CASE AND COMMENTCONTRACT - VARIATION OF AGREEMENT UNDER SEAL -

KNOWLEDGE OF PROMISOR THAT PROMSEE WILL ACT ON PROMISE-AGREEMENT WITHOUT STRICT CONSIDERATION. - Forcenturiesthe doctrine of consideration withstood the attacks of its criticsand has, up to the present, remained as one of the essentialelements of an enforceable agreement at common law. Yet itshold on the English and American law of contract might be saidto have been lessened in cases where estoppel and the rules ofequity can be applied by the court. Cheshire and Fifoot remarkthat "Professional reactions to the doctrine of consideration haveoscillated in the course of its history between the extremes ofcomplacency and disgust".' An example of this professionaldisgust is expressed by Lord Wright in one of his essays 2 " . . . . .

I cannot resist the conclusion that the doctrine is a mere encum-brance. A scientific or logical theory of contract would in myopinion take as the test of contractual intention the answer to theoverriding question whether there was a deliberate and seriousintention, free from illegality, immorality, mistake, fraud orduress, to make a binding contract . That must be in each casea question of fact." Lord Wright was, at the time he wrote,Chairman o£ the English Law Revision Committee, which madea thorough study of consideration and recommended, in itsReport of 1937, certain modifications in the application of thedoctrine as a test of contractual liability. The Committeerecommended, among other things, that consideration should nolonger be necessary where there was writing. A decision whichseeks to give judicial recognition to such a recommendation isworthy of attention.

The recent case of Central London Property Trust Limited v.High Trees House Limited, 3 although it does not make any changein the lawrelating to consideration, gave DenningJ. an opportunityto restate the law in a case where a contract under seal had beenvaried by a promise in writing for whichno consideration had beengiven. The facts before the court were comparatively simple .The defendant was a company which was a subsidiary of theplaintiff company. By a lease under seal the plaintiff leased tothe defendant a block of flats for a term of years, commencing inSeptember 1937, at a ground rent of £2,500 per annum.

Owingi Cheshire and Fifoot : Law of Contracts (1945), at p. 69 .Ought the Doctrine of Consideration to be abolished from the Common

Law? (1936), 49 Harv . Law Rev. 1225-1253 ; reprinted in Legal Essays andAddresses (Cambridge 1939) .

1 [194711 K.B . 130 .

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to a shortage of tenants in the first years of the War the defendantwas unable to pay the full amount of the rent reserved under thelease . Accordingly it was arranged that the rent should bereduced to £1,250 per annum as from the beginning of the term.This arrangement was confirmed in January 1940 by a letter from,the plaintiff to the defendant. In March 1941 a Receiver wasappointed by the debenture holders of the plaintiff. The Receiverlooked into the matter of the lease and ascertained that the rentactually reserved by it was £2,500 .

In September 1945 he wroteto the defendant saying that the rent must be paid at the fullrate and claiming that arrears of £79916 were due.

Subsequentlyhe instituted friendly proceedings to test the legal position inregard to the rate at which rent was payable.

In the action theReceiver did not claim the whole amount of £79916 but onlysought to recover £625, which was the amount represented bythe difference between the rent at the rate of £2,500 and £19250per annum for the quarters ending September 29th and December25th, 1945 .

The court gave judgment in favour of the plaintiff,finding that the conditions prevailing at the time the reductionin rent was made had completely changed by the early months of1945 and, when the flats had become fully let at that time, thereduction in rent ceased to apply.

His Lordship refused to decide the case as being one ofestoppel, stating that he was boundby the ninety year old decisionof Jorden v. Money,4 where it was held that a representation as tothe future must be embodied in a contract, i.e. a contract for whichconsideration can be found, before estoppel can be pleaded. Hefollowed a series of decisions where promises (for which it mightbe difficult to find consideration) have been held to be bindingon the promisor.

Even when neither of the parties have goneso far as to give a cause of action in damages for the breach ofsuch apromise the courts have refused to allow the party makingthe promise to act inconsistently with it. His Lordship statedat page 134, "It is in that sense and that sense only that such a.promise gives rise to an estoppel", and again at page 135, "Thedecisions are a natural result of the fusion of law and equity".Denning J. approved the recommendation of the English Lawevision Committee that writing should replace consideration

in a case of this kind, but his remarks in this connection were not,strictly speaking, necessary to his decision and are really obiter .

A somewhat similar question came recently before theOntario Court of Appeal in Shook v. .Munro .' There the agree-

4 (1854), 5 H.L.C . 185.5 [19471 o.R . 73 .

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ment was to extend the time for payment of both principal andinterest on a mortgage made in 1923 for the life of a widow liableon the covenant . No payment of principal and interest was evermade and after her death in 1943 her executor brought an actionfor a declaration that the mortgagees' rights had been extinguishedunder The Limitations Act, R.S.O ., 1937, c. 118. The court indismissing the action found that there was consideration for theextension. Henderson J.A . at page 77 said :

Agreements extending the time for payment of indebtedness,whether payable under mortgage or otherwise, are of everyday occurrenceand the effect of such an agreement is to prevent the Statute of Limitations from running against the creditor or in favour of the debtor.This constitutes the consideration, on both sides, for the agreement .

It' is apparent that here also the court in the interests of equitywas striving to avoid the strict doctrines of consideration. CentralLondon Property Trust Limited v. High Trees House Limited(supra) provides an interesting and extended analysis of the stateof the law on this aspect of afundamental and recurrent problem.

