IS THERE A CONTRACT?
Offer and Acceptance
Offer is a statement made by one party to another, which contains all the necessary terms of an agreement
such that, if the other party gives a simple assent, a contract will be formed (Johnston Bros)
-Quotation of price is not an offer (need specified quantity) (Johnston Bros)
-Advert in newspaper is usually an invitation to treat, not an offer (Lefkowitz)
-Advert in newspaper can be an offer if it is clear what is being sold (quantity) and how one must accept the
offer (Lefkowitz)
-Advertisement cannot have secret terms (Lefkowitz)
-Cannot impose silence as mode of acceptance
-Offer and acceptance must apply equally to both parties (saying customer in self-service store is bound to a
contract when they put product in basket is absurd) (Boots)
Communication
-Silent acceptance and silent revocation mean nothing (Dickinson)
-Can withdraw offer until it is communicated to him that it has been accepted: rational is that parties must be
told whether or not they are in a binding contract so they can rely on it (Larkin)
-Can withdraw offer at any time before it is accepted so long as withdrawal is communicated (Manchester
Diocesan)
Terms of Offer
-Each counter-offer terminates terms of pervious offer, so acceptance based on terms of last offer (Eliason)
(Butler Machine)
-Cannot add more terms to completed contract: would need to make new contract (Eliason)
-Party making offer can dictate any mode of acceptance they want (Eliason)
Will court imply terms?
-If there is no time frame, court will imply ‘reasonable time’ considering expectations of both sides, transfer of
title date, time it takes for legal work to be done (Manchester Diocesan)
-Court will not enforce promise to keep offer open unless there is A) Consideration or B) Signed under seal
(Dickinson)
-Court will imply ‘reasonable mode of acceptance’ ONLY IF mode is not specified (Eliason)
-Court will imply ‘reasonable price’ unless parties have ‘agreed to agree’: NO CONTRACT (May and Butcher)
Tendering Process: (MJB)
1. RFP = offer for contract ‘A’
Terms of contract ‘A’: “if we select a proponent bid, we will select only from compliant bidders, and will treat
you fairly once you make your bid, but you must comply if you are accepted”
2. Proponent Bid = acceptance of contract ‘A’
-Whichever proponent bidder is accepted, the two parties then make contract ‘B’ about the actual work
-Privilege clause (that you can choose not to accept any of the bids) does not relieve you from having to
accept only compliant bidders, if you accept at all
Formalization and Certainty
-Cannot ‘agree to agree’: NO CONTRACT (May and Butcher)
-Can leave out important terms if there is a mechanism to resolve disputes (market price, arbitrate) (Hillas)
-Agreeing to negotiate only forces you to negotiate; does not force you to agree (Hillas)
-Court reluctant to repudiate contracts that parties have been relying on because they believed it valid (Foley)
NOTE: Mechanism does not work if you contract to ‘agree to market price’ (Empress Towers)
Implying 1) Negotiate in good faith and 2) Cannot unreasonably withhold agreement: Court is reading in
“agree to market rate” when contract actually said “market rate, as agreed upon” UNUSUAL JUDGEMENT
(Empress Towers)
Correspondence
When offer is made, it is capable of acceptance or revocation until:
A) It is communicated that it is revoked or accepted
B) It has been standing for an unreasonable time
Mailbox rule for acceptance: Contract formed when acceptance is put in mailbox (makes seller bear the risk)
(Henthorn)
Don’t apply mailbox rule when: A) Different mode of acceptance specified in terms
B) Mail is not the reasonable mode of acceptance
Mailbox rule for revocation: Revocation only applies once it is received by accepting party (because accepting
party should be allowed to act on contract instead of waiting for the potential revocation) (Bryne)
Mailbox rule for lost acceptance: If acceptance letter is lost in the mail, the risk has shifted to the seller
because he is uncertain about whether or not there is a contract until he receives acceptance. Court will
strictly interpret terms of contract because they want to rule in favour of the person who bears risk (Howell)
Instantaneous Communication: Contract formed when acceptance received (Azienda)
Electronic Commerce Act [2000]:
s. 21(c): You can revoke an electronic K if you revoke it immediately
s. 22(3): Presume the information is received when it enters the information system/becomes capable of
being retrieved (rebuttable)
CONSIDERATION
White v. Bluett [1853] England
-Father promised to forgive promissory note (debt) in exchange for not complaining
Hamer v. Sidway [1891] NYCA
-Uncle said nephew gets $5000 if he abstains from vices until age 21 (right to vices, so detriment)
Thomas v. Thomas [1842]
-Husband makes deathbed with to give his wife the house to live in, and executor tries to eject her
-House came without provision that she had to maintain it, so ground rent ($1) can be consideration
Tobias v. Dick [1937] Manitoba
-D invents machine and makes K for P to be exclusive seller of the machine, without obligation to sell any
machines—no consideration moving from P
Wood v. Lucy, Lady Duff Gordon [1917] NYCA
-K for P to exclusively market D’s fashion brand, and D gets ½ the profits
-Court says there is good enough consideration. Why is this different to Tobias v. Dick?
1) Tobias K had nothing linking profits back to the maker
2) The elaborate structure of the Wood K made the obligation to make profits an implied term
Harris v. Watson [1791], Stilk v. Myrick [1809]
-Sailors sign on for flat wage, and when emergency occurs they exhort higher wages in return for greater
effort to save ship (NB: economic duress did not exist then)
-K for higher wages not enforceable because there was no consideration: cannot promise to do something you
are already legally obligated to do (can’t sell a pre-existing duty)
Gilbert Steel v. University Construction [1976] Ont CA
-Price of steel rises so UC agrees to pay more (contractual variation), but did not pay because no consideration
Three arguments for why contract is enforceable:
1) K rescinded and replaced: NO, increased price is only change, not mention of rescission by either party
2) There was consideration given because:
a) At the higher price, D was getting more credit: NO, natural burden of higher price
b) Gave “good price” on second building: NO, too vague
c) UC gets practical benefit (no delay, new subcontractor at higher price): NO, consideration must be
detriment moving from GS, not just benefit accruing to UC
3) Estoppel: GS kept working because UC led him to believe there would be higher payment: NO, Estoppel can
only be used as a shield, not a sword, and here GS is trying to force UC to pay more
Williams v. Roffey (1991) QBCA *Not adopted by SCC yet, but supported in NBCA*
-Subcontractor refuses to complete K unless he is given more money, so contractor agrees because he doesn’t
want to be fined for job not finishing on time, then he refuses to pay
-Consideration in contractual variations can simply be the practical benefit to D (without moving from P) if
the variation is not made under economic duress (and financial pressure is not economic duress)
1. Contract between A and B
2. B genuinely believes A will not complete contract
3. B promises to pay greater price for A to complete K
4. Because of the new promise, B obtains a practical benefit
5. B’s promise is not made under economic duress
6. Practical benefit to B equals good consideration
Greater Fredericton Airport Authority v. NAV (2008) NBCA
-GFAA wanted to build a new runway; NAV can either build new equipment or move old equipment, but they
are responsible for providing the equipment. NAV chooses to replace equipment, but says GFAA must pay
-GFAA says they will pay for it, but only under protest, and NAV is contractually obligated to pay for it
Foakes v. Beer (1884)
-Foakes said he would pay Beer money he owed, if Beer gave up right to sue for interest
Court: No consideration because Foakes had pre-existing legal duty to pay interest and principle
Law and Equity Act, RSBC 1996 *Overturns Foakes*
-Explicit agreement to pay less, even without new consideration, is legally binding
-Practical reasons why person might take lessor sum (immediate, avoid court, better than nothing)
Fairgrief v. Ellis (1935) BCSC
-Sisters agreed to care for D in exchange for his home when he died / Wife made them leave / Accepted $1000
for work thus far, instead of house later / Statute of Frauds said original contract for house unenforceable
Zellers Case
