Law 108A – ContractsLAW 108A – CONTRACTS...............................................................................................................................................................1

GOING TRANSACTION ADJUSTMENT.......................................................................................................................................4

DOCTRINAL REQUIREMENTS.............................................................................................................................................................4Harris v. Watson (1791) (English)...............................................................................................................................................4

GTA not enforced to avoid extortion/duress in an emergency situation – compromises voluntariness.......................................................4Stilk v. Myrick (1809) (English)...................................................................................................................................................4

A promise to do what you are already obliged to do under K is not good consideration.............................................................................4POSSIBLILITIES FOR ENFORCING A GTA...........................................................................................................................................5RESCISSION........................................................................................................................................................................................5

Raggow v. Scougall (1915) (English K.B.)..................................................................................................................................5K enforcable since not variation but recission – old K terminated, consideration for new K......................................................................5

CONSIDERATION................................................................................................................................................................................6Duress..........................................................................................................................................................................................6

FORBEARANCE...................................................................................................................................................................................6Stott v. Merit Investment Corp. (1988) (OCR).............................................................................................................................6

Forebearance on right to sue good consideration if claim given up was real cause of action (irrelevant if might not ultimately succeed).6SPECIAL SITUATION: DEBT SETTLEMENT..........................................................................................................................................7

Gilbert Steel v. University Construction (1976) (Ont. C.A.)........................................................................................................7No rescsission since only price changed (rest intact) – unenforcable since no fresh consideration.............................................................7

Williams v. Roffey Bros. (1991) (English C.A.)............................................................................................................................8English decision: enforcable since no duress; consideration = mutual practical benefit (maintain good relations).....................................8

PROMISSORY ESTOPPEL...............................................................................................................................................................8

Central London Property Trust v. High Trees House (1947) (English K.B.)..............................................................................9Promissory estoppel: intent for legal relation, promisor knew promisee would act, and did act.................................................................9

D&C Builders v. Rees (1966) (English C.A.).............................................................................................................................10Promissory estoppel not available if duress / intimidation (beyond normal business pressure).................................................................10

SWORD VS. SHIELD..........................................................................................................................................................................10Combe v. Combe (1951) (English C.A.).....................................................................................................................................10

Promissory estoppel: only a shield, not a sword, so it cannot create a new cause of action.......................................................................10

PRIVITY.............................................................................................................................................................................................11

Tweddle v. Atkinson (1861) (English Q.B.)................................................................................................................................12Doctrine of privity: third party cannot enforce even when benefit to third party is essence of K..............................................................12

AVOIDING PRIVITY..........................................................................................................................................................................12Greenwood Shopping Plaza v. Beattie (1980) (S.C.C.).............................................................................................................14

Negligent employees personally liable – third parties so cannot take advantage of subrogation clause....................................................14Agency – exclusion/limitation clause.........................................................................................................................................14London Drugs v. Kuehn and Nagel (1992) (S.C.C.)..................................................................................................................15

Privity relaxed to allow employees in where clear intent in K and acting within scope of employment...................................................15Laing Property v. All Seasons (2000) (B.C.C.A.).......................................................................................................................16

Intention the employees can take benefit of K found where share identity of interest and known that work carried out by employees (now assumed).............................................................................................................................................................................................16

Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. (1999) (SCC)...............................................................................17Extends 3rd party liability principle developed in London Drugs: it is the intention of the party that is important....................................17

REPRESENTATIONS AND WARRANTIES................................................................................................................................17

INNOCENT MISREPRESENTATION.....................................................................................................................................................19Redgrave v. Hurd (1881) (Ch.D.)..............................................................................................................................................19

Limitations on innocent misrepresentation: must be able to give back what was taken, only get back what is paid and must be partially executory..................................................................................................................................................................................................... 19

WARRANTIES...................................................................................................................................................................................20Heilbut, Symons v. Buckleton, (1913) (English A.C.)................................................................................................................20

A statement is a collateral warranty if the parties intended it to be so........................................................................................................20Dick Bentley Productions v. Harold Smith (Motors) (1965) (English)......................................................................................21

Provided gloss / clarification on when a representation amounts to a warranty: intention = objective test – what would a reasonable person in the circumstances believe............................................................................................................................................................21

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Oscar Chess v. Williams (1957) (English).................................................................................................................................22Innocent misrepresentation since unsophisitcated parties – no reasonable reliance on knowledge...........................................................22

Carman Construction v. Canadian Pacific Railway (1982) (S.C.C.)........................................................................................22To show warranty, both parities must intend a legal effect; warranty cannot contradict written K...........................................................22

Fraser-Reid v. Droumtsekas (1980) (S.C.C.).............................................................................................................................23Written warranty since failed to dislose “all outstanding infractions” as required in K.............................................................................23

Murray v. Sperry Rand (1979) (Ont. H.C.)................................................................................................................................24Advertising created a collateral warranty by means of a unilateral contract..............................................................................................24

NEGLIGENT MISREPRESENTATION: TORTS VS. CONTRACTS.......................................................................................25

Candler v. Crane, Christmas (1951) (K.B.)...............................................................................................................................25Early case showing wall between tort and contract....................................................................................................................................25

Hedley Byrne v. Heller (1964) (English H.L.):..........................................................................................................................26For the first time in tort, recognized claim for false or negligent statements, but only in special relationships where there was duty of care between the speaker and the listener...................................................................................................................................................26

Esso Petroleum v. Mardon (1976) (English C.A.).....................................................................................................................26Allows for Possibility of concurrency in tort and contract; reliance damages from tort can include lost opportunity (almost equal to expectation damages)..................................................................................................................................................................................26

V.K. Mason Construction v. Bank of Nova Scotia (1985) (S.C.C.)............................................................................................27Negligent misrepresentation since should have known there would be reliance = duty of care.................................................................27

BG Checo International Ltd. v. British Columbia Hydro and Power Authority (1993) (SCC).................................................28Can sue in both tort and contract, but can only receive a single set of damages........................................................................................28

MISTAKE...........................................................................................................................................................................................29

POLICY CONSIDERATIONS:..............................................................................................................................................................30MISTAKE AS TO TERMS...................................................................................................................................................................30

Raffles v. Wickelhaus (1864) (English Exch.)............................................................................................................................31Early subjective test: contract void if true ambiguity, important term and no reason to prefer one party’s understanding.......................31

Hobbs v. Esquimault & Nanaimo (E&N) Railway (1899) (S.C.C.)...........................................................................................31Adopted objective test: focus on what reasonable person would understand from words/acts..................................................................31

Staiman Steel v. Commercial & Home Builders (1976) (Ont. H.C.).........................................................................................32Accepts objective test; however, subjective test where impossible to determine what reasonable person would have concluded...........32

MISTAKE AS TO RECORD.................................................................................................................................................................33Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. (2002) (SCC)................................................................33

Requirements for rectification: “convincing proof” of prior oral agreement; must povide precise wording and show D ought to have known of the mistake..................................................................................................................................................................................33

MISTAKEN PAYMENT.......................................................................................................................................................................34Budai v. Ontario Lottery Corporation (1982) (Ont. Div. Ct.)....................................................................................................34

MISTAKEN ASSUMPTIONS................................................................................................................................................................34Smith v. Hughes..........................................................................................................................................................................35

Demonstrates general rule for mistaken assumption: no recovery due to caveat emptor; if important, should have specified in contract35Sherwood v. Walker (1887) (Mich. S.C.)...................................................................................................................................35

Recovery where mistaken assumption goes to the essential nature of the subject matter..........................................................................35Bell v. Lever Brothers (1932) (English H.L.).............................................................................................................................36

Expands Sherwood to allows mistaken assumption for quality where bilateral or essentially different....................................................36Solle v. Butcher (1950) (English C.A.).......................................................................................................................................37

Equity allows voidable K where common misapprehension, fundamental issue and P not at fault...........................................................37

FRUSTRATION................................................................................................................................................................................38

Paradine v. Jane (1647) (Common Pleas).................................................................................................................................39Historical rule of absolute promises: no frustration due to caveat emptor..................................................................................................39

Taylor v. Caldwell (1863) (English Q.B.)..................................................................................................................................39Frustration since destruction of subject matter – may be express (force majeur) or implied limitation.....................................................39

Krell v. Henry (1903) (English C.A.).........................................................................................................................................40Frustration where substance/purpose of contracts depends on circumstances that have changed..............................................................40

Amalgamated Investment Property v. John Walker (1976) (English C.A.)...............................................................................41Frustration less likely where express discussion of risk allocation – consider trade practice, sophistication of parties............................41

Aluminium Company of America (ALCOA) v. Essex Group (1980) (U.S. Penn)......................................................................41Frustration possible where risk foreseeable, but turns out to be excessive – like mistaken assumption....................................................41

Re Westinghouse Electric (1981) (US).......................................................................................................................................42No frustration for huge cost increase based on poor guaranteed price.......................................................................................................42

Eastern Airlines v. Gulf Oil (1975) (US)....................................................................................................................................42FRUSTRATION AND LAND................................................................................................................................................................42

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Capital Quality Homes v. Colwyn construction (1975) (O.C.A.)...............................................................................................43Weak authority – frustration granted when land sold rezoned = radical change in circumstances............................................................43

Victoria Wood Development v. Ondrey (1977) (O.C.A.)...........................................................................................................43Leading authority – no frustration when land rezoned: knowledge of purchasers intention not sufficient................................................43

KBK Ventures v. Canada Safeway (2000) (B.C.C.A.)................................................................................................................44Frustration must: occur after K formation, not be self-induced, not reasonably foreseeable.....................................................................44Must be: More than mere inconvenience, be radical/fundamental change, and permanent.......................................................................44

Fibrosa Spolka Akcyjna v. Fairburn Lawson Combe Barbour (1943) (English H.L.)..............................................................45Restitution damages where frustration eliminates contract – limited to money, not work/reliance; overruled by Frustrated Contracts Act..................................................................................................................................................................................................................... 45

CONTROL OF CONTRACT POWER...........................................................................................................................................46

INTERPRETATION: HOW TO DETERMINE CONTRACTUAL OBLIGATIONS.........................................................................................46Federal Commerce & Navigation v. Tradax Export (1978) (English H.L.)..............................................................................47

Example of legal formalism: contract should be interpreted in a consistent manner - fast, efficient.........................................................47Scott v. Wawanesa Mutual Insurance (1989) (S.C.C.)...............................................................................................................48

Where meaning clear/unambiguous, use plain meaning approach; may depart in cases where interpretation unreasonable/contrary to intent............................................................................................................................................................................................................ 48Dissent: contrapreferentum – where ambiguity, resolve in favour of non-drafting party...........................................................................48

PAROLE EVIDENCE RULE...........................................................................................................................................................49

Exceptions to the rule.................................................................................................................................................................50REPRESENTATIONS AND WARRANTIES............................................................................................................................................51

Bauer v. Bank of Montreal (1980) (S.C.C.)................................................................................................................................51Exception to parole evidence rule if representation = collateral warranty; no exception if contradicts written agreement.......................51

Gallen v. Allstate Grain (1984) (B.C.C.A.)................................................................................................................................52Recasts parole evidence rule as presumption (not absolute rule) – strongest when there is contradiction.................................................52

Zippy Print (1995) (B.C.C.A.)....................................................................................................................................................53Discredits parole evidence rule in favour of parties’ intent; misrepresentation should be avoided through exclusion clause...................53

STANDARD FORM CONTRACTS................................................................................................................................................54

TICKET CASES.................................................................................................................................................................................54Parker v. South Eastern Railway (1877) (English C.A.)............................................................................................................54

Lord Mellish test: only bound by unsigned document if knowledge of some conditions or reasonable steps taken to inform of some conditions.................................................................................................................................................................................................... 54

Bradshaw....................................................................................................................................................................................55Under Mellish rule, more unreasonable the caluse, more notice that is required.......................................................................................55

Thornton v. Shoe Lane Parking (1971) (English C.A.)..............................................................................................................55Signs posted after ticket bought not binding since after K formation; requires knowledge of actual conditons (not some)......................55

SIGNED CONTRACTS AND FUNDAMENTAL BREACH........................................................................................................................56Avoiding the Signature Rule.......................................................................................................................................................56

FUNDAMENTAL BREACH.................................................................................................................................................................56Karsales (Harrow) v. Wallis (1956) (English C.A.)...................................................................................................................56Hunter Engineering v. Syncrude Canada (1989) (S.C.C.).........................................................................................................57

Fundamental breach remains as rule of construction, but unconscionability usually preferred.................................................................57Tilden Rent-a-car v. Clendenning (1978) (Ont. C.A.)................................................................................................................58

Signed contract not binding if condition unreasonable or reliance unreasonable – often distinguished on the facts.................................58Karroll v. Silver Star Mountain Resorts (1988) (BCSC)............................................................................................................59

Tilden not general principle – only applies in special circumstances.........................................................................................................59

E-COMMERCE.................................................................................................................................................................................59

Radin Article: Humans, Computers and Binding Commitment.................................................................................................60Specht v. Netscape Communications Corp. (2001) (NY)...........................................................................................................60

Mere notice insufficient, must provide way to consent to terms................................................................................................................60Rudder v. Microsoft (1999) (Ont. Superior Court)....................................................................................................................60

Clicking “I agree” makes a K enforcable....................................................................................................................................................60Kanitz v. Rogers Cable Inc. (2002) (Ont. Sup Ct)......................................................................................................................60

Agreement variations posted on website binding - controversial...............................................................................................................60

UNFAIRNESS....................................................................................................................................................................................61

DURESS............................................................................................................................................................................................61Economic Duress........................................................................................................................................................................61

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Port Caledonia (1903) (English)................................................................................................................................................61D&C Builders v. Rees (1966) (English C.A.).............................................................................................................................61

UNDUE INFLUENCE VS. UNCONSCIONABILITY................................................................................................................................62UNDUE INFLUENCE..........................................................................................................................................................................62

Bank of Montreal v. Duguid (2000) (OCA)...............................................................................................................................63

Going Transaction AdjustmentDoctrinal Requirements

Relational contract (not discrete contracts) - parties expect that the contract will be performed over a period of timeChanges/Adjustments/Amendments – changes to the original contractMutual agreement – one party cannot unilaterally decide to make a change to the contract – all parties must agree to the changeOne party pays more or gets less than in the original contractParty benefiting from the change does no more than they would have done under the original contract and often does less Both parties have unfulfilled obligations from the original contract (if all the obligations had been fulfilled, the contract would be completed)

Harris v. Watson (1791) (English)

GTA NOT ENFORCED TO AVOID EXTORTION/DURESS IN AN EMERGENCY SITUATION – COMPROMISES VOLUNTARINESSFacts: Captain of ship promises increased wages to crew to get ship through emergency situation, but later refuses to pay increase.

Change happened in the middle of the voyage after the sailors had agreed to a particular employment situation – sailors claimed for greater wages

Decision: Promise not enforceable due to policy reasons – to avoid extortion/duress in an emergency situation

Comments:Decision made entirely on policy reasonsIn an emergency situation, don’t want one party to be able to engage in extortion or duress in order to get moreContracts are voluntary, and if you agree to something in an emergency situation, the voluntariness of this agreement is compromisedCourt ignored fact that it was the captain who had in fact offered the increased wage and not the sailors who demanded it – however, the court wanted to set a certain precedent

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Stilk v. Myrick (1809) (English)

A PROMISE TO DO WHAT YOU ARE ALREADY OBLIGED TO DO UNDER K IS NOT GOOD CONSIDERATIONFacts: While ship in port, two crew members desert. Captain promises to spread their wages amongst remaining crew (i.e. promised wage increase) if rest of crew take over their duties. Captain later refuses to pay increase.

Decision: Desertion is an emergency situation and remaining crew already under contract and obligated by it work as necessary through an emergency, and they cannot leave the ship. Thus no fresh consideration here for the promised wage increase, so not enforceable.

A promise to do what you are already obliged to do is not good consideration

Comments: Emergency here not as obvious/immediate as in Harris v. Watson (since promise made on shore here), and could argue by not paying promised increase Caption gets unjust enrichment (since saves the wages of the two crew), and remaining crew perhaps relied on promise in working harderAlso some unfair surprise for the crew, who were expecting a larger wageCrew in fact did more work than they were required to under their original contract – otherwise, why would the captain make the promise to spread the wages?

Possiblilities for Enforcing a GTASeal – removes the need for considerationConsideration – implied or actualRescission – old contract is dead and a new contract is formedForbearance – giving up a legal right; usually not pursuing a right to which you are entitled

The actual value of the legal right is irrelevant, as long as it is voluntarily given up

RescissionRaggow v. Scougall (1915) (English K.B.)

K ENFORCABLE SINCE NOT VARIATION BUT RECISSION – OLD K TERMINATED, CONSIDERATION FOR NEW KFacts: Contract of employment, due to changed circumstances (the war) business conditions became difficult and employer considered closing business. Instead, employees agreed to accept lower wages (till end of war) and they put this in writing.

Claim: after some time, one of employees claims original wages, suggesting there was no consideration for his promise (so should not be enforceable as in Stilk v. Myrick)

Decision: Enforceable, since not a variation of original contract, but rather terminated original contract and entered a new one (which was enforceable

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bargain with consideration). Court here felt employee was being dishonest, so needed some way to make his promise enforceable.

Rescission – the old employment contract was terminated and the employees entered into a new one for lower wagesConsideration = mutual exchange of promises to accept lesser wages

Comments:Any contract can be cancelled by mutual agreement at any time (whether or not there were cancellation terms in contract). Cancellation itself is a contract – an agreement to release each other from the original contract obligations

What is the difference between terminate/new contract and variation? Parties here had in fact torn up the old agreement, and written out a new one (although note there is nothing magical about putting things in writing). Generally court will have to decide upon parties’ intent and the circumstances.

Another possible argument in favour of enforcement in this case: employer had considered closing the business (which they had the right to do) but did not do this (i.e. consideration = forbearance) in exchange for employees agreeing to lower wages (this differs to Stilk v. Myrick where crew did not have legal option of quitting)

ConsiderationAnytime parties make a change to an existing contract, the court will uphold the GTA if the court can find fresh considerationThere is no new consideration if you are doing something you are already legally obligated to do – modification fails (Stilk)

Duress – no contract is valid if it’s entered into under duress – invalidates the concept of consent

Types of duress:PhysicalPsychologicalEconomic – problematic since the essence of the marketplace is that some parties will profit more than others

Doctrinal Requirements for Establishing Duress – From Pao On v. Lau Yiu Long (1980)

At the time the contract is signed, the disadvantaged party has to make some sort of protestWas there an alternative to signing the contract?

If there was no alternative, more likely to be duressDid the disadvantaged party have access to independent legal advice?

If no legal aid, more likely to be duressSubsequent to entering into the contract, the disadvantaged party must take steps to avoid performing the contract

Forbearance

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Compromising on a right to take legal action (giving up right to sue) is good consideration where:

Claim or defence is reasonable – not frivolous or vexatiousPerson giving up the claim or defence has a bona fide belief in its chance of success – not simply blackmailThere is no concealment of material facts

Stott v. Merit Investment Corp. (1988) (OCR)

FOREBEARANCE ON RIGHT TO SUE GOOD CONSIDERATION IF CLAIM GIVEN UP WAS REAL CAUSE OF ACTION (IRRELEVANT IF MIGHT NOT ULTIMATELY SUCCEED)Facts: P was broker for D. P had customer that fell below necessary collateral level, so in accord with policy, P closed accounts. P’s boss forced him to reopen accounts. Customer didn’t have money, loss of $66K. Stott acknowledges debt and makes payments on debt and then signs 2nd paper acknowledging the debt. When Stott signed the initial agreement, Merit acknowledged that the document would not hold up in court. Stott leaves Merit and sues.

