brasserie labatt v - lsalsa.mcgill.ca/.../397-dedek_contractualobligations_full-ye… · web...

H. Dedek: Contractual Obligations 2008-2009

Contractual Obligations – Prof. Helge Dedek1. Introduction...................................................................................................................................................................... 5

CML – Bruker v. Marcovitz (2008) SCC CB 1...................................................................................................................................6

2. Formation of Contract: Moment of Responsibility.............................................................................................................. 6

2.1. Intention to Create Legal Relations.......................................................................................................................................8CML – Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256 (C.A.): CB 106......................................................................................8CML – John D.R. Leonard v Pepsico, inc. United States District Court, Southern District of New York 88 F.Supp.2d 116 (S.D.N.Y. 1999), aff’d 210 F.3d 88 (2d Cir. 2000): CB 135..............................................................................................................................9CML – Kleinwort Benson Ltd. v. Malaysia Mining Corp. BHD., [1989] 1 All E.R. 785 (C.A.): CB 140................................................9

2.2. Meeting of the Minds..........................................................................................................................................................10CML – Raffles v. Wichelhaus (1864), 2 H. & C. 906 (Exch.): CB 142..............................................................................................10CVL – Terrasse Holdings v. Saunders, Quebec, 1989 CB 144.......................................................................................................10Invitation to Treat (invitatio ad offerum)......................................................................................................................................11CML – Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern), Ltd., [1953] 1 Q.B. 401 (C.A.): CB 179.........11CML – Entores v. Miles Far East Corporation, [1955] 2 Q.B. 327 (C.A.): CB 180...........................................................................11

2.3. Revocation and Lapse.........................................................................................................................................................122.3.1 Mailbox Rule....................................................................................................................................................................12CML – Shatford v. B.C. Wine Growers Ltd., [1927] 2 D.L.R. (B.C.S.C.): CB 182..............................................................................12CML – Errington v. Errington and Woods, [1952] 1 K.B. 290 (C.A.): CB 197..................................................................................13CML - Dawson v. Helicopter Exploration, [1955] S.C.R. 808, [1955] 5 D.L.R. 404........................................................................14

2.4. The Mirror Image Rule and the Battle of the Forms............................................................................................................14CML – Doughboy Industries, Inc., (1962), 233 NYS 2d 488 (C.A.): CB 181....................................................................................17

2.5. Alternatives to Legal Contracts: The Gentlemen’s Agreement............................................................................................17

2.5.1. The Option Contract.........................................................................................................................................................18CVL – Cere c. Neely, [1980] C.S. 1160: CB 206..............................................................................................................................19

2.5.2. Agreements to Agree.......................................................................................................................................................19CML – Empress Towers v. Bank of Nova Scotia [1991] 73 D.L.R. (4th) 400 (B.C.C.A.): CB208dv...................................................19

3. Consideration and Formalities......................................................................................................................................... 20

3.1. Civil Law Cause....................................................................................................................................................................20CVL – Hutchinson v. The Royal Institution for the Advancement of Learning, [1932] S.C.R. 57....................................................20

CVL Law and Formality..............................................................................................................................................................21CML and Gifts............................................................................................................................................................................21

3.2. Common Law Consideration...............................................................................................................................................21Origins of Consideration............................................................................................................................................................21

3.2.1. Bargain Theory..............................................................................................................................................................22CML – Holt v Feigenbaum, 52 N.Y. 2d 291 (N.Y. 1981): CB 225....................................................................................................23CML – Hamer v. Sidway (1891), 124 N.Y. 538 (C.A.): CB 221........................................................................................................233.2.2. The Bargain Test...........................................................................................................................................................24CML – Roscorla v. Thomas (1842), 3 Q.B. 234: CB 230.................................................................................................................243.2.3. The Peppercorn Theory................................................................................................................................................24

1


CML – White (Executor) v. William Bluett (1853), 23 L.J. Ex. 36: CB 220......................................................................................25CML – Miami Coca-Cola Bottling Co. v Orange Crush Co..............................................................................................................253.2.4. Mutuality......................................................................................................................................................................25CML – Wood v. Lucy, Lady Duff-Gordon (1917), 118 NE 214 (C.A.): CB 228.................................................................................25

