Compromises/Settlements
- Forbearance on right to sue/to make a legal claim is good consideration. Giving up a right to sue is okay
- It is a very common practice in the settlement of civil litigation
- Policy: Courts will uphold settlement agreements because they want parties to settle. Even if no legal
merit
Fairgrief v. Ellis (1935, B.C.)
- Facts: he made an agreement with two women that if they lived with him and kept house, they could
have his house after death. Then his wife came back and asked them to leave. He said that he would give
them $1000 to break the K, but he never did
- Issue: Whether the agreement is enforceable or not.
- Decision: Agreement to pay $1000 for past services enforceable even though underlying claim, the one
for the house, would have failed. The sisters could not have enforced the claim for the house because it
was not in writing but they could have claimed unjust enrichment, or restitution.
- Consideration: The women are waving their rights to sue in breach of contract or unjust enrichment and
his consideration is the paying of $1000.
B.(D.C.) v. Arkin (1996, Man. C.A.)
- Facts: The son shoplifts and the goods are returned undamaged. Zellers claim the costs of the
shoplifting prevention program and send a letter asking for money. She pays the $250.00 but then she
gets legal advice and finds out that parents are not responsible for the civil actions of their children. She
then she sues Zellers for the return of money. Original claim was not valid, no claim in law.
- Issue: Objective issue is if there is an actual claim recognized by law. Then the subjective question is
whether the person had a good faith belief that it was against the law. Is the compromise on an “invalid”
claim good consideration?
- Decision: Here there was no valid claim. Rather than saying no consideration so no contract and so
therefore unjust enrichment. They used to doctrinal belief of mistaken assumption. She paid Zellers on
the mistaken assumption that it was a true claim
Stott v. Merit (1988, Ont. C.A.)
- Criteria for a valid compromise.
- (1) Claim  reasonable in terms of law and not subjective belief, not spurious (extortion).
- (2) Good faith belief in the claim (concern goes back to the extortion issue)
- (3) No concealment of material facts (can’t hide evidence)
Charitable subscriptions
- Common law is very reluctant to enforce gift promises (uphold university naming’s).
- A promise of a gift is irrevocable when the other party has relied on it. But generally reliance on a
promise is not consideration.
- Where there is a subscription for a certain purpose, there is a corresponding obligation to use to money
as it was meant to. (like money for a bursary, is expected to reach the students)
Dalhousie College v. Boutilier Estate (1934, SCR)
- Facts: He wrote a letter to the university and wanted to donate money to the university. But he died
before he could fulfill the promise
- Decision: Here there was no negotiation with other subscribers, no requirement to carry out certain
works, and reliance did not make the promise irrevocable. A promise can only be binding if the K is
supported by good and sufficient consideration. The gift promise is not enforced.
- If you want these types of promises enforced need to find some kind of corresponding benefit (bargain).
- If done under seal, then it is binding and could execute against the donor. But very good practical
reasons to not do it. Since they are your donors
Intention
- Offer/acceptance: There must be an objective manifestation of an intent to be bound.
-
Whether a reasonable person would consider that the promisor intended that it be legally binding or not.
o Evidence, deliberation, reliance, unjust enrichment, issues against social utility
Jones v. Padavatton (1967, Eng. C.A.)
- Agreement between mother and daughter is not enforceable.
- Facts: mother told daughter to move to UK to study for the bar and she would give her an allowance.
Agreement changed so that mother gave daughter house. But now mother wants to evict daughter.
- Balfour Case: Between husband and wife for support. Court expresses the separation between public and
private realm of contract law. Familial relations are outside the bounds of contract law. But this type of
thinking has changed substantially. Now you have the divorce regime, restitution law and contract with
respect to prenuptial and separation agreements.
- Danckwerts (Majority): There has been a traditional reluctance of the common law courts to view family
relationships as contractual. People don’t rely on legal contracts with family; they like to rely on mutual
trust and family obligations instead. Here the housing situation was not fresh evidence but adaption of
the mother’s financial assistance to daughter so not stiff contractual operation. There was no intention
to enter a legally binding contract.
- Salmon (Dissent): There was intent to be bound and therefore enforceable but there was an implied term
in the contract that it was not an ongoing support obligation. It had been five years, so the time was up
o Facts indicative of intention: Mutuality, she gave up her life and job in Washington, had a letter
which was sent by the attorney which is evidence that show deliberation and clear reliance.
o Court has to consider what the parties said and wrote in light of all the surrounding
circumstances and then decide whether the true inference is that the ordinary man or woman
would speaking and writing in these terms would have intended to create a legally binding
agreement.
- Presumption against finding a family relation as being legal, but facts may deem there are legal relations
Rose and Frank Company v. J.R. Crompton & Brothers (1923, Eng. C.A.)
- Facts: They signed an agreement which specifically stated that it was not legally binding. Then one
party withdrew and the other one brought the action.
- Principle: Parties can agree that a business relation will not give rise to legal obligations. They can say
that this is a non-legally enforceable business relationship.
- Decision: Intention may be implied by the subject matter or expressed by the parties. There is no public
policy reason for not giving effect to intention. Here agreement was declared invalid, so no legal right.
- Application: This normally arises when business are negotiating, there is an implication that the
preliminary negotiations are not binding, have letter of consent which says this
Seals
- A non-bargain promise can be made enforceable with seal due to the form in which it is made.
- Is enforced even if it does not meet the doctrinal components of a contract: offer, acceptance,
consideration. Symbol signifies legal promise
- Requirements: in writing, signed, sealed and delivered.
- Modern Test: A court will not find that the document is sealed unless they find intention. Courts are less
inclined to enforce sealed documents, when a company uses a seal on its standard forms.
- Fuller: Functions of Seal
o “Evidentiary Function”: evidence of the existence of the contract in case of controversy
o “Cautionary Function”: a formality may also perform a cautionary or deterrent function by acting
as a check against inconsiderate action
o “Channeling Function”: a seal offers channels for the legally effective expression of intention.
o Highlights the policy rationales for having and enforcing seals
- Brudner: The fact that promises under seal are binding without consideration has led many to surmise
that consideration must be a substitute for seal. Requirements for consideration cannot be simply
explained because like a seal, consideration plays the same function. Argues/takes issue with Fuller
argument that it can be played functionally
o The seal is not an alternative to consideration in triggering the enforcement of a promise, rather it
-
is something that along with delivery, transforms a promise into an executed transfer over
o Incorrect to say that a seal imports consideration, the seal predated the doctrine of consideration.
It is conceptualized as a symbolic transfer of property. More like a gift then a contract. From a
practical point of view need to recognize the conceptual differences between a seal and
consideration.
Consideration is based on the bargain theory of contract, so that is key to what kinds of promises will be
enforced. So it is important to differentiate between bargains, promises and seals. Can have a contract
that has all three but then also is sealed.
o Traditionally there were a few technical differences between them all. One difference is with
regards to limitation periods. Like seals may have a longer limitation period then contractual
breaches
Past consideration
Past consideration is not good consideration
- Things that happen between the parties before the promise is made are not enforceable. They may be
morally obliged but not legally obliged to perform.
Policy rationale
- Lack of deliberation: promise may not have been made rationally, may have been on impulse without
having thought it through.
- Lack of reliance: initial act was done gratuitously
- No unjust enrichment because the benefit was not requested
- Moral vs. legal obligations: you may have a moral obligation to uphold certain promises, but they don’t
transfer into legal ones. Should not be used as an instrument to adjust obligations between people.
- Concern regarding fraud on creditors: Ex is family business situation where the parent gives money to
child to start business. The business doesn’t go well, file bankruptcy and in order to avoid creditors they
say there is a promise to pay the parents the money back. They convert a gift into a loan in order to
evade the creditors. Courts have said no consideration to pay back the money, so its past consideration
Application in commercial context
Roscorla v. Thomas (1842. Eng.)
- Facts: There was a K for sale of horse. The promise was that the horse was not over five years, was
sound and free of vice. There was a breach of promise as the horse was “very vicious, restive,
ungovernable, and ferocious”. No consideration for promise that horse was free of vice.
- Decision: The promise must be co-extensive with the consideration. A consideration will be insufficient
to raise an implied promise and will nevertheless support an express one
- General Rule: Consideration past and executed will support no other promise that such as would be
implied by law.
- This is a GTA case, no consideration for the promise, as it has passed.
- The courts avoid this potential unfairness through request, if something is done at the request of another,
then the court may re-categorize it as an offer. Then you have performance and see it as a unilateral
contract. The promise to pay is simply a quantification of the previously existing legal obligation. As
shown below
Exception
- Doctrine does not apply if the past act/performance was done at the request of the promisor
- Example: At T1 – request for service (offer), T2 – performance (acceptance = unilateral contract), T3 –
promise to pay (quantification of legal obligation), T4 – reneges on promise
- Lampleigh v. Brathwait
- He incurred many expenses to get the man a pardon, a promise to pay is given but then it is breached.
By re-categorizing the facts can find that there was a pervious request. The consideration had passed and
a mere voluntary courtesy will not have a consideration to uphold an assumpit
Court might imply obligation to pay - Restitutionary relief.
- They may say that the law requires you to pay because there is an unjust enrichment.
- But also have the busy body who provides services and then wants payment, so there is a concern about
the line between unjust enrichment versus allowing bystanders to provide unwanted gifts.
Reliance and Estoppel
Reliance is not consideration
- There is a very strong policy rationale for protecting reliance. The mere fact of reliance does not
necessarily mean that there is consideration
Background on estoppel
- Common law estoppel: A party is barred from denying or alleging a certain fact or state of facts because
of the party’s previous conduct, allegation or denial.
o It is a notion that is akin to fraud. If you make a representation of fact, you cannot go back on
what you said if the other party has relied upon that statement to their detriment.
o Robertson: had accepted that the disease was related to the war service, and so he was estopped
for going back and saying that the disease was not caused by the war service. Since the Veteran
had gone through treatment, if they changed their decision, the evidence was no longer available
- Promissory estoppel: question of estoppel as to future conduct. Is a promise made about future conduct
o “I will not take that action”, promise to not something you have a legal right to do it
o Ex. I told you that you could bring the machine on Monday, even though the contract said
Friday. So you are estopped from using legal rights because made promise which was relied on.
Sword or shield – Promissory estoppel cannot be used to found a claim
- The Ps want to use it as a sword while the Ds try to use it as a shield
- If a promise can be enforced solely on the basis of estoppel then the law recognizes a form of “injurious
promise” and no requirement for consideration as an element of an enforceable promise.
- Doctrine in Canada: Gilbert Steel: “A plaintiff cannot found his claim in estoppel.” The fact that it can
be used defensively doesn’t mean you can use it to bring a claim
- A promise to accept less can be enforced using estoppel but an agreement to pay more cannot.
Elements of promissory estoppel
- Existing legal relationship between parties;
- A clear promise or representation;
- Made with the intention that it be relied upon;
- Reliance; and
- No compelling reasons to excuse person from representation (i.e. coercion).
Cases
Hughes v. Metropolitan Railway Co. (1877)
- Facts: The landlord demands that the tenant repair the premises with 6 months. But the parties enter
negotiations for the landlord to buy tenants interest. The negotiations fail and 6 months later the landlord
enforces the right
- Decision: It was said that the landlord could not assert their right because the negotiations stopped him
from asserting the right. You cannot assert the right because you let the other party believe that he was not
following the past legal arrangement
o The landlord should have made it clear in the initial K or prior to negotiations that the
discussions will not change their legal position.
- Principle: when two parties have entered into a definite and distinct terms but then enter into negotiations
which led one party to suppose the strict rights under the K will not be imposed, the person who wanted to
enforce the terms cannot where it would be inequitable having regard to the dealings which have taken
place between the parties.
Central London Property Trust Ltd v. High Trees House Ltd. (Eng. KBD, 1947)
- Facts: Agreement to reduce rent during the WWII. Classic variation.
- Enforced: A promise intended to be binding, intended to be acted on and in fact acted on, is binding so far
as its term properly apply. Basic doctrinal requirements but can have “a cause of action in damages for the
breach of such a promise, but courts have refused to allow the party making it act inconsistently with it. It
is in that sense and that sense only, that such a promise gives rise to an estoppel.” This is where one party
agrees to not rely on their full legal rights.
- Here they find that the agreement or estoppel was conditional for wartime and not to accept last forever.
Combe v. Combe (Eng. CA, 1951)
- Facts: Divorced couple and husband agrees to pay spousal maintenance of $100 annually. No payment
and almost 7 years later, wife sues for arrears.
- Husband argues there was no consideration, because he received nothing from his wife to give her money.
The wife argues promissory estoppel and two contract. Relying on High Trees she said there was a
promise, and she had a forbearance to sue and that is good consideration.
- Decision: Promise not enforceable because promissory estoppel cannot be used to create new causes of
action where none existed before. It only prevents a party from insisting on strict legal rights when it
would be unjust, having regard to the dealings between the parties.
o The doctrine of consideration is too firmly fixed to be overthrown by a side wide.
- With respect to consideration the judge says that there was no express promise, no bargain. Also her
promise had no value because had she gone to court she would not have been successful in her claim.
o She makes more money than him. But that is bad law because the mere fact that she would not
be successful is not enough to rid of consideration for the forbearance.
John Borrows v Subsurface Surveys Ltd
- Facts: Have a sale agreement between the parties where the person pays some money in the beginning
and then on a promissory note, they pay interest every month on the amount still outstanding. If they
default then they have to make pay the full amount. They are friends and the vendor accepted late
payments a few times. They have a falling out and a payment is late, so the breach of not paying on time
is commenced. The P took over the shares until the person agreed to pay the money.
- Question: Is the vendor estopped from using their legal right to demand the money. The Ds were lulled
into a position of false sense of security as they made 11 late payments without any problems.
- Decision: Two reasons for no estoppel
o (1) The mere fact that you allow payments to be late is insufficient to ground claim. There was
no specific promise or representation, a mere act of indulgence is in and of itself insufficient.
o (2) No course of negotiations, estoppel must be the product of such negotiations. (Hughes)
Owen Sound Public Library Board v Mial Developments Ltd.
- Facts: Payments are made upon completion of the various parts of a building. This is certified by an
engineer or an architect. The library requests that the company put its corporate seal on some supporting
documents, but it is not required by the K. The company undertook to do so, this was to ensure that that
subcontractor was being paid. They mail the check after the received the files.
- Question: Was the company estopped from claiming breach because the library was allowed to not pay
until they received the sealed document even though this was not required
- Decision: They are estopped if there is evidence of specific intent, would an objective reasonable person
think based on the conduct of the parties, that the libraries payment obligation would be delayed.
o As a matter of common business practice, a request for further documents would be interpreted
as a suspension of the payment obligation.
o The court infers knowledge and intent from the fact that normal people would expect request for
further documentation as being suspension of the effect of certificate.
- This is different from John Borrows, because there was an agreement that they would get the corporate
seal, but no promise of delayed payment, even though that is how the library understood it.
- In John Borrows the focus was on the intent of the parties while in this case the focus moves to whether
reliance was reasonable. That appears to be the contemporary trend, that of reasonable reliance.
D&C Builders Ltd. v Rees
- Facts: The wife made threats of non-payment and so she held the creditor to ransom. No person can
insists on a settlement which was obtained via intimidation.
- Issue: is there a compelling reasons to excuse a person from representation
- Principle: when the creditor and debtor enter into negotiations which lead the debtor to believe that on
payment of the lesser sum, the creditor will not enforce payment of the balance and so the debtor pays
the lesser sum and the creditor accepts it then the creditor cannot sue for the rest of the balance.
- We can enforce debt settlement on the notion of promissory estoppel. But in BC we have legislation
that gets rid of the past laws which now say we can enforce debt settlement agreements.
- Decision: Settlement was not enforced because of the intimidation factor.
- The modern approach is to apply the doctrine of economic duress. But the point at which playing
hardball turn into duress or intimidation is hard to determine.
N.M. v A.T.A.
- Facts: she gives up her job in England to move to Vancouver with her boyfriend. He promises to pay the
mortgage on her house in England. He then refuses to pay the mortgage and then loans her money. He
then evicts her and she can’t find a job and goes onto social assistance. He sues her on the promissory
note for the money he loaned her. At trial she counterclaims on the basis of promissory estoppel, that he
promised to pay off her mortgage if she moved in with him.
- At trial he wins and her counterclaim is rejected, she appeals and that claim is also rejected
- Decision: It was clear that there was a promise made, but no existing legal relationship and cannot
estoppel unless a prior legal relationship exists. There must be an expectation of a legal relationship
between the two.
o No intention in this type of situation to enter into legal relations (presumption against).
o Also a lack of mutuality and no consideration
- Policy: evidentiary issue, reliance (very strong, why wouldn’t we want to enforce this),
deliberation/intention (even though it was a promise, was there an intention for it to reach the legal
standard)
Unilateral Contracts
- Offer accepted by performance acts as acceptance and consideration. Reward type cases
- Distinction between unilateral and bilateral in bilateral have mutuality of promises, one party promises
one thing and the other promises another, then performance by both parties
Knowledge/intention/motive
Williams v. Caradine (1833, Eng.)
- Facts: A man’s brother was killed and he posts a reward for information. A woman has information and
the actual murderer beats her and she believes she was about to die so to ease her conscious, she tells the
police about the murderer. She doesn’t do it out of intention or inducement of the reward.
- Trial: A promise could only be enforced in favor of the person who should have been induced to make
disclosures by the promise of reward
- Decision: P by giving information brought herself into the terms of the advertisement and is entitled to
recover. Cannot go into the motives of the P. But acceptance cannot be valid if you don’t know there is
an offer since no intention to contract.
Contrast with The Crowne v. Clark (1927, Aust. H.C.).
- Facts: Clark was charged as an accessory to murder and he provided information leading to conviction
of others. The government had a reward out for the information, but when Clark gave the information,
he didn’t know about the reward. He provided information to secure his own release. Since he was
acting on his own self-interest, he did not have the intention of accepting the reward or reliance on the
award, it was to just get out of jail. Was not aware that there was a reward offer, so factual distinction
from Williams.
- Principle: In order to obtain a reward you have to be aware of the offer, and have acted with the
intention to accept it. Need to show an intention to accept the offer, and act in reliance of the offer and
be induced by it.
- Note: in Quebec the Civil Code says you get the money even if the person doesn’t know about the offer.
But the governing authorities say that is not the case in common law.
Performance of the condition is sufficient acceptance without notification
Carlill v. Carbolic Smoke Ball Company (1893, Eng. C.A)
- Foundational common law case solidifying the principle of a unilateral contract.
-
Facts: They offered a reward of $100 to anyone who caught a cold while using the carbolic ball. The P
used it religiously and she still caught the cold and now wanted the money
Decision: The court dismisses the idea that this was a mere advertisement. This was a serious offer
because they said the money was deposited in the bank. The D also argued that she never notified us of
the acceptance of the offer, but the court establishes that you can have acceptance of the offer without
actual notification.
o They could not accept that hundreds of users would write to them and say that we are going to
use the ball, and that we accept your offer. This is not the way that this offer is meant to be used.
