliance (Foley)
 Exception: Implied term in k to negotiate in good faith with goal of reaching agreement (Empress Towers) Note: This not
widely adopted – most courts say that K must have binding renewal clause in order to be enforceable
o Walford v. Miles: “Duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties
when involved in negotiations.”
o Martel Building v. Canada: no duty of good faith in context of commercial contractual negotiations
BIDS/TENDERS
o Last shot rule: Last form wins. CL approach. (Loughton’s decision in Butler) Often the terms of the seller’s form that comes with
the delivery of the goods that the buyer signs at delivery.
o Tendering process: Analyzed as a two-contract approach (Ron Engineering, MJB Engineering)
 Contract A: The contract governing the tendering process. The call for tenders = offer, bid = acceptance. Bid is also
irrevocable offer so if bid accepted, bidder must enter into Contract B for the provision of goods or services. The terms of
contract A depend on the call for tenders.
 Note: Contract A does not arise in all circumstances, ie. if the request for proposals specifically states that it is not
an offer.
 Contract A has two implied terms: to treat all bidders fairly and equally and to accept only a compliant bid. (MJB,
Double N Earthmovers)
o Note: The tender can have a complete exclusion clause where they don’t have to accept any bid, i.e. could be an invitation to
treat. Problem: No incentive for bidders.
POLICY FACTORS
o The role of legal formalities in contract law:
 Evidentiary Function: the need for evidence of the existence of a contract. (witnesses, docs)
 Cautionary Function: ensure that parties deliberate before they contract. Shows intent to be bound
 Channelling Function: ensures there is a simple, external test of enforceability.
o Policy factors as to why certain promises might be enforced:
 Reliance: has P changed its position to its detriment as a result of the promise? Has anyone lost an opportunity (i.e. time
that they could have been searching for another donor)?
 In gift cases, look at how long the parties have been relying on the money
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Unjust Enrichment: look at the current situation in the fact pattern to see if there is any unjust enrichment in the current
scenario – don’t address potential UE if the K was enforced
 Can be intangible – i.e reputational
 Deliberation: or lack thereof
 Social utility: is this the type of promise that courts should enforce? Is contract law the appropriate mechanism for
enforcing this type of promise?
 i.e. “As a general rule contract law enforces bargains, not gifts. Enforcement of all gift promises might make
donors wary of making gift promises if donors think that all gift promises can be legally enforced through the
courts.”
REMEDIES FOR BREACH
Restitution
Damages
Prevent unjust enrichment to D
Reliance
Damages
Prevent harm to P, put P in as good a
position as before the contract was
entered
Secure benefit to P, place P in same
position as if contract been fully
performed
Expectation
(Wertheim
Damages)
o
Benefit to D = difference
between sale price and
market price
Loss to P (so include any
other money P put in)
Corrective
Expected P benefit or
cost of performance
Distributive
Restorative
The general purpose of damages is to protect the reasonable expectations of P without placing an unfair burden on D
RELIANCE DAMAGES
 Awarded when expectation measures are too speculative/uncertain (Anglia)
 Can’t exceed expectation damages (Bowlay)
 Onus is on the defendant to prove that the reliance damages > expectation damages (i.e. money losing venture from the
beginning) (Bowlay)
 Can include pre-contract expenses if in reasonable contemplation of parties (Anglia)
 Counter: are they too remote? Would D reasonably assume that P already had the necessary equipment?
EXPECTATION DAMAGES (WERTHEIM)
 Include both pecuniary and non-pecuniary harms (Hawkins)
 Counter: Are expectation damages too speculative? Is something inherently risky?
o Counter: Just because it’s difficult to award damages doesn’t mean that a court should not award them.
Distinguish difficulty with impossibility. (Carson v. Willitts)
NON-PECUNIARY DAMAGES
 General rule: no damages for non-economic interests (Addis, Hobbs)
 Noted exceptions: Ks for pleasure (Jarvis: holiday), enjoyment (Wilson: wedding photos), entertainment, peace of mind
(Warrington: disability), pets (Newell, Ferguson, Weinberg – note in Pezzente the dog was treated as a consumer good,
only $ to replace), physical inconvenience or discomfort caused by sensory experience (Wharton - Must be a sensory
experience AND must be reasonably foreseeable. No recovery for mere disappointment)
 Current approach to non-pecuniary damages with respect to employment:
 Employment contract is not one of peace of mind. No damages for mental distress merely because employer
exercises legal right to terminate. (Honda) However there is an implied duty of good faith in the manner of
termination
 Possibility of aggravated damages if mental distress arose specifically from the manner of termination (attacking
employee’s reputation; misrepresentations regarding the reason for dismissal; dismissal to deprive an employee of
pension benefits etc.) (Honda)
o Current approach to non-pecuniary damages (Fiddler)
1. An object of the contract was to secure a psychological benefit that brings mental distress upon breach within the
reasonable contemplation of the parties (from Hadley)
2. The degree of mental suffering is sufficient to warrant compensation. Consider how a reasonable person would have
reacted. Onus is on P to prove this.
AGGRAVATED DAMAGES
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

Damages arising from the manner of breach (i.e. rudeness, callousness, vindictiveness)
Not the same as general claims for non-pecuniary damages (i.e. can be awarded in the employment context where the K is
not specifically one for psychological benefit)
An IAW is not required
PUNITIVE DAMAGES
 Not compensatory. Purpose: Punishment, deterrence, denunciation.
 Requirements:
 Misconduct must be “high-handed, malicious, arbitrary or highly reprehensible” (Whiten)
 Misconduct must be an IAW (Whiten - breach of implied contractual obligation of good faith, established for
insurance Ks)
 Must be proportionate: to the blameworthiness of the D’s conduct, P’s vulnerability, harm or potential harm directed
towards the plaintiff, to the need for deterrence, considering other assessed penalties, to the advantage wrongfully gained
by the misconduct. Also: Exceptionality, rationality
DIMINUTION IN MARKET VALUE
 If the cost of performing the contract is not enough to warrant the slight increase in value, P is only entitled to damages for
the slight increase in value (Peevyhouse)
 Rationale: Performing the contract would cause economic waste, windfall argument - P only entitled to the financial
position he’d be in if K performed, not more, P wouldn’t even use the money to fix the problem
COST OF PERFORMANCE
 John Wunder: P gets full amount of cost to fix land even though it wouldn’t increase the value of his land. Rationale:
Sanctity of contract.
 Radford: courts orders cost of performance to build the fence even though does not affect value of the land because it’s an
essential part of K Rationale: D may be unjustly enriched if they get to keep the money for unprovided services, there
wouldn’t be any unfair surprise
CONSUMER SURPLUS
 Balance between cost of performance and diminution in market value. Damages for loss of pleasure but not the total cost
to fix (Ruxley Electronics)
ECONOMIC WASTE
 Construction to put in pipe specified in contract, but court did not going to order the destruction of the house to put in the
right pipe. (Jacob & Young) Measure damages by difference in value when it would be disproportionate to award cost of
performance
 Would be economic waste to rebuild pool that was not perfect (Ruxley Electronics) also applied the difference in value
SUPPLY AND DEMAND
 Thomson v. Robinson: Supply > demand = Car dealer entitled to expectation damages.
 Charter v. Sullivan: Demand > supply = Car dealer cannot claim lost profits.
 Note: If buyer was going to pay more than market price, you can still sue for the difference
LOSS OF A CHANCE
 P must show on a balance of probabilities that but for D’s conduct, P had a chance to avoid a loss or gain a benefit (Folland)
 Chance was sufficiently real and rises above mere speculation (i.e. not just a statistical chance to win the lottery) (Folland,
Kinkel)
 The outcome must depend on someone/something other than P (Folland)
 Exception: Chaplin
 The loss of the chance had some practical value (Folland)
 Chaplin: different from Anglia because the prize was known, the probability was not. In Anglia we didn’t know either.
REMOTENESS AND COMMUNICATION OF SPECIAL CIRCUMSTANCES
 Policy: balance between reasonable expectation of P and risk of unfair surprise to D.
 Entitled to damages if damages arise naturally or damages are in reasonable contemplation of the parties (Hadley)
 Only ordinary lost profits recoverable if special circumstances not communicated or foreseeable (Victoria Laundry)
 P assumes more liability for damages when they buy a secondhand good (Economy Tractor)
 Damages have to be sufficiently likely to result (Heron II)
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

What is reasonable/too remote depends upon the specific industry (Mercator)
If you don’t communicate special circumstances, you can’t hold D liable. (Hadley)
If you do communicate special circumstances, you can only hold D liable if there was a special contract (Horne)
Canadian approach: Even though there was no special contract, D is liable for special losses if the special circumstances are
communicated. (Purolator - Created reasonable consumer expectations through its conduct, D could have refused whereas
in Hadley the common carrier could not have refused)
Communication must be sufficiently specific (Munroe)
D just has to foresee the type of damages, not necessarily the extent. (Munroe)
GENERAL FACTORS FOR REMOTENESS OF DAMAGES
 Express contractual provisions/exclusion clauses
 Degree of probability/foreseeability of loss
 Timing, clarity, specificity
 D’s knowledge of P’s business and D’s special expertise (Victoria Laundry)
 Relationship between P and D – is it transient or established?
 Nature of the product or service being offered (brand new or second hand?)
 Sophistication of parties (more sophisticated knowledge = more is foreseeable)
 Ordinary marketplace allocation of risk (what is typical in the industry?)
 Proportionality ($30 for service = $3000 in damages?) (Victoria Laundry)
MITIGATION
 General rule: Claimant must take reasonable (not extraordinary) steps to avoid loss after a breach of contract to minimize
damages. (Payzu)
 Purpose: avoid hardship and unfairness for D liable for avoidable losses, fair allocation of risk – P is in best position to
allocate risks, avoid economic waste/promote economic efficiency – p can’t recover losses which he reasonably could avoid
(Payzu)
 Exceptions: personal service contract, breach of k is reason for impecuniosity (General Securities), or P entitled to specific
performance (Wroth v. Tyler)
 In commercial context, reasonable to require continued dealings (Payzu)
 Required to mitigate within reasonable time of breach. (Asamera) Generally this is at the time of breach.
 For unique circumstances (i.e. entitled to SP) damages can be measured at a later time, including the date of the
trial/judgment (Wroth v. Taylor) or sometime in between the breach and trial (Asamera)
 If P mitigates completely (or ends up in better position) there are no damages. (British Westinghouse)
 Onus is on the defendant to prove that the plaintiff’s duty to mitigate has been breached.
DOCTRINE OF ELECTION
o If K for future performance + anticipatory breach, P has option to (1) accept repudiation and sue for damages or (2) treat the
contract as if still in effect. (McGregor)
 Available only if P can exercise contract unilaterally (not the case in Finelli – P had to trespass)
 P must have a legitimate interest in the performance
 Contradicts idea of duty to mitigate
o Counter: Canadian courts reluctant to adopt. In Asamera, SCC suggests that the legitimate interest in question is one which
would entitle the plaintiff to seek specific performance. Indicates an overriding duty to mitigate except where you are entitled
to SP
EQUITABLE REMEDIES
o When common law remedies fail to provide adequate relief. Onus is on P to prove this.
SPECIFIC PERFORMANCE
 Unique goods: i.e. specific painting (Behnke)
 Land: old rule: can always claim SP for land. Now must be unique. Generally not available for cookie cutter suburbs or
commercial real estate. (Semelhago)
 Long term supply contracts where P may go out of business. Vulnerability of P, damages hard to calculate (Sky Petroleum)
 Where transfer of land is conditional upon work being done (Tanenbaum)
 When it would force a proprietor to keep to his lease by running a business at a loss for many years. (Argyll)
 Note: A court never orders SP for personal services (Warner Bros) Rationale: akin to slavery
 Arguments against SP: Historical (equity only steps in where CL inadequate), Ideological (purpose of contract law is to
enforce rights not compel good behavior), Practical (Damages more convenient), Administrative (Difficult to
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enforce/supervise), Efficiency/Duty to Mitigate (P has no incentive to reduce costs of the breach), prolongs and may
exacerbate hostility between the parties
INJUNCTION
 An order not to do something, often sought to enforce a promise not to do something.
 Requirements:
1. Existence of a negative covenant in contract (express/implied – i.e. “you can only work for us”)
 Lady Duff Gordon: implied term in k was to not endorse other clothing lines
2. Damages inadequate – i.e. unique skills (Warner Bros), or damages impossible to calculate. Onus on P to establish this.
3. Must not amount to compulsion to perform a personal services contract (or be an undue restraint of trade)
4. Can’t prevent someone from performing in their desired field (Page One/Warren)
RESTITUTION
o Recovery of benefits conferred by P for some type of wrongful act such as mistake, duress, to protect the life/health/property of
another. Solved the problem of unjust enrichment where the law of contract or trusts could not be applied.
o Disgorgement of profits: Blake
o Rotham: instead of tearing down houses that were built in contravention of a negative covenant, court orders a percent of the
defendant’s profits to be paid to the plaintiff. (echoes of the economic waste principle)
o Restitution as an independent cause of action: Deglman - Nephew awarded damages on basis of quantum meruit =
compensation based on what the nephew actually did (NOT the value of the house next door). (Note: the promise would have
had to be in writing, so there was no contract. This is why they had to sue in restitution)
o Every efficient breach does not result in a claim for disgorgement of profits. Courts don’t want to hinder efficient breaches by
always awarding restitution damages (i.e. disgorgement of profits resulting from the efficient breach)
CONSIDERATION
COMPROMISES
 Forbearance on right to sue/to make a legal claim is good consideration. Rationale: if it wasn’t, court system would be
overborne. Courts will uphold this even if the claim was not legitimate in the first place, i.e. limitation period had expired
 Fairgrief v. Ellis (1935, B.C.): Agreement to pay $1000 for past services enforceable even though underlying claim would
have failed under the Statute of Frauds.
 B.(D.C.) v. Arkin (1996, Man. C.A.): Zellers goes after mother for shoplifting by her son even though by law she wouldn’t
have been liable. Mother gets letter from Zellers saying she should pay $225 to settle the matter out of court. She pays. She
then goes after Zellers to get the money back. Court uses the doctrine of mistake to give the mother her money back. Note
this is different from the result in Fairgrief. Here it is pretty obvious that there was no good faith belief on the part of the
lawyer that he had an actual claim (should have known the parental liability laws)
 Stott v. Merit (1988, Ont. C.A.): Criteria for a valid compromise:
 The claim must be reasonable (not spurious)
 There must be a good faith belief in the claim. Newcombe says there has to be an objective component here (i.e. like in
Arkin where the lawyer should have known about parental liability laws).
 No concealment of material facts.
CHARITABLE GIFTS
 Common law is very reluctant to enforce gift promises.
 Dalhousie College: gift promise not enforced. Reliance generally does not make a gift promise enforceable. There was no
return promise (i.e. naming a building after the donor)
INTENTION
 Offer/acceptance: there must be a manifestation of an intent to be bound. This is an objective test – would the
reasonable person have thought that they would be bound?
 Jones v. Padavatton (1967, Eng. C.A.): Mother wants the daughter to go to law school and agrees to pay a monthly
amount to their daughter. They decide instead to buy a house, daughter rents a room out and uses the income to
sustain her. After 5 years mother wants to evict the daughter. Agreement between mother and daughter is enforced.
Here there was a letter from the lawyer (deliberation, evidence) and clear reliance. Minority says that there was an
intent to be bound and that it was enforceable but that there was an implied term in the contract that the support
would be for a limited time and the time had expired.
 Parties can agree that a business arrangement will not give rise to legal relations. Even though it’s a bargain, parties can
exclude contractual obligations. Often during negotiations they will have a letter of intent that says that the contents
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

