Download Is there a Contract

1
FORMING A CONTRACT.......................................................................................................... 4
LEGAL/POLICY FRAMEWORK ....................................................................................................... 4
OFFER ............................................................................................................................................. 4
ACCEPTANCE .................................................................................................................................. 5
TENDERING ..................................................................................................................................... 5
CORRESPONDENCE ........................................................................................................................ 6
INTENTION ...................................................................................................................................... 7
CONSIDERATION ............................................................................................................................ 7
GOING TRANSACTION ADJUSTMENTS: CONTRACT MODIFICATION ................................................ 8
DEBT SETTLEMENT/COMPROMISE AGREEMENTS ......................................................................... 10
CHARITABLE SUBSCRIPTIONS........................................................................................................ 10
PAST CONSIDERATION ................................................................................................................... 10
SEALS ............................................................................................................................................ 11
RELIANCE AND ESTOPPEL ........................................................................................................... 11
UNILATERAL CONTRACTS .................................................................................................. 12
CONTRACTS AND THIRD PARTIES .................................................................................... 14
PRIVITY OF CONTRACT ............................................................................................................... 14
THIRD PARTY BENEFICIARIES ....................................................................................................... 14
EMPLOYEE LIABILITY .................................................................................................................... 16
MISTAKEN IDENTITY ................................................................................................................... 17
NON EST FACTUM ........................................................................................................................ 18
FAIRNESS & CONSUMER PROTECTION ........................................................................... 19
UNDUE INFLUENCE ...................................................................................................................... 20
UNCONSCIONABILITY .................................................................................................................. 21
DURESS.......................................................................................................................................... 22
CONSUMER PROTECTION POLICY .............................................................................................. 23
DECEPTIVE OR UNCONSCIONABLE ACTS/PRACTICES ............................................................... 24
BUSINESS PRACTICES AND CONSUMER PROTECTION ACT............................................................ 24
COMMON LAW:.............................................................................................................................. 25
ISSUES IN CONTRACT FORMATION .................................................................................. 25
UNCERTAINTY IN FORMATION ...................................................................................................... 25
DUTY TO NEGOTIATE IN GOOD FAITH? .......................................................................................... 26
STANDARD FORM CONTRACTS & REASONABLE NOTICE ......................................................... 26
FUNDAMENTAL BREACH ............................................................................................................. 27
PENALTIES AND FORFEITURES .................................................................................................... 29
PENALTY CLAUSES ........................................................................................................................ 29
FORFEITURES ................................................................................................................................. 29
ILLEGALITY .................................................................................................................................. 29
2
(A) CONTRARY TO PUBLIC POLICY ................................................................................................ 29
(B) COMMON LAW ILLEGALITY ..................................................................................................... 30
(C) STATUTORY ILLEGALITY ......................................................................................................... 30
MISTAKE ....................................................................................................................................... 31
CATEGORIZATION OF MISTAKE ..................................................................................................... 31
GENERAL RULE OF MISTAKE: ....................................................................................................... 32
MISTAKE IN FORMATION ............................................................................................................... 32
MISTAKE IN ASSUMPTION ............................................................................................................. 32
EQUITABLE MISTAKE .................................................................................................................... 33
MISTAKE IN RECORDING – REMEDY: RECTIFICATION .................................................................. 33
FRUSTRATION .......................................................................................................................... 34
REQUIREMENTS FOR FRUSTRATION ........................................................................................... 35
TO OBTAIN COMPENSATION,  MUST ESTABLISH: ..................................................................... 36
REMEDIAL CONSEQUENCES ........................................................................................................ 36
Response: Frustrated Contracts Act .............................................................................................. 37
CONTRACT INTERPRETATION ........................................................................................... 37
THE PAROL EVIDENCE RULE ...................................................................................................... 39
CONTRACTUAL TERMS ................................................................................................................ 41
DEFINITIONS: ................................................................................................................................. 41
ARBITRATION CLAUSES ............................................................................................................... 43
CONCURRENT LIABILITY IN CONTRACT & TORT ...................................................... 44
NEGLIGENT MISREPRESENTATION ................................................................................................ 44
1) CONCURRENCY IN K AND TORT CLAIMS: CAN  CLAIM IN BOTH?............................................. 44
2) EFFECT OF CONTRACTUAL CLAUSE THAT LIMITS TORT LIABILITY? .......................................... 44
3) NEGLIGENT MISREPRESENTATION AND THE ASSESSMENT OF DAMAGES ................................. 45
BREACH OF CONTRACT........................................................................................................ 45
EFFICIENT BREACH ..................................................................................................................... 45
REMEDIES FOR BREACH OF CONTRACT ........................................................................ 46
EQUITABLE ................................................................................................................................... 46
SPECIFIC PERFORMANCE ............................................................................................................... 46
NEGATIVE COVENANT ................................................................................................................... 46
INJUNCTION ................................................................................................................................... 47
DAMAGES ...................................................................................................................................... 47
RESTITUTION ................................................................................................................................. 47
RELIANCE ...................................................................................................................................... 47
EXPECTATION ................................................................................................................................ 48
3
FACTORS THAT AFFECT THE CALCULATION OF DAMAGES ............................................................ 48
Economic Waste ............................................................................................................................ 48
Consumer Surplus ......................................................................................................................... 48
Lost Volume .................................................................................................................................. 48
Loss of Chance .............................................................................................................................. 48
NON-PECUNIARY/NON-MONETARY DAMAGES.......................................................................... 48
PUNITIVE DAMAGES..................................................................................................................... 49
LIMITS TO DAMAGES ................................................................................................................... 49
POLICY CONCERNS ........................................................................................................................ 50
REMOTENESS ................................................................................................................................. 50
Reasonable contemplation ............................................................................................................. 50
Communication of Special Circumstances .................................................................................... 50
Factors affecting reasonable contemplation/foreseeability ........................................................... 51
Ordinary Allocation of Risk .......................................................................................................... 51
Proportionality ............................................................................................................................... 51
MITIGATION ................................................................................................................................... 51
EMPLOYMENT CONTRACTS AND DAMAGES FOR TERMINATION.............................................. 53
EMPLOYMENT KS – TERMINATION ................................................................................................ 53
MENTAL DISTRESS AND EMPLOYMENT......................................................................................... 53
EMPLOYMENT STANDARDS ACT: LIABILITY RESULTING FROM LENGTH OF SERVICE .................. 54
4
Forming a Contract
Legal/Policy Framework
 Balance need to enforce promises (reasonable expectation) with avoidance of surprising parties with
unanticipated liabilities (unfair surprise)
 Doctrinal req’mts: offer, acceptance, consideration
 The written K isn’t the contract, just evidence thereof; K may still exist if paper is destroyed.
 Uncommunicated states of mind are irrelevant – offer and acceptance must be communicated to the
other party
 Objective (‘reasonable person’) standard – did the party intend to be bound?
Offer
 An offer creates the power of acceptance in the recipient of that offer [Denton v. Great Northern
Railway Company (1856)1]
 Recipient of communication (offeree) enjoys power to bind offeror to a K
 With communication of an offer, obligation incurred
 Must be a manifestation of an intent to be bound
 Mere advertisement, enticement or invitation to treat is insufficient. [Johnston Bros v. Rogers
Bros (1899)2]
 But sometimes advertisements can give power of acceptance, when they are specific enough to
be interpreted as intending to constitute an offer [Lefkowitz v. Great Minneapolis Surplus Store
(1957, US)3]
 Expectations created through advertising can be considered part of K commitment
[Cornwall Gravel Co. Ltd. v. Purolator Courier Ltd.4]
 Offer must be sufficiently specific and comprehensive that the terms of the agreement can be identified
 3 Ps: Parties, Price, Property (subject matter of K)
 Offeror can specify whatever terms/offer they like
 If rejected, an offer ceases to exist
 Offers expire after a “reasonable” time [Manchester Diocesan Council for Education v. Commercial
& General Investments Ltd. (1969)]
 Two approaches outlined in Manchester Council:
 Term implied by offeror (if an offer is made without an end date, still an implied term of
‘reasonable time’, after which it expires)
 If not accepted within reasonable time, offeree is deemed to have refused the offer
(preferred approach)
 Once accepted (unequivocally), an offer is binding, cannot be revoked
Denton v. Great Northern Railway Company:  made arrangements, came to station in expectation of K;
liability imposed for damage resulting from incorrect schedule. Held that open offer of train travel on given
schedule constituted offer of K – fraudulent. misrepresentation. NB: reliance not a doctrinal req’mt of K,
but often a reason for remedy.
2
Johnston Bros v. Rogers: Merely a price quotation, an invitation to treat as opposed to an offer of K; not
legally binding.
3
Lefkowitz v. Great Minneapolis Surplus Store: Held: clear, definite and explicit terms stated in ad, tried
to change terms afterward. Established cond’ns for obtaining product – left nothing to negotiation
(acceptance through performance). Common law consumer protection.
4
Cornwall Gravel v. Purolator: Not a common carrier – commercial entity/service. Slogan “when it’s just
got to get there on time”. Customers pay premium for this promise, ct holds ∆ to bargain.
1
5
 K is formed when the offer is accepted [Pharmaceutical Society of Great Britain v. Boots Cash
Chemists (Southern) Ltd. (1953, Eng. CA)5]
 At any time before acceptance is received, offer may be revoked [Dickinson v. Dodds (1876, Eng.
CA)6]
Acceptance
 Types of K formed by acceptance:
 Acceptance by word or return promise produces a bilateral contract
 Acceptance by performance/action results in unilateral contract
 Acceptance must show a clear intent to be bound
 Acceptance must sufficiently correspond to the offer, or it will be viewed as a counter-offer
 If the offer seeks actual performance, an attempt to perform does not constitute acceptance 
reward is only earned by completing the K
 Communication of acceptance
 Acceptance must be communicated to the offeror
 If offeror has not yet received the acceptance, no K, and offeror is at liberty to withdraw
from bargaining [Larkin v. Gardiner (1895)7]
 Acceptance must be communicated before the offer expires or is revoked
 Method of communication or manner of acceptance may be stipulated by offeror [Eliason v. Henshaw
(1819, US SC)8]
 Offeree would have to comply with all terms of offer to properly accept it

Silence cannot be construed as acceptance – must be actively communicated to offeror
 Consumer Protection Act prevents negative option billing, e.g.
Tendering
 Owner/buyer makes a call for tenders/bids. This call sets out the terms upon which the owner/buyer is
interested in contracting
 Two-contract structure to tendering:
 Contract A: the K governing the tendering process
 Does not always arise
 Terms depend on call for tenders
 Contract B: the K for the provision of goods or services with the owner
 In Contract A: Offer = call for tenders, Acceptance = bid
 If a bid is accepted by the owner/buyer, the bidder must enter into Contract B
 Bid as offer for Contract B, which is binding upon acceptance
 Contract A has some implied terms [MJB Enterprises v. Defence Construction (1951, SCC)9,
5
Pharmaceutical Society v. Boots: Question of whether K forms through display of price, or when
consumer pays for item. Held: K is formed when offer of payment is accepted by cashier.
6
Dickinson v. Dodds:  already on notice of revocation, no right to accept and form K. Offeror is master of
the offer: no such thing as a firm offer – always right to withdraw before acceptance, unless consideration
is given.
7
Larkin v. Gardiner: vendor’s delivery of acceptance to agent was still revocable; K not formed until
offeror receives acceptance.
8
Eliason v. Henshaw: Acceptance was delivered to a different location than stipulated in the offer, and the
offeror declined to accept the bargain. Held: valid, since offeree deviation from terms of offer meant
offeror had no obligation unless change accepted.
9
MJB Enterprises: K formed in request for tenders, allowed ∆ to accept an offer other than lowest, but not
a non-compliant one. Good faith ≠ defense for breach (strict liability)
6
Double N Earthmovers v. Edmonton (2007, SCC)]
 Treat all bidders fairly and equally
 Only accept a (substantially) compliant bid
 Technical mistakes (i.e. wrong font) don’t make tenders non-compliant. Must be
materially non-compliant
 No requirement to accept the lowest bid
Correspondence
 General Rule
 Acceptance must be communicated, and received by offeror before there is a contract 
contract forms upon offeror’s receipt of acceptance.
 Postal Acceptance Rule
 An exception to the general rule
 Offer is accepted when the offeree puts notice of the acceptance in the mail  contract is
formed upon conveyance, prior to actual receipt of acceptance by offeror [Household Insurance
Co. v Grant, (1879, Eng. CA)]
 Applies where use of mail/courier etc. is contemplated method of communication
 PAR puts the risk on the offeror
 If mail is lost, contract was still formed and enforceable
 However, as the master of the offer, if offeror doesn’t want to assume the risk, can
forestall PAR applicability in terms of offer:
 Offeror can require receipt of notification of acceptance [Howell Securities v.
Hughes (1974, Eng. CA)]
 Doctrinal reasoning: offeror impliedly authorized postal service to act as agent, accept on his
behalf
 PAR does not apply to revocation of offers [Henthorn v. Frazer (1892, Eng. CA)10, Byrne v.
Van Tienhoven (1880)]
 Offeror must be considered as continuously making offer until notice of revocation is
actually received by offeree
o A rejection or counter-offer sent by mail/telegram doesn’t necessarily negate the offeree’s
power of acceptance
 Acceptance will win out if the acceptance reaches the offeror before the counteroffer/rejection
o PAR does not apply to faxes – fall under general rule (instantaneous communication)
[Eastern Power Ltd. v. Azienda (1999, ON CA)]11

Acceptable correspondence:
o Put offeror in position to retrieve acceptance (i.e. through mail slot, in voicemail)
o Mode must be designated as an acceptable means for communication
o Offer and acceptance can be in electronic form [BC Electronic Transactions Act]
 Instantaneous communication rule would most likely apply to email
 S. 18(2): Acceptance when/where received by offeror
 Forms: preferred rule in common law: Last Shot Rule
o Aka performance doctrine – the last form sent during bargaining for K trumps all previous
10
Henthorn v. Frazer: Offeror posted a revocation, then offeree posted an acceptance, before he received
the revocation. Held: valid K. Offer open until revoked, revocation not operative until communicated.
11
Eastern Power Ltd. v. Azienda: K negotiations communicated b/w ON and Italy; question of where K
was formed. Held: where acceptance received, according to instantaneous communication rule.
7
forms [Butler Machine Tool Co. v. Ex-Cell-O Corp. (1979)12]
o Also possible:
 First shot rule – first set of terms governs K
 Reconcile terms, contradictory cancel out, court implies reasonable terms
Intention
 To form a K, there must be a manifestation of an intent to be bound (offer/acceptance)
 Public/Private distinction – contract law doesn’t intrude into the private sphere; family relations
presumed to be outside contract law, no intent to be bound [Jones v. Padavatton13]
 Parties can agree that a business arrangement will not give rise to legal liability [Rose and Frank Co v.
JR Crompton & Bros14]
 An arrangement which might otherwise constitute a K may be unenforceable, given clear
intention to this effect.
 Memorandum of Understanding (MOU)
 Parties can clarify in an MOU or letter of intent that a deal is “subject to contract” – i.e. that
these are preliminary negotiations, not an offer that can be accepted and made binding.
 Can also stipulate confidentiality, exclusivity of negotiations, etc.
 So a mixed approach is available; parties do not have to choose between being completely
binding or not binding at all.
Consideration
 Rule that something must be exchanged between parties to form a binding K
 Filtering mechanism, to determine what types of Ks to enforce
 Role of legal formalities in contract law:
 Evidentiary Function: need for evidence of existence of K
 Cautionary Function: ensure parties deliberate before K
 Channeling Function: ensure simple, external test of enforceability
 Policy Considerations for the enforcement of promises (balancing unfair surprise)
 Evidence
 Deliberation
 Unjust Enrichment (will often encourage court to enforce a K)
 Reliance (esp. if someone changes pos’n on basis of promise, ct will be more likely to
enforce a K)
 Facilitate private ordering/utility of exchange
o Familiar/personal seen as private, not an area for contract law regulation [White
(Executor) v. William Bluett (1853, Eng. Ex. Ct.)15]
 Doctrine of Consideration
 In order to be enforced, a promise must be made for consideration
12
Butler Machine Co v. Ex-Cell-O Corp.: Seller offer included a price variation clause, buyer responded
with own terms & included a tear-off acknowledgement of terms, which seller signed and returned. Counts
as acceptance, last form governs; policy against unfair surprise, since price variation clause was hidden in
seller’s std form K
13
Jones v. Padavatton (1967, CA): Mother paid & provide house for daughter to study law in England,
dispute arose and mother evicted. Held: agreement b/w mother and daughter not enforceable.
14
Rose and Frank Co v. JR Crompton & Bros (1923, CA): Parties had history of successful Ks, drafted
new agreement but stipulated it was not legally binding (only a mutual pledge to honour the terms). Held:
document doesn’t give rise to legally enforceable rights.
15
White v. Bluett: Agreement that father will cancel debt if son stops whining ≠ binding.
8




o Consideration is the ‘price’ paid for the promise
o Must be something of value exchanged b/w parties – each party has to
give/give up something in the bargain
Consideration distinguishes Ks from incomplete gift cases
Peppercorn theory: court does not inquire into adequacy of consideration [Thomas v.
Thomas]16
 Consideration does not have to benefit either party – “it is enough that something is
promised, done, forborne, or suffered by the party to whom the promise is made as
consideration for the promise made to him.” [Hamer v. Sidway (1891, NY CA)17]
Forbearance of something you do not have a legal right to is not consideration [White v.
Bluett]
Mutuality
 Mutual promises are good consideration
o Expectation damages based on value of promise
 There must be mutual obligations [Tobias v. Dick and T. Eaton (1937, Man. KB)18]
o Promise to accept someone’s money does not count as consideration (onesided)
o Courts can imply a promise to use reasonable efforts, even where no express
obligation is stated [Wood v. Lucy, Lady Duff-Gordon (1917, NY)]
Going Transaction Adjustments: Contract Modification
 General Rule: Contract modification without ‘fresh’ consideration is unenforceable
 Promises of additional pay for helping when an emergency arises in course of
performing K are not enforceable. [Harris v. Watson (1791, Eng. KB)19]
 Promises to do things you are already obligated to do as part of original K does not
constitute consideration on a K modification [Stilk v. Myrick (1809)20]
 Policy Considerations:
 For enforcing modification:
o Party autonomy
o Reliance
o Reasonable expectations (unfair surprise)
o Unjust enrichment
 For not enforcing modification:
o Exploitation, ransom, duress [Harris v. Watson, Gilbert Steel v. University
Construction (1976, ON CA)]
o Gratuitous promise (i.e. already legally obliged to fulfill, or unfair to fulfill
original bargain as made)
 Techniques to make K modification enforceable:
 Seal  sealed documents are legally binding
16
Thomas v. Thomas: £1 is acceptable consideration; mother keeps ctrl of property despite son attempting
to oust her.
17
Hamer v. Sidway: uncle promised nephew $5000 for not smoking/drinking/gambling until 21. Enforced
(from estate to 3rd party, to whom nephew had sold his debt).
18
Tobias v. Dick: Tobias had exclusive right to sell Dick’s machinery, but no corresponding obligation on
Tobias, thus not enforceable K due to lack of mutuality.
19
Harris v. Watson: Sailor promised extra pay for helping in an emergency – not enforceable. Policy
concern against paying ppl to help in emergencies at work.
20
Stilk v. Myrick: Two sailors deserted, captain promised their pay to remaining crew upon safe
completion of voyage. Not enforceable – sailors had already ‘sold’ all their services, nothing more to sell.
9