TorontoWILMOT H. BROUGHALL

UNJUST ENRICHMENT-ACTION DE IN REM VERSO -QUEBEC . -One of themany points of difference between the CivilLaw and the Common Law is in the treatment of unjust enrichment . Under the Common Law, some cases of unjustifiedenrichment of one party at the expense of anothercan be remediedby the doctrine of implied contract. For example, a minor wasforced to pay for the benefit he had derived from occupying ahouse.,There is, however, no general theory that unjust enrich-ment is recoverable and, if a payment has been made by mistakein circumstances where an action indebitatus assumpsit wouldnot lie, recovery is impossible because a contract cannot beimplied.2

Indeed, the development of a general theory of unjustenrichment seemed to have been made impossible by the dictumof Lord Sumner in Sinclair v. Brougham that "There is now noground left for suggesting as a recognizable `equity' the right torecover money in personam merely because it would be the right

1 Valentini v. Canali (1339), 24 Q.B.D . 166 ; Lawford v. Billericay RuralDistrict Council, [190311 K.B . 772 ; Banque Belge v. Hambrouck, [192111 K.B .321; Liggett (Liverpool) Limited v. Barclay'o Bank Limited, [192311 K.B. 48 .

2 Couern v. Nield, [19121 2 K.B . 419 ; Leslie, Limited v. Sheill, [191413 K.B . 607 ; Bilbie v. Lumley (1802), 2 East 469 .

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and fair thing that it should be refunded to the payer" .3Morerecent jurisprudence 4 has tended somewhat more to favourrecovery of unjust enrichment, but the Common Law is still veryfar from any general doctrine on the subject.

On the other hand, the rule that no man may enrich himselfunjustly at the expense of another is a general rule of the law ofQuebec.'

This general rule is sanctioned by the action de in remverso, which lies if there be enrichment ; 'impoverishment ; a con-nection between the enrichment and impoverishment; and nocontract, text of law or natural obligation to justify the enrichmentor impoverishment. In addition, some authorities hold that theaction will not lie if there is any other type of action that may betaken.

In the opinion of the writer this last requirement is notwell-founded and should rather be that no imperative rules of lawmay be evaded by the action .

A recent interesting application of the doctrine of unjustenrichment in Quebec is in the judgment of the Quebec Court ofAppeal in Poulin v. Corporation de la Municipalitë du Village deLa Patrw.6 The facts in this case are somewhat complicated.Poulin wished to purchase a farm . He induced the municipalcouncil of the ]Tillage of La Patrie to agree informally to loan himpart of the purchase price of a farm belonging to one Langlois,in return for his agreeing to sell to the Municipal Corporation astrip of land fifteen feet wide on either side of a creek on theLanglois farm. This strip was needed to improve a municipaldrainage ditch- but Langlois had always refused to sell it to themunicipality.

Langlois signed a promise of sale to Poulin for aprice of $8,025 .

The plan as conceived by Poulin and themunicipal corporation was that Poulin would purchase theproperty from Langlois and finance the purchase by borrowing$3,000 from the Credit Agricole, borrowing $4,000 from themunicipal corporation and supplying the balance of $1,025 fromhis own savings.

The Minister of Municipal Affairs in Quebecrefused to approve the loan from the municipal corporation toPoulin and it was suggested that the municipality buy the farmand resell it to Poulin .

It was then agreed informally betweenPoulin and the corporation that the corporation would purchase

3 [19141 A.C. 398, at p. 456 ; see also Baylis v. Bishop of London, [191311 Ch. 127, at p. 140 .

_4 Craven-Ellis v. Canons, [193612 K.B . 403 ; Brook's Wharf v. Goodman

Bros ., [19371 1 K.B. 534.s D'Orsonnens v . Christin-(1885), 30 L.C.J. 9, at p. 12 ; La Cie de Fret v.

St . Germain (1881), 26 L.C.J. 39, at p. 46 ; Gage Investment Inc . v. Menard(1931), 50 K.B. 315, at p. 323 ; Regent Taxi Co . v. La Congregation desPetits Frères de Marie, [19291 B.C.R . 650, at p. 690 .

1[19461 K.B. _783 .

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the property from Langlois for $8,025 and resell it to Poulin for$7,305, less a strip fifteen feet wide on each side of the creek.All these negotiations took time and it finally became urgentlynecessary to do something to prevent Langlois from withdrawingfrom his promise of sale ; to avoid this Poulin paid Langlois $1,025in cash.

Poulin took possession of the farm, worked it and continuedto work it even after a formal contract of sale of the property waspassed between Langlois and the corporation.

The sale price .of$8,025 under this contract was acknowledged by Langlois as paidin full when the corporation paid him $7,000. However, it latertranspired that Poulin was unable to borrow sufficient funds fromthe Credit Agricole and after several months he wrote to thecorporation stating that he was unable to carry out his undertakingto purchase the property from them. A few months later themunicipality sold the property to one Dumoulin for $5,605, butreserved a strip thirty feet wide on either side of the creek insteadof the fifteen feet on either side which it had been agreed wouldbe reserved if the purchase were made by Poulin .

At the thencurrent value of land, the price received by the municipality fromDumoulin, together with the value of the thirty foot strip on bothsides of the creek, was at least equal to the $7,000 which had beenpaid by the corporation to Langlois.

Poulin took an action de in rem verso against the corporationfor the sum of $1,025 paid by him to Langlois, by whichhe claimedthe corporation had been enriched to his detriment.

The actionwas dismissed in the court of first instance but on appeal thisjudgment was unanimously reversed . Marchand J. held that theaction de in rem verso was well founded because the payment of$1,025 by Poulin to Langlois had impoverished Poulin and at thesame time enriched the corporation, and there was no justificationfor the enrichment or impoverishment .

The corporation's claimthat the contract of sale between it and Poulin was justificationfor the impoverishment was rejected on the ground that no suchcontract of sale had ever been formally executed.