are non-binding. Rose and Frank Company
Parties can also take a mixed approach whereby certain things are binding and others aren’t. I.e. confidentiality of info
or exclusivity of negotiations may be binding.
Very fact-specific with regards to enforcing an intra-familial contracts, presumption against finding a contractual
relationship is still the relevant law although the courts may find a relationship.
SEALS AND DEEDS
 A non-bargain promise that is enforceable because of the form in which it is made.
 Requirements: in writing, signed by promisor, sealed and delivered (now delivery can be constructed, i.e. sealed in the
person’s presence and then put in a safe)
 Still enforced even if there is no offer/acceptance/consideration.
 Idea is that it is an executed gift
 Any legal promise can be enforced by deed/seal
 Modern trend is towards less formality – it could just be a circle on a piece of paper that says seal. The question is did
the parties intend that the document be sealed?
 Even if there is a seal, though, the Court may not enforce it (particularly in consumer transactions where a company
uses pre-printed forms) if they don’t believe there was an intention there to have a sealed document.
 If you want it to be binding, you should go through a formality (which can be used as evidence to show the intent), the
more formality the better.
 Runder article: Consideration is not the same as a seal. They are both formalities with the same functions. Incorrect to
say that a seal imports consideration. Seals are more symbolic, like gifts, than contracts.
 You can have a binding contract that is sealed, and it would be enforced for both reasons. Note that the limitation
periods may be different, which is why there is an abundance of caution.
PAST CONSIDERATION
a. Past consideration is not good consideration.
b. Policy rationale (lack of deliberation, lack of reliance, no unjust enrichment, distinguish moral and legal obligations,
concern regarding fraud on creditors – i.e. Parents give son a gift to start up business. Son goes bankrupt. In order to
defraud creditors, son says that he later made a promise to his parents to repay the money aka “the loan”. Converting
the gift into the loan to defraud the creditors. Court would find that there was no consideration here.)
c. Roscorla v. Thomas (1842. Eng.) K for sale of horse. Later promise that horse was not over five years, was sound and
free of vice. Horse was “very vicious, restive, ungovernable, and ferocious”. No consideration for promise that horse
was free of vice, so promise not enforceable.
d. Exception: (Lampleigh v. Brathwait)
i. Promisor makes a request for service (offer)
ii. Performance by the promisee (acceptance = unilateral contract)
iii. Promisor promises to pay (quantification of legal obligation)
iv. Reneges on promise
RELIANCE AND ESTOPPEL
Reliance is not consideration
Common law estoppel: When a party is barred from denying or alleging a certain fact or state of facts because of the party’s
previous conduct, allegation or denial.
Roberton Pension: Gov dept says that a particular disease caused by war, guy who has the disease relies on this, and court holds
that gov cannot go back on this as it was a representation of fact which is relied on.
Promissory estoppel: question of estoppel as to future conduct (i.e. a promise is made about future conduct): “I will not take that
action.”
Issue here is that promissory estoppel can essentially override the doctrine of consideration.
Cannot be a sword, must be a shield. “A plaintiff cannot found his claim in estoppel.” (Gilbert Steel)
Owen Sound: Seller claiming against the buyer for failing to take delivery. Buyer says they didn’t breach because the contract said Fri
and delivery was on Mon. Seller says that the buyer represented to him that he could deliver late. So the seller relied on that and
delivered late. So the buyer is estopped from alleging breach of contract. Plaintiff seller is in fact the one suing and relying on the
promissory estoppel.
Often promissory estoppel is used to enforce an agreement to accept less. A promise to pay more is not binding under promissory
estoppel. But an agreement to accept less is binding.
Elements of promissory estoppel:
existing legal relationship between parties;
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a clear promise or representation;
made with the intention that it be relied upon;
reliance; and
no compelling reasons to excuse person from representation (i.e. coercion)
Hughes v. Metropolitan Railway (1877) If a party had previously relied on a waiver of rights, the person seeking to end the
contract must give notice to end the waiver and return to their strict legal rights
Facts: Landlord gave notice of six months for the tenant to repair the property but negotiated an alternative in the meantime. When
negotiations broke down, landlord still thought there was a six month period. Landlord served eviction as though the original 6
months notice had kept running from the time of notice.
Held: Court finds that the landlord cannot enforce the 6 months because of the dealings which later took place. The landlord waived
the right to end the contract. To turn this back on, must give notice. What the landlord should have done: at the beginning of the
negotiations, the landlord should have asserted that they were still standing on their original rights. They could also have done this
at the end of negotiations.
Ratio: The person who otherwise might have enforced rights will not be allowed to enforce them where it would be inequitable
having regard to the dealings which have then taken place between the parties.
Comment: Lawyer would say in a letter allowing a time extension would say “time is of the essence” which effectively means that
the party represented by the lawyer is continuing to rely on their legal rights.
High Trees (Eng. KBD, 1947) Agreement to accept less, full payment cannot be pursued later as D can use promissory estoppel.
Here the agreement to accept less was conditional.
Facts: Agreement to reduce rent during the WWII. At the end of the war, P sues, wanting to claim the original rent. D says there was
an agreement for the lower rent and uses estoppel as the basis of his defence.
Held: (Justice Denning) “a promise intended to be binding, intended to be acted on and in fact acted on, is binding so far as its term
properly apply.” Can’t just read this on its own because it would effectively override the doctrine of consideration!
But: “The courts have not gone so far as to give a cause of action in damages for the breach of such a promise, but they have refused
to allow the party making it to act inconsistently with it.” (in a legal action)
Combe v. Combe Promissory estoppel cannot be used as an independent cause of action (sword)
Facts: Divorce. Husband agrees to pay spousal maintenance of L100 annually. No payment. Almost 7 years later, wife sues for
arrears. Husband argues no consideration, didn’t receive anything from the wife, it was purely gratuitous. Wife disagrees and uses
High Trees.
Held: Promise not enforceable: Promissory estoppel cannot be used to create new causes of action where none existed before. It
only prevents a party from insisting on strict legal rights when it would be unjust, having regard to the dealings between the parties.
“The doctrine of consideration is too firmly fixed to be overthrown by a side wind…. It remains a cardinal necessity of the formation
of contract, although not of its modification or discharge.”
Comment: This quote essentially means that you don’t need consideration for a GTA. Roffey later says that you do need it. GFAA
then later picks up Denning’s approach and says in Canada that consideration not needed.
Subsurface Surveys Mere acts of indulgence are insufficient for claiming promissory estoppel
Facts: The defendant (Subsurface) purchased a business belonging to the plaintiff (Burrows) in excess of $127,000. Part of the
purchase price was secured by a promissory note which stipulated monthly installments and contained an acceleration clause
permitting the creditor to claim the entire amount due if there was a default on more than 10 days. Over a period of 18 months, the
defendant was consistently more than 11 times in default with its monthly payments. On each occasion, the creditor accepted these
payments without protest and without invoking acceleration clause. Finally, following a disagreement between presidents of the
companies, the next time that the defendant was late in paying, the plaintiff sued for the whole amount owing (i.e. asserting the
legal right under contract)
Issue: Does promissory estoppel apply?
Held: No. Defendant wins. The evidence here does not warrant the inference that the plaintiff entered into any negotiations with
respondents (defendants) which had the effect of leading them to suppose that the appellant had agreed to disregard the relevant
part of the contract. It’s insufficient for there to be mere acts of indulgence to claim promissory estoppel and there was no specific
promise or representation other than accepting the late payments.
Note: In later cases the court finds that conduct can be sufficient to give the defense of promissory estoppel.
Note: At any time you can give notice that you are reasserting your rights, and that brings the estoppel to an end.
Owen Sound Public Library Conduct can be sufficient for promissory estoppel if reliance is reasonable
Facts: Term in a construction contract that money must be paid. Library had defaulted. Contractor then had the right to walk away.
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Library project manager had assumed that did not have to pay since no seal had been obtained for a subcontractor (this should not
have mattered). Contractor walked away (at this point the project was not going well). Contractor sues for breach of contract.
Issue: Library claimed estoppel – you promised us that the time period would not start until you got the seal.
Held: Court recognized the promissory estoppel. Reasonable for the library to expect that the time period was suspended.
Contractor not entitled to terminate the K. Based on the conduct of the parties, was it reasonable for the library to believe that
payment would be delayed? Yes. There was no express agreement to this effect but that it was still the library’s understanding and it
was reasonable. This case suggests that inferences from conduct are sufficient (different from Subsurface)
D & C Builders v. Rees Agreement to accept less is enforceable on the basis of promissory estoppel but must be voluntary
Facts: Settlement of a debt for a building job. Rees owes 450 pounds. Rees knows P is in difficulty and offers 300. P is near
bankruptcy accepts the lower payment, then sues for the remainder. Rees claims he can’t, according to promissory estoppel.
Held: Judgment for P. Court finds that for promissory estoppel to apply, the offer to accept less must be voluntary. Here it wasn’t
voluntary since the creditor was intimidated by the debtor (duress).
Analysis: Promissory estoppel is an equitable issue (so the court will look at whether there are any reasons not to use it, i.e. you
must come with clean hands)
N.M. v. A.T.A.
Facts: NM and ATA planned to be married. ATA came to Canada from England to live with NM after he promised to pay the
outstanding mortgage balance on her home in England. Relying on the promise, ATA gave up her English job and home to move to
Vancouver. Problems arose when NM refused to fulfill the conditions of the promise to pay off the debt on the house in England.
NM did however loan ATA money (100,000) to pay off the debt on a promissory note. Later NM and ATA split up and since that time
ATA has been unable to find suitable permanent work in either England or Vancouver. ATA brought an action to force NM to fulfill
his promise to pay off her house in England. NM evicts her and sues her to get the $100,000 for the promissory note back. She uses
promissory estoppel as a defence for that.
Lower courts:
Held: He gets the $100,000 back and doesn’t have to pay off her mortgage. Even though there was a promise, court does not
enforce because of lack of intent and background social policy factors. No promissory estoppel because no pre-existing legal
relationship between the parties. Furthermore, the parties did not intend to enter into a legal relationship. Lack of mutuality
because he could have paid off the mortgage and the obligation on her part was not clear. Furthermore there is a presumption
against finding legal obligations between family members.
Comment: She could have gotten a promise to pay the mortgage under seal. Or they could have made a contract that said I will pay
your mortgage if you leave your job and move to Vancouver with a view to marriage. Newcombe doesn’t think that lack of mutuality
is really a good argument of the court because she gave up her job and he said he would pay.
UNILATERAL CONTRACTS
Performance does double duty as acceptance and consideration.
Unilateral vs. Bilateral Contracts
 Unilateral contract: I will pay you $500, if you find my dog. There is no binding obligation to find the dog.
 I promise to find your dog. In exchange you promise to pay me $500. Here, if I don’t find your dog, you can sue me
because there is a binding obligation to find the dog. Would the court enforce something that is essentially just a
possibility? Maybe. This is a stupid promise to make though, you should say “I promise to use my best efforts to find
your dog.”
Williams v. Caradine (1833, Eng.) Illustration of the CL position regarding rewards and unilateral contracts; motive irrelevant as long
as you know about the reward
Facts: P does not provide the info with a specific intention to collect on the award.
Issue: Is P nonetheless entitled to the reward?
Held: Yes. Motive is irrelevant – she provided the info, therefore she gets the reward. The reasonable person test. If she knew of the
award, and presented the info, the CL would find that there was a presumption of accepting the offer.
Note: If you do not know of the offer at all, there can be no contract. (rationale: no intention)
Problem: What if you confer a benefit by providing info that makes someone a lot of money (unjust enrichment), without knowing
about a reward? Arguably you could make a restitutionary claim here.
The Crowne v. Clark (1927, Aust. H.C.) If you don’t know about the reward, you cannot claim it. Suggestion that motive may be
relevant.
Facts: Clark was an accessory to murder. To get out of that, he provided info that led to the conviction of another. The government
had an offer out for information leading to the conviction of the other people. At the time he gave the info, he did not know about
the reward.
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Held: The court says that since he didn’t know, there is no contract. Given that he was acting for his own self-benefit, he did not
provide the info with the intention of benefiting from the reward or in reliance of the offer of the award (suggestion that motive
may be relevant).
Common law position towards accepting rewards:
1. You have to be aware of the offer
2. You have to act with the intention of accepting the reward
Carlill v. Carbolic Smoke Ball Company (1893, Eng. C.A) Performance of the condition is sufficient acceptance without notification
Facts: Advertisement says there is a reward if you use this ball and you get sick, and says that they have money deposited specifically
for the purpose of reimbursing clients who use the product and get sick. Company says that P did not notify them of her acceptance
of their offer.
Held: Court establishes that acceptance was through performance. Company could not have reasonably expected to have every
consumer write a letter to them saying I accept and plan to use your product.
CONTEMPORARY ILLUSTRATION OF UNILATERAL CONTRACT: GOVERNMENT PROGRAMS
Dale v. Manitoba (1997, Man. C.A.): University funding: By establishing a program for disadvantaged students, it
was held to have contractually committed itself to fund their continued attendance at university. Protecting
the reliance of the students. The students’ consideration was the alteration of their lifestyle to go to
school.
Grant v. NB (1973, NB App. Div.): Potato stabilization programme. Offer was the application form, Grant’s consideration was the
filling out of the application form and complying with its conditions. Intent is objective and based on what a reasonable person
would think. Words and conduct are easier to measure than subjective intent.
REVOCATION BEFORE PERFORMANCE COMPLETE: HOW TO PROTECT RELIANCE?
Problem: Doctrinal common law rule is that offer can be revoked at any point before acceptance.
APPROACH #1: TWO CONTRACT APPROACH
Errington v. Errington (1952, Eng. C.A) Court can imply a promise not to revoke the bargain (two contract approach)
Facts: Parent makes deal with child saying that if you pay the mortgage off, the house will eventually be yours. Father dies, now
mom wants to kick them out of the house.
Analysis: Contract #1: pay mortgage and house will be yours. Contract #2: so long as you pay the mortgage you may remain in
possession (an implied promise not to revoke Contract #1) Court rejects the bilateral contract approach because if the court had
taken this approach it would have meant that the son had to pay the mortgage, and that if he didn’t there would be a breach of
contract and the dad could have sued the son.
APPROACH #2: BILATERAL CONTRACT
Dawson v. Helicopter Exploration (1955, SCC) Court can find that there is a bilateral contract by an exchange of mutual promises
Facts: Offer is “if you take us to the site, we’ll give you 10% if we want to invest” Acceptance was “I will take you, just let me know
when you get the helicopter.” Then the company says that they can’t find the helicopter.
Held: D in fact exercised control over whether Dawson could perform the contract because they were controlling the method. So
there was a binding bilateral contract here.
Note: Courts are more likely to find bilateral contracts than unilateral contracts.
APPROACH #3: IMPLIED PROMISE NOT TO REVOKE OFFER ONCE PERFORMANCE HAS STARTED
Hydro One (Ont. SCJ, 2004) Offer cannot be revoked when performance has commenced
Facts: Ontario Hydro not permitted to revoke offer for payments under energy efficiency program once performance commenced.
Relies on Baughman v. Rampart Resources (BCCA, 1995), which states: “Whilst I think the true view of a unilateral contract must in
general be that the offeror is entitled to require full performance of the condition which he has imposed and short of that he is not
bound, that must be subject to one important qualification, which stems from the fact that there must be an implied obligation on the
part of the offeror not to prevent the condition becoming satisfied, which obligation it seems to me must arise as soon as the offeree
starts to perform. Until then the offeror can revoke the whole thing, but once the offeree has embarked on performance it is too late for
the offeror to revoke his offer.”
THIRD-PARTY BENEFICIARIES AND PRIVITY OF CONTRACT
Privity of contract: A contract can neither confer rights nor impose obligations on 3P. 3P has no rights under a contract and cannot
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enforce K. This is true even where purpose of the contract is to convey a benefit to a third party.
Rationale: Not a party to the contract, have not provided any consideration, 3P could prevent contract modification since 3P rights
could be seen to have crystallized, encouragement of market based concepts, support nascent capitalism, self-reliance, minimize
liability.
Langridge v. Levy (1837), Winterbottom v. Wright (1842) and Longmeid v. Holliday (1851): No contractual liability because injured
person is not privy to contract.
Vertical privity: relates to a buyer within the distributive chain who did not buy directly from the defendant. Manufacturer –
distributor – retailer – consumer.
Horizontal privity: relates to a person who is not a buyer within the distributive chain, but who consumes, uses or is affected by the
product. Seller – buyer – user.
Tweddle v. Atkinson (1861, Eng.) No legal entitlement to enforce a K is conferred on 3P to an agreement
Facts: Fathers promise to pay $ upon marriage. They die without paying. Husband sues father-in-law’s estate for payment.
Held: Action cannot be maintained. No consideration flowing from the husband. Consideration must move from party entitled to
sue upon the contract. No legal entitlement is conferred on third parties to an agreement. Third parties to a contract do not derive
any rights from that agreement nor are they subject to any burdens imposed by it.
Beswick v. Beswick (1968, CA/HL) Denning’s failed attempt to overrule Tweddle/strict privity of contract
Facts: Uncle sells business to nephew on condition that he pay him an annuity and when he dies to continue paying it to the widow.
Only makes one payment to the widow. Widow is a third party beneficiary who is also the executor of her husband’s estate. So she
brings the claim in her capacity as the executor and in her personal capacity.
Held: She fails. Unclear why her claim as rep of the estate failed (should have worked) Lord Denning agrees in the Court of Appeal,
but then overruled by the House of Lords (saying that it’s a legislative issue) Proceeds on the basis that the widow cannot sue in her
own capacity due to privity, but she can sue on behalf of the estate. Problem here is that the estate hasn’t really suffered – more the
wife who has suffered. So arguably no damages available because no damage to the estate. Court gets around this through an order
of specific performance which forces Beswick to make the payments.
Resch v. Canadian Tire (Ont. SCJ, 2006) Strict approach to privity of K in consumer context
Facts: Procycle manufactures the bike, sells to Canadian Tire, who sells to Mill Roy (who is the Canadian Tire Dealer) who sells to
Resch (stepfather). Boy is seriously injured riding the bike. Can the boy sue Canadian Tire even though he was not the actual buyer?
Held: No, buyer was the stepfather. They were not co-buyers. To be a co-buyer, each would have had to pay some cash or put on
two credit cards.
AVOIDANCE OF THE PRIVITY PROBLEM: AGENCY, ASSIGNMENT, TRUST
AGENCY
View B as also contracting as an agent for 3P, so that 3P is in a direct contractual relationship with A.
Dunlop Pneumatic Tyre (1915, HL) Agency argument fails: Dunlop trying to sue Selfridge under the price maintenance agreement.
Argument is that Dew was an agent for Dunlop in creating the price agreement with Selfridge. Court says that there was no evidence
that Dew was an agent of Dunlop and furthermore the Dunlop provided no consideration for the Dew-Selfridge contract.
New Zealand Shipping [1975] Agency used to extend limitation of liability to 3P
Facts: Cargo damaged. Consignee sues stevedores for negligence.
Issue: Can stevedores rely on limitation of liability in carrier’s bill of lading?
Held: Yes.
Analysis: Carrier was agent for stevedores for the purposes of contracting for limitation of liability. The contract referred to carriage
– which means loaded from point A to unloaded at point B. The contract specifically said that the relationship between the Carrier
and the Stevedores was a trustee or agency relationship (drafters knew that it would be a problem to just say Stevedores are
excluded from liability because the privity issue) These were called Himalaya clauses.
Note: It’s cheaper for the drill maker to insure their property than it is for the shipping company to get 3 rd party (buyer) liability
insurance, which makes it good policy to allocate the risk to the buyer.
Agency criteria from Scruttons v. Midland Silicones, [1962] (H.L.):
1. The negotiating parties must have intended that the stevedores (“3P”) benefit from the contract. In New Zealand
Shipping it was clear that the limitation clause was intended to benefit the stevedores since the bill of lading contained a
clause expressly extending protection to “every independent contractor” of the carrier.
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2.
3.
4.
The contracting party must also be contracting as agent of the stevedores (“3P”). In New Zealand Shipping, the bill of
lading expressly stated that the carrier was deemed to be acting as an agent for independent contractors.
The party that acted as an agent for the stevedores (“3P”) must have had the authority to do so. In New Zealand
Shipping the Privy Council held that the carrier was authorized to act as an agent on behalf of the stevedores because the
carrier was a wholly owned subsidiary of the stevedores. However, this sort of express authorization is not necessary since
authority can be granted ex post facto.
There must be consideration moving from the third party to the non-agent party. In New Zealand Shipping the Privy
Council found that, in agreeing to the terms of the bill of lading, the shipper had essentially made the following unilateral
offer to the stevedores (through their agent, the carrier): “if you unload my goods I accept that you are protected by the
limitation clause.” By unloading the goods the stevedores both accepted the shipper’s offer and provided consideration for
it (their labour).
EMPLOYEES AS 3P BENEFICIARIES TO LIMITATION OF LIABILITY CLAUSES
Greenwood Shopping Plaza (SCC, 1980)
Facts: Mall owner to insure for property damages. Insurer is to have no rights of subrogation, meaning that the insurer cannot sue
tenant, Canadian Tire. Canadian Tire employees cause fire.
Issue: The employees want to get the benefit of this so that the insurers/Greenwood cannot sue the employees.
Held: Situation is not within agency requirement as established in New Zealand Shipping, so the insurers were allowed to sue the
employees.
Analysis: (applying Scruttons criteria)
1. No evidence that clause was intended to apply to employees.
2. No evidence that Canadian Tire was in fact was contracting for employees.
3. Canadian Tire had no authority to contract on behalf of the employees.
4. No consideration from employees to Greenwood. It was a lease, and there was no performance by the employees that
could act as consideration.
Critique: Too formalistic, failure to consider consequences of judgment, unfair surprise, disrupts risk allocation, if no subrogation,
presumably higher premiums, inefficient because it means that employees need to insure also (double insurance)
London Drugs (SCC 1992) Exclusion clause impliedly extends to employee b/c employees performing essence of K
Facts: Storage of LD’s transformer. LD to insure. K&N employees negligently damage transformer. K&N had a limitation of liability for
$40.
Issue: Are the K&N employees able to claim the benefit of the exclusion clause? Note that the agency argument is not going to work
because there is no language that you would see from a Himilaya clause.
Held: Yes.
Analysis: SCC relaxes doctrine of privity in context where employees are the third party beneficiaries to limitation of liability clauses
between employer and customer, provided:
(a)
Limitation of liability expressly or impliedly extends benefit to employee
(b)
The employee seeking the benefit of the limitation of liability clause is acting in the course of their employment
and providing the very services provided in the contract when the loss occurs.
Court spins things around and says that there is no evidence that the employees were to be excluded. Greenwood is distinguished
on the basis that it was a lease, and you don’t need an employee to lease building – employees were not acting in the context of
duties for the lease, here the employees are needed for the very purpose of the contract (storage).
Note: “Reasonable expectations of the parties” and “risk allocation of the parties” are always considered regarding 3Ps.
Laing (BCCA)
Facts: Santa display burns down whole mall. Employees were supposed to be supervising.
Issue: Does the exclusion clause apply to the employees?
Held: Yes. Applied LD and exonerated the employees.
Significance: Impact is that you don’t have to go through the agency rule – just go to the 2-step test under LD. You can still make the
agency/trust argument if it wouldn’t fit under the LD test.
The fate of the employee: What problems continue?
 Employer may have no insurance/no limitation clause. Employee only obtains 3P benefits if employer has protected itself.
 Even if insurance/limitation clause, employer might not ensure that it extends to employees.
 Employer may not decide to insure employees.
 Employee options:
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o
o
o
o
Ensure insurance coverage extends to employees
Ensure employee benefits from waiver of subrogation
Employee self-insures
Employee obtains indemnity from employer (Note that this only works if the employer has assets)
LONDON DRUGS CRITERIA NOT LIMITED TO EMPLOYEE CONTEXT
Can-Dive (SSC 1999) Extension of London Drugs Criteria to General Commercial Context
Facts: Boat charterer seeks to rely on waiver of subrogation clause in insurance contract between insurance company and boat
owner. Boat sunk due to negligence of charterer. Insurance company pays boat owner and then sues the boat charterer, arguing
that London Drugs limitation of liability for 3rd parties is limited to contract for services.
Held: The London Drugs test can apply anywhere.
Analysis: 1) Did the contracting parties intended to extend the benefit to the third party? Yes, insurance K referred to charterers. 2)
Are the activities performed by the third party the very activities contemplated as coming within the scope of the contract?
Activities performed by the 3rd party are the very activities contemplated as falling within the scope of K–chartering of boat.
Third parties rights cannot be revoked by agreement once they have crystallized. Basically, when the charterers signed the contract
with the boat owner, that’s when the rights were crystallized.
Policy: Sound commercial rationale to enforce the bargain.
ASSIGNMENT
Law and Equity Act, S.36: An absolute assignment, in writing signed by the assignor, of a debt or other legal chose in action, of
which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been
entitled to receive or claim the debt or chose in action, is and is deemed to have been effectual in law, subject to all equities, to pass
and transfer the legal right to the debt or chose in action from the date of the notice, and all legal and other remedies for the debt
or chose in action, and the power to give a good discharge for the debt or chose in action.
Note: As opposed to assignments, a negotiable instrument (like a cheque) is taken without having to worry about any equities (i.e.
reasons why the party gets less because of what has gone on between the two of them) With assignment, you only get the
assignment subject to all equities.
LEGISLATION REGARDING 3P BENEFICIARIES
New Brunswick Law Reform Act
4(1) A person who is not a party to a contract but who is identified by or under the contract as being intended to receive some
performance or forbearance under it may, unless the contract provides otherwise, enforce that performance or forbearance by a
claim for damages or otherwise.
4(2) In proceedings under subsection (1) against a party to a contract, any defence may be raised that could have been raised in
proceedings between the parties.
4(3) The parties to a contract to which subsection (1) applies may amend or terminate the contract at any time, but where, by doing
so, they cause loss to a person described in subsection (1) who has incurred expense or undertaken an obligation in the expectation
that the contract would be performed, that person may recover the loss from any party to the contract who knew or ought to have
known that the expenses would be or had been incurred or that the obligation would be or had been undertaken.
4(4) This section applies to contracts entered into before or after the commencement of this section, except that subsection (3)
does not permit the recovery of loss arising in relation to an expense incurred or an obligation undertaken before the
commencement of this section.
MISTAKEN IDENTITY OF VOID AND VOIDABLE CONTRACT
o The scenario: B, the rogue, passes himself off as another well-known person or a person with means. A contracts with B
and sells property to B. B then sells to C, a bona fide purchaser for value (BFP). A is unpaid and B absconds. A, the
defrauded owner, sues C, argues that fraud means B did not obtain title to the property and had no right to transfer it to C.
o Nemo dat quod non habet
o The common law (and sale of goods legislation in the common law provinces) follows the rule nemo dat quod non
habet: no one can transfer to another something that he or she does not have.
o Sale of Goods Act s. 26 (1) Subject to this Act, if goods are sold by a person who is not the owner of them, and who
does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the
goods than the seller had, unless the owner's conduct precludes the owner from denying the seller's authority to
sell.
o This principle conflicts with the policy of protecting innocent purchasers who buy in good faith without notice of
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o
the defect in title
Which innocent party should bear the loss?
o Policy: Economic analysis generally favours the BFP as the seller is in the best position to avoid the loss at the least
cost. To protect themselves, the seller should require full payment/bank draft/certified cheque/security etc.
before allowing purchaser (the rogue) to have possession of the property. It is cheaper for the seller to do this
than for the buyer to make a full search of the seller identity and title to the goods.
THE COMMON LAW NON-SOLUTION: VOID AND VOIDABLE CONTRACTS
Whether the property owner retains title to the property depends on the characterization of the contract between A and B.
No offer to rogue – contract void: A-B contract can be characterized as being void ab initio (from the beginning) because there was
no offer/acceptance. There was an offer but it was not made to the rogue; it was made to the person the rogue was impersonating.
No contract was formed and as a result no title passes from A to B. B cannot pass any property to C.
Result: A retains title to property. (Ingram v. Little)
Fundamental mistake regarding identity of contracting party – contract void: If A-B contract is void for fundamental mistake
regarding the identity of a contracting party, the contract is void because there was no meeting of the minds. Some of this discussion
in the dissent in Ingram.
Result: A retains title to property.
Contract voidable because of fraudulent misrepresentation: If A-B contract is voidable because of B’s fraudulent
misrepresentation, then there is a contract under which title can pass from A to B. However, as a result of the misrepresentation, A
has an equitable right to rescind the contract with B and regain title. If contract rescinded then A regains title. Could also just sue for
damages.
Result: A regains title to property.
Contract voidable but not avoided before sale to BFP: If B transfers title to C before A finds out about the fraudulent
misrepresentation and rescinds the contract with B, then C, the BFP, acquires the property.
Result: C takes title to property. Lewis v. Averay
 Sale of Goods Act s. 28: When the seller of goods has a voidable title to them, but the seller's title has not been
avoided at the time of the sale, the buyer acquires a good title to the goods, if they are bought in good faith and
without notice of the seller's defect of title.
Phillips v. Brooks (1910, Eng. H.C.)
Held: Brooks (BFP) wins because also there was misrepresentation but the rogue sold it to Brooks before Phillips rescinded. Here the
identity of the rogue/purchaser was not important.
Ingram v. Little (1961, C.A.)
Held: The contract was with a particular person and the identity was of utmost importance. Therefore the contract between the
seller and the rogue was void ab initio, so Little (BFP) did not acquire title.
Lewis v. Avery (Eng. CA, 1972) Modern approach
Facts: The rogue buys a car from Lewis via misrepresentation and sells to Avery. It was a voidable contract and it was not voided
prior to selling to Avery so Avery got the title.
Comment: These cases all arise in the context of face-to-face dealings. When it happens through mail (Cundy v. Lindsay) the HL
followed the nemo dat principle that there was no contract so the original seller would get the goods back. The HL reaffirmed this in
a 2004 case. Newcombe says that in Canada courts would probably apply the Lewis v. Avery approach in Canada if we had a written
scenario.
NON EST FACTUM
 “It is not my deed”
 Historically, non est factum was only available where:
o The person did not actually sign the document themselves (fraud and forgery)
o A blind/illiterate person that did not know what they were signing – Contract was void ab initio because there was
no consent and no intention to contract.
 Modern General Rule
o Generally if you sign a document, you are bound by it.
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o