Performance is enough to accept the offer.
Contemporary illustration of unilateral contracts—government programs
Dale v. Manitoba (1997, Man. C.A.): University funding.
- Facts: government started an ACCESS program to provide educational opportunities to disadvantaged
people. The P believed they had a contractual agreement with the government not to alter the terms and
conditions of funding and it had been communicate to them by the staff of access.
- Issue: Did the communication commit the government or university or both
- Decision: Notification of acceptance doesn’t have to be made so long as the offer continues without
being revoked. The role assigned by the government to the university that a binding offer was made to
student applicants open for acceptance without specific and direct communication to government.
University staff had the authority to make commitments on behalf of the government.
Grant v. Province of NB (1973, NB App. Div.): Potato stabilization program.
- Facts: the government started up a program to help potato farmers get rid of their surplus potatoes. This
person’s appeal was rejected because they said he didn’t own the potatoes.
- Trial: judge found that the potatoes were in fact his and ordered the province to pay
- Appeal: although he owned the potatoes, the payments were made to the applicants under the program
constituted subsidies which the appellant had no right
- The P argues there was an offer by the province to sell and acceptance by him when he filled out the
form and potatoes were disposed of in a satisfactory manner
- Decision: need to apply objective test to interpret intent of binding offer. A reasonable person would be
entitled to assume that if he complied with the conditions set out in the general information and disposed
of his potatoes to the satisfaction of the inspector, he was entitled to sell his potatoes to the Province and
they were legally bound to pay for them.
Revocation before performance complete: how to protect reliance?
- Offer can be revoked any time before acceptance, once begun can’t stop
- Problem: Doctrinal common law rule is that offer can be revoked before acceptance. There are three
avoidance techniques to protect reliance.
(i) Court can imply a promise not to revoke the bargain - two contract approach
Errington v. Errington (1952, Eng. C.A)
- Facts: The father bought the son a house. He said pay mortgage and house will be yours (Contract #1).
So as long as you pay the mortgage you may remain in possession (Contract #2 is an implied promise
not to revoke Contract #1). The father dies and the mother is the executor, and so she is kicking them out
of the house. They are not done the payments yet
- Decision: The judge implies a promise by the father not to revoke contract one. As long as they
continue to pay the mortgage, they can remain in possession
- Payment of the mortgage is both consideration for contract one and two. It was not a bilateral agreement
because the son was not obliged to make the payments. If they didn’t pay it, the father could not sue.
- Note the difference between unilateral and bilateral contract
(a)
I will pay you $500, if you find my dog (unilateral contract - offer accepted upon performance,
no binding K to find the dog).
(b)
I promise to find your dog. In exchange you promise to pay me $500 (bilateral contract exchange of promises, binding obligation to find the dog, sue if I fail)
(ii) Court can find that there is a bilateral contract by an exchange of mutual promises
Dawson v. Helicopter Exploration Co. Ltd. (1955, SCC)
- Facts: Dawson had some mineral claims, and knew where valuable mineral rights were. He contracted a
company and they said if you show us where the mineral claims are and we concluded that they are
worth claiming, we will give you 10%. He signs all his rights over. The company then says they don’t
have a pilot yet. But then they locate everything by themselves without his involvement and stake the
claim. They said we found them, so don’t have to give you money
- Helicopter said that it was a standing offer and he did not unilaterally accept the claim by taking them to
the place. Since he never performed, there is not contract.
- Decision: The courts said there was a bilateral contract, an exchange of promises, if you take us we will
give you 10%. He agreed and therefore there were bilateral promises. The courts are more willing to
find a bilateral, rather than making it unilateral. Find an exchange of mutual promises and address the
issue of reliance
(iii) Offer cannot be revoked when performance has commenced
Ayerswood Development Corp. v. Hydro One Networks (Ont. SCJ, 2004)
- Facts: Ontario Hydro not permitted to revoke offer for payments under energy efficiency program once
performance commenced. Baughman v. Rampart Resource: Once the offeree has embarked on
performance it is too late for the offeror to revoke his offer.
Privity of Contract
- Privity: Contract can neither confer rights nor impose obligations on 3P
- A third party has no legally enforceable rights under the K, even where the purpose of the K is to convey
a benefit to the third party
- Generally a third party cannot claim against A or B, because no consideration for third party
Rationales
- Doctrinal rationale: Not a party, they are a beneficiary under the K, No consideration, may interfere with
the contractual freedom of the other two parties like could prevent modification, since rights crystallized
- Economic: Encouragement of market based concepts, support nascent capitalism, Self-reliance,
Minimize liability
- Langridge v. Levy (1837), Winterbottom v. Wright (1842) and Longmeid v. Holliday (1851)—no
contractual liability because injured person is not privy to contract.
Vertical and Horizontal privity
- Vertical privity: relates to a buyer within the distributive chain who did not buy directly from the
defendant. Privity prevents them from going after the manufacturer because they are not part of the
contract, but they can use tort law
Manufacturer
Problem – The chain may be broken
|
- bankruptcy
Distributor
- exemption clauses
|
- limitation periods
Retailer
- seller/distributor closed/cannot be located
|
Consumer
- Horizontal privity: relates to a person who is not a buyer within the distributive chain, but who
consumes, uses or is affected by the product. They buy the consumer good, but someone in the
household uses the good but where the user is hurt, they cannot sue seller in K due to doctrine of privity
Seller
|
Buyer — User
The foundational case - Tweddle v. Atkinson (1861, Eng.)
- Facts: Fathers promise to pay $ upon marriage. They die without paying. P is suing the father-in-laws
executor for the promise
Atkinson (Executor)

John Tweddle (deceased) —K— William Guy (deceased)


Plaintiff
— married —
Daughter
- Held: Action cannot be maintained. No consideration flowing from P. Have the idea of natural love and
affection and so have to distinguish between the social and legal. The executors can sue each other,
binding contract. The contract also says that the son can sue on the contract not withstanding that it is for
the benefit for third party, but the court does not enforce it. Both had not paid, so it was unfair to have
one of them live up to the obligation.
- The father could have assigned the rights to the son immediately, and so the son could have stood in the
shoes of the assignor and sued under contract.
Avoidance of the contractual box
- Three ways to get around the privity doctrine: Trust, assignment and agency
o Categorize the 3P as beneficiary (trust) or assignee (assignment) or the B as an agent, so the 3P
is no longer a third party
(1) Trust
- The contracting party was acting as a beneficiary for the 3P and so under trust law, the beneficiary of the
trust may sue the other party because this is a trust and is a different legal category then contract. Even
though trustee is legal owner, they hold the assets in trust and so the beneficiary has a legal right.
(2) Assignment
- Someone who has the benefit of the K can assign the rights to receive money under the contract to a
third party. Ex, someone owes you $1000, you go to a company and say that someone is going to pay
me this money on July 1, buy it from me today for $900.
- Common law did not accept this because the rights were personal between the two people. You have no
business assigning the right
- But equity stepped in and said that you can’t make a legal assignment but can make an equitable
assignment.
o Law and Equity Act, Section 36, Assignment of debts and choses in action
o
36(1) An absolute assignment, in writing signed by the assignor, not purporting to be by way of charge only, of a
debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other
person from whom the assignor would have been entitled to receive or claim the debt or chose in action, is and is
deemed to have been effectual in law, subject to all equities that would have been entitled to priority over the right
of the assignee if this Act had not been enacted, to pass and transfer the legal right to the debt or chose in action
from the date of the notice, and all legal and other remedies for the debt or chose in action, and the power to give a
good discharge for the debt or chose in action, without the concurrence of the assignor.
Beswick v. Beswick (1968, CA/HL)
- Denning’s failed attempt to overrule Tweddle
- Facts: The coal merchant sells his business to his nephew who agrees to provide money to the man and
then to his widow. After the owner dies, he fails to continue to pay the widow. Widow is a 3P
beneficiary and also the executor of the state, so brings case in both capacities.
- Trial: Her claim is rejected, unclear why the claim as the representative of the estate was not successful.
- CA: Denning refers to older cases saying that a third party can sue under the common law. They could
bring the action in the name of the contracting party. Refers to a bunch of equitable cases, the trust
scenario, which doesn’t apply here but also discusses orders of specific performance in order to protect
the rights of the third party.
o This would pretty much get rid of the privity rule
- House of Lords: Say that they don’t have to rely on the privity issue. We will let the legislature fix the
problems that we have created by our bad reasoning. The widow cannot sue in her own capacity but can
sue as the representative of the estate. But if she is suing on behalf of the estate, what are the damages.
o The estate itself is not harmed, it is the widow who is out of money so arguably there are no
damages to the person making the contract, it is the third party who has damages.
o Court gets around that by ordering specific performance.
(3) Agency
- Agent: they are contracting on behalf of the principle. Under this, K is between A and 3P, the agent is
not a contracting party. They are just a means by which the contract is performed.
Dunlop Pneumatic Tyre Company v. Selfridge & Company (1915, HL)
Dew (A?) — K (sale) — Selfridge (Promisor) — K — Jameson (consumer )

K (price maintenance)
Dunlop (P?)
- Facts: Dunlop wants to sue Selfridge under the price maintenance agreement. Selfridge sells Dunlop’s
tires and they want them to sell them at a certain price. But the contract is between Dew and Selfridge.
Dunlop argues that Dew was simply acting as an agent for Dunlop.
- Decision: The court says that only a party to K may sue on it, also in order to enforce a K there has to
be consideration from the promisor and a principle may only sue in K, if the promise sues for the agent.
- In this scenario there is no evidence that Dew was contracting as an agent for Dunlop. Also Dunlop
didn’t provide any consideration for the contract between Dew and Selfridge. They have the idea that
there was two contracts here, one between Dew and Dunlop and then one between Dew and Selfridge
Exclusion clauses
- An exclusion or limitation clause is a term in a K that limits liability. For example, parking tickets: the
liability of parking lot owner in contract or tort is limited to nothing or $25 or $50 dollars.
Employee Liability
- I take my car to Canadian Tire for work. Employees are negligent and damage car. (K with CT)
- If care is damaged who do you sue for the negligent action if the employee is responsible?
o Doctrine of respondeat superior, the employer is liable for torts of employee (vicarious liability).
- If K contains an exclusion clause that they are not liable for damage that exceeds $100 is employee
covered? No limitation on right to sue employee, they have no CL right of indemnification from
employer.
New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., [1975]
- Facts: Cargo damaged. Consignee sues stevedores for negligence. Stevedores: actually unload the goods
at the doc.
Ajax/Drill Maker
Federal Steam
Consignor/Shipper – carriage contract/bill of lading – Carrier
|
|
Contract for drill
Stevedores
|
New Zealand Shipping
Consignee
A.M. Satterthwaite
- Issue: Can stevedores rely on limitation of liability in bill of lading?
- Decision: They can rely on the bill because the carrier was an agent for stevedores for the purposes of
contracting for limitation of liability. The consignee is also bound by the bill of lading because to make
this claim, they step into the shoes of the consignor. So they bring an action as independent contractors/
third party. But argued that they cannot, because a third party cannot obtain the benefits of the K.
o It is generally cheaper for the property owner to insure their object/property then the carrier
obtaining third party. It is an efficient risk allocation mechanism
- The consignee is entitled to the benefit of and bound by the stipulations in the bill of lading by
acceptance of the bill and the request for delivery of the goods.
- Agency criteria from Scruttons Ltd. v. Midland Silicones Ltd.
- (1) The negotiating parties must have intended that the stevedores (“3P”) benefit from the
contract: Here it was clear that the limitation clause was intended to benefit the stevedores since the bill
of lading contained a clause expressly extending protection to “every independent contractor” of the
carrier.
- (2) The contracting party must also be contracting as agent of the stevedores (“3P”). The bill of
-
-
lading expressly stated that the carrier was deemed to be acting as an agent for independent contractors.
(3) The party that acted as an agent for the stevedores (“3P”) must have had the authority to do
so: The carrier was authorized to act as an agent on behalf of the stevedores because the stevedores were
a wholly owned subsidiary of the carrier. However, this sort of express authorization is not necessary
since authority can be granted ex post facto.
(4) There must be consideration moving from the third party to the non-agent party: In agreeing to
the terms of the bill of lading, the shipper had essentially made the following unilateral offer to the
stevedores (through their agent, the carrier): “if you unload my goods I accept that you are protected by
the limitation clause.” By unloading the goods the stevedores both accepted the shipper’s offer and
provided consideration for it (their labour).
Greenwood Shopping Plaza Ltd. v. Beattie (SCC, 1980)
- Facts: Agreement that the Mall owner was to insure for property damages. The insurer was to have no
rights of subrogation, cannot step into shoes of landlord to sue tenant, Canadian Tire. The whole idea is
to allocate the risk to one party. So the waiver is the insurer’s waiver. Employees cause fire due to
negligence
- Issue: Can the employee benefit from the clause in the lease contract that says Greenwood cannot sue
Canadian Tire.
- Decision: Employees are third party beneficiaries, exceptions do not apply. Situation is not within
agency requirement as established in New Zealand Shipping:
- (1) The negotiating parties must have intended that the third party benefit from the contract. No
evidence that clause was intended to apply to employees.
- (2) The contracting party must also be contracting as agent of the third party. No evidence that
Canadian Tire was in fact was contracting for employees.
- (3) The party that acted as an agent for the third party must have had the authority to do so. No
authority or ratification.
- (4) There must be consideration moving from the third party to the non-agent party. No
consideration from employees to G. It was a lease – not a contract to fix Greenwood’s car. No
performance that could act as consideration.
Criticisms of Decision
- Formalistic: failure to consider consequences of judgment
- Unfair surprise
- Distributive justice: Part-time low wage people work in mall, not fair to put risk upon these types of
people.
- Disrupts risk allocation: the risk of fire is supposed to be allocated to one party, but going around that to
get at the employee, disrupts the risk allocation. Prevent 2 parties from paying insurance premiums
- If no subrogation, presumably higher premiums
- Inefficient: means that employees need to insure also: double insurance
London Drugs v. Kuehne & Nagel (SCC, 1992)
- Facts: Storage of transformer. London Drugs did not buy the insurance so K has a limitation of liability
of $40. They need to get their own property insurance. Employees negligently damage transformer.
London Drugs gets money from its own insurance but the contract also allows the insurer to step into the
shoes of London Drugs, and sue storage company for damages. They do this
- Issue: To what extent can the employees obtain the benefits of the limitation clause? Also the agency
argument will not work
- Decision: Relaxes doctrine of privity in context where employee is third party beneficiary to
limitation of liability clause between employer and customer, provided:
o (a) Limitation of liability expressly or impliedly extends benefit to employee
 In this case there is no express extension to the employee, but the court implies that the
clause extends to the employees, because of the nature of relationship and the identity of
-
-
interest between the two. London Drugs knew or ought to have known that people would
be involved in the moving.
 No evidence that they were intended to be excluded, shifts the onus. If not an express
exclusion, it will extend to the employee, so a shift in onus
o (b) The employee seeking the benefit of the limitation of liability clause is acting in the course of
their employment and providing the very services provided in the contract when the loss occurs.
Policy: Develop an incremental change with regard to third party beneficiaries. They do this because
there are no concerns about double recovery, floodgates, very personal contract, no concern about
reciprocity and no concern that it would be unjust to allow a party to sue on a K when he or she cannot
be sued on it. Only issue is no consideration
o Very close to the recognized agency exception and proposing a very specific and limited
exception
How is Greenwood distinguished?
o In that case, it was a lease of space agreement and so employees not necessary to the
performance of the agreement. Here the employees are need for the actual contract, as they are
needed to move stuff around.
What problems continue?
- Employer may have no insurance/no limitation clause form which the employee can benefit as 3P
- Even if insurance/limitation clause, employer might not ensure that it extends to employees. They may
expressly exclude their employees, to get cheaper rates.
- Employer may not decide to insure employees.
- Employee options:
o Ensure insurance coverage extends to employees
o Ensure employee benefits from waiver of subrogation
o Employee self-insures
o Employee obtains indemnity from employer
Extension of London Drugs Criteria to General Commercial Context
Fraser River Pile & Dredge Ltd. v. Can-Dive Services (SSC, 1999)
- Facts: Boat charterer (K w/owner) seeks to rely on waiver of subrogation clause in insurance K between
insurance company and boat owner. The boat sunk due to negligence of charterer. Insurance company
argues that London Drugs is limited to contract for services and not relevant here as license of property.
- Decision: 2 conditions can apply anywhere.
- (1) Did the contracting parties intended to extend the benefit to the third party? Here the insurance K
referred to charterers.
- (2) Are the activities performed by the third party the very activities contemplated as coming within the
scope of the contract? Here the activities performed by the 3P contemplated fall in scope of K
- Third parties rights cannot be revoked by agreement once they have crystallized
- The idea is that when Can-Dive rented the boat, they signed a certain deal. Presumably they asked if
they have to get insurance, but they were told that the price they were paying covered insurance.
- Policy: Sound commercial rationale to enforce the bargain. Should not allow insurance companies to
disrupt the risk allocation by going after the third party.
New Brunswick Legislated this, Law Reform Act
4(1) A person who is not a party to a contract but who is identified by or under the contract as being intended to receive some performance or
forbearance under it may, unless the contract provides otherwise, enforce that performance or forbearance by a claim for damages or otherwise.
4(2) In proceedings under subsection (1) against a party to a contract, any defence may be raised that could have been raised in proceedings between
the parties.
4(3) The parties to a contract to which subsection (1) applies may amend or terminate the contract at any time, but where, by doing so, they cause
loss to a person described in subsection (1) who has incurred expense or undertaken an obligation in the expectation that the contract would be
performed, that person may recover the loss from any party to the contract who knew or ought to have known that the expenses would be or had been
incurred or that the obligation would be or had been undertaken.
4(4) This section applies to contracts entered into before or after the commencement of this section, except that subsection (3) does not permit the
recovery of loss arising in relation to an expense incurred or an obligation undertaken before the commencement of this section.
Current Privity Issue
Resch v. Canadian Tire (Ont. SCJ, 2006)
- Facts: Pro-Cycle manufacturers bikes and they sell them to Canadian Tire Corp, who sells them to
MillsRoy (Canadian Tire Dealer) from who Resche and his stepfather buy it
- Issue: Resche is a 15 year old who is severely injured due to a manufacturing default of bike. So he
wants to be the purchaser so he can have the certain benefits and protections.
- Under Sale of Goods Act there is an implied condition that goods will be reasonably fit for consumption.
