2. Common Law - LSA
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Commercial Law – Summary Table of Contents INTRODUCTION ........................................................................................................................................................... 4 I. THE COURSE ON SALE........................................................................................................................................... 4 II. SOURCES AND HISTORICAL DEVELOPMENT OF THE LAW OF SALE ................................................................... 4 III. GOOD FAITH.......................................................................................................................................................... 8 C.C.Q. : 6, 7, 1375.......................................................................................................................................................................................................................................... 8 Vienna 1980 : 7.1 , (7.2) ........................................................................................................................................................................................................................... 9 Vienna, Austria, Arbitration Decision - June 15, 1994 ..................................................................................................................................................................... 9 Germany Supreme Court - October 31, 2001 ..................................................................................................................................................................................... 11 CUSTOM ...............................................................................................................................................................13 IV. Custom in the CVL ...................................................................................................................................................................................................13 Usage/ custom in CVL can be either a source of implied obligation or a canon of interpretation .............................................................. 13 Art. 1426 CCQ .............................................................................................................................................................................................................................................. 13 Art. 1434 CCQ .............................................................................................................................................................................................................................................. 14 Custom in the CML..................................................................................................................................................................................................14 S.G.A.: 15, 29................................................................................................................................................................................................................................................. 14 Custom in International Law ............................................................................................................................................................................14 Vienna 1980: 8(3), 9 ................................................................................................................................................................................................................................ 14 A. FORMATION ...........................................................................................................................................................14 I. FORM OF THE CONTRACT ...................................................................................................................................15 1) Consensual ............................................................................................................................................................................................................15 CVL:......................................................................................................................................................................................................................................................................... 15 C.C.Q.: 1385, (1455).................................................................................................................................................................................................................................. 15 (A) Sale of residential immovables ......................................................................................................................................................................................................... 15 Art. 1785 CCQ .............................................................................................................................................................................................................................................. 15 Art. 1786 CCQ .............................................................................................................................................................................................................................................. 15 Art. 1793 CCQ .............................................................................................................................................................................................................................................. 16 (B) Consumer Contracts ............................................................................................................................................................................................................................... 16 (QC C.P.A.: 23 et seq.)............................................................................................................................................................................................................................... 16 CML ......................................................................................................................................................................................................................................................................... 16 S.G.A.: 4 ........................................................................................................................................................................................................................................................... 16 (ONT C.P.A.: 22).......................................................................................................................................................................................................................................... 16 Form in International Law .......................................................................................................................................................................................................................... 17 Vienna 1980: 11 ......................................................................................................................................................................................................................................... 17 (2) Bilateral ...............................................................................................................................................................................................................17 (3) Sale is an Onerous contract ........................................................................................................................................................................17 1381 CCQ ....................................................................................................................................................................................................................................................... 17 (4) Contract of instantaneous performance ..............................................................................................................................................17 II. 1383 CCQ. ...................................................................................................................................................................................................................................................... 17 Registration requirements:......................................................................................................................................................................................................................... 17 CCQ 1708. ...................................................................................................................................................................................................................................................... 18 CCQ 1806. ...................................................................................................................................................................................................................................................... 18 Contracts of sale v. contracts of enterprise ......................................................................................................................................................................................... 19 CCQ 2098. ...................................................................................................................................................................................................................................................... 19 2118 ................................................................................................................................................................................................................................................................. 19 2119 ................................................................................................................................................................................................................................................................. 19 How to distinguish between COS and COE? ........................................................................................................................................................................................ 20 Jobin § 1-5 ........................................................................................................................................................................................................................................................... 20 Problem 1 : “Old MacDonald” .............................................................................................................................................................................................................. 21 OFFER AND ACCEPTANCE ...................................................................................................................................22 CVL .................................................................................................................................................................................................................................22 Art. 1388 CCQ .............................................................................................................................................................................................................................................. 22 Art. 1390 CCQ .............................................................................................................................................................................................................................................. 22 Art. 1391 CCQ .............................................................................................................................................................................................................................................. 23 Art. 1392 CCQ .............................................................................................................................................................................................................................................. 23 Art. 1393 CCQ .............................................................................................................................................................................................................................................. 23 Art. 1394 CCQ .............................................................................................................................................................................................................................................. 23 Commercial Law – Summary CML ................................................................................................................................................................................................................................23 CISG ...............................................................................................................................................................................................................................23 Art. 14 CSIG .................................................................................................................................................................................................................................................. 23 Art. 18 CSIG .................................................................................................................................................................................................................................................. 24 Art. 19 CSIG .................................................................................................................................................................................................................................................. 24 1. Determination of the Price ...........................................................................................................................................................................24 C.C.Q.: 1373, 1388 ..................................................................................................................................................................................................................................... 25 Jobin § 7, 233 ..................................................................................................................................................................................................................................................... 25 Beaudoin v. Rodrigue [1952] B.R. 83 (Quebec Sup. Ct.) .............................................................................................................................................................. 25 S.G.A.: 9, 10 ................................................................................................................................................................................................................................................... 26 Vienna 1980 : 14, 55 ................................................................................................................................................................................................................................ 26 Austria, Supreme Court - November 10, 1994 ...........................................................................................................................................27 2. General Conditions, Incorporation by Reference, and the Battle of the Forms....................................................................28 Jobin §6-11.......................................................................................................................................................................................................................................................... 28 C.C.Q.: 1393, 1435 ..................................................................................................................................................................................................................................... 28 CML: ..............................................................................................................................................................................................................................29 Vienna 1980 : 7, 8 (14, 18, 19) ............................................................................................................................................................................................................ 29 Achilles (U.S.A.) v. Plastics Dura, 2006 QCCA 1523......................................................................................................................................................................... 29 Stmicroelectrics, Inc. v. Matrox Graphics, Inc., [2008] R.J.Q. 73 (C.A) .................................................................................................................................... 31 The European Approach ......................................................................................................................................................................................35 Germany, Supreme Court - January 9, 2002 ....................................................................................................................................................................................... 35 LESION AND UNCONSCIONABILITY ...........................................................................................................................36 CVL : Lesion................................................................................................................................................................................................................36 C.C.Q.: 1405, (1406).................................................................................................................................................................................................................................. 36 QC C.P.A.: 8, (9) ........................................................................................................................................................................................................................................... 37 Jobin § 17 ............................................................................................................................................................................................................................................................. 38 Richard v. Time Inc., 2012 SCC 8 .............................................................................................................................................................................................................. 38 CML: Unconscionability .......................................................................................................................................................................................43 ONT C.P.A.: 15, 18 ...................................................................................................................................................................................................................................... 44 III. PROMISE OF SALE ...............................................................................................................................................44 Jobin § 33-47 ...................................................................................................................................................................................................................................................... 45 Unilateral promise of sale............................................................................................................................................................................................................................ 46 Art. 1396 CCQ .............................................................................................................................................................................................................................................. 47 Art. 1710 CCQ .............................................................................................................................................................................................................................................. 47 Art. 1711 CCQ .............................................................................................................................................................................................................................................. 47 Art. 1712 CCQ .............................................................................................................................................................................................................................................. 48 S.G.A.: 2, (4) .................................................................................................................................................................................................................................................. 48 Remedies for breach of promise of sale ........................................................................................................................................................48 Houlachi c. Bray, J.E. 97-2114 (C.A.) ....................................................................................................................................................................................................... 48 Contract made in violation of a promise to contract .............................................................................................................................51 Problem 2 : “John and Joan”........................................................................................................................................................................................................................ 52 B. TRANSFER OF OWNERSHIP AND RISK ..........................................................................................................53 I. TRANSFER OF OWNERSHIP ................................................................................................................................53 CVL rule regarding double sale of immovables ........................................................................................................................................53 1. Civil Law .................................................................................................................................................................................................................54 C.C.Q.: 1453, 1455, (1456) .................................................................................................................................................................................................................... 54 Jobin § 69-70, 73-77, 79-81 ........................................................................................................................................................................................................................ 55 2. Common Law .......................................................................................................................................................................................................56 II. S.G.A.: 17-19, 12.3, 50 .............................................................................................................................................................................................................................. 56 In re Goldcorp (1995): .................................................................................................................................................................................................................................. 58 In re Wait [1926] (UK CA) ........................................................................................................................................................................................................................... 59 Carlos Federspiel & Co. v. Charles. Twigg & Co. [1957] ................................................................................................................................................................ 60 TRANSFER OF RISK .............................................................................................................................................62 1. Moment of the Transfer of Risk ...................................................................................................................................................................62 S.G.A.: 21 ........................................................................................................................................................................................................................................................ 62 Exception – Frustration:.................................................................................................................................................................................................................62 C.C.Q.: 950, [1453], 1456 ....................................................................................................................................................................................................................... 63 QC C.P.A.: 133 .............................................................................................................................................................................................................................................. 63 2. Resolution of the Contract .............................................................................................................................................................................63 C.C.Q.: 1562................................................................................................................................................................................................................................................... 64 Commercial Law – Summary S.G.A.: 8 ........................................................................................................................................................................................................................................................... 64 Vienna 1980: 66, (67, 68), 69, spec. 69 (1), (70) ........................................................................................................................................................................ 65 Problem 3 : “Q-Mart”...................................................................................................................................................................................................................................... 65 SALE OF PROPERTY BELONGING TO ANOTHER ................................................................................................67 III. 1. Civil Law .................................................................................................................................................................................................................67 C.C.Q.: 1713-1715, 2917, 2919 ........................................................................................................................................................................................................... 67 Entreprises Maurice Canada v. Cossette [1980] (QC CS) ............................................................................................................................................................. 69 Masella v. Nettoyeur Eden [1993] (QC CA) ......................................................................................................................................................................................... 69 2. Common Law .......................................................................................................................................................................................................70 S.G.A.: 22, (24), 25 ..................................................................................................................................................................................................................................... 70 Pacific Motor Auctions v. Motor Credits (Hire Finance) [1965] (HL; Aus) .......................................................................................................................... 71 Problem 4 : “The Worrisome Computer” ............................................................................................................................................................................................. 73 WARRANTY OF OWNERSHIP ..............................................................................................................................74 IV. 1. Civil Law .................................................................................................................................................................................................................74 C.C.Q.: 1723-1725, 1738......................................................................................................................................................................................................................... 75 Chartré v. Exploitation agricole et forestière des Laurentides [2002] (QC CA) ................................................................................................................ 75 Larin v Curadeau, JE 97-475 (CA) ...................................................................................................................................................................78 2. Common Law .......................................................................................................................................................................................................80 S.G.A.: 13 ........................................................................................................................................................................................................................................................ 80 Rowland v. Divall [1923] (UK CA) ........................................................................................................................................................................................................... 81 3. International Law ..............................................................................................................................................................................................82 Vienna 1980: 41-44 .................................................................................................................................................................................................................................. 82 Problem 5 : “Patricia” .................................................................................................................................................................................................................................... 82 C. SELLER’S OBLIGATIONS......................................................................................................................................83 I. WARRANTY OF QUALITY ....................................................................................................................................83 1. Civil Law .................................................................................................................................................................................................................83 C.C.Q.: 1726-1733, 1739, 1794 ........................................................................................................................................................................................................... 83 Placement Jacpar v. Benzakour [1989] (QC CA) ............................................................................................................................................................................... 85 Cook v. Warren [1992] (QC CS) ................................................................................................................................................................................................................ 88 Trembloy v. Galipeau [2003] (QC CA) ................................................................................................................................................................................................... 89 Blanchard v. Guertin [2004] (QC CA) ..................................................................................................................................................................................................... 89 QC C.P.A.: 37-8, 44, 53, [261-2] ........................................................................................................................................................................................................... 90 C.C.Q.: [1437, 1716, 1726, 1731-2] ................................................................................................................................................................................................... 91 C.P.A.: [44]..................................................................................................................................................................................................................................................... 91 Hay v. Jacques [1999] (QC CA) .................................................................................................................................................................................................................. 92 ABB v. Domtar Inc. (SCC) 2007 ................................................................................................................................................................................................................. 92 C.C.Q.: 1739, (1594, 2925) .................................................................................................................................................................................................................... 95 Problem 6 : “Costly Yesterday’s House” ............................................................................................................................................................................................... 96 2. Common Law .......................................................................................................................................................................................................97 S.G.A.: 14, 15(1), 15(2), 53 .................................................................................................................................................................................................................... 97 Hardwick Game Farm v. SAPPA (Henry Kendall & Sons); (Grimsdale & Sons) [1969] (HOL) ................................................................................... 99 Ashington Piggeries Ltd. v. Christopher Hill [1972] (HOL)...................................................................................................................................................... 101 Murray v. Sperry Rand ............................................................................................................................................................................................................................... 103 3. Consumer Law .................................................................................................................................................................................................. 104 QC C.P.A.: 10, 37-8, 44, 53, [261-262]........................................................................................................................................................................................... 104 ONT C.P.A.: 7(1), 9 .................................................................................................................................................................................................................................. 105 4. International Law ........................................................................................................................................................................................... 105 II. Vienna 1980: 35-40, [44], 48 ............................................................................................................................................................................................................ 105 Germany Supreme Court – June 30, 2004 ........................................................................................................................................................................................ 106 RECOURSES....................................................................................................................................................... 107 1. Civil Law .............................................................................................................................................................................................................. 107 C.C.Q.: 1590, 1601-1605, [1739, 1728]........................................................................................................................................................................................ 107 2. Common Law .................................................................................................................................................................................................... 109 S.G.A.: 12.3, 33-34, 50-51 .................................................................................................................................................................................................................... 109 IBM v. Shcherban [1929] (CA)................................................................................................................................................................................................................ 110 Reardon Smith Line Ltd. v. Yngvar [1976] (HOL) ......................................................................................................................................................................... 110 Rafuse Motors v. Mardo Construction Ltd. [1963] (NS SC) ...................................................................................................................................................... 111 3. Consumer Law .................................................................................................................................................................................................. 111 QC C.P.A.: 270 ........................................................................................................................................................................................................................................... 111 ONT C.P.A.: 6 ............................................................................................................................................................................................................................................. 112 Commercial Law – Summary 4. International Law ........................................................................................................................................................................................... 112 Vienna 1980: (5), 25, 28, 37, 45-6, (47), 49-50, (51-2)........................................................................................................................................................ 112 III. EXCULPATORY CLAUSES IN WARRANTY OF QUALITY ................................................................................... 113 A. Civil Law.............................................................................................................................................................................................................. 113 B. Common Law .................................................................................................................................................................................................... 114 Murray v. Sperry Rand [1979] (ON SC) ............................................................................................................................................................................................. 114 D. MANUFACTURER AND PRODUCT LIABILITY ........................................................................................... 114 I. QUEBEC CIVIL LAW .......................................................................................................................................... 114 1. Contractual Liability .................................................................................................................................................................................... 114 C.C.Q.: 1434, 1458, [1726].................................................................................................................................................................................................................. 114 QC C.P.A.: 53 .............................................................................................................................................................................................................................................. 114 GM v. Kravitz [1979] (SCC) [Art. 1442 codifies decision in Kravitz] ................................................................................................................................... 115 1442, 1730 C.C.Q. ; 54 QC C.P.A. ...................................................................................................................................................................................................... 116 2. Extra-Contractual Liability ....................................................................................................................................................................... 118 C.C.Q.: 1468, 1469, 1473, [1474(2), 1726, 1730] ................................................................................................................................................................... 118 3. Duty to Warn..................................................................................................................................................................................................... 119 4. Right to Damages............................................................................................................................................................................................ 119 II. COMMON LAW .................................................................................................................................................. 120 Winnipeg Condominium Corp no 36 v. Bird Construction Co. [1995] (SCC)................................................................................................................... 121 Problem 7 : “Exercising Machine”......................................................................................................................................................................................................... 124 INTRODUCTION I. The Course on Sale Sale is the transfer of ownership from a seller to a buyer in exchange for money. Both art. 1708 CCQ and art. 2.1 of the Sale of Goods Act offer similar definitions. The basic objective of the law of sale is ensuring stability in the law. This is done in two ways: 1. Ensuring good title 2. Ensuring quality of the good transferred Sale encompasses commercial sales and personal transactions - Personal transactions are covered by private law and consumer law - Commercial sales are purchases and transactions of companies II. Sources and Historical Development of the Law of Sale Sources CVL : The important thing to note is that the law of sale in Quebec is very modern. The CCQ rules on sale only date back to 1994. Its provisions are therefore very modern and very clear. It has the advantage of taking the original rules and codifying the jurisprudence which had been rendered under the CCLC. Instead of jurists having to look up cases, the articles now just reflect the past decisions of the courts. o Contracts of sale are part of the group of nominate contracts, which are dealt with in Book 5, Title 2 of the CCQ. The most relevant articles are those between art. 1708-1735 CCQ. A nominate contract is one where you will find special rules governing its existence and content in the CCQ. Innominate contracts are those which don’t have a legislative framework, but are determined by the parties and governed by the basic rules on contract. There are 18 different nominate contracts, the first of which are contracts of sale. Commercial Law – Summary Nominate contracts can have derogations from the general rules on contract. For example, art. 1396 says that a promise to enter into a contract is not a contract. However, the provisions on sale, art. 1710 state that a promise to sell accompanied by possession is equivalent to sell. o CVL tends to prioritize an integration or synthesis approach to codal articles: CCQ articles outside the chapter we are concerned with will be used to interpret those provisions we are concerned with CML : The situation is the opposite in Ontario – the CML doesn’t have this advantage. The Sale of Goods Act was adopted in 1893 in the U.K. and throughout the CML world. The key cases that interpret the Act are old ones (from around 1920s). The CISG – the United Nations Convention on the International Sale of Goods has integrated both the CVL and CML Historical Development Sale is the transfer of ownership for a monetary price: - 1708 CCQ: - SGA s.2(1): The law of sale exists as a continuation of the Exchange (CVL) and Barter (CML) systems - As such, we see in the CCQ that the effects of a contract of sale apply to contracts of exchange as well o 1798: ** As governments develop, the law of sale develops, and we are able to trace it through different civilizations “Sale’s carousel of progress”: this is the notion that each civilization added refinements to the law of sale Egypt: Main objects of contract were animals and slaves. Often contracts contained certain protections such that the item sold would have to satisfy certain standards. - Code of Hammurabi (2023-2080) contained provisions on sale – often dealing with animals and slaves Rome: Both the CML and CVL (but especially the CVL) can trace their roots back to the Roman system. While CVL accepted both receptions of Roman Law, CML accepted first and rejected the second. The Romans went further than any previous legal system had for a number of reasons: (a) they achieved greater levels of wealth and so the law had to keep pace with more complex transactions. (b) compared to the laws of ancient Egypt or Greece or Mesopotamia, the roman system had order, stability and longevity; Rome was in power for approximately 1000 years. As such, if you have a period of sustained economic progress and political stability (thousands of years), then the legal system you create can be clear, stable, reviewed, applied and enforced – quite an attractive system to emulate; (c) the Romans created and maintained an actual system private individual could institute proceedings and have hearings precedents were created through the Roman system of note-taking and the judge would retire and hand his notes over to the next judge Juris Consuls wrote doctrine Developments in Roman Law: The classical period (450 BC) included the creatin of the Aedalicane Edict (199 BC) o This edict was what many consider the first consumer protection legislation – dealing with animals and slaves o Roman citizens were often defrauded, so this legislation was intended to ensure that if the property bought suffered some defect, they would be entitled to a reduction in price or a cancellation of the same The decline of Roman power and the end of authority in Gaul (France) was in 476 C.E. Justinian Digests is the most influential instrument of private civil law, but this was proclaimed in 538 CE. By this time Roman authority in France had ended and, therefore, had no effect in Gaul at the time of its proclamation. Its influence came in through these “receptions” Commercial Law – Summary After the fall of the Roman Empire, there were a variety of Germanic Tribes (including the Franks), who had their own set of rules and law, which pushed out the Romans. However, the Germanics had a respectful approach to other legal systems and decided to govern the law according to nationality so that Romans would be governed by Roman law, and Franks by Frankish law, with different courts for each. This system worked to some extent but would break down when there was a conflict – ended up with a merger of Franc and Roman law over time. At the same time, there was a decline in the economy and education. Went from literate society with codified rules to illiterate judges applying oral law as they understood it. This also meant that law was being applied locally as opposed to on a wider scale, and there was little communication between localities. People were therefore applying local oral law rather than a refined, uniform and systematic set of rules. So ended up with various different customs and systems of customary law. First Reception : When explorers and settlers came from Europe to Canada, they brought their own customs. Merchants were not happy with unpredictable oral law and wanted more certainty, stability and clarity. Around 1100, the Pope began searching for religious documents and discovered the Digest of Justinian, which dealt with the law of purchase and sale. The Digest was mostly excerpts of commentary (i.e. doctrine). However, it was not fully understood - it contained conflicting scholarly opinions and was written in a wholly different time and place. However, it was considered stable enough that merchants could rely on it. This became extremely popular and spread to places beyond where the Romans had settled. Eventually, a jurist in Bologna (Irinius) taught jurists from all over Europe who wanted to learn the law. They would go back to their respective countries and spread the Roman law. This was the beginning of the First Reception of Roman Law. These jurists, however, would only study and apply the Digests, without analyzing it for themselves. Ends up being a certain dissatisfaction with this system. It did not necessarily correspond with the quickly approaching period of scientific and cultural enlightenment. Second Reception: Second Reception involved taking what was known and adapting it. Had to modernize the law to ensure it could be adapted to modern needs and transactions. They are taking what they knew, now with the full understanding that not all of the excerpts in the Digests have the same impact and weight. In the context of sale, jurists considered their current transactions and applied Roman principles to them. o You must chronologically order them to fully understand them – to go from A and B to the solutions in E and F. o Knowledge is increased since you have perception but you also have a need on the part of Jurists and society to take this old law and modernize it to adapt it to modern requirements, needs and transactions. There was a resistance to this reception in the UK: Although they did take part in the first reception of Roman Law, they were succeeding beyond everyone else at the time and did not want to follow suit. They developed their own modernization and application of the principles to the modern needs of English society Creation of English Common Law o They came up with their own modernization based on their unique system of Kings Courts and Common Courts. They developed a system of ambulatory judges that would go from place to place advising and deciding disputes. Judges would confer among themselves to create a system that was common. This represented the first division between the CVL and CML as jurists at the time would refer to similar sources but concluded different interpretations. Problem: The law was not particularly coherent or clear, particularly with respect to the law of sale In 1893, it was recognized by legislation that it was necessary to clean up the law of sale Commercial Law – Summary o Mackenzie Chalmers was given a mandate to codify the existing law of sale to make it more coherent. He also attempted to resolve some of the apparent issues Result was the Sale of Goods Act While UK developed its unique system and rules, they still had the influence of the first Roman Law reception. All of the other European empires then spread “civil law” based on the law developed during the second reception. Development of the Law of Sale in Quebec By the Colonial Era, European countries had refined their laws and took them with them to their colonies. France exported Justinian French Law to New France (Quebec), French Africa, Belgium and Louisiana. Quebec: 1642 : Various customs were being followed in Quebec until 1642, when it was decided that the province would follow the Custom of Paris exclusively. 1763 : As a result of the English conquest, the whole territory is transferred to English jurisdiction. Royal Proclamation Act abrogated French law. 1774 : Quebec Act restored French law in respect of property and civil rights. From this point on, the law no longer evolves from precedents of the Cour du Paris. Rather, Quebec legal rules will develop independently. 1804 : Code Napoleon, French civil code, is adopted in France. This is not a problem in 1804 since there is a ton of doctrine and cases that clarify the law in 1774. However, as time went on it became clear that past doctrine is no longer relevant and Quebec did not have well developed law faculties with full-time academics. As such, it was felt that Quebec needed their own civil code. 1865 : First Quebec civil code (CCLC) 1994 : Recodification (CCQ) modernized old laws and removed contradictions, incorporating the law of statute as well as case law into codal provisions. Development of the Law of Sale in the CML Modernization of the law of sale by Chalmers, but mandate was to codify the law as it existed (not to resolve issues very much). 