Download Contracts Summary

Contractual Obligations Summary – April 2005
Kirk Shannon
Prof. Jukier - Contractual Obligations Summary – 2004/2005
PART IV: CONTENT OF CONTRACTUAL OBIGATIONS .............................................................................................3
A: EXPLICIT OBLIGATIONS .......................................................................................................................................................3
Contra Preferentum Rule ................................................................................................................................................................ 3
L’Estrange v. Graucob Proposition ................................................................................................................................................. 3
Parker v. The South Eastern Railway Co., Gabell v. The South Eastern Railway Co. ........................................................................ 4
Thornton v. Shoe Lane Parking Ltd. .................................................................................................................................................... 4
McCutcheon (A) v. David MacBrayne, Ltd. (R) ................................................................................................................................. 4
British Crane Hire Corp v. Ipswich Plant Hire ................................................................................................................................... 5
Parole Evidence Rule ...................................................................................................................................................................... 6
Gallen v. Allstate Grain Co. ................................................................................................................................................................ 7
B: IMPLIED OBLIGATIONS .........................................................................................................................................................7
Civil Law ........................................................................................................................................................................................ 7
Raymor Painting Contractors (Canada) Ltd. v. Purolator Courier Ltd. ............................................................................................. 8
National Bank of Canada v. Soucisse .................................................................................................................................................. 8
Houle v. National Bank of Canada ...................................................................................................................................................... 9
Common Law ............................................................................................................................................................................... 10
Transamerica Life Canada Inc. v. ING Canada ................................................................................................................................ 10
McKinlay Motors Ltd v. Honda Canada Inc. .................................................................................................................................... 11
PART VI: TYPES OF K’S THE LAW SHOULD ENFORCE – AN ALTERNATIVE VIEW ........................................11
PART VII: REASONS FOR SETTING ASIDE AGREEMENTS ......................................................................................13
A. IMPAIRED CONSENT ...........................................................................................................................................................13
Thibodeau v. Thibodeau .................................................................................................................................................................... 13
Barton v. Armstrong .......................................................................................................................................................................... 14
B: Threats of Economic Nature ..................................................................................................................................................... 14
Atlas Express Ltd. v. Kafco (importers and distributors) Ltd ............................................................................................................ 14
J.J. Joubert Ltée v. Lapierre et Lapierre ........................................................................................................................................... 15
Barclays Bank Plc v. O’Brien ........................................................................................................................................................... 16
B: EXPLOITATION AND UNFAIRNESS ......................................................................................................................................17
S. 1 Interpretation as a tool to Ensure Fairness of Terms .................................................................................................17
Tilden Rent-A-Car Co. v. Clendenning ............................................................................................................................................. 17
George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd. ......................................................................................................... 18
Photo Production Ltd. v. Securicor Transport Ltd. ............................................................................................................................ 18
Hunter Engineering Co. v. Syncrude Canada Ltd.............................................................................................................................. 19
S.2 State of Necessity ........................................................................................................................................................20
Post v. Jones ...................................................................................................................................................................................... 20
Tribunal Civil de Saumur, 5 juin 1947 - Époux Strauss-Schillio c. Vve Goblet ............................................................................... 21
S.3 Unconscionability ........................................................................................................................................................21
Lloyds Bank Ltd. v. Bundy ............................................................................................................................................................... 22
National Westminster Bank Plc. V. Morgan ...................................................................................................................................... 23
Toker v. Westerman ........................................................................................................................................................................... 23
Tilden Rent-A-Car Co. v. Clendenning ............................................................................................................................................. 24
S.4 Civil Law and Lesion ...................................................................................................................................................24
Roynat Ltée v. Restaurant Nouvelle-Orléans Inc. ............................................................................................................................. 26
B: Lesion in the Consumer Protection Setting .............................................................................................................................. 27
Gareau Auto v. B.C. Impériale de Commerce ................................................................................................................................... 27
S. 5 Abusive Clauses .........................................................................................................................................................29
Slush Puppie v. 153226 Canada ........................................................................................................................................................ 29
Yoskovitch v. Tabor ........................................................................................................................................................................... 29
Quebec v. Kechichian ........................................................................................................................................................................ 30
C: MISTAKE/MISAPPREHENSION ............................................................................................................................................31
S.1 Unilateral Mistake ......................................................................................................................................................31
A: Civil Law  Unilateral Error Error ...........................................................................................................................31
Rawleigh v. Dumoulin ....................................................................................................................................................................... 32
Smith v. Hughes ................................................................................................................................................................................. 32
Huot v. Ouellette ............................................................................................................................................................................... 32
Page 1 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Limitations on Error ...................................................................................................................................................................... 33
Paradis v. Merrett ............................................................................................................................................................................. 33
Le Poussin (Cours d’appel de Versailles, 7 janvier 1987) ................................................................................................................ 34
B: SHARED MISTAKE ..............................................................................................................................................................34
Bell v. Lever Bros. ............................................................................................................................................................................. 34
Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd. ................................................................................................. 35
S. Smith, Excerpt on Mistake from Contract Theory (2004: OUP) ................................................................................................... 36
D: MISREPRESENTATION / DUTY TO DISCLOSE ......................................................................................................................36
Tremblay v. Les Petroles Inc. ............................................................................................................................................................ 37
Creighton v. Grynspan ...................................................................................................................................................................... 38
Bail v. Bank of Montreal ................................................................................................................................................................... 38
Martel Building Ltd. v. Canada ......................................................................................................................................................... 40
Common Law Solutions other than Good Faith ............................................................................................................................ 41
Esso Petroleum Co. Ltd. v. Mardon .................................................................................................................................................. 41
V.K. Mason Construction v. Bank of Nova Scotia ............................................................................................................................. 42
E: CHANGED CIRCUMSTANCES ..............................................................................................................................................42
Taylor v. Caldwell ............................................................................................................................................................................. 44
Otis Elevator Co. Ltd v. A. Viglione & Bros. Inc............................................................................................................................... 44
Krell v. Henry .................................................................................................................................................................................... 45
Canada Starch Company Inc. v. Gill & Duffus (Canada) Ltd. .......................................................................................................... 46
H.R. Sainsbury v. Street..................................................................................................................................................................... 47
Aluminum Company of America v. Essex Group Inc. ........................................................................................................................ 47
PART VIII: BREACH AND REMEDIES .............................................................................................................................48
A: SERIOUSNESS OF BREACH .................................................................................................................................................49
Cehave NY v. Bremer Handelgesellshaft ........................................................................................................................................... 51
B: SPECIFIC PERFORMANCE ...................................................................................................................................................52
Common Law ............................................................................................................................................................................... 52
Falcke v. Grey ................................................................................................................................................................................... 52
Warner Bros. Pictures Inc. v. Nelson ................................................................................................................................................ 53
Civil Law ...................................................................................................................................................................................... 54
Les Propriétés Cité Concordia Ltée v. La Banque Royale du Canada .............................................................................................. 54
C: MONETARY AWARDS ........................................................................................................................................................55
D: COST OF CURE VS. DIMINUTION IN VALUE .......................................................................................................................55
Tito v. Waddelll (No. 2) ..................................................................................................................................................................... 55
Ruxley Electronics and Construction Ltd. v. Forsyth ........................................................................................................................ 56
E: THE SCOPE OF REMEDY.....................................................................................................................................................57
Hadley v. Baxendale .......................................................................................................................................................................... 57
Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. ............................................................................................................ 58
Koufos v. Czarnikow Ltd. .................................................................................................................................................................. 58
F: MITIGATION OF DAMAGES.................................................................................................................................................59
Payzu, Ltd. v. Sauders ....................................................................................................................................................................... 59
G: NON-PECUNIARY LOSS AND PUNITIVE DAMAGES.............................................................................................................60
Jarvis v. Swans Tours Ltd.................................................................................................................................................................. 61
Farley v. Skinner ............................................................................................................................................................................... 61
H: PUNITIVE DAMAGES .........................................................................................................................................................62
Whiten v. Pilot Insurance Co............................................................................................................................................................. 62
I: LIQUIDATED DAMAGES – PENAL CLAUSES ........................................................................................................................62
H.F. Clarke Ltd. v. Thermidaire Corp. .............................................................................................................................................. 63
Page 2 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Part IV: Content of Contractual Obigations
What is in or out of the obligational agreement.
 Overt and explicit obligations in a K
 Implied or implicit obligations in a K (eg. good faith)
A: Explicit Obligations
Why do we have problems in law with explicit obligations  Main reason is: Problems of language. Language is, at best,
imperfect vehicle to convey thoughts or intentions of parties. K’s are victims of ambiguous, incomplete drafting. Courts
must resort to rules of interpretation to get at what the parties really mean
 Both CL and CV have means of interpretation. They are largely guidelines and include:
o Art 1425-1432. Section of interpretation of K’s.
o Common Law takes on similar forms of interpretation. (Empress Towers) Court picks interpretation that
will give K some effect rather than no effect (like Art 1428)
o Art 1427 and 1429. Must look at K as a whole – cannot take one sentence out of context. Interpret each
cause in light of the others. Words are given meaning derived from the K as a whole.
Contra Preferentum Rule
Other rules  Contra Preferentem Rule: Expressed in art 1432. Allows a judge to interpret a clause in a
K against the person who stipulated it. Goes further in CCQ to deal with adhesion K’s. Used lots in cases
in Exoneration clause.
Art 1432
In case of doubt, a contract is interpreted in favour of the person who contracted the obligation and
against the person who stipulated it. In all cases, it is interpreted in favour of the adhering party or the
consumer
Construe a clause in a way least favourable to the party relying on that clause.
o
What is the general philosophical stance about interpreting K’s (NB difference b/n CV and CL)  INTENTION
i. CIVIL LAW
Art 1425  Subjective. Look to the subjective will of the parties. In 1013 of CCLC said only when meaning of the K is
doubtful, then look to the subjective intention. Interesting change.
o BUT…..not totally subjective…..Look to art 1426  common intention is of primary
importance….but…..look to things like the nature of the K or circumstance under which formed, previous
interpretation by parties. All quite objective.
Art 1425
The common intention of the parties rather than adherence to the literal meaning of the words shall be
sought in interpreting a contract.
Art 1426
In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the
interpretation which has already been given to it by the parties or which it may have received, and usage, are
all taken into account.
ii. COMMON LAW:
  Objective. Lord Reid in McCutcheon says – judicial task is not to discover the intention of the party. To decide
what each person was reasonably entitled to conclude (reminiscent of Carlill).
L’Estrange v. Graucob Proposition
The L’Estrange v. Graucob proposition  the signature of a K is conclusive (barring duress, etc.).
 If you sign it, objectively you have conveyed to the other party that you are intending to…..and…you are estopped
from going back on that promise
What if not a signed K?  Written terms to which the K refers but are in an oral or unsigned K. Example:
 Reward K (like Carlill)
 Or ticket cases, or dry-cleaning, parking, board an airplane. Lotto ticket
 Most of the time cases arise b/c of an exclusion of liability clause.
Page 3 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Parker v. The South Eastern Railway Co., Gabell v. The South Eastern Railway Co.
Jurisdiction [1871] England
Facts
- Deposit of articles in a railway cloakroom that are lost. Each customer given a ticket on which conditions
are written which exculpate the D. Condition was not liable for loss of goods exceeding ₤10.
Issues
Is the PL prevented from recovering based on clauses on a ticket that were not read nor signed.
Holding
For the D.
Ratio
Mellish JJ. – Bound if a reasonable person ought to expect to be bound. To measure this, must ask if the
railway did what is sufficient to convey to the minds of people in general that the ticket contains conditions.
Focus is on the railway company (D).
- If handed a ticket with writing knowing that the ticket contains conditions, person is bound even if he does
not read the ticket. In this case, however, did not read and did not know that there were conditions on the
ticket.
Bramwell:
- Unless conditions are unreasonable or the ticket is read and objected to, the PL must be bound by the
conditions on the ticket. People don’t usually put unreasonable conditions into their K’s (would be pushed
out of business)
Jukier
- Civil law would call this a K of deposit – Art 2280.
Thornton v. Shoe Lane Parking Ltd.
Jurisdiction [1971] England, Q.B. Denning
Facts
- Thornton enters parking garage, takes ticket, parks. Returns and is injured in garage.
- Ticket says “subject to conditions on premises” which are posted on a post near the place where ticket was
issued. Conditions exempt D from liability.
Issues
Is the D liable for the PL’s injury. Do the conditions apply?
Holding
For the PL – D cannot escape liability as it did do what was reasonably sufficient to call attention to the
exempting condition.
Ratio
- Red Hand Test: Conditions that are not merely regulatory (such as exempting conditions) must be printed
in red ink with a red hand pointing to it – or something equally startling.
- This condition was destructive of rights as included bodily harm. Also, very wide clause.
Note
- In civil, would have been covered by art 1474(2) see below
- Also manipulates offer and acceptance in Thornton  offeror was Shoelane, accepted by Thornton
and conditions on the ticket are therefore too late (after the formation of the K) but is not
remembered as offer and acceptance case.
Jukier on Parker and Thornton
 Parker and Thornton come out with different results. One was sufficiently pointed out to the PL and the other was
not. Different b/c of the reasonableness of the condition. Thornton says, more unreasonable the condition, the more
you must do to draw it to the customer’s attention.
Incorporation of terms into a K…but…L’estrange v. Graucob rule would have applied but…by luck, was not signed.
McCutcheon (A) v. David MacBrayne, Ltd. (R)
Facts:
 Appellant shipped car on Respondent’s carrier; R and A
have had many previous dealings
 The ship that car was on negligently sailed into a rock and
sank; car was total loss
 Shipping form has conditions (extremely long and in fine
print) which absolve Respondent of liability for negligence
 Respondent was not given form and did not sign it on this
occasion by mistake
Issue:
 Is Respondent liable for the car?
 conversely, is the Appellant bound by conditions he did not
expressly agree to?
Notes: [1964], H of L, Lord Delvin
Decision:
 Not a valid K – For the PL
Ratio: Proof of previous dealing is not sufficient to
incorporate an exculpatory clause into an unwritten
contract if a party was not aware of the content of
these dealings
 Wherever possible, the law will protect the
consumer because we are in a situation of
unequal bargaining power
Adhesion contracts are looked at with great suspicion
by the courts
Page 4 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Jukier on McCutcheon
 Issue turned on whether the condition was part of the obligational content of the K. Here NO
British Crane Hire Corp v. Ipswich Plant Hire
Jurisdiction England [1975] Q.B. Denning
Facts
- D hires a crane and driver from the PL. PL’s driver allowed the crane to sink into a marsh despite using
proper “navimats” or protection against sinking.
- Contract had not been signed but in previous dealings the contract contained the stipulation that the D
would be liable for the expenses.
Issues
Who must bare expense of recovering the machine from the marsh
Holding
For PL  can recover costs of sinking crane
Ratio
- Parties are of equal bargaining power in this case.
- Both parties knew the conditions well and knew the substance of those conditions.
- From McCutcheon, each party “was reasonably entitled to conclude from the attitude of the other” that
the D were accepting the crane on the PL’s conditions.
Notes:
“But of course” the parties would have said this was part of the obligational content.  this is an implied
obligation – implied in law (see below)
Jukier
 Issue also turned on whether the condition was part of the obligational content of the K. Here, YES
 Ipswich sits on the cusp of explicit and implicit obligations.
Can we pull some common themes. Differences b/n McCuthcheon and Ipswich. Most come down to fairness:
 Bargaining strengths of the parties. In McCutcheon the PL is in weaker bargaining power b/c 1) D is a monopoly
and 2) he is the consumer in an adhesion K (a civil law concept). In Ipswich, the parties were both in the trade and
were of equal bargaining power.
 Knowledge of the terms. In McCutcheon said not to have knowledge of the terms. Analogy to ticket cases above
(must have done what is sufficient to…..). However, in McCutcheon, Devlin said even if it happened 99 times, if
you never read the conditions, you are not bound. BUT…… in McCutcheon the contract can be seen to be unfair
whereas in Ipswich the K could be considered to be fair. Ipswich knew the usual conditions of the trade. Thus, the
opposite decision. (also see Hunter v. Syncrude)
 Prior Dealings. Goes towards calling the K fair but, as per Devlin in McCutcheon, could have entered into the K 99
times – if you didn’t read the K, doesn’t matter.
 Conditions in a K may or may not be reasonable depending on the K as a whole. Judge this relative to the bargaining
power of the parties, nature of the K, etc….
What is the best means of regulating this problem that Cuts Across Jurisdictions
1. Legislation: From Devlin in McCutcheon. Legislation is the considered the panacea.
 Anglo Cdn law of K and Tort is one of the last bastions of un-legislated law.
 In Civil, drafted Lord Devlin’s thought  Art 1379 protection for consumer in adhesion K. All three very
similar to Lord Devlin’s words.
2. Civil Law Regulation (see Articles above): Once you define it as an adhesion contract, aside from Contra
preferenta you can
 External clause is null unless called attention to  Art 1435 VERY similar to Parker
 Abusive Clause in Adhesion K is null
Art 1435
An external clause referred to in a contract is binding on the parties.
In a consumer contract or a contract of adhesion, however, an external clause is null if, at the time of
formation of the contract, it was not expressly brought to the attention of the consumer or adhering
party, unless the other party proves that the consumer or adhering party otherwise knew of it.
Art 1436
In a consumer contract or a contract of adhesion, a clause which is illegible or incomprehensible to a
reasonable person is null if the consumer or the adhering party suffers injury therefrom, unless the other
party proves that an adequate explanation of the nature and scope of the clause was given to the consumer
or adhering party.
Page 5 of 64
Contractual Obligations Summary – April 2005
Art 1437
Kirk Shannon
An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it
may be reduced.
An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the
adhering party and is therefore not in good faith; in particular, a clause which so departs from the
fundamental obligations arising from the rules normally governing the contract that it changes the nature
of the contract is an abusive clause.
Example
Lotto Qc case  We breached nothing b/c we followed the regulations. We had no obligation to pay.
 Court very quickly calls this an adhesion K.
 Question: do 1435, 1436, 1437 protect him. NO!
o Court held was sufficient, not illegible, not incomprehensible, and was not an exoneration clause.
o Clause on the K clearly states that serial numbers must match up to list at Lotto Qc, didn’t so no payment.

Are these really adequate protections????
3.
Other Alternatives:
 Focus on the types of clauses that cause problems consistently.
 Unfair K terms Act  Re exoneration clauses (see CBp.
 Specific legislation targeting exoneration clauses such as:
Art 1474
A person may not exclude or limit his liability for material injury caused to another through an intentional
or gross fault; a gross fault is a fault which shows gross recklessness, gross carelessness or gross
negligence.
He may not in any way exclude or limit his liability for bodily or moral injury caused to another.
 If gross fault or intention fault  Stupid or careless person wouldn’t do. (Puralator case)
 Thornton would be covered by Art 1474
Art 1475
A notice, whether posted or not, stipulating the exclusion or limitation of the obligation to make
reparation for injury resulting from the nonperformance of a contractual obligation has effect, in respect
of the creditor, only if the party who invokes the notice proves that the other party was aware of its
existence at the time the contract was formed.
 Do not have to know the content of the clause but must know the existence of the conditions. Something must draw
attention to (sounds like Thornton and Red Hand test)
Parole Evidence Rule
Flipside of McCutcheon: What if you have a K but is changed by oral conversation prior to signing of K?
Parol Evidence Rule: (Common Law doctrine) Subject to exceptions, when parties have set down terms in a document,
extrinsic evidence is not admissible to add, subtract or vary the terms of the written contract.
- Atiyah says this Rule doesn’t mean much
- Sits on the cusp of evidence and substantive law.
Civil Law Equiv: Look at article 2863, 2864,  Parties to juridical act set forth in writing cannot contradict by testimony.
Principles of Contract
Clear/ certainty of contracts are enforced to promote the concept of the K
 Worried about Fraud/lies.
 Worried about intention (like in Kleinwort). A lot of what you say in discussions may be inducement,etc.
Rule is not always applied strictly without exception
 Exceptions: Many….so Atiyah thinks the rule doesn’t exist
o Fraud, incapacity, Ambiguities…..
o Entire K theory, Colateral K theory  and also Art 2863
o See CBp. 230
Page 6 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Even when K’s have “entire agreement clauses” limiting K to written terms & no oral representations they are often ignored.
Gallen v. Allstate Grain Co.
Jurisdiction B.C.C.A. [1984]
Facts
- D wanted to grow and harvest buckwheat in B.C.. PL met with them and were told there was no worry
about weeds.
- Signed K that released D from liability for bad productiveness or any other matter pertaining to the seed.
- Crop failed due to weeds.
Issues
Is the D liable for the loss of the crop despite the K’s conditions.
Holding
For the PL. The oral guarantee stands.
Ratio
 The oral must prevail or could be an addition to the K.
- Evidence of an oral statement is relevant even where it may be to add to or subtract from, vary or contradict
the document. (In specific cases – see CBIp. 230)
o Possible that Oral representation adds to agreement (one-contract theory)
o Possible the Oral Rep is itself another agreement (two-contract theory)
Effects of both are the same in law.
- If Oral contradicts written, written was demonstrably made and must stand.
- If a K is induced by an oral misrepresentation that is inconsistent with written K, written K cannot
stand.
Adding, subtracting, etc. is fully reasonable.
Note
- What happens when Oral rep contradicts, written is in effect. J. says there is no contradiction. How so?
Contra Preferenta Rule must be explicit – weeds must be said explicitly.
B: Implied Obligations
Civil Law
The four corners of the agreement are not the end of the story. Both legal systems imply obligations in both fact and law.
In civil law there is a very clear theory (art 1434) whereas there is more haphazard system in the Common Law.
Consequence of finding an implied obligation: Then you are dealing with a breach of K and not in ECO/Torts.
Courts can imply obligations into the K:
 Implied in Fact  Represent obligations that the parties really intended but just didn’t make them explicit in their
written and oral K (Ipswich is about this according to Jukier – centres around notion that, if the parties had been
asked if this was included, the answers would have been “but of course”. Goes without saying (the key comes with
the car). Both legal systems do this to flesh out what the parties intended anyway.