Mutual Obligation in Unilateral Cases.......................................................................................................................................26CML – Dahl v. HEM Pharmaceuticals Corp., United States Court of Appeals, Ninth circuit, 7 F. 3D 1399 (1993): CB 228............26CML – Stott v. Merit Investment Corp. (1988), 63 O.R. (2d) 545 (C.A.): CB 232............................................................................263.2.5. Pre-Existing Duty Rule...................................................................................................................................................27CML – Harris v. Watson (1791), 170 E.R. 94 (H.L.): CB 231...........................................................................................................27Stilk v. Myrick, [1809] EWHC KB J58, (1809) 170 ER 1168; KB......................................................................................................27CML – Kirksey v. Kirksey 8 Ala 131; 1845 Ala.: CB 245..................................................................................................................28CML – Gilbert Steel Ltd. v. University Construction Ltd. (1976), 12 O.R. (2d) 19 (C.A.): CB 234....................................................28CML – Williams v. Roffey Bros and Nicholas Ltd., [1991] 1 Q.B. 1 (C.A.): CB 238..........................................................................29

3.3. Promissory Estoppel............................................................................................................................................................29CML – Central London Property Trust v. High Trees House, [1947] K.B. 130: CB 236...................................................................30

Promissory Estoppel in Different Jurisdictions..........................................................................................................................31CML – Walton Stores (Interstate) Ltd. v. Maher., (1988) C.L.R. 387 (H.C.A): CB 241....................................................................32

4. Contract Drafting and Interpretation............................................................................................................................... 33

CML – Royal Bank of Canada v. Kiska...........................................................................................................................................33

4.1. Incorporation of Terms........................................................................................................................................................38CVL - Dell Computer Corp. v. Union des consommateurs, [2007] SCC - Deschamps J..................................................................38CML – Thornton v. Shoe Lane Parking Ltd., [1971] 2 Q.B. 163 (C.A.)............................................................................................39CML – McCutcheon v. David MacBrayne, Ltd., [1964] 1 All E.R. 430 (H.L.): CB 287......................................................................40CML – British Crane Hire Corporation Ltd. v. Ipswich Plant Hire Ltd., [1975] Q.B. 202 (C.A.): CB 290..........................................40

4.2. Doctrine of Good Faith........................................................................................................................................................414.2.1. Good Faith in the Civil Law...........................................................................................................................................414.2.2. Good Faith in the Common Law...................................................................................................................................42

Good Faith in Quebec Case Law................................................................................................................................................43CVL – B.C.N. v. Soucisse, [1981] 2 S.C.R. 339: CB 295...................................................................................................................43CVL – Houle v. CNB, [1990] 3 S.C.R. 122: CB 314..........................................................................................................................44CVL – Provigo Distribution v Supermarche ARG. [1998] R.J.Q. 47 (C.A.): CB 344..........................................................................44

Common Law and Good Faith...................................................................................................................................................45CML – McKinlay Motors Ltd. v. Honda Canada Inc. (1989), 46 B.L.R. 62 (Nfld. S.C.): CB 308........................................................46CML – Martel v. Canada, [2000] 2 S.C.R. 860: CB 336...................................................................................................................46CML – Transamerica Life Canada Inc. v. ING Canada Inc., [2004] 68 O.R. 457 (C.A.): CB 352.......................................................47

5. Policing the Agreement................................................................................................................................................... 48

5.1. Public Policy and Community Values...................................................................................................................................485.1.1 CVL - Severability.............................................................................................................................................................505.1.2 CML – Doctrine of Severance...........................................................................................................................................50CVL - Brasserie Labatt v. Villa, [1995] C.A. Que – CB2: 5...............................................................................................................51CVL - Cameron v. Canadian Factors, [1971] SCC – CB2: 10...........................................................................................................52CML - In The Matter of Baby M, [1988] Supreme Court of New Jersey CB2: 19...........................................................................52

5.2. Vitiation of Consent.............................................................................................................................................................53CVL – Thibodeau c. Thibodeau, [1961] – SCC – CB2 :39................................................................................................................54

