Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
Sanctity of K, Ks don’t have to be good to be binding, courts shouldn’t create new Ks
The Fuller & Perdue article presents three measures for damages:
1.
Restitution : Defendant must return the value he received from the other party
Policy: Preventing unjust enrichment to D, corrective
2.
Reliance : Restoring loss to P, putting her in the position she was before the K
Policy: Preventing harm to P, restorative
3.
Expectation : Putting P in position she would have been if K was performed
Policy: Securing benefit to P, distributive
“The party complaining should, so far as it can be done by money, be placed in the same position as they would have been in if the contract had been performed.” o This is the expectation measure of damages
 If K not performed, expectation damages = cost of performance
 Ex. Difference in Price Rule for market goods
 Ex. Difference in Volume for market goods o If supply exceeds demand = lost sale and lost profit o Exception: if demand exceeds supply = no lost sale and no lost profit, so no damages available
 If faulty performance, expectation damages are measured by comparing what was contracted for and what was received
a. Expectation Damages too Speculative
If expectation damages too speculative (ex. lost profits), can claim reliance damages (wasted expenditures) o Includes expenditures incurred before the K if within reasonable contemplation of the parties as likely to be wasted if K broken o Limitation: reliance damages can’t exceed expectation damages b. Cost of Performance v. Loss of Value
In construction contracts, default damages is cost of performance o Exception: can apply difference in value , considerations:
 Economic wastes (performance involves destruction)
 Cost of performance out of proportion to value gained (windfall)
 The clause breached is merely incidental (not essential) to the K o Unless: if in bad faith, more likely awarded cost of performance
Alternately, middle ground: compensation for consumer surplus o Personal/ subjective value a person places on something over and above market value
 Ex. for a pool 9” too shallow (minor deviation, no practical or financial effect)
 Awarding loss of amenity = what P truly suffers c. Loss if a Chance
Loss of a chance is compensable if: o P shows (on a balance of probabilities) that:
 1. She had a chance to obtain a benefit/ avoid a loss
 2. The chance lost was real, not just speculative
 3. The outcome depended on something other than herself
 4. The lost chance had practical value
( Wertheim )
( Thompson )
( Charter )
( Hawkins v.
McGee )
( Anglia )
( Bowlay )
( Jacob &
Youngs )
( Peevyhouse )
( Peevyhouse )
( Groves )
( Ruxley )
( Chaplin v.
Hicks )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe o Even if substantial damages can’t be measured with certainty
The loss is measured by the quantum of damages x probability
( Carson )
We limit ballooning damages (ripple effect) by containing them in boxes: remoteness and mitigation
General policy: Courts strive to achieve a fair balance between the reasonable expectations of the party to whom the promise was made and the risk of unfair surprise to the defendant if she’s held responsible for an unexpected liability.
Therefore damages that are too remote are unrecoverable.
Express contractual provisions: now, contracts can expressly limit the type/ amount of damages that can be claimed if a contract is breached (exclusion clauses)
To avoid a finding of remoteness, damages must be:
1) In “the usual course of things” (i.e. arising naturally form the breach) OR
2) In “the reasonable contemplation of the parties” (i.e. communication of special circumstances)
( Hadley v.
Baxendale )
( Victoria
Laundry )
Relevant factors: a) Defendant’s knowledge: o Experts are expected to know the usual result of a breach of K in their field o This constructed knowledge falls under special circumstances in the Hadley test o Note: even experts are not expected to be contemplating unusual losses
Unusually large profits lost due to breach of contract are only compensable if they were in the reasonable contemplation of the breaching party b) Nature of the defendant’s business
When common carriers were obliged to delivery goods, you had to enter into a second contract with them for special circumstances (not fair to put all liability on carrier)
Now, no second contract is required with carriers (just notification of special circumstances) since they can choose whether or not to accept o Especially since the carrier advertised its promise to deliver and profited from it c) Nature of the products or services
Second hand products are not expected to work as well as a new top of the line one - the reasonably foreseeable use of a second hand product is different than for a new product
Even if the specific type of work is not communicated, losses are compensable if it’s clear that a breach would result in lost profits d) Sophistication of parties – more sophisticated parties = more foreseeable losses o Ex. accidental run-in vs. formally intended contract e) Ordinary allocation of risk / customs of the trade – understandings or expectations in the marketplace f) Proportionality – comparison of contract price and nature of the service with risk o Ex. $20 watch, can’t claim $20,000 lost profits from missing an interview
Contemporary applications: chartered party law
Fluctuating market prices is reasonably foreseeable (broad characterization)
Even if a result is within the reasonable contemplation of parties, courts can limit the scope of liability based on “implicit” terms of a K o Broad characterization but limits scope
Hadley rule is intended to give effect to the presumed intention of the parties, not to contradict them
These cases are about how narrowly or broadly we characterize losses (the scope) o Ex. pigs getting sick with e. coli – couldn’t have anticipated e. coli but could’ve anticipated that they would’ve gotten sick
( Horne v.