Implied by law  Implied by the judiciary into the K regardless of what the parties may have intended. Best
shown in art 1434. (formerly art 1024 CCLC)
Art 1434
A contract validly formed binds the parties who have entered into it not only as to what they have
expressed in it but also as to what is incident to it according to its nature and in conformity with usage,
equity or law.
- Has used this article to extrapolate intentions….but….also to add obligations that were not intended by parties (see
Houle and Soucisse)
- Art 1434 has four ways to imply obligations: Nature, law, usage, equity.
o Nature:
 By virtue of the nature of the K, obligations are implied. Goes beyond nominate K’s.
Combination of the type of the K and the object of the K.
 Will be done, in many cases, to give business efficacy of that type of K.
 E.g. contracts of air carriage (safety and security), contracts for sale of dangers goods,
medical services (safety and security of patients), summer camps….
o Conformity with law:
 Imperative provisions: in various legal enactments (code, statutes). K’s are automatically
subject to those provisions whether or not you have turned your mind to them. (e.g.
vendor of a good is subject to uphold warranty against latent defects).
Page 7 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon

Suppletive provisions: when you have not turned your mind to certain provisions but are
alterable by law. Inserted to the extent that the parties have not changed them. They
could be changed had they been inserted into the K. (generally dealing with nominate
K’s)
 In the Common Law, areas like “sale of goods” which is done through legislation or
statute
o Conformity with usage:
 Most like custom
Raymor Painting Contractors (Canada) Ltd. v. Purolator Courier Ltd.
Jurisdiction [1976] C.S. Que
Facts
- The potential contractor could not get his bid in on time because Purolator did not deliver the letter to the
proper location. Would have received job as they were the lowest bid. D delivered to Kingston which
appeared in return address instead of address.
Issues
Is there a breach of a K.
Holding
Gross Negligence, breach of contract to deliver tender by next day. Given expectation interest. “Quite
extraordinary degree of stupidity.”
Ratio
- Exoneration clauses do not apply in situations of gross negligence or intentional harm (Art. 1474)
(Stupidity) (the care that the least careful and most stupid person would take in similar circumstances).
- Customary term (they pay specifically for the fast service) although there was no express promise to deliver
the next day. This obligation implied by custom and usage in the trade.
- Reasonable Man standard
- Obiter: exoneration clauses are within public order but in this case, it did not address the problem
Notes
- Only defence was “I didn’t breach”. But….clearly one of the customary terms of the K.
Jukier on Raymor
- Must ask where the case sits on the Implied in fact to implied by law. Sounds like could be “but of course” situation. But
others say it is implied by custom and usage.
o
Conformity with equity:
 Gives judiciary ability to imply good faith into the contract. Good faith can mean
different things in different contracts (duty to inform in Soucisse).
National Bank of Canada v. Soucisse
Jurisdiction SCC [1981] Beetz J., CIVIL
Facts
- Respondents are the heirs of Dr. Groulx who signed one promissory note (for $1400) and 2 letters of
suretyship guaranteeing repayment to Appellant bank of Maurice Robitaille’s current and future debts
- When Dr. G died, suretyship binding on to his heirs and estate under Art. 1937 CCLC (no longer
possible (CCQ art 2361)); Bank only informed heirs of promissory note obligation; heirs were not made
aware of suretyship or possibility of revocation
- Advances were made by bank to Maurice Robitaille’s company before ($15,000) and after ($107,000)
the death of the surety.
- Bank is suing heirs (under inherited suretyship) for these debts
Issues
Should the heirs be made to repay advances made after the death by a creditor (the Bank) who was aware of
the death when the heirs, who were completely unaware of the suretyship, were unable to revoke it?
Holding
For Soucisse – Debts after death were not due b/c of breach of obligation of Good Faith – duty to disclose
Ratio
There is an obligation of good faith is an implicit clause in all Ks. It is grounded in Article 1024 (equity)
(now Art 1434). The obligation of good faith translates into a different in obligation in all cases. (here 
the obligation to disclose). [Note that here K is silent…an obligation is ADDED]
- Bank had an obligation as soon as it learned of the death to disclose to the heirs of the surety that the
suretyship existed and was revocable – this obligation results from the principle that agreements must
be performed in good faith (ie bank turned what was a revocable suretyship into a non-revocable
suretyship)
- Because it was at fault, the Bank could not carry out its action. Respondents could plead a fin de nonrecevoir based on the fact that “no complaint can be based on, nor advantage derived from, one’s own
action, negligence, imprudence or incapacity, much less fault, to the detriment of another.” They are
estopped from continuing their suit against the hiers.
Page 8 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Jukier on Soucisse
- This begins development of trilogy of cases which Good Faith  (Soucisse, Houle, Bail)
- Beetz takes “Equity” and uses it to find a breach of good faith. With breach there finds fault and pleading fin de
non-recevoir. Equity implies an obligation into the K. He does this when the CCLC says NOTHING about Good
Faith. Reads in an obligation to perform in good faith which, in this K, is a duty to inform. BRILLIANT according
to Jukier.
- As a result, the legislature copied the jurisprudence in art 1375 of the CCQ.
- Soucisse and Houle are both cases dealing with performance of a K. Bail deals with the formation of the K.
Houle v. National Bank of Canada
Jurisdiction [1990] SCC, Civil, L’Heureux-Dubé J.
Facts
- Respondent (Houle Bros.) were shareholders in their family company
- Company had a credit line with Appellant Bank – security for loan consisted of letters of surety The
loan was a DEMAND loan, thus bank had a K-ual right to recall with NO notice.
- 20 days after signing of trust deed, Appellant bank decided to recall loan. It was aware of the impending
negotiations of sale of the company to new shareholders.
- Bank informed company of loan recall and took possession of the assets three hours later
- Respondents closed sale of company but received $700,000 less than expected. They are claiming this
amount from the Appellant bank.
Issues
Did the bank abuse its contractual right? If so, can the Respondents as third parties to the contract, ground
an action in contractual liability?
Holding
Recall of loan without a reasonable delay amounted to an abuse of bank’s contractual right to recall loan
with no notice.
Respondents must ground action in extra-contractual liability. Damages for $250,000
Ratio
Abuse of a K-ual right is a breach of the implied K-ual obligation of good faith. Criteria for abuse of K-ual
right is not malice or bad faith but “reasonableness”. Implied obligation to exercise K-ual right in a
reasonable manner. Now codified in Art 7 CCQ.
- The doctrine of abuse of contractual rights is part of Quebec civil law.
- The abuse of a contractual right gives rise to contractual liability; but, third parties to the contract have
no right of action in contractual liability.
- The bank did not abuse its contractual right to recall the loan (it had reasonable explanation for doing
so) however it abused its contractual right to realize securities after the demand for payment was not
met. The contractual right was abused because the right was exercised unreasonably (without sufficient
delay) when the bank knew of the impending sale of the company.
Notes
The Respondents are third parties to the contract. It is not appropriate to lift the corporate veil. The
Respondents must make a claim in extra-contractual liability. The banks impulsive and detrimental
repossession and sale of the company’s assets after such a short and unreasonable delay, while fully aware of
the respondents’ imminent sale of their shares, was a fault entailing its liability for the ensuing direct and
immediate damage caused to the shareholders.
Different from Soucisse as the Bank had an explicit right to call the loan on demand. Easier way out would
have been to pierce the corporate veil and sue contractually or use 1053/1457. The code codifies
jurisprudence through articles 6 and 7 and 1375
Implies an obligation to act in good faith in performance which, in this case, translates into a duty to give reasonable
notice.
Theory of Abuse of rights is central. Contract law must change to include notion that K obligations must be performed
within the broader confines of Good Faith.
- Express K’ual rights and NOT a fundamental right.
DIFFERENCE B/n SOUCISSE and HOULE: Soucisse adds an obligation. Houle overrides a right. In this way Houle
goes further than Soucisse. The K, here, was not silent. It gave the bank expressly the right to do what it did.
 If you imply an ob and has the effect of contradicting a clause in the K, what trumps??? Implied obligation of good
faith overrides or tempers the express condition.
Page 9 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Difference b/n Good faith and Abuse of Rights
 The context in which use doctrines is different. Abuse of rights only occurs if there is indeed a right being abused.
 Similarities include: Good faith is the overriding concept. When one implies the obligation of good faith which is
in contradiction of that is a right, that it becomes an abuse of rights case. Notion of abuse of rights does not stand on
its own – it is a particular application of the good faith doctrine.
Difference b/n Acting in Bad Faith and Not acting in Good Faith
 Old good faith test  If malicious and intention test (as in Civil prior to 1971 case).
Good Faith
 Now test of good faith has changed. It is now the test of reasonableness.
 There is a presumption of good faith in Art 2805.
Bad Faith
 Bad Faith is intentional and malicious. Bad faith is now relegated to fraud or other specific K’s (e.g. insurance K’s)
 This difference and the new standard is firmly entrenched as of Houle. Now entrenched in Art 6 and Art 7.
Art 6
Every person is bound to exercise his civil rights in good faith.
Art 7
No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner
which is contrary to the requirements of good faith.
Principles of K Law
Houle as a movement away Autonomy of the Will
 Argument is implying good faith in this case goes against autonomy of the will. According to Jukier, this is a
cogent argument. It does go against autonomy of the will.
 L’Heureux Dubé J.’s response is in para 65 CBp. 259  the insertion of good faith “inserts itself into today’s trend
toward a just and fair approach to rights and obligations”. In effect, slams the autonomy of the will theory
Common Law
Common Law does not understand Good Faith:
 Not persuaded by Civilian context. Think its too open, too broad. Sounds great but impossible to apply.
 Examples of Good Faith in CL  Brewer, Lac Minerals, Empress Towers
 Other concepts protect good faith indirectly  Extra-con as surrogate, constructive trusts, promissory estoppel
 No cohesive theory exists.
Transamerica Life Canada Inc. v. ING Canada
Jurisdiction
Facts
Issues
Holding
Ratio
Ont C.A. [2004] Laskin J.A DISSENTING. Common Law
- NN Life sold by ING to Transamerica Life. Post sale, PL claimed D had misrep’d the value of NN Life.
- D claimed PL knew of accounting errors that were the misrep’d issues but was “wilfully blind” to them.
- This, the D says, is a failure to disclose and a breach of implied duties of good faith thereby disentitling
PL from using them as part of a claim.
Was PL in breach of implied obligation of good faith?
Cannot imply an obligation of good faith.
D had a disclosure obligation written into the K, not PL. They could have written in a duty to disclose
for the PL but didn’t. Not for the courts, under the rubric of good faith to rewrite the bargain.
 Good faith referred to explicitly in the K in different circumstances – cannot be implied in others
Terms may be implied in a K in 3 situations
1. based on custom or usage
2. as the legal incidents of a particular class or kind of K
3. based on the presumed intention of the parties where the implied term must be nec. ‘to give
business efficacy to a K or as otherwise meeting the ‘officious bystander’ test as a term which
parties would say, if questioned, that they obviously assumed.
- Could try and base on No.3 but was not needed to give business efficacy to the K.
- Sees nothing obvious or necessary about the implied term pleaded by the D. It is inconsistent with the
entire agreement.
- Equal bargaining power and yet nowhere in K is there a duty for PL to disclose.
Page 10 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Jukier on Transamerica
 Para 90 and 91 – no good faith as relationship does not call for duty of good faith b/c both big companies and banks
which have access major T.O. law firms. No need to protect them.
 Cdn courts have not developed a comprehensive approach to implications of good faith in commercial contracts.
McKinlay Motors Ltd v. Honda Canada Inc.
Jurisdiction [1989] S.C.Nfld, Wells J., Common Law
Facts
- Honda and McKinlay (MM) dealership have long-standing relationship. MM has an excellent sales and
service record. (highest sales compared to other dealers)
- At Honda’s request MM begins renovation, but it proceeds slowly b/c MM is unsure that allocation of
cars would remain steady or increase to support expense of renovation
- Honda changes method for allocating cars to one which favours discretion over the mathematical
formula. K of Adhesion.  MM’s allocation decreases.
- As a result of reduced allocation, MM begins to suffer economic difficulties and does not move forward
with the expansion. Eventually Honda terminates MM’s contract (primarily for failure to renovate)
- McKinlay is suing on basis that reduced allocation of cars was an act of bad faith(??) and constituted a
breach of the dealership agreement.
- [Note that Honda did have the right to terminate the K “at will”.]
Issues
Did Honda breach its contract?
Holding
Honda is liable for breach of contract; breach of good faith requirement implied in K. Damages awarded for
proven losses arising directly from the breach.
Ratio
Common law courts may speak of obligation of “good faith” in order to mitigate situation of unfairness.
BUT…there is no consistent and coherent theory of good faith in the common law.
- There is obviously an implied term of any such agreement that the parties act towards each other in their
business dealings in good faith.
- Honda acted in bad faith by reducing the allocation of cars to MM Motors, therefore it breached the term
of good faith. There was no justification for such reduced allocations given that MM’s sales were high,
it was in a major market area and the number of cars entering the region did not decrease with import
restrictions. If the car allocations had been in good faith, MM would have been able to finance the
planned expansion, and there would have been no reason to terminate the agreement.
Jukier on McKinlay Motors
 Judged explicitly on good faith
 K of Adhesion. Engineered the drop in sales through allocation quotas. Downwards spiral of allocation of cars.
From 300 and some to 100 and some in two years.
 Termination was clean but the allocation of cars was in bad faith. Don’t know whether implied in law or in fact
Sounds like an art 1434 argument  breach of good faith is a breach of K and liable.
Part VI: Types of K’s the law should enforce – an alternative view
 Up to this point, only reason to deviate from autonomy of the wills theory is public order.
 From now on, look at when the law will not enforce an agreement even though there may be all essential elements of the
K. Looking to reasons other than public order. If you adhere to the autonomy of the will theory you will see the “becauses”
as different than you would if you see it as Ghestin does.
Ghestin, L’utile et le juste dans les contrats, 1981
Ghestin looks beyond the conservative autonomy of the will theory (see Roynat) and argues that there are other fundamental
reasons for a court to nullify a contract: utility & justice. Most of what the law does through capacity, misrepresentation,
duress, etc is protecting against some unfairness. Must have both utility and justice.
Reasons for rejecting the autonomy of the will
1. Myth of equality (inequality in bargaining power) Very few K’ing parties are equal.
2. Proliferation of adhesion contracts (K’s are no longer discrete K’s where there was bargaining which gov’t has
attempted to mitigate against through legislation of protective public order (for the individ))
Page 11 of 64
Contractual Obligations Summary – April 2005
-
Kirk Shannon
It is presumed that autonomy of the will includes both utile et juste.
- Let’s look at the justice of K’s  all reasons for getting out of a K is the fairness of the K. Parties are looking
for a way to get out. Quote of Fouillée is “Qui dit contractuel, dit juste.” This is rejected by Ghestin.
- Autonomy of the will creates this presumption but the parties may not be equal (see above)
If you view juste and utile as exceptions w/in the larger exception of public order, there is a very very strict application.
Court enforces very narrowly. Ghestin does not like this and says it does not work. Instead of saying when the state should
not enforce a K (due to lesion, error, unconc…..etc) – should say when should enforce K.
1) Le contrat est juste parce qu’il est utile
Public Utility
a) The contract is only an instrument that the law sanctions b/c it permits operations that have social utility; the
contract is subordinate to general interest. (similar to Fuller’s justification for expectation damages to ensure social
utility of the K)
b) Social utility of individual will
 Le contrat est l’instrument indispensable des prévisions individuelles et le contrat est l’instrument privilégié
de la liberté et de la responsabilité des individus.
 La parole donnée should not be justified by morality but by social utility. Utilitarian notion – must be
useful for society.
 K’s without a price, not useful.
 K’s with an impossible object
2) Le contrat n’est obligatoire que s’il est juste (this is the drastically different part of the theory – it is a concept of justice
in the K sense)
- Justice distributive: remettre à chacun la part qui lui revient : believes that contract should not play a role in distributive
justice. Does not want to re-distribute justive through the K.
- Justice commutative ou corrective is real contractual justice: Vise à maintenir ou rétablir en valeur l’état de choses
préexistant entre le créancier et le débiteur. Justice b/n two parties in a K. This is corrective justice. Keep the parties in
positions they were in before but make sure that K does not disrupt this balance. K should not make this balance worse
(nor should it redistribute so as to make it better)
o Equivalence of prestations within the K. Does not destroy the equilibrium of patrimonies of the parites. (see
Art 1406 on Lesion – disproportion b/n the prestations of the parties)
o Must be a balance between subjective (Gareau Auto) and objective (price) factors
Le principe de la justice contractuelle : Drives to demand that the contract does not disrupt the balance that exists between
the patrimonies of the parties. Protecting consent, therefore, is but the manner of forcing respect for contractual justice.
- The contract is not obligatory only b/c it is useful with the condition of it being just - C'est-à-dire conforme à la justice
contractuelle.
Ordre public de direction  utilité publique  justice distributive (salaire minimum)  nullité absolue
Ordre public de protection  justice sociale  justice corrective (interdiction des clauses abusives)  nullité relative
Règles régissant la formation du contrat
- Consent: Justice contractuelle : le consentement doit être libre, éclairé et réfléchi.
- L’objet : L’objet doit être licite (ordre public de direction)
- All necessary elements of formation : For the contract to be “utile” and just, the object and the price must be determined
(ordre public de protection). Il s’agit de protéger les parties que s’étaient mises en état d’infériorité (nullité relative)
- La cause : Cause illicite ou immorale – ordre public de direction – nullité absolue/ Absence de cause – nullité absolue
car ne répond pas à son utilité sociale
Conclusion : Reference to “l’utile” et “le juste” is more fertile than the simplistic application of the autonomy of the wills,
which today no longer permits us to take into account positive law and, most of all, in contrast to “l’utile et le juste”, does not
contain the elements of research and progress implied in these two notions.
Aside  Lots of this theory is practiced in doctrine of unconscionability in the CL.
Page 12 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Part VII: Reasons for setting aside agreements
A. Impaired Consent
S.1 Capacity
Sits at the border of two areas of law  law of persons and law of K’s. Primarily the law of persons.
Art 1385
A contract is formed by the sole exchange of consents between persons having capacity to contract,
unless, in addition, the law requires a particular form to be respected as a necessary condition of its
formation, or unless the parties require the contract to take the form of a solemn agreement.
It is also of the essence of a contract that it have a cause and an object.
Art 4
Every person is fully able to exercise his civil rights.
In certain cases, the law provides for representation or assistance.
 The CCLC used to outline which people were “incapable” to enter into K’s. Included Married Women until 1954.
Types of Incapables: Includes the “incapable major”, minors. Two senses of incapable majors:
o 1. Court orders that person is incapable
o 2. Persons around incapable or doctor can testify as to the factually incapable. (Thibodeau)
 Might make capable people incapable for certain reasons. As administrator of a property cannot buy property for
yourself. As tutor to minor (who could enter into a K for a minor) cannot buy property from minor, etc….
Contract with a Minor
 What happens when a minor enters into a K (eg used cars) – will only be annulled if it represents no benefit to the minor.
If there is lesion but “simple lesion or subjective lesion” which is different from art 1406(1). Irrelevant if you showed fake
ID or if it was a fair price – if it is useless to the minor.
Art 1406(2)
In cases involving a minor or a protected person of full age, lesion may also result from an obligation that
is considered to be excessive in view of the patrimonial situation of the person, the advantages he gains
from the contract and the general circumstances
Thibodeau v. Thibodeau
Jurisdiction
[1961] SCC – Taschereau J. Civil
Facts
- Contracts with brother in manner that is not favourable. As “curatrice”, his wife wished to have two
notarial acts nullified as, when they were signed, he was suffering from mental problems that did not allow
him to give valid consent.
Issues
Were the mental problems suffered sufficient to nullify consent.
Holding
K is null – no valid consent – impaired due to incapacity
Ratio
If the one of the parties does not have capacity to understand the effect of his acts, does not have will to
appreciate or to resist, if he can not weigh the acts he is binding himself to perform or the consequences that
he may suffer, he does not have to capacity to consent or contract
- Does not need to be totally insane. (factual incapacity)
- This man showed signs of mental derangement and intellectual instability prior to the signing of the Ks.
- This is not a question of capacity but one of consent Art 1385, 1398
- Courts reversed the presumption of capacity of Art 4 through testimonies and evidence
Notes
- No sympathy for the co-contractant (brother) but there is no attribution of fault in the question of
capacity (only in unconscionability).
- You do not have to be totally insane. The law will protect the incapable over the innocent cocontractant.
Common law: This would be decided under unconscionability and there the wrongdoing is relevant.
Page 13 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
S.2 Threats (Fear or Duress)
External consent does not mirror internal consent. It is different b/c of the acts of another. Both Civil and Common
characterize in similar ways.
Civil Law: Old Code is called violence or fear. In the new code it is called Fear – it is an act of violence (threat) that
engenders fear in the other party. Fits with Civil Law of K’s as this law is based on consent at the moment of formation. If
there is something wrong with the consent – problematic and the civil law will fix it. Art 1399
Art 1399
Consent may be given only in a free and enlightened manner.
It may be vitiated by error, fear or lesion
 “Free” sounds like duress in para 1. Must mount legal argumentation based in Para 2 if not free and enlightened.
Defects of Consent: Error, fear, lesion, fraud (which is a component of error – or “error induced by fraud”).
Common Law: Called Duress
Barton v. Armstrong
Jurisdiction
[1976] England, A.C. PC Common
Facts
- Barton claims that Armstrong coerced him into entering a commercial agreement to sell his interests in
the company by threatening to kill him and wants nullity.
Issues
Is it necessary for Barton to establish that he would not have executed the deed if it weren’t for the
threat?
Holding
K is null. Not nec to establish ‘but for threat would not have sold’
Ratio
- If Armstrong’s threats were A reason for Barton’s executing the deed he is entitled to relief
- The onus of proof on Armstrong to demonstrate that threats contributed nothing to decision to sign.
Dissent
Civilian approach.
- Defines duress as “threat to life and limb”.
- Consent, as determined by the trial and appeal judges, was present and the threat, although made, did
not play a role in Barton’s entering into the agreement.
Notes
- Analogous to Crown v. Clark: how would you know if the party would have entered into agreement?
- Public order element to it: we also want to sanction wrongdoing [more than protecting autonomy]
Jukier on Barton
- Determinative quality of the defect of consent. In this case, would he have sold the interests even without the threat?
- This is a public policy issue. We don’t really care if the threat to murder was the real reason – don’t want people going
around threatening people.
B: Threats of Economic Nature
Atlas Express Ltd. v. Kafco (importers and distributors) Ltd
Jurisdiction
[1989] England, Q.B. Tucker J.
Facts
- Kafco needed to have delivered cartons of basketware. When Atlas saw that he underestimated the
amount of carriages needed, he refused to deliver any more cartons unless Atlas paid more. Atlas agreed
because they were seriously dependant on this delivery but later refused to pay the extra amount.
Issues
Is K null for economic duress?
Holding
K is null for economic duress
Ratio
In determining whether there was a coercion of will (sounds like 1399 – vitiated), it is material to inquire
whether:
(1) the person coerced did or did not protest;
(2) at the time he was coerced, he did or did not have an alternative course open to him;
(3) he was independently advised;
(4) after entering the contract he took steps to avoid it.
The pressure must be such that the victim’s consent to the K was NOT VOLUNTARY.
- Economic duress must be distinguished from commercial pressure.
- Atlas signed the contract unwillingly and under compulsion. He had no bargaining power
- Consent given under economic duress is vitiated consent and thus revocable…UNLESS it is
approbated either expressly or by implication after the illegitimate pressure has ceased to operate.
Notes
- Analogous to Williams v. Roffey or Gilbert Steel: the finding of duress here may be due to the fact
that the promissee made the offer. There might also be a consideration issue
Page 14 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Jukier on Atlas
- Language that makes up duress: “no real consent”; “no option but to sign, unwilling agreement, under compulsion,
no free and equal say, no bargaining power, over a barrel, illegitimate pressure, intimidation, coercive acts…this makes
up the defence of duress in the common law. There is no code to tell us what constitutes duress so we look to case law.
Civil law – End: get more money. Means: we will not deliver. Atlas has a right not to deliver. Its means were not
illegitimate b/c it underestimated the original price (i.e. it wasn't trying to get more money just to increase profit margin).
BUT  Art 1403: it exercised its right abusively (if we can show that Atlas knew that Kafko would not be able to find a
carrier at the last minute).
Art 1403
Fear induced by the abusive exercise of a right or power or by the threat of such exercise vitiates consent.
-
Case exemplifies fine line b/n business pressure and duress. Duress requires to have no other option, no opportunity for
independent advice, protest (no protest in Williams v. Roffey), speed to avoid K
Also, “vitiated” is the language of 1399.
Jurisdiction
Facts
Issues
Holding
Ratio
J.J. Joubert Ltée v. Lapierre et Lapierre
[1972] C.S. Que, Colas J.
Joubert transferred the milk man’s status from that of an employee to that of an independent contractor
by not renewing his expired worker’s convention and thereby forcing him to sign the agreement under
the threat that he would lose his job if he did not [this was to prevent unionizing].
Valid K?
K is null for economic duress
- He signed under fear according to Art 1402 (995 CCLC). The complaint is reasonable here b/c of
the link of subordination b/n the parites.
- Here the means to coerce signing (threatening to fire) were legitimate but the ends (union busting)
were not. The purpose of the threat was to get rid of the collective bargaining agreement (the union).
- You don’t necessarily need contractual injustice à la Ghestin.
- It is not a question of unfairness but of autonomy, the only freedom left in contract law. You cannot
force someone into a contract no matter how good a deal it is. Joubert argued that the employees
would get a better deal under the new agreement (i.e. that they would make more $). Court says that
the advantageous nature of the K is not an "objective" one - it is up to the person to decide if the
situation is worse or not.
- Public order reasons as well.
What is the effect of the fact that we all have different thresholds of fear?
Should we look to the subjective or objective?  should it be engendering fear in a reasonable person or in this person?
What if the person is a very paranoid person?
 Used to have a two step test in the CCLC  1. Reasonable and present fear of serious injury (objective threshold).
2. Age, sex, character, condition of party (subjective)
 Same test still basically applies but also have requirement of imputability.
Art 1402
Fear of serious injury to the person or property of one of the parties vitiates consent given by that party
where the fear is induced by violence or threats exerted or made by or known to the other party.
(2) Apprehended injury may also relate to another person or his property and is appraised according to the
circumstances
 Commentaires say that it is essentially the same Article as in the CCLC.
 Note  does not have to be a threat against you. Threat has to come from the K’ing party or be known about by the
K’ing party (imputability – as in Barclay’s Bank case)
Many threats are made. But what about the “If you don’t pay me I’ll sue you”
 Differentiation b/n the ends and the means. BOTH must be legitimate in order to have valid K free of duress.
o Joubert says can’t have fear w/out some form of illegitimacy.
o MEANS: Even if you have a right to sue, law will still not let you use illegitimate means to assert that
right. Means can cause the K to be vitiated.
o ENDS: The ends could also be illegitimate.
Page 15 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
S.3 Undue Influence
ONLY A COMMON LAW concept. No direct equivalent in the Civil Law.
Undue influence can be presumed from the fact of a relationship of trust and confidence. Burden then shifts to wrongdoer to
show that K was entered into freely.
 Similar to duress, if you are unduly influence then your consent is not free – it is impaired (like in duress)
 Different from duress –NO threat in undue influence. It’s all vibes around a relationship.
 Almost always occurs when people are guaranteeing the debts of another.
 Lords other than Denning in Lloyd’s Bank case go for undue influence.
 In this case, not fraud as there is no connection with the bank – imputability.
Barclays Bank Plc v. O’Brien
Jurisdiction
[1994] 1 AC 180 HofL – Lord Browne Wilkinson
Facts
- Husband agreed with bank that he would secure his liability by a second charge over the
matrimonial home owned jointly by the husband and wife.
- Husband and wife went to the bank and signed the documents without reading them. Contrary to the
instructions of the bank manager, the bank staff did not advise either party of the content of the
documents or recommend the wife to seek independent legal advice.
- Co’s indebtedness increased beyond the agreed limit and bank brought possession proceedings
against the husband and wife.
- The wife claimed that (1) her husband put undue pressure on her to sign; and (2) that her husband
misrepresented the effect of the legal charge (she thought the security was limited to L60,000).
Issues
Is the K null b/c of undue influence
Holding
Not null  only enforceable to ₤60,000
Ratio
A person who enters into K under UI can have it set aside. Undue influence can be presumed from the
fact of a relationship of trust and confidence. Burden then shifts to wrongdoer to show that K was
entered into freely. Where UI exists and K is with a third party, third party must take reasonable steps to
ensure that weaker party entered into agreement freely (inform and advise to seek independent advice)
[CONSTRUCTIVE NOTICE]
 There are two ways to establish a “confidential relationship”  (1) certain relationships are such as a
matter of law (e.g. doctor-patient, lawyer-client); (2) claimant may prove the de facto existence of a
relationship under which he/she generally reposed trust and confidence in wrongdoer.
 Husband and wife relationship is not a confidential relationship as a matter of law; falls into class 2
 Where creditor is aware that one cohabitant has agreed to stand as surety for the other’s loan, (1)
surety obligation will be valid and enforceable unless there was undue influence or misrepresentation;
(2) if there was UI or misresp, creidtor will be unable to enforce surety obligation unless he took
reasonable steps to satisfy himself that surety entered into the obligation freely and with knowledge
of all the facts; (3) reasonable steps = warn surety at a meeting not attended by principal debtor and
advise her to seek independent legal advice
Note
- Actual undue influence: claimant must prove actual exertion of undue pressure
- Presumed Undue Influence: undue influence is presumed from the fact of a relationship of trust
and confidence. Once a confidential relationship has been proved, burden shifts to wrongdoer to
show that transaction was entered into freely.
Jukier
 No specific threat but entire relationship the complainant generally had trust from this relationship.
 Remember that husband did not have imputability but yet bank is forced to suffer. This is b/c of
CONSTRUCTIVE NOTICE: they ought to know that whenever they are dealing with a spouse signing a
guarantee for another spouses business, make sure it is done freely. Offer ability to get independent advice.
From civilian perspective we can justify that the bank loses through good faith. Civil law has NO concept of Undue
Influence. Good Faith includes obligation to inform (Bail case)
Note as well, there are two competing policy considerations at play in this case: (1) the fact that despite increasing equality
of the sexes, men often have control over financial decisions (thus creating possibility of them having undue influence in
decisions affecting jointly held wealth); (2) if loans on security of matrimonial homes are rendered vulnerable – may reduce
flow of loan capital to business enterprises.
Page 16 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
B: Exploitation and Unfairness
 Slight misnomer to only call this exploitation and unfairness. Many of those found in Impaired consent section would
also be considered exploitation and unfairness.
 However, these are best examples. BUT….there is no legal category of “Exploitation and Unfairness”…..however, these
are the ways the law seeks to uphold or protect parties who have been exploited and are subject to K’s that are unfair.
S. 1 Interpretation as a tool to Ensure Fairness of Terms
How the courts have used existing doctrines to promote fairness and protect against exploitation
 Tool of interpretation.
 First look to the exoneration clause. Waddams says (CBp.53 quoted in Hunter v. Syncrude) that
o 1) not all exclusion clauses are unreasonable and
o 2) it is not only exclusion clauses that are potentially abusive.
 We have seen this in McCuthcheon, Ipswitch, L’Estrange…...
 When they are clearly part of the obligational content – what do we do?
Solutions
 Legislative intervention. Eg. 1977 Unfair K terms Act. (excerpt on CBp. 40)  Applies in consumer K’s and
standard form K’s. Puts a test of reasonableness on exoneration clauses in that particular context. There is
equivalent legislation in Canada.
 Court Solutions: L’Estrange v. Graucob  Parties who sign K are bound by the K. Does not deal with what they
intended to sign but what they signed. Look to dissent in Tilden , cannot get past this L’Estrange.
Two approaches
 From Ghestin: whether or not a judge holds on to the autonomy of the will theory will affect hoe open they are to …
 Traditional attitude: avoid difficult task of deciding issue of “reasonableness” of clauses. Linked to belief that a K is a K.
Tilden Rent-A-Car Co. v. Clendenning
Jurisdiction
[1978] Common Law
Facts
Clendenning rents a car from Tilden at the airport. He signs the contract quickly without reading the
terms: By paying 2.00/day his liability for damages to the car will be NIL, except if the damage results
from illegal acts. D drives the car into a pole and then pleads guilty to a charge of impaired driving, as
suggested by his lawyer.
Issues
Is the D liable for the damage cause to the car while being driven by him by reason of the exclusionary
provisions in the K?
Holding
The clause is null
Ratio
Dubin J.A.
- The clause is inconsistent with the express terms
- Procedural unfairness in the formation of the contract: Given the circumstances, the employee
should have taken reasonable measures to draw the terms to the attention of the other party
(Thorton). No steps were taken to alert the part. Staff told not to inform unless asked.
- Substantive unfairness of the clause: The ambit of the clause was potentially unreasonable and
limitless:
 Clause would apply even if the driver had one glass of wine, or if drove into a parking lot
(off a provincial or federal highway) would not be covered. (Canadian Factors)
Dissent
Note
Relationship between the parties: Inequality in bargaining power
The court does not apply the l’Estrange Rule blindly when to do so would be to enforce an exclusion
clause in an unfair situation.
L’Estrange – if you sign something you are necessarily bound by it [dissent]. Traditional mindset of
autonomy of the will.
This is clearly an unconscionability case though this wording is not used.
Page 17 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Procedural issues with the K  subjective factors (relate to the circumstances around the conclusion of the K)
o Hurried nature of the conclusion of the K.
o Tiny, hidden clause that was on the back and was not read.
o Adhesion or standard form K.  unequal bargaining power.
o No steps to alert of the limits by the staff.
Substantive issues  Objective issues
o Unfair  Far-reaching or scope of the exoneration clause
o Fundamental Breach (possibly?)
Procedural and subjective factors go to abuse of bargaining power. Unfair K due to scope or broadness of clauses (objective
or substantive). Fits nicely into general thread of all cases from Lloyds Bank.
TILDEN IS REVISTED BELOW AT P. __
Fundamental Breach
An exoneration clause will not apply to exclude liability for the doing of the very thing that was at the root of the contract.
George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd.
Jurisdiction
[1983] QB CA Common Denning M.R.
Facts
Plaintiff orally ordered cabbage seeds from the defendant. The invoice of sale contained conditions
excluding “any express or implied condition or warranty”. The seed supplied was not late cabbage seed
and was unmerchantable.
Issues
Read this case as doctrine  description of history of interpretation of K’s
Holding
Fundamental Breach: exclusion clause is inapplicable
Ratio
Denning J.
- True construction approach (NO): Courts would resort to the true interpretation of the contract in
order to strike down an unfair interpretation clause, arguing that the clause was not specific enough.
Problem was then exoneration clauses became longer and more complicated. Criticises this
approach as it is NOT true. Judges would be departing from the meaning of the words and straining
the words such that a party could be protected.
- Doctrine of fundamental breach (YES): An exoneration clause will not apply to exclude liability
for the doing of the very thing that was at the root of the contract. It is an inflexible rule of law and
Denning argues that it should be a tool of construction and not a rule in itself [this has traces in art.
1437].
Denning disagrees with the notion that exclusion clauses are to be construed strictly contra preferentum
(Gallen), whereas limitation clauses are to be construed naturally Art 1432 in Quebec  This is the
strict construction approach. Denning notes that, if you look at the plain language of the two, there is
“nothing to choose between them”. He then reads a limitation clause contra preferentem.
Notes
Strict approach to exoneration clauses where one will not exclude liability for general negligence if a
narrower meaning can be attached to it. They are using it to judge the reasonableness of the clause.
Jukier on Mitchell
 Denning devels doctrinal tools to do what Tilden did at the end of the day.
 What is really going on is a wish to uphold the reasonableness of clauses.
 Two basic approaches that courts had taken to unfair exoneration clauses
o True construction of the K approach: Criticism by Denning as this interpretation
o Fundamental Breach doctrine: ONLY has meaning in the Common Law. (there is a similar thing in
Civil but it is not called same thing).
Photo Production Ltd. v. Securicor Transport Ltd.
Jurisdiction
[1980] Common House of Lords
Facts
Photo Production hired a watchman who was clearly underpaid and deliberately set fire to the building
(but did not intend to destroy the factory). The contract incorporated printed standard conditions so that
Securicor would not be liable for fire except if caused by negligence (here: deliberate action…).
Issues
Is Securicor liable for the actions of the fire-starting employee?
Holding
Securicor is exempted from liability
Page 18 of 64
Contractual Obligations Summary – April 2005
Ratio
Kirk Shannon
-
Fundamental breach: The clause undermines the very thing the company had promised to do.
BUT this doctrine should not be a fixed rule. He holds that exemption clauses must be very clearly
worded if they are to exclude liability for fundamental breach.
- The application of the fundamental breach doctrine depends on: the nature of the contract; what the
rest of K says; salary of employee; bargaining power; whether parties have assumed risks, etc.
Rejected Fundamental Breach (at CBp. 40) b/c
o 1. Equal bargaining power
o 2. Notion of risk  Not much money paid for security  modest charge for visit (ie,
look in light of other terms of K). One party assumed risk of what was happening.
Words were very clear in the exclusion clause. Factory assumed risk. The watchman
was not paid much for his work: more reasonable that there is a wider ambit for
exclusion of liability.
- It would be reasonable to assume that Photo Productions (as it is paying next to nothing for the
patrolman) should assume the substantial risk whereas Securicor only a modest risk.
Notes
The exclusion clause should be interpreted contra preferendum and so there would have to be clear
words to the effect that the exclusion clause includes also deliberate actions in addition to negligence.
Jukier on Photo Production v. Securicor
 His job was to protect factory and he is the one that burnt it down. Fundemental Breach was rejected????
Fundamental Breach and Contra Preferentum
 If there is an exoneration clause but the person who is trying to assert is one who committed a breach so
fundamental a breach of the root of the K – cannot be exempt. It is called a DOCTRINE OF LAW. Must be
applied.
Critiques of Fundamental Breach
 Very difficult to define what a fundamental breach is.
 Sidetracks the examination. Does not focus on the fairness of the exoneration clause. Instead focuses on the breach
which should not be the nature of the enquiry. Waddams says, cannot look at the clause in isolation from the K,
parties to the K and circumstances of the K. Why does it only apply to exoneration clauses – are they the only ones
capable of being affected by breach?
Look to art 1437  Abusive clause is not only an exoneration clause (but can be). Also sounds like Fundamental breach
(clause which allows you to completely go against the fundamental elements of the K
Hunter Engineering Co. v. Syncrude Canada Ltd.
Jurisdiction
[1989] Common SCC
Facts
Syncrude entered into three contracts, one of which being with Allis-Chalmers for the supply of a $ 4.1 M
extraction conveyor system, including four extraction gearboxes. The purchase agreement excluded
statutory warranties and conditions. The gearboxes were supplied but they were unfit for the service and
were repaired at Syncrude’s costs. They seek compensation.
Issues
Is Allis-Chalmers liable under the contrince of fundamental breach?
Holding
Valid exclusion clause – doctrine of fundamental breach does not apply.
Ratio
Dickson J. – OBITER
This is clearly a case of fundamental breach since the defect destroyed the workable character of the
machine, but Dickson rejects this doctrine. Does not favour requiring the court to assess the reasonableness
of the K terms.
- Justification from Suisse Atlantique: “If the parties clearly intended an exclusion clause to apply in the
event of fundamental breach, the party in breach would be exempted from liability”.
- Especially in commercial settings where there often equality of bargaining power, exclusion clauses
are not always unreasonable and unfair according to Waddams.
- The doctrine of fundamental breach came down to a game of characterization of the breach instead of
the exoneration clause. Needs to be contextual. “there is little value in cloaking the inquiry behind a
construct that takes on its own idiosyncratic traits…”
Dickson replaces the doctrine of fundamental breach with unconscionability but does not apply it here
since there was no inequality of bargaining power.
Dissent
Wilson J. (dissent):
- We should not dispense with doctrine of fundamental breach even though it is not a rule of law.
Page 19 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
-
Notes
-
About the doctrine of unconscionability: it is less certain than the doctrine of fundamental breach,
less certain than “the length of the Chancellor’s foot”.
- We should apply fairness and reasonableness while taking into account fundamental breach.
- Residual power residing in the court to make thinks fair and reasonable. Waddams says there is
no different from unconscionable.
Similar to Photo Production but in the Canadian context
Dickson’s analysis is similar to that of Fried: i.e. apply the doctrine of unconscionability instead of an
artificial doctrine of fundamental breach.
Dickson recognizes what Denning said in George Mitchell. Interpretation techniques are keys to bring
fairness and reasonableness.
Jukier on Hunter
 Desire to KILL fundamental breach. Really wants to replace Fundamental Breach with Unconscionability. Hold
parties to terms provided the terms are not unconscionable.
 Wilson does not like fundamental breach as point of law….but….does not want to do away with it entirely. Melds
true construction of the K with fundamental breach.
 Also, she (Wilson J) seems to care about fairness and reasonableness of the clause….but…..then says
unconscionability may be less certain than fundamental breach.
Unconscionability and Fundamental Breach: Hold parties to terms provided the terms are not unconscionable. Let us
focus on the clauses themselves rather than focusing on the breach (whether it is fundamental or not….etc). Apply doctrine
that deals in fairness. Go the Ghestin route (like Freed in consideration debate)
S.2 State of Necessity
There is a state of necessity in both common and civil. Common usually puts them in categories whereas civil appends them
to violence and fear in Art 1399. There are just two different (duress and state of necessity) ways until unconscionability
comes along with Lloyds Bank
 Typical example  drowning and somebody asks for huge amount money to save you. You agree to anything.
Common Law
 Post v. Jones, called a salvage agreement where one is in dire straits and agreement. Courts have recognised that if
situations allow for extortion, they should not be upheld.
Post v. Jones
Jurisdiction
[1856] US Common Law
Facts
A ship containing valuable cargo was stranded in the Arctic Ocean which was only navigable for another
15 days. Another ship passed by and offered to salvage them if they auctioned their whale oil and bone
(their cargo) and so they did so for a minimal price. (salvage agreement) Stuck in an ocean that will not
be navigable. Dire necessity. Crew was glad to escape with their lives. Master of the ship was
hopeless, helpless and passive.
Issues
Is the K valid? Is in null as was a salvage agreement in a state of necessity.
Holding
Contract is null
Ratio
“The contrivance of an auction sale, under such circumstances, where the master of the Richmond
was hopeless, helpless, and passive – where there was no market, no money, no competition –
where one party had absolute power and the other had no choice […] is a transaction which has no
characteristic of a valid k.
We can see this case as the court asserting some general power of control over the reasonableness of
contracts.
 One party had absolute power and the other party had no choice but submission.
 Cannot avail themselves of the calamities of others to drive a bargain.
Jukier on Post v. Jones
 Way before a doctrine of unconscionability.
 Seems to be against public order in some way  court “will not permit the performance of a public duty to be
turned into a traffic of profit.”
Used to be put into a specifc exception called “Maritime Salvage Cases”. But Jukier thinks we can extrapolate and see
this as a recognition that courts have asserted some control over the reasonableness of K’s. 
Page 20 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Civil Law
Under the heading of violence or fear. However, states of necessity do not stem from the co-contractant and therefore are
not imputable to him. Problem therefore arises as seen in case below.