2


5.3. Fear/Crainte (CVL)/Duress(CML)......................................................................................................................................545.3.1. Fear/Crainte (CVL)........................................................................................................................................................545.1.3 CVL – J.J. Joubert c. Lapierre et Lapierre, [1972] CS Que. CB2 : 41...................................................................................555.3.2. Duress (CML)................................................................................................................................................................56CML – Atlas Express Ltd. v. Kafko Ltd., [1989] QB 833, CB2: 44....................................................................................................565.4. Undue Influence (CML)....................................................................................................................................................57CML – Lloyds Bank Ltd. v. Bundy, [1975] QB 326 (CA), CB2:47.....................................................................................................57CML – Barclays Bank v. O’Brien, [1994] 1 AC 180 (HL), CB2: 51....................................................................................................585.5. Lesion (CVL)/Unconscionability (CML).............................................................................................................................595.5.1. Unconscionability (CML)...............................................................................................................................................59CML – Harry v. Kerutzinger, [1979] 9 BCLR 166 (CA), CB2 : 53.....................................................................................................59CML – Toker v. Westerman, 1970, 274 A.3d 78 (NJDC) CB2 : 60..................................................................................................605.5.2. Lesion (CVL)..................................................................................................................................................................60CVL – Gareau Auto v. B.C. Impériale de Commerce, [1989] RJC 1091 (CA), CB2 : 61....................................................................62CVL – Slush Puppie c. 153226 Canada Inc., [1994] RJQ 1703 (CQ), CB: 67....................................................................................63CVL – Quebec (PG) c. Kechichan, [2000] JQ no 2049 (CA), CB2: 70..............................................................................................635.6. Fraud/Dol , Error (CVL)/Misrepresentation/Mistake (CML).............................................................................................645.6.1. Fraud/Dol (CVL)...........................................................................................................................................................64CVL – Creighton v. Grynspan, [1987] R.J.Q. 527 (C.A.): CB2 76...................................................................................................65CVL – Tremblay v. Les Pétroles Inc., [1961] B.R. 856 (C.A.): CB2 80..............................................................................................655.6.2. Misrepresentation (CML)..............................................................................................................................................66CML – Sarvis v. Vermont State Colleges, 172 Vt. 76, 772 A.2d 494 (2001) – CB2 87...................................................................66CML – Esso Petroleum Co. Ltd. v. Mardon, [1976] Q.B. 80 (C.A.): CB2 89....................................................................................67CML – V.K. Mason Construction Ltd. v. Bank of Nova Scotia, [1985] 1 S.C.R. 271: CB2 93...........................................................685.7. Duty to Disclose...............................................................................................................................................................705.7.1. CVL Duty to Disclose.....................................................................................................................................................70CVL - Bail v. Bank of Montreal, [1992] SCC CB2: 103..................................................................................................................705.7.2. CML Duty to Disclose....................................................................................................................................................71

Theorists on Economic Efficiency and the Duty to Disclose in CML and CVL.............................................................................715.8. Error (CVL)/Mistake (CML)...............................................................................................................................................725.8.1. Error (CVL)....................................................................................................................................................................72CVL – Rawleigh v. Dumoulin, [1926] S.C.R. 551: CB2: 97..............................................................................................................73CVL – Huot v. Ouellette, [1981] C.S. 872: CB2 : 141......................................................................................................................74CVL – Yoskovitch v. Tabor, [1995] R.J.Q.1397 (Sup. Ct.)...............................................................................................................755.8.2. Mistake (CML)...............................................................................................................................................................75CML – Sherwood v. Walker (1887), 22 NW 919 (Mich S.C.): CB2: 99............................................................................................77CML - Bell v. Lever Bros., [1932] A.C. 161 (H.L.) CB2: 138...........................................................................................................77

6. Change in Circumstance, Frustration, Hardship................................................................................................................ 79

6.1. Impossibility of Performance in CVL....................................................................................................................................79CVL – Otis Elevator Co. Ltd. v. A. Viglione & Bros. Inc., Mtl., 500-09-000316-786 (C.A.): CB2 22.................................................80

6.2. CML Frustration..................................................................................................................................................................80CML – Alcoa v. Essex Group, 499 F.Supp. 53 (Penn S.C. 1980): CB2 224......................................................................................80CML – Amalgamated Investment and Property v. John Walker & Sons Ltd., [1976] 3 All E.R. 509 (C.A.): CB2 225......................81