Midland )
( Cornwall
Gravel v.
Purolator )
( Munroe
Equip Sales )
( Scyrup v.
Econ. Tractor )
( Munroe
Equip Sales )
( Heron II )
( Achilles )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
Doctrinal test today: Hadley and Baxendale as qualified by Heron II ( Heron II )
OBJ TEST: if a reasonable person in the position of the def would have realized the losses were sufficiently likely , the losses are naturally flowing and damages are proper
= what the defendant ought to have known (arising naturally) re: Hadley 1)
+ what the defendant actually knew (special circumstances) re: Hadley 2)
Qualifications:
The courts haven’t set the % of what is “sufficiently likely” to result o Therefore “sufficiently likely” and “liable to result” aren’t really different things and not useful
The broad v. narrow characterization of the losses is also not very useful since it depends on the judge
What is “proper” is also not very useful since it depends on the judge
Law Today: Fidler Test
The Hadley rule applies to non-pecuniary (loss of enjoyment, mental suffering, distress) damages as well
The test for compensability of non-pecuniary losses:
1.
Was psychological benefit an object of the contract, such that mental distress upon breach is within the reasonable contemplation of the parties? o Need not be the dominant purpose of the K, just part of the bargain
AND
2.
Was the degree of mental suffering of a degree sufficient to warrant compensated?
Former Law
These examples are still useful ! Each situation provides a precedent for finding that peace of mind was part of the contract
Phase 1 - Pre-1973: non-pecuniary damages not compensable
Separation of K and tort, K are commercial transactions (stiff upper lip) o Exceptions:
 Breach of promise to marry
 Failure to pay on cheque
 Vendor failure to make title
 Physical discomfort (old railway cases, Hobbs )
Phase 2 - 1974-2005: development of pigeon holes
Contracts for pleasure/ peace of mind : Holidays ( Jarvis , 1973), Wedding Photos ( Wilson ,
1988), Wedding Music ( Dunn , 1978), Disability insurance ( Warrington ) o Farley, 2001 : Peace of mind doesn’t have to be the ‘essence of K’, sufficient if it’s a
‘major important part of K’ (precedent to Fidler )
Pets : Death while in aircraft hold ( Newell , 1976), Loss from a kennel ( Ferguson ), Failure to notify of cat’s residence ( Weinberg v. Connors [“ Hobocat ”], 1994), Dog purchased with unknown severe medical problems ( Pezzente , 2005)
Physical inconvenience/ discomfort by a sensory experience (like old railway cases): Cadillac with buzzing radio ( Wharton )
Employment where there’s an independent actionable wrong : intentional infliction of mental distress
The expectation interest is used for non-pecuniary damages; awards usually small ( Wilson )
( Addis, Hobbs )
( Vorvis )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
C/L: employer can terminate anytime:
1) For cause; or
2) With reasonable notice (number of weeks/ months of pay or may in lieu of notice)
Employees also have to give reasonable notice ( RBC v. Merrill Lynch )
Employment contracts are not one of peace of mind – can’t receive damages for mental distress merely because you were terminated
( Honda ) The Law Today: Honda Test
Employees may claim aggravated damages for mental distress caused by the employer’s bad faith in termination (manner and reason for termination) o Ex. attacking employee’s reputation, dismissal to deprive pension benefits
No requirement for independent actionable wrong
Distress incidental to termination (i.e. feeling bad) is not compensable
Back to Hadley v. Baxendale for breaches compensable under normal contract damages
Former Law
To obtain aggravated damages for mental distress, there must be an independent actionable wrong
(unclear what this is)
No aggravated damages for mental distress in employment context (overturning Vorvis )
But court can increase the period of reasonable notice where the dismissal (only) is unfair or in bad faith ( Wallace damages ) o Problem: if your salary is higher, this means your mental distress is worth more
( Vorvis )
( Wallace )
Punitive damages are an exception to the general rule that damages are compensatory; consequently, they are only granted in exceptional cases
There are two requirements for a punitive damages claim: o 1. Misconduct must be “ highly reprehensible ” o 2. Misconduct must be an independently actionable harm
 Can be an independent breach of K or a breach of fiduciary obligations
 In a denial of insurance benefits case, the duty of good faith is an implied contractual obligation that satisfies this test.