Why not lesion? (If price wasn’t fair). This is more under exploitation and unfairness and not Violence and Fear
(as is needed in the civil code (C.N. 1109 or CCQ 1399)
NO historical tradition in French or Quebec law for lesion  It is restricted to incapacity.
Art 1405
Except in the cases expressly provided by law, lesion vitiates consent only in respect of minors and
persons of full age under protective supervision
 Can’t have situation predicated on lesion in a civilian tradition that is based on consent and autonomy of the will.
Tribunal Civil de Saumur, 5 juin 1947 - Époux Strauss-Schillio c. Vve Goblet
Jurisdiction
French Civil Law
Facts
After WWII, the jewish couple Strauss-Schillio, wish to have annulled the K of sale of their movables to
Mme Goblet in 1940. Anti-semetic legislation forced her to sell all her goods at whatever price for fear
that the Vichy regime would take away her things.
Issues
Was this a state of necessity? Through what means?
Holding
The contract is valid
Ratio
- A simple state of necessity that a contracting party finds himself in is not violence or fear in and of
itself unless something more precise and imputable to the co-contractant can be found.
- Il faut que le consentement extorqué ne résulte pas exclusivement de circonstances extérieures.
- In this case, it was not the result of violence but rather an efficient means to avoid future violence.
The co-contractant was not the author of the violence.
- Violence was only the exterior state of necessity  co-contractant must have something to do w/ or
be the author of the state of necessity.
- Mme Goblet did not abuse her position and therefore K was not null
Notes
Art 1404: Consent to a contract, to object of which is to deliver the person making it is not vitiate where
the other contracting party, although aware of the state of necessity, is acting in good faith. Notion of
imputability is required also in Art 1401 & 1402.
 Cannot argue lesion (b/c is civil) and can’t just say it is unfair. SO….only way in Civil to get out of it is concept of
defective consent. Art 1399. Free and enlightened manner  can be vitiated only by fraud, etc, VIOLENCE OR
FEAR.
Who is responsible for the state of necessity??
 When is it the other persons problem?
o When the co-contractant takes advantage of the situation. It is when you have this absolute power b/c of
hopelessness, helplessness  When you take advantage, then it is imputable to you. (see Post v. Jones)
o Just b/c you are in a state of necessity and the co-contractant knows about it doesn’t mean that the
wrongdoing is imputable to them. See Art 1404.
Common Law
 Imputability goes further than just A and B…..but does not extend to everyone
S.3 Unconscionability
Lesion (in the civil law) is the closest counterpart to unconscionability in Common Law but it applies only to
minors, incapacitated adults and particular situations as provided by law (Art 1405)
Unconscionable Transaction: A man is so placed as to be in need of special care and protection and yet his weakness is
exploited by another far stronger than himself so as to get his property at a gross undervalue.
Is the best way to deal with this by putting into separate doctrines or is best to have one overarching doctrine of
unconscionability? Recall Wilson J (dissenting) in Hunter v. Syncrude: unconscionability is less certain than the doctrine
of fundamental breach, less certain than “the length of the Chancellor’s foot”.
Page 21 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Most like Barclay’s Bank v. O’Brian which deals with undue influence (other two decisions in Lloyds based on undue
influence)
Lloyds Bank Ltd. v. Bundy
Jurisdiction
[1975] Common England, Creation of the doctrine of unconscionability
Facts
Bundy’s farm (only asset) was worth ₤10 000. He mortgaged his house to a total amount of ₤11 000 to
guarantee his son’s company debts. The son’s business was going under and the bank knew it. Yet, it
went back to the father and asked for a mortgage over the property’s worth; the father did not get
independent advice on that occasion. The Bank foreclosed on the mortgage because the company went
bankrupt.
Issues
Doctrine of unconscionability.
Holding
The Bank cannot foreclose on the mortgage
Ratio
Lord Denning (in minority opinion) Therefore this is not considered binding. Majority based on undue
influence: relationship of trust: the weaker party was influenced by the strong one, which created a duty
on the part of the stronger party to make sure that the weaker party had an independent legal advice.]
- Denning uses horizontal thinking techniques to pull threads through the various exceptions to
freedom of contract.
-
1) Unequal bargaining power: procedural unfairness; the way in which the contract was formed,
negotiated and completed. Present case: undue influences or pressure by the bank; no possibility of
independent advice.
-
2) Unfairness of the contract: substantive unfairness in the terms of the actual bargaining. Here
price of sale was grossly undervalued
 English law gives relief to one who, w/out independent advice, enters into a K upon terms which are
very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining
power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity,
coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.
Notes
This case seems to have created the legal concept of unconscionability in common law. See Hunter v.
Syndrude
Jukier on Lloyds Bank
 Denning points out that we already use it in other cases, why don’t we just put is all together and call it by one
name. Post v. Jones is the same thing. We may put it in the category of “Maritime Salvage case”, but it is really
unconscionability. We should pull a thread through all these categories and make a new category.
 Usually, no bargain will be upset as we must ensure certainty and stability of K’s as an institution. BUT… there are
exceptions.
 Tilden is a great case to show how all factors are tied together with this thread of unconscionability (even though the
word itself is not used).
 Cannot work in Hunter b/c, as Dickson states, they are of equal bargain power.
 Puts us on a slippery slope but Jukier still thinks it can be applied properly.
For unconscionability must have twin components:
1. Inequality of bargaining power (could be many situations – could be capacity or any other sit).
2. Exploitation or abuse of that unequal bargaining power.
IMPACT of UNCONSCIONABILITY
 Debate still rages
 Some believe that this has created an anglo-canadian doctrine of unconscionability (such as Waddams).
 There are those who have taken as a general concept, but, as in National Westminster Bank, not always the case.
Page 22 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
National Westminster Bank Plc. V. Morgan
 House of Lords [1985] Lord Scarman.
 Undue Influence was basis for the decision which is not what interests us.
 Lord Scarman  [Unconscionability] can never become an appropriate basis of principle of an equitable
doctrine which is concerned with transactions “not to be reasonably accounted for on the grounds of friendship,
relationship, charity, or other ordinary motives on which ordinary men act.”
 Ie. There is no doctrine and there should not be. “I question whether there is any need in the modern law to erect
a general principle of relief against inequality of bargaining power,” Puts the ball in the legislature’s court.
 Lloyds Bank decision is not based on unconscionability but rather on Undue Influence. Denning’s judgment is
obiter.
Return to Hunter Engineering v. Syncrude
 Waddams says there are many cases in Canada that have applied doctrine of unconscionability.
 Most of these were at lower court decisions……until…..Hunter Engineering v. Syncrude  Was looked at this
through Fundemental breach. Dickson rejects fundamental breach. Agrees with Lords that fundamental breach
should no longer be the law with respect to exoneration clauses. HOWEVER –
 “I am inclined to replace the doctrine of fundamental breach with a rule that holds the parties to the terms of their
agreement, provided the agreement is no unconscionable.”
o This seems to support unconscionability….but…….Can’t apply the doctrine in this case as there was no
unequal bargaining power.
o Still, reference to the doctrine in favourable terms.
 Seen already in Transamerica case where says “ don’t come to the court for any reason unless in position of unequal
bargaining power.”
Principles of Contract
Arguments against Unconscionability  Why should we not have unconscionability?
 Certainty and Stability conflicts with this idea of uncons.
 Could, potentially, destroy the autonomy of the wills theory.
 Open of the floodgates.
 Slippery Slope argument. Worried that definition of abuse will slowly lead to encompassing many things. What
should be in the K with such a doctrine
 Used as a life-jacket for people who enter into silly bargains.
SO….can we accurately explain the appropriate instance of where it should be applied?
 Has been attempted through legislation (e.g. US restatement, Unidroit….).
 Has been attempted in Art 1406, Art 2332 and s.8 CPA of Quebec
 Issue is how we can properly insert Unconsc into K and in what instance?
What about corporations
 No stated law on this. Draft code allowed for general lesion provision that DID NOT extend to corps.