21
 New Consideration (accepted by court)
o Nominal Consideration
 i.e. peppercorn
o Additional Consideration
 Promise to do sthg more, or forbearance on a right
 E.g. forbearance on a right to dismiss employee is consideration for
agreement assigning IP rights [Techform v. Wolda (2001, ON CA)]
o Practical Benefit
 Absent duress, a practical benefit will be enforced as consideration
 Requirements as set out in Williams v. Roffey Bros Ltd. [1991]
 K: A to perform service for/provide goods to B, for payment
 Before entirely fulfilled, B has reason to doubt completion
 B promises A add’l payment, A promises to perform on time
 As result of promise, B obtains practical benefit/obviates disbenefit
 B’s promise not given under economic duress, no fraud on A’s part
 Benefit to B can be consideration for promise
 Rescission
o Rescind K1, form K2
o “Mere” change in price may be categorized as a variation in K, not rescission
[Gilbert Steel]
o But price adjustments have also been interpreted as rescission and formation of
a new K [Deluxe French Fries v. McCaidle (1976, PEI CA)]
 Disposing of the req’mt for consideration
o “A post-contractual modification, unsupported by consideration, may be
enforceable so long as it is established that the variation was not procured under
economic duress” [NAV Canada v. GFAA (2008, NBCA)21]
 Estoppel
o Equitable doctrine that holds a party to promise where other party has acted in
reliance on the promise.
o Can’t be used to create a contractual obligation, or to found a claim (‘shield not
sword’) [Gilbert Steel]
Other Approaches:
 United Nations Convention on Contracts for the International Sale of Goods (CISG)
o Article 29
o (1) A contract may be modified or terminated by the mere agreement of the
parties.
o (2) A contract in writing which contains a provision requiring any modification
or termination by agreement to be in writing may not be otherwise modified or
terminated by agreement. However, a party may be precluded by his conduct
from asserting such a provision to the extent that the other party has relied on
that conduct.
 UNIDROIT Principles of International Commercial Contract
o ARTICLE 3.2 (Validity of mere agreement)
o A contract is concluded, modified or terminated by the mere agreement of the
parties, without any further requirement.
Nav Canada v. GFAA: tension b/w this NB ruling (not requiring consideration) and Gilbert Steel in ON,
which is also technically still good law (requiring consideration). River Wind Ventures Ltd v. BC [2009,
BCSC] agrees with general reasoning in GFAA but suggests there is an additional requirement of either
detrimental reliance on the promise or the gaining of an advantage or benefit by the promisor.
10
Debt Settlement/Compromise Agreements
 Payment of a lesser sum for/in lieu of a greater sum is not typically good consideration
[Foakes v. Beer, following precedent from Pinnel’s Case and Cumber v. Wane)
 Agreement to accept partial payment is now enforceable, if expressly accepted by creditor as
satisfaction. [Foakes v. Beer]
 Mercantile Law Amendment Act RSO 1990, Law and Equity Act, RSBC 1996
 Rule in Cumber v. Wane abrogated: part performance of an obligation either before or
after breach of it, when expressly accepted by the creditor in satisfaction or rendered
under an agreement for that purpose, though w/o any new consideration, will be held to
extinguish the obligation
 An agreement to accept less is enforceable (i.e. partial performance)
 Forbearance on right to sue/to make a legal claim is good consideration
 A promise to compensate for breach of an agreement is enforceable regardless of the
validity of the initial agreement, as long as the promisor believed that the agreement
was binding [Fairgrief v. Ellis]
 3 criteria for compromises on invalid claims: [Stott v. Merritt; see also B(DC) v. Arkin.22]
 1) Claim must be reasonable (i.e. not spurious)
 2) Good faith belief in claim (i.e. not just extortion)
 3) No concealment of material facts
Charitable Subscriptions
 Common law is very reluctant to enforce gift promises
 Reliance on a gift promise does not necessarily make promise enforceable [Dalhousie College v.
Boutilier Estate23]
Past Consideration
 Past consideration will not ground a future promise [Roscorla v. Thomas24]
 Bargain theory: bargain must be contemporaneous with promise.
 Things that happen b/w parties before promise is made ≠ good consideration
 Policy rationale
 Lack of deliberation, reliance, or unjust enrichment
 Distinguish moral and legal obligations
 Concern regarding fraud on creditors
 Exception: activities undertaken at the request of a person who later promises a reward, under
circumstances where it was reasonable to expect payment, may serve as consideration for that promise
[Lampleigh v. Brathwaite25].
 Past consideration will be good if past act/performance was done at request of promisor.
 Court may imply an obligation to pay – restitutionary relief
 Presumption against allowing obligation to bystanders for providing unwanted gifts
B(DC) v. Arkin: claim against mother for son’s shoplifting. Claim was invalid, and zellers’ lawyer knew
this to be the case. Held: don’t try to take advantage of parties who don’t understand the law.
23
Dalhousie College v. Boutilier Estate: ∆ promised money to give , died without handing it over. Held:
not a contract. Gift promises generally unenforceable.
24
Roscorla v. Thomas (1842 Q.B.). π contracted to purchase “a horse” from ∆ for £30. ∆ later promised
that the horse was free of vice; it was not. J. for ∆.
25
Lampleigh v. Brathwaite (1612 Eng.). π killed a man and sent ∆ to plea pardon from the King for the
crime. Following π’s successful return, ∆ promised π £100 for the work, but never paid. Held: for π.
22
11
Seals
 A sealed contract is a non-bargain promise that is enforceable because of the form in which it is made
 Sometimes sealed Ks are called “formal contracts”, distinguished from “informal” Ks just made
in writing  formality is what makes it binding.
 Common law:
 Sealed document counts as a gift, not a K  a piece of paper which entitles the recipient in law
to the subject of the promise (i.e. money)
 Any promise which common law can/will enforce can be made binding through a seal.
 Requirements:
 In writing, signed, sealed and delivered.
 Modern trend: less formal, physical seal no longer required – could just be a circle with the
word seal on it.
 Intention can be drawn from the act of sealing,
o However, courts are less inclined to enforce sealed documents (especially in
consumer situations) when company always uses a seal.
 Historically, delivery had to be physical, but this may now be more flexible.
 Legal formalities – three functions (Fuller)
 Evidentiary Function
o To demonstrate the existence of a K, and the “purport” thereof
o Useful in case of controversy
 Cautionary Function
o To deter K breaches etc., by “inducing the circumspect frame of mind
appropriate in one pledging his future.”
 Channeling Function
o Facilitates judicial diagnosis of the agreement
 Ihering compares to a stamp on a coin – in that case it means we don’t have to
assess value; in this case it means a judge does not have to determine whether
agreement was intended to be binding, as it is stated to be so.
o Fuller notes this effect exists for transactions outside of court
o Provides an avenue for “legally effective expression of intention.”
 Brudner
 Promises under seal are valid w/o consideration, but technically not a functional substitute for
consideration.
 A seal, with delivery, turns a promise into an executed transfer (i.e. a gift), whereas
consideration is the element req’d for enforceability of a promise as a promise.
Reliance and Estoppel
 Reliance is not consideration.
 Common law estoppel: When a statement of fact is relied upon, the party making that statement is
barred from denying the truth of that statement if the person to whom the statement has been made has
relied upon the statement.
 Promissory estoppel: a promise is made as to future conduct – ‘I will not take that action’
 Agreeing not to do something legally entitled to do – other party, in reliance, changes
position
 Shield not sword (can’t be used to ground a claim)
 A promise cannot be enforced solely on the basis of estoppel [Gilbert Steel]
o If so, there would be no requirement for consideration as an element of an
enforceable promise.
12
 Elements of promissory estoppel
 Existing legal relationship between parties;
 A clear promise or representation;
 Made with the intention that it be relied upon;
 Detrimental Reliance
 No compelling reasons to excuse person from representation (i.e. coercion).
 If one party gives an indication, intended to be and actually relied upon, that (for example) the terms of
a K are not strictly binding, then this will be so. [Hughes v. Metropolitan Railway Co.26]
 A promise intended to be binding, intended to be acted upon, and in fact acted upon, is binding so far
as its terms apply [High Trees27]
 Narrowed by Denning in Combe v. Combe28: High Trees precedent does not negate the
requirement for consideration  only stops one party from demanding their “strict legal rights”
be enforced in a situation where it would be unjust to enforce them.
 Forbearance is only good consideration when it is requested/intended (impliedly or expressly) by the
other party [Combe v. Combe]
 Doesn’t matter if party suffered detriment for their forbearance.
 Also: parties cannot forbear on statutory rights.
 Waiving of right to enforce K must be clearly indicated [John Burrows Ltd. v. Subsurface Surveys
Ltd.29)
 Must have reliance  when non-enforcement of K rights is clearly indicated and relied upon, the rights
will not be enforceable [Owen Sound Public Library Board v. Mial Developments Ltd.30]
 Courts will consider policy concerns for excusing a party from an obligation [D & C Builders v. Rees31]
 Party cannot force a settlement by intimidation or coercion
 Promissory estoppel can only be claimed where there is a pre-existing legal relationship [NM v. ATA32]
Unilateral Contracts
 Ks in which offer can be accepted by performance.
 Performance does double duty as acceptance and consideration
26
Hughes v. Metropolitan Railway Co. (1877, HL): Landlord led tenant to believe negotiations
represented an abeyance of right to evict after notice period begun. Ct estopped from evicting tenant.
27
Central London Property Trust Ltd. v. High Trees House Ltd. [1947, KB]:  agreed to reduce ∆ rent at
outbreak of WWII, then claimed arrears. Held: reduction in rent binding, at least until flats fully let by ∆.
28
Combe v. Combe: Wife divorced husband, he promised her spousal support but never paid, she
complained to him but didn’t take him to divorce court, then later tried to claim all her money. Held: wife’s
forbearance not on husband’s request/intent, not good consideration.
29
John Burrows v. Subsurface Surveys Ltd. (1968 SCC): ∆ purchased π co.; majority of the cost upfront,
remainder due on promissory note accruing interest to be paid monthly. K provided that if ∆ defaulted,
entire sum would become due. ∆ did default on many occasions, was forgiven by π; finally π invoked the
clause. ∆ seeks promissory estoppel based on conduct. Held: for π.
30
Owen Sound Public Library Board v. Mial Developments Ltd. (1979, ON CA): Construction K,
stipulated time frame in which  must pay amts due, or ∆ could give notice of termination.  requested
corporate seal on one invoice, and didn’t pay while waiting for it. ∆ claimed default and issued notice.
Held:  can estop ∆ from terminating.
31
D & C Builders v. Rees (1965, CA): ∆ owed  co. $, ∆ wife offered to pay part as settlement, or nothing
at all.  accepted part to stave off bankruptcy, and ∆ wife insisted he write on receipt that this completed
the account. Held: ∆ owes remainder to .
32
NM v. ATA (2003, BCCA): With a view to getting married,  quit job and moved to Vancouver, in
reliance on ∆ promise that he would pay her mortgage. Relationship collapsed and ∆ refused to pay
mortgage. Held:  cannot use promissory estoppel as a sword to force ∆ to pay.
13