The court has set out a policy framework for guiding applications of punitive damages: o Exceptionality : Punitive damages are the exception to the rule o Rationality : Must be linked to at least one of the following goals:
 Punishment
 Deterrence
 Denunciation o Proportionality : The total sum awarded (incl. non-punitive and criminal damages) must be proportionate to: 1) Blameworthiness of defendant’s conduct, 2) Degree of vulnerability of the plaintiff, 3) [Potential] harm directed at plaintiff, 4) Advantage wrongfully gained by the defendant’s misconduct
( Fidler )
( Whiten )
( Fidler )
( Whiten )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
According to the SCC:
1) Generally, a claimant must take reasonable steps to avoid loss (what is reasonable depends on the circumstances of the case) and cannot recover losses that they could’ve reasonably avoided o Perhaps what a reasonable business person would do?
2) Exception: where plaintiff is entitled to specific performance
Policy Rationales
1) Avoidance of hardship and unfairness: a.
K liability is absolute: Even innocent reasons for a breach provide no excuse for contractual liability b.
Quantum: the normal measure of damages is quite high; can lead to overcompensation c.
Unfair surprise versus reasonable expectations: It is unfair to make the defendant liable for losses that the plaintiff could have avoided
2) Fair allocation of risk: Often the plaintiff is in the best position to deal with the consequences of the breach
3) Avoiding economic waste: Mitigation promotes efficiency
A party claiming monetary damages must take reasonable steps to mitigate those losses. Failure to do so will limit damages to those that could not be avoided
Additional costs of mitigation are recoverable if they’re reasonable
In commercial context, reasonable to require pltf to continue dealings with def as mitigation even after a breach of K, especially if def’s price is lower than market price o Exception : This excludes personal services contracts o Other situations might be excluded as well; the reasonableness of re-contracting with the defaulting party is a question of fact , not law
Damages are compensatory . Managing to avoid losses entirely will result in nominal (or no) damages despite breached K
Impecuniosity : which party should bear the risk that the loss due to breach might be aggravated due to lack of funds?
Generally, lack of resources to mitigate losses is no defence for failure to mitigate in the commercial context o Exception : If the breach of K is related to financing/ the reason for lack of resources o Exception: Impecuniosity acceptable defence in consumer transaction cases
Issues of impecuniosity can also be viewed as a remoteness issue (i.e. losses due to impecuniosity are not within the reasonable contemplation of the parties)
Doctrine of Election
If there is an executory K (ie K for future performance) and an anticipatory breach or anticipatory repudiation, the other party may: o 1. Accept repudiation and sue for damages for breach immediately o 2. Disregard repudiation and force the contract to stay in effect (this can trump mitigation)
 The electing party can then sue when the contract is actually broken
Election is only available in rare circumstances - where contracting party can unilaterally perform o Limit: there must be a legitimate interest (beyond the economic interest) in performance
The dissent in McGregor objects to this doctrine, stating that the electing party has a duty to mitigate. This dissent was preferred by Laskin J.A. in Finelli v. Dee (Ont. C.A. 1968).
(Payzu)
(Payzu)
( British
Westinghouse )
( Freedhoff )
( General
Securities )
(Freedhoff)
( McGregor )
Date of Assessment of Damages
Generally, damages are assessed at the time of breach (in actuality, courts only require that plaintiffs mitigate within a reasonable time of breach )
If there are “unique circumstances” entitling the plaintiff to specific performance, the damages may be assessed at the time of trial instead
The court has discretion to take into account any special circumstances that indicate it is unreasonable to require the plaintiff to mitigate immediately
Lost Volume
( Asamera )
( Wroth )
( Asamera )
( Apeco )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
If supply of the product exceeds demand, then the plaintiff will be unable to mitigate o Ex. losing the sale of one space, I sell that space but it means I still have another one open – supply > demand, unable to mitigate
Specific Performance
Specific performance is an order compelling the party in breach to perform the contract
Only available in certain circumstances: where normal damages are inadequate, not just hard to measure o Unique goods o Land (although not an absolute rule; only if it’s unique and not purely commercial) o Relational contracts (ex. long term supply contract, where plaintiff may go out of business without performance) o Where transfer of land is conditional on work being done
Specific performance is never granted for personal services contracts (absolute rule) – this amounts to slavery
Reasons for not applying specific performance as the default remedy: o History : Equity supplements common law; only used if damages inadequate o Ideology: Liberalism; separation of law and morality o Practicality : Damages are often more convenient and may be preferred by the plaintiff, a plaintiff may not want to deal with a hostile co-contractor o Administration : Specific performance is difficult for courts to supervise o Adverse Impact on Mitigation : If specific performance was the presumptive remedy, then there would be no obligation to mitigate o Avoidance of Hardship : Might be overly burdensome to the defendant. Would shift the burden of mitigation to the defendant, might prove costly and unfair
Injunctions
An injunction is an order for a party not to take an action that would result in the breach or the non-performance of the contract (ex. enforcing negative covenants)
Courts will not enforce positive covenants (amounts to slavery) but will enforce negative covenants (a promise not to do something)
3 requirements for enforcing negative covenant
1.