MontrealGEORGE S. CHALLIES

ABUSE OF RIGHTS -OWNER ERECTING FENCE- MALICE -ARTICLE 1053 OF THE QUEBEC CIVIL CODE -COMPARISON WITHTHE COMMON LAW RULE. - In the common law countries it isa familiar principle that an act, lawful in itself, will not be

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considered unlawful only because it is done with an improper oreven malicious motive . This rule was laid down in .unequivocalterms in the leading cases of Mayor of Bradford v. .Pickles' andAllen v. Flood.2 In both cases the House of Lords decided thatit is the act itself, not the motive for the act, which must beconsidered.

In France, on the contrary, the courts have held as far backas 1857 (Recueil Sirey 58.1.305), and in full accord with theviews expressed by many authors, that a bad motive may makewrongful an act otherwise legal. Many other examples could betraced in the French jurisprudence to support this theory .

In the Province of Quebec no reported case before 1944appears to have expressly decided the point. But it would seemthat a decision handed down on September 5th of that yearby Mr. Justice Alfred Duranleau of the Superior Court will gofar to settle the question definitely. The case is rodeur v.Choinière,3 in which the presiding judge held that the owner ofan immoveable had no right to erect a fence 47 feet long by 8Y2feet in height alongside his property, on the boundary line of aneighbour, with the sole purpose of depriving him of light andair. Consequently the learned judge granted the neighbour'sdemand for the demolition of the fence and damages.

All the circumstances of the case pointed unmistakably tothe defendant's malice, coupled with his desire to retaliate forprevious annoyances from the plaintiff . The two neighbours werealready on bad terms. The rough wood fence was hideous inappearance and had no spaces permitting the entry of air orlight. Furthermore it was unnecessarily high and provided noadvantage to the builder . As a final arrogant gesture of triumph,the defendant had hoisted a flag at the top of the fence.

Although the court may not have used strictly correctterminology in speaking of the abuse of proprietary rights, whichby their very nature are of the most absolute character, it seemsto me that there should be no difficulty in approving all thereasons given for the judgment, whicb concluded that thedefendant was delictually liable . As the court put it, " , . . it isevidently recognized by the doctrine that in theory the owner ofan immoveable may make use of his property in any way he likes,unless it is subject to some servitude for the benefit of the neigh-bouring property. He may modify, degrade or damage it andhe has the absolute right of erecting thereon any kind of works;

'[18951 A.C . 587.2 [18981 A.C . 1 .3 [19451 S.C . 334.

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but the rights of ownership are limited if they are abused, as inthe case where the owner exercises his rights only with the mali-cious intention of injuring another, without advantage to him-self or without serious motive" (translation). To me such abusdes droits de voisinage constitutes a particular kind of fault forwhich, under article 1053 of the Civil Code of Lower Canada, theauthor is responsible in damages.

The judgment presently discussed vindicates in clear-cutfashion the views neatly expressed in 1938 by Mr. George V. V.Nicholls in his book, The Responsibility for Offences and Quasioffences under the Law of Quebec,4 where the author wrote this :"In spite of the practical difficulty of proving intention, it isafter all logical that the French view should be adopted in Quebec .One of the purposes of law should be to see that a man suffers aslittle as may be at the hands of others . What better opportunityfor the law to interfere than in cases in which a person is mali-ciously causing damage to another without any correspondingadvantage to himself? A man has a perfect right to build on hisown property, but if it can be proved that he has built a highwall near the boundary line for no other purpose than to keepthe light from the windows of his neighbour's apartment house,why should he not be liable in damages?".

Mr. Justice Duranleau's judgment, with its moral andsociological significance, should afford real satisfaction, becauseit will not leave our Quebec jurisprudence open to a criticismsimilar to the one directed by Dr. Gutteridge against the rule ofthe common law: "Our law has not hesitated to place the sealof its approval upon a theory of the extent of individual rightswhich can only be described as the consecration of the spirit ofunrestricted egoism . . . The possibility that a legal right maybe exercised with impunity in a spirit of malevolence or selfish-ness is one of the unsatisfactory features of our law, and therewould appear to be a prima facie case for reform in this direction,a belief which is strengthened by the fact that ours is the onlymodern system which has not endeavoured to evolve some meansby which it may be ensured that a rule of law shall not be trans-formed into an instrument for the gratification of private spiteor the promotion of chicanery." 5

In conclusion, the dicta of our Quebec jurisprudence in thepast, speaking of liability for acts prima facie lawful but done with

4 McGill Legal Studies No. 1, at p . 28. Toronto : The Carswell Company,Limited .

5 H. C. Gutteridge : Abuse of Rights, 5 Camb. Law Jnl . 22 ; quoted inSalmond's Law of Torts (10th ed . by W.T.S . Stallybrass), at p . 28 .

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the sole intention of injuring another, will gain considerablestrength by the .judgment in the case of Brodeur v. Choinière.I hazard the opinion that those dicta, which have now beenreinforced by Mr. Justice Duranleau's judgment, will becomethe unquestioned law of Quebec under article 1053 of the CivilCode .

MontrealANDRÉ NADEAU

PRACTICE-ONTARIO-NOTICE OF TRIAL-TIME FOR SER-VICE-CONFLICT OF DECISIONS. -An interesting point of prac-tice is involved in a recent decision of the Court of Appeal,'which settles a conflict of opinion that has continued for someseven or eight years. The question involved is the calculation ofthe prescribed period before the commencement of the sittingsat which notice of trial must be served . As it is now well settledthat the court cannot force a party who is not asking for anindulgence to accept short notice of trial, the importance of thepoint cannot be overestimated.

The rule upon which this controversy depends reads . asfollows :

.

248 . Except in actions to be tried at Toronto, without a jury,-(a) Notice of trial . . . . . shall be served ten days before the dayfixed for the commencement of the sittings and before enteringan action for trial . . . .

