Table of Contents

CHAPTER 1 7

INTRO TO CONTRACTS 7
GENERAL PROFESSOR NOTES: 7

WHAT IS A CONTRACT? 7
PLANNING & THE ROLE OF CONTRACT LAW 7
THE ROLE OF CONTRACTS IN A MARKET ECONOMY 8
CONTRACT V. PROMISE 8

CHAPTER 2 9
REMEDIES FOR BREACH OF CONTRACT 9
THE 2 PRINCIPLE REMEDIES USED: 9

THE COMPENSATION PRINCIPLE 10

WERTHEIM V. CHICOUTIMI PULP CO. 10
PEEVYHOUSE V GARLAND COAL & MINING CO. (1963) 10
KEYWORDS: COMPENSATION PRINCIPLE, DIMINUTION IN VALUE, FAILURE TO ALLOCATE RISK 10
SWAN’S REVIEW OF CLASS 1: 11
RADFORD V. DE FROBERVILLE (1977) 12
KEYWORDS: NON-ECONOMIC INTEREST AS COMPENSABLE 12
RUXLEY ELECTRONICS AND CONSTRUCTION LTD. V FORSYTH (1996) 12
KEYWORDS: NON-ECONOMIC INTEREST AS COMPENSABLE, LOSS OF AMENITY, 12
VICTORY MOTORS LTD V BAYDA (1973) 14
KEYWORDS: SUPPLY V. DEMAND, OPPORTUNITY COST 14
SWAN’S REVIEW OF CLASS 2: 14
FULLER AND PURDUE: THE RATIONALE FOR THE COMPENSATION PRINCIPLE 14
AN ECONOMIC ANALYSIS - POSNER’S ARTICLE 15
POSITION, RISK AND REMOTENESS 16
HADLEY V. BAXENDALE (1854) 16
KEYWORDS: REMOTENESS, LIMITING DAMAGES, ACCEPTANCE OF RISK. 16
HORNE V. MIDLAND RAILWAY CO. (1873) 18
KEYWORDS: APPLICATION OF HADLEY, ACCEPTANCE OF RISK, REQUIRED NOTICE 18
AN INTRODUCTION TO DRAFTING & RISK ALLOCATION (P.83) 19
CORNWALL GRAVEL CO. LTD. V. PUROLATOR COURIER LTD. (T.C. 1978) 19
KEYWORDS: SPECIAL CIRCUMSTANCES, APPLICATION OF HADLEY 19
CANLIN LTD. V. THIOKOL FIBRES CANADA LTD. (C.A. 1983) 21
KEYWORDS: REMOTENESS, REASONABLE CONTEMPLATION 21
TRANSFIELD SHIPPING INC. V. MERCATOR SHIPPING INC. (THE ACHILLEAS) (2008) 22
KEYWORDS: FORESEEING & ASSUMING RISK, COMPENSABLE LOSS 22
NOTE ON LEGISLATION AND LAW REFORM (P.104) 23

SOME PROBLEMS IN AWARDING DAMAGES 24

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ANGLIA TELEVISION LTD. V. REED (1972) – ZOMBIE CASE 24
KEYWORDS: WASTED EXPENDITURE, EXPECTATION DAMAGES 24
BOWLAY LOGGING LTD. V DOMTAR LTD. (1978) 26
KEYWORDS: UNPROFITABLE CONTRACT, WASTED EXPENDITURE 26
LOSS OF ENJOYMENT 26
JARVIS V. SWAN’S TOURS LTD (1973) 27
KEYWORDS: LOSS OF ENJOYMENT/DISTRESS AS COMPENSABLE 27
EMPLOYMENT CONTRACTS 28
BARDAL CASE 28
VORVIS V. INSURANCE CORP. OF BRITISH COLUMBIA 29
WALLACE CASE 29
TYPES OF DAMAGES 30
KEAYS V. HONDA CANADA INC (2008) 30
KEYWORDS: PUNITIVE DAMAGES, EMPLOYMENT 30
RBC DOMINION SECURITIES INC V. MERRILL LYNCH CANADA INC. (2008) 32
KEYWORDS: IMPLIED CONTRACTUAL OBLIGATIONS ON EMPLOYEES 32
PEACE OF MIND CONTRACTS 34
FIDLER V. SUN LIFE ASSURANCE CO. OF CANADA (2006) 34
KEYWORDS: MENTAL DISTRESS AS COMPENSABLE, DISABILITY INSURANCE 34
SWAN’S REVIEW OF CLASS 5: 36
SWAN’S REVIEW OF CLASS 6 – PROVIDES OVERVIEW OF DAMAGES 36
PUNITIVE DAMAGES 37
WHITEN V. PILOT INSURANCE CO. (2002) – ZOMBIE CASE 38
KEYWORDS: PUNITIVE DAMAGES, INSURANCE 38
UNCERTAINTY & DAMAGES 39

EQUITABLE REMEDIES 39

INTEREST AND THE DATE FOR ASSESSING DAMAGES 41

SWAN’S REVIEW OF INTEREST & DATE FOR DAMAGES (CLASS 6) 41
BANK OF AMERICA CANADA V. MUTUAL TRUST CO. (2002) 42
KEYWORDS: COMPOUND INTEREST 42
SPECIFIC PERFORMANCE, INTEREST AND THE CALCULATION OF DAMAGES 44
RELATIONAL CONTRACTS AND EQUITABLE REMEDIES 45
WARNER BROS PICTURES INC. V. NELSON (1937) 45
KEYWORDS: RELATIONAL CONTRACT 45
RECOVERY OF THE DEFENDANT’S GAINS OR RESTITUTIONARY REMEDIES (P.242) (SWAN’S REVIEW,
CLASS 7) 46
MITIGATION – CONCEPT OF AVOIDABLE HARMS 46
SWAN’S REVIEW OF CHAPTER 2 (IN REVIEW OF CLASS 7) 47

CHAPTER 3 48

THE KINDS OF PROMISES THE LAW WILL ENFORCE 48

A NOTE ON TERMINOLOGY 48
THE BARGAIN PRINCIPLE 48
FULLER, “CONSIDERATION & FORM” 49
PROMISES THAT WILL BE DENIED ENFORCEMENT: UNFAIRNESS 50

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THE “PORT CALEDONIA” (1903) 50
THE DEED: THE PROMISE UNDER SEAL 51

CONSIDERATION 52
THE RATIONALE: ENFORCING BARGAINS AND NOT GIFTS 52
THE BASIC CONCEPT FOR CONSIDERATION 52
THOMAS V. THOMAS (1842) 53
WHITE V. BLUETT (1853) 53
HAMER V. SIDWAY (1891) 54
PAST CONSIDERATION 55
EASTWOOD V. KENYON (1840) 55
MUTUAL PROMISES 56
GREAT NORTHERN RAILWAY CO. V. WITHAM (1873) 57
WIEBE V. BOBSIEN (1985) 57
WOOD V. LUCY, LADY DUFF-GORDON (1917) 58

GOING-TRANSACTION ADJUSTMENTS OR CONTRACTUAL MODIFICATIONS 59

HARRIS V. WATSON (1791) 59
STILK V. MYRICK (1809) 60
STOTT V. MERIT INVESTMENT CORP. (1988) 60
NOTE ON RELATIONAL CONTRACTS & CONSIDERATION 62
GILBERT STEEL LTD. V. UNIVERSITY CONSTRUCTION LTD (1976): 62
FOAKES V. BEER (1884) 63
DOWNEY V. ECORE INTERNATIONAL INC. (2012) 64
BENZIE V. HANIA (2012) 65
TECHFORM PRODUCTS LTD. V. WOLDA (2001) 66
CONTRACTS WITH A THIRD PARTY 67

RELIANCE AS A BASIS FOR THE ENFORCEMENT OF PROMISES 67

RELIANCE IN THE COMMERCIAL CONTEXT 68
CENTRAL LONDON PROPERTY TRUST LTD. V. HIGH TREES HOUSE (1947) 68
COMBE V. COMBE (1951) 70
TUDALE EXPLORATIONS LTD V. BRUCE (1979) 71
WALTONS STORES (INTERSTATE) LTD. V. MAHER (1988) 71
BAXTER V. JONES (1903) 72
RELIANCE IN NON-COMMERCIAL CONTRACTS 73
SKIDMORE V. BRADFORD (1869) 73
DALHOUSIE COLLEGE V. BOUTILIER ESTATE (1934) 74

INTENTION TO CREATE LEGAL RELATIONS 74

JONES V. PADAVATTON (1969) 75
A LETTER OF COMFORT 77
TORONTO-DOMINION BANK V. LEIGH INSTRUMENTS LTD. (TRUSTEE OF) (1999) 77
THE REQUIREMENT OF WRITING: THE STATUTE OF FRAUDS 78
WAYS THAT THE COURTS HAVE RESTRICTED THE STATUTE’S EFFECTS: 79
THE STATUTE OF FRAUDS AND PART PERFORMANCE 79
ERIE SAND AND GRAVEL LTD. V. SERES FARMS LTD. (2009) 79

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UNJUST ENRICHMENT AND THE STATUTE OF FRAUDS 81
DEGLMAN V. GURANTY TRUST CO. OF CANADA & CONSTANTINEAU (1954) 81
SUMMARY OF CHAPTER 3 82

CHAPTER 4 83

THIRD PARTY BENEFICIARIES AND PRIVITY OF CONTRACT 83

INTRODUCTION 83
A NOTE ON NOVATION 83
TWO ASPECTS TO THE THIRD PARTY BENEFICIARY RULE 83
THE FEATURES OF THE RULE 84
A NOTE ON TRIANGULAR RELATIONS 84
THE RULE IN PRACTICE: LEGISLATIVE DEVELOPMENTS 85
THE JUDICIAL RESPONSE TO THE RULE 85
THE DEVELOPMENT OF TECHNIQUES TO AVOID THE RULE 86
THE CANADIAN CASES 87
LONDON DRUGS LTD. V. KUEHNE & NAGEL INTERNATIONAL LTD. (1992) 88
MORE RECENT DEVELOPMENTS 92
NOTES & QUESTIONS 92
THE RULE IGNORED: BILLS OF EXCHANGE AND LETTERS OF CREDIT 93

CHAPTER 5 93

THE FORMATION OF CONTRACTS 93

THE RULES OF OFFER & ACCEPTANCE 93
THE MIRROR IMAGE RULE OF OFFER & ACCEPTANCE 93
THE ACCEPTANCE 95
CONTRACTS MADE BY MAIL 96
SCHILLER V. FISHER (1981) 96
KEYWORDS: POSTAL ACCEPTANCE RULE 96
CONTRACTS MADE BY FAX 98
WHERE IS A CONTRACT MADE? 98
E-COMMERCE AND CONTRACTS MADE THROUGH THE USE OF COMPUTERS 98
RUDDER V. MICROSOFT CORP (1999) 98
KEYWORDS: CROSS-BORDER CONTRACT, ONLINE AGREEMENTS 98
THE REVOCATION OF THE OFFER 100
FIRM OFFERS AND UNILATERAL CONTRACTS 100
CARLILL V. CARBOLIC SMOKE BALL CO. (1892) 100
LEONARD V. PEPSICO INC. (2000) 102
KEYWORDS: OBJECTIVE, REASONABLE PERSON 102
ERRINGTON V. ERRINGTON (1952) 103
KEYWORDS: “WALK TO YORK” 103
AUCTIONS AND TENDERING IN THE CONSTRUCTION INDUSTRY AND FOR GOVERNMENT CONTRACTS 104

LIMITS OF THE TRADITIONAL RULES 105

MISTAKES, MISUNDERSTANDINGS & CONFUSION 105
RAFFLES V. WICHELHAUS (1864) 105
HOBBS V. ESQUIMALT AND NANAIMO RAILWAY CO. (1899) 107
INDEFINITENESS AND THE PROCESS OF CONTRACT NEGOTIATION 108

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AGREEMENTS TO AGREE 110
LETTERS OF INTENT 111
CANADA SQUARE CORP. LTD. V. VERSAFOOD SERVICES LTD. (1981) 111

PROTECTION OF EXPECTATIONS ARISING FROM NEGOTIATIONS 113

MARTEL BUILDING LTD. V. CANADA (2000) 113
DUTY OF CONFIDENTIALITY 115
LAC MINERALS LTD. V. INTERNATIONAL CORONA RESOURCES LTD. (1989) SCC 115
EXERCISES (SHEET) 117

THE BATTLE OF THE FORMS 117

BUTLER MACHINE TOOL CO. LTD. V. EX-CELL-O CORP. (1979) 117
TYWOOD INDUSTRIES LTD. V. ST. ANNE-NACKAWIC PULP & PAPER CO. LTD. (1979) 118
MACNEIL, THE NEW SOCIAL CONTRACT 119

CHAPTER 6 121

EXCUSES FOR NON-PERFORMANCE 121

EXPRESS CONDITIONS: 122
DYNAMIC TRANSPORT LTD. V. O.K. DETAILING LTD. (1978) 124
WAIVER OF CONDITIONS 125
CONDITIONS SUBSEQUENT 125
IMPLIED CONDITIONS 126
THE ORDER OF PERFORMANCE 126
THE PROVISION OF EXCUSES BY THE COURTS 126
HONGKONG FIR SHIPPING CO. V. KAWASAKI KISEN KAISHA LTD. (1962) 127
SAIL LABRADOR LTD V. “CHALLENGE ONE” (THE) (1999) SCC 129
ANTICIPATORY BREACH 130
FROST V. KNIGHT (1872) 131
DOMICILE DEVELOPMENTS INC V. MACTACHISH (1999) 132
THE RIGHT OF A PARTY IN BREACH TO CLAIM RESTITUTION 134
BLAKE V. SHAW (1853) 134
SUMPTER V. HEGDES (1898) 135

PART 2 136

CHAPTER 7 136

INTERPRETATION, RISK ALLOCATION, MISTAKE & FRUSTRATION 136

MACNEIL, THE NEW SOCIAL CONTRACT 136

INTERPRETATION 136
FEDERAL COMMERCE & NAVIGATION CO. V. TRADAX EXPORT SA (THE “MARTHA ENVOY”) (1978) 137
SCOTT V. WAWANESE MUTUAL INSURANCE CO. (1989) 138
SATTAVA CAPITAL CORP. V. CRESTON MOLY CORP (2014) 142
THE PAROLE EVIDENCE RULE 145
GALLEN V. ALLSTATE GRAIN CO. (1984) 146
HI-TECH GROUP INC V. SEARS CANADA INC. (2001) 147

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FILLING THE GAPS IN AN AGREEMENT 147
THE MOORCOCK (1889) 148
MARBRY V. AVRECAN INTERNATONAL INC (1999) 149
A SHORT NOTE ON GOOD FAITH & IMPLIED TERMS 151

REPRESENTATIONS & WARRANTIES 151

THE CLASSIFICATION OF CONTRACTUAL STATEMENTS 152
MISREPRESENTATIONS 152
S-244 HOLDINGS LTD. V. SEYMOUR BUILDING SYSTEMS LTD. (1994) 154
WARRANTIES 155
HEILBUT, SYMONS & CO. V. BUCKLETON 155
DICK BENTLEY PRODUCTIONS LTD. V. HAROLD SMITH MOTORS LTD 155
PLAS-TEX CANADA LTD. V. DOW CHEMICAL OF CANADA LTD. 156
NEGLIGENT MISREPRESENTATION 156
ESSO PETROLEUM CO V. MARDON (P.808) 156

MISTAKE 156
RECTIFICATION: CORRECTING THE WRITTEN CONTRACT 157
PERFORMANCE INDUSTRIES LTD. V. SYLVAN LAKE GOLD OF TENNIS CLUB LTD (2002) 157
MISTAKEN PAYMENTS 158
MISTAKEN ASSUMPTIONS 159
SHERWOOD V. WALKER (1887) 159
BELL V. LEVER BROTHERS (1932) 160
AMALGAMATED INVESTMENT PROPERTY CO. V. JOHN WALKER & SONS LTD. (1976) 163
RON ENGINEERING & CONSTRUCTION V. ONTARIO (1981) SCC 165
REVIEW PROBLEM: 166

FRUSTRATION 167
TAYLOR V. CALDWELL (1863) 167
KRELL V. HENRY (1903) 168
KBK NO. 138 VENTURES LTD V. CANADA SAFEWAY LTD. (2000) 170
HR & S. SAINSBURY LTD V. STREET (1972) 171
FIBROSA SPOLKA AKCYJNA V. FAIRBAIRN LAWSON COMBE BARBOUR LTD. (1943) 172
THIRD PARTIES & MISTAKES 174
MARVCO COLOUR RESEARCH LTD V. HARRIS (1982) 175

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 Chapter 1

Intro to Contracts
General Professor Notes:
- Prof. Swan really likes Blackburn and his cases & likes Lord Hoffman
• Prof. Swan also really like Grange J. (Tywood Case)
• Also likes Laskin J.A. (Domicile)
- *BE CAREFUL about: how you NAME people! (I.e. say “Mr/Mrs Peevyhouse” not
just the “Peevyhouse”). ALWAYS SAY THEIR FULL NAMES!!
- Never use the term “they” unless it actually is plural
- Always ask, “What is the PURPOSE of this rule?”
- In study notes, focus on the risks in the case, problem & solution NOT the case
itself
- Side Note: The convention in the House of Lords is that regardless of who is the
plaintiff, the appellants name goes first – ex: If defendant is appealing, then their
name will go first
- Rule absolute (said at the end of the appeal trial) = means appeal allowed
- Omitted information= won’t be the FOCUS of the exam BUT it can still be
relevant to your answer
On the Midterm:
- “You have asked me…This is what I will do” – beginning, middle, end
- Midterm is only on Ch. 2
On the previous Final
- She disliked self-represented litigants which resulted in her deciding against her
own good faith decision Bhasin.

What is a Contract?
- Contracts are about exchange and the allocation of risk
- One of the problems with contracts is that what seems like a good deal today
may not be tomorrow
- Ex: when you have an inflation in land deals, the seller tries to get out of a deal
to sell it for a higher price

Planning & the Role of Contract Law

- Role of planning: a lot of contracts are used to PLAN ones affairs
Exchange, Planning, and the Role of Contract Law
- The existence of a temporal element – a period between the time of the promise
and performance of the promise - transforms the simple element of exchange
into a powerful method of economic planning
- There is a difference between a “discrete” and “relational” contract

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 - Discrete is a one-time exchange between 2 parties (i.e. sale of goods for cash)
- Relational is a contract that establishes a legal and economic relation for future
co-operation between 2 or more parties that will go on for a period of time.

Some Notes about Cases:

- Always consider the historical context of a case
- If a decision is good: argue that it should be used again
- If a decision is bad: argue to avoid its future use.
- Consider: judicial reasoning for a decision, how useful the judges statement is,
how well it can be used by the courts for future decisions, how well it functions
as a guide for lawyers to advise clients.
- Judiciary more inclined to consider whether the aw produces a socially,
economically, or legally desired result since the Charter.
- Single judicial decision less important than the overall direction of case law

The Role of Contracts in a Market Economy

- Our society is a market economy, and it is characterized by EXCHANGE, such
relations arise from:
1. A scarcity of resources and the need to allocate them
2. The specialization & division of labour
- The law of contracts GOVERN these relations
o Premised on the existence of privately enforceable contracts and markets
o The law is a tool to achieve social, economic, and political goals.

Contract v. Promise
At the heart of any contract is at least 1 promise
- A promise is a “present communication of a commitment to engage in a
reciprocal measured exchange”
- A “contract” is a term used to describe a group of related promises that are
legally enforceable
- The term “exchange” is used as being synonymous with commercial deal or
contract
- These terms mean that there are several exchanges that take place are
characterized by ECONOMIC & COMMERCIAL facts which include:
• There are at least 2 parties (may be individual or group of individuals)
• The exchange involves THINGS that have commercial equivalence
• At the time of exchange, both parties must believe that they will be better off
after it more than before it
• The ability of people to make exchanges permits economic planning
• The ability to plan is an important aspect of individual freedom
• At the time of the contract there is a present intention to limit the future
choice of both parties to the contract.
• Both parties must communicate their intentions to each other

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Role of a lawyer is to anticipate risks created for the client and how those risks may be
avoided, controlled or allocated in negotiating the deal while keeping relations amicable.
A judge must:
• Respect judicial hierarchy
• Be aware of party’s reasonable expectations
• Follow any relevant legislation
Consider which institution is best suited to resolve a dispute:
• The courts, legislation, consensual agreement of the parties.

Chapter 2
Remedies for Breach of Contract
- Law of Offer or Acceptance: the creation or formation of a contract
- Some people believe we should start by looking at this when studying contracts
- Professor thinks we should look at where things go wrong
The Possible Remedies for a Breach of Contract include:
1. Contract-breaching could be a criminal offence.
• S.422 of the Criminal Code: makes it an offence to WILFULLY break it, when
doing so leads to probably consequences (i.e. endanger life, expose valuable
property to destruction, or deprive the inhabitants of a place of electricity,
water etc.)
• In some instances, a breach can include other offenses like fraud
• But ordinarily a breach of contract isn’t a crime
2. A person who breaches a contract can forfeit the right to carry on a business
3. A person can be publicly labeled as one who did not keep promises (i.e. usually
happens with bankruptcy)
4. A court could make the declaration that a contract has been breached and leave
the provision of any other remedy to outside pressure or to the parties
themselves
5. A person can be ordered by a court or gov’t to do what was promised – breach
of order can lead to imprisonment or a fine
6. A Court can order the promisor to pay damages as compensation to the
promisee

The 2 Principle Remedies Used:

1. Specific Performance of a contract
2. Require the promisor to pay damages as compensation to the promisee
o Promisor – (defendant) person who makes the promise
o Promisee – (plaintiff) person who accepts the promise

Three broad issues to consider in discussing remedies for breach of contract:

• What types of losses should be considered and how to best rectify them?

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 • How to limit the award of damages?
• Are there other important values at stake?
o Social, economic, political

The Compensation Principle

Wertheim v. Chicoutimi Pulp Co.

And it is the general intention of the law that, in giving damages for breach of
contract, the party complaining should, so far as it can be done by money, be
placed in the same position as he would have been in if the contract had been
performed… that is a ruling principle.

Peevyhouse v Garland Coal & Mining Co. (1963)

Keywords: compensation principle, diminution in value, failure to allocate risk

Facts
Jackson J.
- Plaintiffs: Peevyhouse
- Defendants: Garland Coal & Mining Company
- Plaintiffs claim that def didn’t complete the remedial work on their farm that
was stipulated in the contract ($25,000)
- Def claims that they didn’t b/c the farm’s value decreased & the measure of
damages is the diminution in value of the farm ($300)
Issue
- What is the proper measure of damages: diminution in value or cost of
performance?
Held: diminution in value is awarded.
Reasoning
- In this situation, the cost of performance greatly exceeds the diminution in value
Conclusion: due to the diminution of value of the farm, remedial work does not have
to be done, as it far exceeds the cost of performance
Reference to American Law Institute, McCormick and Oklahoma Statutes
Importance
- Compensation principle
- Lawyer took case on contingency basis; incentive to inflate damages: did not
represent his client who wanted the ground leveled. In Radford v. De Froberville,
it was clear that the plaintiff wanted performance the court was more inclined to
side with the plaintiff; lawyer and client had different goals.
- Peevy were only prepared to allow Garland Coal to strip mine their land IF they

10
 made the land usable after. They waived a payment of $3000 b/c of this promise
- Give compensation unless damages are grossly disproportionate to actual loss,
then give diminution in value: plaintiff should not be better off by the award of
damages than by performance of contract. Law of contract does not provide
windfall gains.

Swan’s Review of Class 1:

Important things we learned:
1. The role of law of contracts in a market economy
2. Institutional structure: the way in which decisions are made in adjudication.
3. The importance of remembering normative values
Important:
• The role of the lawyer faced with advising a client like in Peevyhouse;
important that a solicitor understand how a contract should be drafted to
ensure that the court understands the expectations of the parties
• Oklahoma Court: had a NARROW view of the facts
• Present: courts rarely have this issue, apply facts more BROADLY
• The Oklahoma Court could not have simply drawn an inference that leveling
the land was “incident” to the contract based on what the Peevys said, b/c it
would be UNJUST
What would a good lawyer do?
• Would propose a different contract to the mining company
• The careful lawyer SHOULD and WOULD have a DISTRUST in the Groves
decision – too good to be true
• Options of what a good lawyer should do:
1. Require Garland to give a payment equal to the cost of leveling, held in a trust
account and released to Garland once the leveling is done
2. Require Garland to pay the actual cost of leveling incurred by Peeveyhouse, not
promise to level. Contract of Indemnity.
3. Require Garland to pay a security cost (can be in the form of a letter of credit)
*The 2nd and 3rd options are MORE likely (as Garland believes that they will get enough
coal to make a profit)
• It may be that they cannot get BOTH a royalty & leveled land – but then at
least they know the 2 options
o How contracts can be amended or re-drafted to fix the problem is
important
o Ex: the risk: if you have the land leveled, we have to make sure the cost of
leveling is factored into Garland’s equation. I can’t get you the royalties
and the land leveled, you have a choice, you either get the land you have
now, or the profits from the coal (and the land unleveled) – can’t do both
b/c means Garland gets no profit.
o When your client is making a claim that looks odd, chances are that judges
will look at it squiggle-eyed

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 - If the Peevys and Mr. Radford were to claim (not damages) but the return of
what the other party gained (so not seeking expectation interests BUT seeking
restitution interests) (I.e. arguing Garland Coal or the purchaser made a gain
that was at their expense) this is rare, but is happening more in English courts

Radford v. De Froberville (1977)

Keywords: Non-economic interest as compensable

Facts & Notes
Swan likes this decision!
- Radford agreed to sell part of his land to the D on the condition that a stone wall
is built between the 2 properties.
- D didn’t built the wall & argued the damages should be nominal b/c there was no
diminution in value or limited to the cost of building a less expensive wooden
wall
- P argued that if awarded the cost of performance, he would build the stone wall
Held: Awarded cost of performance for building of a stone wall.
Importance
- The court recognized the aesthetic, non-economic interest of a stone wall as
compensable
- Court was moved by the genuine intention to build the stone wall
Notes
- A lawyer should say, no, get the money upfront for the wall and build it yourself.
B/c if the buyer doesn’t build the wall and the price was reduced, you need to
sue.
- Radford’s lawyer treated the case in a way that made it likely that the court
would do it – stated that if awarded the cost, I will build the wall.

Ruxley Electronics and Construction Ltd. v Forsyth (1996)

Keywords: Non-economic interest as compensable, Loss of amenity,

Facts
- Deal made to build a pool, after it was built, the D REFUSED to pay the balance
- The D realized the pool was only 6 feet, 9 in deep, and was supposed to be 7
feet, 6 in deep – counter-claimed to rebuild the pool
- D promised to rebuild the pool if awarded the cost of performance
- Non-commercial contract
Procedural History
- Trial judge, however, found that the breach did not decrease the value of the
pool or property

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 - Trial judge awarded the owner 2,500 for “loss of amenity”
- Owner appealed – Court of Appeal allowed appeal and awarded 12,500
- The Court of Appeal decision created an issue for the construction industry b/c it
would make a statement to what people will get from them
Held: General damages awarded for loss of amenity. Restores trial judge’s decision.
Reasoning
- The reasonableness of an award of damages must be linked directly to the LOSS
sustained – the breach was not a total failure of the contract
- The House of Lords: finds the trial judge erred in their decision to base it on the
value of the house, this isn’t about the value, but his particular tastes. It is for
the plaintiff to judge what performance he requires in exchange for a price and
the court should honour this choice.
• Personal preference is a factor in reasonableness, but not determinative
• The courts award him for being upset
- Although the promisee is entitled to money, the Court of Appeal awarded too
much for no reason
Importance
- Non-economic interest can be compensable (“loss of amenity” or
“pissedoffness” (Swan’s Review)
- Recognition of particular tastes and not the value of his home
- So, compensation principle unless disproportionate and if disproportionate, can
be loss of amenity (personal preference)
Notes and Questions
- They did not believe he would take the money to rebuild the pool – Mr. F might
have strengthened his case for the cost of re-building had he only asked to have
the contractor pay after the pool was rebuilt (Swan’s Review)
- There was acrimony between the parties before trial that made it to the
newspapers. It was believed that the promise wanted money to rebuild the pool
due to a desire for revenge or to make the contractor suffer. Is this relevant or
irrelevant? Was it relevant in Radford?
- Prior to this decision, only two measures of damages: cost of reinstatement or
depreciation of value: Court now recognizes non-economic measures.
- Code of Prof Conduct of the CBA states: the lawyer should not take advantage of
any mistakes made by another lawyer
- The Rules of Prof Conduct of the Law Society states: a lawyer when dealing with
an unrepresented client on the other side must not take advantage and must
make clear they are working in their client’s interest
- Importance of this case: they introduce a concept of non-economic losses

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 Victory Motors LTD v Bayda (1973)

Keywords: Supply v. Demand, opportunity cost

Facts
Swan likes this case!!
Hughes DCJ
- D: refused to take and pay for the car once it came, the plaintiff sold it to
someone else, but regardless, the plaintiff was deprived of their profit by way of
a commission
- P: (car dealer) argues D owes him $700 in commission
Held: P wins
Reasoning
- The NEW purchaser would have purchased ANOTHER vehicle had the one
ordered not been there, therefore, the car dealer would have made a profit on 2
vehicles, not 1
- Damages limited to lost commission less the variable commission received on
the subsequent sale of a trade -in. Aligns with the principle that the plaintiff
should be in the same position had the contract been performed.
Importance
“State of trade rule”
• If supply is greater than demand = loss suffered
• If demand is greater than or equal to supply = no loss suffered

Swan’s Review of Class 2:

- Compensation Principle is “expanded” to include non-economic losses
(psychological & aesthetic)
- Motives of the plaintiff are an important factor for the court.
- A good lawyer would provide a guarantee that the plaintiffs land be leveled. If
this makes the deal uneconomic, then it is good that the parties know this prior
to signing the agreement, and that they do not achieve a deal.

Fuller and Purdue: The Rationale for the Compensation Principle

- Rule: Plaintiff should be compensated for the loss suffered

Restitution Interest:
- Plaintiff has a reliance on the promise of the defendant and has conferred some value
on the defendant; and the defendant has failed to perform his promise.
- The court may force the defendant to return the value he received from the plaintiff.
- Meant to protect against the unjust enrichment of the promisor at the expense of the
promisee

Reliance Interest:

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 - Encompasses the costs that plaintiff will incur when they rely on the promise of the
defendant and the defendant changes his position.
- Also loses the opportunity to make another contract
- May award damages for the purpose of undoing the harm which his reliance on the
defendants promise has cause him
- Meant to put the plaintiff in as good a position as he was before the promise was made

Expectation Interest:
- Object is to put the plaintiff in as good a position as he would have occupied had
the defendant performed his promise
- May compel specific interest or damages equal to the value of performance

- Justify the expectation interest because it best protects reliance.

o Reasonable expectation of parties
o Makes the institution of contracts more reliable
o Allows for economic planning
o Encourages people to make contracts
o In a market economy, expectancy created by an enforceable promise
should be regarded as a type of property, and a breach to that property
considered an injury to that property.
o Purpose not so much to compensate the promise, but to penalize the
breach of promise by the promisor - quasi-criminal
o Policy in favour of preventing and undoing the harms resulting from
reliance, but also a policy in favour of promoting and facilitating reliance
on business agreements: facilitates economic activity.
- Justification for reliance is two-fold
o Cure and prevent the harms occasioned by reliance
o Facilitate reliance in a business agreement
- Law and society have interacted for a particular social end
- Possible to distinguish between economic and non-economic losses
o Must clearly articulate expectations at the start of the contract
Notes:
- Fuller and Perdue argue that depending on the FACTS of the case and the
VALUES that the court considers important one can justify a decision to award
damages on any one of these measures

An Economic Analysis - Posner’s Article

- Started Law and Economics (Swan HATES efficient breach)
• Summary of remedies available for breach
Compensation for reliance losses - costs incurred due to reasonable reliance
Compensation for expectation losses - loss of anticipated profits
Liquidated damages - damages specified in the contract in the event of breach
Consequential damages - to compensate for the effect on the promisee business

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 Restitution - return of unjust earnings
Specific performance
Penalty - compensatory damages for economic or non-economic reasons
• Efficient breach - not wrong to breach contract: consider pareto efficiency
• Swan:
Impossible to measure the losses prior to breach of contract
Relationships and integrity and trust matter - contracts fundamentally relational
Efficient breach would undermine the reliance on promise required for increased
economic activity.

Position, Risk and Remoteness

- A promise establishes the position each party expects to be in at the completion

of the contract. Law of contracts to protect reasonable expectation.
- Parties must agree on some definition of position that each will be in when the
contract is finished. Thus, must consider what position each party wants.
- Once position is established, solicitors can control or limit the position the
promisee can expect – they can reduce the expectation interest until the
promisor is willing to accept the risk of breach
o One could limit the amount paid to level land, for example.
- Without a clear position (or statement of expectations) the court will impose a
remedy via the default rules: the court will do what it believes is right (what it
wants to do) based on what the contract provided and what the court considers
the contents of the promise.
- Decisions in Radford and Ruxley are significant b/c they show that a court that
wants to give a plaintiff more can do so so the Q isn’t applying a simply
formula like “expectation damages” but “what do we WANT to do and why?”
- Restitution and reliance interests have a built-in limit whereas the expectation
interest has NO obvious limits
- Need to determine how to limit the award of damages.

The next case: about establishing the limit on the recovery of damages, a concept
called “remoteness”

Hadley v. Baxendale (1854)

Keywords: Remoteness, Limiting damages, acceptance of risk.

Facts
Swan likes this decision!
- P: millers. Their mill broke. Hired the defendant to bring over a new shaft & it did
not arrive until several days after the supposed arrival date. This delayed their
milling and they lost profits.
- D: objected this b/c the damages were too remote & therefore, not liable
Issues:

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 - Who bears the risk of cost due to the delay?
Rules/Test:
Where 2 parties have a contract that one has broken, the damages the party ought to
receive should reflect a cost that:
(1) Would arise naturally (i.e. according to the usual course of things) NATURAL
COURSE (based on reasonable expectations of both parties)
OR
(2) As was discussed in contemplation between the 2 parties SPECIAL
CIRCUMSTANCES
• If special circumstances are laid out in the contract, then when there is a
breach= easier to determine damages
• If no special circumstances, then if there is a breach= he/she at the MOST
would get the damages that would arise generally
Application:
1. Not met. Would not arise naturally.
2. Special circumstances not met.
• The only circumstances communicated in this contract: there was a broken
shaft that had to be transported to a mill
• BUT how do these circumstances show reasonably that the profits of the mill
would be stopped by an unreasonable delay of the parts by the carrier to a
third person?
• What if the millers had another working shaft? And just sent this one back
merely to get fixed. OR, What if there were other defects and the same
results would follow anyways?
• It is true in this situation, that the way the events happened directly affected
the mill stopping work & a loss of profit BUT these special circumstances
were NOT communicated in the contract!!
Decision (Exchequer or “Court of Appeal”)
- Held: the loss of profits cannot reasonably be considered a consequence of the
breach of contract
Precedent set by Hadley
- “Damages that are too remote are not recoverable”
Importance
- Allocation of risk
• Price is proportional to risk
• More risk buyer wants to impose on seller= higher price the buyer will have
to pay
- Where two parties have made a contract which has been breached, the damages
which the plaintiff ought to receive should reasonably be considered either
arising naturally (according to the usual course of things) from such a breach, or
such as may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as the probable result of the breach.
- If the special circumstances under which the contract was actually made were

17
 communicated by plaintiff to the defendant, the damages resulting from the
breach, which they would reasonably contemplate, would be the amount of
injury which would ordinarily follow from the breach under these special
circumstances.
- If the special circumstances were wholly unknown to the defendant, he could
only be supposed to have had in his contemplation the amount of injury which
would arise generally from such a breach. For, had the special circumstances
been known, the parties might have specially provided for the breach by special
terms as to the damages in that case.
Notes:
• Communication of the risk is not sufficient. The communication of special
circumstances enables the parties to bargain over the allocation of risk that
may be foreseen, and unless the defendant undertakes to be responsible for
the increased risk, the defendant cannot be held liable.
• This must be a person of relevant authority -
• The case may have played out differently (in terms of special circumstances) if
they had told a member of the firm as opposed to an employee of the firm;
• Problem with the precedent set by Hadley: saying damages are “too remote”
is a CONCLUSION it is NOT a reason for limiting damages. We need something
more to support it
• Object must be to discriminate between the portion of the loss that must be
borne by the offending party, and that which must be borne by the sufferer.

Consider the following cases about justifications that the courts adopt for the
allocations of risk that they make:

Horne v. Midland Railway Co. (1873)

Keywords: Application of Hadley, acceptance of risk, required notice

Facts
- P: boot manufacturers.
- D: railway company – common carrier
- P made boots for the French Army to be delivered to them
- When the contract was made, the P told the D that if the boot delivery was late
than they would be refused by the buyer. The boots were late and refused.
- P: sold the boots for less, and sued the D for any loss in profits.
Issue:
- What measure of damages is appropriate: the loss of profit or the market value
of the shoes?
Reasoning:
- Applies Hadley v. Baxendale second part of the TEST
If it is a special circumstance and this was communicated to the D, then it is within

18
reasonable contemplation.
- The D was unaware of the exceptional nature of the P’s contract
• If D knew this, they may have charged more – accepting the risk
- The risk the P sought to impose on the D was not assumed by the D
- The notice the D received was INSUFFICIENT to impose “extra” liability
Decision:
- The plaintiff gave no notice of the extraordinary nature of the contract. Even if
they had, since the railway company would not have charged more for the
delivery, they are not bound to pay more than a reasonable consideration of
losses
- Nominal damages awarded
Importance
- Damages for special circumstances will not be awarded unless communication to
& accepted by the parties
Notes:
- Railway companies were the largest & most imp. companies in the 19th century;
prices fixed by legislation and closely regulated by the state
- Court explicitly says: the railways can ONLY charge a tariff & are FIXED in what
they charge. So if someone wants to argue a greater risk, the customer must
show they paid for it. Simple communication of this wasn’t sufficient.

*Important takeaways from these 2 cases: The more risk you want me to assume, the
more you must pay me.
- A note on “common callings” – these are a part of common law & apply to
businesses known as “common callings” they are compelled to allow anyone
to use their services and had a lien on the goods carried (Swan’s Review)

An Introduction to Drafting & Risk Allocation (p.83)

- Role of the solicitor is to allocate the risk that each side faces from the
performance of the non-performance of the contract.

Cases where they sought to allocate the risks by contract:

Cornwall Gravel Co. Ltd. v. Purolator Courier Ltd. (T.C. 1978)

Keywords: Special Circumstances, Application of Hadley

Facts:
Swan does NOT like the decision!!
Holland J.
- Tender for contract had to be delivered by 3pm on Oct 2. Delivered at 3:17pm on
Oct 2 and therefore rejected. Driver was informed of importance of delivery &

19
 timely delivery. It was late b/c truck broke down.
- P is sueing for expectation losses
Issue
- Should Purolator (D) be responsible for paying damages for lost profits under
“special circumstances”?
Held: P was awarded $70,000 with interest.
Reasoning:
- The special circumstances under which the contract was made were
communicated by the plaintiff to the defendant. The damage which flowed from
the breach was one which could have been contemplated and which would
ordinarily follow from a breach of contract under those known and
communicated special circumstances.
- They communicated reliance & the nature of loss to the carrier
- Affirms the test in Hadley – D is liable if special circumstances are communicated
at the time
- Employee of the case: NOT held personally liable, b/c the contract is made
between the 2 business entities.
Importance
- Where special circumstances are communicated & accepted, the breaching part
will be held liable for the loss.
Notes
- PROF: thinks this case is WRONGLY DECIDED!!
- There is no contractual significance
- This is an example of the court doing 2 things WRONG: (1) it forgets the second
rule of Hadley – it says that b/c they were told, it changed the default allocation.
The court forgets that the firm must accept liability. (2) Believing the employee
would ultimately have the power to send communication
- The court treats the mere fact of communication of the “special circumstances”
to the D as sufficient for the imposition of liability. The P had no reasonable
expectation that the driver had authority to change the terms of the contract
(Swan’s Review)
- Carriers are generally held responsible for fewer losses then vendors because
they generally have less knowledge of the value of the transaction.
- This case cause Purolator to change contracts to preclude the company from full
liability for late delivery. Liability limited to the cost of expedited shipment.
- Unclear whether reasonable expectation of a promisee should be influenced by
the contract or by the statements of the company – Purolator ran several adds
which encouraged clients to trust them.
- Difficult for a company to control for the actions of their employees.
- Can control risk through the purchase of insurance:
o Shippers insurance – first party insurance
o Carriers insurance – third party liability insurance
- Kienzle v. Stringer (1981) Reasonable foreseeability not necessarily related to

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 what was reasonably contemplated by the parties, but rather reflects a judicial
decision reflecting policy to find a fair measure to be paid to those who suffer
damages by those who cause them
- For example, courts general deny claims that arise because a plaintiff losses are
increased by its financial inability to protect itself from some of the
consequences of the defendants breach.
- Policy: might cause those who are financial strong to be more reluctant to
engage in business with those businesses that are financially weak.