Existence of a negative covenant
2.
Damages inadequate; and
3.
Must not amount to compulsion to perform a personal services contract AKA positive covenant (or be an undue restraint of trade)
An injunction to encourage or put pressure on one party to continue to work for the employer (but not to force them to continue outright) by preventing them from working for similar employers is not tantamount to SP o There has been much criticism of this decision, in particular due to sexism at the time
Expansion of what constitutes compulsion: an injunction that would prevent someone from pursuing their own chosen profession amounts to a positive covenant o Compulsion is more likely to be found in the context of contracts of lengthy duration and involving relationships of mutual trust and confidence that have since been ruptured o Negative covenants can be limited by subject matter, geography, time frame o e.g. The manager-client relationship in the music industry
A way of measuring damages (based on unjust enrichment)
Actionable even if plaintiff didn’t suffer any harm o Disgorgement of unjustly gained profits from the breach of K
( Behnke )
( Semelhago )
( Sky
Petroleum )
( Tanenbaum )
( Warner
Bros.
)
( Lumley )
( Warren, Page
One )
( Page One )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe o Discretionary (is it just/ equitable?) and only in exceptional circumstances
Useful guide: if plaintiff has a legitimate interest in preventing the defendant’s profit-making activity (and thus depriving them on profit)
( AG v. Blake )

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
When do communications give rise to legal obligations?
Balancing reasonable expectations (need to enforce promises) and avoidance of unfair surprise (unanticipated liabilities)
TEST: objective, reasonable person standard
1.
General
The offeror is the master of the K
The offeree can bind the offeror to the K (has the power of acceptance) and thus to claim expectation damages
2.
Specific Rules a.
There must be an intent to be bound – mere advertisement, enticement or invitation to treat (ie. negotiate) is insufficient i.
An ad quoting prices and showing puffery is not an offer to sell (K) ii.
Exception: An ad that is clear, definite, explicit and leaves nothing open for negotiation amounts to a K. Here, def can change offer anytime before acceptance, but cannot change it after iii.
A display in a store is like an ad (NOT an offer). Customer bringing goods to cashier is the offer, cashier taking money is the acceptance b.
The offer must be sufficiently specific and comprehensive that the terms of the agreement can be identified (the problem of uncertainty ) c.
An offer ceases to exist if it is rejected , and in any event expires after a reasonable time
(the length of which determined by the context) i.
AKA a refusal of the offer by offeree, if not accepted within reasonable time
(conduct of both parties post offer is assessed) d.
An offer can be revoked anytime before being accepted. But unless the offer has expired (passage of reasonable time), effective revocation may require notice e.
An offer is binding once it is accepted, and cannot be revoked
1.
General
Acceptance by word/ return promise is a bilateral contract
Acceptance by performance/ action is a unilateral contract
2.
Specific Rules a.
Must be a clear intent to be bound b.
Must sufficiently correspond to the offer – otherwise it is a counter-offer i.
Offeror can specify how the offer is to be accepted (place/ time/ method) c.
Generally, acceptance must be communicated (letter, verbal) to the offeror and must be done before the offer has expired or been revoked i.
Method of communication may be stipulated by offeror ii.
Silence is not acceptance
(Denton v.
Great
Northern
Railway)
(Johnston
Bros)
(Lefkowitz)
(Boots)
(Manchester
Diocesan)
(Dickinson v.
Dodds)
(Eliason v.
Henshaw)
(Larkin v .
Gardiner)

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe
Seller and buyer use standard form contracts. Each relies on its standard form, but overlapping terms
Approaches:
1.
First shot rule: first set of terms governs
2.
Last shot rule/ performance doctrine: last form wins (C/L adopts this)
3.
Reconcile the terms. If contradictory, they cancel each other out and the court implies reasonable terms
Owner/ buyer makes calls for tenders/ bids. Two contract approach:
Contract A: governs the tendering process. The call for tenders is an offer and the submission of bid is acceptance. If a bid is accepted, the bidder must enter into K B o Contract A terms depend on the call for tenders
Contract B: The contract for the provision of goods/ services
Generally, contract A must accept only compliant tenders (otherwise the next K in line has right to damages), and must treat all bidders fairly and equally
(MJB
Enterprises)
(Double N
Earthmovers)