Looking simply at the rule itself, it seems clear that supposinga sittings is scheduled to commence on, say, May 15th, then oneday "before the day fixed for the commencement of the sittings"would be the 14th, two days before, the 13th, and so on, untilit appears that ten days before the day prescribed is the 5th, whichis the day upon which, or not later than which, if the rule is givena benevolent interpretation, the notice must be served .2

But when the point was first raised before the Master in1939, 3 the Master, after setting out the rule in question, thenreferred to Rule 173(1) which reads as follows :

Where a number of days not expressed to be clear days is. prescribed,the same shall be reckoned exclusively of the first day and inclusivelyof the last day.

YNaughton v. C.P.R ., [1947] O.W.N . 328 .As will be noted in the quotations made later this is the primary

argument used in the Naughton case.3 Moray v . Wawanesa Mutual Ins . Co., [1939] O.W.N . 558 .

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The Master then points out that Rule 248 had been amended in1928, and that prior to 1928 it had read

(a)

ten days notice of trial shall be given before entering an actionfor trial .

He then is noted as having said : "In cases decided before1928 it was held that the last day must be interpreted as the dayfixed for the commencement of the sittings . A proper interpretation of the above Rules [prior to 19281 is that the first day,namely October 28th is excluded, and the last day, namely theday set for commencement of the sittings being the 7th day ofNovember is included, and on this basis of reckoning a properten days' notice [given on October 28th] would have beengiven . . .

"The words particularly to be noticed are `ten days beforethe day fixed for the commencement of the sittings' . This canonly be interpreted to mean that the last day is the day beforethe day fixed for the commencement of the sittings . . . If Rule173(1) . . . . is to have any application, then the first day,namely the 28th day of October, is to be excluded and the lastday, namely the 6th day of November, included . . . Unless thisinterpretation is placed upon the Rules, the word `before' inRule 248(a) has no significance . . . ."

The illogical nature of this argument seems perfectly clear.It involves reading into Rule 248(a) words that are not there.The Master is noted as having said in conclusion : "Upon a proper interpretation the last day is the day before the day fixed forthe commencement of the sittings". So Rule 248(a) is to be inter-preted as reading " . . . ten days before the day before the dayfixed for the commencement of the sittings . . .", which is notthe way the rule reads. Carried, of course, to its logical conclusionthis reasoning also leads to unexpected results . As sittings usuallycommence on a Monday, the day before the day fixed for thecommencement of the sittings is a Sunday, and under Rule 174"where the time for doing act or taking any proceeding expireson a holiday the act or proceeding may be taken or done on thenext judicial day". Rule 248(a) is reckoning backwards so apply-ing Rule 174 it would appear that where the day fixed for com-mencement of a sittings is a Monday, the day before the day sofixed is the Saturday and actually notice of trial must be giventwelve days before the commencement of the sittings . Perhapsit might be argued, however, that Rule 174, actually, wheresittings commence on a Monday, makes the day fixed for com-

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mencement of the sittings the last day despite this interpretationput on Rule 248(x) by the Master.a

The Master's decision does not appear to have been appealed .But the same point arose the following year and an appeal fromthe Master's order was dismissed. 5

So the matter rested until late in 1945 6 when a motion beforea local Master to strike out a notice of trial as being too latewas referred by the local Master to the Judge presiding at thesittings . The judge dismissed the motion? after making a carefulinvestigation of the authorities . The notè of the decision showsa brief but logical reasoning and rejects all the illogicality of theprior decision.

Shortly afterwards the point was raised by the court itselfin an undefended divorce action,$ the court in that case beingthe Master who had given the prior decision, now elevated tothe Bench. Naturally the prior decision prevailed and the noticewas struck out . In the note of his reasons the learned judge,speaking of the immediately preceding decision to the contrary,is noted as having said that it was clear that the authorities werenot before the court. But that was not the case, the authoritieswere all considered. 9

In 1947 the matter again came before the Master. Noticeof trial had been served January 3rd for sittings commencingJanuary 13th and the defendant moved before the Master tostrike out the notice of trial, and the Master allowed the applica-tion. The plaintiff appealed to a Judge in Chambers and he,considering the matter to have been wrongly decided in theprevious cases, referred the question to the Court of Appeal . 1 9

4 This only illustrates the confusion resulting from failing to give Rule248(a) its plain meaning. Resort to Rule 173(1) to assist the interpretationis entirely unnecessary .

s Fox v . Halifax Ins . Go . (1940), April 19th, unreported. This is not thedecision of the same name noted in [1940] O.W.N . 174 . Two motions weremade in that case before the Master, one to strike out a jury notice and oneto set aside the notice of trial. Both were appealed, but reasons were givenby the Master on the former only and the case is noted only on that point .

s In 1944 the Master applied the reasoning of the Moray case to Rule337(1) requiring an appointment for examination for discovery to be servedseven days before the date of the appointment : King v. McLean, [1944]O.W.N . 257.

" Stephens v . Pelletier, [1946] O.W.N . 64 . Before making that decisionChevrier J . made inquiries as to whether Fox v. Halifax Ins. Co . notedunder Rule 248(a) in Chitty's Annual Practice was the decision noted in [1940]O.W.N . 174, and, therefore, had the Moray case before him and disagreedwith it, though in the note of his judgment no mention is made of it.

8 Headrick v. Headrick, [1946] O.W.N . 162 . It is to be doubted whetherthe court had any right to raise the point ex mero mote . The court may haveno power to compel a party to accept short notice of trial, but a party maywaive notice of trial, and certainly may accept short notice.

s See footnote 7 ante.10 Naughton v . C.P.R . (supra) footnote 1, at p. 331 .