Issue: Is there consideration for Stott’s agreement?

Decision: There was valid consideration:Forbearance: D promised not to sue (which they were legally entitled to do) and allowed Stott to keep his job – compromise agreementForbearance on right to sue is good consideration if the claim given up were a real cause of action – irrelevant that the claim might not ultimately succeedForbearance need not be explicit, but can be implied

Court finds that there is no duress:Didn’t complain after the first contact and then even entered into a second disadvantageous contractStott didn’t attempt to access independent legal advice or take adequate steps to avoid the contract

Special Situation: Debt SettlementGilbert Steel v. University Construction (1976) (Ont. C.A.)

NO RESCSISSION SINCE ONLY PRICE CHANGED (REST INTACT) – UNENFORCABLE SINCE NO FRESH CONSIDERATIONFacts: plaintiff agreed to deliver steel bars to defendant who was building apartment buildings. Due to increase in price by steel mill, plaintiff sought price increase from defendant who agreed (i.e. passed on price increase to defendant). Defendant later changed mind and refused to pay higher price. No duress was found in this case (defendant could have found another supplier, albeit with some inconvenience). Perhaps some dishonesty by defendant since they tried to hide that they were not going to pay increase till after bids on second building came in (and realized plaintiff hadn’t given lowest bid).

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Claim: defendant claimed no consideration for their promise of higher price, as in Stilk v. Myrick. Plaintiff claimed there was: provided increased credit to defendant due to increased price, and promised to give defendant a good price on next contract. Alternatively claimed not a variation but instead termination / new contract.

Decision: found no fresh consideration (increased credit flowed from increased price, and the “good price” promise was too vague and unenforceable – again note difference between law and reality, since this is perhaps exactly why the parties agreed to up the price). Since only price changed and all other terms left intact, no termination / new contract, but rather variation. Hence not enforceable.

Comment: This case has been widely criticized since price fluctuations are common in the marketplace, and what should be done is risk allocation. By setting a price in the contract, the risk is allocated between the parties. It may also be common to have a price escalator clause, which further allocates risk. There are steps that Gilbert could have taken to protect themselves. However, in this case the university really lucked out because they were paying substantially below market price for the steel – it could be argued that this was unjust enrichment.

Gilbert is still the leading Canadian case, but it is routinely overridden

Policy reasons for enforcing the contract:Was very specific – there was no uncertaintySophisticated commercial actors who knew what the market is likeStrictly commercial contract – certainty and efficacy highly valued

Williams v. Roffey Bros. (1991) (English C.A.)

ENGLISH DECISION: ENFORCABLE SINCE NO DURESS; CONSIDERATION = MUTUAL PRACTICAL BENEFIT (MAINTAIN GOOD RELATIONS)Facts: plaintiff (sub-contractor) agrees to undertake renovations for defendant (main-contractor). Plaintiff realized had seriously underbid, and combined with their poor supervision of their work crew, would lose serious money on the project. Defendant agreed to increased price, but later refused to pay it.

Claim: defendant claims no consideration as in Stilk v. Myrick, Gilbert Steel v. University Construction (not really any distinction between this case and Gilbert) Gilbert argues that there was rescission - argues that price was the essence of he new contract so changing it was more than just a variation.

Decision: Enforceable, since no duress, and consideration = mutual practical benefit (defendant gets the building finished, plaintiff gets the higher price). No duress since no inequality in bargaining power and other sub-contractors could be hired (but there was pressure, since defendant had penalty clause and had to pay owner if project overran). Although court says it is not overruling the rule from Stilk that there has to be fresh consideration, it virtually is since will consider any practical benefit (provided no duress).

Consideration was provided by the practical benefits of renegotiation – didn’t have to undertake any new search and negotiation to find another carpenter

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– saved money. He also didn’t have to pay the penalty for not finishing his contract on time. Also benefited from the maintenance of good relationships.

Comment: in Canada Gilbert Steel still binding, and Williams only persuasive. But likely Canadian courts might change since Williams is in jurisdiction where fresh consideration rule originally invented in the first place.

Williams tends to be the preferred authority – but must deal with Gilbert Steel first, usually by finding a way to distinguish it. In England, the courts are much more willing to find fresh consideration

If the promisee can show as a matter of fact that the promisor received some benefit, then the promise to pay will be enforceable

If there are good reasons to enforce, we should look beyond the four doctrinal views of consideration

Promissory EstoppelAlthough the general notion of estoppel had been discussed in previous court decisions, the principle was concretely developed by Lord Denning in High Trees in 1947.

Estoppel: Where one person who made a statement of fact and another person relied on those facts, the first person will not be allowed to deny the truth of the statements.

Estoppels are often found in GTAs because changes are made informally and aren’t always put in writing.

Consideration began as simply “are there good considerations (i.e. reasons) for enforcing this promise?” but became rigid rule creating problems with, for example, unilateral contracts and ongoing transaction promises i.e. contracts that should be enforced were not, and especially hurts those without lawyers who don’t know the rulesIn response courts have:

Invented consideration e.g. effectively a gift, but nominal consideration such as £1 in Thomas for life estateConstrued an apparently unilateral offer as a bilateral contract e.g. Dawson

Exception to requirement of consideration carved out by courts: promissory estoppel = reliance as basis for enforcementEstoppel generally confined to subsidiary promise within an existing legal relationship (as in High Trees below, where parties already had a lease, and new promise was to vary a term of that lease)This basis of reliance would solve some of our earlier problem cases. E.g. debt compromises without duress (e.g. Foakes) would be enforceable even without legislative reformBut would not solve all problems, even when there was an existing legal relationship. E.g. promised price increase without duress (as in Gilbert Steel) since estoppel cannot be used as a sword, but only as a shield i.e. plaintiff cannot use estoppel as a basis for an action, rather it can be used as a defence (see Combe below)

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Further, courts will not use estoppel if there are no equitable reasons to do so e.g. in High Trees below it would have been inequitable to not enforce the promise, but in D&C Builders would be inequitable to enforce it

Central London Property Trust v. High Trees House (1947) (English K.B.)

PROMISSORY ESTOPPEL: INTENT FOR LEGAL RELATION, PROMISOR KNEW PROMISEE WOULD ACT, AND DID ACTFacts: long term agreement between owner of flats (plaintiff) and defendant who would manage the building on a 99 year lease (executed under seal), paying monthly rent to plaintiff. Due to trouble filling flats (due to war) agreed to cut the monthly rent in half – classic GTA. Owner now suing for full amount (they were going bankrupt).

There was no rescission of the original contract, and there were no arrangement made for fresh consideration when Central London agreed to the lesser amount

Central London relied on the rule from Foakes v. Beer (1884) (English H.L.)The promise to pay less when you owe more is not a good promise – there is no consideration

Rule:By doctrine of consideration, no fresh consideration for promise here, and contract variation rather than terminated old contract and created new one, so not binding.But, it’s a voluntary business arrangement thought out by both parties, so common sense suggests enforceability.Hence new doctrine of promissory estoppel - promise is enforceable if:

Must be a promisePromise intended to create legal relations (i.e. is binding) - subjectivePromisor intends the promisee to act on that promisePromisee did in fact act on that promise (i.e. reliance e.g. by trying to carry on with the arrangement, rather than breaching original contract)

Decision: Here the promisee did rely on the promise by sticking with the lease arrangement (at the lower rent) and satisfies the conditions. So promise of lower rent binding (during war).

Fifth element added later by Combe v. Combe (1951) (England) to “do justice in the circumstances”

There is no other reason not to enforce the promiseIn other words, estoppel must increase enforceability – estoppel never makes promises unenforceable!! (positive aspect)

D&C Builders v. Rees (1966) (English C.A.)

PROMISSORY ESTOPPEL NOT AVAILABLE IF DURESS / INTIMIDATION (BEYOND NORMAL BUSINESS PRESSURE)Facts: plaintiffs did work on defendant’s house, but defendant did not pay. Eventually, when plaintiff in financial difficulties (bankruptcy) defendant offered to pay

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smaller amount in satisfaction of the whole debt, and plaintiff felt no option but to accept. Plaintiff now seeks the remaining amount.

Looks like High Trees: a party agrees to less in order to get more

Rule:Accord and satisfaction: parties have agreed that there will be a lesser payment and that this payment will be in full satisfaction of the debt – used to get around Foakes

General rule: if you accept less than the amount you are owed, this is not good consideration

Payment of a lesser sum is no discharge of the greater sum – from Foakes

Where a creditor agrees to accept a lesser sum in satisfaction of the debt the agreement to accept less must be voluntary – no economic duress

Must go beyond ordinary commercial pressure – but may be difficult to draw this lineRelies on Pao On to define duress

Decision: there was certainly no fresh consideration for the promise to accept less. Promissory estoppel is not available to enforce the promise to accept less since would be inequitable due to duress / intimidation i.e. creditor here did not accept the lesser amount voluntarily

Defendant took advantage of her knowledge of the plaintiff’s impending bankruptcy

Comment: Strong policy reasons to get rid of the rule in Foakes:In business, its normal practice for a creditor to accept less in order to reach a settlement

Sword vs. ShieldCombe v. Combe (1951) (English C.A.)

PROMISSORY ESTOPPEL: ONLY A SHIELD, NOT A SWORD, SO IT CANNOT CREATE A NEW CAUSE OF ACTIONFacts: Parties getting divorced, husband promised to pay £100 a year maintenance to wife. He didn’t pay, and she then sues.Claim: Wife claimed promissory estoppel since the promise was seriously made (with intent for legal relationship), and apparently wife acted upon it by not suing.

Rule: Rejected by court since “promissory estoppel does not create new causes of action where none existed before. It only prevents a party from insisting on his strict legal rights when it would be unjust to allow him to do so”.

Promissory estoppel can only be used as a shield and not as a sword.

In High Trees, Lord Denning notes that the cases he references are not about estoppel, but about promises that are binding and intended to be acted upon i.e. reliance

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Reliance and/or estoppel may be sufficient to establish a contract – don’t need to look at consideration if you can establish a particular reliance. Through estoppel, will not let you go back on your promise

However, Denning soon retreated from this stanceEstoppel can be used only as a shield and never as a sword (from Combe v. Combe)

Cannot rely on estoppel to support a promise and then sue on it – can only use estoppel as a defence to prevent the party who made that promise from relying on their strict legal right because it would be unfairMust still have consideration – narrowed the use of estoppel to defense and reiterated that it did not replace consideration.

Particularly important in the area of GTAs

In order for promissory estoppel to work as a shield, the variation in the contract has to be a concession or a promise to accept less – never a promise to provide more!

Use of promissory estoppel is often quite arbitrary – sword / shield distinction somewhat illogical:

In High Trees owner was suing for full rent, defendant could use promissory estoppel as a shield to deny that strict legal right due to promise to reduce. In Gilbert Steel the plaintiff was trying to use promissory estoppel to enforce defendant to pay agreed higher price i.e. trying to use it as a sword, and so court dismissed in that case. But suppose the higher price had been paid by University construction to Gilbert Steel, and then University construction tried to get the higher amount paid back – Gilbert Steel probably would then have been able to use promissory estoppel to avoid paying anything back since then using it as a shield. So not too rational is it – turns on whether the promise had been kept or not.

In many ways, promissory estoppel can screw up the regular course of business in the marketplace – somewhat arbitrary about who can use estoppel as a defense.

US PositionRestatement of Contracts: a promise which is intended to be relied upon and is indeed relied upon is binding if injustice can be avoided only by enforcing the contract.

Canadian courts in particular do allow estoppel to be used as a sword, but instead they frame it as consideration

PrivityAnswers two major questions:

Who can enforce a promise? – only the parties to the contractWho can receive benefit from a contract? – only the parties to the contract

Parties to the contract have privity to the contract

Third parties (strangers to the contracts) have neither rights nor obligations under the contract – cannot bring legal claim to a contract.

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Doctrine of privity of contract developed in Tweddle v. Atkinson:

Tweddle v. Atkinson (1861) (English Q.B.)

DOCTRINE OF PRIVITY: THIRD PARTY CANNOT ENFORCE EVEN WHEN BENEFIT TO THIRD PARTY IS ESSENCE OF KFacts: Tweddle has a son and Atkinson has a daughter. Atkinson and Tweddle enter into contract to each pay £100 on marriage of their son and daughter. Both fathers die before they make payment. Tweddle’s son then sues Atkinson’s estate for the dowry.

Decision: son has no right to enforce contract since he is a stranger to the contractThird party cannot enforce even when benefit to third party is essence of the contract.Court found it would be wrong to allow someone to enforce but not to be liable – i.e. there would be no reciprocity (so doctrine of privity one aspect of bargain theory of contracts)Further son did not pay for promise i.e. no consideration

Comment:Can be justified somewhat by:

Considering that it is an executory contract (i.e. to be performed in future) and if the fathers had fallen on hard times, both might agree to reduce the amount they will pay, but if third party beneficiary (the son) could enforce, it would take away their chance to modify the contract by mutual agreementWould greatly expand liability on the contracting parties to possibly numerous third parties

However, arguments against the decision:Possible that a contract could have been found here, but not argued – could have argued that since there was reliance by son on contract (got married), as has daughter, and their marriage could be thought of as consideration, and there would be no unfair surprise or unjust enrichment if son could enforce.

Avoiding PrivityFind/invent a contract

Trust (not a contract, but an equity relationship):The “settler” settles legal title of property to A (the trustee) who holds in trust for C (beneficiary) – transfer agreement is a contract. C (beneficiary) can then enforce contract between A (trustee) and another B e.g. A might hold money for benefit of C, and invest it with a bank B.Even though C is not a direct party to the contract, they still have privityIn Greenwood no trust found since a trustee would not have been able to amend contract without beneficiaries consent

Assignment:

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e.g. contract between B (debtor) and A (creditor), A wants money now, so will assign (sell) the debt to C creating a second contract (discount: usually for 80 or 90 cents on the dollar). C can then enforce the contract on B.

C has no direct privity on the contract between A and B, but does by extension through the second contract

For public policy reasons, cannot assign contracts for personal services (e.g. employment contract), custody agreements, or public pension plans (i.e. future beneficiary of pension wants money now, but by legislative ban not allowed to assign the benefits to another since the beneficiary may then end up without funds on retirement and become burden on state)

AgencyA (principal) arranges for B (agent) to contract with C (still has to be consideration) e.g. A asks B to find a boat and buy it, B buys boat from C.Usually results in a binding contract between A and C, even if C wasn’t aware of A at the time. So can sometimes argue for implied agency between a contracting party and the third party

E.g. in Langridge v Levy, father bought gun (which turned out to not be as described and dangerous) for sons, and claimed he was unconscious agent for his sons (so that sons could sue vendor).

Doctrinal Requirement for Agent to Bind the Principle (New Zealand Shipping)

Was there an intention for the third party (principal) to benefit from the contract?Was the contracting party (B) contracting as A’s agent?Did B have the authority to contract on behalf of A?Does the consideration flow from the principle (A) to the third party (C)?

If these requirements are met, even though there is not privity between A and C, they still have a binding contract.

Employee: exception to doctrine of privity from London DrugsCan an outside party who happens to be an employee claim benefit to a contract that their employer is engaged in?

Often occurs with cases involving insurance – can an employee (agent) acting for their employer (principle) access insurance held by the principle?

Subrogation: refers to a situation where one party assumes the legal right of another – one party “stands in the shoes” of another

Occurs most often in insurance contracts and leasesE.g. car insurance subrogation clause – ICBC will stand in for the insuree and sue in their name in order to recover damagesLease – will agree that only one of the parties will take out insurance – prohibition clause

Party that takes out the insurance will agree that they will not attempt to stand in – agreement not to subrogateIssue: can a third party claim the benefit of the no subrogation clause?

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Greenwood Shopping Plaza v. Beattie (1980) (S.C.C.)

NEGLIGENT EMPLOYEES PERSONALLY LIABLE – THIRD PARTIES SO CANNOT TAKE ADVANTAGE OF SUBROGATION CLAUSEFacts: Greenwood leased out part of mall to Canadian Tire, and the contract between them included (in attempt to avoid dual insurance premiums, and get cheaper property insurance compared to negligence/liability insurance that Canadian Tire would need):

Greenwood will take out replacement insurance (e.g. for fire)Greenwood will not subrogate rights to sue to insurance company

Greenwood breaches the contract - fails to do either of these (only gets construction insurance, and doesn’t avoid subrogation). Due to negligence of Canadian Tire employees (welders), there is a fire, and the insurance only partially covers damage. Greenwood seeks additional amount to cover rest of damages, and Greenwood (really the insurance company) seeks recovery of it’s payout. Unable to sue Canadian Tire due to it’s breach of contract, so it sues the employees

Decision:Employees are liable personally since they were negligent, and since employees are third parties (no consideration) cannot take advantage of the contract (and the fact that it was breached).Court found no evidence to suggest Canadian Tire was trustee for the employees (if there was a trust relationship trustee Canadian Tire would not be able to amend lease without consent of the employees (who would be beneficiaries) and this clearly was not the case), nor was it contracting as an agent on their behalf.Despite no legal duty to do so, Canadian Tire stepped in and indemnified its employees – however, strong business reasons to do this – reputation at stake

Comment:Problems with this decision is that it is unfair by just applying the doctrine, resulting in:

Unfair surprise on employees – not fair for them to be personally liable (especially since Canadian Tire is a corporation and cannot itself start a fire)Unjust enrichment for an insurance company (suppose it charged higher premiums due to no subrogation, but could then go after employees for recovery of payout)Unjust enrichment for Greenwood since leasehold payments by Canadian Tire probably higher since Greenwood meant to be paying insurance premiumsUnjust enrichment for Canadian Tire since they would probably pay employees less if they had to take out negligence insurance for employeesInefficient since requires employees to take out employee liability insurance and so will have multiple insurance premiums being paidNote the Canadian Tire did cover the damages awarded against the employees – possible sense of moral obligation, and also to maintain employer-employee relations (employees unionized) – so again inefficient since Canadian Tire ended up paying higher lease payments and paid damages

S.C.C. vilified for this decision and subsequent London Drugs (below) case, although it distinguished Greenwood so Greenwood is still good law, effectively partially overruled this decision

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Agency – exclusion/limitation clauseExclusion clause - excludes liability completelyLimitation clause – limits liability

Proportionality – prevents claims of extraordinary damages for minor business contracts

London Drugs v. Kuehn and Nagel (1992) (S.C.C.)