6.3. CML Impracticability...........................................................................................................................................................81CML – H.R. & S. Sainsbury Ltd. v. Street, [1970] 3 All E.R. 1126 (Q.B.): CB2 233..........................................................................82

3


7. Breach of Contract........................................................................................................................................................... 83

7.1. Termination Flowing from Breach – CML............................................................................................................................84CML – Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26: CB2 258......................................................84CML – Cehave NV v. Bremeer Handelgeselleschaft mbH, [1975] 3 All E.T. 739: CB2 254.............................................................85

7.2. CVL Breaches of Contract....................................................................................................................................................85

8. Remedies to Breach......................................................................................................................................................... 87

8.1. Specific Performance...........................................................................................................................................................878.1.1. Specific Performance in CVL.........................................................................................................................................87CVL - La Compagnie de Construction Belcourt c. Golden Griddle Pancake House Ltd. 1988 CB2: 272.........................................878.1.2. Specific Performance in CML........................................................................................................................................88CML - Co-Operative Insurance Society v. Argyll Stores (Holdings) Ltd. CB2: 268..........................................................................88CML – Warner Bros. Pictures v. Nelson, [1937] 1 K.B. 209: CB2 261............................................................................................89

8.2. Damages.............................................................................................................................................................................908.2.1. Damages in CVL............................................................................................................................................................90CVL - Ciment Quebec Inc. v. Stellaire Construction, 2002 Cour d’appel, CB2: 299.......................................................................908.2.2. Damages in CML...........................................................................................................................................................91CML – Hadley v. Baxendale (1854), 9 Exch. 341: CB2 211............................................................................................................92CML – Victoria Laundry v. Newman Industries Ltd., [1949] 2 K.B. 528: CB2 220..........................................................................93CML – Koufos v. C. Czarnikow (The Heron II), [1969] 1 A.C. 350: CB2 224....................................................................................94CML - Hawkins v. McGee Supreme Court of New Hampshire 1929 - CB2: 245............................................................................96CML - Security Stove & Mfg. Co. v. American Ry. Express Co., USA – CB2: 181............................................................................97

7.3 Non-Pecuniary Damages (CML)..............................................................................................................................................98CML - Ruxley Electronics v. Forsyth, [1995] H.L., Common Law – CB2: 374.................................................................................98CML – Jarvis v. Swan Tours, [1972] 1 A.L.L. ER 71: CB2 241..........................................................................................................99Farley v. Skinner [2001] UKHL 49, [2002] 2 AC 732 (H.L.).............................................................................................................998.2.3. Evolution of Damages in Canadian CML.....................................................................................................................100CML – Vorvis v. Insurance Corporation of British Columbia [1989] S.C.R...................................................................................100CML – Fidler v. Sun Life Assurance Co. of Canada [2006] SCC 30...............................................................................................1028.2.4. Penalties and Liquidated Damages (CML)...................................................................................................................102H.F. Clarke Ltd v. Thermidaire Corporation Ltd., [1976] 1 S.C.R. 319..........................................................................................1038.2.5. Penalties vs. Liquidated Damages (CVL)......................................................................................................................104151276 Canada Inc. c. Verville [1994] R.J.Q................................................................................................................................104

9. Third Parties and the Relative Effect of Contracts...........................................................................................................105

9.1. CVL Approach....................................................................................................................................................................105CVL - General Motors Products of Canada Limited v. Kravitz [1979] 1 S.C.R. p. 323 CB.............................................................105

9.2. CML Approach...................................................................................................................................................................106CML - Beswick v. Beswick, [1966] 3 WLR 396.............................................................................................................................106CML - Beswick v. Beswick, [1968] HL..........................................................................................................................................106CML - London Drugs Inc. v. Kuehne & Nagel International Ltd. [1992] 3 S.C.R. 299...................................................................106

4


1. Introduction

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations Source of idea of Contract Law – needed contract law with the growth of capitalism Division of labour – development of specialized skills to a highly productive level

“And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent of genius he may possess for that particular species of business.”