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The Court of Appeal" allowed the appeal and dismissed theapplication before the Master . The reasoning of the court issummed up in the following note of the reasons given : 12

If one examines the language of Rule 248, as quoted above, with-out reference to Rule 173(1) there is no ambiguity in the meaning oreffect of it . The event with reference to which time for the service ofa notice of trial is to be computed is `the day fixed for the commence-ment of the sittings', in this case the 13th January 1947 . One day beforethat fixed day in the ordinary sense and understanding of the languageused would be the 12th January. Likewise, ten days before would bethe 3rd January 1947 . Thus, a notice of trial served on 3rd Januarywould be served ten days before the day fixed for the commencementof the sittings and would be in accordance with Rule 248 .

The Rule is plain in meaning and application without resort tothe method of computing time as prescribed by Rule 173(1) . If however,the Rules be read together I would hold that the `last day', as describedin Rule 173, means in Rule 248, `the day fixed for the commencement ofthe sittings' . Thus, the same result is obtained whether one reads andapplies Rule 248 alone or with Rule 173 . By the latter method 3rdJanuary is excluded and 13th January is included, making the serviceof the notice of trial in this case good and sufficient . . . . .If it had beenintended by the revision of Rule 248 in 1928 to alter the practice andthe method of computing time for giving notice of trial as theretoforeexisting, that intention would have been plainly expressed."

This then settles the practice on the plain meaning of Rule248(a) until some future Rules Committee desiring to gild thelily again makes some refinement of the language of the Rulewithout any apparent intention to change its crystal-clearmeaning.

TorontoR. M. WILLES CHITTY

TAXATION - INCOME WAR TAX ACT - LEGAL EXPENSES ASA DEDUCTIBLE EXPENSE - The decision of Angers J. in theExchequer Court in Hudson's BayCompany v. Minister ofNationalRevenue 1 brings to five the number of Canadian cases dealingdirectly with the deduction of legal expenses in the computation

1 1 Robertson C. J. 0 ., dubitante, through the note of his judgment doesnot give reasons for his doubt.

~s Naughton v . C.P.R . (supra) footnote 1, per Laidlaw J . A . at pp. 330-1 .is Robertson C. J . 0 . is also noted as agreeing with this last conclusion,

at p . 328, where he is noted as saying : "I cannot believe that it was everintended, when Rule 248 was put in its present form on a revision of therules, that there should be any change in the very long standing practicethat requires only ten days' notice of trial, computed as Rule 173 provides" .

Unreported.

Comment based on lengthy excerpts in CCH TaxationReporter, volume 1, pages 8554 ff .

Since this note was written the full textof the decision has appeared in [19471 C.T.C . 86 .

It contains an excellentreview of the cases .

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of profits or gains under the Income War Tax Act.

In this caseit was held that legal expenses paid out to sue an infringer of atrade name were wholly, exclusively and necessarily laid out forthe purpose of earning the income and were not paid on account ofcapital and were thus deductible under the act. The bases ofthis decision will be referred to later, but it is desirable first toexamine one general observation arising out of the relevantCanadian decisions on the subject.

In Minister of National Revenue v. Kellogg Company ofCanada Limited Duff C.J. said :

. . , in the ordinary course legal expenses are simply currentexpenditures and deductible as such 2

_

which is a partial repetition of his own comment in Minister ofNational Revenue v. Dominion Natural Gas Co . Ltd. where hewisely went on to say: a

. . . but that is not necessarily so . The legal expenses incurred,for example, in procuring authority for reduction of capital were held bythe Court of Sessions not to be deductible in Thomson v. Batty .4

In fact, of the five Canadian decisions referred to in this note,three held legal expenses not to be deductible and two held themto be deductible . A survey of the relevant decisions in thevarious Commonwealth jurisdictions would probably show asomewhat similar ratio.' It seems likely that the learned ChiefJustice wasreferring to the fact that legal expenses are frequentlyincurred for a purpose that makes them chargeable to revenueaccording to commercial practice and deductible according toDepartmental practice . That is not the same thing as saying"legal expenses are simply current expenditures" and it is sub-mitted that the Chief Justice's dictum is misleading since there isno useful classification of "legal expenses" for the purposes of theIncome War Tax Act. , All "legal" expenses are not "current"expenses ; and all "current" expenses are not deductible . Expenses,"legal" or otherwise, to be deductible must fall within theexception to s. 6(1) (a) of the Income War Tax Act and not becovered by paragraph (b) of the same section, or any other expressprohibition in the act.

Section 6(1) provides, in part :6. In computing the amount of the profits or gains to be assessed,

a deduction shall not be allowed in respect of

2 [1943] S.C.R . 58, at p . 61 .3 [1941] S.C.R . 19, at p. 25 .4 [1919] S.C . 289.6 See Ratcliffe and McGrath : The Law of Income Tax, pp. 409-413,

1945 Cumulative Supplement, pp . 111-113, where 26 cases are considered,16 allowing deductions of legal expenses and 10 disallowing them . The listis not exhaustive ; e.g. it does not include Thomson v. Batty (supra).

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(a) disbursements or expenses not wholly, exclusively and necess-arily laid out or expended for for the purpose of earning theincome ;

(b) any outlay, loss or replacement of capital or any payment onaccount of capital or any depreciation, depletion or obso-lescence, except as otherwise provided in this Act ;

The whole difficulty in applying these sections lies in the factthat the words do not aptly describe ordinary commercial practicefrom which source such expressions as "current" and "capitalexpenditure" are borrowed .

The factual situations underlying four of the five cases beara striking resemblance and it presents some difficulty to appreciatethat two went in favour of the taxpayer and two in favour of theCrown.