1893 : Sale of Goods Act was adopted throughout the British Empire. It was progressively adopted by every CML province and territory. Ontario was the last province to adopt it in 1919. 1906 : The US felt like it needed to do something similar to England. American Uniform Sales Act improved upon existing merchant law, and proposed that all states adopt it. This was the first US attempt to codify the law of sale. o Samuel Williston wrote a 4-volume treatise on the law of sale and was involved in the early US law of sale. o The problem with this piece of legislation was that it was largely based on the UK Sale of Goods Act but that legislation was simply codified existing law – which was already confusing. 1952 : Publication of the Uniform Commercial Code (UCC), driven by Karl Llewellyn. Adopted by all states except for Louisiana. o Important article is art. 2 UCC o There is a UCC Commission which deals with any issues relating to the UCC. International Law of Sale Convention on the International Sale of Goods (CISG) Ernst Rabel – an Austrian German jurist noticed a problem with the law of sale being limited to the domestic forum is that there often arises the question of what law ought to be applied to international transactions. He sought to develop a neutral set of rules so that it would not be the law of any particular country that applied. He worked with various leading scholars for USA and France, but lost his ability to work and access the library during WWII since he was a jew. 1966: Dutch government took this project on and came up with proposed convention. However, because USA was not interested, the Dutch effort was unsuccessful. Finally the convention was adopted in 1980 in Vienna at an International Assembly. The USA was finally content with the amount of US CML content within it. o One of the main individuals behind the American adoption of the CISG was John Honnold Commercial Law – Summary It was adopted progressively in pretty much every country in the world, including Canada in 1991. CISG division is roughly 65% CVL and 35% CML ** Since 1991, when a seller and a buyer are located in two different countries, both of which have adopted the convention, the Convention applies automatically as of right, unless explicitly written to be excluded. Despite it being a laudable, clear instrument – lawyers are always most comfortable with their own system of law and although it has been marvelously successful as an international instrument adopted in all countries to favor and promote trade in the market place, it has not been extremely practically successful other than in Europe. There is always still a tug of war in every transaction as to which law should apply and usually they decide on one or the other, and will exclude the application of the CISG. Either way, the Convention has been highly successful in promoting trade and serving as a model for law reform. When countries reform their law of sale, they tend to look to the Convention as a point of reference, which is already partially integrated into their law and is widely accepted around the world. When Quebec reformed their CCQ in 1994, introduced various provisions which came from the Convention (arts. 1456, 1736, 1738, 1739, 1740). III. Good Faith Good faith refers to the obligation that seller owes to buyer regarding the object that is being sold The CVL has pushed the notion of good faith far beyond the CML. In CVL, have the idea that you have certain rights, but they cannot be exercised in an abusive or unreasonable manner, and that you can be liable for damages of the resulting effects. The assessment of what constitutes unreasonable can even be subjective, and courts have wide supervisory power to enforce a certain legal morality. In Houle, court held that abuse of rights could also encompass the exercise of standard contractual rights in an unreasonable way. CVL Perspective Good faith has been elevated to a fundamental rule of substance to be applied throughout the entire CCQ. In addition, there are certain specific provisions laying out this obligation: C.C.Q. : 6, 7, 1375 Art. 6 CCQ Art. 7 CCQ Every person is bound to exercise his civil rights in good faith. No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith. However, even more than a fundamental general principle when it comes to contractual matters (and pre-contractual) Art. 1375 CCQ The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished. Therefore, in the law of sale, the good faith requirement entails: 1. Honesty; and 2. Disclosure The CVL takes the notion of good faith further than the obligation to answer questions honestly – it has resulted in a positive obligation to disclose material information (BMO v. Bail). This is especially the case where there is an inequality in access to information. Commercial Law – Summary Where it gets tricky for CVL is whether good faith requires a seller to inform a negligent buyer. Does a seller have an obligation to disclose where the buyer has not been prudent or dilligent Edwards : Believes that seller does have an obligation to disclose information that may affect decision of buyer. However, but the seller must know what the buyer is looking for, or know that he is unaware of some material fact. Jobin [§160]: Buyer’s negligence is his own mistake. He thinks that if the buyer is negligent, seller need not inform. These principles can be found in Quebec, continental Europe, and UNIDROIT contract law. CML Perspective Traditional CML view is that if you make an inquiry, the other party has a duty to respond fully and honestly. But if you do not ask, the other party is under no such obligation. There is no positive obligation to disclose – you have a responsibility to protect your own rights. There is also no concept of abuse of rights – in contract, a right is a right, and you should be able to exercise it whenever and however you want. International Perspective Tough point in the Convention, as both CVL and CML wanted their view to predominate. CML lawyers argue that good faith should not be included in Convention: (1) Clarity and stability are paramount in contract law. Should not give judges opportunity to revise or rewrite contracts on the basis of “goo faith”, since this deters from “certainty”; and (2) good faith is an ambiguous notion – it means different things to different people in different countries and could therefore jeopardize the uniformity of the law of international sales. CVL lawyers responded that : (1) good faith is a general standard of conduct widely acccepted in most legal systems – we all know what it means; (2) the inclusion of good faith would in fact reduce ambiguity by imposing a minimum standard of honest behaviour on all parties; and (3) enunciating and incorporating a specific rule of good faith would prevent local courts from imposing their particular interpretations. Jurisprudence would be able to be used from one jurisdiction to another In the end, the result was a compromise : good faith is not incorporated as a legal obligation, but as a principle of interpretation. Vienna 1980 : 7.1 , (7.2) Art. 7(1) CSIG Art. 7(2) CSIG (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. ** However, jurisprudence has shown that the good faith is not used simply as a principle of interpretation; rather it is evolving into a general rule of the CISG: Vienna, Austria, Arbitration Decision - June 15, 1994 Facts: The defendant (Austrian seller) sold sheet metal to the plaintiff (German buyer), which the latter then resold to a manufacturer. Manufacturer found the goods to be defective and refused to accept the rest of them. Buyer complained to seller who asked for further information to verify problem. Plaintiff started negotiating for lower price and when negotiations went nowhere, ultimately filed notice of non-conformity six months after the fact. Art. 39 CSIG requires that the buyer give notice of non-conformity “within reasonable time.” Commercial Law – Summary Defendant claimed this notice was too late and refused to pay. Issues: (1) Is the doctrine of estoppel applicable to CSIG cases? (2) Is the Austrian able to escape the obligation to pay damages on the grounds that the German failed to meet its obligation to immediately examine the goods? Holding : (1) Yes. Estoppel is an application of the principle of good faith, which means that it ought to inform interpretation of CSIG cases. (2) No Legal Reasoning: Is the CISG applicable? o Seller was from Austria, buyer was from Germany o CISG in effect in Austria but not in Germany o Contract stated choice of law was Austrian law o Choice of law of a contracting state is understood as the national law of that State including the CISG, not a reference to solely the domestic law of that State Article 6 permits contracting parties to modify or exclude provisions of the Convention o This is how it was allowed for the parties to modify article 38-39 notice requirements Notice requirements were: Seller’s warranty for any defect of the goods was subject to the condition that the buyer examine the goods immediately after taking delivery and give without delay written notice The buyer did not comply with these requirements since it did not give notice of the alleged defects in time. Buyer’s argument that the parties implicitly derogated from the notice time limit requirement by both recognizing the complaints as fully justified and jointly discussing their legal settlement is not convincing o Mere fact that the seller did not expressly reject late notice by the buyer is not sufficient to justify the conclusion that the seller intended to waive its contractual rights o Need much clearer evidence than the seller’s silence or the mere fact that it did not immediately object to the late notice Such an intention of the parties must be established beyond any doubt HOWEVER, buyer still has a right to reduced damages o A given legal position (defence) can not only be intentionally waived but can also be objectively forfeited Follows from the principle of good faith and closely related principle of estoppel Party’s defence must be regarded as having been forfeited whenever that party’s conduct could be construed as meaning that it no longer wished to exercise its right or its defence and the other party acted in reliance on the new situation CISG expressly mentions requirement of good faith in international trade in article 7(1) o Principle of estoppel may be seen as one of the “general principles on which the Convention is based” According to article 7(2) of the CISG, estoppel may be invoked to solve the question of a possible forfeiture of the defence of late notice, not expressly settled in the Convention Requirements for forfeiture are met in this case: o Seller may never have had the intention of waiving defence, but objectively its conduct after receiving the first complaint from the buyer was such as to give the latter the justifiable impression that it recognized the lawfulness of the complaint despite the lateness of transmission The fact that the seller did not immediately reject the complaint as having been made after the expiry of the contractually agreed time limit is not important What counts is the circumstance that, even after the complaint had been made, the seller remained in contact with the buyer in order to keep itself informed of the development of the complaints Commercial Law – Summary The seller repeatedly made statements to the buyer from which the latter could reasonably infer that the seller would not set up the defence of late notice o In reliance on that, the buyer refrained from immediately taking legal action not only against its own customer but also against the seller itself Article 78 of the CISG, while granting the right of interest, is silent on the applicable rate o If question is outside scope of CISG, determined by domestic law o If there is simply a gap in the CISG, determined in conformity with CISG general principles Here, there is only a gap One of the general principles is that of “full compensation” of the loss o In the vent of failure by the debtor to pay a monetary debt, the creditor, who as a business person must be expected to resort to a bank credit as a result of the delay in payment, should be entitled to interest at the rate commonly practiced in its country with respect to the currency of payment Ratio: Under the CISG, parties are under the obligation to exercise their rights in good faith (Arts. 7.1/7.2). When a party fails to meet this obligation, the party is estopped from legally enforcing the right. Good Faith as Estoppel: If a party behaves in a way that would lead an objective reasonable person to infer that this party will not exercise a right, and the other party relies upon this inference to his detriment, then the first is estopped from claiming the enforcement of the right. Comments: By extension of good faith, see that estoppel has become a key principle of the CSIG. This case shows how even though good faith is only supposed to be used as a principle of interpretation, ultimately affects (and curtails) substantive rights. Incorporation by reference in law of sale: In CVL, according to article 1435 CCQ, a contract of sale may generally have external provisions or obligations, except in 2 cases: Contract of adhesion or consumer contracts In CML, the incorporation by reference is valid. Germany Supreme Court - October 31, 2001 Facts: Defendant sold plaintiff a gear-cutting machine for 370k. Seller sends out a confirmation of the order which contained a note that this sale is subject to its “standard conditions of sale” but those conditions were not attached. The standard conditions contained an exemption clause which excluded liability for defects of used equipment. After delivery, buyer discovered that the machine was not operational, except with the assistance of outside experts, and sought reimbursement for costs. Issues: Were the seller’s conditions of sale part of the contract and binding under art. 8 CISG? Holding: No. Both efficiency and good faith require that sellers who wish to make an offer based on standard terms has a positive obligation to make the buyer aware of them. Legal Reasoning: Inclusion of general terms and conditions into a contract governed by CISG is subject to articles 14, 18, the provisions regarding the conclusion of a contract CISG does not contain special rules regarding the inclusion of standard terms and conditions into a contract o Not necessary because the Convention already contains rules regarding the interpretation of contracts Through an interpretation according to article 8, it must be determined whether the general terms and conditions are part of the offer, which can already follow from the negotiations between the parties, the existing practices between the parties, or international customs, article 8(3) CISG Commercial Law – Summary It must then be analyzed how a reasonable person of the same kind as the other party would have understood the offer, article 8(2) CISG Required that the recipient to a contract offer that is supposed to be based on general terms and conditions have the possibility to become aware of them in a reasonable manner o 1) requires that the intention of the offeror that the wants to include his terms and conditions into the contract be apparent to the recipient of the offer o 2) requires the user of general terms and conditions to transmit the text or make it available in another way In international trade, the opponent of the user of the clause can often not foresee to what clause text he agrees in a specific case because significant differences exist between the particular national clauses in view of the different national legal systems and customs o True that there may be the possibility to make inquiries into the content of the terms This can lead to delays in the conclusion of the contract For the user of the clauses, it is easily possible to attach to his offer the general terms and conditions, which general favor him It would contradict the principle of good faith in international trade as well as the general obligations of cooperation and information of the parties to impose on the other party an obligation to inquire concerning the clause that have not been transmitted and to burden him with the risk and disadvantages of the unknown general terms and conditions of the other party It is necessary to make the inclusion of general terms and conditions for contracts governed by the CISG subject to uniform principles Parties are under the obligation to act in good faith. This includes a duty to co-operate that extends to the preformation period. Good faith is based on reasonableness, o It is not reasonable for a seller to conclude an agreement unless they make the buyer aware that there is no warranty for defect o As well, it is reasonable for a party to attach the terms to the contract, especially when it is not onerous in the least bit. It involves no effort on the part of the seller to attach the standard terms to the offer – it is much more inefficient to require the recipient to request the standard terms. o Placing the onus on the recipient would contravene the principle of good faith in art. 7(1). o The offeror must take positive steps to make the recipient aware of the standard conditions of sale. Ratio: [Good faith in pre-formation]: A party seeking to incorporate standard conditions into a K must show good faith efforts to communicate these terms to the other party. Where these efforts have not been made, these terms are not part of the K. Comments: Good faith is not merely a source of interpretation but a source of duties and behavioral standards. There is a clear trend that there are specific standards of conduct that each party is required to meet in order to satisfy the obligation of good faith (as seen in CVL). o The fact that this decision was made based on good faith as opposed to conditions of formation says a lot about how far the concept has been taken. In CVL, art. 1435 CCQ deals with “incorporation by reference.” It is valid, but not in consumer or adhesion contract unless the content of the reference is explicitly brought to the attention of the consumer or adherent. No such rule under the CISG. In CML, incorporation by reference is generally valid, even in consumer contracts. Hypothetical: What if the contract contained a hyperlink that refers to the standard terms and conditions? It would probably be binding for two reasons: Commercial Law – Summary o o 1. We can distinguish the facts from Germany, Supreme Court since the court was not satisfied that the buyer would have to request to obtain the terms. A hyperlink gives easy access to the standard terms and conditions 2. Dell case: Stands for the proposition that a clause is not an external clause if attached by a link. IV. Custom Custom usage and practice are a prevalent source of legal interpretation in all jurisdictions Usage: refers to tradition within an economic sector Custom: refers to tradition within a geographical area Practice: tradition between two parties The term “custom”/ “usage” can refer to two things: (1) Custom as an implied obligation: contract binds parties not only with respect to what is expressed, but also to what is incident in conformity with the contract’s nature and usage. art. 1434 CCQ ; art. 9(1) CSIG; 15(3) and 29(4) SGA (2) Custom as a tool for interpretation of how contract should be understood: Has a “gap-filling function” such that it can help interpret an ambiguous clause or how the agreement should be interpreted. art. 1426 CCQ; art. 8(3) CSIG This is true of both CVL and CML. It is especially the case in commercial law, because that is where the notion of custom and usage in different commercial sectors really comes in. Custom can relate to people within a particular industry, sector of the economy, or geographical area. Customs have legal effect and can be incorporated by reference. This is a pretty dangerous prospect. Saying that just because parties are operating in a particular context or sector, will incorporate obligations that they have not explicitly agreed to. *** What conditions are required to make a custom binding? Must be: 1) regularly observed; and 2) widely known by people in the specific sector or area. Distinguish between practice and custom : Practice refers to what is followed between the parties to a given case, whereas custom refers to extends to the entire sector or area. For example, common practice between X and Y is that the buyer always places order and seller automatically processes it without replying. But cannot say that just because these two parties do it, it can amount to a custom. It will be enforced as law between the parties, but not beyond that. Custom must have a high level of generality, so that it can be fairly presumed as a rule of conduct. Custom in the CVL Usage/ custom in CVL can be either a source of implied obligation or a canon of interpretation As a canon of interpretation: In interpreting a contract, the nature of the contract, the circumstances in which it was formed, Art. 1426 CCQ the interpretation which has already been given to it by the parties or which it may have received, and usage, are all taken into account. As a source of implied obligations: Commercial Law – Summary Art. 1434 CCQ A contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law. Custom in the CML While the SGA contains no rule as to usage, it does contain various references to usages: S.G.A.: 15, 29 Art. 15(3) SGA A buyer may have greater protection regarding the quality of the merchandise depending on whether warranties as to quality or fitness are a usage in the trade sector you are dealing with. Art. 29 (4) SGA Subject to this Act and any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows: […] (3) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. Where the seller delivers to the buyer a quantity of goods less than the seller contracted to sell, the buyer may reject them, but if they are accepted, the buyer shall pay for them at the contract rate. […] (4) This section is subject to any usage of trade, special agreement or course of dealing between the parties. Any obligations expressed in art.29 can be increased or decreased subject to usage of trade or practice. Custom in International Law Inevitably, it is more onerous to prove that the same usage or custom exists in two separate places. However, despite its international nature, the CISG still incorporates custom/usage and practice in its provisions. Vienna 1980: 8(3), 9 Art. 8(3) CSIG In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. Art. 9 CSIG (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned. As per 9 CISG, even if usage is not expressly stated in contract, such usage is implied so long as: 1. It is not derogated from by contract; 2. The parties knew or ought to have know of such usage; and 3. Such usage is widely known to and observed by parties to contracts of the type involved A. FORMATION Commercial Law – Summary I. Form of the Contract There are 4 characteristics of a contract of sale: (1) Consensual (2) Bilateral (3) Onerous (4) Instantaneous 1) Consensual The general rule in all three systems is a consensual approach , this is interpreted through the concepts of offer and acceptance no requirement that contract be in writing, formed by the sole exchange of consents between persons having capacity to contract. However, the law will impose some formal requirements on certain kinds of contracts. CVL: C.C.Q.: 1385, (1455) Art. 1385 CCQ A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties require the contract to take the form of a solemn agreement. It is also of the essence of a contract that it have a cause and an object. Art. 1455 CCQ A contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law. Where are there formal requirements? (A) Sale of residential immovables The executed contract of sale must be preceded by an earlier executor contract whereby the parties promise to buy and sell, respectively. The motivation for this is, similar to that in Consumer sales. In essence, it allows the buyer to determine the value of his rights (by evaluating the property, checking titles &c.) Art. 1785 CCQ The sale of an existing or planned residential immovable by the builder or a promoter to a natural person who acquires it to occupy it shall be preceded by a preliminary contract by which a person promises to buy the immovable, whether or not the sale includes the transfer to him of the seller's rights over the land. A stipulation that the promisor may withdraw his promise within 10 days after signing it shall be included in the preliminary contract. The preliminary contract must contain certain clauses: In a preliminary contract, in addition to the name and address of the seller and of the promisor, Art. 1786 CCQ an indication shall be included of the work to be performed, the sale price, the date of delivery and the real rights affecting the immovable, as well as any useful information pertaining to the features of the immovable and, where the sale price is subject to review, the terms and conditions of revision. Commercial Law – Summary Where the preliminary contract provides for an indemnity in case of exercise of the right of withdrawal, the indemnity never exceeds 0.5 % of the agreed sale price. If this is not done, either may apply for nullification, even after the sale has been executed However, this requirement (1786) will not necessarily prevent the formation of the contract; the buyer must petition the court and show that he suffered serious prejudice: Art. 1793 CCQ The sale of a residential immovable that is not preceded by the preliminary contract may be annulled on the application of the buyer if he shows that he suffers serious prejudice therefrom. (B) Consumer Contracts The CPA provides that certain consumer contracts can only be validly formed if there is an exchange of written documents (imposed on merchants so that buyers are in formed of their rights). It also imposes other formalities. o Recognize that person acquiring the goods is vulnerable and there is inequality in bargaining power and access to information. (QC C.P.A.: 23 et seq.) Art. 23 CPA (et seq.) This chapter applies to contracts which, under section 58, 80, the first paragraph of section 150.4, section 158, 190, 199, 208 or 214.2, must be evidenced in writing. Art. 23 CPA (QC) imposes a requirement that everything be in writing in certain cases . These contracts include: o Contracts of sale/ lease of goods o Contracts of credit o Contract which include a conventional option to purchase the good leased o Contracts of lease with guaranteed residual value o Contracts of service involving sequential performance o Physical fitness studios o Contacts entered into by consumers for the lease of goods with a merchant with whom he has entered into a principle contract CML S.G.A.: 4 Art. 4 SGA Subject to this Act and any statute in that behalf, a contract of sale may be made in writing, either with or without seal, or by word of mouth or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties, but nothing in this section affects the law relating to corporations. (ONT C.P.A.: 22) Art. 22 CPA Every future performance agreement shall be in writing, shall be delivered to the consumer and shall be made in accordance with the prescribed requirements. The general rule is that there is no requirement as to form, but exceptions exist in both CVL and CML. These exceptions occur in particular kinds of contracts, where the legislator expresses a concern and wants to ensure that both parties have a good understanding of their obligations under the contract. It goes to show that, this is business, and we want to foster an environment conducive for sales Commercial Law – Summary Form in International Law Vienna 1980: 11 Art. 11 CSIG A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses. The CSIG contains no requirements as to form – the contract can be purely verbal. (2) Bilateral Doesn’t mean that third parties are not affected. But a contract of sale is fundamentally a bilateral contract between the seller and the buyer. (3) Sale is an Onerous contract Contract confers advantage on seller (payment of purchase price) and on buyer (good(s) purchased). The transfer of ownership is not gratuitous in nature. 1381 CCQ. A contract is onerous when each party obtains an advantage in return for his obligation. When one party obligates himself to the other for the benefit of the latter without obtaining any advantage in return, the contract is gratuitous. (4) Contract of instantaneous performance When parties agree to sell, the transfer of ownership takes place at that moment. When you sign that contract or sign deed of sale, at that one moment, the sale occurs. So it’s not like an employment contract or contract of lease, which are continuous or contracts of successive performance. That’s why when there is a problem and contract needs to be cancelled, have to go back in time to when contract occurred. 1383 CCQ. Where the circumstances do not preclude the performance of the obligations of the parties at one single time, the contract is a contract of instantaneous performance. Where the circumstances absolutely require that the obligations be performed at several different times or without interruption, the contract is a contract of successive performance. ** N.B.: This is why we don’t resiliate contracts of sale (e.g. lease – cancel with prospective effect only). With contracts of sale, it is resolved or subject to resolution (cancelled retroactively) and damages seek to put parties in the position they would be in had the contract never existed - meaning the buyer will get back the purchase price (with interest) and the seller will get back the property (with compensation for the fruits that the property has derived from the time of conclusion of the contract until the time of its cancellation by the court) Would resolution be the appropriate recourse in a contract of lease? No because it is not a contract of instantaneous performance; instead, we use resiliation, which only has prospective effect (same goes for a contract of employment) Registration requirements: distinction between a contract being formed and being opposable The law requires that certain formalities – registration- be fulfilled before the contract is opposable (CVL) or can be “set-up” (CML) against third parties. Civil Law: Distinction made between movables and immovables Immovables require registration in order to be opposable 1455 CCQ Commercial Law – Summary 2938 CCQ 2939 CCQ 2941 CCQ 2946 CCQ There is no general condition for registration of movable rights – don’t need to register for it to be opposable o Exception: art. 1745 CCQ 1745 CCQ. An installment sale is a term sale by which the seller reserves ownership of the property until full payment of the sale price. A reservation of ownership in respect of a road vehicle or other movable property determined by regulation, or in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the reservation of ownership is published within 15 days. As well, the transfer of such a reservation has effect against third persons only if it has been published. Similar registration requirements for Leasing and sales of certain types of objects (i.e. car, recreational vehicless) Common Law: There is a general rule in CML there is a uniform rule that regardless of the nature of the agreement, if there is a security interest (i.e. somebody invoking a right with respect to that property), then there is a requirement that it be registered o Art. 23 PPSA o Art. 9 UCC ***Contracts other than the contract of sale transfer ownership of property too, although they are different in regards to their formation and effects: 1) Contracts of sale v. gifts A pure gift is a transfer of ownership through gratuitous title (1806), whereas a contract of sale is a transfer of property by onerous title – (1708) CCQ 1708. Sale is a contract by which a person, the seller, transfers ownership of property to another person, the buyer, for a price in money which the latter obligates himself to pay. A dismemberment of the right of ownership, or any other right held by the person, may also be transferred by sale. CCQ 1806. Gift is a contract by which a person, the donor, transfers ownership of property by gratuitous title to another person, the donee; a dismemberment of the right of ownership, or any other right held by the person, may also be transferred by gift. Gifts may be inter vivos or mortis causa. The difference, therefore is that the contract of gift is not onerous, rather it is gratuitous (while still transferring ownership_: 1381. A contract is onerous when each party obtains an advantage in return for his obligation. When one party obligates himself to the other for the benefit of the latter without obtaining any advantage in return, the contract is gratuitous. In some transactions it may be difficult to differentiate whether the actual contract is by onerous nature or gratuitous title. o Rule: Ask whether the parties receive some benefit from the transaction Unlike a contract of sale sale, there is no obligation placed on the seller to warrant title or quality. The donor is only liable for physical injuries caused to donee resulting from defects he was aware of, but failed to disclose. 1828. The donor is not liable for latent defects in the property given. Commercial Law – Summary He is liable, however, for injury caused to the donee as a result of a defect which impairs his physical integrity, if he was aware of the defect but failed to disclose it at the time of the gift. Furthermore, when you have a mixed contract of gift along with a small benefit received by the donor, then, with respect to the benefit portion, the rules of gift will not apply and the rule of contract will. 1810. A remunerative gift or a gift with a charge constitutes a gift only for the value in excess of that of the remuneration or charge. For example, if you sell your neighbor a TV that is worth $300 for $50. If there is an issue with the quality of the TV, your neighbor can make a claim against you for up to $50 of the repair cost. Contracts of sale v. contracts of enterprise Also important to distinguish contracts of enterprise – a contract by which one agrees to provide services to another for a price which the other binds himself to pay (art. 2098 CCQ). The difference between a contract of sale and the contract of enterprise or services is that the object of the latter contract does not exist at the time it is entered into. CCQ 2098. A contract of enterprise or for services is a contract by which a person, the contractor or the provider of services, as the case may be, undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds himself to pay. For example, instead of buying an existing machine or piece of jewelry, you give manufacturer specifications. He then builds it and delivers it to you. Though ownership of the final product is transferred in exchange for a price, it is not a contract of sale and is governed by its own rules o This is very often seen in the context of construction of a house or building by a contractor Difference in rules and obligations between sale and enterprise is that there are different obligations of warranty. Arts. 2118 and 2119 CCQ deal with immovables and offer added protection to the buyer by making architect, engineer, contractor and subcontractor all solidarily liable for any failure or partial damage in the first 5 years. 2118. Unless they can be relieved from liability, the contractor, the architect and the engineer who, as the case may be, directed or supervised the work, and the subcontractor with respect to work performed by him, are solidarily liable for the loss of the work occurring within five years after the work was completed, whether the loss results from faulty design, construction or production of the work, or the unfavourable nature of the ground Solidarily means that each are liable for the entire debt 2119. The architect or the engineer may be relieved from liability only by proving that the defects in the work or in the part of it completed do not result from any erroneous or faulty expert opinion or plan he may have submitted or from any failure to direct or supervise the work. The contractor may be relieved from liability only by proving that the defects result from an erroneous or faulty expert opinion or plan of the architect or engineer selected by the client. The subcontractor may be relieved from liability only by proving that the defects result from decisions made by the contractor or from the expert opinions or plans furnished by the architect or engineer. They may, in addition, be relieved from liability by proving that the defects result from decisions imposed by the client in selecting the land or materials, or the subcontractors, experts, or construction methods. Issues: However, there are some issues with these provisions which create problems for the law. Consider the following two scenarios: Commercial Law – Summary o o E.g. 1: Suppose buyer meets contractor with project to build something. Contractor completes project and hands over keys to buyer. Buyer now faces various problems. In such a case, because it is a contract of enterprise warranties under contract of sale would not exist. E.g. 2: Suppose you have a buyer of an existing but brand new building. Buyer then faces various problems. This client would not have access to warranties under contract of enterprise (arts. 2118-9) How to distinguish between COS and COE? A contract of enterprise has two elements: 1. Property sold 2. Labour sold If the object has been ordered to be built then, art.2103(3) provides: 2103(3). A contract is a contract of sale, and not a contract of enterprise or for services, where the work or service is merely accessory to the value of the property supplied.” ***Must assess whether the contract is mostly for services or mostly for material (generally, understand “mostly” to mean over 50%). If it is mostly for material, then even if the final product does not yet exist at the time of the contract, it will be considered a contract of sale. If more than 50% of the value of the contract is for services, it will be a contract of enterprise. However, even if it is a contract of enterprise, with respect to the goods that have been built, the contractor is bound by the same obligations as a seller. This is in addition to his regular warranties guaranteed by a contract of enterprise: 2103(2). He shall furnish only property of good quality; he is bound by the same warranties in respect of the property as a seller. Furthermore, in the case of new residential property that has been recently acquired or renovated by a contract of sale, the inverse is true: 1794. The sale, by a contractor, of land belonging to him together with an existing or planned residential immovable is subject to the rules regarding contracts for work or services pertaining to warranties, adapted as required. Those rules also apply to sales by a real estate promoter Therefore, even though it is a contract of sale, both the guarantees of contracts of sale and enterprise exist. But only for residential property (not commercial) You do not need to be the contractor either to be subject to this provision, rather the developer or promoter are also subject to it. o Often, real –estate or development projects have a promoter who buy the land and then contractor builds on it. However, due to this provision, both can be subject to the warranties of contracts of sale and enterprise. Jobin § 1-5 A. Essential Elements and Characteristics 1. Definition A sale is a contract by which the seller 1) transfers ownership of property to the buyer 2) for a monetary price, which the latter obliges himself to pay. 1708 CCQ Sale can transfer a right of ownership or a dismemberment of that right. o This intention is meant to open up the area of sale to take into account commercial realities, like the sale of a copyright or patent If there is no price nor any objective method by which to calculate price, it is not a sale. Commercial Law – Summary The price must be in money, it cannot be an exchange of goods or services. o If the property is given in exchange for a service, this would qualify as an innominate contract – not a sale o Where parties reciprocally transfer property, this is an EXCHANGE o In between exchange and sale is an exchange with cash payment – that is the transfer of property, and other the other side, the transfer of property and the payment of a sum of money In this case, if the value of the cahs payment is superior to that of property, it will be considered a sale (Lamontagne, Vente) Courts free to re-characterize a contract if it does not meet these basic requirements. 2. Characteristics There are four principal characteristics of a contract of sale. It must be: (1) consensual, (2) bilateral (reciprocal relationships of similar value), (3) onerous, and (4) executed instantaneously rather than successively (even if there are periodic payments, they could be executed in one moment) B. Distinctions From Other Contracts 3. Distinction from gift Sale is an onerous contract whereas a gift is a transfer of ownership by gratuitous title (art. 1806 CCQ). 4. Distinction from contract of enterprise Courts had a hard time distinguishing between sale of a future good and a contract of enterprise in which the seller supplies the material and must deliver the good once completed. According to Inns c. Gabriel Lucas ltee and the CISG, there is an a priori contract of enterprise However, a contract will be considered a contract of sale and not one of enterprise if it can be shown that the work is merely accessory to the value of the materials (art. 2103 CCQ). 5. Distinction from assignment of debt Traditional view was to treat assignment of debt as a particular kind of sale. Modern view is to consider it a mode of transfer or a mutation of the debt, similar to subrogation. Problem 1 : “Old MacDonald” Facts: Old farmer wanted to retire, yet still watch over his animals. His son decided to take it over and modernize it. They signed a contract (with a witness) that “for one dollar and other consideration” father sold son the land with all its building accessories, cattle and machinery. Father would help with the farm gratuitously and at his leisure. Son required to furnish room and board for parents until their death by building three-room extension on house. Father thought it useless to pay notary for just this, and said he would notarize at the same time he made his will. It was never done. Six months later, father and son had a dispute about the farm. Father then told son the contract had no legal effect and that since it was a “donation,” he was taking back control of the farm. Resolution: (1) Is it a contract of sale? NO Contract purports to be a contract of sale (says “sold”) but its not actually clear. There is definitely an intention to transfer ownership, which is part of the definition of sale in art. 1708 CCQ. Was it onerous? o The 1$ is irrelevant, but there are respective obligations going back and forth – son gets farm, father allowed to live there for life. o However, according to art. 1708, for contract to be onerous, need fixed price (not necessarily fair price). Commercial Law – Summary The 1$ seems to be more nominal, the true consideration is the room and board. Since the latter is not determinable, there is nothing in this contract which satisfies the requirement that the price be “determinate.” Therefore, not a contract of sale. ** Not published, but not important in this case because its not a third party trying to invoke. (2) If it is not a contract of sale, can it be saved by regarding it as a gift? NO There are two types of gifts : (a) inter vivos and (b) mortis causa Neither one is valid in this case: o (a) would not work, because art. 1824 CCQ says that a gift must be registered unless it is movable property, and the consent of the parties must be accompanied by delivery and immediate possession. Here the farm is an immovable and was not registered. Furthermore, according to art. 1821, the fact that there is an obligation that the son has to provide room and board renders it null o (b) is only applicable in a will or marriage contract, according to art. 1808 CCQ. What if the obligations under the contract are somewhat gratuitous and somewhat onerous? Art. 1810 CCQ says that a remunerative gift or a gift with a charge constitutes a gift only for the value in excess of that of the remuneration or charge. In such a case, the rules of gift would be put aside and the law of sale would come in (but only in relation to the amount paid). Conclusion : Contract is invalid. The law does not want to make exceptions in this area and enforce this type of deal. Want to make sure that objects and prices are clearly defined in contracts, and want to encourage the use of a notary 1824 II. Offer and Acceptance CVL - Offer General Rule: Art. 1388 CCQ An offer to contract is a proposal which contains all the essential elements of the proposed contract and in which the offeror signifies his willingness to be bound if it is accepted. The essential elements of an “offer” are found in s. 1708: 1) the object in question be identified 2) Specified price The offer must be firm and not a mere invitation to treat (i.e. willingness to be bound). There must be a serious intent to enter into contractual relations if offer is accepted. An offer may or may not have a term If a term is attached the offer cannot be revoked until that term lapses If no term is attached then it may be revoked at any point before acceptance is received, in principle o Note that there is some jurisprudence which says that this is subject to good faith principles – this right cannot be abused An offer to contract may be made to a determinate or an indeterminate person, and a term for Art. 1390 CCQ acceptance may or may not be attached to it. Where a term is attached, the offer may not be revoked before the term expires; if none is attached, the offer may be revoked at any time before acceptance is received by the offeror. Commercial Law – Summary ** Note that an exception exists to 1390, where there exists a term in an offer but the offeror has revoked the offer before the offeree has seen it Art. 1391 CCQ Where the offeree receives a revocation before the offer, the offer lapses, even though a term is attached to it. ** When does an offer lapse? 1392 If offeree rejects If time lapses on term If a term is not attached, the offer is only valid for “a reasonable time” Art. 1392 CCQ An offer lapses if no acceptance is received by the offeror before the expiry of the specified term or, where no term is specified, before the expiry of a reasonable time; it also lapses in respect of the offeree if he has rejected it. The death or bankruptcy of the offeror or the offeree, whether or not a term is attached to the offer, or the institution of protective supervision in respect of either of them also causes the offer to lapse, if that event occurs before acceptance is received by the offeror. - Acceptance – ** Acceptance is usually unconditional. However, there are some exceptions: Acceptance which does not correspond substantially to the offer or which is received by the offeror Art. 1393 CCQ after the offer has lapsed does not constitute acceptance. It may, however, constitute a new offer. Silence does not imply acceptance of an offer, subject only to the will of the parties, the law or Art. 1394 CCQ special circumstances, such as usage or a prior business relationship. These provisions tell us that: Acceptance must substantially correspond to the offer. If new important conditions are added, it constitutes a counter-offer. Acceptance must be clear. Silence is not acceptance, except in circumscribed instances. In some cases, can have acceptance through performance. CML These CVL law rules are generally the contractual rules in CML CISG - Offer – A) An offer must: 1. Be serious (intention to be bound) 2. Indicate the goods involved 3. Implicitly or explicitly make provisions for determining the quantity of goods; 4. Implicitly or explicitly make provisions for determining the price B) An offer not addressed to one or more specific persons is an invitation to treat, unless the contrary is clearly indicated: Art. 14 CSIG (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A Commercial Law – Summary proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. (2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal. - Acceptance – CISG provisions are very similar to the CVL: S.18(1) : Statement or conduct can be considered acceptance (silence or inactivity is not acceptance) S.18(3) : performance may constitute acceptance, if practice or usage amongst the parties allows. o This acceptance is effective at the moment the act is performed S.18(2) : Acceptance is effective at the moment it reaches the offeror. Accordingly, if there is a term attached, the acceptance will not be effective if it fails to reach the offeror within that time. Furthermore, if no term is attached, acceptance must reach the offeror in a “reasonable time” (looking at the circumstances) Art. 18 CSIG (1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. (3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph. S.19(1,2,3) CISG: It is NOT acceptance – but rather a counter offer- when there are MATERIAL: 1. Additions 2. Limitations 3. Other modifications If there are non-material changes, it will be considered acceptance unless the offeror objects to the modifications without undue delay (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other Art. 19 modifications is a rejection of the offer and constitutes a counter-offer. CSIG (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially. 1. Determination of the Price Commercial Law – Summary *Price is an essential element of the contract. If there is no price, there is no contract of sale 1708 The price need not be determinate, but it must be determinable (in CML use the terms ascertained + ascertainable). “Determinable” means that while the specific price is not determined, there is a mechanism in place which will allow it to be determined at any point (e.g. price set at $5/kg, or at 10% of market price). Another method is to refer to a third party who will be responsible for determining the price at any given time. C.C.Q.: 1373, 1388 Art. 1373 CCQ The object of an obligation is the prestation that the debtor is bound to render to the creditor and which consists in doing or not doing something. The debtor is bound to render a prestation that is possible and determinate or determinable and that is neither forbidden by law nor contrary to public order. Jobin § 7, 233 Protection for Certain Categories of Buyers or Sellers 7 – Nature de l’offre – An offer, contrary to an invitation to contract, must be reflect the will to be bound and must outline the essential elements of the sale, being the object and the price. The absence of any of these two essential elements generally leads to the conclusion that the contract was not validly formed. Where parties have acted in manner where they wanted to be bound regardless of the fact that the offer was incomplete, this indetermination does not prevent the formation of the contract, but may still provide an opening to a recourse of nullity of the contract. 