PRIVITY RELAXED TO ALLOW EMPLOYEES IN WHERE CLEAR INTENT IN K AND ACTING WITHIN SCOPE OF EMPLOYMENTFacts: Contract for services of storage. Similar fact pattern as in Greenwood: London Drugs owned transformer (worth $40,000), had contract with K & N to store it, and contract had a limitation clause limiting liability of “warehouseman” to $40. Employees of K & N negligent and damage the transformer. Insurance company for London Drugs cannot sue K & N, so go after the employees (by subrogation). London Drugs employees argued they are protected by limitation clause in contract

Rule: Employees not mentioned in contract so agency doesn’t apply. Based on unfair surprise, unjust enrichment, and inefficiency (i.e. the critiques of Greenwood) decide doctrine of privity must be relaxed so employees (who are not party to the insurance contract) can take advantage of limitation clause if:

Clear intent of contract (either express or implied) to include employeesEmployees were acting within scope/course of their employment

Decision: employees protected by limitation clause:Contract only said “warehouseman”, so no express intent in contract to include employees, but it was implied. Argument against was that later in contract said “warehouseman or employees” and by rule of effectivity warehouseman should therefore not include employees. However, court decided should include employees (and so “warehouseman” means “warehousemen”) because of:

Nature of relationship between employees and employer (perhaps means power relationship)The identity of interest with respect to contractual obligations (i.e. employers act through employees)

The fact that London Drugs knew employees would be involvedAbsence of clear intent in contract to the contrary (i.e. that employees should not be protected) – if there is to be such an exclusion, there must be express language

Negligence / damage occurred within scope of employment But what if they had been having forklift races during lunchtime? - probably not, but not decided yet)

Comment:Distinguishes from Greenwood, but doesn’t deny that it is still good law

Note the first 2 reasons for implying the contract to include employees are more to do with policy than intent (i.e. employees should be protected, and indeed

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most think they are). Only real intent was to protect the “warehouseman” i.e. the employer, but S.C.C. extended it to include employees

Apparently, after London Drugs, Greenwood is history in Ontario but not in B.C.

Laing Property v. All Seasons (2000) (B.C.C.A.)

INTENTION THE EMPLOYEES CAN TAKE BENEFIT OF K FOUND WHERE SHARE IDENTITY OF INTEREST AND KNOWN THAT WORK CARRIED OUT BY EMPLOYEES (NOW ASSUMED)Facts: All Seasons sends Santa’s Castles to Guilford mall where they are set up by Laing’s employees. There is a fire and some of the Santa’s Castles get burned. Sues All Seasons, arguing that they were faultily constructed with a tendency to burn. Almost identical to Greenwood – lease, obligation to take out fire insurance, employees negligent resulting in fire

Third party proceedings:The insurer, on behalf of Laing Property, sues All Seasons in tortAll Seasons then bring third party proceedings against Laing Property’s employees – arguing that it was the employees that were negligent in improperly setting up the castles

Argued that they owed a duty of care to the mall tenants to set up the castle properly – legal effect is the same as though the tenants had sued Laing

Then if All Season’s is found to be negligent, they will argue that Laing’s employees had contributory negligence – will split the liability and reduces the damages that All Seasons has to pay

Issue: Court applies Greenwood and allows All Season’s to sue the employees. The question then becomes: can the employees take advantage of the subrogation clause in the insurance?

Two-part test: Is there an express or implied term in the contract that the employees can take the benefits? If yes then Were they acting within the scope of their employment? (providing the very services that were in the employment contract?)

Part 1Turns to the lease – states that the tenant shall pay the costs of promotion and maintenance and that Laing will keep the property in good tenantable conditionAll of these are relied on by the court to show that the landlord did have obligations and that these obligations could only be carried out by the landlords employees – implicit that the agreement should extend to cover the employees

BCCA sets out a couple of factors on how we might discover implied intention

Identity of interest: If the employer is to provide a service and that service is to be performed by employees, than the interest of the employers and the employees is identical

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Should the customer (plaintiff) have known that the performance of a contract would be done by employees?

If it’s a corporate entity, than the work can only be performed by employees!If yes to the second factor, then there will be an implied intention to extend the benefit of the contract to a third party (in this case the employees)

In subsequent cases, part two of the test has evolved into a presumption – we now presume that every customer will presume that the contract will be performed by the employer’s employees.

Held: Employees were absolved from liability by the terms of the lease. Third party proceedings against them were struck down.

Comment: Policy FactorsThere is an implied mutual intention that the land lord employees would have the benefit of any contractual protection obtained by the employer

Makes commercial sense – need to allocate risk: employer is in a better position to take out insurance – more economically efficient and prevents unfair surprise to the employees

Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. (1999) (SCC)

EXTENDS 3RD PARTY LIABILITY PRINCIPLE DEVELOPED IN LONDON DRUGS: IT IS THE INTENTION OF THE PARTY THAT IS IMPORTANT.Facts: Boat owner contracts with an insurance company to insure his boat. The boat owner’s boat was sunk due to the negligence of Fraser River. The insurance company had a clause preventing subrogation. Insurance company paid out the boat owner and then directly sued Fraser River.

Decision:The two conditions that are set out in London Drugs can be applied in broader circumstances - moving beyond the employer-employee context to allow other third parties.

In this case, an insurer tried to argue that it was not bound by a waiver of subrogation rights against a 3rd party. The court held that the important factor was the party’s intention, that intention was that the 3rd party be protected. It extended the limited liability waiver outside the strict employee context.

If any third party was to benefit from the contract, we will look at the third party and make a decision about whether or not they were intended to benefit. Look at activity performed by the third party – if those activities are the very activities that are contemplated by the contract, then the second part of the test will be met.

The Doctrine of Privity is not dead, but it may certainly be relaxed when the court wants to do justice in the circumstance.

Greenwood has not been officially overruled, but is falling into disuseTest developed in London Drugs has been significantly relaxed.

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Representations and WarrantiesRepresentations are always statements made in the negotiations of a contract – they are not part of the contract, but are an inducement to enter into the contract

Often to the surprise of the parties, a representation that one party didn’t intend to be in the contract will be found by the court to be a part of the contract – concerns about unfair surprise

Who ought to bear the risk of the statement?More specifically, if the statement is wrong, who ought to bear the risk of loss for the misstatement?Tend to take a remedial approach – start from the remedy you want and look backward

Classification Remedy Interest ProtectedMere puff None Caveat emptor

Innocent misrepresentation Rescission Restitution (prevent unjust enrichment)

Negligent misrepresentation Reliance damages Reliance

Fraudulent misrepresentation Rescission and reliance damages

Reliance

Warranty Expectation damages Reasonable expectation

Condition Rescission and expectation damages

Reasonable expectation

Every contract has some essential terms and some non-essential terms – a condition is an essential term of a contract

Fraudulent misrepresentation – lying to induce someone to enter into a contractThe courts didn’t want to make every misrepresentation blameworthy, so there is a fairly high threshold to qualify as fraudulent misrepresentationCoupled misrepresentation (contract concept) with a criminal concept (fraud)Very difficult to prove, and the party will be penalized if they fail in establishing the fraud

Policy ApproachCaveat emptor – buyer beware – parties are expected to look after their own interests as best they can - court won’t get involved

Risk allocation: Who has the best and cheapest access to the knowledge about the information? I.e., who could have avoided the most cheaply the incorrect statement?

Doctrinal Approach

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For each category, there are doctrinal elements which provide the rationale for the characterization – what makes something into a warranty as opposed to an innocent representation?

Cases may be very difficult, if not impossible, to reconcile

Remedial approach: Looks at what would do justice in the circumstance, namely the remedy, and then look back and manipulate the reasoning in order to give rise to the desired outcome.

Start from the end and work backwards

ConditionsGoes to the root of the contact – essential terms (essence) of the contract

Essential terms may be express or impliedIf that condition is broken, the contract goes into rescission and the wronged party may seek expectation damages (best type of damages from perspective of wronged party)

Conditions make up the core of a contract, so if they are destroyed, the contract is breached

Fraudulent MisrepresentationMust be some standard of behaviour that prevents one party from lying to another in order to enter into a contractThis idea has long been found in tort – could historically bring a tort of deceit for misrepresentation in contract negationsHas evolved into the legal claim of misrepresentation. However, fraud remains very difficult to prove due to its quasi-criminal nature – can have devastating effects in the marketplace

Even today, fraudulent misrepresentation is very difficult to prove. If you are unable to prove your claim, the other party may turn around and sue you for libel – risky business!

Courts generally want to keep this very high threshold

Innocent MisrepresentationDeveloped by the courts of equity – therefore unable to grant damages, but could grant rescission. However, may still receive reimbursement for any money paid out to obtain that condition (restitution damages)Relates to a party that makes a false statement, but wrongly believed that the statement was trueCaveat emptor – shouldn’t the onus be on the party that relies on the statement to ensure that it’s true?

Doctrinal Requirements for Innocent Misrepresentation (Redgrave)Must be representation of fact that turns out to be false (differentiate between fact and opinion)Misrepresentation must apply to a material (important) matter – not an essential matter (something less than a condition)Must induce the party to enter into the contract – generally presumed by the court, but rebuttable

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Innocent party (listener) didn’t know the correct facts – positive duty on the listener to correct the speaker (cannot simply stand by and claim misrepresentation later)

Redgrave v. Hurd (1881) (Ch.D.)

LIMITATIONS ON INNOCENT MISREPRESENTATION: MUST BE ABLE TO GIVE BACK WHAT WAS TAKEN, ONLY GET BACK WHAT IS PAID AND MUST BE PARTIALLY EXECUTORYFacts: Solicitor trying to sell his home and his legal business. Told potential buyer the average income of the business is about £300, and shows him financial statements. Buyer enters into two contracts: one to buy the home (pays deposit with balance outstanding) and the other to buy the business. Buyer later looks at financial statements and discovers income of business to be significantly less, so refuses to go through with both deals. Solicitor sued for specific performance (equitable remedy) of the home purchase, whereas buyer claims relied on the misrepresentation to enter into both deals. There is no evidence of fraud.

Trial court rules caveat emptor – the purchaser should have taken the time to go over the financial statements before entering into the contract

Decision:Accepts innocent misrepresentation as relevant to home purchase deal and orders remedy of rescission

First effort at definition of innocent misrepresentation:Need a material representation (i.e. important in decision to enter contract) concerning a matter of fact that turned out to be false (but representor didn’t know it was false at the time i.e. not fraud)Which induced the representee into the contract (i.e. reliance), andRepresentee did not know it was false (although it is no defence to say that the representee could have discovered the error had they checked more carefully)

Rescission limited (and still is):Must be able to give back what was wrongfully taken – restitution must be availablePromisee can only get back what they paid to the promisor – no unjust enrichmentMust seek rescission before there has been full performance of the contract – part of the contract must remain executory

In Redican v. Nesbitt (1924) (S.C.C.) vendor made innocent misrepresentation that “house has electicity” but purchaser only discovered it 2 days after contract completed, so rescission not available – contract has been fully performedAlthough courts might get around this: E.g. in Ennis v. Klassen (1990) (Man. C.A.) car turned out to be inferior model of BMW than vendor said it was (innocent misrepresentation), and although the money had been paid, keys turned over, and car registered to new owner, court found contract was not fully discharged by implying a term of “reasonable inspection” (court didn’t want to call this a warranty since that would lead to expectation damages which were considered too high)

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May allow rescission by implying a term the contract remained partially executory

Comment: Some evidence that the court was influenced by wanting to justice in the circumstances and give the buyer a chance to get out of the contract – therefore they worked backwards.

WarrantiesTaking a statement that was made before the contract was entered into and then elevating this statement to become part of the contract

Statement = collateral warrantyOriginal contract = prime contractPrime contract + collateral warranty = new contract

Considered to be a breach of the prime contract, so expectation damages may be awarded

Courts invented the concept of collateral warranty in order to allow the recovery of more than reliance damages

When will the statement made be treated as a mere innocent representation and when will it be treated as a warranty?

Balancing act between unjust enrichment and reliance

Heilbut, Symons v. Buckleton, (1913) (English A.C.)

A STATEMENT IS A COLLATERAL WARRANTY IF THE PARTIES INTENDED IT TO BE SOFacts: Brokerage firm (which has a good reputation) is underwriting shares of a company purporting to be a rubber company. P calls broker firm and has the following conversation: P: “I understand you are bringing out a rubber company”. D “we are”. P “is it all right?”. D: “we are bringing it out”. P: “That is good enough for me”. Turns out the company had only relatively few rubber trees and was involved in other business as well. P bought shares, but company subsequently did very poorly, shares became worthless. P sues brokerage firm.

Claim: P claimed broker firm warranted it was a rubber company

Decision:Fraudulent misrepresentation: no evidence of fraud in this case.Innocent misrepresentation: no use to the plaintiff in this case since the contract is no longer executory, so rescission not available

Obiter dictum: So P tried for collateral agreement/warranty: legal test created – statement is a collateral warranty if parties intended it to be so at the time of sale (i.e. subjective test – the 2 particular parties), and such statement can lead to breach of warranty with remedy expectation damages

“An affirmation at the time of sale is a warranty provided that it appears on the evidence to be so intended”

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In this case, it was ruled there was no such intention and so the statements were an innocent misrepresentation (speaker had little knowledge of the company, he didn’t make a positive/express affirmation, there was unreasonable reliance by P on his words, P really relying on the reputation of the firm bringing it out, casual conversation, highly risky endeavour, etc) so no remedy

Comment: Should there not have been a caveat emptor onus on the plaintiff to investigate the statement further before making a significant investment?

Dick Bentley Productions v. Harold Smith (Motors) (1965) (English)

PROVIDED GLOSS / CLARIFICATION ON WHEN A REPRESENTATION AMOUNTS TO A WARRANTY: INTENTION = OBJECTIVE TEST – WHAT WOULD A REASONABLE PERSON IN THE CIRCUMSTANCES BELIEVEFacts: Dick Bentley bought a car from Harold Smith. Harold said car had been refitted with replacement motor and gear box and had only done 20,000 miles since then. This turned out to be false, car fails

Issue: Was statement a warranty?

Rule:Comments on the intention test from Heilbut:

Dictum in Heilbut said “an affirmation at the time of sale is a warranty, provided it appears on the evidence to be so intended”.

The difficult question is what does the word “intended” mean.Does not mean subjective intention of the parties, but rather means an objective test i.e. look at the conduct and words of the parties from the perspective of what “an intelligent bystander would reasonably infer” taking into account all the circumstances (so if clear evidence of subjective intent, a warranty will be found).So, perhaps oversimplifying, test for warranty = was the reliance reasonable.

So to determine if there was a warranty, should ask:Was there a false or erroneous representation? If yes Timing: Was the representation made in the pre-contractual stage? If yes Purpose: Was it made to induce the other party into the contract i.e. was it a material representation? If yes Actual inducement: Did it in fact induce the other party into the contract? If yes Reliance: Was the reliance reasonable?

Decision: No fraud in this case, but the representation was important, the car dealer was in a position to know the car’s history (easy for dealer to find out), and reliance was found to be entirely reasonable, hence the statement was found to be a collateral warranty.

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Oscar Chess v. Williams (1957) (English)

INNOCENT MISREPRESENTATION SINCE UNSOPHISITCATED PARTIES – NO REASONABLE RELIANCE ON KNOWLEDGEFacts: private individual sells car (Morris Minor), both P and D look at registration and misread it as a 1948 car, whereas it really is 1939Decision: this is only an innocent misrepresentation, since (comparing with Dick Bentley):

Misrepresentation here (difference in year) less significant than number of miles in Dick BentleyIndividuals here, whereas professional dealer in Dick Bentley. So big difference between the two cases since buyer didn’t rely on the sellers knowledge

Carman Construction v. Canadian Pacific Railway (1982) (S.C.C.)

TO SHOW WARRANTY, BOTH PARITIES MUST INTEND A LEGAL EFFECT; WARRANTY CANNOT CONTRADICT WRITTEN KFacts: CPR wanted rock moved out of the way in a hurry (only a 48 hour tender process) for a railway siding. Carman was invited to submit a tender. In trying to figure how much needed to be removed, Carman spoke to an unknown employee at CPR’s engineering department and was told between 7 and 7.5 thousand cubic yards of rock (CPR had performed their own test). Based on this, Carmen submits bid and it wins. Turns out there is 11,000 cubic yards of rock to be removed.

In the signed agreement, clauses that Carmen acknowledges it didn’t rely upon any information provided by CPR, and Carmen read and understood this

Claim: Carman sues, claiming negligent misrepresentation and collateral warranty

Rule: To prove a representation amounts to a warranty, must show both parties intended a legal effect, andCannot have such a warranty if it contradicts the terms of the written contract

Decision: both claims rejectedOn negligent misrepresentation, Carman did not rely on the statement in light of the contractual clause. Carman knew that if they obtained the information from the CPR employee they would be relying on it at their own risk.On collateral warranty: There was no intention by the parties to warrant the accuracy of the estimate of the rock, evidenced by:

Carmen didn’t even get the employees name or position (so perhaps S.C.C. saying no reasonable reliance in these circumstances, and Carmen were experts and they had visited the site)Carmen signed the contract with the clause saying they didn’t rely on such representations. The collateral warranty, even if it did exist, would contradict the express terms of the written contract.

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Fraser-Reid v. Droumtsekas (1980) (S.C.C.)

WRITTEN WARRANTY SINCE FAILED TO DISLOSE “ALL OUTSTANDING INFRACTIONS” AS REQUIRED IN KFacts: P purchased newly built house from builder D. Basement flooded seriously in spring and in every subsequent rainfall because builder didn’t install drain weeping tile around perimeter of house (it’s a conduit to take water away from house, an elementary building element and a building code requirement). Exclusion clause in the contract said there were no representations or warranties other than the ones expressed in written contract. Cost to fix it about $4,500

Courts will often stretch the circumstances to do justice in the circumstances when dealing with consumer purchase of a house - hugely important purchase, not sophisticated party

Claim / Decision: P had a number of options of claims:Legislation – Home Warranty Act only came into force after contract (and no retroactive application)Fraudulent misrepresentation – no fraud hereInnocent misrepresentation – no use since no apparent misrepresentation, and contract said no representations, and contract executed. Further, didn’t want rescission. Implied warranty – more appealing, since could provide damages to fix the house.Written warranty – even though no express warranty, contract did have a disclosure clause that said “vendor has disclosed all outstanding infractions”

Held: S.C.C. said this is a warranty (really a condition since it’s in the written contract)

Implied Warrant – accepted but requirements not metAdopted a British approach that there is an implied warranty for fitness of habitation, but this only applied to sale of incomplete houses where buyer doesn’t have possibility of inspection to find defects.

Rejected argument that drain tile problem meant the house was incomplete

In US, this has been extended to completed but unoccupied houses, but S.C.C. rejects saying legislation should make this extension

Thus, caveat emptor is still the basic rule.Also consider British approach – implied warranty for “fitness of habitation”

Oral contract – “I build good houses” - rejectedQuickly rejected by the courts since this is the kind of statement that every vendor makes about their goods

Written Warranty - succeedsTook “outstanding infractions” to mean any building code infraction

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Drain tile is a requirement of building code and was not installed, which was an infraction. Thus the disclosure clause was breached since the vendor had not “disclosed all outstanding infractions”

Comments:

S.C.C. tries to help distinguish innocent misrepresentations from warranties:A term that goes to the root of a contract is a condition, whereas a warranty is a representation (that induces into the contract) that is a lesser obligation.However, tenuous distinction – but courts like this ability to manipulate the principles to do justice in the circumstance

PolicyPurchaser were unsophisticated parties, so they reasonably relied on the builder who had better knowledge

Missing drain tile was a latent defect – would not have been discovered by a prudent purchaser. Thus, cannot rely on caveat emptor.A reasonable builder ought to have known that drainage tile was not installed.

Effect was really an implied warranty as to fitness, so are essentially adopting the American position.