-Child shoplifts and Zellers charges parents for incidental costs / Zellers lawyers knew parents not legally
responsible for acts of their child, so had no legal foundation for claim
Lampleigh v. Brathwait (1615) UK
-D had killed someone, and asked P to get him a pardon from the king / Retracted later promise of pay
Roscoria v. Thomas (1842) UK
-Buys horse, but does not include warranty in sale / Asks after the sale if horse is good quality / Says yes
-Later discovers that horse has vices, so tries to use money from sale as consideration for warranty
CONSIDERATION
-Consideration must be a detriment moving from one party to the other (both give something); not necessarily
a benefit accruing: Hamar
-Court will not judge the value of the consideration (ground rent of $1): Thomas
-Contract to exclusively market product must at least imply the obligation to make profits: Tobias, Lady Duff
-Explicit agreement to pay less, even without consideration, is legally binding: Law and Equity Act, 1996
-Contractual variation can be enforceable even if original contract is legally unenforceable, if both parties
genuinely believed they had bona fide contract: Fairgrief
-When one party knows contract is illegal, or when absolutely no legal foundation, not bona fide contract
because of mutual belief in it: Zellers
Not good consideration:
1) Abstaining from what you have no right to do: White
2) Burden of the gift (won’t transform gift into contract): Thomas
3) Pre-existing legal duty: Harris, Stilk
4) Practical benefits that are natural consequences of original K: consideration must move from promisee
*This is on its way to being overturned*: Gilbert Steel
NOTE: Williams Exception: Contractual modifications are legally enforceable unless done under economic
duress, and consideration can just be practical benefit (without detriment)
-GFAA: Supports Williams, and says economic duress means party agreeing to modification had no
realistic alternative
Not economic duress: high interest rates, unequal bargaining power, threat to break contract
Economic duress: monopoly on providing service
PAST CONSIDERATION
-General rule: Past consideration (act done before promise of payment) is not good consideration: Roscoria
-Canadian courts are reluctant to enforce gratuitous promise to pay for past service because of reliance
-Cannot get after-the-sale warranty by claiming money from sale is consideration: Roscoria
NB: Today, Sales of Goods legislation would likely include an implied warranty
When past consideration is good consideration: Pao On, Lampleigh
1. Act must be done at promisor’s request
2. Both parties must understand it is renumberable (ex. social norm is to pay plumber)
3. Payment must be legally enforceable had it been promised in advance
CHARITABLE DONATIONS
Dalhousie v. Boutilier (1934) SCC
-D promises to donate $5,000 but then gets into financial trouble and dies without donating
-P argued they had relied on his money (nope, only small part of fundraising campaign)
Court: No contract because no consideration / No gift because no delivery
CHARITABLE DONATIONS
1. Legally enforceable if consideration is given (get name on building, etc)
2. Not legally enforceable if the ‘consideration’ is a gratuitous gift because:
a. Past consideration if the gratuitous gift is given after the money is donated
b. No intention to enter legally binding contract
POLICY
Do not make charity enforceable because:
-Makes people hesitant to donate in case their finances change
-Don’t want donations being spent on legal enforcement of other donations
-Undermines ethical principle of donation
-Don’t want to drive people to bankruptcy for charity
-Don’t want to take from deserving beneficiaries/creditors
Do make charity enforceable because:
-Stability for charities to run their affairs
INTENTION
RELIANCE AND ESTOPPEL
Jones v. Padavatton (1969) UK
-Mother promised to pay daughter $200/month to leave good job, move to UK with grandson, and study law
-Contractual modification: daughter ends up using home instead of getting money, mother wants to evict her
-Daughter kicked out because either no intention for form legal contract, or if there was, must imply
reasonable time (can only remain in house while studying law)
Hughes v. Metropolitan Railway (1877) UK
-Landlord had right to terminate contract on 6 months notice, but negotiation led tenant to believe time
period was suspended / Estopped from enforcing strict legal right
Rose v. Crompton (1923) UK
-Business contract, but clause in it specifically stated that this contract was not intended to legally bind parties
NM v. ATA (2003) BCCA
-She moves to Canada to live with him, and he says he will pay her mortgage in UK = not legally enforceable
-He loans her $100,000 on promissory note for her to apply for mortgage = legally enforceable
INTENTION
-A contract is not legally enforceable if there was no intent to create legal relations: NM
-Evaluate intention of parties objectively so other party can rely on contract
-Presumption that business contracts are intended to be legally binding, but rebuttable: Crompton
-Presumption that family arrangements are not intended to be legally binding, but rebuttable: Padavatton
-Using a legal document to make promise (ex. promissory note) indicates legal intention: NM
-A subsequent legal relationship (promissory note) cannot make previous romantic relationship legal: NM
SEAL
-Contracts made under seal are enforceable without consideration
Functions of the seal: Fuller and Brudner
1. Evidentiary—prove contract was made
2. Cautionary—think of the consequences of putting a seal on
3. Channeling—court does not need to decide intent, because the seal itself is a channel for the legally
effective expression of intent
Central London Property Trust v. High Trees (1947) UK
-During war the tenant was not able to lease out all the flats in an apartment building, so landlord agreed to
lower rent / After the war, receiver wanted to collect back rent for last five years
-Enforcing promissory estoppel would make landlord take less for no consideration (self-limiting)
Lord Denning: says that a promise intended to be binding, and acted on, is binding so long as its terms
properly apply—this abolishes need for consideration
Combe v. Combe (1951) UK
-Husband promises to pay wife maintenance in return for her forbearance to sue for maintenance / Husband
reneges on promise, wife tries to use promissory estoppel to force maintenance payments
-Wife would not have gotten maintenance has she applied in court, and cannot forbear right to sue, so
husband’s promise is gratuitous and not legally enforceable, so cannot estop him from reneging
Lord Denning: takes steps back to preserve doctrine of consideration (need good consideration in legally
enforceable promise before you can estop)
John Burrows Ltd v. Subsurface Surveys (1968) SCC
-Friend owes friend money according to contract / Clause says late payment can make entire sum due
immediately, and when they have falling out, he tries to enforce clause
-Court tried to rein-in promissory estoppel by saying need a course of negotiation to change legal intent (not
just friendship); promissory estoppel has not since been interpreted this way
Owen Sound Public Library v. Mial Developments (1979) Ont CA
-Mial is doing construction work for library, but realizes the job is not very lucrative / Clause in K says that if
library is 5 days late on payment, Mial can revoke contract / Library thinks 5 day period on hold while Mial
gets seal of sub contractor, but Mial tries to enforce strict right to revoke contract
Radical ratio: different from normal promissory estoppel because it is being used as a sword/forcing positive
action (forcing them to pay damages for breach of contract)
D & C Builders v. Rees (1965) UK
- Rees owes builders large sum, but knows they will go bankrupt if they don’t get it, so make them agree to
take lesser sum and later uses promissory estoppel against their claim for full amount
-Court says estoppel is equity argument, so need clean hands (overruled in BC Law and Equity Act)
Crabb v. Arun District Council (1976)
-Crabb asks for easement to use road, and Arun says yes and builds gate, but never transfers registered
easement / Cannot use promissory estoppel because not based on legally enforceable promise
-NB: In Canadian law, cannot sell land without proving access is registered, so this wouldn’t happen
UNILATERAL CONTRACTS
NM v. ATA (2003) BCCA
-She moves to Canada to live with him, and he says he will pay her mortgage in UK = not legally enforceable
-He loans her $100,000 on promissory note for her to apply for mortgage = legally enforceable