233 – Determinate or Determinable Price In order for price to considered a valid element under art. 1708, it does not need to be determinate, rather it can be determinable whereby objective factors can be used to fix the price with sufficient precision – CANNOT be left to the will or discretion of one of the parties In Quebec, without any indication as to price or an objective mechanism to fix a price (For example an arbitration clause or a reference to a price index established by an independent organization), the sale will not be valid (1373) o This solution causes issues since buyers can demand the nullity of a sale without a determined price not even because of the high price, but because he doesn't want the object anymore It is a shame that the Quebec legislature abandoned the idea to allow the survival of such transactions in light of the presumed intentions of the parties by relying on past practices (as seen in CML), or market or reasonable value, which was adopted by the CSIG (art. 55). Where there is complete silence as to the price or the mechanism to determine the price, the courts have had issues in deciding whether to save the contract or to nullify it. The advantage of saving the contract is that it favors the existence of commercial transactions Beaudoin v. Rodrigue [1952] B.R. 83 (Quebec Sup. Ct.) Facts: Plaintiff (B) claimed that defendant (R) concluded a contract with him to purchase 3 tonnes of molasses. The order form sent by R to B stated that the order was subject to final approval. No indication was given as to price. B delivered the molasses to R, but he refused to pay. Issues: Was a valid contract formed between the parties? Holding : No. If the price is not determined or determinable by the contract, there is no sale. Commercial Law – Summary Legal Reasoning: A contract is formed when an offer is accepted. In a contract of sale, delivery of goods is a paradigmatic example of acceptance. Thus, if this delivery follows from an offer, it will constitute a formed contract of sale. However, the order form will only constitute an offer if it contained all of the necessary elements of a contract. In terms of price, need not specify the exact sum. It is sufficient if there is a mechanism for calculating it. o The order form neither set a fixed sum nor a method whereby one might be calculated. The only evidence as to price was the ex post facto assertion by the seller. Therefore, there was no offer, and the order form was not an acceptance. Furthermore, an offer to purchase at the current price or a price to be determined by an arbitrator or experts can only be transformed into a contract by the acceptance of the beneficiary of the offer cannot impose this without mutual consent Price cannot be decided solely by the discretion of one of the parties Comments: Acceptance by execution : In a contract of sale, if the buyer transmits an offer, then delivery of the specific goods constitutes acceptance and instantly forms a contract. However, in order for this principle to operate, the offer must be valid. Determinable price : Price need not be fixed in order for contract to form. It may be calculated on basis of a price that is determinable by objective factors set out in the offer. ** Note : Both the SGA and CSIG offer an alternative to voiding the contract if the price is not determined or determinable. However this is not possible under the CVL – it is simply not considered a contract of sale. S.G.A.: 9, 10 The price must be ascertained or ascertainable by: 1. The parties fixed a price 2. The parties agreed on a way to determine the price 3. The price can be determined by the course of past dealings Art. 9 SGA [Price] The price in a contract of sale may be fixed by the contract or left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties. [Where price not determined] Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay a reasonable price, and what constitutes a reasonable price is a question of fact dependent on the circumstances of each particular case. Where the contract and dealings of the parties and their custom is silent in regards to price, the contract is maintained and a “reasonable price” is determined 9(2) SGA Art. 10 SGA: if a third party is to fix the price but is unable to or cannot do so, the agreement is void. However, if the goods or part of them have been delivered, buyer will pay “reasonable” price for them. Art. 10 SGA Where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party and the third party cannot or does not make the valuation, the agreement is avoided, but if the goods or any part thereof have been delivered to and appropriated by the buyer, the buyer shall pay a reasonable price therefor. Vienna 1980 : 14, 55 Art. 14 states that an offer should indicate intention to be bound and be sufficiently definite. It is definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and price. Commercial Law – Summary Art. 14 CSIG (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. (2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal. Art 55 prima facie considers a concluded contract as valid despite the absence of a determinate or determinable price. Unless there is indication to the contrary, the parties are considered to have impliedly made reference to the price generally charged at the time of the conclusion of the contract. Art. 55 CSIG Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned. Austria, Supreme Court - November 10, 1994 Facts: Defendant (Austrian) bought some fur pelts from the plaintiff (German). The price was stipulated as being between 35 and 65 GM per unit, depending on the quality of the pelt. Defendant received some of the pelts and resold it to an Italian buyer at the same price for which he had purchased them. The Italian returned some, claiming they were of inferior quality. Defendant refused to pay plaintiff for these pelts. Issue : Was there a valid contract? Court of Appeal: Contract is valid and the price can be determined by applying art. 55. All you need is expert evidence as to the specific quality of the furs and based on that once can determine the market value. Holding : Yes. A fixed per-unit price range is sufficiently definite to render a contract of sale valid under the terms of the CSIG. Legal Reasoning: Sales contract is not expressly defined in the CISG but refers to a contract, which obliges one party (seller) to deliver goods and transfer the right of property, and the other party (buyer) to pay the purchase price and accept delivery o Exchange of goods for money According to Article 14 CISG, a proposal to conclude a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offer to be bound in case of acceptance o Proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price Article 14(1) allows for an “implicit determination” Giving criterions which allow for an interpretation that results in a definite price, definite goods and/or their quantity Suffices that the required minimum content can be understood as being sufficiently definite by “a reasonable person of the same kind” as the other party would have “in the same circumstances” (Article 8(2) CISG) Commercial Law – Summary o Article 8(3), in determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties All of the terms of the contract were fixed, with the exception of the price, which was placed along a spectrum. o Necessary definiteness of the quantity of the goods Buyer’s later conduct of selling on the delivered furs apart from a small number, without raising any objection as to the quantity of the goods delivered; must be assumed that the order of “a larger number of furs” is sufficiently definite o Definiteness of the agreed price under Article 14 CISG is met By agreeing upon a price between 35-65$ for furs of medium and superior quality the parties have provided sufficient criteria from which a definite price can be drawn, depending on the quality of the delivered furs Art. 55 CSIG states that where no provision is made in the contract regarding the price, the parties are assumed to have established a price comparable to the market price for the transaction. o However, it is not necessary to apply art. 55 in the present case, because the inclusion of a fixed per-unit price range is sufficiently definite. By agreeing to a price range for furs of certain quality, the parties have provided sufficient criteria from which a definite price can be drawn depending on the quality of the delivered furs ** The court is empowered to determine the per unit price, within the range pre-established by the parties in their contract. Ratio: [Determinable Price – Fixed Range]: Where parties to a K of sale establish a range for the price of sale and act in acceptance of the K then it is held to be sufficiently definite and the court is empowered to fix the price within this range. Comments: Art. 55 CISG ought to only be used as a last resort. Should first look to the contract to see if the parties provided sufficient criteria whereby a price can be formed. 2. General Conditions, Incorporation by Reference, and the Battle of the Forms General Conditions and Incorporation by Reference Jobin §6-11 C.C.Q.: 1393, 1435 External clauses referred to in contracts are binding on the parties. However, there are 2 exceptions: (1) Consumer contracts (2) Contracts of adhesion ** However, for either of these exceptions to apply, the party on whom the clause is imposed cannot have been brought to its attention or known of it Art. 1435 CCQ An external clause referred to in a contract is binding on the parties. In a consumer contract or a contract of adhesion, however, an external clause is null if, at the time of formation of the contract, it was not expressly brought to the attention of the consumer or adhering party, unless the other party proves that the consumer or adhering party otherwise knew of it. Commercial Law – Summary CML: Incorporation by reference is perfectly valid. Vienna 1980 : 7, 8 (14, 18, 19) ** There is no particular rule on incorporation of standard terms, but there is some jurisprudence. The Editor in Germany, Supreme Court, October 31, 2001 (seen above) set out requirements under the convention for the validity of a clause: 1. Found in the offer and acceptance; or 2. Transmitted to the co-contracting parties; or 3. Made available in another manner These requirements were based largely on the idea of making the buyer aware of certain terms based on the principles of efficiency and good faith. As well, the requirements were made in light of the articles below: Art. 7 CSIG (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. Art. 8 CSIG (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. Battle of the Forms **Sophisticated commercial parties generally want to have the contract subject to their own standard terms and conditions (e.g. warranty, choice of law). Standard Process of Sale in Commercial Transactions: 1. First, buyer will send a purchase order stipulating what it will pay for acquiring certain materials, and will include their standard terms and conditions. Basically saying that if seller accepts the order, he accepts their terms and conditions. 2. The seller will receive the purchase order, and then send off the merchandise and invoice to the buyer. On the back of that invoice, they will include their own standard terms and conditions. Basically saying that upon acceptance of the delivery, the buyer accepts their terms and conditions. These terms and conditions tend to be quite different from each other. Each party usually is under the impression that it is their terms and that apply. In Butler Machine Tools (1979), Lord Denning refers to the first shot or last shot doctrine – who put out their standard terms first/last? How do the different legal systems solve the Battle of the Forms? QC CVl/ CML: Achilles (U.S.A.) v. Plastics Dura, 2006 QCCA 1523 Facts: Achilles is a US manufacturer who sells to Dura, a Quebec distributor. Dura then re-sells to a third party. Commercial Law – Summary The third party complains that the goods are deficient, so Dura wants to sue Achilles as the initial seller. However, Achilles claims that this runs contrary to the arbitration clause in their standard terms and conditions contained on the reverse side of all of their order confirmations. While the terms were attached, parties never signed any agreement indicating a choice of forum in case of disputes. Dura argues that it is not bound by the arbitration clause because it was never brought to their attention and they never read the conditions. Evidence at trial indicated that in the thousands of times that they had made orders from Achilles, Dura had never read their terms. They had been in business together for over ten years and had concluded 3500 sales with the arbitration clause Issue : Is Dura bound by the arbitration clause? Holding : Yes. Dura should have read the terms. To hold otherwise would be to encourage willful blindness on the part of parties engaged in long-term commercial transactions. Legal Reasoning (Dalphond J.): General principle = arbitration clauses and choice of law clauses are manifestations of the will of the parties and must be respected. No formality is required to establish consent to an arbitration clause [183] Arbitration clauses are autonomous contracts, separate from the rest of the contract in which they are contained art. 2642 o HOWEVER, this does not preclude the ordinary rules of contract from applying. It follows that the rules regarding tacit acceptance of a contract apply Baudouin and Jobin : o “Acceptance could be express or tacit (1386 CCQ). It is express when it is oral, or written, or done in the form of some non equivocal gesture. It is tacit when, taking into account the circumstances, it is evident that the party wanted to avail himself of the offer, and we cannot deduce his conduct to be anything other than a pure and simple acceptance. o Silence itself cannot be acceptance, however, considered In addition to certain circumstances, it is sufficient to conclude that there is an intention to form a contract (e.g. past business relationships in which the supply, such as ordering of merchandise, was followed by the execution of the contract without express acceptance). Acceptance of terms in a contract, including an arbitration clause, can be tacit, from the behavior of the parties While Dura pleads ignorance of the arbitration clause, and thus the impossibility of having accepted it, this argument must be rejected. To conclude that a party is not bound by terms it could have read in some 3000 past dealings would be to give that party the benefit of its gross negligence. Both are experience merchants, and it is unreasonable to plead ignorance in these circumstances “In this period of market globalization and international contracts concluded by phone or email, it would be inappropriate for courts to adopt the position of Dura and encourage Quebec enterprises to close their eyes and not read contracts, and then try to profit from this voluntary blindness.” [184] Ratio: Silence does not usually result in acceptance of an offer, however, the repetitive nature of the circumstances (10,000 sales) shifted the burden to the person receiving the documents – if they were not in agreement, they had to come forward before the issue actually arose Comments: There is a tension here between the CVL rule that silence is not acceptance (art. 1394 CCQ) and the fact that the parties had a long-term commercial relationship. At what point does the “silence is not acceptance” argument become inopposable? Commercial Law – Summary The repetitive nature of the transactions (10,000 orders) shifted the burden to the person receiving the documents. If they were not in agreement, had ample time to come forward. In modern period of globalization, simply cannot allow parties to be willfully blind in cross-border commercial transactions. Stmicroelectrics, Inc. v. Matrox Graphics, Inc., [2008] R.J.Q. 73 (C.A) Facts: Hewlett-Packard sues Matrox for defective parts and components. Matrox then brings separate action against supplier, STM, suing them in warranty and for damages suffered as a result of the defective components for $21 million. STM presents “declinatory exception” – rejection of the suit based on the lack of jurisdiction of the Quebec courts. o In their standard terms and conditions, they provided that legal disputes were to be heard in Texas. Matrox claims that it never accepted STM’s terms. o Further, Matrox’s 5th clause includes that where there is contradiction between each party’s terms, those of Matrox will trump. Issue : Whose standard terms and conditions apply? Holding : Neither one nor the other. Rather, create a “master contract” and try to harmonize the two. Matrox’s 4 clauses will take precedence by virtue of the 5th clause, but does not exclude any other uncontradictory clauses added by ST’s terms. o In this case, only STM’s contained a choice of forum clause. But the arbitration clause is not clear or imperative enough to exclude other jurisdictions in their entirety construe it against the stipulator and allow Matrox to sue in Quebec. Legal Reasoning (Bich J.): [headnote is at page 186] Facts on the terms & conditions that want to be incorporated lorsque Matrox veut passer une commande chez STM, elle adresse à celle-ci, par télécopieur, un bon de commande précisant la quantité, la date d'expédition (ship date) et un prix. [188] o Le bon de commande assorti d'un second document comportant cinq conditions suivantes 5) These Terms and Conditions will prevail notwithstanding any different or conflicting Terms and Conditions which may appear on any order acknowledgment submitted by the seller tous les bons de confirmation, bons de livraison et factures adressés par STM à Matrox comportent, au verso, une série de "terms and conditions" qui sont les stipulations contractuelles standard de STM o 19. GOVERNING LAWS: This contract will be governed by and construed in accordance with the laws of the State of Texas, and…Buyer agrees that it will submit to the personal jurisdiction of the competent courts of the State of Texas All confirmation notices, invoices and other communications between the parties included their respective terms and conditions. There was never any formal agreement; rather they just repeatedly included each other’s in every communication. o STM de facto accepted 4/5 of Matrox’s conditions (the 5th being that in case of contradiction between each party’s terms, those of Matrix trump), and understood the 5th as simply requiring those 4 to trump wherever there was a conflict [189] Matrox was made aware of ST’s T &C, but ignored them according to their internal policy where they assume that their T &C applies unless there was negotiation on a specific issue. The parties tacitly agreed to each other’s T &C by their conduct. It is common practice in the industry that as deals are executed, the parties implicitly agree to each other’s T & C, barring any glaring exceptions. If Matrox wanted to derogate from this usage, it had to have brought that to ST’s attention. [190] Commercial Law – Summary o Furthermore, internal policy’s that were not expressed to the other party to discard other parties T & C’s does not offer Matrox the ability to dishonor this tacit consent Bich J. rejects the “last shot” doctrine: o In a contractual relation such as this one, the idea that the first party to formulate its conditions ought to win does not adequately take account of the context of a long-term commercial relationship. Les obligations contractuelles naissent de la volonté commune des parties et se forment par le seul échange de leur consentement respectif : l'article 1386 C.c.Q [190] o Cette règle n'implique aucun formalisme et n'impose pas le mode de la communication expresse, sauf là où la loi le prévoit. il peut s'agir d'un échange verbal ou d'un échange résultant des actes mêmes des intéressés l'un envers l'autre, y compris par l'exécution du contrat, l'expression de la volonté commune des parties pouvant être explicite ou implicite. De façon générale, la partie qui conclut un contrat ne peut par la suite ajouter unilatéralement aux termes de celui-ci o Cette règle n'est pas absolue Cependant, les parties, explicitement ou implicitement, conviennent que les conditions générales d'un contrat pourront être ultérieurement complétées ou précisées. dans la mesure où les discussions ayant mené au contrat-cadre (framework) entre les parties ont été somme toute fort générales et n'ont pas couvert tous les aspects de la relation contractuelle, dont seuls les termes de base ont été établis, on peut conclure que, vu l'usage en vigueur dans l'industrie, les parties s'engageaient implicitement à respecter les conditions et modalités additionnelles qu'elles pourraient ultérieurement se communiquer lors des ventes particulières o les parties sont liées par les conditions qu'elles s'imposent mutuellement par le biais d'échanges réguliers de documents. o Sous réserve de la clause 5 de Matrox, STM est donc liée par les "terms and conditions" de Matrox un important fardeau de vérification est imposé à ceux qui participent à un tel type d'échange commercial. o parties sophistiquées, habituées aux transactions internationales, qui doivent être prêtes à faire les vérifications nécessaires ou, à défaut, à accepter les risques Apply to the facts of this case : o les parties sont liées par les conditions qu'elles se sont mutuellement imposées et auxquelles elles ont tacitement consenti en amorçant et en maintenant une relation contractuelle ponctuée de nombreux échanges de documents comportant des conditions dont chacune a eu connaissance. la compatibilité des conditions ainsi stipulées par l'une et l'autre parties? o sauf en ce qui touche les quatre premières conditions stipulées par Matrox, il n'y a ni incompatibilité ni contradiction entre les conditions énoncées Quant aux quatre premières conditions de Matrox, qui se trouvent à préciser la condition 8 de STM au sujet du délai de paiement, mais à contredire la condition 9 (qui traite notamment de l'annulation ou de la modification des commandes), on sait que STM les a acceptées, renonçant à ses propres conditions là-dessus ou acceptant de les modifier en conséquence. What about clause 5? o Que veut dire la clause 5 ci-dessus? A-t-elle pour effet d'écarter toutes les conditions stipulées par STM? Ou a-t-elle plutôt pour effet d'écarter seulement celles des conditions de STM qui ne peuvent être conciliées avec les quatre premières conditions de Matrox? can only mean that if the terms and conditions of both ST and Matrox have clauses dealing with the same subject matter, and if such clauses are in conflict or otherwise incompatible with each other, then Matrox could argue based on Clause 5 that its terms and conditions should prevail Does ST’s choice of forum (article 19) clause bind Matrox? o Matrox’s standard terms and conditions do not include a choice of forum clause. As such, STM’s choice of forum clause will be put into the framework contract. It is complementary and is easily reconcilable with other clauses imposed by Matrox. Commercial Law – Summary Any requirements/conditions before accepting an exclusive jurisdiction clause? o Achilles case: il n'y a pas lieu, en matière de consentement à une clause contractuelle comportant le choix d'une loi ou le choix d'un for étranger, d'être plus exigeant qu'on ne l'est ordinairement, o CCQ 3148 ne le commandant nullement et n'imposant aucun formalisme à cet égard Dell Computer Corp v Union des consommateurs : Il n'y a pas lieu de traiter différemment, sur ce plan, la clause d'élection de for et la clause compromissoire, toutes deux visées par l'article 3148, second alinéa, C.c.Q Can be tacit or express consent clause binds Matrox, as it had tacitly accepted any terms that were not contradictory with its own stated terms. Il faut se demander maintenant si la clause 19 est une clause d'élection de for qui oblige Matrox à se pourvoir devant les tribunaux du Texas! o GreCon Dimter inc : La clause doit avoir un caractère impératif et conférer une compétence exclusive de manière claire et précise à l'autorité étrangère Check out page 194-onwards for examples of what works and what doesn’t Attornment clauses o une simple clause d'"attornment" ou de reconnaissance de juridiction ne constitue pas une clause suffisamment impérative et exclusive pour constituer une véritable clause d'élection de for o Une telle clause est attributive de compétence, mais ne crée pas une exclusivité. Elle permet une alternative additionnelle sans toutefois empêcher un Tribunal d'exercer la compétence ratione personae With the new CCQ, clause compromissoire et clause d'élection de for, qu'une règle demeure : o les deux types de clauses doivent avoir un caractère impératif et doivent également avoir pour effet de conférer une compétence exclusive aux tribunaux désignés une véritable clause d'élection de for celle qui, en termes clairs, oblige impérativement et irrévocablement les parties What’s going on then with our article 19? Two components o assujettit le contrat aux lois du Texas, choix qui est permis par l'article 3111 C.c.Q.26. Ce choix du droit applicable ne suffit cependant pas à investir les tribunaux du Texas d'une compétence sur les litiges susceptibles de découler du contrat. tribunaux québécois peuvent fort bien appliquer la loi étrangère et ils ne sont pas privés de leur compétence par le choix que les parties ont fait de cette loi. o Secondly, la clause prévoit que l'acheteur "will submit to the personal jurisdiction of the competent courts of the State of Texas and of the United States sitting in Dallas County, Texas, in any controversy or claim arising out of the sale contract". SCC has said that le fait de "to attorn to", c'est-à-dire de reconnaître la compétence des tribunaux d’une jurisdiction ne suffit pas à donner à la clause la portée d'une clause d'élection de for le langage d'une clause d'"attornment" (ou clause équivalente) n'est pas suffisamment impératif et compréhensif pour avoir cette portée et ainsi conférer une juridiction véritablement exclusive au Tribunal désigné o Petty v Telus Corp (how to interpret the contract) [198] “The question is what the parties intended by the language of the agreement, viewed objectively, in the circumstances in which the agreement was made The task of ascertaining the intention of the parties must be approached objectively: question is not what one or other of the parties meant or understood by the words used, but "the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract". [102-104] lorsqu'on tente d'établir le sens et la portée d'une clause dont on prétend qu'elle constitue une élection de for, on doit privilégier une approche contextuelle, centrée sur la découverte de l'intention des parties, découverte qui nécessite évidemment que l'on tienne compte de la lettre de la clause. Commercial Law – Summary o lorsque la clause n'exprime pas la compétence exclusive du for étranger en termes absolument limpides, on doit alors se livrer à un exercice de lecture ou d'interprétation qui donne bien sûr une grande importance au texte, mais qui n'exclut pas l'examen du contexte. Cette vision des choses est similaire aux principes d'interprétation que consacrent les articles 1425 à 1431 C.c.Q., et particulièrement les articles 1425 et 1426 : 1425. Dans l'interprétation du contrat, on doit rechercher quelle a été la commune intention des parties plutôt que de s'arrêter au sens littéral des termes utilisés. 1426. On tient compte, dans l'interprétation du contrat, de sa nature, des circonstances dans lesquelles il a été conclu, de l'interprétation que les parties lui ont déjà donnée ou qu'il peut avoir reçue, ainsi que des usages. 1427. Les clauses s'interprètent les unes par les autres, en donnant à chacune le sens qui résulte de l'ensemble du contrat. 1428. Une clause s'entend dans le sens qui lui confère quelque effet plutôt que dans celui qui n'en produit aucun. 1429. Les termes susceptibles de deux sens doivent être pris dans le sens qui convient le plus à la matière du contrat. 1430. La clause destinée à écarter tout doute sur l'application du contrat à un cas particulier ne restreint pas la portée du contrat par ailleurs conçu en termes généraux. 1431. Les clauses d'un contrat, même si elles sont énoncées en termes généraux, comprennent seulement ce sur quoi il paraît que les parties se sont proposé de contracter. Sobeys Québec inc. c. Coopérative des consommateurs de Ste-Foy: o dans la mesure où les termes du contrat ne sont pas ambigus, on doit évidemment présumer qu'ils sont le fidèle reflet de l'intention véritable des parties. o l'article 1425 C.c.Q. présuppose qu'il y a toujours une intention commune à "découvrir". pour qu'il y ait contrat, il doit y avoir un minimum d'intention commune, intention commune quant aux éléments essentiels du contrat des interprétations divergentes sur certaines clauses accessoires o "intention commune" qui n'a en fait jamais existé, mais qui lui semble la plus compatible avec le reste du contrat et des circonstances. o L'interprétation du contrat devient alors plus "objective" si les règles et méthodes d'interprétation usuelles ne permettent pas de fixer avec certitude le sens de la clause, on devra alors recourir à la règle contra proferentem, que consacre l'article 1432 C.c.Q o 1432. Dans le doute, le contrat s'interprète en faveur de celui qui a contracté l'obligation et contre celui qui l'a stipulée. Dans tous les cas, il s'interprète en faveur de l'adhérent ou du consommateur. COA concludes that clause is not sufficiently clear to give Texas exclusive jurisdiction for the agreement o Ressembles an attornment clause o No clear and mandatory wording o No exclusionary type wording o No past usage was proven in this case to determine what the clause meant o It is not clear whether this provision prevents Matrox from suing in Quebec, or whether it simply allows STM to sue Matrox in Texas without Matrox being able to object. So apply contra preferentum rule (art. 1432 CCQ) and construe clause against stipulator. Therefore, the clause allows ST to pursue Matrox in Texas, but does not preclude any other actions in other jurisdictions. Ratio: Where there is a battle of forms and both parties have tacitly accepted the others T &Cs, both parties are bound by the integration of each other’s terms. It is not an all-or-nothing equation; rather the court creates a master contract of terms and conditions that are not contradictive. Commercial Law – Summary The European Approach Germany, Supreme Court - January 9, 2002 Facts: Defendant (German) sold powdered milk to plaintiff (Dutch). The sale was made over the phone. The plaintiff sought to incorporate its general terms and conditions. When the product was delivered, defendant sent confirmation of delivery that incorporated its own terms and conditions, and expressly repudiated all others. The seller’s terms excluded any liability for faulty goods where the buyer did not examine and uncover them within a limited period of time. Following delivery, the plaintiff resold the goods to a third party. The third party noticed defects and sought compensation. Plaintiff compensated the third party and then pursued the defendant for the same amount. Issue : 1) Was there a valid contract? 2) What is the proper approach for dealing with battle of the forms? Holding : 1) Yes. 2) Neither of the parties’ terms and conditions will apply. Instead, court will apply the default regime (in this case, the CSIG). Legal Reasoning: The partial contradiction of the referenced general terms and conditions of [buyer 1] and [seller 1] did not lead to the failure of the contract within the meaning of Art. 19(1) and (3) CISG because of the lack of a consensus o The fact that the parties executed the K shows that they did not consider the disagreement between the forms to be a disagreement as to essential terms that precluded formation, within the meaning of Art. 19 CISG The question to what extent colliding general terms and conditions become an integral part of a contract where the CISG applies German court analyzed two theories regarding resolution of contradictory terms of buyers and sellers, both of which it rejects: o The Rest Validity Doctrine : Insofar as respective terms do not contradict each other, they will apply and be merged into a single contract. Where terms are contradictory, they are removed from the contract and supplemented by the CISG. REJECTED : A set of terms and conditions must be treated as a whole entity – cannot just isolate and eliminate terms and expect what remains to be coherent. This is not respectful to the intention of the parties since documents are drafted as a whole and it is not reasonable to delete parts and maintain others. o The Last Shot Doctrine : The person who made the last action in this respect will have their terms apply. This will most often be the seller. In typical commercial transactions, they are the ones who accept rather than offer. This is in contrast to the First Shot Doctrine, which is simply the reverse, and usually benefits the buyer. REJECTED: Contrary to good faith – ought not treat the buyer’s silence as a tacit agreement that only the seller’s terms would apply. Court finds that the best solution is simply to say that none of the terms apply, and instead apply the default regime (here, the CSIG). This will at least provide a coherent framework that is equally fair to both parties. Who has burden of proof to show that the products did not meet the contractual requirements? o where the CISG applies and where the goods were accepted by the buyer without any complaints, it is the buyer who must show and prove that the goods did not meet the contractual requirements, and it is not the seller who must show and prove that the goods met the contractual requirements o the CISG regulates the burden of proof explicitly (e.g., in Art. 79(1)) or tacitly (Art. 2(a)), so that consequently, recourse to the national law is blocked to that extent, and that the CISG follows the rule/exception principle Commercial Law – Summary the burden of proof rules of the CISG cannot go farther than the scope of its substantive applicability. That scope results from Art. 4(1) CISG; according to that provision, the CISG regulates exclusively the execution of the sales contract and the duties and responsibilities of the buyer and the seller resulting from that contract. o The question whether and possibly which evidentiary consequences an actual admission of liability has, is not part of that scope. That question does not implicate a specific sales-law-related problem, but rather a legal aspect of a general type No intimate relationship to the actual or legal aspects of the international trade in goods, which make up the subject of the CISG. Ratio: [Battle of the Forms] Where the parties each propose T&Cs that contradict with one another, if their conduct evidences that they nonetheless considered a K to be formed then these terms are excluded in their entirety and the K is formed on the basis of CISG provisions. If your contract is subject to the convention, your terms and conditions must get consent or they will be subject to the convention. Editorial remarks section [176]: Despite conflicting standard clauses, the contract is valid, and that the conflicting terms are void and replaced by the provisions of the convention regulating the respective subject matter o The Court refused to single out some clauses of one side which might be beneficial for the other side Since Plaintiff [buyer]'s standard form was in its entirety fair and balanced, but deviated from the CISG regime and was contradicted by the Defendant [seller]'s terms, one could not pick out only some clauses in favor of the Defendant [seller]. same result could be reached under the last shot doctrine, for the silence of the Plaintiff [buyer] to the last reference of the Defendant [seller] to its own terms could not, under good faith and fair dealing principles (art 7) be interpreted by the Defendant [seller] as a willingness of the Plaintiff [buyer] to let only those clauses in the Plaintiff [buyer]'s form be accepted which were favorable for the Defendant core message: Conflicting standard forms are entirely invalid and are replaced by CISG provisions, while the contract as such stays valid. ** Microeconomics case is the current status of the law in Quebec and CML Canada So far, in QC (and CML Canada) there is always this effort and success in saying what the intent of the party was. However, what happens when it is impossible to do that and the clauses are irreconcilable? Consider the German SC decision: In this case we get rid of the T&Cs and look towards the code (default regime). This would be the same in CML, we would look to the Sale of Goods Act Lesion and Unconscionability CVL : Lesion C.C.Q.: 1405, (1406) Art. 1405 CCQ Art. 1406 Except in the cases expressly provided by law, lesion vitiates consent only in respect of minors and persons of full age under protective supervision. Lesion results from the exploitation of one of the parties by the other, which creates a serious disproportion between the prestations of the parties; the fact that there is a serious disproportion creates a presumption of exploitation. Commercial Law – Summary In cases involving a minor or a protected person of full age, lesion may also result from an obligation that is considered to be excessive in view of the patrimonial situation of the person, the advantages he gains from the contract and the general circumstances. Unless you are a minor or under protective supervision, you GENERALLY, cannot invoke lesion Art. 1406 CCQ : Defines lesion as the exploitation of one of the parties by the other, the effect of which is the creation of a serious disproportion between the prestations of the parties. A serious disproportion creates a presumption of exploitation. o complaint that the agreement is not fair – one obligation is excessive relative to the more minor obligation of the other party. However, legislator wanted to maintain the sanctity and stability in contractual relations. Solution is to limit the circumstances in which lesion can be invoked. o (1) Minors or persons with limited capacity (art. 1405 CQQ) o (2) Where expressly provided by law Consumer Protection Act Art. 2332 CCQ regarding unfair loans and 1756 CCQ regarding right of redemption a) When the sale falls within the domain of application of the CPA – Lesion applies: QC C.P.A.: 8, (9) Art. 8 CPA The consumer may demand the nullity of a contract or a reduction in his obligations thereunder where the disproportion between the respective obligations of the parties is so great as to amount to exploitation of the consumer or where the obligation of the consumer is excessive, harsh or unconscionable. Art. 9 CPA Where the court must determine whether a consumer consented to a contract, it shall consider the condition of the parties, the circumstances in which the contract was entered into and the benefits arising from the contract for the consumer s. 8: Defines lesion as a disproportion that borders on exploitation because it is either excessively harsh or unconscionable. s. 9 : Provides some factors to be considered: o Circumstances of the contract (broad discretion) o Benefits to the consumer o Conditions of the party ** We are not just looking at the objective disproportion between the prestations of the consumer and that of the merchant. o Also look at the condition of the parties (health, education level, ability to pay, etc.) as a kind of subjective unfairness component. B) In cases where there is a sale with a Right of Redemption to guarantee a loan, the seller is deemed a borrower and art 2332 would apply. CCQ 2332: In the case of a loan of a sum of money, the court may pronounce the nullity of the contract, order the reduction of the obligations arising from the contract or revise the terms and conditions of the performance of the obligations to the extent that it finds that, having regard to the risk and to all the circumstances, one of the parties has suffered lesion. CCQ 1756: Where the object of the right of redemption is to secure a loan, the seller is deemed to be a borrower and the acquirer is deemed to be a hypothecary creditor. The seller does not, however, lose the right to exercise his right of Commercial Law – Summary redemption unless the acquirer follows the rules respecting the exercise of hypothecary rights laid down in the Book on Prior Claims and Hypothecs. Jobin § 17 Lesion: Domain of application: Under the CCQ, the application of lesion is extremely limited. It is restricted to situations expressly prescribed by law and in cases of minors or adults lacking capacity 1405 There is only one case where lesion may apply between adults in a matter of sale; where there is a sale with a right of redemption to secure a loan. Under these circumstances, the seller is considered a borrower (1756). The seller then benefits from the same advantages of a lender of money under art 2332. The seller can demand the nullity of the contract, reduction of obligations or a revision of the mode of execution. Otherwise, it is principally under the CPA that lesion can be invoked and where we find the most jurisprudence. o Courts have been very respectful of legislative intent in this area – very few successful cases of adults arguing lesion to nullify contract. Courts have not attempted to expand the notion at all. o Jobin : Expresses disappointment with this approach, has looked for other ways to get at the same idea. One example is trying to use abusive clauses in art. 1437 CCQ as a backdoor into allowing lesion-type claims. But the problem with this mechanism is that it is also restricted (to adhesion and consumer contracts). Richard v. Time Inc., 2012 SCC 8 Facts: o In his mail, Richard received an “Official Sweepstakes Notification” from Time magazine. o Document was written only in English and contained several exclamatory sentences in bold uppercase letters stating that he had won a cash prize of US $833,337. o This was combined with conditional clauses in smaller print. o The text on the back stated that Richard would qualify for a $100,000 bonus prize if he validated his entry within five days. o The mailing also contained a reply coupon and a return envelope on which the official rules of the sweepstakes appeared in small print along with a magazine subscription. o The rules explained that a winning number had been pre-selected and that everyone who returned the coupon would be put in the draw and chances of winning were 1 in 120 million. o It said that if he did not return the coupon, they would pick another winner. Richard understood this to mean that he had already won. He thus returned the coupon and signed up for a subscription of the magazine He started receiving the magazine, while the cheque never came. o He contacted Time, who informed him that the document was not a notice that he had won, but only an invitation to participate. Richard brought an action against Time for compensatory and punitive damages in the amount of the grand prize. Issue : Does the mailing in this case contravene the Consumer Protection Act? Holding: Yes. Entitlement under art. 272 of the CPA to 1000$ in moral damages and punitive damages are sufficient at $15, 000. Legal Reasoning: Rise of the Consumer Society and Its Impact on the Normative Environment of Consumer Protection o Historically, the Canadian consumer protection legislation was originally focused on protecting consumers from "abuses of power" by merchants Commercial Law – Summary o focused more on regulating the Canadian economy at a structural level than on directly protecting consumers' interests o With the rise of the consumer society after World War II, however, new concerns to the increased vulnerability of o consumers o liberalization of markets favoured the emergence of systems focused more on protecting consumers In Quebec, the contractual fairness model based on freedom of contract, consensualism and the binding force of contracts seemed increasingly unsuited to ensuring real equality between merchants and consumers o Today's Consumer Protection Act establishes a much more elaborate legal scheme that reflects the Quebec legislature's desire to extend the protection of the C.P.A.to a broader range of contracts and to explicitly regulate certain business practices Title I, "Contracts Regarding Goods and Services", contains provisions whose primary purpose is to restore the contractual balance between merchants and consumers. Title II, "Business Practices", identifies certain types of business conduct as prohibited practices in order to ensure the veracity of information provided to consumers through advertising or otherwise. Aside from s. 272 C.P.A., the main recourses are as follows: demand by a consumer for the nullity of a contract (s. 271 C.P.A.), penal proceeding Prosecutions (s. 277 C.P.A.) application for an interlocutory or permanent injunction (ss. 290, 310, 316) Protection Against False or Misleading Advertising measures to protect consumers from fraudulent advertising practices are to move away from the maxim caveat emptor merchants, manufacturers and advertisers are responsible for the veracity of information they provide to consumers and may, should such information contain falsehoods, incur the civil or penal consequences provided for in the legislation This legislation is the expression of a social purpose, the establishment of more ethical trade practices calculated to afford greater protection to the consuming public. old maxim caveat emptor, let the purchaser beware, yield somewhat to caveat venditor -- let the seller beware Protection Against False or Misleading Representations in the C.P.A. main objectives of Title II of the C.P.A. is to protect consumers from false or misleading representations. Many of the practices it prohibits relate to the veracity of information provided to consumers. o Section 219 C.P.A. sets out this objective in very clear language. no merchant, manufacturer or advertiser may make false or misleading representations to a consumer by any means whatever. "representation" is defined in s. 216 C.P.A. as including an affirmation, behaviour or an omission. According to s. 218 C.P.A., which guides the application of all the provisions of Title II concerning prohibited business practices, to determine whether a representation constitutes such a practice, it is necessary to consider the "general impression" given by the representation and, where appropriate, the "literal meaning" of the words used in it. o In the case of false or misleading advertising, the general impression is the one a person has after an initial contact with the entire advertisement, and it relates to both the layout of the advertisement and the meaning of the words used. Analysed without considering the personal attributes of the consumer who has instituted proceedings against the merchant C.P.A. main objective is to protect consumers. must therefore be able to sanction any representation that, from an objective standpoint, constitutes a prohibited practice. Whether a commercial representation did or did not cause prejudice to one or more consumers is not relevant Commercial Law – Summary o o The C.P.A. is concerned not only with remedying the harm caused to consumers by false or misleading representations, but also with preventing the misleading consumers and possibly cause them various types of prejudice. the test under s. 218 C.P.A. is that of the first impression. o the general impression is the one a person has after an initial contact with the entire advertisement, and it relates to both the layout of the advertisement and the meaning of the words used. General impression test must be applied from the perspective of the average consumer, who is credulous and inexperienced and takes no more than ordinary care to observe that which is staring him or her in the face upon first entering into contact with an entire advertisement. o Defining the average consumer as having "an average level of intelligence, skepticism and curiosity" is inconsistent with s. 218 C.P.A. o a perspective similar to that of "ordinary hurried purchasers" The courts must not conduct their analysis from the perspective of a careful and diligent consumer o This description is consistent with the legislature's intention to protect vulnerable persons from the dangers of certain advertising techniques. "credulous" reflects the fact that the average consumer is prepared to trust merchants on the basis of the general impression conveyed to him by their advertisements. does not suggest that the average consumer is incapable of understanding the literal meaning of the words used in an advertisement if the general layout of the advertisement does not render those words unintelligible o Considerable importance must be attached not only to the text, but also to the entire context, including the way the text is displayed to the consumer. o the Document's visual content and writing style are central to the issue of whether the mailing of the Document constitutes a prohibited practice within the meaning of the C.P.A o to assess the veracity of a commercial representation under s. 218 C.P.A., two-step analysis: [226] o (1) describing the general impression that the representation is likely to convey to a credulous and inexperienced consumer; o (2) determining whether that general impression is true to reality. If the answer at the second step is no, the merchant has engaged in a prohibited practice. o One must have regard, where appropriate, to the literal meaning of the words used by the merchant Applyng law to facts: [227-228] o average consumer, after first reading the Document, would have been under the general impression that R held the winning entry and had only to return the reply coupon to initiate the claim process. o Document's strange collection of affirmations and restrictions was not clear or intelligible enough to dispel the general impression conveyed by the most prominent sentences. o Even if it did not necessarily contain any statements that were actually false, the fact remains that it was riddled with misleading representations within the meaning of s. 219 C.P.A. o contest rules were not all apparent to someone reading the Document for the first time. important facts that T and TCM were required to mention. As a result, T and TCM also violated s. 228 C.P.A. o the use by T and TCM of a "pen name" in their advertising material did not amount to a violation of s. 238(c) o Document contained no false representations concerning their status or identity. o can be understood from a single reading that the Document was from them and that they did not claim to have a particular status or identity that they did not actually have. Remedy + Damages o The purpose of the C.P.A. is to purge business practices in order to protect consumers as fully as possible. o legislature has administrative, civil and penal sanctions that make up Act's enforcement mechanism. o the recourse provided for in s. 272 C.P.A. is based on the premise that any failure to fulfil an obligation imposed by the Act gives rise to an absolute presumption of prejudice to the consumer o two types of obligations that can result in a sanction under s. 272 C.P.A. if not fulfilled. o statutory contractual obligations on merchants and manufacturers that are set out primarily in Title I of the Act. Commercial Law – Summary o o o o Proof that one of these substantive rules has been violated entitles a consumer, without having to meet any additional requirements, to obtain one of the contractual remedies provided for in s. 272 C.P.A. Second, Title II of the C.P.A. imposes obligations on merchants, manufacturers and advertisers that apply to them regardless of whether a consumer contract referred to in s. 2 of the Act exists. prohibitions apply to the pre-contractual phase. The legislature's objective with respect to business practices is clear: to ensure the veracity of precontractual representations in order to prevent a consumer's consent from being vitiated by inadequate, fraudulent or improper information. Subject to the other CPA recourses, a consumer can institute proceedings under s. 272 C.P.A. to have the court sanction a failure by a merchant or a manufacturer to fulfil an obligation imposed on the merchant or manufacturer by: o the C.P.A., o the regulations made under the C.P.A.; or o a voluntary undertaking. the consumer can claim a: o contractual remedy, o compensatory damages; and o punitive damages, o or just one of those remedies. up to trial judge to award the remedies he or she considers appropriate in the circumstances o sanction available under s. 272 for failing to fulfil an obligation must be imposed in accordance with the principles governing the C.P.A. and, where applicable, the rules of the general law. [234] Legal interest depends on the existence of a contract to which the Act applies, since s. 2 C.P.A. establishes the basic principle that a consumer contract must exist for the Act to apply Recourse available only to natural persons who have entered into a contract governed by the Act with a merchant or a manufacturer. o In this case, the parties entered into a contract for a subscription to Time magazine [234] o participating in the sweepstakes and subscribing to the magazine were separate undertakings. When the question is whether a consumer has the interest required to institute proceedings under s. 272 C.P.A., however, the two undertakings are linked. Logically, one depends on the other. Moreover, a contract for a magazine subscription is a contract to which the C.P.A. applies. As a result, the appellant had the interest required to take action against the respondents and his action was properly brought. o For s. 272 C.P.A. remedies, consumer does not have to prove fraud on basis of ordinary rules of the civil law o given the influence that prohibited practices can have on a consumer's decision to enter into a contract, a prohibited practice in itself constitutes fraud within the meaning of art. 1401 C.C.Q. o merchant or manufacturer who is sued cannot raise a defence based on "fraud that has been uncovered and is not prejudicial". o s. 272 C.P.A. recourse is based on the premise that any failure to fulfil an obligation imposed by the Act gives rise to an absolute presumption of prejudice to the consumer. A consumer who wishes to benefit from this presumption must prove the following: [242] (1) merchant or manufacturer failed to fulfil obligation imposed by Title II of the Act; (2) consumer saw the representation that constituted a prohibited practice; (3) consumer's seeing that representation resulted in the formation, amendment or performance of a consumer contract; and (4) sufficient nexus existed between the content of the representation and the goods or services covered by the contract. Commercial Law – Summary o last requirement means that the prohibited practice must be one that was capable of influencing a consumer's behaviour with respect to the formation, amendment or performance of the contract. o s. 272 C.P.A. compensatory damages is not dependent on the specific contractual remedies set out in s. 272(a) to (f). [238] o must nevertheless be exercised in accordance with the rule concerning the legal interest required to institute proceedings under s. 272 and is subject to the general rules of Quebec civil law o extracontractual compensatory damages is available, since fraud committed during the pre-contractual phase is a civil fault that can give rise to extracontractual liability. o Where s. 272 C.P.A. damages is available, burden of proof is therefore eased, whether the recourse is contractual or extracontractual o Because of the absolute presumption of prejudice that results from any unlawful act committed by the merchant or manufacturer. consumer does not have to prove that the merchant intended to mislead. consumer does not have to prove fault of the merchant or manufacturer Applying law to facts: o Sufficient nexus between the prohibited practices engaged in by T and TCM and his subscription contract with them. o R subscribed to Time magazine after reading the documentation T and TCM had sent him, he would not have subscribed to the magazine had he not read the misleading documentation. Document is deemed to have had a fraudulent effect on R's decision to subscribe to Time magazine. o The conduct of T and TCM constitutes a civil fault that triggers extracontractual liability. o Consumers can be awarded punitive damages under s. 272 C.P.A. o s. 272 C.P.A. establishes no criteria or rules for awarding punitive damages, Therefore, such damages must be awarded in accordance with art. 1621 C.C.Q. Must have a preventive objective, to discourage the repetition of undesirable conduct. must be consistent with the objectives of the C.P.A [247] to restore the balance in the contractual relationship between merchants and consumers and to eliminate unfair and misleading practices. o Violations that are intentional, malicious or vexatious, and conduct on their part in which they display ignorance, carelessness or serious negligence with respect to their obligations and consumers' rights under the C.P.A. may result in awards of punitive damages. o must consider the whole of the merchant's conduct at the time of and after the violations. [249] o AMAZING SUMMARY OF PUNITIVE DAMAGES PRINCIPLES IN CIVIL AND CPA [250-251] punitive damages may be awarded only if there is a legislative provision authorizing them; determine whether the plaintiff has the interest required to claim punitive damages under that provision; The court is bound by any criteria for awarding punitive damages established in the enabling provision; If the conditions for awarding punitive damages or the criteria for assessing them are not set out in the enabling statute, the court must consider the general provisions of art. 1621 C.C.Q. and the objectives of the enabling statute; The court must determine (1) whether the conduct is incompatible with the objectives the legislature was pursuing in enacting the statute and (2) whether it interferes with the achievement of those objectives. o punitive damages under s. 272 C.P.A., this analytical approach applies as follows: The punitive damages provided for in s. 272 C.P.A. must be awarded in accordance with art. 1621 C.C.Q. and must have a preventive objective, to discourage the repetition of undesirable conduct; Commercial