 Performance of condition is sufficient, no need to separately convey acceptance of
offer/promise. Acceptance need not precede performance. [Carlill v. Carbolic Smoke Ball
Company33]
Unilateral as opposed to bilateral contract:
 Unilateral: I will pay you X amount if you do Y. (offer accepted upon performance, no binding
obligation to perform)
 Bilateral: You promise to do Y, and in exchange I promise to pay you X amount. (exchange of
promises – binding obligation to do Y, otherwise I can sue you for breach of K.)
Distinct from advertisement – unilateral K exists if offeror “expressly or impliedly intimates that it will
be sufficient to act on the proposal” (i.e. promising to pay if a given condition is fulfilled.) [Carbolic
Smoke Ball]
Test is what a reasonable person in the position of the parties would have thought the offer was
intended to mean [Grant v. New Brunswick].
Competing views as to relevance of knowledge/intention/motive:
 Williams v. Carwardine (1833, Eng.)34: Motive for performing K is irrelevant to obtaining
compensation for a general promise
 The Crowne v. Clark (1927, Aust. HC): if not aware of offer/promise, didn’t act w/ intent to
form K, and thus no K.
o Suggestion that in order to obtain reward, must be aware of offer, and must
have acted w/ intent to accept it.
 Reconciling these views:
o If knew of offer and acted to fulfill it, doesn’t matter why
o If don’t know of offer at all, cannot be a K
 QC civil code: get reward even without knowledge, unless expressly/adequately revoked by
offeror.
Contemporary illustration of unilateral Ks: Government Programs
 Dale v. Manitoba35
 Grant v. Province of New Brunswick (1973, NB CA)36
Problem: doctrinal rule that offer can be revoked any time before acceptance. How to protect reliance if
revocation occurs before performance is complete?
 1) Court can imply a promise not to revoke the bargain: two-contract approach. [Errington v.
Errington]37
Carlill v. Carbolic Smoke Ball Company (1893, Eng. CA): ∆ advertised product, offered reward if
anyone used it and still caught the flu.  fulfilled condition, ct held ∆ had made “express promise” to pay if
that condition fulfilled.
34
Williams v. Carwardine (1833, Eng.): ∆ offered reward for info leading to conviction of his brother’s
killer.  came forward not b/c of reward but due to crisis of conscience or fear for own life. Held: motive
for performance irrelevant, advertisement of reward = general promise to give money to any person who
gave info leading to killer, which  did.
35
Dale v. Manitoba (1997, Man CA): Gov’t program staff indicated to  that gov’t had Kual obligation to
fund his schooling if he fulfilled equity req’mts. Held: staff statement had “apparent or ostensible
authority” to speak for ∆, made “legally enforceable offer…on behalf of”, which  accepted.
36
Grant v. Province of New Brunswick (1973, NB CA): Gov’t potato price stabilization program –  was
denied payment for some potatoes on basis that he couldn’t prove he owned them, and thus didn’t qualify
for program. Held: Potatoes belong to . Gov’t offered to buy potatoes from all eligible resident growers, 
eligible. ∆ legally bound to accept and pay for them.
37
Errington v. Errington (1952, Eng. CA): Father bought son & daughter-in-law house, but kept in his
name. Told them if they paid the installments they could have the house when he died. Died, widow tried to
evict. Held (Denning LJ): father’s express promise = unilateral K, performed by paying installments.
Couldn’t be revoked, but wouldn’t be binding if they didn’t perform. Since they did, will be entitled to
33
14
 2) Court can find bilateral K based on an exchange of promises [Dawson v. Helicopter
Exploration Co. Ltd.38]
o Courts prefer to find bilateral contracts over unilateral. [Dawson v. Helicopter]
(Addresses issue of reliance.)
 3) Offer cannot be revoked when performance has commenced [Ayerswood Development Corp.
v. Hydro One Networks39; relies on:]
o Baughman v. Rampart Resources (1995, BCCA), per Southin J: offeror entitled
to require full performance of cond’n imposed, and generally not bound short
of that, but for qualification: “implied obligation on the part of the offeror not
to prevent the cond’n becoming satisfied, which obligation…must arise as soon
as the offeree starts to perform. Until then the offeror can revoke the whole
thing, but once the offeree has embarked on performance it is too late for the
offeror to revoke his offer.”
Contracts and Third Parties
Privity of Contract
Third Party Beneficiaries
 Only those who are party to a contract can enforce or benefit from its terms. [Tweddle v. Atkinson40]
 Effect: no third party or stranger to a K has any rights/obligations under it – even when the
purpose of the K is to benefit a third party.
 Though generally treated as a distinct doctrine, privity is sometimes linked to the doctrine of
consideration:
 Third parties can be denied right to enforce/take advantage of K either because they aren’t
‘privy’ or b/c they haven’t given any consideration
 Justification:
 Prevents unfair surprise
 Preserves parties’ freedom of contract (right to modify/rescind w/o fear of liability to third
parties)
 Protects certainty of K
 Protects reliance
 Rationales
 Doctrinal:
o Not a party to the K
o No consideration
o Third party could prevent modification, as their rights could be seen as having
crystallized.
property once paid off. K1 & K2 model: implied K not to revoke K1 (payments for house), for as long as
cont’d to pay.
38
Dawson v. Helicopter Exploration Co. Ltd. (1955, SCC): ∆ offered  stake in minerals if he showed
them where to mine. ∆ dithered, found on their own (possibly b/c  had revealed enough in discussions)
and refused to pay . ∆ argued unilateral K and  didn’t perform. Held: exchange of promises,  ability to
perform at ∆ discretion, had helicopter to take him there.
39
Ayerswood Development Corp. v. Hydro One Networks (2004, ONSC): ∆ offer for payments under
energy efficiency program. Held: could not revoke once performance commenced.
40
Tweddle v. Atkinson (1861, Eng.): Fathers promise to pay $ to children upon their marriage, die w/o
paying. Son sues executor. Held: No consideration from ; unenforceable. Since neither father paid,
technically both repudiated – executors could sue each other.
15
 Economic:
o Encouragement of market-based concepts, support nascent capitalism
o Self-reliance
o Minimize liability
 Vertical Privity
 Vertical privity relates to a buyer within the distributive chain who did not buy directly from the
defendant.
Manufacturer
Problem – The chain may be broken
|
- bankruptcy
Distributor
- exemption clauses
|
- limitation periods
Retailer
- seller/distributor closed/cannot be located
|
Consumer
 Consumer can sue retailer for breach of K, but if this is impossible for some reason, must sue
manufacturer in tort, not contracts.
 Horizontal Privity
 Horizontal privity relates to a person who is not a buyer within the distributive chain, but who
consumes, uses or is affected by the product.
Seller
|
Buyer — User
 Avoiding the contractual box:
 Categorize the third party as a beneficiary (trust) or assignee (assignment)
 Alternatively, and more commonly, view B as also contracting as an agent for 3P, so that 3P is
in a direct contractual rel’ship w/ A
 Result: third party is no longer a third party, if categorized as a trust beneficiary, assignee, or
principal
 Trust
o 3rd party as beneficiary
 Assignment
o A transfers legal right to B
 Can sell [Hamer v. Sidway]
 Can be straight signed over, i.e. in a will [Beswick v. Beswick41]
 Agency
o Principal gives agent money to make a purchase (can clearly advise seller that
an agent will be making purchase on his behalf)
o Principal can only sue on K if contractee is officially listed as agent [see
Dunlop v. Selfridge42]
Beswick v. Beswick ( 1968, CA/HL): Widow = beneficiary and administratrix of husband’s estate. He
had sold his business to ∆, who promised to pay annuity to wife after death. ∆ paid once then stopped.
Denning tries to overrule strict Tweddle construction, HL overturns, holds no need to consider privity issue
b/c  is an assignee in this case.
42
Dunlop Pneumatic Tyre Company v. Selfridge & Company (1915, HL): Dew (agent) K for sale w/
Promisor, who K w/ Consumer. Dew also K w/  (principal) for price maintenance.  action against
41
16
 General Test for Principal-Agent Rel’ship [The Eurymedon,43 relying on Scruttons v. Midland Silicones
Ltd. (1962, HL)]
 1) Negotiating parties must have intended that the third party would benefit from the K
 2) The contracting party must also be contracting as agent of the third party
 3) The party that acted as agent for the third party must have had the authority to do so
 4) There must be consideration moving from the third party to the non-agent party (i.e. through
the agent).
Employee liability
 Exclusion clauses: Term in K that limits liability
 An employer may be protected from liability by an exclusion clause.
 However, there is no limitation on right to sue employee.
o Employee has no common law right of indemnification (compensation for
harm) from employee (can bargain for right).
 Employees may benefit from employer’s protection against liability, if they are classified as
agents [Greenwood Shopping Plaza v. Beattie.44]
 General test for agency rel’ship (Eurymedon) still valid in most circumstances, but some modifications
for obtaining the benefit of exclusion of liability clauses:
 Where employee is third party beneficiary to limitation of liability clause b/w employer &
customer, doctrine of privity relaxed if: [London Drugs45]
o (a) Limitation of liability expressly or impliedly extends benefit to employee
o (b) The employee seeking the benefit of the limitation of liability clause is
acting in the course of their employment and providing the very services
designated in the K when the loss occurs.
 Ongoing issues for employees:
 Employer may have no insurance, or no limitation clause. Employee only obtains third party
benefits if there are benefits to be had.
 Even if insurance/limitation clause, employer might not ensure it extends to employees.
 Employer may decide not to insure employees
 Employee options
 Ensure insurance coverage extends to employees
 Ensure employee benefits from waiver of subrogation
 Employee could self-insure
 Employee obtains indemnity from employer
 London Drugs criteria have been extended into the general commercial context [Fraser River Pile &
Promisor. Held:  could have sued if Dew were his agent. However,  no consideration for K b/w A and
Promisor.
43
New Zealand Shipping Co. Ltd. v. AM Satterthwaite & Co. Ltd.(1975, PC) (The Eurymedon): Question
of whether stevedores who K w/ carrier can rely on limitation of liability from K b/w carrier & consignor.
Held: Carrier was agent for stevedores. K on own behalf, as well as for .
44
Greenwood Shopping Plaza Ltd. v. Beattie (1980, SCC): Mall owner to insure for property damage,
insurer to have no right to sue tenant (Cdn Tire). Tenant employee negligently causes fire, burns down
mall. Held: Employee is third party beneficiary, not agent (based on Eurymedon test).
45
London Drugs v. Kuehne & Nagel (1992, SCC): K for storage. ∆ limitation on liability. ∆ employees
tried to use two forklifts pushed together to lift a transformer. Broke,  sues. Employees protected under
employer agreement, employer protected from liability.  cannot recover. Distinction from Greenwood:
here employees were needed to perform the services contemplated under K.
17
Dredge Ltd. v. Can-Dive Services.46]
 Privity issues still arise today.[See Resch v. Canadian Tire47]
Mistaken Identity
 The Scenario:
 B, the rogue, passes himself off as another well-known person, or as a person with means
 A contracts w/ B and sells property to B
 B then sells to C, a bona fide purchaser for value (BFP)
 A is unpaid, B absconds
 A, the defrauded owner, sues C, arguing that as a result of the fraud B did not obtain title to the
property and had no rights to transfer
 Nemo dat quod non habet
 No one can transfer to another something that he/she does not have.
 Common law (and sale of goods legislation in common law provinces) follows this rule.
 However, this principle conflicts with policy of protecting innocent purchasers who buy in good
faith w/o notice of the defect in title (bona fide purchasers for value)
 Issue: who should bear the loss in a mistaken identity case?
 Ultimate issue: risk allocation b/w parties
 Economic analysis favours BFP, as seller was in best position to avoid the loss at least cost
(least cost avoider).
o To protect itself, seller should require full payment/bank draft/certified
cheque/security etc. before allowing purchaser to have possession of the
property. It is cheaper for the seller to do this than for the buyer to make a full
search of the seller identity and title to the goods.
o Nevertheless, the common law has traditionally favoured the property owner
(nemo dat).
 The common law non-solution: void and voidable contracts
 Whether the property owner retains title to the property depends on the characterization
of the K b/w A and B
o (a) No offer to rogue – contract void [Ingram v. Little.48]
 Contract can be characterized as void ab initio (from the beginning), because
there was no offer/acceptance  there never was a K.
 There was an offer but it was not made to the rogue, it was made to the person
the rogue was impersonating. No K formed, thus no title passes from A to B. B
cannot therefore pass any property to C.
 Result: A retains title to property
o (b) Fundamental mistake as to identity of King party – K void
 Amounts to same as (a).
Fraser River Pile & Dredge Ltd. v. Can-Dive Services (1999, SCC):  Boat charterer seeks to rely on
waiver of subrogation clause in insurance K b/w insurance company and boat owner. Held: London Drugs
conditions can apply anywhere, not just in services Ks.
47
Resch v. Canadian Tire (2006, ON SC): Agency argument – father bought bike for son. Held: not an
agency rel’ship. Father paid, no consideration flowing from son.
48
Ingram v. Little (1961, Eng. CA):  sisters selling car, rogue convinces  to take cheque in payment,
then sells car to ∆, who then sold car to another dealer. Cheque bounced,  action against ∆ for
conversion/price of car. Held: for  - no K to sell car to rogue. Offer made to the fake persona (whom they
believed lived up to their concerns re “stability and standing”), not simply open to whatever man was
before them. Dissent: Presumption that person is intending to K w/ person to whom he addresses words of
K. Economic – loss should go to least cost avoider.
46
18
 Result: A retains title to property
o (c) K voidable b/c of fraudulent misrepresentation
 In this case, there is a K, under which title can pass from A to B. However, as a
result of the misrepresentation, A has an equitable right to rescind the K w/ B
and regain title.
 If K rescinded then A regains title.
 Result: A regains title to property
o (d) Contract voidable but not avoided before sale to BFP [Phillips v. Brooks;49
Ingram v. Little dissent; Lewis v. Averay.50]
 If B transfers title to C before A rescinds K, then C, the bona fide purchaser for
value, acquires the property
 Result: C takes title to property.
o (c) and (d) are the current preferred construction, as of Lewis v. Averay.
 In context of written dealings, not completely reconciled with face-to-face [Cundy v. Lindsay51]
Non Est Factum




Documents mistakenly signed
Non est factum: it is not my deed
General signature rule: signed K is binding – proof of acceptance
Originally available where
 A) Person had not signed (fraud/forgery)
 B) Blind/illiterate person did not know what they were signing
 Effect: Contract void – no consent
 Policy Concerns: What about a person of full capacity, who signs a document mistakenly?
 Policy issue of innocent third parties (similar to mistaken identity cases) – who should bear the
loss b/w mistaken party and the innocent third party who relies on the document?
o General rule: person who made mistake should bear loss, as they were in the
best position to avoid it [Saunders v. Anglia; Marvco]
 General Principles: [Saunders v. Anglia52]
 Extremely rare for a court to negate a K for non est factum
 A person of full age and understanding, who can read and write, is bound by their signature on a
legal document.
 Plea of non est factum is available to a person who, whether temporarily or permanently, is not
capable of reading and sufficiently understanding the document signed. [Farrell v. Win Up53]
Phillips v. Brooks (1910, Eng HC): Rogue fraudulently obtained ring from  jeweler, then resold to ∆
pawnbrokers. Held: ∆ gets ring.  had valid K w/ rogue (though voidable due to the fraudulent
misrepresentation), and ∆ purchased ring “bona fide and without notice”.
50
Lewis v. Averay (1972, Eng CA): Rogue represented himself to  as famous actor, bought car w/ stolen
cheque. He then sold car to ∆, who sold it to another dealer.  action against ∆ for conversion. Held:
mistaken identity means K is voidable, but title had already passed to ∆.
51
Cundy v. Lindsay: Fraudulent purchase by mail, rogue resells and absconds. Held: K void;  intended to
deal w/ a person of means, not rogue.
52
Saunders v. Anglia Building Society (Gallie v. Lee) (1971, HL): Mrs. Gallie thought she was giving her
property to nephew, but his business partner tricked her into signing a document guaranteeing his loans w/
∆. He defaulted, ∆ tried to repossess her house. Held: Transfer still good. Non est factum shouldn’t be used
to harm third party, when ’s own carelessness allowed the mistaken signing.
53
Farrell Estates v. Win Up Restaurant (Dec. 7 2010, BCSC): ‘rogue’-owner of failing restaurant, wanted
∆ to take over lease. ∆ doesn’t want to be personal guarantor on lease, wants to use her company so she
won’t be liable. Rogue causes her to sign lease as co-covenantor for the company, and when her
49
19
 Mistaken party must prove that they took all reasonable precautions in the circumstances.
o Generally insufficient to say they relied on a trusted friend/advisor.
 Not available where:
 1) Signature on the document was brought about by negligence of the signer in failing to take
precautions which they ought to have taken, [Saunders v. Anglia; Marvco Color Research Ltd.
v. Harris54] or
 2) the actual document was not fundamentally different from the document as the signer
believed it to be.
Fairness & Consumer Protection
 Three doctrines concerned w/ fairness of a bargain:
 Undue influence; Unconscionability; Duress (physical coercion of will, vitiating consent)
 Substantial overlap – an improvident/unfair transaction that results from a rel’ship of inequality
and trust could meet doctrinal req’mts of all three.
 Difference is in focus of analysis:
 Undue influence: The focus is on the improper exercise of influence by someone in a special
relationship of trust and confidence.
 Unconscionability: The focus is the overall commercial morality of the bargain in light of the
inequality of both bargaining power and the resulting bargain.
o Voidable – remedy is rescission
 Duress: a coercion of will that vitiates consent: The focus is the pressure exerted by one party
on another: the proverbial “gun to the head”.
o Historically: Void – there was never a K
o Current model: voidable.
o (Economic duress is more complicated)
 Choices are always made under constraints – at what point are they so
extreme as to invalidate a bargain?
 Attempts to bundle the doctrines:
o Lambert J in Harry v. Kreutziger thinks that all of these are really just asking one question:
 “Is the transaction, seen as a whole, is sufficiently divergent from community
standards of commercial morality such that it should be rescinded?”
 He feels that “the framing of the question in that way prevents the real issue from
being obscured by an isolated consideration of a number of separate questions.”
 This ruling has been criticized as overly broad, and Morrison and the two-part model
for inequality of bargaining/power is still the preferred judicial authority
o Denning sought a unifying doctrine from unconscionability, duress and undue influence in
Lloyds Bank v. Bundy, but this has not been adopted by BC courts.
restaurant/company fails, she is personally sued for the lease payments company failed to make. Held: ∆
proceeded on basis that only company would be liable, and was misled to sign in personal capacity as well.
∆ couldn’t even read English, and had been vocal in her opposition to a personal guarantee arrangement,
which  knew. Both  and ∆ were mistaken, but  was in best pos’n to avoid the loss, should have clearly
discussed details w/ ∆ to ensure she understood her liability.
54
Marvo Color Research Ltd. v. Harris [1982, SCC]: Harrises tricked by their daughter’s partner into
giving mortgage on their property, as security for partner’s obligations. Held: Can’t rely on non est factum;
law must note that third party was innocent of any negligence, carelessness or wrongdoing, whereas signer
has by its careless conduct made it possible for wrongdoer to inflict a loss. Reflects need for
certainty/security in commerce.
20
Undue Influence
 Historical background:
 Used to be limited to situations of duress (i.e. physical threat, etc.)
 Courts of equity developed a doctrine of undue influence
 Definition: the unconscientious use by one person of power possessed over another in order to induce
the other to enter a transaction [Earl of Aylesford v. Morris]
 Effect: Transaction is voidable. Court can rescind transaction.
 Categories of undue influence:
 1) Actual undue influence: claimant must prove wrongdoer exerted undue influence
 2) Presumed undue influence: a relationship of trust and confidence exists
o A) De Jure: relationships that raise the presumption of undue influence
 Fiduciary rel’ships; trustee/beneficiary; solicitor/client; doctor/patient;
priest/worshipper
 Burden shifts to trusted party to show that beneficiary entered into a transaction
freely and independently
 Best category for .
o B) De Facto: a relationship of trust and confidence
 Spousal relationships
 Relationship of marriage/cohabitation does not presumptively fall under 2A.
 May fall w/in 2B if:
o i) trust and confidence was placed in partner in rel’n to financial affairs
o ii) sexual and emotional ties b/w parties provide a “ready weapon” for undue
influence – interests are overborne by fears of damaging the rel’ship
 Constructive notice of undue influence [tests primarily from Bank of Montreal v. Duguid]
 In general, the transaction (i.e. a guarantee/mortgage) may be set aside where:
o i) the spouse is the agent of the bank (rare); OR
o ii) the bank has actual or constructive notice of the risk of undue influence
 There is constructive notice of the risk of undue influence where spouse/co-habitant co-signs for
another’s debts and:
o i) the transaction on its face is not to the financial benefit of the spouse/cohabitant; AND
o ii) the parties are in a relationship that raises the suspicion of undue influence
(i.e. spouse/cohabitant)
 Response: banks should:
o Meet w/ spouse privately
o Explain extent of liability
o Warn of the risk; and
o Urge the person to obtain independent legal advice
 Rules for spousal guarantees laid out in RBS v. Etridge55:
 1) Issue b/w surety wife and lender bank: can bank rely on wife’s apparent consent to the
suretyship transaction
 2) If bank knows/is willfully blind to fact that consent was obtained through undue
influence/misrepresentation, can’t rely on apparent consent
 3) If consent obtained through undue influence/ misrepresentation, bank may not rely on
apparent consent, unless good reason to believe she understands nature and effect of transaction
 4) Barring special circumstances, knowledge or reasonable belief that solicitor is acting for wife
55
Royal Bank of Scotland p.l.c. v. Etridge (No. 2) & Other Appeals (2001, HL): Surety wife cases. Wives
putting up their assets as surety for debts of husbands.
21
and has advised her re nature/effect of transaction will suffice for aforementioned ‘good
reason’. Written confirmation by solicitor to this effect will entitle bank to hold this reasonable
belief.
 5) Also acceptable: sufficient explanation of nature and effect of transaction given by senior
bank official would constitute good reason
 6) If bank knows of anything that might increase the inherent risk that consent may have been
procured by husband’s undue influence/misrepresentation, may have duty to confirm wife has
received advice re transaction from solicitor independent of husband before relying on consent
 7) if bank hasn’t taken reasonable steps to ensure wife understands nature and effect, wife may
be able to set aside transaction if her consent was obtained by undue
influence/misrepresentation
 8) Subject to special instructions/circumstances, solicitor instructed to act for wife proposing to
stand surety/give security for husband’s debts has duty to try to ensure she understands
nature/effect of transaction
 9) Bank must disclose to surety wife (or her solicitor) the amount of existing debt owed to bank
by principal debtor, and amount of new loan/drawing facility
 10) Subject to 9, creditor has no greater duty of disclosure to surety wife than to any other
intending surety
Unconscionability