No new houses have zero building code infractions, and “outstanding infractions” is used in standard forms across Canada. So although S.C.C. said didn’t want to expand law as in the US (rather said leave it to the legislature), but they ended up expanding the law enormously

Murray v. Sperry Rand (1979) (Ont. H.C.)

ADVERTISING CREATED A COLLATERAL WARRANTY BY MEANS OF A UNILATERAL CONTRACTFacts: farmer (Murray) bought a harvester from dealer (Church Farm Supplies CFS). Dealer bought the harvester from Sperry Rand, the US manufacturer. Farmer asked the dealer if the harvester would perform the way the brochure indicates, and the dealer said yes, it will do everything you want to. The harvester never performs up to that level.

Oral representation by the dealerWritten representation from the manufacturer through the brochure

Decision:Dealer liable to farmer because statement was a warranty – clearly made to induce farmer into contract, important, reasonable reliance, etc.Manufacturer also liable because of representations in sales brochure, even though there was no contract between the manufacturer and the farmer (the dealer sat between them).

How did the court get around the privity to contract problem: said that the advertising created a collateral warranty by means of a unilateral contract: “if you buy our harvester it will do XYZ”, and farmer accepted this offer when he purchased it – acceptance through performance

Adopted from British decision Shankland Pier

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DamagesPlaintiff claimed that he lost $8500 in reselling the harvester – reliance damagesAlso claimed expectation damages for lost profits and inability to board cattle – but too speculativeEventually awarded $20,000, but no reasoning given by the judge

Comment:Agency was never argued in this case, although the dealer was acting as an agent for the manufacturer – would likely have been a simper argumentCourt went quite far in stretching the principles to do justice in the circumstance – invented a unilateral contract

Manufacturer had the deepest pockets, so most likely to be able to pay damages

Negligent Misrepresentation: Torts vs. ContractsTraditionally, there was a wall between negligent misrepresentation in tort and breach of warranty in contracts. However, this wall was finally broken down in the famous case of Hedley Byrne.Now there are cases where a person may sue both in tort and for breach of contract.

Negligent misrepresentation in tort requires: There must be a misstatement Speaker must owe the listener a duty of careListener had to reasonably rely on that misstatement – foreseeable to the speaker that the listener would rely on that statement

Warranty relies on intention:Objective measure – would a bystander reasonably believe that the listener would reasonably rely on the misstatement – Bentley

In fraudulent misrepresentation, the threshold was raised very high – balance of probabilities

Historically there was a gap in that there was no remedy for misrepresentations that fell between innocent (no damages, only rescission) and fraudulent (which required dishonesty and not just negligence). But then came along collateral warranties but this required intent by the parties to form a warranty. So there was still a gap. There is often a gap in compensation – under-compensation for innocent representation, over-compensation for warranty

Candler v. Crane , Christmas (1951) (K.B.)

EARLY CASE SHOWING WALL BETWEEN TORT AND CONTRACTFacts: Company owner made a contract with an accountant to audit the books. Candler, before investing in the company, wanted a measure of its financial status. The accountant was negligent in showing that the company was profitable when in fact it was not. Candler invests in the company and loses his investment.

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Held: Candler could get no recovery because the accountant was not dishonest or fraudulent, just merely incompetent – no fraudulent misrepresentation.

No privity of contract, so he could not sue for breach of contract. Attempted to claim a sort of trust relationship in that he was a third party beneficiary – but there was no consideration, so this argument failed.

Attempted to sue in tort – but the court would not recognize that the tort of negligent misrepresentation could arise out of a contract – wall still in tact at this time.Two floodgate arguments:

Cannot allow torts in this kind of contractual situation Many statements in contracts are very informal and the effects of these statements may create ripples – the potential for others to hear statement and then rely on them would be unlimited, even if the statement had not been aimed at them. Once words are spoken in a negotiation, they can never be taken back – when will it all end?Court was concerned about broadening the number of potential claimants

Economic loss – in torts, don’t compensate for pure economic loss that is not tied to physical or mental injury; however, in contracts, pure economic loss is widely recognized – expectation damages.

Wanted to keep these two areas of law very separate – in tort, not prepared to compensate for pure economic loss.

Note: in 1951, there was no law of agency. These days, agency would likely have been the best line of argument.

Hedley Byrne v. Heller (1964) (English H.L.) :

FOR THE FIRST TIME IN TORT, RECOGNIZED CLAIM FOR FALSE OR NEGLIGENT STATEMENTS, BUT ONLY IN SPECIAL RELATIONSHIPS WHERE THERE WAS DUTY OF CARE BETWEEN THE SPEAKER AND THE LISTENERFacts: P advertising company (puts ads in papers, TV etc. to advertise client’s products). Before entering into a contract with one client, P asks their bank if the client is solvent, which in turn calls the client’s bank. Client’s bank says the client has the money, although they added a disclaimer that the information was only “for your private use and without responsibility”.Decision:

Court recognized tort of negligent misrepresentation – there may be a duty of care in special relationships where providing information, opinion or advice

Relationship arises upon reasonable reliance and duty of care - no need for a contract between the parties

Special relationship between the client and the bank. In this case found negligent misrepresentation, but no liability due to disclaimer.

Breakthough because tort recognized compensation for pure economic loss that was not tied to a physical or mental injury.

However, very narrow circumstances, so door is only opened a littleEsso opened the doors a little wider by allowing negligent misrepresentation even where a contract existed between the parties.

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Esso Petroleum v. Mardon (1976) (English C.A.)

ALLOWS FOR POSSIBILITY OF CONCURRENCY IN TORT AND CONTRACT; RELIANCE DAMAGES FROM TORT CAN INCLUDE LOST OPPORTUNITY (ALMOST EQUAL TO EXPECTATION DAMAGES)Facts: Esso wanted to build a new gas station fronting onto a busy street. With this design, they estimated 200,000 gallons would be sold per year. Planning organization would not allow accessibility from busy street, and required that the tanks not be visible from the street. Esso leased the station to Mardon for 3 years, and Mardon questioned the 200,000 gallons estimate thinking it high but is convinced by Esso’s expertise. He enters into a tenancy agreement at a rent of £2,500 per year. Mardon puts all his available capital into the business, and suffers a serious loss selling only 78,000 gallons in the first year, and even less in the second and third years.

Claims: Mardon defaults on lease payments, and in response Esso sues Mardon to regain possession. Mardon files a counter claim in both contract and tort (i.e. claiming that the 200,000 gallons per year estimate was either a collateral warranty or a negligent misrepresentation). Esso says the estimate was simply an opinion, and that tort of negligent misrepresentation should not be available if there is a contract between the parties.

Opinion is not a warranty since its not a statement of fact

Decision Denning:Contracts: collateral warranty

Although estimate was clearly not a guarantee, it was a forecast made by Esso who had special skill/knowledge, were in a better position to know, and with the intention that Mardon would rely on it and enter the contract, and Mardon did reasonably rely on it and enter the contract (i.e. seems to pass the Dick Bentley tests, which would suggest breach and expectation damages).It’s not the content of the statement, but rather the context of the statement that form the collateral warrantyHowever, the trial judge said there was no collateral warranty and this is a finding of fact, so Denning said he could not overturn the decision

Torts: negligent misrepresentation (from Hedley Byrne):Esso clearly owed a duty of care to Mardon (once layout had changed, they should have reassessed the estimate)Esso had special knowledge/skillInduced Mardon to enter contract i.e. reasonable relianceThus should also be recovery in tort for negligent misrepresentation

Concurrency i.e. overlap of contracts and torts:Concurrent liability is possible i.e. the presence of a contract does not oust the tort of negligent misrepresentation (so can pursue claim under either contract or tort) since:

Concurrent liability had been found in other circumstances e.g. with professionalsIf representor has duty of care when no contract (i.e. to a stranger) surely there should be at least this level of duty of care when make representations to someone about to enter into contract with i.e. otherwise would be absurd situation that representee would be worse off if they paid for the information

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DamagesSince Esso found negligent in tort, measure of damages for negligent misrepresentation is to put person back to their original position as normal in torts i.e. reliance damages i.e. not to where they would have been if the warranty was true i.e. not expectation damages i.e. not lost profitsTo calculate reliance damages, consider if Mardon had not entered contract: would not have spent the capital, would not have gained overdraft charges, and Mardon would have invested the capital so also entitled to interest would have got on the capital and also the earnings (i.e. wages) he would have got by working somewhere else (i.e. includes limited opportunity costs to narrow the difference between reliance and expectation damages)Opens the door to allow opportunity costs to be essentially equal to lost profits i.e. expectation damages!

Puts a Canadian spin on tort/contract distinction:

V.K. Mason Construction v. Bank of Nova Scotia (1985) (S.C.C.)

NEGLIGENT MISREPRESENTATION SINCE SHOULD HAVE KNOWN THERE WOULD BE RELIANCE = DUTY OF CAREFacts: Developer negotiating with Mason to build a building. Mason wanted to be sure that developer had adequate financing – concerned that their current loan was inadequate and wanted to ensure that their bank (the Bank of Nova Scotia) would make further financing available. Bank manager sent letter to Mason with the assurance that they would provide developer with financing “sufficient” to cover the project. As a result, Mason signed the construction deal, but the oil crisis hit, developer runs out of money, the bank refused to advance more funds to developer, and unable to pay Mason. Mason sues the bank on the basis of negligent misrepresentation

Decision Wilson J:S.C.C. said there was no contract between Mason and the bank since:

Too uncertain/complicated to figure out the terms of such a contract – too much is implied or inferredSuch a contract would have promised to provide sufficient funds no matter what (e.g. earthquake) and S.C.C. couldn’t believe the bank would make such a guarantee

Negligent misrepresentation found:The bank knew (or should have known) that Mason would rely on the information they provided, so clear duty of careBank claimed they would have provided sufficient funds but the oil crisis hit etc, so it was not their fault. But they knew the Mason knew how much the loan, and that Mason was looking for some kind of guarantee for funding no matter what i.e. the bank should have said we will make sufficient funds available up to some maximum amount

Damages – choice between damages in contract or damages in tortNormally damages for tort (negligent misrepresentation) is reliance = actual costs + opportunity costs but not lost profits (Denning in Esso)

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But court says reliance damages includes lost opportunity costs which on the facts of this case is effectively lost profits since it was reasonably foreseeable that if the bank had not made the representation that they did, Mason would have put his funds/time into another project that was available and would have made similar profit as expected here. Thus opportunity costs here renders reliance damages = expectation damages (so irrelevant whether sue in tort or contract)Normal measure will be actual loss, so will technically be preference for damages in tort

Same quantum of damages received, regardless of whether found through torts or contracts.

In commercial contracts, may collapse the difference between the damages. But the courts have not been as generous in non-commercial contracts.

BG   Checo International Ltd. v. British Columbia Hydro and Power Authority (1993) (SCC)

CAN SUE IN BOTH TORT AND CONTRACT, BUT CAN ONLY RECEIVE A SINGLE SET OF DAMAGESIn a contractual situation where a wrong occurs and that wrong supports an action in tort and in contract, the innocent can sue in tort or contract or both.

Now quite commonplace to see people sue for the same wrong act in both tort and contract concurrently.

Where there are concurrent claims, the contract will govern if there are any limitation clauses - may be a limitation clause that they will only sue in contract / will not sue in tort. Therefore the terms of the contract become very important.

Very common to provide for allocation of risk in the contractIf you win in both contract and tort for that single wrong, you only get a single set of damages.

When suing in contracts, will sue under breach of warrantyUnder tort, will sue for negligent misrepresentation

Breach of warranty requires:A false or incorrect statementInducement to enter a contractActual inducementMade in the course of dealing

Unlike tort:Misrepresentation must be a term of the contractRemedy: expectation damages = cost and lost profits – want to place plaintiff in the position they would have been had the statement been true (i.e. fully performed)

Negligent misrepresentation requires:A false or incorrect statementNegligently made statement

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Relationship of careReliance foreseeable

Unlike contract:Statement made be made within OR outside the contract Remedy: costs (and opportunity costs) – want to place the plaintiff in the position they would have been in had the statement never been made (essentially reliance damges)

May not meet the doctrinal requirement for both or have a stronger case for one or the other, which may influence the legal claim you make

Quantum of DamagesAlthough damages under tort and contract are formally different, in practice they are actually quite similar

Easier to underestimate opportunity costs and overestimate profits – therefore, usually will get higher damages if you sue under contract.

Other considerations:Apportionment – In torts, may divide damages up between multiple defendants – not available in contract

Contribution - In torts, the plaintiff can be held partially responsible (contributory negligence) – not available in contract

Limitation period – in contracts, runs from the date of breach, whereas in tort runs from date where a reasonable person would learn about the possibility of tort action

Generally, limitation period in torts is significantly longer

MistakeA situation where one or both of the parties are under a mistaken impression about the nature of the contract or the effect of the contract

Often occurs when the subject matter of the contract turns out to be different

Is a residual category – NEVER argued as primary grounds of claimOften only used as a last resort

Catchall category – tends to be picked up by courts when they want to do justice in the circumstance – possible for there to be a mistake in almost any contract

Void - If a contract is found to be void, even if the parties attempted to perform, the contract is treated as if it had never been made – never existed at all at law

Damages = restitution damages

Voidable – contract is said to have existed for a period of time before coming to an end

Damages = reliance damages THERE IS NO SUCH THING AS VOIDABLE FOR MISTAKE

Consider: who ought to bear the risk / consequences of the mistake? 32

Policy Considerations:Reliance, unfair surprise, reasonable expectations, unjust enrichment/windfall

Reluctance to find mistake since:Caveat emptor – parties are the authors of their own mistakes, not duty of the court to fix their mistakes, so generally difficult to obtain relief based on mistakeCertainty of contract – want contracts to meet parties’ expectations and don’t want courts to destroy this by finding mistake too often, giving easy out to second thoughtsProtection of innocent third parties – suppose A sold to B, then B sold to C, but if find mistake in sale from A to B so that contract was void ab initio, then B had no title to pass on to CRisk allocation – contracts allocate risk (or at least they should) and courts really having to decide whether to re-allocate it when deciding whether or not to call it a mistake

Courts have looked at the following factors in finding mistake:Price e.g. Hobbs, price of land with minerals v. price without, and compare to actual priceKnowledge / skill of the parties e.g. Hobbs was a farmer but railway often sold land so ought to have known betterEase of avoidance – who was in the best position to avoid the mistakeCommon usage in trade i.e. custom i.e. how do people in the business usually do things (Hobbs); e.g. Staiman – auction of used steel unlikely to include new steelKnowledge of ambiguity and concern over “snapping up” i.e. not fraud, but one party is aware (or ought to have been aware) of the other’s mistake and is trying to snap up their offer to benefit from it (Staiman Steel) - essentially using a mistake to get unfair advantage = unjust enrichment

Mistake as to Terms

Mistake as to Terms (or formation) - can’t agree on the meaning of term in the contract

Have an apparent contract, but due to disagreement over a mistaken term in the contract, its not enforceable.

Doctrinal Requirements (from Raffles):Must be a TRUE ambiguityMust be an important or fundamental term of the contractCourt must have no reason to prefer one parties version over the other

If all these elements are present, then the contract is void for mistake

Raffles v. Wickelhaus (1864) (English Exch.)

EARLY SUBJECTIVE TEST: CONTRACT VOID IF TRUE AMBIGUITY, IMPORTANT TERM AND NO REASON TO PREFER ONE PARTY’S UNDERSTANDINGFacts: Vendor P to sell cotton to buyer D at a specified price per pound, and contract says will arrive on a ship named “Peerless”. But there were two ships named Peerless, one sailed in October and one in December. Buyer said he expected cotton on earlier

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sailing. But vendor sent the cotton from that ship to another buyer and when cotton arrives on later sailing, buyer refuses to accept it. By this time price of cotton had dropped below contract price (due to abundance of cotton from end of blockade from southern US after civil war)

Decision: no recovery for vendor since no contract:No contract here because there was no consensus between the parties due to the mistake i.e. the parties were not ad idem (“at one”) – contract was void

This is a subjective test – one party thought Peerless 1, the other thought Peerless 2

Thus a contract will be void ab initio if:True ambiguityGoes to important termNo reason to prefer one party’s understanding than the other’s

Comment:If had applied an objective test here i.e. would a reasonable person conclude there’s a material mistake here, probably not a mistake:Could have said no true ambiguity (buyer really just looking for a way out of the contract because the price had fallen and could now buy cheaper elsewhere)Could argue not an important term (the name “Peerless” was probably only mentioned for insurance purposes so vendor would have a record if the ship sunk and their property was lost, and no evidence to show that timing of arrival was indicated by the ship’s name or was of the essence to the buyer)Vendor said relied on the contract and shipped cotton based on it. No evidence of buyers reliance neither on early arrival, nor on unfair surprise if enforce contract for later sailing.So, although this case lays the foundation for mistake of terms, some say it’s a bad decision and would be decided differently today.

Hobbs v. Esquimault & Nanaimo (E&N) Railway (1899) (S.C.C.)

ADOPTED OBJECTIVE TEST: FOCUS ON WHAT REASONABLE PERSON WOULD UNDERSTAND FROM WORDS/ACTSFacts: Contract for sale of land. Prior to payment of last instalment, railway (D) wants to keep mineral rights and claims “land” exclusive of mineral rights. Hobbs (P) sues for specific performance of sale including mineral rights.

Issue: what does “land” mean – surface only or minerals as well. The railway argued Raffles: no contract because there was a true ambiguity with parties not ad idem, it was important, and there’s no reason to prefer one party’s understanding over the others

Majority decision King J:When looking at mistakes, rejected subjective test, but rather objective test – what would a reasonable person think it meant i.e. which of the two parties’ understanding is the more reasonableObjective test is preferable to promote contractual certainty – with subjective test, any party, after have second thoughts about a contract they

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entered into, could fraudulently claim a different understanding of an important termFocus on the meaning of the parties through their words (written or oral) and their actsSo in this case, would a reasonable person conclude “land” includes mineral rights. Reasoning to choose between competing claims (Hobbs expectation that price included mineral rights v. railways unfair surprise):

Perhaps obligation should be on the party that made the offer of sale (the vendor i.e. railway) to make sure it was clearOrdinary meaning of “land” includes mineral rights – unambiguous language

Ease of avoidance: railway could have easily written “land without mineral rights”Price: if the price had been too low to include mineral rights, perhaps “land” would be taken to exclude them, but not so hereSo concludes railway’s mistake was unreasonable and careless, hence contract includes mineral rights and it is to be enforced by specific performance.

Dissent: followed the subjective approach (from Raffles): company thought they were selling the land without the minerals, whereas Hobbes thought he was buying the land with the minerals, therefore no contract

Comment:Timing a little suspicious here since railway only brought up the issue after coal was discoveredThus contemporary approach is objective, but note Raffles and Hinkel still referenced today when a judge thinks a subjective mistake is so serious contract should be void for equitable reasons

Staiman Steel v. Commercial & Home Builders (1976) (Ont. H.C.)

ACCEPTS OBJECTIVE TEST; HOWEVER, SUBJECTIVE TEST WHERE IMPOSSIBLE TO DETERMINE WHAT REASONABLE PERSON WOULD HAVE CONCLUDEDFacts: Commercial (D) auctioned off its inventory of used steel in its fenced yard. They separated items into 383 numbered lots, tagged and catalogued. Also in yard was a pile of newly fabricated steel, piled separately from the rest, not tagged, freshly primed. At one point auctioneer said “I’m selling all the steel in the yard”.