Law – Summary violations by merchants or manufacturers that are intentional, malicious or vexatious, and conduct on their part in which they display ignorance, carelessness or serious negligence with respect to their obligations and consumers' rights under the C.P.A. may result in awards of punitive damages. Finally, must consider the whole of the merchant's conduct at the time of and after the violation. o Article 1621 C.C.Q: punitive damages must never exceed what is necessary to fulfil their preventive purpose. o amount must be determined in light of all the appropriate circumstances, in particular (1) the gravity of the debtor's fault, The gravity of the fault is undoubtedly the most important factor (2) the debtor's patrimonial situation, (3) the extent of the reparation for which the debtor is already liable to the creditor and ( 4), where such is the case, the fact that the payment of the damages is wholly or partly assumed by a third person. o An award of punitive damages was justified in this case o T and TCM had intentionally violated the C.P.A. in a calculated manner in this case o that violation was capable of affecting a large number of consumers, o Nothing indicates that, after R complained, T and TCM took corrective action to make their advertising clear or consistent with the letter and spirit of the C.P.A. This is an aggravating factor. o On the other hand, the impact on R of the fault committed by T and TCM remains quite limited, o the fact that the amount of the award of compensatory damages is small favours awarding a significant amount of punitive damages. $15,000 suffices in the circumstances to fulfil the preventive purpose of punitive damages, underlines the gravity of the violations of the Act and sanctions the conduct of T and TCM in a manner that is serious enough to induce them to cease the prohibited practices Comments: While this case originated in Quebec, expressed SCC’s current stance on consumer protection with respect to the whole of Canada. What was wrong with the Court of Appeal judgment? SCC said that they applied the wrong test : they applied the “reasonable person” test from the civil law, but this is not civil law – it is in the realm of consumer protection. The intent of the legislature is to protect consumer from dangerous advertising techniques. Moreover, the SCC made clear that when dealing with consumers, aren’t dealing with the most intelligent or sophisticated parties, so not entitled to treat them that way. Correct test is that of the “average consumer” who is credulous, inexperienced, etc. Big change is that SCC says that it is about the first impression – not what is discoverable upon further investigation. Will no longer allow companies to get away with misleading ads simply because all the requisite words are contained in fine print. It is the whole visual context that matters (what is emphasized, where things are placed, etc.). CML: Unconscionability o o Quite different from CVL because unconscionability is not restricted to consumer sales It applies to all contracts (Hunter), not just consumer or adhesion contracts. The doctrine of Unconscionability applies if: o 1) There is an inequality of bargaining power between the two parties. o Conditions to consider: o Education, intellect o Age o State of necessity o Language o Lack of independent advice Commercial Law – Summary ** While the doctrine of unconscionability applies to all contracts, in reality it mostly applies to consumer contracts since the relationship between consumer and merchant often consists of the requisite inequality 2) Outcome is grossly unfair o Possibly manifested in excessive price, unfair clause or disproportion in their respective obligations ONT C.P.A.: 15, 18 s. 15: Secures right of consumers to claim unconscionability through codification. o describes factors that should be taken into account in decidfing whether a contract is unconscionable Examples: price grossly exceeds price of similar services, no reasonable probability of the payment in full by the consumer (not necessarily bad deal, may be inability to pay). s. 18: remedies o consumer can simply send notice, declare the contract null and ask for damages; the merchant has to then take the consumer to court. While unconscionability is supposed to apply to all CML contracts, in practice it appears to be mostly restricted to consumer contracts and is largely regulated by the CPA. Art. 15 CPA (1) It is an unfair practice to make an unconscionable representation. (2) Without limiting the generality of what may be taken into account in determining whether a representation is unconscionable, there may be taken into account that the person making the representation or the person’s employer or principal knows or ought to know, (a) that the consumer is not reasonably able to protect his or her interests because of disability, ignorance, illiteracy, inability to understand the language of an agreement or similar factors; (b) that the price grossly exceeds the price at which similar goods or services are readily available to like consumers; (c) that the consumer is unable to receive a substantial benefit from the subject-matter of the representation; (d) that there is no reasonable probability of payment of the obligation in full by the consumer; (e) that the consumer transaction is excessively one-sided in favour of someone other than the consumer; (f) that the terms of the consumer transaction are so adverse to the consumer as to be inequitable; (g) that a statement of opinion is misleading and the consumer is likely to rely on it to his or her detriment; or (h) that the consumer is being subjected to undue pressure to enter into a consumer transaction. III. Promise of Sale First, note that all of the following terms have essentially the same meaning: promise to enter into contract of sale, promise to purchase, promise to sale, promise of sale. Promise of sale is much more developed in CVL, where it is its own concept, than CML where there are no distinctive provisions. The area of prior contracts has been subsumed by general area of contracts in CML. What is a promise of sale? A two-contract transaction: 1) parties agree to enter into second contract (contract of sale) provided that certain conditions are satisfied (e.g. inspection, ensure buyer can receive financing, notary inspects searches title) Commercial Law – Summary 2) parties enter into the actual contract of sale. The concept of a “promise of sale mostly comes up as a practical consideration in the area of SALE OF REAL ESTATE – house, building or vacant land. This two step- process allows buyer to get financing, involvement of a notary, and inspection of the property (to ensure quality) . Three possibilities: 1. When an offer to purchase is accepted, you have a contract of sale; 2. When you have an offer to promise to purchase that is accepted, you have a promise to purchase and to sell This is a reciprocal contract which requires that both parties perform certain obligations in the future (buyer will buy and seller will sell). Parties are bound to enter a contract of sale in the future CML: Each parties obligation to the other is sufficient consideration to support the existence of a contract (the cause requirement in CVL is also obviously satisfied as each parties cause is the other’s consideration) 3. When you have a unilateral promise of sale that is entered into, you have an option – the offeree has the right, but not the obligation, to purchase, and when the right is exercised, it becomes a bilateral promise of sale. Jobin § 33-47 33- Since unilateral and bilateral promises are contracts that fix the essential elements of the sale to come, they presuppose that the parties have agreed on the object and the price 34- Distinction between an offer and a unilateral promise – The unilateral promise is a contract: it requires agreement on price and property, even if the beneficiary has no obligation to either buy or sell. Contrary to an offer, a promise does not expire at the death of the promisor; it transfers to beneficiaries of the estate. Violation of a promise of sale is sanctioned by “action de passation de titre” or a contractual remedy in damages. On the other hand, an offer is not a contract and can be revoked at any time before acceptance (unless there is a term). ** In order to distinguish a unilateral promise from an offer, must consider the intention of the parties and art. 1396 35 –Right of first refusal: The only obligation of the owner is that, if he decides to sell, to offer it first to the beneficiary of the right of first refusal (and to negotiate in good faith). Rights of first refusal generally transfer to the estate upon death, and the rights can be transferred inter vivos. 38- Convention d’arrhes: Buyer promisor gives to the cocontractant a sum of money so that he can be relinquished from his obligations and the recipient keeps the money. The recipient can also be liberated from his obligations by paying back double the amount of the “arrhes” (therefore it is reciprocal). If neither of the parties makes use of the convention, then the promise becomes irrevocable and the sum of money becomes a deposit on the purchase price. 39- Qualification – It often occurs that a buyer-promisor gives a deposit on the price simply to prove his firm acceptance – this is neither an “arrhes” or a penal clause, and if the sale does not go through, it must be reimbursed. CCQ 1711 reinforces this. The convention of arrhes must be clear in the contract; if ambiguous it will considered as a deposit. Bilateral Promise 40 – Effects of a promise: The promise does not give rise to any of the effects of sale, notably it does not transfer the property and does not confer onto the promising buyer any real right susceptible to be published. This is why if the seller violates the promise and sells to a third party, the promising buyer is only entitled to damages 41: must consider intention of the parties to decide if the contract is a bilateral promise or sale. When the parties decide to delay transfer until a notary is involved, it is a promise. Commercial Law – Summary 43 – Recourse against the Promisor: If there is unjustified refusal to conclude the sale, the principal effect is to allow the beneficiary to exercise “une action en passation de titre.” The buyer who invokes this must offer and consign the sale price or furnish a bank security for the same price, while the vendor must offer the property. However this action is only possible if the seller- promisor is still the owner, otherwise the buyer must content himself with damages. If it is decided that the promise is equivalent to sale, at the moment of judgment, the effects of sale are deemed to have already taken place and the judgment is declaratory of the rights of the parties. In terms of movables, when the promise is equivalent to sale and the buyer doesn’t require a written title, he can simply revendicate the property because he is owner (953) The promise can also lead to contractual damages (can be in addition to action en passation de titre). The damages payable to the seller correspond to the difference between the price of the promise and the fair market value of the property, or between the price of the promise and the resale price to a third party, if the seller, obliged to sell at a loss, diligently obtained the highest possible offer. The damages payable to the buyer correspond to the difference between fair market value of the property and the price of the promise, or the certain profit he would have realized by resale or commercial use. 44 – Recourse against third parties: When the property has been sold to a 3rd party in GOOD FAITH in violation of a promise Damages against promising seller is only recourse When the property has been sold to a 3rd party in BAD FAITH in violation of a promise The third party has committed a fault by contributing to the frustration of the beneficiary of his right, which makes him liable for extracontractual damages (1437) The 3rd party, however, even if in bad faith, acquires a right in the property that is opposable -1397 Unilateral Promise 45- The beneficiary of a unilateral promise has no real right before exercising the option, only a personal right whereby he can force the promisor to realize the sale. If the seller then sells to a 3rd party, he will be liable for damages of breaching the contract ** Unless otherwise stipulated, the term that the beneficiary has to exercise the option is one of “de rigeur” = at the expiry of the term, the beneficiary loses his right without having to make him aware of such. There would need to be a new agreement, even implicit, to prolong the term (ex: ongoing negotiations) When no term is stipulated, the term can be fixed by the intention of the parties, or by determining what a reasonable term would be in the circumstances. 46 – The exercise of an option gives rise to a bilateral promise, not a sale therefore no real rights susceptible of registration are created. However, where the intention of the parties is clear, property may be transferred and obligations of sale emerge at the time of exercising the option. Once the option is exercised, both parties enjoy the same rights as those in a bilateral promise: they can invoke “passation de titre”, damages and provisional measures (ex: injunction) Promise with Delivery and Possession The CCQ holds that a promise constitutes sale when it is combined with delivery and possession. Sale thus occurs immediately, even if the parties only sign the deed of sale at some later point 1710 This rule applies to both unilateral and bilateral promises. ** As well, it is not of public order, so it does not apply where a contrary stipulation or conduct of the party is incompatible with immediate sale (ex: buyer takes possession without consent) Unilateral promise of sale Conditions for validity are different in CML and CVL. Commercial Law – Summary One of the requirements of any contract in the CML is consideration The seller gives the buyer an option to exercise a right, while receiving nothing in return. Therefore, unilateral promises to purchase are not enforceable in CML, UNLESS THERE IS NOMINAL CONSIDERATION (if no nominal consideration, promisor can disregard their promise) o Suppose Alex promises to buy specific goods for a specific price for fixed period of time, but Bob makes no undertaking to sell. That promise is not enforceable or binding on either party. However, suppose Bob promises to sell exclusively to Alex within a given territory. Then the promise becomes binding because there is ample consideration – Bob has given something up and Alex has gained something from the contract Bilateral promises with consideration In CVL, do not need consideration, but there must be cause (art. 1385, 1410 CCQ). The cause is the reason that each party has entered into the contract, it does not require that each party get a benefit or value. With a unilateral promise, the seller is giving the buyer the right to buy with the hope that the deal will go through. This reason is all that is needed to render the promise to sell enforceable. o For the party that receives the option, the cause is getting the option. For the party who gives an option, the cause is increasing the chances that a subsequent contract takes place. What are the effects of a promise of sale? An offer to contract made to a determinate person constitutes a promise to enter into the Art. 1396 CCQ proposed contract from the moment that the offeree clearly indicates to the offeror that he intends to consider the offer and reply to it within a reasonable time or within the time stated therein. A mere promise is not equivalent to the proposed contract; however, where the beneficiary of the promise accepts the promise or takes up his option, both he and the promisor are bound to enter into the contract, unless the beneficiary decides to enter into the contract immediately. o Under 1396, we will consider the offer to contract to constitute a promise to enter into a contract of sale when the offeree clearly indicates that: 1) He intends to consider the offer; AND 2) He intends to reply in the time period stated or in a reasonable period of time Transfer of ownership Not usually Can a bilateral promise or accepted unilateral promise transfer property immediately? The general rule is that a promise to purchase is that it is not equivalent to the subsequent sale as outlined in art. 1396(2) ** However, there are 2 exceptions. 1) If the intentions of the parties is to transfer ownership of the object immediately and is clearly expressed in the promise (1396 (2)) o Promise must provide for the immediate transfer of ownership and sale 2) When the promise to contract is accompanied by immediate delivery and actual possession of the property (art. 1710) o Common with movables This provision is intended to protect third parties. People generally use and dispose of things they own, so if the buyer is in possession, third parties will assume he is the owner and will treat him as such (e.g. give him financing, acquire it from him). Application of “doctrine of appearances.” Art. 1710 CCQ Art. 1711 CCQ The promise of sale with delivery and actual possession is equivalent to sale. Any amount paid on the occasion of a promise of sale is presumed to be a deposit on the price unless otherwise stipulated in the contract. Commercial Law – Summary Art. 1712 CCQ Failure by the promisor, whether he be the seller or the buyer, to execute the deed entitles the beneficiary of the promise to obtain a judgment in lieu thereof. S.G.A.: 2, (4) Art. 2 SGA (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a money consideration, called the price, and there may be a contract of sale between one part owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale the property in goods is transferred from the seller to the buyer, the contract is called a sale, but, where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Remedies for breach of promise of sale When a promise of sale is breached, it gives rise to a personal contractual right. There are 2 main remedies: 1. Damages 2. Specific performance o Often damages are insufficient or not what the victim wants – prefer to have contract respected The presumptive remedy in each tradition is different CVL Specific Performance 1590. An obligation confers on the creditor the right to demand that the obligation be performed in full, properly and without delay. Where the debtor fails to perform his obligation without justification on his part and he is in default, the creditor may, without prejudice to his right to the performance of the obligation in whole or in part by equivalence, 1) force specific performance of the obligation; 2) obtain, in the case of a contractual obligation, the resolution or resiliation of the contract or the reduction of his own correlative obligation; 3) take any other measure provided by law to enforce his right to the performance of the obligation This can be achieved through art. 1601 and 1602 , which allows the creditor to demand the debtor to be forced to make specific performance of the obligation There are also other possible remedies: Right to revendicate. If promising buyer can argue that he is the rightful owner of the goods, can seize property before judgment (art. 953 CCQ) 953. The owner of property has a right to revendicate it against the possessor or the person detaining it without right, and may object to any encroachment or to any use not authorized by him or by law. “Action in Passation of Title (art. 1712 CCQ): Declaration by the court that the sale has occurred. If the property is in the patrimony of the seller, the buyer (or seller) can ask the court to order the faulty party to sign the deed of sale. If the party does not sign, then judgment will say that title has passed. 1712. Failure by the promisor, whether he be the seller or the buyer, to execute the deed entitles the beneficiary of the promise to obtain a judgment in lieu thereof. ** Both the buyer and seller can take advantage of this recourse. However, in practice, a seller will not usually do so since he runs of the risk of the buyer being in default, in which case the buyer gets title to the property and the seller becomes a creditor. Houlachi c. Bray, J.E. 97-2114 (C.A.) Commercial Law – Summary Facts: Houlachi promised to sell Bray his home, but then refused to go through with the sale. Bray sued for conveyance of title (passation de titre) and damages. The contract included a provision which allowed Bray to cancel the sale if an expert inspection revealed defects. Following the discovery of a defect, Houlachi refused to sell Bray the house and claims that the negative inspection automatically nullified the contract. Issue : 1) Did the condition serve to automatically nullify the K; is 2) Bray entitled to SP? Holding : 1) No. 2) Yes, when the seller breaches his obligation to sell in the context of a promised sale, the buyer can exercise the remedy of specific performance (i.e. conveyance of title). Legal Reasoning (Fish JA): Argument 1 : Nullity based on clause 14 of the offer [266] In refusing to proceed with the sale, the Houlachis claimed that the offer had become null and void upon the receipt of the inspection report which revealed defects in the immovable. o Clause 14 of the offer allows the purchaser to cancel the offer unilaterally and without penalty where inspection by an expert discloses the existence of “any defects affecting the use of the immovable. However, clause 14 does not oblige the purchasers to cancel the sale. It merely entitles them to do so. In the present case, the Brays never sought to cancel the sale – they sought additional delay in order to conduct further inspections. Though the Houlachis were not bound to grant this additional delay, they are not entitled to treat the request for delay as a unilateral cancellation. This provision exists for the benefit of the purchaser, since it pertains to the quality of the object that they stand to gain. It allows them to escape the sale immediately upon delivering the negative inspection report. However, it does not obligate them to exercise the clause and does not operate automatically to nullify the contract if the purchaser wishes to proceed. Argument 2: Did get his financing for the mortgaging completed on time Houlachi contend that the offer lapsed because respondents did not provide appellants, within the stipulated delays, with evidence of a firm mortgage commitment, as required by clause 11 of the offer. o The allegation is without merit on its face as they had satisfied this stipulation. o In addition, clause 11.3 afforded the appellants two options upon respondents' failure to furnish them, within the stipulated delay, with evidence of a valid and sufficient loan commitment Appellants exercised neither option and they are for that reason alone not entitled to now invoke against respondents the benefit of a right which appellants themselves failed to exercise in a timely manner. Argument 3 : Brays’ failure to deposit the payment in full Houlachi argues that Bray failed to comply with an essential procedural requirement of actions in conveyance of title, in that they did not, upon instituting the proceedings, deposit into court the agreed price in full Article 1574 C.C.Q.: o Where the object tendered is a sum of money, it may be tendered in currency which is legal tender at the time of payment or by cheque made to the order of the creditor and certified by a financial institution carrying on business in Québec. o Tender may also be made by way of an irrevocable and unconditional undertaking, for an indefinite term, by a financial institution carrying on business in Québec, to pay to the creditor the amount tendered if the creditor accepts the tender or if the court declares it valid. The second paragraph of this article is new law. introduced for the express purpose of alleviating the difficulties faced by buyers who must sue to obtain title Moreover, CCQ is marked throughout by a legislative intention to subject social and economic intercourse to a requirement of good faith that is enforceable by law. o article 7 C.C.Q., legal rights must be exercised in good faith; Commercial Law – Summary o article 1375 C.C.Q., all parties must conduct themselves in good faith not only when obligations are created, but also when they are performed or extinguished. Code of Civil Procedure now commands the primacy of substance over form. o Article 2 CCP: CCP must be applied so as "to render effective the substantive law and to ensure that it is carried out". And they must be interpreted "in such a way as to facilitate rather than to delay or to end prematurely the normal advancement of cases" o Article 20 C.C.P: Whenever this Code contains no provision for exercising any right, any proceeding may be adopted which is not inconsistent with this Code or with some other provision of law. No CCP provision subjects the right to acquire ownership of an immovable to the mandatory deposit of the purchase price upon filing an action to compel that result. While numerous cases state that the deposit of the purchase price is an essential formality for conveyance of title, it does not hold that an omission to deposit is necessarily fatal to the proceedings. Bettan case: « on ne doit pas tomber, pour autant, dans un formalisme désuet et injustifié » [272] Prozenano case : o « Le demandeur, dans l'action en passation de titre, doit se soumettre à un certain nombre de conditions strictes. L'une d'elles est précisément d'offrir pour signature une proposition d'acte reflétant à la convention des parties. La raison en est que la vente est un contrat synallagmatique comportant des obligations réciproques à la charge de chacun des contractants. o un acheteur ne peut être contraint de signer un acte de vente qui contient des conditions qui ne sont pas dans l'entente originale. » o « …grand principe qui est le respect de la parole donnée et l'exécution de bonne foi des engagements. Un contractant ne peut refuser de respecter ses obligations en invoquant un simple prétexte ou tenter de se soustraire aux conséquences d'un contrat valablement conclu par de simples arguties. » o « … tribunaux se sont montrés souples et ont toujours refusé de privilégier l'exigence de la stricte conformité de l'acte proposé aux dépens de l'équité et de la bonne foi. » What are the obligations of the parties? [273] “The governing principle on an action in conveyance of title is that courts must ensure performance by the parties to a binding offer of their respective and reciprocal obligations. o on the part of the purchaser, an evident intent and demonstrable capacity to respect the conditions of the offer, i.e the agreed to for payment of the price.” In the present matter, buyers initially tendered, by notarial act en minute, a signed deed and certified cheques covering the purchase price. o Respondents, by their conduct throughout, including tender of the deed and certified cheques by notarial act en minute, have demonstrated their intention and ability to discharge their obligations arising from the offer. o Appellants were found to have sought in bad faith to avoid transferring the property, though they were bound by law to do so. Appellants' refusal to sign the deed and to accept payment made these proceedings necessary to achieve that purpose. When the proceedings were instituted, respondents had already demonstrated their commitment and capacity to discharge their obligations under the contract In these circumstances, I would hold that the law did not subject respondents to the "obsolete formality" of paying for the property when the action was filed -- years before the corresponding obligation of appellants, the transfer of title to the property, could be compelled by court order. purchasers in good faith should not be prevented by anachronistic rules from exercising their proper legal recourse against recalcitrant vendors who refuse without valid cause to proceed with the sale o To this end, if the judge found that the tendered hypothecary commitment did not satisfy the requirements of article 1574 C.C.Q., one alternative was to require respondents to perfect it before rendering a judgment that granted them title. Commercial Law – Summary Another was to dispose of the matter sequentially. First, upon finding that respondents were entitled to succeed on their action in conveyance of title, the trial judge could have rendered an interlocutory judgment: (1) recognizing the right of respondents to acquire ownership of the property against payment of the agreed price; (2) declaring the tendered deed valid and sufficient; and (3) ordering respondents to deposit the purchase price into Court within a fixed and reasonable delay. Later, upon proof of the required deposit, he could by final judgment have transferred title and made the appropriate ancillary orders. Under article 1476 C.C.L.C.: A simple promise of sale is not equivalent to a sale, but the creditor may demand that the debtor shall execute a deed of sale in his favor according to the terms of the promise, and, in default of so doing, that the judgment shall be equivalent to such deed and have all its legal effects o In virtue of article 1712 C.C.Q., the Court may simply order the transfer of title without again summoning the defendant to sign the deed: Failure by the promisor, whether he be the seller or the buyer, to execute the deed entitles the beneficiary of the promise to obtain a judgment in lieu thereof. ** While a promise of sale is not equivalent to a sale, the court may order the transfer of title without the defendant having to sign the deed (art. 1712 CCQ). Comments: The main takeaway is the new flexibility in the area of actions in passation of title. There are ultimately not that many requirements to get court to enforce this right. Contract made in violation of a promise to contract What if seller has sold the object to a 3rd party? Art. 1397 CCQ A contract made in violation of a promise to contract may be set up against the beneficiary of the promise, but without affecting his remedy for damages against the promisor and the person having contracted in bad faith with the promisor. The same rule applies to a contract made in violation of a first refusal agreement. ** Basically, the promising buyer is out of luck. All he has is a recourse in damages against the promising seller and the third party purchaser if in bad faith (art. 1397 CCQ). Recourse against promisor would be an action for breach of contract (art. 1458 CCQ). If the third party was in bad faith (i.e. knew of existence of the promise to purchase), he can also be sued for damages because it is a fault to interfere with the contract (art. 1457 CCQ). What are the damages? Art. 1611 (2 types of damages can be claimed: 1) Loss sustained; 2) Profits deprived) o For the buyer, the difference between the price in the promise to purchase and what he eventually had to pay (FMV) The “Loss sustained” Maybe sue for “profits deprived” – but difficult to prove. o For the seller, the difference between the price in the promise to purchase and what he subsequently sold it for. Alternatively, promising buyer could seek an injunction prohibiting the third party from acquiring the property. But freezing the property during these proceedings is a crucial step. CML ** In the CML, damages are the default recourse and will only award specific performance where: (1) the object subject to the promise is unique or non-fungible; or Ex: Land (2) damages are insufficient to remedy the harm. Where damaged will not compensate them adequately for their loss Commercial Law – Summary Ex: Custom-made ship where there is an immediate need. Timing Issues – “De Rigeur” In both CVL and CML have the concept of “de rigeur” or “time is of the essence” All promises to purchase will say that the deed of sale must be signed by a certain date. There are many reasons why this date cannot be respected (e.g. lack of financing, supplemental investigation necessary). So what happens if the promise to purchase is not concluded on that date? o If the date intended by the parties is not intended to be peremptory: Quebec courts have generally said that the promise to purchase survives and continues to live until either party sends notice to the other that unless the issue is resolved in a reasonable time, then the deal is off. o If the date decided by the parties is intended to be peremptory or “De rigeur”: Failing conclusion at that date, the deal is null and void. Deposit – “Payment in Earnest” When the promising buyer gives the seller a sum of money upon the completion of the preliminary contract, a question that arose was whether that sum was “payment in earnest” (money that guarantees the seriousness of the offer) or a deposit. Suppose a promising buyer does not proceed in good faith, can seller keep the deposit in exchange for limiting his right to claim further? CCQ 1711 Legal presumption is that the amount given is simply a deposit towards the purchase price and if the sale does not go through, seller cannot keep the amount (even if buyer is in default). If you intend the sum given to be for earnest, put it in the contract. Otherwise Seller cannot keep amount unless it is an offset of the true damages seller has sustained. All deposit does is reduce eventual purchase price paid by buyer – if it is never made, he is entitled to full refund. Problem 2 : “John and Joan” Facts: Marie had been trying to sell her house for months. John and Joan were interested, spent a long times examining house. They seemed ready to initiate talks, but Marie approached them first. She said that while the house had a market value of $250,000, she would sell it to them for $200,000. John and Joan expressed their interest and said they would get back to her soon. Marie didn’t hear from them for a week, so she sold her house to Pierre. The next day, John and Joan returned, explaining that the delay was the result of their taking time to secure a loan for the house. Can they get the house? Is their position better if Pierre knew Marie had promised to sell it to them? Was there a binding offer? Art 1388: Offer needs to have all the essential elements of the contract o Art 1708 stipulates what those essential elements are for a sale They are all present in this case! Art. 1396 (1) : Offer to contract made to determinate person constitutes a promise to enter into the proposed contract from the moment that the offeree indicates that he intended to consider the offer and reply within a reasonable time o J&J did consider the offer and “soon” seems like reasonable time but it is really vague. o Because conditions of art. 1396 are met, Marie is probably bound unilaterally to sell – but for how long? If we say that Marie waited long enough (just verbal, waited long enough, they could have kept her updated) that offer has lapsed, she is ok. But if not, she is still on the hook. For the record, in the realities of the real estate market five days to a week is too long to be considered “soon.” Assuming that there was a valid offer to sell, what would Marie’s obligations be? (art. 1397): Sue Marie for $50,000 (difference in price from market value and deal offered to give them) (art 1611) Can they request cancellation of the sale? Commercial Law – Summary o NO. art. 1397 bars such a claim. All they have is a personal right to claim for damages, not a real right to get the property back. Can only sue Pierre if he was in bad faith and knew about the promise to sell. B. TRANSFER OF OWNERSHIP AND RISK I. Transfer of Ownership Transfer of ownership determines the exact moment that the property changes hands and goes from the seller to the buyer. When it comes to transfer of ownership, courts often apply black letter law to come to what we might think of as unfair decisions. For example, the CVL rule regarding “double sale.” CVL rule regarding double sale of immovables Priority is given to the party who registers their right first 1455, 2946 o This is giving the registration system a kind of primacy over other CVL rights. o Public policy requiring due diligence – we want to encourage people to register their real rights as quickly as possible. o This might not be the fairest solution, but it is at least clear. CCQ 1455. The transfer of a real right in an immovable property may not be set up against third persons except in accordance with the rules concerning the publication of rights. CCQ 2938: The acquisition, creation, recognition, modification, transmission or extinction of an immovable real right requires publication. Renunciation of a succession, legacy, community of property, partition of the value of acquests or of the family patrimony, and the judgment annulling renunciation, also require publication. Other personal rights and movable real rights require publication to the extent prescribed or expressly authorized by law. Modification or extinction of a published right shall also be published. CCQ 2946: Where two acquirers of an immovable hold their title from the same predecessor in title, the right is acquired by the acquirer who first publishes his right. Registration system takes precedence even over claims of fraud or breach of contract. It is basically an obligation of anyone who wants to ensure that they have good title to check the registry office. If they don’t they are incurring the risk in full knowledge that they might not acquire good title. This operates irrespective of good or bad faith of the buyers. CVL rule regarding double sale of movables The acquirer who is given possession in good faith (even if title is later in time) is vested with the real right Art. 1454 CCQ o Application of the “doctrine of appearances”: law will favour the person who appears to be the owner 1454. If a party transfers the same real right in the same movable property to different acquirers successively, the acquirer in good faith who is first given possession of the property is vested with the real right in that property, even though his title may be later in time Possession is the equivalent of registration system here – except we have an added condition of “good faith” here. Possession is not sufficient if that sale was in bad faith Both CVL and CML distinguish between 2 types of property: Commercial Law – Summary 1. Certain and determinate (CVL) OR ascertained or specific (CML) 2. Determined as to kind only (CVL) OR unascertained (CML) Note : The CSIG does not deal with the question of when transfer of ownership occurs. It deals only with the consequences (transfer of risk). 1. Civil Law C.C.Q.: 1453, 1455, (1456) Art. 1453 CCQ Art. 1455 CCQ The transfer of a real right in a certain and determinate property, or in several properties considered as a universality, vests the acquirer with the right upon the formation of the contract, even though the property is not delivered immediately and the price remains to be determined. The transfer of a real right in a property determined only as to kind vests the acquirer with that right as soon as he is notified that the property is certain and determinate. The transfer of a real right in an immovable property may not be set up against third persons except in accordance with the rules concerning the publication of rights. a) When property is certain and determinate When the property that is the object of the sale is certain and determinate, the acquirer is vested with ownership at the time the contract has been entered into. Immovables are always considered certain and determinate (but need to register in order to make it opposable 1455) 1453(1) CCQ : The transfer of a real right in a certain and determinate property, or in several properties considered as a universality, vests the acquirer with the right upon the formation of the contract, even though the property is not delivered immediately and the price remains to be determined. Classic application of consensualism; no requirement of form or delivery. This applies even if property is not delivered immediately and even if price is not determined. Can also apply to a “universality of goods.” Could say “I’m selling you everything in my inventory” and at that moment, we haven’t determined how much is in there, but can say everything is sold at cost price. At this point, have everything you need to say that there has been transfer of ownership. Then it is just a price issue, not a transfer of ownership issue. b) When property is determined only as to kind Property that is determined only as to kind is identified in nature, but has not been specified, or individualized; it is still part of a greater lot. So there is a requirement to proceed to that preliminary step of isolating, labeling or earmarking the specific goods that the buyer intends to buy and separating them from the general goods (probably kept in some sort of bulk). Ex: Buying 500 KG of coffee. Unless specific amount is separated or labeled from the bulk, then this is unascertained 1453(2) CCQ : The transfer of a real right in a property determined only as to kind vests the acquirer with that right as soon as he is notified that the property is certain and determinate. ** Two conditions before transfer of ownership takes place: (1) Individualization of specific property (2) Notification to buyer that it has been individualized Notification is required for two reasons: o to ensure consent of buyer (cannot properly consent unless he knows what he is getting), and o because this is the point at which third party rights are affected. Commercial Law – Summary Parties can waive notification requirement buyer then gains ownership upon individualization of property What happens in the event of default by seller? Buyer can seek resolution of sale Buyer can seek damages Buyer can sometimes, but rarely, ask for specific performance and require seller to individualize the property and thus effect transfer of ownership o Specific performance is a lot more accessible as a remedy in the CVL. Jobin § 69-70, 73-77, 79-81 : differences in transfer of ownership based on circumstances of the sale (1) Sale of a certain and determinate object The right is transferred at the moment of formation (art. 1453(1) CCQ) time of delivery is irrelevant This applies to movables and immovables. o In the case of immovable (and some movable property), however, to be opposable to third parties, the transfer of property must be accompanied by a registered deed of sale (publication). This rule also applies to the sale of many goods considered as a “universality” (1453(1)) According to Jobin, this also applies to certain “vente a la mesure”, where the object of the sale is all of the property in a given place and the price is determined by some measurement (e.g. weight). In such cases, from the moment of formation, the property is individualized o The CML does not transfer ownership in such situations until measurement is done (and price is determined) (2) Sale of an object determined only as to kind This applies to fungible objects which have not yet been individualized (CML – unascertained). Conventional sale by measurement is the most frequent case of a sale of property determinable only as to kind (certain quantity of goods purchased amongst identical goods that are found in a determined place by weighing or counting) The right is not transferred upon formation, but rather is delayed until two operations are completed: 1) the object becomes identified and 2) the buyer becomes aware of this (art. 1453(2) CCQ). o (a) Individualization Individualization can happen by various means: measuring, counting, weighing or any kind of operation which allows for clear identification of the property destined to the buyer In practice, individualization often occurs upon delivery or upon transferring the goods to the transporter If goods are damaged after being individualized but before being delivered, the onus of proof will lie upon seller to show that goods were indeed rendered specific. This is because he is the only person who will have the knowledge necessary to do so. Since the purpose of the contract of sale is to effect the transfer of ownership, seller is under obligation of individualizing within a reasonable time (good faith) or as stipulated in the contract. Remedy - If he fails to do this: The buyer can seek resolution of the contract by a court (art 1604); or if it is movable sale, without a court (1736) Buy the identical goods elsewhere and claim compensation for the difference in price; or Seek specific performance through an injunction. o SP becoming increasingly available, can be effected through injunction as long as it does not require personal performance of the seller (and not of an employee e.g.). If seller is a corporation, it is always available. ** In any event, the seller owes will owe damages if there is any harm according to 1458. Commercial Law – Summary o (b) Awareness / Notification Legislature wants the buyer to be well informed of the fact that he is the owner the state of his rights, and the risks that correspond to them (consent issue) No particular formality is required to inform the buyer: letter, phone call, presence of buyer at moment of individualization (3) Sale of a future object Operates analogous to a good determinable as to kind That is, transfer is only effected once the good is individualized, and the buyer is made aware. o When the good is something unique that is destined to the buyer, there is individualization upon its existence. This category includes objects that currently exist, but that seller does not yet own (i.e. seller must buy from a third party before delivering to buyer). In such instances the seller could not transfer over ownership of something that he did not yet have. (4) Double sale This operates differently, but analogously, depending upon whether or not the property is of a type that needs to be registered. (a) Object not susceptible to registration o The first party to take possession in good faith is the owner, regardless of if he acquired the good later in time (art. 1454). The good faith stipulation implies, in the case of the second buyer, that he not have known about the previous sale. o The party who does not gain ownership of the good will still retain his rights against the vendor in default if he was in good faith. o It is becoming more prevalent that real rights in movable property require to be published. Even if the object of a double sale never required publication, it could happen that the good is the object of a hypothec. Art 2943(1) includes a presumption of knowledge on behalf of the buyer when purchasing a good that has been registered. Therefore, to invoke the good faith requirement, the buyer must have consulted the appropriate registry. This provision puts a reverse onus on behalf of the buyer in possession to prove his “good faith” (b) Object susceptible to registration (pertains to immovable and certain movables where publication is required) o The first buyer to register is the owner (irrespective of bad faith). This pertains to immovables and some movables (hypothecs). o Since the right is only opposable against third parties upon registration, and buyers are third parties relative to one another, they gain the ability to assert their right against the other once they have registered. o The buyer who does not get the right retains their claim against the vendor. Also, first buyer will have rights against the second buyer if he is in bad faith. This deviation from the general rule that ownership of an individualized object passes at formation is intended to maintain an orderly system of property entitlements. Possession and registration tie ownership to control. By limiting the claims of the dispossessed they minimize litigation, and compel would-be owners to solidify their claims. Also, the rule protects third parties who are likely to consider the possessor or registrar the owner and will act on reliance upon that (e.g. by extending credit with security on the property). 2. Common Law S.G.A.: 17-19, 12.3, 50 Art. 17 SGA Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer until the goods are ascertained. Commercial Law – Summary Art. 18 SGA Art. 19 SGA (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Unless a different intention appears, the following are rules for ascertaining intention of the parties as to the time at which the property in the goods is to pass to the buyer: Rule 1.—Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made and it is immaterial whether the time of payment or the time of delivery or both is postponed. Rule 2.—Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. Rule 3.—Where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof. Rule 4.—When goods are delivered to the buyer on approval or “on sale or return” or other similar terms, the property therein passes to the buyer; I. when the buyer signifies approval or acceptance to the seller or does any other act adopting the transaction; II. if the buyer does not signify approval or acceptance to the seller but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time, and what is a reasonable time is a question of fact. Rule 5.— I. Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer, and such assent may be expressed or implied and may be given either before or after the appropriation is made. II. Where in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer and does not reserve the right of disposal, the seller shall be deemed to have unconditionally appropriated the goods to the contract. a) When property is ascertained (Rules 1-3) In sale of ascertained goods, ownership transfers when the parties intend it to transfer (18 SGA). One problem with this is that very often, parties do not intend anything specific, especially when they are unsophisticated. How is intention of the parties ascertained? 18 SGA : terms of the contract; conduct of the parties and circumstances of the case. 19 SGA : Rules offer guiding principles Commercial Law – Summary Art. 19 SGA : Sets out five different guidelines regarding different types of transactions. Look at what the intention of the parties should be based on those circumstances. BUT these are just guidelines. ** Overall intention of the parties to the extent that they differ from the guidelines are determinative. So a lot more complicated to figure out transfer of ownership in CML. CVL and CML have a kind of different approach in this respect: CVL lays out certain conditions that must be followed, and the legal result is clear so long as you apply those conditions. CML is primarily interested in the intention of the parties regarding the moment of the transfer of ownership (much more specific to particular transaction). S.19(1), in combination with art 12(3) causes a significant problem for buyers’ recourses: Art. 12(3) SGA Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, or where the contract is for specific goods the property in which has passed to the buyer, 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 goods and treating contract as repudiated, unless there is a term of the contract, express or implied, to that effect. In CML, there is a distinction between a condition and a warranty (In CVL, there are simply obligations) o A condition is considered a type of obligation on which the foundation of the contract is established and if the condition isn’t met, there is a right to treat contract as resolved and reject the goods. o On the other hand, a warranty only gives rise to a claim in damages. Art. 12(3), in effect transforms conditions into warranties once ownership has passed. Any breach is considered to be a breach of warranty and is therefore not grounds for rejecting the goods. Result of this is an effort on the part of CML courts to interpret restrictively when a transfer of ownership occurs since it would deprive a buyer of their whole range of their normal remedies. o Courts have interpreted this provision to only apply where the product being bought is entirely seen and examinable. Edwards : Most sales of specific goods are considered under s.19(5) rather than 19(1) Under Art 19(3), the CML buyer is given more protection than in CVL where specific goods have not been weighed in order to ascertain the price. In such a case, there would be no transfer of ownership in CML, whereas there would be in CVL. Therefore, if there is a fire before the weighing, there has not been a transfer of ownership and therefore it is not the buyers loss (unlike what the case would be in CVL) What happens in the event of default by the seller? Art. 50 SGA In an action for breach of contract to deliver specific or ascertained goods, the court may, if it thinks fit, direct that the contract be performed specifically, without giving the defendant the option of retaining the goods on payment of damages, and may impose such terms and conditions as to damages, payment of the price, and otherwise, as to the court seems just. b) When property is unascertained Three conditions must be met for the transfer of unascertained property to pass (art. 19(5)): 1. Property must be in a deliverable state 2. Property must have been unconditionally appropriated to the contract 17, 19(5) 3. There must be assent on the part of the buyer (equivalent to notification) In re Goldcorp (1995): New Zealand case in which Goldcorp offered to sell gold and stored it on their premises. It was stored in bulk and not allocated for each particular buyer. Did not buy as much gold as it had received payment for. It securitized all of its inventory to the bank and then it went bankrupt. Commercial Law – Summary o Issue : Who is entitled to the gold in inventory – the bank or the investors? Main argument of the bank was that the gold had not been ascertained or individualized for any particular customers. So under art. 17 SGA, there can be no transfer of title and customers can only claim as unsecured creditors. Holding: There can be no intention to transfer property, until the very goods sold are ascertained. Unless the customers can say they are the owners of any particular gold bars, then there cannot be any transfer of ownership to them. It is insufficient to say that one has a right in the gold unless such separation exists. Customers can only claim as UCS o ** Even if Goldcorp had gone bankrupt and it had more gold than every customer was owed, then the bank would still have priority because the gold had not been identified or separated. Has been criticized as very unfair to investors or buyers who pre-paid. But remains good law. In re Wait [1926] (UK CA) Facts: Wait purchased 1000 tons of wheat. Buyer purchases 500 tons. After Wait sells some of his wheat, he has about 530 tons left in his warehouse. Buyer gives Wait the purchase money, although they had never received any bill of lading, warrant, delivery order, or any document of title representing the goods. Wait goes bankrupt without ever determining out of the 530 tons of wheat, which 500 tons were the buyers Wait had hypothecated the 1000 tons to the bank Bank seizes the remaining 530 tons Buyer wants specific performance, wants their 500 tons of wheat saying it is theirs because they paid for it Issue : Did the “ownership” transfer? Were the goods “ascertained” so as to force delivery? Holding : No. Specific performance can only be claimed once transfer of ownership has occurred. In this case, transfer of ownership did not occur because the goods were not ascertained. Buyer has to make an unsecured creditor claim Legal Reasoning (): “goods were never so ascertained that specific performance could have been ordered of them” [292] “An agreement for the sale of goods does not import any agreement to transfer property other than in accordance with the term of the Code: o the intention of the parties to be derived from terms of the contract; o the conduct of the parties and the circumstances of the case; and o unless a different intention appears, from the rules set out in s. 18 (s.17 SGA Ontario) The SGA covers exhaustively all the legal remedies that are available to the parties. o Cannot advance a claim in equity unless equity was one of the terms expressed in the contract of sale Court of equity would enforce specific performance if consideration was received “In the absence of express intention, the property only passes when goods of that description and in a deliverable state are appropriated to the contract, either by the seller with the assent of the buyer, or by the byer with the assent of the seller, notwithstanding an express agreement that the property shall not pass except on payment” No difference that the creditors paid their purchase money in advance of the due date o Early payment cannot create an equitable contract/obligation where it did not previously exist Specific performance is only available in the event of breach of a contract to deliver specific or ascertained goods (s.50 SGA). In the present case, specific performance is not available because the goods were not ascertained. o not ascertained because the contract involved the sale of a portion of a larger sum of goods. o Where this is the case, intention of the parties is presumed to be that the transfer of ownership does not take place until the goods are fully ascertained. Commercial Law – Summary s.17 SGA : Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer until the goods are ascertained. In this case, nothing in the actions of the parties rebutted this presumption by indicating a clear intention to transfer ownership before the goods were ascertained. Same result would occur if it was the buyer that went bankrupt o If seller transferred possession=ownership before receiving payment and the buyer went bankrupt, the bank would get the goods if it was hypothecated Ratio: Where there is a sale of a portion of a larger sum of goods, the goods will not be “ascertained” [Transfer of ownership]: Under the SGA, the moment where ownership is transferred is determined by the intention of the parties. Transfer never occurs until the goods are ascertained. Unless the parties express a clear intention otherwise, then in a sale of unascertained goods ownership is not transferred until the goods become both ascertained and unconditionally appropriated to the K (measured and set aside), unless the parties intended otherwise [ss.17, 18, 19-rule 5]. [Specific Performance]: Specific performance in a K of sale is only available where transfer of ownership has taken place [s.50]. Exception - Ascertainment by exhaustion: If you have a sale of a specified quantity of unascertained property and the buyer has pre-paid, and what remains of the bulk is equal or less than what has been ordered, the property is considered individualized by default and is transferred to the buyer. Must be clear that what is left clearly belongs to the buyer. UK has codified this doctrine in their SGA. - Ex: So if there were 31 less ton of wheat in the Wait case above, then the buyer would have been entitled to the remaining wheat. What are other possible remedies that have been adopted where seller fails to ascertain the property ? 