Non-existence of K – Void K (Common Law mistake) - UVic LSSuviclss.ca/outlines/242-Outline_Long_Final.docx  · Web viewP rented a flat from D at above non-rent control price. ...

LAW 108 Contracts – April Exam CANNon-existence of K – Void K (Common Law mistake)..................................................................................................2K that can be undone – Voidable K........................................................................................................................................ 2

1. Is There A Contract?.......................................................................................................................................................................... 2A. Mistake as to Fact?........................................................................................................................................................................ 2B. Mistake as to the terms of the contract?.............................................................................................................................2

Types of Mistake............................................................................................................................................................................ 3C. Mistake as to the Nature of the document – Non est factum.....................................................................................4D. Mistake as to the identity of the parties? (void & voidable contracts).................................................................4F. CL Mistake – Mistaken Assumptions.................................................................................................................................... 5Equitable Mistake............................................................................................................................................................................... 7

Before going on to stage 2, link to other doctrines:.......................................................................................................82. What are the Terms of the Contract?.........................................................................................................................................8

Interpret the Contract...................................................................................................................................................................... 8Mistake as to the recording of the terms? Seek Rectification......................................................................................10Reasonable Notice?......................................................................................................................................................................... 10

1. Notice Requirement – Unsigned Documents.............................................................................................................112. Notice Requirement – Signed Documents.................................................................................................................. 11

Were the Terms added after the contract concluded?....................................................................................................123. Is there an Exclusion or Limitation of Liability Clause?.................................................................................................13

3. End of Fundamental Breach...................................................................................................................................................134. Has the Contract been Frustrated?.......................................................................................................................................... 14

1. Development of the Doctrine................................................................................................................................................ 142. Land cases...................................................................................................................................................................................... 15

5. is the Contract Unfair?................................................................................................................................................................... 16Excuses for Non-Performance of the K.................................................................................................................................. 161. Duress.............................................................................................................................................................................................. 162. Undue Influence.......................................................................................................................................................................... 173. Unconscionability....................................................................................................................................................................... 19

6. Is K contrary to law or public policy - illegality.................................................................................................................202. Categories of Illegality.............................................................................................................................................................. 20Consumer Protection..................................................................................................................................................................... 22

7. Has there been dishonest performance? (Good Faith)...................................................................................................238. Remedies............................................................................................................................................................................................. 249. Breach of Contract = Damages...................................................................................................................................................24

1. The Interests Protected........................................................................................................................................................... 242. The Expectation Interest......................................................................................................................................................... 253. The Reliance Interest................................................................................................................................................................ 25

Expectation Damages – Quantification Problems..................................................................................................................27Loss of Chance................................................................................................................................................................................... 27Cost of Performance, Economic Waste, Diminishing Value..........................................................................................28

Limiting principles............................................................................................................................................................................... 29Remoteness........................................................................................................................................................................................ 29Mitigation............................................................................................................................................................................................ 31

Intangible harms & Punitive damages........................................................................................................................................ 32Punitive Damages............................................................................................................................................................................ 33

1

Pre-K you can make claims on: mistake, duress, undue influence, unconscionabilityDuring K period you can make claims on: breach, frustration, limitation period, unfairness Both pre- and during-K you can make claims on: illegality, public policy

NON-EXISTENCE OF K – VOID K (COMMON LAW MISTAKE)Where there is a flaw in formation that prevents K from coming into existence at all. Any result from performance is non-existent. No discretionary aspect. No basis for CL damages or termination. May be possible to sever aspects of K that will be unenforceable rather than void.

Reasons CL might find a K void: (1) Flaw in formative stages (e.g. offer/acceptance); (2) Illegality; (3) Common Law mistake; (4) Duress; (5) Non est factum; (6) Some mistaken identities

K THAT CAN BE UNDONE – VOIDABLE K K exists, but is flawed in some way. Law allows injured party to elect to undo K. Until K is undone, it is perfect valid and enforceable. If party chooses to undo K, then they have ‘avoided/rescinded/set aside’ the K and performance isn’t required. If avoided, parties are restored to their positions just before K existed. Should be no basis for claim to any secondary obligations under K if it is voided. Monetary compensation may be granted under rescission where it is impossible or inequitable to restore the original property.Reasons K might be voidable: (1) Duress; (2) Fraudulent misrepresentation; (3) Undue influence; (4) Unconscionability (sometimes); (5) Mistake (equity)

1. IS THERE A CONTRACT?

A. Mistake as to Fact?- Generally caveat emptor. Normally would be a question of representations and warranties (not on

final exam), unless falls under consumer protection.- In business-business sales: risk of mistakes as to fact rest with party making the mistake.

B. Mistake as to the terms of the contract?- Resolved using traditional formation principles; offer, acceptance- Apply objective reasonable person test (Smith v Hughes).

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

person who should possess knowledge or skill. Ease of avoidance: who is in the best position to avoid mistake (cheapest). Common usage of the trade: tells Courts what parties likely expected and indicated

normal allocation of risk. - Usually where there are 2 separate things (like the cotton ships in Raffles – fundamental uncertainty

over subject matter of contract – as opposed to 1 thing in mistaken assumptions). o Situations often involve parties being at odds over what is being contracted for (Raffles,

Staiman).o Were the parties fundamentally at odds over what was being bought/sold? If so, there is no

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

agreement between parties. (Hartog v. Colin & Shields)

2

Staiman Steel Ltd. v. Commercial & Home Builders Ltd (1976). F: Auction for bulk lot of steel – “all the steel in the yard.” Seller thought excluded new building steel, buyer thought included (mutual mistake). Buyer argues objective approach (allocation or risk on seller – could have avoided misunderstanding at least cost). A: Court distinguished Raffles v Wichelhaus because in that case no definite agreements between the parties (so only applies where circumstances are so ambiguous that a reasonable person could not infer any common intention). C: Buyers expectations unreasonable. Being opportunistic (snapping up).

Smith v. Hughes (1871) F: Unilateral mistake. K for sale of oats by. P had shown sample of oats to D. D refused to complete sale because he believed that K had been for sale of old oats, while P thought it was for new oats and provided new oats (mutual mistake). A: Subjective intentions or motives are not relevant. Parties contracted for sale and purchase of oats (what Hughes thought does not affect formation). Party does not have to clarify other party of factual mistake as long as no fraud or deceit. BUT, if mistake of terms, then court may find no contract was formed (objective person would have to see certainty of terms). C: Court distinguishes:- Purchaser agreeing to take oats under belief they are old – caveat emptor (and he got sample).- Purchaser agreeing to take oats under belief that the vendor warrantied them to be old – mistake of

terms, mutual mistake. Go back to formation and see what was agreed/contract formed.- Purchaser agreeing to take oats under the belief that the vendor warrantied them to be old & vendor

knows purchaser has misapprehended the terms of contract – mistake of terms, unilateral mistake. If this then no contract.

Snapping up: offeror taking advantage of offerree by not disabusing offeree of mistake. Also Hartog v. Colin & Shields). Courts look to what parties intended (so challenge to objective formation principle)

TYPES OF MISTAKE Description What kind

of mistakeEffect at CL Effect at Equity Notes

Unilateral MistakeUsually caveat emptor. Seller does not have to tell buyer. Normal rules of formation/reps apply.

One party is mistaken (X) and other is not mistaken (Y)

Terms or assumptions

No K if mistake as to terms (Smith)

Rectification (see e.g. Sylvan)ORK is void (in ‘snapping up’ or tendering context (Solle)). If Solle is interpreted broadly, court may be able to set aside if unconscientious.

If mistake about assumption – irrelevant unless can be seen to amount to fraud (Smith)

Mutual MistakeCaveat emptor – or normal rules around reps/warranties – whose

One thinks X and other thinks Y, and neither is clearly wrong (or right)

Tends to be mistake as to terms

K is void if Court cannot infer common intention and mistake is fundamental (Bell)

Rectification (see e.g. Bercovici)

Court may have no choice but to rectify K. Court may try to interpret as unilateral

3

assumption was reasonable in circumstances.

mistake.

Common Mistake

If about fundamental matter then no contract formed.

Both parties think X, but X does not exist

Tends to be mistaken assumption about fundamental matter.(Sherwood v Walker – Rose II cow)

At CL, will make K void

At equity may be voidable, if it is about something fundamental (Solle).For rectification: P must prove that what was executed was not agreement made

Miller says look to K to see if parties have provided for who bears risk of relevant mistake,

C. Mistake as to the Nature of the document – Non est factum.- Signature rule: signed contract is binding (Lestrange) - Non est factum: it is not my deed – void ab initio. High standard though (document has to be

fundamentally different from document thought you were signing). o Originally where person had not signed (forgery) or blind/illiterate person signing. No

consent – contract void.- Policy: who should bear the loss between mistaken party & innocent 3rd party (who relies on

document). - General Rules:

o A person of full capacity is bound by their signatureo Claim of non est factum available to person for permanent or temporary reasons no capable of

reading and sufficiently understanding the document signed. o Effect = no contracto Claim not available where:

Signature brought about by negligence of signer in failing to take precautions (carelessness).

Actual document not fundamentally different from the document as the signer believed it to be.

o Mistaken person must prove they took all reasonable precautions in the circumstances.

Saunders v Anglia Building Society (1971) F: Induced to sign transfer to 3rd party – thought was transferring property to her nephew, but turned out was a fraudster (she knew fundamental character was a transfer document, so not protytpical non est factum)A: Person who signed the doc should have burden of proving that his signature was not brought about by negligence on his part. Doc as it is and doc as it was believed to be must be fundamentally different, radically different or totally different as to content, character or otherwise.

D. Mistake as to the identity of the parties? (void & voidable contracts)- Mistake as to identity: mistaken belief by A that he is contracting w/ B, whereas in fact he is K w/ C –

will negative consent where it is clear that intention of A was to K only w/ B (Bell) - Courts have applied various solutions on case by case basis.