But..very few examples of where this could work (unequal bargaining power).
Toker v. Westerman
Jurisdiction
N.J. U.S. [1970]
Facts
D bought a fridge for 2.5 times the value of the appliance. D is refusing to pay the remaining $500 or so
(the final payments of the fridge) claiming that the K clause was unconscionable.
Issues
Is selling a fridge for 2.5 times actual value unconscionable?
Holding
Yes – D does not have to pay remainder of payments.
Ratio
Suffice it to say that in the instant case the court finds as shocking, and therefore unconscionable, the sale
of goods for approximately 21/2 times their reasonable retail value.
- Reference to the K injuring the public in some way.
Jukier on Toker v. Westerman
 One argument is that this is not seen this as a proper case to use unconscionability. Used as a life-jacket for people
who enter into silly bargains. There was no unequal bargaining power and only an unfair price.
 Another view of the case could be:
Page 23 of 64
Contractual Obligations Summary – April 2005
o
o
Kirk Shannon
Unequal bargaining power stems from fact that people were on social assistance. Inequality in economic
power is often seen as inequality in bargaining power.
Or, unequal bargaining power b/c door to door salesman (Itinerant vendor). This is considered particularly
susceptible of abuse. This has been placed in the Consumer Protection Act wherein you have 10 days to
get out of the sale.
Tilden Rent-A-Car Co. v. Clendenning
Jurisdiction
[1978] Ont C.A. Common Law
Facts
Clendenning rents a car from Tilden at the airport. He signs the contract quickly without reading the
terms: By paying 2.00/day his liability for damages to the car will be NIL, except if the damage results
from illegal acts. C drives the car into a pole and then pleads guilty to a charge of impaired driving, as
suggested by his lawyer.
Issues
Although contract was signed, is D bound to pay.
Holding
The clause is null
Ratio
Dubin J
- The clause is inconsistent with the express terms
- Procedural fairness in the formation of the contract: Given the circumstances, the employee should
have taken reasonable measures to draw the terms to the attention of the other party (Thorton). No
steps were taken to alert the part. Staff told not to inform unless asked.
- Substantive unfairness of the clause: The ambit of the clause was potentially unreasonable and
limitless:
Clause would apply even if the driver had a glass of wine (Canadian Factors), or if drove into a
parking lot (off a provincial or federal highway) would not be covered.
Relationship between the parties: Inequality in bargaining power
- The court does not apply the l’Estrange Rule blindly when to do so would be to enforce an exclusion
clause in an unfair situation.
Three possible arguments for this case
1. On its face it is not an unconscionability decision. In fact, on its face the explicit reason is a watering down of the
L’Estrange v. Graucob proposition (which is, if you sign a document you are bound by it b/c we look at the objective view
rather than the subjective intention).
 Strength of inference that signature truly shows consent is not always the case. It varies with circumstances. IT IS
NOT AN IRREBUTTABLE PRESUMPTION.
o In this case Standard form K, consumer, hurried, procedural….etc….
 2. OR….could be thought of through another lense. Unconscionability.  A situation where there is an abuse or
exploitation (substantively) of an unequal bargaining powers which lends itself to that abuse.
 Waddams says there should be
o An inequality in Bargaining power
o An inequality in Exchange.
 3. Per Beley - Wish on the judiciary’s part to protect a form of reliance  not protect reliance of A on the promise of B
but….trying to protect the reliance of A on the contractual product produced B (Tilden in this case). Rely on the fact that the
standard form K that they impose is a reasonable one in the case. Here the product is the K that Tilden creates and there is a
reliance that this K will not be defective.
S.4 Civil Law and Lesion
A: Lesion in the Civil Code
Look at the code  Art 1399 and impaired consent which is fear in the civil law.
 Either deals with incapacity or a manner of the judiciary getting out of autonomy of the wills  Neither of which are
really a defect of consent.
1. First Idea of lesion – Defect of consent
Art 1399
Consent may be given only in a free and enlightened manner.
It may be vitiated by error, fear or lesion
 Shows that consent is basis of civil law of K  free and enlightened manner.
Page 24 of 64
Contractual Obligations Summary – April 2005

Kirk Shannon
o Free refers to duress or fear
o Fraud (subset of error) deals with enlightened manner
Jukier does not think this is the right place to put lesion
o Use is limited  minors and incapable persons (eg Thibodeau v. Thibodeau)
o But…is this the same as unconscionability or is it a defect of consent?
o Really this lesion is a mechanism to protect incapacity. Jukier says it is not a defect of consent
2. Second idea of lesion
Art 1405
Except in the cases expressly provided by law, lesion vitiates consent only in respect of minors and
persons of full age under protective supervision



THIS IS MORE AKIN TO UNCONSCIONABILITY
Ghestin civilian equivalent  Contractual Justice.
What is provided for by law??
o Comsumer Protection Act – Statute
o K’s of Loan. Art 2332 of the CCQ or what was 1040c CCLC
Art 2332
In the case of a loan of a sum of money, the court may pronounce the nullity of the contract, order the
reduction of the obligations arising from the contract or revise the terms and conditions of the
performance of the obligations to the extent that it finds that, having regard to the risk and to all the
circumstances, one of the parties has suffered lesion.
 What does this have to do with a Defect of Consent???
Art 1406
Lesion results from the exploitation of one of the parties by the other, which creates a serious
disproportion of prestations. Fact of serious disproportion creates presumption of exploitation.
In cases involving a minor or protected major, lesion may also result from an obligation that is
considered excessive in view of…
Elements:
1. Exploitation  PROCEDURAL, subjective  Look at who parties are and circumstances they entered into K.
2. Prestation Disproportion  SUBSTANTIVE, objective  is this a fair deal.
3. Rebuttable Presumption of exploitation  defn in Art 1373
Art 1406(1) This is a presumption that is NOT rebuttable
o Reminds of procedural unfairness and unequal bargaining power (sounds like Waddam’s two criteria)
o What does this have to do with defect of consent? Jukier thinks it does not. Roynat does not show that
this type of lesion is a defect of consent. Does not fit into Art 1399 which shows four defects of consent
one of which is supposed to be lesion. In Roynat their consent was not defective but basis of decision was
rather on the fairness of a K. The judge is stuck with autonomy of the wills where K itself is just.
History of Lesion  LAESIO ENORMIS
 CCLC 1012  capable major cannot be relieved from K’s for cause of lesion only.
 French civil code has similar provision. As well, from the Roman law, the concept of Laesio Enormis where vendor
sells for 7/12 too little, then can get out of sale.
Contracts of Loan
 Return to Wilson v. First County Trust Very specific formalities had to be in place for K of Loan
 In 1964 put an article in the CCLC (1040c) and watched it go so horribly wrong.
 Took the article from a statute in Ontario.
o Didn’t bother to translate article into Civilian terminology (used the word unconscionability), didn’t bother
to think about where to place the article, didn’t amend related articles (article 1012 CCLC)
o Went to the SCC for constitutionality as applies in part to interest rates (which is federal) but still survives
as applies elsewhere too
o Note new codal article change in Art 2332 below
o So then we get to Roynat
Page 25 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Roynat Ltée v. Restaurant Nouvelle-Orléans Inc.
[1976] C.A., Civil Law
NOTE: This case was affirmed in the S.C.C. in 1978 (even though we are looking at C.A. judgement)
- K of loan b/n Roynat and the restaurant
- One (quite usual) clause in the K: a “pre-payment” clause - cannot pre-pay loan. [lender wouldn’t
want you to pre-pay loan b/c he doesn’t make money this way. Such a clause is fine in and of itself].
- The Restaurant wants to pre-pay the loan b/c it wants to sell to Ramada. Ramada says “no sale
unless you get rid of the loan”
- Restaurant goes to the lender and says it wants to pre-pay  Roynat says fine…but must pay “prepayment penalty”. On $750,000 loan, demanded $150,000 penalty.
- Trial judge reduced the penalty to $30,000 on the basis that it was abusive, exorbitant and excessive.
[So penalty was 5x what would have been reasonable].
Issues
Can the penalty clause be reduced or annulled pursuant to art. 1040c (i.e. on the grounds that the cost of
the loan is excessive, harsh, unconscionable)?
Holding
No.
Ratio
- A provision (such as Art. 1040c) that derogates from the autonomy of the will theory (freedom of K)
must be interpreted strictly. "La liberté des conventions est la regle; la convention est la loi des
parties. Les Tribunaux ne peuvent y deroger que dans la mesure ou une disposition specifique de
Loi y autorise: une telle disposition en étant une d'exception devra quant a la portée de son
application recevoir une interprétation stricte."
- Art. 1040c applies to Ks of loan. The pre-payment penalty is not in the K of loan (i.e. it is not
"une obligation monetair decoulant d'un pret d'argent"); rather the penalty flows from another K,
distinct from the K of loan.
- Thus, the pre-payment penalty cannot be annulled or reduced on the basis that it is harsh or
unconscionable. It is not a K of loan.
Note
Ridiculous as could not have the pre-payment K without the K of loan. Still, understandable b/c of the
bad codal provision.
 This has nothing to do with Defect of Consent. It is closer to Unconscionability.  This case implies that the consumer is
presumed to be an idiot.
Jurisdiction
Facts
Outcome of this case is just but reasoning and implications are horrendous.
- Reasoning: Did the penalty clause K come from the K? NO. These are not two completely different Ks; the K in
question is secondary to the principal one and would not have been entered into but for the principal one. Would have
been more reasonable if judge looked at K as a whole - prepayment K was part of this whole and made the "operation"
of the K of loan harsh and unconscionable.
- Justice of outcome: Restaurant wasn't in position of weak bargaining power or state of necessity; it just wanted to sell
the restaurant for a lot of money. If they wanted to avoid the high penalty they could have. Jukier likes this outcome.
- (1) not sold now (waited until expiry of penalty); or
- (2) reflected cost of penalty in the selling price.
Implications:
- The strict/narrow interpretation of 1040c may have been just in this case but nullified its effect for the future. Art.
1040c "never really had a life". He says, strictly, this does not flow from K of loan.
- Lawyers/lenders modified their practices to take account of this decision (and avoid art. 1040c  would put
excessive admin fees and other charges into a separate K (not the K of loan). [Eiffel Construction case: these
excessive separate Ks were upheld by the C.A.]
What if there was a penalty clause provision in the K of loan?: Pre-1994, no chance for court to review a penalty clause…no
such thing as an unfair penalty clause. Recall Canadian factors case  he was contesting the penalty clause…but couldn’t
attack it directly…had to attack the whole K as he did. (Penalty clauses are accessory obligations that cannot live with a
principal obligation).
- BUT…CCQ has article 1623 which enables penalty clauses to be attacked: amount of stipulated penalty may
be reduced if clause is abusive (look then to Art 1437 – notion of abusive clauses).
THIS DECISION SHOWS WHAT CAN HAPPEN WHEN JUDGE REMAINS WEDDED TO THE AUTONOMY
OF THE WILL THEORY (think GHESTIN)!
Page 26 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Art. 1040c in the CCQ  Art. 2332 CCQ:
In the case of a loan of a sum of money, the court may pronounce the nullity of the K, order the
2332 CCQ
reduction of the obligations arising from it or revise the terms and conditions of the performance to
the extent that it finds that, having regard to the risk and to all the circumstances, one of the parties
has suffered lesion.
How is 2332 different from 1040c CCLC?
1. Doesn't use the word unconscionable
2. Is in the section on K of loan - provision now has its anchor (this is important symbolically)
3. Mentions lesion  Defined in Art. 1406 CCQ (CCLC had no def'n of lesion)
Other lens to look at Roynat
1. Also, note the lesion is meant to be a problem with consent at formation of the K. You are supposed to look at the time of
formation. This is not clear in Common law whether it is formation based or whether looking at later circumstances.
2. Look through the lens of Houle – are they acting as the reasonable lender? Could be considered an abuse of rights (right
not to accept early payment).
B: Lesion in the Consumer Protection Setting
Here again we see the problems with lesion being translated. This is an example of an attempt to create the parameters of
“lesion” or “unconscionability”.
- QC Consumer Protection Act was enacted in 1978
S. 8 (CPA) The consumer can ask for nullity of K or reduction of obligations when the disproportion between the
prestations of the parties is so great that it amounts to the exploitation of the consumer OR that the
obligation of the consumer is excessive, abusive or unconscionable (exorbitant in French).
S. 9 (CPA) When the court must interpret the consent given by a consumer to a K, it should hold account of the
condition of the parties, the circumstances in which the K was concluded and the advantages which result
from the K for the consumer.
S. 8 CPA has been read disjunctively (see Gareau Auto) by the courts such that S. 8 has TWO TYPES of lesion (rather than
two requirements for lesion):
- [1] Objective lesion - disproportion of prestations is so great as to amount to exploitation. [note…exploitation is here a
fait accompli; it is not just a presumption as in art. 1406; not even rebuttable!]
- Just having a severe disparity b/n the prestations of the parties, there is lesion.
- Presumes that consumers are NEVER able to appreciate the economic value of what they are buying
 Arguments against objective lesion: Should the court have to be the smart shopper? This is not the place for the law it is
the place of the market, how can judge say that b/c it was twice the price (and only that fact) that it is lesion.
OR
- [2] Subjective lesion - the obligation of the consumer is excessive, harsh, unconscionable.
(Compare this to 1406 which requires both disproportion of prestations AND exploitation of one party by another).
 Reminiscent of art 1406 and incapable majors and minors by effectively giving consumers the tool of subjective
lesion.
 Is there an obligation for the co-contractant to check out the ability of the purchaser to pay? This seems nuts.
Jurisdiction
Facts
Issues
Holding
Ratio
Gareau Auto v. B.C. Impériale de Commerce
[1989] C.A., Civil Law
- Guy bought a boat for about $11,174. [As a matter of fact, this was NOT an excessive price for that
boat!]
- The guy decided he didn’t want the boat anymore. He regretted his decision almost immediately and
he only used the boat once. He didn’t have a chalet. He doesn’t pay and is sued
Is K null for lesion?
Yes. Appeal dismissed
S. 8 of the CPA includes two separate types of lesion. Wrt type [1], judge must determine if the price
paid is fair and reasonable (is it the market price?). Wrt type [2], s. 9 mandates that the judge must make
a subjective determination of whether the obligation is excessive or exorbitant or abusive - this will
include a consideration of the three elements in s. 9 CPA. LESION IN THE CPA REQUIRES ONLY
Page 27 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
SUBJECTIVE LESION (NOT OBJECTIVE LESION)
S. 8 has two forms of lesion:
1. Disproportion of prestations: when determining this, court should not at the personality of the
contacting parties and the circumstances which they were in  must just ask if (1) there is a
disproportion and (2) if the disproportion is considerable that it gravely prejudices .
 In this case, there was no disproportion of prestations b/c the boat was sold at a fair
(commercial) price.
2. Consumer must prove that obligations are excessive OR abusive OR exorbitant. Judge
interprets this as subjective lesion (based on the words of s. 9). It depends on the MEANS of
each consumer; must prove that it will be disastrous for the patrimony of THIS consumer. Do
not have to show that the obligation is objectively exorbitant or excessive; consumer can be
relieved even if the price is fair.
 It is not useful for this consumer (Il n’avait meme pas un chalet).
 Treating consumers like incapable people by giving them effectively the tool of
subjective lesion.
Lesion type 2 - must consider each of the elements in s. 9 in order to determine if obligations are
excessive, abusive or exorbitant:
1. Condition of the parties: look at the economic situation of the consumer - does it make the
obligation excessive?
2. The circumstances in which the K was concluded: look at the circumstances surrounding the
negotiation and conclusion of the K
3. The advantages of the K for the consumer: A court might consider as acceptable a purchase by
a consumer of an object that he absolutely needs even if the obligation he assumes is quite
excessive. The same court however might annul a K that includes obligations which are only
relatively onerous if proven that the object is totally unneeded/ unuseful to the consumer.
The consumer in this case is on workers comp., is married w/ 3 kids, has a mortgage and not much
equity. The boat is of no use to him as he doesn't have a chalet and does not participate in water sports.
[This looks like a Mr. Bundy] He obviously cannot afford the boat as he had to get his bro to pay $500
deposit. The K will have detrimental consequences for consumer and should be annulled.
COMPARISON with Lesion under the Code
 Night and Day
 Code is more demanding than the consumer protection act as it requires both objective and subjective lesion. Odd
as statutes are supposed to be interpreted restrictively and Code is supposed to have a very wide interpretation.
Here, the opposite is happening.
 So…..they are saying that Lesion varies according to the quality/class of the K and the parties.
Principles of Contract
PL argued that S. 8 and S. 9 should be interpreted restrictively b/c art. 1040c has been interpreted restrictively. Court
rejected this argument in saying that the old (though still respectable) concepts of contractual freedom founded on the
autonomy of the will and the obligation to honour the "parole donée" aren't enough these days to satisfy the equally
imperative notion of contractual justice (see page 22). The principle enunciated in Roynat isn't exportable to this case.

Jukier likes unconscionability but hates where people can get out of K’s where they are burdensome to the people or
they enter into silly bargains.
 Fully in favour departing from autonomy of the will and inject contractual justice but….cases like Gareau Auto will
give ammo to those who argue against unconscionability.
 As a result, she thinks we must look at both the objective AND subjective (substantive and procedural in
unconscionability) so as to ensure that there is no abuse.
 In Civil law, it is always an exception to “in cases provided for by law”, a contract is a contract is a contract.
Page 28 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
S. 5 Abusive Clauses
Art 1437
An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it
may be reduced.
An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the
adhering party and is therefore not in good faith; in particular, a clause which so departs from the
fundamental obligations arising from the rules normally governing the contract that it changes the nature of
the contract is an abusive clause.
Slush Puppie v. 153226 Canada
[1994] C.S. Que
Contract b/n depanneur and slush puppie that gives ice machine for slushies to dep and obliges them to
use the machine and all its products. Random testing revealed that the products were not from slush
puppie but the PL will not reveal the nature of the test (ie chemicals used). Penalty of breach in K was
set at $2500
Issues
Is the clause abusive
Holding
Clause is abusive as per Art 1437
Ratio
- PL shows no proof that the test is valid manner of showing the use of other products and the breach
of the K.
- Doesn’t give the franchisee any rights to contest
 First case on the new code on Art 1437 which was a new article at the time.
 Has been recently used to do with exoneration clauses. (see Allendale Mutual Insurance Co v. Hydro Quebec)
Jurisdiction
Facts
This case limits Art 1437
Jurisdiction
Facts
Issues
Holding
Ratio
Notes
Yoskovitch v. Tabor
[1995] C.S. Que, Bishop J.
Tabor worked as a cleaning lady for the Yoskovitch. Mrs. Yoskovitch sold Tabor her baking business for
$50 000 when it was worth less than 100$. She gets 2 recipes, some pans, used oven, list of 12 possible
clients.
Valid K?
Contract is annulled through the doctrine of error as to find justice
Inequality in the prestations (analogous to Tilden):
- It was not a consumer contract but there was objective (substantive unfairness) and subjective
(procedural unfairness) lesion of the highest order
- There is inequality between the parties. Mrs. Tabor does not read English, being Hungarian nor did
she go to school. She trusted them and was in a position of subordination (see Barclays Bank)
- They did not show or explain the contract to her before she signed.  no independent advice
Error:
-  “Her consent was vitiated by an error as to an essential element of the contract”, which was its
value.
- In light of Art. 1400, Mrs. Tabor was in error as to “anything that was essential in determining that
consent”
- “A price of $50,000 for these assets, payable in part at the rate of $500 per week, was
unconscionable and abusive”. Mrs. Tabor’s error was excusable taking into account, inter alia, age,
mental state, intelligence, financial or economic position of the parties.
Art. 1437: cannot be used although this is an adhesion k when the abusive clause has to do with price
only (requirement of art. 1438). This would be a backdoor for lesion, which cannot apply. [But they use
error as a backdoor for unconscionability and abusive clauses]
- It is obviously a case about unconscionability and NOT error although it was decided that way. The
court is contemplating factors of unconscionability in the discussion of error?!?
- Jukier does not see error in Yoskovitch except in relation of the value of the business, which is an
economic error and should not be accepted. Mental gymnastics were done so as to ensure
contractual justice.
- Could have been decided under good faith as well
Page 29 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Jukier on Yoskovitch
 We would like to inject contractual justice through lesion but…
o Not a minor, Not incapable, Not in a K of loan (no Art 2332)
o Not a consumer (buying a business not a consumer item for her own use)
 Therefore, cannot use lesion. BUT….this is the quintessential lesion case but we can’t use it.
 Serious disproportion b/n the prestations
 Sounds like argument from Ghestin where error masquerades as lesion.
RE; Art 1437  This article here is not allowed to apply to price (which would amount to lesion). Singles out price b/c
otherwise would be lesion. Can’t get in the front door so you shouldn’t be able to get in the backdoor.
Maybe we shouldn’t try and find the equivalent to unconscionability in lesion. Maybe it doesn’t work, Perhaps the
answer could be in Good Faith or Abusive Clause. (See below in comparison of abusive, good faith and lesion).
Jurisdiction
Facts
Issues
Holding
Ratio
Quebec v. Kechichian
[2000] C.A. Que, Baudouin J.
Immigration sponsorship under a signed declaration (guarant) that the person you are sponsoring is not
going to accept any welfare from the state. This is a contract for the benefit of a third party and even a
contract of adhesion. The province claims the welfare money that was given to the immigrants.
Valid K – abusive??
Clause not abusive
Obiter statements by Baudouin about the ambit of 1437
 There must excessiveness in an unreasonable way for art. 1437 to apply.
 There is a valid provincial objective for the clause: prevent sponsored immigrants from being looked
after by the State. This permits the “guarantee” to have a family member come to Canada. It is of
benefit to him and his economic difficulties are irrelevant since they were aware of the nature of their
engagement before signing.
 Says that it should not become an instrument of exploitation of the weaker by the stronger. This points
to unconscionability. He is thus applying lesion and unconscionability in his rejection of article 1437.
-
Notes


He almost attempts to substitute Good Faith for unconscionability.
Refers again to objective and subjective lesion and applies them to this particular clause.
Baudouin is doing exactly what Tabor says you cannot do: he focuses on weighing the prestation of the
party objectively. He dismisses quite quickly the subjective aspects by stating that the D was able to reflect
on the obligations of this agreement and freely consented (para 51,55)
Baudouin’s statements are in obiter as he decides the clause is not abusive….but then goes on
Note use of language that sounds like objective lesion from the CPA when discussing Art 1437.
Comparison b/n Lesion, Good Faith, Abusive Clause.
 To what extent is 1437 (abusive) a surrogate to protection of exploitation and unfairness
o Look to Yoscotvitch - court gives judgement to Mrs. Tabour but solves the issue through defect of consent
of error. 1437 fails in this case with odd language.  Seems to be saying, you can annul clauses under
1437…..but cannot annul essential clause like the price. 1437 does not not specify that this is to be so.
o Look to Art 1438 – contract does not fall if a clause is null unless K is an indivisible whole. But this is not
what judge is saying in Yoscovitch. He is saying, don’t touch price b/c would be bringing lesion in through
the backdoor which cannot do b/c of Art 1405.
 Then….Kechichian. CA talks about what 1437 really does. Refers to contractual morality (not K justice per
Ghestin). Is this an application of Good Fiath? Is it lesion? Something different? JUKIER doesn’t know.
o At para 48,50 there are illusions to things that sound like objective lesion from the consumer protection
act…..but is not dealing with that Act….just with the code. THIS SOUNDS LIKE LESION being used by
the Court of Appeal in art 1437.
 Comparison b/n Houle and Roynat  Aren’t they both dealing with abusive clauses?
 Some would like to see abusive clause as a manner to deal with lesion indirectly.
 It is CLEAR what the legislative intent was. Lesion is limited! (With the draft code there was a general lesion
Page 30 of 64
Contractual Obligations Summary – April 2005