Signature Rule: a signed contract is binding. If you sign, it is almost irrefutable proof that you accepted the
contents
Effect of non est factum  the contract is void
Modern Cases:
o Typically those around the situation of a person with full capacity that mistakenly signs a document as a result of
fraud or an inducement to do so
o Issue: who should win / who should bear the loss as between the mistaken party and the innocent third party?
The burden of proof is on the person seeking to rely on non est factum
The mistaken person has an obligation to take all reasonable precautions in the circumstances (generally insufficient to
say that you relied on the trusted friend)
Saunders v Anglia Building Society
Facts: Aunt wanted to assist her nephew, Parkin, financially. Parkin does not want his aunt’s house to go to him because he wants to
be judgment-proof from his wife. So Parkin and Lee decide that the house will go to Lee and then Lee will pay Parkin secretly (so
there is no paper trail). Parkin and Lee mislead the aunt into thinking that she is assigning the house to Parkin, where in reality she is
transferring it to Lee. She could not read the documents because she had broken her spectacles. Lee does not pay Parkin anything.
Issue: Is the contract between the aunt and Lee void on the basis of non est factum?
Held: No. The aunt must bear the loss.
Analysis: CA overturns findings of fact. The aunt only gave her evidence on commissions (and did not actually give any oral evidence
at trial). Therefore, the CA is in just a good possession as TJ to assess what her evidence means because it is only a transcript.
 She had no idea of the assignment to Lee. CA reframed this: Gallie clearly understood that the document was intended to
divest herself of property
 She thought it was a gift to Parkin with an oral understanding that she is gifting over the house, but a condition of that
arrangement is that she gets to stay in the house until she dies. CA: she knew that Parkin and Lee were jointly concerned –
she knew that there was some arrangement between Parkin and Lee where there would be some money raised
 TJ: Focused on the identity of transferee – she thought it was Parkin, whereas in reality it was Lee. CA: who it was
transferred to was not necessarily the essential part/not the object of the exercise
General Principles from Saunders:
1. Non est factum is granted very rarely
2. General Operating Principle: a person of full age and understanding, who can read and right, is bound by their signature on
a legal document. You can’t take advantage of your own carelessness
3. A plea of non est factum is available to a person who, for permanent or temporary reasons, is not capable of reading and
sufficiently understanding the document signed.
A plea of non est factum is NOT available where:
a) The signature of the document was brought about by negligence of the signer in failing to take precautions that they ought
to have taken:
I.
Negligence means carelessness in contract law
II.
Carlile held that negligence must mean that there is a public duty owed but Saunders overruled that
b) A plea is not available where the actual document is NOT fundamentally different from the document as the signer
believed it to be.
Marvco Color
Facts: Harrises are tricked by Johnson into giving him a mortgage on their property. The mortgage provided security to Marvco for
Johnson’s obligations.
Issue: Can the Harrises rely on non est factum?
Held: No.
Analysis: The court accepts Saunders. If the person is negligent/careless they are precluded from obtaining the benefit of the
doctrine of non est factum.
Win Up Restaurant (BCSC 2010) Non est factum successfully argued
Facts: Sui had a lease with Farrell on this restaurant. Sui is on the hook for ten years for the payments – there is no termination
clause. But he has used up all of his assets. He wants to get out of his lease so he tries to get Yang to take over the lease so that he
can be released from the obligation. Yang is very clear that she does not want to be the personal guarantor of the lease. Yang looks
at it with her lawyer and crosses out the personal guarantee stuff. The lease that she signs provides that the company is liable and
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that she is liable personally as a personal guarantor for the arrangement. Yang is now being personally sued for $600,000 in lease
payments.
Held: Yang is not liable on the basis of non est factum – all along she proceeded on the basis that it was only Win Up that was going
to be liable and that she was misled by rogue (Sui) to sign in her personal capacity. Court finds that Farrell should have essentially
been on notice that there was something up.
CONTRACT INTERPRETATION
o The process of contractual interpretation is aimed at ascertaining the true intentions of the parties at the time the contract
is signed. Consolidated-Bathurst v. Mutual Boiler
o Literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be
contemplated in the commercial atmosphere in which the contract was created. Where words may bear two constructions,
the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would
promote the intention of the parties. Consolidated-Bathurst v. Mutual Boiler
o But if there is no ambiguity, the written document should prevail as it should be presumed that the parties intended the
legal consequences of their words. Eli Lilly & Co. v. Novopharm Ltd.
o The courts apply an objective approach to the determination of the parties’ intention at the time of contract. B.C.C.I. v. Ali,
quoted in ATCO Electric v. Alberta
o The court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in
the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction.
B.C.C.I. v. Ali, quoted in ATCO Electric v. Alberta (ABCA)
o Where there is no ambiguity in the written agreement there is no need for extrinsic evidence. KPMG v. CIBC, (ONCA),
Scott v. Wawanesa, (SCC)
o The “factual matrix”, “commercial context”, “surrounding circumstances” are almost always relevant. (Reardon Smith
Line)
o The general rule is that evidence of prior negotiations is inadmissible for the purpose of construing the final agreement.
o Interpretation must give effect to all parts of the agreement. No provision of an agreement should be interpreted to be
redundant. The presumption is that a term in a contract is not meaningless. Nevertheless, courts recognize that agreements
drafted by lawyers often contain language that is duplicative.
o Where there are apparent inconsistencies between different terms of a contract, the court should attempt to find an
interpretation which can reasonably give meaning to each of the terms in question.
o A frequent result of this kind of analysis will be that general terms of a contract will be seen to be qualified by specific
terms -- or, to put it another way, where there is apparent conflict between a general term and a specific term, the
terms may be reconciled by taking the parties to have intended the scope of the general term to not extend to the
subject-matter of the specific term.” BG Checo [1993] 1 S.C.R.
o Subsequent conduct
o Although English courts have stated it is not legitimate to examine subsequent conduct, Canadian courts have
generally taken a more flexible view.
o Where there are two reasonable interpretations of a provision then evidence of subsequent conduct “may be
admitted and taken to have legal relevance if that additional evidence will help to determine which of the two
reasonable interpretations is the correct one”. Re CNR and CP (1978) (BCCA)
o Look at the length of time that the parties have been acting a certain way.
o Related Agreements
o Related agreements may be taken into account where the agreements are components of one larger transaction.
o Meaning of words
o Words are to be given their natural or ordinary meaning. Evidence may be admitted to prove that the word has a
special or technical meaning.
o Construction Contra Proferentem
o Provisions of contracts that suffer from ambiguity are to be construed against the interest of the person who drafted
the ambiguous provision.
 Evidence of prior negotiations or the parties’ subjective intent is inadmissible for the purpose of construing the final
agreement Prenn v. Simmonds
 But evidence of the following is admissible:
 the commercial or business object of the agreement;
 the “genesis” and objectively the “aim” of the transaction;
 mutually known facts to identify the meaning of a descriptive term;
 and to establish a trade or technical meaning.
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THE PAROL EVIDENCE RULE
o Conflict between written contract and other extrinsic evidence (oral, written, electronic etc.).
o Prototypical situation is where there is an oral representation that either conflicts with the written contract or is excluded
by an “exclusion clause” or “entire agreement” clause.
o Rationales for the parol evidence rule
o Administrative/adjudicative ease
o Prevent fraud/perjury
o Enhance certainty
o Efficacy of commercial documents
o Prevent unfair surprise
o Control agents/employees
o Signature Rule from L’Estrange: If you signed it, that is a representation to the world that you agree with the document.
o Traditional view: Extrinsic evidence is inadmissible to alter the contract. You can admit evidence of a collateral agreement
that doesn’t contradict the main agreement, but you can’t admit evidence that contradicts the original contract. (Hawrish)
o Note: probably a different approach would be adopted if there was clear evidence of an oral promise.
HOW TO AVOID THE PAROL EVIDENCE RULE: THE TWO-CONTRACT APPROACH
 Two contracts: One for buying car (which perhaps says “no other promises are made”), and one that says “if you buy my
car, I promise it’s rust free” which would be unilateral and consideration would be the purchase of the car.
 If it was interpreted using the one K theory, oral promise that it was rust free would be inadmissible under parol evidence
because it contracts the written purchase document.
 With the parol evidence issue, GTA issues often arise, because if you’ve already contracted for the car, then the added term
that the car is rust free, if this occurs after the contract is formed, then that’s a GTA, and the issue is what was the
additional consideration for this GTA? Did the oral representation form part of the original contract, or is it a second
contract?
EXCEPTIONS
 When the written agreement is not the whole contract.
 Interpretation: Extrinsic evidence can be introduced to clear up an ambiguity in the contract.
 Invalidity: Extrinsic evidence can be introduced to show that the contract is invalid because of lack of intention,
consideration or capacity
 Misrepresentation: Extrinsic evidence can be introduced to show there was a misrepresentation that was either innocent,
negligent or fraudulent.
 Mistake: Extrinsic evidence can be introduced to show that there was some mistake as to the nature or effect of the
agreement.
 Rectification: Extrinsic evidence can be introduced to correct an error/mistake in putting the agreement in writing.
 Condition precedent: Extrinsic evidence can be introduced to show that there was a condition precedent to the agreement
taking effect.
 Collateral Contract/Warranty/Agreement: Extrinsic evidence can be introduced to show that there was a separate
agreement along with the written agreement.
 Unconscionability: Extrinsic evidence can be introduced to show that the transaction was brought about through
unconscionable means.
 Modifications and discharge: Extrinsic evidence can be introduced to show that the contract has been modified or
terminated.
 Equitable remedy: Extrinsic evidence can be introduced in support of a claim for an equitable remedy.
Gallen v. Allstate Grain (BCCA, 1984) Reformulation of the Parol Evidence rule: there is a strong presumption in favour of the
written rule, but the Hawrish is not absolute: If there is a contradiction, “there is a strong presumption in favour of the written
document, but the rule is not absolute, and if on the evidence it is clear that the oral warranty was intended to prevail, it will
prevail.” Strength of presumption in favor of the written contract varies depending upon the circumstances: Does it add a term
(weak), vary a term (medium), or contradict a term (strong presumption against)?
Proper Approach:
1. Determine whether the oral representation is a warranty. i.e. “rust-free” – how to categorize? Innocent, misrep, fraud
misrep, nominate term, etc.
2. If it’s a warranty, then the oral warranty and the contractual document must be read together if possible. If no
contradiction, then there is no problem.
3. Contradiction? If yes, then strong presumption that the written contract governs.
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Zippy Print (BCCA 1995) General exclusion clause can override specific oral representation only in limited circumstances
Facts: Someone is buying a franchise. Some very specific oral representations were made with regards to the profitability of the
franchise. In the contract there was basically every exclusion clause possible.
Held: “A general exclusion clause will not override a specific representation on a point of substance which was intended to induce
the making of the agreement unless the intended effect of the exclusion clause can be shown to have been brought home to the
party to whom the representation was made by being specifically drawn to the attention of that party, or by being specifically
acknowledged by that party, or in some other way”.
What you should do: have a clause whereby the buyer agrees that nothing outside of the written contract has induced them to buy.
FACTORS INFLUENCING APPLICATION OF THE RULE
 General: Intent, reliance, reasonable expectations, unfair surprise
 Nature of change/conflict: how serious is the conflict/contradiction?
 Nature of Document
 Intended to be whole agreement—entire agreement clause?
 Clarity of wording
 Read by parties (knowledge)?
 Bargaining Relationship
 Power
 Standard form contract
 Past relations/experience
 Evidence of sharp practice (?)
 Nature of Representation
 Quality and credibility of evidence
 Clarity and specificity
 Significance
 Legislation
PAROL EVIDENCE RULE OVERRIDDEN IN CONSUMER CONTEXT
BC Business Practices and Consumer Protection Act, s. 187 overrules the parol evidence rule in the consumer context.
Note: "consumer transaction" means a supply of goods or services or real property by a supplier to a consumer for purposes that
are primarily personal, family or household. After Gallen you would have been able to admit the evidence anyway, so this doesn’t
really change much, but supposedly makes it easier to get your evidence in.
FUNDAMENTAL BREACH
Doctrine of fundamental breach: an exemption clause cannot be construed to excuse liability for a fundamental breach of contract
(a breach that goes to the root of the contract). The issue is whether the guilty party should be permitted to rely on the exclusion
clause where there has been a fundamental breach of contract?
Repudiatory Breach: Breach of contract that entitles the innocent party to treat the contract as at an end.
THE RULE OF LAW APPROACH
Karsales v. Wallis (Eng. CA, 1956) Denning tries to make the doctrine of fundamental breach a rule of law
Facts: The defendant purchaser refused delivery of a used car, which was delivered severely damaged. Vendor relies upon exclusion
clause.
Held (Denning): “It is now settled that exempting clauses of this kind no matter how widely they are expressed, only avail the party
when he is carrying out his contract in its essential respects…They do not avail him when he is guilty of a breach which goes to the
root of the contract.”
THE RULE OF CONSTRUCTION APPROACH
Suisse Atlantique (1967): the House of Lords held that fundamental breach is not a rule of law—it is merely a rule of construction.
The House of Lords confirmed this position in Photo Production (1980).
Photo Production (HL, 1980) Exclusion clause applies even in a totally ridiculous scenario
Facts: Contract between Photo Production and Securicor to provide nightly patrol of Photo’s premises. The contained an exclusion
clause: “Under no circumstances shall Securicor be responsible for any injurious act or default by any of its employees…” Security
guard started a fire and it burnt down Photo’s premises.
Held: Fundamental breach of contract brings contractual obligations of performance to an end. The exclusion clause survives and
the issue is whether the clause applies to the loss in question. HL overturned Denning and found that the exclusion clause could be
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relied upon. Wilberforce explicitly rejected Denning's application of the doctrine of fundamental breach (i.e a rule of law approach)
and opted for a "rule of construction" approach. Exemption clauses are to be interpreted the same as any other term regardless of
whether a breach has occurred. The scope of the exclusion is determined by examining the construction of the contract. On the
facts, Wilberforce found that the exclusion clause precluded all liability even when harm was caused intentionally.
CANADIAN APPROACH TO FUNDAMENTAL BREACH
Hunter Engineering v. Syncrude (SCC, 1989) If there is a doctrine, it is a rule of construction
Facts: Syncrude contracts for 14 conveyor systems, including gearboxes, and enters into contracts with Hunter and Allis. The Allis
contract provides a one year warranty and excludes all other warranties and conditions. System failed after 15 months of startup.
Value of contract was $4,000,000. The value of the gears in issue was $460,000. The repairs cost $400,000.
SCC: All five members of the Court agreed that, if there is a doctrine, it is a rule of construction. All five upheld the exclusion clause,
but two competing sets of judgments.
Dickson (and LaForest): While Canadian courts say the doctrine is a rule of construction, in reality it functions as a rule of law and it
should not be used. Problems with the doctrine a) uncertainty—a game of categorization b) Exclusion clauses are often fair and
reasonable c) unfair surprise and unjust enrichment: in commercial contexts, exclusions are normally reflected in price d)
Unevenness of doctrine: why restrict fundamental breach to exclusion clauses—other clauses may be as harsh e) The doctrine cloaks
the real enquiry—unfairness. Unconscionability should be used. Upholds exclusion clause as it is clear and unambiguous and there is
no evidence of unconscionability.
Wilson (joined by L'Heureux-Dubé): The doctrine should be retained as a rule of construction and applied where a party has been
deprived of substantially the whole benefit of the K. Using unconscionability as the doctrine to control exclusion clause is
problematic because unconscionability is assessed at the time of contract formation. An exclusion clause may be fair at the time of
formation, but become unfair during the course of performance.
Tercon Contractors v. BC (SCC, 2010) No more doctrine of fundamental breach; proper test for exclusion clause
Facts: BC issues RFP for highway contract. Province selects contractor that is technically illegible under the RFP.
Issue: Did exclusion clause in RFP exclude the province’s liability for breach of RFP?
Exclusion clause: “Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall
have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a
proposal each proponent shall be deemed to have agreed that it has no claim.”
Test for whether the exclusion clause applies:
1. As a matter of interpretation, does the exclusion clause apply? “This will depend on the Court’s assessment of the
intention of the parties as expressed in the contract.”
2. If the exclusion clause applies, was the exclusion clause unconscionable at the time the contract was made?
3. Are there any overriding public policy reasons, proof of which lies on the party seeking to avoid enforcement of the clause,
that outweigh the very strong public interest in the enforcement of contracts?
o Examples: criminality, fraud, abusive conduct
o Plas-Tex v. Dow Chemical (2004): ABCA refused to enforce an exclusion clause where the defendant Dow
knowingly supplied defective plastic resin to a customer who used it to fabricate natural gas pipelines hoping to
rely on its exclusion clause. The court concluded that “a party to a contract will not be permitted to engage in
unconscionable conduct secure in the knowledge that no liability can be imposed upon it because of an
exclusionary clause.” The public policy that favors freedom of contract was outweighed by the public policy that
seeks to curb its abuse.
Majority:
1. The exclusion clause did not apply. The clause only applies to claims arising “as a result of participating in this RFP”, not to
claims resulting from the participation of other, ineligible parties.
2. A process involving other bidders …is not the process called for by “this RFP” and being part of that other process is not in
any meaningful sense “participating in this RFP”
3. “Not any and every claim based on any and every deviation from the RFP provisions would escape the preclusive effect of
the exclusion clause. It is only when the defect in the Province’s adherence to the RFP process is such that it is
completely outside that process that the exclusion clause cannot have been intended to operate.”
4. Interpretation in the context of other provisions: Right to cancel RFP and have new RFP with additional bidders is
redundant if “the exclusion clause were broad enough to exclude compensation for allowing ineligible bidders to
participate”
5. Contra proferentem: In the alternative, language is ambiguous and clause should be interested against the
Province.
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Minority: “The parties expected, even if they did not like it, that the “no claims” clause would operate even where the eligibility
criteria in respect of the bid (including the bidder) were not complied with.”
1. Exclusion clause was not ambiguous. The Province’s breach of the RFP process did not end the RFP process.
Tercon was still participating in the process.
2. Not unconscionable. No relevant imbalance in bargaining power. Tercon is a major contractor and is well able to
look after itself in a commercial context.
3. Not contrary to public policy “I do not believe the Ministry’s performance can be characterized as so aberrant as to
forfeit the protection of the contractual exclusion clause on the basis of some overriding public policy.”
4. Floodgates argument
5. De minimis argument: RFP contemplated changes in the team.
6. Leave it to the market
7. Other relief available? Injunctive relief was a live possibility
STANDARD FORM CONTRACTS AND REASONABLE NOTICE
General Rule for Signed Documents: Party signing a written contract is bound by its terms (L’Estrange)
Unsigned Documents?
o The dominant approach is that the contract is formed when you get the ticket and you are bound by the conditions.
o CL developed the doctrine of reasonable notice: Even if there is no knowledge of conditions, a person is bound to
conditions if there was reasonable notice that the ticket contained conditions.
o With unsigned docs, you are bound by conditions if you knew or had reasonable notice that the ticket contained conditions.
Parker
o Comment: This was the CL approach, focused on process, rather than on determining whether a specific provision
is reasonable or not.
o Spurling v. Bradshaw Onerous conditions must be brought to the attention of the consumer. The more onerous the
provision, the higher the standard of care
o Tilden v. Clendenning (Ont. CA, 1978) Even for signed documents, reasonable notice of onerous provisions applies
o This is limited in Karrol
SIGNED WAIVERS: RISKY ACTIVITIES
Delaney v. Cascade River Holidays (BCCA 1981) In the absence of some evidence of unconscionability, fraud, misrepresentation or
case of non est factum the signature rule continues to prevail. Contract can trump tort – you can exclude liability for negligence.
Karroll v. Silver Star (1988, BCSC) Tilden is limited to where other party knew or had reason to know of the other’s mistake as to
terms
Facts: Karroll signs waiver form, participates in ski race and is injured. Ski Hill argues the signature rule from L’Estrange. Karroll
argues that she did not receive reasonable notice of terms in standard form (Tilden)
Issue: Is she bound by the release?
Held: Yes. It is not a general principle of contract law that reasonable steps need be taken to bring an exclusion of liability to the
attention of the consumer. Tilden is a limited principle, only applicable in special circumstances: where person knew or had reason
to know of other’s mistake as to its terms. Special circumstances: where hasty, informal transactions are normal, clause inconsistent
with rest of K, absence of opp to read, really length docs that are hard to read. None of this was the case here.
REPRESENTATIONS AND WARRANTIES
Classification
Mere Puff
Innocent
misrepresentation
Negligent
misrepresentation
Fraudulent
misrepresentation
(tort)
Definition
Legally meaningless statement Ex: this car’s
a beauty
A false statement made by someone who
did not know it to be false.
Did not know for sure, did not check and
knew it would be relied upon
Knew was not true or was reckless as to
truth of statement
Remedy
None
Interest Protected/Policy
Caveat Emptor (you’re screwed)
Rescission (must be
promptly sought)
Reliance damages
Restitution (unjust enrichment)
Rescission and
reliance damages
Reliance
Reliance
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Warranty (express &
contractual)
Condition
A representation by the seller that the
subject of the sale has certain
characteristics that is elevated to a term of
the K.
A term that goes to the root of the K
Expectation damages
Reasonable expectation
Rescission and
expectation damages
Reasonable expectation
Rescission vs. repudiation: Rescission is an equitable remedy, courts can apply this. Parties do not rescind contracts. I.e. parties can
never grant equitable orders i.e. specific performance. Parties can terminate contracts. Repudiation is a right of a party, where there
is a breach of a condition, to repudiate the contract. What’s the difference practically speaking? The really good deal?
Analytical approaches
Doctrinal: the legal test
Policy approach: protect reliance and reasonable expectations of one party while avoiding unfair surprise.
Economic approach (risk allocation): From this perspective, the issue with warranties is information failure, and then the question is
who will bear the risk of the information failure. Generally, it’s the person who could have obtained the info or avoided the risk at
least cost.
Remedial approach: Often, the categorization of a statement is remedy driven. Justice is done between the parties by selecting the
appropriate remedy.
CATEGORIES OF STATEMENTS
 Innocent misrepresentation
o Statement that, unknown to speaker, is false. Four requirements:
 Representation of fact that turn out to be false
 Material – i.e. an important matter;
 Induces the making of contract, relied upon (but will be presumed); and
 Maker did not know correct facts.
o Policy concerns: caveat emptor v. unjust enrichment
o Remedy: rescission, provided: (1) contract not executed; (2) restitutio in integrum (return to its original state) is
possible.
o Redgrave v. Hurd (1881): D advertised to sell law practice and house together. P moves to town, occupies house,
and finds out that D made statements about profitability of business that were false. This was categorized as an
innocent misrep, and P was entitled to rescission of contract to buy house and law practice. Contract not found to
be executed. Deposit returned but no damages for moving costs. A buyer can seek rescission for an innocent
misrep even where the buyer had the opportunity to verify the correctness of the representation and did not.
o Redican v. Nesbitt (1924): contract for sale of cottage. Contract executed. P found out that the cottage didn’t
have electricity, and fewer rooms than advertised. P did a stop payment on the check, but this didn’t work. No
rescission. Note: this is a sale of land, and CL has historically been very reluctant to rescind sales of land. It’s a lot
more “caveat emptor” with land, and buyers are expected to go out and inspect it.
o Ennis v. Klassen (1990, MAN. CA): sale of BMW (chattel). Misrepresentation as to model discovered after 3 days.
Vendor had illegally imported the vehicle into Canada. Court rescinds on basis that though the contract was
executed and delivery taken, acceptance had not yet taken place before rescission was sought. Notion of a period
of reasonable inspection of the goods to make sure that the goods comply with the contractual terms. (Codified in
Sale of Goods Act s.39)
o Big issue: Is it an innocent misrep or a warranty? Usually you are only aware of the problem much later on, after
the reasonable period for inspection has passed, so you need to sue on the basis that it was a warranty
 Fraudulent misrepresentation (tort)
o Remedy for fraud includes rescission and reliance damages. Rescission will be difficult because very unlikely that
you can put parties exactly back how they were. Halbitt references Peek v. Derry which gives the test: “statement
must be made recklessly not caring whether it’s true or not.”
 Negligent misrepresentation (tort)
o Reasons for the traditional reluctance to recognize this tort: a) commerce is the arena of K – risks should be
allocated by K, floodgate concerns regarding economic loss, words are different from acts (potential P’s are
unlimited), words can exist forever, it’s an economic not physical loss.
o Hedley Byrne Establishes the doctrine of negligent misrepresentation, but contract can trump (exclusion clause)
Facts: Hedley Byrne were advertising agents who had provided a substantial amount of advertising on credit for
Easipower. Hedley became concerned that Easipower would not be in a financial position to pay the debt and
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