Williams v. Carwardine (1833) UK
-Reward offered to anyone who knows information about brother’s death; she tells about death much later as
a death bed confession with motivation for telling to clear conscience, not get reward
Estoppel as to fact
-Example: A owes $100 debt to B, and B sells debt to C saying it is for $150. If C checks with A, and A agrees it
is for $150, A is estopped from later claiming it is only $100
Carlill v. Carbolic Smoke Ball Company (1893) UK
-D advertised that anyone who uses their product in specific manner and still gets flu will get 100 pounds
Estoppel as to representation of future conduct
-If conduct implies that ability to enforce strict legal rights under contract has been waived, estopped from
enforcing strict legal rights until giving notice: Hughes
-Rationale: if you fail to enforce your strict rights, reasonable person believes you don’t intend to, until you
give clear notice that you do intend to
-Example: Say you need payment in one week, but give extension: buyer does not believe time is really of the
essence until you reassert that it is
Promissory estoppel
-If promised not to enforce legal rights, estopped from reneging on promise unless: HT
1. Give clear notice that returning to legal rights
2. Self-limiting estoppel: promise ends when circumstances under which promise was made change
-Promissory estoppel must be based on a legally enforceable promise (not gratuitous or romantic
relationship): Combe, Crabb, NM
-Only need to show conduct would lead reasonable person to believe intent to enforce rights has changed
(would allowing enforcement of strict legal right create an inequity?): Owen Sound
-Promissory estoppel can only be used as shield (stop from enforcing right), not sword (force actions): Combe
-If promised to pay lesser sum, will be estopped from claiming original sum unless can show economic duress:
Law and Equity Act
Dale v. Martin (1997) Man CA
-Student goes to university with tuition paid for by government, but government tries to end program while
student still in university
-University official had authority to make offer, and student relied on it, so unilateral contract is enforceable
Grant v. New Brunswick (1973)
-During potato glut, province sets up program to buy farmers’ potatoes from them, and application form
looked like a unilateral offer, even though technically it was just an invitation to treat
Errington v. Errington (1952) UK
-Father bought house, but said son and daughter-in-law could have title to it if they paid all the mortgage
payments / When father dies, executor tries to revoke offer because not complete / Contract would not make
sense without implied term that unilateral offer is irrevocable so long as couple continues to make payments
because performance requires a long time
Dawson v. Helicopter Exploration (1955) SCC
-D’s offer: I agree that if you (P) take us to mineral site, we have claims in our name, but we will give you a 10%
share / Then D made excuses about why they couldn’t go, then later found site alone, and wouldn’t give share
-Cannot enforce unilateral contract because performance has not been completedbilateral contract
UNILATERAL CONTRACTS
-Unilateral contract is an offer to the world, and acceptance is performing the act (good consideration)
-Would reasonable person interpret as unilateral offer, or invitation to treat?: Grant
-Looks like an offer, but technically it was not: still an offer because could have clarified otherwise
-Offer must be specific (ex. invitation to treat is different because usually no quantity limit)
-Motivation for performing contract is irrelevant: Carwardine, Carbolic
-Rewards are unilateral contracts and legally binding (not too vague): Carbolic
-Unilateral contract will be binding if evidence that it was intended to be (not puffery): Carbolic
-Court might imply a term (performance is pending until other party acts) or interpret as a bilateral contract
requiring action on both sides: Dawson
-NB: Interpreting as bilateral contract in Dawson is problematic (would require personal service)
Revocation
-Generally can revoke until acceptance (act completed)
-Exception: can be estopped from revoking when
A. Performance has begun and already gotten benefit from part completion (unjust enrichment)
B. Performance takes a long time: Errington
CONTRACTS AND THIRD PARTIES
THIRD PARTY BENEFICIARIES
Tweedle v. Atkinson (1861) UK
-Son in law tries to sue father in law’s estate under contract between fathers—son not privy to contract
Beswick v. Beswick (1966) UK
-Uncle transfers his business to nephew on condition that he pays uncle salary for rest of his life, and pays
widow annuity for rest of her life / Uncle dies and nephew doesn’t pay widow
-Widow cannot sue on contract because: A. Not privy to contract; B. Not a trust
-Widow can sue as administrator of husband’s estate, but his estate suffered no damages!
Dunlop v. Selfridge (1915) UK
Dunlop makes tires  Dew is wholesaler who sells tires to retail stores, but term in K says won’t sell below
price floor  Selfridge is retailer who sold to customer at price below floor, which was also a term in their
contract with Dew
-Dunlop cannot sue Selfridge directly because consideration for price floor moved from Dew (not Dunlop)
Eurymedon (1975) UK
Consignor in UK  Carrier transports item (stevedore K’s with carrier to deliver)  Item to Consignee
-Shipping Act: even though consignee is not privy to K, they can sue on the K between consignor and carrier
-Exclusion clause: between consignor and carrier, and usually includes stevedore’s that contract with carrier
-Stevedore breaks item, so consignee sues stevedore in negligence, even though no contract exists
-Stevedors: exclusion clause limits damages
-Consignee: cannot claim benefit of limitation of liability if not privy to K
-Court: stevedore is actually parent company of carrier, so authorized carrier as agent to make K on principal’s
behalf. Got around consideration problem by saying consignee made unilateral offer, and stevedore accepted
London Drugs v. Kuehne and Nagel (1992) SCC
-LD stored large transformer with KN, and contract limited liability of “warehousemen” to $40
-It is more efficient for P to get insurance, so did so. When D’s employees break transformer, insurance
company wants to subrogate (stand in shoes of P to sue) to sue employeesprotected under contract
Fraser River Pile v. Can-Dive (1999) SCC
-FR has insurance contract with insurance company where IC waived right to subrogation against any
“charterer” / Benefit extends to CD (POLICY: IC already accounted for risks knowing it cannot sue charterer)
-CD and IC cannot amend their contract after-the-fact
General rule
-Third party beneficiary of contract cannot sue on contract because gave no consideration: Tweedle, Dunlop
When can third parties be protected by contract?
-Even if third party beneficiary has no standing, court can order equitable remedy (SP, injunction, etc): Beswick
-Exclusion clauses of agent also apply to principal: Eurymedon
-Employees (not privy to contract) get benefit of exclusion clauses when: London Drugs
1. Employees are doing task that was contemplated in contract
2. Clause in contract explicitly or impliedly extends to employees (warehousemen = employees)
-Waiver of subrogation (insurance company cannot stand in shoes of client to sue) can protect third parties if
name acting in scope of contract and named in contract (London Drugs application): Can-Dive
-Parties cannot amend exclusion clauses after the fact to prevent third parties from benefitting: Can-Dive
When can third parties sue on contract?
1. Trust
-A transferred legal title to B, who holds it in trust for C (B = legal owner, C = beneficial owner)
-C can sue even though no consideration moved from him, because he is beneficial owner.
-A cannot change terms of K without C’s consent
2. Agency
-Principal makes agreement with agent that agent has authority to sell/contract on behalf of principal
-The third party and the principal both have rights against each other, even though there is an agent in
between them, because they both give consideration so are privy to contract
3. Assignment
-A in contract to sell house to B
-B can assign his right to buy house to C. Now C steps into shoes of B, and can sue A directly
-Can only assign rights, not obligations (painter can assign right to collect payment, but cannot assign
obligation to paint)
4. Statutory Expectations
Insurance Act: B can directly sue A’s insurance company without going through A
Personal Property Security Act: bank’s interest in money loaned to buy a business trumps financing interest in
business?
