Long).docx · Web viewStandard Form Contracts & Exclusion Clauses4. Contractual Interpretation4. Scott v. Wawanesa Mutual Insurance Co (1989, SCC)5. Standard Form Contracts & Exclusion

Sarah Chaster – Law 108A Contracts Outline (Final)

LAW 108A: CONTRACTS OUTLINE (FINAL)

Standard Form Contracts & Exclusion Clauses..............................................................4Contractual Interpretation.....................................................................................................................................4

Scott v. Wawanesa Mutual Insurance Co (1989, SCC)................................................................................5Standard Form Contracts & Exclusion Clauses..............................................................................................5Unsigned Documents................................................................................................................................................7

Parker v South Eastern Railway (1877, Eng. CA).........................................................................................7Thornton v. Shoe Lane Parking (1971, UK CA)..............................................................................................8Interfoto Picture Library v Stiletto Visual (1989, Eng. CA)......................................................................8Promech v Bronco Rentals (1995, Man. CA)...................................................................................................9

Signed Documents......................................................................................................................................................9Tilden Rent-A-Car v. Clendenning (1978, Eng. CA)...................................................................................10Delaney v Cascade River Holidays (1983, BCCA).......................................................................................10Ochoa v Canadian Mountain Holidays (1996, BCSC)...............................................................................10Karroll v. Silver Star Mountain (1988, BCSC)..............................................................................................10

Doctrine of Fundamental Breach......................................................................................................................11Karsales v Wallis (1956, Eng. CA)..................................................................................................................... 12Suisse Atlantique v Rotterdamsche (1967, Eng. HL)................................................................................12Photo Production v Securicor (1980, Eng. HL)...........................................................................................12Hunter Engineering Co v Syncrude Canada (1989, SCC)........................................................................12Plas-Tex Canada v Dow Chemical (2004, ABCA)........................................................................................13Tercon Contractors v BC (2010, SCC).............................................................................................................. 13

Mistake......................................................................................................................14Mistake: Introduction.............................................................................................................................................14

Staiman Steel v Commercial & Home Builders (1976, Ont. HC)..........................................................17Smith v Hughes (1871, Eng.)............................................................................................................................... 17

“Snapping up” a Mistaken Offer.........................................................................................................................18Mistaken Assumptions.......................................................................................................................................... 18

Bell v Lever Bros (1932, Eng. HL)..................................................................................................................... 18McRae v Commonwealth Disposals Commission (1951, Aust. HC).....................................................19

Equitable Mistake.................................................................................................................................................... 20Solle v Butcher (1950, Eng. CA)......................................................................................................................... 21Great Peace Shipping v Tsavliris Salvage (2002, Eng. CA)....................................................................21Miller Paving v Gottardo Construction (2007, Ont. CA)..........................................................................22

Mistaken Identity.....................................................................................................................................................23Cundy v Lindsay (1878, Eng. HL)...................................................................................................................... 26Phillips v Brooks (1919, Eng. KB)..................................................................................................................... 26Lewis v Averay (1972, Eng. QB)......................................................................................................................... 26Shogun Finance v Hudson (2003, Eng. HL)..................................................................................................26

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Non Est Factum..........................................................................................................................................................28Saunders v Anglia Building Society (1971, Eng. HL)................................................................................28

Rectification................................................................................................................................................................28Performance Industries v Sylvan Lake Golf & Tennis Club (2002, SCC)...........................................29Morley Shafron v KRG Insurance Brokers (2009, SCC)............................................................................29

Frustration.................................................................................................................29Introduction............................................................................................................................................................... 30Historical Development.........................................................................................................................................31

Paradine v Jane (1647, Eng. KB)....................................................................................................................... 32Taylor v Caldwell (1863, Eng. QB).................................................................................................................... 32Krell v Henry (1903, Eng. KB)............................................................................................................................. 32

Land Cases...................................................................................................................................................................32KBK No. 138 Ventures v Canada Safeway (2000, BCCA)........................................................................32

Frustration: Summary............................................................................................................................................33Frustration: Remedial Consequences.............................................................................................................34

Control of Contractual Power.....................................................................................35Duress........................................................................................................................................................................... 35

Universe Tankships of Monrovia v Int’l Transport Workers Federation (1982, JCPC)..............36Nav Canada v. GFAA (2008, NBCA).................................................................................................................. 37

Undue Influence........................................................................................................................................................38Geffen v Goodman Estate (1991, SCC)............................................................................................................ 39Royal Bank of Scotland v. Etridge (2001, Eng. HL)...................................................................................40

Unconscionability....................................................................................................................................................40Morrison v Coast Finance (1965, BCCA)........................................................................................................42Lloyds Bank v. Bundy (1975, Eng. CA)............................................................................................................ 43Harry v Kreutziger (1978, BCCA)..................................................................................................................... 43

Illegality and Good Faith.............................................................................................44Common law illegality........................................................................................................................................... 44

KRG Insurance v Shafron (2009, SCC)............................................................................................................. 45Statutory Illegality...................................................................................................................................................46

Still v Minister of National Revenue (1988, FCA).......................................................................................47Good Faith...................................................................................................................................................................48

Bhasin v Hrynew (2014, SCC)............................................................................................................................. 49

Consumer Protection..................................................................................................51Rushak v Henneken (1991, BCCA).................................................................................................................... 53Loychuck v Cougar Mountain (2012, BCCA)................................................................................................54

Commercial Practice & Contract Drafting....................................................................55

Remedies...................................................................................................................58Principles of Remedies and Damages.............................................................................................................59Reliance Damages....................................................................................................................................................60

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McRae v. Commonwealth Disposals (1951, Australia H.C.)...................................................................60Anglia Television v. Reed (1972, Eng. CA)..................................................................................................... 61Bowlay Logging v. Domtar (1978, BCSC)......................................................................................................61Sunshine Vacations v. Hudson’s Bay (BCCA, 1984)...................................................................................61

Loss of a Chance........................................................................................................................................................61Chaplin v. Hicks (1911, Eng. CA)....................................................................................................................... 62Folland v. Reardon (2005, Ont. CA).................................................................................................................. 62

Cost of Completion v. Difference in Value.....................................................................................................62Groves v. John Wunder (1939, US).................................................................................................................... 62Peevyhouse v. Garland (1963, US).................................................................................................................... 63Radford v. De Froberville (1977, UK).............................................................................................................. 63Ruxley Electronics (1996, House of Lords)...................................................................................................63

Remoteness................................................................................................................................................................ 64Hadley v. Baxendale (1854, UK)........................................................................................................................ 65Victoria Laundry v Newman Industry (1949, Eng. CA)...........................................................................65Scyrup v. Economy Tractor Parts (1963, Man. CA)...................................................................................65Cornwall Gravel v Purolator Courier (1980, SCC).....................................................................................66Koufos v. Czarnikow (The Heron II) (1969, Eng. HL)...............................................................................66

Mitigation.................................................................................................................................................................... 68Punitive Damages....................................................................................................................................................69

Whiten v Pilot (2002, SCC)................................................................................................................................... 70Loss of Enjoyment................................................................................................................................................... 70

Jarvis v Swans Tours (1973, Eng. CA)............................................................................................................. 71Fidler v Sun Life Assurance (2006, SCC)........................................................................................................72

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Standard Form Contracts & Exclusion Clauses

Contractual Interpretation

Guiding principles:

1. The process of contractual interpretation is aimed at ascertaining the true intention of parties at the time the K was signed.

- A contract is an agreement. Written piece of paper is evidence of that agreement.- Courts will look at: the whole K, the context, its commercial purpose- Courts will look at literal meaning of words (courts only depart from this if an unreasonable

result, or if clearly goes against purpose of K/parties’ intentions) – Consolidated-Bathurst- If there is no ambiguity, then must give it plain meaning (cannot interpret for a more “fair

result” or a “sensible commercial result”). Must presume that parties intended the legal consequences of their words – Eli Lilly v. Novopharm Ltd

2. Courts use an objective approach to determine parties’ intentions. - Inquiry into subjective intentions is usually not allowed- Policy: K law is to protect reasonable expectations. The test is thus how the promisor’s

conduct would strike a reasonable person in the position of the promise.3. Surrounding circumstances are almost always relevant. - Ks not made in a vacuum. The factual matrix, commercial context, genesis of the K, market

etc will be considered4. If there is no ambiguity in the written document, there is no need for extrinsic evidence. - If intention is clear, courts cannot stray beyond the “four corners” of the agreement.- Majority in Scott v. Wawanesa – when the wording is unambiguous, courts cannot take a

different meaning5. Evidence of prior negotiations is inadmissible. - However, might be included to show the general aim or genesis of the transaction6. No redundancy. Interpretation must give effect to all parts/provisions of the agreement. - Doctrine of effectiveness – must give effect to every word of the agreement- General terms are often seen as qualified by specific terms7. Subsequent conduct is not relevant - Canadian courts have been flexible here – to resolve ambiguity, courts may look to see if a

party behaved as if they were in a K8. Related agreements may be considered if components of one larger transaction. 9. Words given their natural or ordinary meaning. - Evidence may be admitted to prove the word has a special/technical meaning.10. Contra Proferentem - Ambiguities construed in favour of the non-drafting party.

Ambiguity No Ambiguity- Contra proferentum (authority: minority

in Wawanesa)- Subsequent conduct can be relevant if

two reasonable interpretations (Re Canadian National Railways)

-

- Objective approach- No need for extrinsic evidence if no

ambiguity (majority in Wawanesa)- Give words their natural/ordinary

meaning- Per majority in Wawansa: judiciary can

only give effect to a different meaning if

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it is a) unreasonable or b) clearly contrary to the intention of the parties

Sattava Capital Corp v. Creston Moly Corp (2014, SCC)- Most recent word from the SCC on interpretation of contracts- Interpretation is generally a practical, common-sense approach – not dominated by

technical rules of construction – focus on finding the true intention of the parties- Most evidence of surrounding circumstances can be admitted (however, the parol evidence

rule precludes evidence re: subjective intention of parties)- However, evidence of surrounding circumstances cannot overwhelm the words of the K- Focus on the words of the written document, in light of its entire context and the

commercial purpose of the agreement

Policy considerations: Finality, certainty, reasonable expectations versus unfair surprise

CASES

Scott v. Wawanesa Mutual Insurance Co (1989, SCC)Facts: Mr/Mrs. Scott had homeowner’s (fire insurance) policy. 15 year old son Charles was covered by the policy. Charles deliberately set fire; insurer denied coverage by relying on exclusion clause which excluded any losses caused by criminal/wilful acts of an insured.Issue: Does the exclusion policy apply only to the insured responsible for the wrongful act (i.e. Charles) or does it also apply to an innocent insured (i.e. Mr/Mrs. Scott)?Dissent: Insurance policy = classic standard form contract. Policy language is ambiguous, thus contra proferentum – insurance companies prepare policies for their own benefit, naturally; so any ambiguities should fairly be resolved in favour of the insureds.

- For insurers to succeed here, would have had to clearly bring clause to the insureds’ attention- Thus, the insurer’s obligation was owed severally to each insured, and the exclusion clause

applied only to the insured responsible for the act (and not other innocent insureds)- Policy: reasonable expectations of parties (parties unfamiliar with complexities of insurance law

might assume coverage)Majority: The terms of the policy are clear and unambiguous. It clearly excludes this type of risk.

- If wording is clear, courts cannot give K a different meaning unless:a) contract is unreasonableb) contract has an effect contrary to the intention of parties.

- Restrictive approach taken by courts (“if I could find another meaning, I would gladly use it, but the policy is clear, so I can’t – the insureds’ damages are excluded under the policy.”)

- Policy: Balancing reasonable expectations with unfair surprise

Standard Form Contracts & Exclusion Clauses

Standard form Ks/exclusion clauses: related but distinct issues (standard form Ks may be problematic without having exclusion clauses; exclusion clauses may appear in Ks that are not standard form).

Standard Form Contracts

Three different contexts where standard forms are used:

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1. Ticket cases: Earliest use of standard form. Hundreds of transactions a day – entrepreneurs did business on fixed terms (no time to negotiate the terms of each).

2. Businesses with numerous, lengthy and complex transactions often rely on standard form Ks (entrepreneur can’t negotiate terms with each customer, and customers don’t have the expertise). E.g.: insurance, finance & lending agreements, car rentals

3. Transactions (usually of sale) where a vendor uses a standard form for ease, but also to introduce disclaimer clauses meant to limit the vendor’s liability.

Benefits: Convenient/efficient tool for parties in equal positions Downsides: Can be used as an oppressive tool; party in dominant position can dictate terms In commercial arenas, standard form Ks are necessary for complex dealings like freight,

insurance or commodities Must distinguish between standard form Ks between commercial equals from those

between parties where there is a disparity in bargaining power Presumption: Standard form Ks assumed to be fair if parties equal. No presumption

between parties in unequal positions. Two main types:

1. Business to business standard form contracto Commodity markets, charter-party agreementso Reduces transaction costs, increases certainty and predictabilityo Efficiency in bargainingo Ensures consistent interpretation of these kinds of contractso Facilitates administration of contract

2. Business to consumer standard form contracto Signed or unsigned (tickets/oral)o Concerns : terms imposed by stronger party (“take it or leave it”)

Fairness of terms Exclusion of liability Knowledge of terms

Trebilcock, The Common Law of Restraint of Trade (1986)o Standard form Ks reduce transaction costs (e.g. dry-cleaning K – you don’t want to

negotiate the terms every time)o They are not always the result of concentrated market power; the real measure of

market power isn’t whether a supplier presents his terms on a “take it or leave it” basis, but whether the consumer, if he decides to “leave it”, has a competitive range of alternate sources of supply

o Standard form Ks aren’t always evidence of abuse of market power

Exclusion Clauses

Clauses which limit/deny liability are not inherently offensive; are often necessary to define the bargain between the parties

When do problems arise?o If exclusion clause is inserted in a standard form K by a dominant partyo If exclusion clause appears to relieve contracting party of the very responsibility

which the K imposed If exclusion clause is relied on by one party and challenged by the other, must ask:

1. Was the clause effectively included as a term of the K (i.e. was there notice given?)2. What does the clause mean? (Strict reading may narrow meaning.)3. Is there some reason to simply refuse to apply the clause? (E.g. unconscionable result).

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Strict construction: Ambiguities will be construed against the drafting party (contra proferentum)

Exclusion of liability for negligence: Line of cases here (p. 510-511)o Generally, very clear words are needed to protect from liability for negligence –

courts usually take a very restrictive approach hereo General exclusion clauses will not protect against negligence unless CLEAR words to

this effecto Authority: Canada Steamshipo Where a defendant’s liability rests ONLY in negligence, then general words of

exclusion can cover negligence (since otherwise, the clause wouldn’t have a subject matter) - Alderslade

Unsigned Documents

General rule for signed documents: party signing written K is bound by its terms, regardless of whether they read or are aware of terms (L’Estrange)

For unsigned documents, courts have developed the doctrine of reasonable notice: If there is no knowledge of conditions, a person is bound to conditions if there was reasonable notice that the ticket contained conditions (Thornton)

Mellish rule (reasonable notice): Where written document contains conditions but document not signed and party did not know of conditions, evidence is required to show assent to terms. Evidence may be:

a) actual knowledge that the document contains conditions; orb) reasonable steps taken to provide notice that the document contains

conditions. Reasonable notice doctrine was developed in many railway cases (see Parker) Trilogy of cases using the reasonable notice doctrine:

o Parker (Mellish rule: reasonable notice of terms)o Thornton (reasonable notice for exemption clauses)o Interfoto (reasonable notice for any stringent/unusual clause)

Ticket cases deal with two levels:a) Pure contractual analysis (did one party do enough to give the other notice that a

term was being incorporated in the K?)b) Question of fairness/reasonableness (would it be fair in the circumstances, given

the natures of the transaction/character of the parties, to hold one party bound by a particularly unusual/stringent condition

Civil law systems have principles of good faith; English common law has instead used piecemeal solutions to issues of unfairness (i.e. playing with contract formation rules, finding no consideration, using reasonable notice doctrine, etc)

CASES

Parker v South Eastern Railway (1877, Eng. CA)Facts: Parker received ticket for storage of bag at railway; bag lost; ticket limited liability to $10.Reasons: Creation of the Mellish rule

- Parker had no actual knowledge (thought it was simply a receipt, didn’t read conditions).

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- However, Railway company had taken reasonable steps – he had been handed ticket, ticket said “See back” and conditions limiting liability were on the other side, and there were prominent notices at the place where he received the ticket that it was subject to conditions

- As long as railway company has done what would be sufficient to inform people in general that the ticket contains conditions, then that is enough (wouldn’t be fair for a particularly ignorant plaintiff to succeed because of his own stupidity or carelessness!)

Held: Based on this reasonable notice that there were conditions, Parker was held to be bound by those conditionsRatio: Creation of the Mellish rule. Law treats signature and notice as substitutes.

Thornton v. Shoe Lane Parking (1971, UK CA)Facts: Car accident hurt Thornton when he was in a multi-storey car park owned by defs. Sign says, “All cars parked at owner’s risk”. Ticket printed from machine.Issue: Defs. acknowledge fault, but rely on exemption clause (ticket said “subject to conditions” – long list of conditions were printed on panel elsewhere in the car-park).Held: Exclusion clause does not apply. Df cannot rely on exclusion clause to escape liability.Reasons: Plays with rules of contract formation. Historically, tickets were offers – customer could accept by buying. Here, ticket from an automated ticket booth is merely a receipt (customer pays and gets a ticket – cannot then refuse terms and get money back – this would be K modification)

- Insufficient notice (per Parker): Terms must be brought to his notice before buying ticket (i.e. placed on or near machine). This ticket was simply a receipt – subsequent terms could not alter K since K was concluded.

- Df didn’t do what was reasonably sufficient to bring notice of exempting condition- This exemption clause was so destructive of rights that it would need to be specifically

brought to plaintiff’s attention – printed in red ink with a red hand pointing to it- Actual knowledge: No finding that the plf knew of the condition- Dfs didn’t bring clause to plf’s attention, and no evidence that he knew of exempting

condition, thus it does not applyRatio: Rather than just requiring knowledge that there are conditions, there must be knowledge of the actual exempting condition

Interfoto Picture Library v Stiletto Visual (1989, Eng. CA)Facts: Interfoto runs a library of photo transparencies; Stiletto is a advertising agency

- Stiletto asked Interfoto for some transparencies; Interfoto sent over 47 pictures- Stiletto liked them, said one or two may be of interest and they would be in touch- Stiletto never got in touch and didn’t return photos til almost a month later- Transparencies had been accompanied by a delivery note with the word “Conditions” in

fairly prominent capital letters (Condition 2 stipulated all transparencies must be returned within 14 days, or a holding fee would be charged)

- Stiletto did not send transparencies on time and Interfoto sent a bill for 3800 pounds (evidence was that the reasonable charge, i.e. market rate, would’ve been only 330 pounds)

- No previous dealings between partiesIssue: Was condition 2 sufficiently brought to Stiletto’s attention to be binding on Stiletto?Held: No. Nothing was done to draw the plf’s attention to condition 2 specifically, thus it is not part of the K. Reduces the amount of the judgment to the reasonable market rate stated above.Reasons: Rejects argument that condition 2 was not part of the K (the delivery note was supplied with the transparencies)

- Rejects contract formation argument (i.e. that K was already formed over the phone and

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that delivery note was a contract modification) – this kind of playing around is unrealistic- Considers the jurisprudence on ticket cases:- Parker: Concerned with whether the printed conditions as a whole were sufficiently drawn

to the customer’s attention (if yes, customer bound, even if hadn’t read them)- Thornton: Concerned with whether one particularly onerous condition was sufficiently

drawn to the customer’s attention- Thus the Mellish rule is not limited to exemption clauses and can generally be applied- Condition 2 is very onerous/$$ - no way pls could know, unless it was brought to their att’n- Historically and today, people tend not to read printed conditions (today, printed conditions

are very complicated & usually one-sided in favour of the drafting party)- Plus, plfs never asked for 47 transparencies – this, plus huge cost, leads to inordinate liability

Ratio: If one condition (not necessarily an exemption clause) in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party.

Promech v Bronco Rentals (1995, Man. CA)Facts: Bill of lading between a shipping company and a railway company acknowledge receipt of goods “subject to the classifications and tariffs in effect”, and limited liability to $500.Principle: Reasonableness of any notice depends on the particular recipient involved (in this case, the plaintiff shipping company was bound by terms because they weren’t just a layperson – they were a company who regularly worked in this business, knew this kind of language and bills of lading – less was required to give them reasonable notice)Principle: That which is reasonable for one class of customers may not be reasonable for another. The threshold for what constitutes “reasonable notice” with unsigned contracts may be much lower if parties can be assumed to know certain things based on their commercial capacity.

Signed Documents

L’Estrange: general rule for signed documents (bound, regardless of whether party has read or is aware of terms)

Tilden: departure from strict signature rule in l’Estrange Tilden was decided in 1970s (height of consumer protection legislation); since then, has

not been broadly applied – Courts today tend to uphold standard form contracts and signed waivers of liability (even if waivers haven’t been read)

Karroll: A very narrow view of the rule in Tilden (narrows it considerably). Has been widely cited with approval and implicitly accepted by the SCC.