The first was the Dominion Natural Gas case where theexpenses sought to be deducted were incurred in defending anaction brought by the United Gas Company in Hamilton againstDominion Natural Gas Company in the following circumstances .The Dominion Co. held a franchise to supply gas to the inhabitantsof the Township of Barton . The United Co. held a similarfranchise for the City of Hamilton .

In the course of years thecity extended its boundaries to include part of the township and,about 1930, the United Co. claimed exclusive rights in that partof Hamilton formerly Barton township territory, where theDominion Co. had continued to sell its gas. The matter wasfinally decided by the Privy Council in favour of the DominionCo. which incurred legal costs amounting to $48,506.94 in 1934and this amount was deducted in computing taxable income forthat year. The Minister disallowed it, the Exchequer Courtallowed the Company'sappeal,butthe Supreme Courtunanimouslyreversed the Exchequer Court and restored the Minister's assess-ment.

On the facts it is not difficult to see how the court heldthat the money was not wholly, exclusively and necessarilyexpended for the purpose of earning the income, particularlywhen it adopted the test of the Lord President Clyde in RobertAddie & Sons Collieries Ltd. v. C. I. R.,s as approved by the PrivyCouncil in Tata Hydro-Electric Agencies Ltd. v. C. I. R., 7

Is it a part of the Company's working expenses ; is it expenditurelaid out as part of the process of profit earning?

Whether this is a "test" or a mere restatement of the words ofthe act is open to doubt, but in either event, in applying the "test"or the act, the personal element must play a strong part in border-line cases.

It would seem no more difficult for a court to holde [19241 S.C . 231, at p . 235 .7 [19371 9.C . 685 .

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money paid to keep customers for one's gas was money spentdirectly for the purpose of earning the income received from thosecustomers .

ut the Supreme Court did not rest there.

They went onto hold that the legal expenses were a payment on. account ofcapital.

Both the Chief Justice, with whom Davis J. concurred,and Kerwin J., with whom Hudson J. concurred, stated the testof a capital expenditure set out by Viscount Cave in BritishInsulated & Helsby Cables v. Atherton : 8

But when an expenditure is made, not only once and for .all, butwith a view to bringing into existence an asset or an advantage for theenduring benefit of a trade, I think that there is very good reason (inthe absence of special circumstances leading to an opposite conclusion)for treating such an expenditure as properly attributable not to revenuebut to capital .

There is, perhaps, some doubt whether an action attacking theDominion Co.'s franchise might,be brought again, but there isno doubt that "an asset or advantage" was not brought intoexistence .

Rather, the money was spent to preserve or, protectan asset already in existence, quite a different thing.

Kerwin J.sensed this difference, although he evidently did not consider itmaterial, for when he quoted Viscount Cave's test again, twoparagraphs later, he changed the words to

It was a `payment on account of capital' as it was made (to useViscount Cave's words) `with a view of preserving an asset or advantagefor the enduring benefit of a trade' . 9

There is abig difference between the creation and-the preservationof capital, well recognized in commercial practice and, it is believed,by the income tax authorities themselves . For example, thepurchase of machinery for a manufacturer's plant is a capitalexpense. The expense of oil and grease to preserve the machineryis an operating expense and is deductible. Fire insurancepremiums on the plant and machinery are deductible, althoughpayments under the policy in the event of a fire are capitalreceipts. How are these expenditures made for the purpose of"earning the income"? The Supreme Court, having adoptedan English test as applicable in Canada, where the words ofour act differ from the English act, would seem to have departedunnecessarily from "sound" commercial practice in this case inextending the test beyond its original scope.

The Hudson's Day case presents some nice problems ofdistinction on facts from the Dominion Natural Gas case .

In thes [19261 A.C . 205, at p . 213 (italics mine) .' [19411 S.C.R . 19, at p. 31 (italics mine) .

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former, Hudson's Bay Co. in Canada claimed a perpetual injunc-tion in the United States District Court for the Western Districtof Washington against the Hudson Bay Fur Company, Inc. torestrain the defendant from using the name Hudson Bay, or anycolourable combination of the words likely to mislead theircustomers into thinking they are doing business with the historicHudson's Bay Co. At the trial several witnesses testified thatthey had dealt with the Hudson Bay Fur Company believing thatit was a branch or subsidiary of Hudson's Bay Co. and that theywould not have dealt with it had they known the facts. AngersJ. quoted the appellant's brief

This litigation was incurred to protect the name, reputation andgoodwill of appellant and to turn customers from Hudson Bay FurCompany to appellant and to make a profit from the sale of its goods ;the suit was not brought to defend its corporate rights, but to protectits trade name and trade.

In the course of this litigation Hudson's Bay Co. incurred costsamounting to about $33,000 spread over two years. In 1938the Co. deducted $10,377 and the Minister allowed it . In 1939the Co. deducted $22,953 but by the time the assessment wasmade the decision of the Supreme Court in the Dominion NaturalGas case had been handed down and the Minister disallowed thededuction and reopened the assessment of the previous year anddisallowed that deduction as well . Angers J. reversed theMinister's decision. The difficult problem of distinguishing theDominion Natural Gas case did not trouble Angers J. greatly,although it is not easy to see how he circumvented the extensionof Viscount Cave's test .

Apparently he considered the distinctionbetween procuring assets and preserving assets of some importancefor he said :

The legal expenses and costs laid out by the appellant to protectits trade name, business and reputation were not incurred with theobject of creating or acquiring any new asset but were incurred in theordinary course of protecting and maintaining its already existing assets .On the other hand, I do not believe that these expenses and costs canbe considered as being a capital outlay or loss.

. . . There was no new asset brought into existence by theseproceedings. The expenses were incurred in the ordinary course ofmaintaining the already existing assets of the Company .