1. BC - For a consumer who has prepaid, he would have a lien on the goods that are yet to be ascertained. This lien is a secured right and would give the buyer the right to sell the remaining goods, and the proceeds to provide the buyer up the amount to the prepayment (basically favorable treatment for pre-paid buyer) Assent and notification Both parties must have received noticed and have knowledge that the goods have been individualized 19 SGA, Rule 5 (i) : adds an additional, higher-threshold condition Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer, and such assent may be expressed or implied and may be given either before or after the appropriation is made. Assent can be express or implied More flexible than in CVL assent can be even before individualization occurs. Carlos Federspiel & Co. v. Charles. Twigg & Co. [1957] Facts: Carlos [plaintiff], a Cost Rican company, entered into a K to buy a load of bicycles from Charles [defendant] for a fixed price. Clear according to contractual documents that risk until loading of the goods onto the ship was on seller. Buyer paid entire price in advance. Seller had given security to his bank to all inventory including all bikes in warehouse. Seller went bankrupt. At time of bankruptcy, the bikes ordered by buyer were manufactured and in deliverable state (even packaged). Clear that they were individualized and ready to go Issue : Were the goods “unconditionally appropriated to the contract” so as to transfer ownership? Commercial Law – Summary Holding : No. According to the factors laid out by the court, the goods did not meet the requirement of being “unconditionally appropriated” to the contract, so there was no transfer of ownership. Legal Reasoning (): S.18 SGA holds that property passes at the time parties intended it to pass, whole s.19 sets out presumptions regarding that intention. o One must then determine the nature of the contract S.19(5) SGA sets out three conditions required for transfer of ownership of unascertained goods: o (1) goods must be in a deliverable state o (2) buyer must assent o (3) goods must be unconditionally appropriated to the contract The first two criteria are met in this case. At the time of the bankruptcy, the bikes were in the warehouse, ready to be delivered, and buyer had consented to their appropriation (assented in advance, in the contract itself). Court sets out some principles regarding concept of appropriation to the contract: o Mere setting aside of the goods is not sufficient – seller must be unable to use the goods to perform another contract, or be unable to use different goods to perform this contract. “The parties must have had, or be reasonably supposed to have had, an intention to attach the contract irrevocably to those goods, so that those goods and no others are the subject of the sale and become the property of the buyer.” o Appropriation, involving the change in ownership, is made by the agreement of the parties o Appropriation by the seller, with the assent of the buyer, may be said always to involve “actual or constructive” delivery Transfer of ownership is not the same as transfer of possession. If seller maintains possession, he must do so as a bailee for the buyer (constructive delivery). Delivery is transfer of possession, appropriation is transfer of ownership o Transfer of risk indicates transfer of ownership s.20 SGA says that ownership and risk are normally associated If the goods were, at all material times, still at the seller's risk, that's a prima facie indication that property never passed to the buyer. o Appropriating act is usually (though not necessarily) the last to be performed by seller If there is a further act, an important and decisive act to be done by the seller, there is prima facie evidence that probably the property does not pass until the final act is done. In the present case, there is no appropriation to the contract All correspondence between the parties indicates ownership would pass on shipment. Emphasis throughout is on shipment as the decisive act to be done by the seller in performance of the contract, and intention of parties in contract is that the sellers are to arrange the insurance and the contract of affreightment, and they are to pay the freight and insurance and charge them as extras to the buyers Sellers charge the cost price to the buyers, so that any rise or fall in rate of freight or insurance would be for the account of the buyers and of no interest to the sellers Cannot find any agreement to a change of ownership before the time of shipment. There has been no actual or constructive delivery; no suggestion of the seller becoming bailee for the buyer No suggestion that the buyer bears any risk at any time before shipment. The last two acts of the seller – sending the goods to Liverpool and having them shipped - were not yet performed. Comments: A a question of some kind of irrevocable or final step indicating that these truly are the goods being directed to buyer. Mere setting aside or selection of the goods is not enough, because seller can still change his mind and designate these goods to another customer. Must be that last step. Commercial Law – Summary o o Parties must have had intention to attach the contract irrevocably to those goods. In CVL, just need to put the goods in the corner of the warehouse. But in CML, this requirement is tantamount to delivery! [constructive delivery]. Sometimes buyer’s consent is conferred in advance. In practical terms, means that this condition about assent is not so important and very easily satisfied. Conclusion on transfer of ownership It is not easy to transfer ownership in either system (especially in CML). This is good policy - want to make clear that there are certain conditions that must be fulfilled – but sometimes ends up yielding unfair result (e.g. prepaid buyer). II. Transfer of Risk We need to know who bears the risk in the event of lost property, fire damage. 1. Moment of the Transfer of Risk The moment of the transfer of risk is same in both CVL and CML. Res perit domino : as a general rule, transfer of risk takes place as same time as transfer of ownership CVL: CCQ refers to general provisions on property and the fact that owner of property assumes risk of loss. CML: SGA holds that goods remain at seller’s risk until transfer of property to the buyer, whether delivery has occurred or not. However, “res perit domino” rule has been subjected to criticism: 1. Where ownership passes before delivery, property is under the control of one who has no incentive to protect it. The corollary of this is that before delivery, buyer is in no position to reduce risk of damage to goods (law and economics). 2. Frequently seller is merchant and buyer may or may not be a merchant, but professional seller is more capable of passing the loss of the goods to his insurance. 3. Rule is considered counter-intuitive in the sense that it flows against a person’s normal expectations. If a buyer doesn’t receive his goods and they are damaged, but he has pre-paid, then it is not reasonable that he suffers all the consequences. S.G.A.: 21 Art. 21 SGA Unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer, but, when the property therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not, but, (a) where delivery has been delayed through the fault of either the buyer or seller, the goods are at the risk of the party in fault as regards any loss that might not have occurred but for such fault; and (b) nothing in this section affects the duties or liabilities of either seller or buyer as a bailee of the goods of the other party. Exception – Frustration: If the loss or damage of goods occurs before delivery, or if the buyer is prevented from receiving delivery for some reason, then both parties are discharged o If buyer has already paid, he is entitled to a refund However, if property is damaged or lost after delivery, then the frustration exception no longer applies. The loss is then suffered by the buyer. o If the buyer has not paid yet, then he is required to pay ** Therefore, key factor of frustration is that it only applies such that delivery has not taken place Commercial Law – Summary C.C.Q.: 950, [1453], 1456 Art. 950 CCQ Art. 1456 The owner of the property assumes the risks of loss. The allocation of fruits and revenues and the assumption of risks incident to property forming the object of a real right transferred by contract are principally governed by the Book on Property. The debtor of the obligation to deliver the property continues, however, to bear the risks attached to the property until it is delivered. The exception in art. 1456(2) to the general rule of art. 950 is a result of the CISG (69) Art. 1456(2) : despite transfer of ownership, risk remains with debtor of obligation until delivery has been effected. o Since delivery is an obligation of the seller under art. 1716, this reverses the rule most of the time. o Thus, between the formation of contract and delivery, the risks are dissociated from the right of ownership. Why? Because the seller is best placed to prevent losses. ** Thus, if the good perishes before delivery, the sale is resolved and the buyer is liberated of his obligation to pay the price. Note: The rules of the CCQ on the transfer of ownership and risk are not imperative. Parties can change the moment of transfer of either one by contract. Absent an express and precise stipulation, usage (1434) or other elements of the contract can consequence in a different solution than the one offered by law. A stipulation that expressly deals with transfer of ownership will not be interpreted so as to also apply to transfer of risk - transfer of risk will be subject to ordinary rules CVL : special rules for special circumstances Installment sales Sale is made and buyer gets possession, but buyer only gets ownership once the final payment is made under the contract. Installment buyer accepts the risk once he gets possession, but before he gets ownership. o This is another exception to res perit domino. Art. 1746 CCQ: An installment sale transfers to the buyer the risks of loss of the property, except in the case of a consumer contract or where the parties have stipulated otherwise. The idea behind this is that this is simply a financing technique and they buyer is really acting as the owner and in full possession of the asset. Therefore, if anyone should be taking precautions to protect the asset and should suffer from property damages, it should be the buyer. However, there is an exception in consumer sales, the buyer will only assume the risk after ownership has transferred – which usually occurs after the last installment was paid: QC C.P.A.: 133 Art. 133 CPA The merchant shall assume the risk of loss or deterioration by superior force until the ownership of the goods is transferred to the consumer. [installment sales] Remember that CPA is mandatory, cannot derogate therefrom. 2. Resolution of the Contract Civil Law Impossibility of Performance Art. 1693 A debtor is released where he cannot perform an obligation by reason of a superior force and before he is in default, or where, although he was in default, the creditor could not, in any case, benefit by the performance of the obligation by reason of that superior force, unless, in either case, the debtor has expressly assumed the risk of superior force. Commercial Law – Summary Art. 1694 The burden of proof of superior force is on the debtor. A debtor released by impossibility of performance may not exact performance of the correlative obligation of the creditor; if the performance has already been rendered, restitution is owed. Where the debtor has performed part of his obligation, the creditor remains bound to perform his own obligation to the extent of his enrichment. Impossibility of performance : Debtor is released where he cannot perform obligation of delivery by reason of force majeure. 1693(1) CCQ “Superior force” – an external, unforeseeable and irresistible event (1470(2) CCQ Art. 1693(2) CCQ : The burden of proof of proving a superior force is on the debtor. If proven, he will be released from his obligation unless he consented to assume the risk of force majeure. If delivery has not taken place at all and seller is discharged from obligation to deliver, both parties are discharged. Seller can be released from obligation to deliver but cannot ask for the buyer to be forced to fulfill his obligation to buy; and if performance has already been rendered, restitution is owed art. 1694(1) When there is no obligation of delivery, this rule simply wouldn’t apply. What if there is only a partial loss or deterioration of the goods? Art. 1562 CCQ : Even if it has suffered deterioration (partial loss only), debtor has performance obligation to deliver. Jurisprudence has not been very clear what encompasses a partial loss vs a total loss. However, to the extent that there is a 10% loss, we can estimate that partial loss provisions will apply o If the goods are substantially damaged then debtor may be released according to art 1693 C.C.Q.: 1562 Art. 1562 A debtor of a certain and determinate thing is released by the handing over of the thing in its actual condition at the time of payment, provided that the deterioration it has suffered is not due to his act or fault and did not occur after he was in default. Provided that deterioration is not due to seller’s fault and did not occur after default, buyer entitled to only pay for what he has received art. 1694(2) Jobin§ 89-91 : transfer of risk and resolution of contract Total Loss Until delivery, it doesn’t matter whether a sale is made under a resolutory or suspensive condition because (unless otherwise stipulated) in every case the risk are borne by the seller until delivery After this point, we must determine who is owner because then the res perit domino principle reapplies o When a loss occurs after delivery but before the realization of a condition, the owner at the time of the loss, the seller, will bear the risks of the contract; the buyer will be either exempted from the purchase price or refunded if paid resolved contract Partial Loss: If the deterioration occurs before delivery, the buyer cannot object to receiving the good but can, in most cases, have a right to the reduction in price If the partial loss occurs after delivery, what happens if the buyer must restitute the property to the seller? The legal regime of 1699 and following on the restitutions of property applies such that the seller must receive the property in the condition it is in and the buyer must indemnify for the deterioration, which in effect means that the price that the seller must reimburse will be reduced accordingly CCQ 1702 Common Law S.G.A.: 8 Commercial Law – Summary Art. 8 SGA Where there is an agreement to sell specific goods and subsequently the goods without any fault of the seller or buyer perish before the risk passes to the buyer, the agreement is thereby avoided. Frustration CML equivalent to impossibility of performance, occurs when property is destroyed before delivery or seller is prevented from delivering. If frustration applies both parties are discharged. If buyer has already paid, he is entitled to refund. If property is damaged or lost after delivery, doctrine of frustration does not apply and loss is entirely suffered by the buyer. In addition, in accordance with principles of common law, if the contract has not been discharged (i.e. buyer hasn’t paid) the buyer must pay now. The key point of frustration is that it only applies to the extent that the delivery has not taken place. International Law Vienna 1980: 66, (67, 68), 69, spec. 69 (1), (70) Art. 66 CSIG Art. 69 CSIG Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. (1) In cases not within articles 67 and 68, the risk passes to the buyer when he takes over the goods or, if he does not do so in due time, from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery. (2) However, if the buyer is bound to take over the goods at a place other than a place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at his disposal at that place. (3) If the contract relates to goods not then identified, the goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract. Art. 66 CSIG : Loss or damage of the goods after the transfer of risk does not excuse the reciprocal obligation, unless it was due to an act or omission of the seller. Because the CSIG deals with international matters, there are many specific rules regarding transportation, carriers, and when precisely the moment of transfer of risk occurs. It sets out different rules for different types of contracts. 1. Seller delivers goods himself Risk is transferred either o (a) Upon delivery (69(1) CSIG) ; or o (b) When delivery ought to have occurred (69(2) CSIG) 2. Seller delivers goods through an agent This applies to almost all situations, especially in international context Risk is transferred to the buyer upon handing over the goods to the agent, unless the goods are not yet appropriated to the contract (67 CSIG) 3. Goods are already in transit when contract is formed Risk passes upon the formation of the contract, unless the goods are already damaged at that time and the seller knows or ought to know of that damage, in which case risk remains with seller. (68 CSIG) Problem 3 : “Q-Mart” Commercial Law – Summary Facts: Q-Mart is a supermarket chain. Umbrella Inc. is a specialized manufacturer of umbrellas. On 1 February, Q-Mart ordered 1000 golf umbrellas to be manufactured (according to its specifications) by Umbrella. 500 umbrellas are to be made available to Q-Mart by 1 April, and the remaining 500 by 1 May. Q-Mart pays in advance. Umbrella accepts order and advance payment, but decides to make 2000 umbrellas of the type ordered by Q-Mart. It expects to sell the extra 1000 to others. By 15 March, 2000 golf umbrellas have been manufactured. On 1 April, Umbrella Inc. telephones Q-Mart that 500 umbrellas are available. During transportation from Umbrella to Q-Mart on 2 April, delivery truck carrying the umbrellas is hit by lightning and umbrellas are destroyed. On 15 April, Umbrella goes bankrupt. There are 1500 golf umbrellas of the type ordered by Q-Mart left in Umbrella’s warehouse. On 15 May, Q-Mart makes a claim for 1000 of these umbrellas. It claims 500 in lieu of the umbrellas destroyed during transportation on 2 April, and the other 500 as owner of part of the umbrellas, which are still stored in the warehouse of Umbrella Inc. 1. Can Q-Mart Claim the 500 umbrellas in the truck? In order to determine whether ownership and risk of loss was transferred, must determine whether delivery was made. In this case, that question depends on whether it was the delivery truck belonged to the seller (or its agent) or to the buyer. Hypothesis 1 : Q-Mart’s truck CVL: If Q-Mart or his agent picked up the umbrellas, they have been “delivered” and ownership and risk of loss have been transferred to Q-Mart, Q-Mart bears the loss. Q-Mart cannot claim for destroyed umbrellas because contract was already executed. Q-Mart’s only option is to make a claim to its insurer. CML: Ownership and risk of loss have been transferred to Q-Mart, Q-Mart bears the loss. Two conditions of s.19(5) SGA are met, so ownership and risk of loss was transferred: o “Unconditionally appropriated” : Particular goods have been unconditionally appropriated to the contract. If they were given to Q-Mart to put into their truck, they were obviously separate and ascertained and that “final step” completed. This is enough to meet even high standard set for s.19(5) SGA in Federspeil. o Assent of the buyer : Accepting goods and putting them into truck Q-Mart’s only option is to make a claim to its insurer. Hypothesis 2: Umbrella Inc.’s truck CVL: No delivery, Q-Mart has a claim, but only as an unsecured creditor There has been destruction prior to delivery, so loss falls on the seller (art. 1456(2) CCQ). Given that buyer has prepaid, does seller have to refund he amount? Loss was the result of superior force, meaning that the contract is resolved (art. 1693 CCQ). o Seller no longer has obligation to deliver, but must refund buyer. Problem is that company is bankrupt. So even though Q-Mart has a right to a refund, must get in line as an unsecured creditor (unlikely to get much). CML: No delivery, Q-Mart has a claim, but only as an unsecured creditor Because loss was result of superior force and occurred before delivery, doctrine of frustration applies and contract is resolved. Buyer cannot claim umbrellas, but is entitled to a refund. However, since seller is bankrupt, must claim as unsecured creditor and hope for the best. 2. Can Q-Mart Claim the other 500 umbrellas in the warehouse? Commercial Law – Summary CVL: Q-Mart does not have a right of ownership in the remaining umbrellas – they have not been individualized and no notice has been given. So cannot claim them. If Umbrella hadn’t gone bankrupt, could have asked for specific performance under art. 1590 and demand that they be separated as part of seller’s obligation under contract. However, because they are bankrupt, only solution is claim in bankruptcy. CML : Q-Mart only has claim in bankruptcy: o There is no ascertainment, they have not been earmarked (Goldcorp) o CML courts will not give specific performance in this area (Wait). Keep in mind UK rule that in similar circumstances, would hold all prepaid buyers to be owners in common of the umbrellas. III. Sale of Property Belonging to Another The principle underlying this regime is nemo dat qui non habet – “he who hath not cannot give.” What are the competing interests? Interests of the true owner o Want true owner to have the right of revendication (to ask for judicial order forcing transfer of possession of the goods) o True owner might also have a claim in damages for resulting inconveniences Interests of the buyer o Want to protect good faith buyer who has paid for the property and has possession (maybe for a significant amount of time). o Maybe buyer won’t be able to keep property, but can he claim damages? This is especially a problem when faulty seller has disappeared from the picture. Why should innocent buyer bear the loss? The protection of business o Want to create stability and certainty for buyers when they purchase property – don’t want them to fear that their investments are not safe. 1. Civil Law C.C.Q.: 1713-1715, 2917, 2919 Art. 1713 CCQ Art. 1714 CCQ Art. 1715 CCQ Art. 2919 CCQ The sale of property by a person other than the owner or than a person charged with its sale or authorized to sell it may be declared null. The sale may not be declared null, however, if seller becomes owner of the property. The true owner may apply for the annulment of the sale and revendicate the sold property from the buyer unless the sale was made under judicial authority or unless the buyer can set up positive prescription. If the property is a movable sold in the ordinary course of business of an enterprise, the owner is bound to reimburse the buyer in good faith for the price he has paid. The buyer as well may apply for the annulment of the sale. He may not do so, however, where the owner himself is not entitled to revendicate the property. The possessor in good faith of movable property acquires the ownership of it by three years running from the dispossession of the owner. Commercial Law – Summary Until the expiry of that period, the owner may revendicate the movable property, unless it has been acquired under judicial authority. What can the true owner do? [Jobin § 48-65] Nullification (relative) Where a vendor sells an object that he does not own or is not authorized by the owner to sell, this contract may be declared null (art. 1713). o The true owner of an object has the right to revendicate that object from a purchaser under invalid title (art. 1714). o The nullification can also take place at the behest of the would-be purchaser (art. 1715). The sale is only defective where the vendor does not hold the rights implicated in the sale at the moment of transfer of ownership. Thus, a vendor may conclude a contract of sale for an object that he will subsequently purchase from a third party, if the transfer is deferred. If the defective vendor becomes the rightful owner after the transfer of ownership would have taken place, but before any action implying nullification is taken, then the recourse disappears and the ownership is merely transferred. Exceptions to nullification and revendication (art. 1714 CCQ) The true owner may apply for the annulment of the sale and revendicate the property from buyer unless : (a) sale was made under judicial authority, or (b) buyer can set up positive prescription. This right derives from the basic principle of private property (art. 953 CCQ) (1) Judicially authorized sale Where court orders the sale of an object, likely to satisfy a debt owed. In such a case, rightful owner may not nullify the sale or revendicate the object from the purchaser. (2) Subsequent acquisitive prescriptions Where a purchaser takes possession, may acquire right of ownership once prescription period has passed. If such an acquisition occurs, rightful owner may not nullify the sale and revendicate the object. o Movables : three year period; possessor presumed to be in good faith, so burden in on party seeking to revendicate to prove that he wasn’t. o Immovables : ten year period; possessor presumed not to be in good faith, so burden is on him to prove otherwise (because of registry, obligation to check). o Stolen goods : Thief cannot acquire stolen goods by prescription. However, if thief sells the goods the buyer is presumed in good faith and subject to rules of prescription. Art. 2917: Period for acquisitive prescription is 10 years, unless otherwise fixed by law. Art. 2919: Good faith possessor of movable property acquires ownership after 3 years. Until that time, owner may revendicate unless it was acquired by judicial authority. (3) Double sale Once second buyer takes possession, the sale becomes valid. Nullification can be rationalized because no actual transfer of rights was effected – vendor did not possess the rights, so he could not convey them to buyer. Commercial sales However, if the property is a movable which was sold in the ordinary course of business or bought from a professional seller, the owner must reimburse the good faith buyer for the price he has paid. See a new level of protection for commercial sales. Because of the presumption of good faith (art. 2805 CCQ), the true owner would have to prove bad faith in order to avoid reimbursing the buyer. Commercial Law – Summary What is good faith? There is no general obligation of the buyer to inquire into the title of the seller (because it is an implicit obligation of the seller to warrant the sale). However, if the buyer’s failure to inquire is negligent or unreasonable, can amount to bad faith. Damages Along with nullification, true owner may also claim damages in ECO o May have incurred expenses (e.g. locating the goods; amount paid to buyer in good faith following revendication). However, may only claim damages if owner can establish that seller was in bad faith and thus committed a civil fault under art. 1457 CCQ. There is no contract between true owner and buyer, so cannot sue under art. 1458. In sum, true owner can claim : (a) nullity of sale; (b) revendication; (c) damages. Entreprises Maurice Canada v. Cossette [1980] (QC CS) Facts : Maurice (plaintiff) sent its trailer to LR to be painted. LR went bankrupt, and the trustee sold the trailer to Cossette (defendant). Maurice found out, and had his lawyer inform Cossette that he was the true owner. Cossette got a letter from the trustee guaranteeing the validity of his title. In fact, the trailer was registered to Maurice. Issue : (1) Can Maurice revendicate the trailer? (2) If so, must he compensate Cossette? Holding : (1) Yes. (2) No. Legal Reasoning : Cossette will be entitled to retain ownership of the trailer despite the defective title if he can prove he was in good faith at the time of the sale. o 1488 CCLC only applies to protect good title where the acquirer is in good faith Cossette was not in good faith. He was adviser earlier of the issue with the title, but failed to investigate before the sale. He also failed to take the simple step of checking the SAAQ registry. o Did not check into the legal documents of the sale, which would have shown they were fraudulent o Shows that when there is question as to validity of title, failure to check registry will constitute bad faith. “l'acheteur n'est pas protégé par l'article 1489 lorsqu'il est prouvé qu'il n'a pas acquis la chose de bonne foi, o lorsqu'il avait au temps de la vente des doutes sur la façon dont le vendeur se l'était procuré o lorsque les circonstances établissaient que l'acquisition pouvait être entachée de vices sérieux Maurice can revendicate, and Cossette (being in bad faith) is not entitled to compensation. In the right circumstances, negligence can constitute lack of good faith. Masella v. Nettoyeur Eden [1993] (QC CA) Facts: Owners of Eden sell their shares to O and A. o To guarantee sale price, shares were placed with third party fiduciary. o O and A defaulted on payment, so shareholders recuperated their shares. At the same time, Bank seizes Eden’s equipment pursuant to pledge to guarantee O and A’s loans. Masella wants to buy the equipment, but Bank said it had to act quickly. o So Masella went to Eden and met with Hazan, who managed the business for O and A, and falsely held himself out to be president. o Hazan’s lawyer showed extracts of Board minutes appointing Haza as president. o Masella concluded the sale with Hazan and took possession of the equipment. Masella then discovered the fraud that Hazan had no authority to sell the equipment. The true owner (Eden) tried to revendicate the property, but Masella argued it was bought in good faith. Issue : Is Eden entitled to revendicate the property? Holding : No, because Masella was in good faith at the time of the sale. Commercial Law – Summary Legal Reasoning (Baudouin J.): Nous sommes en présence ici d'un cas de vente frauduleuse de la chose d'autrui, par l'intermédiaire d'un mandataire apparent. The general rule is that the sale of a thing belonging to another is null (art. 1487 CCLC). However, art. 1488 CCLC, read in conjunction with 2268 CCLC, provides an exception to this rule : the sale of a thing belonging to another which occurs in the course of a usual business transaction is valid only where the buyer is in good faith. So question is whether Masella was in good faith at the time of the purchase. o The trial judge erred in equating simple negligence with bad faith. Bad faith is more than simple fault – only gross negligence will qualify as bad faith. Masella was negligent in failing to check the registry or otherwise verify Hazan’s authority. o However, this fault was not equivalent to gross negligence. He had little time to make the decision as the Bank told him to hurry! was persuaded by the fact that Hazan had a lawyer. Comments: The law protects people who purchase property in good faith from someone with defective title when this occurs in normal business transactions. Restricts bad faith to actual knowledge that the seller was not the true owner or gross negligence. Difference between CCLC and new CCQ approach: o CCLC : they are held to be the owner o CCQ : they are entitled to restitution of sale price upon revendication by true owner So, today, Eden could revendicate the property, but Masella would be entitled to demand restitution of the sale price from the Bank. Also note that today, conditional sale would have had to be registered, so would have been easier to decide if there was bad faith (because Masella would have been obligated to check the registry system; cannot invoke good faith as defense for this) (art. 2943 CCQ). What can the buyer do? (1) Nullification Once purchaser learns about defective title, he may ratify the sale (explicitly or implicitly), although it will still be subject to nullification by the rightful owner. It is subject to the above exceptions (art. 1715(2)). Nullification implies restitution – buyer gets payment returned; arguably they are obligated to return object unless it is seized. No requirement in art. 1715 that the buyer be in good faith – so seems like even bad faith buyer can benefit from this remedy. (2) Damages If buyer can prove vendor’s fault, entitled to damages in ECO for harm suffered. May also use art. 1458, because there is a contract between seller and buyer. CCQ makes no mention of this remedy, but it doesn’t have to because the seller has breached the obligation of warranty (one condition of which is that the seller is the true owner). 2. Common Law S.G.A.: 22, (24), 25 s. 22 SGA Subject to this Act, where goods are sold by a person who is not the owner thereof 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 of the goods is by conduct precluded from denying the seller’s authority to sell but nothing in this Act affects, (a) the Factors Act or any enactment enabling the apparent owner of goods to dispose of them as if he, she or it were the true owner thereof; or Commercial Law – Summary s. 25 SGA (b) the validity of any contract of sale under any special common law or statutory power of sale or under order of a court of competent jurisdiction. (1) Where a person having sold goods continues or is in possession of the goods or of the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for that person, of the goods or documents of title under a sale, pledge or other disposition thereof to a person receiving the goods or documents of title in good faith and without notice of the previous sale, has the same effect as if the person making the delivery or transfer were expressly authorized by the owner of the goods to make the delivery or transfer. (2) Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for that person, of the goods or documents of title, under a sale, pledge or other disposition thereof to a person receiving the goods or documents of title in good faith and without notice of any lien or other right of the original seller in respect of the goods, has the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner. (3) Subsection (2) does not apply to goods the possession of which has been obtained by a buyer under a security agreement whereby the seller retains a security interest within the meaning of the Personal Property Security Act, and the rights of the parties shall be determined by that Act. (4) In this section, “mercantile agent” means a mercantile agent having, in customary course of business as such agent, authority either to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods. What can the true owner do? s. 22 SGA : Unauthorized seller will never confer any rights regarding ownership of property to the buyer, unless he has given the buyer the impression that he was authorized to sell (Factors Act). Buyer acquires no better title than seller – so if seller has no rights, buyer acquires none. Unlike CVL, CML does not get into nullity. It just gives true owner right of revendication, unless the circumstances fall into one of the exceptions: Exception #1: Estoppel Estoppel operates as an exception to right of revendication: applies where true owner put himself in a position such that either through deliberate acts or negligence, the court should not grant him true owner his normal rights. Exception #2: The Factors Act This exception is expressly mandated by s. 22 SGA Applies where unauthorized seller has acted in such a way as to give buyer the reasonable impression that he was authorized to sell. Exception #3: Rule of sellers in possession s. 25(1) SGA : Where a person having sold goods keeps possession and then subsequently sells those same goods to a second buyer, the sale will be valid if : (a) the second buyer was in good faith, and (b) delivery or transfer of the goods took place. o Equivalent to the rule of “double sale” in CVL o In practice, this is a very narrow rule which receives very narrow interpretation. Pacific Motor Auctions v. Motor Credits (Hire Finance) [1965] (HL; Aus) Facts: Parties are the dealer of second hand cars (MD), the buyer (PM) and the financer (MC). Commercial Law – Summary Under the financing plan, every time MD bought a car, MC would buy it from them and pay 90% of what MD had paid. MD had the power to sell cars under its own name, even though it was no longer owner (became bailee of cars). Once car was sold to a third party customer, MD had to pay back the 90% to MC, plus a certain percentage of their profit. MD had financial trouble and owed money to PM. MC knew of MD’s troubles, and withdrew the right of MD to sell cars on their behalf. o No one else knew about this. Meanwhile, MD sold 29 cars to PM, without ever notifying PM of its financial arrangement with MD. o MC found out, sued PM to get the cars back. Issue : Was the sale between MD to PM valid, such that PM is now the owner of the cars? Holding : Yes. Where a vendor sells goods to a buyer but remains in continuous physical possession of them, if that vendor sells those same goods to a second purchaser who takes possession of them in good faith then the second sale is valid and that purchaser becomes the owner. Legal Reasoning (): Under Australian SGA, when a vendor sells goods but keeps continuous possession of them and subsequently sells them a second time to another person who takes possession of them in good faith, the second sale is valid. o This is equivalent to s.25(1) ONT SGA. The point under section 28 (1) turns on the construction of the words "where a person having sold goods continues or is in possession of the goods." Does not apply if buyer is in bad faith. Intended to protect innocent purchaser from being deceived by the fact that a would-be vendor has possession and thus appears to have title. o protect an innocent purchaser who is deceived by the vendor's physical possession of goods or documents and who is inevitably unaware of legal rights which fetter the apparent power to dispose. o Where a vendor retains uninterrupted physical possession of the goods why should an unknown arrangement, which substitutes a bailment for ownership, disentitle the innocent purchaser to protection Checking old case law o Mitchell v Jones: “section does not apply where a sale has been absolutely final by delivery and possession has been obtained by the vendee o Union Transport Finance ltd. V Ballardie: Clark sold his car to a finance house with a view to its being let on hire-purchase to his employee. The employee signed the agreement but the Clark at all times was intended to keep possession Finance house and the employee had a right to the possession of the car but neither had exercised the right at the date of delivery of the car to the innocent purchaser. The section therefore applied. o Olds Discount Co. v Krett: The finance house bought the goods from Goldstein and the hirer took possession of them. He defaulted, however, and Goldstein as agent for the finance house took possession and then dishonestly sold them to an innocent purchaser. Possession had passed mere accident that the agent to whom the finance house subsequently gave their mandate to hold the goods was the person who had sold them to the finance house o thus no case which holds that the section does not apply where after the sale the seller simply attorns to the buyer and holds the goods as his bailee right to read the section as inapplicable to cases where there has been a break in the continuity of the physical possession Legislature has enlarged the powers of persons in the actual possession of goods or documents of title, but without property therein, to pass the property in goods to bona fide purchasers. Commercial Law – Summary o o Possession of, not property in, the thing disposed of is the cardinal fact. From the point of view of the bona fide purchaser the ostensible authority based on the fact of possession is the same whether there is property in the thing, or authority to deal with it in the person in possession at the time of the disposition or not. Ratio: the words "continues in possession" were intended to refer to the continuity of physical possession regardless of any private transactions between the seller and purchaser which might alter the legal title under which the possession was held. Application to the facts of this case When a person sells a car to a finance house in order to take it back on hire-purchase o the finance house must take physical delivery if it is to avoid the risk of an innocent purchaser acquiring title to it. o Even assuming that a separate agreement of bailment, following a sale, without any break in the seller's physical possession, were sufficient to break its continuity for the purposes of the section… Here there was no separate bailment. Motordom's continued physical possession was solely attributable to the arrangement which constituted the sale. Term of the sale by Motordom to the respondent that Motordom should be entitled to retain possession of the cars for the purpose of selling them to customers. Comments: This rule imposes a penalty on first buyer for having left the goods in possession of the seller. Moral of the story is that once you acquire ownership, should not delay getting possession. Exception #4 : Rule of buyers in possession Codified in s. 25(2) SGA Applies where A sells to B under arrangement whereby B gets possession but pays over a period time and there is a suspension in transfer of ownership, but then B sells the goods to C. o Newtons : Dealership (plaintiff) sold car to Andrews under agreement that ownership would only transfer when his cheque cleared. Cheque bounced, but in the meantime Andrew sold the car to Biss, who sold it to Williams (defendant). Dealership was never paid so revendicates the car. But Williams paid for it, and wants to keep it. Court concludes that dealership may not revendicate. Andrew had valid possession (even if he did not pay), so sale to Williams is valid. This rule attempts to ensure that before giving possession of goods, seller should make sure he gets paid. The burden is on seller to ensure he obtains payment. Conditions for application of the rule: o (1) sale or promise to sell between two parties, whereby buyer obtains possession of the goods with the consent of the seller, while seller retains rights therein; o (2) sale with delivery or transfer by the person having bought or agreed to buy the goods to a third party; o (3) the third party must be in good faith and unaware of defect in title; o (4) original buyer must have possession either concurrently or subsequent to agreement to sell; o (5) original buyer must have obtained that possession with consent of the initial seller Difference between CVL and CML CML has a more “black and white” approach to these situations – either the true owner is the owner, or someone can evoke one of these exceptions and resist revendication. CVL is more complicated position; makes special provisions for professional sellers and compromises with respect to the true owner. Problem 4 : “The Worrisome Computer” Facts: On Jan 2, James buys an IBM Model 1000 computer from Office Supplies. It is a registered, conditional sale, whereby James will pay price by monthly installments (last being due on Dec 31) and ownership of computer remains Commercial Law – Summary with the seller until James has performed all his obligations. But then James wants new model - buys Model 1500 on April 1. That day, rents his Model 1000 to Ann. The written contract of lease is for a period of 6 months, ending Oct 1. It gives lessee option to purchase computer at the expiry of contract, provided notice is given before Sept 1. James continues making his installments to Office Supplies and does not inform Ann of the conditional sale. On August 25, Ann sends James a notice that she avails herself of the option, at stipulated price. It is only on Sept 10 that she finds out about the existence of a conditional sale between Office Supplies and James. What is Ann’s legal situation? CVL Assuming that Ann went through with sale under her option, have a movable resold by someone who was not the owner. Does art. 1714(2) CCQ apply? o This does not seem to meet the requirement of being in the ordinary course of James’ business. This only applies when the item is one of the standard types of objects ordinarily sold by the seller (usually when bought for resale). Was Ann in good faith? o Ar. 2943 CCQ says that in order to invoke good faith, must have checked the registry. It is clear on the facts that the conditional sale was registered. So if Ann had checked, would have found out that James was not the owner. Therefore, Office Supplies can revendicate without giving indemnity for purchase price. But Ann is not without recourse – she has recourse against James for violation of the warranty of ownership. If she has paid, can claim back purchase price in damages. She could also claim difference between additional amount she might have to pay to buy computer elsewhere. The only way to avoid nullity would be if the seller became the owner (art. 1713(2)). So if James became the owner (e.g. by paying the full amount), this might change the analysis. CML Starting point is the nemo dat rule – that James had no right to sell the property. Ann cannot invoke any of the exceptions. o Cannot invoke buyer in possession rule, because s.25(3) SGA says that registry rules have primacy. Like in CVL, Ann could make claim against James under warranty of ownership (s.3 SGA). IV. Warranty of Ownership Warranty of ownership does not only relate to the fact that when we buy something, we expect to obtain good title. It also deals with the fact that a piece of property may be subject to certain rights or limitations (e.g. security on the property, servitude, state limitations, zoning regulations or bylaws). 