But you have to be the buyer to obtain the benefits
- Decision: The step-father bought it on his credit card, so he is the buyer. No evidence that the boy was
the co-buyer, at time of purchase both must have paid his giving money to his step-father not enough
- In consumer contracts, the privity doctrine still applies. London Drugs affects the shield issues in the
particular context of commercial relationships, not sword. Must sue in tort and not in contract. But in
contract it is strict liability and you have the implied condition in the sales of goods act, so easier
Mistaken Identity – Of Void and Voidable Contract
- B, the rogue, passes himself off as another well-known person or a person with means. A contracts with
B and sells property to B. B then sells to C, a bona fide purchaser for value (BFP). A is unpaid and B
absconds. A, the defrauded owner, sues C, arguing that as a result of the fraud B did not obtain title to
the property and had no rights to transfer (nemo dat). B is judgment proof if found or will be in jail.
Nemo dat quod non habet
- The common law and sale of goods legislation follows the rule nemo dat quod non habet: no one can
transfer to another something that he or she does not have. You can only transfer/sell what you own,
must have an interest in the property
- Sale of Goods Act: Sale by person not owner: 26 (1) Subject to this Act, if goods are sold by a person who is not the owner of
them, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the
goods than the seller had, unless the owner's conduct precludes the owner from denying the seller's authority to sell.
-
This principle conflicts with the policy of protecting innocent purchasers who buy in good faith without
notice of the defect in title (bona fide purchasers for value).
- Note: The SGA distinguishes between property and title.
- Property in SGA focuses on the totality of rights the seller has over goods and the passage of those
rights to the buyer. Can transfer the right of property without owning the whole thing. The concept of
title is that of an absolute ownership, valid against the entire world. Reflects the basic idea of “nemo
dat”, that you can only sell what you own
Issue in the mistaken identity cases: which innocent party should bear the loss?
- The seller is in the best position to avoid the loss because they can best protect themselves because they
don’t have to give the property until they get payment
- To protect itself, the seller should require full payment/bank draft/certified cheque/security etc. before
allowing purchaser to have possession of the property. It is cheaper for the seller to do this than for the
buyer to make a full search of the seller’s identity and title to the goods.
- Now have the Personal Property Security Registry, have special rights under this act. But it is costly
- Nevertheless, the common law has traditionally favored the property owner (nemo dat). It is generally
very protective of property rights and the property owner.
The common law non-solution: void and voidable contracts
- Whether the property owner retains title to the property depends on the characterization of the contract
between A and B.
(a) No offer to rogue – contract void:
- A-B contract can be characterized as being void ab initio (from the beginning) because there was no
offer/acceptance. There was an offer but it was not made to the rogue; it was made to the person the
rogue was impersonating. So no K was formed and as a result no title passes from A to B and so B
cannot pass any property to C
- Result: A retains title to property. (Sellers J. in Ingram v. Little)
(b) Fundamental mistake regarding identity of contracting party– contract void
- If A-B contract is void for fundamental mistake regarding the identity of a contracting party, A retains
title to property.
- There was a mistake and so the court should provide a remedy
- If equitable mistake, the court can do whatever it wants to relieve the parties
- If common law mistake, there was no meeting of the minds. A gets to keep the property because no
transfer from A to B
- Devlin (dissent) in Ingram discusses this
(c) Contract voidable because of fraudulent misrepresentation
- If A-B contract is voidable because of B’s fraudulent misrepresentation, then there is a contract under
which title can pass from A to B. However, as a result of the misrepresentation, A has an equitable right
to rescind the contract with B and regain title. If contract rescinded then A regains title.
- Rescission: If you are tricked into contract on the basis of fraudulent misrepresentation, the K is not void
but is voidable. So there was a contract but are getting it voided, equity.
(d) Contract voidable but not avoided before sale to BFP
- If B transfers title to C before A rescinds the contract with B, then C, the BFP, acquires the property.
Denning in Lewis v. Averay
- Sale under voidable title: 28 When the seller of goods has a voidable title to them, but the seller's title has not been avoided at
the time of the sale, the buyer acquires a good title to the goods, if they are bought in good faith and without notice of the
seller's defect of title.
-
The K was voidable, but before A realized the mistake, B gets rid of the property and since the K was
not voided before the transfer of property, C wins.
Cases
Phillips v. Brooks (1910, Eng. H.C.) Decision for C
- Facts: The rouge goes to the jewelers to buy a ring and pearls. He pretends to be someone else. He says
that of course you have to get the cheque cleared, I will only take the ring and sells to pawn broker.
Jeweler now sues pawnbroker.
- The seller intended to contract with the person present and there was no error as to the person with
whom he contracted, although the P would not have made the K if there had not been a fraudulent
misrepresentation. No issue that the company was contracting with A, therefore C obtained the title.
Ingram v. Little (1961, C.A.) Decision for A
- Facts: Ingram sold the car to Hutchinson and took a cheque after he pretended to be someone else. He
then sold the car to Little who then sold it to another dealer. Ingram now sues Little to get the car back.
- Decision: No K because the offer to sell was made to Hutchinson and the rouge could not accept. They
were only willing to sell to others for cash. Therefore no K
o This was different from the Brooks because there the fraud came after the decision for the K
- The judge was clear that the decision of contracting with a specific person or anyone is a question of
fact, and therefore dependent on each case. This leaves a very discretionary system because depending
on how you characterize it, it influences whether or not there was a K
- Devlin(Dissent): the operating presumption should be that you intend to K with the person you are
actually talking to. Here she was a victim of fraud, the offer was made to the person she was talking to
and since there was a K, property can pass.
o To him the identity of the buyer was irrelevant, identity was surrogate for the real issue which
was credit worthiness. He wants law reform, to provide the court discretion to properly
distribute/apportion the loss.
Lewis v. Avery (Eng. CA, 1972) Decision for C
- Facts: He sold the car to “Green”. Who then sold it to Avery, now Lewis seeking damages from Avery
- Issue: How do we characterize the contract
- Denning: He says that the policy rationale is that we are going to put the risk on the seller as they are
the least cost avoider. The mere fact that one party is mistaken doesn’t mean that there is not a K.
o The rogue obtained a legal title and since this was not voided before the transfer of the sale, it
belongs to the buyer. The void must be done before third party has obtained rights under it.
-
-
Principle: When 2 parties have come to a K the fact that one party is mistaken as to the identity of the
other does not mean there is no K or the K is a nullity and void from the beginning. It only means that
the K is voidable and liable to be set aside so long as he does so before the third parties have in good
faith acquired rights under it.
The cases are analysed through the lens of 4(d), so that C can take good title.
Cundy v Lindsay where the fraud was through mail, A wins.
Documents Mistakenly Signed -- Non est factum
Signature rule: signed contract is binding—proof of acceptance.
- Generally if you sign a document, you are bound by it. Most irrefutable evidence of acceptance
- I signed it, but I didn’t know what I was signing – Non est Factum
- The signature provides evidence of consent or acceptance but the paper itself is not the contract.
- So also need to know what was said (oral) and what the agreement between the two parties was.
Non est factum: it is not my deed
- Originally available where:
o Person had not signed (fraud/forgery).
o Blind/illiterate person did not know what they were signing
- Effect: Contract void—there was no consent. There never was an intention to contract.
What about the person of full capacity who signs a document mistakenly?
- Similar concern to the mistaken identity cases: innocent third party who relies on the document?
o The person who made the mistake was the one who could have taken steps to protect themselves.
- Policy: Who should bear the loss as between the mistaken party and the innocent third party?
Saunders v. Anglia Building Society (Gallie v. Lee ) (1991, HL)
- Facts: Mrs Gallie induced to sign transfer to third party. Wanted to help her nephew, Parkin she gives
him the deeds to her house. Agreement that she would remain in the house until she died and then he
would get the house.
o Parkin needs money and he is trying to get out of maintenance and spousal support. To make
himself judgment proof he makes a deal with Lee and gets the house transferred into his name.
The lady doesn’t read the document because her glasses are broken. The house is transferred to
Lee and he uses the money to pay off other debt.
- Issue: Transfer to Lee void on the basis of non est factum? No.
- Decision: The old lady bears the loss.
- TJ: Found that she had no idea about the assignment to Lee.
- CA: They said that she meant to give the house to Parkin and it was a divestiture to the nephew.
Although it was under the understanding that she gets to stay in the house for the rest of her life, this was
not in writing. She knew that there was some agreement to use the house as security for obtaining
money between Lee and Parkin. Who it was transferred to was the not object of the exercise, it was to
raise money for his business
General principles:
- It is very RARE to be granted non est factum.
- A person of full age and understanding, who can read and write, is bound by their signature
- Plea of non est factum is available to person who, for permanent or temporary reasons, is not capable of
reading and sufficiently understanding the document signed.
- Effect of non est factum is no contract.
- Plea not available where:
o (i) Signature of the document was brought about by negligence of the signer in failing to take
precautions which person ought to have taken; or
o (ii) The actual document was not fundamentally different from the document as the signer
believed it to be.
- Mistaken person must prove that he or she took all reasonable precautions in the circumstances. It is
generally insufficient to say “I relied on a trusted friend/advisor”.
o Only applies where it is apparent that the K has legal consequences.
-
o The mere fact that you have full understanding but have been induced fraudulently to not read,
does not stop you from being bound.
Burden of proof is always on the person alleging the defence.
“If you sign a contract that is intended to have legal consequences, then if you do not read it but rely on
the word of another as to its character or contents or effects, you cannot be heard to say that it is not
your document.
Marvo Color Research Ltd. Harris (1982, SCC)
- Facts: Harrises (parents) tricked by Johnston (their daughter’s partner) into giving mortgage on their
property. Mortgage provided security to Marvo for Johnston’s obligations.
- Issue: Can parents rely on non est factum? No. SCC adopts Saunders.
- Decision: Parents were careless.
- 1. As between an innocent party and the mistaken party the law must take into account that one party
was completely innocent of any negligence, carelessness or wrongdoing whereas the signer has by its
careless conduct made it possible for the wrongdoer to inflict a loss
- 2. Rule reflects the need for certainty and security in commerce.
- 3. Very fact specific inquiry.
- Policy: Between the two parties, one was completely innocent and acted on the basis of that to release
their claims. Although the other party was tricked, they signed the document without proper due care.
We want third parties and finance companies to be able to rely on documentation. Therefore the loss
goes to the person who was careless.
Farrell Estates v Win Up Restaurants (BCSC Dec 7, 2010)
- Facts: A rouge, Mr. Chui was operating a restaurant and had a lease with Farrell for 10 years, no
termination clause. His restaurant was not going well and could not get out of the lease.
- He tells Yang to get into the restaurant business, just have to put a bit of money in. She is interested in
this, but is unsophisticated business person. Mr Chui, is trying to get out of his lease by making Win Up
take over his lease.
o Ms. Yang is clear that she doesn’t want to have any personal business responsibility. She is a
shareholder and director of Win Up. She crosses out the personal guarantee stuff from the
document but Mr. Chui is carrying out the negotiations with Farrell. Wants to ensure that she
signs up, so the lease that she eventually signs says that the company is liable and that she is
personally liable.
o So she obtains a personal guarantee under the lease. She convents or agrees to the lease promises
with Win Up in her personal capacity. So she signs twice. The company is a bust and she is sued
for $600,000 for the lease payments that were not made
- Decision: She is not liable to a co-coveter on the basis of non est factum, all along she proceeded on the
basis that Win Up was liable. So she was misled to sign up in her personal capacity. She could not read
English, had no business experience. Also she had been very vocal in her opposition with personal
liability with Farrell and they knew that.
- The court said that in this situation Farrell should have been in notice that something was up. In the
other cases we have actual innocent third parties, they had no notice and were not involved in the
misleading transaction. The difference in this case is that Farrell is not an innocent third party. They are
in a direct contractual relationship with Win Up and with Ms. Yang to a certain degree.
- Policy: From Marvco, when the innocent third party who didn’t do anything wrong, it is the mistaken
one that should be responsible. So in this case it is very fact specific and essentially Farrell got the
benefit of Mr. Chui’s scam, they knew he was opposed to this arrangement. So in these circumstances,
Farrell should have been on notice and clarified with Ms. Yang that she knew she was going to be a
personal guarantor in this situation.
Interpretation of Contracts
Some guiding principles of interpretation
1. The process of contractual interpretation is aimed at ascertaining the true intentions of the parties at
the time the contract is signed
Consolidated-Bathurst v. Mutual Boiler, [1980]
- Where words may bear two constructions, the more reasonable one, that which produces a fair result,
must certainly be taken as the interpretation which would promote the intention of the parties.
- Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into
the commercial transaction in the first place should be discarded in favour of an interpretation of the
policy which promotes a sensible commercial result.
- But Eli Lilly & Co. v. Novopharm Ltd., [1998]: When there is no ambiguity in the wording of the
document, the notion in Consolidated-Bathurst that the interpretation which produces a “fair
result” or a “sensible commercial result” should be adopted is not determinative.
- However, to interpret a plainly worded document in accordance with the true contractual intent of the
parties is not difficult, if it is presumed that the parties intended the legal consequences of their words.
2. The courts apply an objective approach to the determination of the parties’ intention at the time of
contract.
- To ascertain the parties’ intentions the court does not of course inquire into the parties’
subjective states of mind but makes an objective judgment. B.C.C.I. v. Ali [2001]
- The principal function of the law of contracts is to protect reasonable expectations engendered by
promises...[T]he test of whether a promise is made ... does not and should not depend on an
enquiry into the state of mind of the promisor, but on how the promisor’s conduct would strike a
reasonable person in the position of the promisee. Waddams, The Law of Contracts
3. Where there is no ambiguity in the written agreement there is no need for extrinsic evidence.
- Where court is interpreting a K, and there is no ambiguity, you would not be entitled to submit evidence
with respect to the surrounding evidence. If the K is clear, all the extrinsic evidence is useless. They
don’t want to have to hear evidence and listen to lots of testimony for no reason.
- The cardinal interpretive rule of contracts is that the court should give effect to the intention of
the parties as expressed in their written agreement. Where that intention is plainly expressed in
the language of the agreement, the court should not stray beyond the four corners of the
agreement. KPMG Inc. v. Canadian Imperial Bank of Commerce
- When the wording of a contract is unambiguous, courts should not give it a meaning different from
that which is expressed by its clear terms, unless the contract is unreasonable or has an effect
contrary to the intention of the parties. Scott v. Wawanesa Mutual Insurance Co., [1989]
4. The “factual matrix”, “commercial context”, “surrounding circumstances” are almost always relevant
- In a commercial contract it is certainly right that the court should know the commercial purpose
of the contract and this in turn presupposes knowledge of the genesis of the transaction, the
background, the context, the market in which the parties are operating. Lord Wilberforce,
Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen, [1976]
5. The general rule is that evidence of prior negotiations is inadmissible for the purpose of construing the
final agreement.
Prenn v. Simmonds (1971, H.L.)
- Facts: Contractual dispute regarding whether the condition for purchase of shares had been satisfied,
which depended on the meaning of profits of R.T.T.
- Issue: Is the evidence of negotiations and parties intentions admissible?
- Decision: Not helpful to determine what the final outcome was by looking at their approach in how to
get to the K, positions switch. The agreement was what they signed, not what they thought
- Contractual interpretation is not isolated from the “matrix of facts” in which the agreement was made.
The Court may admit evidence of the surrounding circumstances, including;
o The commercial or business object of the agreement; the “genesis” and objectively the “aim” of
the transaction;
o Mutually known facts to identify the meaning of a descriptive term; and
o To establish a trade or technical meaning
- Evidence of the negotiations or of the parties’ subjective intentions is not admissible: only the final
document evidences the agreement of the parties
- Note: The line between evidence relating to the commercial purpose of the agreement and the
subjective intentions of the parties is often very difficult to draw. Professor McCamus suggests that the
rule is that although evidence of prior negotiations is generally inadmissible, it may be admitted “where
it is relevant either to show the aim and genesis of the transaction”.
6. Interpretation must give effect to all parts of the agreement. No provision of an agreement should be
interpreted to be redundant.
- The presumption is that a term in a contract is not meaningless. Nevertheless, courts recognize that
agreements drafted by lawyers often contain language that is duplicative.
- Where there are apparent inconsistencies between different terms of a contract, the court should attempt to
find an interpretation which can reasonably give meaning to each of the terms in question.
- Only if an interpretation giving reasonable consistency to the terms in question cannot be found will the
court rule one clause or the other ineffective. In this process, the terms will, if reasonably possible, be
reconciled by construing one term as a qualification of the other term BG Checo International Ltd. v. British
Columbia Hydro and Power Authority
7. Subsequent conduct
- Although English courts have stated it is not legitimate to examine subsequent conduct, Canadian courts
have generally taken a more flexible view.
- Where there are two reasonable interpretations of a provision then evidence of subsequent conduct may
be admitted and taken to have legal relevance if that additional evidence will help to determine which of
the two reasonable interpretations is the correct one. Re CNR and CP (1978)
8. Related Agreements
- May be taken into account where the agreements are components of one larger transaction.
9. Meaning of words
- Words are to be given their natural or ordinary meaning. Evidence may be admitted to prove that the
word has a special or technical meaning.
10. Construction Contra Proferentem
- Provisions of contracts that suffer from ambiguity are to be construed against the interest of the person who
drafted or proffered the ambiguous provision.
- If ambiguity it is against the person who drafted the agreement assumes that they should have made
something clear if they wanted it to be conveyed. Therefore the consumer will get the benefit of the
ambiguity
Parol Evidence Rule
Issue: Contract Interpretation
- There is a conflict between the written contract and other extrinsic evidence (oral, written, electronic)
- Prototypical situation is where there is an oral representation that either conflicts with the written
contract or is excluded by an “exclusion clause” or “entire agreement” clause
- Entire Agreement Clause: This Agreement including the Schedules hereto constitutes the entire
agreement of the parties and supersedes all prior agreements, negotiations, representations and
proposals, whether written or oral. There are no conditions, covenants, representations or warranties,
express or implied, statutory or otherwise relating to the subject matter except as expressly provided.
- Contractual obligations are contained within this agreement. Does not matter what you were told, the
agreement is what you signed.
Signature Rule (L’Estrange (Eng. CA, 1934))
- Signed contract is binding. Common law traditionally accords high degree of deference to the written
contract. The fact that you haven’t read the document doesn’t matter. If you sign it, it is a representation
that you agree with the contents of the K
Parol Evidence Rule
- Extrinsic evidence is inadmissible to alter the contract. Parol = Oral
- “If the language of the written contract is clear and unambiguous, then no extrinsic parol evidence may
be admitted to alter, vary, or interpret in any way the words used in the writing” (Fridman).
-
Although the rule is nominally procedural about admissibility of evidence), it operates substantively. In
the face of a written agreement the prior representation or statement has no contractual effect.
Hawrish v. Bank of Montreal (1969, S.C.C)
- Facts: Hawrish guarantees debts of company. He was assured by the bank manager that the guarantee
only covered existing indebtedness and he would be released when bank obtained a joint guarantee from
directors. The document that he signed said that he was liable for future debts and the bank never
obtains other guarantee. Here the signed guarantee contradicts oral assurances and he was sued.
- Decision: The guarantee was binding.