sought assurances from Easipower’s bank (Heller) that Easipower was in a position to pay for the additional
advertising which Hedley may give them on credit. Heller gave a favourable report of Easipower’s financial
position, but stipulated that the report was given "without responsibility." On the strength of the report given by
the respondents, Hedley placed additional orders on behalf of Easipower which eventually resulted in a loss of
£17,000. Hedley then brought an action against the respondents for damages under the tort of negligence.
Held: A negligent, although honest, misrepresentation, may give rise to an action for damages for financial loss
even if there was no contract between the advisor and the advisee and no fiduciary relationship. The law will imply
a duty of care when the advisee seeks information from an advisor who has special skill and where the advisee
trusts the advisor to exercise due care, and that the advisor knew or ought to have known that reliance was being
placed upon his skill and judgment. However, in this case there was an express disclaimer of responsibility and
there was therefore be no liability.
Condition
o Term of fundamental importance, the breach of which will give rise to a right to repudiate and expectation
damages.
o See s.17 (1) of the Sale of Goods Act – sale by description, goods must correspond with description
o S.18 – implied conditions that the goods are of merchantable quality, will be durable for reasonable period of time,
and reasonably fit for purpose.
o Generally, when you’ve bought something, the remedy will be damages, not recission.
o After the period of reasonable inspection:
 (4) …the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty,
and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term
of the contract, express or implied, to that effect.
 Sale of Goods Act applied in Leaf, barring a claim for rescission
Warranty
o A term of contract that parties intend to be binding.
o Collateral contract/warranty: Rather than one contract (sale of a racing horse), the courts sometimes adopted a
two contract approach. K1= contract for sale of horse, K2= if you enter K1, I promise it is a racing horse. Unilateral
contract, the performance of which is entering into K1. This also gets around the parol evidence rule.
o Note: Gallen said this is legal fiction to pretend there are two contracts!
o Remedy: Expectation damages.
o Legal test for warranty: Heilbut Symons (1913, HL): "An affirmation at the time of the sale is a warranty provided it
appears on the evidence to be so intended." (Objective test)
 P claims that D made a representation that the company was a rubber company which induced P to buy
shares.
 Court finds that this is just an innocent misrep, not a warranty, and therefore no damages
 Why?
o Floodgates argument (court doesn’t want every statement made during K negotiations
to become a promise/warranty)
o It was a very short preliminary discussion for informational purposes, not an in-depth
negotiation session
o Arguably the seller didn’t make any misrep at all regarding whether or not it was a
rubber company (it was a rubber company).
o Furthermore, P’s reliance was more on the general reputation of the underwriters who
were issuing the shares. The reliance wasn’t on the statement of the seller about the
fact that it was a rubber company.
o Dick Bentley (Eng. CA, 1965): Statement about miles on engine. Prima facie, warranty if:
 Representation
 Made in the course of dealings
 for the purpose of inducing other party to act (important issue)
 induces entry into K (reliance)
 reliance is reasonable
o Leaf v. International Galleries (Eng. CA, 1950): D sells a painting and says that it is a Constable painting. Five years
later, P tried to sell the painting and found out it was not by Constable. P only sought rescission. Court said that it
was too late – general rule is when the contract is executed (after the reasonable period of inspection) you can’t
get rescission, only damages (unfortunately P didn’t claim damages). The painter of the painting was a condition,
but it turned into a warranty because of the amount of time that had passed. (as under the Sale of Goods Act)
24