Claims: Buyer (Staiman) claimed this included the new steel, and that by the objective test a reasonable person would agree that “all the steel in the yard” was unambiguous, and that the seller should bear the risk since they set up the auction and should have been more clear. Seller argued Raffles and Hinkel (subjective test) they meant it to be “all the used steel”Decision:

Court accepts objective approach (Hobbs), but still finds for the seller, since the proper test is: what would a reasonable person understand as the meaning taking into account all the circumstancesIn this case should have been obvious that auctioneer was not including new steel as it was piled separately, not tagged, not listed in the catalogue. Court held a binding contract was created for the purchase of the used steel but did not include

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the new steel, but by refusing to deliver any steel to Staiman the defendant had breached the contract

Distinguishes and narrows Raffles (subjective test) – will only be able to apply Raffles when the circumstances are so ambiguous that a reasonable person would not be able to infer any common intention between or amongst the contracting party

In Raffles it was impossible (not simply difficult or challenging) to impute any common intention – will only use a subjective test where it is impossible to determine what a reasonable person would have concluded, otherwise use the objective test

Comment:This case is perhaps more about “snapping up” i.e. buyer is just short of fraud in their unreasonable claim that the sale include the new steelSeller didn’t “tender” the used steel to the buyer after the auction (lawyer probably recommended they do nothing that might make contract look solid)

Mistake as to RecordCommonly found when there is an oral agreement and when it is reduced to writing, there is some inconsistency.

However, the courts tend to favour written over oral evidence. Parole evidence rule – court doesn’t want to import into a written document oral statement that have a different meaning.Caveat emptor – if you take the time to formalize an agreement in writing, then should have taken the time to review the written document before signing – especially where it is a serious or important document

Exception Rectification – where there is a mistake in writing, the courts have discretion to go into the contract and “rewrite” the mistake – bringing something from outside of the contract and making it a term of the contract

Equitable remedy – all the rules of equity applyDiscretionary remedy – court has discretion to allow or deny

Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. (2002) (SCC) REQUIREMENTS FOR RECTIFICATION: “CONVINCING PROOF” OF PRIOR ORAL AGREEMENT; MUST POVIDE PRECISE WORDING AND SHOW D OUGHT TO HAVE KNOWN OF THE MISTAKEFacts: There was an option agreement for the purchase of land that was adjacent to a golf course. The land was to be used to develop houses. There was an oral agreement that a 480 by 110 yard piece of land would be subject to the option. The written agreement mistakenly referred to 110 feet. Defendant insisted on the written terms despite knowing terms did not accurately reflect prior oral agreement.

Rule:Plaintiff must prove the existence and content of the prior oral agreementMust be “convincing proof” of the oral agreement (above a balance of probabilities but less than beyond a reasonable doubt)

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Higher threshold than civil standard of proof - want to make it difficult for a party alleging mistake to establish this claim - don’t want parties to allege mistake simply because they got a bad deal

Plaintiff must provide the precise wording for the rectificationPlaintiff must show defendant knew or ought to have known of the mistake in written document.

Standard of proof required: must show that the refusal of the court to grant rectification would be tantamount to supporting equitable fraud – will produce an unconscionable result (unfair advantage/unjust enrichment).

Held: Mistake - court rectified the contract by replacing feet with yards. Granted expectation damages. Denied punitive damages since defendant’s conduct was not sufficiently egregious.

Comment:No due diligence requirement on the part of the plaintiff, but if they did not sufficiently look after their own interest, the court may reduce or entirely deny damages for the mistake

Mistaken Payment One party may pay too much or too little

General rule – when one party pays too much, repayment will be ordered on the basis of unjust enrichment

Exception: Won’t be repayment if the person who is mistakenly paid in significant reliance on that money has changed their position such that it would be unfair to require full or partial repayment.

Focus on the unfairness aspect

Budai v. Ontario Lottery Corporation (1982) (Ont. Div. Ct.) Facts: Budai won lottery but only for $5, but by computer error received cheque for $835, and he immediately went out and spent it on a trip

Decision: Only ordered to pay back the money that remained unspent, since although mere fact of spending a mistaken payment is not enough to justify not paying it back, but can keep what has been spent “if there has been a change of position” i.e. can convince judge it would be unfair to repay it, and perhaps it was reasonable to assume it was your money to spend

Mistaken Assumptions

General Rule: relief is rarely granted (residual argument)

Refers to mistake regarding facts existing before or at time of contract, regarding the motives or reasons for party to enter into the contract

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Raises strong Caveat Emptor argument that the party should have taken precautions (e.g. better investigated the facts, taken out insurance, etc). But on the other hand can sometimes lead to staggering unjust enrichment if don’t give a remedy.Basic question is really a matter of allocation of risk – which party should be deemed to have taken on the risk for this kind of mistake

Smith v. Hughes

DEMONSTRATES GENERAL RULE FOR MISTAKEN ASSUMPTION: NO RECOVERY DUE TO CAVEAT EMPTOR; IF IMPORTANT, SHOULD HAVE SPECIFIED IN CONTRACTFacts: Contract to buy oats for a stable. One party assumed should buy old oats, the other new oats. Upon delivery, stable refused to buy them because they were the wrong kind. Supplier then sued stable owner.

Decision: Refused to grant relief because the substance of the contract was to provide oats. If the type of oats was so important, should have specified this in the contract.

Comment: Not as though they were contracting for two separate things, say oats and barley.

Policy Reasons: Caveat emptor – if the quality of the oats was so important should have specified the quality of the oats.Caveat emptor is the starting point for mistaken assumption. So if you want to protect yourself, you should investigate the quality of the substance and more importantly, should specify it in the contract. Modern courts would even recommend purchasing insurance for the eventuality that the other party is unable to deliver – risk allocation.

Four exceptions to the general rule:Res extincta – the subject matter of the contract didn’t exist at the time of formation Res sua – purchaser already owns the item in questionMistaken assumptions re: identity – identity of the purchaser is not their true identity; mistakes the identity of the other party to the contractNature vs. quality – mistake as to the nature (not mere quality) of the item – major common law exception

Sherwood v. Walker (1887) (Mich. S.C.)

RECOVERY WHERE MISTAKEN ASSUMPTION GOES TO THE ESSENTIAL NATURE OF THE SUBJECT MATTERFacts: Farmer/breeder (D) agrees to sell cow (“Rose the 2nd of Abalone”) and says “she is probably barren”. Sold to banker (P) for $80 (= value of the cow for beef, if cow were a breeder would be worth 10 times as much). When banker goes to collect the cow, breeder refuses since cow now in calf.

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Majority decision: Contract is void for mistakeContract is void since the thing they contracted for (a “barren beef cow”) didn’t exist – instead there was a “breeder cow” – this was a mistake as to the nature of the cow, not the quality

So can rescind if mistaken assumption goes to the essential nature of the subject matter (i.e. the thing contracted for) as opposed to just being a mistake concerning the quality of the thing

Dissent:Accept the nature v. quality distinction, but the nature of the thing contracted for here was a cow – Rose the II of Arbarlone in particular! So mistake in this case went to quality, not natureBoth parties knew that this specific cow was the subject of the contract – so mere mistake in qualityRisk analysis: neither party knew if she could breed, although they made assumptions i.e. both parties took their chances

Comment:Nature v. quality test mostly just rhetoric – judges can characterize something as nature or quality according to the desired resultThis case really decided to avoid unjust enrichment (purchaser would have got $850 cow for $80 because of mistaken assumptions)Dissent generally favoured, especially due to knowledge imbalance between seller (farmer/breeder) and purchaser (banker)

Bell v. Lever Brothers (1932) (English H.L.)

EXPANDS SHERWOOD TO ALLOWS MISTAKEN ASSUMPTION FOR QUALITY WHERE BILATERAL OR ESSENTIALLY DIFFERENTFacts: Two senior executives of Lever Brothers, both with 5 year contracts, half way through their positions are no longer needed, but under employment law redundancy not sufficient to terminate fixed term. Employer (since legally required to) gives severance package of 2 ½ years salary plus bonus. Later discovered that during their employment, they had been insider trading, and this breach of their employment contract meant employer could have summarily dismissed them with no severance.

Claim: employer claims severance money back i.e. severance contract void since based on mistaken presumption there was a valid employment contract to be terminated (i.e. arguing the mistake went to the fundamental nature of the contract).

Decision Atkin: no legally operative mistake in this caseLegal effect of a mistake is to nullify consent to the contract, so the contract would be void ab initio (contrast with Solle v. Butcher below where in Equity contract is voidable at time frustrating event occurs)

Mistakes may nullify consent – if your mistake is sufficient, cannot give full and informed consent = contract not voluntary void ab initio

Mistake as to nature will void a contractMistake as to quality will void a contract when (Lord Atkins Test):

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Both parties are mistaken as too the quality – mutual/bilateral/common mistake ANDThe subject matter of the contract is essentially different from what the parties believed it to be at the time of formation i.e. the subject matter of the K has become something essentially different from what the parties believed it would be at the time of formation

Gives the courts significant flexibility in determining that the quality of the subject matter has changed sufficiently (essentially different) – so set criteria for making this assessment – highly manipulative

On the facts of this case: an agreement to terminate an invalid employment contract is not fundamentally different from an agreement to terminate a valid contract.

Comment:The employment contract was not invalid on severance, since by employment law it doesn’t become so until employer learns of misconduct and fires you – so perhaps H.L. here saying even a mistake over valid v. invalid still would not be sufficient to make contract voidPerhaps this case is really about risk allocation – whenever an employer gives severance pay, it takes the risk that it might find out later it didn’t have to

Employer is in the best position to estimate how long employment should go on, as well as in the best position to prevent the loss

The Atkins Test has been very narrowly construed by subsequent courts

Solle v. Butcher is an example of mistaken assumption in EQUITY

Solle v. Butcher (1950) (English C.A.)

EQUITY ALLOWS VOIDABLE K WHERE COMMON MISAPPREHENSION, FUNDAMENTAL ISSUE AND P NOT AT FAULTFacts: Solle (P tenant) rented one of the apartments with a 7 year lease from Butcher (D owner). Tenant told owner he would find out if the rent control act applied (the rent control act limits rent and rent increases). However, the rent control act does in fact apply and the rent is disallowed as too high. Tenant seeks reimbursement for overpayment and continuance of lease at lower level.

Decision Denning: contract here is not void:Common law remedy of void ab initio may be fair in some cases, but not here:

Mistake here was over whether or not could have a higher rent than allowed in the statute, and this does not seem to fundamentally change the nature of the thing contracted for. So by Bell v. Lever Brothers, would seem contract is not void.Even if found it void, would be void ab initio, but this would have bad policy implications since landlords could kick out tenants on finding the Act applies, and subsequently re-lease at higher rent

So looked to Equity for relief instead: notwithstanding mistake doesn’t fall within common law, if it would be unconscionable or unjust to allow contract to

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stand then it’s voidable (i.e. has full force and effect up until this point of time, but void from then on). Equity can intervene if:

There is a common (mutual) misapprehension either to facts or to rights, andGoes to a fundamental issue, andParty seeking relief is not at fault (and could not have found out by exercising due diligence)

In this case, parties were given option to work out new terms for the lease

Comment: today might claim negligent misrepresentation by tenant, but not available in 1950

So the process is:If mistake legally significant at common law, then contract void ab initioOtherwise, if common misapprehension on fundamental issue and party seeking relief not at fault, then at Equity contract is voidable

Factors a court will consider in deciding whether or not to enforce a written contract:Importance of the assumption and effect on the economics of the transactionHas the risk been allocated risk?How obvious is the risk? Who is the best risk avoider?Price is sometimes used as a risk premiumBona fides and reasonableness of the expectations

Great Peace ShippingEnglish courts stated that there is no such thing as an equitable remedy for mistaken assumption. Reaffirmed that Bell is the leading case in Britain. However, Great Peace Shipping has not been adopted in Canada, but Butcher has. Thus, in Canada there are two chances for a remedy in mistaken assumption: one in common law and one in Equity.

Frustration

Really a subcategory of mistake

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Judge canchoose path to do

justice

Mistaken assumptions

Void ab initio (common law)Sherwood v. Walker, Bell v. Lever BrothersMistake characterized as going to “nature” or “essential quality” rendering the thing contracted for entirely different

Voidable (Equity)Solle v. ButcherCommon misapprehension on fundamental issue and party seeking relief not at fault

Frustration = mistake with respect to future eventIf frustration is found, contract is voided as of date of frustrating event, but doesn’t void performances already made

As always, question is: bad stuff has happened, who should bear the loss i.e. risk allocation

Courts generally resistant to applying frustration since contract should have allocated risks of possible future events already. Waddams suggests the future event must be so far beyond the reasonable contemplation of risk in the contract that it fundamentally changes the bargain

Categories:Contract becomes impossible to fulfill

E.g. contract to hire music hall, but hall burns downEnforcement of contract would result in undue hardship

Some unforeseen future event renders performance inordinately expensive to one of the partiesRequires a radical change in the circumstances, not merely becoming more expensive (which is common and such risk should have been allocated by the contract)

General rule: Rule of Absolute PromisesWhen a contract is formed, its expected that you will abide by your promises – general rejection of the concept of frustration. Should have contemplated risks and allocated them.

Historically the rule was absolute promises, so no relief for frustration:

Paradine v. Jane (1647) (Common Pleas)

HISTORICAL RULE OF ABSOLUTE PROMISES: NO FRUSTRATION DUE TO CAVEAT EMPTORFacts: 3 year lease, English civil war, Prince Rupert takes occupation of leased land, tenant doesn’t get use of property and can’t pay rentDecision: tenant is liable for the rent

Caveat emptor (parties should assign all risks in contract), no doctrine of frustration.Court said since lessee had benefit of casual profits (e.g. land turns out to be more fertile than thought) so too should they take the risk of it being less advantageous i.e. notion of reciprocityDistinction between public and private obligations – in private obligations, when a party is bound by a voluntary agreement, they must be prepared to bear the risks of this contract

Problem with this approach is it assumes parties are omniscient. After 150 years, absolute rule is relaxed:

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Taylor v. Caldwell (1863) (English Q.B.)

FRUSTRATION SINCE DESTRUCTION OF SUBJECT MATTER – MAY BE EXPRESS (FORCE MAJEUR) OR IMPLIED LIMITATIONFacts: P rented music hall for 4 nights, but hall burns down beforehand through no fault of the parties. P sues for damages for breach of contractDecision: Contract is void since frustrated (destruction of subject matter). Starting point is absolute obligation, but subject to:

Express limitations in contract (anticipation of future risks written in, e.g. in event of war, insurrection, labour dispute, has provision)

Force majeur clause – event which is beyond the reasonable control of the party (e.g. act of god, war, insurrection, strike) other than a failure caused by the negligent or deliberate action or inaction of one of the parties Modern: An event which could not be controlled or reasonably foreseen and against which the parties could not have taken precaution

Implied limitation: presumed intent test – where parties must have known that contract could not be performed unless the specified thing continued to exist (as in this case)

From the beginning, the parties must have known that the K could not be performed unless some particular specified thing continued to exist, so that when entering the contract they must have contemplated thisConditions subsequent – new condition that arises subsequent to the formation of the K

Comment: this subjective presumed intent test has been replaced by an objective test i.e. a term can be implied (if reasonable and fair in the circumstances) from what reasonable persons would have done if they had turned their mind to the matter

Presumed intent is a much lower standard than implied intentIf reasonable parties had turned their minds to this issue, what would have been their response?

Consider number of factors:Caveat emptor – still the starting point (from Paradine) – other cases have simply carved out exceptionsUndue hardship – if one party suffers inordinately, may grant reliefRisk allocation – are the risks fairly balanced?

Doctrine of frustration was then expanded beyond only destruction of the subject matter to where future event has adverse impact on the contract:

Krell v. Henry (1903) (English C.A.)

FRUSTRATION WHERE SUBSTANCE/PURPOSE OF CONTRACTS DEPENDS ON CIRCUMSTANCES THAT HAVE CHANGEDFacts: room leased for £75 to view the coronation, £25 deposit paid. But parade is cancelled since Prince Edward is sick, Lessor sues for the extra £50.Decision:

Test: does substance/purpose of the contract depend on a particular circumstance that is a foundation of the contract

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If yes, than will frustrate contract since fundamentally different from what was originally contemplated

In this case: this is not a contract for a lease of a room as a room, but rather is a contract for a lease of a room to view the procession, and both parties knew this, so foundation of the contact frustrated by cancellation of the procession

D not required to pay £50, but doesn’t get return on deposit – seems to balance the risk

Comment:Court said the analogous situation of someone taking a cab to the horse races, but then races cancelled, would be different (so cab contract would be binding) since the cab has no special qualification i.e. every cab is the same, so no particular significance of the particular cab, but in Krell the room was special due to it’s vantage point. Perhaps not such a convincing distinction however.Reasonably foreseeable risks will generally be held on the lessee / purchaser (since could have put express clause in contract to assign risk elsewhere)

E.g. if the risk of cancellation of parade had been reasonably foreseen (e.g. parties knew Edward was sick) can argue this would imply assignment of risk of cancellation had been assigned to the lessee.

This is not a mistake case, but unlike many cases there was an explicit discussion of risk allocation:

Amalgamated Investment Property v. John Walker (1976) (English C.A.)

FRUSTRATION LESS LIKELY WHERE EXPRESS DISCUSSION OF RISK ALLOCATION – CONSIDER TRADE PRACTICE, SOPHISTICATION OF PARTIESFacts: Parties reach agreement for sale of £1.7 million property, “subject to contract” (condition precedent, so no agreement until in writing, contrast with condition subsequent which can void an existing contract). Purchaser writes to seller asking if property has historic designation and seller says no. Contract written, then next day property gets historical designation and value drops to £200,000.Decision: Contract is binding.