- Parol evidence of a distinct collateral agreement that does not contradict main instrument is admissible.
This is the two-contract approach, the consideration is the performance.
o The written K might say no other promises, so the courts adopted the two contract theory in
which the oral promise was prior to the written one, so we have a collateral contract.
- But if it is an innocent misrepresentation then all you can get is recession. This is because you didn’t
know that the guarantee was not correct.
- Note that Justice Judson does not in fact think that the oral assurances were ever made. Even though
there is always the rule that the written trumps, here they said it didn’t matter because they didn’t
believe the truth of the evidence.
- Collateral agreement contradicts the terms of the guarantee and therefore cannot stand.
Rationales
- (1) Administrative/adjudicative ease (2) Prevent fraud/perjury (3) Enhance certainty (4) Efficacy of
commercial documents (5) Prevent unfair surprise (6) Control agents/employees
Exceptions to the admissibility of the evidence (the procedural side of the rule)
- Evidence is admissible where:
- The written agreement is not the whole contract.
- Interpretation: Extrinsic evidence can be introduced to clear up an ambiguity in the contract.
- Invalidity: Extrinsic evidence can be introduced to show that the contract is invalid because of lack of
intention, consideration or capacity
- Misrepresentation: Extrinsic evidence can be introduced to show there was a misrepresentation that was
either innocent, negligent or fraudulent.
- Mistake: Extrinsic evidence can be introduced to show that there was some mistake as to the nature or
effect of the agreement.
- Rectification: Extrinsic evidence can be introduced to correct an error/mistake in putting the agreement
in writing.
- Condition precedent: Extrinsic evidence can be introduced to show that there was a condition precedent
to the agreement taking effect.
- Collateral Contract/Warranty/Agreement: Extrinsic evidence can be introduced to show that there was a
separate agreement along with the written agreement.
- Unconscionability: Extrinsic evidence can be introduced to show that the transaction was brought about
through unconscionable means.
- Modifications and discharge: Extrinsic evidence can be introduced to show that the contract has been
modified or terminated.
- Equitable remedy: Extrinsic evidence can be introduced in support of a claim for an equitable remedy.
What is left of the rule? When is evidence inadmissible?
- To provide evidence of subjective intentions of the parties and cording to to introduce evidence of a
collateral agreement that contradicts the written agreement, Hawrish v. Bank of Montreal
Reformulation of the rule
Gallen v. Allstate Grain (BCCA, 1984)
- Facts: Plaintiff farmer buys buckwheat seeds from All State. Allstate’s Manager assures farmer that
there will be no problem with weeds - buckwheat would choke the weeds out. The buckwheat would
“grow up and cover the field like an umbrella”. The contract has an exclusion clause:
o Allstate gives no warranty as to the productiveness or any other matter pertaining to the
seed sold to the producer and will not in any way be responsible for the crop.
-
The farmer sued on the basis of the oral representation as a warranty. Allstate counters with
parol evidence rule—representation contradicts contract.
- Innocent misrepresentation v. warranty: difference is the remedy.
- Was there a warranty (Question of fact): (1) Need to look to what extent the accuracy of the
statement would be likely to affect the substance and foundation of the adventure which the K is
intended to carry out. (2) The essence of a warranty is that it becomes plain by the words and
actions of the parties that it is intended in the purchase, the responsibility or the soundness will
rest upon the vendor.
- It was not Contradictory. 2 approaches (1) oral representation admissible on the basis that the
document did not contain the whole agreement or (2) on the basis that the document contained
one complete agreement but the oral representation formed the basic term of another agreement.
o Oral Representation: Buckwheat will choke out weeds, not affect crop
o Written Clause: Not responsible for the productiveness of crop (yield).
- If this interpretation is incorrect, then the oral representation and exclusion clause must be interpreted
harmoniously: So Allstate not responsible for matters relating to the yield, but responsible for any risk
that the crop would be destroyed by weeds.
- Rule with respect to collateral warranties in Hawrish, Bauer and Carman is not absolute: If there
is a contradiction, “there is a strong presumption in favour of the written document, but the rule is not
absolute, and if on the evidence it is clear that the oral warranty was intended to prevail, it will prevail.”
- (i) Strict interpretation contra proferentem (“against the one bringing forth”): “reading down” the
exclusion clause
- (ii) Parol evidence rule recast as a presumption: “Once it has been decided that the oral representation
was a warranty, then, in my opinion,
o (a) evidence accepted on the basis that there would be a subsequent ruling on admissibility,
becomes admissible
o (b) the oral warranty and the document must be interpreted together, and, if possible,
harmoniously, to attach the correct contractual effect to each;
o (c) If no contradiction becomes apparent in following that process, then the principle in Hawrish,
Bauer and Carman has no application; and
o (d) If there is a contradiction, then the principle in Hawrish, Bauer and Carman is that there is a
strong presumption in favour of the written document, but the rule is not absolute, and if on the
evidence it is clear that the oral warranty was intended to prevail, it will prevail.”
- Strength of Presumption: Varies depending upon the circumstances.
------------------ Presumption in favour written K strengthening ----------
Adds a term
Varies
Contradicts
- In these oral collateral warranties, have the issue of K modification in terms of when the actual
representation was made. Did it form part of the K, or was it after?
- Courts have tried to control this through the tools of offer and acceptance.
- Proper Approach
- (i) Determine whether the oral representation is a warranty.
- (ii) If yes, then if possible the oral warranty and the contractual document must be read together. If no
contradiction, then there is no problem.
o If there is a contradiction then a strong presumption that the written contract governs.
- “A collateral agreement cannot be established when it is inconsistent with or contradicts the written
agreement”. 8 comments about this principle
Zippy Print (BCCA, 1995)
- “A general exclusion clause will not override a specific representation on a point of substance which
was intended to induce the making of the agreement unless the intended effect of the exclusion
clause can be shown to have been brought to the attention of that party.
- Facts: There were very specific statements made about the profitability of the franchise. But there was
an exclusionary clause in contract. Need to draw their attention to the clause, when inducements made
Factors influencing application of the rule
- (a) General: Intent, reliance, reasonable expectations, unfair surprise
- (b) Nature of change/conflict: how serious is the conflict/contradiction.
- (c) Nature of Document
o Intended to be whole agreement—entire agreement clause?
o Clarity of wording
o Read by parties (knowledge)?
- (d) Bargaining Relationship
o Power
o Standard form contract
o Past relations/experience
o Evidence of sharp practice
- (e) Nature of Representation
o Quality and credibility of evidence
o Clarity and specificity
o Significance
Legislation
- Section 187, Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 provides: Admissibility
of parole evidence: In a consumer transaction, a provision in a contract or a rule of law respecting parole
or extrinsic evidence does not operate to exclude or limit the admissibility of evidence relating to the
understanding of the parties as to the consumer transaction or as to a particular provision of the contract.
o NOTE: "consumer transaction" means a supply of goods or services or real property by a
supplier to a consumer for purposes that are primarily personal, family or household.
Standard Form Contracts and Reasonable Notice
General Rule for Signed Documents
- Party signing a written contract is bound by its terms regardless of reading or being aware of terms
(L’Estrange, Eng. CA, 1934). Deemed to have consented to the terms of the agreement.
Unsigned Documents
- (a) Tickets: trains, buses, movies, amusement parks, parking, museums, skiing, etc.
o K is formed when you get the ticket and you are generally bound by it.
- (b) Common law courts developed the doctrine of reasonable notice: if there is no knowledge of
conditions, a person is bound to conditions if there was reasonable notice of conditions.
Parker v. South Eastern Railway (Eng. CA, 1877) – Bound if reasonable notice
- Facts: He received a ticket for storage of bag at railway. The bag is lost, worth £24 and the ticket limited
damages to £10. He knew the ticket had writing and thought it was a receipt for the money he had paid.
The reasonable steps taken were that the ticket said see back and there was a notice posted.
- Questions: Did the P read or was he aware of the special conditions and was the P under any obligation
in the exercise of reasonable and proper caution to read or make himself aware of the conditions?
- Mellish: When an agreement is reduced to writing and the party knows it is a K with conditions and
receives it but doesn’t read it, they are bound by it. If the person receiving the ticket does not know that
there is any writing on the back, he is not bound by the conditions on the back. But if he knew that there
was writing on the ticket but did not know or believe that the writing contained conditions, nevertheless
he would be bound if the delivering of the ticket to him in such a manner that he could see there was
writing upon it, here jury said reasonable notice that the writing contained conditions.
- Reasonable Notice Rule: Where written document contains conditions but document is not signed and
party did not know of the specific conditions, evidence is required to show assent to terms. Evidence:
- (i) Actual knowledge that document contains conditions; or
- (ii) Reasonable steps taken to provide notice that the document contains conditions.
o Courts have generally not explicitly accepted the idea that only reasonable terms are acceptable.
Reasonableness is a process, where the person who wants to rely on the documents has taken
reasonable steps to make you aware of those terms.
Responses/Avoidance
J. Spurling Ltd. v. Bradshaw - Notice of specific condition
- Facts: The P stored 8 barrels of orange juice with the D. On the document which was sent to the P it said
that they were not liable for the damage, even if caused their negligence. Goods were stored at the
owners risk, if they want to protect, they should get insurance.
- Decision: The clause was binding, sufficient notice was given and by the course of the business and
conduct of the parties, these conditions were part of K
- Policy: Courts find various ways to not enforce unreasonable terms. May find problem is not the unfair
contractual terms, but the company didn’t give reasonable notice of terms and so it cannot be enforced.
- The more onerous the clause/conditions becomes, must pressing need for the specific onerous condition.
Tilden v. Clendenning (Ont. CA, 1978) – requirements for reliance on signature
- Facts: He pled guilty on drunk driving, but on the civil side, there is a finding that he was not drunk and
was capable of operating a motor vehicle. He rented a car and got additional insurance. He had signed
the conditional damages waiver, which had limited his damages to zero. He had no knowledge of the
actual onerous terms.
- Reliance on signature: (a) Customer had no actual knowledge of term and no reasonable steps were
taken to bring it to his attention. (b) Adopts purposive interpretation to the signature rule. Tilden ought
to have known that there was no actual assent. (c) Where party seeking to rely on the contract knows
that the signature of the other party does not reflect the true intention of the signer and the other party is
unaware of the stringent and onerous provisions that the standard form contains, then:
o the party seeking to rely on such terms should not be able to do so in the absence of first having
taken reasonable measures to draw such terms to the attention of the other party
- Why Tilden’s reliance on the signature was not reasonable:
o The transaction was very quick, didn’t draw his attention to the provisions, there was a
contradiction between the idea of getting complete coverage and the exemption in the back. The
form was very long and fine print, almost illegible in certain cases.
- Dissent: He signed it and is bound. It is up to the market and so the limitation are reflected in the price
- It suggested that unless there was very explicit notice of unreasonable clauses, they would not be
binding.
Signed Waivers: Risky Activities
- Generally courts have upheld waiver forms. People engage in risky sports activities which have an
element of risk and a voluntary assumption. It has been said that absence of fraud, the signature rule
applies and if you get injured, the waiver will exempt the operator from liability unless negligence
- In the absence of some evidence of unconscionability, fraud, misrepresentation or case of non est factum
the traditional rule that signature is a manifestation of assent continues to prevail: Delaney v. Cascade
Karroll v. Silver Star (1988, BCSC) – Limits the Tilden rule as for special circumstances
- Facts: Karroll signs waiver form, participates in ski race and is injured. Claims the D were negligent in
failing to ensure that the downhill race course was clear of other skiers.
- Issue: Is she bound by the release? Ski Hill argues the signature rule (L’Estrange) Karroll argues she
did not receive reasonable notice of terms in standard form (Tilden)
- Reconciliation: Not a general principle that reasonable steps need to be taken to bring an exclusion of
liability to the attention of the consumer.
o Tilden is a limited principle, only applicable in special circumstances where person knew or
had reason to know of other’s mistake as to its terms. (Hasty, inconsistent clause, absence of
opportunity to read, lengthy but hard to read documents)
- No special conditions here, she knew document would affect her liability and that the contract was a
release of liability. It was a risky activity, very short and clear document and she had signed such
releases before.
- Liability of Vernon Ski Club: She argues the Ski Club was not a party to the release. Court relies on
agency exception to privity rule. (case is from 88, now have London Drugs in 92)
Fundamental Breach
The Development of the Rule of Law Approach
- Doctrine of fundamental breach: an exemption clause cannot be construed to excuse liability for a
fundamental breach of contract—a breach that goes to the root of the contract.
Karsales (Harrow) Ltd. v. Wallis (Eng. CA, 1956)
- Facts: The defendant purchaser refused delivery of a used car, which was delivered severely damaged.
Vendor relies upon exclusion clause.
- Denning: It is now settled that exempting clauses of this kind no matter how widely they are expressed,
only avail the party when he is carrying out his contract in its essential respects. They do not avail him
when he is guilty of a breach which goes to the root of the contract. As a rule of law
Distinction between Fundamental Breach and Repudiatory Breach
- Fundamental breach exists in two ways
- (1) Repudiatory Breach: Breach of contract that entitles the innocent party to treat the contract as at an
end. When is a party entitled to get out of their contractual obligations? When can an innocent party get
out of their contractual obligations?
- (2) Doctrine of Fundamental Breach: is the guilty party permitted to rely on the exclusion clause where
there has been a fundamental breach of contract? This was a categorization after the breach, had to look
and see if it went to the root of the contract
Fundamental Breach: The Rule of Construction Approach
- In Suisse Atlantique (1967), the House of Lords held that fundamental breach is not a rule of law—it is
merely a rule of construction. Confirmed in:
Photo Production (HL, 1980)
- Facts: There was a contract between Photo Production and Securicor to provide nightly patrol of Photo’s
premises. The K contained an exclusion clause: “Securicor not responsible for any injurious act or
default by any of its employees”. The Security guard started a fire and burnt down Photo’s premises.
- Decision
- (i) Fundamental breach of contract brings contractual obligations of performance to an end.
o Due to the fundamental breach, the innocent party is entitled to repudiate the contract. The
performance obligation of the parties is at an end, but the contract still exists as a matter of law.
So the exclusion clause also exists and applies to obtain the remedy.
- (ii) The exclusion clause survives and the issue is whether the clause applies to the loss in question.
o Liability is excluded because the clause excluded the negligence of the employee and they were
not negligent in hiring the employee.
- Policy: Court seems to do a risk analysis, no guarantee with the service that was being provided, and no
transfer of risk from photo production to the security company. It would be cheaper for photo production
to insure against fire, then for Security Company to obtain third party. So photo production can avoid
the risk at the lowest cost, and this is all reflected in the cost of the service.
Canadian Approach to Fundamental Breach Post Photo Production
Hunter Engineering Co. Inc v. Syncrude Canada Ltd. (SCC, 1989)
- Facts: Syncrude contracts for 14 conveyor systems, including gearboxes, and enters into contracts with
Hunter and Allis. The Allis contract provides a one year warranty and excludes all other warranties and
conditions. System failed after 15 months of startup. Value of contract was $4,000,000. The value of
the gears in issue was $460,000. The repairs cost $400,000. They argued that the gearboxes were
inherently defective, unsafe and unfit for their intended purpose and were not of merchantable quality.
- Trial: Breach did not go to root of contract (10% of value of contract).
- CA: Syncrude deprived of substantially the whole benefit of the contract (repair costs were 86% of the
value of the gears) they compared the value of the gears within the K
- SCC: All five members of the Court agreed that, if there is a doctrine, it is a rule of construction. Also
all five upheld the exclusion clause, but two competing sets of judgments.
-
-
-
-
Dickson (joined by LaForest): While Canadian courts say rule of construction, in reality is a rule of law.
Problems:
o Uncertainty—a game of categorization as illustrated by lower court decisions.
o In many cases, exclusion clauses fair and reasonable.
o Unfair surprise and unjust enrichment: in commercial contexts, exclusions are normally reflected
in price.
o Unevenness of doctrine: why restrict fundamental breach to exclusion clauses—other clauses
may be as harsh.
o The doctrine cloaks the real enquiry—unfairness.
Solution: Unconscionability, address fairness explicitly. The court should not disturb the bargain the
parties have struck and I am inclined to replace the doctrine of fundamental breach with a rule that holds
that parties to the terms of their agreement, provided that it’s not unconscionable.
Here upholds exclusion clause, clause clear and unambiguous and no evidence of unconscionability.
Wilson (L'Heureux-Dubé): Agrees with Dickson regarding the problem but thinks that the doctrine
should be retained as a rule of construction. Exclusion clauses need not be fair and reasonable at the
time the contract is made to be enforceable. The courts are not in a position to second-guess the parties
in making their contract.
Using unconscionability as the doctrine to control exclusion clause is problematic because
unconscionability is assessed at the time of contract formation. An exclusion clause may be fair at the
time of formation, but become unfair during the course of performance. This doctrine doesn’t look at
post formation actions so should retain it to address situations where the clause has become unfair after
the contract formation.
The End of the Road for Fundamental Breach
Tercon Contractors Ltd. v. British Columbia (SCC, 2010)
- Facts: BC issues RFP for highway contract. Province selects contractor that is technically illegible
under the RFP. BC breached Contract A, the tendering process. But there was an exclusion clause
- Issue: Did exclusion clause in RFP for highway construction exclude Province’s liability for breach?
- There is a split on the interpretation of the exclusion clause.
- Analytical approach (Binnie J.)
- 1. As a matter of interpretation, does the exclusion clause apply?
o “This will depend on the Court’s assessment of the intention of the parties as expressed in
the contract. If the exclusion clause does not apply, there is obviously no need to proceed
further with this analysis.”
- 2. If the exclusion clause applies, was the exclusion clause unconscionable at the time the
contract was made?
o The focus the time of the contract formation. Look at both the parties and bargain, is it
unfair. They have done away with fundamental breach, look at whether the exclusion
clauses which was made, in light of what the parties knew at the time.
- 3. “If the exclusion clause is held to be valid and applicable, the Court may undertake a third
enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion
clause because of the existence of an overriding public policy, proof of which lies on the party
seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the
enforcement of contracts.”
o Examples: criminality, fraud, abusive conduct. Plas-Tex v. Dow where the Court refused to
enforce an exclusion clause where the defendant knowingly supplied defective plastic resin to a
customer. Instead of disclosing its prior knowledge of the defect to the buyer, tried to protect
itself by relying upon limitation of liability clauses in its sales contracts. The public policy that
favours freedom of contract was outweighed by the public policy that seeks to curb its abuse.
- Application of Test: All the judges proceed on the basis that the Province breached Contract A.
- Majority:
- (1)Characterization of context: Province acted egregiously by ensuring that the true bidder was
-
-
-
-
-
not disclosed and that its breach attacked the underlying premise of the tendering process
(2) Special commercial context of tendering: public procurement, need for transparency and
integrity of the bidding process
(3) No other effective remedy
(4) Province could have drafted a clearer exclusion clause
(5) Interpretation: Tercon’s claim is not barred by the exclusion clause because the clause only
applies to claims arising as a result of participating in the RFP, not to claims resulting from the
participation of other, ineligible parties.