Exchange of goods and services – contract Humans depend on each other Foundation of a market economy – mutual self interest (“self-love”), not benevolence – to make a contract, one must interest the “self-love” of the

other party to the contract“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Evolutionary aspect – the ability to contract makes human thriving possible All depends on the ability to exchange – this is why society needs to institutionalize and enforce contracts Rise of contract law – end of 18th, beginning of 19th century “Golden Age of Contract” – rose with the market orientation of society, the rise of individualism (which formed the basis for the Civil Code in France) – a

certain ideological background“The increased importance of the private law contract in general is the legal reflex of the market orientation of our society” Max Weber, Economy and Society II, p. 672

Contract law was re-formulated in the 19th century – market exchange transaction as a paradigmo Pre-consumer lawo Pre-labour law

“A contract is, per se, just” – it is the exchange of the free wills of two independent parties – very ideological This dynamic all over countries affected by the Industrial Revolution

o Cross-fertilization between French Civil Law and Common Lawo Contract law really trans-systemico Contrast to property law which is still rooted in different traditions

Europeanization is now changing the system in Europeo Movement towards abolition of national systems to facilitate economic transactions across European borders

Alan Watson, The Making of the Civil Law CB 31 Civil law from Roman roots, corpus juris Civil law system may be weakened by outside ideologies e.g. mixed legal systems It is not accurate to identify civil law systems with codification Justinian’s Code (ca. 500 CE)

o Codified Roman lawo Tradition existed long before its codificationo S. Africa is a civil law jurisdiction with no code

Code is thought of as the basic social constitutiono Comprehensive (principle that it includes everything and that it is easy to understand)o Lays down canonical language governingo Makes law accessible to everyoneo Based on the Enlightenment traditiono The construction of the private sphere, not relying on the stateo Private law in that time was much more relevant than public lawo Many remnants of the Roman law – how did it get there?

Codifiers of the French code saw their own ideals reflected in the Roman tradition Breakaway from feudal structures Foundation of most European law preceding codification

J.E.C. Brierley & R.A. Macdonald, Que Civil Law: An Intro to Que Private Law (35-45) CB 34 CCQ as more than legislative enactment, but also cultural identity (reflected society, cultural, urban and rural values) Is constitutionally protected, is constitutive of society’s most important values

J.E.C. Brierley & R.A. Macdonald, Que Civil Law: An Intro to Que Private Law (134-147) CB 54 Talks about way to interpret canonical codes (method is problematic)

o Teleological – what is the intentiono Text (look at Code)o Systematico Historical Argument

James Gordley & Arthur Taylor Von Mehren, An Introduction to the Comparative Study of Private Law: Readings, Cases, Materials CB 61 Interpretation doesn’t arise from a legal vacuum, but comes from a context which the judge should recognize

5


Claire L’Heureux-Dube, “By Reason of Authority or By Authority of Reason” CB 63 Discusses problem of mixed jurisdiction (CVL and CML), argues for “authority of reason” Binding precedent as opposed to elucidation of codal provisions (in CVL law is not made by judges, therefore, judicial decisions are – technically – not

binding) Difficulty in simply applying facts to the Code

Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition CB 72 Obligation as a two-ended relationship Natural obligations unenforceable Historically, nexum to guarantee payment of a loan Borders between contract and tort quite blurry

D. J. Ibbetson, A Historical Introduction to the Law of Obligations CB 79 Roman history, consensual contracts: sale, services, partnership, mandate (do something for free) Consensual contracts: voluntary, agreement, lack of effect on third parties, enforcement of contractual entitlements independent of reliance or actual

loss suffer All reciprocal (except mandate) Requirement of good faith historically

Richard Kidner, Book Review of A Historical Introduction to the Law of Obligations by D. J. Ibbetson (2001) CB 85 Critiques that Ibbetson purports that common law (not just civil law) grew out of “intermingling of native ideas and sophisticated Roman learning”

perhaps a grounds of our transystemic education

D. Kennedy, “Form and Substance in Private Law Adjudication” CB 97 Classical individualism denies that altruism has anything to do with basic legal doctrines Community vs autonomy Bargaining power as detriment to resource allocation

K.P. Berger, The Practice of Transnational Law CB 102 Economics as ordering force in global world, even more so than “reason” or rule of law

CML – Bruker v. Marcovitz (2008) SCC CB 1Jurisdiction CanadaFacts Two parties, B and M, married for several years. They decided on a civil divorce. During the divorce proceedings, he agreed to provide her with

a Jewish religious divorce (get). He never did, despite having agreed to do it immediately upon receiving the civil divorce. She pursued him for damages for not allowing her to re-marry in her faith or having religiously legitimate children. Get can only be given by the husband.JUDICIAL HISTORY: Trial judge upheld contract. Appeals judge said it was a moral obligation and as such, unenforceable by the court.