In discussion of risk assessment, court felt risk should fall on purchaser since:

Risk of historical listing was foreseeable (clearly – the purchaser even asked about it)Purchaser is professional property developer and should know of such risks (parties equally experienced here)

Thus loss should lie where it falls (i.e. on the purchaser)Purchaser should have guarded against the risk e.g. contract could have provided for it

Comment: Reasonableness of unforeseeability is always in the eye of the beholder i.e. the court! Courts will often consider:

Practices of the trade – where do risks usually fall in the marketplaceSophistication of the parties – who is in the best position to avoid the riskToday, insurance may also play in

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But what if some amount of risk is foreseen, but it actually goes way beyond that:

Aluminium Company of America ( ALCOA ) v. Essex Group (1980) (U.S. Penn)

FRUSTRATION POSSIBLE WHERE RISK FORESEEABLE, BUT TURNS OUT TO BE EXCESSIVE – LIKE MISTAKEN ASSUMPTIONFacts: long term contract for sale of aluminium, with escalator clause i.e. so that ALCOA would continue to get 4¢ per pound profit, price will be determined by formula including:Production charge increases – tracked industrial composite index ICI (a wholesale price index equivalent of the consumer price index), but problem was although it had a component for price of electricity it was a much smaller percentage than electricity made up in ALCOA’s overall expenses. After oil embargo (which no one anticipated) price of electricity went way up, so ICI went up a little, but ALCOA’s expenses went up a lot i.e. parties chose a poor price index for aluminium industry

Labour charge increase – price would also go up based on collective bargaining increases

Decision: contract void for mistaken assumption and for frustration (analysis almost identical for both):

Both parties assumed the escalator clause would keep uncertainty for ALCOA within 3¢ per pound i.e. thought they had narrowly confined risk for ALCOABoth parties had agreed that purchaser should bear the risk of increased production and labour charges

Mistaken assumption (similar to Solle v. Butcher): Mistake was fundamental ($60 million in damages at stake here for ALCOA)Would be extreme and undue hardship for ALCOAWould not cause serious harm to plaintiff’s reliance because they expected price increasesNo other policy reasons to make D bear risk (e.g. D not at fault)

Can characterize mistake as error in escalator pricing formula which was meant to constrain the risk to within 3¢ per pound, but bilateral mistake in thinking chosen price index would reflect ALCOA’s costs

Remedy = reformation (i.e. court rewrites contract in accordance with what the parties intended). Note this is a US remedy and has not yet been applied for frustration in Canada – extremely rare remedy

Rewrote the escalator clause

Comment:Trade practice was to constrain such risks, and court wanted to encourage this, and also to support long term contractsALCOA could have taken out insurance against such an occurrence, or bought futures in electricity to guard against the risk (both standard trade practices), although if court accepted this and didn’t grant ALCOA relief might suggest no mistakes should be entertained by courts because there could always be insurance

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Just because a contract becomes more expensive, this doesn’t necessarily provide grounds for frustration. Contrast ALCOA with the following 2 which show the old absolute obligation / caveat emptor rule (i.e. you enter into contracts at your own peril) is still alive and well in some cases:

Re Westinghouse Electric (1981) (US)

NO FRUSTRATION FOR HUGE COST INCREASE BASED ON POOR GUARANTEED PRICEFacts: Westinghouse sold nuclear reactors and included in contract sale of uranium for fixed price over some time, but uranium price went way up (resulting in claim for $1 billion damages)Decision: Westinghouse not given relief for huge cost increase

Distinguished from ALCOA on the basis since there was only a guaranteed price and not a misunderstood escalator clauseWestinghouse was the consumer and not the supplierPossibility of unjust enrichment if Westinghouse was able to reform the contract – had already made significant profits

Eastern Airlines v. Gulf Oil (1975) (US) Facts: Gulf oil had contract to supply oil with objective formula to calculate price based on the domestic price of oil, but Gulf Oil bought their oil from overseas and the price of that went way up. Decision: no relief for cost increase

Frustration and LandHistorically no frustration with land since “land is land” i.e. caveat emptor applied strictly to purchaser, regardless of future changes. No longer true (Capital Quality Homes) but still hard to get finding of frustration for land – cases that have given relief have concerned intended use of land, or when zoning has changed

Capital Quality Homes v. Colwyn construction (1975) (O.C.A.)

WEAK AUTHORITY – FRUSTRATION GRANTED WHEN LAND SOLD REZONED = RADICAL CHANGE IN CIRCUMSTANCESFacts: vendor sold land to purchaser, deposit paid. By express condition of contract, vendor was to subdivide land into 26 lots and then convey title to the 26 separate lots. But change in zoning disallowed such a subdivision, and purchaser wants deposit payment backDecision: deposit should be repaid, basing judgement on frustration (so as to avoid expectation damages):

Unanticipated event,Radical change in circumstances, andVendor knew intended use to which purchaser would put the land, and that use was frustrated.

Comment:Clearly at odds with Amalgamated and Victoria Wood, which both said frustration was not available (so loss should lie with purchaser)

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This case criticized not only for going against doctrine, but also on policy grounds since if call this frustration, what are consequences for all other cases where vendor has knowledge of purchasers intended use (which is then frustrated)Doctrine of frustration only applied to land in the rarest of circumstances

Buying a piece of land is fraught with risks – values may fluctuate widely; risk falls where it may – on the purchaser

The leading decision (as specified in KBK) is:

Victoria Wood Development v. Ondrey (1977) (O.C.A.)

LEADING AUTHORITY – NO FRUSTRATION WHEN LAND REZONED: KNOWLEDGE OF PURCHASERS INTENTION NOT SUFFICIENTFacts: vendor selling land zoned for industrial use, knows purchaser intends to use it for industry. After completion of sale, legislation puts land into the agricultural reserve, thus prohibiting industry. Value of land drops significantlyClaim: purchaser argued Krell applied (should characterize sale here not just for land, but for industrial land) and also Taylor (destruction of subject matter). Vendor argued purchaser confusing subject matter / foundation of the contract with motive, or alternatively that contract was for profit and gambled since rezoning was foreseeable (and so could have included something in the contract to allow for such an occurrence)Decision:

Disappointed expectation does not frustrate a contractMere knowledge on part of vendor of purchaser’s intended use of land is not sufficient for finding of frustration (i.e. if that use then becomes impossible)

The date of closing was irrelevant, only the date of contract mattersComment:

Similar to result from Amalgamated (historical designation day after sale, foreseeable risk, knowledgeable purchaser, loss should lie where it falls i.e. on purchaser)

KBK Ventures v. Canada Safeway (2000) (B.C.C.A.)

FRUSTRATION MUST: OCCUR AFTER K FORMATION, NOT BE SELF-INDUCED, NOT REASONABLY FORESEEABLE

MUST BE: MORE THAN MERE INCONVENIENCE, BE RADICAL/FUNDAMENTAL CHANGE, AND PERMANENTFacts: vendor (Safeway) owned land and advertised it as prime development property. KBK became purchaser (price = greater of $8.5 million of $38/square foot × area allowed by development permit, which wasn’t yet known), and make first payment of $150,000. City, on it’s own (which is very unusual) then announces re-zoning, which would result in allowed square footage dropping by 90% (both parties objected to city by failed to change City’s mind). Value of land drops form $8.5 to $5.4 million. KBK sought return of the $150,000

Under the BC Frustrated Contracts Act, KBK is entitled to restitution damages

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Decision: confirmed B.C.S.C. finding of frustration (so $150,000 should be returned):A finding of frustration requires:

Frustrating event must take place after contract formationCan’t be self inducedNot reasonably foreseeable

If these three requirements are met, consider the impact:Impact of frustrating event must be more than mere inconvenienceMust be a radical/fundamental change in the contract, making it totally different (look at the nature/meaning/purpose/effects/consequences of the change)Change must be a permanent one

Cites Victoria Wood as leading decision (mere knowledge of intended use insufficient to find frustration). But frustration here since vendor (Safeway) had more than mere knowledge of intended use, and cited the following factors (but no discussion as to how these factors led the court to this decision)

Event in question (rezoning by City on it’s own) was highly unusual, although re-zoning alone is quite common (i.e. unforeseeable in this case) – allows exception to be narrowly readAdvertisement by vendor referred to zoning by designation “prime development opportunity, zone C2”Clause in contract said buyers intention was to developPurchase price calculated based on floor space allowed i.e. on development potential of the landContract was silent on allocation of risk, and did not explicitly assign to purchaser (but it did say “vendor made no representations or warranties regarding zoning or obtaining a development permit”, and “agreement not conditional on buyer obtaining a development permit” – might think this assigns risk for re-zoning as well to purchaser, but court didn’t think so, saying they were just general clauses)

Comment:Not clear why court deviated from Victoria Woods (only $150,000 at stake here), unless advertisement seen as a warranty (but then why not call it warranty instead of frustration)Barrage of criticism since it represents a fundamental shift in where the risk lies (so B.C.C.A. might back away from this decision)Question as to why Safeway didn’t try to enforce the contract (and so get $3.1 million difference from KBK)Perhaps fact that price was based on floor space was taken as Safeway taking on the risk, and also Safeway went as intervener to support KBK to have re-zoning stopped so perhaps court saw this as a joint venture

When frustration found, contract voided at time of frustrating event, but problem of partial performance i.e. what happens about losses/performance/work done by one of the parties prior to the frustrating event? Historically, no relief, loss lies where it falls (criticized since left losses to happenstance)

E.g. Krell: lease was for £75, and £25 paid as deposit, so when frustrated £25 is not returned

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E.g. Chandler v. Webster (1904) (English K.B.) another coronation case but lessee had paid the whole amount, so although contract frustrated no return of money paid

Fibrosa Spolka Akcyjna v. Fairburn Lawson Combe Barbour (1943) (English H.L.)

RESTITUTION DAMAGES WHERE FRUSTRATION ELIMINATES CONTRACT – LIMITED TO MONEY, NOT WORK/RELIANCE; OVERRULED BY FRUSTRATED CONTRACTS ACTFacts: English company sells machine to Polish company for £5000, with £1000 deposit paid by Polish company. But World War II frustrates the contract, and Polish company wants deposit back.Decision: may have recovery on restitution basis where frustrating event entirely eliminates contractComment:Problem with this is that restitution is limited to money payments and not for work/reliance e.g. if English company had started work building the machine, would be no set off against the £1000

Statutory response: Frustrated Contracts ActAcross Canada except B.C.: reliance losses recoverable but only as a set-off against money paid (so up to at most £1000 for reliance in Fibrosa)In B.C.: goes further, and allows independent claim for reliance losses

E.g. $1000 deposit (paid purchaser to vendor), suppose vendor spends $2000 building machine, then both parties out $1000 so no need to exchange any further (can apportion other than 50-50 split if appropriate, but prima facie parties should equally bear the loss)

Recap: Frustration FactorsFrustrating event must be fundamentalMust produce substantial hardship – much more than a mere increase in expenses or drop in profit (one of the parties must be deprived be deprived of a substantial intended benefit of the contract)Risk must be unanticipated – cannot be risk addressed and allocated, or which ought to have been addressed and allocated. Consider:

Sophistication and relative knowledge of the partiesWhere risk usually falls in the industryWhether there is allocation of risk, or whether allocation is incompleteParty claiming frustration must not be at fault

Control of Contract PowerInterpretation: How to Determine Contractual Obligations

APPROACH: Just look at express bargain e.g. written contract (recognizes effort/time to write it down)

APPROACH: Contextual

McNeil / Renner:Should also look at context: class,

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Federal Commerce:Consistent interpretationEfficient, easier administration

Scott v. Wawanesa (Majority):Literal interpretation, unless goes against intent or if unreasonableIf sign it, stuck with itPrice may have been set differently otherwise

But:Language is inherently ambiguousCan be inequitable/unjust, since ignores reality of unequal bargaining power, maintains class divisions, etc.

gender, race, relative bargaining power, past dealings, etc.

Scott v. Wawanesa (Dissent):Contrapreferentum if ambiguityRecognizes inequality of bargaining power and reasonable expectations

But:Inconsistent

Determining the obligations that flow from a contract, will have to consider:Interpretation of the contractThe sources of obligations e.g. just from a written document if there is one, or also from previous oral statements (parole evidence rule)Representations that amount to warrantiesMistakes and frustration (i.e. obligations that are frustrated by external events)The unfairness or unconscionablility of obligations

Mensch, Freedom of ContractFreedom of contract is a legal construct – the boundary between decision that are free and voluntary and those that are not is only defined by lawWhat are freedom of choice paradigm is really an ideological constructCoercion lies at the heart of every bargain

Aboriginal Perspective: AnishnabeRule of giving: the closer you are in kin, the more you will rely on both the giving and receiving of gifts. When you are kin, this exchange is seen to balance out over a long period of timeSystem of reciprocity: taking another view, the Anishnabe perspective is almost like a life insurance policy – as food becomes scarce, the Anishnabe are more anxious to give it away. Storing food in the stomach of their relatives – social value leading to return in times of hardship.

To what extent should a court look beyond the 4 corners of a contract to determine the obligations that flow from it?

MacNeil, The New Social ContractArgued that historically the search for obligations was too narrow looking only at the express bargain (i.e. positivist, looking only at what was said or written down), but this fails to meet the general expectations of the commercial

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world since there are always some non-express bargain obligations - over influenced by the classic laissez-faire attitudeShould instead use contextual approach – look at surrounding circumstance such as who are the parties, what are the circumstances, what is the context (e.g. past dealings), what public/social considerations are there, etc.Thus contract law is just one aspect of what may govern exchanges between human beings – also influenced by custom, status/class, habit, hierarchical command structures, markets, maintaining goodwill and future relationship, etc. So to do reasonable justice to the issues raised by contractual relations must include aspects of anthropology, sociology, economics, political theory, and philosophy.All contracts are accompanied by non-promissory exchanges – promises, understanding or expectations that the parties know will form part of the relationship between them, of which the contract is only partBy not bringing in the contextual side of the contract, argues that this produces a jurisprudence that will ultimately fail to capture our real life contractual obligation Will lead to unfair results

Renner, The Institutions of Private Law and their Social FunctionSimilar concern about positivist, narrow doctrinal approach, since it is asocial and acontextual.Similar to MacNeil, argues should look at class, gender, race, economic circumstances, etc.Renner more extreme in that the failure of judges to ‘look beyond the end of their nose’ and look at context was, although not necessarily a conspiracy, the method behind the madness to sustain capitalismIf we ignore the contextual component of law, we run the risk of having outcomes or legal principles that will be unfair.

Problem with broad/contextual approach suggested by MacNeil and Renner is interpretation will be idiosyncratic, depending on particular context, with the same words/phrases meaning different things in different contracts i.e. contextual approach sacrifices certainty of contractual obligations, and certainty may be better in some cases

Legal formalism: approach to legal interpretation where rules are held to be important – rules prevail regardless of other circumstances – bound by the four corners of the contract.

Federal Commerce provides a prime example of legal formalism:

Federal Commerce & Navigation v. Tradax Export (1978) (English H.L.)

EXAMPLE OF LEGAL FORMALISM: CONTRACT SHOULD BE INTERPRETED IN A CONSISTENT MANNER - FAST, EFFICIENTFacts: notorious case involving standard form contracts. Contract for carriage of goods, delay in loading goods at the dock. Issue over allocation of risk when ships are tied up – many associated costs.Decision: It is essential to interpret in a consistent/coherent manner, since bargaining will then be faster and more efficient (i.e. people will know what

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things mean) and administration of the contract will be easier since everyone will agree on the obligationsCourt quite adamant that rules prevail and that court are consistent with standard risk allocation clausesReasons:

Efficiency in bargaining - everyone knows the rulesFaster – reduce transaction costsEncourage competition and shopping around Facilitate administration of contract – understand their rights and obligationsFairness will be achieved by setting out clear rules that produce clear results

Criticisms:Assumes parties have equal knowledge/awareness of the lawSuch certainty may be illusory, since language is inherently ambiguous and dependent on contextCan lead to inequitable/unjust results

Scott v. Wawanesa Mutual Insurance (1989) (S.C.C.)

WHERE MEANING CLEAR/UNAMBIGUOUS, USE PLAIN MEANING APPROACH; MAY DEPART IN CASES WHERE INTERPRETATION UNREASONABLE/CONTRARY TO INTENT

DISSENT: CONTRAPREFERENTUM – WHERE AMBIGUITY, RESOLVE IN FAVOUR OF NON-DRAFTING PARTYFacts: Insurance contract, standard form, included two clauses: 1) the insurance coverage includes relatives (father is home owner and named insured) and 2) nothing would be paid out if loss caused by a criminal act of any insured person (e.g. to avoid arson). Son starts fire and house burns down (arson).Issue: should the insurance have to pay out?Majority decision (4-3): No recovery since:

Terms are clear and unambiguous – takes a plain meaning or literal approachWhen the meaning in the contract is unambiguious, should not give it meaning other than in its express term – adopting legal formalismIn this case the clear, literal meaning of the clauses should be used (i.e. son is covered so is an insured person, but son committed criminal act). In other cases may depart from the clear/plain/literal meaning where it is contrary to the intent of the parties or where it is unreasonable (neither occur in this case). Reasoning:

You are responsible for your own contracts i.e. don’t sign unless you understand i.e. general rule: if you sign it, you are stuck with it – caveat emptorNot fair to hold insurance company liable due to other parties failure to understandThere was even a clause that said no payout for vandalism/malicious acts by members of the household – what more could the insurance company have doneInsurance company would have calculated different premium if included fire by criminal acts of relativesIf need express notification of every clause, why bother writing anything down

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Dissent: Thought majority decision unfairMade a joint v. several distinction: insurance covers both fathers and son’s property, and if son destroys his own property not covered, but felt if son destroys fathers property (as here) should be covered i.e. several (each is obligated not to destroy his own property) rather than joint (i.e. multiple obligations – each obligated not to destroy their own nor each others property).

Reasoning:Found ambiguity in the clauses (as to whether it was meant to be joint or several)To resolve ambiguity, use contrapreferentum i.e. where ambiguity leads to 2 reasonable interpretations, should resolve in favour of the party who did not prepare the contract i.e. the drafter loses out since they are responsible for the ambiguity (the insurance company here which prepared the standard form, and this problem is common with standard forms)Significant inequality in bargaining power due to differing knowledge (MacNeil / Renner might suggest looking at other people who have used this standard form and ask if they were aware of the clauses)Reasonable expectation of parties i.e. a person unversed in insurance law would assume coverage in this caseIndividuals (father) should not be responsible for wrongdoings of another (son)

Parole Evidence RuleParole evidence rule only concerns contracts that are written down (writing a contract down is not the agreement itself but just evidence of it, but the parole evidence rule, at least historically, gave tremendous deference to the written contract)An agreement can be infected/obscured/contradicted or alternatively illuminated by the sometimes murky background facts out of which it arose, both before, during and even after the negotiations for the contract. “Parole” refers to any potential source of the terms of the contract that is not part of the written contract, and includes both oral and written documents

Integration clause and/or Exclusion ClauseStates that the entirety of the contract is what has been written down

General Rule: the written contract is what counts; surrounding statements are irrelevant

Parole evidence rule:A court must first ask: was it the parties’ intent that the written contract be the complete expression of their agreementIf so, what the parties may have said during negotiations or in other writings is irrelevant

General deference to written contract, especially when signed – as a general rule, will not stray outside the written contract

Signing is taken to be evidence of careful deliberation of the document that you are signing

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Where there is a written contract, parole evidence is not admissible to add to, subtract from, vary or contradict the written agreement

Strength of the presumption that written contract is the entire deal: Strong Add – Subtract – Vary – Contradict Weak

Issue: can produce unfair surprise – while written evidence may be more reliable, that is not always the case

Taking a narrow interpretation, a clear intention from both parties to the contract may be defeated if we only look at the writingEspecially true with standard form contract

Perjury – deference to the written word may encourage people to lie May also frustrate reasonable expectation and reliance

Rationale for the Rule:Parties took the time and effort to write it down – should give weight to thisAvoid injustice through perjured evidence – juries might be swayed by witnesses and not capable of assessing relevant weight of oral vs. written evidence, therefore don’t let them hear evidence contrary to written (not as relevant since juries rarely used in modern civil trials)Certainty – other evidence has subjective elements which could undermine the predictability of the written evidenceCourt efficiency – trials would be long with high costs if admitted all previous evidenceTo control and restrict misrepresentations by agents/employees – e.g. agent/employee says something at odds with the written contract which will be between the employer and the other party

Problems with the rule:Promotion of perjury and injustice – allows promisor to recant (without penalty) their previous promise (which they made sure was not in the written contract) e.g. one party says “I assure you it’s like this …” telling the other party about the written contract or “I promise you …”, but the written contract says no such thingPromotes unfair surprise, uncertainty, can defeat intentions and reliance – promisee may rely upon oral promise which is not in the written form e.g. common in “battle of the forms” cases where one party never looks at the standardized form

Exceptions to the rule Extrinsic evidence is admissible to show the following:

It was not both parties’ intention that the written agreement be the whole contract (in which case the rule does not apply at all)

Tends to be the starting pointInterpretation of an ambiguous clause – may try to bring in extrinsic evidence to champion a specific meaningMisrepresentation, either innocent, negligent or fraudulent – extrinsic evidence can be brought in to show that there was a misrepresentationMistake – use extrinsic evidence to show that there was a mistake in the written contract

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Rectification (i.e. court rewrites part of contract) if agreement simply written down wrongly and so didn’t reflect the parties agreementTo establish condition precedent – (i.e. contract only comes into being if X happens) so need extrinsic evidence to show whether X did or did not occur Unconscionability – show that contract was brought about by unconscionable means = void ab initioStatutory override e.g. in consumer contracts the Trade Practices Act says if signer is in a rush, or has no time to read the contract, rule does not applyTo prove modifications or discharge (i.e. all obligations satisfied) – GTAsCollateral contracts/warranty/agreement – extrinsic evidence brought in to show that there was a separate agreement along with and in addition to the written agreement

Most common exception

Representations and Warranties

Misrepresentation can give rise to an independent action leading to rescission

But if the statement doubts amount to misrepresentation, then may argue in the alternative that there was a collateral warranty.