Control of contractual power in cases where there is: [Morrison v. Coast Finance]
o 1) Inequality in bargaining power [Lloyds Bank v. Bundy56; Lidder v. Munro57]
 Contextual factors: economic resources, knowledge, need, disability that falls short of
legal incapacity, etc. [See e.g. Pridmore v. Calvert]58
 Common categories: unlike duress, there are no express categories. Nonetheless,
cases tend to involve pre-existing rel’ships where there is potential for an inequality
of bargaining power (e.g. employment, family)
o 2) AND substantial unfairness in the resulting contract
o On proof of these circumstances, presumption of fraud, which the stronger party must repel
by proving that the bargain was fair, just and reasonable or perhaps by showing that no
advantage was taken.
Business Practices and Consumer Protection Act (SBC 2004)
o Addresses unconscionable acts/practices in s. 8
o s. 9 – burden of proof is on party who is alleged to have committed/engaged in an
unconscionable act/practice
Remedy: Rescission
A party is entitled to rescission where it is established: [Marshall.59]
Lloyds Bank v. Bundy (1975, Eng. CA): ∆ guarantees son’s debts w/ farm, for more than farm worth.
Held: inequality in bargaining power (rel’ship w/ son = trust/influence), inequality in bargain (inadequate
consideration from bank).
57
Lidder v. Munro (2004, BCSC):  signs ICBC release of claims arising from car accident in exchg for $.
Injuries worsen and tries to get out of release. Held: rescission for unconscionability. Weakness in
bargaining pwr (limited English, less than HS education). Misrepresentation re legal advice – false
representation re material fact induced to enter K to disadvantage.
58
Pridmore v. Calvert:  injured in car accident, ∆ relied on complete waiver. Held: for , who had
weakness in bargaining power, “limited intelligence”, no friends to ask for advice and no business acumen.
59
Marshall v. Canada Permanent Trust Co. (1968, AB SC): ∆ in old folks home,  entered into K for
land, but ∆ lawyers seek rescission, arguing offer grossly inadequate for land, not fair & reasonable, and
56
22
1) That the party was incapable of protecting his interests (doesn’t matter whether or not the
other party was aware of this)
o 2) That it was an improvident transaction for the party
 Onus on offending party to prove the price was fair.
The law does not protect against making bad bargains [Plas-Tex]
In certain circumstances, the onus is shifted to the more powerful party to prove the weaker party was
properly capable of entering into the agreement [Mundinger v. Mundinger.60]
o An equitable rule, protecting those in a position to be easily taken advantage of.
Trebilcock – The Limits of Freedom in Contract
o Pareto efficiency
 Will the transaction make someone better off while not making anyone worse off?
 Economic presumption is that if two parties enter into a voluntary private exchange,
they must be better off (i.e. the transaction is welfare-enhancing), otherwise they
would not have transacted.
 Subject to market failures, monopoly, externalities, information failure, and
voluntariness
 Presumption to allow parties to decide what is welfare-maximizing for them
o Procedural unconscionability: “transactional incapacity”/”naughtiness in bargaining”
o Substantive unconscionability: fairness of bargain (is there a “just price”?)
o



Duress
 Classic formulation: “overborne will” approach [Pao On]
 Focuses on voluntariness of consent: “a coercion of will so as to vitiate consent”
 Commercial pressure is insufficient – compulsion must deprive the party of the “freedom of
exercising his will.”
 Effect:
 Historical: consent vitiated; contract void.
 Modern approach: K voidable at option of party who was object of duress.
 Categories of duress
 (a) Duress to person:
o Threats to person or family etc.
 (b) Duress to goods or property: [Port Caledonia61]
o Threat to damage or take the other’s property; extortionate payment required to
release a good (pawnbroker cases).
 (c) Economic duress: [D & C Builders;62 Stott v. Merit63]
o Now an accepted subcategory of duress.
o Economic pressure is not enough. Indeed commercial transactions often occur
in circumstances of unequal bargaining power where one party feels pressured
claim  took advantage of inequality in ∆ pos’n. Held: ∆ gets rescission. Costs not awarded b/c  not aware
of ∆ mental (in)capacity.
60
Mundinger v. Mundinger (1968, ON CA):  claims ∆ husband forced her to sign documents while
suffering serious mental breakdown etc. Held: onus shifted to ∆ to show no unconscionability, failed to
discharge.
61
Port Caledonia (1903): K for rescue assistance from Tug to prevent collision. Tug signaled “$1000 now,
or no rope.” Held: agreement set aside as “inequitable, extortionate, and unreasonable.”
62
D & C Builders: settlement case – overdue bill,  facing bankruptcy & accepted less that full amt in
satisfaction. Held: no valid consent,  held to ransom.
63
Stott v. Merit Investment (1988, ON CA):  agreed to pay client debt on margin acct. Held: economic
duress, but  subsequently aff’d agreement through conduct.
23




into the deal.
o Coercion of will test is difficult to apply as it involves an inquiry into the
psychological state of the party. Further, just because one party forces a hard
bargain, should the choice to accept the hard bargain (even when there is no
alternative choice) result in the contract being set aside?
Modern Test: [Universe Tankships v. Int’l Transport Workers Federation, 1982 PC]
 1) Pressure amounting to compulsion of the will of the victim
o Though often described in terms of vitiation of consent: the real issue is not
lack of will to submit, but “the victim’s intentional submission arising from the
realization that there is no other practical choice open to him.”
o Releovant factors include: [exemplified Gotaverken Energy Systems64]
 Whether coerced party protested
 Availability of alternative courses of action [most important]
 Existence of independent legal advice
 Whether coerced party took steps to avoid the K
 2) The illegitimacy of the pressure exerted in light of the nature of the pressure and the nature of
the demand.
o i.e. Was there a threat of unlawful action? What was being demanded?
 3) If a court finds that the victim expressly or implicitly approved the contract after the pressure
ceased to exist, the victim will be denied relief.
Fairness of bargain is doctrinally irrelevant
 Issue is consent. However, almost all cases of duress involve bargains that the coerced party
claims are unfair.
Subsequent cases have emphasized
 Whether there is a lack of practical alternatives
 The illegitimacy of the pressure exerted
o Threat would almost always be viewed as illegitimate where it involves a tort
or a breach of statutory duty
o Difficult cases arise where pressure is lawful
 i.e. threats to fire an employee; threats to breach a K and K modifications
o This criterion has been criticized as incoherent and unruly. Also difficult to
apply in context of contract modifications [Nav Canada v. GFAA]
Where there is legitimate hard bargaining, even in context of no practical alternative, courts will
enforce a K. [Gordon v. Roebuck65]
Consumer Protection Policy
 Consumer protection policies address certain forms of market failure and disparities between
manufacturers/sellers and consumers in knowledge, bargaining power and resources.
 Economic rationales for government intervention in consumer marketplaces:
 (i)
Monopoly: Competition laws aim to ensure a competitive market place and maximize
consumer welfare.
 (ii) Externalities: Regulation of product safety hazards and pollution.
64
Gotaverken Energy Systems (1993, BCSC): Pulp company agreed to contract modification which
disadvantaged them. Held:  had no remedy or option but to agree.  agreed under protest, had not obtained
legal advice on issue of duress, and took steps to avoid the K once work was completed.
65
Gordon v. Roebuck: Parties acting as trustees for different parties in a real estate transaction that had to
close by Dec. 31. At last minute, ∆ refused to execute unless  paid extra, ostensibly for repayment of $
lent into the venture.  agreed but then refused to honour the agreement, citing economic duress. Held: 
hadn’t proven the pressure exerted was illegitimate – maybe just hard bargaining.
24
 (iii) Information failures: In the consumer/retailer/manufacturer relationship there are usually
asymmetries in information. Consumer protection policy addresses information failure by
various means:
o Prohibiting fraud and deceptive practice: Competition Act, Food and Drug Act
o Mandatory disclosure requirements: Textile Labelling Act, Consumer
Packaging and Labelling Act, Hazardous Products Act, Weight and Measures
Act
o Government provision of information: funding to consumer groups, consumer
education
 (iv) Transaction costs: pursuing complaints costs money and time—what are the best types of
redress mechanisms: cooling off periods, cancellation rights, small claims courts, arbitration
etc.?
 (v) Public goods: public goods, in particular, consumer education will be “under produced” by
the market—government needs to supply consumer education.
o In addition to the economic rationales for government intervention, noneconomic rationales include:
 (i) Paternalistic concerns: Even if consumers have choice and there is full information, the
transaction in question may not be in consumer’s long-term interest: capacity issues;
unconscionability; protection of the gullible and vulnerable by “predatory” sellers.
 (ii) Redistributive concerns: Interest rate regulation, rent controls, statutory warranties, pricing
of goods etc. may reflect distributive concerns.
Deceptive or Unconscionable Acts/Practices
Business Practices and Consumer Protection Act
 Act gives consumers broad protections
 Very few cases come to court on this kind of issue
 Deceptive Acts and Practices
 Prohibition and burden of proof
 5 (1) A supplier must not commit or engage in a deceptive act or practice in respect of a
consumer transaction.
 (2) If it is alleged that a supplier committed or engaged in a deceptive act or practice, the burden
of proof that the deceptive act or practice was not committed or engaged in is on the supplier
 Unconscionable transactions
 Prohibition and burden of proof
 9 (1) A supplier must not commit or engage in an unconscionable act or practice in respect of a
consumer transaction.
 (2) If it is alleged that a supplier committed or engaged in an unconscionable act or practice, the
burden of proof that the unconscionable act or practice was not committed or engaged in is on
the supplier.
 Remedy for an unconscionable act or practice
 10 (1) Subject to subsection (2), if an unconscionable act or practice occurred in respect of a
consumer transaction, that consumer transaction is not binding on the consumer or guarantor.
 Other important matters to address in BPCPA
 direct sales Ks (door-to-door)
 funeral services Ks
 future performance Ks (where consumer to obtain goods/services in future)
o subset: continuing services Ks
25
 distance sale Ks (internet sales)
 unsolicited goods
 time shares
 prepaid purchase cards
 consumer credit & debt collection
 No Waiver or Release
o s. 3: any waiver or release by a person of the person’s rights, benefits or
protections under this act is void except to extent that waiver/release is
expressly permitted by this Act
 Reversal of burden of proof
 Supplier has burden of proof to show that it did not commit or engage in a deceptive or
unconscionable act or practice (sections 5(2) and 9(2)).
Common Law:
 Don’t have to intend statements to be misleading for them to count as deceptive statements. [Rushak v.
Henneken66]
 “Where a seller has factual evidence gained from inspection suggesting that the thing offered may have
a latent defect of great importance to the potential buyer, then to express a commendatory opinion w/o
qualification must be ‘conduct having the capability of misleading’…because…such a statement must
tend to lead the potential purchaser ‘astray into making an error of judgement’.” (‘misleading’ quote
refers to s. 3(1)(b) of the Trade Practice Act)
 ““Puffery” cannot, in my view, excuse the giving of an unqualified opinion as to quality when the
supplier has factual knowledge indicating that the opinion may in an important respect very well be
wrong.”
 “the section must be taken to require that suppliers involved in the defined transactions refrain from
any sort of potentially misleading statement, and that this must include an honestly-held opinion given
in circumstances in which the supplier knows that giving the opinion without appropriate qualification
may mislead”
 NB: No comment made on potential situation in which an erroneous but honest opinion is given by a
supplier who is not aware of any evidence suggesting it may prove incorrect.
Issues in Contract Formation
Uncertainty in Formation



Court will not enforce an agreement that has gaps, or is missing an essential term
o If the court filled in such a term, this would amount to forming a K for the parties
Price and payment must generally be agreed upon to have an enforceable K [May and Butcher,
Limited v. The King (1929)67]
Courts will sometimes enforce an agreement despite uncertainties [W.N. Hillas and Co., Limited
v. Arcos, Limited (1932)68], particularly where the parties involved have worked together
Rushak v. Henneken (1991, BCCA):  bought car from ∆, who used “laudatory language” despite
knowing of a risk that the car might have rust underneath the coating on its undercarriage, which he failed
to specifically warn against. Held: ∆
67
May v. Butcher: Court refused to enforce the agreement, because prices, quantity and delivery had not
been agreed upon. No K where such critical gaps exist.
68
Hillas v. Arcos: Court should construe documents fairly and broadly to give them effect, and so despite
uncertainties the agreement is enforced.
66
26
successfully in the past. [Foley v. Classique Coaches (1934, Eng. CA)69]
Duty to negotiate in good faith?