Therefore: the rule in L’Estrange applies, with certain exceptions:i) Cases of fraud/misrepresentationii) Non es factumiii) Where the party seeking to enforce the document knew or had reason to know

of the other’s mistake as to its terms – then those terms shouldn’t be enforced Generally, there is no obligation on a party to bring terms to the other party’s attention,

except in special circumstances, and the signature rule holds

CASES

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Tilden Rent-A-Car v. Clendenning (1978, Eng. CA)Facts: Df rented car, signed standard form car rental contract without reading all terms/conditions.

- Clendenning paid extra premium for additional coverage ($2/day)- Front of K said client would have no liability for damages (unless vehicle used in violation of

provisions of K).- Back of K had numerous small, faint, barely legible conditions - contained clause limiting

liability if vehicle used contrary to any law, rule or regulation, or if driver consumed any liquor, whatever the quantity

- Accident (df had alcohol in his system, but wasn’t impaired)Issue: Is df liable for damage caused, due to exclusionary provisions in the K?Held: No. Tilden could not rely on the exclusionary clauses.Reasons: Condition was unreasonable (inconsistent with reasonable expectations that collision damage would be covered, as long as party was not impaired)

- Policy concerns: reasonable expectations, unfair surprise- Signature: Plf had no actual knowledge of this term and no reasonable steps taken to bring it

to his attention. Thus here the signature wasn’t enough – still need knowledge of particularly onerous terms

- Cannot rely on signature as indication of assent to terms (speedy transaction, long document, lots of fine print, clause was inconsistent with overall purpose for which the K was entered into by the plaintiff); different than a formal, sophisticated business exchange

Dissent: Affirms signature rule (policy concerns: business efficacy, market ordering). Emphasizes judicial restraint; courts should give effect to the clear intent of a commercial K. Terms were not unusual, oppressive or unreasonable. Limitation was reflected in the price ($2/day).Ratio: Qualifies the signature rule in l’Estrange: If a party seeking to rely on the K knows the signature of the other party does not reflect the true intention of the signer, and the signer is unaware of the stringent/onerous provisions in the K, then the party can only rely on the terms if they have taken reasonable measures to draw them to the attention of the signing party.SHORT: Extension of the ticket cases to signed contracts. Must give reasonable notice to onerous terms if you want to rely on them.

Delaney v Cascade River Holidays (1983, BCCA)Facts: Signed waiver/risky activity case (plfs signed liability waiver before white water rafting)Majority: Signature rule applies to “Standard Liability Release” hereDissent: Says signature rule does not apply – insufficiency of notice (per Tilden)

Ochoa v Canadian Mountain Holidays (1996, BCSC)Principle: Reasonable individual doesn’t understand the word “negligence”. Thus, any waiver seeking to cover negligence must use something more than the word “negligence” to make sure that the individual signing it actually understands what is meant.

Karroll v. Silver Star Mountain (1988, BCSC)Facts: Plf in a downhill ski race signed release of liability waiver, broke leg, then sued mountain. She argues she was neither given notice of its contents nor sufficient opportunity to read/understand it.Issue: Is Karroll bound by the terms of the release?Held: Yes. No onus on the defendant to bring the contents of the release to plf’s attention.Reasons: How to reconcile two conflicting principles? (Signature rule – if you sign, you’re bound – versus Tilden – you need reasonable notice of onerous conditions)

- Reconciliation: Tilden is a limited principle available only in certain circumstances Hasty, informal, absence of opportunity to read

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Clause inconsistent with rest of K Length and amount of small print Parties reasonable expectations

- Obligation arises where a reasonable person should have known that the signing party was not consenting to the terms in question (i.e. if they were mistaken as to a term)

- A reasonable person would not have known Karroll was not consenting:1. The release was consistent with purposes of the K (to limit liability to permit her to

engage in a hazardous activity)2. She signed knowing it affected her legal rights3. The release was short, easy to ready, headed in capital letters to “please read carefully!”4. Such releases are common; this term is not unusual; she had signed similar releases in

previous ski races- The onus is on the plaintiff to bring herself within one of the exceptions to the rule in

l’Estrange, and she failed to do this – thus no obligation on df (and even if there were an obligation on df, they actually did bring the contents to her attention! Capitalized letters to read contents carefully, sufficient time to read)

- In usual commercial situations, no need to bring exclusions of liability or onerous terms to the att’n of the signing party (safe to assume signing party intends to be bound by them)

- NB: Vernon Ski Club could benefit from the release (agency exception to privity rule)Ratio: Reigns in the application of Tilden – it is a limited, not general, principle. Rule: No general requirement to bring terms to signing party’s attention, unless circumstances are such that a reasonable person should have known that the signing party was not consenting to the terms. This case limits Tilden to its unique circumstances.

Doctrine of Fundamental Breach

Doctrine of fundamental breach: an exemption clause cannot excuse liability from a breach that goes to the root of the contract (Lord Denning, Karsales)

“Repudiatory” versus “fundamental” breach:o Repudiatory breach: Breach of K (breach of condition, innominate term, creates

situation which deprives a party of substantially all benefits of the K) which allows an innocent party to repudiate the K

o Fundamental breach : Common law doctrine – question is whether a party can rely on an exclusion clause that results in a fundamental breach of K

House of Lords confirmed that fundamental breach is merely a rule of construction, not a rule of law (Suisse Atlantique, Photo Production)

Denning tried unsuccessfully to resurrect the rule (Harbutt’s, 1970) SCC agreed in Hunter Engineering with House of Lords’ position

o Dickson: “Fundamental breach” should be laid to rest – use unconscionability instead

o Wilson: “Fundamental breach” should continue in limited circumstances (sometimes, courts should have discretion to refuse to enforce excl. clauses)

Case left in this bifurcated state until Tercon Doctrine of fundamental breach was laid to rest in Tercon

o Rather than using semantics like “fundamental” or “immense” breach, the basic principle is that the court has no discretion to refuse to enforce a valid and

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applicable contractual exclusion clause unless the plaintiff can point to some paramount public policy concern which overrides freedom of K

o Three step analytic approach:1. Does the exclusion clause even apply?2. If so, was the exclusion clause unconscionable at the time of K formation?3. If exclusion clause is valid and applicable, are there overriding public policy

reasons which say the Court should nevertheless refuse to enforce?

CASES

Karsales v Wallis (1956, Eng. CA)Facts: Df inspected second-hand car (in excellent condition), agreed to buy. Plf kept car on bailment, left it out, became badly damaged. When df later saw car in deplorable state, refused to accept it. Plf now sues df for 10 months of payment instalments on car.Issue: Can plf rely on clause (no conditions/warranty as to condition of car)?Held: No. Fundamental breach of K – disentitles plf from relying on exempting clause.Reasons: Implied term to deliver car in the same condition as when it was seen

- Exempting clauses, no matter how clear, can only protect the party when he is carrying out the contract in its essential aspects (must look at the contract overall)

- Doctrine of fundamental breach: exempting clause cannot protect a party who is guilty of a breach that goes to root of the K (applied as a rule of law)

Suisse Atlantique v Rotterdamsche (1967, Eng. HL)Principle: Doctrine of fundamental breach is merely a rule of construction, not a rule of law.

- Flexible approach- The more serious the breach, the clearer the language required to protect the defendant

Photo Production v Securicor (1980, Eng. HL)Facts: Contract between Photo Production and Securicor to provide nightly patrol of Photo’s premises. Contract contained an exclusion clause that Securicor not responsible for any injurious act of its employees. Security guard started a fire, burnt down premises.Held: Fundamental breach of K brings contractual obligations to an end (i.e. party can repudiate)

- Question of interpretation as to whether the exclusion clause applies to the loss in question- Thus, doctrine of fundamental breach is a rule of construction, not a rule of law

Hunter Engineering Co v Syncrude Canada (1989, SCC)Facts: Syncrude contracts for 14 conveyor systems from Hunter. Contract provides 1 year warranty – they fail after 15 months. Value of K was $4 million, cost of repairs was $400,000.Held: All 5 members of SCC agreed that the doctrine is a rule of construction. All 5 upheld the exclusion clause (with 2 sets of judgments).Dickson: Problem with doctrine of fundamental breach (too uncertain, exclusion clauses are usually fair/reasonable, disguises the real inquiry, which is around unfairness)

- Better approach is unconscionability- Upholds exclusion clause (clause clear and unambiguous – no unconscionability)

Wilson: Agrees there are problems with the doctrine, but unlike Dickson, would retain it as a rule of construction (especially useful for post-contractual conduct)

- Exclusion clauses need not be fair/reasonable at the time the K is made (courts should not

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second guess the parties in making their contract)- Unconscionability is problematic because it is assessed at the time of K formation;

conversely, an exclusion clause may be fair at the time of formation, but may become unfair during the course of performance

- Good to keep some residual power with the courts to withhold its assistance on policy grounds in the appropriate circumstances

- Held: even if the breach of K is fundamental, there is nothing unfair or unreasonable in giving effect to the exclusion clause (two commercial parties, equal bargaining power)

Plas-Tex Canada v Dow Chemical (2004, ABCA)Facts: Dow sold resin to plaintiff pipeline company. Dow knew resin was defective & would need fixing (dangerous pipe, huge cost). Plf sued for breach of K, df relied on limitation of liability clauses.Held: Down cannot rely on limitation of liability clause.Reasons: Confirms that the doctrine of fundamental breach is a rule of construction

- Courts usually enforce contracts regardless of stringent terms, to allow for certainty, unless party seeking enforcement has engaged in unconscionable conduct (does this sparingly)

- Refers to Hunter Engineering: Courts will only refuse to enforce limitation of liability if to do so would be unconscionable (Dickson) or unfair, unreasonable, or contrary to public policy – basically all mean the same thing (Wilson)

- Unconscionability can arise from unequal bargaining power (if defendant knew of possible risk, failed to disclose such knowledge, or deliberately withheld information)

- Dow knew the resin was defective and could be potentially dangerous, but solid it anyway and tried to protect itself from liability by inserting these liability limiting clauses – its behaviour was clearly unconscionable

- Public policy: concerns over abuse of power/unconscionability outweighed freedom of K

Tercon Contractors v BC (2010, SCC)Facts: BC issues RFP for highway contract, but selects a bidder who was technically ineligible.Issue: Did exclusion clause in RFP for highway construction exclude BC’s liability for breach of RFP?Held: No – exclusion clause does not exclude BC’s liability for damages here.Analytical Approach (Binnie):

1. As a matter of interpretation, does the exclusion clause even apply? Depends on intention of the parties in the K

2. If it applies, was the exclusion clause unconscionable at the time the K was made? Has to do with K formation, not breach Procedural and substantive (fairness in terms of the process, and fairness in terms

of a substantive result) Was the K unconscionable at the time of K formation? (Concern over inequality in

the bargaining process. Post-formation conduct is not relevant here.)3. If exclusion clause is valid and applicable, Court may nevertheless refuse to enforce due to

overriding public policy (proof lies on the party seeking to avoid enforcement of the clause) that outweighs the very strong public interest in the enforcement of contracts

Examples: criminality, fraud, abusive conduct (see Plas-Tex v Dow) A party can’t be allowed to engage in abusive/unconscionable conduct knowing that

no liability can be imposed on it due to an exclusion clauseMajority (Cromwell): The time has come to lay the doctrine of fundamental breach regarding exclusion clauses to rest (as Dickson did in Hunter Engineering, 20 years ago).

- Uses Binnie’s analytic approach (above) and says exclusion clause does not apply- Reasons:

1. Characterization of context: Misconduct (trial judge found that BC acted egregiously by

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ensuring that the bidder was not disclosed – attacks the underlying premise of the tendering process)

2. Special commercial context of tendering: Need for transparency/integrity in bidding process

3. No other effective remedy 4. Province could have drafted clearer exclusion clause 5. Interpretation: Court takes narrow meaning of what it means to participate in RFP

Tercon’s claim is not barred because the exclusion clause only applies to claims arising as a result of participating in the RFP, not to claims resulting from the participation of other, ineligible parties

A process involving other ineligible bidders isn’t part of the RFP – it is completely outside of the process, thus the exclusion clause cannot apply

6. Interpretation in the context of other provisions: Right to cancel RFP/have new RFP would be redundant if exclusion clause were so broad that it would exclude compensation for allowing ineligible bidders to participate

Again, interpretation narrows the scope of the exclusion clause7. Contra proferentem: At the end of a long argument, “even if I am wrong”, the clause is

at best ambiguous and thus ambiguity should be construed against drafting party- Fails at stage 1 of analytical approach: exclusion clause does not apply to this breach.

Minority (Binnie): Majority and minority agree on analytical approach, but disagree on whether the exclusion clause actually applies (majority says no, minority says yes)

1. Exclusion clause was not ambiguous: Province’s breach of the RFP process did not end the RFP process (Tercon was still participating in the process)

2. Not unconscionable: No imbalance in bargaining power (Tercon is a major contractor, sophisticated commercial entity – doesn’t need court’s protection)

3. Policy of the Transportation Act: Does not bar exclusion clauses4. Not contrary to public policy: BC’s behaviour not so terrible that the protection of the

contract can be overridden by public policy (distinguishes Plas-Tex)5. Floodgates argument: If claim succeeds here, floodgates would open to all ineligible bidders6. De minimis argument: Conduct not that bad (not an egregious breach)7. Leave it to the market: If someone doesn’t like the terms, they don’t have to participate!8. Other relief available?: Possibility of injunctive relief

Ratio: There is no special rule re: fundamental breach in the context of exclusion clauses.

Mistake

Mistake: Introduction

Introduction: A residual basis for relief Many cases involve “mistake” are addressed by the law of misrepresentation and terms Many cases of so-called “mistake” dealt with by traditional contract formation principles:

offer, acceptance, and appl’n of objective reasonable person test (Smith v Hughes) Mistake is a nebulous, residual category of relief involving a serious ambiguity in the terms

of the contract or in parties’ contractual assumptions This is an argument of last resort, where no other doctrine fits True mistake cases are very rare

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Mistake as to fact (matters external to the agreement - e.g. I thought the car you were selling me had a six-cylinder engine) versus mistake as to terms (e.g. I thought you promised, as part of the K, that the car you were selling me had a six-cylinder engine)

Mistakes as to terms of the K relate to law around offer/acceptance (K formation), not law of mistake

Legal doctrines involving questions of mistake Common law mistake

o Mistake as to terms (“internal mistakes” – what was agreed in the k?)o Mistaken assumptions (“external mistakes” – common mistaken assumptions that

lead parties to enter into a K) E.g. Sherwood v Walker: sale of fancy cow – rancher thought she was

barren and sold her to a hobby farm. Turns out she was not barren, and her value as a breeding cow was 10 times higher.

Majority said, no K – fundamental misapprehension as to one of the cow’s essential qualities

Minority said, there was a K – this was a mutual mistake (rancher thought she was barren, buyer didn’t know either way) – they weren’t necessarily making the same mistake, so caveat emptor

Difference is whether the parties made the same factual assumption, or different assumptions (common or mutual mistake). Affects whether there actually was a K

o Mistaken identity (“rogue” cases – somebody impersonating somebody else) Equitable mistake (if common law doesn’t work)

o More discretionary remedies Remedies: Common law only awards damages

o Takes binary approach (either there was a K or there wasn’t)o Dealing with questions of contract formation

Non es factum: Documents mistakenly signed Rectification: mistake in recording of documents Mistaken payment (usually dealt in restitution – an unjust enrichment) Frustration: mistakes as to future events

o Mistake: Mistake as to existing facts/assumptions (e.g. K for purchase of a vase that does not exist)

o Frustration: Mistake as to future events (e.g. K for a vase which was then destroyed) Contract is frustrated – destruction of the subject matter of the K – parties

thus relieved of contractual obligations

Categorization of mistake

Courts and scholars sometimes distinguish between different kinds of mistake based on (i) who made the mistake; and (ii) whether the mistake is shared

These are analytical categories, not doctrinal categories Sometimes terms used interchangeably, piecemeal; no single accepted “theory of mistake”

(a) Common mistake: Both parties make the same mistake(b) Mutual mistake: Misunderstanding where parties are at cross-purposes/ “not of the same

page” / “two ships passing in the night” (one person thinks they are selling X, the other person thinks they are buying Y).

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- Raffles and Wickelhouse: Cotton meant to go on boat called Peerless. 2 boats with same name, left 3 months apart; no K because each party thought it was a different boat

(c) Unilateral Mistake: One party is mistaken about an important issue concerning the contract and the other party knows or ought to know of the mistake.

Illustration

Seller is selling a painting. Buyer believes that it is an original but it is in fact a copy.

If seller also believes it is an original then there is a common mistakeo This scenario often arises in cases of mistaken assumptions—both parties make a

mistake about a fundamental matter: they think they are contracting over an original but in fact they are contracting over copy.

o If this mistake is about a fundamental matter then no contract formed—fundamental mistake as to the subject matter of the contract.

If seller believes/knows that it is a copy: mutual mistakeo Seller is selling copy, buyer thinks they are buying original.o Result will usually depend on normal rules of contract formation and representation

and warranties. If buyer is simply mistaken about a fact then caveat emptor What was promised (the terms of the contract) will depend on normal

contractual rules If seller believes/knows it is a copy and knows that buyer believes it is an original: unilateral

mistakeo Again caveat emptor will normally apply.o Seller does not have an obligation to tell buyer of their mistake

BUT – Note the potential application of consumer protection legislationo Normal rules of contract formation/representation apply—what did seller say,

represent? Did seller promise through words/conduct that it was an original?o Per Smith v Hughes – no duty to disclose (if I thought you believed it was an original

but it wasn’t, then caveat emptor – unless I made a representation that it was – but then this brings us out of the realm of mistake and into the realm of representations and warranties)

o Thus, critical difference between terms and assumptionso Lots of consumer protection legislation, so for consumers common-law rule of

caveat emptor usually doesn’t apply – but often still does in a commercial contextMutual Mistake

Both parties make mistake as to terms of the agreement, and mistakes are different Courts must ask whether there is nevertheless a valid K (principles of offer/acceptance) Lack of subjective agreement due to mutual mistake may prevent K formation But sometimes objective test of K formation determines that a K exists despite the parties

being subjectively at cross-purposes: see Staiman Steel

Unilateral Mistake as to Terms No general duty on one party to disabuse the other of a mistake (caveat emptor) Smith v Hughes: Distinguishes “mistaken belief of external facts” (mistaken assumption) and

“unilateral mistake as to terms” (mistake by one party about one of the terms, and the other party knows – or ought to know – of the mistake)

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CASES

Staiman Steel v Commercial & Home Builders (1976, Ont. HC)Facts: K for sale of goods: “all the steel in your yard”. Plaintiff (buyer) thought it included building steel and used steel; defendant said used steel only. Plaintiff sued for breach of K.Issue: Did the mutual mistake prevent a contract from being formed?Held: No. Binding contract did exist (for used steel only).Reasons: Defendant argued no consensus ad idem, thus no K (relied on Raffles)

- Plaintiff argued subjective intention doesn’t matter; must look at objective assessment, which shows there was a sale for building steel (used steel only)

- Court uses objective approach to say K was created, but for used steel only (buyer’s expectations that new steel was included were unreasonable)

- Court takes middle ground between two extremes (buyer: K for both new and used, seller: no K at all). Yes, K, but only for used steel.

- Distinguishes Raffles, where it was truly impossible to figure out a definite agreement between parties (could not tell which ship)

- Cases of mutual mistake: Courts must decide what terms are from an objective standpoint (only in cases of TOTAL AMBIGUITY will courts decide that no K was created)

- Talks about mistake, but really turns on contract formation (what were terms of K?)Ratio: Raffles (mutual mistake) only applies where the circumstances are so ambiguous that a reasonable person could not infer any common intention.

