CONTRACTS FINAL OUTLINE (April 2016) – Jayde Jessome

Parol Evidence Rule (Extrinsic Evidence, Entire Agreement Clauses)................2How to Apply Parol Evidence Rule.......................................................................................................2Case Briefs.......................................................................................................................................... 3Standard Form Contracts & Exclusion Clauses................................................3Principles of Interpretation/Strict Construction....................................................................................3

Case Briefs....................................................................................................................................... 4Standard Form Contracts.................................................................................................................... 4Signed Documents/Reasonable Notice Doctrine.................................................................................4

Case Briefs....................................................................................................................................... 4Doctrine of Fundamental Breach.........................................................................................................5

Case Briefs....................................................................................................................................... 5Mistake.........................................................................................................7Mutual Mistake.................................................................................................................................... 7

Case Briefs....................................................................................................................................... 7Unilateral Mistake................................................................................................................................ 8

Snapping Up/Mistake as to Terms....................................................................................................8Case Briefs....................................................................................................................................... 8

Common Mistake................................................................................................................................. 8Common Law/Mistaken Assumption................................................................................................8

Equitable Mistake................................................................................................................................ 8Case Briefs....................................................................................................................................... 9

Mistaken Identity............................................................................................................................... 10Case Briefs..................................................................................................................................... 11Common Law Solution...................................................................................................................12

Mistake in Written Record................................................................................................................. 12Case Briefs..................................................................................................................................... 12

Documents Mistakenly Signed..........................................................................................................12Case Briefs..................................................................................................................................... 13

How to Approach a Mistake Question................................................................................................13Frustration..................................................................................................14Test................................................................................................................................................... 14Historical Development..................................................................................................................... 14Remedy............................................................................................................................................. 14Case Briefs........................................................................................................................................ 15Control of Contractual Power.......................................................................15Duress............................................................................................................................................... 15

Categories...................................................................................................................................... 16Test................................................................................................................................................ 16Case Briefs..................................................................................................................................... 16

Undue Influence................................................................................................................................ 17Categories...................................................................................................................................... 17Test................................................................................................................................................ 17Case Briefs..................................................................................................................................... 17

Unconscionability.............................................................................................................................. 18Test................................................................................................................................................ 18Case Briefs..................................................................................................................................... 18Statute........................................................................................................................................... 19

Illegality & Public Policy..............................................................................19Categories......................................................................................................................................... 20Restraint of Trade.............................................................................................................................. 20

Severance...................................................................................................................................... 20

Case Briefs..................................................................................................................................... 20Other Public Policies.......................................................................................................................... 21Statutory Illegality............................................................................................................................. 21

Case Briefs..................................................................................................................................... 21Effects of Illegality............................................................................................................................. 21Good Faith/Duty of Honest Performance...........................................................................................21

Case Briefs..................................................................................................................................... 22Consumer Protection...................................................................................22Legislation......................................................................................................................................... 22

Sale of Goods Act...........................................................................................................................22Business Practices and Consumer Protection Act..........................................................................22

Policy................................................................................................................................................. 23Case Briefs........................................................................................................................................ 23Commercial Practice & Contract Drafting......................................................24Principles of Effective Drafting..........................................................................................................24Building Blocks of a Contract.............................................................................................................24Common Law Remedy – Damages.................................................................25Expectation Measure of Damages.....................................................................................................26Reliance Measure of Damages..........................................................................................................26

Case Briefs..................................................................................................................................... 26Loss of Chance.................................................................................................................................. 27

Case Briefs..................................................................................................................................... 27Cost of Completion vs. Difference in Value.......................................................................................27

Case Briefs..................................................................................................................................... 27Remoteness....................................................................................................................................... 29

Test................................................................................................................................................ 29Case Briefs..................................................................................................................................... 30

Loss of Enjoyment/Mental Distress Damages....................................................................................31Test................................................................................................................................................ 31Case Briefs..................................................................................................................................... 31

Punitive Damages............................................................................................................................. 32Test................................................................................................................................................ 32Case Briefs..................................................................................................................................... 33

Mitigation.......................................................................................................................................... 33Case Briefs..................................................................................................................................... 34

Liquidated Damages, Deposits & Forfeitures....................................................................................34Case Briefs..................................................................................................................................... 34

Equitable Remedies.....................................................................................35Specific Performance......................................................................................................................... 35

Defenses........................................................................................................................................ 35Case Briefs..................................................................................................................................... 35

Injunction.......................................................................................................................................... 36Case Briefs..................................................................................................................................... 36

Appendix 1 – Chart on Duress, Undue Influence & Unconscionability..............37Appendix 2 – Chart on Cause & Effect of Each Principle.................................38Appendix 3 – Checklist.................................................................................39

Parol Evidence Rule (Extrinsic Evidence, Entire Agreement Clauses)

Parol = verbal expressions or words1

Excludes from the courts’ consideration evidence as to oral/written statements preceding or contemporaneous with the completion of the written contract

Purpose : to achieve finality and certainty in contractual obligations and to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (Sattava) helps to prevent fraud, enhance efficiency, prevent unfair surprise, etc.

Very little residual practicality because exceptions have largely “swallowed” the rule EXCEPTION: rectification allows proof by extrinsic evidence that the parties made an

agreement, but then recorded it incorrectly, so that the court may correct the inaccurately written document

Section 187 of the Business Practices and Consumer Protection Act says: “a provision in a contract or a rule of law respecting parole or extrinsic evidence does not operate to exclude or limit the admissibility of evidence relating to the understanding of the parties as to the consumer transaction or as to a particular provision of the contract”

How to Apply Parol Evidence Rule(1) Determine whether the oral representation is a warranty(2) If yes, harmonize (read together) with the signed document if possible

(a) If there is no contradiction, there is no problem(b) If there is a contradiction, there is a strong presumption that the written contract governs

Presumption in favor of written K increases Adds a term varies contradicts

Factors to consider: Nature of the change/conflict and how serious it is Nature of the document intended to be whole agreement, entire agreement clause, clarity

of wording, knowledge of parties Bargaining relationship power, standard form K, past relations and experience Nature of the representation quality and credibility of the evidence, clarity and specificity,

significance Entire agreement clause holds more weight if shown to party, holds less weight if part of

standard form, general vs. specific exclusion clause and representation (Zippy Print)

Extrinsic evidence can be introduced: When the written agreement is not the whole contract To clear up an ambiguity in a contract To show that the contract is invalid because of a lack of intention, consideration, or capacity To show that there was a misrepresentation that was either innocent, negligent, or

fraudulent To show that there was some mistake as to the nature or effect of the contract To correct an error/mistake in putting the contract in writing (rectification) To show that there was a condition precedent to the contract taking effect To show that was a separate agreement along with the written agreement (collateral

contract/warranty/agreement) To show that the transaction was brought about through unconscionable means To show that the contract has been modified/terminated In support of a claim for an equitable remedy

Extrinsic evidence cannot be introduced: To provide evidence of subjective intentions of the parties According to Hawrish, to introduce evidence of a collateral agreement that contradicts the

written contract

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Case Briefs Hawrish v. Bank of Montreal (SCC, 1969) parol evidence of a distinct (independent)

collateral agreement that does not contradict the main agreement is admissibleo Parole evidence rule didn’t apply here because the oral evidence was in plain

contradiction of the terms in the guarantee Bauer v. Bank of Montreal (SCC, 1980) collateral agreement cannot be inconsistent with

written contracto Provision in the agreement that parties orally decided could not be used if one party

breached its undertakingo Court found it difficult to find evidence of this collateral agreement, and in any event it

would contradict the written contract so parol evidence rule cannot applyo Recognized an exception to the principle that agreements cannot contradict one

another: if the contract is induced by an oral misrepresentation that is inconsistent with the written contract, the written contract cannot stand

Gallen v. Allstate Grain Co. (BCCA, 1984) reformulated PER into a presumptiono Provision in the K said that AG gave no warranty as to the productiveness of the

buckwheat, but AG gave oral assurances that it would smother weeds (which it did not end up doing)

o Court found no contradiction between oral warranty and signed document, so the oral warranty has contractual effect and AG is liable for breaching it

o Eight points about PER :(1) If there are two agreements about the same subject matter and they contradict

each other, the oral one is assumed to have never been made(2) Rule should not be absolute b/c shouldn’t protect unscrupulous(3) Fact that evidence in Hawrish and Bauer was considered indicates that the rule was

not meant to be absolute(4) If contract is induced by an oral misrepresentation that is inconsistent with written

contract, the written contract cannot stand(5) Rule not applied with equal force in all situations (distinguishes between

contradicting the written agreement and merely subtracting from, adding to, or varying it)

(6) Rule only a strong presumption, and is strongest when parol evidence actually contradicts the written agreement(7) Presumption is stronger when individually negotiated than if standard form K(8) Presumption is less strong when oral agreement is specific and written agreement

is more general

Standard Form Contracts & Exclusion Clauses Principles of Interpretation/Strict Construction

Contractual interpretation aimed at ascertaining the true intentions of the parties at the time the contract was signed courts apply an objective approach to determining intentions

Consider: factual matrix, commercial context, and surrounding circumstances General rule is that evidence of prior negotiations is inadmissible for the purpose of

construing the final agreement Interpretation must give effect to all parts of the contract no provision of an agreement

should be interpreted to be redundant Although English courts have stated that it is not legitimate to examine subsequent conduct,

Canadian courts have generally taken a more flexible viewo When there are two reasonable interpretations of a provision then evidence of

subsequent conduct “may be admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable interpretations is the correct one” (Re CNR & CP)

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Related agreements may be taken into account where the agreements are components of one larger transaction

Words are to be given their natural or ordinary meaning evidence may be admitted to prove that a word has a special or technical meaning

Contra proferentem: where a contract has been drafted by one of the parties, any ambiguities in it are likely to be construed against that party and in favor of the other (Mobil Oil)

Very clear words must be employed in order for one party to protect itself from liability for negligence

Where a defendant is potentially subject to two liabilities (strict liability and negligence), general words of exclusion will not be construed as protecting the defendant from negligence; however, where a defendant’s potential liability rests only in negligence, general words of exclusion are capable of covering negligence (since otherwise the clause would lack subject matter)

House of Lords has suggested that clauses limiting liability should not be regarded with the same hostility as those excluding liability (should be construed more broadly)

Case Briefs International Terminal Operators (SCC) relaxed the principle that negligence had to be

addressed specifically by the exclusion clause Bow Valley Husky (SCC) suggested that a different approach should be adopted for the

construction of clauses that expressly provide for “the assumption of liability limited to a specific circumstance” as opposed to those that provide for general exclusion from liability

Standard Form Contracts Business to business contract transactions that follow a standard layout May be signed (contracts) or unsigned (tickets/oral agreements) Offer a level of certainty and predictability (should be consistently interpreted) BENEFITS: efficiency and bargaining made faster, facilitates shopping b/c can compare

various rates, facilitates administration of K b/c both parties understand the duties, etc. CONCERNS: terms imposed by stronger party (“take it or leave it”), fairness/knowledge of

terms, broad exclusions of liability

Signed Documents/Reasonable Notice Doctrine Traditional view that a signature on a document containing terms established assent to those

terms; contract binding whether or not the party actually read the document (L’Estrange) this is also the case for signed waivers for risky activities

Doctrine also applies to unsigned documents (tickets) that come from trains, buses, movies, amusement parks, parking, museums, skiing, etc.