Implied term in some Ks [Empress Towers v. Bank of Nova Scotia (BCCA, 1990)70]
Courts have distinguished between pre-contractual and post-contractual obligations
o Once in a K, idea of obligation to perform in good faith
o Empress case straddles this line – performance of a contractual obligation to mutually agree,
but of course since it is an agreement to agree, not necessarily a K
Standard Form Contracts & Reasonable Notice
 Note: Common law has refused to strike down Kual standard form cond’ns unless the terms are so
unreasonable as to amount to fraud, or are manifestly irrelevant to the object of the K.
 General rule for signed documents:
o Party signing a written contract is bound by its terms regardless of whether the party read/was
aware of terms [L’Estrange] (subject to mistake, non est factum, unconscionability – where
applicable)
 Unsigned documents: where a written document contains cond’ns, but is not signed, and party did not
know of specific cond’ns, evidence is required to show assent to terms. [Parker v. South Eastern
Railway.71]
 E.g. tickets – trains, buses, movies, parking, museums, skiing, etc.
 Doctrine of reasonable notice: if no knowledge of cond’ns, a person is bound to them if there
was reasonable notice that the document contained conditions.
 One way out: argue K formed before given ticket – thus ticket and cond’ns constitute GTA w/o
consideration.
 Notice of specific onerous condition [J. Spurling Ltd. v. Bradshaw72]
o Red ink/red hand rule: unreasonable/onerous clauses need to be specifically highlighted in K.
 Narrowly applicable rule: Where party seeking to rely on K knows the signature of the other party
does not reflect the true intention of the signer and the other party is unaware of stringent/onerous
provisions, then the party seeking to rely on the terms must first take reasonable measures to give
notice of the terms to the other party. [Tilden v. Clendenning73]
o Tilden rule is a limited principle, applicable only when party knew or had reason to know of
Foley v. Classique Coaches: provision that price of petrol is “to be agreed by the parties in writing from
time to time.” Held: b/c parties believed K was enforceable, can read in an implied term. Policy: ∆ not
acting in good faith, cts want to make commercial agreements work, esp where they have worked in the
past.
70
Empress Towers: Held: implied term of K that landlord will negotiate in good faith, will not
unreasonably withhold agreement. Ct forces parties to go back to negotiations, does not create a new
agreement/lease period.
71
Parker v. South Eastern Railway (1877, Eng. CA):  rec’d ticket for storage of bag, bag lost. Cond’n on
reverse of ticket limited damages to £10. Held: new trial ordered, jury must determine whether ∆ took
reasonable steps to notify of limiting clause.
72
J. Spurling Ltd. v. Bradshaw (1956): ∆ warehousemen delivered goods for storage.  sent document
acknowledging receipt & directing ∆ to cond’ns on reverse, which incl. exemption clause. Held: exemption
clause binding,  should have read and did not object so cond’ns binding. Shift in rule – now notice req’d
for specific onerous cond’ns.
73
Tilden Rent-A-Car Co. v. Clendenning [1978, ON CA]: ∆ believed he was protected from liability in
any circumstance by an additional fee on rental car. Crashed while intoxicated, in fact not protected. Held:
 took no steps to alert ∆ of onerous provisions, and ∆ was unaware. Consequently,  could not rely on
them, ∆ not liable for damage to vehicle.  should have known there was no actual assent. Cts have since
limited the application of this case to the specific circumstances.
69
27
the signing party’s mistake as to its terms. [Karrol v. Silver Star Mountain Resorts.]
 Signed Waivers
 In absence of evidence of unconscionability, fraud, misrepresentation or non est factum, the
traditional rule that signature is manifestation of assent continues to prevail [Delaney v.
Cascade River Holidays (BCCA, 1981)]
 It is not a general principle that reasonable steps need to be taken to bring an exclusion of
liability to the attention of the consumer. [Karroll v. Silver Star74]
 Trebilcock: The Limits of Freedom in Contract – addresses concerns re std form Ks
 Monopoly: prevalence of std form Ks is explained by desire to reduce transaction costs; deal
with competitive market.
 Imperfect information on part of some parties: although no meaningful consent, argues that
“there is a margin of informed, sophisticated and aggressive consumers” who discipline the
market.
Fundamental Breach
 Doctrine of fundamental breach:
 An exemption clause cannot be construed to excuse liability for a fundamental breach of K (i.e.
a breach that goes to the root of the K)
 This is of historical interest, no modern application. [Tercon]
o The issue is now dealt with in two other doctrines.
 Distinct from repudiatory breach
o Breach of K that entitles innocent party to treat K as at an end.
 Rule of Law approach
 Can only exclude liability to extent that party is carrying out contractual
obligations/responsibilities. If they completely fail to carry out any, and breach K in such an
egregious way that it goes to heart of K, cannot rely on an exclusion clause
o Clause becomes invalid as a matter of law.
 Exclusion clause cannot apply in face of fundamental breach of K [Karsales v. Wallis.75]
 Rule of Construction approach [Suisse Atlantique (1967, HL); Photo Production.76]
 Fundamental breach is not a rule of law, it is merely a rule of construction.
 Distinct from repudiatory breach
o Breach of K that entitles innocent party to treat K as at an end
o When a fundamental breach occurs, K does not become non-existent. K is
meant to protect the parties, and this role still exists
o Fundamental breach of contract brings contractual obligations of performance
to an end.
o The exclusion clause survives and the issue is whether the clause applies to the
loss in question.
o Apply contractual terms to determine.
 Canadian Approach Post Photo Production
Karroll v. Silver Star Mountain Resorts (1988, BCSC):  signs waiver form, participates in ski race and
is injured. Held: bound by release.
75
Karsales (Harrow) Ltd. v. Wallis (1956, Eng. CA): ∆ purchaser refused delivery of used car when it
showed up severely damaged.  vendor relies on exclusion clause. Held: exempting clauses only apply
when party is operating w/in the essential respects of K. Don’t apply when in breach that goes to root of K.
76
Photo Production Ltd. v. Securicor Transport Ltd. (1981, HL): ∆ employee started fire and burned
down bldg he was supposed to be guarding. Held: Exclusion clause stands, ∆ not liable for acts of
employee.  can avoid risk at lowest cost (cheaper to insure than for ∆ to pay); no inequality of bargaining
pwr, no guarantee/transfer of risk from  to ∆.
74
28
 NB: Canadian courts have adopted the Photo Production model, but not the comprehensive
legislative protections that go with it in the UK.
 Hunter Engineering v. Syncrude77 - two judgements:
o Dickson (w/ La Forest):
 Technically a rule of construction, but operates as rule of law
 If an exclusion clause is clear and unambiguous, with no evidence of
unconscionability, it will remain in effect despite a fundamental breach.
 Concerns w/ unfair surprise/unjust enrichment b/c exclusions are
normally reflected in price in commercial contexts.
o Wilson (w/ L’Heureux-Dubé):
 Cts should maintain the rule of construction approach
 Exclusion clauses don’t have to be fair/reasonable at time of K.
 Using unconscionability as the doctrine to control exclusion clauses is
problematic, because it is assessed at the time of K formation. An
exclusion clause may be fair at time of formation, but become unfair
over course of performance.
 Plas-Tex v. Dow Chemical (2004, ABCA)
o Ct refused to enforce an exclusion clause where ∆ knowingly supplied
defective product to customer, and chose to rely on limitation of liability clause
instead of disclosing the defect.
 The Leading Case: End of the Road for Fundamental Breach [Tercon Contractors Ltd. v. BC78]
 Analytical Approach: Binnie
o Ct will interpret applicability of exclusion clauses based on intention of parties
as expressed in K
o If the clause applies, ct will determine whether it was unconscionable at the
time the K was made.
o Focus on formation, not breach.
o If the exclusion clause is valid and applicable, ct may still decide not to enforce
it based on overriding public policy, outweighing “the very strong public
interest in the enforcement of contracts”
o Onus of proof on party seeking to avoid enforcement
 Majority considers several factors:
o Characterization of context
o Special commercial context of tendering
o No other effective remedy
o Ambiguity in clause
 Contra proferentem
 Minority:
o Finds no ambiguity
o No unconscionability
o Relevant statute does not bar exclusion clauses
o Not contrary to public policy
o Floodgates concern
o De minimis argument
o Allow market to solve problems
o Availability of other relief (injunction, e.g.)
77
Hunter Engineering Co. Inc. v. Syncrude Canada Ltd. (1989, SCC): Syncrude K for conveyor systems,
failed shortly after warranty period expired. Held: exclusion clause upheld.
78
Tercon Contractors Ltd. v. British Columbia (2010, SCC): ∆ issues RFP for highway K, then elects
ineligible contractor. Does exclusion clause in RFP protect ∆ from liability? Held: ∆ liable.
29
Penalties and Forfeitures
 Issue: control of contractual terms that impose increased liability for damages for breach of K or that
provide for forfeiture of payments/deposits for breach
Penalty clauses
 E.g. ‘upon breach, party must pay damages of certain amount’
 Distinct from liquidated damages clauses (genuine pre-estimate of damages that will occur in a breach):
 Penalty: sum stipulated is extravagant/unconscionable in comparison to the loss [HF Clarke
Ltd. v. Thermidaire Corp. Ltd.79]
 Liquidated damages: fair/genuine pre-estimate of damages
 Penalty clauses unenforceable when they do not correspond reasonably with the loss. [HF Clarke v.
Thermidaire]
Forfeitures
 e.g. deposit is forfeited if K breached.
 When there is no forfeiture clause: [Stockloser v. Johnson]
 If money is handed over in part payment and buyer then makes default:
o So long as seller keeps K open and available for performance, buyer cannot
recover money
o Once seller rescinds K or treats it as ended due to buyer default, buyer is
entitled to recover money (subject to cross-claim by seller for damages)
 When there is a forfeiture clause (or money is paid expressly as a deposit, which is equivalent
to forfeiture clause): [Denning LJ in Stockloser v. Johnson.80]
 Buyer in default cannot recover money at all
 However, buyer may have equitable remedy – even with an express term in K, equity can
relieve buyer from forfeiture and order seller to repay, as court deems fit.
o For equitable remedy to arise:
 1) Forfeiture clause must be of penal nature (i.e. the sum forfeited must be out
of proportion to damage)
 2) Must be unconscionable for seller to retain the money
Illegality
 Issue: when will the court decline to enforce a transaction, or not give it effect, because it is in some
sense illegal?
 When does public policy trump private ordering?
 Three categories:
(a) Contrary to Public Policy
 No court will lend its aid to a man who found his cause upon an immoral or illegal act [Holman v.
Johnson, 1975 Eng.]
 Categories of K contrary to public policy:
 Categories of contract contrary to public policy:
 (i) Contracts injurious to the state
HF Clarke Ltd. v. Thermidaire Corp. Ltd. (1974, SCC): Penalty clause found to be “grossly excessive.”
∆ loss was extremely small in comparison to what the clause would force  to pay.
80
Stockloser v. Johnson (1954, Eng CA): agreement stipulated that in case of  default, ∆ entitled to retake
possession and keep all payments made by . Held: forfeiture clause binding.
79
30
o w/ enemies of state, sale of public offices, bribery of officials
 (ii) Contracts injurious to the administration of justice
o e.g. K not to disclose info in crim investigation
 (iii) Contracts involving immorality
o Historically: Ks w/ prostitutes (i.e. renting a room/carriage to a prostitute),
insurance policies on brothels
o Not many nowadays  unlikely to be set aside for immorality unless the act is
also a criminal offence
 (iv) Contracts affecting marriage
o e.g. Ks in restraint of marriage (payment to not marry person of certain
ethnicity/religion)  now also contrary to human rights legislation
o Ks to divorce
 (v) Contracts in restraint of trade: Shafron v. KRG.81
o Restrictive covenants  must be limited in geographic scope
o In Shafron the issue was “metropolitan area of Vancouver”  too vague, no
legal entity of that name; not clear whether Richmond was w/in or no.
 (vi) Contracts to benefit from a crime
 Surrogacy Ks
 Some jurisdictions have found surrogacy Ks contrary to public policy [Baby M, 1988]
 Assisted Human Reproduction Act (Canada)
o Payment for surrogacy
 6. (1) No person shall pay consideration to a female person to be a
surrogate mother, offer to pay such consideration or advertise that it
will be paid.
o Reimbursement of expenditures
 12. (1) No person shall, except in accordance with the regulations and a
licence,
 … (c) reimburse a surrogate mother for an expenditure incurred by her
in relation to her surrogacy.
(b) Common Law Illegality
 Contracts that involve the contravention of a legal obligation imposed by the common law.
(c) Statutory Illegality
 Statutory illegality can arise is various ways, e.g. where K:
 Is expressly or impliedly prohibited by statute;
 Is entered into with the object of committing an act prohibited by statute;
 Requires performance contrary to statute; and
 Confers benefits in violation of a statute
 Classical approach: Rogers v. Leonard82
 Modern Approach:
 Ct may find K void, but has discretion to refuse, grant relief, etc.
o Depends on purpose of statutory prohibition, effects of finding it contrary to
81
Morley Shafron v. KRG Insurance Brokers (Western) Ltd. (2009, SCC): Restrictive covenant not clear,
certain or reasonable. Term has no legal meaning.
82
Rogers v. Leonard (1973, ONHC): Sale & purchase of cottage. Agreement signed on Sunday, contrary to
Lord’s Day Act. Vendor knew of Act but was willing to ignore as dealing w/ friends. When vendor refused
to complete, purchasers sued. Held: K was illegal, void as contrary to statute.
31
public policy, harm in enforcing K.
 Might strike out offending provisions, leaving rest of K untainted by illegality
o Historically, would strike entire K, but now: severance approach [See New
Solutions,83 Still.84]
 Red Pencil Approach
o Strike out entire provision of K to make it work.
 Notional Severance:
o Read K down to make it enforceable
o Alter terms to get closest to parties’ intentions, rather than just striking out a
provision.
Mistake
 A residual category of relief
 Several types of Mistake
 Mistakes in formation (mistakes as to terms)
 Mistake in assumptions (mistakes as to basis for entering K)
 Mistake in recording  rectification of documents
 (Mistaken Payments)
o Primarily dealt with under restitution law
o See Budai v. Ontario Lottery Corp.85
 Mistake vs. frustration
 Both involve mistakes
 Frustration involves mistakes about future events, rather than mistake as to existing facts
 Mistake: res extincta, e.g.
o If what you’re K’ing over doesn’t actually exist, there is no K – void.
o E.g. K over vase, both parties think it’s still intact, but turns out it was already
broken.
 Frustration:
o K over vase, but during delivery it is broken.
o Because of a supervening event, K can’t be completed.
Categorization of Mistake
 Example: buyer purchases painting from seller – buyer believes that it is a Da Vinci but it is in fact a
copy.
 (a) Common mistake
 Both parties make the same mistake
 If seller also believes it is a Da Vinci  common mistake. K void if fundamental term.
 Req’mts for common mistake to avoid a K: [Great Peace]
o 1) common assumption as to the existence of a state of affairs
83
New Solutions Financial Corp. v. Transport North America (2004, SCC): Credit agreement provided
for payment in excess of 60% criminal rate of interest.
84
Still v. Minister of National Revenue (1998, FCA):  applied for permanent resident status in 1991,
assumed she was entitled to work. Worked from May to October 1993, and was granted permanent resident
status as of 23 Sept 1993. Laid off October 1, denied EI benefits on basis that her employment was illegal.
85
Budai v. Ontario Lottery Corp: ∆ told  he won $1000, he went out and spent $500 partying, then next
day ∆ called and said they were mistaken, he hadn’t won. ct dealt w/ it as negligent misrep, awarded him
the reliance damages ($500), but not expectation.
32
o 2) no warranty by ether party that this state of affairs exists
o 3) the non-existence of the state of affairs must not be attributable to either
party
o 4) the non-existence of the state of affairs must render performance of K
impossible
o 5) state of affairs may be the existence, or a vital attribute, of the consideration
to be provided or circumstances which must subsist if performance of the Kual
venture is to be possible.
 (b) Mutual mistake
 Misunderstanding where the parties are at cross-purposes
 If seller believes/knows it is a copy  mutual mistake. K based on objective test?
 (c) Unilateral mistake
 One party is mistaken about an important fact concerning the K and the other party
knows/ought to know of the mistake.
 If seller believes/knows it is a copy and knows that buyer believes it is a Da Vinci  unilateral.
K based on objective test?
General Rule of Mistake:
 If there is a true ambiguity regarding an important/fundamental term of the agreement, and there is no
reason to prefer one party’s understanding over the other, the agreement may be void for mistake. [See
Williams v. Gled.86]
 Policy issue:
 Assignment of risk – who should bear risk, consequences of the mistake in question?
o Balancing reasonable expectation and unfair surprise
o Balancing reliance and caveat emptor
Mistake in Formation
 The idea that K formation is objective was arguably not cemented until Smith v. Hughes
 If there is a fundamental ambiguity in a K, due to common mistake, court may void the K [Raffles v.
Wicklehaus87]
 If there is disagreement as to meaning of a description used in K formation, may be void due to
fundamental ambiguity, or court may find determinable meaning, and enforce K. [Staiman Steel Ltd.88]
Mistake in Assumption
 No clear dividing line b/w mistake in formation and mistake in assumptions
 Separate categories, but really all mistake in formation cases.
 Difference: rather than mistake as to which steel the K refers to, e.g., it’s a mistake around the
Williams v. Gled (2006, BCSC): ∆ had line of credit, didn’t understand it was secured against their
mortgage. When seeking new mortgage, common mistaken assumption as to value of mortgage. Court
grants relief – even if not CL mistake, would grant on basis of equitable mistake. Useful characterization of
mistake as residual category of relief.
87
Raffles v. Wicklehaus (1864): Two ships named Peerless, seller’s goods on second, buyer expected on
first, refused delivery when arrived. Held: No consensus ad idem, no K. No reasons given, but apparently
used subjective analysis to assess existence of K.
88
Staiman Steel Ltd. v. Commercial & Home Builders Ltd. (1976): Auction of steel. Buyer thought “all
the steel in the yard” included a dismantled piece of scaffolding, in add’n to scrap steel. Seller thought it
didn’t incl the new steel, which was set off a ways. Seller argues based on Raffles that there is fundamental
ambiguity, no K. Held: Determinable meaning, K enforceable for the old steel only.
86
33
assumptions/basis for entering the K. [See Sherwood v. Walker.89]
 Three types of operative mistake: [Bell v. Lever Bros.90]
 (a) Identity of K’ing parties
 (b) Existence of subject matter
 (c) Quality of subject matter
o Raises difficult questions – won’t affect assent unless:
o (i) it’s a mistake of both parties, and
o (ii) mistake is as to the existence of some quality which makes the thing
without the quality essentially different from the thing as it was believed to be.
 Failure by one party to disclose material facts does not presumptively void K. [Bell v. Lever Bros.]
Equitable Mistake
 If under CL a K would be void, under equity, court has the authority to rescind a K or find it voidable.
[Solle v. Butcher.91]
 If there is a material misrepresentation (where one party takes advantage of the other, even
where not fraudulent etc.), court can grant relief on the basis of the mistake.
 Or, if parties are under a common misapprehension as to facts etc., can set K aside, provided the
party seeking to have it set aside was not himself at fault.
 Some debate in UK as to existence of doctrine of equitable mistake [See Great Peace.92]
 Equitable mistake has been adopted in Canada [See Miller Paving93]
Mistake in Recording – Remedy: Rectification
 Parties are generally bound by a written and signed contract. One long-standing exception to the rule
that the written contract reigns supreme is where there is a mistake in recording the agreement. Where
there is a typographical or transcription error in recording an agreement, the court may order
rectification to correct the error.
 Four part test for rectification: Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd.
89
Sherwood v. Walker (US): Vendor sells pedigreed cow on assumption that she is infertile (i.e. based on
value as beef, not as breeder). Turns out cow is fertile, becomes pregnant before delivery. Held: Risk
allocated by parties to the seller. Could have added a condition subsequent to K’ual obligations, covering
the situation that arose.
90
Bell v. Lever Brothers Ltd. (1932, HL): Termination agreement,  paid Bell satisfaction, then discovered
he had been in breach of his original K, so they could have terminated him without payment. Held: Valid
K. Caveat emptor – failure to disclose material facts doesn’t void the K. Didn’t question ∆, or they could
have voided K based on his lies, or not entered it if they discovered the truth. More important to maintain
principles of K law than to compensate  loss here.
91
Solle v. Butcher (1950, Eng. KB): Landlord (Butcher) relied on tenant (Solle) to determine whether rent
ctrl legislation applied to him, tenant said it did not. Now claims it does apply, and that he does not owe full
agreed rent. Butcher seeks rescission b/c K was entered into on basis of mistake. Policy concern against
allowing landlords to void Ks for mistake, evict tenants suddenly. Held: under CL K might be void, but
equity allows ct to find it voidable, circumventing the policy issue.
92
Great Peace Shipping Ltd. v. Tsavliris Salvage (Int’l) Ltd. (2002, Eng. CA): ∆ seeking ship to
chaperone another ship in distress. K w/ , who ∆ believed to be only 35 miles away. Turned out to be 410
miles away. ∆ cancelled K,  claims damages under K cancellation clause. Held: Abolished equitable
mistake in UK. ∆ owes  damages.
93
Miller Paving Ltd. v. Gottardo Construction Ltd. (2007, ONCA):  k to supply materials to ∆, who had
third party K to build hwy extension.  signed agreement saying paid in full, then discovered nonreimbursed expenses. Held: Common mistake doesn’t save , nor does equitable mistake (which does exist
in Canada). K clearly/expressly allocates risk to , must deal with it.
34
(SCC, 2002)94.
 1) The plaintiff must prove the existence and content of the prior oral agreement.
 2) There must be “convincing proof” of the oral agreement (beyond a balance of
probabilities but less than beyond a reasonable doubt).
o Note: presumption of caveat emptor is very strong in the case of written
documents setting out the terms of a K. The court is concerned that to allow
rectification would promote lack of due diligence (i.e. people will be sloppy
and then seek rectification).
 3)
The plaintiff must provide the precise wording for the rectification.
 4) The plaintiff must show that defendant knew or ought to have known of the mistake in
written document. Essentially,  must prove that to refuse rectification would be inequitable and
unconscionable.
o Note: Many rectification cases give rise to an odor of fraud—sometimes strong
and other times weak. After all, the context is that one party is claiming that the
written agreement reflects the “deal” while the other party claims that it does
not. If the court concludes that the written agreement contains an error then the
defendant looks like it was engaging in sharp practice.
 See Shafron  ∆ could not show prior discussion, let alone agreement, as to a legally meaningful term,
so ct could not rewrite “Metropolitan City of Vancouver” into something that would make K valid.
 No evidence that parties had agreed on something and then mistakenly included something else
in the written K  rather, used an ambiguous term, and paid the consequences.
Frustration
 Falls w/in general ambit of law of mistake
 Distinction:
 Mistake: assumptions regarding existing facts (i.e. cow in Sherwood v. Walker)
 Frustration: assumptions regarding future events
 Frustration involves cases where an event occurring subsequent to K formation makes performance
legally problematic:
 (i) Impossible to perform
o Promise to marry – promisor dies.
 (ii) Undue hardship – event imposes an inordinate and unexpected expense
o Changes to interest rates etc. don’t count – people hedge their bets by locking
into long mortgages etc.; acceptable/allocated risk.
o General assumption that risks have been allocated – threshold for frustration is
very high.
 Policy Context: Assignment of Risk
 The mere fact that a K becomes more expensive/difficult to carry out is not in itself a sufficient
reason to provide relief.
 The unexpected event must be so far beyond the range of risks that the K allocates that it
constitutes a fundamental change in the bargain: “a radical change in the circumstances”
 Historical development:
 Stage 1: Rule of absolute promises [Paradine v. Jane.95]
94
Performance Industries: Option agreement for purchase of land adjacent to a golf course. The land was
to be used to develop houses. Oral agreement that a 480 by 110 yard piece of land would be subject to the
option. The written agreement mistakenly referred to 110 feet. ∆ insisted on the written terms despite
knowing that the terms did not accurately reflect the prior oral option agreement.
95
Paradine v. Jane (1647): Caveat emptor, lessee takes benefits and burdens.
35
 Stage 2: Relaxing the absolute rule.
o Courts imply a condition of the continued existence of the subject matter of K
(Taylor v. Caldwell)96
o “… where, from the nature of the contract, it appears that the parties must from
the beginning have known that it could not be fulfilled unless when the time for
the fulfilment of the contract arrived some particular specified thing continued
to exist, so that, when entering into the contract, they must have contemplated
such continuing existence as the foundation of what was to be done. [first para,
p. 845]
o Critique: Test is based upon the presumed intent of the actual parties.
Frustration only arises in situations where the parties have not considered the
risk and therefore have no intent.
o Courts subsequently abandoned the device of presumed intent and applied the
condition as a matter of law – i.e. they developed the doctrine of frustration as a
rule of law.
 Stage 3: Move from destruction of physical subject matter to destruction of the
foundation/commercial purpose of the K
 Frustration for sale of land
 Historically, frustration was not available for sale of land.
o Land is unique, cannot be destroyed. Caveat emptor
 Modern courts have recognized that Ks for land can be frustrated [Capital Quality Home v.
Colwyn97]
o Event
 - must occur after formation.
 - must not be self-induced
 - must not have been foreseeable
o Impact - must be more than mere inconvenience – must make contract fruitless
 - must be radical change in contract (completely affects nature,
meaning, purpose, effect and consequences of contract)
 - change must be permanent
Requirements for Frustration
 Event
 Must occur after formation
 Must not be self-induced
 Must not have been foreseeable
 Impact
 Must be more than mere inconvenience – must make K fruitless
 Must be radical change in K (completely affects nature, meaning, purpose, effect and
consequences of K) [See Krell, Davis]
 Change must be permanent
 Multi-factorial assessment  consider: [Sea Angel.98]
96
Taylor v. Caldwell (1863): Music hall lease; hall burns down. Assumed that parties expected hall to
remain standing  ct implies cond’n into K.
97
Capital Quality Home v. Colwyn (1975, ONCA): Agreement to transfer 26 bldg lots. Planning
legislation brought into force before transfer. Legislation req’s various consents for subdivision. Held:
legislation destroyed the foundation of the agreement.
98
Sea Angel (2007, Eng. CA): Vessel Charter for salvage operations of oil tanker. Port authorities prevent
vessel from leaving port, alleging that salvagers negligent. Held: No frustration of K. Delay generally on
36
 Terms of K
 Context
 Knowledge, expectations, assumptions of parties as to risk
 Nature of event
 Doctrine not to be invoked lightly – must be a “break in the identity” b/w K and its performance
in the new circumstances [Sea Angel]
 Fundamental question: whether, due to changed circumstances, the risk of unfair hardship to one party
outweighs the general policy of enforcement as expressed through caveat emptor.
To obtain compensation,  must establish:
 (1) Basic underlying assumption:
 The element of the K, or circumstance that is disrupted by the frustrating event, must be
fundamental/foundational, such that it would be tacitly assumed by the parties to be a precondition to performance
 The cont’d existence of the goods/subject matter of K (Taylor v. Caldwell)
 Continuation of certain cond’ns or the happening of an event (Krell v. Henry)
 (2) Substantial Hardship
 Major impact on economics of transaction
 Must be more than a mere increase in expense that makes the contract less profitable
 Change is permanent
 Must deprive one of the parties of the substantial intended benefit of the transaction
 (3) Unanticipated Risk
 The frustrating event must be unanticipated
 Occurs after formation
 Not foreseen
o Not a risk addressed by the parties
o Not a risk that the parties should have been expected to address
 (4) No allocation of risk by K
 Is the risk of the unforeseen event expressly or implicitly allocated in the contract?
 (5) No fault
 The event is beyond the ctrl of the parties and is not caused by one of them. Frustration cannot
be self-induced.
Remedial Consequences
 If the contract is frustrated, parties are relieved of future performance obligations. However, they may
have suffered losses in partial performance.
 Example: Manufacturer to design and build special machine. K frustrated due to export
restrictions.
o Buyer had paid deposit
o Seller had performed design work
 Historically, CL held that the loss lies where it falls. (Appleby v. Myers)
 Rationale was that frustration does not render the contract void ab initio. Although the parties
are relieved of future performance obligations, everything done up until the frustrating event
was performed under valid K.
 Critique
charterers, and foreseeable. Risk of delay contemplated by K’ual provisions. Not unjust for charterers to
bear risk.
37
 Unprincipled: leaves rights and losses to pure chance.
 Krell v. Henry.99
 The Reform – Restitution [Fibrosa Spolka Akeyna v. Fairbairn Lawson (1943, H.L.)100]
 Problem: Recovery on restitutionary grounds is limited to monetary payments; it does not apply to
expenses incurred in reliance on the contract.
 In Fibrosa Spolka Akeyna v. Fairbairn Lawson Viscount Simon stated:
 While this result obviates the harshness with which the previous view in some instances treated
the party who had made a prepayment, it cannot be regarded as dealing fairly between the
parties in all cases, and must sometimes have the result of leaving the recipient who has to
return the money at a grave disadvantage. He may have incurred expenses in connection
with the partial carrying out of the contract...
Response: Frustrated Contracts Act
 Most jurisdictions have enacted a Frustrated Contracts Act, which allows the court to apportion prefrustration losses.
 In many jurisdictions, reliance losses are recoverable but only to the extent of pre-payment (i.e. they
may be set-off against any payment/deposit).
 In BC, reliance losses are independently compensable. Even where there is no pre-payment the court
may apportion any reliance losses. Losses are apportioned equally.
 Adjustment of rights and liabilities
 5 (1) In this section, "benefit" means something done in the fulfillment of contractual
obligations, whether or not the person for whose benefit it was done received the benefit.
 (2) Subject to section 6, every party to a contract to which this Act applies is entitled to
restitution from the other party or parties to the contract for benefits created by the party's
performance or part performance of the contract.
 (4) If the circumstances giving rise to the frustration or avoidance cause a total or partial loss in
value of a benefit to a party required to make restitution under subsection (2), that loss must be
apportioned equally between the party required to make restitution and the party to whom the
restitution is required to be made.
Contract Interpretation
 Process of contractual interpretation is aimed at ascertaining the true intentions of the parties at the time
the K is signed
 General Principles: [Consolidated-Bathurst v. Mutual Boiler]
 Ct seeks an interpretation which, from the whole of the K, would appear to promote or
advance the true intent of the parties at the time of entry into the K.
 Literal meaning should not be applied where to do so would bring about an unrealistic
result; or a result which would not be contemplated in the commercial atmosphere in
which the insurance was contracted.
 Where two constructions are possible, the more reasonable one, which produces a fair
result, must be taken as the interpretation which would promote the intention of the
99
Krell v. Henry: coronation viewing. K for £75. £25 paid as a deposit. K frustrated (b/c royal gets sick)
but landlord entitled to keep the deposit. Had no deposit been paid, then landlord entitled to nothing. If
entire price paid, then tenant not entitled to return of deposit.
100
Fibrosa: Sale of machine by English company to Polish company. Contract price is £4,800 and £1000
paid in advance. WWII frustrates contract and Polish company sues to get deposit back. Held: Buyer may
recover deposit based on restitution. There is an unjust enrichment because there has been a total failure of
consideration. English company has to keep the loss of £1000 in reliance damages.
38