Smith v Hughes (1871, Eng.)Facts: Sale of oats from plaintiff farmer to defendant horse trainer. Df thought oats were old; when oats not old, he refused to complete K (said he was told by plf that oats were old, he would not buy old oats since horses won’t eat them, plus price matched normal price for old oats)Principle: Foundational case on objective approach (subjective intentions in K formation irrelevant)

- Mere fact that Hughes thought he was buying old oats doesn’t affect K formation- Caveat emptor: no general obligation for one party to disabuse the other of a mistake, short

of fraud or deceit (today, courts moving away from this towards duties of good faith)- But, if one party intends to contract on one set of terms and the other party on a different

set of terms, there may be no K, unless court can apply objective K formation principle to see that a reasonable person would have found certainty as to terms

- Court distinguishes between: Purchaser agreeing to take oats under belief they are old (binding K – mistake as to

fact only) Purchaser agreeing to take oats under belief that vendor warranted them to be old

(mistake as to terms – mutual mistake)o Whether there is a K, and what the terms are, will depend on traditional

contract formation rules. What was promised/agreed? Purchaser agreeing to take oats under belief that vendor warranted them to be old,

and vendor knew purchaser had misapprehended the terms of the K (mistake as to terms – unilateral mistake)

- For defendant succeed, there would need to be a unilateral mistake – i.e. that the plaintiff believed the defendant to belief that he, the plaintiff, was contracting to sell old oats

Plaintiff would have to know the df misapprehended the actual terms of the K Important difference here between mistaken assumption (simply believing oats

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were old) versus mistake as to the actual terms of the K (that the plaintiff was actually contracting to sell old oats specifically)

- Unclear as to what they actually believed or knewHeld: Can’t confuse motive to enter K with the actual terms of the K (clearly was a purchase for sale of oats – though buyer thought they were old oats, this wasn’t a term of the K, so K stands)

“Snapping up” a Mistaken Offer

Cases where there is no consensus ad idem – one party just “snapping up” the other party’s mistake before that party realizes it (Hartog v. Colin & Shields)

Despite the fact that objectively the offer was clear, both parties knew or should have known there was a mistake – thus no K

Fairness-based principle: exception to the normal objective approach to K formation (courts look to parties’ subjective intentions)

o To prevent a form of fraud, court can look to parties’ subjective intentionso Only applies to mistake of the terms of the K itself (not facts external to the K)o Example: I state the weight in kg but it was meant to be lbs, and you try to

opportunistically snap up my mistaken offer before I realize

Mistaken Assumptions

Mistaken assumption: A mistake that goes to the basis for entering into the K, i.e. “external mistake” (Bell v Lever Bros, Sherwood v Walker)

Highlights tensions between values of certainty/predictability (caveat emptor) versus unfair surprise, regret and unjust enrichment

Issue 1: Risk allocation (who should bear risk of mistake?) Issue 2: Fairness (will one party be unjustly enriched if K enforced?) Courts rarely grant relief on the basis of mistake: general principle remains caveat emptor If there is a mistaken assumption regarding an essential quality, at common law the K is void Basically, law of mistake fills a gap where a mistake, by no fault of either party, makes the K

impossible to perform, and it is unclear who should bear the risk Cases below deal with common/mutual mistake (i.e. both parties made the same false

assumption concerning a matter material to decision to enter into K)

CASES

Bell v Lever Bros (1932, Eng. HL)Facts: Severance agreement (LOTS of $) for Bell and Snelling, two senior employees. Employer (Lever Bros) subsequently discovers that employees had been engaged in insider trading and it could have fired them without reasonable notice.Issue: Employer claims mistake (mistakenly entered severance agreement – if employer had known true facts, could have fired employees with no severance).Held: K not void for mistakePrinciple: Courts take very narrow view here – strong judicial policy in favour of upholding settlement agreements and keeping them out of courts (w/ settlements, you accept uncertainty)

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- Further, Bell/Snelling had done very well for company, given huge bonus (weren’t some terrible employees they wanted to get rid of)

- Court identifies three types of operative mistaken assumptions where mistake can nullify consent and makes contract void:i) identity of contracting parties

intention is to contract with specified individual onlyii) existence of subject matter

res extincta: where subject matter is assumed by both parties to be in existence, but is not

res sua: contract for sale of item but you already own itiii) quality of subject matter: contract void where

mistake of both parties, and mistake is to existence of some quality of the thing contracted for, which

makes the thing without the quality essentially different from the thing it was believed to be

e.g. Sherwood v Walker (barren vs. breeding cow)- Applies narrow formulation here. Mistake does not render the severance agreement entirely

different – no mistake re: substance (doesn’t matter that they wouldn’t have entered the K if they had known true facts – the nature of the contract was the same either way)

- Although cases of mistake often benefit one party over another, perhaps unjustly, it is still of paramount importance that the K be observed, as long as parties can still comply with the essentials of the formation of contracts (i.e. agree in the same terms on the same subject-matter) and as long as there wasn’t a representation/warranty as to the mistake

- Factors: Both received reasonable notice plus a substantial bonus (which reflected good past

performance). No mistake regarding performance Jury acquitted defendants of fraudulent misrepresentation or concealment Policy of certainty and predictability regarding compromises/settlements Power relations differential: employer takes risk when it settles

- Cautions against implied conditions just b/c they seem just or more businesslikeRatio: It is a mutual mistake when both parties make an erroneous assumption which was a fundamental reason for entering into the contract (and where, due to this mistaken fundamental underlying assumption, the quality of the K is essentially different). Courts should use restraint when determining whether the assumption was a fundamental reason for contracting.

McRae v Commonwealth Disposals Commission (1951, Aust. HC)Facts: Commission sells rights to salvage oil tanker that did not exist (reckless, irresponsible promise). Salvager relies on promise and spends lots of $ in a salvage attempt.Issue: Was there a K between plaintiff and Commission, or was it void due to mutual mistake?Held: K not void for mistake. K did exist – defendant owes damages.Reasons: Must first see whether a K actually existed – question of construction

- Discussion of Couturier v Hastie – question of construction, based on language in the K- Discussion of Bell v Levy – true analysis is that there is a K, but that the one party is unable

to supply the goods contracted for, & thus K is unenforceable and other party can recover $- A party can’t rely on mutual mistake if they had a) no reasonabßle grounds for the belief and

b) deliberately induced that belief in the mind of the other party- They took no steps to verify what they were asserting (i.e. the existence of a tanker”, should

have known that any tenderer would rely on their assertion of the existence of a tanker, and thus any “mistake” was induced by their own culpable conduct

- The existence of the tanker was not a condition precedent to the creation of contractual

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obligations- Court differentiates between contract that is subject to a condition precedent (i.e. common

assumption that the goods exist) and a situation where the vendor promises the goods are in existence (even if they are not). In the first case, there is no K; in the latter, there is a K and the risk is on the vendor

- No common assumption of fact (as to the existence of a tanker). Rather, the Commission made an assumption, but the plaintiff’s didn’t – simply relied on Commission

- The proper construction of the K is that it included a promise by the Commission that there was a tanker in the position specified, and since there was no tanker, then plaintiffs are entitled to damages for breach of K

Ratio: Party cannot rely on mistake to get out of a K where it is responsible for the mistake.

Equitable Mistake

Bell v Lever Bros set out basic principles of mistaken assumptions 20 years later, Lord Denning set out a new approach in Solle v Butcher:

1. Is the K void at common law (per Bell v Lever Bros)?2. If K is valid at common law, is it voidable on grounds of equitable mistake?

Examples where equitable jurisdiction might be used:o Fraudo Material misrepresentationo Mistake by one party (re: terms or identity) and other knows but remains silento Common assumption regarding a fundamental fact or rights, and party not at fault

Benefits of equitable mistake:o Much less restrictive than common law mistakeo Enables courts to avoid injustice to third parties who relied on existence of valid K

Criticisms of equitable mistake:o Denning’s approach is flatly contrary to authorityo Too uncertain (i.e. court can set aside K based on equitable mistake if it is “unjust in

all the circumstances” and the party is without “fault”, but who decides? Too much variation in possible outcomes)

50 years later, Eng. CA overturned equitable mistake in Great Peace – said Denning was wrong, and mistake should only extent to common law mistake

Canadian courts have not accepted Great Peace; equitable mistake remains a part of Canadian law. We should not overturn Solle v Butcher. Why? Good policy reasons:1. Restrictive: Test for mistake in Great Peace (i.e. fundamental mistake/impossibility of

performance) is too restrictive. Too high a standard.2. 3Ps: Common law mistake doesn’t allow flexibility for third parties who may have relied

on the contract – how do we balance their interests?3. Remedial flexibility: Very important! Without remedial flexibility, the mistaken

assumptions doctrine is in an unsatisfactory state. Summary: Narrow doctrine of common law mistake, supplemented by more flexible

doctrine of mistake in equity, is a satisfactory state of the law1. Did K (expressly or impliedly) provide who bears the risk of mistake?2. If not, can turn to common law mistake.3. If K is valid at common law, can make a plea in equity (last ditch attempt!)

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CASES

Solle v Butcher (1950, Eng. CA)Facts: Solle and Butcher are business associates. Butcher owned house, Solle wanted to rent a flat. Solle advised Butcher it was not subject to rent control, and they entered into a lease at a rate above that permitted by rent control legislation. Relationship sours; Solle claims rent control legislation applies and he is entitled to recover difference in rent. Butcher claims lease was entered into on basis of mistake, asks for rescission (equitable remedy – “unmaking” of the K).Reasons: Not void at common law, no fundamental change in subject matter (a lease is a lease).

- Solution: Uphold the contract but invokes equitable jurisdiction- Courts of common law could only find a K void (mistake as to contract formation)- Other types of mistakes can make contract voidable in equity, at discretion of court, to do

justice between parties (as long as no injustice to third parties)- Policy concerns: If these kinds of contracts are void, then landlords can make mistake re:

rent control and kick out tenants – big problem- Claims common law has gone too far re: mistake – made contracts void which are merely

voidable, and thus does injustice to third parties relying on the contract- Test: Equity will relieve a party from consequences of a mistake where K entered into:

Test on basis of unilateral mistake:o If one party induced by a material misrepresentation by the other (even if not

fraudulent/fundamental), or if other party knows of the mistake and lets him conclude the K rather than pointing out the mistake

Test on basis of common mistake:o If parties were under common misapprehension as to facts/rights, as long as

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

Held: Lease set aside on terms that allowed landlord to apply to have rent increased to previously agreed amount. Tenant can either choose to stay at proper rent, or leave.

Great Peace Shipping v Tsavliris Salvage (2002, Eng. CA)Facts: Boat suffered damage en route to China. Salvage company hired to provide help; advised that “The Great Peace” was closest vessel and would be there in 12 hours. Advised the Great Peace (plaintiff) was closest to them and would be there in 12 hours. Defendant thus hired plaintiff to go help; agreement permitted defendant to cancel, but would have to pay minimum 5 day fee. Turns out Great Peace was actually 410 miles away (not 35). Once they found a closer ship, defendants canelled agreement with plaintiff but refused to pay cancellation fee. Salvage company seeks to avoid liability on the basis of a mistaken shared fundamental assumption that “The Great Peace” was in close proximity to the vessel in need of assistance.Held: Court applies Lever Bros (very narrowly!) and says no mistake. Also, overturns Solle v Butcher.Principle: Lever Bros and Solle v Butcher are irreconcilable – led to much confusion in the law

- What is the difference between a common misapprehension that is “fundamental” (Solle) and a mistake as to quality which “makes the thing contracted for essentially different from the thing it was believed to be” (Lever Bros)?

- These are the same thing, but just looser threshold when applied in equity. Must restore coherence to the law and say that there is no equitable mistake

- Discussion of risk allocation (i.e. did one party, either expressly or by implication, take responsibility in case the K becomes impossible to perform?)

- Court finds the distance between vessels was not so great as to make the contractual

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adventure impossible of performance (high threshold for doctrine of mistake)- Plus, df didn’t cancel K until they knew there was a closer vessel (thus, clearly didn’t find K

completely devoid of purpose, or they would have cancelled at once)- They entered K, had right to cancel (subject to cancellation fee), did cancel, so are liable to

pay 5 day cancellation fee. This is a just result.

Requirements for common mistake to void a contract (Great Peace):i) There must be a common assumption as to the existence of a state of affairs;ii) There must be no warranty by either party that the state of affairs exists;iii) The nonexistence of the state of affairs must not be the fault of either party;iv) The nonexistence of the state of affairs must render performance of K impossible;v) The state of affairs may be the existence, or vital attribute, of the consideration to

be provided, or circumstances which must subsist if performance of K is to be possible

Miller Paving v Gottardo Construction (2007, Ont. CA)Facts: Parties signed agreement where Miller acknowledged it had been paid in full for materials. Later, Miller realized it had not billed Gottardo for some materials. Send further invoice; Gottardo relied on the first invoice (though it had actually been paid itself by highway owner for those materials – question of unjust enrichment?)Held: Courts refuse to set aside release of claims. Supplier knew it was releasing claims & fault was due to its own accounting error.Principle: Court confirms Great Peace has not been adopted in Canada; there are good reasons to retain the flexibility provided by the doctrine of equitable mistake.

- Thus gives reason to keep doctrine of equitable mistake, even tho it doesn’t apply here- Highlights importance/predictability of settlement agreements

Analysis: Clearly a common mistake (both parties mistakenly believe all materials were paid for)- In determining whether to set aside a K, courts must balance values of contractual stability

versus providing relief in cases of severe injustice- Looks to tests in Bell v. Lever and Solle v. Butcher

o BvL: It must be shown that the subject matter of the K has become something essentially different from what it was believed to be

o SvB: K can be set aside if there is a common misapprehension which is fundamental, and that the party seeking to set it aside was not himself at fault.

Allows relief where it would be "unconscientious" for the party to avail itself of the legal advantage it obtained, and where this could be done without injustice to third parties

- Risk allocation: Responsibility was on supplier to determine amount owing, thus supplier bears risk of any mistake

- Common law approach (Bell): Must show the subject matter of the K became something essentially different from what it was believed to be - but the subject matter hasn't changed

- Equitable approach (Solle): Miller must show it was not at fault, which it cannot do - it made errors, Gottardo did nothing wrong, so it is not unjust for Gottardo to avail itself of the legal advantage it obtained

Held: The December 20 agreement precludes Miller from resorting to the doctrine of common mistake, but even if it could, neither the common law doctrine nor the equitable doctrine would result in the contract being set aside.

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Summary: Approaching Mistake Questions

1. Apply normal contract formation rules: is there a contract? Was there sufficient certainty about the subject of the contract, the price and the parties? Apply objective reasonable person test? Is this a Raffles-type case where parties were contracting over two different ships or a Staiman type case where the court can impute a definite agreement between the parties.

2. Is this a snapping up the offer type of situation where the offeree might be seen to be taking advantage of the offeror by not disabusing the offeror of a mistake (Hartog v. Colin & Shields).

o Courts have not enforced because no consensus ad idem3. Caveat emptor generally applies in business-business sales: risk of mistakes as to fact rest

with party making the mistake (if you make a mistake regarding the quality/performance of the thing you are buying, the risk will generally fall with you).

4. If a problem arises with respect to contract, typically a question of the terms of the contract – was there a representation or warranty? What are the terms of the contract? Did the contract allocate the risk? Did the contract exclude liability for the risk? (E.g. risk allocation in Gottardo – supplier responsible for mistake)

If, after all these steps, the issue is not resolved and there was clearly a fundamental mistake, then turn to the next steps (common law mistake first – high threshold – then equitable mistake)

5. Apply common law mistake analysis: mistake about a fundamental underlying assumption? If so, contract is void. If the contract allocated the risk of the relevant mistake, then mistaken party bears risk.

6. Apply equitable mistake analysis: fundamental mistake, no fault, one party taking advantage of other, would it be unconscientious to enforce contract? If yes, contract is voidable (court can rescind). If the contract allocated the risk of the relevant mistake, then mistaken party bears risk. Remember: parties in equity must come with clean hands – can’t have been at fault themselves. Also, can’t have assumed the risk which they are now asking the court to relieve them of (Gottardo)

Contextual Factors to Considero Price: Price may be relevant in determining the reasonable expectations of the party.o Knowledge and skill of the parties: The court is less likely to protect a mistake made by a

person who possesses, or should possess, substantial knowledge or skill.o Ease of Avoidance: Who is in best position to avoid the mistake – who can avoid it the

cheapest?o Common usage of the trade: The common usage of the trade may be another way in which

the court can get a sense of what the parties probably expected. Also, trade usage indicates normal allocation of risk

o Knowledge of ambiguity - snapping up: If one party is aware of the ambiguity they should presumably be bound to clear up the ambiguity. Often times expressed as the “snapping up” point: taking an advantage that leads to inequitable results.

Mistaken Identity

Common scenario: A contracts with B (a rogue, pretending to be someone else). B then sells the property to C, an innocent party (bona fide purchaser for value). A is unpaid and B absconds. A, the defrauded owner, sues C, arguing that as a result of fraud B did not obtain title to the property and had no rights to transfer (nemo dat).

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Thus, unilateral mistake created by deliberate deception. Difficult question: is there an enforceable K between B (the rogue) and C (the innocent party?)

Policy considerations:o Between two innocent parties, who do we protect?o Common law traditionally v. protective of rights of property ownerso Judges often disguise policy concerns in decisions based on the status of the

contract itself (i.e. rules of K formation)o However, rise of ID theft in today’s world – courts becoming more transparent

about policy decisions in these cases Nemo dat quad non habet: No one can transfer to another something that he does not have

o Legislated by statute in most provinceso Sale of Goods Act, s. 26(1)o However, this conflicts with policy of protecting bona fide purchasers for value

Risk allocation:o This is the ultimate issue in mistaken ID caseso Who bears the risk, between two innocent parties?o Economic analysis generally favours BFP, since seller is usually in the best position

to avoid the loss at least cost Seller can protect itself (should require full payment, bank draft, certified

cheque, security etc) before allowing purchaser to take possession Cheaper for seller to do this than BFP to make a full search of seller ID and

title to goodso Nevertheless, common law has traditionally favoured property owner (nemo dat)o You can register real property but not usually personal property – thus, very

difficult/costly to prove what belongs to whomo Ultimately, no solution to this problem of who to protect. Long series of cases

where courts have come to dif. solutions & distinguished them on the facts The common law non-solution: void and voidable contracts

o Whether the property owner (A) retains title depends on the characterization of the contract between A and B (rogue)(a) No offer to rogue – contract void :

A-B contract can be characterized as void ab initio because there was no offer/acceptance

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

Thus, no contract as formed and no title passed from A to B (thus B cannot pass any property to C)

Result: A retains title to property (Cundy v Lindsay)(b) Fundamental mistake regarding ID of contracting party – contract void :

If A-B contract is void for fundamental mistake regarding the ID of a contracting party, then same result as in (a)

Arrive at same result, but using language of mistake rather than offer-acceptance

Possibility is hinted at in Bell v Lever Bros Result: A retains title to property

(c) Contract voidable because of fraudulent misrepresentation: If A-B contract is voidable due to B’s fraudulent mispreresentation, then

there is a contract, but A has an equitable right to rescind Thus, property can pass from A to B, but if contract rescinded then A

regains title

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NB: If B transfers title to C before A can rescind, then C gets title to property (see option d)

Result: A can regain title to property (Lewis v Avery, Lords Nichols and Millett in Shogun)

(d) Contract voidable but not avoided before sale to BFP: If B transfers title to C before A rescinds contract with B, then C (the BFP)

acquires the property Codified in the Sale of Goods Act: s. 28, Sale under voidable title: “When

seller of goods has voidable title to them, but seller’s title has not been avoided at time of sale, then buyer acquires a good title to the goods.”

Compare to a “condition subsequent” (i.e. transfer subject to original owner discovering fraud in time)

Result: C takes title to property (Lewis v Avery, Lords Nichols and Millett in Shogun)

(e) Apply normal rule of contract formation: What was the intention of contracting parties from their words/conduct? Strong presumption that parties intend to contract with the person with

whom they are in personal contact (or phone, email, etc) Will depend on facts, look at form/medium of communication, etc Lord Philipps in Shogun

3 cases considered in Shogun (Cundy, Phillips, Lewis): 3 different approaches/results used by courts.

Shogun: Majority (Hobhouse, Phillips & Walker) held there was no K, thus car did not belong to BFP

o Followed principle in Cundy, that written agreements do not infer a presumption to sell to the immediate purchaser if identity is of key importance

o Dissent: Nicholls & Millett – argued to overrule Cundy, preferred later decisions of Philipps and Lewis. Policy reasons: In cases of fraud, if a party parts with their property without receiving payment, then they assume the inherent risks of fraud

Accords with the intention of Parliament and the creation of statutory exceptions to the rule of nemo dat

Criticisms of Shogun:o Financing company should have assumed risk (could have avoided this by doing

better due diligence)o What else could Hudson have possible done? (Registration was there with Patel’s

name, etc)o Some consumer protection legislation has arisen to deal with this (car dealers of the

world should assume the risk – it’s the cost of doing business)o Still, strong common law presumption to protect the Shoguns of the world

Name of Case Scenario Type of Dealing

Reasoning Result

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Cundy v Lindsay (1878, Eng. HL)

Rogue called Blenkarn passes himself off as W. Blenkiron & Sons. Plaintiff provides goods to rogue, which he sells to 3P.

Written Focus on intention of the offeree.

Presumption that written agreements do not infer a presumption to sell to the immediate purchaser, where identity is of key importance

No contract w/ rogue (void ab initio).3P holds no title.Original owner wins.

Result: No K.

Phillips v Brooks (1919, Eng. KB)

Rogue passes himself off as Sir George Bullough, write cheque for ring, which he sells to 3P.

Face to face

- Inference that plaintiff intended to contract with the rogue, and not the person whose identity the rogue had assumed.- Face-to-face K, thus courts make this inference- Rogue only passed himself off as Sir George after the K was completed, therefore K was with the rogue (court plays with rules of contract formation – very flexible)

Contract concluded with rogue.