MISTAKEN IDENTITY—VOID OR VOIDABLE?
NON EST FACTUM
Phillips v. Brooks (1910) UK
-Fraudster says he is identity of person in phone book, so buys jewelry with fake cheque to pawn it
-Mistake about attributes (did not care about actual identity, cared that phonebook validated attributes)
Saunders v. Anglia (1971) UK
-Ailing auntie signed transfer of sale document to nephew’s friend while being led to believe (by friend and
nephew) that it was a gift to nephew / No negligence because broken glasses, and could not understand
Ingram v. Little (1961) QBCA
-Fraudster says he is identity of person in phone book, so buys car with fake cheque
-Mistake about identity because woman went to some lengths to validate identity
-Dissent: she intended to prove creditworthiness (attribute), not identity. She had best chance of avoiding risk
Marvco Color Research Ltd v. Harris (1982) SCC
-Defrauded by their son-in-law to mistakenly sign re-mortgage of their house to guarantee his loan
Lewis v. Averay (1972) QBCA
-Fraudster pretends to be famous actor, so buys car with fake cheque and sells it with log book, etc
-Follows dissent in Ingram: strong presumption that you intend to contract with person in front of you, only
rebuttable if you prove otherwise. Best chance of avoiding risk
MISTAKE IN IDENTITY OR ATTRIBUTES
-If a contract is voidthird party cannot acquire rights (get car back)
-If a contract is voidablethird party does acquire rights (can sue rogue for damages)
Theft = no contract because nemo dat says cannot sell what you do not own
Forgery = there was a contract, but it is void
Fraud (mistake in attributes) = there was a contract, but it is voidable
Examples of mistake in attribute: did he have money, was he honest?
Fraud (mistake in identity) = there was a contract, but it is void
Strong presumption that you intend to contract with the person in front of you (attributes, not identity): Lewis
Policy: Had best chance of avoiding risk, so bear cost of fraud: Lewis
NEF
-Contract is void where one party to the contract can show: Marvco, Anglia
A. They signed it having been misled as to the character and nature of the document (must have
radically different objectives / fundamentally different) and;
B. They signed it without carelessness or negligence
-NEF only applies to written contracts between the two parties (ex. if third party misled you about value of
jewelry, and then you sold it, the fraud of the third party has no effect on your contract)
-NEF always works when document was forged
-NEF sometimes works when mistake, or induced by fraud of third party that was close to contract?
-NEF never works against negligence
Rationale: if you had reasonable opportunity to avoid the loss, you must (ex. rarely granted to able-minded)
CONTRACT INTERPRETATION
General rule: Objective reading of contract, but allow some factors (special meanings, freedom of contract
law, unfairness) to move interpretation towards subjective reading
Why we should not interpret contracts subjectively?
1. Parties think identical term means something different (both reasonable interpretations)
2. Clauses can be deliberately left vague so deal can be completed, and parties pray court will rule in their
favour
3. Large part of standard form contracts aren’t even read by parties, so subjective intent is not yet formed
4. Third parties need certainty to act on contract
5. It would be impossible to look at all facts in court to determine intent at time contract was made
PAROL EVIDENCE RULE
Prenn v. Simmonds (1971) UK
-Prenn wanted to secure expertise of Simmonds, so Prenn bought parent company
-Incentive contract: Simmonds gets shares in company for good price if the company profits pay off what
Prenn owes for buying company in stipulated time / Parent company profits just miss target, Prenn controls
Hawrish v. BMO (1969) SCC
-Lawyer signs guarantor of business with bank, which explicitly says his guarantee does not depend on others’
-Lawyer says bank manager made oral promise that his guarantee would be released once others signed
Tilden Rent-a-car v. Clendenning (1978) Ont CA
Modern standard form contract had limitation of liability clause if car was driven off highway or laws broken
D’s arguments:
1. Clause appeared to be unreasonable
2. Employee knew D did not read contract
3. Employees were instructed not to talk about exclusionary clause
4. Oral clarification (full coverage) was contradictory to actual terms in contract
Gallen v. Allstate Grain (1984) BCCA
-P was concerned about weeds, D said not to worry, and weeds killed crop
-Contract said nothing about weeds, had exclusion clause limiting D’s liability
PER
General Rule: Once contract is reduced to writing and signed, it is presumed to be entire contract, and court
will not consider pre-contractual evidence: Gallen
-Presumption in favour of final written contract is stronger when the pre-contractual evidence is
contradictory: Hawrish, Gallen
-Do not admit evidence of pre-contractual negotiations because parties can change minds: Prenn
-Can imply term to align contract with reasonable interpretation (don’t rectify): Prenn
Collateral contract or warranty: The signing of the contract is a consideration for another contract
-Collateral contract is admissible when it is evidence of a distinct collateral contract that does not contradict
and is not inconsistent with the final contract (can be read harmoniously): Hawrish, Gallen
Exclusion clauses: Gallen
A. Pay attention to entire contract to interpret exclusion clauses
B. Interpret exclusion clauses narrowly
C. If ambiguous, court will apply interpretation principle contra proferentum (interpret least favourably for
party who wrote the contract, because they had power to determine what it said)
Modern standard form contracts: Exclusion clauses in these contracts are not enforceable when: Tilden
A. Party knows signee hasn’t read/understood terms, and;
B. Party relying on terms did not take reasonable steps to draw signee’s attention to them
EXCLUSION CLAUSES
UK
-LD came up with idea of fundamental breach, saying it voids the entire K, so party in breach cannot rely on EC
clause because the entire K no longer exists: STUPID
Suisse Atlantique, Securicor (1980): Fundamental breach relieves parties of future contractual obligations, but
does not destroy the entire K. Rather, consider if EC was intended to apply to this situation based on strict
reading and context (modest cost of security check, no negligence, both sides knew about EC so would have
been sensible for P to get insurance, words used are clear enough to combat contra proferentum)
CANADA
Hunter v. Syncrude (1989) SCC
-Gear boxes no longer under warranty, but they were poorly designed and broken
Majority: apply strict construction
Dissent: apply strict construction, but also consider unconsciousability and fairness
Tercon v. BC (2010) SCC
-Pre-qualifying process for bidders, then RFP issued to successful bidder / Basically submitted joint venture
after pre-qualifying individually, so BC breached Contract A by not treating bidders fairly
-Exclusion clause in RFP: “No proponent can claim damages from participating in this RFP”
-Applied contra proferentum so no EC because ambiguous, but strong dissent based on policy (equal
bargaining power, would not undermine integrity of construction, BC got legal advice, no real damages)
Dow Chemicals v. Plastex
-Dow sold resin to Plastex, knowing it would be defective in the manner Plastex tried to use it. Explosion
-Court: EC does not apply because Dow knowingly induced Plastex to buy dangerous/defective products
EXCLUSION CLAUSES
*Fundamental breach does not exist: Tercon
1. Strict construction: on the wording of the clause, was it intended to apply to this situation? Tercon
-Interpret contra proferentum (i.e. strictly, and in favour of party who did not make the clause)
2. If it applies, was the exclusion clause unconscionable at the time the contract was made: Tercon
3. If it applies, are there overriding public policy reasons not to enforce exclusion clause: Dow
-Where entire idea of freedom of contract has been abused by EC (must be extreme, basically erring
on side of criminality/fraud)
-Would warranty make a difference (ex. stocks are volatile, so would stocks in rubber v. agriculture matter?)
-Was seller pressuring the sale, or using misrepresentation to induce sale?
-Did buyer unreasonably rely on misrepresentation?