(6) Interpretation in the context of other provisions: Right to cancel RFP and have new RFP with
additional bidders is redundant if “the exclusion clause were broad enough to exclude
compensation for allowing ineligible bidders to participate”
(7) Contra proferentem: language is ambiguous and clause should be interpreted against Province
Minority: Binnie J.
(1) Exclusion clause was not ambiguous. The Province’s breach of the RFP process did not end
the RFP process. Tercon was still participating in the process
(2) Not unconscionable. No relevant imbalance in bargaining power. Tercon is a major
contractor and is well able to look after itself in a commercial context.
(3) Policy of the Transportation Act. Although the Act favours transparency and integrity in the
bidding process, the Act does not bar exclusion clauses.
(4) Not contrary to public policy: “I do not believe the Ministry’s performance can be
characterized as so aberrant as to forfeit the protection of the contractual exclusion clause on the
basis of some overriding public policy.”
(5) Floodgates argument If a claim succeeds here, it will succeed in other places
(6) De minimis argument: RFP contemplated changes in the team. The breach of the process was
not so egregious, could have brought the person in if they had followed a different process
(7) Leave it to the market: If they are not willing to agree to exclusion clauses of this type, the
construction industry can force the province to change forms, there is a balance of power in the
market place.
(8)Other relief available? Injunctive relief was a live possibility
Representations and Warranties
Classification/Categories
Remedy
None
Interest Protected
Caveat emptor
Innocent
Misrepresentation
Rescission
If contract performed or executed right to
rescind is limited (Ennis)
Restitution
(prevent unjust enrichment)
Negligent
Misrepresentation
Reliance damages
Reliance
Fraudulent
Misrepresentation
Rescission and reliance damages
Reliance
Warranty
Expectation damages
Reasonable expectation
Condition
Repudiation and expectation damages
Reasonable expectation
Innominate term
(Hong Kong Fir event)
Damages or repudiation depending on whether
the result of the breach goes to the root of the
contract
Reasonable expectation
Mere Puff
Analytical approaches
- Doctrinal: the legal tests
-
-
Policy approach: Focus on protecting reliance and reasonable expectations, while avoiding unfair
surprises
Economic approach: Who should bear the risk that the representation is wrong? Who could have
avoided the risk at least cost?
o The whole justification for freedom of K is that voluntary exchanges are self-maximizing, the
issue is often information asymmetries and information failures.
Remedial approach: Categorization is remedy driven. Justice is done between the parties by selecting the
appropriate remedy. Often the categorization is remedy driven, do justice between parties by providing
them a remedy. Measure justice by remedy
The categories
(1) Puff
- A legally meaningless statement of the sort often made by a seller to encourage someone to make a purchase.
For example: “This car is a real beauty.” No remedy available for a mere puff.
(2) Innocent misrepresentation
- Representation: A statement of fact that may give rise to liability if it turns out to be untrue, i.e. if it is a
misrepresentation. Misrepresentations can be classified as innocent, negligent or fraudulent with the
remedies varying accordingly.
Doctrine:
- (i) Representation of fact that turn out to be false
- (ii) Material – i.e. an important matter
- (iii) Induces the making of contract, relied upon (but will be presumed); and
- (iv) Maker did not know correct facts.
Policy concerns: caveat emptor v. unjust enrichment
- If it just induces you and was not made a specific term, then caveat emptor, you bought it so your fault.
- But then if someone misrepresents the object that they are selling, then they sell for more than it is worth
and so a concern about unjust enrichment.
Remedy:
- Rescission provided that (1) contract not executed; (2) restitutio in integrum (return to its original state)
is possible.
- Recession: equitable remedy, no damages here, return the parties to original position
Examples:
Redgrave v. Hurd (1881) – recession of K, no damages
- This was an innocent misrepresentation so rescission of contract to buy house and law practice. Deposit
returned but no damages for moving costs.
- Facts: D is selling the law practice and the house, they sign the K for the sale of the house, but it has not
occurred yet. No transfer of property, when he moves to the town to obtain possession of the house,
finds out that Hurd has misrepresented the law practice
Redican v. Nesbitt (1924) – K executed, no recession
- There was a contract for sale of cottage which had been executed. The purchaser had gotten the keys to
the house and given his cheques. Once got to the cottage, found that it was not as expected, no electricity
and the number of rooms was false.
- He stopped payment on the cheque but because the K had been executed, no recession
Ennis v. Klassen (1990, MAN. CA) – Reasonable period of inspection
- Sale of BMW and a misrepresentation made as to the model, discovered after 3 days. Court rescinds on
basis that although the contract was executed and delivery taken, acceptance had not yet taken place
before rescission was sought because inspection period not occurred yet.
- In sales of goods act there is a time for reasonable inspection of goods. After buying the goods, buyer
has a reasonable time to ensure that the goods comply with the K.
(3) Fraudulent/negligent misrepresentation
- Is a type of tort, important where there is concurrent liability. Many contractual statements can be seen
as warranties and negligent misrepresentations. Remedy for fraud is rescission and reliance damages.
-
Heilbut: can get damages when the statement is fraudulent or made recklessly not caring whether it is
true or not. More discussion below.
(4) Condition
- A term that goes to the root of the contract (fundamental importance), the breach of which gives rise to a
right to repudiate and expectation damages.
- You would not have entered the contract if it was not for that term. Quantity is sometimes considered a
condition, payment and delivery of goods are concurrent conditions. Sale by description also condition.
- In Sale of Goods, once the good has been accepted and after the period of reasonable inspection, a
condition may only be treated as a warranty:
o (4) If the buyer has accepted the goods or part of them, or if 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 the contract as repudiated, unless there is a term of the contract, express or
implied, to that effect.
(5) Innominate Term
- A term in a contract that is neither strictly a warranty or condition, but can give rise to a right to
repudiate depending on the seriousness of the breach of contract.
- Ex: The ship must be “seaworthy”, how do you classify this, as a condition or a warranty. In terms of
what can happen to a ship to not make it seaworthy, is so different. Like if a light bulb goes out, there
will be a breach because it has to be replaced as ship is not seaworthy. But not as serious as ship being
rusted and so can’t be sailed for two years.
- There is a whole range of deficiencies and if it turns out that the breach of K is substantial or
fundamental and goes to the root of the K, then you will be allowed to repudiate the K.
- So issue of little breach v big breach, if it is a small breach they will say it’s a breach of warranty and
can only sue for damages but if it is a big breach it will be a condition and so can repudiate.
- When courts rescind contracts, it is an equitable remedy, parties cannot do this, they can only terminate
contracts.
(6) Warranty
- A representation that is elevated to a term of the contract as parties intend it to be binding. If a warranty is
untrue it amounts to a breach of contract. Thus, the remedy is expectation damages.
- Collateral contract/warranty: Rather than one contract (sale of a racing horse), the courts sometimes
adopted a two contract approach.
o K1= contract for sale of horse, K2= if you enter K1, I promise it is a racing horse (warranty).
Unilateral contract, the performance of which is entering into K1.
Heilbut Symons v Buckleton (1913, HL) Test for warranty
- Facts: They company wanted to buy shares in a rubber company. They later found out that the company
had a large deficiency in rubber trees which brought the value of the shares down. So the purchaser
argued that there was a breach of K in that there was a fraudulent misrepresentation and breach of
warranty that the company was a rubber company whose main object was to produce rubber.
- Test for warranty: An affirmation at the time of the sale is a warranty provided it appears on the
evidence to be so intended (Medina, 1700).
o Did the parties intend that a specific term should be elevated to a contractual promise? Always
an objective determination based on what was said and what a reasonable person would
understand
- Decision: In this case no damages since innocent misrepresentation not giving rise to a warranty
- Policy Factors: Floodgates argument, every statement made in contract negotiations would then become
a promise. Was there an actual misrepresentation by the seller? They just said that they were selling
shares in a rubber company, no representation about the quality of the company. Reliance was more on
the reputation of the underwriters rather than representations made in the course of dealings.
Dick Bentley v Smith (Eng. CA, 1965) Warranty versus innocent misrepresentation
- Facts: He bought a car which D said only ran for 20,000 km on engine and gave a warranty of 12
months. The car kept breaking down.
-
-
-
Prima facie, warranty if:
o Representation made in the course of dealings for the purpose of inducing other party to act
(important issue)
o Induces entry into K and reliance is reasonable
Maker can rebut the inference if he can show that it really was an innocent misrepresentation, he not at
fault for making it and that it would not be reasonable in the circumstance for him to be bound by it.
Is it a Warranty or Innocent Misrepresentation: Factual determination based on the intent, etc. of the
parties. There is a number of factors:
o (1) Time of statement (2) How important was the statement (3) Was the speaker aware of the
importance of the statement (4) Relative knowledge and skills of the parties (5) Content of
statement: is it specific or vague, is it stated as an opinion or fact. (6) Context (7) Have the
parties taken the trouble to reduce the contract to writing. If you have a written contract, strong
presumption that it is the agreement between the parties.
 Courts have been reluctant to add oral terms to a written contract
 Also have the exclusion clause, need to draw the attention of the buyer to the exclusion
clause.
o (8) Disclaimers: did the speaker say or take responsibility in anyway.
o (9) Price/Consideration: price will be a signal
Policy: Does the court want to grant a remedy of damages? Will they say that an objective reasonable
person will say that it was a promise?
Leaf v. International Galleries (Eng. CA, 1950) After time passed condition becomes warranty
- Facts: There was a sale of “Constable” painting. Five years later, L tried to sell the painting and found
out it was not by Constable. L took it back to the seller and asked for his money back (rescission). The
claim went to the court on the claim of recession, damages were not asked for
- Decision: Too late—no rescission. Once the K is executed and the property is passed, and the implied
reasonable period of inspection has passed, no recession available. Should have claimed for damages.
o The term in the contract was a condition, not just a warranty because what the person was buying
was “Salisbury Cathedral by Constable”.
o But once you have accepted it and passed reasonable inspection time can only treat it as a
warranty and claim damages.
- Condition = repudiation, BUT if you buy it then it is treated as a warranty and all you can do is sue for
damages.
Murray v. Sperry Rand (1979, Ont. HC) – two contract approach for warranty
- Facts: he bought a machine for his farm after being told that it was ideal for circumstances that he
needed it for. But it fell short of his needs.
- He had no contact with Sperry Canada or US because he was dealing with Church, the dealer. But he
was given the brochure which contained all of the warranties, and these were made by Sperry.
- Decision: Applied two contract approach, if you buy a forest harvester from our dealers we promise that
the representations and warranties made in our brochures are true. So the courts construct the contract
using the unilateral contract approach to get at the manufacturer. But depends on you being able to show
representations and warranties by the manufacturer which you relied upon. Here manufacturer liable.
Concurrent Liability in Contract and Tort: Negligent Misrepresentation
Tort of negligent misrepresentation - Hedley Byrne, 1964
- Facts: The company relied on a report by the bank about a third parties financial situation. Credit was
advanced based on the report and the company lost a large sum of money when the third party failed to
meet contractual obligations.
- Decision: Recgonized the tort of negligent misrepresentation. The party has to have a special
relationship between the speaker and receiver. And there has to be reasonable reliance and damage.
- Here the bank was protected by the opening statement in the report that they were not liable.
-
Principle: If a man, who has or professes to have special knowledge or skill, makes a representation by
virtue thereof to another, be it advice, information or opinion, with the intention of inducing him to enter
a contract with him, he is under a duty to use reasonable care to see that the representation is correct and
the advice or information or opinion reliable.
Why a traditional reluctance to recognize tort of negligent misrepresentation?
- Harm caused by negligent misrepresentations often arises in a commercial context: e.g. lawyers,
accountants, banking, investing etc.:
o Commercial is the arena of contract—risks should be allocated by contract
o Floodgates concerns regarding economic loss
o Words are different from acts, exist forever so potential plaintiffs unlimited
o Economic not physical loss
o There was reluctance because of the context in which these arose. Statements made here are
normally in regards to negotiations so that leads to the issue of concurrency
Concurrency
- (a) Plaintiff can claim in both tort and contract (BG Checo)
- (b) Effect of a contractual clause on tort liability
o Contract may stipulates a less onerous clause then a tort will impose.
o Contract may stipulate for a more stringent standard then tort, like have a higher standard than
the tort of negligently manufacturing.
o Contact and tort duty are the same, an example is lawyers, court implies terms that you will act
as a reasonably competent lawyer which becomes a warranty for which you can be sued.
- (c) Damages: Rule against double recovery. If there is a negligent misrepresentation, the difference in
damages will not be big. You don’t get lost profits in torts, but you can get lost opportunity as a reliance
measure. There is a functional equivalent between lost profits and lost opportunity
Esso v. Mardon (Eng CA, 1976)
- Facts: Esso plans gas station and estimates annual consumption at 200,000 gallons by Year 3. Planning
authority requires Esso to move pumps to rear of station with no main street access. No revision of
throughput and tenant took lease relying on this report. Claim was both a collateral warranty and a
negligent misrepresentation. Would get lost opportunity which is functionally equivalent to lost profits.
- Contractual Claim: Collateral Warranty
o Forecast made by a person with special knowledge and skill. Clearly intended to be relied upon
(Dick Bentley). Warranty = that forecast was sound - made with reasonable care + skill.
- Negligent Misrepresentation
o Hedley Byrne: Owed a duty of care. Special knowledge/skill (knew facts, town, experienced).
Reasonable Reliance (intention of inducing entry into K).
Fairness in Contract – The Courts Residual Power in Contract Enforcement
- Express concern with fairness of bargain reflected in three contractual doctrines. There is a substantial
degree of overlap and the difference lies in the focus of the analysis
- An improvident or unfair transaction that results from a relationship of inequality and trust could meet
the doctrinal requirements all there
- Undue influence: The focus is on the improper exercise of influence by someone in a special
relationship of trust and confidence. Focus = relationship
- Unconscionability: The focus is the overall commercial morality of the bargain in light of the inequality
of both bargaining power and the resulting bargain. Focus = bargaining power and inequality of bargain
o For these two due to lack of the fairness, court can grant recession at the request of the victim
- Duress: is a coercion of will that vitiates consent, the focus is the pressure exerted by one party on
another, the proverbial “gun to the head”. Related to the consent obtained under coercion
o Since there is no consent, there was no K, since you never agreed.
o Choices are always made under constraints, when do these becomes so bad to make the K voidable
o The courts may allow K to stand but it would be voidable at the request of the person under duress
o Policy: a person may want to still proceed with the contract. So they will not allow the coercer to get
rid of the K because it may no longer be beneficial for them
Undue Influence
- Undue influence: The unconscientious use of power possessed by one person over another in order to
induce them to enter a transaction (Earl of Aylesford v. Morris)
o A relationship between two parties, often of trust and confidence and one party uses power to
obtain an advantage over the other. It is equities version common law duress.
- Example: Caregiver on whom an elderly person has become dependent threatens to abandon them.
Elderly person provides gift or enters into a transaction. Never directly ask for something, but exercise
their influence to get the person to transfer over assets in a non-commercial way (Re Craig [1971]).
- Effect: Transaction is voidable and Court can rescind transaction.
Categories of undue influence
(1) Actual undue influence
- Claimant must prove the wrongdoer exerted undue influence. (Class 1)
o Need to prove that the transaction was not one where the person used their own free mind.
(2) Presumed undue influence
- A relationship of trust and confidence exists. (Class 2)
- 2(a): De jure: presumption in law that in these types of relationships there is undue influence
o Fiduciary relationships, Trustee/beneficiary, Solicitor/client, Doctor/patient, Priest/worshipper,
Parent/child
o If in one of these relations and don’t get fair market value, a presumption that the benefit
obtained illegitimately.
o The burden shifts onto the person to show that notwithstanding the influence, this transaction
was entered freely and independently. So easier for P in this case
o The remedy is that the transaction was voidable, it is not void form the beginning but because it
was entered due to undue influence, the court can rescind it.
- 2(b): De facto: A relationship of trust and confidence.
o Spousal relationships: Courts have held that the relationships of married persons and cohabitants does not, by virtue of the relationship, fall within 2(a). They may fall within 2(b) if:
 (i) Trust and confidence was placed in partner in relation to financial affairs; or
 (ii) Sexual and emotional ties between parties provide a “ready weapon” for undue
influence – interests are overborne by fears of damaging the relationship.
o The question is always whether you fall within the 2(b) category or not
o Test established in Bank of Montreal v. Duguid (2000): The couple already had a troubled
relationship and she didn’t want this to further cause problems, so she just signed the paper.
Constructive Notice of Undue Influence
- In general, the transaction (a guarantee/mortgage) may be set aside where:
o (i) The spouse is the agent of the bank (rare); or
o (ii) The bank has actual or constructive notice of the risk of undue influence.
- There is constructive notice of the risk of undue influence where spouse/co-habitant co-signs for
another’s debts and (Royal Bank)
o (i) the transaction on its face is not to the financial benefit of the spouse/co-habitant; and
o (ii) the parties are in relationship that raises the suspicion of undue influence, such as spouses or
other co-habitants
- Banks should (Royal Bank):
- (i) Meet with spouse privately;
- (ii) Explain extent of liability;
- (iii) Warn of the risk; and
- (iv) Urge the person to obtain independent legal advice
- The failure of the bank to do these things, does not make the guarantee invalid, it simply means that in a
potential action by the P2, they will not have a defence that they took the necessary steps to ensure that
the person was not one of a free independent mind.
Royal Bank of Scotland v Etridge and other appeals
Bank (K Debt) Debtor (P1) - relationship of trust and confidence/vulnerability, married/
Cohabitants
Guarantee
P2
- Facts: Appeals in eight cases, each case arises out of a transaction in which a wife charged her interest in
her home in favor of a bank as security for her husband’s indeptness or for a company which he carried
on business. The wife later asserts that she signed the K under undue influence of her husband
- Issue: Does bank have constructive notice of undue influence?
o Question is that was there undue influence to obtain an advantage, and if so to what extent is the
bank impacted by that. Especially when they have constructive notice that something is amiss.
- Burden of Proof: He who asserts a wrong is committed, must prove it. Proof that the P placed trust and
confidence in the other party in relation to the management, etc. is enough for the burden to shift
- Manifest Disadvantage
o Two prerequisites of the evidential shift in the burden to the other party
o (1) The complainant reposed trust and confidence in the other party.
o (2) The transaction is not readily explicable. Need to look at the size of the gift, whatever the
legal character of the transaction is, it must constitute a disadvantage sufficiently serious to
require evidence to rebut the presumption that in the circumstances of the parties relationships, it
was procured by the exercise of undue influence.
- Constructive notice and banks duties above.