This case outlines an analysis that puts the issue of remoteness in its commercial
context:

Canlin Ltd. v. Thiokol Fibres Canada Ltd. (C.A. 1983)

Keywords: Remoteness, Reasonable Contemplation

Facts:
Swan REALLY likes this case!!
- P was manufacturing mesh swimming pool covers to sell
- The plaintiff asked the defendant to supply the raw material to make pool
covers. The defendant said the material will be resistant to ultraviolent radiation,
to allow the plaintiff to guarantee the covers for three years.
- The material disintegrated when exposed to sunlight and caused the plaintiff to
withdraw from the market.
- P sues for losses suffered and for loss of future profit
- D argues the loss of future business profits was not a foreseeable consequence
of the breach nor a direct natural result
Issue:
- Was the loss of future business profits a foreseeable consequence of the breach
of warranty?
- So, are they recoverable or too remote?
Held: Defendant pays $93,000 for losses on covers manufactured and sold in 1975 plus
$100,000 for loss of profits on expected future business for the 1976 to 1980 period.
Test
Remoteness test.
- The test for determining what is a loss that directly and naturally results in the
ordinary course of events from a breach are the consequences of the breach
such that a reasonable man at the time of making the contract would
contemplate himself as being liable for. The conclusion is inapplicable if the
contracting parties were specifically aware of certain conditions or if precise
contractual provisions fixed the quantum of damages in case of a breach.
Reasoning:
- The D could and should reasonably have contemplated that damages would flow

21
 from a breach of the contract. Those damages would include loss of future or
prospective profits.
- The special circumstances= Disclosure of warranty & D’s acceptance of those
terms allow claim of future lost profit
- Assessment of losses are based on the evidence put before the court, and may
be based loss of future profits upon a pat history of sales of similar items to
similar customers, may be based on projections created by the plaintiff for a
period determined reasonable and proper by the Court, etc.
- Assessment is difficult, but not an impossible task.
Importance
- The loss of future profits from a breach are recoverable if they arise naturally
from the breach of contract; should have been within the contemplation of the
parties or ought reasonably to have been foreseen by the parties.
- One is liable for damages “directly & naturally resulting in the ordinary course of
events from the breach of warranty”
Notes:
- Prof. Swan: Very good example of the court doing exactly what it should do!!
(SHE LIKES THIS CASE) (affirms Hadley Special circumstances doctrine)
- There was a clear understanding here of the consequences of the deal and this
understanding JUSTIFIES imposing the risk of loss on the D (Swan’s Review)

Transfield Shipping Inc. v. Mercator Shipping Inc. (The Achilleas) (2008)

Keywords: Foreseeing & Assuming Risk, compensable loss

Facts:
Lord Hoffman (Swan likes him)
- P owner of vessel and lent it to D.
- P had rented it out to another company at a fixed price after D was supposed to
return the vessel. D returned the vessel late.
- P had to lower the price to change the date, thereby losing money.
- P is claiming for damages and loss of difference between original and reduced
rates for the duration of the next contract (4-6 months at US $8,000 per day).
- Charter argues that they are only liable for the different between the market
rate and the charter rate for the nine days that they were late on the contract.
Issue
- Are the Ps entitled to restitution for loss of profit?
Held: The P is only entitled to the May 2nd price – the difference between the market
price & contract price at the date of breach. The D cannot be liable, b/c it is
unforeseeable at the time of the contract that they assumed responsibility of this risk.
Reasoning
- General understanding in the shipping industry that liability is restricted to the
difference between the market rate and the charter rate for the overrun period,

22
 any departure from this rule will likely have negative effects.
- Support from authorities and academics that the extent of a party’s liability for
damages is founded upon the interpretation of the contract; not on the language
of a contract, but (as in the case of an implied term) upon the interpretation of
the contract, construed in a commercial setting – contract must be interpreted
in the context of the industry norms.
- Before one can consider the principle on which to calculate damages for which a
plaintiff in entitled as a compensation for loss, it is necessary to decide for what
kind of loss he is entitled to compensation.
- In other words, one must first decide whether the loss for which compensation
is sought is of a kind or type for which the contract-breaker ought fairly to be
taken to have accepted responsibility.
- Considering the background knowledge of the parties, neither could have any
reasonable expectation that the charterer would be liable for the difference
between the market rate and super high rate.
- Lord Hoffman in Achilleas looks at the risks assumed & background
understanding of the parties this is a correct reasoning
Importance
- The consequences for which the promisor will be liable are those which the law
regards as best giving effect to the express obligations assumed, and not
extending them so as to impose on the promisor a liability greater than he
could reasonably have thought he was undertaking.
- If a party cannot reasonably have been assumed to accept a risk, then they are
not liable for that risk
- Focus on what should be law, what the court wants to do, and not on the
application of any formula
Notes
- What Lord Hoffman is doing here is acknowledging that the background
understandings of the parties (who are BOTH IN THE SAME BUSINESS) limited
the risk that the charterer faced in the same way that an express contractual
limitation would have done (Swan’s Review)
- The test for inserting a provision based on the understanding of both parties can
be applied by asking whether both parties would have included a provision
based on this mutual understanding, if its absence had been pointed out during
the drafting of the contract, and if both parties would have accepted.

Note on Legislation and Law Reform (p.104)

Only important when you have to look closely at legislation (Swan’s Review)
- The common law est. the “fundamental” principles of contract law, and deals
with contractual relations that are not subject to specific legislation (which may
MODIFY or CODIFY the common law)

23
 - There has been statutorily reform of common law rules to make them more well
suited to modern conditions 2 separate concerns for reform:
1. Desire to encourage uniformity
2. Desire to reduce complexity
• The BULK of our legislation now comes from US models – Canadian courts
will often refer to American Courts, particularly to the Delaware Court of
Chancery (judges are well respected)
• SIMPLE FACT: legislation doesn’t play a large role in Canadian law of
contracts (Swan’s Review) May consider Uniform Law Conference of Canada.

Some Problems in Awarding Damages

Examples below: The court struggling with the appropriate measure of damages for
breach of contract, either in determining what sum of money will put the promisee in
the same position as if the contract had been performed, or some other basis for
recovery than an award of expectation based measure of damages.

Anglia Television LTD. V. Reed (1972) – ZOMBIE CASE

Keywords: Wasted expenditure, expectation damages

Facts
Swan HATES this case!! Lord Denning doesn’t explain this case in an intelligent way!
- Anglia TV (P) were asked to make a film of a play for TV. They planned things in
advance, invested a lot of money & hired an actor (Reed) (D).
- Contract created. He was supposed to come to England to film. His agent already
booked him in American for another play, so he repudiated his contract.
- They tried to find a sub but couldn’t, they abandoned the film and then sued Mr.
Reed for damages
- Reed did NOT dispute his liability… Reed disputed the damages
- Anglia TV cannot say what their profit would have been
- Instead, they claim for wasted expenditure 2,750 Pounds
- Reed claims that they cannot recover wasted money that was incurred BEFORE
the contract, what they can claim is what was spent AFTER it (only 854)
Issue
- Is Mr. Reed liable for the damages incurred before the contract was made or
after?
Reasoning
- In cases where loss of profits is hard to assess, the P can either claim for loss of
expenditure or loss of profits but cannot claim both
- If the P elects to claim for wasted expenditure, he is not limited to expenses
incurred after the contract. He can claim expenditure before the contract – as
long as there is reasonable contemplation

24
 • The plaintiff can claim the wasted expenditure before the contract, provided
that it was such as would REASONABLY be in the contemplation of the parties
as likely to be wasted if the contract was broken if we apply this here,
Reed must have KNOWN the expenditure that was incurred when he signed
• “foregone opportunity” – expenditure was wasted because of the breach
Decision
Held: wasted expenditure awarded in full.
Notes
- Swan doesn’t like the decision, b/c he didn’t actually assume the risk. He should
have only been liable for expenses incurred AFTER the contract he signed on, not
since the inception of the project.
- Anglia TV cannot prove that they would have made a particular profit, b/c the
contingencies are too great
- But it is also hard for Reed to argue that they would’ve made a loss
- Expenses Anglia gets is based on the expectation claim, not a reliance claim
(they BREAK EVEN – due to the 2 factors above) expectancy has a reliance
element to it (Reed agreeing to preform is a reliance that made Anglia stop
looking for another actor)
- He says the plaintiff has a CHOICE between expenses & profits – this is what is
WRONG about the reasoning in the case - this choice doesn’t exist (QUESTION)

This case has been considered as making a significant change in the law.
- The judge in this case refers to Lloyd v Stanbury: in this case… a plaintiff wanted
to sell his land to the defendant. The D had nowhere to live in the meantime, so
to further the sale, P lent him his caravan (mobile home). P paid costs to bring it
to D’s land. D then signed the contract after this. D backed out of the deal. P
sued D for costs incurred before the contract and won.
- Difference: the expenses in Lloyd were “post-negotiation” in a way that the “pre-
contract” expenses in Anglia were not

- No damages should be imposed on Reed unless the court is prepared to hold

that he assumed the risk of that liability
- Denning fails to provide a clear basis for the award, so it is difficult to be certain
of the basis for limiting it.
- When the contract was made, what was reasonably contemplated as the loss?

- Hadley & Horne: losses may be reasonably foreseeable, though foreseeability is

not, as we have seen, by itself, sufficient to impose liability (Swan’s Review)

25
 Bowlay Logging Ltd. V Domtar Ltd. (1978)

Keywords: Unprofitable contract, Wasted Expenditure

Facts
- P agreed to log timber and D agreed to provide trucks
- After the contract was partially performed, D stopped providing trucks; and so P
stopped cutting timber
- P was paid $108,000 for the wood cut but spend $232, 000 in expenses
- Had the contract been fully performed, the P would have only received $120,000
- The P sued for “wasted expenditure” of $124,000 (as per Anglia)
• The contract was unprofitable for the P. Start-up costs were very high
• D argues they should not have to pay b/c the operation was losing money.
And if it continued, they would have lost even more money.
Issue
- Should the defendant pay for the “wasted expenditure” even though the
operation was losing money, and if they continued, they would have continued
to lose more money?
Reasoning
- In Behan, Fuller & Perdue state that we should not put the plaintiff in a better
position than he would have been before the contract Restitutio in integrum
- The law does not compensate a plaintiff for damages resulting from his bad
bargain. Where the plaintiff would have incurred a loss on the contract as a
whole, the expenses he has incurred are losses flowing from entering into the
contract, not losses flowing from the breach.
- If the law of contract were to compensate for the consequences of entering into
contract the burden of risk would be shifted from the plaintiff to the defendant.
The defendant would become the insurer of the plaintiff’s enterprise, and the
greater the loss of the plaintiff, the greater the loss incurred by the defendant.
- In these cases, the onus is on the D to show that the P would make less money
than expended – the D did this in this case
- RULE: If the amount he expended at the breach of contract is LESS than the
expected net loss, he should be given nominal damages only
Held: Awarded nominal damages to the plaintiff.
Notes
- Wasted expenditure +/– profits or loss of the full performance = DAMAGES
- It puts the plaintiff in the same position as they were to begin with

Loss of Enjoyment

- There exists “non-economic” or “non-pecuniary” losses (i.e. distress) that have

been recognized (i.e. in Radford – the building of the wall was for the enjoyment

26
 of the P, it had no effect on market price). But, these are difficult to frame in the
law of contracts, since they have really no legal basis

This case below opens the door to a more generous approach to claims for “loss of
enjoyment”

Jarvis v. Swan’s Tours Ltd (1973)

Keywords: Loss of Enjoyment/Distress as Compensable

Facts
- Plaintiff: Mr. Jarvis – he booked a holiday with Swan’s Tours (D) and was very
disappointed, as the brochure made many promises that were not “kept”
Held: The statements in the brochure were representations or warranties and the D’s
breach of them gave Jarvis a RIGHT to damages; Compensated $125
Importance
When the object of a contract is entertainment or enjoyment, damages may be given
for mental distress caused by the breach
Notes
- No justification for the award of 125; More than likely on the same basis as
Forsyth: acknowledgement of distress and annoyance fixed with reference to the
reasonable person.
- Does it matter if others went on the same trip and loved it? Or if he met
someone and developed a romantic relationship having a great time? Or if he
became clinically depressed from going?
- The effect of Jarvis in reality? Tour operators are forced to raise their rates to
cover the cost of this type of liability, are you willing to have your price go up to
provide a pool of money to compensate bad vacations?
- Awards for lost enjoyment following Jarvis have tended to be modest, fixed by
the courts at a relatively low level and taking little or no account of the
subjective unhappiness suffered by the plaintiff.
- Farley v. Skinner: In general compensation should only be awarded for financial
losses, and that a contract breaker is not liable for any distress, frustration, or
displeasure which his breach caused the plaintiff. Some exceptions do exist. It is
suggested that the limit on non-pecuniary losses arising out of breach of contract
in these circumstances should be capped at 10,000
- Turczinski Estate v. Dupont Heating and Air Conditioning Ltd. Very difficult for
the lay person to predict how a breach will affect a given person;
- If we assume that a cost to mental distress: three choices:
o Put the risk of loss on the defendant
o Leave it with the plaintiff
o If severe may be passed on to society via hospital or medial costs
- Fidler v. Sun Life Assurance: damages for mental distress are recoverable where
such damages were in the reasonable contemplation of the parties [because of

27
 breach] when the contract was made.

Employment Contracts

- In Canada, many of the MOST important cases dealing with non-economic loss
deal with employment contracts
- Employment relations central to individual feelings of self-worth, and the loss of
employment may cause significant distress as well as economic consequences.
- Common law implies that in employment contracts of indefinite duration the
employer can terminate employment “for cause” OR if there is no cause, giving
“reasonable notice”
- It is very hard for employers to establish a cause in court. Theft, fraud, sexual
harassment has generally been accepted. But Court says one must give a
warning & chance to improve, or prove that a misconduct was very bad when
fired for CAUSE – employer is NOT LIABLE
- An employee who is not dismissed legally can either receive a “reasonable
notice” OR get paid for the notice period

- Notice that the employer is required to provide the employee with vary with
reference to employment standards legislation, length of service and contractual
provisions. Absent contractual provisions, court will establish reasonable notice
- An employee who was illegally dismissed was only entitled to compensation for
lost wages during the period of “reasonable notice” (and this notice varies
depending on each case)
- Employees also required to give notice, but much less than a firm is required.

- Prime concern for this section is the proper measure of damages for wrongful
dismissal at common law

Bardal Case
- Set out certain criteria for employment notice
- It listed a number of factors
• Character of employment
• How long have they worked there?
• How old?
• Availability of similar employment
- Rough rule of thumb: 1 month per year of employment
- Compensation for notice period, not for mental distress

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After Jarvis, courts began to offer damages for mental distress in employment contracts:
Mental distress damages referred to as aggravated damages; considered non-pecuniary
damages for lost enjoyment. Differ from punitive damages meant to punish employer.

Vorvis v. Insurance Corp. Of British Columbia

• SCC decides whether it can award damages for non-economic losses in wrongful
dismissal: Majority says that aggravated damages may be awarded in wrongful
dismal, just not in the case at bar. Requires an independently actionable wrong.
• This case created 2 problems: (Swan’s Review)
1. A bizarre focus on the “independently actionable wrong” or “separate
actionable course of conduct”
• What is this? What cause of action would reflect this?
2. The justification for awarding damages for mental distress based on Hadley

Wallace Case
- Wallace: “curious decision” – Wallace was promised a job until he retired (left
another job for this). Then he was brutally fired. Judge (Iaccobucci) says: there is
no duty of good-faith in contracts, and denies a tort duty not to dismiss in good
faith, but then awards the plaintiff 24 months’ notice and said he gets 15 months
of ordinary notice and 9 months more (this addition called the “Wallace factor”.)
– he didn’t identify the cause of action that lead to this addition. He doesn’t
suggest the cause of action (he says that there is no duty of good faith), so he
has the remedy without an underlying cause of action. THIS IS A PROBLEM.
- “CAUSE OF ACTION”: refers to a set of facts that makes this defendant pay this
claim. (you est. contract, breach & damages – FACTS). THIS IS A FUNDAMENTAL
CONCEPT.
- The “Wallace factor” just became a way of giving people more.
McLachlin J. Dissent:
- Iacobucci holds that manner of dismissal may be considered in defining the
notice period. Wrong. Manner of dismissal should only be considered in defining
the notice period when manner of dismissal will impact the ability to find new
employment. Without this connection, damages for manner of termination must
be based on some other cause
o More consistent with the nature of the action for wrongful dismissal
o Principle that damages must be grounded in a cause of action
o Better aid certainty and predictability in the law governing damages for
termination of employment
o Other effective wats to remedy wrongs related to manner of dismissal
- Damages must flow from an actionable, and hence compensable, wrong.
Compensable wrong in wrongful dismissal is the failure to give reasonable
notice so that the employee can find replacement employment.

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 - Would allow for compensation under mental distress and loss of reputation as
an implied term of any contract of employment that the employer treat the
employee decently. This obligation is part of any contract of employment and
damages can be awarded for its breach.

- The Wallace factor persisted until Keays (2008)

- It was improper to add on an amount to a judgment for wrongful dismissal
without stating what the legal basis for the addition is (Swan’s Review)
Types of Damages
Compensatory damages:
a) Ordinary damages (ex: those awarded in Peevyhouse, Victory Motors, Hadley, etc.)
b) Aggravates damages – lost enjoyment or mental distress (Vorvis, Wallace, Keays)
Non-compensatory damages
- Exemplary and punitive = designed to PUNISH

Keays v. Honda Canada Inc (2008)

Keywords: Punitive Damages, Employment

Facts
Swan likes this decision!
- Mr. Keays diagnosed with chronic fatigue disorder. Doctor advised him not to
work for a while. He then returned, he took a lot of days off due to CFD (his
doctor advised him to)
- Honda’s doctor said he should be fine to work
- Mr. K was asked to go see another doctor of Honda, his lawyer advised him to
refuse
- He received a letter from management – the letter said:
o OUR doctors say there is no proof that you should be disabled from working
o Your notes are not valid
o If you don’t agree to meet with our new physician, and to continue to fully
come to work, we will terminate your employment
- After reading it, and advised from lawyer, Mr. K refused and was fired
- Mr. K sued for wrongful dismissal.
Issue
- Are aggravated damages compensable in termination of employment?
Procedural History
- Trial judge held Honda acted very badly. Awarded him 15 months’ notice,
another 9 months for the manner of termination, and punitive damages of
$500,000 b/c of Honda’s bad behavior. Did not award anything on mental
distress. Used Wallace Factor.
- Court of Appeal dismissed Honda’s appeal except that the award of punitive
damages was reduced to $100,000 and the costs premium was ½

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 - Then goes to Supreme Court…
Held: here was no breach and no justification for an award of damages for conduct in
dismissal. No punitive damages either.
Reasoning
- Trial judge made mistakes: (1) TJ said that Honda’s misconduct was planned, no
evidence of this (2) TJ said it was going on for much longer than it really was
- Use this as an opportunity to clarify damages in the law of employment:
- (1) Factors to consider in determining compensatory damages in lieu of notice
for wrongful dismissal:
o Not Bardal, each case should be decided on its own facts.
o Employer must provide reasonable notice, cause for action when
employer fails to provide reasonable notice for termination.
o General rule that damages not be provided for the actual loss of his or
her job or the distress that has been suffered as a consequence of being
terminated. However:
- (2) Calculation of damages for conduct in dismissal (Refute Wallace damages)
o Vorvis v. Insurance Corp establishes that an employee may be awarded
for aggravated damages in wrongful dismiss where the acts complained
are independently actionable.
o Wallace denies an implied contractual duty of good and a tort of bad
faith discharge, but awarded damages anyway
o Fidler clarifies by allowing damages to be recoverable if the damages are
reasonably expected to arise from breach of contract, or if they would
have been in contemplation of both parties (reference Hadley)
o If an employee can prove that the manner of dismissal caused mental
distress that was in the contemplation of the parties, those damages
will be awarded not though the arbitrary extension of the notice period,
but through an award that reflects the actual damage.
Attacking an employee’s reputation, misrepresenting the reason
for dismissal, dismissal meant to deprive the employee of a
pension benefit or other right.
- (3) Overlap for damages for conduct in dismissal and punitive damages
Notes
- Bardal laid out reasonable notices (but you cannot just apply it to any case, it
may differ) The longer or more specialized in a company (i.e. senior), the longer a
required notice
- Cronk v. Canadian General Insurance: denies Bardal, person with less education
may have a much more difficult time finding alternative employment, and so
must be considered with regard to reasonable notice.

Further exploration of the employer-employee relationship, duties of good faith, and

damages for the breach of a duty of good faith.

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 RBC Dominion Securities Inc v. Merrill Lynch Canada Inc. (2008)

Keywords: Implied contractual obligations on employees

Facts
- Appellant: RBC
- Respondent: Merrill Lynch
- They are competitors in the investment brokerage business
- Investment advisors moved to Merill Lynch giving no advance notice
orchestrated by branch manager Don Delamont. RBC collapsed.
- RBC sued Merrill and its former employees, claiming compensatory, punitive and
exemplary damages
*Facts below will deal with the liability of Delamont
Procedural History
- Trial Judge: held that Delamont had breached his contract awarded HIGH
damages (over 1.5 million) – due to his failure to perform duties in good faith,
and virtually taking all employees
- BC Court of Appeal: set aside the large amount on the grounds that it had not
been properly pleaded and that the damages claimed were not “proximate” as
required by contract law – Hadley v. Baxendale
- RBC: appealed
Held: Trial judge award was reinstated. Merill Lynch & Delamont held liable.
Reasoning
The Loss of Profits Award Against Delamont
1. The D argue that the pleading were inadequate to support the award against
Delamont. I am satisfied that the pleading did support this award
2. The D argue that the award doesn’t meet the requirement of proximity set out in
Hadley (i.e. damages attributed to a breach should be such that arises naturally
OR such as may reasonably be supposed to have been in the contemplation of
both parties – D argues it was not within the contemplation of the parties that
Delamont be held liable for losses beyond the applicable notice period (trial
judge rejected this)

- The Court of Appeal applied the proximity test WRONGLY they didn’t look at
whether or not these damages were discussed in reasonable contemplation
between parties BUT asked whether the BREACH was foreseeable
- Held that the collapse of the branch was NOT foreseeable due to Delamont’s
actions HERE, they are wrongfully conflating unforeseeability of
consequences with unforeseeability of breach
- The Correct legal Q: is whether, had the parties at the time directed their minds
to the possibility that Delamont might orchestrate the departure of practically all
investment advisors, would they have contemplated a loss of profits giving rise
to damages?

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 - An implied part of his employment contract was to RETAIN the employees – he
breached this duty of good faith. And the damages (1.48 mill) is the loss caused
to RBC
Notes
- It is clear that he behaved badly, but did the undertakings he gave when he was
promoted to Branch Manager extend as far to make him liable $1.5 mill?
- So… Is foreseeability alone sufficient or should there have been a more careful
analysis as to the obligations of a BM? Is it obvious that he assumed the risk that
he faced?
- If the BM breached the duty of good faith, isn’t it odd that in Wallace his
employer would not owe him the same duty of good faith?

Contracts Promising Peace of Mind

- Contracts sometimes seen as a promise to provide “peace of mind”
- In Wallace: judge stated “An employment contract is not one in which peace of
mind is the very matter contracted for, and so, absent an actionable wrong, the
foreseeability of mental distress or the fact the parties contemplated, is of no
consequence”
- Typically, contracts offering “peace of mind”= insurance (principally disability
insurance)
• If insurers don’t abide by this, they will have to pay for damages for a lost
peace of mind
• Warrington v. Great-West Life Assurance: P had chronic fatigue disorder.
Insurer refused to pay him claiming he was malingering. His condition
became worse due to stress. Received aggravated damages for breach of
duty of good faith and loss of peace of mind.
o Parties contemplation and the scope of the contract considered
o “Both the insured & insurer would contemplate that a failure of the
insurer to pay medical and rehab accounts will foreseeably occasion
mental distress and emotional upset”
o the OBJECT of disability insurance contracts is PEACE OF MIND
o Thus, disability insurance is one of the few contracts in which damages for
mental distress are recoverable when they are proven as resulting from a
breach of contract.
o This case becomes important in Whiten

Fiduciary duty: lawyer owes this to their client. Must subordinate your interest to the
interest of the client.
- Protects the integrity of the situation
- RBC argues that the employees owed a fiduciary duty to the bank

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 - Problem with RBC is the same as in Anglia, it isn’t a Q of what consequences are
foreseeable BUT the risks assumed

The Focus in the Case Below: the justification developed by the SCC for an award to
compensate for mental distress

Peace of Mind Contracts

Fidler v. Sun Life Assurance Co. of Canada (2006)

Keywords: Mental distress as compensable, disability insurance

Facts
- Plaintiff: Ms. Fidler – had long term disability insurance. Became ill and could not
work. After Sun Life received video surveillance of Ms. Fidler doing activities that
show she would be able to do light work, stopped paying.
- Fidler sued. Before trial: they offered to reinstate her benefits. SO at trial: only
issue was aggravated and punitive damages
Procedural History
- Trial judge: awarded her $20,000 in aggravated damages for mental distress. Did
not award her punitive damages b/c insurer did not act in bad faith
- BC Court of Appeal: awarded her the 20 and $100,000 in punitive damages b/c
did find the insurer to act in bad faith
Held: SCC allowed appeal in part, restored trial judge decision
Reasoning – Aggravated Damages
Analysis
Damages for Mental Distress
- Damages for breach of contract should place the P in the same position as if the
contract had been preformed
- Hadley: damages must be such that arise (1) naturally or (2) or from reasonable
contemplation principle of reasonable expectation!
- Should damages for mental distress be excluded from remedies for breach of
contract?
- Some argue that damages for mental distress are excluded as a matter of policy,
however, mental distress damages have been awarded in vacation contracts,
breaches of contract for wedding services, etc.
- Court should ask, what did the contract promise? And provide compensation
for those promises breached. Measure of damages subject to remoteness, but
no reason they should not include damages for mental distress where such
damages were in the reasonable contemplation of the parties when the
contract was made.
- In a normal contract, breach may leave the wronged party feeling angry or
frustrated. The law does not award damages for “incidental frustration”.
- However, if the parties enter into a contract where the object of the contract is

34
 to secure a particular psychological benefit, damages arising from mental
distress should be recoverable, where they are shown to be within the
reasonable contemplation of the parties at the time the contract was made.
- Two-part test:
o The OBJECT of the contract is to secure psychological benefit
o The DEGREE of mental suffering is sufficient
- Must distinguish between two types of mental distress damages:
o Mental distress damages which arise out of the contract breach;
exist independently of the aggravating circumstances and are based
completely on party’s expectation at the time of contract formation.
o Mental distress as a result of the breach of an independent cause
of action, which can be awarded outside.
- This decision refutes the need for an independently actionable wrong as a
prerequisite for mental distress damages.
-
- Must remember the reasonable expectations that arise from the contract; one
such expectation may be freedom from mental distress and this can be
considered an important aspect of the position the plaintiff would be in if the
contract were performed.
- Expectations can be changed by statements from the plaintiff and the defendant
to assume or forgo risk, and this will likely be reflected in price.
- Law of contracts is to protect plaintiff expectations, but these expectations must
be considered according to a standard of reasonableness.
- The risk was clearly foreseeability but to justify it based on it being foreseen is
the issue, you must start with looking at the assumed risk
- Correct Reasoning would be: SunLife bore the RISK of someone losing peace of
mind by not giving them their insurance money.
- SO… if they just said “Sunlife assumed the risk of loss of peace of mind…” this
would be GOOD REASONING
- PROPER USE OF COMPENSATION PRINCIPLE is FIRST an understanding of risks.
- Hadley also comes in to the case in terms of LIMITING how much one gets
Notes

35
 - The Court in Hadley did NOT purport to articulate a test for deciding when
damages should be awarded in breach cases; it ONLY stated a test for deciding
when damages should NOT be recovered.. (1) when they could not have been
foreseen/out of the ordinary (2) the D had not accepted the risk that the P had
disclosed
- Hadley, Horne & Cornwall= cases that deal with the allocation of risks arising
from the MAKING of a contract, risks which will exist when the agreement is
breached
- Ruxley & Jarvis= cases that BROADEN the concept of “situation” and allow for
non-economic factors (amenity in Rux and enjoyment in Jarvis) – awards for
being pissed off
- Fidler & Keays= cases raise the Q of whether a different test other than the
compensation principle is being used for non-economic losses
- The SC had to find a way to do what it wanted (award employer’s bad behaviour)
without doing what it did in Wallace (as this case caused a lot of problems)

Swan’s Review of Class 5:

- Hadley v. Baxendale: says that we stop where the loss or consequence is not
foreseeable – this is crucial
- This provides a direct connection between the risks placed on the D and those
allocated/shifted by (1) the background understandings of the parties – like in
Achilleas and (2) the assumptions drafted by the lawyers
- Hadley deals with the consequences of the “position” the P would be in after the
performance. It is NEITHER justifiable nor wise to put on the D all the
consequences of failures to do what it promised to do
- The law must also protect the D’s reasonable expectation: the D is not to be
exposed to a risk that it did not accept or reasonably expect

Swan’s Review of Class 6 – Provides Overview of Damages

- Compensation Principle: It is about risks imposes on the D
- Unless the background allocation of risk (The Achilleas) or the D, by the terms of
the contract it had with the P, limits its risk, the D, will be held to have accepted
the risk.
- The risk is accepted if:
1. It is ordinary/naturally arising/easily foreseen

36
 2. It was communicated
- If a seller defaults on a contract of sale, the buyer may claim damages arising
from the fact that it lost a subsequent sale that it had arranged – and in this
sense, the claim may be for far more these are called “consequential
damages” or “incidental damages”
- In Ruxley, Radford, Jarvis and Fidler there was no inherent limit on the P’s claims
for damages for loss of amenity, loss of enjoyment or mental distress – it
depends on what would have been expected of by a reasonable plaintiff/person
Review of Wrongful Dismissal & Lost Enjoyment
- The wrongful dismissal cases differ from Ruxley and Jarvis v. Swan’s Tours, b/c as
in Fidler v. Sun Life, once the claim under the insurance policy has been paid (i.e.
once Ms. Fidler no longer has a claim under the policy, there is no basis for
another claim for damages, unless an additional contractual undertaking can be
found. (“Disappearance” of a claim – transit in rem judicatam)
- Keays and Fidler represent a significant move away from what was said in
Wallace and Whiten changed the way punitive damages is used (they were
used a lot after Whiten, but then less after Keays and Fidler).

Punitive Damages

- Punitive damages are awarded when a court wants to discourage certain kinds of
conduct and to afford relief to those who may have been victimized by such
conduct. In recent decisions, the SCC have made it clear that, in appropriate
cases, punitive damages may be awarded for breach of contract.

The law governing punitive damages in breach of contract cases, when they can be
awarded and how much they should be, was drastically changed by two cases:

- Royal Bank of Canada v. W. Got & Associates Electric (1999): upheld award of
punitive damages against the bank had improperly appointed a receiver for the
plaintiff’s property. BUT punitive damages was not based on the breach of
contract. It was based on the fact that they filed misleading affidavits

This next case deals with the issue of punitive damages & radically changed Canadian
law on the award of punitive damages:

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 Whiten v. Pilot Insurance Co. (2002) – ZOMBIE CASE

Keywords: punitive damages, insurance

Facts
Swan does not like this decision!!
- Plaintiff: house caught on fire. Fled the house w/ daughter, Mr. Whiten got
severe frostbite. Their 3 cats died. Also had limited financial resources
- Had to live in a small cottage nearby
- Insurer paid them 5,000 for living expenses, paid rent for a couple of months,
then cut them off w/o telling them
Issue
Is a breach of an insurer’s duty to act in good faith an actionable wrong independent of
the loss claimed under the fire insurance policy?
Held: allow the appeal and restore the $1 mill
Notes
- Prof. Swan doesn’t like the way Binnie GOT TO THE RESULT
- Insurers are scumbags.
- The insurers can be disciplined by the Insurance Act – this is where they should
be punished this isn’t the job for the Courts.
- If you want to then give her more, what is your cause of action?
- There is a clear wrong here: apart from the contract, there is a relation between
the insurer & insured set by the general nature of their relations insurer owes
the insured a duty of good faith performance, which it breached. Damages could
have been given for that breach.
- SO if she sued for breach of bad faith (“independent actionable wrong”), the
damages would NOT be punitive it would be COMPENSATORY
- Her position: she doesn’t like punitive damages with a breach of contract.
Punitive damages are too inconsistent or arbitrary.

- After Whiten, Ps had a reduced incentive to make claims for compensation for
mental distress, as they would less than an award for punitive damages.
- Can punitive damages even change behavior in contracts?
Notes on Fidler, Keays & Whiten
- The SC decision in Fidler and Keays is a change in the attitude from Whiten (PDs’
don’t happen very much anymore)
- Need to avoid duplication in damage awards:
o Damages for conduct in the manner of dismissal are compensatory
o Punitive damages are restricted to advertent wrongful acts that are so
malicious and outrageous that they are deserving of punishment on
their own.
- Courts should only resort to punitive damages in exceptional cases
o Need be an independently actionable wrong

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 o Conduct must be harsh, vindictive, reprehensible, and malicious
o Must be extreme in nature and such that by any reasonable standard is
deserving of full condemnation and punishment
- Even in a case where punitive damages ought to be awarded, one should be
aware as to if compensatory damages have already been awarded.
o In this case compensatory damages were awarded for conduct in
dismissal, and were sufficiently punitive.

Uncertainty & Damages

- The problem that there is uncertainty in assessing damages is endemic
o Damages must be awarded in one lump sum, and cannot be evaluated
over time. Where future damages are claimed, future conditions must
necessarily be considered. Where loss of profits is speculative, court may
struggle, or the plaintiff will look to wasted expenditure: Anglia v. Reed.
- One problem: in some cases, the loss that the P suffers is ONLY the loss of a
CHANCE of BENEFITTING (loss of an opportunity)
• Chaplin v. Hicks: the fact damages cannot be assessed with certainty doesn’t
relive the wrong-doer of the necessity of paying damages
• Carson v. Willitts: the difficulty of determining damages is no reason to not
award them
- In some cases, an award can be discounted by the probability that the plaintiff
will not have been successful
- The courts will almost always discount a P’s assessment of future profits due to
skepticism of them possibly making that much

Equitable Remedies
MAIN THING TO KNOW: an equitable remedy is available when common law damages
are inadequate (Swan’s Review)
- It is necessary to explore the reason as to why the courts did not order the
promisors to perform their promise in Peevy and Radford
- And to consider situations in which they will order that the contract be
performed – i.e. make an order for a “specific performance”
- Canadian law is based on 2 major jurisprudential systems:
1. Common law
2. Equity
• Equity developed in response to the LIMITATIONS of CL
• The chancellor would hear from litigants who were dissatisfied with decisions
in common law courts. The rulings depending on the assessment of individual
cases and developed into a body of jurisprudence (“equity”)

39
 • The power of the chancellor was said to be a corrective or supplemental to
common law – he didn’t have the power to overrule or change common law,
but can remedy the deficiencies
o Chancery could not give damages, but could rescind the contract (set it
aside, make it invalid)
• Equity supplemented common law rather than changed it
• You had to come to court of Chancery with “clean hands”
- The 2 laws co-existed together, with their own evidence, procedure and
substantive law (i.e. in common law, you couldn’t give evidence in your own
case, in equity you could)
*For present purposes, the most important contribution of the chancellor was his
power to order a promisor to perform his contract as he had promised remedy
of specific performance
- Method of enforcement in the chancellor was more direct than common law
courts
- They remained separate courts until the 19th century. The historical origin of the
separate systems still determines which remedies we call equitable and which
we call legal

- So, when decisions of common law were “inadequate” would go to the

Chancellor
- But how do we define “inadequate”?
• In particular, situations where damages may not have reflected important
non-market interests
• Equity courts were especially concerned with contracts for the sale of land
and “unique” personal property – where there was a sense damages may
be “inadequate”
• The principle area where the remedy of damages was seen as inadequate,
and where the remedy of specific performance was most granted was in
contracts for the sale of land
• An injunction= specific performance of a promise not to do something
o Damages here were seen as inadequate b/c each piece of land is unique,
it has some special aesthetic, emotional or psychological value to the
purchaser
o A value that can’t be quantified, and damages based on market values
might not reflect such non-economic values
- Another important aspect to the value of property: at that time, property was
linked to power & political power
- Equitable remedy also available for a breach of contract to sell “unique” goods
- It might be argued that the remedy of specific performance is no longer
necessary as aesthetic and non-economic interests can be protected in damage
awards

40
 - Beyond the justification for uniqueness, an award of specific performance
functions as a device for removing the promisee the risk of undercompensation –
it ensure they will get ALL the benefits the promise was intended to provide

- Historically, it was thought to be unfair that only 1 party can get equitable relief
- So, the equitable rule developed that if the purchaser of land could get equitable
relief, so too could the vendor “doctrine of mutuality”
- Courts have not granted a vendor specific performance – a vendor can only want
money and a judgment for damages at common law would give it that
- In 1996: SCC in Semelhago v. Paramadevan: the general rule that specific
performance is available for purchasers in contracts for the sale of land is no
longer accepted, unless the land is “unique” – this case turned the law on its
head. Contracts for the sale of land was not prima facie enforceable unless
unique. PROF thinks this was a BAD decision!

Interest and the Date for Assessing Damages

- The “time value of money” is the idea that payment of $1000 next year is less
valuable to a person than payment today
- The time value of money is usually reflected in the interest paid on an amount of
money
- There are 2 ways of calculating interest:
1. Simple interest: calculates the interest on the principal amount (i.e. would
require $50 to be added to the $1000. The $50 would be added each year)
2. Compound interest: the $50 owed by the borrower at the beginning of year 2 is
an amount on which interest for that year should be paid (interest added on
interest)
- The principle= the amount owing (initial sum of money)
- Pre-judgment interest: is set at simple interest
- Post-judgment interest: set at compound interest
- Interest rates are set by the Court of Justice Act
- Interest changes the damages of the compensation principle
- Calculate the difference between market price when contract made and market
price when breach occurred interest is then added on this difference

*When market prices go up – sellers typically breach

*When market prices go down – buyers typically breach

Swan’s Review of Interest & Date for Damages (Class 6)

- Usual date for assessment of damages= date of breach
- Increases in the market price increase at a COMPOUND rate

41
The below case is an example of a court seeing what full compensation to the P
requires and then adjusting the award to reflect what is wants to do. The adjustment
is dependent on the interest allowed on the P’s claim. An award of interest reflects
the “time value of money”.