Kirk Shannon
article that was then taken out….so we know the intent). Thus the trepidation using lesion.
But….still not used for a price clause. Art 1437 has never been used for a price clause!
Why not just use Good Faith for Yoscovitch??
 Clear that can’t use lesion or abusive clause (which would be lesion through the back door)
 Good faith during formation  The reasonable person (as per Houle) would not expect a person enter into such an
abusive clause, she couldn’t read, signed in a hurried way, no advise, subordination. JUKIER would have like this
application better b/c wouldn’t screw up the defect of consent issue.
C: Mistake/Misapprehension
S.1 Unilateral Mistake
Definition of Mistake  Mismatch b/n internal and external will. A lack of concordance b/n the internal and the external
wills which induce the parties to K.
Difference b/n error and fraud (and, in CL Mistake vs. Misrepresentation)
 Error and Mistake is totally innocent (see Rawleigh v. Dumoulin)
 Does not have to be imputable to the co-contractant
Jukier: Innocence is what makes it so difficult as the co-contractant will be out and they were innocent.
 e.g. Yoscovitch  The reality of the K did not match up with what she thought she was going to get out of the K.
She was in error with respect to the value of the business she was buying.
 e.g.  You buy car based on 50,000km and really 150,000km – claim you were mistaken WRT to value of the car.
Why should we remedy the K through error or mistake?
 Aren’t there more cogent reasons for remedying K’s that have been entered into in an unconscionable way?
o Abuse of inequality of bargaining power
o Exploitation into a substantively unfair bargain
See Huot v. Ouellette. Isn’t this the same as Roynat? In the former, she didn’t know that there was gas line under the house
and she has a phobia of gas. She gets out of it b/c of error….she didn’t know. However, in Roynat it was known but was
only unfair…but no lesion. JUKIER doesn’t see the difference….but I think there is one.
Principles of Civil Law of K’s
 Civil law is telling us in giving remedy to error whereas does not in unconscionable K’s  Autonomy of the will
and NO consent!!! In error there is no consent.
A: Civil Law  Unilateral Error Error
Art 1400
Error vitiates consent of the parties or of one of them where it relates to the nature of the contract, the
object of the prestation or anything that was essential in determining that consent.
An inexcusable error does not constitute a defect of consent.
3 types of error based on:
 [1] Nature of K - e.g. Rawleigh;
 [2] Anything essential in determining consent - Huot v. Ouelette;
 [3] Object of the prestation - you think you're buying x but you're actually buying y (very rare)
Unilateral or Subjective Error/Mistake
 It is only one party which is mistaken.
 How does this matter?  Is it more justified if both parties are mistaken?
o Civil law sees it as a defect of consent. Your consent is not free and enlightened. Can get out regardless of
whether it is unilateral or bilateral error. (see CBp. 112  Rawleigh unilateral or bilateral is good enough)
 Art 1400 where it says both parties or one of them…..
Page 31 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Common Law (as in Smith v. Hughes which is not decided as offer and acceptance – go to CBp. 110)
There is no doctrine of unilateral mistake in the Common law. Whether or not you think A, it is how you
conduct yourself – the objective manifestation of your consent. Smith v. Hughes buyer took the sample for
24 hours and said “I want these” but did not make ‘old oats’ a part of the obligational content. How do you
appear to the world?
NB: Atkin in Bell v. Lever Bros (below) concedes some unilateral mistake in Common Law:
1. Identity of the Co-contractant: If A. is confused as the identity of his co-contractant is allowed….but is narrow.
2. Existence of the subject matter: If A contracts for something that has perished, then will be null. Again, very
limited.
 Unilateral mistake as to quality will not allow nullity.
o
Jurisdiction
Facts
Issues
Holding
Ratio
Jurisdiction
Facts
Issues
Holding
Ratio
Jurisdiction
Facts
Issues
Holding
Ratio
Note
Rawleigh v. Dumoulin
SCC [1926] Civil. – Mignault J.
Signs what he thinks is a reference letter when it is really a guaranturship that was put in by a 3 rd party and
not by the co-contractor.
Is the K null b/c of error?
K is null – Pl cannot claim fin de non-recevoir (or estoppel) against the Ds who were in error.
- K is null when there is no consent b/c of error. The error of one of the parties (unilateral error) is
sufficient).
- Here there was this error as both Ds could not read or understand English. As well, there was a title at
the top of the document stating “Lettre de Référence”. Co-contractant assured (in good faith) that it
was just a letter of reference for the bank.
- Pl cannot plead a fin de non-recevoir in cases of error. Consent is needed and here there was none.
Smith v. Hughes
[1871] England QBD – Cockburn CJ.
Buys oats that he was told were “old oats” but were really new oats. He was able to take a sample home
for a day and still decided to buy the oats.
Is the K null as there was unilateral mistake….
No – K is not annulled for mistake as it is only unilateral mistake.
Cockburn CJ
- Was given a sample for 24 hours after which he made an offer of price and ordered oats.
- Rule of Caveat emptor  gets what K’d to buy, article is what was sold as then is bound.
- No legal obligation to disclose whether oats were new or old. Offered sample.
Blackburn J.
- Look to the objective manifestation of the will and not to what the actual intentions of the parties
were. If it is reasonable to assume from the conduct of the parties that both were assenting to the
proposed terms, they are both bound to those terms.
Huot v. Ouellette
[1981] C.S. Que
K of sale for a house which has a gas line under it and she’s freaked about. K states that there are public
utility servitudes under the house including hydro and bell but does not specifically mention gaz metro.
Is offer contract for sale of immovable null b/c of error
K is null b/c of unilateral error.
- Look to purely subjective motives to nullify K. In visits to the house the gas line was not apparent
and was not specifically mentioned in K of offer to buy.
- Phobia is real.
- Based on error (then CCLC 992) and CCLC 1519 which states that servitudes must be declared
and, if such undeclared servitudes are of such importance that the buyer would not have entered
into the K, the K can be annulled.
- There was no consent as, at the time of formation there was a fact that, had the Pl known of that
fact, the execution of the K would not have been possible.
- Extreme case showing how far a “good” doctrine could be taken
Page 32 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Differences b/n Common and Civil ideas of mistake and error
 Civil law is very broad whereas Common is very restricted  Rawleigh v. Dumoulin shows that unilateral error
suffices – same in Huot v. Oullette
 Smith v. Hughes is clearly of error case in the Civil law is not in the common law.  It is not mistake in the CL.
Resolved in this case, offeror and offeree issue is what the court uses.
 Why is it that there is this difference b/n the Civil and Common law
 Mistake  Rhetoric of mistake is always used as a defense for non-performance. It is a defense for a breach. Can
we get out of this K by mistake (see Great Peace Shipping). Looks at the K at the time of breach. Does this excuse
A from not validly performing the K.
 Civil law error  It is a vitiation of consent. It is not an excuse of non-performance. It is a defect of consent at the
time of formation. Was the consent free and enlightened. Obviously not in breach cause you had nothing to
perform. DIFFERENT OPTIC! (see Art 1399, art 1400)
What must you show for error
 Law must impose reasonable limits on error. Must be essential to determine consent
 Not enough that you are mistaken about your motive, but per Art 1400, must be essential elements, nature or object.
o E.g. buy a house in a new city b/c think are getting a job. Don’t get job, cannot get out of it b/c mistake
was only based own motive. Cannot use error
o E.g. Jukier buys house b/c she thinks Picasso’s had hung on walls for 10 years. Would this be essential to
determine consent. Not really.
Limitations on Error: (inexcusable error and economic error)
(Economic approach would not agree with the decision in Hout. Would say put it on the party which is most able to bare the
loss. She knows what she is scared of and therefore it should be on her to enquire. Error going the opposite way. Allows for
people to sign things they didn’t read and get out of it b/c they cannot read the language. Shouldn’t they just not sign the K?)
Inexcusable error: Art 1400(2)  is new provision in the CCQ which did not exist in the previous
code…but….still was argued even though the word “inexcusable error” was not there. See Rawleigh in 1926.
o Rawleigh cannot read English. Same as Yoscovitch, where Mrs. Tabour cannot read either. Paradis is
similar b/c he could not read French. But these are not all inexcusable. Paradis is inexcusable as he is
educated, etc. Others are not.
o Look to Paradis  Sounds a lot like the procedural/subjective part of the twin criteria of unconscionability
or lesion (looking at things in the context Tilden, unequal bargaining power…..etc.)
Paradis v. Merrett
Jurisdiction
Cour du Que, [1995] – Bossé J.
Facts
Merrertt signs a contract of commercial lease, thinking he is engaging himself only as an officer of the
company when actually he’s engaging himself personally. He does not want to be held responsible for the
company’s failure to pay its rent and fees and claims error in signing the K. He could not read or write in
French
Issues
Is the K null b/c of error?
Holding
No – Valid K – error is inexcusable.
Ratio
- Claims error as to the Nature of the K.
- Like in Yoscovitch, must look at have an in concreto appreciation of error. Look to age, mental state,
economic and financial state, intelligence  defendant is a well-educated businessman and had time to
read the contract over  it is inexcusable error.
- Did not discharge of his burden to establish that he would not have signed the lease if he had known the
weight of the obligation on himself.
- In the commercial sphere, solidarity is presumed.
1.
2.
Economic Error (as referred to in the Civil Law)  Aren’t all errors economic? Subtle difference b/n price and
quality. In all the cases (except maybe Hout) the basis is the quality which has major effects on economic value. It
is ok to complain that I thought I was getting an antique and it is a copy. The fact that the error incidentally effects
value is ok. Nature of the K, object of the prestation, anything essential in interpreting the K – even if effects
value, sobeit. NOT CLEAR WHERE YOU DRAW THE LINE!
Page 33 of 64
Contractual Obligations Summary – April 2005
o
Jurisdiction
Facts
Issues
Holding
Ratio
Note
Kirk Shannon
Differentiated from Lesion: Not actionable if your mistake relates to the value of the K or what you are
getting from the K then that would be nothing more that lesion….which we can’t do unless minor or
incapable major or a consumer or K of loan of money.
 Le Poussin on CBp. 131 there is a difference b/n economic error and error.
 Yoscovitch  Shouldn’t this be wrong!!!! She is complaining about economic error. She thought
she was getting something that would make tons of money. Mistaken about nothing more than the
value of the business she was buying. This case is not consistent. Says you can’t use 1437
(abusive clause) for price….but then uses it for error which is really economic error.
 Yoscovitch passed the limit of Faubert case (not in case book but refered to in Yoscovitch)
Le Poussin (Cours d’appel de Versailles, 7 janvier 1987)
CA de Versailles – French Civil Law [1987]
Sale of a painting that an expert attribues to l’École des Carraches and is valued at 2200F. Some time later,
the Louvre exposes that the painting is a Poussin. Its actual value is about 25 times higher.
Is the K valid? Does error apply
Supplementary sum is awarded
- Erroneous conviction that this could not be a Poussin constituted an error with respect to the
substantial quality of the object of the K and is determinative of consent.
- Here, the error incidentally causes mistaken of the value.
- Economic Error: Distinguish between the error that is truly economic in the value of the thing (this is
not accepted) and an error in the substance of the thing which incidentally affects the value.
B: Shared Mistake
Common law recognizes shared mistake  but…when will they view mistake as shared and when will they allow the
doctrine to be used? Famous case is Bell v. Lever Bros. per Atkin J.
 Why is the mistaken assumption of the obligation to pay the severance shared?  both parties thought he was
entitled to the severance.
Bell v. Lever Bros.
Jurisdiction
[1932] H of L – Lord Atkin
Facts
Bell works as director of company. During employment, he engages in profiteering (with insider info).
Company merges and lays off Bell with severance K for ₤30,000. Lever Bros (Pl) uncover profiteering and
claim back severance based on mutual mistake – ie, had they known of profiteering, would not have given
severance.
Issues
Was there mutual mistake?
Holding
No. K for severance is valid.
Ratio
Mistake will only get a party out of a K when the truth actually destroys the identity of the subject matter as
it was in the original state of facts. That is, mistake as to the quality of the subject matter of the thing K-ed
for will not affect assent unless it is MUTUAL and is as to the existence of some quality which makes the
thing essentially different from the thing as it was believed to be. ASK  did the mistaken parties get what
they bargained for (more or less) or something fundamentally different?
- Mistake existed prior to the severance contract: both parties believed that they were entitled to
severance.
- The employers bargained for a severance k & got exactly what they bargained for.
- In this case, the identity of the subject-matter was not destroyed by the mutual mistake. And it is
perfectly normal that the employees did not disclose their wrongful behaviour.
Note
Defn of Mistake: “The parties must be mistaken in the identity of the K’ing parties, or in the existence of
the subject-matter of the K at the date of the K, or in the quality of the subject-matter of the K.
 Note also that there is no Legal consideration for the severance  there was no reason to give him
severance. But…there is factual consideration - had bonified belief that they owed severance like
Stott v. Merick where no real obligation for Stott to actually pay back the money.
Jukier on Bell v. Lever Bros.
Application of Lord Atkin’s test is practically impossible to meet. The doctrine exists but is very difficult to satisfy. When
is it so substantially different that it changes the subject matter of the thing?
 Such a strict test that it was rarely applied for a long time. No space for it to operate. So rare to find a mistake that
changes the subject matter or identity of the K.
Page 34 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Principles of Common Law K’s
Different philosophy in Bell from Yoscovitch. Bell says that, rather than redress specific hardship, must maintain well
established principles of K. Compare this to Yoscovitch at p. 96 where the court doesn’t want to let subjective, specific
hardships go. Want to redress subjective hardships there. Not reconcilable with Bell v. Lever Bros.
Common Law response to narrow defn of mistake: For the parties  caveat emptor  Put it in the K yourself. Make it
part of the obligational content.
 How is this actually possible? No one has the foresight to think of every permutation / combination that could arise.
Atkin concedes some unilateral mistake:
1. Identity of the Co-contractant: If A. is confused as the identity of his co-contractant is allowed….but is narrow.
2. Existence of the subject matter: If A contracts for something that has perished, then will be null. Again, very
limited.
Unilateral mistake as to quality will not allow nullity.
POST BELL V. LEVER BROS.
Denning in Solle v. Butcher: Mistake was in a K of lease. Previous rent was ₤140. New rent was ₤250. Both parties
believed that the work done of the apartment came within an exception of rent-control legislation. This was not the case.
Rent control legislation did apply.
 Applying Atkin’s test would lead to saying subject matter hasn’t changed and therefore no mistake.
 Atkin’s test of mistake IN LAW. Mistake IN EQUITY has a more liberal test. Allows the court to intervene where
it is unconscientious for the other party to avail themselves of a mistake in law.
 NEW TEST that lasts until Great Peace Shipping: Common misapprehension must only be fundamental and
that the party seeking to set it aside is not at fault.
 - Quoting Denning – A K can be set aside if parties were under a common misapprehension either as to facts or as to
their relative and respective rights, provided that the misapprehension was fundamental and the party seeking to set
it aside was not himself at fault.
This creates debate b/n Lever Bros and Solle v. Butcher. Too difficult to reconcile the two tests. Debate rages for 50 years.
Jurisdiction
Facts
Issues
Holding
Ratio
Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd.
[2003] CA England, Lord Phillips MR
A ship had serious structural damage in the Indian Ocean. T is in a salvage business and contracts with other
vessels in the area to save the sinking ship for a price. Both parties thought they were only 35 miles apart. In
fact they were 410 miles apart. Cancellation fee built into the K. Salvage Company wants to cancel the
contract and not pay anything. Great Peace Shipping refused without a cancellation fee.
Claim based on Mutual mistake as to the distance b/n the ships
Contract not rescinded for mistake.
Impossible to reconcile Bell with Solle v. Butcher. Sides with Bell v. Lever Bros.
- If you applied the Bell test, even though the mistake rendered the k more difficult, it did not “turn it into
something essentially different from that for which the companies bargained and the fact that the
vessels were father apart did not mean that it was impossible to perform a contractual adventure”.
There is therefore no room for mistake in the present case.
- Solle v. Butcher tries to deal with bad bargains. This is not for mistake (like ECONOMIC ERROR)
The assumption of the parties must render K’ual adventure impossible of performance. Here it does not.
Phillips states: From Hobson case mistake requires: 1) Common assumption as to the state of affairs, 2) no
warranty by either party as to this state of affairs, 3) non-existence of state of affairs must not be due to fault
of either party, 4) non-existence of state of affairs must render performance of K impossible, 5) state of
affairs may be existence or vital attribute of consideration.
Jukier on Great Peace Shipping
 Look at test from Hobson  Impossiblity in step 4. – This seems to strengthen the Atkin test. Now has to be
impossible.
HOBSON
TEST
Page 35 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
S. Smith, Excerpt on Mistake from Contract Theory (2004: OUP)
A unilateral mistake cannot ground a defence of mistake – the mistake must be shared
Shared Mistake: Rules are efficient because they reduce the costs of making contracts; they provide defaults terms that
apply automatically unless the parties specify otherwise. These terms should approximate the content that the parties would
have chosen themselves.
Consequences of using the mistake doctrine and default terms
1. Serves as an incentive for risk-averse people to enter into contracts
2. Establishment of default terms takes into account which of the parties is best able to insure against costs associated
with the relevant risk.
3. Setting aside a contract for mistake will affect on how people write Ks in the future.
4. Evaluating the efficiency of mistake rules, the effect these rules will have on contracting parties’ incentive to
gather information prior to entering a k is to be accounted for.
Efficiency-based explanations of the “mutual mistake” rule: What outcome would be the best allocation of resources.
What is the best and most efficient way to avoid a wasted transaction.
- Efficiency explanation for refusing relief in vendor mistake cases: In such cases the purchaser’s superior
information is the result of training and such investments are valuable and should be encouraged.
- Efficiency explanation for refusing relief in purchaser mistake cases: It encourages the purchaser to ask questions
which will help prevent mistakes from happening in the first place.
Principles of Contract Law
 Look ahead to Frustration in the Common Law. Similar fact patterns might fit both.
 Law and economics perspective is one that dominates this area of the law. Leads to statements: One of the parties is
knowingly assuming the risks upon entering into the K. Theorists say: Had the parties turned their minds at the
formation, upon whom would they say the risk would fall  this is the answer to the cases.
o From this perspective, (as well as a Bell v. Lever Bros) Le Poussin was wrongly decided. Vendors assume
the risk that what they are selling now at price X, may be worth more later.
o Efficiency in Huot v. Oullette: Risk would be on the buyer. Must ask about what she is scared of rather
than buyer trying to describe all possible things that could make her scared.
D: Misrepresentation / Duty to Disclose
Entered into a K upon a mistaken assumption which was induced by fraud or a misrepresentation
 Another way the court protects reliance while sanctioning bad behaviour.
Art 1399
Consent may be given only in a free and enlightened manner.
It may be vitiated by error, fear or lesion.
Civil Law:
Included as a defect of consent under error (as opposed to CCLC)
 Makes sense. Internal consent does not match your external consent. Just different cause of defect.
 Significant differences b/n fraud and error….or mistake and misrep.
Consequences:
 Remember Rawleigh. error as to nature of the K (signs guarantee). Rawleigh did nothing to lead Dumoulin into the
K. Third party induced him into entering into the K. Annulled on basis of error. Defect of consent need not be
imputable to the co-contractant.
 Look to fear and duress. Must be induced by threats exerted or known to by the other party. Must have imputability
Art 1401
Error on the part of one party induced by fraud committed by the other party or with his knowledge vitiates
consent whenever, but for that error, the party would not have contracted, or would have contracted on
different terms.
Fraud may result from silence or concealment.
Page 36 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon

On the one hand, same as issue of consent of parties as in mistake or error. On other hand, independently of
consent, it is as well a civil wrong, a tort.  Cross over b/n K’ual and Extra K’ual liability.
Ramification:
 First: See in fraud and misrepresentation that we can get two types of remedies. Both contractual (like error and
mistake) and as well being able to claim damages.
 In Creighton, you can get out of K of sale (contractual by error) and moreover, damages for what they suffered as a
result of having been lead into a K fraudulently.
1. CIVIL LAW remedy of Quanti Minoris: Reduce the amount of my obligation. Not in the CL. Seen in lesion cases (s.8
of CPA and Art 2332 (loan)) where obligations can be reduced. Also in Art 1437 for abusive clause. As well, a general
remedy of Art 1590(2).
Art 1407
A person whose consent is vitiated has the right to apply for annulment of the contract; in the case of error
occasioned by fraud, of fear or of lesion, he may, in addition to annulment, also claim damages or, where he
prefers that the contract be maintained, apply for a reduction of his obligation equivalent to the damages he
would be justified in claiming.
 Quanti Minoris applies in cases where there is fraud. BUT….does not apply in cases of plain error.
Principles of Civil Law K’s and Fraud
Shows the “anti-divorce” mentality of the civil law. If does not wish to get out the K can have Quanti Minoris.
 Without the wrongdoing in error there is no right to damages which is the equivalent of a reduction of obligation. 
 If were doing it in error, would be re-writing the law of the parties which is NOT the job of judges.
 There should be more inducement not to fraudulently enter into a K more so than the innocent entrance in the case
of error.
2. Does Art 1400(2) apply to Art 1401 
Inexcusable error as part of fraud? Inexcusable error is only stated to exist in error: but see Bail and Creighton duty to
self-inform similar to inexcusable error.
 Is there form of inexcusable error in the case of fraud? Cases (Creighton) seem to say this in the
language….But....the language of the code seems to say NO. It is not likely that this is possible. Art 1400(2) does
not apply to fraud.
**DISCLOSURE**
◙____]_________________________________]____________________________________]_________________ 
Overt deliberate
Réticence/Concealment
Positive Duty to inform
misrepresentation
Failure to correct/induce by silence
Not sharing essential info/fraud by silence
(lie: Tremblay)
Creighton (Civil only)
Bail

**INTENTION**
Must distinguish b/n a deliberate lie and a PUFF.
o PUFF = Good Fraud (this is the best horse)  Dolus Bonus
o Lie = Bad Fraud. (This horse has never lost a race)  Dolus Malus
1. Overt Deliberate Misrep.
Jurisdiction
Facts
Issues
Holding
Ratio
Tremblay v. Les Petroles Inc.
[1961] CA Que – Hyde J.
Owners of a service station told a prospective lessee that the net earnings of a garage were $25, 000/yr.
Defendant claimed financial statements had been destroyed. Truthfully, the defendant had been unable to
operate the garage at a profit for years. Plaintiff was at loss during his lease but continued trying
Should the K and hypothec be null b/c of fraud despite the time waited to take action after having
possession of the business?
Yes – K is null for fraud. Relative nullity – return of prestations.
- Fraud: plaintiff would not have entered into the contract but for the lie: dol principal;
- Deliberate misrepresentation
- Relative nullity for fraud means that contract can be ratified Art 1420
Page 37 of 64
Contractual Obligations Summary – April 2005
Dissents
Comment
Kirk Shannon
- In this case, it was only normal for the plaintiff to try. The contract was therefore not ratified.
Bissonnette Dissent
- Shows the civil law reticence towards annulling contracts for misrepresentation: “Le demandeur […] a
exécuter en partie ses obligations, exprimant par là qu’il avait donné un consentement valide à ce
contrat. »
Dissenting opinion demonstrates that the issue is analogous to the one of inexcusable error in mistake.
2. Reticence: Contracting party omits to correct misapprehension (Art 1401(2) Silence or concealment) only in civil law.
Common difficulty with this; a misrepresentation requires some kind of representation (Smith v. Hughes – no duty to
disclose)!!
Creighton v. Grynspan
Jurisdiction
[1987] C.S. Que
Facts
Offer to purchase of estate which was accepted. PL claims that C (vendor) led them to believe that the sale
included a strip of land (which is owned by the city) that they desired and without which they wouldn’t
have contracted. C. knew that the conclusion of this contract was dependant upon the inclusion this land
and did not correct the misapprehension. In the offer and acceptance, they omit the words dealing with that
strip of property and then in K, they say “more or less” as to the dimensions of the property.
Issues
Is the K null b/c of misrepresentation?
Holding
K is null b/c of misrep (reticence). Reliance damages awarded.
Ratio
McCarthy
- Reticence: C. claims he has done nothing wrong as he described the property accurately.
- Court: look at the context of the contract: (previous offers and counter offers). It was then incumbent
upon the vendor to disclose to the buyer.
- Civil law: concealment can be fraud Art 1401(2)
- This is a tort as was in the pre-contractual phase: Grynspan can get his reliance interest
Note that the court is condemning of fraud. Even though they could have gone to the land registry and
checked themselves….but we don’t want to sanction fraud. Like Barton v. Armstrong and duress.)
Note
Lebel, concurring
- Shocking that these people were led into this even though they were successful real estate promoter. In
civil, we don’t let people out of foolish bargains. Hesitant to conclude…but….still for the PL despite this.
Could be a creeping in of inexcusable error into fraud. Gives lesser damages.
- Jukier: there is some active misrepresentation: the vendor was sneaky in the wording of the contract.
Reticence vs. duty to disclose: Difference between letting another party remain in error knowing that party’s
misapprehension without correcting it vs. not sharing information you have that might be relevant in the pre-contractual
sphere and which would alter the other party’s position (Bail).
o Also a possible discussion of this with Smith v. Hughes, were court would not look to unilateral mistake in the
CL. Could be fraud but…..is not b/c was not shown that the buyer asked if the oats were old. Buyer in no way
told the seller that he wanted old oats. Could be a duty to disclose though…..
CIVIL LAW: Duty To Disclose
Civil law….but not in CL
It is one manifestation of a duty of good faith
Bail v. Bank of Montreal
Jurisdiction
[1992] SCC – Gonthier J.
Facts
Duty of Hydro, as the owner, to disclose information in its possession concerning soil conditions to a
subcontractor Laprise in its request for tender. Laprise, who, in consequence suffered great financial
damage (bankruptcy) by continuing the work. Here, Laprise is a third party (his contract was with Bail, not
Hydro) represented by the bank post bankrupcy. He sues extra-contractually
Issues
Was there a duty to disclose the info to the third party (subcontractor in this case)?
Holding
Yes – gets reliance damages
Ratio
(Cites the CCQ which is soon to be enforced – like Doughboys)