It is submitted that this is eminently sound sense but that it is notreconcilable with the Supreme Court decision . It is to be notedfurther that Angers J. derived considerable assistance from anEnglish decision, Southern v. Borax Consolidated Limited,10

11 [194014 All E.R . 412 .

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where the question was whether legal expenses of an actionagainst the taxpayer putting in question its title to property inCalifornia bought by the City of Los Angeles were deductibleunder the English act. ®n the question whether this was a capitalor a revenue expense Lawrence J. said, after referring to ViscountCave's test :

Thus, if it could be said here that this expenditure had in anyway altered the original character of the capital asset which was acquiredby the respondent company, I should have taken the view that thepayment was in respect of capital, but, as, in my opinion, the capitalasset of the respondent company remained absolutely unaltered, thatpayment is properly attributed to revenue u

and later he said,It appears to me that the legal expenses which were incurred by

the respondent company did not create any new asset at all, but were ex-penses which were incurred in the ordinary course of maintaining theassets of the company. . 12

The Borax case is also consistent with commercial practiceand it is remarkable that Mr. President Thorson did not followit in his decision in Siscoe Gold Mines Limited v. Minister ofNational Revenue 11 where he held, according to the headnote :

That legal expenses incurred by a taxpayer in maintaining thetitle to his property. . . are not expenditures directly related to theearning of his income and are not allowed as deductions in computinggain or profit to be assessed .

The facts of the case are quite complex, and not all relevant to thepresent discussion, but part of the legal expenses were incurredin defending title . In that aspect, the facts seem to be on allfours with the Borax case, of which Thorson P. remarked :

In view, of the principles laid down in the Dominion Natural GasCompany' case and the Montreal Coke Company case 14 which are bindingupon this Court, the decision in Southern v . Borax Consolidated Ltd.should not, in my opinion, be regarded as an authority to be followedin construing s . 6(a) of the Income War Tax Act15

Before examining the Montreal Coke case it will be desirable torefer briefly to the Kellogg case to compare its factswith the othercases.

In this case the Kellogg Co. of Canada manufactured aproduct labelled "Shredded Wheat". The Canadian ShreddedWheat Company, Ltd., as plaintiff, sought to restrain the Kellogg

u Ibid . at p. 418.12 Ibid . at p. 419 .13 [19451 Ex. C.R . 257 .14 Montreal Coke and Manufacturing Company v . Minister of National

Revenue, [194411 All E.R . 743 .15 [19451 Ex . C.R . 257, at p . 265 .

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Co. from using these words, or any colourable imitation, as con-stituting an infringement of certain registered trade marks.The Privy Council held that the Kellogg Co. shared with thegeneral public a common law right to use the label "ShreddedWheat" . The Kellogg Co. paid out $16,978.81 in two years inconnection with the litigation, which it sought to deduct fromits income for these years. Maclean J. evidently appreciatedthe distinction between creation and preservation of capitaland stated, by way of distinguishing the Dominion Natural Gascase :

Applying that test to the present case, the payment here madewas not, T think, an expenditure incurred or made `once and for all', witha view of bringing a new asset into existence, nor can it, in my opinion,properly be said that it brought into existence an advantage for theenduring benefit of Kellogg's trade within the meaning of the well knownlanguage used by Lord Cave. . is

In short Maclean J., like Angers J., simply ignored the extensionof the test implicit in the Supreme Court judgments and, it issubmitted, properly applied the test to the facts before him.He further attempted to distinguish the facts by suggesting thatthe Supreme Court considered that the "advantage of enduringbenefit" was the franchise rights which "comprised the foundationand totality of all its (the Dominion Co.) assets". Little canturn on this distinction, it is submitted, for the facts do not showthat all the rights and privileges of the franchise were questionedin the action ; only the right to sell to customers living in that partof Hamilton formerly Barton. The franchise to sell to that partof Barton not incorporated into the city wasunaffected . MacleanJ.'s judgment was appealed to the Supreme Court, perhaps inthe hope that the court would correct its earlier judgment, butthe decision on appeal, read by Duff C.J., adds little to the rule .He merely said that Kellogg's right to trade

was not a right of property, or an exclusive right of any description,but the right (in common with all other members of the public) todescribe their goods in the manner in which they were describing them?7

That does not seem to be a helpful criterion, that the protectionof an exclusive right is a capital expense but the protection of abasic common law right shared with the public, to do business asyou have been doing, is a revenue expense. Surely no matter howcommon the right, its value and fundamental importance is greatif it is attacked by an outsider. The court could have treatedthese expenses as capital just as easily as they did the expenses

is [1942] Ex. C.R . 33, at p . 43 .~' [1943] S.C.R . 58, at p. 61 .

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in the Dominion Natural Gas case, but they evidently preferredinstead to ignore their earlier decision and follow commercialpractice .

It is submitted that the cause of this difficulty lies in themeaning to be attributed to s. 6(1)(b) which disallows the deduc-tion of any expenditure "on account of capital" .

These expresswords do not appear in the English act on which Viscount Cave'stest is based, yet without his test the expenditures in the Hudson'sDay çase, the Siscoe Gold Mines case, the Kellogg case and theDominion Natural Gas case could all be said, in a literal sense, tobe payments on account of capital. Yet "sound" commercialaccounting would have treated them as chargeable to operatingexpenses . Consequently s. 6(1) (b) must be read restrictivelyunless commercial practice is to be ignored and the question thenremains, what restriction is placed, by s. 6(1) (a), on the accountingpractice of charging maintenance to operating expenses .