Bank of America Canada v. Mutual Trust Co. (2002)

Keywords: Compound interest

Facts
- P: Bank of America Canada advanced money to a developer
- D: Mutual Trust committed to advancing money to purchasers of houses being
build by the developer – would have discharged the loan made by Bank of
America to the developer
- Mutual Trust backed out of the deal when the real estate market collapsed in
1990s
- Amount of BofAC’s loss was the difference between what it was owed and what
it recovered when it sold the development after Mutual Trust’s default, around
10 million
Issue
Did the trial judge have the jurisdiction to award compound pre-judgment and post-
judgment interest and if so, was he correct in doing so?
- Bank of America lost the interest it would have earned on the amount of
damages and the only Q is whether the loss if borne by Bank of America or
shifted to Mutual Trust?
Held: Trial judgment restored. Appeal allowed. Appellant entitled to costs. Compound
interest is the appropriate measure.
Reasoning – Major J.
Swan likes this analysis!
The Time-Value of Money
- 3 factors account for the depreciation of the value of money with time
1) opportunity cost
2) risk
3) inflation
- Compound interest COMPENSATES the lender for the decrease in value of
money while simple interest does not. Therefore, if P is only given simple
interest they will not be in the position they would be in had the contract been
performed.
- It is not adequate to give BofA anything other than a compound rate ($5 mill)
Contract Damages
2 types:
1. Expectation damages: focuses on the value which the P would have received If
the contract had been performed

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 • B/c the value of money decreases, getting the dollar amount in a breach of
contract that one would have gotten if the contract was preformed does
not put them in the same position if the contract had been preformed. The
party would receive LESS b/c of the time-value of $
• To award the P, the court must 1st determine the dollar value of the
promise at the time the obligation was to have been performed + interest
rate
2. Restitution damages: (infrequently employed) focus on the advantage gained by
the D as a result of the breach
• Courts generally avoid this so as to not discourage efficient breach
Interest as Compensation
- Compound interest is well suited to compensate a P for the interval between
when damages initially arise and when they are finally paid
Courts of Justice Act s.128 &130
- Entitles a person to interest for the period between the cause of action and the
judgment (“pre-judgment interest”) and for the period between the judgment
and the time when the payment is made in full (“post-judgment interest”)
- Para 55 brings up Hadley – evidence that the parties agreed/knew/should have
known that it was compound damages since both parties were engaged in
finance when they both invested money at compound interest.
Interest Payable by Another Right
- Equity has been recognized as one right by which interest can be awarded
- But one can also be awarded expectation damages in common law contract law
– another right
Was the Court Correct in Awarding Compound Interest?
- The trial judge considered both expectation & restitution damages
Notes
- The extent to which an award of damages is a matter of policy (i.e. of what the
court WANTS to do) is clear in this decision
• But, why should it be a requirement of such an award that the parties
agreed or should have known that the award would bear interest at a
compound rate (Major J. said this)
- What is important: the Q in remedies is always, “what does the court want to do
and why?” There is no specific remedy.
- The SC here is concerned with reaching a particular result

- He uses the word “restitution damages” in the wrong way – he is talking about
something different than what Fuller and Perdue argued. *Be careful of the use
of the phrase.
- Prof would have used the term “expectation” instead of “restitution”
- It is not a double difference b/c Mutual Trust didn’t lose anything – they
AVOIDED the loss b/c of the breach they were not enriched by a payment
from BofA

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Specific Performance, Interest and the Calculation of Damages

- While the general rule is still that damages are assessed as of the date of breach,
some cases have recognized a judicial discretion to choose another date
- For ex: In Wroth v. Tyler: the breach-date rule was not followed
• This case is a good illustration of the possible UNFAIRNESS of the breach-
date rule
• And also of the possible DANGER of the “unthinking replacement” of the
judgment-date rule
• Mr. Tyler decided to sell his house to the Wroths. BUT the conveyance of
title had to be completed by both spouses or a court order. Mrs. Tyler
refused the conveyance (their marriage was under stress at the time)
• Mr. & Mrs. Wroth brought an action for breach of contract seeking specific
performance or damages
• House prices were increasingly drastically at the time (at closing= 7,500 and
at trial= 11,500)
• Megarry J. denied the P’s claim for specific performance (b/c Mr. Tyler
couldn’t force his wife to consent)
• However, damages were assessed at 5,500 (difference between CONTRACT
PRICE and MARKET PRICE at the date of trial)
• The Wroths lacked the resources at the DATE OF BREACH to buy another
house as finances were stretched by making original offer
• Breach-date damages: would be INADEQUATE b/c the P would be unable to
go out and buy an equivalent house
• Judgment-date damages: seemed a fairer alternative
- A judgment for damages assessed as of the date of trial is sometimes referred to
as an award of “equitable damages” = monetary award that allows the P to go
into the market after the judgment to buy land of equal value the monetary
equivalent to specific performance
BUT… the freedom for courts to pick judgment dates creates 2 serious problems:
1. It may seriously overcompensate a P.
• Example given in book. (p.232)
2. By giving the P the option of dates, if may have the opportunity to speculate the
D’s risk
• This was the case in Semelhago v. Paramadevan
• If the house increases in value, the P will seek judgment-date damages
• If decreases in value, the P can seek date-breach damages
• SO, the P never has to worry if they made a bad deal while the D is powerless
to protect himself from the risk of being liable in judgment-date damages

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Relational Contracts and Equitable Remedies

- There are 2 kinds of commercial contracts:

(1) Transaction, sale, contract of carriage
• Usually fixed, static
(2) the kind that est. a relation (a store, business, a car dealer, employment
relations) last for a long time
• Initially will be fixed, but there will be a mechanism for changing them (i.e. a
franchisor can require its franchisees to comply with changes of the law)
• The benefits that each party will enjoy from the relation cannot be known in
advance – so it is very hard to determine damages
• “Efficient breach” argument cannot be applied here
• The nature of a relational contract suggests equitable remedies may be more
appropriate (this includes specific performance and injunction)
• Courts will usually make an order for an interim injunction (i.e. an injunction
pending trial or the settlement of action) for long-term contracts, as opposed
to a permanent injunction

This case raises the issue of equitable remedies

Warner Bros Pictures Inc. v. Nelson (1937)

Keywords: Relational Contract

Facts
- Plaintiff: Warner Bros. has a contract with Neslon (actress)
- The contract stipulates that her services must only be for them
- Clause 23: if the defendant fails, refuses or neglects to perform her services the
plaintiffs have the right to EXTEND the term of the agreement
- Nelson decides she no longer wants to be bound by the agreement (b/c she
wants more money)
Reasoning
- The D broke her positive undertaking in the contract without cause and contends
she cannot be enjoined from breaking the negative covenants also
- We do not have a clear idea or estimate of the profits the relation may create
(we are back at Anglia TV problem) (Swan’s Review)
Issue: whether to grant damages or an injunction
- Problem with damages: even the P’s stated that It is very difficult to determine
damages from this breach
Held: Injunction should be granted. In force during the continuance of the contract or
for 3 years (whichever period is shorter)
Notes

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 - The basis for the dispute (Bette Davis) was that Warner Brothers refused to give
her the kind of roles that she wanted to play
- This contract was a relational one – long term and the benefits each side would
get couldn’t be planned at the beginning
• The nature of relational contracts makes equitable remedies very important
(Swan’s Review)
• This case shows that an equitable remedy can be given to enforce a promise
not to do something

- The only unusual thing about the case: fundamental unfairness of a contract.
Think about the fact that she was a young actress when signing the contract.
Would she have agreed if they said, “by signing this you know you can only work
for us”
• Contract may not be unfair when first signed, but has it become unfair 10
years later when she isn’t getting good roles or advancing her career within
the contract? unconscionability (Swan’s Review), we will explore this more
in Ch.8
- Although they won, after the case, Bette got better roles

Recovery of the Defendant’s Gains or Restitutionary Remedies (p.242) (Swan’s

Review, Class 7)
- Recoveries made by the P measured by D’s gains are very common
(Prof’s Summary of p.242-288 – didn’t have to read)
• There are 3 areas of private law:
1. Restitution – measure of unjust enrichment – how much better off is the D than
they should have been?
• It is the claim by a P to recover from a D the enrichment the D enjoys at the
expense of the plaintiff
• Wrotham Park v. Parkside Homes: important case. It shows how a P can claim
money from D when (1) the P has not incurred a loss BUT (2) the D has made
a profit from its breach of contract (Swan’s Review)
2. Torts – damages here are a reliance measure
3. Contracts – compensation principle
- You can get a tort remedy in a contracts case & restitution in contracts –
OVERLAP

Mitigation – Concept of Avoidable Harms

- Mitigiation= the plaintiff has a duty to mitigate its losses from the D’s breach of
contract we more use the term “avoidable harms”
- Concept of avoidable harm: Acting reasonably could have avoided all the losses
he could have avoided

46
 - Harms you could have or should have avoided (i.e. in employment, if fired, you
must try to find another job, not just sit around and wait for your damages. If
you could have gotten a new job easily, court would not award you damages).
- P must take steps to award the damages
- Onus on D to prove the P failed to try to take steps to avoid harm
- If you incur expenses in trying to find a new job (for ex) those costs will be
covered by the D (i.e. you fly out to Vancouver to find another job, and don’t get
it)
- In Swan’s Review of Class 7 – explains Semelhago and its effects on Southcott
Eststates – deals with mitigation

Swan’s Review of Chapter 2 (in Review of Class 7)

The Compensation Principle
- The attitude to compensation for breach of contract EXCLUDES all kinds of
obvious losses the P might suffer
- Practically speaking, the P can hardly ever be compensated fully for all of their
losses
- What we see in Ruxley, Jarvis, Farley, Fidler and even Canlin is that the P’s
position can be conceived as having an element of freedom from mental
distress, enjoyment or amenity interest arising from the performance of a
contract
Allocating Risk and the Role of the Solicitor
- Hadley does NOT say that foreseeable losses are recoverable
- It says 2 things:
1. We put on the D the ordinary consequences of a breach
2. If the P wants the D to assume more od the risk the P foresees, the D must have
agreed to assume it
- As we saw in The Achilleas, it cannot matter that the limitation on the risk run by
the D charterer comes from a background understanding of the shipping
industry. In either case, there is an agreed limitation on the consequences the
breaching charterer faces
Equitable Remedies
- They explore other ways of working out the compensation principle
Employment
- Here, we saw the principle of avoidable harms (Swan doesn’t like the idea of a
reasonable person, b/c equates too much with the thin skull rule in torts)

47
 Chapter 3

The Kinds of Promises The Law Will Enforce

- One cannot consider what promises to enforce without considering people’s
usual expectations
- So, we shouldn’t just ask “What promises should the law enforce?” but instead,
“consider the Q in the context of social & economic relations that presently
exist”
- However, all too often, the courts focus on narrow doctrinal issues and not on
the rationale explaining how such doctrine developed
There are 4 factors that will strongly influence the enforcement of a promise:
1. A promise arises out of a commercial exchange
2. One party has performed its obligation and is asking the court’s support for the
other party’s failure to perform or to make them perform the obligation
3. There is strong evidence that the promise was made with deliberation
4. One party has relied on an undertaking give by the other where there is reliance
protection
- The cases we will now explore will deal with the problem that will show up over
& over: How should the courts respond if the legal theory used to determine
what contracts to enforce appears to preclude results that are clearly desirable
from a moral, social or economic perspective?

A Note on Terminology
- Agreement: refers to the document that records the terms of the transaction or
relation, reflecting the arrangement
- Contract: agreement creates the contract – the legal basis, promises,
undertakings on which the transaction will be completed
- Arrangement: contract leads to the enforceable arrangement – the terms, the
deal
• Arrangement doesn’t connote legal relations

The Bargain Principle

- 1st group of cases we will explore are referred as cases that deal with the
“doctrine of consideration”
- “Consideration”= the price paid for the promise
• Consideration expresses a “bought” promise should or will be enforced
• Such a “bought” promise is said to be a promise made with consideration
• Promises can also be “bought” by another promise (i.e. a promise to pay)
• We express the BP by saying there must be “consideration” for a promise. To
enforce the contract, if I am suing my employer, I have to show there was
consideration for his promise to pay me through salary.

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 - As we move away from commercial exchanges, the doctrine of consideration
may not work well as a tool to determine was is enforceable
- The doctrine of consideration expresses the “bargain principle”: an enforceable
promise is one made as a part of a bargain exchange of commercial
equivalents
- Existence of a bargain is SUFFICIENT for enforcement, but it not always a
NECESSARY ground just b/c there is an absence of consideration/”bargain”,
doesn’t mean a court will not enforce a promise.
- The following excerpt helps understand what is important in a decision to
enforce a contract:

Fuller, “Consideration & Form”

- This article will look at: rationale of legal formalities (FORM) and the doctrine of
consideration (CONSIDERATION) the extent to which the FORM of the
agreement suggests that it should be enforced
- 2 elements of the doctrine of consideration: (1) form – the manner in which the
contract was made (2) the substance – the enforcement is not of sufficient
importance
- What is important in considering if the contract should be enforced? (BELOW):
- If each is satisfied, it is easier to enforce the contract
The Functions performed by Legal Formalities
1. The Evidentiary Function:
- Providing evidence of the existence & purport of the contract in cases of
controversy
2. The Cautionary Function:
- By entering into the agreement, we make people aware they are steeping from
the non-legal world to the legal world - Cautionary/deterrent function by acting
as a check against inconsiderate action
3. The Channeling Function:
- Reflection of the fact that the more we look at something as a common
transaction the easier it is to enforce it. And vice versa.
- It refers to the EASE in which you can identify the BACKGROUND & CONTEXT of
the contract.
- Form offers a legal framework to fit one’s actions, it offers channels for the
legally effective expression of intention
- Analogy to language: just as a person must communicate their thoughts into a
conventional speech… one planning to enter into a legal contract must take their
objectives and create a legal transaction
- Just with language, there are dangers of the uninitiated – so legal forms are safe
only with those who know their effects
Interrelations of the 3 Functions - The 3 forms relate – the more that 1 is satisfied, the
less important another function is to fulfill. Together they illustrate concerns the court
will have.

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When are formalities needed? The effect of an informal satisfaction of the desiderata
underlying the use of formalities
- Forms must be reserved for important transactions
Notes:
-
- Since this article, many jurisdictions have enacted legislation of a “cooling off
period” if they enter into contracts in their homes (i.e. usually being defined as
being away from the seller’s place of business) these contracts can be the
result of consumers being pressured into buying things
- At the time of Fuller’s article (1941) he was referring to door to door salesmen
- In Ontario, the Consumer Protection Act: consumer that purchases goods under a
“direct agreement” may be cancelled within 10 days
- In 2014: Canada’s Anti-Spam Law (CASL) tries to discourage spam

Promises that will be Denied Enforcement: Unfairness

- This section looks at how the court has the power to deal with contracts that are
unfair
- There is a LARGE problem with (1) the treatment of unfair contracts (2) the
courts’ and academics’ conception of the role played by unfairness in the law of
contracts
- In the past, Courts denied the idea of making a contract unenforceable due to
unfairness – yet in reality they were making these decisions anyways
- Now, courts assert this power to deal with unfairness by a doctrine of
unconscionabilitiy
2 important points:
1. Courts can talk about unfairness
2. The doctrine of consideration can be applied (or manipulated) so that an
arrangement perceived as unfair will not be enforced as a contract

The “Port Caledonia” (1903)

Facts
- 2 ships were sheltering from a storm, when the master of 1 (Port Caledonia)
found his vessel to sail into a dangerous proximity to the Anna, signaling for a tug
- Anna demanded: “1,000 pounds or no rope” to pull the vessel away from
collision
- The master of Port C initially offered 100 pounds but quickly agreed to the sum
named, and was towed back to original place
- Owner of the tug sued for 1,000 pounds on the basis of the promise
Reasoning
- The master of Port C was in a difficult position and agreed to 1000, but I value
this less

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 - This agreement cannot be allowed to stand due to the position of the 2 parties
and it being unfair
Held: 200 pounds
Notes
- This case is a simple example of how the courts deal with unfairness
- The court had no problem putting the contract aside and substituting a fair
award
- What kind of pressure placed by one side to another is justifiable and what is
not?
-

The Deed: The Promise Under Seal

A solicitor has to know how to make a contract where there is a risk of NO
consideration:
- Ex: a woman is self-employed. She wants to get money for her business,
principle way= bank loan. Banks don’t loan money w/o taking security (i.e.
property). Bank says, I need a guarantee from your husband, I will take a charge
on the home, so if the loan goes south, I can sue you & him on the guarantee.
Husband is not given consideration for the guarantee b/c what benefit does he
get form it? Yes, his wife gets a business, but what does he get? So there is NO
sufficient consideration of the promise of the loan for the husband.
- Lawyer from the bank may say, I need a guarantee that the husband cannot raise
the fact of “no consideration” this is a DEED
- Deeds go back into common law

- One of the earliest examples of a contract enforceable at common law was the
promise under seal (“Deed” or “Specialty”)
- Importance of the promise given under seal (deed) is that it is enforceable even
if there is no consideration and it is not part of a bargain - DEED is ENFORCEABLE
b/c of its FORM (**IMP) – it has NOTHING to do with consideration.
- The seal OBVIATES the need for consideration – it is an ALTERNATIVE TO
consideration
- A seal must be affixed with consent of the obligor (person making the promises –
the promisor) and the obligee is the promisee)
- A witness is not necessary, but a witness is a way of ensuring evidence that the
deed was properly executed
- The SEAL is what is important
- Delivery is important with deeds – it is a requirement of every contract. In the
context of deeds, it is the statement of the obligor which can be inferred from
their statement “I agree to be bound by this document”. It is one of the few
places, where subjective intentions matter. Must take the extra step of
“delivery”

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 - A “specialty” is a narrower class of deeds – obligation to pay money
- If a corporation wants to seal a document, there must be a form of testimonium
clause – indicating that the corporate seal is intended to manifest the intent to
be bound to the contract and make the document a deed
- Explains “Sealed contract rule”
- How to Make a Deed: It must be executed in the form set out on pg.305
- People don’t use deeds all the time b/c it is overkill.
- * With a deed – you NEED the document. You cannot base it off oral testimony
(unlike a contract)

Consideration
The Rationale: Enforcing Bargains and Not Gifts
- There are 2 problems when it comes to consideration:
1. Occurs where promises are made that are NOT part of the commercial exchange
2. Ones where the courts are prepared to deny enforcement of a promise made as
part of a commercial exchange for a variety of reasons and use the doctrine of
consideration to ACHIEVE this
- As Fuller suggests, 3 Qs should be asked to determine whether a promise should
be enforced:
1. To what extent is there clear evidence of the promise and of other factors that
would suggest it should be enforced?
2. To what extent is there evidence that the promisor was aware of the fact that
he/she was undertaking a legally enforceable obligation?
3. To what extent is the promise one that is common or typical of commercial
exchange?
- The more one can answer these Qs w/ certainty, the more rationale for
enforcement

The Basic Concept for Consideration

- Bargain= something which is of value in the eyes of the law
- The promisee must have GIVEN VALUE in order to be able to enforce the
promise of the promisor, BUT it is not necessary for the promisor to have
received value.
-

The following 3 cases are examples of the courts using the doctrine of consideration to
determine whether a promise made in a non-commercial situation is enforceable.
*REMEMBER: consideration= exchange/bargain.
To what extent is there a bargain in these cases?

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 Thomas v. Thomas (1842)
Facts
- A few hours before dying John Thomas stated in front of several witnesses that
he wanted his wife to have the house for her life (which he held under a long
lease)
- The executors made an agreement with her: The wife had to pay 1 pound a year
for ground rent and keep it well maintained this is a condition for accepting
the gift
- She lived there until 1 executor died, and the other evicted her
- She sued
- Executor argues: there was no consideration for the promise to let Mrs. Thomas
remain in the house for life
Held: There is consideration. P wins.
Reasoning
- “Mere proviso” – “I will give you my car PROVIDED that you pay”. A proviso is
not a promise (no deal, unless something is done) Judge stated that the P
PROMISED to pay the rent, it was not a ‘mere proviso’ therefore there IS
CONSIDERATION
- The stipulation of payment is an express agreement
- D’s definition of consideration is not correct: motive is NOT consideration
Notes
- We don’t know what moved the executor (the one that evicted her) to do what
he did

White v. Bluett (1853)

Facts
- Father: dead. Lent money to son and left a promissory note of this debt.
- The father’s executor SUED the son on the note
- Defence: his father promised to forgive the debt if he stopped complaining about
how he was not treated equally compared to his siblings (they received more $)
- Action was brought on a promissory note made by the D in favour of his father
Held: No consideration. P loses.
Reasoning
- There was no consideration:
- The son had no right to complain, for the father can do what he likes with his
money, and the son’s abstaining from doing what he had no right to do can be
no consideration
Notes
- A promissory note is like a deed, in that you NEED the document

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 Hamer v. Sidway (1891)
Facts
- William Story (uncle of William Story II) promised to him at a wedding, that if he
refrained from alcohol, tobacco, wearing, playing cards or billiards for money
until he was 21, the uncle would give him $5000
- The nephew kept the promise, at 21, wrote to his uncle asking for the money.
The uncle replied stating the money is set aside for him and gaining interest.
Didn’t want to give so much money to a young man
- Then the uncle died
- Claim was made to the executor for the $5000
- D: claims the contract was w/o consideration, therefore, invalid
• Claims that not using tobacco or alcohol benefited the promisor
• And consideration is not applicable if the promisor benefited
Held: Yes consideration. P wins.
Reasoning
- But… court states, “it is enough that something is promised, done, fordone or
suffered by the party to whom the promise is made as consideration for the
promise made to him”
- The nephew gave up his legal rights to do certain things by making the promise
- It is sufficient that he restricted his lawful freedom of action within certain limits
upon the faith of the agreement
- He made the promise, and CONFIRMS it in a letter
- It isn’t important whether or not the promisor was benefited
Notes
- Could an expression of heart-felt gratitude be consideration?

Notes on all 3 cases:

- Executor: administers your will & state interest. It is a trustee, and they do what
the state says to be done.
- Each case is a case in which a GIFT was NOT done by will
- Each is an uncompleted gift transaction, with a dead donor
- It is a GIFT if there is NO MORE responsibility on behalf of the promisor asides
from giving them the promise.
- It is sometimes said that a promise that entails doing nothing isn’t consideration
- The attitude of the court is it will enforce a promise where:
a) The promisee can show that the promise met some min. standard of care in its
making
b) The term’s of the promisor are fairly clear
c) The promise was made in the course of some readily comprehensible or
common arrangement
• The 3 cases above are more easily understood through these 3 factors rather
than through the doctrine of consideration

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 - REMEMBER: the enforcement of bargains does not necessarily entail the denial
of enforcement to non-bargain promises
- Bargain Enforcement BUT
- X Bargain does not entail X enforcement
- There are ways in which lawyers can ALWAYS avoid the problems of the
doctrine of consideration
- The problems that arose in the above 3 cases could have been avoided through a
will or instruments under seal
- The law will not concern itself with the adequacy or amount of consideration or
the substance of the bargain, but ONLY with the Q of whether there is any
consideration – i.e. legally sufficient
- Don’t think about these cases as precedent! It is dependent on who the Court is
determined to give $ to. *If the courts WANT to do something, they will find a
way to do it.

Past Consideration
- An aspect of this doctrine is: “Past consideration is NO consideration”
- SO if AFTER a promisee has already performed an act, the promisor makes a
promise to pay for it, the promise will not be enforceable, b/c the consideration
is in the past

The below case is the leading one on past consideration

Eastwood v. Kenyon (1840)

Facts
- P: Executor of John Sutcliffe, who died, leaving behind an infant daughter
(Sarah), who then married the D
- P: Sarah’s guardian & spent 140pounds looking after her estate
- P borrowed this money from Blackburn, and owed it back through a promissory
note
- When Sarah became 21, promised to pay it back, paid back 1 year interest
- When she got married to D, he assumed her debt. D promised to pay P. Didn’t.
- D: argued he was not liable b/c it was Sarah’s debt and it was barred by
suretyship of the Statute of Frauds – (no cause of action)
Held: No cause of action. Past consideration is NO consideration.
Reasoning
- Court held the statute was outside the Statute of Frauds since the D promised to
pay the primary debtor (the P) and not the creditor (Blackburn), hence it was
NOT suretyship
Was there sufficient consideration?
- NO
- Cannot sue on oral affirmation – sarah only affirmed. Also her oral affirmation

55
 (as a minor) MUST be in writing.
• Minors’ contracts are voidable.
- The link is broken b/c the affirmation is NOT in writing
• If she put it in writing, the obligation would have passed to her husband and
would been enforceable.
- There is a moral obligation running through the MONEY BORROWED and Mr.
Keyon’s PROMISE – and this has no consideration

- Kenyon had a moral obligation to look after his wife

• Wennal v. Adney (1802) (p.322): Reporter added a long note to this case.
Note: stated moral obligation can be NO consideration, & supported this! At
this time, they were happy to keep morality out of the law.
Notes & Questions
- Claim was made against Mr. Kenyon, b/c at that time, all of her property was
vested in her husband
- Lampleigh v. Brathwait (1615): Exception to the rule of past consideration. If
the plaintiff does something at the request of the defendant, without any
specific agreement at the time for the amount of payment, a subsequent
promise to pay the original thing will be enforceable if the thing was done at the
defendant’s request or in the expectation that there would be some payment
• (p.324) Ex: Let’s say A takes care of B’s land while he is away and in return, B
will do it back (expect it to be reciprocal). A never goes away, so B
QUANTIFIES the work done as $500. Then, it does not get paid. Can A sue?
YES. B/c this is not past consideration, this is simply quantifying the work
after it is done. can sue for quantum meruit relief.
• Other exceptions: minor’s debts, debts barred by the limitation period &
debts discharged by bankruptcy
- Under the Ontario Limitations Act – an action on a contract has to be
commenced 2 years after the “claim”
• So if P owes $ to S on Oct. 1 2015, S cannot maintain an action on this debt if
the Statement of Claim is issued after Oct.1 2017.
• BUT, if P acknowledges the debt in May 2016, the period will begin at this
date
Notes
- Historical significance - Ex: if someone is travelling & gets sick, and someone took
care of them, then asked for the costs incurred. Court would say NO. (Past
consideration)

Mutual Promises
- There are concerns regarding an absence of consideration in mutual promises
- Another issue: is the requirement that both parties be bound or neither is bound
– “mutuality”

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Below Cases deal with the issue of mutuality

Great Northern Railway Co. v. Witham (1873)

Facts
- P: Railway – they put out an advertisement for a supply of timber for a year.
- D: Witham – made an offering, they accepted it.
- Some orders were duly executed, but the order in Q now was NOT.
- D wants to be excused from this performance, claiming it was unilateral
- D argued there was no consideration for the D’s promise to supply the goods
Held: There is consideration. Order is binding. P wins.
Reasoning
- “If you will give me an order for iron, I will supply it at a given price” – SO, if the
order is given there is a complete contract and a consideration
- SO, in this case, accepting the order is binding
Rule
“If you go to York, I will pay you $100” this is unilateral
There is no obligation to go to York…
But, if A goes to York, he will get the $
Competing the action [is sufficient] [to create] consideration for the promise
Notes
- Witham was bound b/c he wanted to withdraw AFTER the order was given
- There are 2 promises here: (explicit) promise to stand ready to supply goods and
(implicit) promise to supply the goods actually ordered
• The explicit promise is a “framework agreement” or a “standing offer” –
standing offers are revocable, unless BOUGHT for consideration and
transformed into option contracts or put under seal
• Could have made a “requirements or exclusive dealing contract” – which
means GNR would promise to purchase specified goods only from Witham
(with no min. amount) this would be consideration for his promise to
stand ready to supply

Wiebe v. Bobsien (1985)

Facts
- The parties made an agreement (“interim agreement”) for the sale of the D’s
home to the P for $360,000
- Deal condition on the sale of P’s house: The purchase was conditional to a
“subject to clause” – stated: the offer is subject to the sale of P’s property, on or
before Aug. 1984. P agrees to remove this subject within 24 hrs of entering into a
firm contract for the sale of his property”
- The clause is dependent on the purchaser being satisfied by offers made

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 - Month later, D told the P the agreement was cancelled
- P sold his house in August REGARDLESS satisfying the “subject to” clause
- P requests specific performance b/c he satisfied the clause.
Held: there was a binding contract, ordered specific performance. P wins.
Reasoning
- The parties intended for it to be a binding contract
- Problem: the contract is unfair b/c it is “lopsided” – the P has all the power to
EITHER sell the house and abide by the contract OR choose not to satisfy the
clause. UNEVEN power.
- BUT contract STILL enforced b/c they both agreed on it.
Dissent
- The condition precedent in this case is uncertain
- Bothered by this decision

Wood v. Lucy, Lady Duff-Gordon (1917)

Facts
- Gives P the exclusive right (subject to her approval) to place her endorsements
on the designs of others, place her designs on sale, or license others to market
them
- She would get ½ of ALL profits & revenues
- P claims he kept his side, D broke it by endorsing her own designs, as she
withheld profits.
- They both signed a contract, but D claims he gave no consideration.
Issue
- Was the contract a mutual promise?
Held: Yes. Binding contract. Awarded P.
Reasoning
- Must look at the contract more broadly, although the terms were not expressed
specifically, there is obligation is implicit within the contract
- A promise may be “instinct with an obligation imperfectly expressed”
- D gave P an exclusive right to market only through P’s agency – accepting this
right= promise
- Lady Duff-G is ‘more’ bound – looks like a bad deal on her part
Notes regarding Wiebe and Wood (2 cases):
- In both, the attitude of the judges is determined not to regard the contracts as
unenforceable
- “Lopsided” agreements

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 Going-Transaction Adjustments or Contractual Modifications
- Going-transaction adjustments: changes to the original deal that the parties
made
• The parties AGREE to modify it
• This change occurs when 1 or both parties still have obligations to fulfill
under the contract
• The party benefiting from the contract change does not do any more for the
other than the original contract required
- Doctrinal Q here: Is whether there is consideration for the modifying promises
- The rule: if there is NO NEW consideration, the promise to modify the original
contract is not enforceable
- This rule rests on the following (unrealistic) assumptions:
• The original deal expresses the whole relation of the parties – they are
entirely “bound” by the deal
• Neither party shared any future acquaintances with each other
• Neither party places any value on the chance that careful & exact
performance of one deal may make it easier to make other deals with the
same person or another
UNREALISTIC

The following cases reflect the consequences of the acceptance of some of these
assumptions by the courts & the evolution of the law.

Harris v. Watson (1791)

Facts
- The D, in consideration that the P would perform extra work, promised to may
him 5 guineas over & above his common wage
- Not paid
Issue
- Was the captain required to keep his promise?
Held: P lost.
Reasoning
- No action would lie at the suit of a sailor on a promise of a captain to pay him
extra wages, in consideration of his doing more than the ordinary share of duty
in navigating the ship. If such a promise could be enforced, sailors would in many
cases suffer a ship to sink unless the captain would accede to any extravagant
demand they might think proper to make
Notes
- Public policy argument

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 Stilk v. Myrick (1809)
Facts
- Action for seaman’s wages
- The P was said to be paid 5 pounds a month
- During the trip, 2 men deserted. The captain told the other crew members that if
he finds no one else, they will have the wages of the 2 men who deserted,
equally divided
Issue
- Was the captain required to keep his promise to a higher wage?
Held: Agreement void. No new consideration. P can recover at rate of 5 pounds a
month.
Reasoning
- D argues it is void – during such trips, death & desertion are common and if a
promise of advanced wages were valid, there would be a unreasonable amount
of claims this ground was taken by Lord Kenyon in Harris v. Watson
• Judge stated that if such a promise would be enforced, sailors would ‘allow’
the ship to sink, UNLESS the captain would agree to the demands to pay
more
- YET, this case is distinguished from Harris b/c the agreement here was made on
shore and not when there was danger or pressing emergency, and when the
captain was not under constraint or apprehension
- But the agreement here is VOID. The desertion of the crew is to be considered
an emergency of the voyage as much as their death – and those who remain are
bound by the original contract
Notes
- Harris v. Watson: raises legitimate concerns about policy, namely, the possibility
of inappropriate pressure being brought to bear on a party to a contract to
increase the amount of payment promised similar to The Port Caledonia –
awareness of “economic duress”
- In this case (Stilk) moved away from policy concerns to a general model of
modification contracting
- If the P in Stilk gave the captain a peppercorn in return for the promise, should it
have helped?

- No purpose behind Stilk

Stott v. Merit Investment Corp. (1988)

Facts
- Stott= broker with Merit Investment Corp.
- Stott purchased gold futures contracts for a customer (Guyenot)

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 - Merit was loaning Guy the money for the purchases (w/ the futures contracts
serving as collateral)
- Price of gold was dropping, Guy failed to “maintain the margin” (provide
additional collateral) – SO Stott (as he was entitled to do) sold 2 of Guy’s
contracts to PROTECT Merit
- Guy complained to Douglas (Stott’s supervisor) who allowed him to repurchase
- Guy’s cheque not honoured, price of gold dropped more, Guy was left owing
$66,000 to Merit (which would NOT have been owed if Douglous did not
intervene and the account had been sold out)
- Term of Employment for brokers: Broker is liable to his firm for any losses caused
to the firm by his client’s default on a margin account
- Stott agreed to sign a document – outlining his obligation of this debt – when
leaving, the manager said “this document probably won’t be held up in Court”
- After, every month, sums were deducted from him. Agreement signed in
November + received $3000 bonus
- Stott resigned, and brought an action to RECOVER the amount that had been
deducted from his commissions. Merit countered for the balance owing
($35,000)
Issue
- Was Stott liable for Guy’s debt to Merit?
Procedural History
- Trial Judge: Stott won. B/c found it was Doug’s intervention at fault.
Held: Stott is Liable.
Reasoning
RULE: Forebearance to sue is good consideration.

- Trial Judge found NO consideration for the initial agreement in Jan (the signing of
the agreement with the manager Kasman)
- It is not a Q of whether the claim of Kasman as to Stott’s liability would have
stood up in court, but whether it was a bona fide (real) claim at the time.
- Forbearance to sue would be good consideration if the claim was a real cause of
action and bona fide
- “Honest claim” = one that the claimant does not know is unsubstantial

- Stott clearly acknowledged his indebtedness in January and again in

acknowledging monthly withdrawals and signing another in November
- The trial judge’s reasoning that the January agreement is non-existent is based
on the WRONG idea that Stott’s contract of employment made him liable ONLY
for losses incurred b/c of error or negligence – he was in fact liable for client’s
obligations to the firm
- Trial judge made no finding of bad faith

- Stott’s future at the firm would have suffered if he did not sign the agreement

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 - Counsel for Merit: claimed there was no mention of forbearance to sue in the
agreement
- But forbearance can be implied
- By signing statements & agreements Stott accepted responsibility regardless of
Doug
Dissent
- Intervention of Douglas exonerates Stott’s liability
- I recognize that forbearance to sue on a non-existent claim made in good faith
may constitute consideration. But, Merit is precluded from arguing that its non-
existent claim was made in good faith. the agreement was to force him to
assume responsibility of Doug’s actions and not to affirm liability THEREFORE,
not bona fide
Notes
- A solicitor can re-cast the parties’ dispute as a settlement to make the
compromise enforceable
- DCB v. Zellers: mother of a young shoplifter paid Zellers $225 after a demand
letter from their lawyer. Lettered threatened to bring a suit against her of $1000
to provide for “restitution” of the “incremental” costs – even though the items
stolen were only $60 and were recovered undamaged
• Mother sued in court
• Store argued: her payment and the store’s forbearance constituted a
compromise of an action
• Judge sided with the mother, & condemned the action of the lawyer

- When it looks like a settlement – it is grade A enforceable. It is extremely hard to

get the settlement set aside.
- None of the details in this case are imp!

Note on Relational Contracts & Consideration

- **IMP: in Gilbert Steel Ltd. V. University Construction Ltd (1976): the courts
applied the rule in Stilk

Gilbert Steel Ltd. V. University Construction Ltd (1976):

Facts
- The P (steel supplier) was providing steal to the D (builder) to use in a number of
buildings
- The P had initially agreed in a written contract to provide the D with fabricated
steel for the project at a fixed price
- After deal was signed & some steel given, the P was faced with price increased
from its supplier of raw steel
- The D then signed a 2nd contract, accepting higher costs

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 - After 2nd increase in prices, reps of the P met with reps of the D and made an
oral agreement for the D to pay more again
- The P sent the D a drafted contract, the D never signed
- Continued to deliver steel, and sent invoices of the orally agreed amount
- D paid “rounded amounts” & only paid the amounts set in the 2nd signed
contract
Issue
- Was there new consideration for the new oral agreement?
Held: P sued based on the oral contract, but LOST b/c of a lack of consideration
Reasoning
- Consideration cannot be too vague, it must be understood by both parties
- Promissory Estoppel: when the court stops the parties from getting out of a
contract because the other party relied on it, despite a lack of consideration
• Cannot use estoppel as a sword, but a shield
Notes
- This decision was highly criticizes & shows an imp. problem with traditional
contracts doctrine
- You can’t tell Gilbert Steel you will pay them, then change your mind – that is not
operating in good faith.
- When a party starts a performance before a contract there are huge problems
involved
- *Prof doesn’t like this decision
Ratio
- Consideration cannot be too vague

- The model of contracting developed here is based on a discrete contract

between parties that has neither a past nor future and exists in a vacuum in
reality, few contracts fit this model

The following cases show that there are several available tools that judges can use to
mitigate the harshness of the doctrine of consideration. (Qs to consider on p.356)

Foakes v. Beer (1884)

Facts
- Agreement that Dr. Foakes paid 500 pounds on signing and the balance in
installments over 5 years
- Mrs. Beer promised not to claim any interest provided he paid the installments
- He paid, but she sued for the interest
Procedural History
- Trial judge: P lost.
- Court of Appeal: P won.
Held: appeal dismissed. P won. Promise to forego interest is unenforceable, no

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consideration.
Reasoning
- Cumber v Wane: the doctrine in this case has been strongly criticized
• Doctrine= in order to render a valid contract not under seal, the adequacy as
well as the existence of the consideration must be est. now erroneous
the court cannot inquire into the adequacy of consideration
- In Reynolds v. Pinhowe: it was found that the saving of trouble was sufficient
consideration
Notes
- The only way to make an agreement enforceable between a creditor & debtor
under which the creditor would take LESS than the full amount owed was by
“accord and satisfaction”
- Accord= the deal
- Satisfaction= payment/performance debtor must offer something other than
money
- Couldery v. Bartum (p.379) – good judge*
Ratio
- A promise by debtor to make partial payment of debt in return for creditor’s
promise to accept the partial payment as basis for treating the debt as fully
discharged does not give rise to an enforceable agreement. A payment of a
lesser sum to satisfy a greater sum cannot be seen to be satisfaction for the
whole (doctrine, stated in Pinnel)

Downey v. Ecore International Inc. (2012)

Facts
*IMP Case
- P: engineer, offered a senior management position as an employee with the D
- The P rejected those terms and offered (for tax reasons) to work for the D
through his personal corporation: CSR Industries
- The D accepted
- [Make a contract before P starts working. He then starts working & required to
sign another contract not with CSR, but with the man himself – promise to keep
employer’s info confidential. Has a “forum selection clause” (parties agree that if
litigation were to arise, it will happen in a particular place i.e. in the US). He signs
it. Problems then arise, and he says there was no consideration for the promise
b/c it was after starting work]
- Upon working, P signed a confidentiality agreement in which he was described
as an “employee” and CSR was not a party to this agreement
Issue
- Is there consideration for the 2nd contract made after he started working?
Procedural History

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 - Trial Judge: No consideration for confidentiality agreement
Held: P loses. There is consideration if you look at the whole arrangement
Reasoning:
- When dealing with a transaction that involves several documents as a part of a
larger whole, then assistance in the interpretation of 1 agreement may be drawn
from the related agreement
- Upon asking Downey to join their “team” it would be required that he personally
commit to protect Ecore’s Proprietary Info as a condition of his relationship
- The arrangement w/ CSR was JUST a tax device
- This business reality is a critical component to the factual context in which the
Consulting & Confidentiality agreements were signed
- The Consulting Agreement was signed on the faith of the Confidentiality
Agreement – they are RELATED & must be read together
- JUDGE: You would have NEVER gotten the job, if you didn’t make the 2nd
contract with the employer.
- Although CSR is not a party in the agreements, when read together, the
intentions was for the protection of Ecore’s info
- SO, the intent of the parties was to require a confidentiality agreement that
bound Downey
- To conclude otherwise, would deprive Ecore of any protection
Notes
- Had the P not signed the Confidentiality Agreements, he would not have gained
the benefits he and CSR enjoyed – MUTUAL PROMISE
- The Court of Appeal saw the contracts as a complete contractual relation NOT as
a series of discrete contracts unlike the trial judge who saw the contracts as
separate (which is WRONG)
- In this case, the judges encouraged co-operation and protecting the integrity of
relations
- Existing relation is changed through another contract – the going-transaction
agreement – between the parties

- Rejects Gilbert Steel – doesn’t matter that in Gilbert the contract was made
orally. It should have still been enforceable.
- You must treat the contracts as a WHOLE – Contract A relates to Contract B
- When you ask, “Why would you not enforce it” you can come up with more
reasoning

Benzie v. Hania (2012)

Facts
- Father & mother gave property to 1 daughter (Michael) who in return, gave her
sister Barbara and brother, Mitchell, a right of first refusal over the property if
Michael wished to sell it recorded in agreement

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 - Michael got married to Norman, and he signed a document to honour the
Agreement
- Barb & Mitch consent to conveyance of the property to Michael & Norman and
did not seek to take advantage of their right of first refusal
- After issues, Michael argued that the case was not binding on Norman
Issue
- Whether consideration had been given for Norman’s promise to be bound by the
Agreement?
Held: Finds consideration for Norman’s promise b/c Barb & Mitch did not act.
Reasoning
- Barb & Mitch argue that the trial judge erred in concluding that they gave
consideration for the Norman Undertaking by way of forbearance (not exercising
their right of refusal)
• They state this right is only triggered by sale or intent to sell. So, they had no
rights to forbear, and there is no consideration. Norman’s Undertaking not
binding. Court of Appeal rejects this argument…
- Just b/c it isn’t a “sale” does mean they had no rights at the time Norman signed
- Just b/c a court may think it falls outside their rights doesn’t mean that they
didn’t have the right to take the legal steps to try to enforce it
- SO, by forbearing, Barb & Mitch did forbear, giving consideration for Norman
- And Norman is also bound by the Agreement
Notes
- What is imp. here is the judge’s determination to hold Norman (& Micheal) to
the agreement they had made
- Side note: If a promise can be seen as a part of a compromise, the problem of
consideration can be avoided. this suggests a way for a solicitor to draft
letters dealing with modifying agreements

Techform Products Ltd. V. Wolda (2001)

Facts
- When first starting in 81, the D built a car hinge
- Relationship between the parties changed in 1989 – the D became a consultant
and independent contractor and invented another hinge
- D was working on an invention, while being paid by P (who claims he owns it) –
valuable truck hinge
- Written agreement – signed ETA
- 1996: “3D Hinge” – core of this litigation – D demanded specific terms for the
sale of this hinge & the company was outraged, regarding them as betrayal of
their relationship
- He was then fired & he sued to be the rightful owner of the 3D Hinge
Held: There was consideration for the employee promise to do what he now says he is
not obliged to do, in the ETA.

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Reasoning
- Trial judge erred in finding no consideration in the ETA (based on the fact that
continuing employment is not consideration)
- CofA finds that in Maguire continuing employment & implied forbearance for
dismissal is adequate consideration
Notes
- Imp. to notice the different attitudes in: Downey, Techform and Watson
- Judge raises 2 cases: Watson v. Moore and Maguire: problem with them=
contract is made, employment starts, and then a change is made. In Macguire, it
was a non-competition clause.
• In Watson, it was a change in employment. Change occurs, & the
employment continues. The continued employment relation was
consideration for the PROMISE MADE (the contract). You will be held liable
due to the mere fact that the employment continued= sufficient
consideration.
• But in Watson, judge says this is not right. Mere employment is not enough,
you must threaten dismissal, but think about this. Is this good employment
practices? This is absurdity. Then, when you keep them on it is sufficient
consideration.
• The judge surveys the cases, then finds consideration in this case.
- Prof says this is a GOOD decision! (Rosenberg J.)