4

Nemo dat quod non habet: CL & sale of good legislation follows this rule – no one can transfer to another something that he or she does not have. So if B has not title because obtained frequently, can’t pass title to C. At CL, A still owns good.

o Sale of Goods Act, s.26(1): buyer acquires no better title to the goods than seller had. S.28: Sale under voidable title – when seller has voidable title to them, but the

seller’s title has not been avoided at the time of the sale, the buyer acquires a good title to the goods if bought in good faith and without notice of defect in title.

o Conflicts with policy of protecting innocent purchasers who buy in good faith (bona fide purchasers for value)

All cases deal with both victim and fraudster – so who to protect? CL says property owner even though the seller is in best position to protect himself (can require full payment/title search).

a) No offer to rogue – contract void: void ab initio because no offer/acceptance (offered to person rogue is impersonating. Original owner retains title.

b) Fundamental mistake regarding identity – contract void: same result as in (a).c) Fraudulent misrepresentation – contract voidable: If A-B is voidable because of fraud, then

contract between A-B exists. A can rescind contract and regain title.d) Contract voidable but not avoided before sale to BFP: like (c), but if B transfers to C before A

rescinds the C takes title. (Lewis v Averay, Shogun). e) Normal rule of contract formation: intention of parties from words and conduct. Strong

presumption intend to contract with person whom they are in personal contact face-to-face (Shogun). Where there is some form of personal contact between individuals who are conducting

negotiations, apply strong presumption that each intends to K w/ other w/ whom he is dealing (Shogun)

Where there is a documentary K, there is no K w/ the person that sends the doc if they are not named in the written K (Shogun)

Shogun Finance Ltd. v. Hudson (2003) F: Rogue acquired Patel’s driver’s license. Rogue went to car dealership, posing as Patel, and agreed to buy car. Dealer made hire-purchase K – sold car to finance company (P). P hired car to rogue. Rogue allowed to take possession of car, and then sold it to D – then rogue disappeared. P claimed car or its value from D, D claims rogue passed good title to him. I: Is K void due to mistaken identity? A: Parties must be shown to have agreed w/ each other. To an extent, dealings here were interpersonal through medium of dealer. P had set up formal system under which Ks would be concluded in writing – treat this as documentary K. P decided to K w/ Patel and no one else. K is void because it was contracted w/o Patel’s consent – therefore rogue could not convey title to D. If K had been voidable, then rogue would have had voidable title to goods.C: Appeal dismissed – no K.

F. CL Mistake – Mistaken AssumptionsA mistake that goes to the basis for entering into the contract (external mistake).- Balancing certainty & predictability (caveat emptor) and unfair surprise, regret and unjust

enrichment on the other.- Essential issue is RISK ALLOCATION – who should bear risk of mistake. - Second issue is fairness: will one party be unjustly treated if contract enforced?- Courts rarely grant relief on basis of mistake – general principle remains caveat emptor. - Apply doctrine from Bell and McRae – But threshold is EXTREMELY HIGH.

o Mistakes nullify consent. Mistake = no contract formed.

5

Identity of contracting parties: intention is to contract with specified individual only (see identity): contract void.

Existence of subject matter: o Res Extincta: where subject matter of contract is assumed to be in existence by both parties

but in fact is not. o Res Sua: K is void if contracting to buy something that you already own and both parties

did not know (Bell)o BUT case is different if seller promised that they owned the thing in question or promised

that it exists. Quality of subject matter: mistake of both parties & mistake is to the existence of some quality

which makes the thing without the quality essentially different from the thing as it was believed to be – in that case makes K void (Bell) (Sherwood Walker)

o Must be fundamental underlying assumption.o Question of categorization by parties & court (what is essential quality of pen – is it the

color of ink or the fact you can write with it?).

Bell v. Lever Brothers Ltd. (1932) F: Severance agreement for two senior employees. Employer subsequently discovers that employees had been engaged in insider trader and it had cause to fire employees without reasonable notice. Employer claims mistake: mistakenly I: Is K void due to mistake?A: Court draws narrow approach to mistake. Mere fact that parties are mistaken with respect to their legal rights and then entire into settlement is generally not going to mean the settlement is void. Bonus paid showed they were happy. Doctrinal test = essential quality of what it was believed to be, but interpreted narrowly. Policy = certainty and predictability regarding settlements. C: Appeal allowed – compensation agreements not void.

McRae v. Commonwealth Disposals Commission (1951)F: Common mistake. D entered into K to sell to P a tanker located at a specific location. There was never a tanker at that location. P spent a lot of $ in discovering that they had bought a non-existent tanker. I: Is K void? A: D took no steps to verify that tanker was there. Ps only mistake was believing D. K should be constructed to include promise by D that there was a tanker there. Ds mistake was their own fault, cannot be relied upon to avoid the K. Buyers acted upon reliance of existence. If it can be said parties have allocated risk in K in such a way that this is simply how it’s supposed to unfold, liability is strict - that party can’t get out of its obligation simply by saying it was mistaken. C: Enforceable K – no tanker – breach of K – Ps entitled to damages. Note: if contract was subject to true condition precedent (existence of subject matter – common assumption the good exists), then no contract. But where vendor promises goods exist (even though they aren’t), then contract. Note 2: Calculation of damages in remedies.

6

Equitable Mistake- A more flexible test where there is material misrepresentation or fundamental misapprehension.

Court may set-aside contract on terms in its equitable discretion. Is it unfair/unconscientious for party to seek enforcement of the contract? Should the mistaken party be relieved of their mistake?

Test: Equity will relieve a party from the consequences of a mistake where contract entered into:o On basis of unilateral mistake: one party taking advantage of another, so court provides

relief. “One party knowing the other person is mistaken about the terms of an offer, identity of the person, lets him remain under his delusion and conclude a contract on the mistaken terms instead of pointing out the mistake.” Pg 580

o On basis of common mistake: misapprehension was fundamental and party setting aside not himself at fault. (So discretion, where in CL just get yes/no contract).

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

Is Solle good law? Bell says K is void, whereas Solle says K can be set aside. Great Peace (UK) says mistake does not exist in equity – overrules Solle (but Great Peace not applied by SCC). Miller (Canada) indicates that Solle may be good law in establishing a separate equitable branch of mistake.

Solle v. Butcher (1949) F: P told D that flats would not be subject to rent control. P rented a flat from D at above non-rent control price. P found out flat was subject to rent control and sued to recover overpayment. D counterclaimed for rescission on grounds of mistake. I: Is lease void? A: 2 types of mistake: mistake which render K void (CL) and mistake which render K voidable (equity). K only void where mistake prevented formation of K. Here there was a K – landlord was under fundamental mistake. Bell represents law at CL – but different w/ equity. Parties misapprehended application of law – common misapprehension. Lease can be set aside on terms as court thinks fit. C: Rescission granted on terms – not totally void. Tenant can opt to continue lease (at statutory rent) or end lease. D: Introduces equity into mistake. Might be bad law. Denning was one of three judges – one judge dissented (said Bell was right, did not need to be expanded upon) and other judge simply applied Bell. Has been relied upon in Canada for both unilateral and bilateral mistakes. Note: Policy – Denning is concerned about finding lease void (landlord could evict lots of tenants on basis of mistake). So doesn’t want to apply Bell (mistake about rent wouldn’t render the subject matter of contract to be entirely different from what thought it would be – a lease is a lease). Solution = Uphold contract but invoke equitable jurisdiction. Created 2 kinds of mistake (CL & Equity).

Great Peace Shipping v. Tsavliris Salvage (2002)F: Common mistake. K to salvage boat. D entered into K w/ P to offer assistance. D and P thought P was 35 miles away, was actually 410 miles away. D got someone else to salvage boat, and then refused to pay cancellation fee to P. I: Is K void?

7

A: English CA applies Bell and holds no mistake (so overturns Solle). Concludes impossible to reconcile Solle & Bell (and Denning’s attempt to create equitable jurisdiction wrong). Found distance of vessels not so great that contract couldn’t be fulfilled. Introduces language of impossibility of performance in order to find void (related to frustration). Bell should be complete code. Common assumption of both parties when K formed that 2 vessels were sufficiently close. No mistake fundamental enough to render K void. C: Appeal dismissed – difference in miles doesn’t matter – K not impossible to perform. D must pay cancellation fee.

Miller Paving Ltd. v. Gottardo Construction Ltd. (2007) F: P selling materials to D. P and D signed agreement in which P acknowledged that it had been paid in full. Then rendered invoice after discovering it had not been fully paid for. D refuses to pay. I: Did TJ err in failing to apply doctrine of common mistake to set aside K? A: P had responsibility to determine what was owing – K clearly allocates to P risk that payment in full has not been received. If following Bell – nothing about mistaken assumption changes subject matter. If following Solle – P must show it is not at fault. Obiter: Great Peace shouldn’t be followed in Canada. 3 reasons: (1) restrictive – set too high a bar for CL mistake and will lead to manipulations; (2) on/off switch doesn’t allow remedial flexibility to deal with 3P that may have relied on transaction; (3) remedial flexibility of equitable mistake seen as good thing. C: In favour of D – P knew is was releasing claims and was at fault due to unexplained errors in its own accounting procedures (so doesn’t apply doctrine). Policy: reluctant to tear up settlement agreements after the fact because of certainty & predictability, also allocation of risk was on P in contract so can’t get out of it.

BEFORE GOING ON TO STAGE 2, LINK TO OTHER DOCTRINES:- Was there free and informed consent? Duress, undue influence?

o Duress at CL went to consent of parties (so if gun to head, haven’t consented – therefore didn’t consent, no contract in the first place). But now say question of contract being voidable. So formation comes in here.

- Does the law prohibit the formation of the contract? Illegality?o Ex – don’t want people buying and selling kidneys, so formation of such a contract is

prohibited and could never be a contract. So illegality COULD go to formation issues.

2. WHAT ARE THE TERMS OF THE CONTRACT?

Interpret the Contract- Process of interpretation aimed as ascertaining true intention of the parties (reasonable objective

person test is applied). Look at whole of the contract (Tercon), where two results found look to more reasonable,

fairness, (Consolidated-Bathurst)- Objective approach used by the Courts (ATCO Electric Limited v. Alberta)Factual Matrix, commercial

context, surround circumstances relevant (Reardon Smith)- Where no ambiguity, no need for extrinsic evidence (KPMG Inc.)- General Rule – prior negotiations inadmissible (can change with negotiation) - No provision should be interpreted to be redundant (BG Checo International)- Subsequent conduct can be admitted to show intention (CNR and CP)- Related agreements can be taken into account

8

- Meaning of words derived from purpose of agreement, nature of relationship (contextual) – but interpreting terms should not overwhelm words of agreement.

o So all evidence except subjective intentions & prior negotiations.