It is in answering this question that the Montreal Coke caseacquires great significance . In that case the Montreal Coke andManufacturing Co. called in certain bonds and issued new onesat a reduced rate of interest . Obviously with a lower interestpayment there is bound to be a relative increase in earnings.For this reason it was argued that the expense of "refinancing"was deductible as wholly, exclusively and necessarily laid out forthe purpose of earning the income . However there seems tohave been unanimous judicial opinion in Canada (with theexception of the dissenting views of Rinfret and Taschereau JJ.) ,and in the Privy Council that the deduction was prohibited bys. 6(1)(b) as a payment on account of capital. Put the SupremeCourt of Canada to a less extent, and Lord Macmillan almostentirely, rested their decisions on an interpretation of s. 6(1) (a).On the effect of s. 6(1)(b), which seems to be clearly applicablein this case, where the expense was concerned directly with thecreation of capital by extinguishing a more expensive kind andreplacing it with a less expensive kind, Lord Macmillan said

In the Courts in Canada the deductions claimed were held to bestruck at both by para (a) of section 6 as not being expenditure for thepurpose of earning the income and by ,para (b) as being payments onaccount of capital.

It may well be that items of expenditure may beopen to both objections. The first objection which their Lordshipsuphold, is sufficient for the disposal of the cases but their Lordships inno way dissent from the view that the second objection also appliesis

It is submitted that their Lordships would have been morehelpful had they proceeded on the basis of s. 6(1) (b) alone and

18 [194411 All E.R . 743, at p. 747 .

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held that when an expense may be said to come under s. 6(1)(b)as a payment on account of capital in the accepted commercialsense, as it does in this case, then it is not allowable as a deduction,and s. 6(1) (a) need not be considered . It could then be held, inan appropriate case, that an expense not caught by s. 6(1) (b) mustnext be considered under s. 6(1) (a).

In this case it should makeno difference whether the expenditure was for the purpose ofearning income or not, because it was clearly on account of capitaland prohibited in any event by s. 6 (1) (b).

Instead of approachingthe case from this view, the Privy Council placed an extendedmeaning on the words of s. 6(1)(a) which quite possibly were notintended to deal with the problem of capital expenses at all .Speaking of a capital expenditure and with reference to s. 6(1)(a),Lord Macmillan said

Expenditure to be deductible must be directly related to the earningof income . The earnings of a trader are the product of the tradingoperations which he conducts. These operations involve outgoings aswell as receipts and the net profit or gain which the trader earns is thebalance of his trade receipts over his trade outgoings . It is not thebusiness of either of the appellants to engage in financial operations .The nature of their businesses is sufficiently indicated by their titles.It is to these businesses that they look for their earnings . Of course,like other business people, they must have capital to enable them toconduct their enterprises, but their financial arrangements are quitedistinct from the activities by which they earn their income.l 9

It seems fair to say that these words could apply equallyto any expenditure to protect, preserve or maintain capital andyet, if such expenses are taken out of the operation of s. 6(1)(b),it is a pointless achievement unless they are also brought withinthe exception of s. 6(1)(a). There seems to be a hiatus betweenwhat the business man regards as "operating expenses", which theDepartment usually allow as deductible, and the words "wholly,exclusively and necessarily laid out for the purposes of earningthe income" as used in the act and interpreted by the courts.What could happen to these sections if construed literally mayonly be surmised . The weakness in the suggestion that thecourts should follow what I have referred to glibly as "sound"commercial accounting is that in borderline cases the accountantis in the same state of uncertainty as the lawyer, as a referenceto standard works on accounting will quickly show . 2 0 Since

11 Ibid . at p . 746 .2° See e.g . Finney, Principles of Accounting (1946), at p. 294 :

"Thedetermination of the proper classification of an expenditure is not alwaysan easy matter .

Attempts have been made to state principles or lay downrules, but the principles and rules are not always susceptible of exact inter-pretation or application."

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neither judicial definition nor commercial practice is referableto specific cases with sufficient certainty, the solution will lie in astatutory test with explicit rules for the most frequently recurringfact situations . In the meantime it is perhaps wiser to assumethat the courts are deciding each case on its own facts and are notsetting forth rules of interpretation for future cases."

Admittedlythis reduces the reliability of prediction, but a study of the casessuggests that prediction based on them will be unreliable anyway.22As Angers J. said in the Hudson Bay case, referring to the decisionsrelied upon by the Supreme Court in the Dominion Natural Gascase, only a few years before :

I may note that the doctrine has evolved appreciably since thesejudgments were rendered.

The doctrine will doubtless continue to evolve, andin a continuallyhaphazard fashion, until competent experts in taxation, law andaccounting within the Department frame more adequate anddetailed rules. ,, It is submitted that it should not be left to thecourts for the simple reason that litigation depends too muchupon the financial position of the taxpayer affected.

Dalhousie Law Schoof

THE COSTS OF LITIGATION IN 1863

J. B. MILNER

Cheap law like cheap whiskey is a curse to a people . This is a triteremark, often made, but not always understood. There is a fascinationabout litigation, which some men cannot resist . The cheaper the cost oflitigation, the greater is the fascination. (9 Upper Canada Law Journal85)

21 Note the cheerful optimism of Lord Hanworth M.R. in Mitchellv . B. W. Noble Ltd., [1927] 1 K.B . 719, at p . 737 : "I respectfully share the,view of Lord Buckmaster that it is not easy to find much help from theparticular facts of decided cases ; nor is it easy to define the limits of theprinciple upon which one is acting. At the same time I think in a concretecase it is possible to determinewhether an expenditure is a capital expenditureor rightly to be attributed to revenue."

22 In recent Privy Council decisions on the Income War Tax Actreferences to cases are conspicuously absent .

22 Such a revision is evidently in the offing .

See Hon . D . C . Abbott'sBudget Speech, House of Commons Debates, 1947, pp . 2625-2626 .