1. Civil Law Art. 1716 CCQ The seller is bound to deliver the property and to warrant the ownership and quality of the property. These warranties exist of right whether or not they are stipulated in contract of sale. One of the fundamental aspects of a contract of sale is that ownership is transferred. But what if, after the sale, the acquirer is told by a third party that the seller did not own the goods? The obligation is on the seller to clear up problems or title defects (arts. 1723-1725 CCQ). Warranty of ownership is essentially a supplemental protection given by the law – the seller has an obligation to protect or defend the buyer when there is a title issue. Rules originate from the Middle Ages, where buyer was entitled to have seller and third party claiming ownership to solve the issues amongst themselves. Commercial Law – Summary This rule has really evolved, even since the CCLC. Now just three provisions in the CCQ cover all of the substantive rules in this area. Why so few provisions? o This is largely a result of the registry system and the ease with which people can now determine the owner of property. Arts. 1723-5 must therefore be interpreted in light of art. 2943 CCQ. o Movables these days have a shorter lifespan. Most movable property today is basically disposable – low quality, expect to replace it in a few years. C.C.Q.: 1723-1725, 1738 Art. 1723 CCQ The seller is bound to warrant the buyer that the property is free of all rights except those he has declared at the time of the sale. The seller is bound to discharge the property of all hypothecs, even declared or registered, unless the buyer has assumed the debt so secured. Art. 1724 CCQ The seller is warrantor towards the buyer for any encroachment on his part unless he has declared it at the time of the sale. The seller is also warrantor for any encroachment commenced with his knowledge by a third person before the sale. Art. 1725 CCQ The seller of an immovable is warrantor towards the buyer for any violation of restrictions of public law affecting the property which are exceptions to the ordinary law of ownership. The seller is not warrantor towards the buyer where he has given notice of these restrictions to the buyer at the time of the sale, where a prudent and diligent buyer could have discovered them by reason of the nature, location and use of the premises or where such restrictions have been registered in the registry office. Art. 1723(1) CCQ : The seller is bound to warrant the buyer that the property is free of all rights except those he has declared at the time of the sale. “Free of all rights” has been interpreted broadly This means that any defects in title must be declared by the seller : obligation of full disclosure. See in Chartré that this provision extends to both private and public rights that may interfere with buyer’s ownership. o However, some rights in the common law are so usual they are considered an implicit and voluntary restriction on ownership (e.g. arts. 976, 1008). Chartré added two new conditions to art. 1723: o If the problem is known to the buyer, it need not be disclosed o If the restriction is registered, it need not be disclosed unless the presumption of knowledge is rebutted. Art. 1723(2) CCQ : Deals specifically with hypothecs. The only way the seller can get around the obligation to disclose existence of a hypothec on the property is if the buyer assumes the debt that the security guarantees. Chartré v. Exploitation agricole et forestière des Laurentides [2002] (QC CA) Facts: Chartré bought land after having visited it. He later found out that it was encumbered by a registered public servitude of drainage and of non-construction. Neither the seller, nor the notary Chartré consulted declared the existence of the servitude. Issue : Can Chartré obtain a remedy? Holding : Yes. While art. 1725 doesn’t apply because there was no violation at the time of the sale, the general regime of art. 1723 can offer protection. Legal Reasoning : Does art. 1725 CCQ apply? NO At first blush, seems like it should apply because the charge was imposed by the state in the public interest, and it falls outside the general regime of ownership. Commercial Law – Summary o A charge against land will be considered “public” where it serves public utility and the general interest (as distinguished from a servitude, which is private interest). However, it cannot apply because art. 1725 only applies to existing violations of public law charges, or where the property gives the illusion of “apparent legality.” [319] o Goal is to protect buyer confronted with state of affairs which appears perfectly legal but in fact violates the regulations. In this case, at the time of the sale, there was no construction so there was no violation. Does art. 1723 CCQ apply? YES If there is a public law restriction, but art. 1725 is not triggered, can still turn to art. 1723. Now question of registration. Since art. 2943 establishes a presumption that the buyer is aware of any registered real rights against the property, this would eliminate seller’s obligation to declare them. o “Si un vendeur doit obligatoirement divulguer les charges qui grèvent son bien lorsqu'il vend, ce ne peut être que pour en porter l'existence à la connaissance de l'acquéreur.” [320] However registration creates a presumption that can be rebuttable or irrebuttable o distinguer les ventes de biens immeubles de celles des biens meubles. En matière immobilière, l'inscription au registre foncier crée une présomption irréfragable de connaissance des charges de la part de celui qui se porte acquéreur d'un immeuble immatriculé. Si l'immeuble n'est pas immatriculé, la présomption est simple. En matière mobilière, la présomption est toujours simple car le registre des droits personnels ne peut procurer le même degré de fiabilité In this case, the presumption is rebutted because buyer went to trouble of checking with notary, and neither notary nor seller mentioned it. So he discharged his burden. o le notaire Léonard ne leur a pas dévoilé l'existence de la charge. o pour la consultation des registres appropriés, les acheteurs s'en sont remis à un homme de loi, ce qui constitue un geste prudent. o La personne prudente et diligente en fait autant en pareilles circonstances. En somme, ici, les acheteurs peuvent légitimement faire appel à la garantie du vendeur Ratio : le vendeur d'immeuble, qui ne déclare pas une charge, engage sa responsabilité envers l'acheteur lorsque celui-ci est dans une position où il peut repousser la présomption découlant d'une inscription au registre approprié Defendant argued that the servitude was relatively apparent or obvious from the state of the land. o While this would serve to displace application of art. 1725, art. 1723 does not say anything about whether it was evident or not. Must prove that he knew, and he didn’t. Nothing about it being hidden or apparent Liability: Problème de déterminer la responsabilité respective de deux ordres de débiteurs, la venderesse tenue à la garantie contre l'éviction, et les notaires, dont l'exécution fautive du contrat de services a causé le préjudice subi o l'objet de chacune de ces deux obligations, bien que différent, implique l'exécution d'une prestation identique, puisque, dans chaque cas, il s'agit du versement d'un montant de 33 000 $. o Cette exécution, par l'un ou l'autre des obligés, entraînera l'extinction des deux créances o À l'évidence, la solidarité prévue au Code ne trouve pas application puisqu'il ne s'agit pas d'une situation expressément prévue par une convention ou par la loi (article 1525 C.c.Q.). Obligation in solidum Comments: Shows that art. 1723 is a general provision to fall back on where the more specific provisions (in this case, art. 1725) do not find application. Chartré added two new conditions to art. 1723: o If the problem is known to the buyer, it need not be disclosed [para 24] o If the restriction is registered, it need not be disclosed unless the presumption of knowledge is rebutted. In this case, buyer has recourse against both the notary and the seller for damages. Commercial Law – Summary This is an important case because it offers added protection against public restrictions. Art. 1724 CCQ : Deals with an “encroachment” (trespass in CML) - someone using your property without right. Covers two possible scenarios: (a) seller warrants against encroachment by himself, unless it has been declared at time of sale o No defence on the part of the seller for his own encroachment on the property he sells other than full disclosure; not so much trespass in the sense of the seller coming on the land from time to time, but more so occupying it – e.g. if a seller sells a block of land, but has a house in the back that is partially (or entirely) on the land sold; (b) seller warrants against any encroachment commenced with his knowledge by a third person before the sale o The seller must be aware of the encroachment at the time of sale, and encroachment must have occurred before the sale. Art. 1725(1) CCQ :Deals with restrictions of a public nature versus those of a private nature (e.g. servitudes, hypothecs, encroachments etc.). Seller of an immovable warrants against any violations of restrictions of public law affecting the property which are exceptions to the ordinary law of ownership (municipal bylaws, provincial/federal legislation, zoning bylaws, fire regulations etc.). There may be no protection on public restrictions on how to use the land. The only protection is that the public requirement affecting the land is not being violated. So, if the restriction is being respected, you do not fall within this provision. However, you do fall within it if the restriction is violated at the time of the sale. o E.g.: Seller sells a property. He is operating a business but the property is zoned as residential, not commercial. Here, there is a restricting (zoning law) and a violation, so the provision would apply. o E.g. 2: But what if the land were vacant and zoned as commercial, and buyer’s intention was to build a residential condo on it? At the time of the sale, there would be a public restriction on the land (zoning law), but no violation. So this provision would offer no protection to the buyer. Bottom line is that to fall within protection of 1725(1), four conditions must be met: (1) property sold must be an immovable; (2) there must be a public law restriction; (3) there must be a violation existing at the time of the sale, and (4) it must not be part of the ordinary law. However, Chartré shows that if the case does not fall under art. 1725, may still be able to look to art. 1723 for protection (general regime still applies to public law restrictions). Art. 1725(2) CCQ :Even once all of the conditions of the first paragraph are met, there are three possible defenses (1) seller has given notice of the restriction to the buyer at the time of the sale (2) a prudent and diligent buyer could have discovered the restriction by reason of the nature, location and use of the premises Use same factors that are used to assess prudent and diligent buyer with respect to warranty of quality : status of seller, status of the buyer, age of the property, nature of the defect, price, nature of the property and conduct of the parties. (3) restriction has been registered with the registry office Conventional Warranty Art. 1732 CCQ : Parties may, in their contract, add to obligations of legal warranty, diminish its effects or exclude it altogether but in no case may seller exempt himself from his personal fault. o Latter part is a rule of public order, cannot be contracted out of. o Cannot exclude responsibility for the warranty of ownership related to any act that the seller has been personally involved in. Art. 1733 CCQ : Seller may not exclude or limit his liability unless he has disclosed the defects of which he was aware or could not have been unaware and which affect the right of ownership or the quality of the property. An exception may be made to this rule where a buyer buys property at his own risk from a seller who is not a professional seller. o It is a question of negligence when it says “could not have been unaware” Commercial Law – Summary o In Trilogy of Stolen Cars, Court of Appeal came up with different ways to interpret this – completely incomprehensible, no general principle to take away. Does not have same meaning as used in warranty of quality. Paragraph 2 says that an exception can be made if seller is not a professional seller and buyer bought at his own risk and peril. o Allow professional sellers to exclude liability BUT buyer must be a professional buyer with the same expertise as well. Even if these articles apply and seller can exclude liability with respect to warranty of ownership, buyer can attempt to claim fraud (arts. 1401, 1407 CCQ). Note that in the CVL, it is very difficult for the seller to eliminate the suppletive provisions governing protection of the buyer. It is far easier in the CML. Art. 1738 CCQ A buyer who discovers a risk of infringement of his right of ownership shall, within a reasonable time after discovering it, give notice to the seller, in writing, of the right or claim of the third person, specifying its nature. The seller may not invoke tardy notice from the buyer if he was aware of the right or claim or could not have been unaware of it. Art. 1738(1) CCQ : A buyer who discovers a risk of infringement of his right of ownership shall, within a reasonable time after discovering it, give notice to the seller, in writing, of the right or claim of the third person, specifying its nature. In terms of “reasonable time” some cases use the same time limit as warranty of quality (6 months) but this is not set in stone. However, if it is not done in what court considers a reasonable time, will lose right to claim any compensation. Jurisprudence has now said that notice can also be verbal. Seems strict to require that buyer provide notice where he even discovers risk of infringement. Note that this does not apply to all infringements, only to those coming from a third person. If risk comes from seller himself, would be no requirement of notice. Exception provided in art. 1738(2) CCQ : seller may not invoke tardy notice from the buyer if he was aware of the right or claim or could not have been unaware of it (negligence standard). Enforcement of warranty of ownership is simply governed by art. 1590 CCQ. Plaintiff can ask for: (1) specific performance (2) resolution or resiliation of the contract or a reduction of his obligations; or (3) any other measures provided by law to enforce his right to performance of the obligation. Larin v Curadeau, JE 97-475 (CA) Facts : Plaintiff/Appellants saw an ad saying property was being sold that could be used as a storage business Plaintiff unsure about this claim as none of the surrounding apartments allow for businesses Defendant, seller, says that all is cool but that you shouldn’t put a sign up; be discrete about it Plaintiff buys the immovable from the seller and sets up a storage business Bylaw officer comes around and says that zoning regulations ban businesses from being set up Plaintiffs sue saying they bought the immovable to make a business and defendant didn’t say that it wasn’t allowed Reasoning Majority Les limitations de droit public, découlant d'un règlement de zonage qui restreint l'usage d'une propriété, ont tantôt été assimilées à des vices cachés, tantôt à des servitudes non apparentes o on doit y retrouver un élément occulte le vice doit être caché ou la servitude ne doit pas être apparente. Commercial Law – Summary ne suffit pas de dire que le vendeur n'en a pas fait mention, mais il faut établir qu'un acheteur normalement prudent et avisé aurait été induit en erreur Les mesures de droit public qui limitent l'usage de la propriété foncière sont considérées comme des servitudes légales d'utilité publique qui doivent être dénoncées au vendeur lorsqu'elles échappent au droit commun de la propriété et qu'elles ne peuvent être découvertes par la nature, l'utilisation ou la situation des lieux. o si l'assignation à des immeubles d'un usage restrictif, par un règlement de zonage, équivaut à une servitude de caractère légal, étant donné que ce règlement est autorisé par une loi de la Législature provinciale, il ne faut pas en déduire dans tous les cas une présomption de connaissance de la part de l'acheteur : il faudra pour ce faire que des indices matériels viennent susciter le doute dans son esprit Apply facts to the case o n'a pas conclu à la mauvaise foi du vendeur peut raisonnablement croire qu'il pensait que l'occupation commerciale, qui avait été tolérée dans le passé se poursuivrait sans encombre o peut pas affirmer que les appelantes ont fait preuve de la prudence normale qu'on exige d'un acheteur raisonnablement prudent et avisé. Elles savaient que l'immeuble était situé dans une zone résidentielle et que l'utilisation du garage à des fins d'entreposage devait se faire d'une façon discrète (sans enseigne à l'extérieur) Messina case (very similar) : o La configuration des lieux et les traces laissées par les travaux de transformation devaient nécessairement indiquer à Messina que l'espace du sous-sol avait été soustrait à sa vocation originale, ce qui aurait dû le mettre sur ses gardes et l'inviter à s'informer de la conformité des espaces de stationnement qui restaient aux normes municipales : ... o ... Dans des circonstances où la disposition physique des lieux aurait déjà dû le mettre en garde, l'appelant ne peut s'en prendre qu'à lui-même Strong Dissent « Donc, suivant les appelantes, [les demandeurs] savaient que le bâtiment secondaire ne pouvait pas être exploité comme magasin. » [335] o D'autre part, de ce qu'elles voyaient et de ce qui leur était dit par l'intimé, elles pouvaient comprendre que le bâtiment pouvait être exploité comme entrepôt, à la condition qu'il n'y ait pas d'enseigne à l'extérieur du bâtiment. o Effectivement l'offre d'achat réfère au fait que le bâtiment secondaire est exploité comme entrepôt. manifeste qu'en fixant le prix qu'elles étaient prêtes à payer pour les deux bâtiments, faisaient un investissement, prenaient en compte le fait que l'entrepôt rapportait un loyer mensuel de 300$ o En réalité, si ce qu'a dit l'intimé aux appelantes avant l'offre d'achat était aussi ambigu que son témoignage lors de l'instruction, il n'est pas surprenant que les appelantes n'aient pas compris que l'exploitation du bâtiment secondaire comme entrepôt était une exploitation clandestine. Il est certain, et les appelantes l'admettent, que l'intimé a avisé les appelantes que le bâtiment accessoire ne pouvait pas abriter un magasin. o Il est certain également que l'intimé a avisé les appelantes qu'on ne pouvait pas installer une enseigne sur le bâtiment. o Mais l'intimé n'a jamais explicitement dit aux appelantes que l'exploitation du bâtiment comme entrepôt était également défendue. o À l'audience l'avocat de l'intimé nous a affirmé que, sans le dire en toutes lettres, son client avait suggéré aux appelantes que l'exploitation du bâtiment comme entrepôt était une exploitation clandestine. Selon l'avocat de l'intimé, de ce qu'elles avaient vu et de ce qu'elles avaient entendu de l'intimé, les appelantes auraient dû comprendre qu'il fallait être "discret" dans l'exploitation du bâtiment comme entrepôt Commercial Law – Summary Les appelantes étaient peut-être des personnes naïves, mais, à mon humble avis, elles n'ont jamais su avant d'acquérir l'immeuble que l'exploitation du bâtiment secondaire comme entrepôt violerait le règlement d'urbanisme. Il me paraît manifeste que, si les appelantes avaient su cela avant d'acquérir l'immeuble, elles n'auraient jamais acheté cet immeuble ou, à tout le moins elles n'auraient pas payé le prix de 164 500$. l'intimé savait que l'exploitation de son bâtiment comme entrepôt était illégale. o une situation où un vendeur qui sait que son bâtiment est exploité illégalement comme entrepôt le met en vente comme "entrepôt" et ne dit pas clairement à son acheteur que l'utilisation est illégale, pour, par la suite, devant une action en diminution de prix, prétendre que l'acheteur aurait dû déchiffrer de ses paroles que cette occupation était illégale. Il ne s'agit pas d'un cas où, devant des indices physiques, un acheteur se ferme les yeux ou simplement manque de vigilance. Ratio Don’t be a stupid buyer. Article 1725 incorporates a certain negligent, certain hidden element into warranty of title, unlike article 1723 2. Common Law S.13 SGA. relates to both commercial and private sales, and to both chattels and real property. S.G.A.: 13 Art. 13 SGA In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is, (a) an implied condition on the part of the seller that in the case of a sale the seller has a right to sell the goods, and that in the case of an agreement to sell the seller will have a right to sell the goods at the time when the property is to pass; (b) an implied warranty that the buyer will have and enjoy quiet possession of the goods; and (c) an implied warranty that the goods will be free from any charge or encumbrance in favour of any third party, not declared or known to the buyer before or at the time when the contract is made. s.13 SGA : Unless parties’ intentions indicate otherwise, a contract of sale imposes three obligations: a) title obligation : implied condition that, in case of a sale, seller has the right to sell the goods, b) quiet enjoyment of the goods : implied warranty that the buyer will not be disturbed in its use by third parties who might make claims on the goods; right to use without disturbance; and c) goods are free of any charge or encumbrance of a third party not disclosed to the buyer : an implied warranty; very similar to Art. 1723 (2) CCQ. Two things to note: Recall the difference between a condition and a warranty with respect to remedies These obligations can be excluded, must fewer restrictions than we saw in CVL. Niblett [1920] (UK CA) Deals with equivalent of ss.13(a) and (b) SGA. This case involves the sale of cases of condensed milk labeled under the name “Nissly.” Nestle contended that the cases infringed on their trademark. Buyer, through injunctive remedies, was prevented from selling these goods as they could only be sold on a no-name basis. Buyers sued sellers for damages. Was this a breach of the warranty of ownership? Commercial Law – Summary o Held that SGA does apply because (a) should be interpreted broadly. If you cannot sell these goods because of trademark violations, you don’t have the “right to sell the goods” within the meaning of s.13(a). Note that the CVL doesn’t get into this. CML has extended IP law to contracts. o There is no right to sell the goods if the goods are in violation of applicable trademark; there is no quiet possession, since Nestle could prevent them from selling. S.13 also covers disturbances by a third party. Main takeaway is that title does not automatically mean that the holder as a “right to sell.” Rowland v. Divall [1923] (UK CA) Facts: D (defendant) bought a car, and resold it to R (plaintiff). R used the car for several months then resold it to a third party, who took possession of it. Subsequently, the car was seized by the police and returned to the rightful owner, from whom it had been stolen by the person who had initially sold it to D. R refunded his buyer, and sought a refund from D. D refused. Issue : Is D liable for the breach of warranty of the right to sell and the right of quiet possession, thereby entitling R to recover the full purchase price? Holding : Yes. Notwithstanding that he had had the use of the car the consideration had totally failed, and he was entitled to get the purchase money back. The use of the car that he had had was no part of the consideration that he had contracted for, which was the property in and lawful possession of the car, o what he got was an unlawful which exposed him to the risk of an action at the suit of the true owner Legal Reasoning (Lord Atkin): Court rejected both of seller’s defenses: o (1) the buyer cannot return the vehicle to the seller, so he can’t ask for cancellation (because, of course, he has to return it to the original owner) Not the buyer’s fault that the car was seized from him by true owner – he had a legal responsibility to give it to someone else. o (2) the buyer benefited from use and could no longer ask for cancellation “it cannot possibly be said that the plaintiff received any portion of what he had agreed to buy. It is true that a motor car was delivered to him, but the person who sold it to him had no right to sell it, and therefore he did not get what he paid for-namely, a car to which he would have title; S. 12 SGA: " In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is (1) An implied condition on the part of the seller that .... he has a right to sell the, goods." o “it cannot now be disputed that there was an implied condition on the part of the defendant that he had a right to sell the car, and unless something happened to change that condition into a warranty the plaintiff is entitled to rescind the contract and recover back the money.” Where a condition of a contract is breached, the plaintiff is entitled to rescind the contract and recoup the entirety of the purchase price. o This will apply against the condition of the right of sale, unless the buyer has been compelled to treat the condition as a warranty (in which case he can only get damages). Defendant argued that no condition was breached because once there is transfer of ownership, s.12(3) SGA holds that all breaches of conditions are to be treated as a breach of warranty. Lord Atkin gets around this by saying that there was in fact no transfer of ownership because the seller did not have good title. o Basically saying that failure to convey title is a total failure of consideration – property with no title is not worth anything. o “There can be no sale at all of goods which the seller has no right to sell” So because there was a breach of a condition, buyer is entitled to recision of the contract. The recision of a contract yields an obligation of restitutio in integrum. Commercial Law – Summary o In this case, R cannot return the car. However, full restitution is impossible precisely because D breached his obligation. As such, it would be absurd to allow D to rely upon his own breach as a defense Comments: Often see courts trying to read down or get around the application of s.12(3) SGA. enjoyment without title is not true enjoyment because its not worth anything. 3. International Law Vienna 1980: 41-44 Art. 41 CSIG Art. 42 CSIG Art. 43 CSIG Art. 44 CSIG The seller must deliver goods which are free from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim. However, if such right or claim is based on industrial property or other intellectual property, the seller’s obligation is governed by article 42. (1) The seller must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on industrial property or other intellectual property: (a) under the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State; or (b) in any other case, under the law of the State where the buyer has his place of business. (2) Obligation of seller under the preceding paragraph does not extend to cases where: (a) at the time of the conclusion of the contract the buyer knew or could not have been unaware of the right or claim; or (b) the right or claim results from the seller’s compliance with technical drawings, designs, formulae or other such specifications furnished by the buyer. (1) The buyer loses the right to rely on the provisions of article 41 or article 42 if he does not give notice to the seller specifying the nature of the right or claim of the third party within a reasonable time after he has become aware or ought to have become aware of the right or claim. (2) The seller is not entitled to rely on the provisions of the preceding paragraph if he knew of the right or claim of the third party and the nature of it. Notwithstanding paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice. The international law rules are found in arts. 41-44 CSIG, which have essentially codified Niblett: Art. 42(1) CISG : General rule that IP rights must be respected o It is the law of the place of the buyer that must be respected; but there are two scenarios which would reduce this protection: (a) where the buyer knew or should have known that the goods would be in violation of trademark, and (b) where the breach of IP results from the buyer’s requirements or specifications. Art. 43 CISG : In the event that there is a violation under the warranty of ownership, the buyer must give a notice specifying the nature of the right or claim of the third party. o Note that this is the exact wording found in art. 1739 CCQ (this was its source). o This responsibility is excluded where seller was aware or could not have been unaware. Problem 5 : “Patricia” Facts: Pat wanted to buy Terry’s house. She arranged financing at her bank, reached an agreement with Terry, and entered into a contract of sale. Shortly thereafter, Pat received a notice from Laurier, demanding payment of $50,000. Apparently, Terry still had a hypothec registered against the property. Unable to reach Terry, Pat sought an order of the court against Terry, to force him to radiate the hypothec (strike it from the registration roll). Terry’s defense was that the hypothec was registered against the property. As such, the buyer should have known of its existence. In addition, Commercial Law – Summary he stated that creditors impose a heavy penalty for advance payment of hypothecs, and he was not willing to take on such a heavy financial burden. What issues might a court consider before granting the order? Note : Since we don’t cover the CML rules for real estate in this course, will take CVL perspective. Art. 1723(2) : Seller is bound to discharge the property of all hypothecs, even declared or registered, unless the buyer has assumed the debt so secured. There is no evidence that Pat assumed the debt in this case. This is the only exception! Presumed knowledge, even registration, does not matter However, the court would be reluctant to order the seller to radiate (remove) the hypothec, so what would be Pat’s recourse? Damages for violation of the warranty of ownership Quantum of damages will be in the amount of the hypothec Pat could also sue the notary – should have picked up on the hypothec. Also remember that Pat obtained financing from the bank in order to acquire the property. The bank could sue the notary The hypothecary creditor will be upset because he won’t get first-ranking hypothec. C. SELLER’S OBLIGATIONS I. Warranty of Quality With warranty of quality, its scope has expanded and its importance has increased. o Relates not only the quality of the goods, but also the safety of the goods o Obligation extends beyond immediate seller and buyer o Addition of certain accessory obligations (e.g. in QC have obligation to warn, liability for safety defects, Canadian Consumer Product Safety Act which emulates American legislation, etc.) 1. Civil Law A) CONDITION AND DEFECTS To begin, art. 1716 CCQ deals with warranty of quality as well as ownership. o Seller is bound to warrant ownership and quality of the property, regardless of whether it is mentioned in the contract. If parties want to exclude its application, must indicate it expressly. o Also applies in a number of other contracts, e.g.: o Contract of exchange (Art. 1798 CCQ) o Giving in payment (Art. 1800 CCQ) : Suppose you owe me a debt, and I agree to extinguish the debt if you give me property in place of payment. If that property is defective, there is a warranty of quality. o Alienation for rent (Art. 1805 CCQ) : Refers to payments made in annuity over a period o Leasing (Art, 1845 CCQ) : Suppose you want something but cannot afford it. Leasing company provides financing (like bank would), and law considers person giving financing equivalent to a seller so lessee will have the right to invoke warranty. But there are also more specific provisions dealing with the substance of the warranty of quality: C.C.Q.: 1726-1733, 1739, 1794 Warranty of Quality Commercial Law – Summary Art. 1726 CCQ Art. 1727 CCQ Art. 1728 CCQ Art. 1729 CCQ Art. 1730 CCQ Art. 1731 CCQ The seller is bound to warrant the buyer that the property and its accessories are, at the time of the sale, free of latent defects which render it unfit for the use for which it was intended or which so diminish its usefulness that the buyer would not have bought it or paid so high a price if he had been aware of them. The seller is not bound, however, to warrant against any latent defect known to the buyer or any apparent defect; an apparent defect is a defect that can be perceived by a prudent and diligent buyer without any need of expert assistance. If the property perishes by reason of a latent defect that existed at the time of the sale, the loss is borne by the seller, who is bound to restore the price; if the loss results from superior force or is due to the fault of the buyer, the buyer shall deduct from his claim the value of the property in the state it was in at the time of the loss. If the seller was aware or could not have been unaware of the latent defect, he is bound not only to restore the price, but to pay all damages suffered by the buyer. A defect is presumed to have existed at the time of a sale by a professional seller if the property malfunctions or deteriorates prematurely in comparison with identical items of property or items of the same type; such a presumption is not made, however, where the defect is due to improper use of the property by the buyer. The manufacturer, any person who distributes the property under his name or as his own, and any supplier of the property, in particular the wholesaler and the importer, are also bound to warrant the buyer in the same manner as the seller. Sale under judicial authority does not give rise to any obligation of warranty of the quality of the sold property. Conventional Warranty Art. 1732 CCQ The parties may, in their contract, add to the obligations of legal warranty, diminish its effects or exclude it altogether but in no case may the seller exempt himself from his personal fault Art. 1733 CCQ A seller may not exclude or limit his liability unless he has disclosed the defects of which he was aware or could not have been unaware and which affect the right of ownership or the quality of the property. An exception may be made to this rule where a buyer buys property at his own risk from a seller who is not a professional seller. There are six conditions necessary for the warranty of quality to apply: 1. Defect must be latent, not apparent : defect will be considered apparent when it can be perceived by a prudent and diligent buyer without expert assistance, or when seller has fully disclosed it to the buyer [art. 1726(2)]. 2. Defect must be serious : defect will be serious when it is the case that if buyer had known about the defect, he wouldn’t have bought the property or wouldn’t have paid such a high price [art. 1726(1)]. 3. Defect must have existed prior to the sale [art. 1726(1)]. 4. Defect must have been unknown to the buyer [art. 1726(2)]. 5. Defect must have been known (or presumed to be known) to the seller in order to obtain damages [art. 1728]. 6. Buyer must give written notice within a reasonable time [art. 1739(1)], but late notice is okay if seller knows or is presumed to know of the defect at time of sale [art. 1739(2)]. What is meant by a “defect” under art. 1726? A defect generally means a derogation from the applicable norms, which can be found in various sources (both codified and not codified). Mere derogation is not sufficient to trigger warranty of quality under art. 1726 CCQ. o In some cases, warranty of quality will cover a defect that is not a derogation from established norms because there are no real norms dealing with that area (e.g. Cook). Some defects do not only derogate from norms, they also impair the use of the product. Art. 1726 only covers defects which impair use of the product. Commercial Law – Summary o What constitutes “use”? SCC in ABB decided that the reasonable expectations of the buyer determine whether or not there has been an impairment of use. This means that value could conceivably be covered. Various impairments end up being covered by the warranty of quality, even if we can’t really say that all such impairments are “defects” (e.g. a person buys something and uses it improperly which causes it to deteriorate, and resells it). Warranty of durability (i.e. against wear and tear”) is only imposed on professional seller (art. 1729 CCQ). Bottom line : Any fact or set of facts which impair the expected normal use of the buyer will be considered a “defect” for the purposes of the warranty of quality. So the warranty is not really against the existence of a latent defect so much as it warrants reasonable, normal use. The evolution of art. 1726 CCQ has essentially become equivalent to the requirement under the CPA that a product be fit for its intended use. What is meant by “latent” under art. 1726? Four conditions: o Defect must exist at time of the sale ; need not be full-blown, but must exist “en germe.” o Defect must be unknown to the buyer; refers to positive knowledge. o Defect must be serious; buyer would not have bought it at all, or would have insisted on reduction in price. o Defect must be hidden; hidden means not apparent, could not be perceived by a prudent and diligent buyer without expert assistance. When is a defect “apparent”? Placement Jacpar v. Benzakour [1989] (QC CA) LeBel J. set out seven criteria to determine whether a normal inspection will suffice, or whether an in-depth inspection is required to discharge buyer’s obligation of reasonableness and diligence: 1. Status of the seller : is seller a professional or not? 2. Status of the buyer : is the buyer a professional or not? 3. Nature of the property : is property movable or immovable? 4. Age of the property : the older the property, the more in-depth inspection must be 5. Price of the property : the more expensive the property, the more in-depth inspection must be 6. Type of defect 7. Behaviour of the parties : if the seller acts in such a manner to suggest the property is free of defects, may require less in-depth inspection. Placement Jacpar v. Benzakour [1989] (QC CA) Facts The shitty cement apartment that falls apart! The key facts is the negotiations, the inspection of the apartment building, what a latent defect and prudent purchaser is in these circumstances…will copy-paste the key extracts from the facts Parent affirme avoir visité une première fois l'édifice en juin 1983 o Cette visite se déroule uniquement avec le courtier. o L'acheteur procède à une visite générale de l'immeuble et examine quelques appartements. remarque que la parqueterie de certains appartements se décolle près des fenêtres. Le courtier lui déclare qu'il s'agirait de problèmes très mineurs Après cette visite, Jacpar présente une offre d'achat au montant de 855 000,00$, conditionnelle à la visite des logements et à la vérification des baux. Benzakour accepte la proposition. o Une seconde visite a lieu avec Farouk et Benzakour. o Parent examine l'ensemble de l'immeuble, de la cave au toit. Il se fait ouvrir d'autres appartements. Il souligne à nouveau, devant Benzakour, le problème de la parqueterie et en demande la cause Commercial Law – Summary Celui-ci lui répond à nouveau qu'il s'agit de problèmes de locataires imprudents o Au cours de ces visites, Parent n'est assisté d'aucun expert ou technicien en construction. Le 22 juillet 1983, Jacpar signe l'acte de vente. Celui-ci contient notamment des clauses par lesquelles l'acheteur reconnaît avoir visité les lieux et être satisfait de leur état. Soon after the sale, shit goes down, water seapage, insulation problems, cracking due to the quick thawing and pressure/temperature gradients o Jacpar réclame les coûts complets de correction des défauts de l'immeuble o Elle réclame des dommages divers qu'elle évaluait à plus de 110 000,00$ dans sa déclaration. Benzakour rejette complètement cette réclamation, en s'appuyant sur l'expertise de Dubois Benzakour admet qu'il existait des vices de construction: absence de calfeutrage, de système de ventilation dans les appartements, de chantepleures dans la brique des murs pour assurer l'évacuation de l'eau. Les intimés soutiennent néanmoins que tous ces vices étaient apparents, en ce sens qu'ils auraient pu être constatés au premier coup d'oeil, si seulement Parent s'était fait accompagner d'un expert de la construction Leur présence aurait dû mettre en garde l'acquéreur contre la possibilité de défauts Reasoning La notion de vice caché et l’obligation d’expertise L'article 1522 C.c. impose une obligation de garantie au vendeur o L'article 1523 C.c. tempère cette garantie, lorsqu'il en exclut les vices apparents: (CCQ 1726) "Le vendeur n'est pas tenu des vices apparents et dont l'acheteur a pu lui-même connaître l'existence. On doit définir ce que signifie cette notion de vice caché, de déterminer pour qui et dans quelles circonstances un défaut est considéré comme caché au sens de l'article 1522 C.c [404] o S'opposant au vice apparent, il doit être celui qui ne se révèle pas à l'examen de la chose vendue o "Le vice ne doit pas, lors de la vente, se révéler à l'examen de la chose vendue. si le vice dont se plaint l'acheteur est apparent, quelque grave qu'il soit, il ne donne aucune action contre le vendeur. le défaut est apparent s'il pouvait être perçu par l'acheteur ayant pris toutes les précautions raisonnables." Cette exigence du caractère caché d'un vice pour la mise en oeuvre de la garantie légale se rattache au comportement du vendeur o impose un standard de conduite à l'acquéreur d'un bien meuble ou immeuble l'acquéreur est tenu à une obligation de prudence et de diligence. prête une attention suffisante à l'objet qu'il examine Il faut évaluer le comportement de l'acquéreur par rapport à la norme objective de l'acheteur raisonnable et prudent. Dans l'un et l'autre cas, l'examen antérieur à l'achat n'est pas un examen approfondi, comportant un travail spécial o "Le vice est en effet caché s'il ne peut être aperçu eau moyen d'un travail qu'il n'est pas dans l'usage de faire." o vérification élémentaire; inspection de normale ou de normalement; "simple examen"; "inspection raisonnable" o Le vice cesse d'être apparent lorsqu'il ne peut plus être constaté qu'après des recherches minutieuses, d'un caractère spécial Dans le cas d'un édifice comme celui de l'appelante, l'acheteur prudent ou son expert, s'il en engageait un, satisferait à l'obligation d'inspection en procédant à un examen visuel des principaux éléments constitutifs de l'extérieur et de l'intérieur, des principaux systèmes mécaniques accessibles de la toiture et en vérifiant l'état de quelques-uns des appartements. Il ne serait pas obligé de tout vérifier dans le détail et encore moins, de commencer à ouvrir ou à sonder planchers, murs, plafonds ou fondations. o But do we need an expert??? Were Parent’s expertise enough? Have to look at all the facts and circumstances of the case Commercial Law – Summary prend en considération des facteurs tels que le statut du vendeur, s'il est professionnel ou non, celui de l'acquéreur, la nature, l'âge et le prix du bâtiment, le type de vice et parfois, le comportement même des parties o « Toutefois, alors que l'absence d'expertise peut dans certains cas constituer une faute ou une négligence, l'expertise sera, dans d'autres cas, jugée non essentielle au succès d'un recours basé sur des vices cachés." ces fausses représentations ou le dol du vendeur quant à l'état de la chose ou aux causes réelles de vices apparents, dégageront parfois l'acquéreur de l'obligation d'explorer davantage o Le dol ou le mensonge du vendeur peut rendre un vice juridiquement caché surtout lorsque l'acquéreur a demandé une explication au sujet des manifestations d'un défaut et qu'on l'a orienté sur une fausse piste. On ne peut reprocher à l'acquéreur de soupçonner la mauvaise foi de son vendeur Applying law to facts l'immeuble en litige était important. o Il comprenait quarante logements. o Il était relativement neuf, puisque construit depuis un peu moins de dix ans avant l'achat. Parent, le principal actionnaire de Jacpar, décrit comme un homme inexpérimenté, sans être un professionnel de ce milieu, possédait une expérience pratique de l'immobilier. o Il avait déjà acheté, administré et revendu plusieurs immeubles à revenus. o Il n'était donc pas complètement ignorant des problèmes de construction, même s'il s'agissait de son premier immeuble à structure de béton L'expert Dubois, pour les intimés, a soutenu que du simple examen visuel de la dalle, laissée à nu, sans isolation à l'extérieur, l'on pouvait conclure à la présence d'un défaut de construction. o Rappelons toutefois que cette transaction s'est déroulée principalement pendant l'été et que le phénomène de condensation dépendait surtout de la présence du froid à l'extérieur o Le seul signe inquiétant était le soulèvement des parquets, au sujet duquel il a reçu la réponse que l'on connaît de Benzakour Or, Benzakour savait qu'il avait rencontré des problèmes répétés avec sa parqueterie, depuis trois ans devait savoir qu'il existait un problème dont la cause n'était pas celle qu'il indiquait. o on ne saurait reprocher à Parent de ne pas avoir poussé plus loin son enquête, alors qu'on l'orientait dans une mauvaise direction et qu'on lui créait une fausse sécurité. Sur ce point, on peut reprocher dol et fausses représentations de la part de Benzakour. Un homme raisonnable, auquel on donnait une explication plausible, n'avait pas à pousser plus loin sa vérification et à engager un expert. Il n'avait pas à présumer la mauvaise foi de son interlocuteur. L'attitude de Benzakour, jointe à la nature même du vice, qui supposait un examen des lieux au bon moment de l'année, créait une situation qui, de toute façon, constituait un vice caché au sens de l'article 1522 C.c. pour Parent, qu'il ait été accompagné ou non d'un expert. How to assess damages When choosing how best to fix the apartment, pick the cheapest option that most reasonably resolves the problem long-term! o 10 000,00$ pour le coût des réparations se rapportant aux infiltrations d'eau provenant du toit et aux difficultés causées par le pont thermique o 6 000,00$ pour les réductions de loyers. o 35,00$ pour les fins de la preuve en cours, o 1 200,00$ pour le reste des dommages o L'indemnité pour dépenses additionnelles atteindrait 18 635,00$ This indemnity is the maximum buffer that the court set for fixing the insulation problem. Commercial Law – Summary After determining 18 635,00$ was enough for the cheapest, most reasonable solution, the court says that the plaintiff is allocated that amount to fix the problem! Cook v. Warren [1992] (QC CS) Facts: Cook [plaintiff] purchased a home from Warren [defendant] for $250 000. Cook’s inspector checked the building and found no problems. But turned out there was a bat colony living in the exterior walls that had lived there for some years. Expert said it would be very difficult to get rid of them. Cook contacted Warren just two weeks after moving in. Cook seeking annulment of the sale, reimbursement of purchase price, and damages. Issue : Does the warranty of quality apply? Holding : Yes. The warranty applies, as the defect was both latent and serious. Legal Reasoning: Seriousness (a) Consider scope of the remedial work to correct the problem and prevent its recurrence, and the cost of such repairs o Cost would be at least $20,000, and would be extensive - have to seal off all access points during the winter to prevent bats from nesting there. (b) Consider utilitarian function o Bats do not threaten the structural integrity of the house or pose any health risk. There is just some chirping and droppings. So from objective standpoint, don’t seriously affect use of premises as a residential dwelling. (c) Consider economic consequences o Purchase of a home is an important investment, often people have a view of reselling in the future. Bat colony adversely affects the value of the house (even if corrected). (d) Consider psychological factor o Bats were a source of stress to the family o However, seems like this might have been exaggerated (normal expectation of critters when moving to the countryside?). All things considered, it can be viewed as a “serious defect” especially from economic perspective. Latency Placement Jacpar Inc. -vs-Bensakour: o "Le vice, pour donner droit à la garantie, doit être caché. Il ne doit pas, lors de la vente, se révéler à l'examen de la chose vendue. si le vice dont se plaint l'acheteur est apparent, quelque grave qu'il soit, il ne donne aucune action contre le vendeur. o Cette exigence découle de l'art. 1523 C.C. Le vice apparent est celui dont l'acheteur a pu lui-même connaître l'existence. [...] le défaut est apparent s'il pouvait être perçu par l'acheteur ayant pris toutes les précautions raisonnables." Cook was diligent in hiring an expert, and facts established that there was no fault on the part of the expert with respect to the type of inspection carried out. Warren argued he should have examined attic more closely because then he would have found bat droppings which would have indicated need to examine further. o But the type of inspection mandated is reasonable inspection. o If inspector was also a bat expert maybe would have found it. But this goes far beyond the obligation of inspection imposed on the purchaser. o “not only was Cook diligent in obtaining the services of an inspector but, in my view, the inspector cannot be faulted for having failed to detect external signs of bats or signs which would have prompted him to recommend a more detailed investigation.” [368] Placement Jacpar Inc. -vs-Bensakour: Commercial Law – Summary l'examen antérieur à l'achat n'est pas un examen approfondi, comportant un travail spécial. Le vice est en effet caché s'il ne peut être aperçu qu'au moyen d'un travail qu'il n'est pas dans l'usage de faire. "vérification élémentaire". o inspection de normale ou de normalement attentive. Des arrêts plus récents de notre Cour parlent d'un examen rapide ou d'un "simple examen", ou encore d'une "inspection raisonnable". Le vice cesse d'être apparent lorsqu'il ne peut plus être constaté qu'après des recherches minutieuses, d'un caractère spécial. Trembloy v. Galipeau [2003] (QC CA) Facts: Trembloy [plaintiff] bought a chalet built in 1973, with a 10 year old addition, from Galipeau [defendant]. After inspecting the house himself, he asked questions about the septic system and flooding. The people who had rented the home for some time prior to the sale indicated that they never had problems. He was satisfied with their statements praising the quality of the home, so he bought it without having a formal inspection. Starting Nov. 1998, the chalet slowly got moldy and smelly. In April 1999, he called in an inspector, who told him the chalet was no longer habitable. Trembloy notified Galipeau and sought nullification of the sale and damages. Issue : Is Trembloy entitled to nullify the sale and obtain damages? Holding : Yes. Despite the fact that the damages were not latent, the defendant’s negligent misrepresentation transforms apparent defects into latent ones. He is therefore entitled to nullify the sale and obtain damages. [384 for short and sweet headnote] Legal Reasoning (Fish J.): Both of the lower courts found in favor of the defendant, because experts indicated that the defects were apparent for more than a year before the sale. o This means that Galipeau was aware of the issues. But when Trembloy asked about them, he deliberately withheld information (and possibly actively persuaded him that there weren’t any). “Si l'appelant n'a pas poussé plus loin son examen des lieux avant l'achat, c'est qu'il avait été entièrement rassuré par les propos des intimés. Ainsi, quand il eut commencé à creuser afin de localiser la fosse septique, l'intimé lui suggéra de cesser cette démarche, lui donna quelques explications sur la localisation du réservoir et lui déclara qu'il n'avait jamais eu de problème à ce sujet.” [385] o Furthermore, en retenant du témoignage des experts que les vices étaient apparents, un an avant leur inspection, et en ne tenant aucun compte de ce que tous les témoins qui avaient habité l'immeuble ou qui l'avaient visité déclaraient le contraire, le juge d'instance a commis une erreur manifeste et dominante Where the seller engages in fraudulent misrepresentation which conceals or minimizes the defect, it transforms an otherwise apparent defect into a latent one. o The only reason Trembloy did not investigate further was that Galipeau made these representations. o His failure to include the defects amid all of his reassuring and positive comments makes him liable for this misrepresentation. Des réticences et des abstentions visant à minimiser les défauts, peuvent constituer un dol1. o des représentations erronées du vendeur ont fait d'un vice apparent, un vice juridiquement caché o L'omission de divulguer des informations pertinentes et adéquates quant à la gravité du vice révélé par des signes apparents, engage la responsabilité du vendeur Il y a donc lieu de prononcer l'annulation du contrat de vente Blanchard v. Guertin [2004] (QC CA) Commercial Law – Summary Facts: In 1998, appellants bought a house from the respondents that was built in 1920. On year after they took possession of the house, they claimed that the entire wooden structure was rotting. They sought to have the purchase price reduced. Markings from previous touch-ups were apparent, and the respondents had warned them that repair would be necessary. On the other hand, the sale was done quickly, and the structural damage was not readily visible. Issue : Are the appellants entitled to a reduction of the sale price? Holding : No. The appellants were negligent in failing to investigate further or conduct tests. Legal Reasoning: How to interpret the standard of conduct for the buyer under 1726 o L'acheteur prudent et diligent d'un immeuble procède à un examen visuel attentif et complet du bâtiment. o Il est à l'affût d'indice pouvant laisser soupçonner un vice. o Si un doute sérieux se forme dans son esprit il doit pousser plus loin sa recherche. D'une part, on ne peut exiger d'un acheteur prudent et diligent une connaissance particulière dans le domaine immobilier. D'autre part, on ne peut conclure au vice caché si le résultat d'un examen attentif aurait amené une personne prudente et diligente à s'interroger ou à soupçonner un problème. o À partir de ce point l'acheteur prudent et diligent doit prendre des mesures raisonnables, selon les circonstances, pour connaître l'état réel du bâtiment. o Il faut donc examiner, suivant chaque cas d'espèce, la conduite d'un acheteur prudent et diligent. o il est possible dans certains cas que le fait de ne pas recourir à un expert pourra être perçu en soi, comme un manque de prudence et de diligence. o Cet acheteur ne fera pas preuve de prudence et de diligence alors qu'il existe des indices perceptibles pour un profane, s'il ne prend pas les moyens (y compris le recours à des experts le cas échéant) de s'assurer que l'immeuble est exempt de vice The vast number of apparent fissures where previous repairs had been done and evidence of blocking were important hints that were sufficient to alert a prudent and diligent buyer that a more in-depth inspection was needed. Furthermore, the age and state of the home should have suggested underlying problems. o Undeniable, that the defects were apparent! The sellers did not hide any of the information In fact, they warned the buyers that the house needed a bunch of repairs and showed them the cracks Simple hydrographic and thermographic tests would have been easy to perform and minimally intrusive. They would have permitted the appellants to obtain greater certainty with respect to the state of the immovable. Any consultation with an expert prior to the purchase would have revealed these problems. The buyers, who had experience in real estate, were negligent. They therefore accepted the risk. o Even though they are not professional buyers, the law will adapt the intensity of the obligation of inspection to the specific knowledge and experience of the parties. Buyers were also not prudent because they were acting all rushed to quickly by the dream home that they had fallen in love with o Because they acted in this manner, they took on the risks of the quality of the house Comments: octrine and jurisprudence have recognized that the question of whether the buyer discharged his obligation of reasonable inspection may vary from case to case. While the buyers here are not professionals, they did have some experience in the realm of real estate. As such, they are held to a (slightly) higher standard. QC C.P.A.: 37-8, 44, 53, [261-2] Art. 37 QC CPA Goods forming the object of a contract must be fit for the purposes for which goods of that kind are ordinarily used. Art. 38 QC CPA Goods forming the object of a contract must be durable in normal use for a reasonable length of time, having regard to their price, the terms of the contract and the conditions of their use. Commercial Law – Summary Art. 44 QC CPA Art. 53 QC CPA In a conventional warranty, exclusions are prohibited unless they are clearly indicated in separate and successive clauses. A consumer who has entered into a contract with a merchant is entitled to exercise directly against the merchant or the manufacturer a recourse based on a latent defect in the goods forming the object of the contract, unless the consumer could have discovered the defect by an ordinary examination. The same rule applies where there is a lack of instructions necessary for protection of the user against a risk or danger of which he would otherwise be unaware. The merchant or the manufacturer shall not plead that he was unaware of the defect or lack of instructions. The rights of action against the manufacturer may be exercised by any consumer who is a subsequent purchaser of the goods. B) SCOPE AND EXCLUSION C.C.Q.: [1437, 1716, 1726, 1731-2] C.P.A.: [44] Warranty of quality can be excluded under two possible headings: (1) Exclusion by law The only example of this in the CCQ is art. 1731, sale under judicial authority does not give rise to any warranty of quality. When does sale by judicial authority occur: o Case where creditor seizes assets and satisfies judgments from proceeds of sale, o Sale by licitation (e.g. cases of co-ownership or for persons under protected supervision). There is no warranty because there are already so many formalities and administrative difficulties. It would be too problematic to unravel. (2) Exclusion by contract (a) Restrictions regarding the form of the exclusion In case of ambiguity or doubt, will find in favor of existing warranty of quality. If you want to exclude it, intention must be made clear and unequivocal. “Sale as is” interpreted as covering apparent defects, but not hidden ones. Also refer to art. 1474 (b) Restrictions regarding the substance of the exclusion Rules outlined in arts. 1732-1733 CCQ What is meant by the presumption of knowledge in art. 1733? o Term “could not have been unaware” has a unique meaning with respect to warranty of quality. The following professional sellers are subject to a presumption of knowledge : Manufacturer (quality of materials and labor for movables) Builder/Contractor (quality of materials and labor for immovables) Specialized seller (most stores, not Zellers – though each section of a generalized store might be considered a SS; but most boutiques will be considered a SS) Non-specialized professional seller (e.g. a depanneur – great variety of products); will be able to more easily rebut the presumption. There are also substantive limitations. There can be no exclusion of: Personal fault (art. 1732) Seller’s knowledge (art. 1733) Bodily injury (art. 1474) Commercial Law – Summary Exclusion under the CPA Quebec CPA sets up quite an extensive regime with respect to warranty of quality. For