- Notes
- BC Law Institute: Current tests are now in flux. They have a paper on unfair contract act and propose
certain changes. Get rid of the categories because they don’t make sense
- In this case, Court moved away from the 2a and 2b categories. The issues is not really one of trust and
confidence, for these relationship what the complaint has to show is that (1) holds trust or confidence or
there is a vulnerability (2) the transaction is not readily explicitly, idea of it being disadvantageous
o In practical reality, there has to be something suspicious about the activity, one person is
giving up something (UK).
- In Canada there is a lot of uncertainty in the law, whether the transaction has to be disadvantageous. But
most likely will be part of it.
- If it is a family business, and income is shared, the threshold test, or burden is complicated. You have to
show no advantage to prove undue influence and if the wife can prove this, then the guarantee can be set
aside, so the bank takes a risk
- Advice: Proof of outside advice is important. With respect to the content of the advice, need to explain
the nature of document and the nature of the risks and so the bank should involve the spouse early and
send full information. Also ask the spouse about the lawyer they wish to use and obtain confirmation
from the spouse
- At the end of the day the decision about whether to proceed that of the respondent and not the solicitor.
If he believes it is not in her best interest, then tell her and advise them not to proceed. But if they say
that they understand and they want to proceed, done your duty. Issue is do you persist to help them if
you don’t agree?
Critiques
- Radical feminist view: Sexually transmitted debt, issues of family relations are viewed as a private
matter dealt with in the family and not in the market place. If someone does something in the home it
was not viewed as good consideration because it was not a commercial transaction. But this flips in
spousal guarantees because the reason the person enters is because of the relationship.
o Also the issues of if a person is of full capacity, they should be allowed to make their own
decisions.
- Law and economics approach is cost-benefit analysis: What can the law do so that people take proper
precautions to protect themselves. If we don’t enforce spousal guarantees, then families will not be able
to leverage their most important asset which is the family home in cost enhancing activities. If we don’t
accept these guarantees, it increases the cost of borrowing.
-
o Echo of this in Royal Bank when Lord says that all of these obligations have a very low cost and
help to ensure a liberal balance. The law allows them to make the choice
Marxists critique: Contract law rules around the enforcement of guarantees are ridged in favor of the
financial institutions and coercion is in every transaction. As a result of this case, the bank has to jump
through a few more hopes and the bank gets the guarantee and the spouse ends up poor and homeless.
Unconscionability
- Control of contractual power in cases where there is (a) inequality in bargaining power; and (b)
substantial unfairness in the resulting contract.
- (a) Inequality of bargaining power
o Contextual factors: Economic resources, knowledge, need, disability that falls short of legal
incapacity, etc.
o Common categories: There are no express categories of relationship but the cases involve
relationships where there is potential for an inequality of bargaining power employment, family.
- (b) Substantial unfairness
o Mere inequality of bargaining power is not sufficient, the claimant must also prove that the
bargain was substantially unfair.
o Morrison v. Coast Finance (BCCA, 1965)
 Facts: old lady gives up property
 A plea of undue influence attacks the sufficiency of consent and invokes relief against an
unfair advantage gained by an unfair use of power by a stronger party against a weaker.
 Material ingredients are proof of inequality in the position of the parties arising out of
the ignorance, need or distress of the weaker, which left him in the power of the
stronger, and proof of substantial unfairness in the bargain obtained by the stronger.
 On proof of these circumstances, it creates a presumption of fraud which the stronger
must repel by proving that the bargain was fair, just and reasonable or perhaps by
showing that no advantage was taken.
- (c) The synthesis – community standards of commercial morality
o Lambert J.A. in Harry v. Kreutziger (1978, BCCA): All considerations looked at in this area
really come down to a single question: Is the transaction, seen as a whole, sufficiently divergent
from community standards of commercial morality such that it should be rescinded?
o This decision is too broad, what are community standards of commercial morality? The
preferable authority is Morrison which has the two part examination and not just some sort of
community standards test where the judge gets to decide
Trebilcock article
- Pareto efficiency: Will the transaction make somebody better off while making no one worse off? The
economic assumption is that if two parties enter into a voluntary private exchange, they must be better
off (the transaction is welfare enhancing) otherwise they would not have transacted.
- If the welfare of both parties stays the same or is approved then it is a welfare maximizing transaction,
otherwise they would not have transacted
- Subject to market failures – monopoly, externalities, information failure and, of course, voluntariness.
- Procedural unconscionability: “transactional incapacity” / “naughtiness in bargaining”
o Focus is on the process of bargaining, the transactional nature. Something unfair in the
bargaining process so goes to the parties consent in the transaction.
o The focus is that one party took an advantage of a relationship of trust.
- Substantive unconscionability: fairness of bargain (is there a “just price”)
o The focus is on the resulting contract and whether the bargain was fair.
o He argues against the idea of contracts being rescinded due to unconscionability. Focus should
be on the just price and fairness of the bargain
o No such thing as just prices because markets determine what prices are, and so this process is
misguided and the focus should be on procedural unconscionability. If it was caused by their
own folly, the law is not there to protect them
o There are some jurisdictions where this is the test. In Louisiana there is a provision which says
that if you sell something below a certain market value (1/2), they can have the contract
rescinded. This is against the idea of autonomy of individual, also people may use situations after
the fact to try to rescind the contract
- Standard form contracts concerns:
-
(i) Monopoly: Prevalence is explained by desire to reduce transaction costs; further markets are
competitive
o It will dictate the terms, but standard form contracts are everywhere and they reduce costs.
(ii) Imperfect information on the part of some parties: Although meaningful consent (knowledge and
agreement of terms) is absent, “there is a margin of informed, sophisticated and aggressive consumers”
who discipline the market
Lloyds Bank v. Bundy (Eng. C.A., 1975)
- Facts: Bundy owns farm worth £10,000. He signs a series of bank guarantees for debt of son’s company
all secured by farm. T1 = Son’s company has an overdraft of £L1500. T2 = Son and banker (Bennett) go
to Bundy’s house. Papers left with Bundy. Bundy sees solicitor, who says the maximum additional
amount is £5000. Increased by £6000. Total of £7,500 secured against house. T3 = New bank manager
(Head) and son go to Bundy. Bank looking for guarantee of additional £3500. All paperwork done (no
opportunity to seek legal advice). Final guarantee for £11,000 charged against Bundy's house - only
asset and worth £10,000.
- Issue: Notwithstanding valid consent, is contract nonetheless unenforceable?
- Denning:
- Reviews exceptions to the general rule that contract is binding:
- (i) Duress of goods: typical case is when a man is in a strong bargaining position by being in possession
of the goods of another by virtue of a legal right such as by way of pawn or pledge or distress.
- (ii) Unconscionable transactions: a man is so placed as to be in need of special care and protection and
yes his weakness is exploited by another far stronger then himself so as to get his property at a gross
undervalue
- (iii) Undue influence: (1) The stronger has been guilty of some fraud or wrongful act as to gain some
gift or advantage over weaker (2) Where the stronger has been guilty of any wrongful act but has
through the relationship with the weaker gained some gift or advantage for himself.
- (iv) Undue pressure (duress): Stipulates unfair advantage to which the other has no option but to submit
- (v) Distress and salvage agreements: One party is in danger and seeks help, rescuer in strong bargaining
position.
- Common denominator is inequality of bargaining power. Therefore the transaction was
unconscionable. He tries to develop a unified doctrine but in England his idea has not been picked up.
- Principles/factors: Relief where:
o (i) Unfair terms or inadequate consideration
o (ii) Impaired bargaining power
o (iii) Influence or pressure brought to bear (conscious or unconscious).
- In vast majority of cases a customer who signs a bank charge cannot get out of it, but are exceptions
where the courts will set aside a K when the parties have not met on equal terms, one is in a strong
bargaining power and other is weak.
- This approach has not been adopted in Canadian courts.
- Decision: Found against the bank for undue influence. Bundy had trust and confidence with the bank
and due to long standing relation, it was one of trust and confidence, and so there was undue influence.
Lidder v. Munro (BCSC, 2004)
- Facts: P signs ICBC release of claims arising from motor vehicle accident in return for $. P was a
Punjabi immigrant, works as a laborer, has less than high school education and limited knowledge of
English. He signs the release, his injuries worsen and he tries to get out of release.
- Issue: Should the release that the P signed in return for a check be upheld?
- Decision:
- (a) Lack of intention to contract and non est factum. No, he knew it was a legal document
- (b) Undue influence: His will was not overborn by the exercise power of power of the adjuster.
- (c) Unconscionability:
o Weakness in bargaining position, Unfair advantage, ICBC has a public monopoly and so the
public holds ICBC to a very high standard.
- (e) Misrepresentation of legal advice
o False representation: not all lawyers charge the 30% fee
o Material fact: it dissuaded him from getting legal advice
o Induced Lidder to enter contract to disadvantage
o It entitled him to a recession of the release
Plas-Tex Canada Ltd. v. Dow Chemical of Canada Limited (2004 ABCA)
- Example of unconscionability in a commercial context.
- Facts: Dow supplied resin for use in natural gas pipeline. They realized that there was a defect in the
resin. Rather than disclosing this knowledge to the other companies that were using the pipe made from
the resin, Dow chose to protect itself from liability by inserting liability limiting clauses in its contract
- ABCA: Dow’s conduct was unconscionable so exclusion clause not enforced. Refers to authorities:
- If a defendant (a) knew of a possible risk associated with its product, (b) failed to disclose important
assumptions within its knowledge thereby preventing the other party from properly measuring the
consequences and risks they were undertaking (c) deliberately withheld information and induced the
claimant to enter the agreement on the basis that the other party had “scientifically done their
homework”, this would prohibit the defendant from relying on the limited liability clauses in the
contract.
Duress
- Classic formulation focuses on voluntariness of consent - the ‘overborne will’ approach
- Pao On (1980): A coercion of will so as to vitiate consent in a contractual situation of commercial
pressure is not enough. The compulsion has to deprive the party of the “freedom of exercising his will”.
- Effect: Modern approach is to find that the contract voidable at the option of the party who was the
object of the duress. Older authorities held contract void as it vitiated consent.
Categories of duress
- (a) Duress to person: Threats to person or family (spousal violence). Gun to head type cases, K voidable
- (b) Duress to goods or property: Threat to damage or take the other’s property; extortionate payment
required to release a good (pawnbroker cases). Won’t give it back unless you pay a large amount
- (c) Economic duress: Now an accepted subcategory of duress.
o Economic pressure is not enough. Indeed commercial transactions often occur in circumstances
of unequal bargaining power where one party feels pressured into the deal.
o Coercion of will test is difficult to apply as it involves an inquiry into the psychological state of
the party. Further, just because one party forces a hard bargain, should the choice to accept the
hard bargain (even when there is no alternative choice) result in the contract being set aside?
Port Caledonia (1903)
- Contract for rescue assistance from Tug to prevent collision. Tug signaled “£1000, or no rope.” Court
set aside agreement as “inequitable, extortionate, and unreasonable”. Awards £200.
D & C Builders (1966)
- Settlement case. Overdue bill of £480. Plaintiffs facing bankruptcy and accept £300 in satisfaction.
Denning: no valid consent—creditor held to ransom.
Stott v. Merit Investment (1988)
- Stott agreed to pay client debt on margin account. Although finding economic duress, court concluded
that Stott subsequently affirmed the agreement through his conduct.
Modern Test
- The focus of the analysis is on the question of whether there were any alternative courses of conduct.
- Universe Tankships Inc. of Monrovia v. International Transport Workers Federation and Others
- (1) Pressure amounting to compulsion of the will of the victim.
o Note: Lord Scarman observes that although previous cases refer to the test as coercion or
vitiation of consent, the real issue is not lack of will to submit “but the victim’s intentional
submission arising from the realization that there is no other practical choice open to him.”
o Relevant factors include:
o Whether the coerced party protested;
o The availability of alternative courses of action;
o The existence of independent legal advice; and
o Whether the coerced party took steps to avoid the contract
- (2) The illegitimacy of the pressure exerted in light of the nature of the pressure (was there a threat of
unlawful action?) and the nature of the demand (what was being demanded).
o The test that is proposed is the illegitimacy of pressure, Courts have not been able to draw a line
between what is legitimate pressure and illegitimate. At what point does tough bargaining
become too hard.
-
o If the pressure being exerted is unlawful, like defamation or bribery that will be illegitimate.
What is exactly being demanded, what are the circumstances of the demand?
(3) If a court finds that the victim expressly or implicitly approved the contract after the pressure ceased
to exist, the victim will be denied relief.
Notes
- Fairness of bargain is doctrinally irrelevant. The issue is one of consent. However, almost all cases of
duress involve bargains that the coerced party claims are unfair.
- Subsequent cases have emphasized (i) whether there is a lack of practical alternatives and (ii) the
illegitimacy of the pressure exerted.
- Threat would almost always be viewed as illegitimate where it involves tort or breach of statutory duty.
- Difficult cases arise where the pressure is lawful: is it akin to blackmail or economic pressure to enforce
a bona fide claim?
o i.e. threats to fire an employee; threats to breach a contract and contract modifications;
- Criterion of illegitimate pressure has been criticized as incoherent and unruly. Further, it is difficult to
apply in context of contractual modifications (NAV Canada Inc.).
o Need some sort of bad faith on the part of one of the parties.
o Under US law, a threat is thought of as hard bargaining, but cannot have “improper threat”, this
includes committing a crime or tort but also acting in bad faith. No clear dividing line and the
current consultation paper by law reform in BC it is too mucky and unclear and they propose
codifying the test as illegitimate pressure and leaving it to the courts to decide what this is on a
case by case basis.
Gordon v. Roebuck (OCA, 1992)
- Facts: Parties acting as trustees for different parties in a real estate transaction that had to close by 31
December due to tax rules. In late December, Roebuck refused to execute certain documents unless
Gordon agreed to pay $160,000, which Roebuck argued was required for repayment of monies lent to
the venture. Gordon agreed to repayment but later refuses to honour the agreement and claims
agreement should be set aside on the basis of economic duress.
- Decision: Courts find coercion. Gordon protested but there was no practical alternative course open to
him. He was advised that he had no alternative and he took steps to avoid the contract. Nevertheless,
Gordon had not proven that the pressure exerted was illegitimate—there was an open issue (a bona fide
claim) as to whether Roebuck was entitled to the money.
Gotaverken Energy Systems (1993, BCSC/Affirmed BCCA).
- Facts: A pulp company agreed to modify a construction contract from a “fixed price contract” to a “time
and materials contract” 2/3 through the project. The pulp company could not operate during the 24 hour
per day construction period.
- Decision: The court agreed that given the circumstances, the pulp company had no effective remedy or
option but to agree. The pulp company executives agreed to the contract under protest, had not obtained
legal advice on the issue of duress and took steps to avoid the contract once the work was completed.
Consumer Protection
- For exam will not be examined on all these different types of contracts. Need to be able to apply the
provisions that are given about deceptive practice and unconscionability within a consumer transaction
Policy
- Consumer protection policies address certain forms of market failure and disparities between
manufacturers/sellers and consumers in knowledge, bargaining power and resources.
- Economic rationales for government intervention in consumer marketplaces:
- (i) Monopoly: Competition laws aim to ensure a competitive market place and maximize consumer
welfare.
- (ii) Externalities: Regulation of product safety hazards and pollution.
- (iii) Information failures: In the consumer/retailer/manufacturer relationship there are usually
asymmetries in information. Consumer protection policy addresses information failure by:
o Prohibiting fraud and deceptive practice: Competition Act, Food and Drug Act
o Mandatory disclosure requirements: Textile Labelling Act, Consumer Packaging and Labelling
Act, Hazardous Products Act, Weight and Measures Act
o Government provision of information: funding to consumer groups, consumer education
o Assumption is providing more information will lead to fairness. But this is contestable
- (iv) Transaction Costs: pursuing complaints costs money and time—what are the best types of redress
mechanisms: cooling off periods, cancellation rights, small claims courts, arbitration etc.?
- (iv) Public goods: public goods, in particular, consumer education will be “under produced” by the
market—government needs to supply consumer education.
o Have ministries that are focused on providing information to consumers
- In addition to the economic rationales for government intervention, non-economic rationales include:
- (i) Paternalistic concerns: Even if consumers have choice and there is full information, the transaction in
question may not be in consumer’s long-term interest: capacity issues; unconscionability; protection of
the gullible and vulnerable by “predatory” sellers.
- (ii) Redistributive concerns: Interest rate regulation, rent controls, statutory warranties, pricing of goods
etc. may reflect distributive concerns.
Sale of Goods Act
- Provides implied conditions with respect to description (s. 17), quality and fitness (s. 18), and samples
(if provided with sample, should be same quality as the actual product (s. 19).
- S. 20: Does not include a sale for business or corporation, suppliers cannot contract out of implied
conditions under section 17, 18 or 19 of new sale of goods. If it is used, then caveat emptor.
- Every consumer has these warranties and they cannot be contracted out of.
o
No waiver of warranties or conditions: 20 (1) For the purpose of this section, retail sale or lease includes every contract of
sale or lease made by a seller or lessor in the ordinary course of the seller's or lessor's business but does not include a sale or lease
of goods… (b) to a purchaser or lessee who intends to use the goods primarily for business purposes, (c) to a corporation or an
industrial or commercial enterprise, or (2) … in the case of a retail sale or lease of goods, other than goods that on reasonable
inspection appear to be used goods or goods that are described or represented by the seller or lessor to be used, any term of a
contract of sale or lease, or any collateral or contemporaneous contract or agreement, that purports to negative or in any way
diminish the conditions or warranties under sections 17, 18 and 19 of this Act, is, (a) if a term, severable from the contract and
void, or (b) if a collateral or contemporaneous contract or agreement, void.
Business Practices and Consumer Protection Act (BPCPA)
(a) Note wide definitions
- “Consumer transaction”: primarily personal, family or household. Cannot be business purpose.
- “Supply” includes, in respect of the supply of goods or services or real property to a consumer, a sale,
lease, assignment, award by chance or other disposition;
(b) Scope
- (i) Deceptive acts and practices
o Prohibition and burden of proof: 5(1) A supplier must not commit or engage in a deceptive act or
practice in respect of a consumer transaction. (2) If it is alleged that a supplier committed or
engaged in a deceptive act or practice, the burden of proof that the deceptive act or practice was
not committed or engaged in is on the supplier.
 In light of remedial approach, the burden of proof is on the supplier, must prove they
were not deceptive and the court in Rushak said any statement that is misleading is
deceptive
- (ii) Unconscionable transactions
o Prohibition and burden of proof: 9(1) A supplier must not commit or engage in an
unconscionable act or practice in respect of a consumer transaction. (2) If it is alleged that a
supplier committed or engaged in an unconscionable act or practice, the burden of proof that the
unconscionable act or practice was not committed or engaged in is on the supplier.
o Remedy for an unconscionable act or practice: 10(1) Subject to subsection (2), if an
unconscionable act or practice occurred in respect of a consumer transaction, that consumer
transaction is not binding on the consumer or guarantor.