Page 38 of 64
Contractual Obligations Summary – April 2005
-
Kirk Shannon
Hydro took advantage of its position of strength to induce the continuance of the work. Farther along
the spectrum of misrepresentations than mere silence.
Third case in the Soucisse-Houle-Bail trilogy that adds an obligation of good faith in the precontractual stage in the form of a duty to disclose.
3 necessary element for a duty to disclose:
1. Knowledge of the information (actual or presumed)
2. Information has to be important
3. Impossible for the other party to get it or he has legitimately relied on it
Parties to a K are extra-K’ually liable for the damage the may cause to 3rd parties in the context of their
K’ual relationship. Standard of reasonableness: the duty to act reasonably encompasses a duty to
disclose in certain circumstances otherwise you are in breach of Art 1375.
- Expansion of the pre-contractual sphere of obligations that already contains duress, fear,
misrepresentation etc.
- In Soucisse – court will imply an obligation of good faith in performance. Add an obligation.
- In Houle – Allows court to override a positive obligation for the reason of good faith in performance
(recalling a loan)
- Here, in Bail, extends concept of good faith to formation of the K. Translated into art 1375
-
Note
Jukier
 Emphasis on the fact that he is making new law. Gonthier J. is well aware of this. It is considered a move forward.
Goes to the French doctrinal source (Ghestin) and transplants into this case.
Jukier sees this as another manifestation of an attempt to protect fairness.
Let’s look to the three criteria borrowed from Ghestin:
1. Presumed knowledge is that you are being wilfully blind or professional sellers are presumed to know of a
defect in the thing as they ought to have the knowledge.
2. Decisive importance  Can’t give unless it has some importance in leading them into the K.
3. Duty to share info is a positive obligation in cases where one party is in a vulnerable position with regards to
info (sounds like fairness, exploitation, unconscionability). It includes a duty to self-inform to the extent that is
reasonable.
o Look at Smith v. Hughes  Would not pass this part of the test  he got a sample and therefore was
not impossible for the buyer to find out what the oats are and therefore is not relying on the sellor from
the info.
o Note that the duty to self-inform is just like inexcusable error.
Is this really fraud or misrepresentation?
 It is actionable – but is it really fraud? In fraud we need to show the intentional element (bad faith) of the fraud.
But, in Houle and Bail there is only a standard of reasonableness. It is very different.
o If this is fraud, then you get nullity under Art 1407.
o Description of Art 1401(2) in Baudouin extends what we mean by fraud by silence to include duty to
inform.
 There is still debate as to whether the breach of duty to inform (with a standard of reasonableness and NOT bad
faith) is given the proper damages  Ie is it really fraud and, therefore, should it really be a defect of consent and
given nullity. Remember, Art 1375 does not provide for nullity.
o Good faith (not bad faith) a la Houle but in the pre-contractual realm.
 There is a theory (by Vincent Karine) that failure of a duty to inform will lead to nullity under Art 1416. This article
is really geared towards formalities…but….it could work through textual analysis.
Art 1416
Any contract which does not meet the necessary conditions of its formation may be annulled.
Is the Duty to Inform really Good Faith in formation
 As in Bail, the duty to disclose in the formation of a K is just a particular instance of good faith (like in Houle).
 Court makes a general duty to disclose under good faith in the formation and performance of the K as shown by the
Bail and Houle cases. These are just two instances – in other cases could manifest itself in other ways.
Page 39 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
How far does the duty of good faith go?
 Does it extend to a duty to bargain in good faith (Walford v. Miles, Brewer, Walton Stores in the Common Law)?
 Not always. Parties can lead on a party with no intention of making a K. Breaking off negotiations at your whim.
 Good faith, therefore does not extend YET to duty to bargain in good faith.
Does it matter if damages are K’ual or Extra-K’ual
 Per Wilson in Mason it does matter. Per Jukier, the wrong has been committed before the formation of the K – it is
pre-contractual and therefore should be Extra-contractual. Other argument would be that the parties are in a promise
to K and that is why damages
Bail in the Common Law: Duty to Disclose in Common Law
 Alberta case (Opron) Alb failed to give info which lead to significant econ losses. Alberta was found liable under
Tort. Negligent misrepresentation. Here it is included in misrepresentation much like in Civil it falls under fraud.
COMMON LAW
- PL in Common Law can recover for 3 types of misrepresentation 
1. Deliberate (fraud),
2. Negligent, and
3. Innocent  Jukier says no practical application except in mistake.
A "victim" in the CL can choose b/n the two routes  Collateral Warranty (Contractual) or Misrepresentation (Tort).
o A "victim" in the civil law cannot choose 
Art 1458
Every person has a duty to honour his contractual undertakings.
-
Where he fails in this duty, he is liable for any bodily, moral or material injury he causes to the other
contracting party and is liable to reparation for the injury; neither he nor the other party may in such a
case avoid the rules governing contractual liability by opting for rules that would be more
favourable to them.
Dismisses pre-contractual good faith in Common Law
Martel Building Ltd. v. Canada
Jurisdiction
[2000] SCC Iacobucci, Major JJ.
Facts
Martel owns buildings in which the Department leased. The lease had an option for renewal. No
misrepresentation and no ‘undisclosed documents’ but the Department strung along the negotiations and
lead Martel into thinking they would renew. Martel is claiming that the appellant has breached an implied
term to renew the lease. Martel also has a claim in tort stating that the Department breached a duty to
negotiate in good faith and acted negligently in the auction for tender.
Issues
Is there a common law duty to negotiate a K in good fiath?
Holding
No duty to negotiate in good faith in the pre-contractual phase; no damages awarded.
Ratio
Iacobucci J.
- True intention of the gov’t was to treat with casual contempt…just like Brewer, Walford.
- Court finds that policy reasons (Anns, Kamloops) preclude them from finding a duty here: “it would
defeat the essence of negotiating and hobble the marketplace” Would deter socially and economically
useful conduct.
- Gains are realized at the expense of the negotiating party. Note the focus on “commercial” situations.
Possible way to distinguish from this case (if not in a commercial situation)
- Would interject tort law as after-the-fact insurance against failures to act with due diligence or to hedge
the risk of failed negotiations through the pursuit of alternative strategies or opportunities.
- Conservative argument: Traditional doctrines (duress, misrepresentation, promissory estoppel, etc.) are
enough in the pre-contractual stage
Notes
Question of which interest we want to protect
McCaughley (doctrine): market will solve the problem (bad rep)
 The basis for Iacobucci’s decision is “a dog eat dog word”
- Aside, note that, unless mentioned explicitly in the request for tenders, there is no obligation to take lowest
tender.
Page 40 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Argument for and against good faith in negotiations.
 Economic perspective: good faith in negotiations is not role of courts. The Marketplace will weed you out.
 Argument in favour of creating obligation of good faith – if reasonable behaviour exists in the performance is
required, it should apply to circumstances where one party is hurt by other’s behaviour (whether in negotiation or
other situation)
Martel in Civil Law
 Not clear how would be decided. Some lower court decisions say yes, Good Faith extends to duty to negotiate. No
higher court decisions.
 Seems to be the opposite to Bail (although not on the same facts).
 In Bail, just not disclosing is just as bad as giving bad information.
Principles of K law in Common Law
 In Martel, THE CONTRACT IS SEEN AS A CONFLICTUAL DOCUMENT
o Civil Law Doctrine  Diesse argues that the K is not “I win, you lose.” B/c K’s are more relational and long term
today, he sees K’s as cooperative (like K’s of partnership).
Common Law Solutions other than Good Faith
ACTION IN CONTRACT
A) Imply Collateral Warranty:
- Court makes the misrep an implied term  if breached, PL can take action IN CONTRACT for BREACH OF
CONTRACT. (E.G. imply a warrant that the car is a 1996 car and this warrant is a term of the K – then is
misrepresentation and the parole evidence rule does not apply)
- Note the limitation presented by the parole evidence rule - cannot imply a term if it contradicts another term in the K.
 One of the exceptions to the parole evidence rule is misrepresentation.
- Remedy: Expectation damages (often higher than mere reliance damages). Could you get rescission ?
- See: Gallen v. All State Grain
- Esso v. Mardon: Where a party makes a misrepresentation based on the experience and expertise that it has as its
disposal and intends that the other party should act on it and he DOES act on it, it can be interpreted as a warranty. (
this is an inference which can be rebutted by the maker of the misrep - he can show that it was innocent)
ACTION IN TORT
B) Negligent Misrepresentation:
- Remedy: rescission and RELIANCE damages (restore to original position) (no damages if misrepresentation is
innocent).
- Esso v. Mardon: If a man with special knowledge or skill, makes a representation (advice, information, opinion) by
virtue of that knowledge or skill with the intention of inducing him to enter into a K with him, he is under a duty to use
reasonable care to see that the rep is correct or reliable. If he negligently gives unsound advice or expresses an
erroneous opinion and thereby induces the other side into a K with him, he is liable in damages. [Special skill or
knowledge, a misrepresentation with intention to induce, misrep is determinative of consent].
Esso Petroleum Co. Ltd. v. Mardon
Jurisdiction
[1976] CA Eng  Denning M.R.
Facts
Esso made estimates as to the prospective sales believing that they could have the forecourts and pumps
fronting on the busy main street. But the station was only accessible by a small side street. They innocently
did not revise their estimates and rented the location to Mardon who relied on these original estimates.
This was a fatal error on the part of Esso. Note that Mardon could not prove fraudulent intention of Esso.
Issues
Does Mardon get damages under misrepresentation?
Holding
Reliance interest, damages awarded
Ratio
Options:
1. Collateral Warranty (Gallen)→Term→Breach of contract→Damages (expectation interest)
- There was a warranty and damages should be awarded but Denning conflates the two solutions and
says the damages, in either case, are the same.
Page 41 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
2. Negligent misrepresentation →negligence →tort →damages (reliance) or rescission of the contract.
 If a man, who has or professes to have special knowledge or skill, makes a representation by virtue
thereof to another, with the intention of inducing hum to enter into a K with him, he is under a duty to
use reasonable care to see that the representation is correct.
-
Denning finds both a warranty and negligent misrepresentation (which was innocent), and says that in
either case, there would be damages as if he had never entered the contractTHIS IS WRONG!!!
You get damages for misrepresentation but you get expectation damages for collateral warranty.
Jukier
 Resulted from the fact that very difficult to make case for fraud (hard to find evidence).
Negligent misrepresentation
Jurisdiction
Facts
Issues
Holding
Ratio
V.K. Mason Construction v. Bank of Nova Scotia
[1985] SCC Wilson J.
Mason signed a fixed price contract with Courtot but only because he was told by the Bank that Courtot
was adequately financed to meet his payments. Both Courtot and the bank knew that the bank’s loan would
not meet the cost of completion, the bank failed to inform Mason that they had not included the soft costs
in their loan to Courtot.
Is the K null for Negligent misrep?
Yes, damages awarded
- We are in tort because the person misrepresenting is not the contracting party
- All requirements for negligent misrepresentation are met in this case;
3 requirements for liability for neg misrep: (1) untrue statement; (2) statement must have been made
negligently; (3) special relationship = duty of care; (4) reliance which is foreseeable.
All the requirements are met in this case:
[1] Falsity - Mason sought assurance over and above terms of loan; Bank gave assurance relying solely on
terms of loan.
[2] Negligence - b/c Bank made statement of assurance w/o revealing that it was based on loan
arrangement which Mason had already said was not sufficient assurance.
[3] Special Relationship - Bank was inducing Mason to sign K with Courtot (distinguish this from Bank
merely making representations to third party about one of its clients)
[4] Reliance - Mason relied on it and such reliance was foreseeable.
Damages: Mason gets his lost profit because he is suing for reliance interest of his loss of opportunity: had
it not been for the misrepresentation he would have contracted with another  lost opportunity costs.
Jukier
 Trial judge gave damages that was K damages minus anticiplated profit. Not actually Tort damages.
 Conceptual difference b/n K’ual and Tort damages. Sometimes the quantum is the same.
o If lost anticipated profit is usual/reasonable return, the K’ual and Tort damages quantum will be the same.
In K, damages is lost profit in this K. In tort, but for this injury would have entered into a K with another
and would have got reasonable return.
o If returns are higher than reasonable, the quantum will be different.
E: Changed Circumstances
In both Common and Civil Law, starting to call this HARDSHIP
After the moment of formation  prima facie valid K w/ no reason for undoing it…BUT circumstances change during life
of K (ie post formation) and substantially affect the equilibrium of the K.
Principles of Contract
 Remember that the whole purpose of the K is to bring the uncertainty of the future into the certainty of the present. Why
should we be able to get out of a K b/c circumstances change -- When an exterior event is overly onerous on one party.
 If there is a valid K, shouldn’t it be pacta sunt servanda? Certain things will get a party out of the K.
Page 42 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
No easy answers as to when.
Common Law generally draws the line after futility but the civil law stops at impossibility. The Common law will not
always award damages for futility and hardship (case by case basis). As you move along the spectrum, increasingly difficult
to justify intervention.
Spectrum
____1_____________________2__________________3__________________4________
IMPOSSIBILITY
FUTILITY
HARDSHIP
CATASTROPHIC
(Taylor v. Caldwell)
PRICE INCREASE
1) IMPOSSIBILITY:
CL - YES. Civil L - YES but must also be unforeseeable.
Def'n: Supervening event such as weather, fire, war seriously affects K and makes performance IMPOSSIBLE. Absent risk
allocation, and fault of debtor, these events are usually "frustrating events". NB – no fault of parties.
Common Law
Frustration: NOTE that frustration is a defence to a breach allegation and an excuse for non-performance.
To some, Mistake & frustration are two sides of same coin (Waddams). One at formation - one post formation.
Implied Condition Theory: Court finds that parties, in the K, impliedly agreed that they would be excused in case
performance became impossible due to an exterior event. (this is an unwritten clause in every CL K).
 Example: Taylor v. Caldwell - K to rent music hall; music hall burns down. PL sued for non-performance. Court
held D not to be liable b/c existence of music hall was essential premise on which K was based.
PROBLEM: Exterior event should, by its nature, be unforeseeable so how could the parties have turned their minds to it
during formation? Cannot turn minds to something that nobody could say they should turn their minds to it and, if they had,
would not be frustration. SO….implied condition not for these parties but the reasonable parties. (see H.R. Sainsbury v.
Street, CBp. 217)
 Therefore, implied condition by law (ie. by the courts and not by the parties like Ipswich). Imposed for policy and
business efficacy.
 BUT…..Corbin (doctrinal writer) says it goes without saying that these things can happen. Just b/c you haven’t
turned your mind to something doesn’t mean that it can’t be an implied condition.
Civil Law  "Force Majeure"
Force Majeure & Imprévision (exceptions mentioned in art. 1439)
o Occurs after the formation of the contract and seeks to excuse a party from non performance and prevents him from
being in breach. This is NOT breach.
Debtor is excused by SUPERIOR FORCE under impossibility of performance
A debtor is released where he cannot perform an obligation by reason of a superior force…unless the debtor
Art 1693
has expressly assumed the risk of superior force.
The burden of proof of superior force is on the debtor.
Superior force is something that is unforeseeable AND irresistable (i.e. = impossibility).
Art 1470(2) A superior force is an unforeseeable and irresistable event, including external causes with the same
characteristics.
Civil law test is more rigorous and difficult than common law test: Impossibility of performance VS Impossibility of
performance AND Unforeseeability (e.g. Canada Starch – drought is not a force majeure b/c did not lead to impossibility
of execution).
Page 43 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Principles of K Law
NB: If a legal system relies heavily on the impossibility for breaking the pacta sunt servada, then 1) much of the juridical
argumentation is spent trying to classify it as a force majeure rather than on the circumstances, 2) Parties themselves will
say, where law isn’t helping out, take the law into own hands (commonly referred to as force majeure clauses in the K
(misnomer as they include things that are not force majeure) where they are allocating the risk - see Otis)
Impossibility (due to an external event)
Jurisdiction
Facts
Issues
Holding
Ratio
Notes
Taylor v. Caldwell
[1863] Eng – Blackburn J.
Pls rent a Music Hall for four nights to give a concert. The Music hall burns down on the day the first
concert was to be given.
Should the losses suffered by the PL fall on the D?
The parties are excused from the K. Loss falls on the D
Existence of the Music hall was essential premise on which K is based.
- Implied condition rationale: Implied that the parties will be excused where, before breach,
performance becomes impossible from the perishing of the thing without the fault of the contractor.
The existence of the Hall was essential to the performance of the contract.
- Pothier: the only thing that could alter this rule is if by some stipulation, a party has taken upon himself
the risk of the particular misfortune which has occurred.
 This is the beginning of the doctrine of frustration, based on the notion of implied provisions.
 Civil Law: would have been decided under force majeure Art. 1470(2) & 1693.
Jukier
 More recent cases (Great Peace Shipping) question the use of the implied condition device. Not clear that it would
still be used.
 Not like Ipswich where “but of course that goes without saying” are the kind of things that are within the
contemplation of the parties. Frustration cannot be in the contemplation of the parties by definition.
Contractual allocation of risk – (force majeure)
Otis Elevator Co. Ltd v. A. Viglione & Bros. Inc
Jurisdiction
Q.C.A. [1978] – Turgeon J.
Facts
- K b/n Otis (aplt) and A. Viglione & Bros.(rspdt) for installation of elevators.
- Clause in K read that neither party would be liable to the other party for any loss, damage or delay due
to any cause beyond the party's reasonable control, including but not limited to, strikes, lockouts…
- Otis started work in January. In February, workers' productivity slowed. By late April, all elevator
workers had gone on strike.
- Viglione sued for damages suffered as result of non-execution
Issues
Was the strike a force majeure that excused Otis from performance?
Holding
Not a force majeure but explicit term deals with strikes and releases Otis from obligation.
Ratio
A strike doesn't constitute a case of force majeure. Parties may contractually specify that some event,
though it doesn't render execution absolutely impossible, will be a case of force majeure.
- C.S. found that Otis didn't prove the absolute impossibility of the execution of the K; thus, the Court
did not liberate Otis from its obligations under the K. Damages were awarded for loss of rents and
other expenses.
- The delay was the result of strike or lockout. Strikes and lockouts are not, in and of themselves, cases
of force majeure. However, K in this case, explicitly specified strikes and lockouts as causes outside
of the reasonable control of the party. The aplt is thus not responsible to the rspdt for such the delay
because it was a cause outside the reasonable control of the aplt.
Note
- In absence of force majeure clause  would have found against Otis - b/c strike is not a force majeure.
- Why is strike not force majeure?  TEST: Impossibility - may be possible to get other employees
(on K) to fulfill duties. BUT…even if not impossible  Unforeseeability - co. with unionized workers
= foreseeable that they would go on strike.
Page 44 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
2) FUTILITY: Civil - use interp to make K impossible. CL - only where frustrated event is sole purpose of K.
Def'n: Performance of K is possible but principle purpose underlying K has become non-existent. The K is futile, not
impossible.
 Can only happen in certain circumstances – not with every cab ride to the Derby at Epsom.
Futility
Krell v. Henry
Jurisdiction
[1903] Eng C.A. Vaughan Williams L.J.
Facts
Henri contracts with Krell to rent a room during the day (was not allowed to spend the night) of the
procession coronation of the King. Because of appendicitis, this procession does not take place. Henry
wants out of the contract.
Issues
Are the parties excused as the circumstances changed
Holding
The parties are excused
Ratio
- The view of the coronation was the foundation of the contract. The contract is not impossible but
futile in the circumstances.
- That the procession would be cancelled was unforeseeable and unpredictable.
- Characterization: Here, the contract is characterized not as a contract to rent a room but a contract to
provide a view of the coronation. [not merely his motive but the contract itself] and both parties
understood this.
- No loss of opportunity for the lessor since he was not operating a business. This goes to the court’s
assessment of the parties’ assumption of risks.
Note
Two types of ways to dismiss the contract: 1) legal interpretation of the contract 2) implied condition
Jukier on Krell
 One of the most fascinating decisions of the CL.  Seen as an exceptional decision. Most likely will not be
repeated.
In Civil Law
 Would not be a force majeure b/c, although unforeseen, it does not render the K impossible.
 Cause has not changed but rather the motive of the K has changed (return to the example of getting a job at U of
Laval and buy a house, then change mind as to the job – don’t want the house. Motive has changed).
Contrast with Cab to Epsom on Derby Day where, if the Derby is cancelled, you should still have to pay for the cab.
o True you wouldn’t take the cab, but cabs are interchangeable. This is not a K about the lease of the room
but for a balcony seat in front of the procession.
Principles of K law
Futility is farther along the spectrum, the more judges are reluctant in applying the implied condition. It is an ex post facto
rationalization by judges; it’s not used in courts anymore
 Idea that the parties should split the cost has been floated out of East Germany in a K for a printing press.
 Economic perspective, in cab example, cab driver would have lost opportunity cost. Mr. Krell would not have lost
an opportunity cost as he was not in the business of renting the room for the day.
 Also, economic perspective, who is in best position to absorb the risk or loss (Huot v. Oullette).
HARDSHIP (as called in Europe) refers to both cats 3 and 4
3) IMPRACTICABILITY: Civil-no imprevision. CL - implied condition (presumed intention of reasonable men)
Def'n: Performance of the obligations has become overly onerous or difficult due to unforeseen events.
- Compare this to catastrophic price increases - impracticability requires some supervening EVENT that leads to the
increase in price (e.g. a drought).
Common Law:
- UCC: Where performance becomes impracticable by the occurrence of a contingency the nonoccurence of which was a
basic assumption on which the K was made…a party can allocate production
- Sainsbury v. Street - In order to relieve party from overly onerous or difficult obligation that is result of supervening
event which is not his fault, court can imply a condition which will give effect to the presumed intention of reasonable
men. (E.g., if D failed to produce stipulated tonnage, buyer will accept partial delivery OR buyer can discharge K).
[Jukier: the supervening event would have to be an exceptional one]
Page 45 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Civil Law:
- Canada Starch: There is no "imprévision" in QC law. Parties can only be excused from their obligations in the event
that they become impossible to perform (force majeure). It is not sufficient that the obligations have become merely
difficult and/or onerous. However, parties may contravene the law in this regard by agreeing to a "force majeure" clause
which allocates risk to either party.
- Good Faith (Art. 1375): Could bring imprevision into civil law using GF - other party has obligation based on GF to
be REASONABLE (understanding, accommodating, mitigate damages  are there reasonable steps party could have
taken?) when some supervening event makes the obligation very onerous or difficult. (Reasonable steps = renegotiate?).
Jurisdiction
Facts
Issues
Holding
Ratio
Canada Starch Company Inc. v. Gill & Duffus (Canada) Ltd.
QCA – Unreported decision [1983]
Contract 1: The US shellers and Gill & Duffus [common law]
Contract 2: Gill & Duffus (middlemen) and Canada Starch [civil law] Both contracts are to buy and sell
peanuts. A major crop failure occurs. The US shellers are excused by the UCC frustration provision. (see
above). UCC allows to be excused from entire obligation.
 Even though market price when up 3x, Canada Starch does not want to modify its contract and
sues Gill & Duffus under Quebec law to honour its obligation in full or pay damages (difference
that it has to pay to replace peanuts at higher market price).
Is the D liable to fulfill obligation or is he excused for force majeure?
Defendant not liable because force majeure clause by which they were not responsible for causes
“beyond the reasonable control of the Seller”
NOT force majeure
- QC civil code requires that, in order to be excused from obligations, such obligations must have
become both unforeseeable and absolutely impossible, not just more difficult or onerous. Not the case.
- The action taken by the shellers was not force majeure b/c it did not result in impossibility of
execution of K. It was POSSIBLE for the D to supply peanuts…but at a price of $.90 per lb. (3x the
original price). [Q: couldn't we say that it is impossible for the dft to pay for the peanuts? NO.
***Note that the payment of money is never seen to be IMPOSSIBLE…]
- There is no theory of "imprévision" in QC civil law. However, parties may contravene the law in this
regard (by agreement - a "force majeure clause") b/c it is not a matter of public order.
- In this case, the parties' agreement had a force majeure clause which excluded the seller's responsibility
for delays or non-shipment due to…"any cause beyond the reasonable control of the seller".
Should it follow UCC which goes beyond physical impossibility……NO
- However, the D are to have the benefit of the force majeure clause. The wording of the force majeure
clause in the K is broad enough to cover the situation even though the specific event that occurred was
not accounted for. The drought and the resulting allocation program imposed by the sellers were
beyond the D’s reasonable control. The K should read as if it specifically included "an allocation
program put into force by the shellers" in the Force Maj clause.
- Court follows Otis Elevator with a “force majeure clause”.
 This is corroborated by the elimination of a possible imprévision article from the Draft Civil Code.
Note
Jukier
 Note that cannot have economic impossibility. Keeps impossibility strict in definition of force majeure.
 Cannot include imprevision as it would go against the traditional principle of pacta sunt servanda.
Principles of K law
 Acceptance of the force majeure clause or Hardship clause is startling – unlike Otis does not refer directly to the cause
(strike in that case). Here is is “any other clause beyond….”. This is VERY broad.
 SO…at the end of the day, parties who need the least protection get it. If you go to an expensive lawyers and they draft
such a clause, you will get out of the K. If not, too bad, so sad.
GOOD FAITH
 Argument that Art 1439 (ability to modify K) can be combined with Art 1375 to force Skippy to modify K in such
an extreme case.
 Could argue good faith, that the doctrine makes in incumbent upon K’ing party to perform in good faith….
Page 46 of 64
Contractual Obligations Summary – April 2005
Jurisdiction
Facts
Issues
Holding
Ratio
Kirk Shannon
H.R. Sainsbury v. Street
[1972] England Common Law – MacKenna J.
PL buyers under alleged K for about 275 tons of feed barley. D denies K – alleges agreed to sell subject to
the condition that he would harvest that amount…but only harvested 140 tons. PL wants damages for the
140 tons.
Is there a K? Is the D excused? If so, for what reason?
There is a K. D is excused for not delivering 275 but not for 140 tons.
In order to relieve party from overly onerous or difficult obligation that is result of supervening event
which is not his fault, court can imply a condition which will give effect to the presumed intention of
reasonable men. (E.g., if D failed to produce stipulated tonnage, buyer will accept partial delivery OR
buyer can discharge K). [Jukier: the supervening event would have to be an exceptional one]
 There was implied condition in the K that if the D, though no fault of his, failed to produce the
stipulated tonnage of his growing crop, he should not be required to pay damages.
 This implied condition is reasonable b/c of (1) the risks of agriculture; (2) the fact that crop was still
growing when K was signed..
 Not exonerated completely because it create an imbalance in the market but excuses him from
supplying the rest even though on the reasoning of Canada Starch it would not have been impossible for
him to go into the market and buy the barley to sell it to its suppliers
 There was no implied condition that if D failed to produce the whole, he would not have to deliver any.
If parties had actually intended this, they would have estimated the output more carefully (and less
optimistically)
 How to determine what condition should be implied: It should be a condition which will give effect to
the presumed intention of reasonable men. (For example, may be unreasonable to compel buyer to
accept the partial volume…condition should thus allow buyer to discharge K or accept part delivery).
4) CATASTROPHIC PRICE INCREASES: Civil - NO. CL - usually NO (but exceptions)
Civil Law:
No.
Common Law:
General tendency of law is not to grant discharge from K as a result of variations in prices which make K less profitable.
This would eliminate the utility of K-ing (See US case of Re Westinghouse Electric Co. - court held that changes in econ
circumstances don't fall w/in frustration).
 This is only a general rule - some exceptional cases may justify court intervention  e.g. Alcoa
 Alcoa: Must acknowledge this case. Court modified the K b/c the oil embargo was seen as a frustrating event.
Why would the court go against the general rule?  (1) It's a US case; (2) Court interpreted the allocation of risk
clause VERY BROADLY so as to include such a circumstance.
Catastrophic price fluctuation in itself is not enough but there are circumstances in which there is a catastrophic price
increase due to an unforeseen contingency which has the effect of a catastrophic price increase
Aluminum Company of America v. Essex Group Inc.
Jurisdiction
[1980] US Common Law – Teitekbaum J.
Facts
Alcoa agrees to process aluminium for the defendant. Contract: the contract price will vary according to:
1) hourly wage increases; 2) If the wholesale-price index goes up. The OPEC oil embargo makes the
price of electricity increase. If carried out, ALCOA would lose 60,000,000.00. Event falls outside their
force majeure clause which provides for price escalation.
Issues
Should the terms be modified for frustration or mistake or neither?
Holding
Yes
Ratio
- Court’s way: The fact that the party did stipulate 1 and 2 means that they wanted the court to supply
default terms of C and D. The parties sought to limit their risks, and courts should imply remedies to
that effect.
- The mistake in this case was as to the calculation of risk. Both parties consciously undertook a
closely calculated risk rather than a limitless one. Both parties believed that the range of uncertainty
would not exceed three cents per pound. This mistake was fundamental and mutual.
Page 47 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
-
Note
Alcoa is thus entitled to some form of relief due to mutual mistake of fact.
Alcoa is also entitled to relief due to frustration.  The non-occurrence of an extreme deviation of
the WPI-IC and Alcoa’s non-labor production costs was a basic assumption on which the K was
made. (focus here is on hardship)
Policy concerns: If the law refuses an appropriate remedy when a prudently drafted long term contract
goes badly, people will refrain from entering into long term contracts.
- Turns the force majeure clause idea (or hardship clause as Jukier likes to call it) on its head saying it
provided for certain increases…..but this one is so far beyond that that it must be included.
Jukier
 Policy considerations are key.
Principles of K law
Policy concerns: If the law refuses an appropriate remedy when a prudently drafted long term contract goes badly, people
will refrain from entering into long term contracts.
EFFECTS OF FRUSTRATION
 Krell v. Henry the guy doesn’t get back his deposit even though excused from the K.
 English case of Polish company which led to the Ontario Frustrated Contracts Act. Machine K’d for with deposit.
Frustrated by WWII. Court says should give back for unjust enrich. BUT….what if deposit is used to build part of
machine…then what. Answer in 3(1)a and 3(2) below
Frustrated Contracts Act, R.S.O. 1990, c. F.34, ss. 1-3(3) (p.223)
2(1): The Act applies to any contract that has become impossible to perform and been otherwise frustrated and to the parties
which for that reason have been discharged [Art. 1693]
3(1)a In case of sums paid, they are recoverable.
but
3(2): If, before the parties were discharged, the party to whom the sums were paid or payable incurred expenses in
connection with the performance of the contract, the court, if it considers it just to do so having regard to all the
circumstances, [allow restitution] [Like Art. 1694]
Art 1694
A debtor released by impossibility of performance may not exact performance of the correlative obligation
of the creditor; if the performance has already been rendered, restitution is owed.
Where the debtor has performed part of his obligation, the creditor remains bound to perform his own
obligation to the extent of his enrichment.
Part VIII: Breach and Remedies
Point of remedies is to re-enforce the institution of the K.
Looking at a breach of a validly formed K. So….How do we advise the innocent party of a K whose content is
determined, whose formation is good and whose validity is not questioned.
Baudoin & Jobin, Les Obligations, p.557-562, 583-592, 597-602, 635-662, 667-670, 675-685
L’inexécution du contrat
Art. 1590: les sanctions reliées à l’inexécution du contrat.
1) Refus d’exécution: Permet à l’autre partie de suspendre l’exécution de l’obligation corrélative.
2) Exécution tardive: Lorsque cela cause un simple inconvénient  dommages moratoires/ Lorsque cela fait en sorte que le
contrat n’a plus d’intérêt pour l’autre partie  équivalent à une inexécution totale ; cela donne droit à la résolution du
contrat.
3) Exécution partielle: Considérer la nature de l’objet et l’intérêt que représente l’inexécution pour le créancier. Si le
contrat est indivisible  comme une inexécution totale.
4) Inexécution d’une obligation accessoire: Peut être traité comme un contrat inexécuté si l’obligation accessoire est
absolument indispensable à l’utilité même de l’obligation principale.
5) Exécution défectueuse: Une obligation mal exécutée est une obligation non exécutée
Le fardeau de la preuve est sur celui qui veut prouver les faits de sa prétention. Dépend du degré de l’intensité.
Page 48 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
A: Seriousness of Breach
Less serious breaches give rise to some remedy (S.P., damages, Quanti minoris or Exception for non-performance.
Two questions to ask:
1) Has there been a breach?
2) What remedy can innocent "non-breaching" party receive?
1. HAS THERE BEEN A BREACH ?
Mere non-performance does not necessarily constitute a breach - depends on nature of obligations. Could be shotty
performance, partial performance, etc.
 Not just a factual issue but also a legal element to it.
Civil Law  Intensity of obligations:
- Obligation of means only breached when debtor did not perform as would a reasonable person (fault based)
- Obligation of result breached when result not obtained (presumption of fault unless force majeure)
- Obligation of warranty breached if not performed (arguably strict liability)
Common Law  Contractual interpretation:
CL does not have same taxonomic structure of classification. Court will interpret an obligation as obligation to achieve
result or obligation to take reasonable care  then determine if breach has taken place.
 End result is still the same. Content of the obligation is interpreted to determine if there was a breach which is
not classified according to intensity.
- Will see same outcome as in civil law
So how do we determine the extent of the breach
 ex post facto (this is what Denning focuses on.)
 a priori (Parties particularly K’d to say that a certain term is an important term)
o This is possible in the CL
o In Cv, not so possible where in Art 1604(2) it is not allowed to the contrary (public order).
2. DETERMINE THE REMEDY
Point of remedies is to re-enforce the institution of the K.
If you decide that you have more obligations to perform, you are going to be interested in getting rid of the K.
 In Esso, K is over and therefore wants damages to RII
 In Yoscovitch, there are still obligations ($50,000) and therefore she wants out of the K.
Factors that distinguish where innocent party can get out and cases where have to perform but can sue for damages.
Depends on the seriousness of the breach. Cannot be excused from own performance for a trivial breach.
Art 1604 (2)
However and notwithstanding any stipulation to the contrary, he is not entitled to resolution or
resiliation of the contract if the default of the debtor is of minor importance, unless, in the case of an
obligation of successive performance, the default occurs repeatedly, but he is then entitled to a
proportional reduction of his correlative obligation.
See Cehave  only part of the citrus pellets were damaged…not all. Real reason was the drop in price
Common Law:
Ending K for innocent party should not always be the case. Damages are not always best option.
Rescitation of K: K ended at formation (nullity)
Termination of K: More appropriate for breach. (like CV resolution/resciliation)
Set Aside:
Page 49 of 64
Contractual Obligations Summary – April 2005
In what
circumstances
Remedies available
Kirk Shannon
END K
Parties stipulated that a clause is a "condition"
& thus breach = end K.
OR
- Court has interpreted an "intermediate
stipulation" (not obviously a warranty or a
condition) as a condition = can end K OR elect
to affirm K.
[a] Damages – TERMINATION
OR
[b] Restitution - RESCISSION
-
-
-
AFFIRM K
Party who suffers breach elects to
affirm.
OR
Party is not entitled to affirm b/c court
has interpreted the breached clause as a
warranty, not a condition (Cehave)
[a] Damages
OR
[b] Specific Performance
Party elects the remedy.
Court (not the parties) determine remedy
Termination Damages - party can sue for all the expectations which he has been deprived of (limited by mitigation and
remoteness). E.G. party could get damages for cost of buying pellets to replace damaged ones. Can also get reliance
damages (?)
Rescission and Restitution - party can get back what it paid  Why would a party choose restitution over damages? Either
b/c (1) didn't suffer any damages (Cehave); (2) you cannot prove your damages.
**Note that parties in the CL can stipulate whether an obligation will be a condition or warranty (and thus whether breach
will entitle parties to end K or not). Parties in the CV cannot stipulate (Art. 1604 is mandatory).
Civil Law:
Resolution: For K’s of instantaneous performance (same effects as nullity)
Resciliation: For K’s of successive performance (lease)
RESOLUTION / RESILIATION
AFFIRM K
Art. 1604: Notwithstanding any
Party will affirm K IF the breach is of "minor
In what
stipulation to the contrary, he is not
importance" (art. 1604)
circumstances
entitled to resolution or resiliation of the
OR
K if the default of the debtor is of minor
IF party elects to affirm the K (even where breach IS
NOT of minor importance
importance.
Remedies available
If breach is NOT of minor importance
(look at breach, not clause)  can resolve
or resiliate.
Art. 1606:
Resolve = the K never existed 
restitution.
Resiliate = prospective setting aside;
ceases to exist but only for the future.
Resiliation is used for Ks of successive
performance (e.g. lease). Resolution used
for Ks of instantaneous performance (e.g.
K of sale)
Resolution is akin to NULLITY (both =
K never existed)…BUT, nullity is only
available for defects of consent (Art.
1407). Breach is met with resolution.
Art. 1590: …where debtor fails to perform his
obligation WITHOUT JUSTIFICATION [force
majeure or reasonableness - depends on intensity], the
creditor may
[1] force specific performance of the obligation
[2] obtain resolution or resiliation of the K or the
reduction of his own correlative obligation
[3] take any other measure provided by law to enforce
his right to the performance of the obligation**
OR
Art. 1591 (non adimpleti contractus)
Where parties have dependent correlative obligations,
you don't have to perform until the other guy does.
(E.G. "you aren't delivering my goods…so I won't pay
you")
"Exception for Non-Performance"
Quanti Minoris
** E.g. of "any other measure provided by law" = QUANTI MINORIS in Art. 1407. QM is a reduction of your obligations.
Keep K alive but give party something back in damages. Only available for bad-faith type defects of consent (?). This
remedy does NOT exist in the common law
Page 50 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Damages
 Provided by law at Art. 1607
Cannot stipulate that a breach of minor importance will lead to resolution or resiliation
 Art. 1604 is mandatory. This goes against the autonomy of the will. It is paternalistic.
Compare CL and CV wrt Remedies
- Choice: When K is maintained  Civil law gives choice of remedy to innocent party (victim of breach). CL does not
give choice to innocent party
- S.P. vs Damages: Civil law - S.P. is the primary remedy. Common law - damages are primary remedy; S.P. is the
secondary remedy.
Principle of Civil Contract Law
Why does civil law have so many remedies and why does it love S.P.?
CIVIL LAW FOCUSES ON WILL AND CONSENSUS. The civil law likes to keep the K alive. Parties wanted to create
this institutional framework…thus there is a reason to keep it alive.
Jurisdiction
Facts
Issues
Holding
Ratio
Cehave NY v. Bremer Handelgesellshaft
[1975] Eng CA – Denning
Buyer receives Citrus pellets slightly damaged and rejects the whole cargo. Clause: pellets will be in “good
condition”. By then, the market price for pellets had gone way down. Middleman gets a hold of the goods
ands resells them to the same buyer but for 1/3 of the original price. Buyer uses the goods for the same
purpose.
Is the buyer liable.
The contract is not terminated; the buyer gets damages for the difference in value between the damaged
goods and the sound ones
Breach of one party will only excuse performance of the other party when a CONDITION (and not a
warranty) is breached. Some clauses - breach may be minor or serious - these are "intermediate
stipulations". Breach of an intermediate stipulation will only excuse performance when the breach goes to
the root of the K (i.e. breach is very serious)
- Clause = condition (termination and possible damages) or warranty (damages but must carry on
obligation)?  Basically saying some breaches are serious and others, not so much.
- Two available ways of approaching the question:
1) An AB INITIO determination that these terms are warranties and these are conditions make this determination based on the construction of the K - based on intention of parties
themselves.
2) In an ex post facto way, depending on the seriousness of the breach itself
-
Denning finds for the second approach on the basis that the vast majority of terms are intermediate
terms that are neither conditions nor warranties (capable of being both or either). Their classification
depends on the actual breach that occurs and its consequences. The buyer is not allowed to resiliation if
the breach itself is of minor importance [Art. 1604 in Civil law].
- Breach was of “ship in good condition”. Doesn’t clearly fit into ‘condition’ or ‘warranty’ from above
– depends on how rotten the citrus pellets are!!
- In this case, the goods were ‘of merchantable quality’ as they were in fact used by buyer and therefore
the buyer was not entitled to reject the entire lot and can only claim damages as this was a warranty.
Civil law: refusal to accept delivery was a refusal to perform the k in good faith pursuant to Art 1375.
Comment
Jukier
 Language reminds us of the “Fundemental Breach”. Probably not the exact same but it sounds very familiar.
 Test for whether or not K can be ended - based on seriousness of breach. Same in civil - see Art. 1604.
Page 51 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
B: Specific Performance
Def'n of SPECIFIC PERFORMANCE
Party tries to get court order to compel the debtor to do the very thing that was promised under the K. The "ultimate
expectation protection". Not damages equivalent to the expectations - the expectation itself.
Pro’s to Specific Performance
Con’s to Specific Performance
Fairness
Unfair
o Consistent with the wills
o Personal service K’s  obligation to do (this is a
o Rights based approach  that there is an individual
contract intuitu personae (you are the coright in each K. Rights in those parties to the K.
contractant precisely b/c of your personal
o Hardship
characteristics –ie this particular person)
With respect to continuous operation clause – so that
- nemo praecise cogi potest ad factum (force
they do not lose an anchor tenant.
- infringes on personal liberty by, basically, physically
o Public interest argument – people should think that
constrains them. Enslave them is a possible analogy)
they are going to be held to perform so that they
o Hardship
will rely on the institution of K’s – if not, giving
Stuck in an economically unfair bargain.
into the theory of efficient breach (do the math and
o Court supervision
say its cheaper to breach and pay damages)
o Waste of resources on certain occasions (Ruxely
o Risk of under-compensation in giving damages.
would be if forced to dig new pool)
Good faith (acting reasonably) comes in as making sure that the person seeking specific performance is not doing so
vindictively.
Who should we focus on – the debtor or on the creditor
o Different in each system  illustrates differences b/n systems
Common Law
Common law invents the Injunction as the procedural device used for granting substantive doctrine of specific performance,
which is the epitome of expectation interest.
Remedies in Equity, including Specific Performance, are discretionary (not a remedy of right)
History of Specific Performance = it is a secondary (equitable) remedy:
1) Remedy of specific performance comes from equity (Falcke) and is a secondary remedy. Secondary to damages.
2) Equitable origin: courts can for equitable reasons decide not to award it (discretionary)
3) Court’s reluctance: forces parties to work in an antagonistic relationship, which may compromise the quality of
performance. Issue of the supervision of the court’s order.
4) Exception in the case of unique objects
Courts in CL have tried to find ways NOT to force SP:
- Will not award where damages are adequate or more appropriate (see Warner Bros)
- Will not award where compels a person to DO or remain idle (Warner Bros)
- Will not award where it creates exceptional hardship on a party (Ruxley?)
- Will not award where court will not be able to supervise performance.
- Court doesn't want the parties to keep coming back to court to get the order enforced
- Complex obligations = difficult to precisely frame the order, difficult to determine what constitutes performance.
Does providing 1 teller = "staying open for business". CL wouldn't grant injunction to "stay open for business".
Focus of the Common Law
 Here, the focus is on the wrongdoer – debtor.
Falcke v. Grey
Jurisdiction
[1854] Eng - Sir R.T. Kindersly V.C.
Facts
Mrs. Grey agreed with Falcke that at the expiration of his lease, he would have the option of buying her
two china jars for ₤40. Falcke knew they were worth much more. However, Mrs. Grey sold them for a
higher price to Mr. Watson.
Issues
Can specific performance be ordered
Holding
Specific performance is denied
Ratio
- In this case, monetary compensation wouldn’t be appropriate because the jars were unique.
- Must come to equity with “clean hands” - he did not do this b/c he knew they were worth more and
Page 52 of 64
Contractual Obligations Summary – April 2005
-
Note
Kirk Shannon
therefore was not in good faith (though the word is not used)
Specific performance is discretionary remedy. Equity arguments can be used to dissuade the court
from ordering specific performance. Here, the contract was unconscionable
- Substantive unfairness: Disproportion in prestations.
- Unequal bargaining power: Inequality in knowledge: he was an expert in antiques and knew
This was in 1859: No doctrine of unconscionability; through its discretionary power to refuse specific
performance, the court indirectly protected the party from an unconscionable contract.
Obligation to do or not to do
Jurisdiction
Facts
Issues
Holding
Ratio
Note
Warner Bros. Pictures Inc. v. Nelson
[1936] England – Branson J.
o Defendant (Betty Davis) agrees to perform solely and exclusively for Warner - ends up breaching K.
o K has negative covenant: D agrees that during term of K she will not engage in any other work w/o
the written consent of the producer.
o Plaintiff asking for specific performance of the restrictive covenant not to act for another company.
They didn’t ask for a mandatory injunction for her to fulfill her obligations to act for them.
o PL claimed declaration that K valid and binding, injunction to restrain D from acting in breach of
it and damages.
Will an injunction be granted in favour of a negative covenant in a K  ie will specific performance of
negative covenant be granted?
Injunction granted for three years and only in the jurisdiction of the court (ie England)
General rule is that courts will not enforce specific performance of a positive covenant of personal service
(or a positive covenant framed in negative terms). Should not grant an injunction if to do so would be
tantamount to ordering the D to perform her K or remain idle OR unless damages would be a more
appropriate remedy.
o Cannot order mandatory injunction for positive covenant – Nemo Praecise cogi potest ad factum
(intuitu personae)– cannot order someone to act as it would infringe their personal liberty
o Court finds that it is reasonable here because it only restricts her from working for a motion picture
company and it is the only effective remedy for the breach
o Such an injunction would not force the D to perform her K (although it might tempt her to b/c she
could not get as much $ in another occupation) [Jukier is critical of this - could she really wait
tables?]
o Damages are not a more appropriate remedy. The parties explicitly recognized (in the K) the
appropriateness of an injunction over damages. Also, damages would be very hard to evaluate (b/c of
the nature of her occupation - she is valuable b/c of who she is) [she is a "unique good" - damages
cannot replace her]
Court did not apply the rule cogently: specific performance here is almost equated to a mandatory
injunction because she has no choice but to accept to work for Warners.
Jukier
o Law has been inspired by a distinction b/n obligations to do and not to do. False dichotomy that is based only on
semantics: Obligation not to work somewhere else is the same as saying “you SHALL work for Warner Bros.” It is
a positive obligation in this sense.
o Quebec cases (2): Obligation not to block a lane way. One case said obligation was “not to block” a
laneway. Other was to “take down the blocker”. One is positive and the other is negative.
o How is personal liberty not involved when NOT doing something.
Principles of Common Law of Contracts
Secondary role of SP as equity is only used when common law is lacking.
 It brings in a discretionary remedy of the courts in the CL. Therefore it is not a remedy of right at the choice of the
creditor. Opens the door to such arguments as hardship.
 Mindsets have profound influence on the CL – it is restrictive. These are practical problems that are associated with
remedies. Common Law finds all sorts of reasons not to reward SP. Including:
o Supervision – how can we order a business to stay open? Operate well? Operate with one cashier or
ten…. So, this is often been a convenient excuse for the CL courts. They say it is far too complex to order.
 CV law has not such problem
Page 53 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Civil Law
Cannot be purely discretionary and secondary as in equity in the CL b/c there is not such thing as equity in the civil law.
Art 1590
An obligation confers on the creditor the right to demand that the obligation be performed in full,
properly and without delay.
Where the debtor fails to perform his obligation without justification on his part and he is in default, the
creditor may, without prejudice to his right to the performance of the obligation in whole or in part by
equivalence,
(1) force specific performance of the obligation;
(2) obtain, in the case of a contractual obligation, the resolution or resiliation of the contract or the
reduction of his own correlative obligation;
(3) take any other measure provided by law to enforce his right to the performance of the obligation.
Art 1601
A creditor may, in cases which admit of it, demand that the debtor be forced to make specific
performance of the obligation.
Focus of the Civil Law
 In the Civil law we look through the lens of the CREDITOR. Remedies are the choice of the creditor.
 Does this make sense  Root of the Civilian
o Autonomy of the parties’ will.
o Just enforcing the will (and therefore RIGHTS BASED)
Still can’t Make the Opera Singer Sing
 Still cannot force certain personal obligations (intutio personae) but not all personal obligations are of this nature.
Some can be enforced.
Civil Law (Art. 1590):
o Primary Remedy - Usually not discretionary in most Civil law jurisdictions – except Quebec
o Borrowed notion from the Common law (equity branch)
o Art. 1601: “in cases which admit of it” This tells the court that specific performance only lies where the case
admits of it. This gives the court the discretion it needs.
o Concordia case seemed to recognize this - a landmark decision. Courts no longer insist on restrictive
interpretation of S.P. just b/c injunction comes from CL. Does not have to be applied exactly the same as
in Common law. (This is resolution of danger of comparative law in which doctrine is taken from another
system and plunked into Civil.)
Principles of Civil Contract Law
Theoretical Justification for S.P. as primary remedy in the civil law:
- The will theory is the basis of the obligation in the civil law and the reason why it is enforced. Civil law of Ks is based
on the parole donée and consent (vs. CL - focus on external ratification - consideration). Since the parties manifested
their consent to perform this particular obligation = the obligation should actually be performed.
- BUT…can we still justify specific performance even if it creates a significant hardship on the other party (could be
WAY more costly than damages!)
Problems with the Remedy
 If the order of specific performance is not performed the party would be in contempt of court. This would bring
imprisonment which would necessitate a criminal penalty for a civil wrong. This CANNOT be.
 Response in France is “Astreinte” which obliges payment of a lot of cash when do obey the order.
 In cases like Concordia very hard to order specific performance b/c would require continuous court supervision –
thus bad allocation of court resources.
Recall discussion of lesion and comparison b/n common and civil
Positive obligation/operating clause in contract of lease
Les Propriétés Cité Concordia Ltée v. La Banque Royale du Canada
Jurisdiction
C.S. Que
Facts
The bank wants to close its branch at the La Cité complex and thus rescind its lease. The Pl demands a
mandatory interlocutory injunction to stop the Bank from reducing its hours of operation, its staff, etc. – ie.
Specific performance. Lease had a continuous operation clause (which is often aimed at ankor tenants)
Issues
Should an injunction be granted for a positive obligation?
Holding
Injunction granted
Page 54 of 64
Contractual Obligations Summary – April 2005
Ratio
-
Kirk Shannon
Positive obligation to stay opened is at issue. When an anchored tenant leaves, this affects others.
The damage for the bank will be minimal if the branch stays open whereas the damage for the PL would
be considerable should it close – in short and in long term.
Can do this b/c it was in the K – through continuous operation clause.
Breakthrough: you can have a positive obligation to stay there because it is a corporation and while it
may cause economic hardship to the bank, it is not a personal liberty because it is a large corporation.
Recourse in damages will be indicated in the cirumstances.
Jukier
o What does “stay open for business” mean? Can leave one teller??
C: Monetary Awards
Fuller & Perdue, the Reliance Interest in Contract Damages
Purposes of awarding contractual damages:
1. The plaintiff has in reliance on the promise of the defendant conferred some value on the defendant. The object is to
prevent unjust enrichment (protecting restitution interest). Restitution is akin to corrective justice.
2. The plaintiff has in reliance on the promise of the defendant changed its position. The object is to put him in the
position as he was before (reliance interest).
3. We may seek to give the promisee the value of the expectancy which the promise created (profits). This is the
expectation interest. Expectancy is akin to distributive justice.
Why should a promise which has not been relied on ever be enforced at all? Penalize breach of promise by promisor;
discourage breach of contract; prevent losses; promotes and facilitates reliance on business agreements; protects reliance on
the institution of contract itself. “Whatever tends to discourage breach of contract tends to prevent the losses occasioned
through reliance.”
CONCEPT BEHIND DAMAGES: Goal is to compensate. RII. Making whole again.
 Compensation is through three types:
1. Restitution Interest: Goal is to prevent unjustified enrichment. Gives the lesser of the enrichment and
impoverishement (Degelman, Brewer, Les Terrasse)
2. Reliance Interest: Puts you back in the situation had there not been a wrong. (Esso, Mason Contruction)
3. Expectation Interest: Question is asked  What would it take in the way of damages to put the PL in the position
he would have been had the K been performed.
 Supports the institution of K’s  Most effective way to: Stimulate economic activity,
D: Cost of Cure vs. Diminution in Value
What happens if the cost of curing the defect so outweighs the value of the performance (ie gross wastefulness of resources)?
Raised in Specific performance cases and Damages cases.
 Is giving Expectation Interest not just giving all costs of curing the defect without regard for the Value.
What is value?
 Is it emotional or economic…..?
Tito v. Waddelll (No. 2)
Jurisdiction
[1977] England – Meggary V.C.
Facts
British company wanted to mine island of Banabans and both parties agreed on K. Clause: obligation on
part of mining company to replant island. WWII happens and the island is rendered unliveable and entire
population moved to another island. The mining company never does replanting and are sued. Banabans
want damages. Cost of cure to replant is extremely expensive and yet there is no economic value to the cocontractant for the replant.
Issues
Is the British Company responsible for the replant (cure) despite the fact that there is no economic value to
the co-contractant.
Holding
Diminution in value of the land allowed (but nominal) - Cost of cure is not given.
Ratio
- The cost of replanting the island was enormous. But the diminution in value of a non replanted island
was virtually nothing because they are not living there
Page 55 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
-
Factors to take in consideration: i) need to compensate the victim by putting him in the same place he
would have been had the contract been performed ii) whether there is a monetary loss suffered iii) if
the loss is the cost of doing work then there is a possibility to recover damages by equivalence iv)
uncertainty about whether the money given will go towards the works.
In this case, they will not benefit from the replanting and there is no value in replanting. We should only
give them the diminution in value, which would be nominal.
Jukier: Question is why should we hold someone to this obligation when there is no value to it?
 Smells of force majeur and frustration. Why wasn’t this argued. Just wasn’t argued.
 Other solutions possible as to the remedy  i) Restoring the contractual value (“Buy back the clause!” to prevent
unjust enrichment; a restitutionary type interest but difficult to calculate in cases like Ruxley ii) Frustration because
of the war iii) Disgorgement of profit (give back the profit made).
Jurisdiction
Facts
Issues
Holding
Ratio
Ruxley Electronics and Construction Ltd. v. Forsyth
[1996] House of Lords.
Contract of a swimming pool contained a clause saying that the depth was supposed to be 7’6”. The actual
performance gave a pool of 6’9”. This does not affect the use or the value of the pool but it was not the
depth contracted for. The cost of building the right pool would be ₤21,000. Wants damages
Is Mr. Forsyth able to get expectation damages (the pool being 7 inches deeper)
- Diminution in value granted (almost nil)
- Compensation in the form of non pecuniary loss of amenities [loss of pleasure].  ₤2500
 There is a breach because this was an obligation of result [Civil law concept however]
Lord Jauncey
- Cost of building a new pool + retain existing one = substantial gratuitous benefit
- Intention to cure is key. Does not think Forsyth intends to re-do pool.
- Cannot give cost of cure would not be reasonable.
Lord Lloyd
- 1) Cost of reinstatement not appropriate if the expenditure would be out of proportion to the benefit.
- 2) Appropriate measure of damages in such case would be the difference in value b/n the two pools.
- In every case where breach happens, PL is not always entitled to monetary equivalent to SP. First
must ascertain the loss.
- If no intention to cure in this case then the PL has lost nothing except the difference in value b/n
the pools (nominal)
- Underlying principle: plaintiff cannot always be placed in the same physical position as if the contract
had been performed where to do so would be unreasonable [intention to cure is only a factor to
consider].
Plaintiff cannot recover damages for injured feelings except when the object of k is to afford pleasure.
Rule is you do get the cost of cure unless it would not be reasonable to do so.
Note
Jukier
 When cost of the cure is so much above the dimunition of value, it all comes down to reasonableness.
 Why? Jauncey  reference to reasonableness indicates that if the Pl does not truly value to the cost of performance
then it would not be reasonable to give them the cost of cure.
o If he doesn’t intend to re-instate the property, we would be giving him a windfall gain.  he would not reinstate property so it is not reasonable to give him cost of cure.
o Linked to Specific Performance. As if asking for damages but want them to go to the performance of the
K. Why are we asking what people will do with K damages – reasonableness.
Principles of Contract Law
It is not wrong to think about the intention of the parties with respect to the damages awarded.
 B/c it helps us determine what the loss is. Creditor of the breach has not suffered the loss of the pool if, in essence,
he did not care about that contract term. Also, goes to the reasonableness of giving SP.
 Problem – could promote inefficient breach of K based on something like idiosyncratic need for a pool of this depth.
o Lord Lloyd  re reasonableness: he does not fixate on what the party will do
Focus on disproportion b/n cost of cure and the value. Will give cost of cure unless it is out of proportion.
Debate
 Must enforce Cost of Cure to enforce the institution of the K Sanctity of promises.
 The judges are in effect rewriting the K saying that the pool put in was reasonable.
Page 56 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
 Could be seen as promotion of inefficient breach.
Arguments on other side
 Don’t want economic wastefulness.
 Don’t want to give windfalls
 Would be punishing the other party which is not the purpose of damages.
Arguments for cost of cure
Argument against cost of cure
A contract is a contract (judge cannot erase terms of k)
Wasteful
Otherwise: encouraging breach
Windfall
Property right (folly)
Punishment
Other possible remedies: that don’t involve all or nothing
 Per Corona a constructive trust.
 Require the D to disgorge the profits that were made. Ie. Don’t give Forsyth ₤21,000 but make Ruxley give any
profit he made on the deal. (Restitutionary like claim)
 Out of Tito , British Posphate Co had agreed to replant and this was made up for in the quid pro quo from the
Banabans. Therefore, they should pay the other party to buy out of the obligation. (restitutionary like claim)
E: The Scope of Remedy
Limitation on awarding of damages
Once we have decided what the damages would be in order – do you automatically get the damages? NO. Not if damage is
too remote. Must ensure that there is a causal link. Cannot extend damages to every loss incurred from the breach.
See excerpt from Baudouin at p. 572
Civil law: concept of directness (causation) and foreseeability at the time the obligation was contracted in assessing damages
[art. 1607, 1613]
Art 1607
The creditor is entitled to damages for bodily, moral or material injury which is an immediate and
direct consequence of the debtor’s default.
Art 1613
In contractual matters, the debtor is liable only for damages that were foreseen or foreseeable at the
time the obligation was contracted, where the failure to perform the obligation does not proceed from
intentional or gross fault on his part; even then, the damages include only what is an immediate and
direct consequence of the nonperformance.
o Art 1613 is really simplistic.
o Even though 1613 uses foreseeable (which sounds like tort) which seems to be the wider test, Baudouin thinks a
stricter test is still used for contractual situations.
Common law: concept of remoteness in the trilogy of cases.
1868 case of B.C. and Vancouver Mettleship Case. Where man going to get married stops to fix horse’s shoe – horse is
lamed and woman marries another. Claims for loss of K to marry. Is blacksmith liable.
o Question: Not whether to limit damages on ground of remoteness but what factors determine limit damages.
Language used
More Contractual….
o
o
o
o
o
o
o
Probable result
Ordinary course of events
Great multitude of cases
Not unlikely to occur
Not very unusual
Reasonably Certain
Likely result
Jurisdiction
Facts
TORT
o
o
o
o
o
Serious possibility
On the cards
Reasonably foreseeable
Real danger
Liable to result.
Hadley v. Baxendale
Eng [1854] – Alderson B.
Owner of Mill sent a broken shaft through a carrier to use as a mold for a new shaft. PL told the courier
to hasten its delivery. Delivery was delayed for an unreasonable time and Mill was unable to operate.
Owner incurred loss of profits. Delay of five days.
Page 57 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Issues
Holding
Ratio
Should the owner of the mill recover for lost profits?
No recovery for loss of profit: it was not a foreseeable type of damage for the carrier
Elaborates Remoteness test to determine the scope of the remedy – based on knowledge :
1. The damages which the other party ought to receive […] should be such as may fairly and
reasonably be considered arising according to the normal course of things (naturally) with no
particular knowledge.
2. Or such that may reasonably be supposed to have been in the contemplation of both parties
[where the special circumstances are communicated]
- Relates to the ability of the reasonable person to contemplate the type of damage not the extent.
Application of the test: 1) a reasonable carrier could not contemplate that late delivery would result in
the complete halt of the mill and loss of profit is not a consequence that flows naturally from delayed
delivery – not likely to occur in the multitude of cases (could have a spare shaft) 2) No special
knowledge communicated to the defendant as to the indispensability of the shaft.
Note
- Efficiency justification for innocent party as carrying the loss: Plaintiff had the power to regulate the
risk and take precautions.
- Civil Law equivalent of test: Art 1613.
Jukier: From Fuller expectation test  damages to put this mill owner back in the position he would have been
in……These are expectation damages.
o Two branches b/c parties in certain situations parties do not plan for breach.
o Branch 1 is (with no particular knowledge) damages that would arise naturally as the probable course of
the breach.
o Branch 2 (WITH special knowledge) damages are broader b/c of special knowledge.
Note new test used with reasonably foreseeable  Did not use reasonably likely as above.
Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd.
Jurisdiction
[1949] Eng – Askquith L.J.
Facts
Seller delivered a boiler to the defendant 20 weeks after the stipulated time. PL are claiming loss of
profits from clientele and from particularly lucrative dyeing contracts they would have had. D were in the
business and knew that plaintiffs needed this boiler for immediate use (correspondence).
Issues
Should the PL recover for lost profit and for loss of lucrative K?
Holding
Damages for loss of profit awarded but not for lucrative contract lost.
Ratio
- Reformulates/rephrases it into a test of reasonable foreseeability at the time of the contract: – this
depends on the knowledge which is of two kinds:
o Imputed: knowledge resulting from the natural course of things
o Actual: Special circumstances that must be communicated to make additional losses
recoverable
- Here, it is enough that the defendant would foresee, that the damage could result.
Note
Application: Loss of profit was clearly foreseeable in this case: D knew more than the layman. Lucrative
contracts: special knowledge of these was not communicated; not something that would arise in the
natural course of events
- Inherent difficulty and artificiality in differentiating between the type of damages and the extent of
damages (lucrative k → also loss of profit).
Jukier
o Says that other uses for the shaft (in Hadley) and the Boiler in Victoria Laundry are irrelevant – most obvious one is
the one that is the use in this case.
o Why the different outcomes  Some say use of a different test. New test is like a tort test  can be “reasonably
foreseeable” but not likely to occur. “On the cards” is terrible use of words according to Lord Reid as it is VERY
different from likely to occur.
Jurisdiction
Facts
Koufos v. Czarnikow Ltd.
[1969] AC
Vessel carrying sugar arrived late: breach of contract. Pf had the intention of selling the sugar as soon as
it arrived but could not because of the delay. By the time the sugar arrived, the market price had dropped
and PL claims the difference in profit
Page 58 of 64
Contractual Obligations Summary – April 2005
Issues
Holding
Ratio
Kirk Shannon
Are damages too remote to award damages
Loss of profit is not too remote and recoverable
- Lord Reid: Difference between the Victoria and the Hadley test formulations: something can be
reasonably foreseeable but only occur in a small minority of cases.
- It is not enough that something be unlikely to occur but foreseeable: It should be a result which is
likely because it would occur in the majority of cases
o Criticizes Lord Asquith in Victoria: to bring in reasonable foreseeability appears to be
confusing damages in contract with tort
o In contract, we should have a narrower test because parties can protect themselves. Tort
imposes a much wider liability.
-
Lord Pearce: there was no novel reformulation of the law in Victoria but simply a
restatement/clarification.
o Pearce preserves the two-branch test
Finds that loss of market here arises naturally as a result of the breach and was therefore within the
contemplation of the parties
The case of Ruxley can be rationalized as applying the Hadley test for remoteness
Note
Jukier
o Reid says there is a problem in Victoria Laundry – test used there is a tort test. Contract test must not be the same.
o Note that Reid agrees with outcome in Victoria just not the reasoning.
Criticism of Lord Reid: Increasing number of situations where parties can choose tort or K. This should not be the
distinction. Maybe should be the type of damage. Contract-type (lost economic profits) vs. ECO-type (injury, nonpecuniary, etc.) which would define the test. This is not possible in the Civil Law as per Art 1458.
Principles of K Law
In a contract you have the opportunity to communicate special knowledge and making it part of the foreseeability test of
Hadley step 2. Can foresee higher K prices to take into account unusual risk. Thus the stricter test.
Problematic in a day and age where adhesion K’s are so prevalent.
Looking back to the course
o Remember Puralotor Courrier where they do not deal with remoteness. Civil looks at things through the
obligational content. Whereas Common Law like to deal with remedial part.
o Remember Ruxley. Could be looked at through remoteness. Damage is so remote that it cannot be seen of as
damage. In the vast multitude of cases, this shallower pool would not be considered damage.
F: Mitigation of Damages
One of the reasons why a court would want to limit the expectation damages. Both Common Law and Civil Systems
Civil
Art 1479
o
A person who is liable to reparation for an injury is not liable in respect of any aggravation of the
injury that the victim could have avoided.
What a prudent person ought reasonably to do in order to mitigate his loss.
Jurisdiction
Facts
Issues
Holding
Ratio
Payzu, Ltd. v. Sauders
Eng [1919]
Goods delivered by D. K did not provide for number of installments. D claims that the failure of the PL
to pay right away constituted a breach and a repudiation of the whole contract. D sends a letter refusing
to carry on contractual obligations unless the plaintiff paid cash each invoice. Market price arises and the
PL claims damages equal to the difference b/n their K’d price and the market price.
Can the PL recover – did the PL mitigate his damages.
Recovery only for the loss of profit they would have sustained had they mitigated their damages.
- Principle: imposition on the plaintiff of taking all reasonable steps to mitigate the loss consequent
on the breach, and debars him from claiming any part of the damage which is due to his neglect to
Page 59 of 64
Contractual Obligations Summary – April 2005
Note
Kirk Shannon
take such steps. “What a prudent person ought reasonably to do.”
Application to the case: by not accepting the offer to pay cash, the plaintiffs did not mitigate and
permitted themselves to sustain large losses which as prudent and reasonable people they ought to have
avoided.
- Breacher is only liable for the extent of the damage he caused (art. 1607)  causality. Other party
liable for the extent of the damages he could have avoided through mitigation. Mitigation =
obligation of means
Civil law: art. 1479
Principles of K Law
o Explanations for need to mitigate damages
o Economic: To avoid wastefulness.
o Normative behaviour argument: Obligation to act in K and tort to act as a reasonable person.
o Comes down, in cases, to a question of causality and apportionment. Maybe PL is not responsible for initial
damage but is for some of the rest. The innocent party actually stops being innocent and ends up being a
contributory cause of the damage.
o Almost as if innocent party is no longer innocent by not acting consistently with the way we expect people to act. Key
here is reasonableness.
o Remember the case of Cooke v. Suite which was a decision that there could be damages awarded for breach of a
sterilization even where they represent child-rearing and child-birth. Part of issue was mitigation. Should the mother
who gets pregnant following a failed tubo-ligation mitigate by having an abortion or giving up for adoption? NO – this
would not be unreasonable to ask.
G: Non-Pecuniary Loss and Punitive Damages
Contract law has a problem with these two issues.
Civil Law: NB. Subject to causality and foreseeability, non-pecuniary damages are NO PROBLEM FOR THE CIVIL LAW
Art 1607
The creditor is entitled to damages for bodily, moral or material injury which is an immediate and
direct consequence of the debtor’s default
o Expectation damages is only a pecuniary or economic perspective. All framed in a material or pecuniary sense.
BUT….people suffer more than these damages.
o One can imaging emotional stress due to breach. Very hard to quantify. Don’t confuse ability to quantify with
ability to claim.
Principles of Civil Law Contracts
Note in the civil law that there is a Unitary concept of obligations. One concept of an obligation and all have juridical links
b/n two parties (creditor/debtor) wherein one obliges himself to perform a prestation. Art 1607 does not say contractual or
extra-contractual.
o This is contrasted with water-tight compartments of the common law of Contracts, torts, restitution.
General principle of Art 1607 (as long as causality, foreseeability (of Art 1613)) then can recover. Perfect example of the
unitary concept of the civil law. Thus, no debate as to the level of availability of non-pecuniary damages in the civil law.
Says that harm is harm and we should compensate.
Common Law
o Different types of damages. Will not award pure economic loss without some tangible loss.
Principles of Common Law Contracts
Before Farley v. Skinner there is a general rule  “A K breaker is not liable for any distress, frustration, anxiety,
displeasure, tension or aggravation which his breach of K may cause to the innocent party.”
o From another case, rage and distress will result but, reasonable expectations will that disappointed party will
approach the subject with a certain amount of fortitude and will be satisfied with fact that he can recoup his losses.
o Not based on assumption that anger, etc. are not foreseeable but on considerations of policy.
o Policy  floodgates which can be linked to the compensation principle. We will not be restricting
ourselves to actual harm but rather over-compensating which is basically punishment.
Page 60 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Policy  Basic bargain theory. The K in CL is preoccupied with the economic function of the bargain
which do not lead naturally to giving economic consequences. Non-eco remedies should be in Tort.
o
Practical worry is that PL’s will get a windfall gain. Numbers grow over time and there is nothing on paper to show value of
loss which is thought to lead to a litigious society (as mentioned in Farley at CBp. 311)
Jurisdiction
Facts
Issues
Holding
Ratio
Jarvis v. Swans Tours Ltd.
[1973] QB Eng – Denning M.R.
Jarvis was a solicitor who wanted to go to Switzerland for a skiing trip. The brochure of the Swan Tours
promised House parties, cake, yodelers, fondue and more…but really what Jarvis got was a crappy
holiday by himself with no party, mini-skies and a disenchanted yodeler
Can Jarvis claim damages for disappointment and loss of enjoyment (non-pecuniary) in K.
Yes – damages given
To what extent can we compensate Jarvis for what he really suffered?
Denning introduces recovery of non-pecuniary losses in common law
- Notwithstanding the rule barring recovery for non-pecuniary losses in the common law, “in a
proper case, damages for mental distress can be recovered in contract”
- Jarvis Rule: A proper case is one where the very object of the contract is to provide pleasure. It
failed to de just that. Basis for the contract was enjoyment.
- A contract to provide a vacation is the perfect example
Civil law allows for non-pecuniary damages: Art 1607 and then limits the scope through causation.
Note
Jukier
o Could see brochure as misrepresentation (negligent or fraudulent) which would be tortious
o Or see the terms of brochure as being incorporated into K for which you could sue for breach/expectation interest.
Jurisdiction
Facts
Issues
Holding
Ratio
Farley v. Skinner
[2002] HofL – Lord Steyn
Buyer employed a surveyor to investigate whether the countryside property he wanted to purchase was
affected by aircraft noise. The surveyor negligently failed at his job. The house was located under an
aircraft spiral route. PL’s enjoyment of the house was extremely compromised by the noise. Still, the
buyer has no intention of selling the house. Claim for diminution of value of the property and nonpecuniary damages.
Can the PL recover non-pecuniary damages?
Non-Pecuniary damages awarded
- C.A. said that this falls outside the Jarvis type K for which the object of the K (major or sole part) is
enjoyment.
- The Farely Rule: The Jarvis rule can apply here: It is sufficient that an important object of the
contract is to give pleasure, relaxation or peace of mind. Here it is not major or sole part of the K
but it is an important part of the K….so award non-pecuniary damages.
-
Note
-
Argument of distinction b/w this case and Jarvis based on language akin to intensity of obligation
(surveyor’s = obligation of means/Swan = obligation of result (note not these words as is CL)) This
was rejected in context of recovery for non-pecuniary (relevant for finding of breach).
Test of Hadley of remoteness or foreseeability: Like in the civil law, all these cases can be analyzed
under the rubric of remoteness and foreseeability without artificially categorizing them. Here, the
non pecuniary injury was foreseeable.
Jukier
o Difference here is that the suffering does not come from the breach as in Jarvis. Here, loss of enjoyment flows from
a breach in the K which was not for enjoyment.
o She thinks the extension of the test to an “important part of the K” is dangerous as could extend to most contracts.
o Characterisation of the contract is a problematic way to
o Possible solution: Could go back to remoteness and look at Farley. Given the circumstances of the case
and that the PL made it clear that it was important. It would reasonably foreseeable in the great multitude
of cases that he would be upset….and this should therefore.
Page 61 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
Principles of K Law
Goal of damages – compensation v punishment & Social Cost
1. It would be punishing the defendant
2. Non-pecuniary damages vs. Punitive damages: One seeks to compensate and the other to punish but really the non
pecuniary damages arise usually because of the defendant’s behavior in the breach. Whenever you are looking at the
defendant’s behavior, you are not compensating, you are punishing.
3. Social cost argument: Farley v. Skinner: Non-pecuniary damages can eventually contribute to a litigious society
H: Punitive Damages
Debate about its appropriateness in the private law sphere: public law should give punishment and private law should give
compensation. Often said that it is not the job of private law to punish. This mindset has remained in the CL and CV of K’s.
Punitive damages are very rare.
Civil law
Before CCQ, there was nothing on punitive damages. Like the art 1405 for lesion…no, except.
Art 1621
Where the awarding of punitive damages is provided for by law, the amount of such damages may
not exceed what is sufficient to fulfil their preventive purpose.
Punitive damages are assessed in the light of all the appropriate circumstances, in particular the
gravity of the debtor’s fault, his patrimonial situation, the extent of the reparation for which he is
already liable to the creditor and, where such is the case, the fact that the payment of the damages is
wholly or partly assumed by a third person.
o
You can only get punitive damages where that is provided by law. Even where punitive damages are allowed, the
code makes it clear that their goal is to deter and not to punish.
Two major areas in which punitive damages are provided by law
- Consumer protection act S.272
- The Quebec Charter of Human Rights and Freedoms s. 49(2) (must not be unlawful and intention)
Most of the time the punitive damages are going to be claimed against misleading advertising (ECO) as oppose to a breach of
the contract in the consumer contract.
Common Law
Jurisdiction
Facts
Issues
Holding
Ratio
Whiten v. Pilot Insurance Co.
SCC [2002] – Binnie J.
Insurance contract for a home. Fire was covered. There was a fire in the home and the entire house was
destroyed. They were not a wealthy family and the insurance company refuses to pay because they say it is
arson performed by the family even though they later retract this theory. Jury in lower court awarded
damages and $1 million in punitive damages
Are Whiten’s entitled to punitive damages
Punitive damages awarded in this case.
Punitive damages are only obtainable where there is an actionable wrong in addition to the breach of
contract. Must be a separate actionable wrong. Here: breach of the insurance company’s duty of good faith
to the insured.
Awarded in cases where there is a marked departure from ordinary standards of decent behaviour.
o Over compensation is given in this case also b/c of socially useful service. (Bringing this to the
courts to show wrong of insurance co.)
Jukier
Separate actionable wrong is the controller of the floodgate.
I: Liquidated Damages – Penal Clauses
Parties can deal themselves with a breach in the clauses of the conditions. This is done, for e.g., in exoneration clause.
Therefore, on the flip side, a set stipulated some can be agreed to that will be payable in the event of a breach.
 Cost of breach is then predictable.
Page 62 of 64
Contractual Obligations Summary – April 2005
Kirk Shannon
 Also seen to be good for victim of breach who avoids risk of going through courts (time, expense, risk)
In essence, a pre-determined damages clause
In some cases, stipulated sum exceeds amount of breach.
 Opportunity court provides for operssive and unconscionable bargains (Clark v. Thermidaire)
 Risk is over compensation and repugnancy of damages.
Common Law
Courts have said since 1915, we have to have some ability to assert some judicial intervention in this area to avoid
unconscionable, oppressive penalty clauses and avoid doing terrible damage to the rule of compensation.
 Liquidated damages clause: clause represented a genuine pre-estimate of damages that were to be suffered.
 Penalty clause then was just a sum of money that represented a threat against breach.
Formula to calculate damages was clincher from Dunlop case in 1915. Lawyers start putting in a formula (like in other
sections (force majeure clauses
H.F. Clarke Ltd. v. Thermidaire Corp.
[1976] SCC – Laskin CJ
Non-competition clause. Penalty was $200,000 was expressed in a formula (gross profits from sales of
competitive products) which related number to breach. Actual loss was only $92,000 b/c net (and not
gross) should be used. Lower courts say can’t touch the clause.
Issues
Is the clause a penalty clause?
Holding
Renders clause unenforceable.
Ratio
Clause is unenforceable.
 Mutual consent of the parties is not enough to support such a clause.
 Law is not limited to mutual consent. There is a power to relieve  equity.
 Basis of intervention: manifestation of a concern for fairness or reasonableness. Parties’
predetermination is subject to judicial appraisal of its reasonableness in the circumstances.
Thermidaire still gets damages that they can prove are the natural damages from the breach.
“The sum will be held to be a penalty if it is extravagant and unconscionable in amount in comparison
with the greatest lost that could conceivably be proved to have followed from the breach.”
 Remember Cameron – but this is different as scope was not the problem as in that case.
 Part of a trend to not base decision on artificial elements and get to the route of the problem.
 There is a watering-down of pacta sunt servanda
o Element of disproportionality (substantive) in the prestations
o Notion that it goes counter to the principles of damages (compensation)
o BUT….equal bargaining power.
 Sounds like unconscionability but equal bargaining power.
Jurisdiction
Facts
Shows pull b/n protecting unfairness per se and protecting fairness of certain parties. (see Roynat which made 1040c useless
but still was 2 corporations with equal bargaining power)
Civil Law
 Look from position of pacta sunt servanda.
 They were not allowed to be touched! Period. CCLC 1135. “Amount of the penalty cannot be reduced by the
court.”
Art 1623
A creditor who avails himself of a penal clause is entitled to the amount of the stipulated penalty without
having to prove the injury he has suffered.
However, the amount of the stipulated penalty may be reduced if the creditor has benefited from partial
performance of the obligation or if the clause is abusive.