Factors to look at: Context/Circumstance: In a commercial contract it is certainly right that the court should know

the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. (Reardon Smith Line Ltd.)

Subsequent Conduct: “may be admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable interpretations is the correct one”. Re CNR and CP (1978), 95 D.L.R. (3d) 242 (B.C.C.A.).

Prior Negotiation: evidence of prior negotiations is generally inadmissible, it may be admitted “where it is relevant either to show the aim and genesis of the transaction (Newcombe)

Meaning of words: Words are to be given their natural or ordinary meaning. Evidence may be admitted to prove that the word has a special or technical meaning. (Newcombe)

Ambiguity: the more reasonable one, that which produces a fair result, should be the interpretation which would promote the intention of the parties (Consolidated-Bathurst)

o Contra Proferentem (La Forest Dissent in Scott): Provisions of contracts that suffer from ambiguity are to be construed against the interest of the person who drafted or proferred the ambiguous provision.(Scott Dissent)

No Ambiguity: When there is no ambiguity in the wording of the document, the notion in Consolidated-Bathurst that the interpretation which produces a “fair result” or a “sensible commercial result” should be adopted is not determinative (Eli Lilly & Co)

Scott v WawanesaF: Son burns down house. Question of whether the “Insured” includes the sonA: Held 4/3 no recovery. Maj: clear and unambiguous language give clear meaning unless (1) unreasonable; (2) has effect contrary to intentions. Min: language ambiguous (tautology), contra proferentem, intention (party assumed he was insured).

- Standard Form Contracts:o Business to business: provide certainty & predictability

Gives efficiency in bargaining, facilitates shopping (comparisons), facilitates administration of contract (both parties know duties)

o Business – Consumer: Signed: Rule = bound by its terms regardless of whether read or aware of terms

(L’Estrange) Unsigned: Tickets: buses, movies, parking

CL doctrine of reasonable notice (below)- Concerns: terms imposed by stronger party (take it or leave it), fairness of terms, knowledge of

terms, exclusion of liability - Trebilcock, The Common Law of Restraint of Trade: just because a standard form it is not necessarily

unfair or unbalanced power (you wouldn’t want to negotiate a dry cleaning service every time).

9

Mistake as to the recording of the terms? Seek Rectification.dispute is as to written record that is used as evidence of K. Rectification is not about intention, but about documentation of K. Often operates in conjunction w/ parol evidence rule. Equitable doctrine.

Presumption of caveat emptor is very strong. Policy: court concerned that to allow rectification would promote lack of due diligence (and lead to sloppy contracts).

Due diligence on part of P is not a condition precedent to rectification BUT rectification is an equitable remedy and its award is in discretion of court. (Sylvan)

Rectification is predicated on existence of a prior oral K whose terms are definite and ascertainable – term must be easily returned to its original state (Sylvan)

P must establish: that terms agreed to orally were not written down properly; attempt of D to rely on the erroneous written doc must amount to fraud or equivalent of fraud; at time of execution of written doc the D knew or ought to have known of error and P did not (Sylvan)

- Requirements for unilateral mistake rectification: (1) P must show existence and content of inconsistent prior agreement, (2) P must show that written doc does not correspond w/ prior oral agreement, and that D either knew or ought to have known of mistake in reducing oral terms to writing [must be unconscientious/unfair for person to avail himself of advantage], (3) P must show precise form in which written doc can be made to express prior intention (addresses floodgates concern that invites court to speculate about parties unexpressed intentions or impose in hindsight what looks like a sensible agreement – court can only use equitable discretion to put into terms that which has already been orally agreed to), (4) All of foregoing must be established by convincing proof. (Sylvan)

- Note: many rectification cases give rise to order of fraud.- Also see KRG Insurance Brokers (Western) Inc. v Shafron (in Illegality/Public Policy section –

rectification not applied – SCC says inappropriate for CA to re-write covenant when the doctrinal requirements from Sylvan had not been met – no prior oral agreement departed from when put into writing, so rectification not available).

Sylvan Lake Golf & Tennis Club Ltd (R) v Performance Industries Ltd (A) (2002)F: Option agreement for purchase of land that was adjacent to a golf course. Land was to be used to develop houses. Oral agreement that a piece of land would be subject to the option. The mistaken agreement read feet rather than yards. D insisted on written terms knowing they did not reflect the prior oral agreement.A: SCC grants rectification and sets out 4 part test:1) Plaintiff must prove existence of and content of prior oral agreement.2) Must be convincing proof of the oral agreement (beyond a BOP, but less that BRD).3) Plaintiff must prove the precise wording for rectification.4) Plaintiff must show that defendant knew or ought to have known of the mistake in written document

(P must prove that to refuse rectification would be inequitable and unconscionable).

Reasonable Notice?- Mellish Rule (evidence of assent): document contains conditions but is not signed, evidence must

show consent to terms: (Railway cases – Parker v South Eastern Railway).o Actual knowledge that document contains conditionso Reasonable steps taken to provide notice that there are conditions.

- CL treats signature as notice (L’Estrange doctrine) - Notice of terms in K has to come before or at time of K coming into existence (Thornton)

10

In cases w/ automatic ticket dispensers, K is formed when P inserts money into machine and receives ticket – conditions that are not seen until after this time are not binding as K has already been agreed upon w/o the conditions (Thornton)

If a term of K is particularly onerous, party looking to enforce term must prove that it took measures to properly notify other party of term (Tilden)

Not a general principle that party must draw attention to exclusion clause – where party has signed written agreement, irrelevant whether conditions have been read (Karroll)

o 3 exceptions: (1) non est factum; (2) induced by fraud/misrepresentation/unconscionability; (3) where party seeking to enforce doc knew or had reason to know of other’s mistake as to terms – then terms should not be enforced (Karroll)

o To find if there is duty to draw attention, look at: (1) effect of clause in relation to nature of K; (2) length and format of K and (3) time available for reading K. (Karroll)

1. NOTICE REQUIREMENT – UNSIGNED DOCUMENTS

Thornton v. Shoe Lane Parking Ltd. (1971) (478)F: P parked car in parking lot, then received ticket from automatic machine. Ticket said subject to conditions posted in parking lot. Conditions included exemption clause. P seriously injured by another car in lot. A: No chance to look at conditions, reject them and get $ back. Offer is made by D in having machine w/ posted prices, P accepts when places $ in machine. Writing on ticket not visible until after K had been formed – so conditions do not apply. D did not do what was reasonably sufficient to give notice of conditions. C: Appeal dismissed – exemption clause does not apply.

Interfoto v StillettoF: Photo company sending out pictures. Never sent back. Fee for holding pics. A: There was not reasonable notice. Thornton rule isn’t just for exemption/exclusion clauses applies to ANY onerous clause

“particularly onerous clause in a printed set of conditions which would not be generally known to the other party.”

2. NOTICE REQUIREMENT – SIGNED DOCUMENTS

Tilden Rent-a-Car Co. v. Clendenning (1978) (492) F: Car rental agreement with very onerous exclusion clause – no coverage for accidents that occur if driver had consumed any alcohol. D had previously inquired about insurance fee and been told it was ‘full non-deductible coverage’. Signed in presence of clerk – clear he did not read conditions, had not previously read conditions. D had accident after consuming alcohol. I: Is exemption clause valid? A: Maj: (1) condition unreasonable; (2) reliance on signature: customer had no knowledge of the terms and no steps to bring to his attention. Reliance unreasonable due to speed of transaction, length of document, fine print.Dissent: K not difficult to read, was brought to D’s attention clearly, economically efficient clause, courts should give effect to intent of commercial doc. Affirms signature rule. C: Appeal dismissed – exemption clause not valid.

11

NOTE: Courts have not applied Tilden broadly and continue to uphold standard form contracts with signed waivers of liability even when not read or when given notice (Karroll). So apply Tilden in special circumstances where person knew or had reason to know of other’s mistake as to terms: hasty, informal, clauses inconsistent with rest of contract, absence of opportunity to read, length and amount of small print.

Delaney v Cascade River Holidays (1983 BCCA)A: Maj: Applies Signature Rule to “Standard Liability Release” for trip down Fraser River. Min: past consideration (waiver wasn’t signed until after paid – so contract modification), insufficiency of notice (Tilden).

Ochoa v Canadian Mountain Holiday (1996 BCCA)A: Concern about waiver not explaining ‘negligence’ for lay people - requires more.

Karroll v. Silver Star Mountain Resorts Ltd. (1989) (496) F: Karroll signs wavier form, participates in ski race and is injured – had very large heading stating ‘release and indemnity – please read carefully’. She had signed release before, short easy to read, participating in hazardous activity. I: Is indemnity agreement binding? A: Burden on P to show fraud/misrepresentation, or that D knew or had reason to know she was mistaken as to terms. Release was consistent w/ purpose of K. P signed knowing it was a legal doc affecting her rights. Reasonable person would conclude P was agreeing to terms. D took reasonable steps to discharge obligation to bring contents of K to P’s attention (capitalized heading/short). C: Action dismissed – D not liable. Note: Karroll a pull back from Tilden towards upholding waivers & onerous terms even if not reasonable notice if in a usual commercial situation where safe to assume the party signing intends to be bound.

Vernon Ski ClubA: Agency exception to privity rule. Ski club not party to the release (so how to get benefit of the release).(1) release makes it clear that the club is intended to be protected by the provisions which limit liability; (2) release makes it clear that Silver Star was contracting not only on its own behalf but on behalf of its agents; (3) Silver Star had authority from the Club to contract on a release of liability on its behalf; (4) Ski Club gave consideration for the release.

Were the Terms added after the contract concluded?- Use offer, acceptance and consideration doctrines to argue that contract already formed.- (Thorton – contract formed when ticket is spit out – so a modification, no part of original contract)

Loychuk v Cougar MountainA: Argument from Thorton run through here. BCCA says doesn’t work because condition for allowing you to go on zipline was that you would sign the waiver. The fact you had already paid for ziplining was not when contract was formed – the waiver allowed you on the course, so was part of initial formation. Note: this decided under BPCPA which uses same test as CL (except CL only applies at contract formation, Act applies before, during and after contract is entered into). Looked at unequal bargaining (plaintiff was law student so aware of waivers), high standard for unconscionability (not met), waivers not contrary to public policy, P argued deceptive advertising (found advertising was true – never claimed training of employees).