Common law courts have developed a doctrine of reasonable notice: if there is no knowledge of conditions, a person is bound to conditions if there was reasonable notice of them

Decision in Tilden has not been largely upheld courts continue to uphold standard form contracts and signed waivers of liability even when they have not been read

Case Briefs Tilden Rent-A-Car Co. v. Clendenning (Ont. CA, 1978) if there is an onerous provision in a

contract, one party cannot rely on it if he/she does not alert the other party to the provision and knows that the other party has not read it

o C signed contract to rent a car without really reading it (which clerk knew) so didn’t notice a clause that said he would be fully liable for damage if he drove after having consumed alcohol, consumed alcohol and drove, damaged the car

o Court said Tilden cannot rely on provisions which it had no reason to believe were being assented to by C; no consensus ad item (meeting of the minds)

o Dissent affirmed signature/signed documents rule and expressed concern for certainty, business efficacy, and market ordering

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o Note this has not been largely applied by courts Parker v. South Eastern Railway (Eng. CA, 1877) where a written document contains

conditions but the document is not signed and the party did not know of the conditions, evidence is required to show assent to terms

o Ticket received for storing a bag at a railway, the bag got lost, but the ticket limited damages to 10 pounds

o Evidence required to prove assent to terms: may be actual knowledge that the document contains conditions or reasonable steps taken to provide notice that the document contains conditions

o P held to be bound by the conditions on the ticket because he knew that it contained writing (though he didn’t read it), the ticket said “see back”, and there were posted notices to the same effect

Thornton v. Shoe Lane Parking Ltd. (Eng. CA, 1971) notice that there is a condition is not sufficient; must also be knowledge of conditions generally or the particular condition specifically

o Conditions posted in a parkade that people “park at their own risk”, T got in an accident on the premises

o Court held that Shoe Lane could not rely upon this exclusion because there was insufficient notice and T did not have actual knowledge of the condition

Karroll v. Silver Star Mountain Resorts Ltd. (BCSC, 1988) no general requirement to take reasonable steps to ensure that party signing onerous terms reads/understands them; such reasonable steps only required where a reasonable person should have known that signing party was not consenting to the terms (misrepresentation)

o K sustained a broken leg while participating in a downhill skiing competition at Silver Star, but K had signed a contract protecting SS against all claims of injury

o Court said the starting point is the L’Estrange rule : doesn’t matter if a party knew what the contract said as long as they signed it

EXCEPTIONS (L’Estrange): circumstances made signature not the plaintiff’s act, or where agreement was induced by fraud or misrepresentation

EXCEPTION (Tilden): where party seeking to enforce knew/had reason to know of the other’s mistake as to terms this case alters this exception by holding that Tilden is a limited principle, only applicable in special circumstances where one party knew or had reason to know of the other’s mistake as to the contract’s terms

o Court held K to be bound by the terms she signed because she knew it was a legal document affecting her rights and she doesn’t fit within any of the exceptions

o SS not required to take reasonable steps to bring terms to K’s attention and had no reason to think that K was not agreeing to the terms

Doctrine of Fundamental Breach A party cannot rely on an exclusion clause where it has committed a fundamental breach of

contract (breach that goes to the root of the contract) Contrasting argument that can be advanced is sanctity of contract; that contracts should be

enforced regardless of the stringency of their terms limiting liability because parties require certainty that negotiated provisions will be legally enforceable (Plas-Tex) exception: when party has engaged in unconscionable conduct

Doctrine laid to rest in Tercon use “Tercon test” from dissent

Case Briefs Karsales (Harrow) Ltd. v. Wallis (Eng. CA, 1956) a breach which goes to the root of the

contract disentitles the party from relying on the exemption clauseo Plaintiff company bought a car for defendant to lend out on hire-purchase terms which

took a while, so by the time W saw it again after his initial inspection it was so damaged that it was undriveable so refused to take it/pay for it

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o Plaintiff sued for the money, arguing that the hire-purchase contract contained a clause that there was no warranty as to the vehicle’s roadworthiness

o Court found that in this type of agreement, where the hirer has examined the car, there is an obligation on the lender to deliver the car in substantially the same condition (implied term) this breach went to the root of the contract

o Exemption clauses can’t be used as a cover for misconduct Suisse Atlantique v. NV Rotterdamsche (HL, 1967) fundamental breach is not a rule of law,

but merely a rule of construction Photo Production v. Securicor Transport Ltd. (HL, 1980) there is no rule of law that an

exclusion clause does not apply in cases of fundamental breacho Contract between parties contained an exclusion clause saying that security wasn’t

responsible for any injurious act by its employees, premises burnt downo The doctrine of fundamental breach would mean this exclusion clause wouldn’t apply

b/c the breach went to the root of the contracto Court held that the fundamental breach brings contractual obligations of performance

to an end (innocent party can repudiate the contract)o The exclusion clause survives the issue is just whether the clause applies to the loss

in question, which is merely a question of interpretation Hunter Engineering Co. Inc. v. Syncrude Canada Ltd. (SCC, 1989) if there is a doctrine of

fundamental breach, it is only a rule of constructiono Contract b/w parties allowed for a 1 year warranty but excluded liability after thato Dickson’s judgment even though Canadian courts call the fundamental breach

doctrine a rule of construction, in reality it functions as a rule of law Problems with fundamental breach doctrine: uncertainty, exclusion clauses

often fair and reasonable, unfair surprise, unjust enrichment, unevenness (other clauses can be just as harsh)

Solution to all of these problems: doctrine of unconscionability Ruled that the exclusion clause in this case should be upheld because it is clear

and unambiguous and there is no evidence of unconscionabilityo Wilson’s judgment doctrine of fundamental breach should be retained as a rule of

construction Exclusion clauses need not be fair and reasonable at the time the contract is

made to be enforceable; courts are not in a position to second-guess parties Using unconscionability as a doctrine to control exclusion clauses is problematic

b/c unconscionability is assessed at the time of contract formation (and an exclusion clause may be fair at the beginning but become unfair later)

Courts should have residual power based on policy Plas-Tex Canada Ltd. v. Dow Chemical of Canada Ltd. (SCC, 2005) a party cannot engage

in unconscionable conduct secure in the knowledge that no liability can be imposed upon it because of an exclusionary clause

o Defendant sold plaintiff defective product, knowing it was defective, and tried to rely on a clause in their contract that said the plaintiff accepted all liability for loss

o Since the defendant knew of the defects and the danger it would cause, withholding this info was unconscionable and they cannot rely on exclusion clause

Tercon Contractors Ltd. v. British Columbia (SCC, 2010) time has come to lay the doctrine of fundamental breach to rest

o BC accepted a bid from a bidder that was not eligible for participate and then tried to conceal this fact, dissent contains current test

o Key principle of contractual interpretation provisions are not isolated, must be considered in harmony with the rest of the contract

o BC not entitled to rely on the exclusion clause (but not because of fundamental breach doctrine); dissent said they would have upheld the exclusion clause

o Dissent said that exclusion clauses should be upheld unless there is a paramount public policy consideration sufficient to override freedom of contract

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Says courts should consider:(1) Whether as a matter of interpretation the exclusion clause even applies

to the circumstances established in the evidence (depends on intention of parties);

(2) If the exclusion clause applies, whether the exclusion clause was unconscionable at the time the contract was made as might arise from

situations of unequal bargaining power between the parties (has to do with contract formation, not breach); and

(3) Even if the exclusion clause is held to be valid and applicable, the court may still consider whether they should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of that clause, that outweighs the very strong public interest in the enforcement of contracts (criminality, fraud, or illegality)

Mistake Circumstances where a party to a contract may avoid liability because he/she has entered

into a contract on the basis of a mistake A mistaken party is often left to bear the cost of their own mistake (caveat emptor)

arguing for relief on the basis of mistake is a last resort Three types of operative mistaken assumptions where the effect of the mistake nullifies

consent so that no contract is formed/contract is void (Bell v. Lever):(1) Identity of contracting parties intention is to contract with specific individual only(2) Existence of subject matter res extincta (where subject matter of a contract is assumed

to be in existence by both parties but in fact is not) and res sua (contract for sale of an item you already own)

o BUT the case is different if the seller promised that the subject matter existed or that they owned the thing in question

(3) Quality of subject matter where both parties’ mistake is to the existence of some quality which makes the thing without the quality essentially different from the thing as it

was believed to be (must be a fundamental underlying assumption)

Mutual Mistake Where each party makes a different mistake as to terms When each party thinks the agreement contains terms different from those the other party

believes it to contain Court must determine if there was a valid contract between parties

Case Briefs Staiman Steel Ltd. v. Commercial & Home Builders Ltd. (Ont. HC, 1976) in a case of mutual

mistake, court must decide what reasonable third parties would infer to be the contract from the words/conduct of the parties

o Buyer made successful bid on “all the steel in the year”, buyer thought this included building and used steel but seller meant just used steel so wouldn’t deliver all of it to buyer

o Court found that a contract had been formed, and seller breached it courts will generally only hold that no contract was formed where the circumstances are so ambiguous that a reasonable bystander could not infer a common intention

o Buyer’s expectations unreasonable, buyer was acting opportunistically and trying to take advantage of ambiguity in the words used

Unilateral Mistake Where one party is mistaken about an important issue concerning the contract and the other

party knows or ought to know of the mistake7

There is a difference between a mistaken assumption (thinking you are buying one thing but really it is another thing) and a mistake as to terms (thinking that the seller has agreed to sell the thing you think you are buying)

Snapping Up/Mistake as to Terms Unilateral mistake occurs where A knows that B is mistaken about the terms to which A is

agreeing in this case sometimes A will try to “snap up” the offer Principles against snapping up represent a fairness-based exception to the objective

approach of contract formation

Case Briefs Smith v. Hughes (QB, 1871) there is no legal obligation on a seller to inform a purchaser

that he is under a mistake not induced by the sellero Seller meant to sell new oats but buyer thought he was buying old oatso One judge: unless there is a warranty saying that the item possesses some particular

quality, the buyer must take the item he has bought though it does not contain that quality, EVEN IF the seller knew the buyer was mistaken (unless fraud/deceit)

o Another judge: for the buyer to be relieved of the contract, he would have to prove that the seller knew that the buyer thought the seller had contracted to sell old oats (not just that the buyer was mistaken about the oats)

o New trial ordered, not enough evidence on these facts Hartog v. Colin & Shields (KB, 1939) where buyer must have realized the seller made a

mistake, they can’t claim breach of contracto Parties discussing sale at a certain price, seller mistakenly offered a lower price than

they had discussed, buyer snapped up the offer then claimed breach of contract when the seller wouldn’t sell at that price

Belle River Community Arena Inc. v. WJC Kaufmann Co. (Ont. CA, 1978) an offeree cannot accept an offer which he knows has been made by mistake & which affects a fundamental term of the contract

o Buyer submitted a tender that was accidentally much too low, seller tried to accept ito Court held that a promisor is not bound to fulfill a promise where the promisee knew

that the promisor did not intend it

Common Mistake Where both parties make the same mistake; agreement made under mistaken assumptions See Great Shipping for common mistake test to make a contract void

Common Law/Mistaken Assumption Where parties have reached an agreement but both make the same false assumption

concerning a matter material to the decision to enter into the contract Bell largely followed and approved in Canada very narrow formulation of rule

Equitable Mistake NOTE equitable mistake applies to both common mistake & unilateral mistake see Solle for

rules about equitable mistake For nearly two decades it appeared that Bell had set out all the basic principles that applied

to the controversial area of contracts founded on mistaken assumptions Then Solle suggested that cases of mistaken assumptions should be subject to a two-stage

analysis:(1) Did the mistake render the contract void at common law (according to Bell)?(2) If the contract was valid at common law, was it voidable on the grounds of equitable mistake?