 This can be before, during or after the consumer transaction (Section 8, other notes). The
factors that the court is supposed to address are similar from the cases: undue pressure,
took advantage of inability or incapacity, etc., someone overpaying
o What is unclear under the act, is that if the total price exceeded the price of objects and no
reasonable chance of payment and no inequality of bargaining power, is this unconscionable.
- (iii) Other important matters address in the BPCPA
o A strange list of areas in which there have been perceived abuses in the past.
o (1) Direct sales contracts (door to door sales) (2) Funeral services contracts (3) Future
performance contracts (4) Distance sale contracts (internet sales) (5) Unsolicited goods: you
don’t have to pay for it, didn’t buy it (6) Time share contracts: you have a ten day cancellation
right. (7) Prepaid purchase cards: don’t have an expiry date but there are some exceptions (8)
Consumer credit and debt collection (9) Also the pre-payment cannot be over 10% or $100 (10)
Continuing service contracts: these are the gym contracts, if you sign up for them, you have your
ten day cancellation right, also can’t K for over two years, provision allows you to get out of the
K if you move. You have a special, arbitrary list of contracts that contain certain services
- (iv) No waiver or release
o Section 3: Any waiver or release by a person of the person's rights, benefits or
protections under this Act is void except to the extent that the waiver or release is
expressly permitted by this Act.
- (v) Reversal of burden of proof
o Supplier has burden of proof to show that it did not commit or engage in a deceptive or
unconscionable act or practice. (Sections 5(2) and 9(2)).
- (vi) Remedies
o Damages recoverable: 171(1) Subject to subsection (2), if a person, other than a person referred
to in paragraphs (a) to (e), has suffered damage or loss due to a contravention of this Act or the
regulations, the person who suffered damage or loss may bring an action against a (a) supplier
who engaged in or acquiesced in the contravention that caused the damage or loss.
- Court actions respecting consumer transactions: 172(1) The director or a person other than a
supplier, whether or not the person bringing the action has a special interest or any interest under this
Act or is affected by a consumer transaction that gives rise to the action, may bring an action in Supreme
Court for one or both of the following:
o (a) A declaration that an act or practice engaged in or about to be engaged in by a supplier in
respect of a consumer transaction contravenes this Act or the regulations;
o (b) An interim or permanent injunction restraining a supplier from contravening this Act or the
regulations.
Rushak v. Henneken (1991, BCCA)
- Facts: In 1982 Rushak, with the advice of her friend, Hall, purchased a 14-year old Mercedes. The
vendor, Mr. Henneken, a car dealer, told Rushak that a car as old as this one was bound to have rust and
that cars developed rust within two months out of the factory. The salesperson, Mr. McAllister, pointed
out several spots of rust visible under the fenders and recommended she take the car to a Mercedes Benz
dealer for proper rust inspection. Mr. Henneken added that the car was “a good vehicle”, “one of the
best of its kind in Vancouver”, and “a very nice car”.
o Rushak purchased the vehicle but found that she could not drive it because she could not get
used to standard transmission. Put it in storage, and when took it out a year later sell, she found it
was in a sad mechanical state, and rusted so badly that it would cost upwards of $10,000 to repair
- Decision: Breach of Trade Practices Act.
- Mr. Henneken’s use of laudatory language to describe the car in circumstances where he knew there
might be extensive rust under the undercoating was conduct having the capability, tendency, or effect of
misleading a person within the meaning of s. 3(1)(b), Trade Practice Act.
- Puffery: Cannot excuse the giving of an unqualified opinion as to quality when the supplier has factual
knowledge indicating that the opinion may in an important respect very well be wrong.
o No duty of disclosure, but if the vendor does not disclose of all the material facts that might led
someone astray in making a judgment, they will potentially be liable for a statement.
- Section requires that suppliers involved in the defined transactions refrain from any sort of potentially
misleading statement, and that this must include an honestly-held opinion given in circumstances in
-
which the supplier knows that giving the opinion without appropriate qualification may mislead.
o Was not open to the defendant to describe the car as “a good vehicle”, “one of the best of its
kind” and “very nice”, without appropriate qualification, when he had reason to suspect that
there might be extensive rust, and that the rust had been coated over with brushed-on
undercoating so as to render it incapable of discovery by ordinary inspection.”
A statement is misleading if it leads the potential purchaser “astray into making an error of judgment”.
Remedies
- If there is a breach of the act and you suffer damage, then you can recover damages.
- With respect to unconsionabile actions, the transaction is not binding, there is recession available and
you can get damages
Who can bring action?
- The director or a person other than the supplier
- It allows members of the public to go out and be a defender of the public interest and bring an action
even if you have no special interest
Penalties and forfeitures
- Issue: Control of contractual terms that impose increased liability for damages for breach of contract or
that provide for forfeiture of payments/deposits for breach.
- Penalty clause: Upon breach, party must pay damages of certain amount: $100 payable on 31 March, if
not paid on 31 March must pay $200 on 1 April.
- Courts distinguish between penalties and liquidated damages clauses:
- Penalty: Sum stipulated is extravagant/unconscionable in comparison to the loss
- Liquidated Damages: Fair/genuine pre-estimate of damages. In the event of breach, you will have to pay
a certain amount of damages.
o Parties make a genuine estimate of their damages, instead of leaving determination to the court.
- House being built. Liquidated damages clause for delay:
o $250 per day = a pre-estimate of the cost of a hotel and storage of furniture etc.?
o $2500 per day = penalty?
o If the amount is very large and extortionate will not be enforced because a penalty clause
- Forfeiture: Deposit of $200 on a $300 purchase. It is forfeit if purchase not completed by 31 March.
This determination is normally made in relation to the time the contract was made and not when it was
breached. Like the car example, there is no way that the dealer would suffer $10,000 in damages, so it
doesn’t really matter what the reason for the breach was, this is doctrinally.
- Law and Equity Act (BC): Relief against penalties and forfeitures, (S. 24) The court may relieve against
all penalties and forfeitures, and in granting the relief may impose any terms as to costs, expenses,
damages, compensations and all other matters that the court thinks fit.
H.F. Clarke Ltd. v. Thermidaire Corp. Ltd. (1974, SCC)
- Facts: Clarke agreed not to sell competing products and if he did, he would pay Thermidaire an amount
equal to the gross trading profit realized through the sale of such competitive products.
- Decision: Provision requiring payment of gross trading profit for breach of covenant not to sell
competing goods is “grossly excessive and punitive”.
Stockloser v. Johnson (1954, Eng. C.A.)
- Facts: Default on payment for purchase of machinery. Vendor claims to be able to retake possession of
machinery and retain all installment payments.
- Where no forfeiture clause: Buyer cannot recover money as long as k not terminated. If seller terminates
(by recovering the goods), buyer entitled to recover money subject to cross-claim for damages.
- Where forfeiture clause or money paid as a deposit: Buyer cannot recover money at common law, but
equity can relieve the buyer from the forfeiture of money.
- Forfeiture where: (i) effect is penal in the sense that the sum forfeited is out of all proportion to the
damage; and (ii) unconscionable for the seller to retain the money.
Illegality and Public Policy
- Issue: When will the court decline to enforce a transaction or not give it effect because it is in some
sense “illegal”? When does public policy trump private ordering?
- Categories
- (a) Contrary to public policy: as developed by the CL (b) Common law illegality (c) Statutory illegality
Contrary to public policy
Holman v. Johnson (1775, Eng.) - Court will not aid a man who found his cause upon an immoral or illegal act.
- Facts: P sells the tea to a buyer in France. Knows that the tea will be imported illegally into England. P
had no interest in the smuggling scheme and sold the tea as they would have to any other person
- Decision: this K was made in France, shipped to France, he had not committed an illegal act in England.
The mere fact that something is illegal in our laws doesn’t mean that the court will not enforce the
contract if it happened legally in another country.
- Courts have just asserted this inherent power, where there is a gap within the law
- Concern that it is a broad judicial power that will be used to undermine the legitimacy of contract.
Denning says not to worry, it can be controlled.
Categories of contract contrary to public policy:
- (i) Contracts injurious to the state: K with enemies, bribery or corruption with public officials, voidable
- (ii) Contracts injurious to the administration of justice: Arbitration agreements were void at one point, K
not to disclose information in criminal proceedings, K not to testify in criminal proceedings.
- (iii) Contracts involving immorality: Any type of K with prostitutes, insurance policies on brothels.
- (iv) Contracts affecting marriage: Restraint of marriage, I will pay you money if you don’t marry a
person of a certain ethnicity
- (v) Contracts in restraint of trade: Shafron v. KRG
o To promote freedom of K, they want to ensure that people are not restricting themselves.
Restrictive covenants have to be reasonable geographic scope, type of activity and time.
o Facts: He worked as an insurance broker and had a non-competition clause in his K, cannot work
in the same type of business for three years within “Metropolitan City of Vancouver”. He started
to work in Richmond for another company.
o Decision: The RC’s geographic scope was ambiguous. No such legal entity as the “Metropolitan
city of Vancouver”, the person who drafted it was from Toronto and didn’t realize that was not a
legal term. Since it’s ambiguous, it’s unreasonable and therefore not enforceable.
o Restraints on trade are contrary to public policy because they interfere with individual liberty of
action and because the exercise of trade should be encouraged and be free. But exceptions if the
restraint is reasonable.
- (vi) Contracts to benefit from a crime: Arson cases where you burn house and try to get insurance
proceeds, or where one spouse kills the other spouse and collect on insurance proceeds.
- Surrogacy contracts: Some courts have found surrogacy contracts as contrary to public policy (Baby M)
o Facts: A couple paid a woman to be a surrogate. But then she refused to give up the baby. They
sued for specific performance of the K. The TJ found that the K was enforceable and in the best
interest of the baby for the Ps to keep it
o Decision: The surrogacy contract was void both because it is contrary to the laws of the state
prohibiting money being used in adoptions and public policy of the state. But the court awarded
custody because it was in the best interest of the child.
o Assisted Human Reproduction Act (Canada): Payment for surrogacy 6. (1) No person shall pay
consideration to a female person to be a surrogate mother, offer to pay such consideration or
advertise that it will be paid. Reimbursement of expenditures: 12. (1) No person shall, except in
accordance with the regulations and a licence (c) reimburse a surrogate mother for an
expenditure incurred by her in relation to her surrogacy.
Common law illegality
- Contracts that involve the contravention of a legal obligation imposed by the common law.
- If you K to commit a tort, it is a contract to do something that is contrary to common law.
Statutory illegality
- Statutory illegality can arise is various ways, such as where contract:
- Is expressly or impliedly prohibited by statute;
- Is entered into with the object of committing an act prohibited by statute;
- Requires performance contrary to statute; and
- Confers benefits in violation of a statute
(a) Classical Approach
Rogers v. Leonard (1973, Ont. H.C.J.)
- Facts: Sale and purchase of a cottage. Agreement signed on a Sunday contrary to the Lord’s Day Act.
Vendor knew of Act but was willing to ignore it as she was dealing with friends. When the vendor
refused to complete (and presumably was no longer a friend), the purchasers sued.
- Decision: Court held that the contract was illegal and void as it was contrary to statute. Any type of
prohibition of violation of statue, the K is void.
(b) Modern Approach
- The court says we have the discretion whether to enforce relief or not. What was the purpose, the
effects, are they contrary to public policy. Is their harm in enforcing the K?
- The statute does not describe non-compliance so the court has to deal with it.
New Solutions Financial Corp. v. Transport North America (SCC, 2004)
- Facts: NS entered into a credit agreement with Transport which provides for payment in excess of 60%
criminal rate of interest. They could not keep up with the interest rate and applied for a declaration that
the agreement contained an illegally high rate of interest and should not be enforced.
- Traditional Approach: If there was a violation of statute the contract is void at the beginning. Therefore
the borrower would not be charged the 60% interest, they still have to pay back the money but the court
would use the law of restitution, unjust enrichment. Probably impose some sort of market interest. K
void due to illegality.
- Modern approach: There is a spectrum of remedies available, one being the “blue pencil approach”. In
order to save the contract might strike out the offending provisions leaving the rest of the K untainted by
illegality. This is the severance approach, we can just strike out one provision to make it a legal interest
rate. But if the clause is at the core of the agreement, then the entire K is void.
- Blue pencil approach will often fundamentally alter the consideration associated with the intention of the
parties. Therefore Notional severance, reading in a contractual provision to make it legal, more
preferential. They will read say a 65% to 60% to make the K legal.
- Decision: SCC endorses the idea of notional severance, can read down the provision to notionally strike
out the illegality.
Still v. Minister of National Revenue (1998, F.C.A.)
- Facts: Still applied for permanent resident status in 1991 and assumed that she was legally entitled to
work on the basis of a letter. She worked as a housekeeper from May to October 1993. She was granted
permanent resident status on 23 September 1993. She was laid off on 1 October 1993 and applied for EI
benefits, which were denied on the basis that her employment was illegal.
- Principle: Where a K is expressly or impliedly prohibited by statue, a court may refuse to grant relief to
a party when, in all of the circumstances of the case, including regard to objects and purpose of the
statutory prohibition, it would be contrary to public policy, reflected in the relief to do so.
- The court takes a modern approach and says that she did engage in insurable employment, she had paid
into the system, acting good faith, no overriding public policy to say otherwise, she lacked intention
- Under the modern approach, the court rejects the idea of the K being void and says that it will be a
question of proportionality of whether it will grant relief or not.
Mistake
A residual category of relief
- Argue mistake when no other arguments available. Since it is a residual category, can almost always be
argued but very exceptional. Very high threshold to get it.
- Policy: Always dealing with issue of risk allocation. Courts operate under the assumption that parties
allocate the risk under the K, the principle of caveat emptor, making assumptions under the K, you are
stuck with that. If you want to be protected, should get an express warranty or condition otherwise the
risk is on you. The court will enforce the K as the risk has been allocated by the parties.
- Misunderstanding between the parties. One party entered into the K on the basis of a fundamental
misapprehension. Never had the meeting of the minds.
- Mistakes in terms: formation mistakes, whether there was certainty with respect to the subject matter of
the K, if the parties were not certain about what they were contracting over, the court says no K formed
- Mistake in assumptions: enter into a K on a misapprehension. We agree that we are contracting over
something, but both parties were under a fundamental mistaken assumption about the quality of the
matter. Contracting over a sewing machine is different than contract over a sewing machine with
different fundamental qualities, like ability to sew. So there is no K
- Mistake in recording: rectification of documents, clerical errors
- There is also cases with mistake in payments which is dealt with under restitution
Mistake versus Frustration
- Frustration is about future events and mistake is about existing facts
- Mistake: You purchase a car, but without your knowledge it has been destroyed so in essence what you
are contracting over does not exist, so no K. Mistake as to existing facts because the object doesn’t exist
- Frustration: Where it exists when you make the K, but between the date of the K and the date of passing
over, it breaks or goes missing. Due to some future event, we cannot perform the K and in that case we
say that the K is frustrated.
Categorization of mistake
(a) Common mistake
- Both parties make the same mistake (Sail problem) if it is fundamental, then K will be void
- Both parties are under a common misapprehension. Both think the sewing machine can sew the material
- Cases where both parties think the thing exists (Res extincta), or the buyer buys something they already
own (res soa)
(b) Mutual mistake
- Misunderstanding where parties are at cross-purposes
- Example: The seller thinks they are selling the red car and the buyer thinks they are buying the blue one
- Enforcement depends on objective formation principles. For example if the add said the colour and
then the blue car is shown, it was clear on an objective basis that the blue car was being contracted for
then the buyers subjective view doesn’t matter, objectively led to a K being formed over the new car.
- The question is really about whether the court can find on the objective facts that there was K formation.
(c) Unilateral Mistake
- One party is mistaken about an important fact concerning the contract and the other party knows or
ought to know of the mistake.
- This is where there is a hint of fraud, the seller knows the buyer is mistaken but doesn’t do anything to
correct the misapprehension.
- Smith v Hughes: the seller didn’t correct the misapprehension of the quality of the oats. The K is formed,
they are saying I am selling this, look at them, even though they were mistaken, it is caveat emptor. The
K will be enforced on the traditional caveat emptor approach, if the buyer wanted warranties about
quality they should have bargained for that.
Illustration of Three approaches
- Buys a painting from Seller. Buyer believes that it is a Da Vinci but it is in fact a copy.
- If seller also believes it is a Da Vinci: Common mistake and contract void if fundamental term.
- If seller believes/knows that it is a copy then mutual mistake and contract based on objective test
- If seller believes/knows it is a copy and knows that buyer believes it is a Da Vinci then unilateral and
contract based on objective test
General rule
- If there is a true ambiguity
- Regarding an important/fundamental term of the agreement; and
- There is no reason to prefer one party’s understanding over the other,
- The agreement may be void for mistake.
- No K was formed because the offer and acceptance machinery broke down. The parties never had that
consensus ad hedium, meeting of the minds.
o From objective reasonable person standard there has to be an agreement of what they are
contracting over.
Policy issue
- Assignment of risk: Who ought to bear the risk and the consequences of the mistake in question?
- Balance reasonable expectations/unfair surprise, Reliance/caveat emptor
-
Given that some sort of mistake has arisen, on whom do we impose the loss?
Who could have avoided the mistake at the lowest cost, did one of the parties act in a commercially
unreasonable way
Mistake in Formation Cases
Raffles v. Wichelhaus (1864)
- Facts: There was a K to buy cotton that was to come on a ship. Had two ships with the same name. One
sailed in October and one in December. The sellers goods were on the second ship. The buyer refused to
take delivery because they said they contracted for goods brought over on the first ship and there were
no goods on that ship.
- Decision: At trial, there must be judgment for the Ds, there is no reason. But the appeal court found no
K because there was no meeting of the parties minds.
o In assessing whether there was K, they seem to take a subjective analysis. What the parties mean
and if both parties have to mean the same ship for there to be a K, so need a subjective meeting
of the minds of both parties (ad idem).
o Smith v Huges (1871): idea that it is an objective process was not fully cemented in the common
law until this case. Now a court would apply a fully objective tests
- There was uncertainty over the K formation, whether the cotton was on the first or second ship. No
consensus ad idem and therefore no contract between the parties.
- Where should the loss fall? No actual evidence that they complained when the first ship came with no
cotton. The court treated the name of the ship as a condition of the K, legal scholars have argued that
this assumption is not necessarily correct, the name of the ship didn’t really matter, this was a K for
cotton. Only thing important in the name of the ship is that it would be important for insurance purposes.
- Criticism: Have to assume the time of the delivery was important to the buyer, it was a fundamental
issue for the buyer, and then there was not an agreement with the parties in respect to the cotton.
o What really happened is that by the time the second ship came, the cost of cotton had declined.
The buyer bought at the high price and is now trying to get out of a K where they have over paid
based on the current market price. In terms of the risk allocation approach the court made a
mistake, the K should have been enforced.
o Also the risk generally on price increases and price decreases is on the buyer. The whole notion
of what ship or the delivery date was not a fundamental term of the K.