3P holds title.

Result: K.

Lewis v Averay (1972, Eng. QB)

Rogue passes himself off as Richar Green of Robin Hood fame, takes car and sells to 3P.

Face to face

- Fraudulent misrep. makes K voidable and liable to be set aside by mistaken party- Means courts can rescind using equity- Turns on timing (i.e. whether title was voided before rogue sold it)

Contract concluded with rogue.

Contract not rescinded before sale to 3P.

3P holds title.

Result: K voidable, but not yet voided.

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Shogun Finance v Hudson (2003, Eng. HL)

Rogue passes himself off as Patel, takes car and sells to 3P.- UK: “hire purchase agreements” (i.e. technically “lease” the car from the finance company and then have option to purchase). Rogue disappears, Shogun wants to get the car back from Hudson, who purchased it from the rogue.

Face to face, phone, and writing

Court is split. See three judgments below.

Lords Hobhouse & Walker

- Construe written document; Patel did not authorize conclusion of K- Thus no K; since there was never a K with Patel, the rogue never obtained title, therefore Shogun keeps the car and Hudson (the BFP) is out of luck

No contract.

3P holds no title.

Original owner keeps title.

Lords Nichol & Millett

- No special rule for written correspondence. When two persons deal with each other, whatever the medium, a contract is concluded between them- Overrules Cundy v Lindsay (old case of written contract which resulted in no K)- Says whatever the medium, if two people are dealing with each other, a K is concluded between them- So there WAS a K; however, it is voidable because of the fraud

Contract.

3P holds title.

K voidable, but not voided before property transferred to BFP (Hudson); thus 3P holds title.

Lord Phillips - Must look at intention of parties from their words/conduct (objective approach)- Strong presumption

No contract.

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that parties intend to contract with the person they are personally dealing with- Contract concluded in writing, intention of parties thus depends on construction of written terms- Patel was the contracting party, not the rogue

Non Est Factum

Signature rule: Signed K is binding (signature is proof of acceptance) Non est factum: “It is not my deed”

o Originally available where: Person had not signed (fraud/forgery) Blind/illiterate person (didn’t know what they were signing)

Effect: K void (there was no consent). K is thus void ab initio. Very rare cases (must be completely different, i.e. you thought you were signing a petition

but it is the deed of transfer to your house) Capacity: What if a person of full capacity signs a document mistakenly? Policy concerns:

o What about innocent 3Ps who rely on document? (Like mistaken ID cases)o Who should bear the loss as to mistaken party and innocent 3P?

CASES

Saunders v Anglia Building Society (1971, Eng. HL)Facts: Mrs. Gallie was induced to sign transfer to third party.Issue: Was transfer to Lee void on the basis of non est factum?Held: No.Principle: General principles in this area:

1. A person of full age and understanding, who can read/write, is bound by their signature on a legal document.

2. Plea of non est factum is available to persons who, for permanent or temporary reasons, are not capable of reading or sufficiently understanding the document signed

3. The effect of non est factum is no contract (void).4. A plea of non est factum is NOT available where:

i) signature on document was brought about by negligence (i.e. carelessness) of signer in failing to take reasonable precautions

ii) the actual document is not fundamentally different from what the signer believed the document to be (difference in class – difference in substance isn’t enough)

5. Onus is on the mistaken person to prove that he/she took all reasonable steps in the circumstances (usually not enough to say, “I relied on a trusted friend/advisor”)

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Rectification

Typically, the written contract reigns supreme. Parties are generally bound to a written and signed contract.

Exception: If there as a mistake in recording the agreement (e.g. technical/typographical transcription error)

Legal requirements set out in Performance v Sylvan Lake (see below). Very high threshold – you must show the other party is trying to engage in unconscionable conduct and that they knew or ought to have known there was an error (not quite fraud, but almost).

Caution: One concern underlying rectification is caveat emptor, which is very strong in cases of written documents setting the terms of the K (will allowing rectification promote sloppy work, lack of due diligence?)

o Cannot undermine the confidence of the commercial world in written contracts Fraud is a concern underlying many of these cases

CASES

Performance Industries v Sylvan Lake Golf & Tennis Club (2002, SCC)Facts: Typical rectification scenario – K for purchase of land next to golf course, oral agreement for land measured in yards, but written agreement mistakenly referred to 110 feet. Defendant insisted on the written terms, despite knowing the terms did not accurately reflect the prior oral agreement.Held: Judgment for plaintiffs; SCC granted rectification.Principle: SCC set a four part test for rectification:

1. Plf must prove the existence and content of prior oral agreement2. There must be “convincing proof” of oral agreement (beyond BOP, short of beyond a RD)3. Plf must provide the precise wording for the rectification4. Plf must show the defendant knew, or ought to have known, of the mistake in the written

document (basically must show refusing rectification would be inequitable/unconscionable)

Morley Shafron v KRG Insurance Brokers (2009, SCC)Facts: Shafron signed restrictive covenant with employer, agreed that he would not work in the “Metropolitan City of Vancouver” for 3 years after his employment with them. He then began working in Richmond.Issue: “Metropolitan City of Vancouver” is not clear/certain. Can rectification apply?Held: No. Doctrinal requirements for rectification set out in Performance v Sylvan not met.Principle: KRG unable to show prior oral agreement, let alone the contents of one. Rectification is thus not available.

- 3rd requirement (i.e. “precise form”) is to close the floodgates argument – court cannot speculate about parties’ unexpressed intentions, or to impose what seems reasonable in hindsight – rather, the court can only put in the words which the parties had orally agreed to

- “The power of rectification must be used with great caution”- Parties simply used an ambiguous term in the K. This is different than an error in the written

agreement and fixing the mistake to reflect the oral agreement.

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Frustration

Introduction

Frustration falls within the general ambit of the law of mistake. Distinction: Mistake : assumptions regarding existing facts Frustration: assumptions regarding future events Not black and white (often very hard to distinguish between the two) Often arises in land sales (contract executed on day 1, but you actually purchase at day 60 to

allow time for financing/due diligence, and something happens in the interim which frustrates the K – either makes performance impossible or very difficult)

Balance: Relieving party of obligations where foundations have shifted and would be unfair/onerous to complete, versus the idea of certainty/predictability

Risk allocation: Parties should have allocated risks under the K (if problem does arise, risk usually falls on one of the parties)

Strategy: More remedial flexibility under mistake, so a party trying to get out of contractual obligations should first argue mistake, and make an alternative argument for frustration

Frustration involves cases where an event occurring subsequent to K formation makes performance legally problematic:

(i) Impossible to perform Promise to marry: promisor dies Contract for portrait: painter loses sight Music hall lease: music hall burns down (Taylor v Caldwell) Int’l sale: export ban – legal impossibility (rather than physically impossible)

(ii) Destruction of commercial venture Commercial purpose of the K is destroyed More common than above; no real impossibility of performance, more that the

contractual purpose for which the K was entered into is destroyed

Policy context: assignment of risk Who should bear the risk of the unforeseen event? Mere fact that a K becomes more expensive/difficult to carry out is not enough Unexpected event must be so far beyond the range of risks allocated by the K that it

constitutes a fundamental change in the bargain:o “A radical change of circumstances”o “Significantly changes the nature of the contract”o Renders the obligation “radically different”, a “different thing”

Role of the judiciary: If judge grants frustration, it is almost like insurance (i.e. you are relieved of an obligation you should otherwise have to comply with). But are judges in the best position to do this?

o Trebilcock, The Limits of Freedom of Contract: No. Parties should allocate the risk. If they are concerned with non-performance, they should obtain insurance, not judicial remedies via frustration

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Echoes Posner’s arguments – usually one party is better placed to estimate the probability of a given contingency, and thus absorb the risk (through self-insurance, market insurance, or simply superior wealth)

Judicially rendered insurance via doctrine of frustration is much more expensive – first-party insurance is preferable

Clear enforcement is the clearest signal to parties to future contractual obligations to always get insurance (rather than turning to frustration – deterrence aspect)

o Collins, The Law of Contract: Judges take fairness between parties into consideration when considering contract formation

Would insisting on performance be unfair? Consider sophistication of parties, risk allocation (if one party lacked skill,

risk wasn’t properly allocated, then courts more likely to find frustration – but if parties have comparable resources for devising complex transactions and can allocate risks between the parties, it will take a CALAMITY for the court to find an imbalance in obligations between the parties)

o Posner, Economic Analysis of Law: Distinction between prevention and insurance as methods of minimizing loss

Commercial contracts are a form of insurance – shifts risk, commits parties to future courses of action in the face of uncertainty

Who is the “cheaper” insurer (can best bear the loss?) “Impossibility” is a very high threshold (e.g. unforeseen death). If

contractor unexpectedly encounters difficult soil conditions, K is not impossible – he should be able to self-insure at a low cost

Force majeure clauses often included, specifying circumstances where failure to perform will be excused

Historical Development

Stage 1: Rule of absolute promises (strict liability, property protection)o Paradine v Jane: caveat emptor, lessee takes benefits and burdens

Stage 2: Relaxing the absolute ruleo Imply a condition of continued existence of subject matter (only bound by

obligations as long as what was being contracted for continued to exist)o Taylor v Caldwello Criticisms of this artificial “presumed intent” (frustration only arises where parties

have not considered the risk and thus have no intent) – courts have since abandoned this devise and developed the doctrine of frustration as a rule of law

Stage 3: Move from destruction of physical subject matter to destruction of commercial purpose of the K

o Krell v Henryo Lays out test for frustration. NB: Very similar to mistake! “The subject matter of the

contract is entirely different from that which was contracted for.”

Mistake versus Frustration: In mistake, K is void ab initio. In frustration, the K is not void ab initio – rather, it means

parties are relieved of future obligations only (so everything done up until the point of frustration has been done in accordance with the contract and is okay).

Must determine date of frustrating event (very difficult)

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Frustration is forward-looking Thus, in Krell v Henry, landlord got to keep 25 pound deposit – but defendant didn’t have to

pay remaining 50 pounds, because at that point K had become frustrated Potential unfairness: So much depends on timing. What if everything was paid up front?

CASES

Paradine v Jane (1647, Eng. KB)Facts: Paradine had leased lands to Jane, Jane failed to pay. English Civil War; Jane argued that due to invasion, he had been expelled from the lands and couldn’t enjoy them. By law of reason, he ought not be charged rent (he wasn’t even there, through no fault of his own!)Held: Jane had to pay rent.Principle: Strong property protection: “The landlord shall have his whole rent, no matter what”

- Absolute risk allocation: once you take on land, you assume all risks, no matter what

Taylor v Caldwell (1863, Eng. QB)Facts: Rental of music hall for four nights. Music hall burns down (not the fault of either party); lessee sues for damages.Held: Contract was subject to an implied condition of continued existence of subject matter in K. Music Hall ceased to exist; thus, both parties excused from their contractual obligations.Criticisms: This presumed intention/implied condition is artificial. Frustration only arises where parties have not considered the risk, thus have no intent.

Krell v Henry (1903, Eng. KB)Facts: Coronation of Edward VII. Plaintiff rents out rooms to view coronation procession. Defendant pays a 25 pound deposit. Coronation cancelled. Plaintiff sues for remaining 50 pounds.Held: Parties discharged from further performance (thus plaintiff keeps deposit but doesn’t get remaining 50 pounds).Principle: Test for frustration:

a) What is the foundation of the K, having regard to all the circumstances?b) Was performance of the K prevented?c) Was the event foreseeable or not (i.e. cannot reasonably be said to have been in the

contemplation of the parties at the time of the K?)Application: Purpose wasn’t just to lease a room, but to lease a room with a view of the procession. No longer possible, thus commercial purpose was destroyed & contract frustrated.

Land Cases

Historically, frustration was not available for sale of land. Land is land: no matter what happens (fire, trees cut down), the land is still there.

But this absolute rule re: land has softened over time Criticisms of KBK: Even if this specific rezoning by the City was unusual, risks of rezoning are

generally known risks; Safeway had a clause for this and the risk thus should’ve been on KBK

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CASES

KBK No. 138 Ventures v Canada Safeway (2000, BCCA)Facts: Safeway owns a parcel of land in East Van, advertises it as a “prime development opportunity” for $8.8 mil. KBK was interested in purchasing and redeveloping the land as mixed commercial and residential. Contract for sale closed - $8.8 million purchase price, KBK pays $150,000 deposit. One month later, the City (on its own motion – highly unusual) rezones the land which creates redevelopment restrictions (despite both KBK and Safeway’s objections at a public hearing). This results in a loss in value of $3.4 million.

- KBK claims contract is frustrated and requests return of $150,000 deposit- Safeway argues that purpose of K was simply sale/purchase of property, i.e. not frustrated- Legislation – Frustrated Contract Act – if contract is found frustrated, party is entitled to

restitution (i.e. deposit back)Trial: Contract is frustrated. KBK is entitled to restitution (see legislation above) to prevent unjust enrichment.Held: K is frustrated. KBK is entitled to restitution (agrees with trial judge).Principle: Cites four different tests (event that changes the nature of contractual obligations, radical change, totally different, etc).

- Event: Must occur after formation Must not be self-induced Must not have been foreseeable (otherwise, parties could have allocated risk)

- Impact: Must be more than mere inconvenience – must make contract fruitless Must be radical change in K (completely affects nature, meaning, purpose, effect

and consequences of K) Change must be permanent (e.g. not just a delay)

- Approves of Victoria Wood, where mere knowledge of development intention was not sufficient ground for frustration in case of subsequent rezoning

- However, here there was more than “mere knowledge”: Ad specifically referred to zoning designation & set out permitted uses Contract contained a clause specifically stating KBK’s intention to redevelop Purchase price specifically calculated on basis of redevelopment potential Contract silent as to allocation of risk (highly unusual rezoning – unforeseen change)

- Risk allocation: Safeway argued K allocated risk (clause stipulating no representations or warranties as to zoning, development or permitted use of land. Agreement shall be completed whether or not permit is obtained)

Court held that these clauses were just generally worded, not specifically intended for this scenario

Neither party foresaw the rezoning – it was part of a pilot project and is unfortunate Risk is on the developer

- Developers get out of bad deal, get deposit back, and Safeway sells to somebody else (but for $3.4 million less)

Ratio: This was a fundamental change in circumstances which struck at the root of the agreement and is entirely beyond what was contemplated by the parties when they entered into the K. The contract is “radically altered” (not mere inconvenience) and is thus frustrated.

Frustration: Summary

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

In order to be entitled to frustration, the plaintiff must establish that:

1. Basic Underlying Assumption: The elements of the contract, or circumstances that are disrupted by the frustrating event, must be fundamental/foundational, such that it would be tacitly assumed by the parties to be a pre-condition to performance.

The continued existence of the goods or subject matter of the K (Taylor v Caldwell – music hall)

The continuation of certain conditions or the happening of an event (Krell v Henry – coronation)

2. Substantial Hardship: Major impact on economics of transaction Must be more than mere increase in expense that renders K less profitable Change must be permanent Must deprive one of the parties of the substantial intended benefit of the

transaction National Carriers Ltd: The change must be so significant that it would be “unjust to

hold the party to the literal sense of its stipulations in the new circumstances”

3. Unanticipated Risk: The frustrating event must be unanticipated. Occurs after formation Not foreseen

o Not a risk that the parties addressedo Not a risk that the parties should have been expected to address

4. No Allocation of Risk by Contract: Is the risk of the unforeseen event allocated in the contract? The contract is always our starting point here.

5. No Fault: The event is beyond the control of the parties and is not caused by, or the fault of, one of them. Frustration cannot be self-induced.

Frustration: Remedial Consequences

1. Issue: If K is frustrated, parties are relieved of future performance obligations. However, they may have suffered losses in partial performance.

E.g. Manufacturer to design/build special machine, but K becomes frustrated due to export restrictions. What if buyer had already paid a deposit, and seller had already performed design work?

2. Historical common law test: the loss lies where it falls (Appleby v. Myers) Frustration does not render a contract void ab initio – parties relieved of future

performance obligations, but everything up until that point is okay (because it had been performed under a valid contract until that point)

3. Critique: this is unprincipled and leaves losses to pure chance

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E.g. Krell v Henry – coronation viewing – contracted frustrated, landlord entitled to keep deposit. But had deposit not been paid, landlord would’ve had nothing; or if entire price had been paid, landlord would’ve had everything

4. The Reform – Restitution: Fibrosa Spolka Akeyna v Fairbairn Lawson (1943, Eng. HL): Sale of machine by

English company to Polish company. Contract price is 4,800 pounds; 1000 pounds paid in advance. WWII frustrates contract, Polish company sues to get deposit back

Held: Buyer may recover deposit based on restitution (prevents unjust enrichment)

5. Problem: Recover on restitutionary grounds is limited to monetary payments (ignores any expenses incurred in reliance on the K)

In Fibrosa v Fairbairn, court stated that while restitution helps, it still isn’t always fair (party might have to return deposit money, and what if they spent a lot in reliance/partial performance of the K?)

6. Response: Frustrated Contracts Act Many jurisdictions have this act, which allows courts to apportion pre-

frustration losses In many jurisdictions, reliance losses are recoverable but only to the extent of

pre-payment (i.e. may be offset against payment/deposits) In BC, reliance losses are independently compensable – even if there is no

prepayment, court may still apportion any reliance losses. Losses are apportioned equally.

Adjustment of Rights and Liabilities:5 (1) In this section, "benefit" means something done in the fulfillment of contractual obligations, whether or not the person for whose benefit it was done received the benefit.

(2) Subject to section 6, every party to a contract to which this Act applies is entitled to restitution from the other party or parties to the contract for benefits created by the party's performance or part performance of the contract.

(4) If the circumstances giving rise to the frustration or avoidance cause a total or partial loss in value of a benefit to a party required to make restitution under subsection (2), that loss must be apportioned equally between the party required to make restitution and the party to whom the restitution is required to be made.

Control of Contractual Power

Duress

Classic formulation: focuses on the voluntariness of consent – the “overborne will”

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Pao On (1980, JCPC): “A coercion of the will so as to vitiate consent … In a contractual situation, commercial pressure is not enough.”

The compulsion has to deprive the party of the “freedom of exercising his will”

Effect: Older authorities held contract void as it vitiated consent Modern approach is to find that the contract is voidable at the option of the party who was

the object of the duress Same for all three unfairness situations (undue influence, duress, unconscionability): effect is

that the contract is voidable, and party then has a decision (they can bear the contract, or can have it voided)

Categories of duress:(a) Duress to person: Threats to person or family, etc(b) Duress to goods/property: Threat to damage/take another’s property; extortionate payment

require to release a good (pawnbroker cases)(c) Economic duress: Now an accepted subcategory of duress

Economic pressure is not enough – many commercial situations occur in circumstances of unequal bargaining power where one party feels pressured

Coercion of will test is difficult to apply as it involves an inquiry into the psychological state of the party. Further, just because one party forces a hard bargain, should the choice to accept the hard bargain (even where there is no alternative choice) result in the contract being set aside?

Very difficult to establish

Examples: Port Caledonia (1903): Contract for rescue assistance from tug to prevent collision. Tug

signaled “£1000, or no rope.” Court set aside agreement as “inequitable, extortionate, and unreasonable”. Awards £200 based on quantum meruit.

D & C Builders (1966, Eng. Q.B): Settlement case. Overdue bill of £480. Plaintiffs facing bankruptcy and accept £300 in satisfaction. Denning: no valid consent—creditor held to ransom.

Stott v. Merit Investment (1988, Ont. C.A.) Stockbroker agrees to pay his client debt on margin account and hold the investment firm harmless. Although finding economic duress, court concluded that stockbroker subsequently affirmed the agreement through his conduct.

Modern Test: Universe Tankships (see below). Economic duress and contract modification: Nav Canada (see below). Not yet picked up by

SCC, but law might be moving in this direction

CASES

Universe Tankships of Monrovia v Int’l Transport Workers Federation (1982, JCPC)Test:(1) Pressure amounting to compulsion of the will of the victim.

- Note: Lord Scarman observes that although previous cases refer to the test as coercion or vitiation of consent, the real issue is not lack of will to submit “but the victim’s intentional

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submission arising from the realization that there is no other practical choice open to him.”- Relevant factors include:

whether the coerced party protested; the availability of alternative courses of action; the existence of independent legal advice; and whether the coerced party took steps to avoid the contract

(2) The illegitimacy of the pressure exerted in light of the nature of the pressure (i.e. was there a threat of unlawful action?) and the nature of the demand (what was being demanded).(3) If a court finds that the victim expressly or implicitly approbated (approved) the contract after the pressure ceased to exist, the victim will be denied relief.Notes:

Fairness of bargain is doctrinally irrelevant. The issue is one of consent. However, almost all cases of duress involve bargains that the coerced party claims are unfair.

Subsequent cases have emphasized (i) whether there is a lack of practical alternatives; and (ii) the illegitimacy of the pressure exerted.

Threat would almost always be viewed as illegitimate where it involves a tort or breach of a statutory duty.