Great Peace seems to have repudiated equitable mistake, but this decision hasn’t been adopted in Canada according to Miller

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Case Briefs Bell v. Lever Brothers Ltd. (HL, 1932) in order for a contract to be void for common

mistake, the mistake must involve actual subject matter of the agreement & must be of such a fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreement (renders K essentially different)

o Plaintiff was promoted to a higher position within the company then later terminated and given a compensation package, company later discovered that the plaintiff had breached an employee duty (for which he could have been fired)

o Company argued that the money was paid under a mistake of fact because the plaintiff would have been dismissed without pay had they known of the breach

o Court found that there was no mistake regarding substance here; the mistake did not render the severance agreement entirely different than anticipated

McRae v. Commonwealth Disposals Commission (Aust. HC, 1951) a party cannot rely on mistake where the mistake consists of a belief which is held without any reasonable grounds and is deliberately induced by him in the mind of the other party

o Parties contracted to sell/buy a tanker at a specified location, buyer paid for it and spent money/resources trying to find it, but it turned out it wasn’t there and the seller had been reckless (its existence was based on rumors/gossip)

o Court held that the seller could not rely on mutual mistake to make the contract void b/c it had no reasonable grounds to belief the tanker existed and/or were negligent in not ensuring that it existed before offering to sell it

o Distinction b/w contracts subject to a true condition precedent (existence of subject matter) & situation where seller promises goods are in existence even though they are not

In the first case no K In the latter case there is a K and the risk is on the seller

o Court held that a contract had been formed, and the seller breached it Solle v. Butcher (Eng. CA, 1949) contract may be voidable under equity where a contract is

entered into on the basis of a unilateral or common mistakeo S rented a suite from B, S said it was not subject to rent control so they agreed on a

rent cost, later discovered the suite was subject to rent control so S sued for money he had been overpaying & B claimed that the contract should be rescinded b/c of mistake

o Court said there are two kinds of mistake:(1) Mistake which renders the contract void under common law, and(2) Mistake which renders the contract not void under common law, but voidable or able to be set aside on terms decide by a court of equity

o Since law and equity have now fused together, a contract will only be considered void where the mistake was such that there was no contract at all

o In this case, there was a contract between the parties (so not void) but B did make a fundamental mistake so the court considers equity

o Equity will relieve a party from consequences of a mistake where the contract was entered into:(1) On the basis of unilateral mistake, OR

If one party is induced by a material misrepresentation by the other, or if other party knows of the mistake and lets him conclude the contract rather than pointing out the mistake

(2) On the basis of a common mistake If parties were under a common misapprehension as to facts/rights, as long as

the misapprehension was fundamental and the party seeking to set it aside was not himself at fault

o S’s own mistake caused him to pay higher rent, and it would be unjust for S to take advantage of his own mistake, so the contract is voidable

Great Peace Shipping v. Tsavliris Salvage (Eng. CA, 2002) overturned Solle; there is no equitable mistake

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o Contract between parties for GP to go out of its way to offer assistance to a damaged vessel, contained a term that TS could cancel if they paid a 5 day fee, TS discovered that GP was very far from the damaged vessel, found a closer one and cancelled with GP but refused to pay the fee

o GP sued for payment of the fee, TS argued that the agreement was entered into on the mistake assumption that GP was much closer than it actually was

o Applies Bell test: did the mistake about distance render GP’s services different from what was contracted for? no, still possible to perform services

o Court finds that Solle basically said that Bell was wrong; it is impossible to reconcile the two

AND, there is no difference between equitable mistake (Solle – “fundamental”) and common law mistake (Bell – “essentially different”)

o Court declared that there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid at law

o Five elements required for a common mistake to make contract void :(1) There must be a common assumption as to the existence of a state of affairs(2) There must be no warranty by either party that that state of affairs exists(3) The non-existence of the state of affairs must not be attributable to the fault of

either party(4) The non-existence of the state of affairs must render performance of the contract

impossible(5) The 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 contractual adventure is to be possible

Miller Paving Ltd. v. B Gottardo Construction Ltd. (Ont. CA, 2007) equitable mistake does exist in Canada, we have not adopted Great Peace

o Parties signed an agreement saying that M had been paid in full for material, but M later realized there was some deliveries left unpaid

o Considered Solle and Bell decisions, and ultimately held that Great Peace hasn’t been adopted in Canada and there is good reason for that (loss of flexibility)

o If contract provides for who should bear the risk of the mistake, that governs it was M’s responsibility to determine owed amount so risk was allocated to M and M has to bear consequences of that risk transpiring

o But no matter which test was used, the result would be the same (K not void for mistake)

Mistaken Identity Technically a type of unilateral mistake If A negotiates with B, believing that B is C, any agreement reached will be infected by a

unilateral mistake of fact Question to ask whenever mistaken identity arises: is there an enforceable contract between

the rogue and the innocent party? Often raises difficult policy questions about the conflicting rights of two innocent parties (the

defrauded person who contracted with the rogue, and the bona fide purchaser for value)o Economic analysis favors bona fide purchaser (b/c seller is in better position to avoid

loss)o Nevertheless, common law has traditionally favored the seller

Note nemo dat principle: no one can transfer to another something they do not haveo Sale of Goods Act, s. 26(1) if goods are sold by a person who is not the owner of

them… the buyer acquires no better title to the goods than the seller had

Case Briefs

Case Scenario Type of Dealing Reasoning ResultCundy v. Lindsay A rogue named Written Focus on intention No contract with

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(1878) Blenkarn pretended to be Blenkarn & Sons, C provided goods to the rogue who sold to a 3P

of offeree rogue, 3P holds no title

Phillips v. Brooks (1919)

Rogue pretended to be Sir George Bullough, wrote a cheque for ring then sold to a 3P

Face to face Inference that plaintiff intended to contract with the rogue and not with the person whose identity the rogue assumed

Court concluded with rogue, 3P holds no title

Lewis v. Averay (1972)

Rogue pretended to be Richard Green of Robin Hood fame, took a car and sold to a 3P

Face to face Fraudulent misrepresentation makes contract voidable and liable to be set aside by mistaken party

Contract concluded with rogue, not rescinded before sale to 3P so 3P holds title

Shogun Finance Ltd. v. Hudson (UKHL, 2003) result in cases of mistaken identity should be that no contract was formed with the rogue, and the third party doesn’t get title

o Rogue dishonestly acquired someone else’s license, brought it to a car dealership and agreed to buy a car subject to obtaining financing, SG purchased the car for the rogue to make payments towards, rogue sold car to H & ran off with money

o Court was split about what to do (3-2)o Lord Phillips: must deduce intention of parties from their words and conduct

There is a distinction between written agreements and face-to-face dealings; strong presumption that parties intend to contract with the person with whom they are in personal contact

The person with the license was the contracting party, not the rogue pretending to be him, so there was no K and H holds no title in the car

o Lords Hobhouse & Walker: must construe the written document The person with the license did not authorize the conclusion of a contract in his

name, so there is no contract and H holds no title in the caro Lords Nicholl & Millett (minority): there are no special rules for written correspondence

When two people deal directly with each other by whatever medium, a contract is concluded between them

Overruled Cundy and approved Lewis to apply in all situations There was a contract, but it is void for fraud, so H holds title in the car

Common Law Solution Whether property owner retains title to property depends on the characterization of the

contract (basically resolving the issue based on other contract law principles):o Scenario 1 no offer to rogue, contract is void

There was an offer but it was not made to the rogue, it was made to the person the rogue was impersonating

Contract is void from the beginning, so no title passes to the rogue and therefore the rogue cannot pass title to a third party

Result is that the original owner retains title to property (Cundy)o Scenario 2 fundamental mistake regarding identity of contracting party, contract is

void

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The contract between the owner and the rogue is void for fundamental mistake regarding identity, so no title passes to the rogue and therefore the rogue cannot pass title to a third party

Result is that the original owner retains title to property (Cundy)o Scenario 3 contract voidable because of fraudulent misrepresentation

As a result of fraudulent misrepresentation, the owner has an equitable right to rescind its contract with the rogue and regain title

Result is that the original owner retains title to property (Lewis, minority in Shogun)

o Scenario 4 contract voidable but not avoided before sale to bona fide purchaser If the rogue transfers title to the third party before the original owner rescinds

the contract, the result is that the third party acquires title (Lewis, minority in Shogun)

o Scenario 5 apply normal rules of contract formation Look at the intention of the contracting parties from their words and conduct Strong presumption that parties intend to contract with the person with whom

they are in personal contact (majority in Shogun)

Mistake in Written Record One exception to parties of a contract being bound to their promises is if there is a mistake in

the written record of the contract This type of mistake doesn’t affect the creation of the contract Question to ask: does the contract contain a mistake that should be corrected by the court?

if yes, under equity a court may order rectification (court corrects the mistake, and the contract is considered “rectified”)

Case Briefs Performance Industries Ltd. v. Sylvan Lake Gold & Tennis Club Ltd. (SCC, 2002) test for

rectification of contract based on mistake in written recordo Parties discussed the number of yards of land to be transferred, but their written

contract accidentally used feet insteado Court granted rectification and set out a test:

Plaintiff must prove existence and content of prior oral agreement Must be convincing proof or oral agreement (beyond a balance of probabilities

but less than beyond a reasonable doubt) Plaintiff must provide precise wording for the rectification Plaintiff must show that the defendant knew or ought to have known of the

mistake in the written document (that to refuse rectification would be inequitable and unconscionable)

Documents Mistakenly Signed Signature rule is that a signed contract is binding and is proof of acceptance of terms Non est factum (it is not my deed) available where a person has not themselves signed the

contract (fraud or forgery) or a blind/illiterate person signed but did not know what they were signing effect of this is that the contract is void because there was no consent to terms

The situation is different if a person of full capacity signs a document mistakenlyo Similar policy concern to mistaken identity (which innocent party should bear the

loss?)o Successful use of the non est factum defense is very rare; is not meant to be used to

get someone off the hook

Case Briefs Saunders v. Anglia Building Society (HL, 1991) a person of full age and understanding, who

can read and write, is bound by their signature on a legal document

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o One party induced to sign a transfer to a 3P, court rejected the claim that the contract should be void on the basis of non est factum

o Plea of non est factum is available to a person who, for permanent or temporary reasons, is not capable of reading and sufficiently understanding the document they are signing

o Plea of non est factum is not available where: The signature of the document was brought about by the negligence

(carelessness) of the signer in failing to take precautions which he/she ought to have taken

The actual document was not fundamentally different from the document as the signer believed it to be

o The onus is on the mistaken person to prove that they took all reasonable precautions in the circumstances (generally insufficient to have merely relied on/trusted the other party)

How to Approach a Mistake Question STEP 1 apply normal contract formation rules

o Is there a contract?o Was there sufficient certainty about subject of the contract, price, and parties?o Apply objective reasonable person testo Is this a case where parties were contracting over two different items?o Is this a Staiman type case where court can impute a definite agreement between

parties or a Raffles type case where parties are contracting over two different ships? STEP 2 consider whether it is a “snapping up” situation where the offeror might be taking

advantage of the offeree by not disabusing the offeree of its mistakeo If so, there will be no agreement (Smith)

STEP 3 caveat emptor generally applies in business-business sales (risk of mistake as to fact rest with the party making the mistake)

STEP 4 apply common law mistake analysis (fundamental underlying assumption)o If the test is fulfilled, contract will be voido If K allocated risk of relevant mistake, then mistaken party bears the risk

STEP 5 apply equitable mistake analysiso If the test is fulfilled, contract will be voidable (able to be set aside)o If K allocated risk of relevant mistake, then mistaken party bears the risk

Contextual factors to consider:o Price may be relevant in determining the reasonable expectations of the partyo Knowledge and skill of parties court is less likely to protect a mistake made by a

person who possesses, or should possess, substantial knowledge or skillo Ease of avoidance considers who was in the best position to avoid the mistake

and/or who could avoid it at the least costo Common usage of trade common usage of trade may be another way in which the

court can get a sense of what the parties probably expected; trade usage also indicates normal allocation of risk

o Knowledge of ambiguity if one party is aware of ambiguity they should presumably be bound to clear up the ambiguity (snapping up)

Frustration Frustration provides an excuse from contractual obligations where there have been

inaccurate assumptions about future circumstances Falls generally under the law of mistake but mistake refers to assumptions regarding

existing facts, whereas frustration refers to assumption regarding future facts

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The fundamental question is whether, due to changed circumstances, the risk of unfair hardship to one party outweighs the general policy of enforcement as expressed through caveat emptor

Involves cases where an event occurring subsequent to the contract formation makes performance of the contract legally problematic

Debate arises here over the role of the judiciary in developing contract lawo Those in favor of judicial restraint argue on the grounds of certainty and predictability

that courts don’t have absolving power over contractso Those in favor of judicial activism argue on the grounds of fairness and efficient

allocation of risk that courts often make aspects of the contract for parties

Test Three questions (Krell):

(1) What is the foundation of the contract, having regard to all the circumstances?(2) Was performance of the contract prevented?(3) Was the event that prevented performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract?