Product liability (innocent misrepresentation comes from manufacturer, so consumer not privy to K): Sperry
-Need to construct a ‘unilateral’ type of contract that must be:
1. Very specific: Carlill, Sperry
2. Realistic (Red Bull won’t give you wings)
-Consideration for ‘unilateral collateral’ contract is purchaser entering into contract with store “at request of
manufacturer”
INNOCENT MISREPRESENTATIONS
Redgrave v. Hurd (1881) UK
-P makes innocent misrepresentations about quality of his law practice to induce D to become his partner
-D was to purchase a house for the office, but contract not yet complete when D discovers misrepresentation
Leaf v. International Galleries (1950) UK
-Leaf bought ‘Constable’ painting from gallery, but when he tried to sell it 5 years later he learned it was fake
When can innocent misrepresentation result in rescission (equitable remedy)? : Leaf
1. Contract not yet completed is not complete bar to rescission, but is helpful
2. Must act promptly (other party must be able to rely on contract after certain time)
3. Must come with clean hands
4. Must be possible to restore parties back to original positions (ex. exchange money for item)
Helibut v. Buckleton (1913) HL
-Investor almost blindly purchases shares in a company he really liked, thinking he was investing in a rubber
company, but rubber company was only small side project to larger agricultural company
Bentley Productions v. Smith (1965) UK
-Man discovered his car had much greater than 20,000 miles on it, but this wasn’t written into contract
Murray v. Sperry Rand Corp (1979) OntCA
-Murray bought tractor from Church, manufactured by Sperry Rand
-Sperry Rand gave out pamphlets with very specific representations about capabilities of tractor
Church = liable, because he knew how fundamental the representation was to the purchase
Sperry Rand = liable, because court imposed collateral contract because of specific misrepresentations
When can innocent misrepresentation be a collateral contract to induce main contract? : Bentley
1. How important is the issue to the contract?
2. Who was in the best position to determine the truth?
3. How specific was the representation?
4. Was the representation vital to forming the contract? “But for, P would not have entered K…”
Other criteria: Helibut
NEGLIGENT MISREPRESENTATION
Esso v. Mardon (1976) QBCA
-Mardon to manage franchise, but Esso did not reevaluate estimate after they were cut off from the main
street, so 200,000 gallons/year was a negligent misrepresentation in collateral contract
Central Trust
-Lawyers negligently made contract that gave their clients’ mortgage as security for their shares in a company,
but this was statute barred because of limitation time obviously lawyers were negligent
-Negligent misrepresentation claim in contracts barred by limitation periodsue for negligent misrep in tort
NEGLIGENT MISREPRESENTATION
-Without contract, can sue for negligent misrepresentation in tort
-Requires “special relationship” of DOC because there is no contract
Criteria for special relationships: Hedley
-assumption of responsibility (payment for the advice is good evidence of reliance and responsibility)
-if there was consideration, it would have been a valid contract
-actual contract or collateral contract can be evidence of relationship
Criteria to succeed under negligent misrepresentation: Hedley
-reasonable and actual reliance (representation induced entry into contract)
-negligent misrepresentation (so made without care)
-damages must be suffered due to the misrepresentation
Give reliance damages for negligent misrepresentation and collateral contract: Esso
-Damages from collateral contract are not expectancy (profit you would make), but rather reliance
(what you lost from entering into primary contract) because function of collateral contract is not a guarantee
of profits, but to induce you to enter primary contract
Can sue for negligent misrepresentation in tort or contract unless: Central Trust
1. Breach of a specific term laid out in contract (abide by contract rules if dealt with in contract)
2. Cannot use tort to escape an exclusion clause in contract that would normally apply
3. Cannot use tort to escapes parol evidence rule (cannot admit collateral contract if it contradicts primary)
Sue in either = fraud, collateral contract, or negligent misrepresentation
RESIDUAL POWER OF COURT
UNCONSCIONABILITY, UNDUE INFLUENCE, AND DURESS
Marshall v. Canada Permanent Trust (1968) Alberta SC
-Farmer in nursing home, about to have committee appointed to take care of his affairs, Marshall doesn’t
know this and gets him to sell his land for $7,000. Farmer signed, witnessed, but lawyers refuse to transfer
Mundinger v. Mundinger (1968) OntCA
-Husband had been having a long affair, and wife was psychologically broken (hospital for 3 years). She signs
agreement to give away her 2 interests in property and alimony for $10,000; later she wants alimony
Pridmore v. Calvert (1975) BCSC
-2 days after car accident, insurance adjuster got her to sign release to bar her from legal claims for only $331
UNCONSCIOUSABILITY
-Unconsciousability focuses on fairness, and requires: Marshall, Pridmore
1. Grossly unfair bargain (no lawyer would ever advise it)
2. Substantial imbalance in bargaining power
-If unconsciousability proved, onus shifts to party trying to enforce contract to prove it is fair: Mundinger
Lloyd’s Bank v. Bundy (1975) UK
-Old farmer guarantees his sons’ terrible business using his farm as security, but the security becomes greater
than the value of the farm, and bank wants to foreclose on the farm (bank was acting in good faith, but COI)
-Categories of inequality of bargaining power:
1. Duress of goods: one man places high personhood values on goods, and other exhorts him for much > value
-Also includes colore officii: one uses his position of official position or profession to exhort more than is just
2. Unconsciousable transaction: unfair bargain gained by imbalance of bargaining power
3. Undue influence: unfair because consent is overborne / vitiated
4. Undue pressure: stronger party exacts an inequitable bargain because weaker party has no recourse
5. Salvage agreements: ship sinking
Denning: All the above rest on “inequality of bargaining power”—law will give relief to one who enters into a
contract without independent advice upon terms which are very unfair (or transfers property for grossly
inadequate compensation), when his bargaining power is grievously impaired by reason of his own needs or
desires, or his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him
for benefit of the other
Royal Bank of Scotland v. Etridge (2001) UK
-Wives claim UI from husband to sign loan guarantee using house as security
-Banks are responsible for 3rd party UI from husband
UNDUE INFLUENCE
-Undue influence focuses on validity of parties’ consent (was consent vitiated by duress, free will overborne?)
Undue influence can occur in three ways: Bundy
A. Actual UI: stronger is guilty of fraud or wrongful act to gain advantage from weak
B. Presumed UI: (either prove trust/confidence OR relationship presumes UI, AND K needs explanation)
-Does not require wrongful act
-Onus now shifts to stronger party to prove the transaction was fair and reasonable
Spousal relationship: Etridge
-Not a presumed relationship of undue influence; use ‘prove trust/confidence’ category
-Do not automatically assume contract needs explanation (often for benefit of both spouses)
-Banks are on constructive notice (presumed to know) that there might be UI
-If bank actually knows of UI, contract is unenforceable
-If ought to have known, we presume constructive notice and contract is unenforceable
-Etridge rules: To protect itself from constructive notice, bank must ensure wife has gotten independent legal
advice (get certificate of independent legal advice from lawyer)
Lawyer must discuss K with spouse, and bank must give lawyer appropriate information he needs
Lawyer does not need to determine if there is UI, but must ensure wife understands her liability and gives
consent
If lawyer is negligent but signs certificate, he is now liable
-Independent legal advice not always necessary if spouse is sophisticated
PENALTIES AND FOREFEITURES
Birch (2008) OntCA
-Union member crossed picket line and union clause said it would take his gross wages for every day he works
-Court found gross pay was unconscionable (only Saskatchewan has leg about this and fine < net pay)
Penalty clauses: Birch
-Commercial contracts: court will not enforce clauses made in terrerom to terrify you into not breaching
contract (oppression?)