12

3. IS THERE AN EXCLUSION OR LIMITATION OF LIABILITY CLAUSE?

3. End of Fundamental Breach - Not going to talk about doctrine of fundamental breach as SCC has gotten rid of it.

Karsales (Harrow) Ltd. v. Wallis (1956) F: D viewed car being sold by S. D agreed to buy car. S set up hire-purchase agreement. P bought car from S, then lent to D on hire-purchase terms. When D saw car again, it was in very different state. D refused to pay for car. Clause in hire-purchase agreement said no condition/warranty as to car’s condition. I: Does an exemption clause excuse a fundamental breach? A: Created fundamental breach doctrine. Under a hire-purchase agreement of this kind, when hirer has himself previously seen and examined car and made application for hire-purchase on basis of his inspection of it, there is an obligation on lender to deliver car in substantially same condition as when it was seen. Implied term that car would be kept in suitable order. C: Appeal allowed – fundamental breach so clause does not apply.

Plas-tex Canada Ltd. v Dow Chemical of Canada (2004) F: Dow knowingly supplies defective plastic resin that was used to create gas pipelines (and leaked). Tried to rely upon limitation of liability clause C: Dow so contemptuous of its contractual obligations – public policy that seeks to curb abuse outweighed freedom of contract. (More like unconscionability)

Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) (2010) D accepted bid from bidder who was not eligible to participate in tender and tries to use exclusion clause.A: Bid was ineligible and Province was aware – K A was breached. Terms should be read in context of entire K. Exclusion clause did not apply (minority would have held it to apply). D acted in manner that was affront to integrity and business efficacy of tendering process. C: Appeal allowed – clause does not apply because doesn’t specify claims arising from ineligible parties. (5/4 decision – but agree on proper analytical doctrine). Maj: focuses on integrity of the tendering process, misconduct of Province, no other effective remedy, clause could have been drafted clearer, interpretation (for outcome), Contra proferentum (against Province). Min: clause not ambiguous or unconscionable, not contrary to public policy, floodgates (specifically in joint venture situations), market, other relief available (injunction).

RULE: End of Fundamental Breach. New analytical approach looks at fairness in terms of process and substantive result.1. As a matter of interpretation, does the exclusion clause apply? 2. If the exclusion clause applies, was the clause unconscionable at the time the contract was made?3. Even if contract is valid, Court may not apply exclusion clause because of public policy, proof of

which lies on the party seeking to avoid enforcement of the clause, that outweighs strong public interest in enforcement of contracts (like criminality, fraud, abusive conduct).

13

4. HAS THE CONTRACT BEEN FRUSTRATED?

- Termination of a K consequent upon an unforeseen catastrophic event that makes K impossible, or prevents K from being performed in a manner at all similar to what was contemplated by the parties when they entered K. Very difficult to successfully argue frustration.

- Falls within ambit of law of mistake (mistake = assumption about existing facts - frustration = assumption regarding future events).

o Differentiate (categorize): pilings example – was water table high when contract formed (mistaken assumption about whether pilings could be put into the ground) or did the water table rise (heavy rain created unforeseeable change in the soil).

Could be important – more flexibility under equitable mistake for party wanting to get out contractual obligations.

- Includes performance impossible to perform, but also destruction of commercial venture. - Policy: assignment of risk (courts would prefer parties get insurance or allocate risk in contract – so

differing opinion of how broad doctrine should be). o Careful to exclude contracts that become more expensive or difficult to carry out. o Frustrating event must be so far beyond range of risks that the contract allocates that it

constitutes a fundamental change in the bargain.

1. Development of the Doctrine- Step 1: Rule of absolute promises – when a person enters a K they cannot escape liability from that

K simply because events turned out differently than expected rendering it impossible to perform the K. Bargain in K sets out allocation of risk definitively – no doctrine of frustration (Paradine)

- Step 2: Relaxing the absolute rule: Imply a condition of continued existence of subject matter of contract. (Taylor)

- Step 3: Move from destruction of physical subject matter to desctruction of commercial purpose of the contract (Krell).

Paradine v Jane (1647) F: P had leased certain lands to D and brought this action in debt for rent which D had failed to pay. D claimed Prince Rupert invaded his land and expelled him.A: When the party by his own K creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his K. C: In favour of P – “Landlord shall have his whole rent.”

Taylor v Caldwell (1863) F: K to use hall for concert, but hall burnt down before concert. Ps seek damages from Ds for failure to supply music hall. L: If nature of K is such that parties must have known at time of contracting that it could not be fulfilled unless some specified thing continued to exist, it is not a positive K. BUT if a party gives an express/implied condition that that thing will continue to exist, that party is liable for breach if it ceases to exist. A: Parties contracted on basis of ongoing existence of music hall (contract subject to implied condition).C: Both parties excused from obligations - K frustrated. Critique: test is based upon the presumed intent of the actual parties – Frustration only arises when parties have not considered the risk and therefor have no intent.

14

Krell v Henry (1903) F: Coronation of Edward VII cancelled. D had paid deposit. P sues for remaining.A: purpose is not lease of room, but a lease of a room to view procession.C: parties discharged from further performance – commercial purpose destroyed/frustrated.Note: frustrated does not mean void ab initio – forward looking (everything up until frustrating event has been done, so doesn’t void contract). So who loses depends on facts (if D had paid up front would have been out of pocket). Test: (similar to test for mistake – subject matter different that what was contracted for)What is the foundation of the contract, having regard to all of the circumstances?Was performance prevented?Was the event that prevented the performance of the contract of such a character that is cannot reasonable be said to have been in the contemplation of the parties at the date of the contract (forseeable).

- Most provinces have legislation (Frustrated Contracts Act) to set up regime for how burdens are shared out.

2. Land cases- Historic rule was that frustration was not available for land.

KBK NO. 138 Ventures Ltd. v. Canada Safeway Ltd. (2000 BCCA)F: Safeway owns parcel of land advertised as “prime development opportunity.” KBK pays deposit on $8.8 million property. City rezones land so development can’t go ahead. KBK wants deposit back.TJ: based on legislation, KBK entitled to restitution of deposit.BCCA: cites 4 tests (National carriers – changes nature of the contractual obligations and unjust to hold party to the contract, Davis – radical change in the obligation, Folia – totally different, Krell – foundation of the contract.Event: Must occur after formation, must not be self-induced, must not have been foreseeable (if foreseen, should have allocated risk).Impact: Must be more than mere inconvenience, must make contract fruitless, must be radical change in contract (completely affects nature, meaning, purpose, effect and consequences), change must be permanent.C: Agrees frustration (because of ad referring to zoning designation). But risk with potential development was on developer (so sympathy for Safeway – risk of zoning changes are known).

Summary:(1) Basic underlying assumptions: the element of the contract that is frustrated must be

fundamental/foundational – assumed to be a pre-condition to performance. (Taylor, Krell).(2) Substantial hardship: major impact on economics of transaction, must be more than just increase in

price, change is permanent, must deprive parties of substantial intended benefit. (National Carriers Ltd – unjust to hold party to literal sense of its stipulation in the new circumstances).

(3) Unanticipated risks: occurs after formation and not foreseen (not a risk foreseen or that should have been foreseen).

(4) No allocation of risk by contract: look at contract first to see if risk allocated.(5) No fault: event beyond control of the parties – cannot be self-induced.

15

5. IS THE CONTRACT UNFAIR?

Excuses for Non-Performance of the K

Device Reason Who Uses? Prerequisites EffectMistake (One or) both

parties mistaken about assumption (or terms)

Mistaken party

Usually common mistaken assumption before K; sometimes mistake about other’s identity

K void (usually); some law saying K voidable

Duress One party coerced by other to K

Coerced party

Illegitimate threat K voidable (historically, void)

Undue influence One party dominated by other

Dominated party

Relationship of undue influence leading to questionable K

K voidable

Unconscionability Contracting circumstances unfair and tantamount to fraud

Weaker party One party taking unfair advantage of position of other

K voidable or unenforceable or subject to judicial adjustment

Illegality Public policy disapproves of some contractual situations

One or both parties, depending on type of illegality

Formation/performance of K prohibited by statute or CL

K void or unenforceable

Frustration K purpose becomes impossible

Both parties Unforeseen catastrophic event

K wholly discharged from point of frustration; statutory consequences

There are some instances where you may be able to argue all three doctrines under this heading. Duress and undue influence mostly have to do w/ process of consenting, not w/ content of K that results – relationship does not have to be between parties of K itself. Unconscionability looks more at where one party is taking advantage of the other party’s weak position – looks at K that results.

1. Duress- Pao On (1980): a coercion of will so as to vitiate consent. Commercial pressure is not enough.- Effect:

o Old approach: Vitiated consent = no contract.o Modern approach: find contract voidable at option of party claiming duress.

- Fairness of bargain is doctrinally irrelevant – but often what parties claim. Categories of duress:

1. Duress to the person (physical threat)2. Duress to goods or property

For #1 and #2: coercion of will leads to no assent to K – void ab initio at CL3. Economic duress

o Ex: D & C Builders (overdue bill, plaintiff facing bankruptcy so take less), Stott v Merit.

16

Test for (economic) duress from Universe Tankships: (1) Pressure amounting to compulsion of the will of the victim. Pao On factors.(2) Illegitimacy of pressure in light of nature of pressure (unlawful?) and nature of demand (what was being demanded).

- difficult when pressure is lawful (is it blackmail or pressure to enforce bona fide claim).(3): If victim expressly or implicitly approved the contract after pressure ceased to excist, the victim will be denied relief.

Test for economic duress in context of modification to existing K (GFAA): Finding of economic duress is dependent initially on 2 conditions precedent: (1) Promise (contractual variation) must be extracted as a result of the exercise of ‘pressure’, whether characterized as a ‘demand’ or a ‘threat’; (2) Exercise of that pressure must have been such that the coerced party had no practical alternative but to agree to the coercer’s demand to vary the terms of the underlying K. Once these 2 threshold requirements are met, legal analysis must focus on whether the coerced party ‘consented’ to the variation, examine: (1) whether the promise was supported by consideration; (2) whether the coerced party made the promise ‘under protest’ or ‘without prejudice’; (3) if not, whether the coerced party took reasonable steps to disaffirm the promise as soon as practicable.