Difficult cases arise where the pressure is lawful: is it akin to blackmail or economic pressure to enforce a bona fide claim?—i.e. threats to fire an employee;—i.e. threats to breach a contract and contract modifications;

Criterion of illegitimate pressure has been criticized as incoherent and unruly. Further, it is difficult to apply in the context of contractual modifications (see Nav Canada)

Breaching a contract simply leads to liability to pay damages. It is not necessarily illegal – so may not be illegitimate pressure.

This is the modern test (to be applied on exam)

Nav Canada v. GFAA (2008, NBCA) The criterion of illegitimate pressure in context of K modifications is problematic to apply

(the nature of pressure in all cases is a breach of contract, and that is not actually illegal – just leads to liability to pay damages)

In contract modification cases, the nature of the pressure (breach of contract) and the demand (for more $) will always be the same

Focus should be on victim, not the legitimacy of pressure Thus, rejects illegitimate pressure test in the context of contract modifications Test:(1) Promise (the contract variation) extracted as a result of “pressure”, whether characterized

as a “demand” or a “threat”; “In most instances pressure for the contractual variation will come from the

promisee in the form of an express or implied threat to breach the underlying contract, usually by withholding future performance.”

(2) Coerced party had no practical alternative but to agree to the coercer’s demand to vary the terms of the underlying contract;

“In short, the absence of practical alternatives is evidence of a lack of consent, but is not conclusive of the issue. The law is still concerned with the possibility that the contractual variation may have been consented to for reasons that the promisor alone deems sufficient. This leads us to ask how one goes about assessing the presence or absence of “consent”.

(3) Assuming the first two criteria are met: did the coerced party consent to the variation? Factors to assess:

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(i) Was the promise supported by consideration?(ii) Whether the coerced party made the promise “under protest” or “without

prejudice”; and(iii) If not, whether the coerced party took reasonable steps to disaffirm the promise as

soon as was practicable? (I.e. acting opportunistically or in good faith?)NB: Neither good faith, or the fact that the coerced party received independent legal advice, is a defence (i.e. often advice will just confirm the circumstances you find yourself in).

Undue Influence

Undue Influence: Definition: the unconscientious use by one person of power possessed over another in order

to induce the other to enter a transaction (Earl of Aylesford v Morries) Duress was a common law doctrine. Undue influence is an equitable doctrine (i.e. valid

contract at common law, but courts of equity can step in to rescind the transaction) Undue influence = ability to exercise exceptional power in relation to another’s choices Relationships of trust and confidence (closely related to equitable doctrines of trust and

fiduciary relationships) NB: There is nothing reprehensible about influence itself (often arises in relationships of

trust or confidence) – rather, it is the motivation sought when that influence is exercised Need not be any specific overt acts of persuasion (simply the relationship itself can mean

that, without more, one party is predisposed to agree with the other party) – Royal Bank Example: Caregiver on whom an elderly person has become dependent threatens to

abandon person. Elderly person provides gift, or enters into a transaction. Effect: Transaction is voidable. Court can rescind transaction.

Categories of Undue Influence

1 . Class 1 – Actual undue influence: Claimant must prove the wrongdoer exerted UI.- No pre-existing relationship of trust/confidence, thus claimant must prove UI

2. Class 2 – Presumed undue influence: A relationship of persuasive influence.2(a) De jure: Relationships that raise the presumption of dependence

Trust/confidence between parties = dependence is presumed (claimant need not prove it), and this, coupled with a suspicious transaction, gives rise to a presumption of UI; onus then shifts to the other party to show the transaction was entered into freely and voluntary

Shifting in the evidentiary burden Examples: fiduciary relationships, trustee/beneficiary, solicitor/client,

doctor/patient, priest/worshipper, parent/child, guardian/ward Example: If you enter into questionable real estate deal with your psychiatrist, a

relationship of influence is presumed and the onus shifts to your psychiatrist to show that you entered into the deal freely and voluntarily

2(b) De facto: Other special relationships of trust or confidence Relationship of trust/confidence must be proven, unlike in 2(a) – e.g. sexual

relationships, bank/client, professor/student, etc

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Husband/wife – not presumed – must actually show that there is a relationship of trust, confidence, or dependence, and further that the transaction is one where the fairness is called into question (see Royal Bank v Etridge)

NB: This overall framework for UI has generally been accepted in Canada.

CASES

Geffen v Goodman Estate (1991, SCC)Facts: Family dispute over Tzina Goodman’s estate (troubled life, mental health issues). She had created a trust under which her children and nephews/nieces would share. Goodman children argued that Tzina’s brothers had exercised UI over her (didn’t want money shared with cousins).Issue: Does the presumption of UI apply? Is it a requirement to show a manifest disadvantage?Analysis: 3 stages to consider.

1. A relationship of dependence? Recognized relationships of dependency (de jure – solicitor/client, parent/child, guardian/ward), and other relationships which defy easy categorization (de facto relationships)

2. Manifest disadvantage? Must this be shown as a required element of UI? (HOL says yes) SCC says not always – depends on context With gifts/bequests, makes no sense to insist that the donor prove their generosity

placed them at a disadvantage (person may have materially less after giving a gift, but may have wanted to anyway out of generosity)

However, in commercial transactions, the plaintiff should be required to show, in addition to the required relationship between the parties, that the contract was manifestly disadvantageous (either plaintiff unduly disadvantaged by it, or defendant was unduly benefited by it). Makes sense because parties act in their own self-interest in most commercial exchanges.

La Forest’s minority view also supports that UI need not always involve undue disadvantage or benefit, even in a commercial transaction. The focus on UI is on the use of influence, rather than the result itself – UI is just as concerned with the process as it is with the result

UI can thus exist without a manifest disadvantage (e.g. doctor abuses relationship of trust & convinces patient to sell house, patient gets better than market price, no manifest disadvantage – but still sold something they didn’t want to sell due to UI)

Policy considerations: Protecting abuses of trust, confidence or power, on the one hand, with the idea that the law should not interfere with reasonable bargains on the other (freedom of K)

NB: Court was split on the manifest disadvantage test, so can argue it either way – unsettled area of the law

3. Onus then shifts: “Influencer” must show the transaction was entered into as a result of “full, free and informed thought.” The presumption is thus rebuttable.

Show no actual influence was deployed in the transaction Independent legal advice obtained? The magnitude of the disadvantage or benefit is evidence going to the issue of

whether influence was exercised (so, even if manifest disadvantage isn’t a required element, the extent of the unfairness will still be relevant – if a really unfair transaction, then will be much harder to rebut the presumption)

Held: Relationship between brothers/sisters has the potential for influence (so fits into the 2(b) de

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jure category). However, presumption is rebutted because: little contact between Tzina and her brothers at the relevant time, she was not in fact relying on them to advise her, the brothers’ main motivation was to advance Tzina’s welfare, and she received independent legal advice and it seems the agreement was in line with what she wanted.Principle: Sets out a test. 1) What kind of relationship? (De jure or de facto?) 2) What kind of transaction? (If commercial, must show manifest disadvantage). 3) Onus then shifts to defendant to rebut the presumption.

Royal Bank of Scotland v. Etridge (2001, Eng. HL)Facts: Common scenario: Husband works, wife is home with kids. Husband’s business is going badly and he takes out a loan; the bank wants security so wife signs a personal guarantee. Husband gone broke, couple is divorced and now bank is suing on the security (often the matrimonial home). She is in a direct contractual relationship with the bank, which is a third party to the undue influence alleged between the husband and wife.Issue: Can the bank rely on the guarantee obtained by the husband’s undue influence?Analysis: This case is important because it sets ground rules for banks in these situations.

- Husband/wife relationship does NOT fall into the 2(a) de jure category, although Courts are aware of the opportunities for abuse here. Thus onus is on the spouse to show the relationship falls into 2(b) – not automatically assumed (factors: were you relying on your partner to take care of your interests in financial affairs? Were sexual or emotional ties being used as a weapon?)

- The position of the bank: The transaction may be set aside where the bank has actual or constrictive notice of the risk of UI (the bank is put on inquiry in every case where the relationship between parties is non-commercial. Assumption is that commercial parties can look after themselves here). Court set out steps the bank must take to ensure the person making the guarantee is doing so voluntarily and with full consent:i) meet with spouse privately;ii) explain the extent of liability;iii) warn of the risk; andiv) urge the person to obtain independent legal advice

- Court justifies this – it is a valuable means of protection but only a modest burden on banks- Independent advice is a factor – weight attached varies (doesn’t necessarily disprove UI)- Policy question: To what extent is the third party to the wrong affected by it?- If it turns out there was UI, then the bank will have no defence (they will be “constructively

tied” to this relationship of influence). But if they did their due diligence in the 4 steps above, then they are shielded

- Unless bank had actual or constructive knowledge of UI, then generally they are protected and wife would be held to the guarantee, even if she actually was subject to UI

- Policy considerations: free market liberalism, can’t be paternalistic just because people are in spousal relationships (they are still autonomous individuals capable of making decisions and maximizing their own welfare)

- So: bank not actually required to take these steps, but if they don’t and there is UI, then they will be at risk of not getting their $.

- NB: Solicitors have a similar checklist as well: if someone is seeking independent legal advice, ask about undue influence, do they need an interpreter, have a witness, etc (this area is problematic for lawyers – taken seriously by courts, could be opening themselves up to serious liability).

Principle: Banks are put in “inquiry” in every non-commercial relationship. Must then take four steps to protect themselves (in case UI is being exercised) so they can rely on the guarantee.

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Unconscionability

Equitable doctrine to control contractual power in cases where there is:(a) Inequality in bargaining power (procedural unconscionability)

Contextual factors: economic resources, knowledge, need, disability that falls short of legal capacity, etc

Common categories: unlike UI, no express categories of relationships here. However, cases often involve pre-existing relationships where there is potential for an inequality of bargaining power (e.g. familial relationships)

(b) Substantial unfairness in the resulting contract (substantive unconscionability) Mere inequality of bargaining power is insufficient; claimant must also prove that

the bargain was substantially unfair (no clear cut-off for what meets this threshold)

Traditional Doctrine: Narrower view – uncontroversial If there is a relationship where a person can take undue advantage of the other, whether by

distress, recklessness, wildness or want of care, a transaction resting on such unconscionable dealing will not be allowed to stand; if parties are not on equal terms, the party who gets a benefit cannot hold it without proving that everything has been fair & reasonable on his part

Morrison v. Coast Finance

Wider (Modern) View: Contracts may be avoided if there is unequal bargaining power or if community expectations

are offended Departs from traditional narrow view (which was limited to unconscionability if a person’s

severe physical or situational disadvantage was taken advantage of) Time of expanding consumer protection legislation; pushing back against traditionally strict

doctrines Lloyd’s Bank v Bundy, Harry v Kreutziger NB: Denning’s attempt to create a unified principle of unfairness (in Bundy) has NOT been

accepted in Canada. We still have the triumvirate of unfairness (undue influence, duress, and unconscionability).

NB: Lambert’s attempt in Kreutziger to create an overarching principle based on community standards of commercial morality has been applied by the courts, but usually along with an unconscionability analysis (thus has a more supporting role than replacing the actual unconscionability test)

o Criticisms of the community standards test as being too subjective (based on that judge’s specific views, etc)

o Some say it is better to have the two-step test which focuses both on the procedural unconscionability (unfairness in the bargaining process itself) while also considering the resulting unfairness in the bargain

Legislation: The test for unconscionability in the Consumer Protection Act is more beneficial to

consumers

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Timing: Says unconscionability can occur before, during or after the transactiono Whereas the doctrine of unconscionability only looks at the time of K formation

(problem raised by minority in Tercon – what if an exclusion clause becomes unfair over time?)

Burden of proof: This shifts to the supplier (i.e. if unconscionability is alleged by consumer, then leads to a prima facie presumption of unconscionability which must be disproved by the supplier)

Laesio enormis (enormis loss): Roman law concept – rescission available if sale of land for less than half market value (Louisiana Civil Code)

Business Practices and Consumer Protection Acts. 8, Unconscionable acts or practices (1): Unconscionable act by supplier may occur before, during or after the consumer transaction (2): In determining unconscionability, court must consider all surrounding circumstances that the supplier knew or ought to have known (3): Lists circumstances that a court must consider (undue pressure, taking advantage of physical or mental infirmity, ignorance, illiteracy, age, or inability to understand the transaction, whether price grossly exceeded what would be charged elsewhere, if there was no reasonable probability that full payment would be made by the consumer,or if terms or conditions were inequitable).

s. 9, Prohibition and burden of proof (1) A supplier must not commit any unconscionable acts or practices in a transaction. (2) If unconscionability is alleged, the burden of proof to disprove allegation is on the supplier

s. 10, Remedy for an unconscionable act or practice (1) Subject to sub 2, an unconscionable transaction is not binding (2) Gives specific remedies in respect of unconscionability in the context of a mortgage loan

CASES

Morrison v Coast Finance (1965, BCCA)Facts: 79 year old widow of meagre means is persuaded to borrow money ($4200) on a mortgage granted by Coast Finance and lend it to two rogues, who used the money to pay back a finance company and buy two cars (so companies weren’t themselves the rogues, but did benefit from this relationship, plus office manager Crawford knew about the dealings).Issue: Claim to have the mortgage set aside.Analysis: Discusses the difference between UI and unconscionability

- UI attacks the sufficiency of consent- Unconscionability invokes relief against an unfair advantage gained by an unconscientious

use of power by a stronger party against a weaker- Two requirements:a) proof of inequality in the positions of the parties arising out of the ignorance, need or

distress of the weaker, which leaves him in the power of the strongerb) proof of substantial unfairness in the bargain obtained by the stronger- If met, these requirements create a presumption of fraud, which the stronger must rebut by

proving the bargain was fair, just & reasonable, or by showing that no advantage was takenHeld: Clearly unequal bargaining positions between the widow and the rogues/companies. Plus, it is

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absurd that she would mortgage her home (without no $ to pay it back) to lend to two basic strangers. They took advantage of her ignorance and inexperience and made no attempt to prove that the transaction was fair, just and reasonable.

- Huge abuse of power. Policy: protect the vulnerable.- Mortgage set aside; widow need not repay anything

Lloyds Bank v. Bundy (1975, Eng. CA)Facts: Old Herbert Bundy owns a farm worth 10,000 pounds. Signs a series of bank guarantees for debt of son’s company, all secured by farm. Son & bank manager see Bundy and initially secure 7,500 against house. 2 years later, son & new bank manager go see Bundy. Bank wants guarantee of an additional 3500; all paperwork done (no opportunity to seek legal advice). Final guarantee for 11,000 pounds charged against Bundy’s house – his only asset, and worth only 10,000. “Poor old gentleman”; just trying to help his son, didn’t really know what he was doing.Issue: Notwithstanding valid consent, is the contract nonetheless unenforceable?Analysis: Other judges in this case looked to fiduciary duty, but Denning looked to unconscionability

- Considers all the exceptions to the general rule that a contract is binding:i) duress of goodsii) unconscionable transactionsiii) undue influenceiv) undue pressure (duress)v) distress and salvage agreements

- Says the common denominator is inequality of bargaining power: English law gives relief to one who, without independent advice, enters into an unfair bargain, when his bargaining power is grievously impaired by his own needs/desires, his own ignorance/infirmities, or undue influence or pressures brought to bear on him by another.

Held: Insufficient consideration moving from the bank, relationship of trust/confidence which the bank failed to properly discharge, etc. Appeal allowed.Principle: Attempts to bring various strands of common law together in a common, overarching principle of unfairness.

Harry v Kreutziger (1978, BCCA)Facts: Aboriginal man (grade 5 education, hearing defect) had a boat which was worth little, but had a valuable fishing licence attached to it. Man wanted to buy it for $2000; plaintiff refused, defendant assured him he would be able to get a new fishing licence for a new boat. Plaintiff eventually agreed to sell for $4500. However, buyer knew boat was worth $16,000 due to fishing licence. Plaintiff was left without boat and his application for another fishing licence was denied.McIntyre: Morrison is the leading test in this area. Two requirements – inequality in bargaining power, plus substantial unfairness in the bargain – create presumption of fraud, which can be rebutted by proof that the bargain was fair/reasonable

- This case was unconscionable and should be rescinded- Plaintiff was not equal to df (education, physical infirmity & economic circumstances)- Defendant was aggressive, assured plaintiff falsely/recklessly that he could get another

licence, wouldn’t take no for an answer- Plaintiff clearly overpowered by this. Resulted in an improvident bargain.

Lambert: Tries to unify the general principles in both Morrison and Bundy- Central question: Whether the transaction, seen as a whole, sufficiently diverged from

community standards of commercial morality that it should be rescinded?- Canadian cases are more helpful to consider (since different standards of commercial

morality may exist in different jurisdictions). Can also look to legislation as embodying these

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standards.- Applies to the facts to say that this clearly departs from community standards of commercial

morality & should be rescinded

Illegality and Good Faith

When will the court decline to enforce a transaction because it is “illegal”? When does public policy trump private ordering?

- Either the K itself may be illegal, or performance under the K may be illegal- What can parties consent to under contracts?- Boundaries of K law and public policy- Policies in support of freedom of K:

o Agreements made by rational individuals should be enforcedo Promotes individual freedom and security of expectationso 19th century law of K – libertarian state encourages liberty & self-reliance

- When can public policies override freedom of K?o Borderline between “public” and “private” realmso When do private rights injure the public interest?

- Tercon: Courts retain the ultimate power to decide when to enforce K, taking public policy into consideration

- Strict test: Usually, freedom of K will be respected. Public policy should only override in rare and clear cases where harm to the public is “substantially incontestable” (not based on the opinion of just a few judges)

- Terminology: “Illegality” here means a transaction that a court will refuse to enforce for public policy reasons – doesn’t necessarily mean unlawful (statutory/criminal penalties may also apply, but that isn’t our focus here)

- Categories:(a) Common law illegality

(i) Contrary to public policy (courts have long recognized power to set aside a K in this case – Holman)

(ii) Contrary to common law (e.g. contract to commit a tort)(b) Statutory illegality

Common law illegality

Holman v Johnson (1775, Eng.): No court will lend its aid to a man who found his cause upon an immoral or illegal act.

Categories of contracts traditionally recognized as contrary to public policy/common law:(i) Contracts injurious to the state

o E.g. K with enemy

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(ii) Contracts injurious to the administration of justiceo E.g. K not to testify in criminal proceedings

(iii) Contracts involving immoralityo E.g. frequently K’s involving prostitution

(iv) Contracts affecting marriage (restricting right to whom you can marry)o K’s affecting who you can marry based on race/religion

(v) Contracts to benefit from a crime(vi) Contracts to commit a tort or a common law wrong

Contracts in restraint of trade

Courts took very restrictive approach here due to general laissez faire attitudes (that it is in everyone’s best interest to have freedom of K)

Liberal economic thinking = should not limit ability to engage in commerce Thus restrictive covenants are prima facie unenforceable, since free trade/freedom of K is in

the public interesto Exception: restrictions can be allowed if they are reasonable (by time, activity and

geography)o Stricter scrutiny applied to employment contracts because of disparity in bargaining

power, as opposed to restrictive covenant in the sale of a business, for example (KRG v Shafron)

o Notional v blue pencil severance: Notional = reading down the provision so that it isn’t illegal Blue pencil = scratch out individual words in order to avoid illegality

CASES

KRG Insurance v Shafron (2009, SCC)Facts: Shafron left work with KRG, went to work in Richmond. Restrictive covenant said he would not work for 3 years in the “Metropolitan City of Vancouver. Reference to “Metropolitan City of Vancouver” was ambiguous and a restrictive covenant that is ambiguous is prima facie unenforceable.Issue: Can the court use severance to render an unreasonable restrictive covenant reasonable?Analysis: Restrictive covenant = restraint of trade – tension between this and freedom of K

- Restraint of trade is only allowed if it is found to be reasonable (balanced between private parties & interests of the public)

- K for sale of business versus employment K: More freedom of K in the sale of business than in the employment context Public policy requires that everyone work and not deprive themselves of the ability

to work (via a restrictive covenant); whereas in buying/selling, it makes more sense for people to sell in the most advantageous way possible (which sometimes includes precluding competition with purchaser through a restrictive covenant)

Goodwill payment: Often in the sale of a business – goodwill payment made to vendor to protect the purchaser’s business (i.e. no competition)

Doesn’t apply in employment context (imbalance between employer/employee) Thus, more scrutiny of restrictive covenants here

- Assessing reasonableness: Look at geographic coverage, time period, and extent of activities being prohibited, plus terms must be unambiguous

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- Notional (reading down) versus blue pencil severance (removing part of a provision). Notional severance isn’t appropriate to cure a defective restrictive covenant – ONLY

blue line severance can be used. Why?o No objective “bright-line” rule that can be applied in all cases to render the

covenant reasonable – this basically amounts to the court rewriting the Ko Invites overly broad restrictions by employer, increases risk of

unreasonable K for employee Blue pencil severance can only rarely be resorted to, where the part being removed

is trivial and not the main purpose of the restrictive covenantHeld: Rejects using blue-pencil severance to fix geographical ambiguity (BCCA tried to “resolve” the ambiguity, but simply substituted what they thought would be reasonable – this is wrong). Ambiguity can’t be resolved, thus restrictive covenant is unreasonable.Principle: Courts will not use notional severance to save a restrictive covenant. Can only use blue pencil severance, and even then only in rare cases.