Note: if before the K had been executed, P had an inspector look at the painting who said that it wasn’t a
Constable, even though P had agreed to buy, he could repudiate the contract at that time on the basis
that there was a breach of condition.
o Murray v. Sperry Rand (1979, Eng HC) Using unilateral Ks to get at the manufacturer in a distribution chain
P bought a foraging machine in reliance on a brochure that outlined its specs. Harvester fails to act as brochure
said it would. It’s clear that the dealer is liable as there was a clear representation that induced entry into the K.
But there is no K between P and the manufacturers. Privity would say that P can’t sue the manufacturer. Court
takes a two-K approach: If you buy harvester from our dealer, we promise that the representations made in our
brochure are true. Consideration for manufacturer’s promise that harvester would meet certain qualifications was
entering into the main contract with the retailer to buy the harvester. Therefore, manufacturer is also liable even
though not a party to the K of sale because representations in brochure are a collateral warranty. Note you still
have to apply the test for warranty and show that it is met. Important doctrinally since it avoids the problem of
privity of K (Normally manufacturer would not be liable since they are not privy to the K between vendor and
purchaser, Tweedle v. Atkinson)
Innominate Terms
o A term in a contract that is not specified as a warranty or condition when the contract is signed, but can give rise to
a right to repudiate depending on the seriousness of the breach of contract. This is only assessed after the breach.
o i.e. a contractual term that a ship is seaworthy. Defects can range from minor (i.e. a light burnt out that is legally
required) or a really serious issue requiring 2 years to repair.
o In Hong Kong Fir Shipping [1962], the English Court of Appeal held that where shipowners breached a charter
party contract by delivering an unseaworthy vessel, the fact that the term could not be classified as a condition did
not mean that the charterers were necessarily precluded from repudiating the contract. An innominate term lies
somewhere between a condition and a warranty. The remedy for the breach of an innominate term depends on
whether the breach is of a fundamental nature. If the injured party has been deprived of substantially the whole
benefit of the contract, she will be entitled to treat the contract as repudiated and claim damages. If not, she will
be entitled to damages only.
DISTINGUISHING BETWEEN INNOCENT MISREPRESENTATIONS AND WARRANTIES
The doctrinal test is an objective assessment of the promissory intent of the parties: did the parties intend the statement to be a
binding promise? Factors:
 Timing of Statement: The earlier the statement was made in the negotiations, the less likely that it was a warranty, or
indeed even a misrepresentation. Negotiations involve give and take. A certain amount of puffery in the initial stages is
expected and early statements may be displaced or merged in the later negotiations.
 Importance of statement: How important was the statement to the person to whom it was made - to what extent did it
induce formation of the contract?
 Was the speaker aware of the importance of the statement (foreseeability of reliance): Was the importance of the
statement clear to the maker of the statement or will that person be unfairly surprised by finding that it has contractual
consequences?
 Relative knowledge and skills of the parties: Does the person making the statement have a special skill or knowledge of
the facts upon which the other relies? Conversely, how knowledgeable is the person to whom the statement is made
(which in turn goes to the reasonableness of her expectations that the statement is true)?
o Think of Dick Bentley where the car salesman was in the best position to know about his cars which makes it more
likely that the statement will be elevated to warranty status.
 Content of Statement:
o How specific or vague is the statement?
o Opinion or Fact: Was the statement merely and obviously an expression of opinion, or was it offered as a
statement of fact? Obvious statements of opinion will not usually be held to be warranties, though this may turn
on knowledge and skill of speaker.
 Context: What was the degree of formality surrounding the statement? Was it an offhand or casual opinion or did it play a
central role in the negotiations?
o i.e. “I think..” is generally too vague to be elevated to warranty equivocal
 Have the parties taken the trouble to reduce the contract to writing? If yes, then the parties had an opportunity to
incorporate the statement as a term of the contract. Courts are reluctant to add oral terms to written documents especially
where the term significantly adds to or deviates from the obligations of the parties. (Parol evidence rule)
 Disclaimers: Did speaker say or do anything to disclaim responsibility for it or to prevent the other party from relying upon
it? Was there an exclusion clause?
25
o “I think it’s rust-free but you should have it checked out.
Price/consideration: Does the price charged tell us anything about how the parties allocated responsibility for the truth of
the statement? (e.g. buying a “gemstone” for $5.00 is different from buying the same stone for $5000)
MISREPS AND THE RELATIONSHIP BETWEEN CONTRACT AND TORT




Concurrency is not a problem. (BG Checo)
Tort liability can be excluded by K but should be clear.
Most of the time, the K is imposing a more stringent standard than tort would impose, because K allows expectation
damages whereas tort is simply focused on compensation
o There are situations where the contract and tort duties would be the same, often with professional services (i.e.
lawyers – court implies in a term of the solicitor-client K that you will act as a reasonably competent lawyer. So
they could sue you for breach of this warranty of the K and in tort the same standard would be applied in
negligence.
 You never get double recovery.
 There are numerous judicial statements saying that the damages would be the same in either
o In tort, you wouldn’t get lost profits (as you would in K under expectation damages) but you can get damages for
lost opportunity which can end up being the same thing.
Esso Petroleum v. Mardon Breach of warranty found regarding future facts, also liable under negligent misrep
Facts: Esso selected a site for a new gas station and estimated it would sell 200 000 gallons of gas per year. The planning authority
then refused to allow the station to front on the busy street as Esso had planned, instead the gas station was hidden behind a
building with only a sign on the busy street directing customers to the gas station. Esso did not revise their estimate of the annual
sales and contracted with Mardon to be a tenant of the station, claiming that the station would soon reach sales of 200 000 gallons
per year. By no fault of Marden, the sales were significantly less than the predictions and Marden could not pay the rent. Esso
proceeded to cut off the petrol supplies and then issued a writ claiming possession of the gas station and money owed to them by
Marden. Marden counterclaimed for damages for breach of warranty, and alternatively for negligent misrepresentation as to the
expected gas sales.
Held: HL held that the gas sales predictions were a contractual warranty because it was a factual statement on an important matter
made by a party who claimed to have special skill and knowledge. Furthermore the statements were made with the intention of
inducing the contract and did in fact induce Marden to enter into the contract. Therefore Esso breached the warranty and were
liable for damages flowing from the breach. The HL (Denning) held further that if not a warranty, the sales predictions were
negligent representations made by a party claiming to have special skill and knowledge. Esso was therefore under a duty to take
reasonable care ensure that all representations were accurate. It was held that the duty existed before the contract was formed and
continued to apply once the contract was underway. Accordingly, the plaintiffs were liable for damages under the tort of
negligence. Note that warranties normally pertain to present or past facts. However in this case a breach of warranty was found
regarding future facts.
UNCONSCIONABILITY, UNDUE INFLUENCE AND DURESS
 Express concern with fairness of bargain reflected in three contractual doctrines (Undue Influence, Unconscionability,
Duress)
 Substantial degree of overlap: An improvident or unfair transaction that results from a relationship of inequality and trust
could meet the doctrinal requirements of all three.
 Difference lies in the focus of the analysis
o Undue influence: The focus is on the improper exercise of influence by someone in a special relationship of trust
and confidence. (contract voidable, remedy is rescission)
o Unconscionability: The focus is the overall commercial morality of the bargain in light of the inequality of both
bargaining power and the resulting bargain (“substantial unfairness in the resulting contract”). (contract voidable,
remedy is rescission)
o Duress is a coercion of will that vitiates consent: The focus is the pressure exerted by one party on another: the
proverbial “gun to the head”. (since there was no consent, there was no contract, contract void – later found that
it was voidable)
 Economic duress is a difficult concept because contracts are about commercial bargains. At what point
does economic pressure reach the duress threshold?
UNDUE INFLUENCE