Greater Fredericton Airport v NAV Canada (2008)F: Agreement to pay more – post-K modification. Court decided that promise could be enforced, provided that it was not procured under economic duress. A: AA had no practical alternative but to agree to pay $ it was not legally bound to pay. Party seeking to enforce variation must establish either that it was not procured under economic duress or that other party is precluded from raising duress doctrine for having subsequently affirmed variation. Test from Universe Tankships for economic duress: (1) pressure amounting to compulsion of will of victim; (2) illegitimacy of pressure exerted. Illegitimate pressure is not a condition precedent to a finding of economic duress in cases involving post-contractual modifications to executory Ks. Different test should be applied for economic duress, at least in cases of modification of existing K. Failure to object to variation is not necessarily fatal to plea of economic duress. Look at lack of consent – impact of pressure on victim. C: Plea of economic duress established – appeal dismissed.

2. Undue InfluenceEquitable – results in voidable K/unenforceable K. Unconscientious use by one person of power possessed by him over another in order to induce other to enter a K. (1): Actual Undue Influence: Claimant must prove the wrongdoer exerted undue influence (most parties argue #2.(2): Presumed Undue Influence:

a) De Jure: Relationships that raise the presumption of undue influence. When meets threshold of a transaction that would give rise to suspicion, the onus shifts to D to show transaction was entered into freely/voluntarily.

a. Fiduciary, trustee/beneficiary, solicitor/client, doctor/patient, preist/worshipper

b) De Facto: other special relationship of trust or confidence. Could be spousal, sexual, employer/employee, professor/student.

a. P has to show that there is a relationships & that fairness of transaction would be called into question (suspicious).

17

Test: (1) Relationship of dependence? Established by P. (i) De Jure relationships where undue influence is irrebuttably presumed (ii) De Facto relationships – examine whether potential for domination exists in nature of relationship, must be proven by P. (2) Manifest disadvantage - If relationship of undue influence, consider whether K is suspect (established by P). (i) Commercial – P is obliged to show that K worked unfairness either in sense that he was unduly disadvantaged by it or that D was unduly benefited by it. (ii) Non-commercial – enough to establish presence of dominant relationship (gifts are always unbalanced, so disadvantage doesn’t make sense here). (3) Onus shifts - D must show that decision of other party was result of full, free and informed thought, despite establishment of relationship (Geffen)a) Show no influence was deployed in transactionb) Independent legal advice obtained?c) Magnitude of disadvantage/benefit is evidence of influence (fairness still relevant – but if D paid

over market value, then step will be easier to pass.

Geffen v Goodman Estate (1991)F: TG was mentally ill. TG’s mother’s will left life estate to TG. TG’s brothers sent her to a lawyer who suggested she set up a trust w/ her brothers as trustees (brothers were worried about how she would deal w/ estate). After TG’s death, her son not happy w/ trust and tried to have it set aside arguing undue influence. TG’s will left estate to her children, in conflict w/ trust. I: Was trust created under undue influence? A: No evidence of undue influence, so consider relationship. Nothing per se reprehensible about persons in a relationship of trust/confidence exerting influence over beneficiaries – depends on motivation/objective (La Forest dissents on this point – doesn’t think undue influence must always involve undue disadvantage or benefit – ex, the ‘unique’ cottage). Ds have rebutted presumption of undue influence. C: Appeal allowed, trust upheld, no undue influence. D: Suggests that doctrine is moving towards looking at content of K, rather than just relationship.

Royal Bank of Scotland v. Etridge (HL 2001)F: Spouse guarantee for financial obligation. Husband goes broke. Couple is divorced. Bank suing on the security (often family home).I: Whether bank must take steps to ensure that person taking on financial liability is aware of actual scope. Most commonly the guarantor is required to seek independent legal advice. A: Spouses do not fall under 2a – in Can test is trust/confidence in respect to financial affairs – were you relying on your partner to take care of your interests OR if relationship being used as weapon by one spouse. Constructive notice: Banks should meet with spouse privately, explain liability, warn of risk, urge person to obtain ILA. (constructive notice in non est factum cases too). ILA checklist: difficult to provide legal advice in a spousal situation, so protect themselves by using checklist.

18

3. Unconscionability Equitable – discretionary remedies. Assessment of circumstances surrounding creation of K – unconscientious use of power and examination of K that resulted. Usually result is K or part of K is unenforceable – but court may be creative in remedies (e.g. Morrison).

a) Inequality in bargaining power (procedural unconscionability)a. Contextual factors: economic resources, knowledge, need, disability (but not legal incapacity). b. Common categories: not rigid categories, but often involve pre-existing relationships where

there is potential for inequality of bargaining power (familial relationships). i. *unconscionability and undue influence overlap – argue both.

b) Substantial unfairness in the resulting contract (substantive unconscionability)

There are five historical categories of unconscionability (Lloyds):1. Duress of goods – owner is in a weak position because he is in urgent need of goods 2. Unconscionable transaction – a man is in need of special care and protection, yet a stronger party

exploits his weakness and his property is taken for grossly under value.3. Undue influence:

a. stronger party is guilty of fraud to gain the advantage of the weaker; orb. stronger has taken advantage of their relationship of the weaker to gain an advantage for

himself.4. Undue pressure – stronger party forces weaker to enter into an unfair K by threatening them.5. Salvage agreements – when a ship is sinking and requires assistance, the rescuers cannot take

advantage of the sinking ship's urgent position to demand ridiculous fees. All 5 categories share scenario of inequality in bargaining power: law relieves party who, w/o

independent advice, enters into a K upon terms which are very unfair or transfers of property for a consideration that is very inadequate when his bargaining power is seriously impaired by reason of his own desires (Lloyds)

Test for unconscionability: (1) proof of inequality in the position of the parties arising out of the ignorance, (2) need or distress of the weaker, which left him in the power of the stronger, and (3) proof of substantial unfairness of the bargain obtained by the stronger; (4) proof of these circumstances creates presumption of fraud, which stronger party must rebut by proving that bargain was fair, just and reasonable or by showing no advantage was taken (Morrison).

Alternative test: Is transaction as a whole sufficiently divergent from community standards of commercial morality that is should be rescinded? (Harry – alongside Morrison test)

Alternative test – inequality of bargaining power: K is voidable for unconscionability if: (1) terms were very unfair or consideration inadequate; (2) bargaining power was impaired by necessity, ignorance or infirmity; (3) undue pressure or influence was used, not necessarily consciously; (4) there was an absence of independent advice (Lloyds). Not followed in Canada.

Morrison v Coast Finance Ltd (1965) F: Elderly widow, persuaded to borrow on mortgage on her home and lend the $ to men. Men did not repay P – P commenced action to have mortgage set aside as having been procured by undue influence and as an unconscionable bargain. I: Should K be set aside for unconscionability? A: Inequality in positions of P and D. Loan to advance interests of D, and men, not P.

19

C: Whole transaction should be set aside but not possible. Set aside mortgage, w/o requiring P to repay money. Appeal allowed.

Lloyds Bank v Bundy (1975) F: D’s son asked D for collateral for taking out loans from P. D signed original collateral for smaller $ after considering it overnight and talking to lawyer. Later, D’s son needed more money – lawyers from P came to D’s house and convinced D to sign doc to put up house as collateral as only way to help son. Bank then foreclosed on son’s assets – and seized D’s house. D wouldn’t leave house, and P sued to have him evicted. I: What is unconscionability? Is K void for unconscionability? A: Denning: Usually no way out of signing bank charge. BUT exception when parties have not met on equal terms. Here P took advantage of D – D’s relationship w/ son and desire to help him negated his bargaining power. P should have told D to get independent legal advice (breach of fiduciary relationship). C: Appeal allowed. D: General approach has been Morrison, Harry not followed in Canada (still look at 3 separate doctrines rather than overarching unfairness).

Harry v Kreutziger (1978) F: P was poor Native w/ little formal education, physical infirmity. Owned boat w/ fishing license – boat was not worth much but license for very valuable. D offered $ for boat, P took some convincing before agreeing. D later unilaterally reduced price. D told P he would be able to get another license, but P was not able to get another license due to selling boat. P sued to have sale set aside. I: Is K void for unconscionability? A: Application of Morrison test. Clear inequality between parties. D’s actions demonstrate his power. Deal is clearly unfair. D unable to demonstrate that deal was fair. Lambert’s community standards test (again trying to get one overarching doctrine) – K fails test and should be rescinded. C: Appeal allowed, K rescinded. D: Lambert’s test not supposed to overrule Morrison, (usually applied first, then Morrison).

6. IS K CONTRARY TO LAW OR PUBLIC POLICY - ILLEGALITYIssue: When will the court decline to enforce a transaction or not give it effect because it is in some sense “illegal”? When does public policy trump private ordering?

2. Categories of Illegality

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

- Categories traditionally recognized as contrary to public policy/common law:i. Contracts injurious to the state

ii. Contracts injurious to the administration of justiceiii. Contracts involving immoralityiv. Contracts affecting marriage (restricting who you can marry)v. Contracts to benefit from a crime

vi. Contracts to commit a tort/common law wrong

Contracts in Restraint of Trade:- Restrictive covenants are prima facie unenforceable; restrictions must be reasonable: by

activity; time and geography.- There is a public interest in every person carrying on his or her trade freely

20

- Stricter scrutiny applied to employment contract- Notional & blue pencil severance.

Surrogacy Contracts: contrary to public policy (Baby M, 1988). - Assisted Human Reproduction Act

KRG Insurance Brokers v Shafron (2009)F: Restrictive covenant prohibited D from working w/ a competing insurance business for 3 years in ‘Metropolitan City of Vancouver’, after leaving employment of P. D began working for another insurance agency in Richmond. P commenced action against D. I: Can doctrines of severance/rectification be applied to resolve ambiguity in a restrictive covenant in an employment K or render an unreasonable restriction in a covenant reasonable? A: SCC says inappropriate for CA to re-write covenant when the doctrinal requirements from Sylvan had not been met – no prior oral agreement departed from when put into writing, so rectification not available).Policy - Applying severance to an unreasonably wide restrictive covenant invites employers to draft overly broad restrictive covenants w/ prospect that court will only sever unreasonable parts or read down covenant to what courts consider reasonable. C: Allow appeal – dismiss P’s claim. Restrictive covenant that is ambiguous is prima facie unenforceable.