Generally concerns an oral representation made during negotiations, and one party claims it gives rise to legal obligationsIf contract written down, then parole evidence rule suggests can’t introduce evidence of such representations. Further, written contract will often contain clauses expressly saying no such representations were made or relied upon.However, there is an exception to the parole evidence rule if can show the representation amounted to a warranty. Two ways of looking at it:

“One contract theory” says the oral agreement is part of the overall agreement, and the parole evidence rule does not apply because the written part is not the entire agreement“Two contract theory” says there is a main (written) contract and a separate collateral contract consisting of a promise given by one party in exchange for the other party entering into the contract i.e. a contract to make a contractLambert in Gallen v. Allstate Grain says makes no difference which way look at it – result must be the same in either case

Bauer v. Bank of Montreal (1980) (S.C.C.)

EXCEPTION TO PAROLE EVIDENCE RULE IF REPRESENTATION = COLLATERAL WARRANTY; NO EXCEPTION IF CONTRADICTS WRITTEN AGREEMENTFacts: Bank made loan to company and took security interest (a kind of collateral) which was the accounts receivable of the company (i.e. assignment of debts owed by customers to the company, so that in event of company not repaying load, customers would pay to bank instead of to company). In case of company going bankrupt, the priority of creditors would be that bank would get the customers money before anyone else, provided the security interest was registered (i.e. perfected)

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Bauer goes into the bank to guarantee the loan from bank to company, and one of clauses in guarantee says bank doesn’t need to perfect the security. However, Bauer claims the bank manager promised that the bank would do so, but it did notCompany went bankrupt, since didn’t perfect the bank couldn’t collect on the accounts receivable, and so went after Bauer for the whole load. Bauer said: “but you promised you’d perfect the security interest” (i.e. sues claiming misrepresentation and a collateral warranty) whereas bank said “look at the written guarantee you signed – we have no obligation to perfect” (and claimed the parol evidence rule made the bank manager’s promise inadmissible)

Rule McIntyre:There is an exception to the parole evidence rule if the representation was a collateral warrantyHowever, this collateral agreement exception does not apply where the collateral agreement would clearly contradict the written agreement

Decision McIntyre: both claims rejectedFound no evidence of a misrepresentationFound that the oral representation contradicted the written contract, so cannot rely on the collateral warranty exception

Comment:So collateral warranty can add to the written agreement but not contradict itPerhaps McIntyre didn’t really believe that the bank manager made the representation as claimed by Bauer, but couldn’t say this since this is a matter of fact and there is a strong rule of practice that matters of fact should be left for the trial judge – Lambert J. in Gallen felt would have been better to break this rule than to create this bad law, since problem now is even if the bank manager had promised to perfect in front of witnesses, then because it contradicts written still would not be allowed – Gallen below is response to this absurd result

Gallen v. Allstate Grain (1984) (B.C.C.A.)

RECASTS PAROLE EVIDENCE RULE AS PRESUMPTION (NOT ABSOLUTE RULE) – STRONGEST WHEN THERE IS CONTRADICTIONFacts: Gallen were farmers, Allstate was grain dealer. Grain dealer agreed to sell buckwheat seed to farmer and buy the crop when harvested. Grain dealer’s manager assured farmer that there would be no problem with weeds. Signed contract had an exclusion clause which said that grain dealer gives no warranty as to productiveness of seed and will be in no way responsible for the crop. Crop was total failure because it was choked with weeds. Farmer sued for profit.

Rule Lambert J:Determine whether the oral representation is a warranty i.e. did the parties intend it to have legal effectThe oral warranty and the written document should be read together if possible i.e. representation can add to the written document. As shown in this case, can get around contradiction rule if can re-characterize/harmonize

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the representation and/or clause so they do not contradict and can stand together.Lambert commented on the Bauer/Carmen rule that there can be no collateral warranty if it contradicts the written: If cannot harmonize i.e. there really is a contradiction then the principle from Bauer/Carmen is only that there is a strong presumption in favour of the written document, but it is not an absolute rule and so can still conclude on the facts that the collateral warranty should supersede the written document (says even Bauer decision recognized that it is not absolute, for if the rule were absolute, McIntyre would not have bothered to look at the evidence to determine it was invalid). Recasts the parole evidence rule as a presumption! The strength of the presumption depends on the circumstances:

Less strong if the representation adds or interprets the written, more strong if it varies the written, and stronger still if it contradicts the written (but can still be ousted if clear and unequivocal evidence)Less strong with standard forms than for negotiated agreements (parties may have made oral arrangements without being aware of a standard form contract)Less strong with a specific oral representation but more general written clause

Decision Lambert J:Intention test – yes, clear intention in this case that farmer should rely on statements and reasonable to do so (went to the heart of reason for buying the seed)Contradiction test: the oral representation/collateral warranty (Buckwheat will choke out weeds) was not contradictory to the exclusion clause in the written agreement (no warranty for productiveness of crop, which was interpreted as meaning if you don’t get the yield you expected, but has nothing to do with weeds). I.e. said the representation adds to the written document rather than contradicts it.

Comment: Lambert J. thinks the parole evidence rule is nonsense, but note the B.C.C.A. does not overrule the S.C.C., and all comments regarding contradictions creating only a presumption for the written document (rather than a strict rule) were obiter dicta since Lambert concluded this case as non-contradiction. However, some think it likely S.C.C. will follow Lambert in the future.

Zippy Print (1995) (B.C.C.A.) confirms Gallen (again, Lambert J)

DISCREDITS PAROLE EVIDENCE RULE IN FAVOUR OF PARTIES’ INTENT; MISREPRESENTATION SHOULD BE AVOIDED THROUGH EXCLUSION CLAUSEFacts: Plaintiff was unable to pay franchise fees because they could not meet sales volumes. Claimed that the defendant has misrepresented potential sales volume. Defendant had an exclusion clause removing liability for failure of a franchise.

Decision: Lambert J. makes 5 points:To exclude evidence on the parole evidence rule is absurdRule should be what underlies the parole evidence rule – did the parties intend the written document to be the entire agreement

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Absent an exclusion clause, one party cannot make a representation designed to persuade someone to enter into the written contract, and then hide behind the parole evidence rule when that representation was not included in the writtenBut where you have a properly drafted exclusion clause, liability for misrepresentation may be avoided - not on the basis of the parole evidence rule, but on the basis of the exclusion clauseHowever, exclusion clauses in standard form contracts will not exclude liability for representations made

Unless the effect of the exclusion clause has been brought home to the party to whom the representation was made by being specifically drawn to the attention of the party or by being specifically acknowledges by that party

Signed document are still considered to be the best evidence of both the parties’ intention for the agreement. Therefore, still hard to get around the deference for written agreement.

In particular, when there is a contradiction between an oral collateral warranty and a contract, will generally adhere to the parole evidence rule.

In summary, written documents still the best evidence of contractual terms, but may look beyond them. To decide whether to do so, relevant factors include:

General intent (how strong was the intent to be bound by representation), reliance (on the representation), unfair surprise (on other party if representation made a warranty)Nature of the change: does representation add/vary/contradict the written (how serious a contradiction is it)Nature of the document: was it intended to be exhaustive, are there exclusion clauses, clarity of wording, knowledge of parties (e.g. was it read), standard form contract (more likely to allow representation)Nature of the representation: quality/credibility of evidence (e.g. unknown employee in Bauer), was it clear, significance (was it at core of reason to enter contract as in Gallen)Nature of bargaining power: equality/inequality, standard form document, past relations, sharp practice (e.g. lies, unconscionability, unscrupulous making promises duping the unwary when not in written

Construction and Contracts

Is there an implied common law warranty?General rule: caveat emptorException: can a warranty be implied?

Qualification: unfit for habitation (Fraser-Reid) – house must be incomplete!

Lead to expectation damagesRationale: if house is complete, purchaser should be able to inspect it

Is the building incomplete? Is there a latent defect?Would the fixtures that are incomplete prevent the purchaser from adequately inspecting the house

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Standard Form ContractsSignature Rule – where a document is signed, then except in exceptional circumstances, the party that signed is bound regardless of whether they actually read the contents of the contract

Has been extended to include clicking “I Accept” for electronic media

Ticket CasesUnsigned DocumentsTwo general perspectives: who has the onus of making sure that there is knowledge?

The party seeking damages (wants to avoid limited liability clause) – this person ought to have known about the limitation clause or ought they to have made the inquiries?

This policy accords with caveat emptor, strong business efficacy considerationsThe party seeking to rely on the contract should bear the onus for ensuring that the party entering into the contract is aware of the limitation clause

Parker v. South Eastern Railway (1877) (English C.A.)

LORD MELLISH TEST: ONLY BOUND BY UNSIGNED DOCUMENT IF KNOWLEDGE OF SOME CONDITIONS OR REASONABLE STEPS TAKEN TO INFORM OF SOME CONDITIONSFacts: P left bag with railway cloakroom, paid 2d and got ticket back, bag was lost.Rule:Lord Mellish test: with an unsigned document, only bound by exclusion clause if party assented to it, and 2 ways to assent:

If party had actual knowledge document contained some conditions (but actual knowledge of the specific conditions themselves not required), orParty seeking to rely on conditions took reasonable steps to provide adequate notice document contained some conditions (but notice of actual conditions themselves not required) – so other party ought to have known document contained conditions

Rule justified:With a signed document, assent is deemed by the signingReasonable expectationsEncouragement of self protection / caveat emptor (i.e. given sufficient notice should enquire further)To protect party trying to rely on conditions from other party turning a blind eye to the conditions i.e. fraud

Decision:In this case, knew ticket had writing on it but thought it was just a receipt for giving money and didn’t read it, so no knowledge it contained conditionsHowever, reasonable steps were taken: railway gave ticket, ticket on front said “see back”, on back said “no liability for items exceeding value of £10”, and sign near cloakroom said the same

Comments: One problem with the Mellish test is that the condition may itself be very unreasonable, but will be accepted as long as reasonable notice was given At a common understanding, people are now assumed to be aware that standard from contracts contain certain conditions.

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However, terms printed in a contract must not be unreasonable – an implied term that the condition of the ticket will be reasonable

Bradshaw

UNDER MELLISH RULE, MORE UNREASONABLE THE CALUSE, MORE NOTICE THAT IS REQUIREDFacts: Contract with a warehouse for sale of orange juice. Juice was improperly stored and spoiled as a result. Client sued warehouse for negligence. However, warehouse claimed protection of an exclusion clause that state that the warehouse was not liable for negligence. Decision: Exclusion clause was upheld

What constitutes reasonable notice under the Mellish rule varies depending on the reasonableness of the clause – the more unreasonable the clause it, the more notice of its existence that will be required

Denning: When faced with a highly unreasonable clause (e.g. exclusion of all liability)

Should be in red inkShould be on the face of the documentShould be a red hand pointing to the clause

Decided that the condition in this case was not so unreasonable, so lower onus for providing notice.

Clause was on the face of the agreement and was written in plain English

There was then a retreat from Parker (Mellish Rule): Thornton v. Shoe Lane Parking (1971) (English C.A.)

SIGNS POSTED AFTER TICKET BOUGHT NOT BINDING SINCE AFTER K FORMATION; REQUIRES KNOWLEDGE OF ACTUAL CONDITONS (NOT SOME)Facts: Thornton parked car then suffers personal injury in D’s parkade. Sign at entrance read “cars parked at owner’s risk” and machine gives out ticket when light changes to green and barrier raises. The ticket said “subject to posted conditions” and posted signs said “no liability for personal injury”. Thornton said he read the ticket but only to see what his time of entry was, and saw some other writing but didn’t read itDecision: parkade operator not able to rely on exclusion clause:

Contract was formed (offer/acceptance) when light turned green or when ticket came out of machine, so subsequent exclusions on ticket and signs invalid since not present at the time of formationEven if conditions/posters had been present at time of formation, exclusion would still not be binding since (expands Mellish test):

Requires not just actual knowledge that it contains some conditions (as specified in Parker) but rather requires actual knowledge of the actual conditions themselves Reasonable steps for notice had not been taken: such an extreme term would require very explicit notice: red ink plus a red hand pointing at it in this situation i.e. proportionality between required notice and onerousness of the clause

Comment: illustrates another way that courts can avoid unfair exclusion clauses: the sign at entrance that read “cars parked at owner’s risk” could have been understood

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to mean personal injury instead of just property damage as it was here, so technique of interpretation

Signed Contracts and Fundamental BreachAvoiding the Signature Rule

General Parker signature rule: absent fraud, conditions in a signed document are binding: knowledge of conditions is irrelevant, whether or not read the document is irrelevant i.e. assent to exclusion clause deemed by mere act of signingTo avoid this rule in unfair situations:

FraudCourts can interpret exclusion clause so as not to include the circumstances in the case: contrapreferentum construction = ambiguity in document will be interpreted against the party who prepared itDuress: forced to sign, not voluntary (e.g. gun to head). Requires more than just inequality in bargaining powerMight be able to argue other party made misrepresentationsDocument is not mine: non es factum. I.e. signed it, but mistaken about fundamental nature of the contract. Document must be of a wholly different character. e.g. signed a lease thinking it was a birthday card. Fundamental breach

Fundamental BreachHistorically, a breach of contract by one party does not relieve the other party from completing their obligations under the contract (so should perform then sue for damages) unless breach is so fundamental (e.g. breach that deprives the other party of substantially the whole bargain) that don’t have to perform (and can sue for breach). Rationale: almost every complex contract will be breached in minor / de minimus ways, and could be used by other party to get out of it. This doctrine was extended in 1950’s to strike down exclusion clauses:

Karsales (Harrow) v. Wallis (1956) (English C.A.) Decision Denning: if there is a fundamental breach:

Innocent party need not continue performance, and can sueExclusion clause not binding

Rationale: although an exclusion clause is ok for normal breaches, exclusion clause should not relieve a party for not performing the very thing the contract is about, thus depriving the innocent party of substantially their whole benefit.

Following this ruling two problems emerged:Malleability and hence uncertainty over big breach (fundamental) v. small breach (not fundamental) distinctionSome exclusion clauses were not unfair e.g. when made between corporate parties with equal bargaining power

The Unfair Contract Terms Act was passed in England, saying that exclusion clauses for liability for negligence are void unless reasonable in the circumstances. To determine if reasonable, take into account bargaining power,

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inducements, availability of being able to contract elsewhere without such clauses, and knowledge of the clause at the time for formation

In Canada, we do not have such an act and the doctrine of fundamental breach perhaps remains as a rule of construction:

Hunter Engineering v. Syncrude Canada (1989) (S.C.C.)

FUNDAMENTAL BREACH REMAINS AS RULE OF CONSTRUCTION, BUT UNCONSCIONABILITY USUALLY PREFERREDFacts: Syncrude contracted with third part for 14 conveyor belt systems (for use in Alberta tar sands project), for $300,000 each to total of $4 million. Syncrude contracted with Hunter for the gear systems, which cost the third party $450,000 (part of the $4 million). Both contracts had exclusion clauses saying no liability except for repair/replacement of any parts that break in the first 12 months. 15 months later the gear system fails, costing $400,000 in repairs

Trial: concluded this was not a fundamental breach (so exclusion clause remains binding) since by economic impact assessment: cost of breach = $400,000, total cost = $4 million, so only 10% impact, not fundamental

On Appeal at C.A.: cost of breach = $400,000, cost of gears = $450,000, so 90% impact, yes, fundamental, so exclusion clause falls and Hunter is liable for repair

S.C.C.:Fundamental breach doctrine is not a rule of law but, according to one judgement, remains as a rule of construction. Unanimous that exclusion clause remains binding in this case, but for different reasons:

Dickson J:Discussed problems arising from applying the fundamental breach doctrine as a rule of law:

Uncertainty and characterization games (what is a big / fundamental breach v. what is small)Exclusion clauses are fair and reasonable in lots of casesIn many commercial cases exclusion clauses are reflected in the price so would be unfair surprise / unjust enrichment to say they are not bindingIf allow exclusion clauses to fail, why not other unfair termsResult is to hide the real inquiry, i.e. fairness / unconscionability

Concludes should abolish the doctrine of fundamental breach (even as a rule of construction) and apply law of unconscionability in deciding whether to uphold an exclusion clause

When we are looking to see if a clause is unconscionable, consider: was there duress, an inequality of bargaining power, unfair or unreasonable clauses, etc. at the time of contract formation

In this case upheld the clause since equality of bargaining power (both parties had lawyers, both knowledgeable, no undue pressure to enter contract, etc)

Wilson J:Agreed with Dickson on problems, but should retain doctrine of fundamental breach as a rule of construction, since using test of whether unconscionable at time of contract formation is itself problematic:

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Too complicated / subjective – parties negotiated for 18 months in this case, huge paperwork, impractical for courts to wade through it all to determine if there was a trade off between price and exclusion clauseIgnores fact that exclusion clause might have been fair at time of formation but became unfair later on (e.g. consider employee contract that says can terminate with just 4 weeks notice, but then employee works there for 20 years – is termination provision still fair and reasonable)Even if equality of bargaining power, doctrine of fundamental breach still guards against a party abusing the protection of an exclusion clause by intentionally breaching contract, so would want to make clause unbinding in some cases (comment: this is perhaps just unconscionability however)

Comment: thus not settled whether doctrine of fundamental breach (as a rule of construction) is still with us – subsequent cases have applied both judgements (note it is certainly not a rule of law).

Although the doctrine has fallen out of favour, still open to be argued

Tilden Rent-a-car v. Clendenning (1978) (Ont. C.A.)