For frustration to apply, the event must (KBK): Occur after formation of the contract Not be self-induced can be no fault on the part of the parties Not have been foreseeable no allocation of risk in the contract Be more than a mere inconvenience must create substantial hardship and/or have a

major impact on the economics of the transaction (more than just an increase in price that makes the contract less profitable; must deprive one party of the intended benefit)

Make the contract fruitless Constitute a radical change in the contract completely affects the nature, meaning,

purpose, effect, and consequences of the contract Be a permanent change

Historical Development Stage 1 rule of absolute promises (Paradine) Stage 2 relaxation of absolute rule, imply a condition of continued existence of subject

matter of the contract (Taylor v. Caldwell)o Critique of stage 2 is that it’s based upon presumed intent of actual parties, but

frustration arises in situations where parties have not considered risk & therefore have no intent

o Courts subsequently abandoned the device of presumed intent and applied the condition as a matter of law (i.e. developed doctrine of frustration)

Stage 3 move from destruction of physical subject matter to destruction of commercial purpose of contract (Krell)

Remedy If a contract is frustrated, parties are relieved of future performance obligations (though they

may have suffered losses due to partial performance) Restitution has sometimes been used to return partial payments (Fibrosa) but the issue

with this is that it only applies to deposits Most jurisdictions have enacted legislation which allows courts to apportion pre-frustration

losses BC Frustrated Contracts Act:

o Allows for independent compensation of reliance losses even where there has been no deposit, a court may apportion any reliance losses and will often do so equally (whereas under common law the deposit is forfeited)

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o Section 4(2) loss must be apportioned equally between the party required to make restitution and the party to whom the restitution is required to be made

Case Briefs Paradine v. Jane (KB, 1647) rule of absolute promises

o Parties contracted for lease of a suite, renter was kicked out during the war so he wasn’t occupying the suite, tried to argue that the contract was frustrated

o Court said caveat emptor, he still had to pay his rent Taylor v. Caldwell (QB, 1863) in contracts where giving something becomes impossible

because it has perished, the parties are excused from the performance of the contract (as long as they were not at fault)

o Agreement between parties to rent a venue for a concert, before the concert took place the hall was destroyed by a fire (no fault to either party)

o Court held that contracts should be construed as subject to an implied condition that the parties shall be excused in case performance becomes impossible from the perishing of the thing (this tends to further the object of fulfilling the parties’ intentions)

o The continuing existence of the hall was essential to this contract’s performance, so both parties are excused from their contractual obligations

Krell v. Henry (1903) frustration applies to cases of destruction of commercial purpose of Ko Contract between parties to rent a room to view a coronation process, but the

coronation ended up getting cancelledo Court found that the purpose of the contract was not a lease of a room but a lease of a

room to view a procession, which was prevented and was not foreseeable to the parties

Fibrosa Spolka Akeyna v. Fairbaim Lawson(HL, 1943) a buyer may recover a deposit based on restitution in cases of frustration

o Contract for sale of machine was frustrated but the buyer had already given a deposito Court held that restitution should apply otherwise there would be unjust enrichment

and a total failure of consideration KBK No 138 Ventures Ltd v. Canada Safeway Ltd. (BCCA, 2000) frustration can be used

where an event transforms the contract into something totally different from what the parties intended

o Agreement between parties to sell property but before the sale was complete a zoning by-law was passed that formally rezoned the property

o Buyer told seller the contract was frustrated and asked for deposit back, but seller refused

o Seller knew that the buyer planned to redevelop the property (but had more than mere knowledge was written in the contract, purchase price was based on it, etc.)

o Court found that the rezoning was not foreseeableo The change of circumstances was so fundamental as to be regarded as striking the

root of the agreement and as entirely beyond what was contemplated by the partieso Seller required to return the deposit

Control of Contractual PowerDuress

Common law doctrine Historically the legal doctrine of duress was very narrow and included only situations of

actual or threatened violence relief for duress is no longer limited to these narrow circumstances

Today, commercial pressure may amount to actionable duress

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Duress falling short of these common law requirements may constitute undue influence in equity

Categories(1) Duress to person threats to person or family, etc.(2) Duress to goods or property threats to damage or take someone’s property, extortion payment required to release goods, etc.(3) Economic duress

Test A finding of economic duress in cases of contract modification is dependent initially on two

conditions precedent (Greater Fredericton):(1) The promise (the contractual variation) must be extracted as a result of the exercise of pressure, whether characterized as a demand or a threat, or an implied threat, and(2) The exercise of that pressure must have been such that the coerced party had no

practical alternative but to agree to the coercer’s demand to vary the terms of the underlying contract access to ILA relevant here but not determinative

o Once these two threshold requirements are met, the legal analysis must focus on the ultimate question of whether the coerced party consented to the variation consider:

Whether the promise was supported by consideration Whether the coerced party made the promise under protest or without prejudice Whether the coerced party took reasonable steps to disaffirm the promise as

soon as practicableo Note good faith motives on the part of the coercer are not a defense; motives are

relevant only insofar as they may impact the promisor’s decision to consent Note test is different for contract formation (see Universe Tankships)

Case Briefs Pao On v. Lau Yiu Long (HKPC, 1979) doctrine of duress extended to include economic

duresso Court defined duress as “a coercion of will so as to vitiate consent”o Compulsion has to be such that party was deprived of the freedom of exercising their

willo Factors to consider: effectiveness of an available alternative remedy, fact or absence

of protest, availability of independent advice, benefit received, and the speed with which the victim has sought to avoid the contract

o In order to meet the test for economic duress, it must be shown that the conduct coerced did not amount to a voluntary act

Universe Tankships Inc. of Monrovia v. International Transport Workers’ Federation (UKHL, 1982) changed the test for economic duress to include illegitimate pressure

o Test for economic duress : Pressure amounting to compulsion of the will of the victim (victim’s conduct

arising from the realization that there is no practical choice open to him), and The illegitimacy of the pressure exerted (consider nature of the pressure (such

as threat of unlawful action) & demand (such as whether or not the demand is lawful)

If a court finds that a victim expressly or impliedly approved the contract after pressure ceased to exist, the victim will be denied relief

Greater Fredericton Airport Authority v. Nav Canada (NBCA, 2008) test for duress in cases of contract modification is based on the exercise of pressure and absence of practical alternatives

o N implicitly threatened to withhold performance unless G paid extra, so G dido Absence of a practical alternative is evidence of economic duress, but not

determinativeo The true cornerstone of the doctrine of duress is lack of consent

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o Onus is on the party committing duress to prove that the other party’s agreement was not procured under duress

o Criterion of illegitimate pressure criticized as incoherent and unruly b/c it is difficult to apply in the context of contractual modifications

o Court found that this situation met the test for duress

Undue Influence Equitable relief, granted more often by courts of equity than duress The unconscientious use by one person of power possessed by him over another in order to

induce the other to enter a contract Undue influence can make a contract voidable and court can rescind the transaction

Categories(1) Actual undue influence claimant must prove that the wrongdoer exerted undue influence(2) Presumed undue influence a relationship of persuasive influence

(a) De jure: relationships that raise the presumption of undue influence in which the onus shifts to the powerful party to show that the weaker party entered the deal freely &

voluntarilyo Fiduciary relationship, trustee/beneficiary, solicitor/client, doctor/patient,

priest/worshipper(b) De facto: other special relationships of trust or confidence which is not automatically presumed (must be proven)

Test In order to trigger a presumption of undue influence, the inquiry should begin with an

examination of the relationship between the parties consider (Geffen):o Whether the potential for domination inheres in the nature of the relationship itself,

ando Examine the nature of the transaction

In commercial transactions plaintiff is obliged to show that the contract worked unfairness either in the sense that he/she was unduly disadvantaged by it or that the defendant was unduly advantaged by it

In situations where consideration is not an issue (ex. gifts) plaintiff must prove the presence of a dominant relationship

o Once the plaintiff has established the presumption of undue influence, the onus shifts to the defendant to rebut it (by establishing that the plaintiff entered into the transaction as a result of his/her own full, free, and informed thought)

Case Briefs Geffen v. Goodman Estate (SCC, 1991) transactions between persons standing in certain

relationships with one another will be presumed to be relationships of influence until the contrary is shown

o Estate left to a mother with residue going to all grandchildren, but will was changed so that residue only went to the mother’s children, brothers helped the mother rectify this so that it went to all the grandchildren after she died

o No evidence of undue influence so court considers whether there existed a special relationship b/w the parties which would give rise to a presumption of undue influence

o A relationship of influence is one in which one has the ability to dominate the will of another, whether through manipulation, coercion, or abuse of power

o To dominate the will of another = exercise a persuasive influence over him/her o Court found in this case that the relationship was such that influence was presumed,

but the presumption was rebutted by the brothers Royal Bank of Scotland v. Etridge (Eng., 2001) banks should be put on inquiry in every

case where the relationship between the surety and the debtor is non-commercial

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o Wife charged interest on her home to pay off her husband’s debt, later claimed that she did so because of undue influence from her husband

o The law presumes undue influence in cases where the complainant put their trust and confidence in the other party in relation to the management of their affairs (can still be rebutted)

o The law also presumes that one party had undue influence over the other in relationships where one party acquires influence over another who is vulnerable and dependent and where substantial gifts by the influenced/vulnerable person are not normally to be expected (this cannot be rebutted)

o Court says neither of these presumptions apply to this case (undue influence not presumed in marriages, and large gift from wife to husband is not unusual)

o A bank has an obligation to inquire when a wife stands as surety for her husband’s debt and to take reasonable steps to inform the wife of the risks

o A bank should: meet with the lending spouse privately, explain the extent of liability, warn of the risks, and urge the person to obtain independent legal advice

o If a bank fails to meet these obligations and it turns out that there was actual or presumed undue influence in the situation, the bank does not have a defense that the transaction was one of a person with a free/independent mind

Unconscionability Allows for avoidance of an unfair bargain Where two persons are in a relationship where one can take undue advantage of the other by

way of distress, recklessness, wildness, or want of care, and when one party has in fact taken such advantage, a transaction will not be allowed to stand (Slator)

Test Traditional view (Morrison)

o The material ingredients for a claim of undue influence and unconscionability are: Proof of inequality in the position of the parties arising out of the ignorance,

need, or distress of the weaker, which left him/her in the power of the stronger, and

Inequality based on economic resources, knowledge, need, disability that falls short of legal capacity, etc.

In unconscionability there are not express categories of relationships, but cases still often involve pre-existing relationships where there is potential for an inequality of bargaining power

Proof of substantial unfairness of the bargain obtained by the strongero Proof of the above elements creates a presumption of fraud which the strong party

must repel by proving the bargain was fair, just and reasonable & that no advantage was taken

Wider approach (Lloyds)o Unconscionability should be merged with undue influence and duress under the

broader heading “inequality of bargaining power” overall question is whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded

o Relief is available under this where: There are unfair terms or inadequate consideration There is impaired bargaining power Influence or pressure are brought to bear (whether conscious or unconscious)

o This approach has not been successful in England, but has been influential in Canada in terms of informing the tests for each of the doctrines

Case Briefs Morrison v. Coast Finance Ltd. (BCCA, 1965) unconscionability is based on proof of

inequality of parties and substantial unfairness of the bargain18

o Two men persuaded an old widow to take out a mortgage on her home and lend them money, they were supposed to repay her loan in installments but didn’t

o The old widow had no other way to pay it off, house was her only asset, didn’t obtain ILA

o Widow tried to argue on the basis of undue influence but that plea attacks the sufficiency of consent in contrast, a plea of unconscionability invokes relief against an unfair advantage gained by an unconscientious use of power by a strong party over a weaker

o Court finds that there was inequality in this case, the men took advantage of the widow’s ignorance and inexperience so that there was a presumption of fraud (which the men did not even attempt to rebut)

o This was a gross abuse of overwhelming inequality between the parties so court set aside the mortgage without requiring the widow to repay the money

Lloyds Bank v. Bundy (QB, 1975) attempt to merge the concepts of duress, undue influence, and unconscionability into one legal principle of “inequality of bargaining power”

o Father mortgaged his home to lend money to his son, kept lending money so couldn’t repay the mortgage, eventually the bank brought action for possession of the home

o Court notes that there are cases in which courts will set aside a contract when the parties have not met on equal terms that it is not right that the strong should be allowed to push the weak to the wall (duress, undue influence, unconscionability, etc.)

o The common thread between all of these concepts is an inequality of bargaining power, so they should all be combined

o Court found that the father was entitled to relief under this wider category, but even if the wider category didn’t stand, he could be relieved by way of undue influence

Harry v. Kreutziger (BCCA, 1978) affirmed Morrison that unconscionability involves an inequality in position of parties and substantial unfairness

o Talk between parties to buy a boat with a valuable fishing license attached to it, the seller refused to sell but the buyer kept giving him a cheque for $4000 (though he had knowledge that it was worth closer to $16000)

o The seller was inarticulate, had a grade 5 education, had a hearing defect, and was widely inexperienced in business matters

o Court held that parties were not equal and seller was completely overborne & dominated

o Court directed that the contract be rescinded and that the parties exchange the boat and money back