Contracts with a Third Party

- A promises to pay B a sum of money, if B promises that he will perform his
contract with C
• It has been held that B can give no consideration for A since it is already
bound to perform the contract with C
• So B has “used up” his promising power
- Scotson v. Pegg: Court rejected this argument.
• Regarded the contract between A & B with consideration
• By making the promise to A, B assumed liability to A and may be held liable in
damages to A (and to C) should he breach his contract with C

Reliance as a Basis for the Enforcement of Promises

- So far, we have seen how the classical or traditional doctrine of consideration is
not a satisfactory tool for determining enforcement of promises
Effects of the Doctrine:
1. (More destructive one): it can make promise unenforceable that should be
enforced
• Some of the going-transaction adjustment (modifying existing contracts) are
in this category

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 • Ex: cases mentioned in Techform Products v. Wolda
2. The Courts may stretch the doctrine to make a non-commercial promise
enforceable if it seems fair to do so
• They have “found” consideration to support promises and refused to find it
when they saw no need to enforce
• Ex: Thomas v. Thomas & Hamer v. Sidway

- There are a number of factors that are important in deciding which promises
should be enforced:
• Evidence of deliberateness
• Contracts that arise in commercial contexts
• Is it likely that people will rely on the promise? reliance is very imp to
enforceability

The cases below will deal with reliance as a basis for enforcement of promises. The
focus is the protection of reliance.
- It is impossible to fully separate the reliance as a basis from cases where courts
“find” consideration to protect reliance
- These cases will show how the courts will enforce promises to PROTECT
RELIANCE, even though there may not be any consideration
- The device used to protect reliance & avoid the doctrine of consideration is
estoppel reliance= estoppel
- Estoppel: party has done something, said something or taken some action, the
consequences of which it cannot now avoid: the party will be precluded from
acting contrary to what it has said or done
• BASICALLY, someone cannot say “I wont do that” then say, “I’ve changed my
mind, I want to do it”
*Purpose in studying these cases:
- To determine what “moved” the court to enforce the promise, so that you can:
1. Develop a sense of what factors will move a court
2. Offer a court a “peg” on which you as a lawyer can “hang” your argument

Reliance in the Commercial Context

- The more extensive the P’s acts of reliance the greater the chance of reliance
being protected

Central London Property Trust Ltd. V. High Trees House (1947)

*Leading case in development of legal rules protecting reliance – promissory estoppel
Facts
- The P granted to the D (High Trees) a subsidiary of their company, a tenancy of a
block of flats for the terms of 99 years from Sept. 1937 at a ground rent of 2500
pounds/year

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 - As the war began to prevail, it was apparent that the D’s could not pay the lease
out of the profits of the flats, so discussions took place to change
- Written agreement, P agreed to reduce rent to 1,250
- In 1945: P looked into the matters of the lease, and found it should be 2500
- P sought to recover 625
Issue
- Does Central London have an action for full rent from June 1945 on?
Held: Yes. P wins.
Reasoning
- With regards to estoppel, the rep. made in relation to the reduced rent was as to
the future the payment would not be enforced at the full rate but only at a
reduced rate
- In Jordan v. Money (1854) Such a rep. would not give rise to an estoppel b/c
representations as to the future must be embodied as a contract
- BUT the law has not been standing still since Jordan
- Such a promise should be enforceable regardless of consideration
- The evidence shows that the promise to reduce the price while the block of flats
was not fully or substantially fully let
- Early 1945: the flats were fully let – so rent increased – reduced ceased to apply
- The conditions of the promise was understood by the parties to apply under the
conditions prevailing AT THE TIME it was made (when the flats were partially let)
and that it did not extend further
- If the case had been one of estoppel: it might be said that the estoppel would
cease when the conditions to which the representation applied came to an end
- A promise to accept a smaller sum in discharge of a larger sum, if relied (acted)
upon is binding without consideration.
Notes
- Do you think Denning J. relying on the merger of the courts of equity & common
law is the reason for ignoring Foakes v. Beer? Or was this just an excuse?
- Although he argued that this case was not one of “strict” estoppel, his decision
had been regarded as establishing a new, broader meaning of the term –
referred to as promissory estoppel
- “Friendly” – it was just who owed who what?
- One of the first cases that promissory estoppel is recognized.
• If I state a fact to be true in a document I am estopping to deny the fact is
true.
Ratio
A promise intended to be binding, intended to be acted on and in fact acted upon, is
binding so far as its terms properly apply, notwithstanding a lack of consideration. This
is the doctrine known as promissory estoppel – crucial aspect of this is the protection of
reliance.
Promissory Estoppel is binding when they are:
a. Intended to be binding

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 b. Intended to be acted upon
c. In fact acted upon

Combe v. Combe (1951)

Facts
- Wife who has divorced her husband claims maintenance from him on an
agreement embodied in letters
- It was agreed the husband would pay a maintenance of 100 pounds a year
- He never paid
- She made 700-800 a year, he made 650
- Sued 7 years later
- She argued promissory estoppel
- Unlike the ordinary commercial case, there is no pressure to enforce. If she
needs money family law will provide it for her.
Issue
- Is the promise enforceable under promissory estoppel?
Procedural History
- Trial judge awarded P – he said there was no consideration to pay 100, but he
held the promise was enforceable on the principle stated in High Trees b/c it was
a unequivocal acceptance of liability, intended to be binding, intended to be
acted on and in fact, acted on
Held: No consideration.
Reasoning
- The trial judge erred in stating that the wife can sue even with no consideration
– the real Q is: Was there sufficient consideration to support the promise?
- Promissory estoppel applied to parties who are in a contractual relationship
already it cannot create a new cause of action where there was none before.
- I do not think it is right for the wife, who is better off than her husband, to take
no action for 6 or 7 years then demand the whole 600 from him
Notes
- At the time of the case in England, one can only get a divorce if they have prove
that the spouse was “guilty” of a matrimonial offence (ex: adultery)
- Since her income was higher, it seems unlikely that it was a genuine claim for
support – so it could be that they colluded on their divorce, and he “bribed” her
with saying he’d give 100
- In High Trees, Lord Denning extended the principle of estoppel from statements
of fact to statements about future conduct - Denning backs off from High Trees
& reconsiders the decision.
- In Gilbert Steel: Court applied the rule from Stilk and rejected an estoppel-based
argument – “estoppel can never be used as a sword but only as a shield”
- Problem: a case involving husband & wife becomes a precedent for commercial
affairs

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 Tudale Explorations Ltd v. Bruce (1979)
Facts
- Written extension of time to gain shares promised & received, however, the
contract was repudiated that day
- Tudale (promisor) agreed to extend time for exercising Teck’s (Bruce) option and
then repudiated the agreement on the ground that time had expired. This was
clearly detrimental to Teck because had the extension not been revoked or had
they known that the option was about to expire, they would have exercised that
option and gained the shares.
Held: Cannot revoke the offer. It still stands
Reasoning
- Promissory estoppel can be used to enforce oral variations without
consideration even when there is an in-writing requirement for variations as per
specified in provisions of the K or statutes. Court want to see detrimental
reliance by P (appears to be consideration)
- NOTES: Tudale brought the action to declare it had full rights in the shares it
transferred – as a result, Teck was the D and could use promissory estoppel.
Sword vs. shield argument is weak since it could have been used either way in
this case.
Rule
Where words or conduct of one party to a contract makes unambiguous
promise/assurance which is intended to affect legal relations between them AND the
other party acts upon it, by altering his position to his detriment, then the party that
made the promise-assurance will not be permitted to act inconsistently with it.
Notes
- To mine, you need to put money into the ground
- Jr. mining companies don’t have the $, so call upon a senior company
- This is what is going on, Tech is a senior mining company & wants to get in on
the discovery of the Jr. company. It wants more time to accept the offer from
the Jr. company. Case goes on b/c the Jr. says you are too late w/ your offer, it is
revoked, meaning that the Jr. can take the mine & sell it to someone else.

Waltons Stores (Interstate) Ltd. V. Maher (1988)

Facts
- Waltons negotiated with the Mahers for a lease of land
- It was conceived that the Mahers would erect a building on the land that was in
accordance with specifications given by the Waltons
- This would entail a demolition of an existing building
- Waltons didn’t want to proceed, by this time, the demolition work was finished
and the new building was 40% complete Maher acted in reliance

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 - Trial Judge: ruled in favour of the Mahers, Waltons appealed
- Court of Appeal: upheld
Issue
- Whether the appellant is estopped from retreating from its promise to complete
the contract?
Held: Mahers win.
Reasoning:
- Promissory estoppels extends to representations (or promises) as to future
conduct
- Just b/c estoppel has been said to be used as a shield and not a sword doesn’t
mean Ps cannot rely on it
- As said in Combe, the estoppel “may be part of a cause of action, but not a cause
of action in itself”
- Walton was estopped from retreating from its implied promise to complete the
contract because, knowing the owner was exposing himself to detriment by
acting on the basis of false assumptions, it was unconscionable for Waltons to
adopt the course of inaction which encouraged the Mahers to demolish the
building and build a new building.
Notes
- Common thread through promissory estoppel cases is the promising party has
played a part in the wronged party’s assumption that caused them to act
- Unconscionability – used as a concept of good faith here – the D encouraged
them to rely on the deal. There is a clear fact of reliance here. The Q is, do we
protect it? Judge says I cannot protect it via estoppel but I can protect it under
unconscionability – or what Prof calls “good faith”.
• Didn’t use promissory estoppel b/c it would have been a sword in this case
(???)
- Walton shows that “negotiation” happens before the contract.
Ratio
- Estoppel may be a cause of action

Baxter v. Jones (1903)

Facts
- The D: Insurance broker, had arranged insurance for the P
- Year later, P arranged to increase their insurance coverage on 1 plan by $500
- The D told the P he would give the necessary notices to the other insurers, but
he failed to do so
- When a fire occurred, the other policies were not fully enforceable and the Ps
had inadequate insurance coverage
- P sued
- Trial judge: P won, D appeals
Issue

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 - Was the D negligent?
Held: Yes. P wins.
Reasoning:
- The D knew the importance of giving notices, and the effect of an omission to do
so
- B/c he was procuring the insurance at the request of the Ps, to the extent he was
acting for them, it is necessary to consider how far he was bound to give notices
- “If a person undertakes to perform a voluntary act, he is liable if he performs it
improperly, but not if he neglects to perform it”
- Reliance interest is being protected for P. D did a portion of the task but did not
complete the task and was therefore negligent.
Notes
- This case is a tort case – action of negligence – lawyer doesn’t try the contract
route
- Courts protect reasonable reliance even in the absence of consideration
Ratio
When a person makes a voluntary promise which it is reasonable for the other party to
rely on they may not skirt liability for damages by citing want of consideration. Courts
will award damages for negligent performance of a relied-upon undertaking, even if
there is no consideration (i.e. gratuitous promise), but if loss occurs.
Notes
- Coggs v. Bernard: important case mentioned here.
• “It is well est. that one who enters upon the performance of a mandate or
gratuitous undertaking on behalf of another, is responsible not only for
what he does, but for what he leaves unfulfilled & cannot rely on the want
of consideration as an excuse for the omission of any step that is requisite
for the protection of any interest intrusted In his care”

Reliance in Non-Commercial Contracts

Skidmore v. Bradford (1869)

*Not required reading
Reliance – enforcing the gift as a contract
Prof is not convinced it is the correct result
Facts
- Jacob Bradford arranged to buy a factory for his nephew Edward.
- He paid £1500, balance owing £3500 and had the owner put Edward’s name
down as the purchaser.
- Edward signed the agreement to purchase.
- And then Jacob died.
Issue

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Does Edward get the 3,500 pounds from Jacob’s estate?
Held: yes, b/c incurred liability
Reasoning
- By signing the purchase agreement, Edward took on the liability of having to pay
for the factory. He only did this in expectation of receiving the balance from his
uncle.
- If he were just a volunteer, he’d be owed nothing.

Dalhousie College v. Boutilier Estate (1934)

*Not required reading
- Court refused to enforce promise b/c Dalhousie didn’t rely on promise (didn’t
spend money) + no consideration
Facts
- 1920, Arthur Boutilier pledges in writing: “for the purpose of enabling Dalhousie
College to maintain and improve the efficiency of its teaching… and in
consideration of the subscription of others, I promise to pay…$5000..”
- 1926, writes that the promise is still on his mind, but he’s had some reverses, but
expects “before too long” to be able to redeem his pledge.
- 1928, Boutilier dies.
- Between 1920 and 1930, Dalhousie spent $1,491,687 on buildings, grounds and
equipment. $700,000 less than the aggregate of the 1920 campaign
subscriptions.
Issue
Does Dalhousie pay $5000?
Held: No.
Reasoning
- The only basis for enforcing the promise would be if it was a contract.
- Consideration in the Pledge Paper? The deceased did nothing other than signing
the paper to help Dalhousie with the efficiency of its teaching, etc.
- Reliance by Dalhousie: Since they spent so much less than they had pledged in
1920, it can’t be said that they spent anything in reliance on Boutilier’s $5000.

Intention to Create Legal Relations

- There must be an intention to create legal relations in order for a contract to be
enforceable
- There are some situations in which courts may hold a promise is NOT
enforceable b/c there was a “lack of intent to create a legally enforceable
contract”

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 - Problems with this issue commonly arise:
1) In regard to promises made between family members – there is a
presumption that there is no intention here
• Ex: Balfour v. Balfour: court did not see the domestic promises between
husband & wife enforceable. Worked to deserted wife’s detriment.
o No one in Combe v. Combe raised the issue of intention to create
relations
o Difference between the 2 cases: at the later date, separation was more
common
• But in Bracklow v. Bracklow: SCC found that marital vows are premised on
obligation & expectations of mutual & co-equal support – man should owe
woman in cases of support under statutory spousal support principles
• Re Spears v. Levy: wife did not get a proper divorce, “remarried”, can she
get the estate of her dead husband? Not really, but courts are determined
to give her his money.
- Courts encourage spouses to enter into marriage contracts and unmarried
partners to enter into cohabitation agreements
- The presumption above is also evident in cases between child & parent

The below case illustrates that when there is a significant reliance there is a strong
pressure to enforce a promise in the situation of a child & parent.

Jones v. Padavatton (1969)

Facts
- P: mother, offered to pay $200 for rent while daughter finished school.
- Change in agreement, P buys a house, and offers for the D to stay there and not
pay rent.
- D took longer than necessary to finish school
- P (left Trinidad) tried to recover possession of the house
- D: argued the parties intended to create a legally binding contract
- P: denied this, and even if it were, it is too uncertain
Issue
- Should P recover possession of the house?
Held: YES. P wins.
Procedural History
- Trial Judge: dismissed mother’s claim for possession – & on daughter’s count-
claim awarded her the value of repairs to the house made by her.
- Mother appealed
Reasoning – Danckwerts – Swan doesn’t like this reasoning
- The acceptable duration of the D’s studies were not settled
2 Main Qs:
1. Were the arrangements intended to produce legally binding agreements, or

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 were they simply family arrangements depending on good faith & truth (not
enforceable legally)
• This case is one made on goof faith and not intended to be rigid, binding
agreement
• On this view, the D cannot resist the P’s rights as the home owner.
• In terms of the counterclaim, D may be reimbursed for expenditure
incurred
2. Were they made so obscure & uncertain that even if they were intended to be
legally binding, a court could not enforce them?
Reasoning – Salmon
- Same conclusion, different reasoning
- Still applied the above 2 Qs
1. Intentions?
• This needs an objective test
• Court must look at what they said & wrote
• Ask “Whether the true inference is that the ordinary man & woman, speaking
or writing, would have intended to create a legally binding agreement”
• Counsel for mother has said RIGHTLY: that in cases of allowance between
family= NO such intention
o FINDING: NO intention here: D doesn’t have the legal right to receive & P no
legal right to pay.
o I think (contrary to P’s argument) that the daughter’s obligations were very
clear – if the D didn’t fulfill this, the P wouldn’t be able to recover damages,
but simply end the allowance
o It is said the duration of the agreement was not specified, but I think it is safe
to conclude there it was implied that she should complete her studies in a
reasonable time
o A reasonable time could not exceed 5 years
- She should not be entitled to anything further
*Prof Swan likes Salmon’s reasoning better
Importance
- Salmon expands the scope of the facts, looks not just at the relation between
mother and daughter, but as 1 party having reliance on another party
- This was also seen in Spears v. Levy
Notes
- Rule from Balfour v. Balfour: any decision to enforce a promise between those
who are in a close relation should be clearly justifiable in the sense that it meet
some test of deliberateness on the part of the promisor, and that its
enforcement not catch the promisor by surprise
- Rose & Frank Co. v. J.R. Crompton (p.443): “binding in honour only” – cannot sue
on it

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A Letter of Comfort
- “Letter of Comfort”= form of undertaking that is deliberately designed not to
create enforceable obligations, but is intended to provide some “comfort” that
something will be done – no right to sue

The below case shows how parties bargain over a comfort letter

Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee Of) (1999)

Facts
- Claims about letters of comfort provided to Bank in connection with loans made
during Plessey’s takeover of Leigh
- GEC= controlled Plessey

- Bank wants to bring in a big English business as a client – one is a subsidiary, one
is a parent business.
- Lends money to subsidiary, wants a guarantee from the parent.
- Borrow says, we will not give you a guarantee but a letter of comfort
Issue
-
Held: Dismissed appeal. Bank loses.
Procedural History
- Trial: dismissed all of the appellant’s claims
Reasoning
- Letter: contained a representation BY Plessey to the Bank as to its policy with
respect to the business affairs of Leigh
- It was understood that the Bank as a rep. by Plessey would manage Leigh’s
affairs to ensure Leigh would always be in a position to meet its obligations to
the Bank
- Bank contends it was entitled to RELY on this rep. as to Plessy’s policy UNLESS
and UNTIL given notice of a change in policy
- The respondents: emphasize that this is not the right interpretation. Rather a
rep. that it was Plessy’s policy that its subsidiaries, including Leigh, manage their
OWN affairs in such as way as to meet their obligations trial judge accepted
this
- We agree that the terms “be managed” does not suggest Plessey itself would
manage the affairs of Leigh
- It is well known that Plessey would NOT provide any guarantee on loans made to
Leigh by the Bank
- The letter was crafted to ensure Plessey had no legal responsibility for the loans
Notes
- Example of commercially sophisticated parties including unenforceable terms in
a contract: inclusion of terms in sovereign debt instruments (loan to countries)

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 that purport to PREVENT a debtor state from even requesting a re-structuring
obligation” – “don’t even ask”
• BUT it is not possible to prevent a debtor from at least making a request
- A problem: when the gov’t promises benefits to individuals and then tries to cut
back the benefits promised:
• Dale v. Manitoba: even when the gov’t decided to end affirmative action to
support university studies for adults from disadvantaged backgrounds,
court found it could not be discontinued for those who had already
commended studying while under it. the gov’t had the intention to fulfill
such an agreement
• Students gave consideration by altering their lifestyles
• Somerville Belkin Industries Ltd. v. Manitoba: another case gov’t was held
liable for a promise
- What limits do you think should be placed on gov’ts that want to change policies
and programs in times of shrinking resources?
- Promises made by politicians during campaign elections, NO MATTER HOW
EXPLICIT, does not give rise to a legal cause of action
• Canadian Taxpayers Federation v. Ontario (Minister of Finance): during
election promised not to raise taxes unless the increase was approved by a
referendum of Ontario. When elected, dishonoured this claiming the
provincial finances were in worse shape than he thought. The case was
DISMISSED as w/o having sufficient legal basis. (excerpt p.454)

The Requirement of Writing: the Statute of Frauds

- While it may be more difficult to prove an oral contract was made & its terms it
is generally AS enforceable as a written one – (prof likes to say “oral” NOT
“verbal”)
- HOWEVER, there is an important statutory requirement (applicable to a limited
class of promises) that they will ONLY be enforceable if in writing (i.e. written
document & SIGNED) – i.e. Statute of Frauds
- Statute of Frauds (1677) – enacted to prevent fraudulent practices method of
achieving this was through the requirement of a written document
• It is in some respects, quite inappropriate now – a lot has been repealed
now
• Typical case example of when a situation falls under the Statute: (p.457)
o D(ebtor) owers C(reditor) money.
o S(urety) promises C that if D doesn’t pay, S will
o This case would be within the statute, and S’s promises would ONLY be
enforceable by C if it were in writing.
o IF, the promise of S is made to D himself, then the Statute wouldn’t
apply

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 - In certain situations, this is still enforced as having to be in writing. BUT in some
cases, the application of the statutory requirement is thought to lead to injustice
and judges will STRETCH their powers of statutory interpretation to avoid this
- The Ontario Act: principle sections 4-7 (p.455)
- There are more difficult situations than the one above, that arise (ex: p.458)

- S.6 of Statute: suretyship = the note need not show the consideration for the
promise
- Under the Consumer Protection Act: various types of consumer contracts are
ONLY enforceable against a consumer if in writing
- Under Family Law Act: a domestic contract is unenforceable unless made in
writing and signed by the parties & witnesses

- S. 4 of Statute of Frauds: principle part (c) most important part

Ways that the Courts have Restricted the Statute’s Effects:

1. Clause (c) brings within the Statute all contracts for the sale of land
- One MAJOR exception to the rule requiring contracts for the sale of land to be in
writing which has been developed by the court of equity is “part performance”
• This is discussed in SCC Delgman v. Guaranty – “to constitute part
performance sufficient to avoid the effects if the Statute, the acts of part
performance must be UNIQUELY or “unequivocally referable” to the contract
regarding the land most common ex= purchaser’s taking possession of the
land (oral contract ONLY needed)
o Traditional test: you can only invoke PP if the P’s actions were uniquely
referable to the contract
o
2. The courts have tended to take a BROAD view of what constitutes as a
memorandum or note under it
• A signed offer by ONE party and an oral agreement from the other is
SUFFICIENT to enforce
• It is “signed” even if the name is printed
• A memo may fail to set out the actual agreement, but the court will correct it
via oral evidence

The Statute of Frauds and Part Performance

The below case is an example of the attitude of the Canadian courts’ attitude to the
Statute – narrowing its effect through the “doctrine of part performance”

Erie Sand and Gravel Ltd. v. Seres Farms Ltd. (2009)

Facts
*Statute of Frauds won’t be on exam

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 - P wanted to buy land from D (Seres Farm)
- Seres agreed to sell it, subject to the right of first refusal in the D, Tri-B. Under
this right, Tri-B was entitled to match any offer Seres received for the land
- Seres delivered the offer to Tri-B, but Tri responded with an offer which did not
match Erie’s
- Seres sold it anyways then conveyed it to Tri-B (in breach of contract)
- Erie sued both Seres & Tri
- Tri argued that there were insufficient acts of part performance on the P’s part
to take the oral agreement outside the requirements of the Statute
Procedural History
- The Court of Appeal agreed with the trial judge and held there was part
performance of the contract in that Erie prepared a written offer reflecting the
agreement’s terms which it gave to Seres
• Erie suffered a detriment from its partial performance of the deal
• CofA also uphel an order for specific performance as the land had “unique”
value to Erie – last site in the county in which there was a possibility of mining
Issue
- What actually amounts to part performance?
Held: it was sufficient part performance.
Reasoning
- RULE (Hill): if 1 party to an otherwise unenforceable agreement stands by while
the other party acts to its detriment by performance of its contractual
obligations, the 1st party will be precluded from relying on the requirements in
the Statute to excuse its own performance
- Application: Seres Farm is precluded from relying on s.4 of the Statute to excuse
it from performance of its obligations under the agreement. Tri-B cannot stand
in a better position than Seres.
- Seres got the “ultimate benefit” of the Agreement – it was Erie’s performance
that enabled the sale of the land
- Seres fulfilled part obligations. As promised, it took the agreement to Tri, but did
NOT SELL the property to Erie when Tri failed to match the offer
• In breach of the agreement, Seres sold it to Tri rather than Erie.
- I reject that there is no detriment b/c Erie got their deposit back, this isn’t the
point, the point is they lost the land
- Detriment b/c if Erie had not delivered the Offer, Seres would have been
unable to use the right of first refusal to provoke an offer from Tri.
Equity
- Equity will not allows Seres to rely on the Statute to excuse it from its obligaitons
- Equity created “part performance” for the purpose of not allowing the Statute to
be used as an “engine of fraud”
Is the doctrine of part performance limited to a consideration of acts of the P?
- Tri says that to constitute as PP, the acts relied on must be the acts of the P
alone – NO. Court rejects this

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 - The P must prove that there was performance by 1 party, and the other party
stood by – doesn’t have to be limited to only their acts
Two aspects must be met:
1. Detrimental reliance: must prove its acts of performance
2. The party alleging the agreement is permitted to adduce evidence of the oral
agreement
Are the acts of part performance unequivocally (indisputable) referable in their own
nature to some dealing with the south side property?
- Yes. But must also show there was “some dealing with the land”
- *By taking the Offer to Tri, Seres demonstrated it accepted it, unless Tri matched
the offer – the knowledge of the right to first refusal is critical here
Notes
- Was the Court moved to make this decision?
- Usually, the courts held that the payment of money to by a buyer to a seller
pursuant to an oral contract did not constitute as part performance

Unjust Enrichment and the Statute of Frauds

The below case illustrates how the courts respond to problems when the Statute of
Frauds renders a promise unenforceable, but the party to whom it was made has
already given value for the promise.
- This decision applied a restitutionary remedy to prevent “unjust enrichment” of
the D
- General lesson: the pressure to give a remedy may be SO strong that even
statutory unenforceability will not be sufficient to resist it

Deglman v. Guranty Trust Co. of Canada & Constantineau (1954)

Facts
- Respondent: nephew of the deceased
- Nephew’s Aunt promised him that if he was “good to her” and did services, he
would be included in her will and would get her property
Issue
- What is the nature of part performance which will enable the Court to order
specific performance of a contract relating to lands unenforceable at law by
reason of s.4 of the Statute of Frauds.
Held: Nephew wins. Remedy given.
Reasoning
- The services were not given gratuitously, but on a contractual relation to which
they were to be paid for
- There is an unjust enrichment of the D at the expense of the P
- This is exemplified in the simple case in which part/full payment of money as the
price under an oral contract; it would be inequitable to allow the promisor to

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 keep BOTH the land and money and the other party to the bargain is entitled to
recover what was paid.
- The acts relied upon by the nephew are not unequivocally and in their own
nature referable to any dealing with the land… BUT due to unjust enrichment in
this case, the nephew will be entitled to money.
Importance
- You cannot sue on the contract, but you can sue on restitution – shows counsel
an alternative way of presenting a case
- You can’t sue on the promise, but it is the promise that makes the aunt’s benefit
unjust so the promise is the basis to unjust enrichment claim
Notes

- Unjust enrichment is restitutionary in nature b/c it is based on the gain of the

promisor – although this gain is the amount the promisee gave up in reliance on
the broken promise, the remedy is not reliance-based
- Boone v. Coe: P and D orally agreed to the sale of land in Texas. P moved from
Kentucky to Texas, when getting there, D refused to sell. P sued for the costs of
moving. Judge dismissed the claim.
• B/c: it must appear the D received or will receive some benefit from the acts
of part performance
• Today, the Ps may have won on the basis of the D’s words causing economic
loss
- It was UNJUST: b/c he would not have done what he did w/o the promise
- Unjust enrichment is a restitutionary concept courts may use to give relief
when there is no enforceable contract

Summary of Chapter 3
- Common law has adopted the doctrine of consideration as a principle test to
determine enforceability
- It works well in the commercial paradigm
- The problems of the doctrine are seen in cases such as Thomas v. Thomas -
while courts talk about consideration, the courts are mainly moved to enforce a
promise by ‘finding’ consideration.
- The deed offers a way to make any promise (that is not offensive in some way)
enforceable – i.e. in Port Caledonia, even the making of a deed would not have
rescued the promise, as the court deemed it as offensive
- Intention is important
- Troublesome cases are those dealing with on-going transaction agreements
(Gilbert Steel)
- Duress will make a contract unenforceable

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 - Reliance – protection of this – extremely important b/c offers alternative ground
for enforcing a promise. The remedy can be tailored to what is necessary
(examples: High Trees, Tudale v. Bruce)

Chapter 4

Third Party Beneficiaries and Privity of Contract

Introduction
- Now we will look at the Q: Who can enforce or receive the benefit of a
promise?
- An important common law rule of enforceability is that only a party to a contract
can enforce it; someone who is a “stranger” to the contract can have no rights
under it “third party beneficiary rule”
- The courts occasionally avoid the rule by what can be called a creative re-
ordering of the triangular relation – for ex: B and C are aggregated and treated as
1 party, then the 3rd party beneficiary problem disappears b/c either B or C can
sue A
• This was seen in Coulls v. Bagot’s Executor and Trustee Co.

A Note on Novation
- A party cannot have contractual obligations imposed on it unless it has assented
to them and by assenting a party would of necessity have become a party
- Such an assent would occur on the novation of a contract where a new obligor is
substituted for an old one and the new obligor expressly undertakes to perform
the obligations of the old one
- A novation occurs when:
• Seller sells its business to a Buyer and Buyer wants to enter into a contractual
relation with the Seller’s Suppliers
• If all agree (which they have to if there is to be novation) Then Seller will
release Supplier from its obligations to Seller and Supplier will release Seller
from its obligations
• Buyer will undertake to Supplier to perform Seller’s obligations and Supplier
undertakes to accept Buyer in place of Seller
- [A – B] [B C] C cannot sue A in the promise is b/c C is not a party – doctrine of
privity. But sometimes you want to modify the situation & bring C into the
contract – you do this via novation.

Two Aspects to the third party beneficiary rule

1. Doctrine of “privity”
• It excludes the person who is not a party (the 3rd party) from being able to
enforce the promise

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 2. A third party that has given no consideration has no right to enforce the contract

The Features of the Rule

- In reality, the courts try to avoid using the rule
- It has the same nasty features of the doctrine of consideration: its application
will usually only catch those who have not had (access to) good legal advice
- The third party beneficiary rule was established in Tweddle v. Atkinson –
interesting b/c for about 50 years after this case, the law was ignored
- Examples of common third party beneficiaries: life insurance, pension plans,
carriers, letters of credit
Carrier Example
- Ex: A is a carrier who agrees to carry B goods, if B promises to not sue A or
anyone else who handles the goods.
• A= shipper/seller
• B= consignee/buyer
• C= carrier (handling the goods) third party beneficiary of the contact
• The reason for the promise to not sue is the allocation of the costs of
insurance. The insurance that A and B take out is first party insurance. Carrier
takes out third party insurance. First party insurance is much cheaper b/c
they know the value of the goods.
Letters of Credit Example:
1. Documentary letter: Seller gets paid by the buyer. B will ask to open a letter of
credit in favour of the seller. When seller presents certain documents to the
bank, the bank will pay seller
• Seller is the third part beneficiary of the contract (C) between B (buyer) and
the bank (A)
• Although there is a contract of sale between the buyer & seller, the letter of
credit is a different contract
2. Stand-by letter of credit: one person giving someone else security
• A landlord lends to a place to a tenant. The tenant promises to restore the
place at the end of the lease to what the landlord wants
• To secure this promise, the L requires the T to provide a letter of credit
• It is promise by the T’s bank made to the L that if certain events occur, the
bank will pay the L the amount of the security (standby)
• Reason: Getting an L.C. is much cheaper than putting up a deposit
• Promise between tenant (T) and bank – landlord (L) is the third party
beneficiary

A Note on Triangular Relations

• Important triangular relations in how to get around the third party
beneficiary rule:
1. Agency:

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 • Grocery Store example:
o The principle: the store (P)
o The (store’s) agent: cashier (A)
o Third party: customer (T)
• Contract is made between P and T
2. Trust Relation:
• Settlor gives money or property to another person (the trustee)
• By the terms of the settlement, the trustee must use the money/property for
the benefit of a third party (the beneficiary) or the cestui que trust
• [S – T] [T beneficiary]
• Ex: S passes will onto T, T must pass it onto his children (the beneficiaries)
• Used in Les Affreteurs v. Leopold Walford
3. Assignment:
• Occurs when a creditor (the assignor) owes money under contract by a
debtor, assigned the debt to a third party (the assignee)
• Ex: store (C) wants to sell my debt to the bank, bank can then sue D (debtor)
– the contract has become property
• The right of the creditor to pay the debtor has become a form of property (so
debt can be sold or given away)
• This too can be used to avoid the third party beneficiary rule, but much less
than agency & trust

- If you recast the relations as one of these exceptions, you will avoid the third
party beneficiary rule. If you can constitute someone as an agent or trustee, you
will avoid the problem.

The Rule in Practice: Legislative Developments

• Legislation has responded to the problems with the doctrine of privity
• Ex: the Insurance Act was amended to allow the beneficiary to sue the
insurer directly (before this, the beneficiary (i.e. the dead insured’s spouse)
was unable to claim the money of their spouse through the insurance policy
• Where the rule causes the greatest difficulties it was reversed by statute:
The driver of a car can sue the owner’s insurer
An employee can claim benefits of a collective agreement made between
employer and union the employee belongs to
A mortagee can sue the transferee of the original mortgagor if the
transferee promises in an agreement with the transferor to pay the
mortgage
A consignee of goods can sue the shipper or carrier

The Judicial Response to the Rule

- The Q of enforceability of a third party beneficiary was directly raised in Beswick
v. Beswick:

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 • A (nephew) promises B (old Peter) that in return for the business, A will pay
part of the purchase price to C (Peter’s wife) – he didn’t
• Could C sue? Luckily, she was the administratix of her husband’s estate,
allowing her to sue and gets an order of specific performance – they avoided
the rule by combining A and C
- Midland Silicones Ltd v. Scruttons Ltd.
• There were 3 contracts. Each stipulated it would cover costs of $500, for it to
cover more, would have to be declared as over $500 by the shipper, they
never did that. Upon delivery, stevedores dropped the drum.
• If the consignee had sued the carrier for the loss, the consignee could not
have recovered more than $500
• If she carrier had sued the stevedores for the loss, the carrier could not have
recovered more than $500
• BUT the consignee can sue the stevedores in tort for negligence and recover
the full value, in spite of the fact the value was never declared in excess of
$500
• So the stevedores were not protected by the bill of lading contract to which
they were not a party followed the rule of privity
• The court outlined an exception to the privity rule (Lord Reid test) through
agency as it applies to sub-contractors & employees seeking protection in
their employers’ contract
• Consequence of this: increased the cost of carriage
- The law of torts can also be used to provide relief for a disappointed third party
beneficiary
• In White v. Jones, a solicitor, in breach of his obligation to his client (a
testator) did not prepare a will in time to have to signed by the testator
before he died
• The will would have benefited the plaintiffs
• Court found that the beneficiaries can sue the solicitor in tort for what the
will should have given them on the basis of the decision in Hedley Byrne &
Co. Ltd. V. Heller & Partners
- It is a VERY SERIOUS MISTAKE to imagine that what was said in Dunlop
Pneumatic Tyre Co. v. Selfridge and Co was ever an accurate statement of law
(the rule of privity was strictly applied here)

The Development of Techniques to Avoid the Rule

- In Midland Silicones (above): Lord Reid suggested that, if in the bill of lading (i.e.
the contract between the shipper & first carrier) the carrier contracted on behalf
of every subsequent person who handled the goods, those subsequent parties
would be protected. (Agency analysis)
• Used the “Himalaya Clause” the making of the contracting party the agent
& trustee of the third parties (this was first explored in Adler v. Dickson)

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 • Solicitors, taking advice from Midland Silicones developed a form of words
sufficient to satisfy the courts that they could protect third parties from the
claims that in cases like this had been considered “irresistible”
• Resulted in a change of practice in shipping contracts by adding Himalaya
clauses to protect 3rd parties

The Canadian Cases

- To understand the significance of the principal modern case on the third party
beneficiary rule, London Drugs Ltd. V. Kuehne & Nagel International Ltd (1992) It
is necessary to examine the immediately preceding case – Greenwood Shopping
Plaza Ltd. V. Beattie (1980)
Greenwood Shopping Plaza Ltd. V. Beattie (1980) – ZOMBIE CASE!
- This cases raises the same issue as in Adler v. Dickson – who is the contractual
party?
• The plaintiff was the landlord of a shopping plaza where a franchised Canadian
Tire store was the tenant
• Defendants were employees of Canadian Tire
• The defendants were negligent and damage was done to the center & store by
a fire
• The lease between the center & tenant (store) provided that the landlord
would insure the center & the store in case of damages by a fire. It also
provided that if the landlord did not obtain insurance, the tenant could
• Neither the landlord nor the tenant complied with the lease b/c there was only
partial insurance to cover the loss
• The landlord’s insurer sued the store & its employees. At trial, the trial judge
found the store was held vicariously liable for its employee’s negligence, but
not for the losses that the landlord should have insured against.
• SCC: McIntyre J. summarized the employees arguments: that the employees,
although not formal parties to the contract, were nevertheless, intended
objects of its benefits along with their employer and the trial judge was
correct.
• McIntyre described the development of the doctrine of privity:
o Referenced the cases in England that have applied this principle: Dunlop
and Scruttons v. Midland Silicone
• SCC allowed appeal & held the defendant employees liable for damages
o What is disturbing is that the court never referred to a case the SC decided
just 4 years before: Commonwealth Construction v. Imperial Oil where a
subcontracts was protected by the terms in an insurance policy (so it was ot
a third party & was entitled to be covered as an insured)
o Maybe the SCC in Greenwood Shopping Plaza didn’t see the 2 issues as the
same? b/c in the above case, McIntyre saw the 2 employees as outside
whatever protection was provided to their employer
• Upheld doctrine of privity

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 • Swan does NOT like this case!! A risk of personal bankruptcy is not one
employees should assume
• Were allocating a risk of loss from the 2 people that SHOULD bear it, to a
person that should NOT bear it and couldn’t even have assumed to.

- Note: whenever a case brings up a “fundamental principle” realize that MANY

cases may abide by it, but MANY other do not. It is not that fundamental

The Canadian law of third party beneficiary contracts radically changed with the next
case.

London Drugs Ltd. V. Kuehne & Nagel International Ltd. (1992)

Facts
Prof: important but semi-satisfactory case.
Semi-satisfactory – b/c it protects employees, but unsatisfactory in how it distinguishes
the case.
- London Drugs delivered a transformer weighing 7,500 pounds to Kuene & Nagel
for storage pursuant to the terms & conditions of a standard form contract of
storage
- The transformer had been purchased from its manufacturer (Federal Pioneer
Limited) and was to be installed in the new warehouse facility being built by
London Drugs
- The contract of storage contained a limitation of liability clause:
• S.11(a) the responsibility of a warehouseman in the absence of written
provisions is the reasonable care & diligence required by the law
• (b) the warehouseman’s liability on any package is limited to $40 unless the
holder has declared in writing a value in excess $40 and paid the additional
charge specified to cover warehouse liability
- With FULL knowledge & understanding of this clause, the appellant chose NOT to
obtain additional insurance from K & N and arranges for its own all-risk
coverage. The appellant knew, or can be assumed to have known, the K & N
employees would be responsible for moving & upkeeping of the transformer
- In Sept. Dennis Brassart & Hank Vanwinkel (respondents) both employees at K &
N received orders to load the transformer onto a truck which would deliver it to
the appellant’s new warehouse. The respondents attempted to move in (in a
way against safe practice standards) and it fell, resulting in damages of $33,955
- London Drugs brought an action for damages against K & N, Federal Pioneer Ltd
and the respondents – can’t go after K & N so goes after employees
Issues
1. The duty of care owed by employees to their employer’s customers
• If yes, they were negligent in their handling of the transformer
2. The extent to which employees can claim the benefit of their employer’s

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 contractual limitation of liability clause
Held: yes to both.
Procedural History
- SC of BC: held that the respondents were personally liable, limiting K & N to only
$40 liability
- Court of Appeal: allowed appeal & reduce liability to $40
- They appealed to argue to be totally free of liability
Reasoning
1. Duty of Care:
- Iacobucci J. held they did have a duty of care to the customer under ordinary tort
principles
2. Limitation of Liability Clause:
- In my view, the respondents were third party beneficiaries to the clause
between their employer and appellant and may benefit directly from this clause,
notwithstanding that they are not a signing party to the contract
- I know that this collides with the doctrine of privity, but it must be reconsidered
in its application to such cases, as the commercial reality and common sense
require such reconsideration
The Doctrine of Privity of Contract & Third Party Beneficiaries
- Doctrine of privity: a contract, as a general rule, cannot confer rights or impose
obligations arising under it on any person except the parties to it. Two key
elements:
1. It precludes parties to a contract from imposing liabilities or obligations on third
parties
2. Prevent third parties from obtaining rights or benefits under a contract – it
refuses to recognize a jus quaesitum tertio or a jus tertii
• **This case deals with only the second aspect of privity. Nothing in these
reasons should be taken as affecting the law as it relates to the imposition of
obligations on third parties
- Closely related to this doctrine, but conceptually distinct, is the rule that
consideration for a promise must move from the person entitled to sue or rely
on that promise
Criticisms of the Doctrine
- Ontario Law Reform Commission published a report stating that contracts for the
benefit of third parties should not be unenforceable for lack of consideration or
privity because…
1. The present state of the law is complex & uncertain
2. The traditional justifications for the doctrine (only those in privity should be
allowed to sue; consideration gives the right to sue; & preventing double
recovery) are unfounded
3. Impairs enforcement of sensible commercial & personal arrangements
4. Exceptions to the doctrine have developed with no rational basis except to avoid
it

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 5. Many jurisdictions have recognized 3rd party rights by abolishing/modifying the
doctrine
- Major criticism is the concern around limitation of liability clauses – preventing
3rd parties from protection here does not respect the assumptions of risk made
by parties to the contract and ignores practical realities of insurance coverage. It
also is inconsistent with the reasonable expectations of all the parties involved
- In an Austrailian case, the court strongly criticized the doctrine and permitted a
3rd party to enforce a provision in an insurance contract notwithstanding that it
was not a party to the contract and had provided no consideration and that
neither agency nor trust was application – Trident General Insurance Co v.
McNiece Bros
• Decision to let the third parties use the contract as a SWORD not as a shield.
Curious thing about judge’s statement about the case, is he just puts the case
there, and leaves it hanging. There is a reference to it, but no commentary.
- Also, in the US, third party rights are recognized in every State to a varying
degree through common law and legislation
Previous Decisions of the Court
- Canadian General Electric: confirms the doctrine to the extent that a stranger
cannot obtain a benefit from a contract to which he/she is not a party
- Greenwood Shopping Center (above). 4 points about this case:
1. The contract here was a lease of premises and not a contract for services
such as one of storage
2. The contract which the employees were seeking to obtain a benefit from
were not general limitation of liability clauses. They were stipulations to
insurance of the premises
3. It was observed that there was little, if any, evidence to support a finding
that the parties to the contract intended to confer a benefit of the
employees by the provisions of the lease relied on
4. The parties seeking to obtain benefits in the case were viewed as strangers
and not 3rd party beneficiaries (important distinction!!)
• Prof says this case is the SAME as Greenwood it is NOT different
- THEREFORE, Greenwood is of limited use in the case at bar
- Also, none of the traditional exceptions to privity is applicable to this case
Should the Doctrine be Relaxed?
- Major reforms should be done by the legislature
- Even though I have strong reservations about the doctrine, it is an established
principle and shouldn’t be discarded lightly
- HOWEVER, the courts also have a duty to change common law to it reflects the
changing needs of society – and here is an appropriate situation to do so. In such
a situation, courts should make very specific incremental changes to the
common law
- The only objection that can really be said here regarding extending the benefit to
the respondents is that the employees have provided no consideration for the

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 contractual limitation of liability. But….
• The doctrine of privity fails to appreciate the special circumstances which
arise from the relationships of employer-employee and employer-customer
• When a person contracts with an employer, there can be little doubt in most
cases that employees will have the prime responsibilities related to the
performance of the obligations which arise under the contract. This is in no
way to suggest that employees are a party to the employer’s contract so that
they can bring an action or be sued for breach of contract. However, in cases
about a contract for services, where employees carry out the service, it
wouldn’t make sense to not extend the benefit of the clause to them as they
perform the contractual obligations.
- Upholding a strict liability would also have the effect of allowing the appellant to
escape the limitation of liability clause to which they expressly consented
- Employees such as the respondents do not reasonably expect to be subject to
unlimited liability for damages that occur in the performance of the contract
when the said contract specifically limits the liability of the “warehousemen”
(such language implies that employees will be benefited)
- SO, it is entirely appropriate in this case to call for a relaxation of the doctrine
of privity
How Should the Doctrine be Relaxed?
- A threshold requirement for employees to obtain the benefit of their employer’s
contractual limitation of liability clause is the express or implied stipulation by
the contracting parties that the benefit of the clause will also be shared by said
employees
- Without such a stipulation (as in Greenwood), they cannot rely on the clause as a
defense
SO: Employees may obtain such a benefit if the following requirements are met:
(1) The limitation of liability clause must, either expressly or impliedly, extend its
benefit to the employee(s) seeking to rely on it
(2) The employee(s) seeking the benefit of the clause must have been acting in the
course of their employment and must have been performing the very services
provided for in the contract between their employer and the plaintiff (customer)
when the loss occurred
Application of the New Exception
(1) (look at clause above) – Kuehne & Nagel do not expressly state that the
respondents are third party beneficiaries BUT it can be implied – unexpressed or
implicit 3rd parties
(2) Yes they were
Notes & Questions
- Notice that the EFFECT of the decision is that the employees are brought within
the protection of their employer; they are aggregated with their employer and
not left on their own as in Greenwood Shopping Plaza
- Brings up the sword/shield distinction as we saw in promissory estoppel