Staiman Steel Ltd. v. Commercial & Home Builders Ltd. (1976)
- Facts: Have an auction for steel, the seller thought this included the new building steel, while the buyer
thought it included everything. The buyer is relying on an objective theory of K, reasonable literal
meaning person. What would a person hearing all the steel in the yard assume?
o Argument that the risk should be on the seller because they could have clarified the ambiguity
- Decision: A reasonable man would infer the existence of a K to buy and sell the bulk lot without the
building steel and therefore I hold that there was a K to that effect binding on both parties,
notwithstanding mutual mistake.
o Court accepts the objective approach to the K. Reasonable person would not conclude that it
would include the new steel because it was kept separate, not tagged, not in the catalogue. Buyer
knew of the mistake and was trying to snap up an opportune deal.
- The seller argues Raffel case, the two ships, we thought it excluded the steel and they thought it included
and because an ambiguity no K. Since no K of any steel, the vendor refused to deliver any steel to the
buyer. Court rejected this; there was a K, based on the objective reasonable person test.
Mistake in Assumptions
- No clear dividing line between mistake in fact and mistake in assumption
- All common law mistake cases are mistake in formation cases.
- Rather then there being a mistake with respect to this steel or that steel, it is mistake around the
assumptions or basis upon entering the contract.
- Sherwood v Walker: a US case where the seller is selling a cow under the assumption that the cow was
not fertile. So value was what she would earn at the slaughter house. But it turns out that the cow is not
barren and becomes pregnant before delivery. Was an action for Replevin, wanted delivery of property.
The vendor says there was a mistake as to the subject matter of the K, mistaken assumption that she was
infertile and because of that mistake, this makes the cow fundamentally different cow, mistake about her
quality.
o Clear agreement that they are contracting over the cow, but disagreement of the fundamental
assumptions upon entering the K
Bell v. Lever Bros. (1932, HL)
- Facts: He is a senior member but his employment becomes redundant. He is terminated and gets paid out
his reasonable notice but gets a bonus in the severance agreement. He gets a very high settlement
agreement. The employer then discovers that they had cause to fire him because he was taking part in
insider trading. Could have terminated his employment and not paid him anything.
- Lever brothers argue that they were mistaken, we terminated his employment on the assumption that we
were terminating a valid employment agreement. Mistaken assumption about essential quality of K, the
K is void and so give us back our money
- Three types of operative mistake:
- (a) Identity of contracting parties: effect is nullity of consent
- (b) Existence of subject matter: “res extincta” K over something that doesn’t exist, “res sua” already
own the thing. No subject matter over which we are K
- (c) Quality of subject matter: In such a case a mistake will not affect assent unless it is a mistake of both
parties, and is to the existence of some quality which makes the thing without the quality essentially
different from the thing as it was believed to be.
- It makes sense to relieve one of the parties because of the unfairness of allowing the K to be upheld in
light of the circumstances. The judge says came to a severance agreement, the employer was mistaken
whether they could have terminated without notice. No mistake to the extraordinary service, because
part of the agreement was a bonus.
- Policy question: should the employer be relieved of the burden, get back money after a few years. No
way of giving the P relief except by confiding to the courts loose power of introducing terms into a K
which would only serve to introduce doubt and confusion where certainty is essential.
o Looked at the whole issue of compromise and severance agreement, strong judicial policy to
hold a settlement agreement. The fact that you enter into settlement agreement on a mistaken
assumption, the general rule is for finality. Uphold them unless there is unconscionability.
Equitable mistake
Solle v. Butcher (1950, Eng. K.B.)
- Facts: they are business associates, Butcher renovates an apartment, rents it out to Solle on the
assumption that the rent control legislation does not apply. Butcher did this on the basis of Solles
statements. The relationship goes bad, Solle says that the rent control legislation does apply and so he
has to pay less. Butcher counterclaims mistake and wants the K rescinded.
- Distinguishes between common law mistake (contract void) and equitable mistake (contract voidable).
o Common law = renders a K void from the beginning
o Equity = renders K not void, but voidable, liable to be set aside on terms the court thinks fit
- Decision: In Bell said that once K is made, it is good unless and until it is set aside for failure of some
condition on which the existence of the K depends like fraud, or some other equitable ground. Here the
judgment was in favor of D, not equitable to allow P to claim mistake.
o Does a mistake about the rent render the subject matter essentially different from what it was
thought to be? No, a lease is a lease and narrows the essential quality test from Bell
- Policy: Concerned that if the lease is void, it will affect the rental market. Since all leases are nullities,
the landlords can just toss out their tenants.
o Court upholds the K, under equity can set aside the K on terms, rescind it, has broad jurisdiction
- Test: Contract will be set aside if the mistake of the one party has been induced by a material
representation of the other, even though it was not fraudulent or fundamental; or if one party, knowing
that the other is mistaken about the terms of an offer, of the identity of the person by whom it is made,
lets him remain under his delusion and concludes a contract on the mistaken terms instead of pointing
out the mistake
- Note: This was overturned in Great Peace, in UK. But in Canada still have doctrine of equitable mistake.
Can set aside a K, where one party has acted in an unfair and unconscienous manner
Great Peace v Tsavliris Salvage
- Facts: The Ds offered salvage to stranded ship. They hired the Ps thinking that they were only 35 miles
away but they turned out to be 410 miles away. So they found another vessel and cancelled the K. The
Ds argued they were under the mistaken assumption that Great Peace was closer so entitled to recession.
P sues for money
- Decision: They say no equitable doctrine, Solle and Butcher is overturned
- The doctrinal basis for common law mistake, rests on the same doctrinal foundation as frustration. In
frustration that idea is the economic purpose of the K has been destroyed. The performance of the K as
contemplated is impossible.
- If it turns out that for a fundamental mistaken assumption, something after the fact happens, that makes
it impossible to realize that common purpose, then a party will be relieved of their obligations.
- In mistake we focus on something gone really bad due to a mistaken assumption by both parties.
Mistake as to existing state of affairs. On whom to place the risk
- In frustration the parties have contracted and something bad has happened after the contract. Entering K
on assumption of containing state of affairs, the assumption is destroyed by continuing state of affairs.
- The court in saying that we should apply the same tests with respect to frustration and mistake. When
does the event or mistake occur. As to the time of K, or after future events
- Canadian courts have not accepted Great Peace, there is equitable jurisdiction, Miller.
- Newcombe: even though equitable mistake is unweilding because the test can be applied in many
different situations, not a lot of clarity because so discretionary and broad, still makes sense to retain the
doctrine. Courts like the remedial flexibility that is given by the equitable mistake doctrine.
Miller Paving v B Gottardo Construction
- Facts: The parties had been supplying gravel for a road project, the supplier was asked to confirm that
all the payments had been made. They signed the acknowledgment and release. The suppliers later
realized that they made miscalculated and still needed a lot of money.
- Decision: They said we made a mistake, were not paid in full, now we want to be paid some more. The
court rejects this argument, the whole purpose of the agreement is risk allocation, acknowledgement of
full and final payment. Court will not allow mistake to be used when the risk has been allocated
between the two parties.
- They reject Great Peace in Canada due to the loss of flexibility needed to correct unjust results in
widely diverse circumstances that would come from eliminating the doctrine of common mistake would
be a step backward. Don’t decide if should use it or not, isn’t necessary
- In considering whether to apply common mistake either in common law or equity, the court should look
to the K itself to see if that parties have provided for how bears the risk of the relevant mistake, because
if they have, that will govern.
- Miller cannot set aside the K, they bear the risk
Williams v The Gleds
- Example of the court granting a relief from mistake
- Facts: Enter an agreement to purchase an apartment. Williams is a mortgage broker, if they can find
someone who will loan the Gleds money, he would get commission. They provide financial information
to Williams. Williams get Mandate to agree to give money to the Gleds. They had a line of credit, this
had been disclosed to Williams earlier, but it was not clear that this was cleared against the property.
Once this is found, Mandate pulls out, they do not want to take the risk. They agreed to give loan on an
assumption on the original amount on the house loan
-
Williams wants his commission now but the Gleds defend and are successful on the basis of mistake
BCCA finds that the whole transaction was entered into on the mistaken assumption of the amount of
financing secured on the property
o It was a fundamental mistake, which if was known, Mandate would not have given money
o The court will grant relief, even if it is not a common law mistake, would have set it aside on the
basis of equitable mistake. Refers to First City Capital case were the SCC rescinded a K and
highlighted the equitable jurisdiction of the court, strong statement of equitable jurisdiction
o Most of the cases are where one party is trying to take advantage of the other.
Note: Rectification
- One long-standing exception to the rule that the written contract reigns supreme is where there is a
mistake in recording the agreement.
- Four Part Test:
- (1) The plaintiff must prove the existence and content of the prior oral agreement.
- (2) There must be “convincing proof” of the oral agreement: beyond a balance of probabilities but
less than beyond a reasonable doubt
o Note: One concern that underlies rectification is caveat emptor. The presumption of caveat
emptor is very strong in the case of written documents setting out the terms of a contract. The
court is concerned that to allow rectification would promote lack of due diligence (i.e. people
will be sloppy and then seek rectification).
- (3) The plaintiff must provide the precise wording for the rectification.
- (4) The plaintiff must show that defendant knew or ought to have known of the mistake in written
document. Essentially, the plaintiff must prove that to refuse rectification would be inequitable and
unconscionable.
- Morley Shafron v. KRG Insurance Brokers (Western) Ltd. (SCC 2009)
o Metro Vancouver case, company can point to no prior agreement, written or oral, that explain the
terms. No indication that the parties acted on something and then mistakenly induced something
else in writing.
Frustration
- Frustration falls within the general ambit of the law of mistake. It is a residual category
- Mistake: assumptions regarding existing facts (cow in Sherwood v. Walker).
- Frustration: assumptions regarding future events. The thing being K will continue to exist or the
assumption that the legal context will stay the same, no change in the legislation
- Frustration involves cases where an event occurring subsequent to contract formation makes
performance legally problematic.
- (i) Impossible to perform: Physical Impossibility
o Promise to marry: Promisor dies.
o Contract for portrait: Painter loses sight.
o Music hall lease: Music hall burns down (Taylor v. Caldwell)
- (ii) Undue Hardship: Event imposes an inordinate and unexpected expense.
Policy Context: Assignment of Risk
- Who should bear the risk of the unforeseen event?
- The mere fact that a contract becomes more expensive or difficult to carry out is not in itself a sufficient
reason to provide relief.
- The unexpected event must be so far beyond the range of risks that the contract allocates that it
constitutes a fundamental change in the bargain: “A radical change in circumstances”. The threshold
requirement for obtaining frustration is very high
Historical Development
Stage 1: Rule of absolute promises, No excuses, and Contractual liability is strict
Paradine v. Jane (1647)
- Caveat emptor, lessee takes benefits and burdens
-
Facts: He failed to pay under a lease because he claimed an alien and enemy of the King invaded his
land and expelled him.
- Decision: If you rent a property and war causes you to be unable to use it, too bad. Where the law
creates a duty or charge and the party is disabled to perform without any default on him, and he hath no
remedy, the law will excuse him. But when the party by his own K creates a duty or charge upon himself
he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity because he
might have provided against it by his K. Should pay rent regardless, frustration not recognized
Stage 2: Relaxing the absolute rule. Courts imply a condition of the continued existence of the subject matter of
contract.
Taylor v. Caldwell (1863)
- Facts: Rental of music hall for four nights. Music hall burns down before the concert and the lessee sues
for damages.
- Held: Where, from the nature of the contract, it appears that the parties must from the beginning have
known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some
particular specified thing continued to exist, so that, when entering into the contract, they must have
contemplated such continuing existence as the foundation of what was to be done.
- Critique: Test is based upon the presumed intent of the actual parties. Frustration only arises in
situations where the parties have not considered the risk and therefore have no intent.
o Courts subsequently abandoned the device of presumed intent and applied the condition as a
matter of law – i.e. they developed the doctrine of frustration as a rule of law.
Stage 3: Move from destruction of the physical subject matter to the destruction of the foundation/commercial
purpose of the contract.
- Move towards a conceptual frustration, the purpose or foundation of the contract, the contractual
adventure has been destroyed as a result of the supervening events
Land cases
- Historic rule was that frustration not available for sale of land. Land is unique and cannot be destroyed.
Caveat emptor. But was recognized in:
Capital Quality Home v. Colwyn (1975, Ont. C.A.)
- Facts: Agreement to transfer 26 building lots. Planning legislation brought into force before transfer.
Legislation requires various consents for subdivision, these were never obtained, so now the P wants
deposit back.
- Decision: Legislation destroyed the “very foundation of the agreement”.
- Event: Must occur after formation. Must not be self-induced, cannot be caused by the negligence of one
of the parties. Must not have been foreseeable: if they saw it, would have allocated the risk or the CL
will allocate the risk to one of the parties through default. Force majeure clauses: acts of gods, what
happens as a result, so they have procedures
- Impact: Must be more than mere inconvenience – must make contract fruitless. Must be radical change
in contract (completely affects nature, meaning, purpose, effect and consequences of contract). Change
must be permanent
- Krell: Foundation of contract
- Davis: Performance would be radically different from that undertaken in the contract.
- Can apply to lease of lands, should be flexible because if the supervening event makes the K incapable
of fulfillment as contemplate by the parties, then it appears to me illogical and unreasonable to content
that the fundamental object of the K can be effected because the equitable interest in the land has passed
to the purchaser.
Sea Angel (2007, Eng. C.A.)
- Facts: The vessel was hired for cleanup of oil spill the D. The port authorities prevented the vessel from
leaving port, alleging that salvagers negligent.
- Issue: Who is stuck with risk (and cost) of delay in obtaining port authority authorization since the K
has become impossible to perform? The Charterer argues K frustrated.
-
-
Decision: No frustration. Risk of delay is generally on the Charters and is foreseeable. It was
contemplated in the K, so not unjust to make the charter pay and bear the risk
Radically Different Test: tells us that that doctrine is not to be lightly invoked, that mere incidence of
expense or delay or onerous is not sufficient and that there must be a “break in the identity” between the
contract and its performance in the new circumstances.
“Multifactorial approach”: Terms of the contract, generally where you are Chartering a ship, the risk of
delay is on the Charterer. You might have to pay for the lease of the ship for a longer period of time.
Look at Context, Knowledge, expectations, assumptions of parties as to risk and Nature of event
Summary
- The fundamental question is whether, due to changed circumstances, the risk of unfair hardship to one
party outweighs the general policy of enforcement as expressed through caveat emptor.
- In order to be entitled to frustration, the plaintiff must establish that:
o Basic Underlying Assumption: The element of the contract, or circumstance that is disrupted by
the frustrating event, must be fundamental/foundational, such that it would be tacitly assumed by
the parties to be a pre-condition to performance, for example:
 the continued existence of the goods or of the subject matter of the contract (Taylor v.
Caldwell – music hall)
 the continuation of certain conditions or the happening of an event
(Krell v. Henry – coronation)
o Substantial Hardship: Major impact on economics of transaction. Must be more than mere
increase in expense that makes the contract less profitable. Change is permanent. Must deprive
one of the parties of the substantial intended benefit of the transaction
o Unanticipated Risk: The frustrating event must be unanticipated. Occurs after formation. Not
foreseen. Not a risk that the parties addressed. Not a risk that the parties should have been
expected to address
o No Allocation of Risk by Contract: Is the risk of the unforeseen event expressly or implicitly
allocated in the contract?
o No Fault: The event is beyond the control of the parties and is not caused by one of them.
Frustration cannot be self-induced.
Frustration – Remedial Consequences
Issue
- If the contract is frustrated, parties are relieved of future performance obligations. However, they may
have suffered losses in partial performance.
- Example: Manufacturer to design and build special machine. Contract frustrated due to export
restrictions.
o Buyer had paid deposit
o Seller had performed design work
- Everything was done under the K, so can be done under that K. Frustration relieves parties of their
obligations. Problem arises when one party has begun the process for the K
Historically, the common law test was that the loss lies where it falls. (Appleby v. Myers)
- The rationale was that frustration does not render the contract void ab initio. Although the parties are
relieved of future performance obligations, everything done up until the frustrating event was performed
under a valid contract.
Critique
- Unprincipled: leaves rights and losses to pure chance.
- Krell v. Henry - coronation viewing. Contract is for £75. £L25 paid as a deposit. Contract frustrated but
landlord entitled to keep the deposit.
o Had no deposit been paid, then landlord entitled to nothing.
o If entire price paid, then tenant not entitled to return of deposit.
o It was just sort of frustrated, to bad
The Reform – Restitution
- Fibrosa Spolka Akeyna v. Fairbairn Lawson (1943, H.L.)
- Facts: Sale of machine by English company to Polish company. Contract price is £4,800 and £1000 paid
in advance. WWII frustrates contract and Polish company sues to get deposit back
- Held: Buyer may recover deposit based on restitution. There is an unjust enrichment because there has
been a total failure of consideration.
Problem
- Recovery on restitutionary grounds is limited to monetary payments; it does not apply to expenses
incurred in reliance on the contract.
- Fibrosa Spolka Akeyna v. Fairbairn Lawson Viscount Simon stated
- While this result obviates the harshness with which the previous view in some instances treated the party
who had made a prepayment, it cannot be regarded as dealing fairly between the parties in all cases,
and must sometimes have the result of leaving the recipient who has to return the money at a
grave disadvantage. He may have incurred expenses in connection with the partial carrying out of
the contract...
- there is a kind of arbitrariness. The reliance expenditures that have been incurred, there is not an equal
sharing of the losses
Response: Frustrated Contracts Act
- Really only deal with the remedial consequence of frustration. Reliance costs are only if there has been
pre-payment. If there has been no pre-payment, then effect of the Act, is that the loss lies with the
company that has incurred in. In BC this is not the case, the loss must be incurred equally between the
parties. If a loss as a result of frustration, you divided it in two. Someone may have to pay back, if there
is a deposit or it the other side incurred lost, the other side will have to pay. Not the fault of either party,
so we will divide the loss as the fairest result.
- Most jurisdictions have enacted a Frustrated Contracts Act, which allows the court to apportion prefrustration losses.
- In many jurisdictions, reliance losses are recoverable but only to the extent of pre-payment (i.e. they
may be set-off against any payment/deposit).
- In BC, reliance losses are independently compensable. Even where there is no pre-payment the court
may apportion any reliance losses. Losses are apportioned equally.
Adjustment of rights and liabilities
5 (1) In this section, "benefit" means something done in the fulfillment of contractual obligations, whether or not the person for
whose benefit it was done received the benefit.
(2) Subject to section 6, every party to a contract to which this Act applies is entitled to restitution from the other party or parties
to the contract for benefits created by the party's performance or part performance of the contract.
(4) If the circumstances giving rise to the frustration or avoidance cause a total or partial loss in value of a benefit to a party
required to make restitution under subsection (2), that loss must be apportioned equally between the party required to make
restitution and the party to whom the restitution is required to be made.