Surrogacy contracts Some jurisdictions have found surrogacy K’s to be contrary to public policy (Baby M, 1988) Canada has legislation on this (Assisted Human Reproduction Act). Essential idea is that

there is no commercial surrogacy in Canada. Someone can be a surrogate mother and be reimbursed for expenses, but cannot be paid income/work-related expenses for actual surrogacy. Canada’s Royal Commission recommended that Parliament prohibit surrogacy agreements as being incompatible with Canadian social values (concerns: commoditization of children/reproduction, detriment to the autonomy of gestational mothers, etc).

Good e.g. of where legislation has intervened to address issue specifically Although, the statute doesn’t address the common law status of a commercial surrogacy

agreement. Also, there may be other issues related to surrogacy which aren’t addressed in the Act (donation of sperm, etc)

What about donor anonymity? No jurisprudence on this. Open question.

Sexuality Courts had the power to refuse to enforce some contracts on the basis of immorality (e.g.

unmarried cohabitation, prostitution) on the basis of infringing public policies on sexual morality

Highly unlikely that this would happen today Brings in constitutional questions; while the Charter only applies to government action (and

not between private parties), some contracts may either be enforced or not enforced because to do otherwise would conflict with fundamental Charter values

E.g. Bruker v Marcovitz (2007, SCC): A wife cannot remarry under Jewish law unless her husband releases her via a Jewish divorce. Marcovitz agreed to release Bruker in a contract, so she could remarry; when he then refused, she sued him for damages. He claimed enforcing the contract would violate his religious freedom, but the SCC disagreed. Abella held that enforcing this agreement was consistent with public policy, protecting equality rights, dignity and autonomy of Jewish women, and the public benefit in enforcing valid contractual obligations.

Statutory Illegality

Statutory illegality can arise in various ways, such as where contract:

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- is expressly/impliedly prohibited by statute- is entered into with the object of committing an act prohibited by statute- requires performance contrary to statute- confers benefits in violation of a statute

Easy cases: Criminal law (drugs, crime) Cases where the statute specifically states that “no contract shall be entered into…”

Hard cases: Administrative infractions, trivial illegality and regulatory regimes where the statute does

not address the effects of non-compliance E.g. in a regulatory regime, it may be an offence with a fine/prohibition attached – but this

doesn’t necessarily mean a K would be unenforceable

Classical approach: Such a K would be void since it is contrary to statute Rogers v Leonard (1973, Ont. HC): Sale & purchase of a cottage. Agreement signed on

Sunday, contrary to statute (Lord’s Day Act). Vendor knew of the Act but was willing to ignore it as she was dealing with friends. When the vendor refused to complete (and presumably was no longer a friend), the purchasers sued.

o Held: Contract was illegal & void – contrary to statute.

Modern approach: More contextual view (look to the purpose of the statute, etc) See Still v Minister of National Revenue To determine the effects of illegality, courts must balance the gradations of offensiveness

and the relative innocence of parties

CASES

Still v Minister of National Revenue (1988, FCA)Facts: Still applied for permanent resident status in 1991 and assumed she was entitled to work. Still worked as a housekeeper from May to October 1993. She was granted permanent resident status on September 23, 1993. She was laid off on October 1, 1993 and applied for EI benefits, which were denied on the basis that her employment was illegal for the period of May to September.Trial: Court held she was not engaged in “insurable employment” because under the Immigration Act she was not entitled to work without a work permit (she could have applied for one, but didn’t).Held: FCA held she had engaged in insurable employment. No overriding public policy to justify a denial of benefits. Thus, Court took a more contextual approach.Analysis: Court acknowledged that there are now numerous exceptions to the traditional common law rule that illegal contracts are void ab initio

- Traces the long history of common law and statutory illegality- Contracts can be either expressly or impliedly prohibited- Contracts can also be illegal as to formation (i.e. prohibited by statute) or illegal as to

performance (i.e. lawful in formation, but performed in a manner prohibited by statute)- Courts have been more relaxed in the illegal performance of contracts – if EVERY trivial

statutory illegality in performance rendered a K void, the result would be chaos- Examines case law to show a shift away from the classic, rigid approach to illegality

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- 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 and purposes of the statutory prohibitions it would be contrary to public policy, reflected in the relief claimed, to do so.”

- Lots of discretion left to the courts (“a court may refuse…”)- Policy: Courts will factor in the serious consequences of invalidating the K, social policy

reasons for the prohibition (i.e. the legislative purpose), and the determination of the class of persons for whom the prohibition was enacted (i.e. who is the prohibition meant to protect?)

- This means if a statute prohibits the formation of a contract, the courts should be free to decide the consequences

- Still’s employment was technically prohibited by statute, and would be illegal according to the traditional doctrine – but they took the modern approach

- Public policy concerns here:1) A person should not benefit from his/her own wrong2) Relief shouldn’t be granted to a party if it would undermine the purposes of the statute

at hand- Still acted in good faith, was not an illegal immigrant (she had PR status, could have applied

for a work permit but didn’t because of a misunderstanding – important factors); thus, public policy weighs in her favour here

Principle: Illustration of a modern approach to statutory illegality. The court takes a contextual approach and has lots of discretion as to whether to enforce the contract or not.

Good Faith

1. A traditional reluctance to recognize a duty of good faith in common law English common law has been resistant to recognize a general duty of good faith in

performance of contracts Interfoto v Stiletto: Most other legal systems recognize overriding principles of good

faith; common law, instead, has developed piecemeal solutions in response to problems of unfairness (rules around exclusion clauses/signed documents – also, doctrines of unfairness like duress, UI, unconscionability)

2. The principle of good faith in contracts is well established in other legal systems Civil Law – e.g. Civil Code of Quebec (everyone bound to exercise civil rights in good

faith) US, Uniform Commercial Code (obligations of good faith) US, Restatement of Contracts (duty of good faith & fair dealing) UNIDROIT Principles of Int’l Commercial Contracts: requirement of good faith & fair

dealing in international trade – parties cannot exclude/limit this liability

3. Canadian law reform bodies have recommended that Canadian jurisdictions adopt the principle

Ontario Law Reform Commission

4. The Academic Debate Most debate has been for the imposition of a duty of good faith For:

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o Many common law doctrines already recognize the doctrine, although not in name (i.e. courts imply terms that parties use “reasonable efforts”)

o Adoption of the doctrine will bring Canadian jurisdictions into line with expectations of contracting parties

o Adoption of doctrine will bring Canadian jurisdictions into line with law in other jurisdictions (e.g. trading partners in the US/Quebec – reasoning in Bhasrin)

Against: o Uncertainty: good faith is too nebulouso Common law already has discrete rules to address particular forms of bad

faith; piecemeal approach is better suited to the common law – preferable to a vague general standard

o Comparative law analysis suggests the doctrine of good faith is problematic and there are dangers in incorporating doctrines from other jurisdictions

5. The Content of Good Faith in Canadian Case Law pre-Bhasin Pre-Bhasrin, there was some (limited) acceptance by Cdn courts of a duty of good

faith in performance of contracts

(i) Good faith imposes a duty to cooperate in achieving the objectives of the agreement

- E.g. conditions precedent: general duty that they be satisfied in order to achieve objectives of the agreement

- Dynamic Transport v. OK Dealings (1978, SCC): Agreement for sale of land subject to CP of subdivision approval being obtained. Court implied a term that the vendor “use best efforts” to obtain approval (i.e. duty to act in good faith)

(ii) Good faith as limiting the exercise of contractual discretionary powers - If discretionary powers are conferred by a K, courts have implied

terms that discretion is to be exercised reasonably, honestly & in light of the purposes for which it was conferred (not arbitrarily or opportunistically)

- E.g. McKinlay Motors v Honda Canada (1989, Nfld)

(iii) Good faith applied to preclude a party from evading contractual obligations - E.g. avoiding a restrictive covenant or rights of first refusal by

incorporating related corporate entities- MDS Health v King Street Medical (1994, Ont)

6. Categories of contractual relationships where good faith requirements are recognized Insurance: Contracts of utmost good faith (uberrima fides) – insured must disclose

all relevant info & insurer must assess claims in good faith Franchisor-franchisee: Addressed by statute in some provinces (e.g. Alta –

Franchise Act – imposes duties in fair dealing in franchise agreements) Employment: Duty of good faith and fair dealing in termination Summary: Limited categories of contracts where courts have recognized good faith

7. Bhasin v Hrynew – Recognition of Duty of Honest Performance (see below)

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CASES

Bhasin v Hrynew (2014, SCC)Facts: Bhasin had a business agreement with Can-Am. Their relationship soured and his contract was not renewed. Can-Am basically colluded with a direct competitor of Bhasin’s to force Bhasin to give confidential business information to this competitor, and basically screwed him over and out of business. Bhasin sued, alleging a breach of an implied duty of good faith in their agreement.Held: Can-Am repeatedly and intentionally misled Bhasin. The court articulated a new duty of honesty in contractual performance and held Can-Am liable for damages.Principle: General recognition by SCC of a “duty of honest performance”

- General organizing principle that underpins more specific legal doctrines (not a doctrinal principal)

- Definition: “This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”

- Important points: It is limited to performance only (not negotiations) It isn’t a duty of loyalty or disclosure (parties aren’t expected to abandon their own

self-interest) It is a contractual doctrine like unconscionability (not an “implied” term) You can’t exclude it (also like unconscionability) Breach of this duty gives rise to damages

- What does this mean for lawyers advising clients? Unclear as to how far this duty extends (outright lies are forbidden, but what about

failure to answer questions? Silence?) Parties may want to add clauses to a contract detailing standards of performance to

modify the duty (since it can’t be excluded outright)- Will be context-dependent and depend on specific types of situations & relationships- However, court still recognizes that the duty applies to all contracts- “The general organizing principle of good faith: a duty of honest performance, which

requires the parties to be honest with each other in relation to the performance of their contractual obligations.”

- A basic level of honest conduct is necessary to the proper functioning of commerce, whereas misleading/deceitful conduct is counter to the expectations of the parties

- Applies equally to relational contracts (e.g. long-term supply agreement) and one-off, transactional exchanges (typical sale of goods)

- Policy concerns: Always, the touchstone of reasonable expectations of the parties, versus the importance of private ordering and certainty in commercial affairs. Some critics say commercial certainty will definitely suffer due to this duty.

- Generally, this organizing principle manifests in existing doctrines about situations and relationships where the law requires honest performance (but this list isn’t closed)

- Allows for incremental developments in this area- Can apply in many circumstances – requires a highly contextual approach (so applies equally

to long-term versus transactional exchanges, but implications may be different – different standards of trust/cooperation required). Probably a higher duty required in a long-term relationship versus a transactional exchange.

- Thus, the duty of honest performance should not be thought of as an implied term, but rather as a general doctrine of contract law that imposes a minimum standard of honest contractual performance

- Thus, it is a rule of law that exists irrespective of the intentions of the parties. You cannot

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contract out of this minimum standard- Exclusion clauses cannot exclude the duty to act honestly (just like parties can’t exclude

liability for unconscionable conduct)Ratio: Courts recognize a duty of honest performance in contracts (however, it is a general principle, not a legal doctrine, and doesn’t apply to the negotiating process, etc).

Consumer Protection

Policy behind Consumer Protection “Seller beware”, rather than buyer beware Idea that challenges the liberal assumption that rational, autonomous individuals enter

contracts to maximize self-interest Targets information failures and enhancing truth in marketing Idea that if we provide consumers with more info, they’ll make better/rational decisions Addresses market failure and disparities between sellers/consumers in knowledge,

bargaining power and resources Economic rationales for govt interventions in the consumer marketplace:

o Prevent monopoly (ensures competitive marketplace)o Regulation of product safety hazards/pollutiono Addresses information failures (prohibits fraud/deception, mandatory disclosure

requirements, etc)o Supply consumer education

Non-economic rationales:o Paternalistic concerns (transactions may not be in a consumer’s long-term interest:

capacity issues, protecting vulnerable/gullible consumers, unconscionability, etc)o Redistributive concerns (interest rate regulation, rent controls, etc)

Sale of Goods Act

- Focuses on substantive rights- Examples: that a good is fit for purchase and is of merchantable quality- Consumers thus have a statutory right that a good is fit for its intended purpose- However, only applies to goods, not services- s. 20: No waiver of warranties or conditions

o Does not apply to primarily business/commercial purposeso These rights cannot be waivedo Any term/contract that tries to waive these rights is void

Business Practices and Consumer Protection Act

- Focuses on procedural rights- Very wide definition (consumer, consumer transaction, supplier)- Reversed burden of proof is on supplier for any allegation of deception or unconscionability- Like the Sale of Goods Act, these rights cannot be waived

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- The BPCPA also deals with door-to-door sales, unsolicited goods, internet sales, credit/debt collection, contracts for gym/dance memberships and weight loss (areas where people have historically been taken advantage of)

- Remedies: Can bring an action for damages or an injunctino- NB: Make sure to distinguish between a consumer situation and a purely business to

business situation

Definitions (s. 1) Applies to consumers (i.e. an individual participating in a consumer transaction), NOT

business to business transactions, or profit-making ventures Consumer transaction: Supply of goods/services/real property for purposes that are

primarily personal, family or householdo Or a solicitation, offer, advertisement or promotion by a supplier with respect to a

consumer transaction Supplier: A person who supplies goods, services or real property to a consumer, or solicits,

offers, advertises or promotes material regarding a consumer transactiono This relationship is not dependent on privity of contract

Waiver (s. 3) These statutory rights CANNOT be waived

Deceptive acts or practices (s. 4) Definition: Any a) oral/written/visual representation made by a supplier, or b) conduct by a

supplier, that has the effect or capability of deceiving or misleading a consumero Representation includes any term in a contract (or any document used in

connection with a consumer transaction) Timing: Can occur before, during, or after the consumer transaction List of what constitutes a deceptive act or practice:

(a) a representation by a supplier that goods or services(i) have sponsorship, approval, performance characteristics, accessories, ingredients,

quantities, components, uses or benefits that they do not have, (ii) are of a particular standard, quality, grade, style or model if they are not, (iii) have a particular prior history or usage that they do not have, including a representation

that they are new if they are not, (iv) are available for a reason that differs from the fact, (v) are available if they are not available as represented, (vi) were available in accordance with a previous representation if they were not, (vii) are available in quantities greater than is the fact, or (viii) will be supplied within a stated period if the supplier knows or ought to know that they

will not;

(b) a representation by a supplier(i) that the supplier has a sponsorship, approval, status, affiliation or connection that the

supplier does not have, (ii) that a service, part, replacement or repair is needed if it is not, (iii) that the purpose or intent of a solicitation of, or a communication with, a consumer by a

supplier is for a purpose or intent that differs from the fact, (iv) that a consumer transaction involves or does not involve rights, remedies or obligations

that differs from the fact,

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(v) about the authority of a representative, employee or agent to negotiate the final terms of a consumer transaction if the representation differs from the fact,

(vi) that uses exaggeration, innuendo or ambiguity about a material fact or that fails to state a material fact, if the effect is misleading,

(vii) that a consumer will obtain a benefit for helping the supplier to find other potential customers if it is unlikely that the consumer will obtain the benefit,

(viii) that appears in an objective form such as an editorial, documentary or scientific report if the representation is primarily made to sell goods or services, unless the representation states that it is an advertisement or promotion, or

(ix) to arrange for the consumer an extension of credit for a fee, unless the fee is deducted from the advance, as defined in section 57 [definitions];

(c) a representation by a supplier about the total price of goods or services if(i) a person could reasonably conclude that a price benefit or advantage exists but it does

not, (ii) the price of a unit or installment is given in the representation, and the total price of the

goods or services is not given at least the same prominence, or (iii) the supplier's estimate of the price is materially less than the price subsequently

determined or demanded by the supplier unless the consumer has expressly consented to the higher price before the goods or services are supplied;

(d)a prescribed act or practice.

Unconscionable acts or practices (s. 8)(1) Unconscionable act by supplier may occur before, during or after the consumer transaction(2) In determining unconscionability, court must consider all surrounding circumstances that

the supplier knew or ought to have known(3) Lists circumstances that a court must consider (undue pressure, taking advantage of physical

or mental infirmity, ignorance, illiteracy, age, or inability to understand the transaction, whether price grossly exceeded what would be charged elsewhere, if there was no reasonable probability that full payment would be made by the consumer,or if terms or conditions were inequitable).

s. 9, Prohibition and burden of proof (1) A supplier must not commit any unconscionable acts or practices in a transaction. (2) If unconscionability is alleged, the burden of proof to disprove allegation is on the supplier

s. 10, Remedy for an unconscionable act or practice (1) Subject to sub 2, an unconscionable transaction is not binding (2) Gives specific remedies in respect of unconscionability in the context of a mortgage loan

CASES

Rushak v Henneken (1991, BCCA)Facts: Plf bought a used car. Df knew history of the car, that it came from Germany and would likely have rust. They recommend she take it to a Mercedes Benz dealer for a rust inspection, but he nonetheless told her it was a good car & one of the best of its kind in Vancouver. She had it

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examined by another guy but not by a Mercedes Benz dealer. She bought it, then a year later wanted to sell it but found it so badly rusted that it cost over $10,000 just to repair rust damage.At trial: Judge held that df didn’t fall below the common law standard of care, but he had committed a “deceptive act” per the BPCPA (a representation/exaggeration as to a material fact).

- Need not involve deliberate deception; must simply have the capability to deceive (his opinion may have been honestly held, but still totally wrong)

- The point of this legislation is for the welfare of the consumer, to allow them to make proper judgment; the supplier thus owes a duty of candour to the consumer to disclose all material facts (context-specific)

- Broad scope of the Act (“any sort of potentially misleading statement”) – very different form the usual common law caveat emptor approach

Issue: Was his use of laudatory language a “deceptive act”, given what he knew about the car’s history and the probability of rust?Analysis: He should have known that just expressing is opinion, w/out qualifying it, might mislead her

- A deceptive act leads to an “error in judgment”- The intention really doesn’t matter – even if they behaved honestly, if the effect is

deceptive, then it contravenes the statute- Thus, what used to be “puffery” on the part of salesmen can now give rise to legal

consequences under the statute (especially if the salesman knows something important, like a potential defect, and doesn’t say anything)

- The defendant gave an honest opinion, but he also knew that his opinion might be wrong, and didn’t tell her that

- Just because he told her to have the car looked at by others doesn’t change the fact that is statement was misleading

Principle: If a seller has evidence suggesting a possible defect, they cannot give their honest opinion without qualification, otherwise this will be misleading and could lead to an error in judgment on the part of the plaintiff.

Loychuck v Cougar Mountain (2012, BCCA)Facts: Old student of Newcombe’s! Clients collided on zipline. Cougar Mountain admitted negligence but argued they had waived their cause of action by signing the release.Issue: Was the waiver of liability enforceable?Held: Yes. Iron clad release, very thorough, not unconscionable.Analysis: It is neither unconscionable nor contrary to public policy for a recreational sports facility to have such a waiver.

- In the unconscionability analysis, they considered that one party was a law graduate, and the other ran a gym where she frequently had people sign similar waivers – thus inequality in positions wasn’t really an issue

- There was no pressure on the plfs to participate in the activity, and it was not unreasonable for the df to try and protect itself from liability – no public policy grounds to refuse to enforce this

- Public policy: Plfs argued that such a waiver is contrary to public policy because the activity was totally within the control of the operator (unlike skiing)

No overriding public policy to not enforce this waiver These kinds of releases have been consistently upheld The plaintiffs knowingly and voluntarily entered into the agreement and decided to

engage in an inherently risky activity The standard for unconscionability is very high & courts will rarely use that

discretion (food supplier knowingly selling toxic products to public, etc)

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Courts will find this if the party seeking to rely on the exclusion clause “either knew it was putting the public in danger by providing a substandard product/service, or was reckless in doing so” – i.e. reprehensible conduct

- BPCPA: Plf argues there is a lower bar for unconscionability under the statute than there is at common law, but court says the tests are basically the same

- Burden of proof that the K is not unconscionable is on Cougar Mountain. They satisfied this burden by showing the appellants knowingly & voluntarily signed the release in order to participate in zip lining.

- Deceptive statements cannot be pleaded in the abstract. Plfs pointed to potentially deceptive statements on the website, but no evidence that they actually looked at or relied on advertising materials on the website. There was still a requirement for reliance (because if they didn’t rely on it, then it wasn’t a representation)

- Consideration: Their consideration was being allowed to actually do the zip lining when they signed the waiver. Thus it doesn’t fail for want of consideration.

- Concerns: Lots of law reform that says these kinds of waivers for physical injury should not be allowed, and the risk of injury from negligence should stay on the operator

Principle: It is not unconscionable for the operator of a recreational-sports facility to require a person who wishes to engage in activities to sign a release that bars all claims for negligence against the operator or its employees. If the person doesn’t want to participate on that basis, then they are free not to engage in the activity.