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 • Says the change in the rule can be used as a shield – b/c Iacobucci is
concerned with only making an incremental change in the law. Prof finds this
role in changing the law very curious. Why he thought you can only use it as a
shield is a mystery.
- Is it possible to image that the parties in Greenwood did not intend to protect
the tenant’s employees while the employer in London Drugs did intend to
protect them? The concept of “intention” is artificial – it is almost certain that
neither had such intentions. Does such an “intention analysis” allow the court to
do what it wants?
• It is quite clear that the K & N and London Drugs did not intend to protect the
employees.
RESULT: Employees are protected

More Recent Developments

- Iacobucci J’s treatment of Greenwood Shopping Plaza was unsatisfactory. Yes, he
managed to distinguish it, but he left it as a zombie (not dead but equally quite
alive) – it was inevitable that the continuing authority of Greenwood had to be
dealt with
- Orange Julius Canada v. Surrey (2000) – dealt with similar issue as in London
Drugs:
• Fired occurred in a mall
• Landlord= Laing Property Corp. – made tenants sign a lease agreement
whereby the tenant was required to obtain property insurance & to insure in
the joint names of the tenant and landlord against loss by fire
• Action was brought by Laing against those who set up a Santa display (which
caused the fire) – the defendants third-partied 3 of the owner’s employees
• At Court of Appeal level: Finch J.A. held that it can be properly implied that
the parties intended the protection of the insuring clauses to extend to the
landlord’s employees. (applying test in London Drugs)
• Just b/c this is a lease as in Greenwood doesn’t mean the decision should
turn on that fact
• Held: the employees were entitled to the protection of the lease covenants

Notes & Questions

- Is Greenwood Shopping Center still good law? Can a provincial court of appeal
declare a decision of the SC to be no longer good law?
- Orange Julius suggests that London Drugs (in spite of the cautious language used
by Iacobucci) set the law off on a new course
- In Fraser River Pile v. Can-Dive: suggests the court will “relax” the doctrine of
privity in order to produce results that “correspond with commercial reality” –
again used the concept of “intention” this is a slippery concept!
• Insurance company trying to undo waiver of subrogation

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 - An important way in which plaintiffs may circumvent the problem of lack of
privity is by bringing a tort action (as occurred in London Drugs, Greenwood
Shopping Plaza and Orange Julius)
- A common feature of cases where the third party beneficiary rule has not been
applied is the first, second & third parties were engaged in an enterprise

The Rule Ignored: Bills of Exchange and Letters of Credit

- There are a large amount of commercial activity where the rule is simply ignored
& third party rights are routinely recognized & enforced
- An area that clearly illustrates this is the area of payment system (explained
p.521)
- Also seen in letters of credit (explained in further detail p.523-24) – the third
party beneficiary rule is simply ignored in letters of credit
• There are 2 types: (explained above)
(1) Documentary (explained in Bank of Nova Scotia v. Angelica-Whitewear)
(2) Stand-by (ex in book)
• No one will argue that it is not enforceable due to the third party
beneficiary rule!
- The only common law province to enact legislation to abolish third party
beneficiary rule is New Brunswick. BUT the act is not a general solution to the
problems of the rule. The legislation is similar to the test set out in London Drugs

Chapter 5

The Formation of Contracts

The Rules of Offer & Acceptance

The Mirror Image Rule of Offer & Acceptance
- The basic rules of contract formation developed as part of the bargain model of
contracts
- This model relies on the “mirror image” approach to contract formation
- The model:
• 1 party (offeror) must state all the terms on which it is prepared to do
business and to present these terms to the other as the “offer”
• The other party (offeree) can accept or reject the offered terms
• If they accept, a contract is made
• If rejected, the offer is “dead”

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 • If they accept but makes changes, then the terms that it proposes becomes a
NEW offer (and it becomes the offeror) and the other party (becomes the
oferree) is free to accept/reject
- Courts have recognized a “pre-offer” statement called an “invitation to offer” or
an “invitation to treat” – however, if the court concludes a statement is only an
invitation to treat, it cannot be “accepted”; only an offer confers on the offeree
the power to make a contract
• Invitation to treat= the stage in contract-making immediately preceding the
offer
- In practice, it can be difficult to distinguish between an invitation to treat and an
offer since the parties often fail to make a clear statement indicated the legal
significance of their communications
- The issue of classifying a statement as an invitation to offer, an offer or an
acceptance is generally undertaken in the context of litigation
• The Court will ask, “What did the offerree reasonably understand by what
the offeror said?”
• Courts, for example, have held that a newspaper ad and a price list are only
“invitations to treat” and not an offer
o However, in Lefkowitz v. Great Minneapolis Surplus Store the D store
published an as announcing a sale “3 brand new coats for sale, worth
$100, $1 only. First come, first served” – this statement was held to be an
offer capable of acceptance by a P who was among the first 3 people
o What is important in cases like this are: the reasonable understanding of
the offeree and the risk that the offeror will be caught by unfair surprise
- In Smith v. Hughes, Blackburn J. explains the approach to interpretation of
communications made in the process of contract formation – the common law
takes an “objective” approach
• An “objective” agreement exists if one party reasonably believes that the
other is assenting to the terms proposed by the first
• If you KNOW that you are not going to give the other side what you KNOW it
wants then you cannot hold them to the contract – a form of good faith
• What the other side understood you to be offering is important!
- Though they have adopted this approach, they sometimes use language that
suggest that what is subjectively in the minds of the parties is important. For
example, it is sometimes said that there has to be an “agreement to the same
thing” or a “meeting of the minds” – but this is too subjective!
- Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. (1952)
• Prosecution of a “self-serve pharmacy” for selling certain drugs in violation of
a statute
• The statute required that the “sale” of specified drugs was to be under the
supervision of a registered pharmacist
• The drugs in Q were on a shelf, customers would take it and bring it to check
out – the pharmacist was near the check out and not near the shelf

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 • The case turned on when and where a contract for “sale” was made in the
self-service store
• English Court of Appeal held that the sale was only made once the drugs
were brought to the register and the shelf was a mere “invitation to treat”
the result of this analysis was the charge being dismissed
• This case is authority for the proposition that the display of goods on a
shelf/store window is NOT an offer, but only an invitation to offer (or treat)
• But customers also have the right to pick up the good and return it to the
shelf so the display then is not treated as an invitation to treat
• Prof. doesn’t mind the decision in this case, but there were very dumb
decisions after it (ex: in book – switchblade)

The Acceptance
- Even in a situation where 2 parties send each other identical “cross offers” there
is still not binding contract unless 1 party sends some form of acceptance
- One issue that arises deals with the time for a valid contract
• If a time is specified it will govern the offeree and an acceptance outside that
time will be too late
• If no time is specific, the rule is that acceptance must be bade within a
“reasonable” time this will depends on CIRCUMSTANCES (such as the
method of communication used and the subject matter of the contract)
• A reasonable time is usually 1-2 business days
- Issues arise in relation to “firm offers” – offers expressed to be open for a fixed
time. In Dickson v. Dodds (1876):
• The D offered P the sale of a house, stipulating that the offer would be held
open for 48 hours
• Before the time was up, the agent for the P approached the D with a written
acceptance, but D already sold to someone else
• The court stated that the common law rule that in the absence of
consideration, the promise to keep the offer open is not enforceable
• The result: at common law an offer said to be “firm” or “irrevocable” for a
fixed period is nevertheless revocable unless consideration was given for the
promise
o Despite the rule in this case, there are ways for parties to make an offer
irrevocable and there are cases in which the courts STRETCH the rule to
PROTECT reliance of an offeree promise to the offeror to keep the offer
open for the time promised
o The way to make a firm offer stand is through a deed
- A person who receives an offer has no obligation to reply. HOWEVER, silence
MAY be sufficient if the parties are already in a commercial relationship and it
would be reasonable to expect a rejection or response
• This occurred in Saint John Tug Boat Co. v. Irving Refining Ltd. – no response
was inferred as acceptance

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 - It was a common practice in Canada for companies to enter into agreements
with consumers with a “negative option” clause
• Such a clause may stipulate that the company could increase the
price/change the service or good provided upon giving notice and UNLESS
the consumer OBJECTED the agreement by termination or rejection of the
additional service, the consumer would have AGREED to the change –
“negative option”
• Main example of this: cable companies, adding channels and charges unless
the customer gave them notice (by a deadline) of rejection
• Legislation in many provinces not regulates/prohibits such practices

Contracts Made by Mail

- Contracts made by mail presented an issue b/c there was a DELAY in
communication
- The rule at common law is that an offer is accepted when the offeror receives
notice of the acceptance
- In Cooke v. Oxley: it was held that there was no binding contract made when the
offeree sent an acceptance some hours after the offer was made as the offeror
had changed his mind about the offer by the time that the offeree purported to
accept it. The court required that the parties’ “minds meet”. It is clear this would
cause problems for contracts made by mail, for there was bound to be a delay
between the making of the offer and acceptance
- In Adams v. Lindsell: it was held that a binding contract was formed by mailing an
acceptance, even if the offeror no longer wished to do business at the time the
acceptance was mailed
- In Household Fire … v. Grant: “postal acceptance rule” – allocating risk of loss of
knowledge of the acceptance to the offeror the contract is made when the
offeree puts the notice of acceptance into mail must prove that it mailed the
acceptance to the correct address within the time permitted
• This rule is a risk allocation mechanism**
• The importance is that there is a risk of LOSS that is being ALLOCATED
• It allocates to the offeror the risk that it may not receive this
• This makes sense b/c the offeror controls the process, and if they do not like
this, can modify it to say the offer is accepted when I receive your acceptance

The following case illustrates how the courts apply the postal acceptance rules

Schiller v. Fisher (1981)

Keywords: Postal acceptance rule

Facts
- Appeal raises Q of whether an enforceable contract for the sale and purchase of
certain land arose out of correspondence which passed between the P

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 (purchaser, Kingsmont) and the D (Nu-Towne)
- Negotiations between Kingsmont (purchaser) and Nu-Towne (vendor) for the
purchase & sale of 23 buildings – during the negotiation, P gave D a cheque of
$20,000 acting as a deposit
- D then wrote an agreement to P to be signed – this amounted to an OFFER
- The offer had to be accepted by August 27th (7 days after it was offered)
otherwise it would be void
- The deposit would be held pending completion of the deposit & returned to P
with interest if the agreement was not completed for any reason other than the
default of P
- P dated a letter August 27th returning 2 copies of a CHANGED agreement – new
date for this offer is before Sept. 1 counter-offer
- D signed the counter-offer, on Sept.1, one copy of the agreement was sent back
dated Sept. 2 – it only got to P by Sept. 8 so P demanded back his deposit as the
counter-offer was not accepted within the time-limit
- When the deposit was not returned, action commenced
Procedural History
- The trial judge found that according to the postal acceptance rule, the offer was
accepted in this case when the agreement was initialed, as was stated in the
offer – dismissed the action
- Court of Appeal: the letter did not have the effect of permitting communication
of acceptance after Sept. 1
Issue
- A question of construction
- What is the effect, if any, of the letter of August 27th, upon the provisions of
Cl.12 of the form of agreement?
Held: P loses.
Reasoning
- The trial judge & court of appeal agree that as a general rule acceptance of an
offer would not be complete until communication of the acceptance was made
- I do not agree with the construction placed upon the letter by the Court of
Appeal
- It is evident from P accepted the Aug. 20th offer, with only some minor changes
that he assumed the changes would be accepted, which they were, and the
agreement would therefore have been reached
- The closing words of the letter, requesting an initialed copy to be returned “as
soon as possible” confirms this view
Notes
- It is important to look at the attitude of the court
- In this case, their attitude is one that was in favour of the enforcement of a
contract that the court was prepared to hold had been made by the parties –
taking a more flexible approach to the rules of contract formation
- This is a good example of the courts dealing with the postal acceptance rule

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Contracts Made by Fax
- The risks that faxed documents might fade, be illegible, or that there may be
difficulty proving signing made lawyers cautious in relying on “fax-formed”
contracts when large sums of money were at stake
- The Ontario Court of Appeal have accepted the validity of use of fax for forming
a contract in Rolling v. Williann Investments (1989) it was considered valid
method of delivery of an option to purchase land, that was in effect an
acceptance of an offer made 15 years earlier

Where is a Contract Made?

- It is necessary to determine where a contract was made – may be important in
some situations
- RULE: Where it was made is determined by when it was made
- For the postal acceptance rule, the contract is made when and where the
acceptance is put in the mail
- For telephone, fax or telex the courts held that the contract is made when
acceptance is received – where the offeror is located
- The use of place is based on the belief that a contract made in a jurisdiction
should be subject to the courts of that jurisdiction

E-Commerce and Contracts Made Through the Use of Computers

- Ontario legislation recognizes the validity of documents formed by electronic
communication and the validity of electronic signatures

The below care illustrates how a court can approach the problem of a contract made
on the Internet and the importance of a “forum selection clause” (a clause limiting
claims to those made in a particular jurisdiction)

Rudder v. Microsoft Corp (1999)

Keywords: cross-border contract, online agreements

Facts
- Ps wanted to bring a class action in the Ontario courts on behalf of all Canadian
subscribers to the MSN network, which was operated by Microsoft
- P claim that Microsoft breached its contract w/ them as subscribers to the
Microsoft Network
- To become a subscriber, potential members “executed” an agreement online –
all the terms were displayed online
- 1 term stated that the agreement was governed by the laws of Washington,
which was to be the exclusive jurisdiction and venue for disputes arising out of
network membership

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 - The P (Rudder) claimed the terms were obscured – he scanned the terms
- But there were 2 opportunities to withhold agreement during registration AND a
notice that subscribers were bound by the entire agreement whether they read
it or not
- The D brought a motion to stay the proposed class proceeding on the basis that
any action had to be brought in Washington

- The court considered the way in which the D brought the “forum selection
clause” in Q to the attentions of its customers

- Subtext in this case= abuse of power

- Merits of the case were not distinguished – b/c the main issue was the
jurisdiction – P didn’t want to deal with the case in Washington
Held: Refused to exercise his discretion to override the forum selection clause &
dismissed the action
Reasoning
- The Ps contend that regardless of the deference to be shown to forum selection
clauses, no effect should be given to it b/c it does not represent the true
agreement of the parties
• The form of the agreement obscures the forum selection clause
• SO the Ps argue that the clause should be treated as if it were a fine print in a
contract which must be brought specifically to the attention of the party
accepting the terms & since there was no such notice given, in their view, the
FSC should be severed
- Their arguments rests heavily on the alleged deficiencies in the technological
aspect of electronic formats for presenting agreements
• They argue that b/c only a portion of the Agreement was presented on the
screen at one time the terms of the Agreement which were not on the screen
are “fine print”
• I DISAGREE: as a part of signing up, potential members were required to
acknowledge their acceptance by clicking “I agree” – presented at the same
time as the terms of the Member Agreement
• Winkler J. relied on the fact that the P admitted the agreement was viewable
by scrolling down, that he had looked at the agreement to determine the
cost, but did not look carefully through it all
- The Agreement: all the terms are displayed in the SAME format. Although certain
terms contain upper-case letters, there are NO physical differences which make
one term more difficult to read than another
• The terms are mostly in PLAIN language
• Although the entire agreement is not on 1 page, it is not different from a
multi-page written document which requires you to turn pages
• Further more, as stated above there were 2 opportunities to disagree and a
notice

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 • There is nothing analogous to “fine print”
• The Ps are trying to avoid the consequences of some terms while seeking to
enforce others
- SO, the Agreement must be afforded the same sanctity as a written agreement
- MOREOVER, the fact that the Ps are grads of law school and have a familiarity
with Internet services, their position is indefensible
Notes
- When dealing with a cross-border contract 2 issues have to be resolved:
1. The Q of the law to govern the contract
2. Whether the parties want to manage the litigation risks they face by choosing
the place where any dispute can be brought
- This case brings up the issue that arises when contracts are made on a website
• A person is then using a computer in effect contracting with a machine
• In some other cases, a binding contract may be made by 2 machines – the
Electronic Commerce Act does recognize this as legally binding

The Revocation of the Offer

- BASIC RULE: an offer can be revoked at any time before acceptance
- Subject to qualifications…
• Notice of the revocation must reach the offeree before acceptance occurs
• If the parties are in a situation where the postal acceptance rule applies, then
to be effective, a revocation must reach the offeree before the acceptance has
been put in the mail

Firm Offers and Unilateral Contracts

- Remember Witham case – example of unilateral contract
- The vast majority of businesses keep their promises and leave firm offers open
for acceptance – good business practice requires nothing else
- In situations where the stakes are high and pressure to maintain a good business
reputation is not present, the parties may arrange to ensure that any promise to
keep an offer open is enforceable – this can be achieved through an “option
contract” (in which the promise to keep the offer open is brought by payment)
- Alternatively, a promise to keep an offer open for a fixed period of time may be
executed under seal
- “Walk to York” example – traditionally, performance is the acceptance

The below case is an example of a unilateral contract, in a context far removed from
the commercial. It is an important illustration of how the rules of offer & acceptance
operate.

Carlill v. Carbolic Smoke Ball Co. (1892)

Facts

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 - The Ds, who were vendors of a medical preparation called “The Carbolic Smoke
Ball” placed an ad in the Pall Mall Gazette stating: “100 pounds will be rewarded
by the Carbolic Smoke Ball Company to any person who contracts the increasing
epidemic influenza, colds or other disease caused by taking cold, after having
used the ball 3 times daily for 2 weeks according to the directions”
- During the last epidemic, many carbolic smoke balls were sold as preventatives
against this disease, and in no care was the disease contracted by those using it
- A lady (the plaintiff) (on the faith of this ad) bought 1 of the balls and used it as
directed, 3 times a day from Nov-Jan and she was attacked by influenza.
- Hawkins J held that she was entitled to recover the 100 pounds. D appealed
Issue
- Is she entitled to recover the 100 pounds?
Held: Appeal dismissed
Reasoning:
- FIRST observation: the document is not a contract it is an offer made to the
public
Defendants Argue:
- The Ds contend that the offer is too vague to be treated as a definite offer, there
is no time fixed for contraction and it cannot be supposed that the advertisers
seriously meant to promise to pay more money to every person who catches the
influenza
- There is much vagueness as to the persons with whom the contract is intended
to be made – its terms are wide enough to include persons who may have used
the smoke ball before the ad was issued; at all events, that it is an offer to the
world in general, that it is unreasonable to suppose for it to be a definite offer
b/c who would willingly contract this disease
- OVERALL, they argue it was not intended to be a contract

- In order to arrive at a conclusion, we must read the as the public would and ask:
How would an ordinary person reading this document construe it?
• The ad was intended to make people use the smoke ball
• Was it intended to pay the 100? Yes. b/c of the statement that 1000 is
deposited at the bank
• Notification of the acceptance: if the person making the offer, expressly or
impliedly intimates in his offer that it will be sufficient to act on the proposal
without communicating acceptance of it to himself, performance of the
condition is a sufficient acceptance without notification – to determine this,
you look at the offer itself
o You extract from the character of the transaction that notification is or is
not required
o Ads would suggest that a person does not need to notify acceptance
the performance of the condition is sufficient acceptance w/o notification
• Consideration? Yes, it is consideration enough that the P took the trouble of

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 using the smoke ball
Notes
- The court here was determined to make the offer stand

The next case demonstrates the consequences and risks of being facetious in one’s ad
campaigns

Leonard v. Pepsico Inc. (2000)

Keywords: objective, reasonable person

Facts
- P sued PepsiCo Inc. in an effort to enforce an “offer” to redeem 7 million Pepsi
Points for an AV-8 Harrier II jump set, which Pepsi had shown in a portion of a
televised commercial about its “Pepsi Stuff” promotion
- The P did not collect 7 mill Pepsi Points through the purchase of Pepsi products,
but instead, sent a certified cheque for $7000, 008.50 as the rules of the
campaign allowed for the purchase of points
- P had 15 points from the acquisition of Pepsi products and offered to pay $0.10 a
point for the remaining points and a $10 shipping & handling fee – the cheque
was not cashed by pepsi
Issue
- Was the commercial ad an offer?
Held: NO. the court rejected Leonard’s claims finding it to not be an offer. Further, the
court concluded that even if it was an offer, no reasonable person would believe that
the company seriously intended to convey a jet worth $23 mil for under a 1$ mill worth
in Pepsi Points
Reasoning
Objective Reasonable Person Standard
- It must not be a subjective consideration of the D or the P, but what an
objective, reasonable person would have understood the commercial to
convey
- If it is CLEAR that an offer was not serious, then no offer had been made
- But if there is no intention that it was “evidently done in jest” then there may be
a valid offer
Whether the Commercial was “Evidently Done in Jest” (Joke)
- P thinks it’s a serious offer, so it requires the court to explain why the
commercial is funny (lists all the reasons why the commercial cannot be taken
seriously)
- P argues that a reasonable, objective person would have understood the
commercial as serious b/c there was “absolutely no distinction in the manner” in
which the items in the commercial were presented
Notes

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 - In 1993: the Hoover Company, in an effort to sell its products, promised free
airline tickets to customers who purchased more than 100 pounds of its
products. It didn’t anticipate so many people would buy the product to get the
tickets. Several customers took them to court and the company soon cancelled
the promotion, but not before it had cost them about $50 million pounds
- Unilateral contract: there is only 1 promise (i.e. the walk to York example, p.558)
– distinguished from bilateral contracts which is formed by an exchange of
promises
• In a unilateral contract, the offer is accepted not by communication of an
acceptance but by the performance
• Until the offeree fully performs, the offeror doesn’t have to pay/a duty to
perform
• But there is an obvious exchange here: A’s promise for B’s action. B’s action
is then both acceptance of the offer and consideration for A’s promise, and
that is, of course, precisely why the problems arise
- Again, relates to objectivity of the contract –how would a reasonable person
understand the offer?

In the below case, Lord Denning is determined to reach a result that he thinks is
correct, but he does not face the fact that the traditional common law rules make the
achievement of that result difficult.

Errington v. Errington (1952)

Keywords: “Walk to York”

Facts
Lord Denning
- Father bought a house for his son & daughter in law
- The father put down $250 in cash & borrowed $500 from a building society on
the security of the house, repayable with interest by installments of 15s. per
week – the house was put in his name
- The father told the daughter-in-law that the 250 was a gift, but he left them to
pay the building society the installments
- He gave her the building society book & said when he retires and the mortgage is
paid, he will transfer the property to their names
- They have been paying. The taxed on the house came to 10s a week and they
found they couldn’t pay both, so the father said he would pay the installment
and he did
Issue
-
Held: appeal dismissed, no order for possession should be made. Allows the couple to
stay there to finish paying the mortgage [finish the “walk”]

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Reasoning:
- The couple never bound themselves to pay the installments
- The parties didn’t discuss what would happen if the couple failed to pay the
installments, but it should be thought that if so, the father would not be bound
to transfer the house to them
- The father’s promise was a unilateral contract – a promise based on
PERFORMANCE of paying the installments
- It could NOT be revoked by him once the couple entered into performance, but
it would cease to bind him if they left is unperformed, which they have not done
- The couple has no right at law to remain, but only in equity and equitable rights
will now prevail
- They were not purchasers b/c they didn’t bind themselves to paying the
installments, but were analogous to purchasers
- They have ACTED on the promise and no one can eject them in disregard of it
Notes & Questions
- Lord Denning was obviously determined to protect the young couple
- It is not clear really how he did it
- We may see it as, he prevented revocation while the son & daughter in law were
“walking to York”
- Under the traditional rules, there would be no binding contract unless they
“walked to York” or by this case, finished paying the installments of the
mortgage
- What he does is prevent revocation to for the time necessary to ALLOW the
couple to complete the “walk”
- Under the doctrine of consideration, the “implied promise” of the father to allow
the couple to remain in possession should not be enforceable by the couple as
they gave no consideration
• WITHOUT referring to this concept, Denning uses something similar to
estoppel to protect the couple’s reliance
- This case is a case of an “uncompleted gift” (we have looked at this before) – it is
NOT commercial
- The idea of an offer in a unilateral contract being unrevocable once performance
has commenced is affirmed in Ayerswood Development Corp. v. Hyrdo One
Networks (2004) (w/o actually citing Errington)
- In Ch.3 we saw that the courts will do things to prevent unjust enrichment or to
protect reliance, is this was Denning is doing here?

Auctions and Tendering in the Construction Industry and for Government Contracts
- The model of offers & acceptances permits bargaining to take place between an
offeree and MORE THAN 1 offeror (ex: auctions)
- The person bidding= making an offer

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 - In ordinary auctions, the bidder has the right to withdraw before the auctioneer
accepts it
- In the Sale of Goods Act, it states that by auction, “a sale is complete when the
auctioneer announces its completion by the fall of a hammer or some other
manner, and until such announcement is made any bidder may retract his/her
bid”
- Construction tendering (very imp. industry)

Swan’s Mini Assignment – Draft Assignment

- To accept an offer, simply say yes. If your client has a particular recommendation
(October), just say that you would request it by a condition (don’t have to
counter offer) “It would be very convenient for me to…”
• DO NOT make a counter offer b/c it will may ruin the deal
- Do not second guess your client or overcomplicate it
- Do NOT say “I’d like to accept” – simply say “I accept”
- There is no strict legal process to this
- If you want to be SAFE you should respond in the SAME way they offered the
offer to you (via email). EVEN if you speak in person, you should still follow up
through email. A voicemail won’t be a good record of acceptance ‘
Note on Writing a Statement of Claim
- When making a statement of claim, you must lay out the facts that will permit a
certain argument to go through

Limits of the Traditional Rules

- The problems with traditional rules can be divided into 2 categories
1. Cases where the terms of the agreement are simply not clear
2. Cases where the parties exchanged documents and conducted “negotiations”
that could be said to resemble bargaining in the classic model. However, on
examination, it turns out that whatever was going on was not really “bargaining”
– but the parties acted on the basis that they had a contract “battle of the
forms”

Mistakes, Misunderstandings & Confusion

The below case is considered one of the leading cases on the problem of mistakes in
the process of contract formation

Raffles v. Wichelhaus (1864)

Facts
- Raffles (P) contracted to sell 125 bales of Surat cotton to Wichelhaus (D). The

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 goods were to be shipped from Bombay to Liverpool, England on the ship
“Peerless”. Neither party was aware that there were two ships names “Peerless”
carrying cotton from Bombay to Liverpool, one arriving in October and the other
in December.
- Wichelhaus thought he had purchased the cotton arriving on the October ship,
but Raffles sent his cotton on December ship. Wichelhaus refused to accept
delivery of the cotton arriving on the December ship and Raffles brought this
lawsuit for breach of contract.
- “Demurs”: means “So what?”
Issue
- Is there a valid contract of misunderstanding (no consensus ad idem)?
Held: D wins.
Reasoning
- The seller sued the buyer for a breach of a contract to purchase cotton
- The D argued there was no contract since the parties meant different ships
- If a term is misunderstood and is relevant to the obligations of the party, the
contract will not be binding. If the term is immaterial, the contract will still be
binding
- Cases uses a subjective standard to consider what the parties to the contract
understood in the circumstances
Importance
- A contract is unenforceable in circumstances where, using a subjective standard,
there is a term that is ambiguous and there is no meeting of the minds.
- If the parties haven’t done enough to make clear what the claim is about, then
the Court will dismiss the claim
- Neither party can impose its terms on the other
Notes
- The judges focused on their subjective understandings
- The existence of even objective differences in the understandings of the parties
should not make the underlying contract unenforceable if those differences do
not affect the obligations of either party under the contract
- Each party here bore the risk that the term he used was ambiguous, and in the
absence of any reason to hold either party to the meaning attached to the term
by the other party, there is no agreement that the law can enforce
- Smith v. Hughes reasoning cannot be applied here since neither party gave the
other party reasonable grounds to think that there was an agreement on the
other’s terms – so any situations will catch one of the parties by surprise
- Case like Stilk v. Myrick – it is treating as a leading case, but there is a 1 line
judgment.

The below case is one of the best examples of a court vindicating the objective theory
of contractual interpretation and the approach to contracts which considered the
reasonable expectations of the P as important

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 Hobbs v. Esquimalt and Nanaimo Railway Co. (1899)
Facts
IMP case!!
- The P was buying land from the railway (D) and thought that he was buying
mineral rights underneath as well, but the D said that the sale did not include
mineral rights because of the way it used the land in its course of business- P
argues a reasonable interpretation of “land” includes below-surface rights.
Issue
- Was there an objective meeting of the minds?
Held: P wins. There was an objective meeting of the minds
Reasoning
- If you use a word I have reasonably understood, you are stuck with MY
understanding.
- It doesn’t matter what offeror thought he was saying, but what offeree
understood him to be saying.
- D used ambiguous language in the offer; a reasonable third party would
conclude that D did not state their policy clearly enough to be able to retain the
mineral claims under the land – a reasonable person would take this to include
the rights underneath as well
Importance
- We use an objective test to determine consensus ad idem 
- must consider the
reasonable expectations of the P.
- Important b/c of its objective theory of contract – it matter how the person
UNDERSTANDS what you are saying
Notes
- Dissent rejects the objective theory of contracts- the railway company thought
they were doing something else- did not intend to send the land w the minerals-
so there is no contract.

- Case is logical extension of the decision in Smith v Hughes.

• The Q is not that there has been a subjective “meeting of the minds” but
whether Hobbs can hold the railway to his understanding of the words
• The “objective reasonable person: approach taken by the majority is now the
accepted method of interpretations – “it is a fruitful method”

- If P knew the land was more expensive w/ minerals and he paid less- could not
have reasonably expected to get the minerals. But here he had no reason not to
think he was getting the land w the minerals
• The price was one that one might assume that Hobbs reasonably thought was
the price for land with the minerals
• If Hobbs should have known that the price was too low for the purchase of the

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 land with mineral rights, he has no basis for arguing that the railway should be
held to the reasonable or objective meaning of the word “land” – again, this
flows from Smith v. Hughes - if you KNOW what I am expecting, you have to
tell me you aren’t going to give me that, if you want to hold me to it.
- Hobbs understood land to mean land w/ minerals so he got the land with the
minerals

Foley v. Classique
- Facts: Man owns a gas station, owns land next door. Owner of bus purchases
land to park his busses there. Man sells the land but in the contract they agree to
buy gas from his gas station. Bus company goes to solicitor who says buy your
gas anywhere you want. Contract stated that prices were to be agreed on from
time to time. P starts buying gas from another supplier. D argues that the
contract was too indefinite
- Issue: Is the contract still enforceable?
- Decision: contract enforceable NWT the uncertainty
- Reasons: The man would have never sold him the land without the promise to
buy the gas there- you can’t undo the sale the price of sale is not just land but
value to promise to buy the gas
o 1) Reliance of partially performed contract- The particular agreement did
not fail for incompleteness imply because of the failure to agree to a firm
price for the gas.
o The purchaser didn’t appear to be interested in returning the land and
thus wishes to have the agreement considered void with respect to only
part of the promise in return for the land.
o Partial execution of the agreement is likely to weigh in favor of
enforceability.
o Court considers the fact that they were able to figure out a price for the
past 3 years based on reasonable market prices so should be no problem
continuing
- RD: Partial execution of the agreement is likely to weigh in favor of
enforceability.
- Notes:
o Court, once again determined to protect reliance

Indefiniteness and the Process of Contract Negotiation

- The traditional common law model of the process of contract formation is
premised on the assumption that there is relatively little bargaining between the
parties
- The model envisages a straightforward exchange of letters, email,
communications which results in both of the parties agreeing to a set of terms or
having clearly failed while some contracts do reflect this, in many situations
this would be an odd an impractical process

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 - There is a “two-stage” process of dealing (which is an imp. aspect of sale
transactions that involve large amounts of money)
1. The deal is made when the formal offer of the purchaser is accepted by the
other
• IN BETWEEN this acceptance & the close – can do things like check the title
of the land (for ex)
2. The deal does not “close” when the offer is accepted – the offer will contain
a closing date
- In the asset or share purchase of a business there are 2 principal features that
dramatically change the process of bargaining & the applicability of the rules of
offer & acceptance
1. The process of reaching an agreement may have an added stage
2. The first stage is not a binding contract but an “agreement in principle”
between the parties, often called a “letter of intent” – problem: this isn’t a
technical term and may or may not be regarded as a binding legal contract by
the courts
- Another feature of complex negotiations: is that they have be protracted and
agreement may be reached in stages. What is important is that the parties may
not consider themselves free (or at least completely free) to do back and reopen
the matters in which agreement has already been reached. The “incremental”
nature of bargaining is a fact of commercial dealing. (people who do this will just
be “unpopular” to work w/)
Three Important Aspects to this Method of Contracting
1. It is wrong to believe that parties accept no obligations until there is a final
executed deal
• Obligations may arise from the fact that bargaining has taken place and that
significant transaction costs have been incurred by both parties
2. When lawyers are involved, they have to be careful to control the process so
their clients aren’t exposed to the risk of being held to a deal too soon
• This risk is illustrated by the “agreements in principle” which sometimes
leads to litigations & enforcement of a contract
3. Parties may not wait until the process of bargaining is complete before they
begin working together
- Another issue arises with the use of vague terms or the deliberate avoidance of a
term dealing with an important point
• Phrases such as “reasonable best efforts” may appear in agreements b/c one
party wants the other it use its “best efforts” while the other is only prepared
to make “reasonable efforts”
• Canadian courts have held that an “efforts” clause imposes an enforceable
obligation and a “best efforts” clause imposes a higher obligations than, say,
one requiring only “commercially reasonable efforts”

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 - One way of expressing the problem of indefiniteness is to ask: “Have the parties
done enough in making their agreement sufficiently precise that a court could
reasonably be expected to enforce it?”
• The classification of cases into this category is arbitrary
• In one sense, Raffles v. Wichelhaus raises this problem: as had the parties been
aware of cross-purposes they could have avoided the problems

Agreements to Agree
- Courts will not “make an agreement” for the parties
- This rule is used to justify that statement that courts will not enforce
“agreements to agree”
- Agreement to agree: is an argument that leaves all or perhaps, only 1 point to be
settled by the parties
- if there is an “agreement to agree” the judge will be reluctant to tell parties what
they should agree to
- BUT if the parties have an agreement but are silent on an important term, or
agree that it will be resolved by a “reasonable term” there is more of a tendency
to believe that the parties have made a present commitment and are willing to
allow a judge to resolve any disagreements in a commercially “reasonable”
fashion (i.e. as the judge considers reasonable)
- Ex: Ontario Sale of Goods Act – where a contract provides that the price of goods
was to be “agreed upon from time to time between” – the parties cannot rely on
s.9(1) b/c there was no mechanism for fixing the price, nor can they rely on
s.992) b/c they had provided for the price to be “agreed” a contract
containing such a clause was void of an important term (the price) and could not
be supplied by the court (May & Butcher v. the King):
• “When a critical matter is left undetermined there is no contract at all”
- The attitude in May & Butcher may be contrasted with that in Hillas & Co. ltd v.
Arcos Ltd.
• The courts in this case upheld an agreement even when important terms
(concerning the size of lumber to be solder, proportions of the sizes etc.) were
not stated
Notes & Questions
- The pressure to enforce will be a function of the extent to which one party had
relied on the agreement, the degree to which the parties are committed to each
other and the problems of disentangling their relation
- As we will see with letters of intent [pre-contractual letter that set out the major
terms of a proposed agreement, but reserve to the parties the right not to enter
into a contractual relation] there are situations where the parties deliberately
plan not to have a relation that gives rise to legally enforceable rights &
obligations
• The parties may use vague language to keep the courts out of their relation

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 - Issues concerning agreements to agree illustrate the problems that arise from
the “discrete” transaction
- Problems with “agreements to agree” – not easily enforceable

Letters of Intent
- Negotiations for large transactions are likely to begin with a discussion between
CEOs involved of the broad outlines of a proposed deal
- In many situations, they cannot used a “standard form” for a contract or
automatically begin negotiations by putting all the details of the agreement in an
offer b/c it would be a poor method of communicating to the other side and
may be a great waste of time, especially b/c terms differ from contract to
contract
• It is common for those negotiating to have a “letter of intent” or “agreement
in principle” after they have reached an initial agreement on the most
important aspects of the deal – “contract to make a contract”
• This is often drafted by the business people not the lawyers
• It indicates the general nature of the deal, and that the parties are committed
at least to the point of being prepared to acknowledge that the terms are the
“principles” of the deal
• The problem: there is no fixed legal meaning to the term “letter of
intent/agreement in principle”
• *Good explanation of it on quote (p.582)
• In some cases, the letter of intent (particularly when drafted by the lawyer)
will make clear that the parties have proceeded some distance, but that they
have not yet reached the stage of a complete deal (example of letter of intent
p.583-84)

The below case illustrates one court’s attitude to a fairly vague set of terms.

Canada Square Corp. Ltd. V. Versafood Services Ltd. (1981)

Facts
- President of D (prospective lessee) sent a letter to the president of P (lessor) to
“confirm our verbal understandings” indicating the letter “constitutes the
general principles of our agreement”
- Regarding a roof-top restaurant the D would operate
- P signed the letter claiming it was “accepted”
- Both parties spent considerable money to comply with the agreement
- 18 months after signing the letter, the D ran into difficulty with money and tried
to argue the letter was not binding, since it was contemplated by both parties
that a formal lease would be executed
- Although some things were in the letter, some significant terms were left out of
the agreement

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Issue
- Whether an enforceable agreement to lease space for a roof-top restaurant had
been made by the parties
Held: Yes. Agreement enforceable
Reasoning:
- “Is the indefinite promise so essential to the bargain that inability to enforce that
promise strictly according to its terms would make it unfair to enforce the
remainder of the agreement?”
- “If the contract cannot be performed without settlement of the undetermined
point, each party will be bound to agree to a reasonable determination of the
unsettled point in order that the main promise may be enforced”
- Where the matters left for future agreement are unessential, each party will be
forced to accept a reasonable determination of the unsettled point
Notes
- Some have criticized this decisions as having taken the D by surprise as the
parties had not signed a formal lease
- The risks created by a decision like this are significantly affected by whether or
not counsel realizes that evidence of the business background might be very
important

- In Girourard v. Druet (2012) – addressed the issue of whether an exchanged of

emails formed a binding contract to sell a condo unit (Swan likes this decision)
• Purchaser contacted the vendor by email after seeing Kijiji ad
• Offered a purchase price, to pay any legal fees and assume the existing
mortgage
• Vendor accepted the price and agreed to make arrangements to allow the
purchaser to see the condo
• The purchaser then offered to have a draft agreement prepared by his lawyer
– few hours later, vendor changed his mind & purchaser sued
• The court of appeal accepted that an exchange of emails might form a
binding contact, and suggested that with the “signature block” at the end of
the vendor’s email could satisfy the “signing requirement” of the Statute of
Frauds
• Court of Appeal, however, held that in the absence of a signed, detailed
agreement, there was no binding contract
o The emails don’t represent the type of detailed agreements
o The reference to future preparation of a draft agreement is interpreted to
mean the parties didn’t intend to create a binding contract until a formal
agreement was prepared & executed
o He also didn’t get to actually see the condo so it is hard to assume he
would have followed through with the purchase w/o seeing it
o The reasonable bystander would conclude there was no intent to create a
binding contract

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 - One of the largest monetary awards in history (almost 11 billion US) turned on
whether a handshake could create a contract: Pennzoil v. Texaco (1987)
• Issue: whether a binding contract had been made to sell the shares of Getty
Oil Co to Pennzoil
• P made an offer to G to buys shares, they accepted, and the president of
Getty came out and shook hands with president of P saying
“congratulations… you’ve got a deal” – press release issued setting out the
terms and announcing an “agreement in principle”
• It was contemplated that there would be a detailed transaction agreement
• 2 days later, Getty voted to accept another offer form Texaco (no agreement
with P was ever signed)
• P then sued Texaco for the tort of inducing a breach of contract P won
awarded 11 billion

Protection of Expectations Arising From Negotiations

The below case appears to suggest that Canadian courts have not recognized a “duty
to bargain in good faith” (but we will see in later cases this sometimes changes)

Martel Building Ltd. V. Canada (2000)

Facts
- D government agency was tenant of a building owned by P (Martel).
- As the end of a 10-year lease approached, P began negotiating for a renewal of
the lease. The lease did not commit the agency to a renewal.
- P was encouraged to believe that it would be renewed.
- D put out a call for tenders for leased space and entered into a lease with the
lowest bidder. P was the second lowest bidder & unsuccessful. P also found they
didn’t have sufficient time to prepare for the tendering competition
- P argued it had been badly treated throughout this process
Issue
- Is there an implied term to bargain in good faith?
- Can the tort of negligence extend to economic loss arising out of the contract of
pre-contractual negotiations?
Held: No duty of good faith. P wins.
Reasoning
- P suffered nothing but economic loss (this is a tort claim for pure economic loss –
prof isn’t sure why P sued in tort)
- To extend a duty of care to pre-contractual commercial negotiations could deter
socially & economically useful conduct
- Martel claims the D was negligent in not providing it wit adequate info
concerning their bargaining position or its readiness to conclude a renewal

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 • D’s conduct here= “hard bargaining”
• BUT, however the D’s behaviour was, that by itself doesn’t create a cause of
action
• It was able to assume this position b/c of its dominant position in the leasing
market – yes, they are advantages of being in gov’t but do NOT point to
liability
- Cannot extend the tort of negligence into the commercial relations – to impose a
duty in the circumstances such as this could interject tort law as after-the-fact
insurances against failures to act with due diligence or to hedge the risk of failed
negotiations through the pursuit of alternative strategies
- P’s expectations weren’t worth protecting- the recognition to behave decently
does not mean that the expectations of those engaging in negotiations will be
met by the imposition of a deal
- Recognizing this duty would also create an overflow of lawsuits
- Overall, any duty is significantly outweighed by the deleterious effects that
would be occasioned through an extension of a duty of care into the conduct of
negotiations
- No obligation to conduct in good faith here because it was pure economic loss
and because of policy considerations there is no duty of care to indicate your
position in negotiating / disclose your intention

- The issue for a duty of good faith was brought up before the Federal Court but
not here… so there was no need to consider it, but court did state that they have
not yet recognized such a duty
• Why no implied duty of good faith? Martel was on the basis of tort claim for
pure economic loss- Bruce thinking in tort terms- he gives advice to court.
Not thinking in terms of contracts. In contracts would think of all the
elements. Once you realize focus on reliance you can protect it- then courts
will be moved to protect it (although has to be reasonable and expected from
the other side)
Importance
- There is no tort obligation for negligence in commercial negotiations and no duty
to bargain in good faith
Notes
- All transactions include the idea that both parties will be better off with the
exchange than without it – it is NOT a zero-sum game Swan HATES this
reasoning!!!
• The kind of argument made here that the negotiations are zero-sum are
WRONG – but negotiations are no more zero-sum than transactions
• To say they are zero-sum completely misunderstands negotiations
• Negotiations ARE IN NEED of protection
- The impoverished view of the value of negotiations adopted by the SCC may
explain why it thought in Martel that the P’s claims should be dismissed or, what

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 is far more importance, that the P’s expectations weren’t worth protecting
- In an important case, Bhasin v. Hrynew (2014): the SCC established that a duty of
good faith in performance inheres in every contractual relation (Swan likes this
decision)
• Cromwell J. referred to this obligation as an “organizing principle” of the law
of contracts
• This duty includes: a duty of honest performance, which requires the parties
to be honest with each other in relation to the performance of their
contractual obligations
o It basically says, “Don’t lie!”, don’t mislead, behave well
o Does not require the disclosure of that which a party would prefer to keep
to itself
o A negotiating relation doesn’t have to be transformed into a fiduciary one
- In negotiation cases governed by labour relations, there is a positive obligation
to bargain in good faith

Duty of Confidentiality
- Equity has always been keen to enforce obligations of confidentiality
- The focus here is on the obligations that arise during negotiations

The below case is an important decision of the SCC dealing with the obligations that
arise when negotiations between 2 parties begin, and established that there are
situations in which the Court will impose obligations of good faith on parties who are
negotiating, even if an agreement is not concluded.