example, goods must be fit for their purpose and perform for some reasonable duration. Remember that there is no possibility of exclusion under the Quebec (or Ontario) CPA. Hay v. Jacques [1999] (QC CA) Facts: In December 1993, Hay [appellant] bought a property from the mis en cause. In 1994, he discovered that there was a water problem and was faced with substantial costs to fix it. Invoking the legal guarantee against latent defects, the appellant brought an action to reduce the sale price against the seller (mis en cause) and the builder (defendant). The seller in turn claimed against the party who sold it to him. Issue : Can Hay claim against the builder, even though he was not the direct seller? Holding : Yes. Pursuant to Kravitz and art. 1442 CCQ, the sub-buyer has the right to sue the ultimate seller directly for breach of the guarantee against latent defects. Legal Reasoning (Thibault and Biron JJ.): In Kravitz, the SCC held that a sub-buyer could bring a direct action for breach of a guarantee which his seller held against his own seller. [410] o "la garantie des vices caches constituent un accessoire de la chose vendue et qu'il devenait créancier de la garantie légale le sous-acquéreur, en acquérant la propriété de la chose devient le créancier de la garantie légale des vices cachés due par le premier vendeur à raison de la vente qu'il a consentie au premier acheteur This decision is codified in art. 1730 and in particular 1442 CCQ : The rights of the parties to a contract pass to their successors by particular title if they are accessory to property which passes to them or are directly related to it. o The sub-buyer can take advantage of this direct recourse when the person who sold it to him cannot be found, has gone insolvent, or cannot be held to the obligation of guarantee. There is no reason that Kravitz should be limited to movable property. The legal guarantee against latent defects applies to all things sold, regardless of whether they are movables or immovables. o “la garantie légale contre les défauts cachés constitue un accessoire de la chose vendue, que celle-ci soit de nature mobilière ou immobilière. » All of the relevant sources (Kravitz itself, jurisprudence, doctrine, commentary) suggest that Kravitz ought to be interpreted in a large and liberal manner. o “la codification de la solution Kravitz dans les dispositions générales des effets des contrats à l'égard des tiers, applicables à toutes les matières contractuelles, mobilières ou immobilières, militent en faveur de l'interprétation donnant à l'affaire Kravitz, une portée large, libérale et englobant tant les matières mobilières qu'immobilières. » However, bear in mind that the right of the sub-buyer is limited by the conditions imposed by the legislator (e.g. defect must have existed at the time of the initial sale). o In this case, there is no bar to the sub-buyer’s claim. ABB v. Domtar Inc. (SCC) 2007 Facts : Domtar [plaintiff-respondent] purchased a recovery boiler from ABB [defendant-appellant] for its new factory in Windsor, for $13.5 million. Boiler used a type of welding that ABB knew to be troublesome, and for which a better alternative was available. Before the time of sale, ABB already had internal memo recommending the switchover. The contract of sale contained an exculpatory clause that excluded liability after one year. Five years later, Domtar learned boiler had many leaks and cracks. ABB replaced some of the welding with alternative process, but Domtar was dissatisfied, so had a competitor fix the boiler. Issue : Is Domtar entitled to damages for latent defects? Commercial Law – Summary Holding : Yes. The defect was latent and seller cannot rely on exculpatory clause because he was aware of the defect at the time of sale. Article 1527 CCLC = CCQ 1728 Legal Reasoning (): Article 1527 C.C.L.C. provides that any seller who knows or is legally presumed to know about the defects of the thing is obliged to pay for all damage suffered by the buyer. o three categories of sellers corresponding to the individual's level of expertise: manufacturers, professional sellers (specialized or non-specialized) and non-professional sellers. determines whether the presumption of knowledge on the seller's part is applicable o determine the scope of the seller's duty to disclose latent defects. non-professional seller is not legally presumed to know about the defects of the good being sold, since selling the good in question is not this person's usual occupation. Professional sellers, being far more aware of the characteristics of their merchandise, are subject to the presumption of knowledge o In Quebec civil law, manufacturers are considered to be the ultimate experts with respect to goods because they have control over the labour and materials used to produce them. manufacturers should be considered to be masters of their craft and specialized sellers should be presumed to have a detailed knowledge of the products they sell, and both should accordingly be deprived of the protection afforded sellers in good faith subject to the strongest presumption of knowledge and most exacting obligation to disclose latent defects. since the enactment of art. 1733 C.C.Q., the presumption of knowledge has applied to all professional sellers without distinction. Only non-professional sellers are now exempt from the presumption o The buyer's expertise is also relevant as it serves to assess whether the defect is latent or apparent more knowledge a buyer has of a good being purchased, the more likely it is that a defect in that good will be considered apparent. Buyers have an obligation to inform themselves by carrying out a reasonable inspection of the good. The test is whether a reasonable buyer in the same circumstances could have detected the defect at the time of the sale o buyer's expertise does not nullify the presumption applicable to the manufacturer. manufacturer and a professional seller always presumed to be in bad faith fraudulence associated with the manufacturer's actual or presumed knowledge of a defect is unaffected by the professional status of a buyer who is a dealer manufacturer will be unable to rely on a limitation of liability clause unless it can rebut the presumption of knowledge of the defect. defect must have four characteristics: o latent latency of the defect is assessed objectively, that is, by reviewing the buyer's examination of the good in light of what a prudent and diligent buyer of identical expertise would have done o sufficiently serious A defect will be considered to be serious if it renders the good unfit for its intended use or so diminishes its usefulness that the buyer would not have bought it at the price paid. [534] For the defect to be considered serious, enough for there to be a problem so serious that the buyer would not have purchased the boiler had it known about the problem. o existed at the time of the sale o unknown to the buyer. Domtar would not have bought a boiler with H-style tie welds if it had been informed of the risks associated with this type of attachment. C.E. used these attachments without having independent analyses conducted to determine whether they could withstand the stress placed on the tubes by the circulation of steam at high temperatures. Commercial Law – Summary Domtar was unaware of the defect at the time of the sale because C.E. had not shared the information it possessed on this subject with Domtar. o Even though Domtar was described as a sophisticated operator, and however expert it was at using boilers, it cannot be characterized as a professional "of identical expertise" to C.E. Expertise in using = expertise in designing [536] o Nor is the defect apparent simply because Domtar was assisted by an expert. The cause of the excessive cracking was unknown to both Domtar and its expert. To rebut the presumption of knowledge of the defect, it is never open to a manufacturer to rely on its ignorance of the defect as its sole defence. [531] o manufacturer must show that it did not know about the defect and that its lack of knowledge was justified, that it could not have discovered the defect even if it had taken every precaution that the buyer would be entitled to expect a reasonable seller to take in the same circumstances. justified only if the manufacturer shows that it had full knowledge of the technology in its field at the time the good was designed and that the defect in question cannot be attributed to it. (development risk) o a professional seller who was aware of a defect or who has not rebutted the presumption of knowledge cannot avoid liability. Such a seller cannot rely on a limitation of liability clause, but is obliged to reimburse the buyer for the sale price and provide compensation for any damage resulting from the latent defect In this case, it can be seen from the evidence that C.E. had known about the problems associated with tie welds since the early 1980s and that a better technology was available to it as of that time The duty to inform and the warranty against latent defects are two concepts that overlap o Duty to inform derives from the general principle of good faith, o Warranty against latent defect is expressly provided for in the C.C.L.C. and CCQ o scope of the general duty to inform is much broader than that of the disclosure of a latent defect. The duty to inform is subsumed in the analysis of the seller's liability for latent defects Comments: “State of the art” defense does not mean seller has a valid defense to the existence of the latent defect. Even if all norms and standards were respected, if the product doesn’t work properly the manufacturer is still liable under warranty of quality (inability to use the product). ABB tried to invoke non-existence of latent defect, saying that it was just a question of technology constantly improving. Not everything we improve makes what existed before defective. o This is normally a very convincing argument. o SCC rejected it. Said that it was a defect because the utility of the boiler was seriously impaired as a result of the old technology. Furthermore, Domtar was not informed of the risk of leaking even though it was known to seller at the time. Domtar would not have bought it if it were aware of the defect. ABB also tried to argue defect was apparent : Domtar was a professional buyer whose own engineers approved the boilers. o SCC rejected this argument as well. Held that no one is more of a specialist than the manufacturer itself and buyer’s staff should not be required to have the same knowledge. o Their exculpatory clause is only valid if the presumption of knowledge attached to manufacturer is rebutted. Don’t look at status of the buyer in determining question of knowledge – looking at knowledge and professionalism of the seller. Important provisions in this case: o Art. 1726 CCQ : latent v. apparent defects; need for expert witness o Art. 1733 CCQ : exculpatory clause and seller’s awareness Discusses Common Law Requirements from para 80-84, will be helpful! In Canada, the common law rule is that a latent defect must affect an essential characteristic of the good and make that good unfit for its intended use: Commercial Law – Summary o onus is on the buyer to prove that the latent defect was known to the seller or that the seller showed reckless disregard for what he or she should have known. o However, where it has been established that the seller could have obtained information about an essential characteristic of the good, the seller cannot simply allege an honest belief provincial and territorial statutes generally allow sellers to limit the warranty against latent defects by contract. o Contrary to French and Quebec law, the common law has no specific rule for the special case of professional sellers and buyers of identical expertise. o In principle, a limitation of liability clause in a contract between two merchants will be valid unless it is declared to be unenforceable either for unconscionability or because failure to discharge the obligation to which it applies would amount to a fundamental breach of contract. doctrine of unconscionability: a limitation of liability clause will be unenforceable where one party to the contract has abused its negotiating power to take undue advantage of the other. generally applied in the context of a consumer contract or contract of adhesion. doctrine of fundamental breach: parties with equal bargaining power can, in certain cases, apply to have an unreasonable clause declared unenforceable on the basis that it does not reflect the intent of the parties. breaching party's failure to perform its obligations under the contract must be such that it "deprives the non-breaching party of substantially the whole benefit of the agreement": latent defect must be "irreparable", or the good must be unusable: o Once fundamental breach has been established, the court must still analyse the limitation of liability clause in light of the general rules of contract interpretation. o If the words can reasonably be interpreted in only one way, it will still not be open to the court to declare the clause to be unenforceable this would amount to rewriting the contract negotiated by the parties. C) REQUIREMENT OF NOTICE WITHIN A REASONABLE TIME C.C.Q.: 1739, (1594, 2925) Art. 1739 CCQ A buyer who ascertains that the property is defective may give notice in writing of the defect to the seller only within a reasonable time after discovering it. The time begins to run, where the defect appears gradually, on the day that the buyer could have suspected the seriousness and extent of the defect. The seller may not invoke tardy notice from the buyer if he was aware of the defect or could not have been unaware of it. Rationale behind this requirement is essentially the debtor’s right to “cure” the defect: a) Allows seller to examine the property and ascertain whether the problem really a problem of warranty of quality. b) Allows seller to repair the problem at a lower price than a third party would charge. c) Reduces litigation : if the seller replaces the good or fixes the problem, the sale will continue to be legally valid and no litigation will be required. What constitutes “reasonable delay”? (Jobin) Not defined, but surely it is an issue of months, not years. Usually set at six months, but will vary depending on nature of the goods (e.g. whether they are perishable). Courts have wide discretion in determining whether a delay is reasonable or not. Varies depending on factors like use, nature of the property, and nature of the object. When does delay begin to run? o Upon buyer’s discovery of the defect, according to the objective standard of prudent and diligent buyer in the same circumstances. Commercial Law – Summary o If defect appears gradually, delay begins to run when buyer could have first suspected seriousness and extent of the defect. Reasonable delay will be extended if an expert is needed to identify the defect or if the defect is perceptible only in certain seasons or at certain times. Reasonable delay is suspended if buyer (despite exercising diligence) cannot contact the seller. Exception to reasonable delay A seller who knew or ought to have known of the defect cannot complain of late notice. o This doesn’t mean that seller is not entitled to notice – they still are. All it means is that seller cannot invoke buyer’s tardy notice to avoid liability. NB : Notice is a condition of substance in the warranty of quality. If the buyer brings an action without having given proper notice, his action will be dismissed and he will lose all rights under the warranty. This is a derogation from the general law, which simply required debtor to pay the costs of any action if he fails to give proper notice (art. 1594). NB 2 : Make sure not to confuse this requirement with art. 1594 and obligation to put debtor in default. Exceptions in art. 1597 do not apply. Problem 6 : “Costly Yesterday’s House” Facts: In the summer, Louis was looking into buying Michelle’s house, and made inquiries as to its general condition. He was told that it was “about 100 years old” and that the roof and plumbing were in “good condition” (having been redone 5 years earlier). Louis still examined the roof and plumbing himself, and was satisfied. He asked about condition of insulation, Michelle told him it was comparable to homes of same age in the area. Louis bought the home and moved in in September. In November, he made inordinate use of heating and suspected it was not efficient. He sought advice of an expert who, upon examining the house, confirmed that there was insufficient insulation in the walls. He said this was characteristic of homes built around 1945. He also said the insulation had largely deteriorated, and he would either have to tolerate high energy costs or spend $10,000 on more effective insulation. Louis also noticed traces of water on some of the ceilings, which were not there when he inspected the house. Louis’ expert, after making some openings in the walls and ceiling, discovered problems in some water-pipe connections. The cost of repair will be $7,000. Feeling that he had been misled, Louis is considering launching an action for latent defects against Michelle. Advise him as to his chances for a successful result. 1) Could there be a claim with respect to allegedly inadequate insulation? NO LeBel : Before asking if an alleged defect is latent, must first ask whether it is in fact a defect. So, is this even a defect? o The house is 100 years old. Important to remember that property must meet the norms of the time it was built or made, not necessarily modern norms. o There was no representation made that the insulation was in any way different or modernized; said it was comparable to other homes of the same age. o Nothing indicates that deterioration was abnormal or anything more than usual wear and tear. There is no defect here. Perhaps could have argued it if owner had represented to buyer that there was a modernized insulation system. 2) Could there be a claim with respect to defective plumbing? YES Here, there was a representation made that the plumbing was “in good condition” and had been redone five years ago. Obvious that five-year-old plumbing should not have these problems. So there is a defect. Can buyer make out a claim under art. 1726 CCQ? o (1) Defect existed at time of the sale Commercial Law – Summary o o o (2) Defect was hidden : signs of water damage not there in original inspection; plumber had to open walls to find problem (3) Defect was serious : cost $7000 to repair (4) Defect was unknown to the buyer 2. Common Law The CML warranty of quality is composed of three distinct obligations or conditions : (a) description; (b) merchantability; and (c) fitness for use. These obligations are all codified in arts. 14-15 SGA. S.G.A.: 14, 15(1), 15(2), 53 Art. 14 SGA Art. 15(1) (2) SGA Art. 53 SGA Where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description, and, if the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description. Subject to this Act and any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows: 1. Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skill or judgment, and the goods are of a description that it is in the course of the seller’s business to supply (whether the seller is the manufacturer or not), there is an implied condition that goods will be reasonably fit for such purpose, but in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose. 2. Where goods are bought by description from a seller who deals in goods of that description (whether the seller is the manufacturer or not), there is an implied condition that the goods will be of merchantable quality, but if the buyer has examined the goods, there is no implied condition as regards defects that such examination ought to have revealed. Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if usage is such as to bind both parties to the contract. A) DESCRIPTION Art. 14 SGA : Where there is a contract for the sale of goods, there is held to be an implied condition that the goods will correspond to the description given. Applies to all goods, whether they are visible or not Applies to partial descriptions too (e.g. “woolen garments” cannot just be 90% wool; “nearly new” must correspond to technical description of that term). Any description falls within this provision, whether written or verbal Who does this obligation apply to? o Both professional and private sellers (unlike other two) o Both good and bad faith seller What this means is that the description given by the seller becomes a condition of the contract. Violations of conditions give rise not only to damages, but also give buyer the most powerful recourse – the right to repudiate the contract and reject the goods. B) MERCHANTABLE QUALITY Commercial Law – Summary Art. 15(2) SGA : Merchantability offers a more broad and general protection, whereas the condition of fitness for purpose is more particular to meeting the expectations of the buyer. o When making a claim, look first to this, and only after to fitness for purpose. Merchantability is not an evaluation of the quality from the point of view of the buyer. Rather, the marketplace determines whether the condition of merchantability is met. To be “merchantable” means to be acceptable in the marketplace. Who does this obligation apply to? o Sale by professional seller o Does not cover apparent defects In CML, not a matter of assessing quality in the abstract (as in CVL). The only question is whether it can be sold under its current description. Some practical notes: Lack of instructions with items for which they are required to understand and use the product makes the product non-merchantable. Even if the product works perfectly, buyer cannot understand how to work it, so it is not sellable. Unavailability on the market of parts needed to maintain it makes the product non-merchantable, even if the product itself works perfectly. Lack of durability can go to merchantability. C) FITNESS FOR USE/PURPOSE FP Art. 15(1) SGA : Where the buyer expressly or by implication makes known the particular purpose for which he is buying the goods, there is an implied condition that the goods will be reasonably fit for such a purpose. There are essentially three conditions in this provision: o (1) Buyer must make intention known (explicitly or implicitly); o (2) Buyer must thereby show reliance on the seller’s skill, judgment or expertise; and o (3) The seller is a professional seller. This is not just a question of whether the goods are saleable or not – it is a question of whether the intended purpose of the buyer is respected The scope of this condition has been widened to the point that it is now the first protection of the buyer. Its conditions have been interpreted so broadly that it almost always applies. o (1) Fitness for purpose is no longer a protection for a “particular purpose” – it extends to protection for a general purpose (normal use), which does not need to be conveyed. If it is normal use, no need to be conveyed because it is considered to be implied. It is only where there is unusual or rare use that buyer needs to inform seller of it. o (2) Reliance is presumed when seller knows the particular intended purpose , and since the particular includes the general, there is basically automatic reliance. Reliance can also be partial or mutual (Ashington). The advantage of a recourse under the SGA rather than in tort is that tort has all kinds of restrictions when it comes to claiming for economic loss. o when it comes to the loss of profit or business interruption, there is no problem claiming under the SGA. When the purpose is ordinary or normal, notification and coverage under FP are automatic. Idea is that there is no need to make known that which is already known (or strongly implied). o This is important because it transforms the condition of particular purpose into one of general purpose. It is a guarantee that goods will conform to their general purpose. When purpose is general, reliance of the buyer on the seller is presumed. So again, if the purpose is ordinary, reliance is automatic. o In Hardwick, House of Lords made clear that you need a very strong and cogent reason to rebut presumption of reliance. Held that even though buyer was a member of the same trade association as seller, it was reasonable for him to assume that BNE would not be harmful. The only exception to these presumptions is when there is abnormal use intended by the buyer. Only then does buyer have duty to communicate it to the seller to get the protection of s.15(1) SGA. Commercial Law – Summary Hardwick Game Farm v. SAPPA (Henry Kendall & Sons); (Grimsdale & Sons) [1969] (HOL) Facts: Hardwick was a pheasant farmer who bought animal feed from SAPPA. Feed was contaminated with a toxin deriving from a fungus attached to brazil nuts. This toxin caused many of the animals to die and the rest to become deformed. SAPPA had bought the infected supply from Grimsdale [plaintiff] with a clause stipulating that the buyer would accept responsibility for any latent defects. Grimsdale, in turn, had bought the goods from Kendall [defendant] under a similar clause. Issues : (1) Are the sellers liable to the buyers? (2) If so, on what grounds? Holding : (1) Yes. (2) While the goods were still of a merchantable quality, they violated the implied warranty of fitness for purpose because they were unsuitable as poultry feed. Legal Reasoning (Lord Reid): APPLICATION OF S. 15 SGA MERCHANTABLE QUALITY Merchantability applies to sales by description (i.e. goods not yet individualized). In such cases, there is a default warranty that the goods will be of such a quality that they would be adequate for a commercial sale. First subsection (2) because it is of more general application (merchantable quality s. 15(2) o a condition (unless excluded by the contract) that the goods must be of merchantable quality. Merchantable can only mean commercially saleable. o If the description is a familiar one it may be that in practice only one quality of goods answers that description - then that quality and only that quality is merchantable quality. Or various qualities of goods are commonly sold under that description lowest quality commonly so sold is what is meant by merchantable quality: do you judge merchantable quality in light of what was known at the time of the sale or in light of later knowledge? o in 1960 there appears to have been thought to be only one quality of this product o Now known [1969] that particular parcels though apparently of the usual quality may really be of a very different quality because they are contaminated by minute quantities of a powerful poison Clear that some later knowledge must be brought in for otherwise it would never be possible to hold that goods were unmerchantable by reason of a latent defect. o latent defect is something that could not have been discovered at the time by any examination which in light of then existing knowledge it was reasonable to make. In the present case it had become well known before the date of the trial that the defect was that these Brazilian groundnut extractions were contaminated by poison also become well known that, while this poison made the goods unsuitable for inclusion in food for poultry, it was generally regarded as proper to include such extractions in cattle food, The question is whether this latter fact should be taken into account in deciding whether these goods were of merchantable quality in 1960. o Very artificial to bring in some part of the later knowledge and exclude other parts. o clear evidence that before the date of the trial Indian groundnut extractions so contaminated were sold under the ordinary description and were not rejected by the buyers when the contamination was discovered Good enough for cows, good enough to be sold! merchantable quality! What s. 15(2) now means by not 'merchantable quality': [425] o " that the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description." Commercial Law – Summary objective test: "were of no use for any purpose …" must mean "would not have been used by a reasonable man for any purpose. …" o If the description in the contract was so limited that goods sold under it would normally be used for only one purpose, then the goods would be unmerchantable under that description if they were of no use for that purpose. But if the description was so general that goods sold under it are normally used for several purposes, then goods are merchantable under that description if they are fit for any one of these purposes “even if unfit for use for that one of those purposes which the particular buyer intended." [426] He ought either to have taken the necessary steps to bring subsection (1) into operation or to have insisted that a more specific description must be inserted in the contract. Applying law to facts buyers who include groundnut extractions in their cattle foods are prepared to pay a full price for goods which may be contaminated. o But buyers who only compound poultry foods would obviously not be prepared to buy contaminated goods at any price. Nevertheless contaminated groundnut extractions are merchantable under the general description of groundnut extractions because some buyers appear to be ready to buy them under that description and to pay the ordinary market price for them. Fitness for Purpose Fitness for purpose can be understood as a special reiteration of a possibility under the wider provision of merchantability. o covers instances where a good is transacted at different levels of quality, but where the buyer has stipulated that a particular level is required. standard of quality to which goods must conform is the one that was stipulated. Section 15 (1) has a narrower scope o requires that the buyers shall have required the goods for a particular purpose, that purpose shall have been made known to the seller, shall have been made known to him in such circumstances that he realized or ought to have realized that the buyer was relying on his using his skill or judgment to select goods fit for that purpose. the requirement of the section that the particular purpose must be made known "so as to show that the buyer relied upon the seller's skill or judgment." [428] “It is certainly not necessary in many cases that the buyer should state his purpose expressly, but it is much easier to infer that the seller ought to have realized that the buyer was relying on him if the purpose is stated expressly.” o "It is clear that the reliance must be brought home to the mind of the seller, expressly or by implication. The reliance will seldom be express: it will usually arise by implication from the circumstances” "But the question is not were they saleable, but were they fit for the purpose for which they were known to have been ordered." o Few examples offered on page 430-431 if you need to find cases to distinguish facts Applying law to facts Kendall knew that Grimsdale were buying the goods to resell to compounders of animal feeding stuffs. o In 1960 that was a particular purpose because there is no evidence to show that it was not sufficiently particular to enable Kendall to exercise skill and judgment would not have helped Kendall to be told that the goods were ultimately to be fed to any particular kind or age of animal because at that time nobody knew that what was suitable for one kind of animal might not be suitable for another. Goods were not of sufficient quality to be used for any kind of animal feed o since the extractions were not reasonably fit for use in compound food for poultry and its use in a compound food for pheasants was an ordinary and reasonable use, G. Ltd. were liable Commercial Law – Summary o The exculpatory clauses do not apply. difficult question is whether the circumstances were such as to show that Grimsdale were relying on Kendall's skill and judgment: o By getting the seller to undertake to use his skill and judgment the buyer gets under section 15 (1) an assurance that the goods will be reasonably fit for his purpose that covers not only defects which the seller ought to have detected but also defects which are latent in the sense that even the utmost skill and judgment on the part of the seller would not have detected them. Thus, if section 15 (1) applies, Grimsdale are entitled to relief even although Kendall had no reason to suspect that the goods might be poisoned. A customer buying from an apparently reputable shopkeeper or from a manufacturer will normally as a matter of fact be relying on the seller's skill and judgment unless there is something to exclude the inference. o do not think that the same can be said when two merchants equally knowledgeable deal with each other If one merchant merely acquired from an importer by buying on c.i.f. documents goods from a normal source and then resold to another merchant by transfer of the c.i.f. documents before taking delivery, there might then be little or no reason to suppose reliance Here, Kendall had acquired these goods from a new source and one would suppose must have exercised skill and judgment in deciding to buy them and put them on the market. o evidence shows that Kendall were recommending them to Grimsdale. enough that a reasonable seller in the shoes of Kendall would have realized that he was inviting Grimsdale to rely on his skill and judgment Comments: The court finds that the goods were of a merchantable quality, because they were still commercially saleable under the description “groundnut extraction.” This results from the rule that if various qualities of goods are sold under that description, the lowest quality meets the condition of merchantability. o Sufficient to satisfy merchantability requirement if some buyers would continue to purchase it, even if they knew of the defect. Would have been different if its sole purpose was as poultry feed, or if it was being sold or described as such. Ashington Piggeries Ltd. v. Christopher Hill [1972] (HOL) Facts: Ashington [plaintiff] developed a formula for mink animal feed. It entered into a contract with Hill [defendant], a producer of animal feed, to produce this feed for them. Hill was a specialist in mixing food for all kinds of animals. The formula contained Norwegian herring, which contained a toxic chemical called DMNA, that caused the mink to die. But contract included stipulation that feed would be of a certain quality that would have precluded such toxicity. So problem was not in the formula itself, it was in the good used to produce it. Issue : Is Hill liable under warranty of quality? Holding : Yes. There was nothing wrong with the formula provided by Ashington. The defect in quality is in relation to the quality of goods Hill used to make it. While the buyer had expertise in the realm of mink, he relied on the expertise of the seller in the making of animal feed more generally. Legal Reasoning (Lord Wilberforce): Section 14 [439] The question is whether the compound mink food sold by the respondents corresponded with the description. o The appellants' case was that the food was to be made up according to a precise formula One of these ingredients was herring meal. The proposition is that the herring meal ingredient did not correspond with the description because it contained DMNA. The question whether that is what the buyer bargained for has to be answered according to such tests as men in the market would apply Commercial Law – Summary I think that buyers and sellers and arbitrators in the market, asked what this was, could only have said that the relevant ingredient was herring meal and, therefore, that there was no failure to correspond with description. Section 15(1) [440] How specific does the purpose need to be for s.15(1) to apply o distinction between a statement (express or implied) of a particular purpose, though a wide one, s, and a purchase by description with no purpose stated and the different warranty which that attracts width of the purpose is compensated, from the seller's point of view, by the dilution of his responsibility particular purpose was made known by the buyers so as to show that they relied on the sellers' skill & judgment. o The particular purpose for which "King Size" was required was as food for mink. there was reliance on the respondents' skill and judgment. o may be cases where the buyer relies on his own skill or judgment for some purposes and on that of the seller for others. "On the one hand Mr. Udall was relying on his own judgment as to what his formula should contain On the other, he was relying, upon the [respondents] to obtain the ingredients, to see they were of good quality and not to use ingredients which, as a result of contamination, were toxic." The sellers knew what the herring meal was required for, namely, for inclusion in animal feeding stuffs to be compounded by the buyers, and no special purpose in relation to mink was relied on. o There was no doubt that herring meal, as such, was suitable for mink; on the other hand, the particular consignments supplied in 1961 were unsuitable because of the presence of DMNA. If mink possessed an idiosyncrasy, which made the food as supplied unsuitable for them though it was perfectly suitable for other animals, this would be the buyers' responsibility, unless they had made this known to the sellers so as to show reliance on them to provide for it. But any general unsuitability would be the sellers' responsibility. "There is no need for a buyer formally to 'make known' that which is already known": Buyer did not inform seller of mink’s sensitivity to DMNA o Therefore, what does the buyer, alleging unfitness, have to prove? If the herring meal supplied, while damaging to mink, was perfectly harmless to all other animals to whom it might be fed, it would be unjust to hold the sellers liable. If, the herring meal was not only lethal to mink but also deleterious, though not lethal, to other animals, the sellers' responsibility could be fairly engaged. The burden was upon the buyers to show that this was so. o Buyers succeeded in doing so in this case What does “in the course of the seller’s business to supply” mean? o S.15 (1):it is if he agrees, either generally, or in a particular case, to supply the goods when ordered, What does “a seller who deals in goods of that description” mean? o S. 15(2): if his business is such that he is willing to accept orders for them. Doesn’t matter for either section whether it was their first time dealing with the good Point of these requirements is to limit the implied conditions of fitness or quality to persons in the way of business, as distinct from private persons o Must note that "Description" here cannot be used in the sense in which the word is used when the Act speaks of "sales by description," for section 15(1) is not dealing with sales by description at all. Comments: Was the particular purpose communicated? o Yes. Buyer made clear that it was to be used as mink food Was there reliance on the skill of the seller? o In this case, seller is relying on buyer to provide adequate formula, and buyer is relying on seller to use non-toxic or high quality ingredients to produce it. Commercial Law – Summary Won’t go as far as to impose obligation on Ashington to tell Hill about the possible toxicity level. If this only affected minks, would have found there was such an obligation. But affects different animals to varying degrees. Manufacturer has obligation to ensure quality of goods, even if the buyer is professional. Murray v. Sperry Rand Facts: Murray [plaintiff] bought a tractor from Sperry [defendant]. The purchase was made on the basis of representations made by Sperry (orally and in brochure), that it would be good for specific purposes. The contract of sale included an exoneration clause saying that seller only warranted that the good was free from manufacturing defects. The tractor did not fulfill its purpose, and Murray claimed damages. “Despite all their efforts, manufacturer and seller were unable to achieve the level of performance set forth in the brochure, or get reasonably near it. o After best efforts the manufacturer's representatives were able to achieve a rate of only 16 tons per hour o This was a far cry from the 45 to 60 tons per hour advertised in the sales brochure. As a result, farmer lost half his crop, other half was of poor quality Had to sell his farm because of this loss o Claims damages! Issue : Did the contract of sale contain a guarantee of fitness for purpose in, such that Sperry is liable to Murray in damages? Holding : Yes. First, exculpatory clauses are interpreted against the party that drafted them. Second, exculpatory clauses can only limit warranties, not conditions such as fitness for use. Finally, this was a case of fundamental breach and as such, exculpatory clause cannot apply. Legal Reasoning (): Key Finding of Facts o Plaintiff was induced to purchase the harvester through oral representations o The performance of the machine fell seriously short of that represented in the sales brochure. o consequence of the machine's failure was damage suffered by plaintiff An affirmation made with the intention of inducing contractual relations is a warranty o The failure of the machine was a clear breach of those warranties Liable under s.15(1)? [605] o Plaintiff was unfamiliar with the characteristics and performance of self-propelled forage harvesters. o he made known to Church the particular purpose for which the harvester was required. o He relied wholly on Church's skill and judgment. The conditions for the operation of s. 15, para. 1 are thus established. Liable under s.15(2)? [605] o not only must the article be saleable in the market, but it must also be reasonably fit for the general purposes such goods serve o “merchantable does not mean that the thing is saleable in the market simply because it looks all right; it is not merchantable in that event if it has defects unfitting it for its only proper use but not apparent on ordinary examination” The defect, or defects, in the forage harvester were not apparent on ordinary examination The condition of merchantable quality is implied where there has been a sale by description. The sale in this case was by description, made, as it was, on the basis of the brochure Effect of the Disclaimer Clause the contract contains a disclaimer clause of an exculpatory type, which states: o “…Except as set forth above, the Seller shall have no obligation or liability of any kind on account of any of the equipment, and shall not be liable for special or consequential damages.” Commercial Law – Summary Exculpatory clauses are interpreted contra preferentum. So in case of any ambiguity, it should be held not to apply to the seller’s representations. o This disclaimer may effectively exclude other warranties but it does not exclude conditions. The implied statutory conditions therefore remain in force the terms of the representations made to plaintiff as being fundamental to the contract. o disastrous failure of the machine was a contradiction of these warranties. failure that went to the heart of the whole transaction. Plaintiff would not have purchased a machine that could perform no better than this one. A 'fundamental term' [is] something which underlies the whole contract o if it is not complied with, the performance becomes something totally different from that which the contract contemplates a disclaimer will not protect a vendor against breach of a fundamental term of a contract “Exempting clauses, no matter how widely they are expressed, only avail the party when he is carrying out his contract in its essential respects. [607] o They do not avail him when he is guilty of a breach which goes to the root of the contract How about the liability of the manufacturer, who wasn’t privy to the sale of contract? Sperry Rand Corporation manufactured the harvester and published the sales brochure. o The brochure’s tone is strongly promotional. o goes far beyond any simple intention to furnish specifications. o It was a sales tool intended to persuade prospective buyers It contained a number of warranties that were proven to be inaccurate. The breach of these creates liability upon the dealer. a person may be liable for breach of a warranty notwithstanding that he has no contractual relationship with the person to whom the warranty is given o no difference whether the affirmations are made orally or in writing. o Plaintiff's purchase from the dealer is "some other act for the benefit of the manufacturer" [608] o Traders Finance v. Haley: “A warranty was given by the respondent [Ford]. Such warranty, although given by a person not a party to the agreement, is nonetheless binding upon him. How does art. 1726 CCQ compare to the CML warranty of quality? Under both regimes, most of the obligations are imposed on specialized sellers o CML : wide interpretation of “seller of goods of that kind”; presumed reliance o CVL : presumption of knowledge Scope of protection is much wider in CVL o CML : when it comes to privates sales in the CML, there is no condition of merchantability or fitness for purpose (only condition of description). o CVL : rules on warranty of quality apply to all sales; differentiate professional sellers only by applying presumption of knowledge to them. “Fitness for use” o CML : directly protections buyer’s expectations by imposing obligation of fitness for use. o CVL : art. 1726 protects use of goods indirectly, through prohibition of “defect”. 3. Consumer Law QC C.P.A.: 10, 37-8, 44, 53, [261-262] Art. 10 QC CPA Art. 37 QC CPA Art. 38 QC CPA Any stipulation whereby a merchant is liberated from the consequences of his own act or the act of his representative is prohibited. Goods forming the object of a contract must be fit for the purposes for which goods of that kind are ordinarily used. Goods forming the object of a contract must be durable in normal use for a reasonable length of time, having regard to their price, the terms of the contract and the conditions of their use. Commercial Law – Summary Art. 44 QC CPA In a conventional warranty, exclusions are prohibited unless they are clearly indicated in separate and successive clauses. A consumer who has entered into a contract with a merchant is entitled to exercise directly against the merchant or the manufacturer a recourse based on a latent defect in the goods forming the object of the contract, unless the consumer could have discovered the defect by an ordinary examination. The same rule applies where there is a lack of instructions necessary for protection of the user against a risk or danger of which he would otherwise be unaware. The merchant or the manufacturer shall not plead that he was unaware of the defect or lack of instructions. The rights of action against the manufacturer may be exercised by any consumer who is a subsequent purchaser of the goods. Art. 53 QC CPA ONT C.P.A.: 7(1), 9 Art. 7(1) ONT CPA Art. 9 ONT CPA The substantive and procedural rights given under this Act apply despite any agreement or waiver to the contrary. (1) The supplier is deemed to warrant that the services supplied under a consumer agreement are of a reasonably acceptable quality. (2) The implied conditions and warranties applying to the sale of goods by virtue of the SGA are deemed to apply with necessary modifications to goods that are leased or traded or otherwise supplied under a consumer agreement. (3) Any term or acknowledgement, whether part of the consumer agreement or not, that purports to negate or vary any implied condition or warranty under the SGA or any deemed condition or warranty under this Act is void. (4) If a term or acknowledgement referenced in subsection (3) is a term of the agreement, it is severable from the agreement and shall not be evidence of circumstances showing an intent that the deemed or implied warranty or condition does not apply. 4. International Law Vienna 1980: 35-40, [44], 48 Art. 35 CSIG Art. 36 CSIG (1) Seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) are fit for the purposes for which goods of the same description would ordinarily be used; (b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgment; (c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods. (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if, at the time of the conclusion of the contract, the buyer knew or could not have been unaware of such lack of conformity. (1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time. (2) The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any Commercial Law – Summary Art. 37 CSIG Art. 38 CSIG Art. 39 CSIG Art. 40 CSIG Art. 48 CSIG guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics. If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention. (1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. (2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination. (3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination. (1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. (2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time limit is inconsistent with a contractual period of guarantee. The seller is not entitled to rely on the provisions of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer. (1) Subject to article 49, the seller may, even after the date for delivery, remedy at his own expense any failure to perform his obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer. However, the buyer retains any right to claim damages as provided for in this Convention. (2) If the seller requests the buyer to make known whether he will accept performance and the buyer does not comply with the request within a reasonable time, the seller may perform within the time indicated in his request. The buyer may not, during that period of time, resort to any remedy which is inconsistent with performance by the seller. (3) A notice by seller that he will perform within a specified period of time is assumed to include a request, under the preceding paragraph, that buyer make known his decision. (4) A request or notice by the seller under paragraph (2) or (3) of this article is not effective unless received by the buyer. Germany Supreme Court – June 30, 2004 Facts: Seller sold 5,000 kg of paprika to buyer, with the understanding that it would not be irradiated. Buyer examined the goods upon receipt, but only for purity and not for radiation exposure (latter test is very expensive). Buyer later learned of the irradiation. Two months later, complained to seller in registered letter and listed its damages. Seller denied these allegations. Buyer’s position was later proven through testing the paprika. Issue: Can buyer obtain a remedy for latent defects? Holding: Yes. While he did not notify the seller of the defect within a reasonable time, the seller is prevented from relying on this defense because he knew or ought to have known of the defect, and his lack of knowledge constituted gross negligence. Legal Reasoning: Commercial Law – Summary Art. 39 CSIG : A buyer loses his right to a remedy for latent defects when he does not notify the seller of this problem within a “reasonable” period of time after he discovered or ought to have discovered the defect. o Given that the test was costly, buyer was not under any obligation to perform it upon receiving the goods. As such, the period of delay began to run not from the moment of receipt, but from the moment he learned of the irradiation. In German jurisprudence, normal period of “reasonable delay” is two weeks (quite short). Buyer did not notify seller within this period. However, art. 40 CSIG fixes the buyer’s failure to give notice within a reasonable delay o “seller cannot rely on the untimeliness of a notice of non-conformity (Art. 39 CISG) if the contractual nonconformity of the goods is based on facts he knew or of which he could not have been unaware” generally, the burden of proof lies with the buyer as to the seller's bad faith o an exception under the aspect of "proof-proximity" or where an evidentiary showing results in unreasonable difficulties of proof for the buyer Art. 40 CISG does not always demand proof of the seller's knowledge of the facts o deems it sufficient that the seller "could not have been unaware of" those facts Thus, Art. 40 CISG also covers cases of negligent ignorance In the case of extreme deviations from the contractually agreed upon condition, gross negligence is assumed if the breach of contract occurred in the seller's domain o necessary to limit the buyer's burden of proof in the case of a gross breach of contract and in view of the aspect of "proof-proximity" in order to avoid unreasonable difficulties in providing proof. Applying law to facts the type of breach of contract does not in itself allow conclusions to be drawn as to the knowledge or grossly negligent ignorance of [Seller] o Irradiation of the paprika powder was not externally identifiable and could only be determined upon expensive laboratory testing. However, considering the aspect of [Seller]'s "proof-proximity" and the unreasonable expectation that [Buyer] make a full evidentiary showing that also addresses [Seller]'s needs, proof requirements must be eased. o [Page 459 shows what would have been reasonable in these circumstances What if there was grossly negligent ignorance? How could it become grossly negligent ignorance? o true that the delivery of irradiated powder to [Buyer], contrary to the agreements made, would constitute a significant breach of contract. But this is not an indication yet that [Seller] remained unaware, as a result of gross negligence, of the pre-contamination of the goods. There would be no gross negligence if [Seller] could show that it had taken suitable precautions Random testing, waivers with their providers of raw materials II. Recourses 1. Civil Law C.C.Q.: 1590, 1601-1605, [1739, 1728] Art. 1590 CCQ An obligation confers on the creditor the right to demand that the obligation be performed in full, properly and without delay. Where the debtor fails to perform his obligation without justification on his part and he is in default, the creditor may, without prejudice to his right to the performance of the obligation in whole or in part by equivalence, (1) force specific performance of the obligation; (2) obtain, in the case of a contractual obligation, the resolution or resiliation of the contract or the reduction of his own correlative obligation; (3) take any other measure provided by law to enforce his right to the performance of the obligation. Commercial Law – Summary CVL offers four possible remedies for the breach of any contractual obligation : 1. Nullification of the contract 2. Reduction of obligations (the sale price) 3. Specific performance 4. Damages Art. 1601 CCQ Art. 1602 CCQ Art. 1603 CCQ Art. 1604 CCQ Art. 1605 CCQ A creditor may, in cases which admit of it, demand that the debtor be forced to make specific performance of the obligation. In case of default, the creditor may perform the obligation or cause it to be performed at the expense of the debtor. A creditor wishing to avail himself of this right shall so notify the debtor in the judicial or extrajudicial demand by which he puts him in default, except in cases where the debtor is in default by operation of law or by terms of the contract itself. The creditor may be authorized to destroy or remove, at the expense of the debtor, what has been made by the debtor in violation of an obligation not to do. Where the creditor does not avail himself of the right to force the specific performance of the contractual obligation of the debtor in cases which admit of it, he is entitled either to the resolution of the contract, or to its resiliation in the case of a contract of successive performance. However and notwithstanding any stipulation to the contrary, he is not entitled to resolution or resiliation of the contract if the default of the debtor is of minor importance, unless, in the case of an obligation of successive performance, the default occurs repeatedly, but he is then entitled to a proportional reduction of his correlative obligation. All the relevant circumstances are taken into consideration in assessing the proportional reduction of the correlative obligation. If the obligation cannot be reduced, the creditor is entitled to damages only. A contract may be resolved or resiliated without judicial proceedings where the debtor is in default by operation of law or where he has failed to perform his obligation within the time allowed in the writing putting him in default. (1) Nullification Right is contained in art. 1590 para 2(2) However, this right is limited to cases where there has been serious breach (art. 1604(2)). o In general, a breach is serious if is represents at least a 30% reduction of the value of the goods, or where it is persistently causing problems. There are two kinds of nullification o Resolution : where there was no enjoyment of the goods by the buyer; contract is nullified ab initio and there is full restitution of prestations. See : Cook, Trembloy o Resiliation : where buyer got some enjoyment of the goods; full restitution is not required, there is a reduction equivalent to the rental price of the good for the time during which the buyer enjoyed it. (2) Reduction of the sale price Right is contained in art. 1590 para 2(2) Applies instead of nullification where the breach is only of minor importance (i.e. < 30%). Buyer is entitled to a reduction of the price corresponding to the extent of the breach. This is determined in two ways: o Price of repair (preferred method) o Market price (value of the defective good on the market) If the obligation is of such a nature that it cannot be reduced, buyer is entitled to damages (art. 1604(3)). (3) Specific Performance Commercial Law – Summary Right is contained in arts. 1590 para 2(1) Where possible, the seller can be forced to perform his obligations to the buyer, either by replacing or repairing the defective good (art. 1601). Alternatively, the buyer can replace the good and charge the seller, but he must notify the seller of this obligation [specific performance at the debtor’s expense]. (art. 1602). (4) Damages Right is contained in arts. 1590 para 2(3) In respect of breach of warranty of quality, buyer can only get damages if seller was aware or could not have been unaware of the defect. (art. 1728). ** Note that all of these remedies are subject to the requirement of notification. A buyer who discovers a defect must notify the seller within a “reasonable time” (usually 6 months). (art. 1739). 