Notional severance has no place in construction of restrictive covenants in employment Ks: no bright-line test for reasonableness AND applying doctrine of notional severance invites employer to impose an unreasonable restrictive covenant on employee w/ only sanction being that if the covenant is found to be unreasonable, court will still enforce it to extent of what might validly have been agreed to.

Blue pencil severance may be resorted to sparingly and only in cases where part being removed is clearly severable, trivial and not part of main purport of restrictive covenant - General rule must be that a restrictive covenant in an employment K found to be ambiguous or unreasonable in its terms will be void and unenforceable.

2. Statutory illegality: Can arise in various ways:- is expressly or impliedly prohibited by statute- is entered into with the object of committing an act prohibited by statute- requires performance contrary to statute- confers benefits in violation of a statute

A Ks creation or execution is prohibited by statute. If creation of K is prohibited, then it was generally void at CL (Still tries to change this – court should be free to decide consequences). If execution of K is prohibited, then equity may step in to make it unenforceable or voidable based on facts and policy (Still has a slightly different approach).

Classical Approach: Rogers v Leonard (1973 ONHCJ) – sale and purchase of cottage signed on a Sunday contrary to Lord’s Day Act. Vendor knew of act, but then refused later to complete sale and purchasers sued. Court held contract was illegal and void as contrary to statute.

Modern approach – Still v MNR - Look at: (1) purpose underlying statutory prohibition; (2) Remedy being sought; (3) Consequences which flow from finding K unenforceable. (Still)

o Courts will factor in the consequences of invalidating the contract, the social policy reasons for the prohibition, and the determination of the class of persons for whom the prohibition was enacted.

21

Still v Minister of National Revenue (1997) F: P genuinely and mistakenly thought she had proper papers to work in Canada. She did work and paid unemployment insurance premiums. When she was laid off, her application for unemployment benefits was turned down on basis that her employment K had been illegal.A: Affirmation of modern approach. Where statutory prohibition goes to performance of a K and not its formation, a party acting in good faith is entitled to relief notwithstanding statutory breach. Where a statute prohibits formation of a K, courts should be free to decide consequences. Public policy here weighs in favour of legal immigrants who have acted in good faith. C: Applicant was not disentitled to unemployment insurance on ground of illegality – no impact of illegality. No overriding public policy to justify a denial of benefits.

Consumer ProtectionLaesio enormis (enormous loss): in Roman and Lousiana Civil Code – rescission for lesion beyond moiety (if land sold for less than ½ market value).

Business Practices & Consumer Protection Act (SBC 2004):- Unconscionable Acts or practices:

o S.8: act can occur before, during or after consumer transaction. Court must consider all surrounding circumstances of which supplier knows/ought to have known. Court look at pressure from supplier, consumer infirmity/illiteracy/inability, price paid (market value), consumer not be able to pay back deal entered into (like Morrison), harsh terms/conditions.

- Prohibition & burden of proof: o S.9: burden of proof is on supplier to show unconscionable act or practice not committed.

- Remedy:o S.10: if unconscionable, transaction not binding. Court can reopen transaction, relieve

obligations to pay, order supplier to repay, set aside agreement.o S.171: damages recoverable (standing – anyone can enforce Act to protect public).

- Other:o Wide definition – covers suppliers outside BC shipping, goods & services.o Burden of proof on supplier that didn’t engage in deceptive act. o Covers: direct sales (door to door – can cancel), future performance contracts (gym

membership – right to cancel), distance sale contracts (internet sales), prepaid purchase cards (no expiry date now), consumer credit/debt collection.

Policy: addresses market failure & disparities between parties in knowledge, bargaining power & resources.

- Economic Rationales: Monopoly (competition), externalities (regulate safety), information failures (prohibit fraud, mandatory disclosure, consumer education), transaction costs (redress mechanisms), public goods.

- Non-economic: Paternalistic (protect vulnerable from predatory effects) & redistributive concerns (regulate interest rates, warranties, pricing)

Sale of Goods Act: Provides implied conditions with respect to description (s.17), quality and fitness (s.18), and samples (s.19).

- S.20: no waiver of warranties or conditions. Only applies to new goods and not services. Good fit for intended purpose.

22

Rushak v Henneken (1991, BCCA) F: P purchased 14 yr old Mercedes. Vendor pointed out rust and told P would have rust and recommended taking care to Benz dealer for rust inspection. Also said very nice car. Rushak parked car for a year and then found needed 10k to repair rust.A: Vendor laudatory language to describe car – misleading (puffery does not excuse giving unqualified opinions on quality when vendor has factual knowledge).C: Held – Breach of the Trade Practices Act

7. HAS THERE BEEN DISHONEST PERFORMANCE? (GOOD FAITH)Duty of honest contractual performance (Bhasin): Parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.

1) Traditional reluctance to recognize a duty of good faith in CL, but developed piecemeal solutions in response to demonstrated problems of unfairness (Interfoto Picture Library v. Stiletto Visual Programmes ltd. 1989).

2) Principle well established in other legal systems: Civil Code of QB, US Uniform Commercial Code, UNIDROIT Principles of Contracts

3) Can law reform recommend Canada adopt principle:a. For: already recognized in doctrine (just not in name), bring Can in line with expectations of

contracting parties and other jurisdictions.b. Against: uncertain (good faith is too nebulous), piecemeal approach is better suited to CL,

danger in incorporating doctrines from other jurisdictions.4) Case law (pre Bhasin): 3 general categories:

a. Good faith imposes a duty to cooperate in achieving the objectives of the agreement (Dynamic Transport v OK Dealings – condition precedent required subdivision approval – Court said vendor is under a duty to act in good faith and take all reasonable steps to complete).

b. Good faith as limiting to the exercise of contractual discretionary power (McKinlay Motors v Honda Canada) – where discretionary powers given by the contract, courts imply terms that the discretion be exercised reasonable, honestly and in light of the purposes for which it was given.

c. Good faith applied to preclude a party from evading contractual obligations: Ex – avoiding a restrictive covenant or right of first refusal by incorporating related corporate entities (MDS Health Group Ltd v. King Street Medical Arts Center).

5) Categories where good faith recognized:a. Insurance: Contracts of utmost good faith (Uberrima fidesIb. Franchisor-Franchisee: Also addressed in statute in AB, ON.c. Employment: duty of good faith and fair dealing in the manner of termination.

6) Recognition of Duty of Honest Performance (Bhasin).

Bhasin v Hrynew (Scc 2014) F: Context of RESP’s where agent pushed out and then clients poached by D. Bhasin claimed breach of implied terms of good faith. A: Principles:1) There is a general organizing principle of good faith that underlies many facets of contract law.2) Implications of the broad principle determined in respect to particular types of situations and

relationships.3) It is appropriate to recognize a new CL duty that applies to all contracts as a manifestation of the

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

23

8. REMEDIES Legal action available to a person when another person has broken some obligation that was owed to 1st person. Arise only when there is a breach of a K obligation. Consider: (1) Do you have the right to that remedy? (2) What will it give you? (3) Can you combine more than one remedy? Summary: There is a contract, the term has been breached, there is no excuse or defence to the breach, so look to level of liability and determine remedy.

- No contract = If there is no contract (step 1), then restitution of benefits (ie deposit). - Equitable mistake = Court has broad remedial discretion – can set aside the contract or terms (once

in equitable mistake, court can fix the situation.- Contract frustrated = Parties relieved of future performance obligations, restitution of past benefits,

sharing of costs.- Unconscionability, undue influence, duress = contract voidable, set aside on terms, order

restitution of benefits/damages. So remedial, but about getting back what was transferred.- Breach = damages!!

9. BREACH OF CONTRACT = DAMAGES

- Expectation damages = general measure- Expectation damages = reliance plus lost profits- How to measure? Cost of performance, diminution in value, loss of a chance- Reliance damages can be granted if Expectation Damages speculative- Restitution of benefits conferred.

Note: Isn’t about saying reliance/restitution, but it’s heads of damages that need to be identified. Then ask if limiting principles apply (too speculative or just a loss of chance/uncertain, remoteness, mitigation).

1. The Interests ProtectedK is a device whereby 2 parties can arrange aspects of their futures and rely on expectations thus generated to be fulfilled when time comes – main point of Ks is to eliminate surprises. Primary obligations have legal meaning because law provides for consequences in event that they are not carried out as agreed and expected.

“The duty to keep a contract at CL means a prediction that you must pay damages if you do not keep it – and nothing else.” (Homles, The Path of the Law).

Interest Purpose Measure Justice

Restitution Prevent unjust enrichment to Benefit to Δ Corrective24

Δ

Reliance Prevent harm to π Loss to π Restorative

Expectation Secure benefit to π Expected benefitπ Distributive

2. The Expectation Interest- General measure of damages in contract law: expectation measure.

o Wertheim v Chicoutimi Pulp Company (1911 PC) – The party complaining should, so far as it can be done by money, be placed in the same position as the party would have been if the contract had been performed.

Fuller and Perdue, The Reliance Interest in K DamagesTo protect reliance interests K law should award expectation measure of damages. Why expectation interest should be protected:- More effective sanction- Easier to calculate the expected benefit that to measure the reliance occasioned by the contract; often

reliance is difficult to quantify. (ex – in a services contract).- Policy in favour of promoting and facilitating reliance on business arrangements – contracts are about

allowing parties to plan into the future.- Promotes market ordering – future entitlements are the subject of many market transactions and thus

they have a present value. (ex – options contract).

- Measure of expectation damages = cost of performance (to put party in same position as if the contract had been performed).

o In typical sale of goods where seller fails to supply: K-price is $10, market price is $25, so damages are $15 (plus any incidental costs or losses).

o If buyer can purchase substitute goods at the same price as contract, then no damages (other than transaction costs).

o Where faulty performance, expectation damages measured by comparing difference in value between what was contracted for and what was received (Hawkins v McGee 1929 – Promise of doctor was to make hand 100% better. So expectation damages was between burnt/hairy hand and good hand).