-Union contracts: court will not enforce clauses if penalty + unconsciousability
-Only the penalty clause is struck down, and rest of the contract still remains
NB: Penalty clauses are now being considered under general unconsciousability rules (unequal power + unfair)
Pre-estimate of damages:
-Court will enforce clauses that estimate liquidated damages so don’t have to wait for damages from court
-Estimate must be made when contract entered into (not at time of breach)
-Limits liability for both parties: Elsley
Differentiating penalty clauses and pre-estimated damages:
-Consider the substance—calling it liquidated damages is irrelevant
-Penalty if: grossly higher than largest possible damages
-Penalty if: breach = not paying money, and result = paying larger sum of money than originally due
-Presumption of penalty if: lump sum of money made payable on the occurrence of one or more elements
that are of trifling damage (might be some serious elements too)
-Do not use hindsight to determineconsider only what parties knew at the time they made the contract
Forfeiture clauses: Stockloser
-Forfeiture tries to keep money that already belongs to you, rather than trying to extort money from breacher
-Deposit is part of the purchase price (will be taken off price if you do buy it)
-There is express clause (forfeiture clause) allowing him to keep the deposit
If no forfeiture clause:
-If buyer defaults on payments, seller can keep money so long as he leaves the contract open
-If buyer defaults on payments, seller can rescind contract but must give back money and make damage claim
If forfeiture clause or money is paid as a deposit:
-If buyer defaults he cannot recover the money unless equity intervenes
-When equity will intervene:
1. Forfeiture clause/sum is of a penal nature (forfeited sum out of proportion to damages)
2. Unconscionable for vendor to keep the deposit/forfeited money
COMMON LAW ILLEGALITY
Holman v. Johnson (1775) UK
-Seller sold tea to buyer, knowing he was going to illegally smuggle it into UK. Buyer didn’t pay seller
-The contract is not illegal because not really a seller’s business what the buyer does with the goods
-But no court will aid a man who founds his claim upon an illegal or immoral act, so won’t aid seller (if buyer
had brought suit, he would lose because court won’t aid him either)
Common law illegality
General rule: court will not aid a man who founds his claim on illegal or immoral contract: Holman
Common law illegality is based on public policy
a. K in restraint of trade
b. K to perform illegal acts
c. K furthering illegal purposes
d. K obtaining benefit as a result of crime
Shafron v. KRG (2009) SCC
-“Metropolitan City of Vancouver” has no definition, so contract has irresolvable ambiguity which makes it by
definition unreasonable and therefore unenforceable
Contracts in restraint of trade: Shafron
-Public policy balance: restraining trade is bad for market, but freedom of contract is important
-Contracts in restraint of trade are generally invalid unless the restriction is reasonable (consider time,
geography, clarity)
-Restraining trade of a business (buy catering shop, then open one next door) is more acceptable than
restraining trade of employee (hire great chef, he works for restaurant next door) because:
Impact is greater on employee than on business
Employee is not really getting paid directly for this restriction because he doesn’t keep the goodwill
Imbalance of power because employee needs job more than business needs employee, so cannot really
negotiate the restrictive covenant
-Contracts restraining trade on employees are scrutinized more than on businesses
Oldfield (2002) SCC *Overturns Brissette rule*
-Life insurance policy is on ex-husband, and beneficiary is ex-wife
-Husband dies accidentally as result of smuggling drugs (illegal act), but wife can benefit
Contracts obtaining benefits as result of crime: Oldfield
-Innocent beneficiaries will not be denied benefit of contract (ex. insurance payout to beneficiary) if:
A. Do not have to claim through hands of criminal (i.e. can be paid directly to innocent beneficiary)
B. No negating public policy reasons
 Allowing innocent beneficiaries to claim would not have an effect on encouraging crime
 It would be inconsistent with justice that innocent beneficiaries be deprived of insurance when H died
accidentally through criminal act
NB: Brissette denied insurance to children when husband killed wife because children would have to claim
through hands of criminal / Heavily criticized case
STATUTORY ILLEGALITY
Kingshot v. Brunskill (1953) OntCA *No longer good law*
-Little apple farmer sells ungraded apples to big apple farmer who is going to grade and sell them
-Court won’t allow little farmer to enforce contract because abrogates regulation (cannot enforce illegal K)
Doherty v. Southgate (2006) OntCA
-Municipality entered into contract to sell surplus lands to contractor, but municipality failed to follow
regulation by giving public notice, and before contract was completed they refused to re-zone lands as agreed
to in contract
-Contractor sues for damages, and municipality says unenforceable because illegal (no public notice)
Steps for deciding if contract that abrogates statute is enforceable: Southgate
1. Does statute explicitly require the contract to be unenforceable?
2. Does public policy require the contract to be unenforceable?
Is the contract reasonable?
Would following the rules under the statutes have changed the outcome?
Is this a disingenuous attempt for a party to take advantage of their own failure to follow the statute rules?
MITIGATING CONSEQUENCES OF ILLEGALITY
Outson v. Zurowski (1985) BCCA
-Plaintiffs want money back (indemnity) from investment in pyramid scheme they did not realize was illegal
-Plaintiffs had not really recruited anyone yet, so could repent
New Solutions v. Transport (2004) SCC
-P gave loan to D at monthly rate of 60.1% and other stuff at 30.8%, but legal maximum is 60%
-Blue pencil rule = strike out monthly and be at only 30.8%, or notional severance = make it 60%?
When courts will give relief based on illegal contract: Outson
1. Parties not in pari delicto (not equally at fault) because one party duped the other through fraud, duress or
oppression or abused a fiduciary relationship (court will help less blameworthy party)
Not an excuse to say they didn’t know it was illegal, must actually be duped (ignorance of law is no excuse)
Pari delicto just means you did not intend actions (as opposed to ‘didn’t understand significance of actions’)
2. When parties repent / decide not to proceed with illegal scheme
Need to repent before contract is substantially performed
How courts sever illegal provisions in contracts: New Solutions
-Use notional severance (blue pencil rule is outdated)
-NB: Dissent is concerned this will result in re-writing contracts
-Only use notional severance when there is a clear legal definition of what to replace severed section with (not
carte blanche to rewrite contracts): Shafron
-If term is ambiguous, do contract interpretation: Shafron
-Look at external evidence to contract
-Look at trade customs
-Interpret contra proferentum
-Notional severance is basically restrained to terms defined in the CCC because need ‘bright line’
-If term is irresolvably ambiguous (ex. Metropolitan City of Vancouver has no definition), K is unenforceable
Still v. MNR (1998) Fed CA
-Still is an immigrant who applied for permanent resident status—got letter from government leading her to
believe she could get a job and work in Canada
-Needs to go on EI, but won’t be granted to her because most of the months she worked she was not legally
allowed to work in Canada, so employment contract was illegal and court cannot assist her in illegal acts
-Factors in application: denial of remedy would be disproportionate to breach, she was not an illegal
immigrant, absurd result (her earnings are not proceeds of crime), no unjust enrichment or insolvency issue
because she was paying into fund, bona fide belief she could work based on the letter
New rules from Federal CA, not yet approved by SCC: Still
Court can refuse to grant relief when:
1. Contract expressly or impliedly prohibited by statute
AND
2. It would be against public policy to give relief: base this on all the circumstances of the case (ex. objective of
contract and purpose of the statutory prohibition, unjust enrichment, absurd result, bona fide belief in K)
MISTAKES
MISTAKE ABOUT CONTRACTUAL TERMS (mistake about meaning of contract term)
Hobbs v. Esquimalt (1899) SCC
-Hobbs bought land from railway, and later railway said the sale did not convey mineral rights, so Hobbs sues
for specific performance
-SCC: “Land” means with mineral rights to reasonable person, so if railway intended to exclude mineral rights
they should have been specific
Raffles v. Wichelhaus (1864)
-Cotton to be delivered by the “Peerless” arriving from Bombay—2 ships with same name arriving in different
months (cotton is a commodity in which price fluctuates a lot, so timing is crucial)
-Irresolvable ambiguity so contract is not enforceable
Staiman Steel v. CHB (1976) OntHC
-At auction for steel, buyer asked auctioneer if all the steel in the yard was included and he said it was, even
though the pile buyer claimed was his was not listed in catalogue and was in a different place and was much
newer and nicer
-Buyer refused to sign waiver to say he wouldn’t sue, so auctioneer wouldn’t let him take any of the steel
MISTAKE ABOUT CONTRACT TERMS
-Special meanings of terms in contract must be explicitly expressed, otherwise reasonable person test: Hobbs
-Steps to interpret mistake in terms: Raffles, Staiman Steel
What would reasonable person think?