Statute Business Practices and Consumer Protection Act (BC, 2004)

o Unconscionability is not limited to before the contract is concludedo In determining whether an act is unconscionable, a court must consider all the

surrounding circumstances of which the supplier knew or ought to have known, including:

That the supplier subjected the consumer to undue pressure Supplier took advantage of the consumer’s inability to reasonably protect their

own interests because of physical, mental, age, etc. Total price grossly exceeded the total price of similar objects No reasonable probability of full payment of the total price Terms/conditions so harsh as to be inequitable A prescribed circumstance

o If it is alleged that a supplier committed an unconscionable act, the burden of proof is on the supplier to prove that the unconscionable act was not committed

o Provides for remedies for unconscionable acts

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Illegality & Public Policy One of the most significant policies reflected in contract law is that of freedom to contract

but sometimes another public policy is considered more important than the freedom to contract, which is why contracts are sometimes said to be illegal or contrary to public policy

Question is whether the public is injuriously affected in such a substantial manner that private rights/interests should yield to those of the public

A court may render a contract void or unenforceable for public policy reasons under the doctrine of illegality, but this doesn’t necessarily mean the contract itself was illegal

Categories(1) Common law illegality

Contrary to public policy, or Contrary to common law (ex. contract to commit a tort)

(2) Statutory illegality (ex. contract to commit a crime)

Restraint of Trade All from KRG A type of restrictive covenant which limits where/when people can work Tension between the concept of freedom to contract and the public policy consideration

against restraint of trade There is a prima facie presumption that restrictive covenants are unenforceable but

freedom to contract creates an exception where the restraint is reasonableo Whether it is “reasonable” depends on the geographic coverage, period of time, and

extent of activityo Terms of the covenant must be unambiguous in order to be reasonable (an ambiguous

restrictive covenant will also be prima facie unenforceable)o Onus is on party seeking to enforce the restrictive covenant to show that it is

reasonable Absence of payment and power imbalance between employer and employee often justifies

more rigorous scrutiny of restrictive covenants in employment contracts

Severance Two types (KRG):

(1) Notional severance involves reading down a contractual provision so as to make it legal and enforceable

o Should not be used on restrictive covenants in employment contractso Can’t cure a defective restrictive covenant

(2) Blue pencil severance consists of removing part of a contractual provisiono May only be resorted to in rare cases where the part being removed is trivial and not

part of the main purpose of the restrictive covenant Severance is applied in limited circumstances to remove illegal features of a contract so as to

render the contract in conformity with the law purpose is to give effect to the intention of the parties when they entered the contract (freedom of contract)

Issue w/ restrictive covenants in employment contracts: applying severance to unreasonably wide restrictive covenants invites employers to draft overly broad covenants with the prospect that the court will only sever the unreasonable parts/read down the covenant to what is considered reasonable

Case Briefs KRG Insurance Brokers (Western) Inc. v. Shafron (SCC, 2009) restrictive covenants must

be reasonable and unambiguouso Employee had a restraint of trade that prohibited him from working in the

“Metropolitan City of Vancouver” for 3 years, started working in Richmond, employer sued past employee for breaching the restrictive covenant

o Court found the contract to be an employment contract requiring rigorous scrutiny20

o Notional severance can’t be used in employment contexts, and blue pencil severance wouldn’t help here because removing ‘Metropolitan’ would leave the covenant much more narrow and not reflect the intention of the parties

o Court ultimately held the geographic term to be ambiguous; there was no mutual understanding between the parties on what it meant (so covenant unreasonable)

o Ruled against the employer trying to restrict trade

Other Public Policies Contracts dealing with sexuality are generally held to be void prostitution, unmarried

cohabitation, etc. Contracts dealing with reproduction surrogacy, sperm donation, etc.

o Assisted Human Reproduction Act prohibits payment for surrogacyo No Canadian jurisprudence on these areas

Statutory Illegality Modern approach: where a contract is expressly or impliedly prohibited by statute, a court

may refuse to grant relief to a party where, in all the circumstances of the case, including regard to the objects & purposes of the statutory prohibitions, it would be contrary to public policy to do so

Courts will consider: consequences of invalidating the contract, social policy reasons for the prohibition, and the determination of the class of persons for whom the prohibition was enacted

Case Briefs Still v. Minister of National Revenue (FCA, 1997) where a statutory prohibition goes to the

performance of the contract, a party acting in good faith is entitled to relief notwithstanding the statutory breach

o S was an immigrant who thought she had the right to work in Canada, turned out she didn’t but she worked anyway, got let go from her job and applied for unemployment benefits but was refused under the Unemployment Insurance Act

o If a particular contract itself is prohibited by statute, the court will not enforce it (even if the parties did not intend to break the law); but where the statutory prohibition goes to the performance of the contract, a party acting in good faith is still entitled to relief

o A distinguishing feature of the modern approach of illegality is that enforceability of a contract is dependent upon an assessment of the legislative purpose or objects underlying the statutory provision

o A contract is no longer automatically void just because it is prohibited by statute a contract may be declared illegal but relief can still be granted, or a contract may be held to be legal and enforceable

o Public policy considerations: strong belief that people should not benefit from their own wrongful conduct, understanding that relief should not be available if it would have the effect of undermining the purposes/objects of the statutes involved

o S was not an illegal immigrant and had acted in good faith; the purpose of the Unemployment Insurance Act was to make benefits available to the unemployed

o Court found that a denial of unemployment benefits in this case is a penalty disproportionate to the statutory breach, and allowing relief to S would not be giving others a license to abuse Canada’s social services

o Public policy in this case weighed in favor of S

Effects of Illegality Three questions arise:

(1) Are contracts that offend a statute or a common law public policy ever enforceable?(2) Can a party ever recover money paid or property passed under the contract?(3) To what extent are courts willing to sever offensive provisions?

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Courts should be sensitive to gradations of offensiveness and the relative innocence of parties

There has been increasing flexibility towards the traditional rule that illegal contracts are unenforceable

Good Faith/Duty of Honest Performance Traditional reluctance in English common law to recognize a duty of good faith in

performance of contracts, but Canadian law reform bodies have recommended that Canada adopt a duty to act in good faith

Arguments for:o Many common law doctrines already recognize this duty although not in name (courts

often imply terms that parties use “reasonable efforts”)o Adoption of the doctrine will bring Canadian jurisdictions into line with expectations of

contracting partieso Adopting of the doctrine will bring Canadian jurisdictions into line with the law in other

jurisdictions (Quebec, US, etc.) Arguments against:

o Uncertainty “good faith” is too nebulouso Common law has developed discrete rules to address particular forms of bad faith; this

piecemeal approach is better suited to the common law and is preferable to a vague general standard

o Comparative law analysis suggests that the doctrine is wanting and that there are dangers in incorporating doctrines from other jurisdictions

Case Briefs Bhasin v. Hrynew (SCC, 2014) recognized a general duty of honest performance

o There is a general principle of good faith that underlies many facets of contract lawo It is appropriate to recognized a new common law duty that applies to all contracts as

a manifestation of a general organizing principle of good faith: a duty of honest performance, which requires parties to be honest with each other in relation to performance of their contractual obligations

o An entire agreement clause cannot exclude liability for dishonest performance because it is a generally recognized duty

Consumer ProtectionLegislationSale of Goods Act

Focuses on substantive rights Consumers have a statutory right that a good is fit for its intended purpose (but this only

applies to goods, not services) Section 20 no waiver of warranties or conditions

o Right to a good being fit for intended purpose cannot be waivedo Any term/contract that tries to waive these rights is void

Business Practices and Consumer Protection Act Focuses on procedural rights Section 1 very wide definitions of consumer, consumer transaction, supplier, etc.

o Consumer transaction: supply of goods/services/real property for purposes that are primarily personal, family or household

o Supplier: a person who supplies goods, services, or real property to a consumer, or solicits, offers, advertises or promotes material regarding a consumer transaction

Section 3 rights under the Act cannot be waived22

Section 5(1) a supplier must not commit or engage in a deceptive act or practice in respect of a consumer transaction

Section 9(1) a supplier must not commit or engage in an unconscionable conduct or practice in respect of a consumer protection

Section 5(2) & 9(2) reversed burden of proof is on the supplier for any allegation of deception or unconscionability

Section 10 if an unconscionable act or practice occurred in respect of a consumer transaction, that transaction is not binding on the consumer

Section 171 if a person has suffered damage or loss due to a contravention of this Act, they may bring an action against a supplier who engaged in or acquiesced in the contravention that caused the damage or loss

Section 172 anyone may bring action seeking a declaration that an act/practice engaged in or about to be engaged in by a supplier in respect of a consumer transaction contravenes this Act, or seeking an injunction

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 marketplace:

o Monopoly competition laws aim to ensure a competitive marketplace and maximize consumer welfare

o Externalities regulation of product safety hazards and pollutiono Information failures asymmetric information going from manufacturer to consumer

There are laws to prohibit fraud and deceptive practices and laws that impose mandatory disclosure requirements

o Transaction costs addresses best types of redress mechanismso Public goods government needs to supply consumer education

Non-economic rationales for government intervention in consumer marketplace:o Paternalistic concerns transactions may not be in consumer’s long-term interesto Redistributive concerns interest rate regulation, rent controls, pricing of goods, etc.

Case Briefs Rushak v. Henneken (BCCA, 1991) suppliers should refrain from any sort of potentially

misleading statement (even of an honestly-held belief) when the supplier knows that giving the opinion without appropriate qualification may mislead

o R bought a car from H who said it was one of the best of its kind, a good vehicle, and a very nice car (though he knew that rust was possibly an issue)

o After a year the car was so rusted that it would cost over 50% of what R had paid just to make it drivable

o Court considered whether H’s exaggerations about the car constituted “conduct having the capability, tendency, or effect of misleading a person” within the meaning of s. 3(1)(b) of the Trade Practice Act (now the Business Practices and Consumer Protection Act)

o H had known there might be extensive rust deliberately covered over by the undercoating of the car knowing this made his expression without qualification capable of misleading the potential buyer

o “Puffery” cannot excuse the giving of an unqualified opinion as to quality when the suppler has factual knowledge indicating that the opinion may be substantially wrong

o H’s conduct falls into the category of prohibited conduct in the Act Loychuk v. Cougar Mountain (BCCA, 2012) it is not unconscionable for a sports recreation

facility to require a person who wishes to engage in activities to sign a release that bars all claims for negligence against them

o Two people collided on a zipline, the mountain admitted negligence but argued that the injured people had waived their cause of action by signing a release

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o Court found that the waiver of liability was enforceable because it was very thorough and not unconscionable

o It was also not contrary to public policy for a recreational sports facility to have such a waiver when the plaintiffs knowingly and voluntarily entered into the agreement and decided to engage in an inherently risky activity

o Plaintiffs argue that there is a lower standard for unconscionability under the Business Practices and Consumer Protection Act than there is at common law, but court said the tests are basically the same

o Plaintiffs were free to decide not to participate in the activity

Commercial Practice & Contract Drafting Writing a contract involves two processes: determining what the parties have agreed to, and

reducing that agreement to words Contracts generally avoid rhetorical flourishes, adjectives, and imprecise terms

Principles of Effective Drafting Precision ambiguities can lead to litigation (contra preferentum)

o Antecedents avoid words like “it” (always say buyer, seller, etc. to be more clear)o Time references specify days (business or non-business), even hours, or “as soon as

is practicable” if actual days can’t be specifiedo Legalese sometimes necessary, but avoid wordiness

Simplicity avoid undue complication by keeping sentences short, deleting unnecessary words, using an active voice, etc.