2. Common Law If there is a breach of a condition, can repudiate the contract; if there is a breach of warranty, can only ask for damages. (12(2) SGA). Once the buyer has accepted the goods, or property has passed to the buyer, a condition turns into a warranty, the breach of which is not grounds for rejecting the goods. (12(3) SGA). S.G.A.: 12.3, 33-34, 50-51 Art. 12(2) SGA Art. 12(3) Whether a stipulation in a contract of sale is a condition the breach of which may give rise to a right to treat the contract as repudiated or a warranty the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated depends in each case on the construction of the contract, and a stipulation may be a condition, though called a warranty in the contract. Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, or where the contract is for specific goods the property in which has passed to the buyer, 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 contract as repudiated, unless there is a term of the contract, express or implied, to that effect. When has the buyer “accepted” the goods? Art. 33 SGA : The buyer is not deemed to have accepted until he has had a reasonable opportunity to examine them and ensure that they conform to the contract. Upon delivery by the seller, he must give buyer reasonable opportunity to examine if requested (unless they have agreed otherwise). Art. 34 SGA : Irrespective of art. 33, the buyer will be deemed to have accepted the goods if he: (1) Communicates acceptance to the seller (2) Does something inconsistent with seller’s ownership (e.g. resells the goods), or (3) Retains the goods for a certain period of time. Art. 33 SGA Art. 34 SGA (1) Where goods are delivered to the buyer that the buyer has not previously examined, the buyer shall be deemed not to have accepted them until there has been a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. (2) Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, the seller shall, on request, afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. The buyer shall be deemed to have accepted the goods when the buyer, Commercial Law – Summary (a) intimates to the seller that the goods have been accepted; (b) after delivery, does any act in relation to them that is inconsistent with the ownership of the seller; or (c) after the lapse of a reasonable period of time, retains the goods without intimating to the seller that they have been rejected. Art. 50 SGA Art. 51 SGA In an action for breach of contract to deliver specific or ascertained goods, the court may, if it thinks fit, direct that the contract be performed specifically, without giving the defendant the option of retaining the goods on payment of damages, and may impose such terms and conditions as to damages, payment of the price, and otherwise, as to the court seems just. (1) Where there is a breach of warranty by the seller, or where the buyer elects, or is compelled, to treat a breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods, but may, (a) set up against the seller the breach of warranty in diminution or extinction of the price; or (b) maintain an action against the seller for damages for the breach of warranty. (2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty. (3) In the case of breach of warranty of quality, such loss is, in the absence of evidence to the contrary, the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty. (4) The fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not prevent the buyer from maintaining an action for the same breach of warranty if further damage has been suffered. R.S.O. 1990, c. S.1, s. 51. Recourses in respect of warranty of quality The three forms of warranty of quality (description, merchantability, fitness for use) are both conditions and warranties. o After Reardon, in order for the breach of warranty to be considered a condition, the breach must be substantial (i.e. has a serious consequence on the buyer). IBM v. Shcherban [1929] (CA) Facts: Shcherban [plaintiff] bought a counting machine from IBM [defendant]. The counting machine had a broken pane of glass, the cost of which was insignificant in light of the total value of the good. Shcherban refused to accept this product. Issue : Is the buyer entitled to refuse the good on the basis that it is a breach of merchantability? Holding : Yes. The guarantee of merchantability is a condition of the contract. Breach of that condition, however minor, entitles the buyer to reject the goods. Legal Reasoning (Hultain J.C.S.): The defect in this case is cosmetic and minor in view of the product as a whole. However, the result of the defect is that the good is not of merchantable quality. The guarantee of merchantability is a condition of the contract of sale. If a good does not met this requirement, it constitutes a breach of a condition and buyer (on first inspection) is entitled to reject the good. The fact that the breach is minor does not limit buyer’s remedy to damages. This cosmetic default, while extremely minor, results in the determination that the good is not of merchantable quality. Reardon Smith Line Ltd. v. Yngvar [1976] (HOL) Facts: Hansen [plaintiff] entered into a contract of sale with Sanko [defendant] for the purchase of a ship that was to be built in Osaka. This ship would be named Hull 354, until it was christened. Because the Osaka port was too small to Commercial Law – Summary build the ship, Sanko had the ship built at a new port in Oshima. Because the port was different, the numbering system was also different. The ship was numbered Hull 004 at Oshima, and also carried the secondary identification of Hull 354 for Osaka. Hansen claimed breach of warranty of description. Issue : Is the buyer entitled to rescission of the contract for breach of warranty of description? Holding : No. The numbering system is not covered by the warranty of description. Even if it were, buyer would not be entitled to rescission because the breach would not be sufficiently grave. Legal Reasoning: When considering whether some identifier or detail about the good being sold falls within the warranty of description, consider whether this element comprises a “substantial ingredient” of the description of the good. In this case, the numbering system on the ships did not comprise a description. Its inclusion in the contract merely served as an identifier by which to distinguish the ship that was under construction by the seller. Even if the number was part of the description (and changing it constituted a breach of the guarantee), the buyer should not be entitled to rescission. Generally, contract law only entitles buyer to rescission for breach of contract where the breach is sufficiently grave, regardless of whether the obligation is classified as a condition or a warranty by the parties. Rafuse Motors v. Mardo Construction Ltd. [1963] (NS SC) Facts: Mardo [plaintiff] bought a tractor from Rafuse [defendant]. Rafuse stated that the tractor would be sufficient in light of the Mardo’s stated purposes. The tractor did not fulfill those purposes and broke down continuously. Mardo continued to use the tractor, despite the difficulties, at the behest of Rafuse. Rafuse offered several solutions that were tried but proved insufficient. Issue : Is the buyer entitled to recision of the contract? Holding : Yes. Continuous representations made by seller effectively extended period of reasonable inspection. As such, buyer never formally accepted the goods and is entitled to reject them. Legal Reasoning (Coffin J.): In CML, once you accept a good you cannot rescind the contract, you can only get damages. Here, Mardo did not accept the goods. Though he used it for a period of five months, this was an opportunity to inspect the tractor and ensure that it was sufficient for his purposes. Other factors: o Continuous representations made by seller that he would fix the goods. Mardo would have rejected tractor immediately had it not been for these repeated assurances that seller would and could fix the problem. o Mardo did not do anything inconsistent with the seller’s title. Because he never accepted the goods, the guarantee of fitness for use remained a condition (not a warranty), so he is entitled to recision of the contract. 3. Consumer Law The consumer law provisions basically repeat those stated by the general law. The significant difference is that these cannot be contracted out of, because they are a matter of public order. QC C.P.A.: 270 Art. 270 QC CPA Art. 272 QC CPA The provisions of this Act are in addition to any provision of another Act granting a right or a recourse to a consumer. If the merchant or the manufacturer fails to fulfill an obligation imposed on him by this Act, by the regulations or by a voluntary undertaking made under section 314 or whose application has been Commercial Law – Summary extended by an order under section 315.1, the consumer may demand, as the case may be, subject to the other recourses provided by this Act, (a) the specific performance of the obligation; (b) the authorization to execute it at the merchant's or manufacturer's expense; (c) that his obligations be reduced; (d) that the contract be rescinded; (e) that the contract be set aside; or (f) that the contract be annulled, without prejudice to his claim in damages. He may also claim punitive damages. ONT C.P.A.: 6 Art. 6 ONT CPA Nothing in this Act shall be interpreted to limit any right or remedy that a consumer may have in law. 4. International Law There are four recourses under the CSIG: (1) Specific performance o Right contained in art. 28 o Availability of recourse is dependent upon the rules of the jurisdiction in which suit is brought (art. 46(2)). o Buyer is only entitled to specific performance where the defect is so serious as to constitute a fundamental breach [defined in art. 25]. (2) Damages o Right contained in art. 45(2) o Buyer will always be entitled to damages for breach (3) Reduction in sale price o Right contained in art. 50 o Price will be reduced in proportion to the value of goods actually delivered. (4) Recision of the contract o Only available in cases of fundamental breach. o Seller can avoid by offering specific performance or repairing the item. If buyer refuses, he may not obtain recision of the contract. Vienna 1980: (5), 25, 28, 37, 45-6, (47), 49-50, (51-2) Art. 25 CSIG Art. 28 CSIG Art. 37 CSIG Art. 45 CSIG A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention. If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention. (1) If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may: (a) exercise the rights provided in articles 46 to 52; Commercial Law – Summary Art. 46 CSIG Art. 49 CSIG Art. 50 CSIG (b) claim damages as provided in articles 74 to 77. (2) The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies. (3) No period of grace may be granted to the seller by a court or arbitral tribunal when the buyer resorts to a remedy for breach of contract. (1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement. (2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter. (3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereafter. (1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. (2) However, in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: (a) in respect of late delivery, within a reasonable time after he has become aware that delivery has been made; (b) in respect of any breach other than late delivery, within a reasonable time: (i) after he knew or ought to have known of the breach; (ii) after the expiration of any additional period of time fixed by the buyer in accordance with para (1) of article 47, or after the seller has declared that he will not perform his obligations within such an additional period; or (iii) after the expiration of any additional period of time indicated by the seller in accordance with paragraph (2) of article 48, or after the buyer has declared that he will not accept performance. If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with arts. 37 or 48 or if buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price. III. Exculpatory Clauses in Warranty of Quality A. Civil Law Art. 1732 CCQ : A seller may limit his liability by way of an exculpatory clause in the contract. However, he may not limit liability for defects which: o Are a result of his own fault o He knew of or could not have been unaware of This will be very difficult for professional sellers or manufactures to rebut (e.g. Domtar) Exceptions: Commercial Law – Summary Separate regime applies where both buyers and sellers are professionals (e.g. Used Car Trilogy). Clause can run even against defects for which seller had knowledge or is presumed to have had knowledge. Where buyer buys property “at his own risk” from a non-professional seller. B. Common Law Art. 15 SGA : Parties can derogate from implied warranties (they are not of public order) many ways in which such limitations can be read down in practice: contra preferentum, unconscionability, doctrine of fundamental breach Murray v. Sperry Rand [1979] (ON SC) see previous summary of the case focusing on how the warranty can’t cover fundamental breach D. MANUFACTURER AND PRODUCT LIABILITY Apart from guaranteeing the quality of goods, the warranty of quality also protects against safety defects that cause damage to the buyer, his property, or a third party. Law evolved to adapt to increasing commercialization of “technical” of goods, which has also made them more dangerous. With reform of the CCQ, saw new importance being given to consumer safety Art. 3 : physical integrity of the person Art. 1474(2) : cannot exclude liability with respect to bodily injury Art. 2930 : defendant can never invoke untimely notice when it comes to claim for bodily injury, despite what art. 1739 requires (notice within reasonable time). I. Quebec Civil Law 1. Contractual Liability A. Rights of the Direct Buyer C.C.Q.: 1434, 1458, [1726] Art. 1434 CCQ Art. 1458 A contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law. Every person has a duty to honour his contractual undertakings. Where he fails in this duty, he is liable for any bodily, moral or material injury he causes to the other contracting party and is liable to reparation for the injury; neither he nor the other party may in such a case avoid the rules governing contractual liability by opting for rules that would be more favourable to them. QC C.P.A.: 53 Art. 53 QC CPA A consumer who has entered into a contract with a merchant is entitled to exercise directly against the merchant or the manufacturer a recourse based on a latent defect in the goods forming the object of the contract, unless the consumer could have discovered the defect by an ordinary examination. The same rule applies where there is a lack of instructions necessary for the protection of the user against a risk or danger of which he would otherwise be unaware. The merchant or the manufacturer shall not plead that he was unaware of the defect or lack of instructions. The rights of action against the manufacturer may be exercised by any consumer who is a subsequent purchaser of the goods. Commercial Law – Summary Art. 1726 : Does the warranty of quality extend to safety defects? Provision doesn’t talk about safety, only asks whether there is a defect which diminishes or otherwise affects the utility of the goods. Edwards : Early in the evolution of the warranty of quality, held that if a defect also impairs safe use, it is covered by the definition of ordinary or reasonable use by the buyer. o Samson; Ross: Products fulfilled their normal use, but they were unreasonably dangerous. That danger was held to constitute a latent defect o E.g. in Ross, it was a rifle that misfired if loaded improperly. Product was not unfit for use, but defect impaired the safe use of the product. B. Rights of the Sub-Acquirer (Direct Recourse) GM v. Kravitz [1979] (SCC) [Art. 1442 codifies decision in Kravitz] Facts Kravitz bought a new from an authorized dealer ("Plamondon") of the manufacturer GM Kravitz complained of certain defects in his car a from the moment he took delivery of it. o common ground that, when it was delivered to Kravitz, the automobile had latent defects that rendered it unfit for the use for which it was intended Kravitz tendered the automobile to G.M. and Plamondon upon reimbursement of the purchase price. o brought an action against Plamondon AND G.M. Issue Can the buyer sue the 3rd party manufacturer? YES! Is the warranty of quality an accessory right in the good? DOUBLE YES REASONING In a contract of sale, the seller has two principal obligations: o the delivery o the warranty of the thing sold (art. 1491 C.C.), which has in turn two objectives: warranty against eviction and warranty against latent defects. 1527 CCLC: If the thing sold has latent defects that render it unfit for the use for which it was intended, the buyer may, inter alia, have the sale cancelled, which entails the reimbursement of the price and of the expenses caused by the sale o if the seller knew or was presumed to know of the latent defects, the buyer is also entitled to the payment of all damages he has suffered o The seller who knows of a latent defect in the thing sold has the obligation to so inform his buyer If he remains silent, he is necessarily in bad faith and commits a "dol" that makes him liable for "all damages suffered by the buyer" For the purposes of art. 1527 CCLC legal warranty against latent defects, the manufacturer and the professional seller are always presumed to be in bad faith, o The manufacturer cannot avoid his liability for latent defects in the thing he has manufactured when he sells it to a dealer. Plamondon could have brought a redhibitory and damage action against G.M., based on this legal warranty. Kravitz could have exercised the remedy himself through an action in subrogation. However, this is not what he elected to do o he sought to exercise against G.M. a personal right which he would have acquired with the automobile and whereby he could avail himself directly against the manufacturer of the legal warranty against latent defects Three difficulties in this claim, all of which Kravitz surmounts (1) The no-warranty clause contained in the contract of sale between Plamondon and Kravitz seeks to repudiate the legal warranty of the dealer and the manufacturer against defects. Commercial Law – Summary o Both the professional seller and the manufacturer must notify the purchaser of the latent defects in the thing sold. o when sales are frequently standard-form contracts, it is important not to permit a manufacturer or a professional seller to systematically ignore the warranty to the detriment of the non-professional buyer The no-warranty stipulation therefore cannot be a bar to Kravitz' remedy against G.M (2) Plamondon, acting as G.M.'s agent, gave Kravitz two booklets published by G.M., certain clauses of which constituted a conventional warranty by G.M. o As stated above, neither a manufacturer nor a professional seller can contract out of the legal warranty against the latent defects or limit the liability resulting from such warranty any provision of the conventional warranty the effect of which would be to relieve G.M. from its liability under the legal warranty must be held to be null and void. (3) Must be decided whether the legal warranty against latent defects can also benefit a subsequent purchaser? o recognized that some rights are so closely related to a thing that they can benefit only its owner o principle of the transfer of rights that are identified with the thing or accessories thereto [550] warranty against latent defects is owed not only to the immediate purchaser, but also to any subsequent purchaser of the thing The sub-purchaser may therefore proceed directly against the first seller for both cancellation and damages. [552-553] Kravitz, the owner of the automobile, is the successor by particular title of Plamondon. o When he purchased the automobile he became the creditor of G.M.'s warranty against latent defects an action in cancellation and in damages against G.M Sub-purchaser must return the goods to be entitled to this remedy, cancel obligations of both parties [555] Discussion on how to tender goods on page 555-556 cancellation in question is that of the first sale, since it is the one which gives rise to the warranty of which the subpurchaser is availing himself. [553] o The price that the first seller must reimburse is thus that of the first sale, namely the price it received. o The difference between the price of the first sale (wholesale price) and that of the second sale (retail price) is included in the damages owed under art. 1527 C.C if the price received by G.M. was less than that paid to Plamondon, G.M. must also pay the difference between the two prices in damages. G.M. must pay Kravitz the amount of the selling price which the latter paid Plamondon and the damages resulting from the latent defects. G.M. is jointly and severally liable with Plamondon for payment in full of the sum owed. 1442, 1730 C.C.Q. ; 54 QC C.P.A. Art. 1442 (KRAVITZ) Art. 1730 The rights of the parties to a contract pass to their successors by particular title if they are accessory to property which passes to them or are directly related to it. The manufacturer, any person who distributes the property under his name or as his own, and any supplier of the property, in particular the wholesaler and the importer, are also bound to warrant the buyer in the same manner as the seller. Art. 54 QC CPA A consumer having entered into a contract with a merchant may take action directly against the merchant or the manufacturer to assert a claim based on an obligation resulting from section 37, 38 or 39. Rights of action against manufacturer based on an obligation resulting from section 37 or 38 may be exercised by any consumer who is a subsequent purchaser of the goods. Arts. 1442 and 1730 : These articles are the codification of the Kravitz decision, where the SCC allowed the purchaser of a car to skip over the insolvent dealer (immediate seller) who and sue General Motors (manufacturer) directly on the basis of breach of warranty of quality. Commercial Law – Summary Art. 1442 CCQ is based on the theory of accessory rights. Basically, rationale is that warranty of quality is so intimately related to the actual property that it flows automatically with the sale thereof. Suppose I am a manufacturer. I produce a good and sell it to A. Then, A sells it to B and B sells it to C. In such a case, the warranty of quality has transferred along with the good to each subsequent buyer, and each buyer has the same recourse against me. But what if there are problems with accessory rights theory. For example, what if you let your prescription period run. Or what if manufacturer tells A about the defect, but A doesn’t tell B or C. This could cause problems. This is why art. 1730 CCQ was created to deal specifically with warranty of quality. : Each person who sells the goods is bound in the same way as the original seller. But its not only the manufacturer - every person in the chain of title is responsible to the ultimate user as though they had sold it directly to him. Whole point of art. 1730 Is to prevent manufacturer from being able to say “I disclosed to the first seller, so I am not liable.” Debate of the sale of reference When a sub-acquirer seeks recourse under art. 1730, the major question is which contract of sale we are looking at to determine whether the necessary conditions have been met. o These articles will apply differently depending on who the seller is (professional or not) and what kind of property we are dealing with (movable or immovable). Jobin : It should be for the anterior condition of the defect. If the defect existed at the time, it should be the last sale. Could be that at the time of the original sale the goods were fine but became defective before the last sale. Edwards : When it comes to sale of normal residential property, sale of reference should be the actual circumstances of the actual sale by the seller being sued. Exception to this might be the prior existence of the defect Jobin §796 : Rights of the Sub-Acquirer When a manufacturer does not sell directly his product to the ultimate buyer, because he sells to a wholesaler for example, there does not exist a contractual relation between the ultimate purchaser and the manufacturer. This is why, for a long time, the recourse of the sub-acquirer against the manufacturer has rested on an ECO. This regime of responsibility gave rise nonetheless to certain difficulties, o This jurisprudence was codified: these are the provisions on the extra-contractual responsibility of the manufacturer with regard to third parties, for defect of security. Kravitz decision allowed direct contractual recourse against the manufacturer on the basis of hidden defects. o subsequent acquirer does not exercise his own rights; o the guarantee due in virtue of the first sale is more so transmitted by the intermediary seller by accessory title of the purchased object, which allows the sub-acquirer to benefit from the same rights as the first buyer. CCQ has clarified the situation: the rights of the parties to a contract are transmitted to those having cause to a particular title as accessories of the property or when they have a close link with the thing. When the vice is dangerous, these diverse possibilities offered to the sub-acquirer pose the problem of law for this person to choose between contractual recourses and extra-contractual recourse against the manufacturer o because the sub-acquirer is also a third party with regard to the first contract in the distribution chain. We may think this choice does not exist, by virtue of the prohibition of the option, because a contractual recourse is already provided for the sub-acquirer. However, article 1458 clearly says that it is the co-contractors who cannot have recourse to rules other than those of contractual responsibility, which is to say the parties who already gave their consent to one same contract. o sub-acquirer never contracted with the manufacturer and it seems difficult to qualify them as co-contractors Commercial Law – Summary o legislator simply grants to the sub-acquirer the right to invoke certain rights resulting from a sale by using a legal fiction. In consequence, it seems that the sub-acquirer can opt between two regimes of responsibility when he exercises a recourse against the manufacturer for dangerous vice. See also : Hay v. Jacques These provisions also apply to immovables o Difference from sale of movables : “sale of reference” will only be the sale that the seller was involved in (unless there are professional sellers) 2. Extra-Contractual Liability At the same time, CCQ also instituted new extra-contractual regime for safety defects. This includes: Specifically applicable to law on sale : arts. 1726, 1730 CCQ General ECO liability : arts. 1468-1469; 1473 CCQ How did these changes come about? Under CCLC, could only address safety defects through general liability [negligence]. Art. 1457 continues to be available, but no point in using it anymore. The origin of these three provisions is European Directive (July 1985) re: safety defects. C.C.Q.: 1468, 1469, 1473, [1474(2), 1726, 1730] Art. 1468 CCQ Art. 1469 The manufacturer of a movable property is liable to reparation for injury caused to a third person by reason of a safety defect in the thing, even if it is incorporated with or placed in an immovable for the service or operation of the immovable. The same rule applies to a person who distributes the thing under his name or as his own and to any supplier of the thing, whether a wholesaler or a retailer and whether or not he imported the thing. A thing has a safety defect where, having regard to all the circumstances, it does not afford the safety which a person is normally entitled to expect, particularly by reason of a defect in the design or manufacture of the thing, poor preservation or presentation of the thing, or the lack of sufficient indications as to the risks and dangers it involves or as to safety precautions. Art. 1468 CCQ: The manufacturer of movable property is liable to reparation for injury to a third person by reason of a safety defect; the same rule applies to anyone who distributes the thing or any supplier (wholesaler or retailer) Essentially holds anyone in the chain of title who distributes products containing a safety defect responsible for the damages caused by the goods, even if the movable is later incorporated into an immovable. Art. 1469 CCQ: A thing has a safety defect where having regard to all circumstances it does not afford the safety a person is normally entitled to expect Art. 1473 The manufacturer, distributor or supplier of a movable property is not liable to reparation for injury caused by a safety defect in the property if he proves that the victim knew or could have known of the defect, or could have foreseen the injury. Nor is he liable to reparation if he proves that, according to the state of knowledge at the time that he manufactured, distributed or supplied the property, the existence of the defect could not have been known, and that he was not neglectful of his duty to provide information when he became aware of the defect. Art. 1473 CCQ: Defenses Commercial Law – Summary Manufacturer, distributor or supplier is not liable if he proves that victim knew of the defect, could have known of the defect (responsibility to examine), or could have foreseen the injury. Manufacturer, distributor or supplier also not liable if he proves that according to the state of knowledge at the time of the sale or manufacture of the good, he could not have known of the existence of the defect (“development of risk defense”). o Cf. contractual regime : If the reason why the product is not fit for its purpose is the state of knowledge at the time, the seller should not make representations that it would meet a certain level of fitness. Edwards : DOR defense is controversial in application to contracts. NB : ECO regime only applies to third parties When a buyer purchases something directly from the party, that buyer’s recourse for safety defects is based on the seller’s warranty of quality. Direct buyer does not have the right to use these three provisions because he has a contract with the seller. Since art. 1458 para 2 eliminates the option, he is forced to remain under contractual regime. o E.g.: You buy a toaster from Zellers. It turns out to be defective and burns down your apartment. Your recourse would be contractual (warranty of quality) against Zellers. But your roommates have no contractual link with Zellers, so their recourse would be under the three ECO provisions. 3. Duty to Warn Separate area of liability for “failure to warn” of defects in the goods. Here, the issue is not that the product is dangerous, but that there was insufficient explanation or instruction as to how to use the good properly. Cleansing liquid to unblock drains is fit for its purpose, but will dissolve your fingers if it spills. Floor varnish very good and useful, but was extremely flammable and so user must be warned to keep it away from any heating units. Jobin : Contract : obligation to inform is not specifically codified in the contractual sphere – falls under art. 1434. ECO : obligation clearly set out in art. 1469 – a safety defect “is on which results from the lack of sufficient indications as to the risks and dangers involved” Consumer protection : obligation to warn under art. 53(2) QC CPA - where there are insufficient directions regarding the risk of danger, it is equivalent to a latent defect. Golden rule : The greater the danger, the more significant your duty to inform or warn. If danger is minimal, a general instruction is probably okay. But if danger is great, it needs to be spelled out and indicated clearly. 4. Right to Damages Art. 1458 CCQ : Unconditional right to compensatory damages under contract. Art. 1728 CCQ : If you are going under the warranty of quality (as a buyer or sub-buyer), the right to damages is dependent on whether the seller was “aware or could not have been unaware” of the latent defect. Would not be appropriate to allow manufacturer to evade liability by invoking immunity. As such, have set up a presumption of knowledge that applies to different categories of seller. For each category, courts have developed a slightly different standard required to rebut the presumption: (1) Manufacturers and builders of immovables Manufacturers have a hard time rebutting this presumption [ABB] Basically will only defeat claim if they can argue : development of risk defense, force majeure after the sale, or improper use by the buyer. Commercial Law – Summary (2) Professional specialized sellers (e.g. electronics) Can rebut the presumption if he can prove that having taken every reasonable precaution, he could not have known or suspected the defect [Samson]. (3) Professional non-specialized sellers (e.g. depanneur) Simple negligence test II. Common Law A. Contractual Liability Contract between seller and immediate buyer: products liability claim can be based in contract. Contract between seller and sub-acquirer: there is no “direct recourse” in the CML. SGA provides no recourse to subsequent purchaser against manufacturer However, there have been some theories developed in the CML to try to address this problem. o E.g.: Murray and theory of collateral warranty : Court held that representations in a brochure were sufficient to create a warranty and direct contact between the end user and manufacturer. The breach of that warranty gave rise to damages. B. Extra-Contractual Liability Negligence gives recourse to end user against manufacturer. Because CML doesn’t have the “option” as in CVL, the end user is free to sue the manufacturer (or whomever else along the chain) despite the existence of a contract. However, note that one cannot use tort to claim pure economic loss. In CML, this is an area purely left to contract – tort is there to compensate you for physical damage to your person or property. The one important exception for our purposes is the CML will permit a claim in tort for economic loss resulting from a dangerous defect. [Winnipeg]. Rivtow Marine Limited v. Washington Iron Works [1974] (SCC) Facts: Appellant was the charterer of a log barge equipped with a special crane designed and manufactured by respondent 1 and distributed by respondent 2. Respondents knew or ought to have known of the defects, but did not disclose them. After a virtually identical crane on another barge collapsed (killing its operator), Rivtow inspected and found cracks in the cranes. Withdrew barge from service to carry out extensive repairs. Respondents were aware of the potential for cracks due to negligent design, but didn’t warn appellant. Appellant sued for: (1) cost of repair, and (2) economic loss suffered while barge was idle. Issue: Can appellants recover damages for (1) economic loss suffered while barge was idle, and /or (2) cost of repair? This is the first time the SCC has been called upon to determine whether recovery can be had in negligence for economic loss independent of physical injury. Holding: (1) Yes. If economic loss is recoverable when such injury is suffered, no reason to deny it when the threatened injury is forestalled. (2) Majority holds that cost of repair cannot be recovered. Laskin dissents on this point, viewing it as part of the economic loss sustained by plaintiffs in an attempt to mitigate the damages. Legal Reasoning (Laskin J., dissenting on quantum of damages) Would enlarge award to allow both the claims of the appellants (would include cost of repairs). He does not agree that the liability of the respondents should be rested on the one basis of a failure to warn of the probability of injury by reason of defective design This is the only liability attributable to distributer, but not to designer and manufacturer. Washington was under a duty to prevent injury which foreseeably would result from its negligence in design and manufacture. Commercial Law – Summary o If physical harm or property damage had been suffered by appellants as a result of the same negligent act, losses would be recoverable. Should it be any less liable for the direct economic loss to the appellant merely because the likelihood of physical harm was averted by the withdrawal of the crane from service for repair? Manufacturer’s liability in negligence for physical harm extends to ensuing economic loss. It is said, however, that it does not extend to economic loss where no physical harm is threatened. o While it is true that economic interests are generally protected by contract rather that tort, Hedley Byrne shows pecuniary loss is not outside scope of liability for negligence. o It should apply in this case because: Economic loss was suffered by a person whose use of the defendant’s product was contemplated – not a case of indirect loss to third parties. Economic loss resulted directly from avoidance of threatened physical harm to property (and potential physical harm to persons). If economic loss is recoverable when such injury is suffered, no reason to deny it when the threatened injury is forestalled. o Negligent defendant should not be made better off at the expense of the plaintiff because the latter took care to mitigate the risk before harm occurred. o Prevention of threatened harm resulting directly in economic loss should not be treated differently from post-injury care. Comments: There is no liability under the tort of negligence for loss of profit. But this was not the standard tort of putting dangerous goods on the market place – there was a clear failure to warn in respect of dangerous defects. o We should allow certain heads of pure economic loss, and this is such a case. o If the warning had been given, they would not have had to remove crane from operating during their peak season and damages could have at least been reduced. Laskin in dissent : Makes no sense to give relief for the damages and consequences of negligence, but not to cover the costs of preventing injury. Winnipeg Condominium Corp no 36 v. Bird Construction Co. [1995] (SCC) Facts Developer contracts with general contractor to build apartment building general contractor sub-contracts masonry Building later converted into condominium and sold to plaintiff corporation Corporate directors concerned with masonry work; original architects and engineers indicate structurally sound Cladding falls from building; no one injured Further inspection reveals structural defects in masonry; masonry removed at plaintiff’s expense Issue Whether a general contractor responsible for the construction of a building may be held tortuously liable for negligence to a subsequent purchaser of the building, who is not in contractual privity with the contractor, for the cost of repairing defect in the building arising out of negligence of construction Reasoning The claim is one of economic loss: asking for the cost of repairing the defective masonry o No one was injured by the collapsing exterior 5 different categories where the question of recoverability for economic loss has arisen: 1. Independent liability of statutory public authorities 2. Negligent misrepresentation 3. Negligent performance of a service 4. Negligent supply of shoddy goods or structures 5. Relational economic loss Commercial Law – Summary The question of recoverability for economic loss must be approached with reference to the unique and distinct policy issues raised in each of these categories o In cases involving the recoverability of economic loss in tort it is preferable for the courts to weigh the relevant policy issues openly The question in hand falls into the 4th category with the one distinction that it was a dangerous good, not merely a shoddy good Central Trust co v Rafuse: duty of care in tort may arise coextensively with a contractual duty o It is not confined to relationships that arise apart from contract o The question is simply whether there is a relationship of sufficient proximity, not how it arose o The principle of tortious liability is for reasons of public policy a general one o Duty in tort must arise independently of the contractual duty Contract will indicate the nature of the relationship that gives rise to the duty of care The duty of care that is asserted as the foundation of the tortious liability must not depend on specific obligations or duties created by the express terms of the contract A contractor`s duty to take reasonable care arises independently of any duty in contract between the contractor and the original property owner o Duty of contract flows from the terms of the contract o Duty of tort flows from the contractor’s duty to ensure that the building meets a reasonable and safe standard of construction The bounds of this duty are not defined by reference to the original contract The unfortunate result of D & F Estates is that it leaves subsequent purchasers with no remedy against a contractor who constructs a building with substandard materials/ workmanship, putting them at considerable risk o The fact that Bird negotiated a contract with Tuxedo, the original owner of the building, does not insulate Bird from a separate duty to the current owners of the building In Rivtow, Laskin’s dissent which expresses concern with safety and the prevention of further damage is justified o Where products are unsafe, prevention of threatened harm resulting directly in economic loss should not be treated differently from post injury treatment Time to apply the Anns test!! Step 1) Was there a sufficiently close relationship between the parties so that, in the reasonable contemplation of Bird, carelessness on its part might case damage to a subsequent purchaser of the building? A lack of contractual privity between the contractor and the inhabitants at the time the defects manifest themselves does not make the potential for injury less foreseeable o The reasonable likelihood that a defect in a building will cause injury to its inhabitants is also sufficient to ground a contractor's duty in tort to subsequent purchasers of the building for the cost of repairing the defect if that defect is discovered prior to any injury and if it poses a real and substantial danger to the inhabitants of the building If a contractor can be held liable in tort where he or she constructs a building negligently and, as a result of that negligence, the building causes damage to persons or property, it follows that the contractor should also be held liable in cases where the dangerous defect is discovered and the owner of the building wishes to mitigate the danger by fixing the defect and putting the building back into a non-dangerous state In D & F Estates and Murphy, the plaintiff who moves quickly and responsibly to fix a defect before it causes injury to persons or damage to property must do so at his or her own expense o Maintaining a bar against recoverability for the cost or repair of dangerous defects provides no incentive for plaintiffs to mitigate potential losses and tends to encourage economically inefficient behaviour o The Condominium Corporation behaved responsibly and as a reasonable home owner should, in having the building inspected and repaired immediately A distinction can be drawn on a policy level between dangerous defects in buildings and merely shoddy construction o With dangerous defects, tort law serves to encourage the repair of dangerous defects and thereby to protect the bodily integrity of inhabitants of buildings o Shoddy defects are questions of quality of workmanship and fitness for purpose not recoverable Commercial Law – Summary Contractors who take part in the construction and design of a building will owe a duty in tort to subsequent purchasers of the building if it can be shown that it was foreseeable that a failure to take reasonable care in constructing the building would result in defects that pose a substantial danger to the health and safety of the occupants Anns test Step 2 Are There Any Considerations that Ought to Negate (a) the Scope of the Duty and (b) the Class of Persons to Whom it is Owed or (c) the Damages to which a Breach of it May Give Rise? Concerns: o 1)Warranties respecting quality of construction are primarily contractual in nature and cannot be easily defined or limited in tort o 2)Recognition of the duty interferes with the doctrine of caveat emptor which dictates that in the absence of an express warranty there is no implied warranty of fitness Rebuttal: o These concerns are version of the Cardozo floodgate argument: liability in an indeterminate amount for an indeterminate time to an indeterminate class o Addressing 1) A tort duty can arise concurrently with a contractual duty, so long as that tort duty arises independently of the contractual duty The duty to construct a building according to reasonable standards and without dangerous defect arises independently of contractual stipulations , because it arises from a duty to create the building safely, free from dangerous defects, and not merely according to contractual standards of quality No possibility of liability to an indeterminate class: the claimant is restricted to the inhabitants of the building no risk of liability for indeterminate amount: limited by the reasonable cost of repairing the dangerous defect in the building and restoring the building to non-dangerous state Any danger of indeterminacy in damages is averted by the requirement that the defect for which the costs of repair are claimed must constitute a real and substantial danger to the inhabitants of the building no risk of indeterminate time: contractor will only be liable for the cost of repair of dangerous defects during the useful time of the building; not liable for dangerous defects arising from normal wear and tear o Addressing 2) the assumption underlying the doctrine is that the purchaser of a building is better placed than the seller or builder to inspect the building and bear the risk that latent defects will emerge necessitating repair costs this concern is not responsive to the realities of the modern housing market imposition of liability on builders provides incentive for care in the construction of buildings and a deterrent against poor workmanship Holding no adequate policy considerations exist to negate a contractor's duty in tort to subsequent purchasers of a building to take reasonable care in constructing the building, and to ensure that the building does not contain defects that pose foreseeable and substantial danger to the health and safety of the occupants Ratio Application of Anns test! Comments : Issue is whether general contractor can be held liable in tort for negligence to a subsequent purchaser of the building (absent contractual privity) for costs related to the repair of negligent construction. La Forest J. : Yes. When defects pose a “substantial danger to the health and safety of the occupants.” This will not apply to all repairs – strictly limited to dangerous defects. Commercial Law – Summary o Rationale : It would not be reasonable to wait for the damage to occur – law should be encouraging current owners to repair the defect and put good into a non-dangerous state. Principle of “caveat emptor” is no longer applicable to the modern housing market. Problem 7 : “Exercising Machine” Facts: On an infomercial, Gilbert saw the spokesperson for a weight training machine, manufactured by Fitco Ltd., demonstrate how easy it was for any person to lose weight and get into better physical condition with this product. Gilbert then purchased the machine from a local sports store (Articles & Sports). He read the instructions carefully and installed the machine as illustrated in the diagram. He was very careful to practice all the positions and only use the machine as indicated. The manual contained the following warranty: “This product is covered by a full warranty against any defects for a period of 1 year from the day of purchase. Should the purchaser be less than fully satisfied, the manufacturer will replace the product, or reimburse the purchaser in full. This warranty replaces any other legal warranty, express or implied.” Six months later, Gilbert’s friend Jacqueline came over to use the machine. She began exercising and suddenly one of the bolts dislodged, causing part of the machine to collapse. This left Jacqueline with a serious back injury. Jacqueline seeks compensation for her injuries. Gilbert returned to Articles & Sports to have his weight training machine replaced. He was told the store would not replace the product, as the collapse was caused by faulty assembly, a matter which, they claim, was not covered by the warranty. What courses of action are available to both Jacqueline and Gilbert? Distinguish whether the manufacturing and sale took place in Québec or Ontario. 1. Can Jacqueline receive compensation for her injuries? a) CVL She could sue the manufacturer Fitco, and might consider suing the retailer. Absence of a contractual link with either defendant would not be an issue. She could sue either one under art. 1468 (ECO for unsafe products). It is a question of fact whether there was incorrect installation. o If it was incorrect installation, was there a duty to warn? Maybe should have put in instructions that if you don’t assemble exactly as indicated, the whole thing will collapse? Especially given how carefully and diligently Gilbert was. o If she cannot sue manufacturer or retailer, she might be able to sue Gilbert for his negligence under art. 1457. What wouldn’t apply here? o Exclusion clause : J is not a co-contracting party o CPA : J is not a consumer b) CML She could sue manufacturer in standard products liability. However, must establish negligence on the part of the person who put this thing on the market (Fitco). She could not sue retailer – hard to see how they could have been negligent under CML. All they did was sell goods which were packaged. o The only way is some evidence that they ought to have known of defect (e.g. hearing news or obtaining notice that they were defective, in which case should have removed them from the shelves). If the cause of the collapse was assembly, means there is no responsibility on the part of the manufacturer unless there was a duty to warn. Commercial Law – Summary Gilbert’s responsibility depends on whether the manufacturer is liable. If the latter is not, J will aslo have to prove negligence on G’s part. 2. Can Gilbert get his machine replaced? a) CVL He can sue the direct seller (retailer) o As a consumer, he can invoke arts. 37, 38 and 53 CPA. More beneficial, as it would make the exclusion clause unenforceable. o He can go directly under art. 1726 CCQ He can sue the manufacturer (direct recourse) under art. 1442 or 1730 or do it via art. 54 CPA. o Again, exclusion clause wouldn’t apply in consumer sale. In either case, could ask for resolution of the sale and refund of purchase price. What if there was no defect and it was improperly assembled? o Exclusion clause doesn’t say it has to be defective, just that customer is “not satisfied” so seems like he could invoke the clause. o Could also raise duty to warn under contract (art. 1458 or 1434 CCQ). b) CML Recourse under SGA Exclusion clause would not be valid under Ontario CPA, so this would be his best course of action against the retailer (art. 9 CPA). Can also claim to be “not satisfied” and take advantage of warranty. If there is a defect, he can sue manufacturer for cost of repair (like Winnipeg). Or get it repaired and sue for the cost. But probably could not sue for cost of replacement, because that is PEL.