External evidence
Custom of the trade
Credibility of the parties; was there too much reliance on a silly question?
-If none of these tools can solve the irresolvable ambiguity, the contract is unenforceable: Raffles
A. Cockburn = Caveat Emptor: Was there a sample so that buyer could come to his own conclusion
about quality of goods? Consider expertise of each party, and vendor has no obligation to disclose everything
B. Blackburn/Hannen:
i. Did seller think buyer thought oats were old based on sampleno relief
ii. Did seller think buyer thought oats were old based on terms of the contractrelief
MISTAKE IN ASSUMPTIONS (mistake about underlying subject matter of contract at present)
Bell v. Lever (1932) UK
-Very profitable employee given $30,000 termination package as a gift for his exceptional work
-Company later finds he had been secretly making money on the side, which would have been grounds to fire
him, so they want severance money back because they could have fired him without it!
-Court says quality is different, but not fundamentally different because he still made them lots of money
Sole v. Butcher (1950) UK *Not good law; rejected by Great Peace Shipping*
-P rents apartment from D and is also his property manager
-D rents at $250/year (fair market rent) because P told him it was outside of Rent Restriction Act
-Later realizes his rent cannot be more than $140, and P tries to sue for lower rent, D wants to set K aside
DENNING: considers if enforcing contract would be unfair (equity is more flexible)
ATKIN: considers if performing contract in the sense parties intended it to be performed would be impossible
Great Peace Shipping v. Tsavliris Salvage (2002) UK
-Salvage company rents ship thinking it is 35 miles away from salvage site, but really is 410 miles
-Held onto contract until they secured a closer ship (very telling!), then cancelled contract and claimed
fundamental mistake in assumption
-Court said the distance makes the contract less useful, but does not destroy nature of K (did not cancel first)
Miller Paving v. Gottardo (2007) OntCA
-Miller said they had been paid fully by Gottardo, but realized later they had not, so tried to rescind contract
Smith v. Hughes (1871) UK *Not fully considered in Canada yet*
-This case swings between mistake of contract terms and mistake in assumptions
-Smith is a farmer suing for price of oats which he sold to Hughes (horse trainer)
-Disagreement about whether words “good oats” or “good old oats” were used
-Hughes got to try a sample of the oats, and only discovered they were new oats after a while had passed
Ron Engineering (1981) SCC
-One hour after bid submitted, Ron calls Crown to say they forgot to include cost of their own labour so
cancelling bid
-Crown wants to keep their deposit, Ron wants it back
-Court says there was no fundamental mistake in nature of contract A: the bid was just lower, but not so weird
it could not even qualify as a bid
Is it a mistake about contractual terms or assumption? *Not fully considered in Canada yet*
1. Does contract mention the term?
If so, mistake about term and do analysis for mistake about terms
2. Does contract say nothing about the term?
If so, mistake about assumptions of contract and do:
Types of mistakes:
Common mistake: same think in same way
Mutual mistake: both mistaken about same thing, but in different ways
Unilateral mistake: only one party is mistaken
Mistake in assumption: UK
-If subject matter is so fundamentally different that you are not getting what you contracted for, then court
can void contract: Bell, Great Peace
Mistake must destroy the identity of the subject matter as it was originally understood
Does not matter if enforcing it makes contract less useful or unfair: Great Peace
-Examples: K to buy something you already own, K to buy painting that has been destroyed
Mistake in assumption: CANADA
-Great Peace not adopted in Canada because it would narrow doctrine of common mistake (must destroy
identity of contract): Miller
-If terms of contract dictate allocation of risk in event of this mistake, contract overrides mistake: Miller
-Cannot take advantage of a very obvious mistake (ex. bid you know is wrong): Ron, Imperial
-Rule in Canada are uncertain, but more flexible than Atkin, less relaxed than Denning
When do parties have a duty to disclose a fact that would correct a mistake in assumption? *OntCA obiter*
1. Past course of dealing with reliance for advice
2. Explicit assumption of responsibility
3. Relative positions of parties with respect to information and bargaining power
4. Manner in which parties were brought together, and the expectation created in the relying party
5. If trust and confidence has knowingly been reposed by one party in the other
RECTIFICATION OF DOCUMENTS
Bercovici v. Palmer (1966) SaskCA
-Contract for sale of business accidentally included cottage (Rob Roy)
-Seller wants rectification to strike out cottage and return it to her
-Buyer wants to take advantage of document and correct the description of cottage on legal title
-Buyer had not acted like they owned cottage: no keys, no visits, no taxes, no insurance
Sylvan Lake v. Performance Industries (2002) SCC
-P signed without reading final document and realized mistake about feet versus yards later
-D was aware of mistake at time contract was signed, but it was in his favour so he kept silent
-Rectification is predicated on existence of prior oral contract—terms are definite and ascertainable: Sylvan
-Purpose is corrective: to restore parties to their original bargain, not to correct an unfair bargain: Sylvan
Classic example: Agreed to purchase parcel A, but lawyer incorrectly writes parcel B—can rectify document
-Look at negotiations leading up to contract, and conduct of parties after contract: Palmer, Sylvan
-Evidence that is required to establish pre-existing correct agreement is “convincing proof” (still civil): Palmer
-Can use rectification for a unilateral mistake (traditionally only allowed for mutual mistakes) if you can prove:
1. Plaintiff can establish terms agreed to were written down incorrectly
2. Error can be fraudulent or innocent (but D knew or ought to have known of error, and P did not)
3. D’s attempt to rely on error must amount to “fraud or the equivalent of fraud”
-Carelessness of parties is not a bar to rectification, but rectification is an equitable remedy, so carelessness
might affect discretion of court: Sylvan
FRUSTRATION
Paradine v. Jane (1647) UK
-Tenant could not stay on land because an enemy of the king had invaded the land and expelled him
-Court said external force means he still has to pay rent
Taylor v. Caldwell (1863) UK
-Contract to rent music hall for performance, but hall burns down before first show
Capital Quality Homes (1975) OntCA
-New regulations make subdivision impossible
-Entire contract was based on assumption that lot would be a subdivision so contract is frustrated
-Very much like mistake in assumptions, but about future events, not present events:
Mistake that is the result of events that happened after contract was made (mistake about the future)
And contract does not provide for a solution (risks that cannot reasonably be assumed to have been
assigned to either party under the contract)
-Contract is void if it becomes impossible to perform due to occurrence of a future event through no fault of
the parties and contract does not allocate for the risk: Taylor
-The mistake must render the contract totally different to what you contracted for: Capital Quality Homes
Ex. Painter dies before completing the painting; music hall burns down before show; by-laws change
-If benefits under contract have already been transferred before frustration renders contract void, court has
discretion to reallocate the benefits fairly: Frustrated Contracts Act (1996)
Only applies when Crown is a party to the contract
REMEDY FOR BREACH OF CONTRACT?