Consistency inconsistency leaves space for ambiguity and differing interpretations Clarity flows directly from above principles (if a contract is written with precision, simplicity

and consistency, it will be clear)o Rule of thumb: if a contract cannot be understood reasonably well by a reasonably

intelligent judge who spends a reasonable amount of time reviewing it, the draftsperson has failed

Building Blocks of a Contract*Note not every contract will have each of these parts, but it is a good place to start as a checklist

Formato Legally required consider capacity of parties, signature blocks, whether

original/electronic signatures suffice, whether notarization or witnesses are required Also look to legislative requirements: Sale of Goods Act, Business Practices and

Consumer Protection Acto Customary requirements title, cover page, table of contents (if necessary), date,

recitals, headings, numberingo Aesthetics consistent font, spacing, margins, breaks

Definitionso Purpose of definitions: provides clarityo Location of definitions (may be as you go, in a definitions section, etc.)o How to define: may use brackets or quotation marks (should always capitalize first

letter)o Nesting definitions: when within a definition, there is another word that is defined (try

to reduce the number of these)o Legislation: try not to define terms differently than how they are defined by statute

Operative provisions provisions that give effect to the contracto Commonly include: conveyance of performance, payment, terms, etc.o Generally come at the beginning of the contract

Representations and warranties statements of fact made in the contract by one party to the other as at a particular point in time

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o Often used synonymously, but there is a slight difference Representation: a statement of fact upon which a party is meant to rely Warranty: a parties’ assurance as to the fact coupled with an implicit

indemnificationo Representations are used to ascertain certain facts and allocate risk

Various types: reps as to the contract (capacity, authority), subject matter reps (ownership, no liens), reps as to the parties (financial condition)

Covenants ongoing promises by a party to take or not take an actiono Three general types:

Affirmative covenant: promise to take a certain action Negative covenant: promise not to take a certain action Financial covenant: promise to maintain certain financial conditions

Conditions precedent one that is to be performed before the agreement becomes effective, and which calls for the happening of some event or the performance of some act after the terms of the contract have been arrested on, before the contract shall be binding on the parties

o Common conditions precedent: authority to purchase, third party consents, all reps and warranties are true, subject clauses

o No contract will be held to exist if a condition was too subjective and could be ignored A term will be implied that the purchaser will take all reasonable steps to satisfy

the condition precedento Basic tips to drafting a condition precedent: draft specifically, use objective criteria,

and be aware of “best efforts” criteria Remedial provisions dictate the remedies available to parties on breach

o Remedial provisions are not required but may be a good ideao Generally contain two elements: a triggering event (such as breach of operative term,

breach of rep/warranty) and a remedy (such as termination of the contract, acceleration of payment, indemnification for costs, damages)

o Must consider legislative provisions which allow for certain remedies available to parties

Limitations of liability/indemnity reduces or eliminates a party’s liability for damageso An indemnity clause commits one party to compensate the other party in the case of

losso Key elements to include in a limitation clause: who is receiving the benefit, who is

agreeing to the limitation, who’s liability is being limited, categories of damages to be limited, amount of limitation

o Significant history of judicial treatment limitation clauses held to be ineffective if the claim went to the root of the contract

o Doctrine of fundamental breach (Karsales case)o Lessons for drafting limitations of liability: anticipate possible conditions to limit, use

plain language, specifically address negligence, be aware of limitations on enforceability

o Courts are less harsh with indemnity clauses than limitations of liabilityo Courts will still narrowly construe indemnity language and bias will be in favor of the

indemnifying partyo As a result you should keep in mind some basic drafting rules: draft specifically,

indemnity must be for reasonable costs Boilerplate miscellaneous clauses at the end of the contract

o Common provisions include: choice of law, counterparts, headings, assignment, further assurances, time is of the essence, arbitration/mediation clauses, notices, entire agreement clause, enurement

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Common Law Remedy – Damages What the innocent party ultimately wants Four general concepts in Canadian law on contract remedies:

(1) There is no compulsion to perform remedies may be either compensatory (substitutional) or coercive (specific)

(2) Compensation for loss suffered by the non-breaking party is provided in the form of money; the non-breaching party may obtain a substitute with this money

(3) No distinction is made in awarding damages based on the manner of the breach(4) The goal for contractual remedies is compensation, not punishment

Dominant view is that contractual remedies should offer the contract-breaker the choice of whether to perform or pay

Common law duty to keep a contract means that you must pay damages if you do not keep it

Expectation Measure of Damages Ruling principle: place plaintiffs in the same position they would have occupied if the contract

had been performed (Sally Wertheim) This sanction is most effective and makes people scared enough not to breach a contract Easier to calculate an expected benefit than to measure the money lost from relying on a K

Reliance Measure of Damages Despite the almost universal ability of expectation damages as a matter of principle,

damages based on the reliance measure do continue to surface in the jurisprudence The main reason for using the reliance measure is that the plaintiff has not suffered any

losses measurable by the expectation level or has been unable to prove expectation losses with the requisite degree of certainty as a consequence, the damages claim is confined to resorting the plaintiff to his/her pre-contractual position

Case Briefs McRae v. Commonwealth Disposals Comm. (Aust. HC, 1951) reliance damages can be

used where expectation damages are impossible to calculateo Contract for tanker but turned out the tanker wasn’t there, difficulty arises in trying to

value a non-existent thing (impossible to place value on what the defendant purported to sell)

o Just because assessing damages is difficult, doesn’t mean a court is relieved from doing it nor is the defendant relieved from paying them

o Defendant tried to argue that expectation damages are impossible to assess b/c it is possible that even if the tanker had been there, it could have been worthless

o The plaintiffs can make a prima facie case on the basis that they were promised a tanker, it was not there, and therefore it was certain that their expenses in getting to the tanker would be wasted to rebut this, the defendants would have to prove that, if there had been a tanker, the expense incurred would have been equally wasted (can’t prove here)

o Court decided to measure damages by referring to the expenses the plaintiff incurred and wasted in reliance on the promise that a tanker existed

Anglia Television v. Reed (Eng. CA, 1972) a plaintiff can elect between expectation damages (lost profits) and reliance damages (wasted expenditures)

o Contract between parties for R to play in a movie produced by A, but R backed out after expenses had already been incurred by A

o A couldn’t seek expectation damages b/c it would be uncertain to try to speculate how much money the movie would have made

o Court awarded reliance damages for expenses made in preparation for the movie (both before and after R had committed to be in it)

Bowlay Logging v. Domtar (BCSC, 1978) where it can be proven that even if the contract had been performed the plaintiff would have lost money, there can be no recovery

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o Contract between parties to log, partway through D fails to provide trucks and therefore breaches the contract so B sues for losses

o B argued that they could not determine the profit because it was too uncertain (when in fact they knew there wouldn’t be any profit) so instead sought reliance damages

o Court found that in any event B would have lost money, whether the contract was fully performed or breached (actually lost less money b/c of breach)

o Court held that remedies don’t provide compensation for people who enter into bad deals; damages are to compensate for losses

Sunshine Vacation Villas Ltd. v. Governor and Company of Hudson’s Bay (BCCA, 1984) reliance and expectation damages are alternatives to one another and must not be used simultaneously

o Parties had an agreement to move stores into buildings owned by defendants, defendant breached and shut down all currently occupied stores

o Lower court awarded damages based on both loss of capital and loss of profit defendant argued that the plaintiff couldn’t get both types of damages

o Since an assessment of damages for loss of profit would be too speculative, court awarded only loss of capital (reliance damages)

Loss of Chance Four requirements for obtaining damages for loss of chance (Folland):

(1) Plaintiff must show that it lost a chance due to the defendant’s conduct,(2) Chance must be sufficiently real and significant to rise above mere speculation,(3) Outcome must not have depended on the plaintiff’s own conduct, and(4) Loss of chance must have some practical value

Case Briefs Chaplin v. Hicks (KB, 1911) where damages cannot be precisely or certainly assessed,

juries should just do the best they can even if their verdict amounts to guessworko C entered a competition in which the top 12 girls would get 3-year acting contracts,

she was one of the top 50 but was out of town when H contacted her so they selected the 12 without her and she sued for loss of chance

o H argued that it was impossible to assess the value of the loss (b/c of the contingencies on C’s chance at winning) court said this makes calculations uncertain and imprecise but not impossible

o The taking away of an opportunity deprived C of something that had monetary value, so the fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damage for his breach

Folland v. Reardon (Ont. CA, 2005) if a contract is breached, the innocent party is entitled to damages (strict liability)

o Proof of damages is not part of the liability inquiry

Cost of Completion vs. Difference in Value Cost of completion the cost of buying substitute performance from another including

undoing any defective performance Difference in value the market value of the performance the contract-breaker undertook

minus that actually given

Case Briefs Groves v. John Wunder Co. (Minn. CA, 1939) lack of value in land does not absolve the

breaching party of the consequences of his breacho Contract between parties for J to remove sand and gravel from G’s land and leave it in

a uniform grade, J breached by removing only the best and richest gravelo Court used a cost of performance/completion analysis to assess damages (the cost of

remedying the defect) and awarded $60,000o This analysis was used because:

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J’s breach was willful and in bad faith so giving less money under a difference of value analysis would reward a bad faith and deliberate breach of conduct

In building/construction contracts, the law aims to give the disappointed promisee, as far as money will do it, what he was promised

o Court found the lack of value in the land itself to be irrelevant; an owner’s right to improve his property is not trammeled by its small value, and if an owner wants he can erect structures on his land that reduce its value

o Economic waste: court will not order cost of performance where it is grossly out of proportion to the good to be attained (does not apply here – usually cases of destruction of a substantially completed physical structure)

o Dissent held that the value of the land was only $12,000 so awarding $60,000 in damages gave G far more than what the parties had contracted for would have used a difference in value analysis

o Majority decision criticized in Posner’s Economic Analysis of the Law because if the plaintiff had wanted the performance rather than the $60,000 he would have sought specific performance (and he did not actually use the money to fix the land); this assessment of damages was not economically correct

Peevyhouse v. Garland Coal & Mining Co. (Okla. SC, 1963) in this type of situation, damages for breach of contract are ordinarily the reasonable cost of performance, but where the contract provision breached was merely incidental to the main purpose in view, and the economic benefit which would result by full performance is grossly disproportionate to the cost of performance, the damages are limited to the diminution in value resulting to the premises because of non-performance

o Contract for lease of land, G was required to perform remedial work ($29,000) at the end of the lease period but didn’t do it

o Judge implied to the jury that they could consider both diminution in value and the cost of repair work judge decided on $5000 in damages which was just a fraction of the cost of performance but more than the total value of the land

o Plaintiffs rely on Groves and argue for the cost of performance rule court notes that Groves is the only case where cost of performance has been followed under circumstances where that amount greatly exceeded the diminution in value resulting from the breach

o Defendants rely on cases which use the difference in value ruleo Court said that no person should recover a greater amount in damages for breach than

he would have gained by full performance, and damages must be reasonable and not unconscionable or grossly oppressive using the cost of performance rule in this case would give P more than the value of the contract and would be grossly oppressive

o Diminution in value resulting from the non-performance is $300, so that is all P is entitled to

o Dissent follows Groves because again breach was done in bad faith Radford v. De Froberville (Eng., 1977) cost of performance is fair where a sale implicitly

included the price of a service as an essential part of the contracto R selling part of his land to D who was supposed to build a stone wall of a specific

height between their properties, but didn’t do so (cost of house had been reduced to account for the building of the fence)

o R argued that he should be entitled to the cost of building the stone wall, and testified that if awarded the full cost, he would in fact use the money to have the wall constructed court agreed

Ruxley Electronics and Construction Ltd. v. Forsyth (HL, 1996) damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party, from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained (but, consumer surplus damages)

o Contract to build a 7'6 deep swimming pool for 70,000 pounds, was only built at 6’9 deep so F sued for damages

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o Court acknowledged that there had been a breach but that it had not decreased the value of the pool or the property; court also doubted that F would use the money (if awarded full cost) to rebuild the pool

o Two extreme options would be to award nothing (because there was no loss in value) or award 21,560 pounds (the cost of rebuilding) court landed somewhere in the middle by recognizing value in “consumer surplus” (personal/subjective value a person places on something over and above market value)

o Court awarded F just 2500 pounds for loss of amenity

Remoteness Idea that a defendant should be relieved from liability for losses that are too remote Involves issues of both principle and policy:

o Principle courts are concerned with the fundamental problem of whether the defendant actually caused the loss that occurred

o Policy courts are concerned with the general policy question of whether the defendant ought to be burdened with the payment of damages of the type claimed

The tests which the courts have used in cases provide the tools with which remoteness problems are approached and where the courts draw the line

Factors to consider:o Degree of probability/foreseeability of loss what would ordinarily be expected in the

circumstances?o Communication of special circumstances fact of communication plus particulars

such as clarity, specificity, and timingo Defendant’s knowledge generally, and of plaintiff’s business in particular

General rule: if defendant has only a transitory relationship with the plaintiff, then the scope of liability might be reduced; if there is an established relationship between parties then the defendant’s knowledge of the plaintiff’s business is likely to be greater (helps distinguish Hadley where defendants were just carriers from Victoria Laundry where defendants had expertise in the field)

o Nature of the defendant’s business expertise and what is being offeredo Nature of product or service second hand or top of the line?o Sophistication of the parties generally, the more sophisticated/knowledgeable the

parties, the more likely the damages in question will be foreseeableo Ordinary allocation of risk expectations in the marketplace (custom of trade)

Contractual liability should be based on legitimate understandings of parties (fair and reasonable risk allocation)

An important function of a contract is risk allocation Where a party to a contract may suffer exceptional harm if a contract is

breached (loss of lucrative contracts), then the defendants will only be liable for those losses that he/she can be reasonably and fairly aware of

Insurance in cases like Hadley, it may be more efficient for businesses to get business interruption insurance to cover lost profits than for carriers to have to get third party liability insurance

o Proportionality comparison of contract price and nature of service with ultimate loss It would be anomalous to impose extensive liability for breach of contract to

provide an ordinary service at a low price

Test Two rules from Hadley:

(1) Damages for breach of contract should be such as arise naturally from the breach itself, or such as may reasonably be supposed to have been in the contemplation of the parties at the

time they made the contract as the probable result of its breacho This rule is brought into play by imputed knowledge (Victoria Laundry)

(2) If there are special circumstances relating to the contract, and these are actually communicated by the plaintiff to the defendant, damages reasonably contemplated would be

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the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated

o This rule is brought into play by actual knowledge (Victoria Laundry) Reasonable foreseeability is the main test under both rules Now a unified test were damages in the reasonable contemplation of the parties (either

b/c they have been in the usual course of things or because of communication of circumstances?)