“The unconscientious use by one person of power possessed over another in order to induce the other to enter a
transaction to gain an advantage for themselves.” (Earl of Aylesford v. Morris)
Equitable doctrine: equity’s version of the CL concept of duress (which was really hard to prove)
26



Broader concept than duress.
Effect: The contract is voidable and the court may rescind it.
Example: Caregiver on whom an elderly person has become dependent threatens to abandon person. Elderly person
provides gift or enters into a transaction. Re Craig (1971) Effect: Transaction is voidable at the request of the vulnerable
party. Court can rescind transaction. Not void ab initio!
Categories of undue influence
1.
2.
Actual undue influence (known as class 1): Claimant must prove the wrongdoer exerted undue influence.
Presumed undue influence (known as class 2): a relationship of trust and confidence exists.
a. De jure: relationships that raise the presumption of undue influence (the burden shifts on to the stronger party to
show that the weaker party entered into the transaction freely and independently): Fiduciary relationships (i.e
realtor-client), Trustee/beneficiary, Solicitor/client, Doctor/patient, Priest/worshipper, Parent/child
b. De facto: a relationship of trust and confidence (includes intimate/sexual relationships). No burden shift. Duguid:
you can fall in this category if there is a relationship of complete dependency with regards to finances;
Husband/wife
Spousal relationships
Courts have held that the relationships of married persons and co-habitants does not, by virtue of the relationship, fall within 2(a).
They may fall within 2(b) if:
(i)
trust and confidence was placed in partner in relation to financial affairs; or
(ii)
sexual and emotional ties between parties provide a “ready weapon” for undue influence – interests are
overborne by fears of damaging the relationship. Duguid
In general, the transaction may be set aside where:
a) The spouse is the agent of the bank (rare); or
b) the bank has actual or constructive notice of the risk of undue influence.
i. There is constructive notice of the risk of undue influence where spouse/co-habitant co-signs for another’s debts
and:
ii. the transaction on its face is not to the financial benefit of the spouse/co-habitant; and
iii. the parties are in relationship that raises the suspicion of undue influence, such as spouses or other co-habitants
Response (Etridge): Banks should:
(i)
meet with spouse privately;
(ii)
explain extent of liability;
(iii)
warn of the risk; and
(iv)
urge the person to obtain ILA
In Etridge, held that the bank has constructive notice in ALL cases where there is a non-commercial relationship between the debtor
and the guarantor.
Royal Bank of Scotland v Etridge
Facts: Eight appeals were heard together before the House of Lords. In seven of them, the appellant was a wife who agreed to
subject her property, usually her interest in the matrimonial home, to a charge in favour of a bank in order to provide security
for payment of her husband's debts or the debts of a company in which her husband carried on business. In each case, the
bank commenced proceedings for possession of the mortgaged property with a view to its sale and the wife defended the
claim by alleging that: (a) her agreement to grant the charge was brought about by undue influence or misrepresentation, or
both, on the part of her husband; and (b) in the circumstances, the bank ought not to be allowed to enforce the charge against
her.
Lloyds Bank Limited v Bundy
Facts: Bundy was a farmer. His son was in financial trouble. Bundy had already guaranteed the business. Son's company got into
more trouble still, and needed more money. Against his solicitor’s advice, Bundy put more in. The assistant manager of Lloyds
explained the company's position to Bundy (i.e. a conflict of interest) but neglected to say the company was in serious trouble.
Bundy signed the guarantee and charge form.
Issue: Whether the contract leading to the repossession of the house was voidable for undue influence?
Majority: Found against the bank but on the basis of undue influence, expanded the categories of trust and confidence. Because of
the long-standing relationship between Bundy and the banker, it was a relationship of trust and confidence, and therefore
the contract was voidable.
Minority: Denning held that the contract was voidable due to the unequal bargaining position in which Mr Bundy had found himself.
Undue influence was a category of a wider class where the balance of power between the parties was such as to merit the
interference of the court.
27
Categories of cases where there has been inequality of bargaining power:
1. Duress of goods
2. Unconscionable transactions
3. Undue influence
4. Undue pressure
5. Salvage agreements
“The English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or
transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of
his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures, brought to bear on him
by or for the benefit of the other.”
UNCONSCIONABILITY
Two Stage Test - Morrison v. Coast Finance
1. Inequality of bargaining power
a. Contextual factors: economic resources, knowledge, need, disability that falls short of legal incapacity, etc.
b. Common categories: unlike undue duress there are not express categories of relationship used in the
unconscionability analysis, nonetheless the cases tend to involve pre-existing relationships where there is potential
for an inequality of bargaining power: employment; family.
2. Substantial unfairness/inequality of bargain
a. Mere inequality of bargaining power is not sufficient, the claimant must also prove that the bargain was
substantially unfair.
Unified Test
a. Is the transaction, seen as a whole, sufficiently divergent from community standards of commercial morality such that it
should be rescinded? Harry v. Kreutziger
b. This test has been criticized as too broad.
UNCONSCIONABILITY AND STANDARD FORM CONTRACTS
 There may be a monopoly in the market and therefore they can dictate all of their terms: prevalence is explained by desire
to reduce transaction costs and promote efficiency; markets are competititive
 Imperfect information on the part of some parties (in 99% of the cases, you haven’t read the contract and you have no idea
what you are agreeing to)
Lidder v. Munro (BCSC, 2004)
Facts: Person signs ICBC release of claims arising from motor vehicle accident in return for $. Lidder, a Punjabi immigrant, works as
a labourer, has less than high school education and limited knowledge of English. Lidder signs release, injuries worsen and Lidder
tries to get out of release.
Arguments put forward by P:
(a) Lack of intention to contract and non est factum. P claims that he didn’t know that the document was a release. Rejected.
(b) Undue influence: did not exercise power to “overbear” his will. No abuse of power, no relationship of trust and confidence.
(c) Unconscionability: weakness in bargaining position, unfair advantage
Held: The agreement was unconscionable.
Analysis: 1) this is an insurance K. They are known as K of utmost good faith. 2) ICBC is a public monopoly. Court wants to hold ICBC
to a high threshold of conduct.
But even if it wasn’t unconscionable, the contract was still voidable for misrepresentation re legal advice (she told him that a lawyer
would charge 30%, take more time, and not increase the amount he would get):
 false representation – not all lawyers charge 30%
 material fact – it was an important consideration for P
 induced Lidder to enter contract to disadvantage
Plas-Tex Inequality of bargaining power can be with respect to capacity or knowledge
Facts: Dow knows about a defect in its product but sells it anyway hoping to rely on the exclusion of liability clause in the K.
Held: Dow’s conduct was unconscionable. Exclusion clause not enforced. The ABCA refers to authorities holding that: “… if a
defendant (a) knew of a possible risk associated with its product, (b) failed to disclose important assumptions within its knowledge
thereby preventing the other party from properly measuring the consequences and risks they were undertaking (c) deliberately
withheld information and induced the claimant to enter the agreement on the basis that the other party had “scientifically done
their homework”, this would prohibit the defendant from relying on the limited liability clauses in the contract.” There is inequality
because of the knowledge of risks of the product. So the inequality in bargaining power doesn’t have to be related to capacity (it can
also be about knowledge)
28
Leff excerpt CB 585
Marshall v. Canada Permanent Trust Co CB 595
Mundlinger v. Mundlinger CB 599
Notes CB 625
Pridmore v. Calvert CB 631
DURESS
 This theory is criticized with respect to economic duress because in economic transactions (it’s not really about consent,
you have consented, it’s more about what types of consent the law will allow)
 Classic formulation focuses on voluntariness of consent - the ‘overborne will’ approach
o Pao On: “a coercion of will so as to vitiate consent …[I]n a contractual situation commercial pressure is not
enough.” The compulsion has to deprive the party of the “freedom of exercising his will”.
 Effect: contract voidable at the option of the party who was the object of the duress.
 Categories of duress
o Duress to person: Threats to person or family etc. (i.e. spousal violence).
o Duress to goods or property: Threat to damage or take the other’s property; extortionate payment required to
release a good (pawnbroker cases)
o Economic duress: Now an accepted subcategory of duress.
 Economic pressure is not enough. Indeed commercial transactions often occur in circumstances of
unequal bargaining power where one party feels pressured into the deal.
 Coercion of will test is difficult to apply as it involves an inquiry into the psychological state of the party.
Further, just because one party forces a hard bargain, should the choice to accept the hard bargain (even
when there is no alternative choice) result in the contract being set aside?
 Port Caledonia: K for rescue assistance from Tug to prevent collision
 D & C Builders: Ps facing bankruptcy and accept less than owed. Denning: no valid consent—creditor held
to ransom.
 Stott v. Merit Investment: Stott agreed to pay client debt on margin account. Although finding economic
duress, court concluded that Stott subsequently affirmed the agreement through his conduct.
Modern Test (Universe Tankships)
1. Pressure amounting to compulsion of the will of the victim.
a. The real issue is not lack of will to submit “but the victim’s intentional submission arising from the realization that
there is no other practical choice open to him.”
b. Relevant factors include:
i. whether the coerced party protested;
ii. the availability of alternative courses of action;
iii. the existence of independent legal advice; and
iv. whether the coerced party took steps to avoid the contract
3. The illegitimacy of the pressure exerted in light of the nature of the pressure (i.e. was there a threat of unlawful action?)
and the nature of the demand (what was being demanded). Note that courts have not been really clear what illegitimacy of
the pressure is. You’re allowed to bargain hard. At what point does that become exploitive? Courts look at the nature of the
pressure (is it an illegal act? Threats of committing a tort or crime against that person? What are the commercial
circumstances of the demand?)
4. If P expressly or implicitly approved the K after the pressure ceased to exist, they will be denied relief.
Notes






Fairness of bargain is doctrinally irrelevant. The issue is one of consent. However, almost all cases of duress involve
bargains that the coerced party claims are unfair.
Subsequent cases have emphasized (i) whether there is a lack of practical alternatives; and (ii) the illegitimacy of the
pressure exerted.
Threat would almost always be viewed as illegitimate where it involves a tort or breach of a statutory duty.
Difficult cases arise where the pressure is lawful: is it akin to blackmail or economic pressure to enforce a bona fide claim?
—i.e. threats to fire an employee;
—i.e. threats to breach a contract and contract modifications;
Criterion of illegitimate pressure has been criticized as incoherent and unruly. Further, it is difficult to apply in context of
contractual modifications (GFAA).
Severe bad faith on the part of one party?
29
Gordon v. Roebuck
Facts: Parties acting as trustees for different parties in a real estate transaction that had to close by 31 December due to tax rules. In
late December, Roebuck refused to execute certain documents unless Gordon agreed to pay $160,000, which Roebuck argued was
required for repayment of monies lent to the venture. Gordon agreed to repayment but later refuses to honour the agreement and
claims agreement should be set aside on the basis of economic duress.
Held: Courts find coercion. Gordon protested; there was no practical alternative course open to him; he was advised that he had no
alternative; and he took steps to avoid the contract. Nevertheless, Gordon had not proven that the pressure exerted was
illegitimate—there was an open issue (a bona fide claim) as to whether Roebuck was entitled to the money.
Gotaverken Energy Systems
Facts: A pulp company agreed to modify a construction contract from a “fixed price contract” to a “time and materials contract” 2/3
through the project. The pulp company could not operate during the 24 hour per day construction period. The court agreed that
given the circumstances, the pulp company had no effective remedy or option but to agree. The pulp company executives agreed to
the contract under protest, had not obtained legal advice on the issue of duress and took steps to avoid the contract once the work
was completed.
CONSUMER PROTECTION
Consumer protection policies address certain forms of market failure and disparities between manufacturers/sellers and consumers
in knowledge, bargaining power and resources. There is a lot of legislation in this area.
Economic rationales for government intervention in consumer marketplaces:
 Monopoly: Competition laws aim to ensure a competitive market place and maximize consumer welfare.
 Externalities: Regulation of product safety hazards and pollution.
 Information failures: In the consumer/retailer/manufacturer relationship there are usually asymmetries in information.
Consumer protection policy addresses information failure by various means:
o prohibiting fraud and deceptive practice: Competition Act, Food and Drug Act
o mandatory disclosure requirements: Textile Labelling Act, Consumer Packaging and Labelling Act, Hazardous
Products Act, Weight and Measures Act
o government provision of information: funding to consumer groups, consumer education
 Transaction costs: pursuing complaints costs money and time—what are the best types of redress mechanisms: cooling off
periods, cancellation rights, small claims courts, arbitration etc.?
 Public goods: public goods, in particular, consumer education will be “under produced” by the market—government needs
to supply consumer education.
In addition to the economic rationales for government intervention, non-economic rationales include:


Paternalistic concerns: Even if consumers have choice and there is full information, the transaction in question may not be
in consumer’s long-term interest: capacity issues; unconscionability; protection of the gullible and vulnerable by
“predatory” sellers.
Redistributive concerns: Interest rate regulation, rent controls, statutory warranties, pricing of goods etc. may reflect
distributive concerns.
Issue: Does the Consumer Protection Act apply?
Need to know the unconscionability provisions and the deceptive practices provisions
Has to be a consumer in a consumer transaction for the Consumer Protection provisions to apply. If a consumer is buying a car, then
the consumer protection provisions apply. On exam, advise them on their CL rights, and then on their rights under the Consumer
Protection Act. Put in the consumer protection provisions.
If there is a breach of the Act and you suffer damages, you have a statutory right to damages. S.171
If there is an unconscionable act, there is a statutory rescission
Who can bring an action? Anyone (s.172)
Rushak v. Henneken Any statement that is potentially deceptive is misleading under the prior Consumer Protection Act
30
Facts: In 1982 Rushak, with the advice of her friend, Hall, purchased a 14-year old Mercedes. The vendor, Mr. Henneken, a car
dealer, told Rushak that a car as old as this one was bound to have rust and that cars developed rust within two months out of the
factory. The salesperson, Mr. McAllister, pointed out several spots of rust visible under the fenders and recommended she take the
car to a Mercedes Benz dealer for proper rust inspection. Mr. Henneken added that the car was “a good vehicle”, “one of the best
of its kind in Vancouver”, and “a very nice car”. Rushak purchased the vehicle but found that she could not drive it because she
could not get accustomed to its standard transmission. It was put into storage, and when she decided a year or so later to sell it, she
found it was in a sad mechanical state, and rusted so badly that it would cost upwards of $10,000 just to repair the rust.
Held: Breach of Trade Practices Act.
Analysis:
 Mr. Henneken’s use of laudatory language to describe the car in circumstances where he knew there might be extensive
rust under the undercoating was “conduct having the capability, tendency, or effect of misleading a person” within the
meaning of s. 3(1)(b), Trade Practice Act. Laudatory language has to be accompanied by appropriate qualifications/limiters.
 “While it used to be said that what is described in general terms as “puffery” on the part of a salesman does not give rise to
legal consequences, I am not satisfied that the same can necessarily be said today in light of the provisions of the Trade
Practice Act. “Puffery” cannot, in my view, excuse the giving of an unqualified opinion as to quality when the supplier has
factual knowledge indicating that the opinion may in an important respect very well be wrong.”
 “I am of the view that the section must be taken to require that suppliers involved in the defined transactions refrain from
any sort of potentially misleading statement, and that this must include an honestly-held opinion given in circumstances in
which the supplier knows that giving the opinion without appropriate qualification may mislead. It was not, in my view,
open to the defendant to describe the car as “a good vehicle”, “one of the best of its kind” and “very nice”, without
appropriate qualification, when he had reason to suspect that there might be extensive rust, and that the rust had been
coated over with brushed-on undercoating so as to render it incapable of discovery by ordinary inspection.”
 A statement is misleading if it leads the potential purchaser “astray into making an error of judgment”?
PENALTIES AND FORFEITURES
Issue: Control of contractual terms that impose increased liability for damages for breach of contract or that provide for forfeiture
of payments/deposits for breach.
Penalty clause: Upon breach, party must pay damages of certain amount: $100 payable on 31 March, if not paid on 31 March must
pay $200 on 1 April.