SIGNED CONTRACT NOT BINDING IF CONDITION UNREASONABLE OR RELIANCE UNREASONABLE – OFTEN DISTINGUISHED ON THE FACTSFacts: Clendenning signed standard form contract for rental car plus coverage, but exclusion clause said would still be liable for any damage if a result of illegal act or after any drinking. Clendenning pleads guilty to impaired driving, but later claims only did this because didn’t want to travel to court and would be cheaper to simply plead guilty. However, as a result was hit with the costs of the damage to the car because of the exclusion clauseMajority decision:Two part test to determine when clause in signed standard form should not be binding:

If condition unreasonable, andIf reliance on signature unreasonable

In this case exclusion clause not binding since:Clause unreasonable since was regardless of amount that had been drunk or illegal e.g. even a tiny sip of wine or driving 1km over speed limitReliance on this clause unreasonable since Clendenning had no knowledge of it and probably would not have entered contract if he had, and Tilden did not take reasonable steps to point it out. Discussed the rationale for the signature rule:

A signature is evidence of a willingness to be bound, just like consideration or putting something under sealHowever, in this case not a formal indication of assent (so not reasonable to rely on signature) since document was not intended to be read, as evidenced by:

Speed of transaction (and this is part of the idea – to get your car as quickly as possible)Length of documentUse of fine print

Thus signature was meaningless as concerns an intention to assent to the terms

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Further, Tilden employee had actual knowledge than Clendenning did not read (so had no knowledge what was in the written contract) but signed anyway. Thus signature further devalued.

Comment:This was seen as a momentous decision, and people asked if this was the end of standard form contracts (i.e. when is a standard form not signed hastily, without fine print, and without reading). It at least suggested the signature rule is rebuttableBut, although Tilden has been applied, there have been an equal number of cases that have distinguished it on the facts. Thus it is not the panacea that consumer rights groups thought it would be.

Court narrows the application of Tilden

Karroll v. Silver Star Mountain Resorts (1988) (BCSC)

TILDEN NOT GENERAL PRINCIPLE – ONLY APPLIES IN SPECIAL CIRCUMSTANCESFacts: Woman signs a waiver to enter a ski race at Silver Star which contains an exclusion of liability clause. She breaks her leg because some random dude gets in her way. She claims that Silver Star was negligent in allowing that other skier to be on the slope while she was racing down to the bottom.Held: Court holds that the Tilden principle of reasonable notice is not a general principle. It is only applicable in special circumstances. Holds that a reasonable person in Silverstar’s position would have thought Karroll was consenting by signing:

Entire purpose of K was a release from liability (unlike Tilden where purpose was to rent a car)Skiing is inherently a risky activity and you engage in it at your perilRelease was only one page, short, easy to read Karroll had signed such releases before and should know what they contain (VS. McCutcheon) – a reasonable person would expect to sign such a waiver

And if I’m wrong and this is an exceptional case, were reasonable steps taken:“Release to indemnity – please read carefully”Short process to read the waiver

Karroll sued the ski club (who provided set up and volunteers) as well as the mountain. The ski club is a third party beneficiary of the mountain’s release form. Ski club is an agency. McLachlin cites Scruttons v. Midland in how to find agency.

E-CommerceGeneral Rule: By clicking an “I Agree” button on an e-contract, one is deemed to consent to all its terms, regardless of if they’ve been read (Rudder)

Mere use of a website does not entail consent to its terms of use (Specht)Mere notice of a license agreement is insufficient to form a binding K if there is no way to consent to its terms. (Specht)Great deal of deference to sanctity of K and caveat emptor, as in Kanitz.BC’s Electronic Transactions Act provides that one can provide consent by electronic means.

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In e-commerce Ks, courts will use the reasonable notice argument from the Ticket cases.Terms displayed, format, significance of clicking ‘I Accept’ made clear, etc.

Radin Article: Humans, Computers and Binding CommitmentContrasts two ideas: contract as consent and contract as product

K as consent doctrinal model of K law K as product terms of K are not bargained in any significant way, they are as much a part of the product as any of its components

With the preponderance of e-contracts, the traditional idea of contract as consent where there is bargaining over terms becomes less realistic. Where one is forced into a view of K as a product, i.e. where one has no choice but to buy a product and its contractual terms, the concept of choice is curtailed.In the context of K as product, we need to bring the product + terms to the attention of the buyer. It is up to the regulatory powers to decide which terms should be brought to a buyer’s attention in such circumstances.To deny the value of this because one is supposedly opposed to regulation is misguided since regulation provides the infrastructure within which the market economy operates.

Specht v. Netscape Communications Corp. (2001) (NY)

MERE NOTICE INSUFFICIENT, MUST PROVIDE WAY TO CONSENT TO TERMSFacts: Considered whether a person who downloaded free computer software was bound by a License Agreement that was merely posted on the site and did not require one to press on an “I Agree” button.Claim: Netscape claimed that the mere act of downloading signified consent.Held: Court held that mere notice of a license agreement was insufficient to form a binding K since there was no way to consent to its terms.

Rudder v. Microsoft (1999) (Ont. Superior Court)

CLICKING “I AGREE” MAKES A K ENFORCABLEFacts: Online sign up procedure for the membership agreement. After the terms of the agreement came up, at the bottom you had to select the ‘I Agree’ box. This case involved a forum selection agreement - an agreement that if you’re going to sue Microsoft, that you can only do it in Washington State.Held: Court held that the forum selection agreement was enforceable.

Found that the terms were not unreasonable: Court observed that users were required to click on the "I agree" button to accept the terms, and that the impugned clause was no harder to read than any of the others. The sign-up procedure itself required users to click "I agree" twice, where the second time the user was told that they would still be bound to the terms even if they do not read them all.

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Kanitz v. Rogers Cable Inc. (2002) (Ont. Sup Ct)

AGREEMENT VARIATIONS POSTED ON WEBSITE BINDING - CONTROVERSIALFacts: Customer signs the Rogers agreement, which provides that Rogers may change/add/remove portions of the agreement at any time without your consent or authorization. Also provides that they will provide notice of such changes by email, post, or posting changes on the website.Held: Court holds that amended agreement is binding since notice was given in accordance with K.

Obligation is on consumer to check the website for amendments from time to time.Ps continued use of the service after amendments were made is seen as acceptance

The Court also upheld the arbitration agreement itself, as well as a "no class actions" clause. In other words, the parts of the contract that forbade Rogers customers from going to a regular court (forcing them instead to seek redress from an arbitration panel) and from suing as a class were deemed valid.

UnfairnessCourts have invented many mechanisms to manipulate contract enforcement in order to do justice in the circumstances – tend to complicate doctrinal rules.

Some judges argue that we need doctrinal rules that allow the court to decide up front whether contract enforcement is fair. Thus, developed three specific rules:

DuressUndue influenceUnconscionability

DuressLong standing rule developed in the courts of equity

Economic DuressPort Caledonia (1903) (English) Facts: one ship had floated dangerously close to another, and requested a tug. Tug boat master demanded £1000 instead of the usual £200. Owner of tug sued to get the £1000Decision: Only £200 to be paid – agreement for £1000 was inequitable, extortionate, and unreasonable – clear economic duress

D&C Builders v. Rees (1966) (English C.A.) Facts: D employed P to do some work, P partly paid D but P still owed £500 to D. P offered to pay £300 in settlement (or nothing), and D, who was on the verge of bankruptcy (P knew this), felt they had no choice but to accept.

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Decision: there was no true accord here since P held D to ransom. “No person can insist on a settlement procured by intimidation”. Thus P has to pay remaining £200

Definition: Occurs when someone in a stronger position demands of the weaker position more than he is justly due.

General Rule: Duress vitiates consent because consent was not given voluntarily 2 types of duress: physical threats, economic duress (Port Caledonia, D&C

Builders) Fairness of K is irrelevant to duress, only important that K was entered into

voluntarily Commercial pressure in and of itself is not enough to conform to economic

duress

4 criteria for assessing whether a court should find economic duress: (Pau-On)

1. Consent done under protest (was there protest at formation?)2. No alternative course of conduct available3. No independent legal advice prior to signing the K4. After signature, prompt steps taken to avoid the consequences 5. Unfairness (policy, not doctrinal requirement)

Remedy for Duress: Party can elect to void K OR Continue on with it which ratifies the K (as occurred in Stott)

Duress vitiates the concept of consent to the contract:Because we concentrate on consent, the fairness of the bargain becomes irrelevant. If the court finds that duress has vitiated consent, this is the end of the inquiry.Remember, K’s are voluntary obligations – doctrine of duress is centred on lack of consent, when consent not freely given

Undue Influence vs. Unconscionability Courts often use the terms undue influence and unconscionability interchangeably. However, still considered to be two separate legal doctrines.

Doctrinally, the test are very similar:Undue Influence

Relationship of power and/or influence over the weaker partyImprovident bargaining

UnconscionabilityUnfairness in formation

But look for a disparity in bargaining power

Unfair bargaining

Really boils down to one determination: is the transaction, seen as a whole, sufficiently divergent from community standards of commercial morality that it should be rescinded?

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Undue InfluenceGeneral Rule: A finding of undue influence will result in the court setting aside the K against the wrongdoerRemedy: Voidable contract

Two requirements for finding undue influence:1. Improvident bargain of manifest disadvantage to one party or to the undue

benefit of another ANDDoesn’t have to be so unfair as to be divergent from community standards of commercial moralityBut, just because the bargain is not in the BEST interests of the weaker party, doesn’t mean that it is improvident

2. Unequal relationship where one has influence over other (but not enough for duress). Two Categories of Relationship of undue influence (Duguid):

Class 1 Relationship: Actual Undue InfluenceCircumstance where there is a disparity in bargaining power arising out of relationship and the stronger takes advantage of the weakerClaimant (weaker party) must prove on the facts that the other party exerted UI (on a BOP)

Class 2: Category of relationship presuming Undue Influence Class 2A – De jure: Certain relationships, as a matter of law, raise the presumption that undue influence has been exercised

Rebuttable if obtained consent/entered K voluntarilyIf you fall into one of these enumerated relationships, then the presumption kicks in automatically (onus shifts to defendant to show consent/voluntariness):

Solicitor-clientDoctor-patientTrustee-beneficiaryFiduciary – by virtue of the relationship, one has power over the otherBanker-client (Lloyd’s)Religious advisor-worshipper (convent cases)Family relationships – a bit controversial in this area, this category tends to move in and out (husband/wife, parent/child etc)

Class 2B – De facto: Relationships of trust and confidence (residual category)

By demonstrating the existence of a relationship under which the complainant placed trust and confidence in the wrongdoer, the complainant raises the presumption of UI.

Onus on the person claiming the relationship to prove it More likely to include marriage relationships if: (Duguid) Trust and confidence placed in partner wrt to $ OR Sexual & emotional ties between parties provide ready weapon for finding

of UI (scared relationship will break up)Presumption will be rebutted if complainant was told to seek legal advice by a third party

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Onus on P to prove either a 2A or 2B relationship, at which point, onus shifts to person trying to uphold the transaction to prove transaction entered into freely.

Can show transaction entered into freely if complainant had independent legal advice.Lack of recommendation by third party that P seek ILA strengthens presumption of UI.Where a third party has constructive knowledge of a wrongdoing AND they are in a relationship of trust and confident with weaker party, it is their duty to set aside the transaction if they can. Failure to do this can be seen as UI.

Bank of Montreal v. Duguid (2000) (OCA)

GIVES US THE CURRENT DOCTRINE OF UNDUE INFLUENCEFacts: Mr and Mrs Duguid co-sign for a loan and the bank doesn’t tell them to seek independent legal advice, as it should have by law done. Bank had concerns about financial viability of the project the Duiguid’s were entering into but they didn’t tell them that. Mr Duguid goes bankrupt and bank comes after Mrs.Held: Majority found that there was no relationship of trust and confidence and that Mrs Duguid made her guarantee with a free and independent mind. So guarantee stands and Mrs Duguid responsible for it.

Unanimously agree that it is not a class 1 or 2A relationship. Make an important statement to show 2B is the operative class – “when we are looking at husband/wife relationships, we ought not to presume that as a matter of law, there is a presumption of UI” even though husband/wife was a historical categoryNot a relationship of trust and confidence as it relates to financial concerns – no evidence brought that Mrs. D relied on Mr. D to make financial decisions.

Mrs. D. was a real estate agent and had knowledge of financial affairs.Recognized that emotional ties work in intimate relationships, but the court assumes that only leads to UI when relationship is in peril (majority). (Court differed on how much jeopardy the relationship must be in)

Although the marriage was rocky, court felt that would not be imperilled by Mrs. D’s failure to sign the loan

Mrs was a guarantor so bank had to wait until Mr stopped paying before they came after her – basically, being a guarantor means that if he doesn’t pay, she willMrs challenges her signature of a guarantor on the basis that she was subject to UI by her husband

How to analyze whether a court will set aside a transaction for UI or UnC in situations where a bank or other party wants a guarantee signed when there is no allegation of UI or UnC against them:

Was the bargain improvident? The property that Mr purchased was in his name alone. She guaranteed it, but to no benefit to herself. However, don’t find it so improvident as to declare it void(a) Was the bank/third party on constructive notice of the possibility of undue influence? It will be if two criteria are met:

transaction not for the financial benefit of the person signing; and

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the parties are in a relationship that raises the suspicion of undue influence unless bank/third party takes reasonable steps to assure the signature of P is valid.

(b) If the answer to (a) is yes, then the issue is whether the relationship is one of actual or presumed undue influence or UnC

Onus on guarantor of loan/debt (P) to demonstrate relationship or trust of confidence (UI 2A or 2B) or inequality of bargaining power (UnC)If cannot prove that it was inequality of bargaining power or 2B (as was the case for the majority in Duguid) then the matter ends there. If she proves that it is 2B or inequality of bargaining power, then the onus is on the bank to rebut the presumption of undue influence or UnC by showing that they took reasonable steps to ensure no UI or UnC. The bank can do so by:

Make inquiries about the relationshipRecommended they obtain independent legal advice Where very risky investment, should insist they get independent legal

adviceShowing that P’s transaction was one of a "free and independent mind" (i.e. a mind with commercial knowledge, experience, independence and sophistication)Meeting with P privately to explain the extent of liabilityWarn P of risk the more improvident the bargain, the more warning required HOWEVER, bank need not disclose its view on the quality of the

investment.The mere failure of the bank to provide the above information and advice does not make the guarantee signed by P invalid. It simply means that the bank does not have a defence where it turns out there was actual or presumed undue influence.

Wegger’s ArticleOur economic model of contracting has at its heart coercion, which lies at the heart of every bargain. Can come from poverty, discrimination, lack of knowledge of Eurocentric system, etc. Idea of freedom of contract is really just an ideological construct. Should instead have a moral dimension.

UnconscionabilityTwo part test – must have unfair bargain and inequality in bargaining power.

Factors: 1. Substantive (Bargain) Unfairness: May involve comparing the contract price with the prevailing market  price and the value of the consideration provided 2. Degree of need and the availability of options: Is there a concern about duress because of the  circumstances surrounding the deal? 3. Capacity: To what extent does the buyer understand the transaction? To what extent is it reasonable for  the seller to assume that the buyer understands? To what extent is the buyer able to protect his or her 

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own interests.  a. Personal Incapacity: age, intelligence, illiteracy, infirmity, drug dependency

b. Transactional Incapacity: the nature of the transaction and the relative abilities of the parties  (experience, knowledge)

4. Nature of Relationship: Are parties at arm's length or is there a relationship of trust, confidence, reliance  or dependence? 5. Awareness/Consent/Informed Consent/Understanding:  Is the buyer aware of the existence of terms  defining rights and liabilities? Is it reasonable for the seller to assume that the buyer is aware?  a. Nature of the document ‐ is it obviously contractual? b. Was there an opportunity to read the terms ‐ access, speed of transaction? c. The prominence of terms and notices? d. Are the terms intelligible and in plain language? Are the terms misleading? e. Nature of terms: are they usual or unusual? f. Has the buyer obtained independent legal advice? g. Does the buyer appreciate the risks?

6. Reasonable Expectations: Whose expectations are the more reasonable in the circumstance. Whose  reliance is more reasonable? a. Are the terms usual or unusual? b. Are the terms consistent with the core and purpose of the contract in light of the parties’ motives  and expectations? c. To what extent will efficient transactions be enhanced/hindered by allowing parties to contract on  the basis of unread terms? d. Has one party said or done anything that would create false expectations in the other? e. The experience and bargaining ability of the parties.

7. Assignment of Risk (Best insurer): In the case of a provision that limits or excludes a liability that would  otherwise attach to one party, which party is better able to safeguard against the loss? Is insurance  available to that party or other measures that reduce the risk of loss? Has some advantage or inducement  (price reduction) been received in exchange for the allocation of that risk?

Lloyds Bank v. Bundy (1975, Q.B.)Denning creates unconscionability. Important for how 3rd party protects themselves so that they can ensure that the agreement is enforced.Facts: Father mortgaged farm to get loan for his son to start a business. Ends up mortgaging more than the total value of the farm. Company fails and the bank comes after the farm.Issue: Father claims that the circumstances were so exceptional he should not be bound. He did not know what he was doing/signing. Held: The agreement was unconscionable. Unfair bargain - dad got nothing for guarantee because the bank had already lent the 11000 pounds.

Takes formalistic approach - Bank tries to argue that forbearance in calling in the loan was consideration. Denning finds it wasn't meaningful, there was either no consideration, or the consideration was grossly inadequateBank knew the company not likely to make it – so sought protection

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Inequality in bargaining power – you can rely on de facto and de jure relationships from undue influence. The emotional relationship between the father and the son also put the father at a disadvantage with the bank. Bank knew or ought to have known son would be very influential tog et father to sign loan guarantees.Father trusted the bank – they had lots of influence over him. He didn’t get any hint he should be asking more questions, be suspicious. Also, he had been relying on the bank for his financial matters for years. Father did not get ILA.Important: Court imparts constructive knowledge on what the bank ought to have known. It also establishes that the weak party should get ILA in these situations.Other majority judge uses undue influence, puts the relationship into 2b class.

Lidder v. Munro (2004, BCSC)

Facts: Plaintiff was injured in motor vehicle accident. Signed a release to settle, but medical problems persisted beyond what was anticipated. Issue: Should the release be upheld or set aside?Decision: The agreement was set aside as unconscionable – ICBC sacrificed fairness to efficiency.Inequal Bargaining Power

1. language barrier2. ICBC more sophisticated party3. At first meeting, he had a friend for translation and support – short notice made

it impossible for him to come with the friend4. No ILA5. Meeting was on short notice6. Substantial deference to ICBC adjudicator – analogize to a bank, in a fiduciary

relationship with Lidder (2b classification). It was under obligation to act for benefit of Mr. Lidder.

Unfair agreement – yes, likely would have got more for non-pecuniary damages and wage loss. ICBC failed to get up to date medical records before making the deal.

Henningsen v. Bloomfield Motors Inc (1960, N.J. Sup Ct)

Facts: Mr and Mrs buy car, has a defect, while she is driving she is injured because of it. The purchase agreement said that there was only a 90 day warranty and everything else was excluded

Rushak v. Henneken (1991, BCCA)Facts: P bought Mercedes Benz for 17,000. Couldn’t drive standard, so put it in storage for a year. When she took it out to sell it, it had rusted so badly it would cost $10,000 just to repair. Before purchase, she had been told she should have the car inspected by a Mercedes Benz dealership. She failed to do so, bought it anyway. Decision: Finds for the purchaser. Cites s. 8 of BCIA.

seller knew that car was from Germany, where they used salt on roads – led to rustseller knew car had been worked on, painted to look good, hide potential rust problems

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court notes that there is no positive obligation on the part of car dealers, but there is a negative obligation not to make statements about the car that he knew were likely false

Illegality

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