Refers back to Art 1437. However, no requirement that penalty clause has to be in a consumer contract (which is a
requirement in 1437) As well, Art 1437 does not explicitly require equal bargaining power
Baudouin would say that there is a new contractual morality which says that autonomy of the wills do not always trump. (e.g.
2332, 1375). Not as far as Ghestin and Contractual Justice.
Both Laws
Page 63 of 64
Contractual Obligations Summary – April 2005

Kirk Shannon
Still require reasonableness (1623, 1437) and judgments like Clarke v. Thermidaire
Principles of K Law
If a K is an instrument of self gov’t, then shouldn’t the question be; what did the parties agree to? Should we not assume that
what they agreed to was what they wanted and what suited them best.
To what extent should the law be able to control that agreement. If so, for what reasons? When.
Remedies and differences b/n Civil and Common
 Common Law  Remedies proceed rights
o Why? Historically – CL develops by system of writs. Fit into a writ and get a remedy. Procedure was
initially more important than substance
o Mentality – very litigious societies. Concerned about their remedies. Divorce mentality.
o Methodology
o Inherent values
 Civil Law  Rights proceed remedies.
o History – not case by case – academic – a priori setting out.
o Mentality of codification  to be a code that ordinary people would follow to live their private lives.
Normative creator. Permissive. (New contractual morality is actually eroding permissive nature of the
code). Only secondarily what they would do if failed to act. Has impact on the types of rememdies (antidivorce which allows for people to get back into Ks)
o Methodology
o Inherent values.
Page 64 of 64