Lac Minerals Ltd. V. International Corona Resources Ltd. (1989) SCC

Facts
IMP case
- The P (Corona) was an junior mining company (small, less capital)
- It owned property to which it believed large deposits of gold were
- Development of mining property requires a large amount of $ so usually junior
companies will seek the help of larger ones
- Some results of the explorations were publicized to attract investment
- LAC was interested, visited the grounds. From the information of the land, it was
clear the neighbouring property owned by Mrs. Williams would also be very
valuable and worth acquiring
- They met to discuss a possible joint venture
- During discussion of a joint venture, Corona was trying to get the Williams
property. Unknown to them, Lac was also making an offer to her, basing its
decision to acquire the Williams property on info received from Corona, which
had not been made public

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 - Williams accepted Lac’s offer (Williams chose Lac b/c their offer was on
letterhead..)
- Corona brought an action against Lac for taking advantage of this info
Issue
- Did Lac owe Corona a duty of confidence & a fiduciary duty?
Procedural History
- Trial judge found that Lac and Corono had no contract, but that Lac owed Corona
a duty of confidence and a fiduciary duty. At the time of the disclosure of
information, here was no explicit discussion about restrictions on the use of
confidential information. HOWEVER, on the basis of industry practice, Lac knew
the info was confidential. Awarded Page Williams mine (mine of the D) to P. Lac
appealed, was dismissed, then appealed to SCC
Held: Upheld. There is a fiduciary duty.
Reasoning
Fiduciary Obligations
- The Courts did not err in finding a fiduciary duty
- A fiduciary relationship is not precluded by the fact that the parties were
involved in pre-contractual negotiations (made clear in United Dominions Corp.)
– good quote from this case
- It is a Q of: have the parties reached a stage in their relationship where their
expectations should be protected? The facts of the case suggest that a fiduciary
obligations exists to not act in the detriment of Corona’s interest by acquiring
the Williams property by using confidential information
Remedy
- A proper remedy here should be measured by Lac’s gain at Corona’s expense
rather than compensating the P for a loss suffered
- Restitutionary measure would be appropriate
- “But for” Lac’s breach, Corona would have acquired the property
Importance
- Bargaining in good faith is one that is worthy of legal protection in those
circumstances where that protection accords with the expectations of the
parties
Notes
- Important thing here is the remedy b/ the majority awarded Corona a
constructive trust – it is a declaration by the court that the property now owned
by Lac was held on trust for Corona (it is called remedial constructive trust b/c it
is a remedy) trust is an equitable remedy – if information is given in
confidence, you cannot use this information for your own benefit
- Calculating damages in this situation would also be difficult
- But the constructive trust is perfect compensation – b/c then Lac is held on trust

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Exercises (Sheet)

1. Tell client – don’t accept the offer

2. You must withdraw as a lawyer. You cannot represent them. “I will be tarred
with the brush you were tarred with.”
3. Phone up the other lawyer and ask about the mistake – neither of you can
enforce the contract on your own terms
4. (McMaster University v. Wilchar Construction) – if you KNOW the mistake must
ACT on it

The Battle of the Forms

- Parties doing business for years under the assumption that they had a valid
contract each time that goods were shipped. No one in either corporation
bothered to read all the documents AND forms did not coincide. No acceptance
of the terms.
• Example of this p.609 (5.200)
- Had anyone done so, one side or the other might have refused to do business
except on the basis of its own form, or they might have tried to negotiate a
consistent set of terms.
- Can’t say that because of the failure of the parties to reach an agreement on all
the terms of their relation, there was no contract.
- No solution other than courts doing its best to find terms to impose
- Can find terms in industry standards, looking for arbitration clauses

Butler Machine Tool Co. Ltd. V. Ex-Cell-O Corp. (1979)

Facts
- Seller sent the buyer its terms and conditions for purchase of a machine
- Buyer sent back a purchase order with different terms and conditions, including
a tear off slip containing acceptance of the purchase order, asking seller to sign
and return it.
- The seller signed and returned it but said that the order was accepted with his
original terms and conditions
- Seller buyer (changes terms) seller (signed and returned)
Issue
- What terms and conditions were the contract made under? Which version of the
contract is to be followed?
Held: Buyer wins. The last form sent and signed makes the contract. Applies rules of
offer and acceptance.
Reasoning
- Under the traditional rule, the buyer’s purchase order was a counter- offer and

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 the seller’s signing and returning was the acceptance.
• The original quote was an offer on particular terms, the buyer’s order was a
counter offer-was accepted when he sent it back and signed the tear off slip.
o The contract was concluded on the buyer’s terms even though the original
offer was made on a standard form that specifically notes that a deal
would follow the seller’s condition
Importance
- “The Last Shot Rule”: The battle of the forms will be won by the party who gets
his forms in just before an act that can reasonably be construed as acceptance

Tywood Industries Ltd. V. St. Anne-Nackawic Pulp & Paper Co. Ltd. (1979)
Facts
- P is an Ontario manufacturing company, and was invited to enter into contract
by D, a New Brunswick company, for sale of storage tanks.
- St. Anne sent “A Request for Quotation” to Tywood which set forth the goods
required. On the reverse side were 13 “terms and conditions” none of which
contained a clause regarding arbitration.
• Tywood replied with a quotation and on the reverse side 12 “Terms and
Conditions of Sale”, none of which contained a clause regarding arbitration
• 12th term: said that NO modifications of the terms would be recognized
• Later, St Anne sent a purchase order with new “Terms & Conditions”, the 19th
condition stipulating that any controversy shall be settled by arbitration –
order included instructions that Tywood mail an acceptance copy of order
• Tywood never signed the purchase orders, but the goods were delivered
- D alleges deficiencies in operation and stopped payment on cheque for third
tank.
- Tywood brought an action for the price of goods sold and St. Anne moved to stay
action stating stipulated disputes would go to arbitration instead
• D wants to stay the action under s. 7 of Arbitrations Act (1970)—grounds that
agreement of sale contained a clause for submission to arbitration.
- Neither purchase order was signed by P or returned to D—“battle of the forms”
each tries to impose its terms on the other without being bound by the other’s
terms.
Issue
- Under whose conditions was the contract formed?
Held: Application for stay dismissed. Tywood’s terms prevail.
Reasoning
- Under the classical model, St. Anne’s contract would hold according to the first
shot or last shot model – BUT Grange J. doesn’t follow this and want to prevent
inefficiency
- Court has to determine what each party would reasonably conclude from the
writing and conduct of the other.

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 - They may have technically agreed to arbitration (it was included in term and
conditions on two purchase orders), Court doubts the plaintiff was aware of this,
or even in agreement. D didn’t complain when P failed to return the forms
acknowledging the terms sought to be imposed.
Ratio
If there is a discrepancy, look to the essence of the contract.
Also, one cannot sneak terms into contracts without proper notification.
Represents a move away from classical contracting model to reasonable contracting.
Notes
- These clauses are treated with care, and he is making his decision in the
CONTEXT of the general approach to arbitration at the time
- He looks at the BACKGROUND of the transaction to see on whom to put the
clause

Uniform Commercial Code – tries to pose a solution to the battle of the forms
- Trying to impose the lowest possible denominator to work for the contract
- Impose the BASIC terms of the contract
- This solution doesn’t really work that well (no solution really does)
- You have to depend on the judge
- NOTE: 5.206: When speaking about a battle of the forms, do not say “she” or
“he” or “it” it is a corporation – one party doesn’t know what the other part
knows you cannot refer to a person within the corporation (i.e. “she wants to
do business”)

MacNeil, The New Social Contract

- SWAN REALLY LIKES HIM!!!
- neoclassical + relational contract law:
o Neoclassical: battle of the forms
o Real world doesn’t work in terms of strict offer and acceptance, and the
mirror rule.
o Sliding scale for consent, not just yes or no.
o Degree of trust
- Daniel Keating: while battle of the forms does lead to litigation, there is pressure
to settle. In repeated transactions of limited value it is often not efficient for
parties to worry about inconsistencies in their forms. As transactions become
larger in size and less standardized, legal departments more likely to be involved.
- Looking at contracts in their economic setting. Contracts allow for many aspects
of society to work.
- No clear line of social ordering that takes form of government activities and
private ones.

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 o Ex: building bridge to Windsor- financing by the government but private
builder. PPP- public private partnership. The actual operation will be
done by a private party but government must give
- “Contracts are about getting things done in the real world”- not an academic
exercise of imagining offer and acceptance but actually getting things to work.
- Thesis: the range of contractual relations is so broad that startling consequences
can be seen
- Contract= the relations among parties to the process of projecting exchange into
the future
- Sense of choice and awareness of future causes people to plan for the future
- Relations between people when people make an exchange for the future
- Contrasts with traditional definition- contract is a promise or set of promises for
the breach of which law gives a remedy… this is a contract- in law rather than a
contract- in – fact
o Any relation not giving rise to legal remedies or legal recognition of duties
is not a contract
o This would mean that collective bargaining, marriage, is outside the
realm of contracts
- Law is not the basis of all contracts- contracts are about getting things done
- Definition is TOO NARROW- we should think about exchange first, law second
- Idea of contract as a promise- also flawed
o Promise involves 2 parties
o Promise means affecting the future- giving up something
o Communication
o Promise as an exchange projector: “present communication of a
commitment to engage in a reciprocal measured exchange”
o This doesn’t capture the function of promise in our society, rather
promises are a commitment to the future
o Will of the promissor, will of the promise, present action to limit future
choice, communication, measured reciprocity- this is the basis of a
discrete contract
- Limits of promises:
- But for relational contracts – a promise is neither the most effective or most
important exchange projector
o Key exchange projectors= custom, status, habit, command in hierarchical
structures, markets
- While non promissory types may be accompanied by promises, promissory
projectors are always accompanied by non promissory projectors
- Limitations of promises:
- A promise is never made exactly the same way as it received- every promise is 2
promises
- Contractual relations exceed the capacities of the neoclassical contract law
system

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- The way he approaches law is the same as how she does
- In business, contracts are relational
- His analysis is based on the thought that law is not a series of discrete
transactions, they may appear to be discrete, but they are actually very
relational
- 5.209 – study on businesses working together – swan HATES the last line – “But
we were told by several reps that it was the result of a new professionalism
among young managers, many of whom have studied contract law”

Chapter 6

Excuses for Non-Performance

- Being excused from further performance does not mean that a breaching party is
not liable to damages for breach of contract
- They are an excuse for non-performance
- Law of excuses: performance by one or both parties may be excused because an
event has occurred which provides an excuse, or if no reference to an event, it is
so serious that a court will decide that an excuse exists and create an implied
condition
- Conditions: tool used to respond to the parties’ desires to be excused rather
than to have damages for breach
- Almost any deal of any complexity will have a bunch of conditions that must be
satisfied. These conditions can be within the party’s control or outside their
control.
• 2 sources of excuses:
1) Agreement of the parties
2) The background to the deal and the standards established by the courts
• Express condition: a deliberate planning tool negotiated between the parties
• Implied condition: represents the court’s view that one party should be excused
from performance- tool to allocate the risks
o Excuses provided by the court
o We saw implied conditions in London Drugs that they intended to benefit the
employees.
o In this context, Iaccobucci justifies the result reach through an implied
condition – it is a common device that is used. It is a device used to reach a
result that the court doesn’t care to specify. The judge decides to protect the
employees but doesn’t explain WHY he does.
o It goes back to the idea of the 19th century common law that everything
depending on the wills of the parties. You talk about implied conditions b/c it
fits in with this structure.

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 o Ask yourself, “what is behind this implied term?”
When can an excuse not be damages.
• Ex: I agree to buy land from you, I expect that the approval should be obtained-
Ontario government passes an act that means the land can’t be developed-
would be an event that excuses performance (external event- could be fire,
tsunami, legislation)
• What if you want to invest in a startup, person dies- can excuse you. If condition
that you had their ability to perform.
Events of default: use them because the lack of money – condition for continued
performance. – does this mean breach / damages?

Express Conditions:
- Condition= an explicit contractual provision which provides either:
- Conditions precedent and conditions subsequent
• Conditions precedent= (before the contract formed) identifies an event that
must occur or must not occur before the party will agree to be bound to
perform its obligations under the contract. There cannot be a condition
precedent unless the parties are in a contractual relation. Prevent a contract
from becoming effective (ex: I won’t buy your land unless I am able to develop
on it or a buyer can walk away from something if the seller haven’t fulfilled
their conditions)
• Condition precedent: must be satisfied BEFORE the parties perform – they
have a contract, but performance requires an event to happen
• These occur all the time, many transactions will have this
o Ex: you have to have a car pass a mechanical fitness test to get insurance
of a car. It is a condition of the sale- until you get that. I’m not obliged to
perform.
o Waiver of conditions cases: Developer wont buy the land until
permission to build on it, because if he doesn’t the value will go down.
o Importance: conditions are excuses for performance (i.e. if this event
doesn’t happen not bound)
o Marshall v. Bernard Place Corp (2002 ONCA): purchaser of a home
entitled to rely on the condition of inspection.
• Condition subsequent= (after the contract formed) events that may bring the
obligations of one or both parties to an end. EX: bank excused from making loans
because borrower did or didn’t do something that indicates risk the bank wants
to avoid.
o Conditions subsequent- focus on an event taking place, if the event takes
place then it is an event of default – Swan says no difference. Controls
would be conditions subsequent, update you about state of permit, and
then an event of default says if you don’t get permit,
2 aspects of conditions:
Use of conditions permits contract planning of 2 kinds:

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 1) The buyer can walk away from the deal but the seller is still bound- lopsided
effect which has led courts to restrict buyer’s right to enforce a contract by
waiving compliance w/ a condition
2) Permits a party to walk away from a deal that has not worked out as had been
hoped, to avoid throwing good money after bad
• Note: if the event providing an excuse is a breach, one party may have a
claim in damages but that will be perceived as less valuable than being able
to get out of the deal / having an excuse
Benefits to the seller:
- Seller may get the chance to undertake to sell its business unless a materially
adverse change occurs – if no condition, the seller may be bound to promise that
no materially adverse change would occur and probably wouldn’t want to do this
- Why don’t you want a promise from the farmer that the land is good to
develop? He can’t promise what he can’t achieve. No one wants the promise
because either it is worthless or one that a seller would never give
- So if they make a promise that the land can be developed, the land can’t really
be developed, the buyer will be pissed and will maybe sue the seller
- Problem that an event may occur in the course of a transaction which may
excuse one party from further performance
• Hongkong fir- event= condition of the ship
• Event must SUBSTANTIALLY deprive the party of the benefit the contract was
to provide – event may be a breach of contract, could be a natural disaster
- Issue for solicitor- Domicile Developments – problem arose because the builder
did not take advantage of opportunity to get out of the deal – had to perform its
obligations –
• an event may occur- buyer says that event excuses me, court doesn’t agree
the event that is serious- then the person alleging the event is in breach.
• If you say yes you can walk away, then the walking away will be a breach if
court doesn’t think youre entitled to—this is the issue that events of default
deal with- they prevent the risk of bank deciding an event excuses it from
further performance (ie stop lending any more money) – the event of default
will deal with it and you give a cure period because you gave them notice to
get things together to do what they should have done
- When are conditions used?
• Common in the 2- stage bargaining process- ex: may be a condition that the
buyer gets disclosure of the details of the seller’s business
• Sale of a house- parties make a deal on the price and the other terms when
they agree to purchase. Condition that the purchaser’s solicitor examines the
vendor’s title, so the inability of the vendor to provide good title to the
property would excuse the purchaser from closing the deal
- How can you include an express condition? Need consent of both parties
- What issues can arise from conditions?
• Leads to asymmetrical obligations- same as with letters of intent

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 • Reluctance to hold one side to the contract unless the other is similarly
bound
• Ex: condition that a purchaser of a house can terminate the deal unless she
obtains satisfactory financing- Gives her power to terminate the deal and the
seller would have no power
- Conditions are a method of controlling the risk to enter into a contract- I am
prepared to buy the car if certain things happen

Dynamic Transport Ltd. V. O.K. Detailing Ltd. (1978)

Facts
Swan likes this case!
Dickson J. (Likes him)
- P agreed to purchase land from the D.
- Land had to be subdivided which required permission of authorities. Land rose in
value so D refused to complete the transaction.
- Condition that planning permission had to be obtained before the land could be
subdivided. Contract did not stipulate if seller or buyer would get the approval.
- D refused to complete transaction so P sued for specific performance
Issue
- If the contract sets out a condition, but doesn’t explicitly state who is obligated
to perform the condition, is it still enforceable?
Held: P Wins. Orders specific performance
Reasoning
- The onus is on the seller to get permission in good faith to have the land
subdivided because it is the one who has to make an application to the
authorities
- Buyer may not want to rely on the seller, so buyer may make the application in
the name of the seller
Ratio
- The mere making of the agreement can impose obligations of good faith on the
party whose responsibility it is to satisfy and meet the condition.
Notes
- Shows that mere making of the agreement, even if the performance of both
parties may depend on a condition, can impose obligations on one or both
parties
- Dickson is filling out the contract to make it work.
- Default rule: Lord Blackburn in Mackay v. Dick- if both parties have agreed that
something shall be done, cannot be done unless they both concur in doing it,
each agrees to do all that is necessary to be done on his part for the carrying out
of that thing, even if no express words to that effect (Blackburn judgment – she
likes him) – important case. Saying there is no provision to help you is NOT good
advice (6.21)

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 - 100 Main Street East Ltd. V. WB Sullivan Constuction Ltd (1978)- Completion of
sale depended on consent of the mortgagee- purchaser refused to disclose its
financial statements to the mortgagee so the sale fell- Court held that purchaser
was in breach of its obligations under the agreement (Morden J.A. – she really
likes him too)
- Attitude of the courts once again- parties can rely on the court to add obligations
or draw inferences from it to “fill in the blanks”
- It matters how you think about the law. If you think of it as a bunch of rules to be
applied, it is the wrong way to think. You must do things in a REASONABLE way.
The controls are imposed by a standard of reasonableness

Waiver of Conditions
- It requires you to make sure that every condition has a particular sentence in it
(Look at para 6.11, p. 621) – example of this
- Turney v. Zhilka: court said here that there is no contract until condition is
satisfied – this is WRONG
- Barnett v. Harrison (1975 SCC)- Judson- you can’t waive a condition unilaterally,
you can only waive a promise – I can excuse you from making a promise
(Dickson was VERY wrong here!!!) – does NOT protect the vendor
• Dickson didn’t recognize that the farmer can now re sell the land, blows off
the first purchaser and get even more money
- Most agreements of purchase / sale of land that have a condition in favour of
the buyer will provide a clause that the buyer can waive it – this problem has
gone away because solicitors are aware of the case and provide a waiver
- Beauchamp v. Beauchamp (1973 ONCA): parties agreed to purchase of property
payment to be in cash. Tried to claim that purchaser waived the condition. Judge
orders specific performance. Condition was not waived but satisfied.

Conditions Subsequent
- If a certain event occurs, parties are excused at that point – not common,
awkward to work in the context of an ongoing agreement
- Provide an excuse for one party’s refusal to continue to perform a contract. Not
applicable once the contract has been performed! You can only claim for
damages there.
- Little or no role in discrete contracts.
- Have a large role in relational contracts – leases, loans, distribution agreements,
agency relations- also does not need to be explicit, courts can imply a condition
o Ex: bank loans- if a person doesn’t pay an amount due, the bank can call
the loan immediately
o Ex 2: long term supply/ sale contracts- seller will have an excuse for
failure to deliver the goods in the event of a terrorist act, floor, explosion,
strike (etc.)

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 o Common to feature a list of “events of default”
- Frustration when a binding contract is threatened by an outside event (ex:
Hurricanes) did damage to the chemical plants on the gulf coast so their supplies
were affected so this is an excuse to the refineries to make deliveries

Implied Conditions
The Order of Performance
- One practical problem that occasionally causes legal difficulties is the Q of the
ORDER in which the parties are to perform
- Ex: employees usually paid AFTER work, you pay for food at restaurants AFTER
eating
- The general rule of the common law is that performance of the parties’
contractual obligations must be simultaneous
- If one party’s performance is a condition of the other’s, the obligations are said
to be “dependent”
• the obligation of a party to show that it is “ready, willing and able” to
perform will then be a condition of the other’s performance
• and an action for breach of the other’s obligations will require the first
party to meet the condition
• The requirements of tender in a contract for the purchase & sale of land will
recognize parties’ obligations are dependent
• A party “makes tender” by producing evidence that it is ready, willing and
able to perform
- Some obligations are “independent” – for example, a tenant’s obligation to pay
rent is independent of the landlord’s obligation to repair. This means a tenant
cannot withhold rent b/c the landlord had not repaired the premises
- Order of performance= Sale of Goods Act – specifies that anyone selling goods
can modify the order of performance (i.e. when you possess & pay the good)

The Provision of Excuses by the Courts

- The purpose of an express condition is (as seen above) that it permits the more
careful planning of an exchange than would be possible withut it
- The essence of this planning is that the agreement provides 1 party (or both)
with an EXCUSE for non-performance
- However, it is no uncommon for parties to agree that 1 party will do something,
w/o explicitly providing that one will be excused from further obligations if the
other fails to perform
• The failure to specify the consequences of non-performance may be the
result of inadequate legal advice OR the difficulty of predicting the
consequences of breach at the time of contract formation

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 - When the court “implies” things from the contract, it may mean that it is
drawing an inference from what the parties have done or said and from the
background of the deal
• OR it could be the court thinking that certain things SHOULD have been
provided in it or what SHOULD happen in the events that have occurred
- When courts imply a condition in the contract, it is saying that in the
circumstances, one party should be excused from further performance (or any)
- Sometimes, it is too late to argue for an excuse (ex: in Canlin Ltd. V. Thiokol
Fibres)

The below care is an important precedent and illustrates how a court can approach
the problem of deciding whether or not an event, whether caused by external
circumstances or by one of the parties, provides an excuse.
*Consider the source of the criteria the court uses to justify the result

Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd. (1962)

Facts
Very Important case!!
Diplock J.
- Hong Kong Fir agreed to rent their ship to Kawaski (D)
- Terms of contract were that the owners promised the vessel was “in every way
fitted for ordinary cargo service” and that they would “maintain her in a
thoroughly efficient state in hull and machinery during service”.
- The boat had many issues during sail. Engine repeatedly broke down, ship had an
incompetent crew. Ship held up for 5 weeks and needed an additional 15 more
weeks to get it ready once it reached Osaka (final destination).
- The market price had fallen over half in this time.
- Kawaski wrote a letter repudiating the contract because of the conditions of the
ship, then the owners (Hong Kong) sued for wrongful repudiation
Issue
- In what event will a party to a contract be relieved of his undertaking to do that
which he has agreed to do but has not yet done?
- What is the test for determining of a breach of contract leads to a right of
repudiation?
Held: Hong Kong Fir (P) wins.
Reasoning:
- When the event occurs as the result of the default of one party, the party in
default cannot rely upon it as relieving himself of the performance of any further
undertakings on his part
- Where the event occurs as the result of the default of neither party, each is
relieved of further performance of his own undertaking
- Diplock J. states that the correct test is to look at the events which have occurred

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 as a result of the breach at the time when the contract was purported to be
repudiated and to decide if these events deprived the party attempting to
repudiate of the benefits that it expected to receive from the contract
- As the charterers will still get to have the boat for 20 more months, the expected
benefits can still be received. Therefore, this breach should not lead to
repudiation but only to damages.
- The occurrence of the EVENT is what is important – charterer say this ship is not
maintained well so I am excused. Owner says no, you got the ship you were
entitled to get. Event did not substantially deprive the charterer b/c the contract
never provided for a ship of a superior quality that they got. The DRAFTING of
the contract effects the events.
Importance
If the event deprived the party attempting to rescind of the benefits expected of ALL
or SUBSTANTIAL benefits from the contract as per the intentions of the parties, then
the party is excused from further performance.
- Shows a substantial non-performance test to determine if rescission is available
in cases involving charter party contracts like the one in Q
- Important quote by Diplock: “Has an event occurred which substantially
deprives one party of the benefit the contract was to provide?”
- What the client wants is, can I walk away from this deal?
-
Notes
- In Ontario Ltd v. Vernon (1999): Weiler J.A. wrote that there are several factors
that provide guidance in determining whether or not a breach is a substantial
breach justifying future non-performance of the innocent party’s obligations.
They are:
(a) Ratio of the party’s obligation not performed to the obligation as a whole
(b) The seriousness of the breach to the innocent party
(c) The likelihood of repetition of the breach
(d) The seriousness of the consequences of the breach
(e) The relationship of the part of the obligation performed to the whole
obligation
- In Jacobs & Youngs v. Kent (1921): a builder sued the owner for the balance
owed on a contract for the construction of a house. The owner had not yet paid
the full price for the construction of the house. The owner claimed to be excused
from full payment on the grounds that the builder did not install a particular
brand of water pipe in the house as the constructions specifications required.
• It was proved that the pipe installed was as good as that which should have
been installed
• On the reasoning of Peevyhouse, owner should not get no damages for the
breach since she suffered no economic loss
• Cardozo J. held that the breach did not offer the owner of the house an
excuse for his non-payment.

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 o The installment of the wrong pipe was a MISTAKE
o The 2 pipes were virtually the same
• McLaughlin J. wrote for dissent: stated that it doesn’t matter how similar the
2 pipes are, the D had a right to contract for what he wanted. He had a right
to this kind of pipe.
• Mr. Kent is treated similar to Mr. Forsyth (Ruxley) – except Mr. Kent didn’t
get damages. The two are as people forced to be reasonable or treated as If
they were content to be reasonable. The 2 cases raise the Q of the extent to
which the law can or should acknowledge individual preferences

The below case deals with a common problem: what happens if 1 party is late in
performing some of its obligations under the contract

Sail Labrador Ltd v. “Challenge One” (THE) (1999) SCC

Facts
Bastarche J.
- Appellant entered into a 5 year agreement with the respondent to charter a
vessel
- Under clause 30 of the charterparty, the appellant had an option to purchase the
vessel at the end of the 5 year period subject to “full performance of all its
obligations in the Charter Party including but not limited to payments being
made promptly and in accordance with the schedule” in the agreement
- One of the stipulations was for the appellant to submit 7 post-dated cheques to
the respondent at the beginning of each operating season
- The cheque for the 5th year was returned due to “insufficient funds” but the
bank’s refusal was actually due to an error by a bank employee
• HOWEVER due to this failure, the respondent informed the appellant that the
option to purchase was void
• At the end of the 5 year term, the appellant attempts to buy the ship
Issue
- Did the “late” payment constitute as a sufficient breach?
Held: Appellant wins.
Reasoning
- The one late payment did not constitute a breach sufficient to allow the
respondent to rely on clause 30
- The defect in performance must be serious enough to entitle the non-offending
party to rescind the contract
- The failure in performance must substantially deprive the other of what was
bargained for – substantial non-performance or a requirement that the breach
go to the “root” of the contract
- If this minimum standard is not met, rescission will not be available to the non-
offending party. This party will be forced to settle for a remedy in damages

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Is Clause 30 a “Time of the Essence” Clause?
- The words used in the clause are NOT precise enough to satisfy this Court that
these parties intended to make timely lease payments the essence of this
contract
- The respondent also said in oral testimony that contracts used in this industry
will often conclude with “time if of the essence” when parties intend to in fact,
make time of the essence
Notes & Questions
- It is common in commercial contracts to have a “time if of the essence” clause
- In Union Eagle ltd. V. Golden Achievement ltd (1997): found that where the
purchaser was 10 minutes late in tendering funds, and held that there was a
“time if of the essence” clause, that the vendor was discharged from selling by
reason of the delay
- In Ontario Inc. v. Jackson (2005): the “time of the essence” clause also upheld
when purchaser failed to pay deposit in 5 days (as stipulated in the clause) –
again, the delay was innocent and the vendor had done nothing to induce the
purchaser to piss the deadline

Anticipatory Breach
- Anticipatory Breach: refers to a situation where, BEFORE the time for
performance has come, a promisor says that it will not perform its contractual
obligations
• SO, the promisor will be held to have repudiated its obligations
• The repudiation anticipates (i.e. comes before) the breach that will occur
when performance is not made

- 2 problems emerge:
1. The technical pleading Q: whether the promisee can sue or not when there has
been no actual breach yet When can you sue me?
2. More difficult problem: is the solicitor’s problem of giving advice o his or her
promisee client when the promisor has repudiated its obligations – 2 parts: (i)
giving advice in the circumstances that exist and (ii) drafting the agreement to
make the giving of advice easier
- It is now clear that, the promisee can immediately sue for breach of contract
here the fact of the repudiation provides the cause of action
- The promisee has to show that he/she was “reading, willing and able” to
perform
- This problem was dealt with in 2 stages:
1. Cort v. The Ambergate Railway Co. (1851): the D agreed to buy goods from the P.
The D bought and paid for part of what it had ordered. It then became insolvent
and gave notice to the P that it didn’t want to buy more. The P sued. Held: the
D’s repudiation excused the P from having to be ready, willing & able to perform

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 his part of the bargain it would be a waste of resources for the P to make the
goods that it now could not sell to the D
• B/c the anticipatory breach came before performance, I am entitled to rely
on it, and sue you notwithstanding that I was not “ready & willing to
perform”
• In the ordinary course, before I can sue you, I have to be prepared to be
“ready & willing” to give the goods to you and tender the goods to you (for
ex), but BECAUSE you told me you are not going to perform I am excused
from tendering the goods (being ready & willing). It is a waste of resources if I
were to continue to be prepared.
• *If you sue at this point, you are still suing for expectation damages
2. Hochster v. De la Tour (1853): D agreed to employ P as a courier or valet for a
trip through Europe, beginning June 1st. D changed his mind before June 1st.
Held: P can sue before the performance of a contract.

The rule in Hochster v. De la Tour was elaborated in the below case; in what is
regarded as the classic statement in the law.

Frost v. Knight (1872)

Facts
Cockburn C.J.
- P sought damages for breach of promise of marriage
- The parties agreed to marry after the D’s father died
- The D, before his father died, said he would not marry the P
- P immediately sued for damages
Issue
- Can the P sue for damages when D repudiates performance before it is meant to
happen?
Held: Yes. P wins.
Reasoning
- P can sue for non-performance in this case, but in that case, he keeps the
contract alive for the benefit of the other party as well as his own, remaining
subject to all his own obligations & liabilities
- OR the promisee may treat the repudiation as a wrongful act putting an end to
the contract
- Applies Hochster v. De la Tour
- Someone saying “I’m out of here” can discharge the other party but does not
have to. You don’t have to accept the anticipatory breach.
- But she did NOT discharge him of his obligation and did NOT accept the
anticipatory breach
Notes
- This case is an entirely appropriate authority for a case like Domicile below

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 - Importance: this case points out the consequences of the anticipatory breach

The below case is a modern example of the same problem. Laskin J.A.’s reasons for
judgment are a concise and useful statement of the law, drafted by a very competent
judge.

Domicile Developments Inc v. MacTachish (1999)

Facts
Swan LOVES this decision!!
Laskin J.A. (likes this judge)
- Mactavish and Domicile signed an agreement of purchase & sale by which Mac
agreed to buy a semi-detached house in Ottawa, built by Domicile
- The agreement stated that “time shall in all respects be of the essence”
- Agreement called for a $5,000 deposit on execution of the agreement
- Further $15,000 on notice that a building permit is obtained
- If the house was substantially completed on Sept, 15th, 1995, Mac was obliged to
complete the transaction
- Mac paid the $5000 deposit but then repudiated the contract and asked for the
return of the deposit
- Domicile did not accept this anticipatory repudiation
- Instead its lawyer wrote that the deposit would not be returned and that
“Domicile remains, ready, willing & able to perform its side of the bargain”
- Domicile elected to keep the contract alive and proceed with construction. On
the closing date, Domicile had not substantially completed the house
- Domicile ended up selling to someone else for LESS (house market decreased)
and sought damages for this loss
Issue
- Raises the Q of the obligation of a vendor under an agreement making time of
the essence, when the purchaser is in default but the vendor also is not ready to
complete the transaction on the closing date
Held: MacTavish not liable & gets deposit back. D wins.
Reasoning
- When there is an anticipatory repudiation, the other party can either accept or
reject it
• If one accepts it, the party can sue for damages
• If one rejects it (as Domicile did), the agreement remains in effect b/c they
did this here, and kept the contract alive, “time is of the essence”
- In order to take advantage of the essence provision the innocent party must be
“ready, desirous, prompt and eager” to carry out the agreement – Domicile
could not satisfy this
- EQUALLY, Mac could not rely on the time of the essence provision to end the
agreement b/c he was not ready, willing and able to close on the agreed date

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 - THEREFORE, neither of them were entitled or enforce or end the agreement
- Important: a party can reinstate time of the essence by setting a new date for
closing & providing reasonable notice to the other party (this was not done here)
b/c this was not done here, Domicile was not entitled to end its agreement
with Mac
• SO: Domicile itself breached the contract
Notes, Questions and Problems
- Laskin J.A. alludes to a “difficult and important Q” – whether the principle of
avoidable harms applies to a party like the P in that case – should the P have
taken steps before the date of breach to avoid some of the harmful
consequences of the D’s breach?
• If the P accepts the D’s repudiation: the rule is that it cannot recover those
losses which, by taking reasonable steps at the time, it could have avoided
• If it elects to keep the contract alive, then the P cannot be required to do that
which would disable it from being able to perform if it has to
- But what if performance by the D is clearly impossible?
• SCC in Asamera Oil Corp Ltd. V. Sea Soil & General Corp (1979): strongly
suggested that the P’s damages will be reduce if reasonable steps are NOT
taken to avoid the harmful consequences of the D’s breach as it is CLEAR the
D will not perform
- P. 660-662= EXAMPLE of contractual provisions that illustrate the techniques a
solicitor can use to reduce the risks arising from breaches that may be less than
very serious
- The Uniform Commercial Code provides a method for dealing with the problem
Bob has with Sarah (example – on page 658)
- The builder either got bad legal advice or didn’t take advice – he took a HUGE
risk. If the builder sued when it was given notice of breach, it would have gotten
damages. He would have not had to return the deposit + gotten ordinary
contract damages

Problem:
- By contract dated on July 1st, Mary promised to sell goods to Tom
- She promised to deliver on October 1st
- On September 1st, Tom tells Mary that he will not accept delivery of the goods
- Mary does nothing
- Mary sues for breach of contract on September 15th
• There is no easy answer to these Qs
• You have to pay attention to the context of the situation
• You advise your client that it is a difficult problem. You can be “damned if
you do, and damned if you don’t”

- Events of Default: If you are drafting these things you want to put in a cure
period. You can also tailor the remedy to the event of default (p.661).

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 • Cure period= used to preserve the relationship – it is a way of getting the
court’s sympathy, and appearing reasonable. Offering, for example, 30 days
to fix their breach.
• Cure period is SEPARATE & DIFFERENT from time of the essence
- P.662 – solicitors anticipating the events occurring (example of draft) – made it
explicit in the contract of what one can do in the events that arise

- Article 2609 – Sale of Goods Act – very important provision. Basically asks for an
insurance of performance when selling goods. Typically, as the buyer, you will
provide a letter of credit to protect the seller through insurance if you do not
provide insurance, it is an EXCUSE for non-performance!!
- Article 71 – International convention on sale *CHECK

- In Jedfro Investments Ltd . Jacyk (2007): the SCC considered the nature of the
acts or communication required to constitute repudiation or abandonment of a
contract – this is a very practical response, he recognizes that an agreement can
die
• The parties in this case have chosen not to do what the joint venture
agreement required them to do
• 1 party of the joint venture agreement sued the other 2 for breach of the JVA
• Rescission of a contract= let us walk away from this – this offer was made
here. Recognizes that relations can just die, parties lose interest.
• The Court found that the parties did not discharge the agreement; there was
no agreement to terminate, no abandonment, and they did not treat the
breach as ending the agreement
• The argument here makes abandonment indistinguishable from rescission
(i.e. the agreement of the parties, made after an offer and an acceptance and
with consideration, to bring the relation to an end)

The Right of a Party in Breach to Claim Restitution

Blake v. Shaw (1853)

Facts
-
Issue
-
Held:
Reasoning:
-
Notes
- The trial judge here rejected a claim based on the value of the services provided

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 (i.e. a claim in quantum meruit)
- This result follows b/c there was NO unjust enrichment in this situation
- There was a deprivation to the P and an enrichment of the D, but it arose as a
result of the term of the contract and hence not considered “unjust”

The below case is an example of the application of the “entire contract rule” to a
building contract. The court recognized some important exceptions to this rule for
building contracts.

Sumpter v. Hegdes (1898)

Facts
- The action was for work done & materials provided
- The P (a builder) contracted with the D to build upon D’s land 2 houses & stables
- The P did part of the work
- He then informed the D that he had no money and could not go on with the
work – the trial judge found he did abandon the contract
- The D then finished building on his own, using certain building materials that the
P left on the ground
Issue
- Should the P be compensated for part work?
Held: Yes. P gets the value of the materials used, but does not get the work which he
had done.
Reasoning
- The P cannot recover the original contract b/c he did not finish the work
- It is suggested, however, that the P can be entitled to recover for the work he
did on a quantum meruit - BUT in order for this to work, there must be evidence
of a fresh contract to pay for the work already done
• This only stands if there are circumstances that give the other party an option
to take or not take the benefit of the work done
- There is no evidence that by completing the unfinished work that the they
entered into a fresh contract to pay for the work done by the P
Notes
- For building contract, there is an important exception to the entire contract rule
– the contractor who has “substantially” performed can sue for the contract
price, less any amount that the promisee can claim as damages for the breach
this goes further than unjust enrichment as it allows the vendor to sue for the
price as the starting point of its claim
- Quantum Meruit: a reasonable sum of money to be paid for services rendered
or work done when the amount due is not stipulated in a legally enforceable
contract

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 Part 2
Chapter 7
Interpretation, Risk Allocation, Mistake & Frustration
The below extract suggests that the range of contractual relations is very broad: so
broad, in fact, that some startling consequences can be seen as necessarily linked to
such a view.

MacNeil, The New Social Contract

- A contract is the relations between parties to the process of projecting exchange
into the future
- There exists a lot of exchange relations in our society, where much occurs to
which the law does not, in any practical sense, extend its remedies or recognize
legal duties
- Contracts= the relations among parties to the process of projecting exchange
into the future
- Contracts are about getting things done in the real world
- In order to properly think about contracts, we need to think about exchange
FIRST and law SECOND
- This idea of contracts contrasts with the traditional definition. A promise is made
to someone. It includes two or more individuals with beliefs in the power of one
to affect the future
• The will of the promisor
• The will of the promisee
• Present action to limit future choice
• It includes communication
• Measured reciprocity

Interpretation
- THE ATTITUDE of what the court BRINGS is important!!
- Interpretation= is a communication – what matter is what the other party
HEARD
- What is most important in this chapter is to understanding the approach of the
courts to the problem RATHER than the detailed rule of interpretation
- The law takes an objective point of view
- If a speaker (or drafter) intends a word/phrase to express some idiosyncratic
meaning, known only to the speaker, that meaning will not be imposed on the
hearer

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 - We saw them in the attitude of offer & acceptance: it was not what the offeror
intended its words to mean but was what the offeree understood them to mean
• We saw this in Smith v. Hughes: The word “oats” could have objectively (and
easily) have mean either old or new oats, BUT if the farmer KNEW that his
customer meant & only wanted old oats, he would be held to that meaning &
be unable to enforce a contract for the purchase of new oats
- There are 3 principle reasons for the adoption of the objective approach.
1. The purpose of the law of contracts is the protection of the parties’ reasonable
expectations
• Someone wont be held to an obligation to do (or a contract is not to be
interpreted to mean) something that is unreasonable, idiosyncratic or what
may be the principle limitation, unexpected by the D
2. It is impossibly difficult to take into account the subjective intentions in the
contract. Subjective hopes are simply outside the scope of what a court can
reasonably be asked to consider.
3. Communication has to rely on standardized communication
- Paragraph 7.33 case where they amend the standard of language – you see a
dialogue between the courts & drafters

The below case illustrates a court’s approach to the problem posed when a particular
form, in common use in a particular trade, here ocean shipping, fails to deal with an
identified problem.