Commercial Practice & Contract Drafting

Will be either issue spotting – i.e. someone comes to you with a draft contract Or, someone comes to you with a K and is asking your advice regarding to a particular

provision and you are reacting to that in the context of the contract Or, a couple of contractual provisions where there are fairly obvious errors based on the

facts, and you are asked to identify those errors (again, issue spotting) E.g. huge ambiguity – the limitation of liability clause covers limits for physical injuries, but

doesn’t say anything about economic injuryo Problematic: Tercon says we interpret this, will use contra proferentum, so I will

advise my client to tighten up the language here

John McLeod

Representing tenant in a commercial lease agreement Sophistication of parties is important Market conditions are important in commercial lease agreements: lots of space, lots of

options for rent and more leverage to negotiate From the landlord’s perspective in the lease, they want as many rights as possible Big danger for the landlord is tenant’s business not going well (cash flow problems – might

leave in the middle of the night with all the stuff so landlords can’t claim the inventory) Add phrases like “acting reasonably” except where there is:

o a breach by the tenant (don’t want to be told be reasonable in this case)o usage of common areas in the mall (landlord doesn’t want to be told how to run the

mall)

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This agreement had a restrictive covenant (you aren’t to operate another store that competes with the store within a certain radius of the malls. Dropped from 4 to 2 km, for 5 years). Time, nature of business and area specified.

Minimum rent (per square foot), additional rent (insurance, taxes, maintenance), percentage rent (extra money paid to landlord if business is going well)

Be specific – i.e. business days, instead of just “days” “General prohibitions” – things you can’t do (e.g. fancy mall doesn’t want a pawn shop) “Alterations/fixtures” – tenants’ ability to mess around with the premises, and landlord’s

ability to change the shopping mall. Fixtures: Landlord can seize fixtures to reduce liability of tenant if lease is terminated prematurely, etc

o Alterations: Adds conditions for what happens if the landlord is doing work to the premises (can’t impair access/visibility to the premises, affect tenant’s business, etc. If tenant can’t reasonably operate its business for 9 months due to interference, it may terminate the lease).

Michael Litchfield

5 Cs of drafting:o Clear – plain language/short sentenceso Concise – No redundancies/repetitiono Comprehensive – everything important is expressed/legal requirements meto Consistent – defined terms are used properly/consistentlyo Connected – logical order, deal with each topic only once

Don’t mix up “will/shall/agrees to” – courts might interpret them to mean different things Form:

o Legal form: are signatures always required? Think about evidentiary ruleso Statutory form: BPCPA has form requirementso Customary form: title, cover page, table of contents, etc

Operative provisions: payment, and root of contract – what is the K trying to do? Representation: A statement of fact upon which a party is meant to rely

o Meant to ascertain facts & allocate risko Rep’s as to the contract, subject matter, and parties ($ condition, etc)

Warranty: A party’s assurance as to the fact, coupled with an implicit indemnification Covenants: Ongoing promises by a party to take or not take certain actions (affirmative,

negative, and financial – to maintain certain financial conditions) Condition precedent: Must be performed before the agreement becomes effective, calls for

the happening of some event/performance after K has been agred on but before it becomes binding on the parties

o CP must be clear, precise and objective (otherwise the K will still basically be in the “offer” stage, i.e. not certain enough

o These can be waivedo Basically a way for a party to get out of a deal if something doesn’t happen

(common CPS are authority to purchase, third party consent, all reps/warranties being true, etc)

Remedial provisions: Usually set out a triggering event (e.g. breach of warranty) and a remedy (termination of K, indemnification, damages)

o Not required, but a good idea Limitation of liability: Reduces/eliminates a party’s liability for damages / Indemnity clause

commits one party to compensate the other in case of loss arising from the agreement

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o Key elements to include are the party receiving the benefit, the party agreeing to the limitation, and the liability being limited, as well as the categories of damages (i.e. not just physical) and the amount of limitation

o Example: Under no circumstances is the company liable to the client or any 3P for claims, losses, costs or damages, including damage to persons or property, arising from performance of this agreement. Not liable for ANY DAMAGE WHATSOEVER arising from the contract.

o Tercon: these clauses are enforceable (unless unconscionable or overriding public policy reasons)

o Anticipate possible conditions to limit, use plain language, specifically address negligence (use clear language if you want to limit liability for negligence), be aware of exceptions to enforceability

o Courts are less harsh towards indemnity clauses, but will still narrowly construe them in favour of the indemnifying party

Specificity: “It” – who does this refer to?o Refer specifically to periods of time (or “as soon as is reasonably practicable”),

business days versus non business days, etco Delete unnecessary words, use the active voice, be consistent

Laylee Rohani

Investigation about the business (due diligence): o Any risks involved?o Authorization forms to get information regarding the businesso Document list (checklist of due diligence searches)

CRA searches (assets clear of any charges?) Worksafe BC (unsafe working conditions?) Corporate search (business in good standing?) Municipal searches

Drafting/negotiation of terms: o Buyer’s lawyer almost always drafts contracto Definitions sectiono Section describing assets (i.e. what is actually being bought?)

Restaurant plus all equipment/machines/furniture, for example Business licence included Good will of the business – value attached to the name of the franchise

(separate from the purchase price itself: not taxable, plus this amount goes to the franchisee itself, not the seller, who just has a licence to use name)

o Inventory: Take stock on last day and include value in the purchase priceo Representations/warranties: Make sure all seller’s obligations are paid off, no

charges on assets, no actions/proceedings ongoing – wants to make sure buyer takes business on a clean slate – does searches for this, but ALSO puts in a warranty to that effect, to protect the buyer

o Franchise: Certain requirements before buying (2 week training course, financial obligations, licence and payment to use the name)

o Covenants: Another way to protect buyer – rely on covenants to ensure seller maintains business and all assets being sold intact until buyer takes them

o Employees: Ensures buyer is taking employees on clean slate (no unpaid obligations re: severance, holiday etc)

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o Conditions: Usually, big section with conditions precedent before buyer is willing to pay the purchase price (lease agreement, franchise agreement, want to make sure all representations/warranties made in the agreement are just as true on closing date). All CPs must be satisfied or waived by closing date. Protects buyer in case big chain refused franchise agreement at the 11th hour (buyer is protected and doesn’t have to go through with the agreement)

o Closing: Provision on what is involved on closing the transactiono Restrictive covenants: Very normal in business transactions – “non-competition

agreements” (wouldn’t help buyer if seller opened competing business next door) Can be difficult to enforce Must pay attention as to what is “fair and reasonable” Can’t restrain seller’s ability to earn a living – needs to be limited What is being restrained (e.g. trade), what is the area (e.g. city of Victoria –

must be clearly defined), what time limit (e.g. 2 years) Reasonableness varies, depending on nature of transaction

Closing of transaction: Closing agenda (checklist of documents required to convey title)o Officer’s certificate – representations/warranties guaranteed as of closing date,

agrees covenants/conditions have been complied witho Lays out the consideration, the conveyance of title, the actual breakdown of money

owed and paid, do all the math

Working with Contracts: What Law School Doesn’t Teach You

The Lawyer’s Functions Usually the party with the most to lose will draft the contract (e.g. buyer in a deal – wants to

have a lot of conditions/representations as to the business) Make sure client carefully reads/confirms all representations and warranties Add exceptions to the representations, if need be Covenants: make sure client understands the scope and practical effect of the covenant Conditions precedent: make sure they are not too onerous/difficult to satisfy, or the deal

will never close Use words like “reasonably” to avoid a purely subjective standard (i.e. to their “reasonable”

satisfaction) Use “best efforts” language (for things like third party deliveries) so the deal can close even

if the delivery wasn’t made, as long as best efforts were made

Principles of Effective Drafting Should be clear and simple. Contracts are about determining what two parties agreed to,

and boiling it down to words. Precision: Weaknesses/ambiguities can lead to litigation (remember, contra proferentum)

o Antecedents: Be careful! Who does “it” refer to? Repeat the party (say “buyer”, instead of “it”) just to be extra clear

o Time references: Specify days (business or non), even hours, or “as soon as is practicable” if actual days can’t be specified

o Legalese is sometimes necessary, but avoid wordinesso Simplicity: Avoid undue complicationo Keep sentences short, use the active voiceo Delete unnecessary wordso Be consistent (love the hobgoblin!). There is no such thing as too much consistency.

Otherwise, there is space for ambiguity and differing interpretations.

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Remedies

Principles of Remedies and Damages

Remedy for breach of K = damages, and nothing else (exception: equitable remedies sometimes available, e.g. injunctions/specific performance).

Assumptions:1. There is a contract2. A term has been breached3. There is no excuse/defence to that breach

Remedy:- Common law damages based on economic losses (usually expectation damages - $)- Can also be intangible losses (e.g. promised vacation, wasn’t great, psychological suffering)- Limiting principles: remoteness and mitigation- The goal is compensation, not punishment- Money remedies: left to plaintiff to effect judgment (may need to try to seize assets, etc)- Coercive remedies: enforced by power of court (e.g. specific performance of contractual

obligations, or prohibiting behaviour through an injunction)

Holmes, The Path of Law (1897): “The duty to keep a contract at common law means you must pay damages if you do not keep it – and nothing else.”

- It is morally neutral – either perform or pay (usually not infused with ethics)

Posner, Economic Analysis of Law (2003): It may often be uneconomic to require performance once a K has been broken (wasting resources, etc).

- Instead of requiring performance, K law usually just requires damages- Idea of an efficient breach (i.e. the profit of a party’s breach actually exceeds profit from

completing the K)

Categories of damages: restitution, reliance, and expectation

Interest Purpose Measure Justice

Restitution Prevent unjust enrichment to Δ (gives back to π whatever they transferred to the Δ)

Benefit to Δ Corrective

Reliance Prevent harm to π (puts π in position as if they had not entered into K)

Loss to π Restorative

Expectation Secure benefit to π (puts π in position as if K had been completed)

Expected π benefit Distributive

Expectation Damages: These are the default measure in K law.

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Definition: “The party complaining should, so far as it can be done by money, be placed in the same position as it would have been if the contract had been performed.”

Fuller & Perdue, The Reliance Interest in Contract Damages (1936):- Expectation damages protect reliance interests of non-breaching parties- Most effective sanction- Easier to calculate expected benefit than measure reliance (difficult to quantify)- Policy: favours promoting/facilitating reliance on business arrangements

o Promotes market ordering – gives future entitlements present valueo We want people in a free market to plan into the future, invest, allocate future risk

Cost of performance: This is the normal measure of expectation damages- Example: seller fails to supply goods –measure difference between the contract price and

the (higher) current market price, plus any incidental costs/losseso If buyer can buy substitute which is same as contract price, damages will be

nominal (no actual losses suffered). This is the mitigating aspect of damages.- If no faulty performance, expectation damages are measured by the difference in value

between what was contracted for and what was receivedo Must measure the difference between what was promised and what was actually

obtained (can be very hard to measure)

Remember, when we are talking about damages, REMOTENESS and MITIGATION are always at issue. Defensive arguments; the breaching party usually claims damages are either too remote, or the plaintiff didn’t properly mitigate.

Reliance DamagesUsed when expectation damages are too speculative/uncertain.

Shifting burden of proof: Plaintiff proves prima facie case

CASES

McRae v. Commonwealth Disposals (1951, Australia H.C.)Facts: Contract for salvage of ship. Salvager goes, turns out there is no ship – Commission made a reckless mistake.Issue: Can McRae claim expectation damages?Held: No. Too uncertain (what was contracted for didn’t exist). Used reliance damages.Reasons: Boat didn’t exist – and even if it did, no guarantee it would have value. Thus expectation damages too speculative/uncertain.

- Different from loss of chance (no quantifiable value to the potentially salvageable ship, whereas a prize has a quantifiable value – e.g. Chaplin v. Hicks)

- Plaintiffs show an expense was incurred in reliance on the promise of a tanker, and they suffered losses because the tanker doesn’t actually exist. They make a prima facie case. Burden then shifts to defendant (to prove that if there had been a tanker, expenses incurred would have equally been wasted). Defendant obviously can’t do this.

- Plaintiffs allowed to claim reasonable wasted expenses (not capital expenses like navigating lights that they needed anyway, but some loss of revenue/opportunity expenses, plus some travel expenses, crew’s wages and office expenses)

- NB: Conceptually, once you add lost opportunity to your reliance measure of damages, then

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reliance damages and expectation damages may be functionally equivalentPrinciple: If expectation damages too speculative, court may award reliance damages, but only for reasonable wasted expenses.

Anglia Television v. Reed (1972, Eng. CA)Facts: Anglia making movie production for TV, Reed (Brady Bunch actor) agreed to play leading role. Reed backs out and Anglia can’t find replacement. Anglia abandons production and claims for wasted expenditures made both before and after Reed had agreed to play the leading role.Held: Court awarded reliance damages for production expenses both before and after Reed’s K.Reasons: Here, expectation damages too speculative/uncertain (impossible to know how popular movie would have been/how much it would have earned – could’ve been bust or a jackpot)

- Objective test – plaintiff knew, or should have known, that Anglia was in pre-production and were relying on him. Thus he was liable for some reliance damages even before he signed K

- Critcisms of this – were expenses really “reasonably contemplated? (He entered K and backed out 3 days later, they still had a month before filming – couldn’t find substitute?

Principle: 1) Plaintiff can elect between expectation damages (lost profits) and reliance damages (wasted expenditures). 2) Remoteness test: Plaintiff can claim expenditures incurred before the K, provided that it was such as could reasonably be in the contemplation of the parties as likely to be wasted if the K was broken.” (Usually plaintiffs will claim expectation damages – biggest possible payout – then court will assess, but may reject like McRae b/c too speculative, and award reliance instead)

Bowlay Logging v. Domtar (1978, BCSC)Facts: Domtar owns timber rights and contracts with Bowlay to log. Domtar also agrees to provide logging trucks. Partway through K, Domtar fails to provide trucks (breaches K). Bowlay claims breach of K, claims for its losses.

- NB: Aggressive litigation strategy! Expected benefit was $150,000 but they had already spent $232,000 – Bowlay was bleeding money and should’ve been happy to get out of K

- Instead, said Anglia tells us we can elect, so we elect reliance damages (and thus asked for $232,000 – the amount they were out of pocket)

Held: Bowlay would have lost money on the K either way. In fact, they would’ve lost even more money had Domtar not breached the K. Thus, no damages awarded.

- Key fact: Domtar proved Bowlay would have lost money anyway (if Reed had proved a similar thing in Anglia, then no damages would have been awarded)

Principle: Damages are to compensate for losses. However, if it can be proven that the plaintiff would have lost $ even if the K had been performed, then no recovery for what would’ve been lost.

- Policy: Remedies can’t provide compensation for those who enter into bad deals

Sunshine Vacations v. Hudson’s Bay (BCCA, 1984)Facts: HBC breaches K with Sunshine for operation of travel agencies in HBC stores.Held: Awarded reliance damages (wasted expenditures of $195,000).Principle: Analogous to Anglia – Sunshine established that it had incurred a loss resulting from the breach of K, however could not establish loss of profits. Burden of proof shifts to HBC, who cannot prove that Sunshine would have lost money in any event (unlike in Bowlay). Thus, reliance damages.

- NB: Avoid double recovery (expectation and reliance damages are alternatives. Can’t usually award both)

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Loss of a Chance- Must be some degree of certainty to award expectation damages (McRae)- However, an element of guesswork won’t always prevent expectation damages (Chaplin)- If loss of a chance can be quantified to an extent, then not too speculative (Chaplin)- Modern application: Often in land development contracts (level of uncertainty about

obtaining rezoning or development permission). Example: defendant is required to do everything to obtain sub-division approval, fails to make best efforts, and plaintiff sues for loss of chance. No 100% guarantee that approval will be obtained (discretionary), but evidence can be adduced re: probability of success (e.g. expert says this type of subdivision is approved 70% of the time).

- 4 requirements set out below

CASES

Chaplin v. Hicks (1911, Eng. CA)Facts: Hicks advertised a beauty contest. 12 winners would be selected and hired as actresses for a 3 year term. Plaintiff was selected as one of 50 finalists for one of 12 prizes, but defendant failed to properly notify her and was held to have breached the K.Issue: She could have received hundreds of pounds through prize, but she could also have ended up with nothing. Defendant argues that damages were impossible to assess.Held: Jury awarded 100 pounds – CA upheld (about one seventh of total jackpot, 750 pounds).Principle: The fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract.

Folland v. Reardon (2005, Ont. CA)Principle: If a contract is breached, you are entitled to damages (strict liability, in this sense – you simply need to prove the breach. Though if no real loss, then damages may be nominal).

- Court identifies four requirements for obtaining damages for loss of chance:1. Plaintiff must show that it lost a chance due to defendant’s conduct;2. Chance must be sufficiently real and significant to rise above mere speculation (no

specific percentage of probability. Chaplin was only 1 in 7);3. The outcome did not depend on plaintiff’s own conduct;4. The loss of chance must have some practical value.

Cost of Completion v. Difference in Value

Two different approaches to award expectation damages:1) Cost of Completion: The cost of buying substitute performance, including undoing any

defective performance.2) Difference in Value: The market value of the performance the contract breakers undertook,

minus that actually given.3) Possible middle ground – compensation for consumer surplus (see Ruxley Electronics)

POSNER? Groves – didn’t ask for specific performance!

CASES

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Groves v. John Wunder (1939, US)Facts: Lease/contract for removal of sand and gravel. Property to be left at uniform grade, but this wasn’t done. Cost of performance = $60,000. Entire market value of property if K had been properly completed = $12,160. Cost of performance is five times the market value of the property.Issue: Should plf get the difference in value, or the cost of performance for the work left undone?Majority: Cost of performance

- Policy considerations: Defendant’s breach was deliberate (bad faith, can’t favour faithless contractor). Must protect plaintiffs’ rights to contract and build for the future.

- Lack of value in land does not absolve the breaching party of the consequences of his breach- No unjust enrichment – they decided to enter K! Proper measure is the work promised, not

the land value- “Ugly statue” scenario (man may do what he wants with his land – just because statue is

ugly/worthless doesn’t mean contractor can deliberately breach)- 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 only the destruction of a substantially completed physical structure)

Dissent: Difference in value- Cost of performance out of proportion to value gained (windfall – 500% more)- Property has no unique value to plaintiff (cost of completion only applicable if some special

or particular use to the plaintiff)- Goal in damages is compensation, not punishment of bad faith contractor- Not fair that he gets the market value and also still ahs the title to the land- NB: Plaintiff didn’t bring an action for specific performance! He didn’t even use the money

to actually do the work which the defendant left undone. Wrong measure of damages – this was an efficient breach

Peevyhouse v. Garland (1963, US)Facts: Mining lease, 5 year term. Garland has right to engage in strip-mining on Peevyhouse’s property. Peevyhouse entitled to royalties on coal extracted. Reclamation clause (restorative work after mining) not completed by Garland. Cost of reclamation: $29,000. Diminution in value: $300.Majority: Difference in value

- Cost of performance not proportionate to value gained (almost 10 times as much)- Windfall for Peevyhouses if costs of completion awarded- Peevyhouses admitted they wouldn’t remediate anyway- Reclamation clause incidental only (main purpose of K = extraction of land)

Minority: Cost of performance- Sanctity of K (Garland = coal company, sophisticated commercial entity)- Reclamation clause essential, not incidental (plaintiff had given up $3000 payment for this)- Unjust enrichment for coal company- Fair – not a surprise (defendants knew what they were getting into, should abide by K)- Policy: Majority is basically rewarding opportunistic conduct

Radford v. De Froberville (1977, UK)Facts: Plaintiff sells part of land to defendant and parties enter K where defendant agrees to build a fence. Fence would have no effect on value of land. Nonetheless, court orders damages based on costs of performance (i.e. building a fence) rather than difference in value.Principle: Sale of property implicitly included price of fence (otherwise plaintiff could have built fence himself and sold property at higher price) so cost of performance order is fair.

- Plus, if no damages awarded, then basically no recourse for plaintiff (policy considerations)

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- Privacy implies non-economic significance (no difference in value, but privacy was imp.)- Court said erection of fence was an essential part of K (courts play with language like

incidental/essential – this is just judicial rhetoric)

Ruxley Electronics (1996, House of Lords)Facts: Swimming pool is constructed 9” too shallow. Two extremes: award nothing (no diminution in value), or award cost of performance to rebuild pool (21,560 pounds).Held: Awarded 2,500 pounds (middle ground)Principle: Court recognizes concept of consumer surplus: personal/subjective value a person places on something over and above market value

- Minor deviations from K may have no effect on market value, yet householder places value on it and is thus entitled to it (something to make house more comfortable, convenient, suited to their tastes, instead of just based on market value)

Remoteness

Remoteness: The “ripple effect” of a breach of K – where to stop the ripple?- Policy: Reasonable expectations versus unfair surprise

The rule in Hadley v Baxendale : Entitled to damages if:a) arising naturally (i.e. in the usual course of things); orb) in reasonable contemplation of the parties (as a result of the notification of special

circumstances)

Unified test: Were damages in the reasonable contemplation of parties – either because they should have been in the usual course or because of the communication of the (special) circumstances?