parties.
 An interpretation which defeats the intentions of the parties and their objective in
entering into the commercial transaction in the first place should be discarded in favour
of an interpretation of the policy which promotes a sensible commercial result.
However, where there is no ambiguity: [Eli Lilly & Co. v. Novopharm Ltd.]
 Where there is no ambiguity, courts are reluctant to alter, even when K is unfair  use
doctrines of undue influence, duress, illegality, consumer protection…these address the fairness
issue directly.
 When there is no ambiguity in the wording of the document, the notion in ConsolidatedBathurst that the interpretation which produces a “fair result” or a “sensible commercial result”
should be adopted is not determinative.
 Admittedly, it would be absurd to adopt an interpretation which is clearly inconsistent with the
commercial interests of the parties, if the goal is to ascertain their true contractual intent.
 However, to interpret a plainly worded document in accordance with the true contractual intent
of the parties is not difficult, if it is presumed that the parties intended the legal consequences of
their words.
Objective approach
 To ascertain the intention of the parties, ct reads terms of K as a whole, (i.e. giving words
natural/ordinary meaning in context of agreement, parties’ rel’ship and all relevant facts
surrounding the transaction so far as known to parties) Ct makes objective judgement w/o going
into parties’ subjective states of mind [BCCI v. Ali]
 Principal function of K law is to protect reasonable expectations engendered by promises – test
of whether promise is made does not and should not depend on any enquiry into state of mind of
promisor, but on how promisor’s conduct would seem to a reasonable person in pos’n of
promisee. [Waddams, The Law of Contracts]
Where there is no ambiguity in the written agreement there is no need for extrinsic evidence
 Ct should give effect to intention of parties as expressed in written agreement. Where clearly
stated, ct shouldn’t stray beyond the agreement. [KPMG Inc. v. Canadian Imperial Bank of
Commerce)
 When wording is unambiguous, cts shouldn’t give different meaning than that expressed in K,
unless K is unreasonable or contrary to intent of parties [Scott v. Wawanesa Mutual Insurance
Co.]
The “Factual matrix”, “commercial context” and surrounding circumstances” are almost
always relevant
 “In a commercial contract it is certainly right that the court should know the commercial
purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction,
the background, the context, the market in which the parties are operating.” [Lord Wilberforce
in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen]
General Rule: evidence of prior negotiations is inadmissible for purpose of construing final
agreement [Prenn v. Simmonds.101]
 (evidence relating to commercial purpose is part of the factual matrix, allowed as noted
above)
Interpretation must give effect to all parts of the agreement – no provision of an agreement
must be interpreted to be redundant [BG Checo Int’l v. BC Hydro]
 Presumption that a term in a K is not meaningless. Cts will recognize that agreements often
contain duplicative language.
Prenn v. Simmonds (1971, HL): Kual dispute as to whether cond’n for purchase of shares had been
satisfied – depended on meaning of ‘profits of RTT’. Held: evidence of negotiations and parties’ intentions
inadmissible. Only final document evidences the agreement of the parties (plus the factual matrix).
101
39




 Where there are apparent inconsistencies between different terms of a contract, the court should
attempt to find an interpretation which can reasonably give meaning to each of the terms in
question.
Subsequent conduct
 English courts will not examine subsequent conduct.
 Canadian courts are more flexible: where there are two reasonable interpretations of a provision,
evidence of subsequent conduct may be considered if it will “help to determine which of the
two reasonable interpretations is the correct one.” [Re CNR and CP]
Related Agreements
 May be taken into account where the agreements are components of one larger transaction
Meaning of words
 Natural/ordinary meaning. Evidence may be admitted to prove that the word has a
special/technical meaning.
Construction Contra Proferentem
 Where there is ambiguity, it should be construed against the interest of the person who drafted
or proffered the ambiguous provision. [See Seidel]
The Parol Evidence Rule
 Presumption: extrinsic evidence is inadmissible to alter the contract
 If the language of the K is clear/unambiguous, no extrinsic parol evidence may be admitted to
alter/interpret the written words.
 Can’t admit evidence of a collateral agreement that contradicts the written agreement. [Hawrish
v. Bank of Montreal.102]
 A procedural rule, but it operates substantively as well – in face of written agreement, prior
representations/statements have no Kual effect
 “There is a strong presumption in favour of the written document, but the rule is not absolute,
and if on the evidence it is clear that the oral warranty was intended to prevail, it will prevail.”
[Gallen v. Allstate Grain.103]
 Rationales:
 Administrative/adjudicative ease
 Prevent fraud/perjury
 Enhance certainty
 Efficacy of commercial documents
 Prevent unfair surprise
 Control agents/employees
 Exceptions to Parol Evidence Rule:
 The written agreement is not the whole contract.
 Interpretation: Extrinsic evidence can be introduced to clear up an ambiguity in the contract.
 Invalidity: Extrinsic evidence can be introduced to show that the contract is invalid because of
lack of intention, consideration or capacity
 Misrepresentation: Extrinsic evidence can be introduced to show there was a misrepresentation
Hawrish v. Bank of Montreal (1969, SCC):  guarantees debts of company. Bank mgr promises  will
be released when ∆ gets joint guarantee from directors. ∆ gets other guarantee but  not released. Held:
signed guarantee contradicts oral assurances.
103
Gallen v. Allstate Grain Co. Ltd. (1984, BCCA):  farmer buys buckwheat sees from ∆, mgr assures 
that it will choke weeds out – “grow up and cover field like umbrella”. Exclusion clause in K says ∆ gives
no warranty, and says oral representation can’t be admitted. Held: Oral representation was a warranty as to
choking out weeds, written clause referred to crop yield – no contradiction.
102
40