Federal Commerce & Navigation co. v. Tradax Export SA (The “Martha Envoy”) (1978)
Facts
Lord Diplock
- A ship, the “Martha Envoy”, loaded with grain from the Great Lakes Northern
Europe, was due to discharge at a port on the River Weser in Germany
- There were no open berths
- In order to shift the costs of waiting for a berth (and they can be high) the ship
owners had the ship sail up the river opposite its direction and do a “U” turn,
heading back out to sea to wait for a berth
- BASICALLY: the ship arrived late b/c the port was busy & the ship was in the
waiting area
- Owner’s argument= by coming within the limits of the port, the ship was an
“arrived ship” and any further delays were at the cost of the charterer – the
charterer believed the opposite “the risk was off of us” we arrived ON TIME
Issue:
- Is the shipowner or charterer correct in the interpretation of the charterparty?
- Which party would bear the costs of delay due to the port congestion?
- Would a ship anchored at the waited place be considered an arrived ship?
Held: Negotiation Settlement – disposed of the issue

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Reasoning:
What is an “arrived ship”?
- When pricing, they know that the shipowner bears the risk that until it is tied up,
it has not arrived – Charterer makes this clear – House of Lords AGREE with this,
that the ship is not “arrived” by doing what it did
- If they have to wait at the port to the shipowner’s expense, he will try to cover
this in the rate he charges
- OR if at the expense of the charterer, he expects a lower rate
Importance
- The job of the courts is to interpret contracts to understand where the risk was
allocated
- Effect of decision= the risks of congestion at destinations will fall more on
shipowners & this cost will now be negotiated to reflect such risks of ocean
shipping
Notes
- Importance here is not who won or loss but as Lord Diplock makes CLEAR – it is
guidance to all shipowners & charterers in their subsequent dealing on a
charterparty with the same language
- Lord Diplock had a far easier task than in the below case, the parties were
familiar with the terms & with the background expectations of the industry. They
just wanted the clause settled for the future.
- Courts sets out the courts role in interpreting this particular kind of contract
- Both parties are institutional litigants, what they really want is for this issue to be
solved for the future

The below case dramatically illustrates how the different views of the members of the
SCC on their proper role in the interpretation of a contract can influence the result.

Scott v. Wawanese Mutual Insurance Co. (1989)

Facts
Swan HATES this case!! This is an example of exactly what the court should NOT do.
- Scott’s home was damaged by a fire set by their 15 year old son deliberately,
- Wawanesa (insurer) denied their claim b/c of an exclusionary clause: the loss
occurred through a willful act of the insured (their son)
- The word insured in the contract defined the insured as the residents of the
household
Issue:
- Whether the exclusion from coverage caused by the wrongful act or omission of
an insured applies only to the insured responsible for the act or omission or
whether is applies not only to that insured but also to an innocent insured?
Held: D wins. They were excluded from coverage
Reasoning (L’Heureux-Dube) – NARROW VIEW (BAD)

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 - “Blinding flash interpretation”: stares at the word on the page and the single
unequivocal meaning, no analysis of what the word means in the context, no
consideration of the authority La Forest identifies
- When the wording of a contract is unambiguous, the courts should not give it a
different meaning than clearly expressed
- The terms of the insurance were clear – the policy excluded liability for the
insured & their children who lived at home
- The insurable interests between parent & child were connected
- This shows a NARROW focus on the contract, NOT taking into account context
Dissent (La Forest) – BROAD VIEW= GOOD
- Discusses the role of context:
- Joint v. several: if joint, insurer would have a defence, if several, the parents
could recover each individual under a contract independently
- Says it should be seen as several for 2 policy reasons:
1. From the point of view of an ordinary insured would the parents expect to be
denied coverage from another’s wrongdoing? NO.
• Courts promote the intentions of parties
• People assume they will be covered if they don’t do anything wrong
- This favours the modern approach to interpreting insurance policies:
“fundamental principle of individual responsibility for wrongdoing” – a
REASONABLE PERSON would expect that his individual interests in the policy is
covered
- Scotts took out insurance to protect their house – the son is insured ONLY on his
property & possessions (to which he wouldn’t be able to be insured due to his
willful act) BUT, the parent’s interests should be protected
- Interpretation should advance the TRUE intent of the parties at the time of entry
into the contract
- When interpreting, the courts must be guided by a reasonable expectation of
the ordinary person. The reasonable would EXPECT that they be entitled to
recover damages
• If the language is ambiguous (as it is here) it should be interpreted for the
benefit of the insured b/c insurance contracts are written in the favour of
the company
• Majority of cases show that only the wrongdoer should be excluded from
recovery
• Relies on Rankin v. North Waterloo Farmers Mutual Insurance Company and
American cases in this case it was interpreted in favour of the insured
• People wouldn’t take out a joint policy if they knew they would be liable for
damages caused by someone else
• Must keep in mind the OBJECTIVE of the purchasers when getting insurance
SO: in the case of unambiguous contract, the courts should interpret their plain meaning
& not imply terms.
Notes

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- Why did they not consider the issue of a third party beneficiary? If the son was
NOT negligent, regardless, would he be able to sue for the loss of his property
due to a fire? NO.
- The quotation used by both L’Heureux Dube and La Forest from Consolidated-
Bathurst Export Ltd. V. Mutual Boiler and Machinery Insurance Co, emphasizes
the importance of discovering “true intent of the parties” as the goal of
interpretation
- It is important to remember that insurance is a bilateral contract – it imposes
obligations on both the insured and insurer so that the “true intent” of the Scotts
must be at least as important as that of the insurer
- BUT a focus on “true intent of the parties” is completely unhelpful. It is VERBAL
FORMULA, often devoid of useful meaning & apt seriously to mislead if not
understood properly
• By looking at this, the courts create an artificial intent
• What does “true” intent even mean?
- The use of the concept of intent is exactly what Iacobucci J. did in London Drugs
Ltd v. Keuhne & Nagel to AVOID the decision in Greenwood Shopping Plaza
• The assumption in London Drugs was that the parties (employer & customer)
“intended” to protect (or extend the employer’s contractual protection) to
the employee-defendants.
• Neither party actually “intended” this in any real sense, the use of intention
was simple a verbal device to justify a result the SC wished to reach on
grounds it did not disclose
• Problem with intentions: while it can be conceived it cannot be conceived
correctly – what did the parties intend? This is NOT a helpful question nor
concept.
• A MUCH more helpful concept is one on expectations. There you can have
evidence.
- La Forest then SHIFTS from speaking about intent to looking at the reasonable
person expectations
• “The courts must be guided by the reasonable expectation and purpose of an
ordinary person…The language employed in the policy is to be given its
ordinary meaning, such as the average policy holder of ordinary intelligence,
as well as the insurer
• This concept is a REAL ONE – and gives a honest and useful answer to the
question before the court
• Although the Scotts may not have considered what would happen if their son
burnt the house down, it is almost certain that they did not expect that, if it
did happen, that they would have no insurance a focus on the parties’
expectations make these facts relevant
- The decision in Rankin and that of the dissent here would make insurers consider
re-drafting their policies to make their insureds aware of the risks that they
would be exposed to. HOWEVER, the majority here just provides the insurers

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 with knowledge about their position but does not provide the same for insureds
who will rarely consider such risks – lopsided!!
• The approach of the dissent would provide a dialogue between courts and
solicitors who draft client contract
• The approach of the majority makes such a dialogue unnecessary for the
insurer who doesn’t have to worry about informing its customers about risks
- The differing approaches of L’Heureux Dube, La Forest and Lord Diplock shows
the issues of interpretation
• The ATTITUDE of the judges are IMPORTANT
• A lawyer must try to foresee what a judge will likely want to do with the
contract
• The important Q is whether or not the judge offers justification for what
he/she does that would permit counsel to debate usefully the correct
attitude to be taken to the problems raised by the cases
- Leaving ASIDE the issue of arson, the son would have been a 3rd party beneficiary
and would have had no enforceable claim against the insurer
- L’Heureux Dube adopts the “blinding flash” approach – this approach was
upheld in SCC decision Eli Lilly & Co. v. Novopharm Ltd. (1998) – Swan hates this
case!!
• What is startling about Iaccobucci’s approach here is his idea that “it is
unnecessary to consider any extrinsic evidence at all when the document is
clear & unambiguous on its face” there is a constant tension in
interpretation in terms of those who believe that the words of a contract are
all that matter and those who believe the context of the deal & goals of the
party and their expectations are important too
• This approach was taken from Lord Atkinson in Lampson v. City of Quebec
(1921) and is also affirmed in Joy Oil Co. v. The King – “the meaning of the
words used by the writer” is important
- Canadian developments have been influenced by Lord Hoffman’s words in
Investors Compensation Scheme: where he said background info is important
- Canadian common law courts have increasingly accepted that words of a
contract cannot be understood apart from their context
• This was supported in Dumbrell v. Regional Group of Companies Inc (2007):
Doherty J.A. disagrees with the idea that subjective intent is the most
important factors b/c what the parties intended at the time they entered into
a contract will often be that they never gave a moment’s thought until it
become a problem!! – Swan REALLY likes this case!!!
o Quotes Swan!! “the meaning of a document is derived not just from
the words used, but from the context or circumstances in which the words
were used”
o Words require courts to look at context and expectations that the parties
had – Swan
- Actual case in the UK – Man was very ill, had a mother and a wife. He wrote an

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 informal will (it was completely valid) and it said “All to mother”. Who gets it?
The wife. Why? What does the word “mother” mean?? In the UK it was very
common to call wives mother
Importance
1. How NOT to go about insurance wording (majority)
2. If you look at the complexity of the words then the answer is completely
transformed (minority) – WAY BETTER
They impose the fault of a 3rd party onto the 2 insured parties

The balance between this tension “tips” in the next case.

The interpretation of a contract, in spite of what the SCC said in Eli Lilly has 2 features:
1. Need for the trial judge to determine & consider the background facts of the
contract as they may effect the meaning of the words
2. The actual interpretation of the agreement

Some Background
- In this case, we look at the standard to be applied by a court of appeal in
reviewing the decision of a trial judge or in this case, an arbitrator. In general,
courts of appeal will not review the findings of fact of trial judges, they are given
deference. They will only be reviewed if unreasonable or they made a “palpable
and overriding error”

Sattava Capital Corp. v. Creston Moly Corp (2014)

Facts
Rothstein J.
- Agreement between parties for Creston (respondent) to pay a finder’s fee to
Sattva Capital (appellant)
- Sattva was to be paid its fee in shared of Creston
- The dispute centered on the method of calculating the fee
- Trial judge found Sattva entitled in its costs
Issue
- The arbitrator’s decision raised a question of law
- When to determine the date of cost shares?
Held: Sattva (P) wins.
Reasoning:
- Should determine the intention of the parties, look at contextual factors like the
purpose of the agreement – the purpose of this is not to displace the words of
the contract but help determine what the parties knew or ought to have known
- Sattva says what did the parties expect based on the arrangement they has
- Investors Compensation Scheme: contracts should look at what does this word
mean when used in this agreement

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 • This contrasts with Iacobucci in Eli Lilly – will no longer be follows – in that
case he said that you only look to the words of the contract & you don’t need
extrinsic evidence when the document is clear used blinding flash of
interpretation
- The goal of interpretation is to protect parties’ reasonable expectations – this is
an organizing principle
Importance
- This case makes VERY CLEAR that the interpretation of an agreement requires
looking at the “surrounding circumstances”
- No judge will now say that the words are so clear that I don’t need evidence of
the background discussion
- When interpreting contracts you need to consider the background expectations
and underlying expectations
- Must look at the contract as a whole, giving the words used their ordinary
meaning consistent with the surrounding circumstances known to the parties at
the time of the formation
Notes
- Rothstein here rejects Eli Lilly – but this wasn’t addressed directly and it should
have
- He also did not mention the word “expectation” BUT the SCC has expressed the
goal of interpretation in terms of protecting reasonable expectations
- In Martin v. American International Assurance (2003): in terms of insurance…
McLachlin stated that insurance policies must take into account reasonable
expectations of the parties.
• The court must attempt to strike a balance between 2 sets of expectations,
and the 2 sets of interests that underlie them. Insurers cannot reasonably
expect the court to adopt an interpretation that gives more protection to
their interests than to those of the insured
- Central to the approach adopted by judges who share Iacobucci’s view is that
courts may only look to context when there is ambiguity
- Shortly after this decision came Vailleres v. Vozniak (2014): Alberta Court of
Appeal refused to follow Sattva
• They said that the restrictive language in Sattva does not apply to the
ordinary appeals in Alberta
- In Ledcor Construction Ltd v. Northbridge (2015) the Alberta Court of Appeal
explored another problem with Sattva Capital – case involved the interpretation
of “all risks” insurance policy which is widely used in the construction business.
At issue was the scope of the exclusion clause in the policy which excluded
coverage for damage caused by “faulty workmanship” relied heavily on its
own reasons in Vailleres
- These 2 cases show that the approach in Sattva has now caused uncertainty – it
ignored the fact that courts of appeal will generally do whatever is necessary to
avoid or correct decisions that they think are wrong

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 - In interpretation, the courts have said that in terms of a Q of law – the standard
if correctness. In Q of fact – the standard is deference.

More on Ledcor Construction Ltd (Extra Reading)

- This case represents backpedalling on the Q of deference.
- Problem of both Sattva & Ledcor is their curious treatment of interpretation –
they don’t have STARTING POINTS. **IMPORTANT** (Nov. 3rd, 2016).
- This case has clarified some of the Qs that Sattva raised by has produced some
mire
- Issue: as we have seen= the scope of inquiry into background info
- What Swan will call the traditional theory (i.e. pre-Sattva) = if the words are
clear, extrinsic evidence will only be admitted if there is “ambiguity” (parole
evidence rule)
- The parole evidence rule is the LEAST understood “rule” in contract. The “rule”
can exclude nothing b/c the Q before the court is to determine WHERE the
parties’ agreement is to be found. In answering this, no evidence directed at
those Qs can be excluded.
- The problem with Sattva: it focused on the NARROW Q raised in the case
- Swan has a problem with both cases
- In neither Sattva nor Ledcor does the SCC outline a theory of interpretation
- We need to pay attention to reasonable expectations
- What is very annoying is that the SCC has continuously recognized the
importance of reasonable expectations (gives 2 examples) BUT they did not
mention these cases in these decisions
- The words “ambiguity” and “true intent” are NOT HELPFUL.
- Neither case dealt with the admissibility of evidence of negotiation
- “The only comfort we can take is the Ontario Court of Appeal is pretty sensible &
generally gets things right”
- *Look at Chartbrook p. 7 of extra reading

Onex Case (read)

- We need to know what were the parties reasonable expectations
- *When you are drafting keep the Hobbs case in mind – you need to
communicate your desires and expectations **IMP – Should ask yourself “Am I
saying something to the other party that they may misunderstand?”

Notes on Intention (discussed a bit above too)

- While intention can be conceived- it cant be conceived usefully
- Mr and Ms Scott- to use intention here is to go down a path ultimately ends up
in the swamp
- Place where you have no guidance – because intentions are going to be judicial
constructs
- The parties never thought about it – what you are talking about in these

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 contexts- is DEEMD intentions
- That which is not A is deemed to be A
- Deeming is short hand way of achieving particular result - deem because you
want to achieve particular goal
- Ex: London drugs- want to protect employees – (Iacobbuci slides off it- he DEEMS
Intention b/c he wants to protect the employees) à unhelpful b/c he is not giving
us reason for result (he is giving us verbal formula), he is just deeming intention
to achieve particular result
- So when talk about intentions and creating one at of thin air- you are deeming
intention- because you think you have to talk about intention terms
- But that’s nonsense- that’s like saying “ for reasons we don’t want care to
disclose, we find against you”
- So back of the deeming- you can find something- but its hidden – because the
courts don’t talk about
- Intention analysis that’s the BACK of so much interpretation – but we don’t
KNOW what they intended- because they haven’t thought about it – DON’T
KNOW TRUE INTENTIONS
- Intention then isn’t a helpful concept
- Much more helpful concept- FOCUS ON expectation- there you can have
evidence “ I expected this”
- Or COULD HAVE HAD REASOANBLE EXPECTATION
- Expectations are REAL things you can talk about
- Through expectation you could also come to the conclusion ”you could not have
had this expectation”
- WHAT WILL OTHER PERSON EXPECT IF THEY READ THIS. What you want to
happen. If you don’t want person to believe they have this right, then SAY SO
- Key to managing contract: KEEP IN MIND HOBBS CASE- am I saying something
other party might misunderstand? Or will other party think I am offering
something that I am not offering?
- Back to example of buying a car: I am just SELLING A CAR- If it doesn’t work
well doesn’t run- don’t come to me b/c im just selling a car( 4 wheels, body etc)

The Parole Evidence Rule

- SWAN HATES THIS!!
- RULE: cannot admit oral evidence that would “alter, vary or interpret” the
written contract is the language is clear & unambiguous – if it will contradict or
subtract from the contract
- This rule is almost universally misunderstood (Eli Lilly is following this)
- This rule is problematic b/c then as soon as the court decides that the parties
contract has to be found in the pages then nothing else matters
- It is the role of the parties to show the source of the contract – is it just the
pages or the pages + something else?

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 Gallen v. Allstate Grain Co. (1984)
Facts
*Didn’t have to read!!
- D is a grain dealer & agreed to sell buckwheat seed to the Ps (farmers) and to
buy the crop when it was harvested
- D gave oral assurance that there would be no problems with the weeds
- P also signed a contract that had an exclusion clause saying “D would give no
warranty to the productiveness of the crop and will not be responsible for it”
- Crop ended up being a failure and was covered by weeds – so P sued for profit
they would have made had they planted a regular crop
Issue
- Is the oral assurance legally binding?
Held: P wins. D is liable for a breach of oral warranty
Reasoning
- Exceptions to parol evidence rule (when the evidence CAN be admitted)
- If the contract does not embody all the terms of the agreement
• *To show contract was invalid due to fraud, misrepresentation, mistake,
incapacity, lack of consideration, or lack of contracting intention
• *To dispel ambiguities, to establish a term implied by custom, or to
demonstrate factual matrix of agreement
• *In support of a claim for rectification
• *To establish a condition precedent to the agreement
• *To establish a collateral agreement
• *In support of allegation that doc itself wasn’t intended by parties to be the
whole agreement
• *In support of a claim for equitable remedy
• *In support of a blain in tort that oral statement was a breach of duty of care
- Evidence admissible here b/c either the document did not contain the whole
agreement or the oral representation formed a separate agreement/collateral
contract
- General rule: Carman Construction: a collateral contract cannot be established
where it is inconsistent or contradicts the written agreement
- BUT in this case, there is NO contradiction so the warranty is binding
Importance
- Once is has been decided that an oral representation was a warrant then:
1. The oral warranty and document must be interpreted together
2. If there is no contradiction, then the rule that written should prevail has NO
application (adding to the written is okay)
3. If there is a contradiction, use the principles of Hawrish, Bauer and Carman that
there is a presumption in favour of the written contract –but this is NOT absolute
Notes
- If the party seeking to have parole evidence admitted pleads that the document

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 - is ambiguous, that the document is ambiguous, that there is a “collateral”
(separate) agreement, or that the document was executed by mistake, the
evidence to establish these propositions will ALWAYS be considered by a judge
- Nevertheless, the rule still causes problems. Some judges like in Bauer, gives the
rule a strict, literal effect

Hi-Tech Group Inc v. Sears Canada Inc. (2001)

Facts
Didn’t have to read!
Morden J.A.
- The P is in the business of organizing and managing consumer clubs on behalf of
retailers, such as the D, to offer benefits and costs savings to consumer members
as well as increase retail sails for the retailer
- The P entered into an agreement with the D dated May 1 1994, which
established the “Mature Outlook Program” that was designed for the D’s
customers who were over age 50
- Customers purchases membership for $9.99. P received $8.99 and D received $1
- The P provided the various benefits to members and administered the program
- The D provided other benefits, notably discount coupons on purchases by
members
- Term of the agreement set out in s.4.1 It submitted that the 120 days notice
was to precede the commencement of the renewal term beginning on May 31st,
1996 and if it did not, the agreement would renew automatically for a further
year from that date. D delivered a notice of termination on February 21st 1996
- P submits that the notice was ineffective to terminate the agreement before
May 31st 1997
Notes
- The harm done by the incorrect & unhelpful statement of the parol evidence rule
in Eli Lilly cane be seen in the motions in the court and appeal judgments in Hi-
Tech Group

Filling the Gaps in an Agreement

- There are 2 principle ways in which an agreement can fail to deal with all that
has to be covered if the parties’ transaction or arrangement is to work properly
(i.e. to meet the parties expectations
1. Something has occurred which was not provided for in the agreement, so the Q
is: “What do we do about it?”
• We can call this failure of completeness a “gap”
- As we saw in Chapter 2 with employment contracts, the law filled the gap by
providing certain default rules
• Important thing is you are allocating a risk of loss

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 • Where is this allocation coming from? Not from the parties. It comes b/c the
law says we are going to allocate a risk of loss in this way
- Problem is that human foresight is limited – can’t be drafted perfectly to foresee
what might happen
- Seen as a Q of interpretation of CREATION of contract
- It is NOT interpretation. It is something that has to be done to make the thing
work. Much more than interpretation.
- The attitude of the court in dealing with gaps can be seen in 3 cases:
1. Reigate v. Union Mfg. Co
2. Shirlaw v. Southern Foundries (1926): “If while the parties were making their
bargain, an officious bystander were to suggest some express provision for it
in their agreement, they would testify with a “Oh of course”
• These 2 cases brought up the idea of an officious bystander
3. Morcock
2. Another way in which terms of an agreement can be supplemented by additional
terms imposed by the courts is when a court believes that, whether or not the
parties thought about the point, an obligation should be imposed on one side
• Ex: in Liverpool City Council v. Irwin (1976): when tenant withheld payments b/c
landlord was not maintaining the building Court of Appeal found that a
reasonable expectation of this contract is to have the building maintained – it
was reasonable & necessary to impose obligations on the landlord to take
reasonable steps to keep the facilities in the apartment block in good repaid. –
implication of the term as necessary to support the relation
• This decision was explained in Canadian Pacific Hotels Ltd v. Bank of Montreal

The Moorcock (1889)

Facts
- Moorcock docked at a moor, and damage was caused
- P is arguing that the D was responsible to ensure his vessel would remain safe
while docked
- D claimed that there was no provision in the contract stating this and they could
not have foreseen this damage
Issue
- Can there be an implied warranty that the wharfinger would be liable for
breach?
Held: P Wins
Reasoning:
- Court can imply terms that wharfingers / owner of wharf had a duty to make
sure the riverbed adjacent to the dock was safe. Should have warned them that
the ridge of the rock would be a potential hazard
- An implied warranty can be read in to ensure business efficacy, based on the
presumed intentions of the parties

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 - POINT: if you invite the master of a ship to tie it up to your dock, you are
representing that it is safe to do so. If you don’t want to take the risk that this
representation entails, then you must erect a sign which says, “Moor here at
your own risk.” The fact that one allocation of risk is achieved by statute and the
other by a judicial decision cannot matter; each is legally effective and justified
on the same grounds.
- The master reasonably expected to buy the goods or tie up the ship without
incurring the risks of loss arising from defective goods or uneven ground. had
you thought about what the buyer’s or master’s expectations were, you would
have known what they were. You have either to accept the consequences of
defeating them or to prevent them from arising in the first place.
Importance
- In business situations courts can imply a term of warranty if the risk is not
allocated otherwise, through a term like “moor at your own risk”
Notes
- Test to determine if a term should be implied: Officious bystander test- if, while
making the agreement, a bystander noticed that you left something out, and the
parties would have said “oh, ofcourse”
- Dynamic Transport- examples of the courts allocating the risk of loss arising from
an event. Moorcock the event is the damage to the ship. Court allocates the risk
of loss to the wharfinger- (pre d&Stevenson) so had to find obligation
undertaken by the wharfinger to base the allocation
- Case creates a default allocation of risk that protects the reasonable
expectations of the person who, without having the terms of the deal changed,
wants to buy (non-defective) goods or tie his ship up at a (safe) wharf.
- The way the court allocates the loss in this case if by talking about an implied
term. Implied term= that it is safe to tie the ship to the dock.
- This case talks about an implied term= the risk of loss arising from ships landing
on uneven ground is to be born by the wharfinger. b/c they are in a BETTER
position than the master of the ship to see if it is safe to tie up. It was a method
for allocating the risk of loss.
- As a solicitor of the wharfinger you should advise the client to say “moore at
your own risk” or add in the contract that you are not liable

The below case illustrates the interplay between the 2 approaches to the existence of
a gap in an agreement: implying a term based on presumed intent of parties &
imposing a necessary term based on an assessment of a “particular kind of contractual
relationship, regardless of presumed intention”

Marbry v. Avrecan Internatonal Inc (1999)

Facts
Braidwood J.A.

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 - M was the exclusive distributor of Reebok made A LOT of money
- The trial judge held that the Avrecan (appellant) was required to given
reasonable notice to the respondent (Marbry) when it terminated an oral
agreement pursuant to which the R acted as a distributor of Reebok products –
Avrecan is appealing this judgment
- The notice period was set at 15 months
- Avrecan finds the trial judge erred in finding that:
1. The relationship between A and M was such as to require reasonable notice to
terminate
2. If notice was required that the appropriate length of notice be 15 months
Issue
- What is the true nature of the relationship between the parties?
Held: M wins. Notice period changed to 9 months
Reasoning
1st Argument:
- When the courts are implying a term into a contract (like reasonable notice upon
termination) attention should be paid to the test in Shirlaw v. Southern Foundries
(ABOVE)
- In determining the relationship at hand, in Montreal v. Montreal Locomotive
Works (1947) a 4 part test:
1. Control
2. Ownership of tools
3. Chance of profit
4. Risk of loss
- Another test in Stevenson Jordon.. “A man is employed as a part of the business,
his work is integral to business..”
- When these test are met= the principle in Shirlaw is satisfied
Application:
1. Relationship Length: Agree with the trial judge that A and M were in a long term
relationship
2. Reliance or Closeness of the relationship: M heavily relied on A
3. Degree of Exclusivity: high degree of exclusivity on the part of M
4. It was a “business integration”: M was not simply an accessory to A’s pursuit
- I would characterize the relationship as more akin to an employer/employee and
not an independent contractor or strict agency
- As such, this relationship falls within the category identified in Carter v. Bell and
reasonable notice is needed
Dissent (McEachern)
- Denies that it is the court’s job to fill the gap
- His point of view is rejected by the courts over and over
- Courts continue to try to fill in the gaps to make the contract work
Notes
- What kind of obligation is imposed on the D by the majority? One to give

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 reasonable notice of termination

A Short Note on Good Faith & Implied Terms

- In Chapter 8 we will explore a VERY imp case Bhasin v. Hrynew (2014)
- In this case, the obligation was NOT imposed as an implied term. Cromwell said
the duty “inheres in the parties’ relation” they quoted Swan!!
- Cromwell states that the duty of good faith should not be seen as an implied
term but a general doctrine of contract law and the parties are NOT free to
exclude it

Representations & Warranties

- *USE for vending machine assignment
• IMPORTANT: The equipment has been well maintained & is working properly
– if the seller can say this, the buyer is satisfied. You must go through all of
the concerns the buyer has. The seller has to either except this or qualify (i.e.
I cannot guarantee this)
- These 2 words have VERY different roles in the law of contracts
- Role 1: devices to be used by solicitors in planning the agreements that solicitors
draft (almost always in agreements of sale – you use them to determine the
quality of what you are buying)
• With respect this role, representations are devices for controlling &
allocating risks that arise with every transaction or contractual relation –
every contract creates risks
• The more risks the buyer bears, the lower the price it will be prepared to pay
• Legislation may impose on sellers both goods & services obligations that
those sellers cannot disclaim – ex: Sale of Goods Act sellers faced with this
obligation may have to increase the prices to cover the risks they face
- “Reps & warranties” are principle drafting techniques – the 2 words are often
used in combination in a section of a contract
• Representation: is a statement made by a seller on which the buyer has
relied (i.e. a statement by a seller that the car has not been in an accident)
it is a statement of fact that is either true or untrue
o It is a statement of QUALITY
o Breach of this (misrepresentation)= usually protects the representee’s
reliance interest
• Warranty: is a promise
o Breach of a warranty= expectation damages will be in the same
position if the promise had been kept
- Reps & warranties are TOOLS for solicitors.

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 - **IMP: In most cases, the buyer drafts the first draft. The buyer will put in the
first drafts the statements & promises it wants the seller to make (i.e. I want the
seller to tell be the car is in good shape). If the seller cannot make this statement
b/c it isn’t true, it must say this.
• It STARTS with the BUYER
• The buyer identifies what it wants to know about what its buying
- Remember (as we saw in chapter 6, an express condition provides 1 or both
parties with an excuse if a particular event does or doesn’t occur. It operates
very differently from a representation or warranty.

The Classification of Contractual Statements

- Role 2: of the words “reps & warranties”: their role in providing analytical or
conceptual arguments – they can be “pegs” on which arguments can be hung
in litigation
- Pegs give you a cause of action cause of actions in contract= you need a
contract + a breach.
• You must identify the PEGS and CONSEQUENCES
- This occurs when the contract does not allocate the risk of loss that have arose
- Ex: this happened in Honkong Fir (chapter 6) – the condition that the charterer
argued existed was implied by the court and not expressed in the agreement.
• This kind of condition has been called ‘innominate term’ (i.e. something that
is not a rep, a warranty or an express condition)
- Although the 2 words are distinct, as we will see, any conceptual clarity is
compromised or obscured by the fact that the word “warranty” will often be
used to refer to statements, rather than being confined to promises – the
leading case on warranties (Heilbut Symons & Co v. Buckleton) uses the term to
refer to a statement that was false
- The courts have developed a range of legal responses for dealing with issues that
arise if the expectations of the buyer (ex in a sale) are disappointed.
• The nature of the remedy depends on how the statement is classified
• An aspect of the problem of classification is the need to recognize what a
seller says about something
• Ex: “It’s a great deal, you wont regret it!” or “That looks gorgeous on you”
the court attaches no legal significance to these statements, they are “mere
puff”

Misrepresentations
- Misrepresentations cover a WIDE range
4 kinds:
1. Low or trivial end: innocent misrepresentation – the remedy for this is limited to
rescission of the contract
• Rescission must be sought before both parties had performed the contract

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 • Original remedy for innocent misrep lay in equity – here, damages weren’t
available, they can only rescind the contract, putting the parties back in the
position before it was made. This equitable limitation has disappeared but
like many rules, it can have lingering effects
2. Next “grade” is the breach of a statement – the remedy is damages
3. Negligent misrepresentation – the remedy for this lies in tort (Donoghue v
Stevenson)
• Pure economic loss
• Doesn’t have to be dishonest (this is what distinguishes it from fraud)
4. Fraudulent misrepresentation or simply fraud – criminal offence, entails
dishonesty or real wrongdoing – the remedy is the rescission of the agreement;
the tort remedy (tort of deceit) is measured by reliance interests
• This is a dangerous peg to hang an argument on
• Should only sue for this if you have serious proof
• If you make a claim against someone for fraud & then you cant prove it, you
are then liable for costs
• If you CAN establish fraud it is very powerful (if you can’t, you should choose
an alternative “peg” like negligence)
- Time is important: if a buyer wants a remedy late in the deal or after the
performance of both parties has been completed, the buyer will face GREATER
difficulties in establishing that the statement was a warranty rather than a
misrepresentation
- The English case Redgrave v Hurd (1881) illustrates the nature of limitations on a
claim based on representations
• Seller (vendor) wanted to see his practice & his home together
• Gave papers to buyer about the income of the practice (they were false) and
the buyer did not look at them closely
• After the buyer had paid a deposit, moved into the home & paid less than
half of the price, the buyer discovered that the practice was making less than
he thought
• He refused to complete the deal and the vendor (seller) sued for specific
performance of the agreement of purchase and sale of the house
• The court held the vendor did misrepresent the income from the practice – it
was held to be innocent and not fraudulent (established proof of fraud is
VERY difficult)
• So remedy was rescission (parties are put in the position had not contract not
been made)
- Two principal limitations on the remedy of rescission:
1. The promisee must be able to give BACK that which it got from the promisor –
restitution in integrum (i.e. restoration to the former state)
2. The promisee CANNOT get reliance (or expectation) damages; it can ONLY get
back what is actually paid the promisor

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 • This limitation arises b/c rescission is an equitable remedy (meaning, it
could not give damages)
• In this case, the purchaser recovered the deposit but did NOT recover
the costs of moving his family to Birmingham from another part of
England
- Had the vendor have been guilty of fraud, the buyer would have been entitled to
rescission + damages for deceit (a common law tort remedy)
- But again, fraud is very difficult to prove – the usual requirement is that the false
representation must have been made “knowingly, or without belief in its truth,
or recklessly, careless, whether it be true or false”
3. Another limitation: the traditional rule is that the remedy for innocent misrep
must be sought before the contract had been executed or fully performed by
both parties – relief is only available when the contract remains executor
• SO if in Redgrave, the buyer completed the deal by paying the full price, he
would not have been entitled to rescission or any other damages (b/c fraud
wasn’t proven)
- Derry v. Peek: in this case- established the requirement for fraud. The director’s
escape from liability for an incorrect prospectus, was quickly overturned by
Parliament through legislation

The below case discusses much of the old law where the court’s struggle to make
sense of the consequences of parties contracting in a very disorganized way is
obvious.

S-244 Holdings Ltd. V. Seymour Building Systems Ltd. (1994)

Facts
Cumming J.A.
- The appellant (S-244 Holdings) was the prime contractor in the development of a
52 unit townhouse project in BC
- The respondent (Seymour) was the subcontractor engaged by S-244 to do stucco
on the exterior
- There is no evidenced the A knew the R only intended to tender for Phase I
- The A prepared an agreement for the stucco of 52 units ($157 thousand) and the
R began the work
- The misunderstanding arose after the work was partially completed & the R quit
- A is sueing for the difference between having all 52 units stuccoed & the
contract price
- R is suine A for a quantum meruit claim against the work it had done
- The trial judge found that Seymour bid on Phase I of the project only (22/52) BUT
the prime contractor thought the bid was for the entire project
- The trial judge also found the A unintentionally induced the mistake on the part
of the R. He dismissed the claim of A and allowed the claim of R.

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Issue
-
Held: innocent misrepresentation. Contract rescinded + R gets $ for work it did.
Also, the A pays no more than it should have for stucco work on the entire project after
paying the R and the other sub-contractors who completed the job.
Reasoning
- The worksheets prepared by the R clearly established that the bid was for Phase
I and they contend that the price would be WAY too low if it was for the whole
project
- There is no evidence that the A knew this price was way too low – and the A
should not have ought to know that the bid was too know. This implies an
obligation on a contractor who is soliciting bids to take further steps to
determine whether a bid price is unreasonable (the A also was no familiar with
the stucco trade)
- The contract made no reference to the phasing of the project
- The R had a mistaken belief that the contract was only for Phase I
- I view this as a case of innocent misrepresentation – b/c there was a
misrepresentation of fact, relied on by the R, which induced the R to enter into
the contract
- Remedy: rescission + R entitled to value of the work done on Phase I on the basis
of quantum meruit
- Historically, the remedy of rescission was not available after the execution of
contract, HOWEVER, such remedies are now available
Notes:
- The court here struggles to protect the reasonable expectations of the sub-
contractor while being FAIR to the general contractors and the decision looks to
have struck the appropriate balance
- This case is imp b/c it shows the court getting disorganized facts and searching
around to find a peg to hang an argument on just take this case as an example
of a court DETERMINED to solve the issue

(Below notes are on omitted readings)

Warranties
- Warranty= collateral contract to a contract of sale

Heilbut, Symons & Co. v. Buckleton

- This case sets out the law on the availability warranty as a peg, the case should
also be seen as an expression of the attitude of the HofL to the idea that a
person can be liable for a non-fraudulent statement
- Securities Act transforms the way the issue is now dealt with

Dick Bentley Productions Ltd. V. Harold Smith Motors Ltd

- This case is an attitude to pre-contractual statements

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 - Look at para 2

Plas-Tex Canada Ltd. V. Dow Chemical of Canada Ltd.

- Example with a company who behaved very badly
- Looks at problems of privity in the context of the sale of defective goods

Negligent Misrepresentation
- Candler v. Crane, Christmas & Co (p.806): makes bank liable based on a duty of
care owed to an advertising agency & they breached their duty by being careless
in the response they made. They held that you could sue for negligent
misrepresentation.

Esso Petroleum Co v. Mardon (p.808)

- Esso sued Mardon on the lease
- He defended by saying: (1) Esso had warranted a promise (2) it was a misrep
made negligently
- Denning refused to go down the warranty route, but did go down the misrep
route tort claim
- The Q then is the damages? He got compensation if you see the damages he
received, it is a tort measure but it actually looks like an expectation measure –
so it doesn’t follow that a reliance measure is necessarily less then expectation

Mistake
- The law of mistake is a residual category: it is invoked as a last ditch effort for
those counsel whose claim for relief can find no better “peg” on which their
argument can be hung
- This is the LAST possible peg
- Back to the problem of allocating the risk of loss
- In all the cases we have looked at, we have seen “mistakes” made (i.e. various
disappointments that should have been foreseen) BUT the difference between
the former and the ones to come is that in the former there was some basis
(such as the words used by the parties or in the reliance of one party on the skill
or knowledge of the other) for the allocation of the risk of disappointment to
one side
- Cases of mistakes can fall into several categories, 2 of these:
1. Where there has been a mistake in transcribing the agreement
2. Where a party has mistakenly made a payment that is not owing or due to
the payee
• In both cases, if the mistaken party can maintain a claim, the allocation of
risk to one side or another is relatively simple.

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 - The difficult cases are the ones where it is difficult to allocate the risk to one
side. This will occur in cases where one or both parties made a mistake about
some underlying assumptions related to the contract
• For ex: the mistake may have been made in the assumptions about the
context of the deal, such as an assumption that gov’t legislation would not
have affected the financial plans
- We again in dealing with these cases find that judges frequently fail to address
explicitly the allocation of risk

Below are 2 types of easy mistakes:

Rectification: Correcting the Written Contract

- One class of mistake occurs when the written agreement fails to accurately
record the terms of the parties’ agreement
- This is a NARROW remedy – it corrects the written agreement b/c it does not
coincide with the actual agreement
- Court of equity has been prepared to give the remedy of “rectification” in these
case
- Ex: the parties agree on the price being $110,000, but then when the agreement
is typed it $100,000 is written and the mistake is only discovered once the
contract is signed
- Oral evidence is admitted to rectify the written document
- Rectification does not need any bad conduct on anyone (Binnie gets this
wrong!!) -

The below case is the leading decision of the SCC on the issue of rectification.

Performance Industries Ltd. V. Sylvan Lake Gold of Tennis Club Ltd (2002)
Facts
Binnie J.
(he confuses things here. The result is correct but suggesting that a fault is needed is a
mistake)
- A entered into negotiations with Bell, respondent’s principal, for joint venture to
allow A to develop part of the lands.
- A and Bell made an oral agreement that gave the R an option to purchase land
for specific residential development to be undertaken by Bell.
- Oral agreement was 110 yards, but written clause was 110 feet. Bell signed
without reading, sought to fix 5 years later, but A insists on the written contract
despite knowing they don’t accurately reflect the oral agreement.
- R sues A for rectification of the agreement or damages in lieu thereof.
Issue
- Should rectification of the agreement be granted?

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Held: R (Bell) entitled to rectification & damages for loss of profits
Reasoning:
- What is essential is that at the time of execution of the written document the D
knew or ought to have known of the error and the P did not
- The hurdles one must show:
1) There must be a prior oral agreement
2) The D either knew or ought to have known of the mistake in reducing the oral
terms to writing
• Mere unilateral mistake alone is not sufficient to support rectification but if
permitting the non-mistaken party to take advantage of the document would
be fraud or equivalent to fraud, rectification may be available
3) The A must show “the precise form” in which the written instrument can be
made to express the prior intention
4) This all must be proven beyond a reasonable doubt
- *This case goes through each factor in details
Notes
- In Sylvan Lake, Binnie J. said “rectification is an equitable remedy whose purpose
is to prevent a written document from being used as an engine of fraud or
misconduct “equivalent to fraud”…”
• The phrase “fraud or equivalent of fraud” is vague and sometimes misleading
• In this case, the party resisting rectification was found to be acting
fraudulently
• It is clear that neither fraud nor something equivalent to this is required for
rectification: it is sufficient that a mistake was made
• What does “equivalent to fraud” mean if its not fraud?
o This confuses the law
• In one case it was described as “unfair dealing and unconscionable conduct”
- The decision in this case suggests that in order to obtain rectification, the P must
satisfy a standard of proof between the civil and criminal standards

Mistaken Payments
- Second class of relatively easy cases is made up of those situations where the P
has made a mistaken (over)payment
- These can generally be recovered
- Ex: Tom is supposed to pay Mary $1000, he pays her $1,100 by mistake Mary
is then unjustly enriched by the payment restitutionary claim
- An important LIMITATION on the right to recover for a mistakenly made
payment is that the right to recover will be lost if the recipient has, in reliance on
the receipt of the money, changed its position
• A “change of position” defence does not arise from simply spending the
money but from the doing of some act (i.e. making of a gift) that would make
it unfair to require that the money be repaid

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 - Ex: in Budai v. Ontario Lottery Corp: P was mistakenly told he won $800 but he
actually won $5. He threw a party spending $430 on reliance of this win. He was
then told of the mistake, and sued for getting the $430 – he won.
- No one can plausibly argue that they relied on getting an advantage from a
typographical error or a windfall from a mistaken payment

Mistaken Assumptions
- Mistake in assumptions: when an agreement is reached and is correctly
recorded, but one or bother parties make a false assumption concerning some
matter relevant to the decision to enter into the contract
- These are the most difficult ones
- It is not obvious how the risk should be allocated

The below case is one of the most famous American decisions in the law of contracts
& is studied by many American law students. It deals with the issue of whether the
argument of mistake can be used to reallocate the chance of gain.