Two measures of damages
1) Reliance: Compensate to the state had contract not been entered into (rescind contract)
2) Expectation: Compensate to the state had contract been completed
Use expectation damages because: (Wertheim)
a) Want to incentivize contracts to be kept
b) Don’t want to allow risk transferred onto other party
c) Avoid double compensation
-Expectation damages = value if contract had been performed – value of current situation (Hawkins)
-Torts uses reliance damages, contracts uses expectation damages (Hawkins)
-Avoid unjust enrichment: insurance company in Bollenback only has to repay premiums from the time they
wrongfully terminated the health insurance (purpose of contract was completely frustrated)
-If expectation damages cannot be determined (cannot know expected profits), you must use reliance
damages and must compensate for losses “in contemplation of both parties before contract was signed”
(Anglia)
-Can limit reliance damages to no more than expectation damages if you can prove limit (prove that profits
would have been negative/broken even/high/low) (Anglia)
-Must pay damages even if you cannot complete contract through no fault of your own (unless under duress)
Measuring damages: Substitute performance OR Economic Value? *Use substitute performance*
-Value of a ‘chance’ is what you are willing to pay for it (not the potential wealth it could bring): value of a
lottery ticket is market price, not the ‘chance of winning lottery’ (Carson)
-Even if expectation damages (forcing completion of contract) unjustly enriches plaintiff (gets $60,000 to
restore land back to inherent value of $12,000), does not allow defendant to escape paying (Groves)
-Inherent value of what you are contracting for does not change the requirement to pay expectation damages
because maybe the purpose of contract is not monetary (Waldron wants ugly fountain) (Groves)
Lost Volume
-Can claim expectation damages (lost profits) if supply > demand (could not resell) (Robinson)
-Cannot claim expectation damages (lost profits) if demand > supply (because you could resell it, so the
limiting factor is how many cars you get from manufacturer, not how many buyers there are) (Charter)
-If demand > supply, can still claim damages for difference of contract price and market price (Charter)
Remoteness
General rule still in place from Hadley and Victoria Laundry and Munroe and Scyrup
1) Can award damages that both parties would contemplate to naturally arise from breach of contract at time
contract was made (everyone ought to know of ‘first obvious use’)
2) Can award damages for special circumstances if they were communicated at time contract was made
-Courts want parties with better information of special circumstances and who are better able to protect
themselves to internalize risk: common carrier cannot refuse to take mail so cannot protect themselves, the
shaft was old/unique so mill had better information, pay more to insure items you care for (Hadley) (Horne)
-Must communicate special circumstances more than just saying X must be done on time (Victoria Laundry)
-Cannot claim damages for special circumstances if you are placing unreasonable value on an inherently
unreliable object/contract: remove 2 years’ wood with second hand tractor in ad hoc contract (Munroe)
-“First obvious use” = inferred knowledge AND “special circumstances” = communicated knowledge (Scyrup)
-Change in market price is reasonably foreseeable: “it is possible to think that it may happen” (The Herron II)
-Construe contract in its commercial setting: only make both parties liable for what they both believed they
were contracting for (Transfield Shipping)
Intangible injuries and punitive damages
Aggravated damages: non-economic, intangible suffering (compensate with expectation damages)
Punitive damages: punishment for breaking contract (punitive)
-Historically, contracts only gave expectation damages and only for economic loss (Addis)
-If purpose of contract is non-financial (purpose is enjoyment) you can compensate for loss of purpose (Jarvis)
-Employment contracts: can get aggravated and punitive damages if the dismissal itself is an actionable
wrong: (Vorvis): Cannot get if: A) Being let go correctly would have been equally distressing
B) The distress happened leading up to dismissal, not because of dismissal
-Employment contracts: ‘duty of good faith’: must be candid, honest, reasonable, forthright (Wallace)
(Fiddler): Aggravated damages today: can compensate for mental distress based on general foreseeability
rule: reasonable contemplation of both parties when contract made (no independent actionable wrong)
Need: A) An object of contract must be to secure psychological benefit (need not be central aspect)
B) Must prove distress is large enough to warrant compensation (more than usual distress of firing)
(Whiten): Punitive damages today: ‘duty of good faith’ breach can allow for punitive, on top of, aggravated
When to award punitive damages:
1) No “categories”: award whenever conduct merits condemnation of court
2) Objectives: retribution, punishment, deterrence, denunciation
3) Restraint principle: if already punished criminally, must take this into account
4) Need a more principled approach than we now have
5) Only award lowest amount that would still obtain the objectives
6) Punitive damages are allowed to take gain from the wrongdoer
7) Do not develop formula for the amount
8) Quantum should be proportional to the “if, but only if” test
9) Judges need to guide juries
10) Appellate court may intervene if award is too large
(Honda): Combined Fiddler (aggravated) and Whiten (punitive) to determine employment laws today
Mitigation
Two options for breach of contract: (Finelli)
A) Agree to rescind: both parties must agree, and neither can sue later
B) Unilaterally repudiated: must mitigate loss, and then can sue for expectation damages
(McGregor: dissent)
-If monetary damages will suffice (no claim for specific performance), P must mitigate loss
-P cannot carry out contract no one wants simply to create damages that would not otherwise exist
If original contract breached but re-offered by breaching party, must accept new contract unless: (Payzu)
A) Attitude has been so hostile it would be unreasonable to remain in contract with breacher (can sue for
difference in original and new contract)
B) Newly offered contract is not bona fide (making new contract simply to force agreement with better terms)
After mitigating loss, can sue for expectation damages:
1) Damages must only compensate
2) Damages must not unfairly burden defendant
3) Damages must incentivize efficiency
Specific Performance
If the good you contracted for is replaceable:
1) You must accept repudiation and mitigate loss (re-enter the market and then sue for difference in price
2) If the original vendor then offers contract again, you need not accept if you have already entered into new
contract (already mitigating) because original contract is already repudiated, and this would be a new offer
If the good you contracted for is irreplaceable:
1) You don’t need to accept repudiation or mitigate loss
2) If offered again, you must accept contract
Specific performance:
1) Exceptional remedy, only awarded when money is inadequate (Tanenbaum), (Argyll)
2) P must come with clean hands (because in the court of equity)
3) Must be pursued promptly
4) Not granted if the court would have to supervise the performance (Argyll)
5) Not granted for personal service: wage differential incentive is okay (Warner Bros)
6) Doctrine of mutuality: if court would award SP to one party, it would award it to the other party, too
7) Cannot seek SP and mitigate loss simultaneously (Tyler)
8) Rights of innocent third parties will not be interfered with (Tyler)
9) Specific performance was defined in contract (Tanenbaum)
10) Disparity of actual performance and specific performance is large (Tanenbaum)
11) Must not unjustly enrich either party (D desperately wants to get out of lease so if P were granted right to
lease he would bargain with D for more than lease is worth) (Argyll)
12) Will enforce specific performance for residential home sales, but not investments realty (Semelhago)
Time
A) Usually measure damage from date of breach (date you should begin mitigating loss)
B) If you argue specific performance, you do not need to mitigate loss.
C) What if court does not accept specific performance claim? Measure losses from date when specific
performance is refused (Tyler) (or when you know it will likely be refused (Asamera Oil))
NOTE: Damages should be a perfect substitute for specific performance at the date P should have began
mitigating
Restitution / Unjust Enrichment / Disgorgement of Profits
-A monetary remedy that is measured according to the defendant's gain rather than the plaintiff's loss
-Very exceptional damage because if discourages efficient breach, but can be awarded in cases where one
makes a profit by breaking the law, fiduciary duty, or principle/agent relationship (Blake)