that was either innocent, negligent or fraudulent.
 Mistake: Extrinsic evidence can be introduced to show that there was some mistake as to the
nature or effect of the agreement.
 Rectification: Extrinsic evidence can be introduced to correct an error/mistake in putting the
agreement in writing.
 Condition precedent: Extrinsic evidence can be introduced to show that there was a condition
precedent to the agreement taking effect.
 Unconscionability: Extrinsic evidence can be introduced to show that the transaction was
brought about through unconscionable means.
 Modifications and discharge: Extrinsic evidence can be introduced to show that the contract has
been modified or terminated.
 Equitable remedy: Extrinsic evidence can be introduced in support of a claim for an equitable
remedy.
 Collateral Contract/Warranty/Agreement: Extrinsic evidence can be introduced to show that
there was a separate agreement along with the written agreement.
 Proper approach for admissibility of collateral Ks [Gallen]:
o 1) Determine whether oral representation is a warranty
o 2) If yes, then harmonize w/ written K if possible. If no contradiction, no
problem.
o 3) If contradiction, strong presumption that written K governs.
 Zippy Print (BCCA, 1995):
o “A general exclusion clause will not override a specific representation on a
point of substance which was intended to induce the making of the agreement
unless the intended effect of the exclusion clause can be shown to have been
brought home to the party to whom the representation was made by being
specifically drawn to the attention of that party, or by being specifically
acknowledged by that party, or in some other way”.
Factors influencing application of the presumption in favour of written documents
 General: intent, reliance, reasonable expectations, unfair surprise
 Nature of change/conflict: how serious is the conflict/contradiction?
 Nature of document
o Intended to be whole agreement – entire agreement clause?
o Clarity of wording
o Read by parties (knowledge)?
 Bargaining rel’ship
o Power
o Standard form contract
o Past rel’ns/experience
o Evidence of sharp practice
 Nature of representation
o Quality and credibility of evidence
o Clarity and specificity
o Significance
Legislation: Business Practices & Consumer Protection Act, SBC 2004
 S. 187
o In a proceeding in respect of a consumer transaction, a provision in a contract
or a rule of law respecting parole or extrinsic evidence does not operate to
exclude or limit the admissibility of evidence relating to the understanding of
the parties as to the consumer transaction or as to a particular provision of the
41
contract.
o "Consumer transaction" means a supply of goods or services or real property by
a supplier to a consumer for purposes that are primarily personal, family or
household
 Not a large effect, as common law took care of this in Gallen.
Contractual Terms
 Analytical approaches:
 Doctrinal: the legal test
 Policy approach: protect reliance and reasonable expectations of one party while avoiding unfair
surprise
 Economic approach: who should bear the risk that the representation is wrong? Who could have
avoided the risk at least cost?
o Who could get the relevant information more easily?
o Economic approach is all about risk allocation.
 Remedial approach: Categorization is more remedy-driven. Justice is done between the parties
by selecting the appropriate remedy.
Classification
Remedy
Interest Protected
None
Mere Puff
Innocent Misrepresentation
Caveat emptor
Rescission
Restitution
If contract performed or executed right(prevent unjust enrichment)
to rescind is limited (Ennis)
Negligent Misrepresentation
Reliance damages
Fraudulent Misrepresentation Rescission and reliance damages
Reliance
Reliance
Warranty
Expectation damages
Reasonable expectation
Condition
Repudiation and expectation damages
Reasonable expectation
Damages or repudiation depending on Reasonable expectation
Innominate term
104 whether the result of the breach goes to
(Hong Kong Fir event)
the root of the contract
Definitions:
 Mere Puff: a legally meaningless statement of the sort often made by a seller to encourage someone to
make a purchase.
 Representation: a statement of fact that may give rise to liability if it turns out to be untrue (i.e. a
misrepresentation). Misrepresentations can be innocent, negligent, or fraudulent.
 Fraudulent/Negligent misrepresentation
 Tort claims, not contract – but remedy for fraud includes rescission.
 Innocent misrepresentation [Redgrave v. Hurd105; Redican v. Nesbitt106; Ennis v. Klassen107]
104
Hong Kong Fir Shipping Co Ltd. v. Kawasaki Kisen Kaisha Ltd. (1962, Eng. CA): where shipowners
breached a charter party K by delivering an unseaworthy vessel, the fact that the term could not be
classified as a condition did not mean that charterers were necessarily precluded from repudiating.
Innominate term.
42
 Statement that, unknown to speaker, is false.
 Doctrine:
o 1) Representation of fact that turns out to be false
o 2) Material – i.e. an important matter
o 3) Induces the making of the K, relied upon (will be presumed)
o 4) Maker did not know correct facts
 Policy Concerns: caveat emptor vs. unjust enrichment
 Remedy: rescission – provided:
o 1) K not executed
o 2) restitutio in integrum (return to original state) is possible
 Condition: a term of fundamental importance, the breach of which will give rise to a right to repudiate
and expectation damages.
 Note: In sale of goods, once the good has been accepted and after the period of reasonable
inspection, a condition may only be treated as a warranty:
 (4) If … the buyer has accepted the goods or part of them, or if the contract is for specific goods
the property in which has passed to the buyer, the breach of any condition to be fulfilled by
the seller can only be treated as a breach of warranty, and not as a ground for rejecting the
goods and treating the contract as repudiated, unless there is a term of the contract, express
or implied, to that effect.
 Implied conditions in sale of goods act: e.g….
o Sale by description – if not what advertised, breach of implied cond’n that
goods must correspond w/ description
o “Reasonably fit for the purpose”; “of merchantable quality”; “durable for
reasonable period of time”
 Warranty: a representation that is elevated to a term of the K. If a warranty is untrue it amounts to a
breach of K. Hence, expectation damages.  does not go to the root of the K, and thus does not give
right to repudiate.
 Collateral K/warranty: rather than one K, the courts sometimes adopted a two-K approach:
o K1 – K for sale of horse
o K2 – If you enter K1, I promise it is a racing horse. [Unilateral K, performance
of which is entering into K1]
 Remedy: expectation damages
 A statement considered a prima facie warranty if it is: [Heilbut, Symons & Co.,108 expanded in
Dick Bentley109]
o A representation
o Made in the course of dealings
105
Redgrave v. Hurd (1881, Eng. CA): K to buy house & law practice, but practice turned out to be
worthless. Held: rescission; deposit returned but no damages for moving costs.
106
Redican v. Nesbitt (1924): K for sale of cottage, misrepresentation as to state of cottage. Purchaser
stopped payment on cheque, but K executed, no rescission available.
107
Ennis v. Klassen (1990, Man. CA): Sale of BMW, misrepresentation as to model discovered after 3
days. Held: K rescinded on basis that although K was executed and delivery taken, acceptance had not yet
taken place before rescission was sought.
108
Heilbut, Symons & Co. v. Buckleton (1913, HL): Purchase of shares in rubber company, which turned
out not to deal only in rubber.  lost money, claimed ∆ had given warranty. Held: “an affirmation at the
time of sale is a warranty provided it appears on the evidence to be so intended.” No evidence of this here,
no liability for ∆.
109
Bentley (Dick) Productions Ltd. v. Smith (Harold) (Motors) Ltd. (1965, Eng. CA):  action against ∆
for breach of warranty on sale of car –false statement as to miles on engine. Held: binding. ∆ intended
statement as warranty.
43
o For the purpose of inducing other party to act (important issue)
o Induces entry into K (reliance)
o Reliance is reasonable
 Must seek rescission within reasonable time [Leaf v. Int’l Galleries110]
 Can be passed down despite vertical privity [Murray v. Sperry Rand111]
 Innominate term (aka intermediate term): somewhere b/w a condition and a warranty. Remedy depends
on whether breach is of fundamental nature. If injured party has been deprived of substantially the
whole benefit of the K, entitled to treat K as repudiated and claim damages. If not, damages only.
 Categorized as intermediate or innominate by the court after the breach occurs, in determining
what remedy will be for the breach.
 Distinguishing between innocent misrepresentations and warranties
 Doctrinal test req’s objective assessment of promissory intent of the parties: did they intend the
statement to be a binding promise?
 A necessarily fact specific determination, but influencing factors include:
o Timing of statement
 The earlier in the negotiations, the less likely a statement was a warranty.
o Importance of statement
 i.e. to what extent did it induce formation of K
o Was the speaker aware of the importance of the statement?
 i.e. foreseeability of reliance. Will the party be unfairly surprised by finding
that statement has contractual consequences?
o Relative knowledge/skills of the parties
o Content of statement
 How specific or vague was it?
 Offered as opinion or fact?
o Context
 What degree of formality surrounding statement? Was it offhand, or did it play
a key role in negotiations?
o Have the parties gone to the effort of reducing the K to writing?
 If yes, they had an opportunity to include the statement. Courts are reluctant to
add oral terms to written documents, especially where the term significantly
adds to or deviates from obligations of the parties.
o Disclaimers
o Price/consideration
 Does the price indicate anything about how the parties allocated responsibility
for the truth of the statement? (e.g. buying something for a high price might
imply a warranty)
Arbitration Clauses
 BC Commercial Arbitration Act [RSBC 1996] CHAPTER 55: Stay of proceedings
 15 (1) If a party to an arbitration agreement commences legal proceedings in a court against
another party to the agreement in respect of a matter agreed to be submitted to arbitration, a
party to the legal proceedings may apply, before or after entering an appearance and before
Leaf v. Int’l Galleries (Eng. CA, 1965): Sale of painting. 5 years later,  tried to sell painting and found
it was not by the supposed painter.  took back to ∆ and asked for money back (i.e. rescission). Held: too
late for rescission, should have claimed for damages.
111
Murray v. Sperry Rand (1979, ON HC): Statements that forage harvester would meet farmer’s needs.
Held: ∆ mftrer liable, despite having no K with the  - brochure was a representation/warranty, w/ 
reliance. Collateral K; unilateral K.
110
44
delivery of any pleadings or taking any other step in the proceedings, to that court to stay the
legal proceedings.
 (2) In an application under subsection (1), the court must make an order staying the legal
proceedings unless it determines that the arbitration agreement is void, inoperative or incapable
of being performed.
 Arbitration clauses do not bind with regard to consumer protection claims. (still binding on breach of K
issues) [Seidel v. Telus (2011, SCC)]
 Protected under Business Practices and Consumer Protection Act, s. 172
 Breach of K claims not protected, arbitration clauses binding on these.
Concurrent Liability in Contract & Tort
Negligent Misrepresentation
 Could be actionable in both tort [Hedley Byrne112] and contract [BG Checo]
 Could be useful to choose one over the other:
 Measure of damages is different in tort (restitution/reliance) than in contract (expectation)
 Limitation periods may be longer in tort, or may begin counting later.
 Traditional reluctance to recognize a tort of negligent misrepresentation
 Harm caused by negligent misrepresentations often arises in a commercial context
o Risk should be allocated by K
 Floodgates concerns regarding economic loss
 Words are different from acts – potential s unlimited
 Words exist forever
1) Concurrency in K and tort claims: can  claim in both?
 Historically, cts reluctant to recognize right of action in tort for a misrepresentation made in context of
a K rel’ship (esp where alleged misrepresentation was incorporated as an express term of K)
o Stemmed from general unwillingness to upset sanctity of K – idea that if two parties
agree that a particular risk should lie w/ a party who wouldn’t ordinarily bear the risk at
common law, they should be allowed to do that.
 Recently: courts are more willing to recognize the right to sue in tort, even when the
representation at issue is also a term of the K [BG Checo Int’l.113]
o Where a given wrong prima facie supports an action in K and in tort, party may sue in
either or both, subject to any limit the parties themselves have placed on that right by
their K.
2) Effect of contractual clause that limits tort liability?


112
It is still open to contracting parties to modify the tort duty to suit their bargain (i.e. to expressly
allocate risks through clauses limiting or expanding liability) [BG Checo]
o Recovery in tort is limited to the terms of the K
o A contract can exclude tort liability.
Three situations that may arise when K and tort are applied to the same wrong: [BG Checo]
o A) K stipulates a more stringent obligation than tort law would impose
Hedley Byrne (1964): Negligent misrepresentation causing pure economic loss is actionable in tort.
Owed duty of care; special knowledge/skill; reasonable reliance.
113
BG Checo Int’l Ltd. v. BC Hydro and Power Authority (1993, SCC): Claim against BC Hydro re
clearance of right of ways. Held: actionable in both contract and tort.
45


Parties are hardly likely to sue in tort, since would recover more under higher
contractual duty.
 Vast majority of commercial transactions.
 May still turn to tort when suit in K is barred by expired limitation period, etc.
o B) K stipulates a less stringent obligation than tort law would impose
 i.e. parties indicate by their K that the usual liability imposed by tort law is not to
bind them.
 This intention is most commonly indicated by an exemption/exclusion of liability
clause in the K.
 Generally, duty imposed by tort law can only be nullified by clear terms.
o C) The duty in K and the common law tort duty are co-extensive
  may seek to sue concurrently or alternatively in tort, to secure some advantage
peculiar to tort law, such as a more generous limitation period.
Tort duty is modified by terms of K only with respect to those wrongs that fall within the scope of
the K.
o Normal tort duty will apply with respect to wrongs independent of the K
o No clear test for independence – categorization depends on facts of case
3) Negligent Misrepresentation and the assessment of damages




It is possible that a pre-contractual misrepresentation will give rise to an action in tort but not in
K.
o E.g.: if a negligent misrepresentation does not amount to a term of K (perhaps b/c not
clearly intended to be a guarantee), but was still reasonably relied upon by the plaintiff in
entering into the K
Under normal tort measure of damages,  would be awarded reliance damages – to put him in
pos’n as if he had never relied on ∆ negligent misrepresentation.
Note, however, that some courts have included “opportunity costs” in calculating reliance damage
awards, meaning that the total damage award ends up being effectively equivalent to an award of
expectation damages [Esso v. Mardon.114]
Consequently, distinction b/w K and tort seems less important w/ respect to an action to recover
losses suffered as a result of pre-contractual misrepresentation.
Breach of Contract
Efficient Breach



114
In some cases, the law favours the economic concept of efficient breach  breaching a K when it
makes more economic sense to breach and pay damages than fulfill K
Policy goal: ensure good/service contracted for goes to the party who values it the most highly (at
the least cost of reallocation)
Scenario:
o K: A to sell machine to B at $1000
o C values machine at $2000
Esso Petroleum Co. v. Mardon (1976, Eng. CA): Esso plans gas stn, incorrectly estimates annual
throughput,  hired to run stn on basis. Held: there was a collateral warranty that the claim was sound.
Negligent misrepresentation -  induced into K.
46
o
o
o


B can obtain substitute at $1200
Efficient for A to breach, sell machine to C and pay B $200
No one is worse off, and now machine is in hands of C, who can use it to create most benefit
for general economy.
Policy: economically desirable for A to breach
o Hence the standard that breach of K will make someone liable for damages of loss
Efficient breaches are different from cynical and deliberate breaches (i.e AG v. Blake), so
restitution of profits wouldn’t apply.
Remedies for Breach of Contract
Equitable
Specific Performance
 An order compelling the party in breach of K to perform the K
 Rarely granted – limited circumstances in which an award of damages would be inadequate
 Unique goods [Behnke v. Bede Shipping Co. Ltd. (1927)115]
 Unique land – depends whether a substitute is readily available
o Specific performance on land Ks is no longer guaranteed. Have to prove on
case-by-case basis that the particular property in question is unique to you.
[Semelhago (1996, SCC)]
 Where transfer of land is conditional on work being done [Tanenbaum v. W.J. Bell Paper Co.
Ltd. (1956, Ont HC)]
o Long-term supply Ks, where  may go out of business due to breach [Sky Petroleum]116
 Reasons for not making SP the presumptive remedy [Co-operative Insurance Society v. Argyll
Stores (1998, HL)]
 Historical: equity supplements the common law; steps in when damages are inadequate
 Ideological: ct’s role isn’t to enforce morality in keeping promises
 Administrative: ongoing cost to ct of supervising ongoing compliance
 Efficiency Concerns: presumptive right to SP would mean no req’mt to mitigate
 Straight damages – advantage of finality, but doesn’t promote ongoing rel’ships
 No SP for personal services – absolute rule against slavery
Negative Covenant
 A promise not to do sthg
 Arises commonly in sale of business cases – non-compete clauses, e.g.
 Must have restrictions to limit the extent of non-competition (i.e. location, time, business area)
 Requirements for enforcing a negative covenant:
 Existence of a negative covenant
 Damages must be inadequate
 Must not amount to compulsion to perform personal services contract, or be an undue restraint
of trade
 See Warner Bros. Pictures Incorporated v. Nelson117
115
Behnke v. Bede Shipping: commercial scenario; unique characteristics of ship complied w/ specific
shipping regulations. In most pure commodity scenarios, though, a commercial substitute will be available.
116
Sky Petroleum:  secured ct order for ∆ to continue supply, due to prohibitively high market price
(backdrop: 70s oil crisis). Protection of long-term supply, also unique good
47
Injunction




An order not to do something – either not to breach K, or not to do sthg that would prevent K
from being performed
Doctrinal Requirements:
o Damages must be inadequate
o Injunction cannot amount to specific performance of a personal services K
Can be used to enforce an express or implied negative covenant
Lumley v. Wagner [1852]  can have an injunction agst working for other ppl in same
profession (no longer applicable)
Damages
Restitution




 awarded damages equal to the benefit unjustly acquired by ∆
Policy Goals: Prevent unjust enrichment of ∆, corrective justice
As an independent cause of action:
o Quantum meruit [Deglman v. Guaranty Trust (1954, SCC)118]
 What the services rendered would have merited in payment
o Prior pigeon-holes:
 Courts might imply a promise (quasi-K approach), for policy reasons
 Trust rel’ships sometimes constructed to artificially allow restitution
o But now restitution is an officially recognized method of assessing damages.
Restitution of benefits conferred vs. disgorgement of profits
o  may not have measurable financial loss, and thus will be due no compensation, even when
K breaker has profited from the breach
o Assumption: wrongdoer should not be allowed to profit from wrong
 Corollary: not as strong an argument for giving this to   windfall concern
o In extreme cases, courts have discretionary power to award restitution damages for profits
earned from a breach of K [AG v. Blake (2000, HL)]119
Reliance





117
 awarded damages equal to unreasonable enrichment of ∆, plus expenditures made in reliance on
the contract being fulfilled by ∆
Measured based on total loss to 
Policy Goals: Prevent harm to , restorative justice
Used when expectation damages are too speculative [Anglia Television v. Reed (1972, Eng.
CA)120]
Reliance damages cannot exceed expectation damages [Bowlay Logging v. Domtar]
Warner Bros. v. Nelson: Damages found inadequate b/c Bette Davis is irreplaceable; held that
restricting her from acting in certain contexts doesn’t force her to work for Warner Bros.; but can’t force
personal services K, so other negative covenants not enforceable.
118
Deglman v. Guaranty Trust: First Cdn case to explicitly recognize restitution principles. Aunt promised
house next door to nephew in exchg for help w/ errands, repairs over 6 mth period. Implied K – expectation
of benefits, but expectation damages not possible.
119
AG v. Blake: ∆ traitor who spied for USSR, wrote autobiography in violation of negative covenant agst
divulging info learned in course of employment. Profits from book sale awarded to .
120
Anglia Television v. Reed: Movie wasn’t completed, could not prove lost profits
48
Expectation




 awarded damages equal to benefit of contract fulfillment; measured based on expected benefit
to  [Wertheim v. Chicoutimi Pulp Company (1911, PC), Hawkins v. McGee (1929)121]
Policy goals: secure benefit of K to ; distributive justice
Typical measure of damages in breach of K [Wertheim v. Chicoutimi122]
 can elect b/w lost profits (expectation damages) and wasted expenditures (reliance damages)
[Anglia v. Reed]
Factors that affect the calculation of damages
Economic Waste