Penalty: Sum stipulated is extravagant/unconscionable in comparison to the loss (courts will not enforce)
Liquidated Damages: Fair/genuine pre-estimate of damages (parties can agree upfront what the damages should be. Court
will enforce these)
House being built. Liquidated damages clause for delay:
$250 per day = a pre-estimate of the cost of a hotel and storage of furniture etc.?
$2500 per day = penalty?
Forfeiture: Deposit of $200 on a $300 purchase is forfeit if purchase not completed by 31 March.
LAW AND EQUITY ACT (BC) S.24: The court may relieve against all penalties and forfeitures, and in granting the relief may impose any
terms as to costs, expenses, damages, compensations and all other matters that the court thinks fit.
Thermidaire: Provision requiring payment of gross trading profit for breach of covenant not to sell competing goods is “grossly
excessive and punitive”.
Stockloser v. Johnson
Facts: Default on payment for purchase of machinery. Vendor claims to be able to retake possession of machinery and retain all
installment payments.
Where no forfeiture clause: Buyer cannot recover money as long as contract not terminated. If seller terminates (i.e. by recovering
the goods), buyer entitled to recover money subject to a cross-claim for damages.
Where forfeiture clause or money paid as a deposit: Buyer cannot recover money at common law, but equity can relieve the buyer
from the forfeiture of money. Relief from forfeiture where: (i) effect is penal in the sense that the sum forfeited is out of all
proportion to the damage; and (ii) unconscionable for the seller to retain the money.
ARBITRATION CLAUSES
BC Commercial Arbitration Act: There is a legislative policy of supporting ADR.
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s.15: If you commence proceedings in court, one party can apply to stay the proceedings if there is an arbitration agreement. The
court must grant a stay and allow the arbitration to proceed unless the arbitration provision is void.
$500+HST, $150 admin fee every 90 days, and you have to pay the arbitrator min $250/hr So it’s at least $2000 for a small consumer
arbitration
Basically the effect of these clauses is that you can’t sue a big company because it would be uneconomical to do so.
Note: in comparison to duress, unconscionability, etc, we are concerned with the relationship between the parties. Here we are looking
beyond the parties to the interests of society wrt the types of Ks we’ll enforce.
Introduction
Issue: When will the court decline to enforce a transaction or not give it effect because it is in some sense “illegal”? When does public
policy trump private ordering?
Categories
(a) Contrary to public policy
(b) Common law illegality
(c) Statutory illegality
(a) Contrary to public policy
Holman v. Johnson (1775, Eng.): No court will lend its aid to a man who found his cause upon an immoral or illegal act. Sale of tea, seller
knowing that the tea will be imported illegally into England. Court says that because the K was made in France, the vendor did not commit
an illegal act.
Gambling in US that would be illegal in Canada – this can be enforced in Canada.
Mellish – “unruly horse of public policy” – you never know where it will take you. Denning: “with a good man in the saddle…blah
blah…come down on the side of justice.”
Categories of contract contrary to public policy:
(i) Contracts injurious to the state (Ks that fetter the legislator, sale of public offices, bribery of public officials, contracts with enemies)
(ii) Contracts injurious to the administration of justice (old – arbitration agreement, K not to disclose info in an investigation or to not
testify, maintenance and champitry (where someone funds litigation)
(iii) Contracts involving immorality (cohabitation agreements between unmarried persons, contracts with prostitutes, i.e. renting a carriage
or room to a prostitute, insurance policies on brothels)
(iv) Contracts affecting marriage (paying someone to divorce spouse, paying someone not to marry someone)
(v) Contracts in restraint of trade: Shafron v. KRG: “Metropolitan City of Vancouver” – was found to be too ambiguous. No such legal
entity under this name. The original RC was drafted by Toronto lawyer…ambiguous, therefore unreasonable and unenforceable. (Betty
Davis) Overly broad restrictive covenants such as non-competition clause – must be reasonable regarding the geographic scope, type of
activity, and time.)
(vi) Contracts to benefit from a crime (legislation to prevent money given to person for recollection of crime)
Oldfield: You can obtain insurance if spouse dies committing an illegal act (swallowed cocaine)
Surrogacy contracts
Some jurisdictions have found surrogacy contracts to be contrary to public policy (Baby M, 1988)
Assisted Human Reproduction Act (Canada)
Payment for surrogacy
6. (1) No person shall pay consideration to a female person to be a surrogate mother, offer to pay such consideration or
advertise that it will be paid.
Reimbursement of expenditures
12. (1) No person shall, except in accordance with the regulations and a licence,
… (c) reimburse a surrogate mother for an expenditure incurred by her in relation to her surrogacy.
COMMON LAW ILLEGALITY
Contracts that involve the contravention of a legal obligation imposed by the common law, i.e. require you to commit a tort.
Seidel
Facts: P brought a case against Telus for a breach of the Consumer Protection Act and breach of contract because Telus charges
users from the time that you log onto the network – i.e. when it’s ringing. Telus was advertising so many “talk minutes”. P was
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arguing that the time should only start when you’re actually talking. There’s a conflict between the arbitration clause in the K
and the Class Proceedings Act.
Issue: Does this claim have to be arbitrated.
Held: BCCA said that arbitration clause in K > Class Proceedings Legislation.
Majority: SCC that s.172 provides a statutory right to go to court, and s.3 says you can’t waive that right. So the legislation
trumps the arbitration clause in the K. She can only use s.172 insofar as it applies to some of her claims. So the complaints
under s.172 go to BCSC, while the pure K claims go to arbitration. In court she can go as a class action if she wants.
Minority: If the arbitration clause fails in relation to an issue, she can go to court but the class action waiver still applies.
Arbitrators should first decide whether there is an issue relating to s.172/s.3. before it goes to the court.
Comment: Quebec and Ontario have legislation that says that you can always go to court regarding consumer issues. In AB,
the arbitration clause has to be approved by the government to see whether it is fair or not. Canada’s model of arbitration is
not suited for the small consumer, so this case changes this slightly.
Holman v. Johnson CB 656
Shafron v. KRG Insurance Brokers CB 660
Brissette Estate v. Westbury CB 669
Oldfield v. Transamerica Life Insurance 671
STATUTORY ILLEGALITY
Kingshot v. Brunskill CB 674
Doherty v. Southgate CB 676
MITIGATING THE CONSEQUENCES OF ILLEGALITY
Outson v. Zurowski CB 687
Statutory illegality can arise is various ways, such as where contract:
- is expressly or impliedly prohibited by statute;
- is entered into with the object of committing an act prohibited by statute;
- requires performance contrary to statute; and
- confers benefits in violation of a statute
Classical Approach
Rogers v. Leonard (1973, Ont. H.C.J.) A K that is contrary to statute is void
Sale and purchase of a cottage. Agreement signed on a Sunday contrary to the Lord’s Day Act. Vendor knew of Act but was
willing to ignore it as she was dealing with friends. When the vendor refused to complete (and presumably was no longer a
friend), the purchasers sued.
Court held that the contract was illegal and void as it was contrary to statute.
Modern Approach
New Solutions Financial Corp. v. Transport North America (SCC, 2004) A contract that contravenes a statute may be void; the
court has discretion
- Credit agreement provides for payment in excess of 60% criminal rate of interest. The traditional approach is not the correct
approach.
Note: with two highly sophisticated parties, it is less fair to just say that one party has to pay back the principle sum that they
borrowed.
Blue pencil approach: The court, in order to save the K, may strike out the offending provisions. If you’ve got 50% and 15%,
strike out the 15%
Notional severance: Reading down the provision to make it legal and enforceable. So if you’ve got 50% and 15%, read it down
to 60%. SCC endorses this one.
So, if this was an illegal rate of interest, the court is not going to find that the K is void and that P doesn’t have to pay the money
back. More likely what happens is that the court will enforce a market rate of interest.
- Consider the harm in enforcing the K, the object and purpose of the statutory prohibition, the effects of finding the K void.
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- I.e. if tenant agreements are void because the suite is illegal, then all tenants will have no rights and could be booted out. So, even
though a landlord may be in breach of zoning regulations, there is still an existing K to rent the suite and the court will probably
not find that the K was void.
(ii)
Still v. Minister of National Revenue (1998, F.C.A.)
Still applied for permanent resident status in 1991 and assumed that she was entitled to work. Still worked as a housekeeper
from May to October 1993. She was granted permanent resident status on 23 September 1993. She was laid off on 1 October
1993 and applied for EI benefits, which were denied on the basis that her employment was illegal.
No overriding public policy concern to deny benefits. She had acted in good faith upon the statement that was provided to her.
She also had paid into the benefits while she was working.
It’s going to be a matter of proportionality in terms of whether the court will enforce or not.
If something is illegal in the criminal law context, unlikely that you can’t sue for bad drugs under the Sale of Goods.
Unlicensed professionals – even if the court finds that the K is void…there is always the law of restitution
MISTAKE
Overview – a residual category of relief
- Mistakes in terms – formation mistakes
- Mistake in assumptions
- Mistake in recording – rectification of documents
Categorization of mistake:
Common mistake: Both parties make the same mistake (Sail problem)
Mutual mistake: Misunderstanding where parties are at cross-purposes
Unilateral Mistake: One party is mistaken about an important fact concerning the contract and the other party knows or ought to know
of the mistake.
Illustration: Buyer buys a painting from Seller. Buyer believes that it is a Da Vinci but it is in fact a copy.
- If seller also believes it is a Da Vinci: common mistake: contract void if fundamental term.
- If seller believes/knows that it is a copy: mutual mistake: contract based on objective test?
- If seller believes/knows it is a copy and knows that buyer believes it is a Da Vinci: unilateral – contract based on objective test?
General rule:
- if there is a true ambiguity;
- regarding an important/fundamental term of the agreement; and
- there is no reason to prefer one party’s understanding over the other,
- the agreement may be void for mistake.
Policy issue:
Assignment of risk: Who ought to bear the risk? Who ought to bear the consequences of the mistake in question?
- reasonable expectations/unfair surprise
- reliance/caveat emptor
Mistake in Formation Cases
Main issue with mistake – risk allocation. Caveat emptor usually applies. If the buyer makes certain assumptions about what they are buying
and should have to live with that. IF the buyer wants to protect themselves they should get an express warranty or condition.
Raffles v. Wichelhaus (1864) Two ships, both had same name, there was no contract because no intent ad idem. Nowadays this case is viewed
as a buyer being opportunistic and trying to take advantage of this fact. The risk of price increases/decreases is typically born by
the buyer. (risk allocation) Which ship the cotton was on was not a fundamental term of the K. The reference to the name of the
ship appeared for insurance reasons. Delivery date was not a fundamental term. If it was really important that the cotton should
have been on first ship, it’s weird that there’s no evidence that the buyer did not take any issue with the fact that the cotton didn’t
arrive on the first ship at the time. They only took issue after the second ship had arrived and only after the price had decreased.
Likely that this case would be decided differently today.
Staiman Steel Ltd. v. Commercial & Home Builders Ltd. (1976) Auction for steel. The term of the K at issue is which steel is included. Buyer
picked up a certain piece of steel and said including this? Auctioneer said yes. Seller thought this excluded the new steel. The
buyer wanted all the steel. Buyer relies on the reasonable person approach – it’s clear what “all the steel in the yard” means.
Policy: This is the seller’s auction. They could have clarified the ambiguity so the risk should be on the seller. Court accepts the
objective approach but rejects the buyer’s argument on the basis that a reasonable person would not conclude that all the steel in
the yeard included the new steel - the new steel was separate, freshly primed and painted, not in the auction book. Sense that the
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buyer was engaging in opportunistic behavior and trying to snatch up a deal. The seller argues Raffles – we thought it excluded,
they thought it included, so because there was a fundamental ambiguity there is no K at all. Since there was no K for any steel, the
vendor refused to deliver any steel to the buyer. Court rejects this argument, K formed, Smith v Hughes objective reasonably
person test and there was a K formed for all of the old steel. Rejects that there is a fundamental mistake and uses reasonable
person test instead to find that there was a K. This is an example of mistake regarding the subject matter…so viewed as a mistake
in formation.
Mistake in Assumptions (no clear dividing line between this and mistake in formation – all CL mistake cases are essentially
mistake in formation…but we have a separate category…difference is that rather than there being a mistake with regards to the
steel, it’s a mistake about some fact or matter relevant to the decision to enter into the K)
Sherwood v. Walker – Vendor is selling a cow under the assumption that she was not fertile (so her price was low…as beef) Buyer got her
for a cheap price, but then it turned out that she was able to have calves. She got pregnant before the delivery of the cow to the buyer. This
was an action for replevin (delivery of property). Vendor doesn’t want to deliver her anymore. Vendor said that they entered into the
contract under the mistaken assumption that she was infertile and that this is a mistake as to the essential quality of the cow. Is a beef cow
fundamentally different than a breeding cow? Note this isn’t like innocent misrep because there was no representation made that would
have benefitted the buyer but didn’t. Argue mistake when there is no other argument available. Very high threshold to get relief for
mistake. Majority found that a beef cow is not the same as a breeding cow and that there was a mistake over the essential quality of the K,
and therefore the K was void. On whom should the risk lie?
Worst result ever
Bell v. Lever Bros. (1932, HL) – is a settlement agreement that the employer made without knowing about the employee’s dishonesty
fundamentally different than the agreement that the employer would have made if they had known about the employee’s dishonesty?
Bell is a senior exec whose position becomes redundant. Employer has to pay him out his reasonable notice under the employment K.
They come to an agreement, give him a settlement and a bonus. He is paid a ton of money. Employer subsequently discovers that it had
cause to fire him because of insider trading. They could have terminated his employment and not paid him anything. Company argues that
they were mistaken and entered into the settlement agreement that they were terminating a valid employment agreement (not knowing they
could have gotten out scott free) so that was a mistaken assumption about the essential quality of the K.
Three types of operative mistake:
(a) identity of contracting parties (remember back to mistaken identity – the concern here is the effect upon 3P) – the effect of the mistake
is that there was no consent (no K)
(b) existence of subject matter – i.e. res extincta, res sua – where the parties are contracting over something that doesn’t exist or is
impossible to sell because buyer already owns it.
(c) quality of subject matter – issue with an essential quality of the subject matter.
On who should the risk lie? Held: Yes, the employer was mistaken as to whether they could terminate without notice, there was no mistake
as to the fact that the employee had made a lot of money for the company (the bonus part of the settlement agreement – so there was no
mistake as to that part just a mistake as to the reasonable notice part…) Should the employer get back their money after 3 or 4 years? No.
Reason 1 – no mistake as to the bonus compenent of the agreement
Reason 2 – strong judicial policy of wanting to uphold settlement agreements (think of Lidder v. Munro – personal injury settlement, a
person settles for $X on the assumption that their problem improves. But if their back gets worse, should they be able to go back on the
settlement? No.. would cause a lot of problems for the courts. In Lidder they got to tear up the agreement on the grounds of innocent
misrep and unconscionability…if he wouldn’t have had those arguments then he would have argued mistake because you can always argue
that…)
Has to be a mistake about the fundamental essential quality of the K. Generally courts apply caveat emptor – you should have protected
yourself. I.e the cow owner should have made that an express contractual term that if the cow turned out to be fertile the price would
increase.
Page 794: “Mistake as to quality of the thing contracted raises more difficult questions. In such a case a mistake will not affect assent
unless it is a mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially
different from the thing as it was believed to be.” Difference in essential quality – is the breeding cow different from the breeding cow? Is
the breeding vs. not-breeding an essential quality. THESE ARE GAMES OF CATEGORIZATION.
Equitable mistake
Solle v. Butcher (1950, Eng. K.B.) Lord Denning recognizes that there is an equitable jurisdiction with respect to mistake. Great Peace – the
English CA says that Denning made it all up and no such thing as equitable doctrine of mistake, overruling Solle in UK. Says that the
statement made by Atkin was the full discussion of the law of mistake. Miller case – in Canada, Great Peace has not been accepted and we
still have an equitable remedy with respect to mistake, particularly where one party has acted in an unfair manner.
So, Solle remains good law in Canada. Business associates renovating apartments. Butcher renovates one on the basis of Solle saying that
the rent control law doesn’t apply, rents it to Solle. Butcher did this on the basis of Solle’s representation and relied on that representation.
Solle now claiming that the rent control law does apply and that he basically only has to pay half of his current rent. Butcher wants
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recission. Denning: Bell test – is the K void? Does a mistake about the rent render the subject matter of the K substantially different from
what it was supposed to be? Is the lease of an apartment to which the legislation does not apply fundamentally different than an apartment
where the legislation does apply? No. Takes narrow approach to the Bell test. Policy: Tenants should not be kicked out when they want to
get their rent reduced under the legislation. That’s what would happen if they found that the lease was a nullity here. So the K is upheld,
but there is an equitable jurisdiction to relieve a party of a mistake. The CL can void a K, but under equity they can rescind and to find that
it was voidable or to set it aside on terms (broad jurisdiction). Test: If there is a material misrep (one takes advantage) = the court can grant
relief. Or, if the parties are under a common misapprehension regarding facts/rights, and it is fundamental, and the party seeking to set
aside the K is not himself at fault = court can grant relief.
Great Peace – ship in distress. Parties under mistaken assumption that the ship is only a few hours away when they K. Find out it’s actually
32 hours away, so boat owners find another ship that’s closer and try to get out of the K with the owners of the Great Peace. They are
arguing that they thought the Great Peace was closer than it actually was. Solle and Butcher overturned – no equitable doctrine. The
doctrinal basis for CL mistake rests on the same foundation as the doctrine of frustration. Frustration – the economic purpose of the K has
been destroyed. The performance of the K that is contemplated is impossible. Not interpreted as literally impossible. Party relieved of K
obligations. Test for mistake – common assumption as to the existence of the affairs, neither can be at fault, and the mistake must render
the performance of the K impossible (K purpose impossible, not actually impossible) Basically saying that mistake and frustration are the
same, same test should apply, one is about current state of affairs and one is about future state of affairs. Is it a mistake at the time of the K
or as to future events. Test should be the same.
Williams v. Gled – Recent mistake case. References McL (when she was in BCCA) who reaffirmed the equitable doctrine of mistake.
Distinguishes between common law mistake (contract void) and equitable mistake (contract voidable).
MISTAKE ABOUT CONTRACTUAL TERMS
Hobbs v. E & N Railway CB 770
Smith v. Hughes CB 779
MISTAKE IN ASSUMPTIONS
Bell v. Lever Bros. CB 793
Solle v. Butcher CB 796
Great Peace Shipping v. Tsavliris Salvage CB 803
Miller Paving v. Gottardo Construction CB 810
R. v. Ron Engineering CB 824
RECTIFICATION OF DOCUMENTS
Bercovici v. Palmer CB 523
Sylvan Lake Golf & Tennis Club v. Performance Industries CB 527
The court won’t rectify the K in order to make a K that the parties might have agreed to (Morley) – Metropolitan City of Vancouver. If
the parties put in an ambiguous term, they have to live with that. Also – this involved a RC. Courts take a very restrictive approach to
RC. Note: most of time parties aren’t going to be litigating about a spelling error. Usually it’s about one party trying to take
advantage of a clerical error, which is why it ends up being litigated….so it’s more like fraud.
FRUSTRATION
Triantis excerpt CB 838
Paradine v. Jane CB 843
Taylor v. Caldwell CB 844
Capital Quality Homes v. Colwyn CB 850
The Sea Angel CB 872
Frustrated Contracts Act CB 895
Frustration
1.
Introduction
Frustration falls within the general ambit of the law of mistake. Distinction:
Mistake: assumptions regarding existing facts (cow in Sherwood v. Walker).
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Frustration: assumptions regarding future events...usually assumptions about a continuing state of affairs (i.e. that
the good will not be destroyed, or that there won’t be a change in the zoning regulations) (Something that happens
after the K is formed)
2.
Frustration involves cases where an event occurring subsequent to contract formation makes
performance legally problematic.
(i) Impossible to perform (physical impossibility)
Promise to marry:
Promisor dies.
Contract for portrait: Painter loses sight.
Music hall lease:
Music hall burns down (Taylor v. Caldwell)
(ii) Undue Hardship: It’s not physically impossible, but the event imposes an inordinate and unexpected
expense.
3.
Policy Context: Assignment of Risk
Who should bear the risk of the unforeseen event?
4.