Effect of Hadley v Baxendale : - Changed the law on damages (previously, a factual matter determined by juries)- Now, court establishes a rule for more certainty/predictability re: damages for K breach- Danzig, Hadley v Baxendale: A Study of Industrialization of Law

o Economic context (1854): industrialization, emergence of rail transport, liability of carriers (i.e. Baxendales of the world) was of considerable economic significance

o Baxendale as a defendant is personally liable (not a company) – concerns hereo Concern with protection of capital and promotion of investmento No insurance – limited ability for people to insure against riskso Judiciary: thinking about classical liberalism, protect yourself from risks by

contracting in the market Floodgates concern: economic losses from large damages claims

o Danzig’s thesis: this is a judicial innovation in an age of industralization Standardization of law (ensuring same standard to be applied by juries) Centralization of power (elite, central, London-based judiciary taking power

away from local juries – who would have been composed of local merchants like Hadley) – idea of controlling juries

Mass production of judicial products – lots more cases are coming through This was an innovation – not based on any authority

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CASES

Hadley v. Baxendale (1854, UK)Facts: Foundational case on remoteness. Miller ordered crankshaft (old broke). Breach of K – shaft did not arrive on time, and days of production were lost in the mill. Hadley claimed lost profits on those days of production.Issue: Can plaintiff recover for days of lost profit?Held: Lost profits not recoverableReasons: Establishes two part test – imputed knowledge (part 1) or actual knowledge (part 2).

- Unfair to impose an unknown risk of lost profits if that risk wasn’t allocated expressly in the contract

- There could be other reasons why the mill had stopped, or maybe there were other replacement shafts on hand (defendant couldn’t be reasonably expected to know that the delay in the shaft being delivered would mean the mill was stopped entirely in production)

- Thus wouldn’t arise naturally in the defendant’s contemplation, plus no communication of special circumstances

- NB: Plaintiff would have to have expressly told defendants that the mill would be waiting on this new crank shaft. Clerk was told but failed on technical issue of agency law (notification did not pass on to Baxendale)

Principle: Establishes test for remoteness (see above).

Victoria Laundry v Newman Industry (1949, Eng. CA)Facts: Plaintiffs buying boiler from defendant engineering company for dyeing business, boiler damaged prior to delivery, delay, plaintiff claims lost profits.Held: Hadley test applied – court grants lost profits.Reasons: Seems a very analogous case to Hadley – failure to properly deliver an implement necessary for commercial activity – but different result

- Lost profits were in the reasonable contemplation of the defendant: expertise (defendant had knowledge of plaintiff’s products), defendant not a public carrier (not simply delivering good, also selling it), and the product itself (launderers clearly need a boiler to heat water and clean clothes and do their business)

- Defendants knew the plaintiffs were launderers and dyers & they required the boiler for use in their business

- Think about the nature of the product and the nature of the business (and what would the parties reasonably assume about the product – would the business stop waiting for it?)

- Sellers/buyers generally have better knowledge of each other than general carriers would (they are simply transferring something from A to B)

- Victoria Laundry lost a) normal contracts, and b) special lucrative contracts from the Ministry of Supply – court allowed recovery for normal lost profits, but not for the special, particularly lucrative Ks (because no communication of those special, lucrative contracts) – normal contracts could reasonably be assumed, but not the special ones (unless actual communication)

- So Court can “slice and dice” losses – pick which ones are in the reasonable contemplation of the parties, and which ones are not

Principle: Application of Hadley test. Categories where lost profits are usually awarded (if something is “obviously a profit-earning chattel”, e.g. ship) or where they usually aren’t awarded (e.g. if

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defendant is just a carrier – Hadley)

Scyrup v. Economy Tractor Parts (1963, Man. CA)Facts: Plf purchased tractor attachment from df. Made it plain that he needed it in a hurry for an upcoming job. The attachment delivered was broken, problematic, and the plf’s job was cancelled. Plf sues for loss of profit that he would have earned on the job.Majority: Applies Hadley (two branch test) and Victoria Laundry (emphasis on reasonable foreseeability & knowledge, either imputed – sufficient for 1st branch of test – or actual – required for 2nd branch of test)

- Plaintiff satisfies on both branches of test- Breach would in the ordinary course of events result in loss of profits, plus plaintiff actually

communicated the special circumstances about the upcoming jobDissent: Says that reasonable foreseeability of lost profits is not made out

- Policy: To saddle the defendant with liability for lost profits, the information communicated must be VERY specific

Not sufficient to simply say “I need it for a contract”; must specify the type of work, magnitude of operation, etc (e.g. K worth only $100 or $100,000?)

Thus concerns about sufficiency of information communicated Defendant didn’t know enough about the job that the plaintiff needed the

attachment for, didn’t know the scope of liability, had no way to contract out of the liability if it didn’t want to be subjected to it

Raises proportionality concerns

Cornwall Gravel v Purolator Courier (1980, SCC)Facts: Courier picked up tender, was told it had to be delivered by 1 the next day, but wasn’t delivered til 3:17, and tenders closed at 3 pm.Issue: Cornwall argued they would have gotten the K if their tender had been delivered on time – sued for $70,000.Held: This was in the reasonable contemplation of parties. First, there was a specific assurance by the employee that it would get there. Second, they had a slogan: “It just has to get there in time.”

- Question of proportionality/risk allocation: this probably cost $50, and yet the award was $70,000. Massive risk.

- As a result of this case, Purolator changed its standard form K, putting in lots of exclusions of liability – expressly said that employees are NOT allowed to make promises like this

Koufos v. Czarnikow (The Heron II) (1969, Eng. HL)Facts: Charter of ship to carry cargo of sugar to Basrah in Iraq. Charter makes deviations to other ports, in breach of K, resulted in a delay of nine days in arriving at Basrah. During this time, the market price of sugar in Basrah fell.Issue: Can they claim damages on the fall in market value?Held: HOL ultimately awards lost profits.Reasons: No special information communicated; however, shipowner was aware that there was a market for sugar in Basrah. Claim for lost profits thus upheld.

- So, carrier situation (like Hadley) but court DID award lost profits here- NB: Lord Reid takes issue with the terminology used in Victoria Laundry: they used language

like “reasonably foreseeable”, but he says this is too loose a formulation (not every type of damage that is “reasonably foreseeable” should be recoverable). The crucial question is whether, on the information available, whether such a loss was sufficiently likely to result

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from breach of K to make it proper to hold that the loss flowed naturally form the breach, or that loss of that kind should have been within his contemplation

- Tort versus K: remoteness in contract is a higher standard than it is in tort In contracts, a party can protect himself against risk in the K – but a party cannot do

the same thing in tort, so it is fair to have a lower, broader in tort to allow easier recovery

Something might be “reasonably foreseeable”, but might not meet the standard of being “sufficiently likely”

Can’t use language that confuses damages in contract with damages in tort- A maze of semantics (likely, highly likely, reasonably foreseeable, etc) – Lord Reid wants to

set a single standard to make it clear- However, Newcombe says this is all rhetoric. The more important issue is the policy

concerns which drive these questions. See summary below.Principle:

Remoteness: Summary and Factors

1. General Policy- Courts try to strike a fair balance between reasonable expectations of the party to whom

the promise was made, and the risk of unfair surprise to the defendant if she is held to be responsible for an unexpected liability

- Rather than semantics, the difference really is how you categorize the loss: categorizing in specific versus general terms – this will vastly change the implications of the result

- SCC has affirmed that the proper test is that in Hadley- Remoteness really is a question of policy rather than law, based on parties’ reasonable

expectations

2. Express Contractual Provisions- The rules relating to remoteness of damages act as default rules in the absence of express

contractual provisions- A contract may expressly limit the type or amount of damages that can be claimed if the K is

breached- These clauses are usually binding – so all these rules around remoteness won’t matter if the

contract says damage is limited to $50

3. Factors to consider in deciding whether damages are too remotea) Degree of probability/foreseeability of loss: What would ordinarily be expected in the

circumstances

b) Communication of special circumstances: Fact of communication, plus particulars (clarity, specificity, and timing

Scyrup: plaintiff made known to the defendant that the attachment was for a tractor needed for a job. Specific type of work not communicated. Majority grants damages for the lost profits. Minority says no – just bought a used tractor attachment for $1000. Defendant can’t be guarantor of the plaintiff’s business (so how reasonable is this expectation, really?)

Munroe Equipment Sales: Tractor needed to remove snow so timber operation could proceed. Tractor doesn’t work, so timber can’t be removed. Majority says no – lost profits not within the reasonable contemplation of the parties. No specificity

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in communication of circumstances that tractor needed to keep road clear from timber removal during winter.

Competing policy concerns apparent in these two cases Was there an assumption of responsibility? It will not be conclusive, but it may be

an important factor nonetheless (Cornwall Gravel)

c) Defendant’s knowledge: Generally, and of plaintiff’s business in particular Hadley (carriers) versus Victoria Laundry (expertise re: boilers, knew use). As a

general rule, if defendant only has transitory relationship with plaintiff, then scope of liability may be reduced. If there is an established relationship between the parties, the defendant’s knowledge of the plaintiff’s business is likely to be greater

However, where consumer expectations are reasonable and created by the defendant, then liability might result even where the relationship is transitory (Cornwall Gravel). Reasonable consumer expectations due to advertising, promise made = better knowledge.

d) Nature of defendant’s business: Expertise, and what is being offered to the plaintiff.

e) Nature of the product or service: Second hand, or top of the line? Monroe: Second-hand tractor, obtained late in the season. Again, affects reasonable expectations

f) Sophistication of parties: Generally the more sophisticated/knowledgeable the parties, the more likely the damages in question will be foreseeable.

g) Ordinary allocation of risk: Understandings or expectations in the marketplace (custom of the trade)

E.g. carriage trade: usually you take out insurance to guard against damage to those goods, plus usually an exclusion clause

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

An important function of contracts is risk allocation. Contract terms allocate the risk of specific events (i.e. in the case of sale of goods, the contract price typically allocates the risk of a potential change in market price)

Where a party to a contract may suffer exceptional harm if a contract is breached (loss of lucrative contracts), then the defendant will only be liable for those losses if it can be reasonably and fairly said that they were aware of them.

Insurance: In cases such as Hadley, it may be more efficient for businesses to get business interruption insurance to cover lost profits than for carriers to have to carry third party liability insurance to cover claims of lost profits

h) Proportionality: Comparison between contract price, and nature of the service with risk (ultimate loss claimed)

Anomalous to impose extensive liability for a breach of K to provide an ordinary service at a low price (consider the dry cleaning contract)

NB: None of this is a legal test. Just factors which courts will consider when assessing remoteness.

Mitigation

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Definition: Doctrinal tool used to limit recovery of damages (similar to remoteness). Principle is that a plaintiff cannot recover for damages it could reasonably have avoided.

- “Duty to mitigate”: plaintiff isn’t liable if it fails to mitigate, but just might get damages

1. General rule: Claimant must take reasonable steps to avoid loss What constitutes “reasonable steps” and “reasonable time” are questions of fact

(depends on circumstances of the case) Onus of proving the plaintiff failed to mitigate is on the defendant Court asks, what would a reasonable business person have done? (Standard is fairly

low since the plaintiff is responding to an unexpected breach) Plf may recover additional costs incurred to mitigate (e.g. oranges example,

purchaser breaches, seller may claim reasonable losses incurred to re-sell oranges)

2. Rationales Avoid hardship and unfairness (unfair to make df liable for losses that the plf could

have avoided) Fair allocation of risk (plf usually in best position to deal with consequences of the

breach). Oranges example: purchaser breaches & refuses to buy oranges, seller can sue for damages but must still resell oranges (can’t just let them spoil and then get full expectation damages)

Avoid economic waste/promote economic efficiency (would be inefficient to allow oranges to spoil)

3. In the commercial context, often reasonable to require continued dealings with contract breaker (Payzu)

Payzu: Plf argued it was unreasonable to expect them to deal with someone who just breached their contract, but court rejected this argument (mitigation might mean go back to the person you dealt with to get the cheapest price possible)

Exception: personal services contracts (e.g. housekeeper)

4. Claimant is requited to mitigate within reasonable time of breach. Timing is context dependent on facts.

Where there are unique circumstances, damages can be measured at a later time, including the date of the trial or some time in between breach and trial

Court may take into account circumstances which indicate that it is unreasonable to require the plaintiff to mitigate immediately

Asamera: Loan of shares not returned on time (price of shares subsequently skyrocketed). Plaintiff had duty to mitigate and buy new shares, but wasn’t expected to do so immediately (price for shares decided by the court when assessing damages reflected this)

Generally, damages are assessed at the time of the breach; additional losses after the breach come from the failure to mitigate, not the breach itself

Justification for this is risk allocation (i.e. after breach, defendant is powerless to reduce plaintiff’s losses – so any further losses should be also on the plf)

Punitive Damages

Leading case we look at is Whiten v Pilot (2002, SCC) General rule: Damages are compensatory (try to compensate plaintiff for loss). Exception: Punitive damages condemn behaviour (focus on df’s misconduct)

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Result of social engineering (i.e. impose a fine to deter similar conduct) These are incredibly rare (e.g. court declined to order punitive damages in Fidler) Usually for intentional torts (e.g. sexual assault) or insurance/employment Ks (taking

advantage of a vulnerable insured) Notional maximum usually around $1 million

CASES

Whiten v Pilot (2002, SCC)Facts: Fire burned house down, Whitens lost everything. Vulnerable financial position but had home insurance through Pilot. However, Pilot took advantage of the Whitens’ precarious financial situation and refused insurance by alleging fraud (even after arson was ruled out). Pilot was trying to force the Whitens to accept a much smaller settlement than what they deserved – even cut off their rent.Held: SCC allowed a $1 million award for punitive damages. Pilot violated “peace of mind” inherent in an insurance K; their behaviour as planned and deliberate.Principle: Despite awarding punitive damages, Court addressed concerns over controversial status of punitive damages (increased frequency of such awards in recent years).

- Set out two basic requirements:1. Conduct must be highly reprehensible2. Misconduct must be an independent actionable wrong aside from the main cause of

action (can be breach of K, not necessarily a tort)- Here, the IAW was anchored in Pilot’s breach of the implied contractual duty owed by all

insurers to act in good faith (could also be breach by an employer, fiduciary obligation)- Court laid out policy framework to guide application of punitive damages:- Exceptionality: these are the exception to the general rule (damages as compensatory)- Rationality: Must have a rational purpose and be linked to one of the three goals of punitive

damages (punishment, deterrence, and denunciation)- Proportionality: Sum should be proportionate to the degree of misconduct & nothing more.

To safeguard against these being used excessively (like in US) Proportionality as against the blameworthiness of conduct, the vulnerability of the

plaintiff, the harm directed at plaintiff, the need for deterrence, and to the advantage wrongfully gained

Shouldn’t be awarded if compensatory damages/criminal penalties are adequate- Trying to maintain a principled framework and not just “sting” the pocketbook of the df

Notes: Punitive damages straddle public/private – uneasy place. Plaintiffs more likely to claim punitive damages than just mental distress (potentially more $ recoverable).

Loss of Enjoyment

Historical Development

Phase 1: Early times to 1974 Historically, general rule: no damages for mental distress/non-economic interests (Addi v.

Gramophone) Why? Commercial transaction, stiff upper lip, these are the rules of the game!

o Tough luck. This is the commercial world. K is about the pursuit of self-interest

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o Maintain distinction between K and tort – i.e., if my conduct causes you mental distress, there is a tort for that. My duty of care to you is in the tort realm.

Exceptions (as per Addis) – very fewo Breach of promise to marryo Failure to pay on a chequeo Vendor failure to make titleo Or physical discomfort (old railway cases – train didn’t come, and I had to walk 10

miles to get to the next station)

Phase 2: 1974-2005 Development of pigeon holes – categories where damages would be granted

A. K for pleasure/enjoyment/entertainment/peace of mind Damages in these areas tend to be small/unprincipled Holidays (Jarvis) Weddings (Jamshidi): loss of enjoyment – photos, music, venue Disability insurance (Warrington) Need not be “essence of the contract”, sufficient if it is a “major or

important part of the K” (Farley, 2001, Eng. HOL)B. Pets

Newell: Dogs died in CP Air Hold – damages awarded Ferguson: Kennel looses dog, $1000 in damages Weinberg v Connors: Connors absconds with cat, $1000 in mental distress

damages.C. Physical inconvenience & discomfort caused by a sensory experience

Wharton: Family up in Tofino, buy a Cadillac for $60,000, radio makes irritating buzzing sound – take it back to dealer 6 times to get it fixed. Eventually make a claim for pecuniary damages re: car, but also for loss of enjoyment

They relied on railway cases here. They were awarded damages.D. Employment (per Volvis): Where there is an independent actionable wrong (such as

intentional infliction of mental distress, defamation, fraud) Old rule: you can’t get damages simply from being fired (still the case

today). Employers have a common law right to terminate employees. Exception is if there is an independent actionable tort (e.g. if the way in

which they were fired amounted to intentional infliction of mental distress)

Phase 3: 2006 onwards So, up until 2005, simply had these pigeon-holes. This changed in 2005. Fidler v Sun Life Assurance: See case brief. On an exam, the proper case to apply is Fidler

CASES

Jarvis v Swans Tours (1973, Eng. CA)Facts: Lonely solicitor goes to Swiss Alps for Christmas holiday, but it is a solitary and nasty holiday. He was promised many things and none of them panned out (“dry little nut cakes”, short yodeling performances, nobody was there for parties, etc).Issue: What could he recover?

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Held: Denning granted double cost of holiday – i.e. he got back what he paid & another 63 pounds- Another way of thinking about this is he lost his two week holiday – so we should let him

take another (might’ve been based on his weekly salary as well – seen as a lost opportunity)- Trial judge had given difference in value (i.e. difference in what he paid for and what he got)

Principle: Takes a broader approach to damages, taking loss of entertainment/enjoyment (i.e. ruined expectations) into account. Analogizes to tort law (just as damages for shock can be recovered in tort, so too can damages for mental distress be recovered n tort).

Fidler v Sun Life Assurance (2006, SCC)Facts: Sun Life denied Fidler long-term disability benefits. They hired PI’s to film her, she was out shopping etc, they said nothing wrong with her, she can go back to work, cut off benefits. Eventually they settled right before trial (admitted they were on the hook for the disability part) – only went to trial on damages.Analysis: Said mental distress is no longer subject to remedial ostracization (old law is no longer applicable). Reaffirms that the rule is in Hadley – it is a question of remoteness. What is in the reasonable contemplation on the parties, based on the K? Then award damages based on that.

- You don’t get damages for incidental frustration- Issue is whether an object of the K has to be a psychological benefit- So, court allows damages in this kind of case; but plaintiff is still required to prove his loss- Court basically asks (per Hadley), what did the contract promise? And award damages based

on that. These principles still apply if the promise was an intangible, like mental security- Court sets out clear two part test:

1. An object of the K was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and

2. The degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation.

- Need not be the dominant purpose or essence of the K – the question is whether: is it part of the bargain?

- One general rule for compensatory damages for breach of K: Hadley v BaxendaleHeld: Part of an insurance contract is a psychological benefit – can rest easy knowing you will be taken care of. Insurance companies sell insurance that way. Significant evidence of mental distress on the part of Fidler.Principle: Typical frustration or mental distress that goes along with a contract breach will usually not be sufficient. Must meet this test – i.e. must have been an object of the K, and must be of a degree sufficient to warrant compensation.

“Aggravated” Damages: Was used in context of mental distress – don’t confuse this term. Term used in tort context: manner of breach of duty may exacerbate or aggravate the harm

in the sense that it imposes an additional intangible harm – i.e. not just a breach, but the way in which it was done causes additional injury

Avoid using this term in contracts damages cases This is a DIFFERENT CONCEPT than mental distress damages Mental distress damages are simply another kind of damages that can be recovered in K,

based on rule in Hadley

Mental Distress and Employment: Traditionally, no mental distress damages available here (i.e. from simply being fired)

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Exception where there is an independent actionable wrong (i.e. a tort such as intentional infliction of mental distress, defamation)

Keays v Honda (2008, SCC):o No damages for loss of employment other than reasonable notice (i.e. three months

and then no job) or payment in lieu (three months wages);o As a general rule, no mental distress damages merely for being fired: mental

distress not ordinarily in the contemplation of parties as employer has the right to terminate; and

o There is a duty of good faith and fair dealing in the manner of termination, breach of which is compensable under damages principles (Hadley v Baxendale): Examples: attacking employee’s reputation; misrepresentations regarding the reason for dismissal; dismissal to deprive an employee of pension benefits

o Yes, employer has a right to fire you, but the manner must be done in good faith & in a fair way

NB: Won’t be examined on this.

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