No cost of completion where grossly/unfairly out of proportion to the good to be attained. [Jacob
& Youngs, Inc. v. Kent (1921, US), Groves v. John Wunder Co. (1939, US)123]
Consumer Surplus

Court can consider personal/subjective value, over market value [Ruxley Electronics (1996, HL)]
Lost Volume

 can sometimes claim lost profits from ∆ failure to fulfill a K to purchase

Depends on supply/demand:
o When supply exceeds demand, lost sale merits damages for lost profit [Thompson (W.L.)
Ltd. v. Robinson (Gunmakers) Ltd., 1955]
o When demand exceeds supply, no sale is truly lost and thus no damages are merited for lost
profit [Charter v. Sullivan, 1957]
Loss of Chance

Can get damages for a lost chance of benefit [Chaplin v. Hicks, 1911]
o Confusion as to how to award damages when  had only a chance of benefit does not relieve
∆ from paying damages

Four criteria to get damages for loss of chance: [Folland v. Reardon, 2005]
o Show on balance of probabilities that but for ∆’s wrongful conduct,  had chance to
benefit/avoid loss
o Chance lost must be sufficiently real/significant to rise above mere speculation
o Outcome must have depended on someone/sthg other than  himself
o Lost chance must have had some practical value

Limitation on expectation damages  untenable when too speculative

Mere difficulty in assessing damages is not a good enough reason not to award damages at all
[Carson v. Willitts (1930)]
Non-Pecuniary/Non-Monetary Damages
Hawkins v. McGee:  promised “100% perfect hand”, but it was hairy. Damages for difference in value
b/w expectation and result.
122
Wertheim v. Chicoutimi Pulp Company: “the party complaining should, so far as it can be done by
money, be placed in the same position as [the party] would have been in if the contract had been
performed.”
123
Groves v. John Wunder Co.: disproportionate; high cost of performance and low gain; held: expectation
damages, not concerned about waste b/c no destruction of bldg etc.
121
49




Compensation for mental distress
Historically not available – concern against punitive damages [Addis v. Gramophone Company
Ltd. (1909)]
o Distinction b/w contract and tort proceedings – law only recognizes commercial relationships
o Exceptions for promises to marry, failure to pay on cheque, vendor failure to make title [per
Addis]; also physical discomfort/loss of time [old railway cases]
1974-2005: development of pigeon-hole categories where damages would be granted
o Contracts for pleasure/entertainment/peace of mind
 Holidays [Jarvis v. Swan Tours (1973)124]
 Wedding (i.e. Wilson, problem w/ photos]
 Disability Insurance [Warrington – bought for peace of mind]
 Does not have to be the essence of K; sufficient as “major or important part”
o Pets
o Physical inconvenience and discomfort caused by sensory experience
o Employment  where there is an independent actionable wrong (i.e. intentional infliction of
mental distress, defamation, fraud, etc.)
Since 2006
o Test set out in Fidler v. Sun Life [2006]
 Object of K must have been to secure a psychological benefit, such that it brings mental
distress upon breach within reasonable contemplation of parties
 The degree of mental suffering cause by breach must be sufficient to warrant
compensation
Punitive Damages




May be applied in an egregious breach of K [Whiten v. Pilot Insurance Co. (2002)]
Policy Concerns
o Exceptionality, Rationality
o Proportionality to:
 ∆ blameworthiness/unjust enrichment
  vulnerability and harm/potential harm
 Need for deterrence
 Other penalties already assessed
Punitive damages may be awarded in very limited circumstances: [Whiten v. Pilot]
o Conduct of ∆ must be “highly reprehensible”
o Must be an independently actionable wrong aside from the main cause of actions
 Can be founded in breach of a term of K (i.e. implied duty to act in good faith)
Requirements re-affirmed in Honda Canada v. Keays
o Punitive damages are restricted to advertent wrongful acts that are so malicious and
outrageous that they are inherently deserving of punishment.
o Courts should award punitive damages only where award is necessary for denunciation and
deterrence
o Independently actionable wrong is req’d
 Can be breach of K provision, fiduciary obligation, etc.
Limits to Damages
Jarvis v. Swan Tours:  compensated for lost enjoyment on a vacation after hotel failed to live up to
brochure promises.
124
50
Policy Concerns


Default of expectation damages can cascade, need to limit from infinite expansion
Courts strive to achieve a fair balance b/w reasonable expectations of party to whom promise was
made and the risk of unfair surprise to ∆ if held responsible for unexpected liability
Remoteness
Reasonable contemplation

Can claim expenditures incurred before a K, if they were such that the breaching party could
reasonably have foreseen them [Anglia v. Reed125]

Damages should be based on the reasonable expectations of both parties (at the time of K) as to
the probable result of a breach of the K [Hadley v. Baxendale (1854)126]
o Naturally resulting consequences
o Special circumstances that were in reasonable contemplation of both parties
Communication of Special Circumstances

Partial communication of special circumstances is insufficient [Horne v. The Midland Railway
Company (1873, Exchequer Chamber)127]
o Policy concern in Horne: When a ∆ cannot refuse K, can’t limit liability – must protect both
parties

If full notice is given before/at time of K, special circumstances can sometimes be considered part
of K and ∆ is obligated to uphold [Cornwall Gravel Co. Ltd. v. Purolator (1978)128]  other
party must clearly have accepted the risk.

Generally, mere communication is not sufficient – can enter into 2nd K (i.e. insurance)

Victoria Laundry Ltd. v. Newman Industries Ltd. (1949)129
o Distinguish b/w imputed vs. actual knowledge – any knowledge outside ordinary course of
things can be used to recover add’l losses
o K-breaker doesn’t have to have considered the potential losses, ct only requires that a
reasonable man in his position would have perceived it as a possibility if he considered
potential losses stemming from breach of K
o  does not have to prove that this reasonable man would foresee the loss as certain, only
“serious possibility” or “real danger”

Per Transfield Shipping Inc. v. Mercator Shipping Inc. (The Achilleas) [2009]130: test is both
inclusive (if losses foreseeable, damages will be granted) and exclusive (if not foreseeable, no
assumption of responsibility, thus no damages)
125
Anglia v. Reed: loss of pre-K expenses w/in reasonable contemplation of breaching party.
Hadley v. Baxendale: Broken mill shaft, delivery of new shaft delayed and claim for lost profits while
mill idle during delay; no damages awarded b/c ∆ didn’t know the mill was idle (notice to courier
insufficient – not directly to mgmt of courier company)
127
Horne v. The Midland Railway Company: Notice given that  under K to deliver, late delivery would
result in rejection of goods by buyer; no notice as to especially lucrative K price for merchandise, therefore
extra profit above market price ≠ covered by damages.
128
Cornwall Gravel Ltd. v. Purolator Courier Ltd.: ∆ employee was aware of the importance of on-time
arrival; Since this case, company has chg’d std form K to state expressly that employees can’t promise
anything above company line.
126
129
130
Transfield Shipping: Charter of ship, returned to owners late, owners claim for lost profits from
subsequent charter cancelled due to lateness and lowered market prices. Ct found for ∆, damages being
limited by reasonable contemplation and proper allocation of risk.
51
Factors affecting reasonable contemplation/foreseeability

Nature of ∆ business
o Munro Equipment Sales Ltd. v. Canadian Forest Products Ltd. [1961], Scyrup v. Economy
Tractor Parts Ltd. [1963]

Nature of the Product/Service
o Loss due to fall in market price during a delay in shipment is not considered too remote
[Koufos v. C. Czarnikow Ltd. (The Heron II) (HL, 1969)]
 Test: “whether, on the information available to the defendant when the contract was
made, he should, or the reasonable man in his position would, have realised that such loss
was sufficiently likely to result from the breach of contract to make it proper to hold that
the loss flowed naturally from the breach or that loss of that kind should have been within
his contemplation.”

Sophistication of Parties
o The more sophisticated/knowledgeable the parties, the more likely the damages in question
will be foreseeable
Ordinary Allocation of Risk

Understandings or expectations in the marketplace (custom of the trade)
o Courts must consider the commercial context of the K – may have inherent assumptions that
affect the reasonable contemplation test [Transfield Shipping]131

Risk allocation is an important function of a K
Proportionality

Comparison of K price and nature of service w/ risk – ultimate loss claimed

Anomalous to impose extensive liability for a breach of K to provide an ordinary service as a low
price

Speaks to concerns of risk-allocation
Mitigation




131
General Rule: claimants must take reasonable steps to avoid loss
What is reasonable depends on circumstances of case
Exception: no requirement to mitigate when  is entitled to specific performance
o  cannot recover damages for losses that could reasonably have been avoided
Rationale
o Avoidance of hardship/unfairness
 K liability is absolute -  doesn’t have to prove intention/negligence; no ∆ reasons can
excuse from contractual liability
 Quantum: normal measure of damages (expectation) is high, and can lead to
overcompensation
 Unfair surprise vs. unreasonable expectations  unfair to hold ∆ liable for losses  could
have avoided
o Fair Allocation of Risk
 Often  is in best pos’n to deal w/ consequences of breach
 Requirement to mitigate provides better way to allocate post-breach risks
o Avoiding economic waste – wasteful expenditures
 Promotes efficiency, by requiring innocent party to help keep costs low
Transfield Shipping: Certain parties believed there would only be damages for overrun at higher cost,
not damages for loss of future K (custom of the trade).
52






Burden of proof is on ∆ to establish that  losses were avoidable
In a commercial context, it is reasonable to require cont’d dealings [Payzu Limited v. Saunders
(1919)132]
o Exception for personal services Ks – unreasonable to force work w/ specific person
(employer), with whom a bad relationship has developed
Impecuniosity
o Lack of resources generally doesn’t justify failure to mitigate
 Unless K breach is related to financing / is the reason for lack of resources
 Even if  cannot mitigate due to impecuniosity, ∆ typically not liable – unreasonable
expectation
o ∆ arguments:
  has failed to mitigate and can’t claim loss that could have been avoided
 Loss wasn’t caused by ∆, but by  failure to mitigate (incl. financial situation)
 Loss = too remote to be recoverable
o Incentivizes  to protect self in advance
o Where a right to specific performance exists there is no duty to mitigate. [Wroth v. Tyler
(1973, UK)133]
o Lack of resources may justify failure to mitigate: where impecuniosity has been conveyed
prior to K breach, inability to mitigate should have been foreseeable [see Wroth v. Tyler] –
couldn’t mitigate and ∆ knew  financing Ks no req’mt to mitigate w/ impecuniosity
Doctrine of Election
o Where an anticipatory breach occurs, contracting party can accept repudiation (other party’s
statement that it no longer wants to be bound) or treat K as if still in effect
 If repudiation is accepted, sue for damages, K is terminated and no further contractual
obligation
 If  disregards repudiation, treat K as if still in effect
o Rule in White and Carter (Councils) Ltd. v. McGregor [1961 HL]:134
 Where there is an anticipatory breach,  may continue to perform K, without a need to
avoid losses, where it is able to do so unilaterally (i.e. where
assistance/consent/participation of ∆ is not req’d)
o Canada has been reluctant to accept the White v. McGregor decision
 Election only available in rare circumstances, emphasis on unilateral reqmt. [Finelli v.
Dee (1968, ON CA)135]
 Must be a legitimate interest in the performance of K [Asamera Oil Corp. Ltd. v. Sea Oil
& General Corp. (1979, SCC)]
Mitigation in lost volume cases
o Where supply is greater than demand, no mitigation is possible.
Complete avoidance of loss
Payzu Limited v. Saunders:  refused a reasonable offer from ∆, lost money was a result of this as much
as K breach.
133
Wroth v. Tyler: breach of K to sell house;  should have mitigated by buying another house, but rising
prices and already-stretched finances made this impossible - ∆ ordered to pay  difference in house price
from original K to time of trial. No absolute right to get specific performance (Wife hadn’t signed off on
deal, ct couldn’t order specific performance).
134
White v. McGregor: K for advertising renewed in error, ∆ called to cancel.  ignored cancellation and
performed K. Doctrine of election used to uphold  behaviour. One justice questioned  right to display ads
w/o permission of ∆.
135
Finelli v. Dee: K to pave driveway, homeowner called contractor to cancel, but contractor paved
anyway and sued for K price. Held:  unable to unilaterally perform, due to trespass on property.
132
53
Where  is able to completely avoid loss (or the avoidance results in  being in a better pos’n
than before K) there will be no damages  K damages are compensatory [British
Westinghouse 136]
Interest & Inflation
o b/c of time delay b/w breach and assessment of damages,  may be awarded pre-judgement
interest on the damages total; may also consider ‘eroding effects of inflation’
 must mitigate w/in reasonable time of breach (context dependant)
o General Rule: damages are measured at date of breach
  is expected to go into market and make a replacement K at time of breach
 Gives  incentive to avoid loss, prevent waste
o Corollary: if losses subsequent to breach aren’t covered, then gains subsequent to breach
should not be subtracted from damages
 If risk of loss from not making substitute K is allocated to , so too should be the gains of
doing so.
o “Date of breach” not literal – w/in reasonable time of breach
 Measure of ‘reasonable time’ is affected by nature of transaction, circumstances
 May be extended if the good contracted for is unusual/unique, if  is exposed to risk from
mitigating, if  has inadequate funds or if nature of good means it cannot be instantly
resold
o One common alternative: to award damages calculated at time of trial
 Courts have the discretion to take into account any special circumstances that indicate it
is unreasonable to require  to mitigate immediately [Asamera137]
o


Employment Contracts and Damages for Termination
Employment Ks – Termination





Employment stds legislation provides very low statutory minimums
Written/oral employment agreement with specific terms: termination rights based on term of K
In common law employment (any indefinite employment rel’ship), employer can terminate at any
time:
o For cause, or
o With reasonable notice (i.e. number of weeks/months of pay) or pay in lieu
Employees must also give reasonable notice [RBC Dominion Securities v. Merrill Lynch (2008,
SCC)]
Wrongful dismissal is the cause of action for termination w/o reasonable notice or cause
Mental Distress and Employment


Employment Ks are not peace of mind Ks
No damages for mental distress merely because an employer exercises legal right to terminate
[Honda v. Keays (2008)]
o Mental distress not ordinarily in contemplation of parties, as employer has right to terminate
British Westinghouse:  replaced machinery w/ better quality than if warranty had been answered.
Held: increased profitability of new machines taken into account as consequence,  recovered only nominal
damages.
137
Asamera: K to loan shares to ∆, shares not returned on time. At time of breach share price = $0.29, but
by time of judgement $21.00. Held:  had duty to mitigate by buying more shares, but damages awarded at
share price of $6.50; illiquid/unstable nature of shares, rel’ship b/w  and ∆ made it unreasonable to expect
 to buy replacement shares at time of breach.
136
54



There must be an independent actionable wrong [IAW] (i.e. tort) for an employee to obtain
damages for mental distress [Vorvis v. ICBC (1989)]
o Unclear what constitutes an IAW
o Implied duty of good faith in a K opens potential claims simply due to bad faith in dismissal
A court may increase period of reasonable notice where employer acts in bad faith in dismissal
(where dismissal is unfair, or employer is untruthful, misleading, unduly insensitive) – known as
the “Wallace bump-up” [Wallace (1997)]
o Problem: compensation based on reasonable notice discriminates b/w different types of
employees (manager would get more $ than clerk for same mental distress)
Honda v. Keays [2008]
o No damages for loss of employment other than reasonable notice
o Duty of good faith and fair dealing in manner of termination, breach of which is compensable
under normal K damages principles [Hadley v. Baxendale]
 No req’mt for independent actionable wrong
 E.g. attacking employee’s reputation, misrepresenting reason for dismissal, dismissal to
deprive employee of pension benefits, etc.
Employment Standards Act: Liability resulting from length of service





63 (1) After 3 consecutive months of employment, the employer becomes liable to pay an
employee an amount equal to one week's wages as compensation for length of service.
(2) The employer's liability for compensation for length of service increases as follows:
o (a) After 12 consecutive months of employment, to an amount equal to 2 weeks' wages;
o (b) After 3 consecutive years of employment, to an amount equal to 3 weeks' wages plus one
additional week's wages for each additional year of employment, to a maximum of 8 weeks'
wages.
(3) The liability is deemed to be discharged if the employee
o (a) Is given written notice of termination as follows:
 (i) One week's notice after 3 consecutive months of employment;
 (ii) 2 weeks' notice after 12 consecutive months of employment;
 (iii) 3 weeks' notice after 3 consecutive years of employment, plus one additional week
for each additional year of employment, to a maximum of 8 weeks' notice;
o (b) Is given a combination of written notice under subsection (3) (a) and money equivalent to
the amount the employer is liable to pay, or
o (c) Terminates the employment, retires from employment, or is dismissed for just cause.
(4) The amount the employer is liable to pay becomes payable on termination of the employment
and is calculated by
o (a) Totaling all the employee's weekly wages, at the regular wage, during the last 8 weeks in
which the employee worked normal or average hours of work,
o (b) Dividing the total by 8, and
o (c) Multiplying the result by the number of weeks' wages the employer is liable to pay.
(5) For the purpose of determining the termination date under this section, the employment of an
employee who is laid off for more than a temporary layoff is deemed to have been terminated at
the beginning of the layoff.