3. The Reliance Interest- Reliance damages are used when expectation damages are too speculative or uncertain- P has in reliance on promise of D changed his position – object is to put him in as good a position as he

was in before promise was made – backwards looking. - Useful when claim based on expectation interest is difficult to make, because it is impossible to say

what financial position of claimant would have been had other party not broken K (McRae).- Cannot recover on both reliance interest and expectation interest (Sunshine)- Onus rests on D to establish that amount of P’s expenditure to date of breach was less than net loss

which would have been incurred had K been completed (Sunshine)- P can elect to claim damages for either expectation interest or reliance interest – whichever is larger -

unless one of them is too speculative (Sunshine, Anglia)

25

o But limits to claiming reliance over expectation (Bowlay)

McRae v Commonwealth Disposals Comm (1951) F: Contract for salvage of ship. Salvager outfits ship, but discovers there was no ship – CDC made mistake. A: Claim for lost profit too speculative. Different from Chapin where prize is still quantifiable (so knew what expectation was) whereas here subject of K was provision of wrecked tanker that only indirectly led to chance of profit. P can claim for expenditure incurred and wasted in reliance on the promise the tanker existed (reasonable wasted expenditures). Have to show suffered a loss – wasted expenses because of breach of promise. BURDEN SHIFTS then to other side to say would have lost many in any event (guaranteed loss to begin with), but with no tanker in evidence, can’t satisfy burden of proof.C: Damages awarded on basis of expenditure incurred (reliance interest). 1) This expense was incurred2) It was incurred because of promise/contract3) Because no tanker made it certain expense would be wasted (then D has to show even if had been

tanker, expense would have equally been wasted).What can they claim?- Capital expenses (navigation lights for the ship)? NO – need those anyway and not specifically for this

purpose.- Loss of revenue/loss of opportunity? YES – factored in lost revenue based on what the ship would

have made shipping cargo instead. SO – lost opportunity can be included in reliance damages – and may be functionally equivalent to expectation damages).

- Travel expenses, ship stores, wages? YES – operating expenses (and maybe capital depreciation).

Anglia Television v Reed (1972 Eng CA) F: Anglia making movie. Reed agreed to play leading role. Expenditures incurred before and after Reed commits to move. Reed backs out, Anglia unable to find replacement. Anglia abandons production and claims for wasted expenditures made both before and after Reed had agreed to play leading role. Can’t seek expectation damages because success of film speculative.I: Can Anglia obtain damages for expenditures incurred before Reed contracted? C: Court awards reliance damages for out of pocket expenses made in preparation for movie. (Outcome criticized – hard to believe they lost opportunity to find someone else in the few days the contract existed).- Plaintiff can elect between expectation damages (lost profits) and reliance damages (wasted

expenditures).- Plaintiff can claim expenditures incurred before the contract, provided that it was such as would be

reasonably in the contemplation of the parties as likely to be wasted in the contract was broken. (Test of reasonable contemplation is kind of a ‘remoteness’ test).

Bowlay Logging v Domtar (1978 BSCS) F: D owns timber rights and contracts with Bowlay to log. D agrees to provide trucks. Part way through, D fails to provide trucks (breach). Bowlay argues profit speculative (because they were bleeding money and would have lost more, so want to claim reliance rather than expectation).C: Court finds would have lost more money had D not breached. Damages are to compensate for losses – so if contract performed would have resulted in losses, then no recovery.R: no remedy for people who enter into bad deals.

Sunshine Vacation Villas Ltd v The Bay (1984)

26

F: P was granted licenses to operate travel agencies in stores operated by D. D broke K after P making preparations. TJ awarded damages based on loss of capital (reliance interest) and loss of profit (expectation interest). I: Can you claim both reliance interest and expectation interest? Normally alternatives would be:- Wasted expenditures = reliance (position would have been in had not entered contract)- Loss of profit = expectation (position would have been in had contract been carried out).A: P did not establish that profits would have exceeded amount of expenditure (that it would make a profit). Only established wasted expenditure.C: Damages should be awarded on basis of reliance interest – expectation interest too speculative.Note: case is analogous to Anglia – Sunshine established it had occurred a loss as direct breach of contract, but could not establish loss of profits (speculative). BURDEN shifts to Bay to show would have lost money in any event (which they can’t show – likely would have made some money). So different that Bowlay where D proved what actual loss of profits would have been.

EXPECTATION DAMAGES – QUANTIFICATION PROBLEMSP has burden of satisfying court as to amount that was lost by virtue of D’s breach of K. Date of breach usually used to assess damages.

Speculations and chance: Ks that are overly speculative or all-or-nothing can be problematic. Resolution depends on just how speculative the chances of gain were had K not been broken.

In McRae, court said that the chance of any gain was too speculative. In distinguishing Chaplin, judges said the very subject of K was giving of chance to win, whereas in McRae the subject of K was provision of tanker that only indirectly led to chance of profit.

When breach of K because work contracted for is not completed, damages = Cost to complete work that was contracted for (Groves – Stone) Difference between market value of property in condition received by P and what its market value

would have been had D completed work (Groves – Olson) (Peevyhouse)

Loss of Chance

Fact that damages cannot be assessed w/ certainty does not relieve wrong-doer of necessity of paying damages for his breach of K (Chaplin).

Chaplin v Hicks (1911) F: Beauty contest inviting applications. 12 winners would selected and engage as actresses for 3 yr. term. P selected as one of 50 finalists but would not notified properly (D breached contract).I: Are damages so uncertain as to be impossible of assessment (she may have lost)?C: Gave her 1/7 value of winning. Modern application: calculate as a % of lost profits based around % chance of making maximum profit. Ex – land development that requires rezoning. No guarantee that approval will be obtained, but if breach around best efforts, P will claim lost profits. Because no guarantee of profits, damages must be discounted by the probability of success – factual determination.

Folland v Reardon (ONCA 2005)

27

Court notes that in contract proof of damages is not part of the liability inquiry (strict liability in contract – don’t have to show harm). If contract is breached, entitled to damages. Court gives 4 requirements for obtaining damages for loss of chance:1) P must show that it lost a chance due to D’s conduct2) Chance must be sufficiently real and significant to rise above mere speculation. (has been cases

showing 20% chance gives rise to damages – unclear how low court will go, but if only a small chance, likely not).

3) Outcome did not depend on P’s own conduct.4) Loss of the chance must have some practical value (not just an trophy or something).

Cost of Performance, Economic Waste, Diminishing Value

Groves v John Wunder Co (1939) F: D was supposed to leave property in a particular state after removing sand and gravel from it. Cost of performance = 60k. Market value of property = 12k. So cost of performance is 5 times the market value of the property. I: Is P entitled to damages that exceed market value? Stone (Maj): Cost of performance to complete work.- Breach was willful, not in good faith, no attempt to perform.- Construction contracts require contractor remedy the default. (Ex – a landowner can contract in a

way that devalues the land – doesn’t let contractor off the hook).- Exception for Economic Waste (Jacob & Youngs v Kent 1921 US): Court will not order cost of

performance where it is grossly and unfairly out of proportion to the good to be attained; apply difference in value. (Ex – contract requires 10mm pipe and contractor uses 9mm – even though a breach, Court will not order tear out old pipe when no functional difference. In this case would apply difference in market value).

Olson (Min): Economic value (would have given 12k).- Cost of performance out of proportion to value gained (windfall).- Property has no unique value to P; no special or particular use.- Parties could have provided for a liquidated damages clause for non-performance.- Exception for public contract inapplicable; in case of public works market valuation not available and

does note apply (so not to bridges/infrastructure because hard to market value such things).NB: There can be more than one feasible, logical, defensible amount for damages – you can argue for either, just justify it.

Peevyhouse v Garland (1963 US)F: 5 year mining lease where Garland has right to strip-mine property – reclamation clause requiring restorative work that was not completed. Cost of reclamation = 29k. Value of property = under 5k. Diminution in value of property because of holes not being filled = $300.Jackson (Maj): Gives diminution in value ($300).- Cost of performance out of proportion to value gained (makes no sense to spend 29K to improve

value by $300).- Windfall- Will not remediate (strategic error by lawyer)- Reclamation clause incidental to contract.Irwin (Min): Cost of performance (29k)- Sanctity of contract

28

- Reclamation clause essential (in facts, PH had given up 3k payment in order to negotiate the reclamation clause).

- Unjust enrichment (Garland got coal as well as 3k from clause negotiation).- Fair – not a surprise (Garland a sophisticated entity and should live by their agreement).

Radford v De Frobervill (England 1977)F: P sells land to D and enter into contract where D agrees to build a stone fence that would have no effect on the value of the land. C: Court order damages based on cost to perform (cost to build the fence).Distinguish from Peevyhouse – sale price reduced to account for promise to build fence (essential part of the contract). Privacy implies non-economic significance (psychic satisfaction – so fence had value, just not economic).

Ruxley Electronics (1996 HL) – middle ground between COP & Loss of value = consumer surplus?F: swimming pool constructed is 9” too shallow (still usable and fine, just a mistake). Two extremes – award nothing as there is no diminution in value or award cost to rebuild the pool (21k)?A: Court recognizes concept of Consumer Surplus – consumer bargains for more that financial considerations – ex to make house more comfortable, convenient, or suiting to particular tastes. So personal/subjective value a person places on something over and above market value. C: Court awards 2.5k in damages – entitled to get what you bargained for, but not going to order economic waste.

LIMITING PRINCIPLES

RemotenessP has to establish that loss is not too remote to pin responsibility on D. Breach of K must lead to damages claimed – must be ‘effective’ cause, need not be only cause. D will not be liable if intervening event breaks chain of causation.Policy: Balance between reasonable expectations & unfair surprise.

Rule in Hadley v Baxendale:Entitled to damages if:1) Arising naturally: in the usual course of things; or2) In reasonable contemplation of the parties (as a result of the notification of special

circumstances): so gave the person notice and told them it was really important that it get there on time.

Unified Test: Were the damages in the reasonable contemplation of the parties – either because they should have been in the usual course or because of the communication of the circumstances?