The mere fact that a contract becomes more expensive or difficult to carry out is not in itself a sufficient
reason to provide relief.

The unexpected event must be so far beyond the range of risks that the contract allocates that it constitutes
a fundamental change in the bargain: “A radical change in circumstances”

There are very very few cases of frustration in the court each year

Originally there was no doctrine of frustration recognizes at CL
Historical Development
Stage 1: Rule of absolute promises. (No frustration available at CL)
Paradine v. Jane (1647): caveat emptor, lessee takes benefits and burdens
Stage 2: Relaxing the absolute rule. Courts imply a condition of the continued existence of the subject matter of
contract. You are essentially saying that something was in the contemplation of the parties when you imply a
condition – so this is very fictitious because the whole thing about frustration is that you’re not contemplating
something that happened!
Taylor v. Caldwell (1863): Rental of music hall for four nights. Music hall burns down and the lessee sues
for damages. Held: Contract subject to an implied condition of the continued existence of the subject
matter of the contract:
“… where, from the nature of the contract, it appears that the parties must from the beginning have known
that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular
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specified thing continued to exist, so that, when entering into the contract, they must have contemplated such
continuing existence as the foundation of what was to be done. [first para, p. 845]
Critique: Test is based upon the presumed intent of the actual parties. Frustration only arises in situations
where the parties have not considered the risk and therefore have no intent.
Courts subsequently abandoned the device of presumed intent and applied the condition as a
matter of law – i.e. they developed the doctrine of frustration as a rule of law.
Stage 3: Move from destruction of the physical subject matter to the destruction of the foundation/commercial
purpose of the contract.
5.
Land cases
Historic rule was that frustration not available for sale of land. Land is unique and cannot be destroyed. Caveat
emptor.
Contracts for land can be frustrated. Recognized in:
Capital Quality Home v. Colwyn (1975, Ont. C.A.)
Agreement to transfer 26 building lots. Planning legislation brought into force before transfer. Legislation requires
various consents for subdivision.
Held: Legislation destroyed “very foundation of the agreement”.
Modern case: KBK – development project frustrated because City of Vancouver changed the zoning
bylaw.
Event
- must occur after formation.
- must not be self-induced (a party who fails to obtain whatever approvals are necessary cannot
argue that the K was frustrated)
- must not have been foreseeable
Impact
- must be more than mere inconvenience – must make contract fruitless
- must be radical change in contract (completely affects nature, meaning, purpose, effect and
consequences of contract)
- change must be permanent
Krell: Foundation of contract
Davis: performance would be radically different from that undertaken in the
contract.
6.
Sea Angel (2007, Eng. C.A.)
Facts: Vessel charter for salvage operations of oil tanker. Port authorities prevent vessel from leaving port, alleging
that salvagers negligent.
Issue: Who is stuck with risk (and cost) of delay in obtaining port authority authorization?
Charterer (salvager) argues that contract frustrated because of the failure of the port authorities to let the vessel
leave port. So we should be relieved of our K obligations to salvage.
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Who’s going to pay for the delay of the ship being at port?
Normally the charterer bears the risk of delays. Here the risk of delay was actually contemplated in the K. Not
unjust for the charterer to bear the risk.
Held: No frustration. There is no bright line test for determining whether something goes to the heart of the K.
“Multifactorial approach”
- terms of the contract
- context
- knowledge, expectations, assumptions of parties as to risk
- nature of event
- doctrine not to be lightly invoked – there must be a “break in the identity” between the contract and its
performance in the new circumstances.
- Here, risk of delay is generally on the charterers and is foreseeable
- Risk of delay contemplated by contractual provisions
- Not unjust for charterers to bear the risk
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7.
Summary
The fundamental question in cases of frustration is whether, due to changed circumstances, the risk of unfair
hardship to one party outweighs the general policy of enforcement as expressed through caveat emptor. In
order to be entitled to frustration, the plaintiff must establish that:
1.
Basic Underlying Assumption: The element of the contract, or circumstance that is disrupted by the
frustrating event, must be fundamental/foundational, such that it would be tacitly assumed by the parties to
be a pre-condition to performance, for example:
- the continued existence of the goods or of the subject matter of the contract (Taylor v. Caldwell –
music hall)
- the
continuation
of
certain
conditions
or
the
happening
of
an
event
(Krell v. Henry – coronation)
2.
Substantial Hardship
- major impact on economics of transaction
- must be more than mere increase in expense that makes the contract less profitable
- change is permanent
- must deprive one of the parties of the substantial intended benefit of the transaction
3.
Unanticipated Risk: The frustrating event must be unanticipated.
- occurs after formation
- not foreseen
o not a risk that the parties addressed
o not a risk that the parties should have been expected to address
4.
No Allocation of Risk by Contract
Is the risk of the unforeseen event expressly or implicitly allocated in the contract?
5.
No Fault: The event is beyond the control of the parties and is not caused by one of them. Frustration
cannot be self-induced.
Frustration – Remedial Consequences
Everything that happens up until the frustration can be done under a valid K. I.e. if you supplied one of
two items and then the frustration happened wrt to the second item. The problem is that the two parties
are not balanced at the time that frustration occurs.
1.
Issue: If the contract is frustrated, parties are relieved of future performance obligations. However, they
may have suffered losses in partial performance.
Example: Manufacturer to design and build special machine. Contract frustrated due to export restrictions.
- Buyer had paid deposit
- Seller had performed design work
2.
Historically, the common law test was that the loss lies where it falls. (Appleby v. Myers)
The rationale was that frustration does not render the contract void ab initio. Although the parties are relieved of
future performance obligations, everything done up until the frustrating event was performed under a valid
contract.
3.
Critique
Unprincipled: leaves rights and losses to pure chance.
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Krell v. Henry - coronation viewing. Contract is for £75. £L25 paid as a deposit. Contract frustrated but landlord
entitled to keep the deposit.
- Had no deposit been paid, then landlord entitled to nothing.
- If entire price paid, then tenant not entitled to return of deposit.
4.
The Reform - Restitution
Fibrosa Spolka Akeyna v. Fairbairn Lawson (1943, H.L.): Sale of machine by English company to Polish company.
Contract price is £4,800 and £1000 paid in advance. WWII frustrates contract and Polish company sues to get
deposit back.
Held: Buyer may recover deposit based on restitution. There is an unjust enrichment because there has been a
total failure of consideration.
5.
Problem: Recovery on restitutionary grounds is limited to monetary payments; it does not apply to
expenses incurred in reliance on the contract. Polish company paid $1000 deposit, but the English has incurred
$2000 of reliance expenses by that time (which they cannot mitigate)...so it’s still not fair at restitution. No equal
sharing of the losses.
In Fibrosa Spolka Akeyna v. Fairbairn Lawson Viscount Simon stated:
While this result obviates the harshness with which the previous view in some instances treated the
party who had made a prepayment, it cannot be regarded as dealing fairly between the parties
in all cases, and must sometimes have the result of leaving the recipient who has to return
the money at a grave disadvantage. He may have incurred expenses in connection with the
partial carrying out of the contract...
5.
Response: Frustrated Contracts Act
Most jurisdictions have enacted a Frustrated Contracts Act, which allows the court to apportion pre-frustration
expenses. You still have to have frustration at CL, but the Act will then step in regarding the remedies.
In many jurisdictions, reliance losses are recoverable but only to the extent of pre-payment (i.e. they may be set-off
against any payment/deposit).
In BC, reliance losses are independently compensable. Even where there is no pre-payment the court may
apportion any reliance losses. Losses are apportioned equally.
ADJUSTMENT OF RIGHTS AND LIABILITIES
5 (1) In this section, "benefit" means something done in the fulfillment of contractual obligations, whether
or not the person for whose benefit it was done received the benefit.
(2) Subject to section 6, every party to a contract to which this Act applies is entitled to restitution from the
other party or parties to the contract for benefits created by the party's performance or part performance
of the contract.
(4) If the circumstances giving rise to the frustration or avoidance cause a total or partial loss in value of a
benefit to a party required to make restitution under subsection (2), that loss must be apportioned equally
between the party required to make restitution and the party to whom the restitution is required to be
made.
Miller – parties had been supplying gravel for a road project. Miller Paving asked to confirm that all payments had been made for the
gravel and signed an acknowledgement and memo of release that said everything had been paid. A few weeks later they realize that
they were owed a lot of money. This isn’t rectification – this is a unilateral mistake…so Miller Paving argued mistake – we weren’t
paid in full. We want to be paid some more. The whole purpose of this agreement is risk allocation. The court won’t allow mistake to
be used where there has been express risk allocation between the parties. Lots of cases where you can’t get mistake (Bell, Great
Peace, Miller).
So when do you get mistake?
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Williams v. Gled (BCSC 2006) Contemporary example of a court granting relief from mistake
Facts: Gled enter into agreement to purchase an apartment. Get mortgage agreement. Williams is the mortgage broker, Gled’s
home and apartment building are the security for the funds. A mortgage was secured. Then info about a line of credit surfaced. This
had been disclosed to Williams earlier but never said anything to the mortgagee. Also it wasn’t certain whether the line of credit also
had the home as security. When the mortgagee finds out, they withdraw. So the Gleds are now being sued by Williams for his
commission. Gleds are successful on the basis of mistake. The whole transaction was entered into with everyone thinking that there
was only 750 000 mortgage against the property, not $1000000. Judge also says that if it wasn’t a CL mistake it would have been set
aside on the basis of equitable mistake (refers to First Capital where McL discussed the equitable jurisdiction of the court in mistake)
Course Overview
1.
2.
3.
4.
Contract Formation
a. Offer, acceptance, consideration
b. Intentions, certainty, agreement to agree, preliminary
c. Bilateral or unilateral
i. Unilateral – performance = acceptance + consideration
ii. Bilateral – mutual promises
d. GTA/modifications?
e. Parties? 3P – London Drugs and agency
Content/Interpretation
a. Statements and representations
b. Issues of categorization of statements and meaning (note remedies)
c. Interpretation of the K text (Don’t forget to do this!!)
d. Parole evidence rule
e. Fundamental breach/exclusion clauses (note: even if the exclusion clause applies it can
still fall under control – can be void for unconscionability or public policy reasons)
Control
a. Rectification (note this goes back to K formation)
b. Non est factum (goes back to K formation)
c. Mistaken identity (also goes back to K formation)
d. Triumverate of undue influence, duress, and unconscionability and they often overlap
e. Penalties and forfeitures
f. Illegality
g. Consumer Protection
Excuse (residual categories of release)
a. Mistake (common law or equitable)
b. Frustration
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