Case Briefs Hadley v. Baxendale (Exch., 1854) an injured party is entitled to damages where the

damage is one that would arise naturally (in the usual course of things) OR was in the reasonable contemplation of the parties (as a result of notification of special circumstances)

o H’s mill stopped working because crank shaft broke, told carrier company to bring it to manufacturer for repair, delivery was delayed b/c of neglect resulting in loss of profits for H because the mill was closed for a few days

o Damages should be such as may fairly and reasonably be considered as either arising naturally from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it

o If there are special circumstances known to both parties, the resulting damage is reasonably foreseeable so damages would be the amount of injury which would ordinarily follow from a breach of contract under these circumstances

o If special circumstances are not known to the breaching party, damages would be the amount of injury which would arise generally from such a breach

o Ordinary circumstances (rule 1) vs. special circumstances (rule 2) approacho Carrier company wasn’t notified that the mill would lose profits if the shaft wasn’t

returned quickly, so loss of profits could not have been reasonably/fairly contemplated by both parties (they didn’t flow naturally, nor were the special circumstances communicated)

Victoria Laundry (Windsor) Ltd. v. Newman Indust. Ltd. (KB, 1949) lost profits recoverable where defendant had knowledge of special circumstances, even if they were not communicated

o Plaintiffs purchased a boiler from the defendants who knew that they were launderers and needed it for their business, boiler was damaged in delivery and delayed by several months so plaintiffs sued for loss of profits

o Propositions applicable to this case: The governing purpose of damages is to put the innocent party in the same

position, as far as money can do, as if the contract had been performed; sometimes this is too harsh a rule (could provide innocent party with complete indemnity for all loss resulting from a breach), so:

In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach

What was at the time reasonably foreseeable depends on the knowledge then possessed by the parties or by the party who commits the breach

For this purpose, knowledge “possessed” is of two kinds:(1) Imputed knowledge everyone, as a reasonable person, is taken to know

the ordinary course of things and consequently what loss is liable to result from a breach of contract in that ordinary course (first rule in Hadley)

(2) Actual knowledge there may be added knowledge which a contract-breaker actually possesses, of special circumstances outside the ordinary course

of things, of such a kind that a breach in those special circumstances would be liable to cause more loss (second rule in Hadley)

In order to make the contract-breaker liable under either rule, it is not necessary that he should actually have asked himself what loss is liable to result from a

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breach; it is sufficient that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result

To make a particular loss recoverable, it does not need to be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss; it is enough if he could foresee that it was likely so to result

o Court found that though the special circumstances weren’t communicated in this case, the defendants were still aware of them so they are responsible for the loss of profit resulting from the facts they knew

Scyrup v. Economy Tractor Parts Ltd. (Man. CA, 1963) both rules from Hadley operate on the basis of reasonable foreseeability

o Plaintiff purchased a tractor part from defendant and made it known to the defendant that it needed it quickly and in good working condition, but the part ended up having parts missing and didn’t work properly, leading to loss of profits

o Court says whether using rule one or two from Hadley, the test of reasonable foreseeability operates in favor of the plaintiff

o Defendant held liable for loss of profit Koufos v. Czarnikow (HL, 1969) unified the Hadley rules and reformulated them as

applying to likely damages instead of reasonably foreseeable damageso Contract for K to move C’s vessel of sugar to multiple places, prediction of length of

voyage was 20 days but a breach of contract resulted in a 9 day delay during which the market price of sugar dropped so K ended up making less money

o K didn’t know what C was doing with the sugar, but knew that there was a sugar market at the ship’s destination court found that K must have realized that it was not unlikely that the sugar would be sold there and that market prices fluctuate day by day (though just as likely to go up as down)

o Court finds that the Hadley rules are not so much based on reasonable foreseeability as they are on likely/unlikely losses; a type of damage that was foreseeable but very unlikely cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties

o Court found the loss in this case to be too remote from the defendant’s breach

Loss of Enjoyment/Mental Distress Damages Frequently parties will seek to attain objectives other than financial objectives when these

types of deals go sour, there is often an uneasy fit between the expectation principle and the computation of the damages necessary to protect the interest recognized by the application of that principle (putting innocent party where they would have been if contract was performed)

The question is how to reduce non-monetary objectives to a monetary value assessment

Test For mental distress damages, the court must be satisfied:

(1) That an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties (but this doesn’t

have to be the dominant aspect/very essence of the bargain), and(2) That the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation

Case Briefs Jarvis v. Swan Tours (QBCA, 1973) in a proper case damages for mental distress can be

recovered in contracto J bought a holiday package that did not live up to the assurances in its brochure so J

sued for damages, including the mental distress and aggravation he experiencedo If the contracting party breaks his contract, damages can be given for the

disappointment, distress, upset, and frustration caused by the breach31

o Court found that though J still got a vacation, he is still entitled to damages for the lack of the facilities promised to him and for his loss of enjoyment

o Court rewarded J with damages in the amount of double the cost of the trip Fidler v. Sun Life Assurance Co. of Canada (SCC, 2006) there is no reason why damages

should not include damages for mental distress, where such damages were in the reasonable contemplation of the parties at the time the contract was made

o For years SL was denied F long-term disability benefits to which she was entitled, causing her significant mental distress

o Court says F should be compensated for this since this distress was reasonably within the contemplation of the parties when they entered into a contract for disability insurance

o Under Hadley, it would appear that mental distress damages weren’t available but court holds here that damages for mental distress for breach of contract may, in appropriate cases, be awarded as an application of the principle in Hadley

Court notes that Hadley is the single and controlling test for compensatory damages in cases of breach of contract

o Under the basic principle of compensatory contractual damages, parties are to be restored to the position they contracted for, whether tangible or intangible

o Court finds that the plaintiff meets both requirements for mental distress, so she is awarded compensatory damages for the psychological consequences of the defendant’s breach

Keays v. Honda Canada Inc. (SCC, 2008) no mental distress damages available for termination of employment, unless there is an independent actionable wrong

o Mental distress is not ordinarily in the contemplation of parties (employer has right to fire)

o There is a duty of good faith and fair dealing in the manner of termination, breach of which is compensable under the general damages principles

Punitive Damages Imposed out of a perceived need to condemn the behavior of the defendant that led to the

loss suffered by the plaintiff Policy guidelines (Whiten):

o Exceptionality punitive damages are the exception to the general rule of compensatory damages in breach of contract

Punitive damages must be a rational response to the circumstances of the case, driven by highly reprehensible behavior of the defendant

o Rationality the award of punitive damages must serve a rational purpose To be rational, an award must be linked to one of three goals: punishment,

deterrence, or denunciationo Proportionality the sum should be proportionate to, and no more than, the degree of

misconduct exhibited Anything in excess is irrational and will be struck down Factors to consider here: blameworthiness of the defendant’s conduct, degree

of vulnerability of the plaintiff, the harm/potential harm directed at the plaintiff, the need for deterrence, the adequacy of the penalties and damages already awarded for the same misconduct, and the advantage wrongfully gained by the misconduct

Test Two basic requirements (Whiten):

(1) The conduct must be found to be highly reprehensibleo Reserved for conduct that is high-handed, malicious, arbitrary, etc.o Conduct that departs to a marked degree from ordinary standards of decent behavior

(2) The misconduct must be an independent actionable wrong

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o This independent actionable wrong may be founded in the breach of a term of the contract, or could also arise from tort law

Also note policy considerations above

Case Briefs Whiten v. Pilot Insurance Co. (SCC, 2002) punitive damages can be used for highly

reprehensible conduct that constitutes an independent actionable wrongo W’s house burned down but had insurance, insurance company alleged that fire was

set deliberately (even though this had been ruled out)o Court found insurance company’s conduct exceedingly reprehensible, so W was

awarded $1 million in punitive damages (plus compensatory damages) Keays v. Honda Canada Inc. (SCC, 2008) confirmed principles from Whiten

o Court confirmed that: Punitive damages are restricted to advertent wrongful acts that are so malicious

and outrageous that they deserve punishment on their own Courts should award punitive damages only in exceptional cases where an

award is necessary for denunciation and deterrence An independent actionable wrong, found in the breach of a separate contractual

provision or in another duty, is required to establish punitive damageso Honda’s conduct was not sufficiently outrageous that punitive damages were required

Mitigation Principle of mitigation is that a plaintiff cannot recover for losses that it could reasonably

have avoided by taking reasonable steps after a breach of contract to minimize damages The duty to mitigate does not mean that the plaintiff is liable for not mitigating, just that

he/she will not be able to recover for losses that could reasonably have been avoided What is “reasonable” (in terms of taking reasonable steps) depends on the facts and context

and what a reasonable business person would have done in the circumstanceso The standard tends to be relatively low since it is understood that the plaintiff is

responding to an unexpected event (breach of contract) and may be facing difficult circumstances

o As a general rule, courts are reluctant to second guess efforts to avoid losso Only required to take reasonable, not extraordinary, actionso If these reasonable steps incur an additional expense, a plaintiff may recover these

Burden of proving that the plaintiff ought to have taken steps to avoid loss is on contract-breaker

Two considerations:(1) The time at which the damages are to be measured general rule is that the assessment

of damages is made at the time of the breacho In a contract for a sale of goods, a disappointed purchaser is expected to go into the

market and make a substitute contract at the time of breacho Justification for this general rule is risk allocation; the decision to avoid losses is solely

on the plaintiff, so the risk of further losses should also be on the plaintiffo The time of breach rule is efficient because it gives the plaintiff an incentive to avoid

loss and prevent wasteo EXCEPTIONS:

Not literally the exact date of the breach; courts will usually only require that plaintiffs mitigate within a reasonable time after breach

The nature of the transaction and the circumstances influence what is considered a reasonable time

The reasonable time may be extended if: the good contracted for is unusual or unique, the plaintiff is exposed to risk from mitigation, the plaintiff has inadequate funds, or the nature of the good means it cannot be resold instantly

One common alternative is to award damages calculated at the time of trial(2) How gains and losses subsequent to the breach are treated

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o Additional losses result not from the breach, but from failure to mitigate

Case Briefs Payzu Limited v. Saunders (Eng. CA, 1919) what is considered reasonable mitigation is a

question of fact to be decided in each caseo Contract between parties for sale of silk to be paid by credit, seller later insisted the

buyer pay in cash which breached the contract, buyer refusedo Court considered what the buyer would normally be expected to do to avoid further

losses normal course of action would be to buy silk at the prevailing market price, and the normal measure of expectation damages would be the difference between the market price and the contract price

o Seller said that the buyer should have mitigated by just paying in cash; buyer said it shouldn’t be expected to deal with someone who had just breached their contract court said in commercial circumstances it is sometimes reasonable to expect a plaintiff to deal with a contract-breaker