Hadley v Baxendale (1854) F: Action by mill owners against carriers for profits lost when there was a delay of several days in delivery of a new shaft for their mill. Delay of delivery prevented mill from operating. Ds objected that damages were too remote. A: Not the probable result of delay in delivery that mill would have to close; carriers might well have supposed that mill would have another shaft they could use in meantime. Special circumstances not communicated. SO damages not arising naturally & no notification of special circumstances.C: New trial ordered. Judge ought to have told jury that they ought not to take loss of profits into consideration at all in estimating damages.

29

Context:- Economic context: mid century period of industrialization.- Concern with protection of capital and promotion of investment- Institutional concern with uniformity/predictability of damage awards (liability of carriers significant

at the time – no limited liability companies, so Bexendale himself was liable. Also mindset of judiciary at time focused on liberalism – same judge as in Winterbottom. )

- Case as a judicial innovation in an age of industrialization: standardization of law, centralization of power, mass production of judicial products.

Victoria Laundry (Windsor) Ltd v Newman Indust Ltd (1949) F: P’s buy boiler for laundry business that is damaged prior to delivery. Repairs to boiler caused delay – Ps sued for loss of business profits. A: Carrier commonly knows less than seller about special circumstances. D was seller so knew that delay was likely to lead to loss of business. Circumstance that Ps had assured expectation of special Ks qualifies as special circumstance that was not communicated (so communication in this instance not determinative). Hadley test applied – damages awarded.Note: Example from class Cornwall Gravel v Purolator – tender arrived 15 minutes late and rejected (and would have been awarded contract). SCC found lost profit within reasonable contemplation of the courier service and awarded 70k. In Vic laundry lost profits substantially less than cost of contract as opposed to Purolator situation (where now have strict exclusion of liability clauses).

Koufos v Czarnikow (C.) (The Heron II) (1969) F: Charter of ship to carry sugar to Iraq. Deviated to other port for 9 days in which price of sugar at destination fell. No special information communicated; however, ship owner was aware there was a market for sugar in Iraq. Claim for loss of profits upheld (so do award lost profits as within reasonable contemplation of parties).L: Interprets Hadley as relating to probability, rather than possibility – high probability = reasonably foreseeable. Disapproves of reformulation of Hadley test in Victoria – too broad. Note: Reed takes issue with terminology used in Victoria Laundry (reasonable foreseeable too loose of a formulation). He says it’s not enough to be causation, but sufficiently likely to result from the breach. Newcome says ‘rhetoric’ – look to policy factors or risk allocation and losses in terms of assessment.

POLICY FACTORS for assessing Remoteness:1) General Policy: balance between reasonable expectations of the party and risk of unfair surprise for

unexpected liability.2) Express contractual provisions: remoteness rules are default when there are not express

provisions that limit type or amount of damages that can be claimed.3) Factors to consider in deciding whether damages are too remote:

a. Degree of probability/foreseeability of loss: what would ordinarily be expected in the circumstances (may depend on business and trade usages).

b. Communication of special circumstances: fact of communication plus particulars (clarity, specificity and timing).

i. Scyrup v Economy Tractor Parts Ltd: P made known part was for a job, specific type of work not communicated. Maj granted damages for lost profits. Min said no – just contracting with someone doesn’t make seller guarantor of your business.

ii. Munroe Equipment Sales: no specificity in communication that tractor needed to keep road clear during winter. Maj – lost profits not within reasonable contemplation of parties.

c. Assumption of responsibility: Cornwall Gravel v. Purolator.

30

d. Defendant’s knowledge: generally of plaintiff’s business in particular. i. Hadley as opposed to Vic Laundry – as a general rule is D has only transitory

relationship with the plaintiff, then scope of liability may be reduced. If established relationship, likely to be greater.

ii. Where consumer expectations are reasonable and created by the defendant, liability might result even if relationship is transitory (Cornwall Gravel).

e. Nature of defendant’s business: expertise and what is being offered to the plaintiff.f. Nature of the product or service: Second hand v top of the line (Monroe Equip).g. Sophistication of Parties: more knowledgeable the parties, the more likely the damages in

question will be foreseeable.h. Ordinary allocation of risk: understandings or expectation in the marketplace (customs of

the trade). i. Liability should be based on legitimate understandings of parties – fair and reasonable

risk allocation. Can only hold D liable for losses if it can be reasonably and fairly said they were aware of them.

ii. Insurance: in cases like Hadley more efficient to get business interruption insurance than for carriers to carry 3rd party liability to cover claims of lost profits.

i. Proportionality: comparison of contract price and nature of the service with risk (ultimate loss claimed). (ex – think about lotto example from class – 10M would not be in reasonable contemplation of parties.)

i. Anomalous to impose extensive liability for a breach of contract to provide an ordinary service at a low price (consider dry cleaning contract).

Mitigation1) General Rule: claimant must take reasonable steps to avoid loss.

a. Reasonable steps = what is reasonable for claimant to do and the time within the claimant must do it are questions of fact dependent on the circumstances of the case.

2) Rationales: avoid hardship/unfairness, fair allocation or risk, avoid economic waste/promote economic efficiency.

3) Continued dealings: often required in the commercial context with the contract breaker (Payzu)a. Ex – silk deal gone bad – should have gone back to original party and got good cheaper rather

than out into the marketplace where more expensive.b. Exception: personal services contracts

4) Reasonable time: Claimant expected to mitigate within a reasonable time – dependent on context/facts. (Asamera).

5) Impecuniosity: lack of resources doesn’t justify not mitigating (can also be viewed in remoteness – losses due to impecuniosity are not in reasonable contemplation of the parties).

6) Doctrine of election: Where anticipatory breach, contracting party has option (1) accept repudiation; (2) treat contract as if still in effect and perform the contract (White & Carter).

a. Election is only available in rare circumstances where contracting party can unilaterally perform.

b. There must be a legitimate interest in the performance (Asmera Scc suggests that legitimate interest is one that would entitle the plaintiff to seek specific performance). In Finellis v Dee Plaintiff (paving contractor) unable to unilaterally perform (trespass on property).

7) Lost volume cases: Car dealers – seller is unable to mitigate. Losses cannot be avoided where supply is greater than demand. Seller loses profit through lost sale.

8) Claimant avoided loss? If claimant is able to avoid loss completely there are no damages (or nominal).

31

INTANGIBLE HARMS & PUNITIVE DAMAGES- Phase 1: Up to 1974 – General rule was no damages for mental distress/non-economic interests

(Addi v Gramophone). o Commercial transaction/stiff upper life/rules of the gameo Contract about pursuit of self-interesto Maintain a distinction between contract and torto Exceptions (Addis): breach of promise to marry, failure to pay on a cheque (harm to

repuations), vendor failing ot make title.o + physical discomfort (old railway cases) – not really mental distress, but compensation for

physical output of walking. - Phase 2: 1974-2005 – pigeon holes – grants tend to be small and generally unreasoned.

o K for please/enjoyment/entertainment/peace of mind Holidays (Jarvis) Weddings: Loss of enjoyment – photos, music, venue: Jamshidi – didn’t get the waterfall

so given $1500. Disability insurance (Warrington) Need not be ‘essence of contract’ – sufficient if it s a ‘major or important part’ (Farley HL

2001).o Pets:

Newell: Dog dies in CP air hold - $500 mental distress Ferguson: Kennel loses dog - $1000 Weinberg v Connors: Connors absconds with cat. $1000

o Physical inconvenience and discomfort caused by sensory experience (Wharton) – car stereo in luxury car – given damages for physical discomfort (railway cases).

o Employment (Vorvis) where there is an independent actionable wrong (intentional infliction of mental distress, defamation, fraud) – generally could not be given damages for getting fired.

- Phase 3: 2006 ono Mental distress no longer subject to remedial ostracization. No categorical bar – apply Hadley-

test is reasonable contemplation.o Courts should ask “what did the contract promise” and provide compensation for those

promises.o No damages for incidental frustration – issue is whether an object of the contract is to secure a

particular psychological benefit. (ex – buy a big screen but doesn’t work and you miss the hockey game won’t give you damages).

o Need not be the dominant purpose or essence of the contract – just part of the bargain.o One rule rules all – Hadley. o Employment: traditionally no mental distress damages for termination. Exception where

there is an independent actionable wrong (tort – infliction of mental distress, defamation). (Keays).

32

Test for mental distress damages:1) An object of the contract was to secure a psychological benefit that brings mental distress upon

breach within the reasonable contemplation of the parties (but note AN object, not THE object – ex insurance).

2) The degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. (more than everyday disappointment or upset).

Jarvis v Swans Tours (1973) F: P bought a 2-week holiday package. Holiday did not live up to brochure. P sued D for damages, including failure of holiday to meet expectations generated by tour company through its brochure and mental distress and aggravation he experienced both on holiday and in its wake.A: Statements in brochure were representations/warranties so P has right to damages for breach. P should be compensated for loss of entertainment and enjoyment which he was promised, but did not get.C: Denning gave double cost of holiday (or maybe cost of holiday plus time off work). BUT – grants tend to be small and generally unreasoanbed.

Fiddler v Sun Life Insurance (SCC 2006)F: denial of long-term disability benefits. Sun Life sent out private investigator and saw Fiddler getting in and out of car and denied benefits. Eventually settled before went to trial, but goes forward on mental distress damages.A: Use Hadley test of reasonable contemplation. C: Fiddler got damages for mental distress – but no bad faith, so no punitive damages. Note: Aggravated damages sometimes used as synonym for mental distress, but don’t use – reserved for tort.

Keays v Honda (SCC 2008)- No damages for loss of employment other than reasonable notice (ie 3 months or payment in lieu). - no mental distress for being fired – not in reasonable contemplation of parties as employer has the

right to terminate.- Duty of good faith and fair dealing in manner of termination, breach of which is compensable under

damages principles (Hadley). (ex – attack reputation, misrep about reason for dismissal).- Area of law often governed by statute.

Punitive Damages

Whiten v Pilot Insurance (SCC 2002)F: Insurer denied coverage when house burned down – alleged making fraudulent claim. Awarded 1M in punitive damages from insurance company.- Exception to general rule (re damages being compensatory)- Is an express case of social engineering (imposing a fine in order to deter others from engaging in

similar conduct).- Very rare in actions for breach of contract. Much more common in cases of intentional torts.- Contract cases – mostly insurance contracts and employment (IM is only time – usually more common

amount would be 100k).

33