Sherwood v. Walker (1887)

Facts
- This is the case of the not-so-barren cow
- Sherwood (P) contracted to buy a cow believed to be a barren, at a low price
from Walker and others (Ds)
- Later the parties realized the cow was with a calf
- The P wanted to enforce the contract while Ds wanted rescission
Issue
- This case ponders the Q of whether 2 parties should be held to an agreement
regarding a thing, if the nature of the thing changes entirely
Held: Reversed
Reasoning:
- The court found that the parties’ misapprehension regarding the barren nature
of the cow went to the substance of the agreement.
- As such, the agreement was void; due to its pregnancy, the cow ceased to be the
animal that it was originally deemed to be
Dissent
- Judge Sherwood found there was no evidence that the P did not, in fact,
understand what he was buying
- The P had expressed that the cow may be able to breed and he was interested in
a breeder
- As such, he was not mistaken and should have been able to recover
Notes
- The buyer can sue for a breach of warranty or negligent misrepresentations if
the buyer (for ex) believed he was buying a cow and she turned out to be barren.

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 The seller has no analogous right b/c there are no implied warranties running
from the buyer to the seller
- All the seller can use for his claim that the loss he will suffer should not be visited
on him is the law of mistake
- Trouble with majority judgment = misallocated the loss
- Which judgment do you find preferable? Most scholars prefer the dissent and
consider its risk-based analysis (“each party took his chances”) to be the best
approach to this type of case
- This case shows you the problems of dealing with a mistake – sellers can only
claim a mistake when they realize something they said is worth much more

The decision below has been regarded as the leading precedent on the Anglo-
Canadian law of mistake, though after reading some of the cases decided later, it may
be open as to whether the courts are still following this.

Bell v. Lever Brothers (1932)

Facts
Lord Atkin
- Levers employed 2 execs- Bell, Snelling to run a subsidiary in Africa.
- Turned company around- company sold and so services no longer needed.
- Levers promised to pay balance of salary for remaining years.
- Discovered Bell & Snelling had been breaching fiduciary duties- speculating in
CoCo (the company) for their own account. Key: jury found that Bell was not
fraudulent.
Issue
- Can Levers recover the payment they made to Bell? He had breached the
contract by dealing in cocoa. Not entitled to payment
o Did Bell have an obligation to disclose his wrongdoing? NO.

Held: Cannot recover

Reasoning
- Mistake either negatives or nullifies consent
- Mistaken belief that A was contracting with B, when in fact he was consenting
with C - this would negate consent
- If the thing they bought had been destroyed before contract was made it
nullifies consent
- Context of offer and acceptance- should have been aborted because there was
no consent
Dissent (Lord Warrington)

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 - Bell was paid 2 amounts: amount of future salary—and given an extra 10
thousand as a bonus. Paid a payment for work he did out of gratitude. By not
dealing with the 2 separate claims- Lord Atkin isn’t being helpful. He should have
separated out the 2 components of the payment made to Bell. Bell’s gratuitous
payment was separate.
o View of mistake is very narrow
o Generally speaking, no obligation to make disclosures

Ratio
- Mistake will not affect assent unless it is the mistake of BOTH parties and is to
the existence of some quality that makes the thing without the quality
different from the thing it was believed to be
- Levers could have sued Bell based on constructive trust- breach of fiduciary duty.
But they wanted to recover the payment they made
Test: Is it fundamentally different? Was there a fundamental difference in the
quality of the thing subject to contract? NO
Issue: what does fundamental mean?
Looks like a conclusion- don’t discuss how should the risk of loss be allocated?
Had levers known all the facts payment would not have been made
Notes
- The amount of money he got was in 2 payments (1) gratuity (2) work
- The House of Lords did not analyze the facts accurately
- Atkin introduces this thing that became the fundamental basis for mistake
mistakes are put into the concept of offer & acceptance – if a mistake operates it
will nullify consent
• The mistake Atkin makes: He puts the context of mistake into offer &
acceptance
• This “law of mistake” is difficult to apply
- In dissent: do the arguments on the issue of mistake apply to the part of
compensation that is the gratuitous payment (a bonus work well done) as well as
to the pre-payment of salary? The verdict is not made clear
- How should a court determine if something is “fundamentally different” or
“different in substance” from something else?
- Really the Q is: “What do the courts want to do and why do they want to do it?”
- Recall that in Raffles v. Wichelhaus the court concluded that NO enforceable
agreement b/c the parties had no agreed on the terms of the contract. This case
was referred to as one of the leading cases on the law of mistake.
• Notice the similar reasoning by Lord Atkin
• He sees the operation of mistake in the context of the rules of offer &
acceptance as a rule either “negatives” or “nullifies” consent
- In Courtrights v. Canadian Pacific Ltd. (1983): the P sued for damages for
wrongful dismissal in a situation where he has just been hired and his employers
refused to allow him to start work. The employee didn’t disclose that he was

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 being investigation of “influence peddling”. The CofA held that his failure to
disclose this at the time of his job interview was a breach of his obligation to deal
with a prospective employer in good faith
• The REPORT of the case raises 2 issues
• FIRST: The judgment refers to Bell v. Lever Brothers in the context of the duty
of the employee to disclose facts which might affect his “acceptibility” to his
employer BUT the report “catch-lines” characterize this case as a mistake of
fact case. But no “mistake” was made and no argument on this mistake was
made either
• SECOND: there was ultimately no basis for any concern by the D about the
P’s integrity. He was the victim of a criminal investigation. However, the
judgment emphasized that being employed as a lawyer constitutes a
confidential relation requiring the utmost good faith, for which there is a
duty of “good faith” that requires disclosure of any material info before a
contract is formed. Does a law student going for an articling interview have a
similar obligation?
- Solle v. Butcher (1950): parties had been partners in a business that bought
houses for renovation – they renovated it and leased a flat to the P (Lord
Denning)
• The parties were concerned the rent charged might be caught by the Rent
Acts
• These acts prohibited an increase in rent during the term of tenancy – they
could only be increased with permission from gov’t agency
• The P sought legal advice on applicability of the acts and after advice that the
flats were not subject to pre-war rents, the parties agreed on 250 pounds per
annum w/o obtaining permission
• Relations between the parties deteriorated and the P brought an action
claiming the rent legislation applied and the max rent was 140 pounds,
seeking overpayment to be returned
• CofA – Lord Denning – he held Bell limited the scope of mistake at common
law. The lease was set aside “on terms”.
• This case illustrates the “residual” nature of an argument based on “mistake”
• The only basis for relief for the landlord was to have the lease set aside so an
application could be made under the legislation to permit the higher rent to
be charged – once again Denning uses equity to create a remedy b/c there
was no other peg to hang the argument on

Below Notes Did not have to Read:

- Great Shipping (check case name): Good allocation of risk of loss here – tried to
use Solle v. Butcher as a peg. The Court didn’t like this decision of giving relief. It
makes sense to put the risk of loss on the ship owner – b/c we want to
encourage good Samaritans. In Solle, it is not helpful unless we focus on, “Is
there a better way to allocate a risk of loss?”

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Amalgamated Investment Property Co. v. John Walker & Sons Ltd. (1976)
- Facts: D selling warehouse, advertising as for occupation or redevelopment. P
buys it—before contract was signed, P asked D to specifically state whether it
was a building of special architectural or historic interest. D says no. A day after
formal contract signed, D gets a letter saying building is of special interest. This
would cause price drop, and make it impossible to fix up the exterior. P pulls out
of the deal, D sues.
- Court says risk of property being listed as historical interest can affect all
ownership of buildings. Extremely remote but substantial risk. Every owner and
purchaser should recognize it’s a risk they are subject to. Risk the purchaser
must carry.
- Swan says court’s adoption of risk analysis is a useful way of dealing with this
type of problem
- Courts talking about risk allocation. It is a land case, company agrees to buy a
building unknown to the company. The building is characterized as a historical
building and this has a catastrophic effect on price, price drops 90%. Risk of loss
on seller or buyer? Put it on buyer b/c he can protect himself either by (1) doing
a search or (2) putting a condition (3) some other method to protect investment
• Civil servant was sent out to wander around London and decide on a building
• No qualifications
• This case is an example of how these decisions are made
• It makes sense to impose the risk on the buyer b/c they can PROTECT
themselves

Terminology (p.888 para 7.372)

- There are 3 kinds of mistakes:
1. Unilateral mistake: only 1 party is mistaken
- 2 separate meanings:
(a) I make a mistake but you KNOW I have made a mistake (Smith v. Hughes) very
easy in this situation to give me relief, because you KNEW I was mistaken
(b) 1 party made a mistake but the other party did NOT know about it difficult
cases
• If you come across this mistake, STOP and ask WHICH type of UNILATERAL
mistake is it?
2. Mutual Mistake: parties misunderstand each other and are at cross-puposes
- I am selling you something, my prized sheep, you think I’m selling you my prized
goat (Raffles v Wichelhaus case)
3. Common Mistake: we both make mistakes of the same kind
- Ex: we both think the ship and cargo we are buying is on the ocean – it is not
- Analysis in deciding which party should bear the risk of loss or get the advantage of chance
of gain. Factors to consider
o Nature of the contract and relation of the parties
o Size, significance, or nature of the mistake
o Communicaions between the parties and the terms and contxt of the contract

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 o Relative fault, responsibility or knowledge (or ease of access to knowledge.
o Timeliness of claim for relief

Mistakes in the Formation of Contracts

- Where the misunderstanding occurs without the fault of either party, the courts
have generally held that no contract is formed.
- Raffles. v. Wichelhaus—two ships named Peerless. Seller had cotton on only one,
and cotton was to be sold. Court held no enforceable contract. The
misunderstanding wasn’t anybody’s fault.
- Staiman Steel Ltd. v. Commercial & Home Builders Ltd (1976 OCJ): D invited bids
on “all the steel in the yard”, which included both old and new steel. Did not
intend to sell the new steel, and when P won the bid and wanted to take the
new steel, D said no. Judgment for P, D bound to sell steel as it was within the
description of what was for sale.
• He didn’t actually mean “all the steal” he meant “all the steal” in the auction
• Court says to the buyer you can’t buy the steel you knew was not for sale
(like Smith v Hughes)
- McMaster University v. Wilchar Construction Ltd. P tried to hold D to an
agreement to construct a building for a fixed price, rejected D’s claim that
agreement was subject to price escalation clause. D accidentally omitted the
page that had the price escalator clause. Pages were numbered, and P knew the
D made such a mistake. Court said P couldn’t enforce the agreement.
- Stepps Investments Ltd. v. Security Capital Corp (1976 OCJ): Contracts exchanged.
P makes small but significant changes without telling D. D signs the agreement.
Court refuses to enforce agreement as signed. “At least give him a real
opportunity to appreciate the change”. This case enforces an obligation to
bargain in good faith.
• Neat way of splitting the risks
- Many of the problems in these cases are adapted with the way in which
contracts are generated now with computers
- Black lining: underlining or highlighting changes. Failure to do this is a serious
impediment to efficient bargaining and is denying a party the right to enforce
the terms covertly inserted into the agreement.
- AMJ Campbell Inc. v. Kord Products Inc (2003 OCJ): P’s lawyer blacklined a major
change. D signed, then tried to seek rectification. Court says changes were
brought to your attention. P has no reason to think you didn’t know of the
change.
• It was a mistake of a COMMA
• It was black lined
• Known as the “million dollar comma”

Below case is the WORST decision by the SCC!

- Swan HATES it
- It puts a loss on someone that it should NOT have

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 - It set the law in a dreadful direction

Ron Engineering & Construction v. Ontario (1981) SCC

Facts
P submitted an offer to D with a deposit. Realized that the offer he submitted had a
mistake in it. Submitted bid for 150k when meant for 750k. Owner still kept the bid
deposit—said P should execute the contract, as P awarded the contract. P refused, D
kept the money and said deposit was forfeited.
Issue
- Is P bound by the call for tenders (Contract A)?
Held: P wins – owner can keep deposit
Reasoning:
- Contract A (appeal for tenders) stated that the commission may retain any
deposit. P said they had good faith intentions, it was an honest mistake. Cotnract
A cannot be violated, binding when submitted. Would be able to retrieve deposit
if certain conditions were met, but they were not in this case. Contract A: terms
and conditions under which the tender was made (unilateral acceptance)
constitutes binding contract. Contract B: construction contract itself—P would
breach when they could not perform.
Offer is the call for tenders, acceptance is the submission of the acceptable bid (Contract
A). Significance of the bid is that it becomes irrevocable if filed in conformity to the
terms and conditions of the call for tenders—tender invitation and tender bid are seen
as unilateral contract.
Ontario courts had developed a satisfactory approach to the problem that reflected
industry practice
1) Contract A , Contract B analysis- Contract A imposed by SCC on negotiating relation-
framework for making the contract. Invite you to submit a tender, owe you obligation
for A.
2 separate contracts which allows the contractor to retain the bid deposit
- Reasons: “When that mistake is proven by the production of reasonable
evidence, the person to whom the tender is made is not in a position to accept
the tender or to seek to forfeit the bid deposit.” The test must be imposed at the
time the tender is submitted and not at a later date after a demonstration by the
tender of a calculation error.
- Look at para 6 page 888
Notes
- Ron Engineering govt claims bid deposit, in Poole construction government claims
the difference between contract- gave leave to appeal in Poole, not Ron- Poole
said that a party cannot accept an offer which it knows to have been made on
mistake
- Contract A/B analysis of tendering process is still generally accepted. M.J.B.
Enterprises Ltd. v. Defence Construction (1951) Ltd. (1999 SCC) Iacobucci: “It is

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 always possible that Contract A does not arise upon the submission of a tender,
or that Contract A arises but the irrevocability of the tender is not one of its
terms, all of this depending upon the terms and conditions of the tender call….To
the extend that Ron Engineering suggests otherwise, I decline to follow it”
- The D suffered no loss but instead gains a windfall.
- Calgary (City) v. Northern Construction Co. Division of Morrison-Knudsen Co Inc
(1987 SCC) similar decision
- This case continues to produce unfair results in every province. Swan hates this
case.
- Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) 2010
SCC: Shoe was on the other foot—province was held liable for breaching the
terms of Contract A. The Contract A/B analysis prevailed.
- Swan says in terms of allocating risk, it is not fair to let it lie where it has fallen or
splitting the loss between the parties.
- Most situations of a mistake can be resolved by identifying which party could
most easily have prevented the mistake, and having that party bear the loss.
- Swan hates this case.
- Brings contractual relationship back to RFP. Legal relations arise earlier.
- D holds bid bond.
- Why Swan thinks this is a mistake
- You’re crazy to accept a bid that is too low. You want someone to bid enough to
make a profit. Because if bid is too low then its likely the work will be poorly
done, won’t get quality.
- P 891 para 7398: clause 7d. tender withdrawal.
- P 892
- Swan doesn’t like Estey’s decision and those that follow, is that nobody looks at
the documents—evidence of the industry thinks how to deal with mistakes. CCDC
and bid deposit documents, they deal explicitly with mistake. You can withdraw
but you can’t rebid. You don’t forfeit bid deposit or be liable for damages. – the
court FAILS to look at the background of this law
- There’s something offensive about a party knowing the other made a mistake and
just pocketing the money anyways.
- Page 888 para 6: intended to bid.

Review Problem:
- A lawyer comes to you asking whether his client, the purchaser in a land contract,
has grounds to appeal a judgment dismissing his claim to rescind a contract
- Judgment by Palmer J.
- 2nd last paragraph, last sentence – “it is worth noting….” suggests the idea of a
vintage year for good judgments – this is an odd thing to say

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 Frustration
- This class of mistakes is made up of those that occur b/c the assumed
background to or context of the transaction changes AFTER the parties have
made their contract
- The methods of analysis here are SIMILAR TO those applied in “mistakes in
assumptions”
- Effect: of a conclusion that a contract is “frustrated” means BOTH parties are
excused from further performance
- A test that is commonly applied to determine if there is a frustrating event is laid
down in Hongkong Fir
• “Does the occurrence of the event deprive the party who has further
undertakings still to perform of substantially the whole benefit that it was
the intention of the parties as expressed in the contract that he should
obtain as the consideration for performing those undertakings?”
• The courts need to deal with the resulting disappointment faced by parties in
ways that do not catch them by surprise and that, so far as possible, are
consistent with commercial expectations
- The first reported case on frustration is Paradine v. Jane – it was regarded in this
case that contractual liability was not only strict (no showing of fault was
required to established liability) but absolute (there were no excuses for non-
performance) Since this case, the development of the law has been a long,
sustained attempt to DENY that contractual liability is strict
- The first case to DEPART from this was Taylor v. Caldwell

Taylor v. Caldwell (1863)

Facts
Blackburn J.
- P and D had agreement that P would use music hall for concerts.
- Less than 1 week before the first performance, the music hall was destroyed by
fire.
- P sues for breach of contract
Issue
- Does an unforeseen event after agreement entered into, constitute a breach of
contract?
Held: Both parties excused.
Reasoning:
- Fire was neither of their fault
- Parties contracted on the basis of the continued existence of the music hall.
Music hall was essential to their performance. Since music hall ceases to exist,
both are excused.
Importance

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 - If an unforeseen event makes it impossible to perform the contract, both
parties will be excused.
Notes
- It might appear that there is no allocation of loss in this case – this is false. The Q
is whether the loss is allocated in a commercially sensible way
- Allowed frustration – important thing here: based it on implied terms (last para
of decision)
- This is the typical approach in the 19th century of filling in gaps

The below case is a part of a group of cases known as the “Coronation Cases.” They
arose b/c the coronation of Edward VII had to be postponed due to appendicitis.

Krell v. Henry (1903)

Facts
Vaughan-Williams LJ
- P rents out flat to D, who wants to watch coronation of the King. This was not
specified in the contract.
- D pays 25L deposit, refuses to pay 50L upon cancellation of coronation (the total
was 75 pounds)
- P sues.
Issue
- When the subject of the contract is frustrated is nonperformance of one of the
parties excused?
Held: Dismissed
Reasoning:
- Look at foundation of the contract. Was performance of the contract prevented?
Was the event which prevented the performance of the contract of such a
character that it cannot reasonably be said to have been in the contemplation of
the parties at the date of the contract? If YES, then both parties get discharged
from performance.
Importance
- A party’s duties are discharged where a party’s purpose is frustrated without
fault by the occurrence of an event, which the non-occurrence of which was a
basic assumption on which the contract was made.
Notes
- This case may be contrasted with another coronation case: Herne Bay Steamboat
Co. v. Hutton (1903): the D had agreed to charter a boat to watch a parade of
ships (the Review) by the King. It was cancelled too. The contract specified that
the charter was for the purpose was viewing the Review and for a cruise. BUT
there was no frustration. This is b/c the fleet remained available in SPITE of the
King’s illness.
- Part of the problem in these coronation cases is that there is no context within

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 which the risks run by the parties can be understood
• In a contract of sale, for example: it is possible to adopt as a DEFAULT RULE
that unless the buyer gets a warranty or some other protection from the seller,
the risk is on the buyer
• The absence of context in coronation cases makes the task more difficult there
is nothing to fall back on in terms of justifying an allocation of risk
• In this case: the risk is SPLIT – the P keeps what the D prepaid and the D does
not have to pay anymore. This can be seen as the most fair situation.
- Sometimes it is hard to draw the line between interpretation & frustration. For
example in Atlantic Paper Stock Ltd v. St. Anne-Nack Pulp & Paper: a contract for
the purchase & sale of paper was alleged by the buyer to be frustrated b/c there
was a lack of markets for the buyer’s product. Dickson stated this was the
buyer’s problem b/c he failed to do his research. So he was liable for the breach
of contract to the seller.
- Sometimes frustration occurs due to legislation that makes a planned activity
illegal
- Some years ago there was an issue of exploding pop bottles. In Ahlstrom v
Canada v. Browning Harvey (1986): the P (a Pepsi bottler) ordered 1.5 L glass
pop bottles from the D manufacturer and paid for them. Before the bottles could
be used their use was prohibited by the Hazardous Products Act. Court of
Appeal held that there was no breach by the D and that the property (and its
risk) had passed to the P.
- It is common in many commercial agreements it to provide for the allocation of
risk of frustration or impossibility. This is called a force majeure clause (ex on
page 903 – but the pattern here is universal)
• Background to this is Hong Kong Fir
• In both cases, there is an EVENT that occurs which then has the potential to
deprive 1 party of the benefit the contract
• The clause has 3 parts:
(1) The person who is aware of the event gives notice – an event has occurred
which prevents them from fulfilling their duties
(2) That then discharges the person from performance – effect of the notice
(3) You have 1 of 2 options: (1) The person who is excused must tell the other
party if they can perform, (2) if they don’t do this, the contract is over – no
one is liable. What they have done is managed the Hong Kong Fir event.
Payments are never excused (what they already bought they have to pay
for). Just the supply – chance to enter back into agreement OR be excused
• Ex: if your factory burns down, and you do not rebuild within 6 months, you
lose the buyer and the contract is done.
• Provides a mechanism for being discharged for further performance – as a
solicitor, what you are doing for your client, is, when the event occurs you
don’t have to determine if it is a frustrated event. The clause provides a
mechanism.

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 • The issues of mistake & frustration are the SAME
• Acts as conditions precedent (?)
- In Aluminum Co of America (ALCOA) v. Essex Group Inc (1980): the P agreed to
process molten aluminum for the D under a contract with a complicated
escalator clause. The price to be paid by the buyer was dependent on 2 varying
factors (varied with WPI-IC) and the changes in hourly wages to Alcoa
employees. A large component of production was electricity costs. These costs
ESCALETED a lot more than would be covered by WPI-IC, Alcoa would lose $60
million if followed original contract. Sought for the contract to be changed on
the basis of mistake or frustration. Trial judge agreed and also judicially imposed
a revised escalator clause called reformation – this is an American case. Not
adopted in Canada.
• This decision was sympathetic to the OPEC crisis
• HOWEVER courts were much less sympathetic to suppliers who made long
term contracts to supply oil or other sources of energy and suffered great
losses. This was exactly the type of risk that a supplier undertakes in entering
into a long term contract (ex: happened in Eastern Air Lines v. Gulf Oil)

Historically, the development of law in the sale of land was affect by a rule that
contracts for the sale or lease of land could not be frustrated. This rule has largely
disappeared and the below case shows this.

KBK No. 138 Ventures Ltd v. Canada Safeway Ltd. (2000)

Facts
Braidwood J.A.
- KBK agreed to purchase land from Safeway in order to construct a mixed
residential and commercial building.
- After the contract was entered into, but before construction, the municipality
amended its zoning bylaws, which prevented the proposed building from being
constructed.
Issue
- Is the contract for the sale of land frustrated?
Held: Appeal dismissed. The contract is frustrated
Reasoning
- The British Columbia Court of Appeal applied the law of frustration.
- Here, the contract was not impossible to perform, but as a result of zoning
changes that happened after the contract was entered into, but before the
completion date, it became so substantially different that it was no longer what
the parties had originally intended. It was a different contract, and therefore
frustrated.
- Vendor can keep deposit if the contract is valid. Reason for enrichment is the
contract- if justification for keeping it is gone then buyer can get deposit back

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 - Risk is on the seller- because the seller sold the property by reference to the
developer area- the area to be developed. By defining it as a price determined by
how many square feet could be developed it indicates the risk is on the seller.
- Steps: does contract allocate it, does background legal deal allocate it, then split
the difference if there is no reason to put it, except that the onus is always on
the P to show the D must compensate. P has onus of proving/ establishing it is
entitled to a remedy

Importance
- The change in zoning laws did not amount to mere inconvenience but rather
transformed the contract into something totally different than what was
intended by the parties making it frustrated
Notes
- What the court is doing here is trying to find where to allocate a risk of loss
- If the decision of whether or not a contract is frustrated due to an unexpected
event, it follows that a “self induced” frustration cannot operate to put the risk
of loss on the party not causing the loss this proposition sometimes runs into
difficulties
- Para 7.445 – cases in which you can’t get relief for self-induced frustration
• Ex: these difficulties arise in spousal support agreements (p.913) – these are
really difficult issues
• Ex: in Miglin v Miglin: the SCC set out condition when the court should
override spousal support provisions in an agreement their decision to
uphold the provisions that limited support (the wife would only get support
for 5 years then after that was expected to find a job, but she couldn’t) was
criticized A LOT
o Is this a case of frustration? In which the court will set outside the
obligation and do something different b/c something came about that
neither party expected (i.e. a woman gets ill and can’t get a job after the
5 years)
o There is no easy answer here

The next case looks at a common problem in agriculture and the need for the doctrine
of frustration to be carefully applied; a simple decision that a contract is frustrated
may not be responsive to the issues that have to be resolved.

HR & S. Sainsbury Ltd v. Street (1972)

Facts
MacKenna J.
- The parties formed a contract before the harvest in which Street was to sell his
entire crop to Sainsbury.
- Due to bad weather, the actual crop yielded far less than the crop estimate (275
tons) on which the contract was based.

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 - Street sold a majority of his crop to another grain dealer. He sold the rest to
Sainsbury at a higher price than agreed upon.
- Sainsbury sued Street for breach of contract.
Issue
- Does the crop shortfall absolve Street of his contractual obligation to deliver?
Held: No. D is excused for not delivering the 275 tons (contract) but not for the 140
tons.
Reasoning:
- There was implied condition in the contract that if the D, though no fault of his,
failed to produce the stipulated tonnage of his growing crop, he should not be
required to pay damages.
- This implied condition is reasonable b/c of (1) the risks of agriculture; (2) the fact
that crop was still growing when K was signed.
- There was no implied condition that if D failed to produce the whole, he would
not have to deliver any. If parties had actually intended this, they would have
estimated the output more carefully (and less optimistically). The contract would
have been carried out more cautiously had the parties anticipated such a
shortfall in tonnage.
- It is unreasonable, however, to conclude the implication that if Street could not
deliver the whole obligation he should not deliver any of it (ending the contract).
- The stipulated tonnage was an upper limit; it cannot be implied as a lower limit
to release Street from his obligation.
- The wording of the contract indicates either a condition precedent or a condition
subsequent, but a decision should not rest on this distinction of words (and not
substance). The presumed intention of the parties, as per the standard of the
"reasonable man", is relevant to determining the implied conditions of the
contract.
Importance
- It is reasonable to expect that such performance as is possible should be carried
out by the seller if the subject of sale suffers some deterioration. (**see United
States Sales Act)
Notes
- The seller seems to get the worst of both worlds
- Farmer is made liable. But the trick of the case comes from a more sophisticated
analysis –a look at Uniform Commercial Code – allows supplier to allocate his
production (Article 2.615 – says it is not “all or nothing”)

The below case shows that frustration can result in a contract “coming to an end” and
creating awkward problems.

Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. (1943)

Facts

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Lord Wright
- D (UK firm - Fairbairn) agreed to sell a machine to P (Polish firm – Fibrosa )
- War broke out and UK could no longer deal with an enemy.
Issue
- Is P entitled to the return of the money he paid? To what degree can parties be
relieved of a duty?
Held: Found in favour of P – the Polish firm can get back money paid and does not have
to make any future payments to D.
Reasoning:
- If there has been what is called a total failure of consideration, then any money
paid in advance can be recovered.
- Rule in Chandler v Webster (another coronation case) (para 6 of reasons)
• The frustrating event does not end the contract from its outset, but only
from the point of frustration forwards
• Frustration does not release parties from further or future performance of a
K – it does not undue what has already been done pursuant to the K
• P could not get back the deposit he paid – if payment was due after
frustrating event then P would not have had to make the payment - RULE IN
THIS CASE IS WRONG
• The rule in Chandler was OVERRULED
• Says yes you can get the money back
Importance
- Where a party obtains no benefit from a contract and they have paid part of a
sum before frustration, then that party can recover the money paid in advance
because it can be said there has been total failure of consideration
Notes
- Again, not clear if it is a mistake or frustration. The Court treats it as a case of
frustration
- War is inevitably seen by the courts as a frustrating event if it prevents future
performance
- Issue: Lord Wright ignored the claim of the respondent to some reimbursement
of the work did on the machinery
• It is not obvious why the buyer can get the price it paid b/c the manufacturer
was incurred costs in making the products
- As evidence of this criticism, the UK enacted legislation to reverse the effect of
this decision. The legislation formed the basis for legislation in all common law
provinces except Nova Scotia.

The Ontario one - Frustrated Contracts Act p.923

Notes & Questions (on the Act)
- *there was a second one adopted in BC and Yukon which is a better version b/c
it defines benefits more broadly differs in 3 significant ways (listed on page
924)

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 - Important thing is the swift reversal of the decision through legislation
Fibrosa said you can get it all back. Legislation said you can get SOME back.

Third Parties & Mistakes

- The problem with third parties= allocating a loss between 2 innocent parties due
to the wrongdoing of a third person
- Ex: I put an ad in the paper to sell a TV and unwisely I accept a cheque from the
person. The cheque bounces. If I come after you, can I get it back from you?
Depends on whether the contract of sale is void or voidable (clearly there is
fraud b/c the cheque bounced). But fraud makes the contract only voidable.
- The “mistake” of Bell v. Lever Brothers (particularly para 4 of judgment) has also
been applied to a number of cases requiring the court to decide which of the 2
innocent parties should bear the cost of a loss from contracts entered into due
to mistaken beliefs induced by the fraudulent acts of a third party
• What the case tells us:
• If A sells B goods, and I believe B is C – there is no contract, the sale is void
can go after third party
• If A sells to B and I believe B is trustworthy – contract is voidable
• Problem= allocating the loss between 1 of 2 people
• We will put the risk of loss on the person who accepts credit. If I allow you to
pay me by a cheque I take the risk.
- 2 situations of the “rogue” who makes a contract with someone:
1. The rogue induced a person to “buy” a chattel that the rogue has obtained from
another innocent party by means of fraud. Litigation arises when the original
owner seeks to recover the goods from the innocent buyer.
• By the time the owner realizes the fraud, the rogue has sold to the innocent
third party
• A mistake can be argued here based on Atkin’s judgment in Bell v. Lever
Brothers: when A makes a contract with B thinking he is C, there is no
contract and A’s consent is “negatived” difficulty: B (innocent party) also
has an argument to claim the protection of the law
2. The rogue induces the other person to sign a document, to which the signer does
not fully understand, and the rogue then uses this document to gain something
from an innocent party. Litigation arises when the party who relied on the
document tries to enforce its claim against the other innocent party.
• The law has to determine which of the 2 innocent people will suffer for the fraud
of another

The defence of non est factum (this writing is not my deed) has gone through a lot of
changes. The SCC decision in below case illustrates the nature of these changes.
Remember: issue is that rogues disappear, are penniless or are in prison with no assets.

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 Marvco Colour Research Ltd v. Harris (1982)
Facts
- D re-signed mortgage because he was told there was a mistake with the dates.
- D did this with J present and J told him he did not have to read it.
- D really signed a new mortgage
Issue
- Is the defence of non est factum available to a party who, knowing that a
document has legal effect, carelessly fails to read the document thereby
permitting a 3rd party to perpetuate fraud on another innocent party?
Held: D is barred by reasons of their carelessness from pleading that their minds did not
follow their hands when executing the mortgage so as to be able to plead that the
mortgage is non-binding
Reasoning:
- Non est factum – a person is induced to sign a contract to which they don’t know
what it is. I signed it, but I thought I was signing something different.
→ The doctrine of non est factum came from Foster v Mackinnon
General rule: the signor in order to deny successfully his signature, has to show
that he had not been careless in executing the document (Foster).
When a doc is executed as a result of misrepresentation as to its nature and
character and not merely its contents the D was entitled to raise the plea of non
est factum (Carlisle v Bragg).
Importance
- Non est factum can only be used when there is NO negligence or carelessness
and there has been mistake as to the nature of the documents.
A precondition to use non est factum is that the document they really singed was
fundamentally or radically different (This is the test)
Notes
- In Saunders v. Anglia Building Society (1970): a 78 year old woman (Mrs. Gallie)
whose glasses were broken, relied on her nephew and his friend to explain to
her the effect of certain documents that they had asked her to sing. The nephew
did not describe the contract correctly. He described it as a gift to him; it was
really an assignment, a mortgage of her leasehold interest in the house she lived.
The respondent building company gave 20,000 pounds to the nephew on the
basis of the documents.
• The House of Lords held she could not rely on non est factum. It is rare that an older
literate person can rely on this if they CHOSE not to read the document. Even if
illiterate or blind, people should still understand contracts they are signing.
- Puts the risk of loss on the person who signs. If you sign an agreement without
reading it you bear the risk.
- There are very very narrow windows which remove this risk. But it is VERY
narrow/rare

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Standards of Conduct

o Understand the importance of your own conduct

o Two forms of standards of conduct:
o 1) Requirement to be reasonable ( i.e context for reasonable dismissal)
must give reasonable notice
Bring in some objectivity – must show the court it is reasonable
o 2) good faith
not telling lies

Bhasin

o Permits courts to talk open about good faith

o Changed nothing in a sense that you would always be giving a client bad advice if
you told a client to lie or act in bad faith ( doesn’t actually change what people do)
o Finally made it possible to talk about good faith performance
o Cromwell goes through examples and says “ this is what good faith performance is”
o Look at 100 main street case
o When you look at what person is doing not hard to say where line should be drawn
o The English courts regarded good faith as implied term filling in a gap
o But it is NOT AN IMPLIED TERM
“ not an implied term b/c it adheres in a parties relation” and it
CANNOT be disclaimed
not subject to the law dealing with implied terms
its something that is simply there b/c you are in a contract
o 1) see’s evidence of good faith all around
o 2) it can’t be disclaimed
o swan says she is not sure how it can be qualified
o lots of cases where courts
o Martel building – said negotiations are a zero sum game- they are wrong

Exam Clarification

Question 1
• Identify the clauses
• Talk about the downsides of each clause
Boat Question
• General terms they would use to focus on quality (breadth over depth – talk
about the terms generally
• There is a little trick to the question….Think “outside the box”
o When we see it, we’ll think “oh, that’s magical”
o “Go back to your childhood”

show her you know the course well

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Bhasin
• Two things about this case
• The technique Cromwell adopted outlined the multiple good faith principles
and brought them together as a “duty of good faith”
• Really important case but it doesn’t actually change much
• Barristers love pegs and so it might change things for them
• For solicitors, it doesn’t change advice you’ll give your clients

1. Case puts to rest the old idea that there was no obligation of a duty to
perform in good faith
o The response has been pronounced as “how can we give our clients
advice?”
o Swan: It’s possible just don’t be a scumbag
2. It won’t change anything
o Competence in conscientious solicitors knows that telling clients to do
something in bad faith is bad advice
o Certain to have the other party mad at you
It’s a bad thing whether or not the client sues you because an
angry other party is not good to deal with
o No sensible lawyer advised a client to negotiate in bad faith
If you’re starting a relational contract, you start your
relationship in a bad way
Penalties and Forfeitures
• Laws are transformed according to Peachtree case
• Equity for a long time controlled penalties and forfeitures
• Penalties specify the damages payable in the event of breach
• Equity intervened with they thought the penalties were excessive
• Pejorative Clause that considered equity was excessive
• Liquidated damages clause (important in procedural sense)
o Back to chapter 2
If I’m suing for breach of contract and claiming damages, suing
to get damages measured by compensation principle
If I’m suing for amount payable in the contract, I’m suing on the
contract for the amount promised by the contract (Hadley et al.
are not engaged)
• Whiten: It was not a claim for damages. It was a claim
on the contract for indemnity promised by the insurer
• Penalty/Pejorative Clauses allow you to sue on the contract
• Control of contract power because courts would prevent somebody from
claiming an excessive amounts
• Peachtree case: if contract is fair, the penalty clause will be enforced. If
contract is not fair, the penalty clause will not be enforced.
Tanjang
• Purchaser agrees to buy a house and pays a deposit

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 o Reflects risks assumed by vendor because by ac epting offer, he loses
opportunity to sell to another
o If purchaser backs out, the deposit provides some compensation if the
buyer breaches
o Deposit helps pay for costs of preparing the same
o If you breach, deposit is forfeited to vendor
• Purchaser makes deposit of $100,000 and breaches contract
• Vendor suffers no loss because he puts house back on market
o Sells house and gets more
• BC COA lets vendor keep deposit and the amount he made

Unconscionability
• Only general dispensing power common law gives to courts
• Anything unsconscouble can be set aside and the contract can be avoidable
• Very narrow remedy
• Not a dispensable
• Narrow because
1. Requires unfairness in transaction
• Might be dealing with the other party’s lack of knowledge, lack of ability
to look after one’s self, bad deal for person to take advantage of
• Marson Coast Finance
Unfairness in the transaction

• Bad deal for the person taken advantage of

• Problem with community standards: how do you determine what they are
• When you bring in things like that – you greatly complicate the trial process

Denning’s Famous Decision

• Talks about unconsciounability to protect old Herbert in the
circumstances
• Swan: Soheric Sax J. reasons are much better
o Idea of protecting integrity of a relation

Common law has set up rules to protect integrity of relations

• Earliest example is a trust
o Set up in equity
o Characterized by one person called trustee holds property for
benefit of another “beneficiary”
• There are heavy burdens placed on trustee to make sure trustee acts in
accordance with the trust and for the benefit of the beneficiaries
o Ex. Man dies, has children and wife, he gives property to a trustee
by will to hold property for the benefit of his wife and minor
children
• Another relation protected by equity is relationship between solicitor
and client

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 o Fiduciary duty characterized by the fact that the person owing the
fiduciary duty must subordinate his/her/its interest to the other
o Solicitor cannot take advantage of the interests to profit from it
o Equity has powerful remedies
o Solicitor that breaches promise to client will regret it bitterly and
the consequences will be unpleasant
Will be liable for breach of contract
In trouble with law society
o Client privilege
If you come to be as a client, nobody can find out what I
said to you
You can release information but I am not allowed to
Minor exceptions like telling me you’re plotting to kill
someone
Makes it easy for a client to get good legal advice

• Supreme Court of Canada protects relations in recent cases

o Fintrack case: Denied access to lawyers information

Lloyds Bank v Bundy

• Bank tells Bundy to be guarantor for son’s company’s overdraft without
consulting independent legal advice to ensure Bundy knows being a
guarantor has risks but no upside
• The reason why the bank cannot give advice is because Mr. Bundy has relied on
the bank for information in the past
• Bank should have said “you can’t trust me on this issue because you trusted me
in the past and this is a conflict of interest. You should get ILA”

• Eric Sachs J. relation of confidentiality

o Bank can’t enforce it because bank should have realized that its
interest having Bundy sign this document conflicted with its duty
o Mr. Head bank manager knew that Bundy was trusting the bank
Long term relations with the banks of the country
o Accepts the fact that banks have lifelong relations with clients
o Bank should have realized they can’t ask him to do this unless he gets
independent legal advice
• Swan
o You’re focusing on the way contracts were made
o Every contract guaranteed by an accommodation guarantor (someone
who gets no direct benefit from the guarantee)
Accommodation guarantors are normally parents or other
family members
It is an unfair deal because the guarantor gets nothing out of it
o All Mr. Bundy gets is the satisfaction of helping his son

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 o The seal becomes important because the guarantor is not getting
anything for the promise
o Independent legal advice goes far in a sense the guarantor knows the
risks involved with his promise
Ex. Explain that the guarantor may lose their home, car, etc.
There is no upside to the guarantor
o If the bank doesn’t get a guarantor, they can’t go after the matrimonial
home in the case of default
• Getting independent legal advice would disallow the bank from telling Bundy
what to do

• Unconscionability (??) Case

o COA realized if you didn’t enforce these things, banks wouldn’t lend
money to allow businesses to get loans
o COA bounds the party to the guarantee she gave because she got
indepndet legal advice
o This is how you deal with unconsciounability
The way the guarantee was obtained
o Bundy or Morrison may not have made the promises they made if
they knew the consequences
Bundy’s lawyer would have told him not to sign because his
son’s business was failing and if he didn’t sign, he would hang
on to some of his assets
• Person must not rely on the bank but only on the independent legal advice
o A member of a firm who give legal advice for a bank cannot offer
advice
o Conflict of interest

Bank of Montreal v. Duguid

Non-competition clauses

1) Vendor sells business to purchaser and agrees not to compete with the
purchaser. Pricer vendor gets for the business includes element of good will –
reflects the fact that after the sale, existing customs of the business will tend to
stay with it ( furue income arising from the fact that customer stayed with the
business- called good will) simply means purchaser is paying more than market
value of the goods being sold.
a. Because vendor has been paid for his promise not to compete- are
prima facie valid- struck down if shown to be un reasonable
2) Where you have employee non-compete. Covent in restraint of trade. CL said
they are prima facie void unless they can be shown to be reasonable
a. Reasonable with respect to public interest

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 b. Reasonable with respect to the parties
Example: hired to bring in Telus because he promised Telus that he wouldn’t
compete against him. accounting for mistake of trade

Drafting them is very difficult and apart from very senior employees they are not
enforceable

Protection of relations

• Lloyds bank v Bundy

• Law identifies certain relations
o Trustee v beneficiary
o Solicitor v client
o Director of corporations vs clients
o Agent vs principal
• The person with power to decide must act for the benefit of the other party, not
for his or her own benefit
• One party depends on the integrity of the other party
• It is this dependence that triggers the fiduciary duty
• Bundy depended on Mr Head triggered bank’s duty
• Bank did not act on duty and courts recognized this
• Can avoid trouble by telling client to seek ILA
• Fidicuary duty requires outmost good faith

Indutech - ANSWER TO QUESTION 5

Dependence arising from the way the parties perform agreement

Courts will look at 3 tests to determine if the relationship is a part of a fiduciary duty-
Frame v Smith test (page 1173) – if satisfied- court will assume fiduciary duty

We saw this in Lac Minerals – did not concern fiduciary duties, the constructive trust
was determined by equitable trust

Equity protects fiduciary duties

Shelanu page 1179

Refers to Wallace as source for obligations of good faith – swan finds that odd because
its repudiation of good faith

Example of court just looking at the relation and then deciding what to do in the
circumstances

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