Asamera Oil Corp. v. Seal Oil (SCC, 1979) courts have discretion to take into account any special circumstances that indicate that it is unreasonable to require the plaintiff to mitigate immediately

o Contract b/w parties to loan shares to the defendant which he failed to return on timeo At the time of the breach the share price was 92 cents, but rose up to $21 by time of

trialo Court found that the plaintiff had a duty to mitigate by purchasing replacement shares,

but that it would be unreasonable to expect the plaintiff to purchase shares at the time of the breach due to the illiquid/unstable nature of them & the relationship b/w the parties

Pezzente v. McClain (BCPC, 2005) damages should not exceed the commercial value of the product b/c the duty to mitigate would preclude this

o P purchased a puppy from M who made an express warranty that the puppy was healthy (which she really did believe), ended up having health problems which cost P $10,000

o Dogs condition wasn’t found until it was 2, so court found it unreasonable to expect M to have taken the dog for an MRI and x-rays before selling him (the warranty about the dog’s health was limited to things known at the time)

o P’s decision to give the dog surgery was an emotional one, but was not reasonably economic since the cost far exceed the commercial value of the dog

o Duty to mitigate might have required P to euthanize the dog or refuse the surgeryo The most P could recover is the amount paid for the dog ($350)

Liquidated Damages, Deposits & Forfeitures Measurement of damages in the event of breach, agreed at time the contract is entered into Meant to compensate for failure to perform obligations (not meant to be expectation

damages) Generally, courts are reluctant to interfere with such agreements Courts distinguish between these three types of clauses:

o Liquidated damages fair/genuine pre-estimate of damageso Penalty sum stipulated is extravagant and unconscionable in comparison to losso Forfeiture clause deposit is forfeit if purchase is not complete by a certain date

Law and Equity Act: provides courts wide discretion to relieve against penalties and forfeitures

Case Briefs Super Save Disposal Ltd. v. Blazin Auto Ltd. (BCSC, 2011) a liquidated damages clause will

only be enforced if it is a genuine pre-estimate of the expected loss that a party will sustain in the event of a breach

o Contract between parties included a liquidated damages clause34

o Enforceability of a liquidated damages provision engages two competing objectives: freedom to contract versus the right of courts to intervene in a case to relieve against an oppressive or unconscionable result flowing from a liquidate damages term

o If a “liquidated damages clause” is actually a penalty clause that is oppressive and unreasonable, equitable intervention will be justified to prevent injustice (but calling something “liquidated damages” or “penalty” is not determinative)

o Judicial interference will be justified if enforcement of the term results in payment of a sum which is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach

o Burden of proving that the sum is actually a penalty clause rests of the party against whom the sum is claimed

o Factors to consider: relationship between parties, type of contract, length of contract, notice of termination, precise terms of damage clause, etc.

o In this case, defendant did not try to prove that it was a penalty clause (and it wasn’t so egregious that the court would infer that it was a penalty) so the liquidated damages clause was enforced

Equitable Remedies Courts have always been reluctant to award specific performance or injunction where there

will be difficulty in determining whether the order of the court has been obeyed

Specific Performance Court order compelling the party in breach to perform the contract Should be ordered if it would “do more perfect and complete justice” than an award of

damages (Beswick); where damages would not sufficiently protect a plaintiff’s interest Historically the one area where SP is common is in contracts involving an estate or interest in

land because land is seen as being unique (though this is changing – see John Doge) Absolute rule: SP is not granted for personal services (Warner Bros) – akin to slavery?

Defenses Mutuality of remedy the remedy is available to those against whom it would be available if

they were in breach, and is not available to those against whom it would be unavailable if they were in breach

o Mutuality is responsible for a vendor’s right to compel SP of a contract for a sale of land

Misrepresentation and mistake in some cases courts will not rescind the contract, but will refuse to allow the plaintiff to compel performance, thus restricting the remedy to one of damages

o SP has been refused in the case of a mistake that was not sufficiently serious to impair the validity of the contract where there is an element of fault on the part of the plaintiff

Conduct of the plaintiff a well-established maxim of equity as that “he who seeks equity must do equity” or “he who comes to equity must come with clean hands” (court has discretion)

Hardship where a decree of SP would cause severe/unnecessary hardship to the parties, or to a third party, specific performance may be refused, leaving the plaintiff to a remedy in damages

o The circumstances giving rise to hardship must have existed at the time the contract was formed, unless the plaintiff’s conduct has caused a change in circumstances

Case Briefs John Dodge Holdings Ltd. v. 805062 Ontario Ltd. (SCC, 2003) SP will only be granted in

cases of land if the plaintiff can demonstrate that the property is unique in the sense that its substitute would not be readily available

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o The “unique” quality of the land should relate to the proposed use of the property and be a quality that makes it particularly suitable for the purpose for which it was intended

o When a breach takes place the wronged party must decide whether to keep the agreement alive by seeking performance or accept the breach and sue for damages the time of breach is when the assessment of property as “unique” or not takes place

o A wronged party is only obliged to mitigate if he/she is not entitled to SP o Specific performance was allowed in this case because location was uniquely suited to

the proposed use and no other land in the area had similar proximity and zoning features

Injunction An order of the court that compels a party to do specific acts (mandatory injunction) or

refrain from doing specific acts (prohibitory injunction) Interim injunction usually obtained ex parte, lasts a short period, existence of an

emergency must be demonstrated Interlocutory injunction usually obtained after the issue of writ, will last until trial or final

disposition of mattero Interim & interlocutory injunctions are extraordinary remedies; their purpose is to

prevent irreparable or uncompensable injury from occurring before a dispute is finally resolved

Perpetual injunction finalizes adjudication

Case Briefs Warner Bros. Pictures Inc. v. Nelson (KB, 1937) courts will not grant an injunction to

enforce negative covenants if the effect of doing so would be to drive the defendant either to starvation or to specific performance of the positive covenants

o Contract between parties for N to only work as an actress for WB, she breached by working for someone else, W sought an injunction to prohibit her from doing this

o Court considered whether a prohibitory injunction could be granted when it would amount to indirect SP of a personal services contract (which isn’t allowed)

o A clause in the contract said that in the event of breach, injunction would be the remedy used but court said the parties can’t contract themselves out of the law

o Injunction would work in this case unless it would be tantamount to ordering N to perform her contract or remain idle (which it wouldn’t b/c she was still capable of other work)

o Court granted a 3 year injunction

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Appendix 1 – Chart on Duress, Undue Influence & Unconscionability

DURESS UNDUE INFLUENCE UNCONSCIONABILITYDefinition

Compulsion under fear of harm, coercion.

Unconscientious use of power to induce other to enter K.

Unfair, one-sided, offends justice.

Categories

(1) Duress to person(2) Duress to goods/property,(3) Economic duress

(1) Actual(2) Presumed (a) De jure (b) De facto

(1) Procedural unconscionability(2) Substantive unconscionability

Test Classic test:(1) Overborne will(2) Vitiation of consent

Modern test:(1) Pressure amounting to compulsion(2) Illegitimacy of pressure(3) Lack of approbation

Economic duress in K modification:(1) Promise extracted by pressure(2) No practical alternative(3) Consent

(1) Relationship of dependence (a) Presumption of undue influence, onus shifts to person with power (de jure) (b) Relationship of trust/confidence must be proven (de facto)(2) Manifest disadvantage(3) Onus on influencer to show full, free & informed thought

(1) Inequality of bargaining power (a) Consider contextual

factors (b) No express

categories, but usually pre-existing relationships with potential for inequality of bargaining power

(2) Substantial unfairness (onus on claimant)

Remedies

Traditional: K voidK voidable option other party

Equitable: K voidable, court can rescind.

K voidable, court can rescind

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Appendix 2 – Chart on Cause & Effect of Each Principle

Appendix 3 – Checklist(1) Is there a contract?

Mistake as to fact? Generally caveat emptor. Mistake as to the terms of the contract? Apply objective reasonable person test:

Smith v. Hughes – what are the terms.o Situations often involve parties being at odds over what is being contracted for:

goods shipped on which ship? (Raffles) contract for sale of all the steel includes new and old (Staiman)

o Were the parties fundamentally at odds over what was being bought/sold? If so, there is no contract (Raffles); no agreement between parties

o Was one party snapping up a mistaken offer (they knew the other party was mistaken?); no agreement between the parties

Mistake as to the nature of the document? Non est factum. Common law mistake - mistake as to the identity of the parties?

o courts can apply different doctrinal analyses to get different resultso case law is inconsistent – focus on who should bear the risk

Common law mistake – non-existence of the subject matter? No contract if what is being sold does not exist

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Issue Reason Effect

Misrepresentation

One party misled other - K rescinded- Sometimes tort damages

Mistake One or both parties mistaken about assumptions or terms

- K void (usually)- Some law saying K voidable

Duress One party coerced by other to K K voidable (classic approach, K void)

Undue Influence One party dominated by other K voidable

Unconscionability

Contracting circumstances unfair and tantamount to fraud

K voidable or unenforceable or subject to judicial adjustment

Illegality Public policy disapproves of some contractual situations

Formation or performance of K prohibited by statute or common law

Frustration K purpose becomes impossible - K wholly discharged from point of frustration- Statutory consequences

Common law mistake - mistaken assumptions? Mistake of both parties relating to the existence of some quality, which makes the thing without the quality essentially different from the thing as it was believed to be?

o Apply common law mistake doctrine form Bell v. Lever and McRae v Commonwealth Disposals Commission. Threshold is extremely high.

If all else fails…..then equitable mistake? A more flexible test where is there is material misrepresentation or fundamental misapprehension. Court may set-aside contract on terms in its equitable discretion. Is it unfair/unconscientious for party to seek enforcement of contract? Should the mistaken party be relieved of their mistake?

Link to other doctrines:o Was there free and informed consent? Duress, undue influenceo Does the law prohibit the formation of the contract? Illegality

(2) What are the terms of the contract? Interpret the contract! Parse the wording carefully. Use interpretative principles,

in particular contra proferentum for standard form contracts. Parol Statements: Is there inconsistency between parol statements and the written

contract? Apply the Gallen framework – there is a strong presumption the written agreement trumps but….courts will not allow written agreement to override a clear, specific representation on which there has been significant reliance.

Mistake as to the recording of the terms of the contract? Seek rectification. Reasonable notice? Did the party have notice of terms of the contract, in

particular, onerous provisions? Signed/Unsigned. Tilden and Karroll Were terms added after contract concluded? Use offer, acceptance and

consideration doctrines to argue that contract already formed? Loychuk v. Cougar Mountain

(3) Is there an exclusion or limitation of liability clause? Apply Tercon analysis: interpret; unconscionability; public policy

(4) Has the contract been frustrated? Event occurring after formation? Does the event destroy the commercial

purpose of the contract? Not self-induced. Not foreseeable.

(5) Is the contract unfair? Duress: focus is on consent of parties Undue influence: focus in on the abuse of trust, confidence, power where there is a

relationship of dominance. Unconscionability: transactional incapacity of the party (person was vulnerable,

reduced capacities; transaction was not substantially unfair.o Common law unconscionability and statutory under the BPCPA

(6) Does the contract violate the law or public policy? Is there an overly broad restrictive covenant? Restrictive covenants are prima

facie unenforceable; restrictions must be reasonable: by activity; time and geography Statutory illegality? Is the formation or performance of contract illegal in some

way? Still Consumer Protection: Does the contract violate consumer protection legislation?

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(7) Has there been dishonest performance? Duty of honest contractual performance (Bhasin): Parties must not lie or

otherwise knowingly mislead each other about matters directly linked to the performance of the contract.

(8) What is the remedy? No contract: if there is no contract (step 1), then restitution of benefits (i.e.

deposit). Equitable mistake: court has broad remedial discretion – set aside the contract of

terms. Contract frustrated: parties relieved of future performance obligations, restitution

of past benefits, sharing of costs. Unconscionability, undue influence, duress: contract voidable, set aside on

terms, order restitution of benefits/damages Breach of contact: Damages!

o Expectation damages = general measureo Expectation damages= reliance plus loss profitso How to measure? Cost of performance, diminution in value, loss of a chanceo Reliance damages can be granted is ED speculativeo Restitution of benefits conferred

Limiting Principleso Remotenesso Mitigation

Liquidated damages, deposits and forfeitureso Court can provide relief against penalties and forfeitures

Intangible harmso Apply Fiddler

Punitive damageso Apply Whiten

Equitable remedieso Is specific performance availableo Injunction available to enforce negative covenant?

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