Issues (1) Can a secular court adjudicate this matter? (2) Has a valid contract been formed? (3) Can the husband avoid legal consequences on other grounds? (4) Was the contract “breached”?

Holding (1) Yes; (2) Yes; (3) No; (4) Yes Bruker (wife)Reasoning Majority:

This is a justiceable case.

Dissent:

Ratio Moral obligations can be transferred into legal obligations by the wills of the parties.Comments The application of contract law is very difficult in a private, intimate context

Legal reasoning is the basis for every decision – it is not a question of “right or wrong” but a question of the quality of the reasoning that justifies a decision – the persuasive argumentation

Rules channel legal debate and provide the structure “Like cases should be decided alike” why is one case different from another? How are the facts interpretated? What is a “juridical operation”? How is one to define this term?

o Historical usage of the termo Ask experts (e.g. rabbis in the case of Bruker v. Marcovitz) – perhaps some actions can be excluded from this term

Actions are not inherently juridical, but can be so if they are made the object of a contract In a typical contract, the object is an exchange of assets or goods – the cause of a contract is usually a market transaction

2. Formation of Contract: Moment of Responsibility

The CCQ and Contractual Obligations

Art. Text Notes1378

A contract is an agreement of wills by which one or several persons obligate themselves to one or several other persons to perform a prestation. Contracts may be divided into contracts of adhesion and contracts by mutual agreement, synallagmatic and unilateral contracts, onerous and gratuitous contracts, commutative and aleatory contracts, and contracts of instantaneous

tries to set out every possible kind of K (exhaustive), moving from general to specific

6


performance or of successive performance; they may also be consumer contracts.1385

A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties require the contract to take the form of a solemn agreement. It is also of the essence of a contract that it has a cause and an object.

Ks are formed by exchange of consents unless otherwise stated (enforceable once consent is exchanged: particular forms of consent may sometimes be required, but general provision does not require tangible exchange)Cause = subjective reason why each party entered into the KObject = legal operation envisaged by the K

1386

The exchange of consents is accomplished by the express or tacit manifestation of the will of a person to accept an offer to contract made to him by another person.

mental, not physical, operation is enough to signify consent [cf. CML doctrine of manifestation of assent]

1387

A contract is formed when and where acceptance is received by the offeror, regardless of the method of communication used, and even though the parties have agreed to reserve agreement as to secondary terms.

cf. CML postbox rule and Denning in Entores

1388

An offer to contract is a proposal which contains all the essential elements of the proposed contract and in which the offeror signifies his willingness to be bound if it is accepted.

same in CML (see Waddams below)

1389

An offer to contract derives from the person who initiates the contract or the person who determines its content or even, in certain cases, the person who presents the last essential element of the proposed contract.

identities of offeror and offeree are variable – only identifiable when K concluded

1393

Acceptance which does not correspond substantially to the offer or which is received by the offeror after the offer has lapsed does not constitute acceptance. It may, however, constitute a new offer.

Acceptance within a specified (or “reasonable”: cf. CCQ 1392) timea contrario: a slightly changed acceptance can still be an acceptance

1394

Silence does not imply acceptance of an offer, subject only to the will of the parties, the law or special circumstances, such as usage or a prior business relationship.

same in CML (see Waddams below)

General NotesThe classical model of an offer is one in which all terms are stated and another person simply acceptsA typical offer will specify limitations such that those within the target group of offerees can accept itIdentities of offeror and acceptor are important, because: will determine when the K was formed; will determine where (in which jurisdiction) it was formed; interpretation of some Ks is more favourable towards one party

CVL Doctrine CML Doctrine“Agreement of wills” (1378 CCQ)“Formed by the sole exchange of consents” (1385 CCQ)Declarations of parties are “manifestations of will” (1386 CCQ)Exchange of consent accomplished when an offer to contract is accepted and the acceptance is received by the offeror (1387 CCQ)

Formation described in terms of “offer” and “acceptance”“Moment of responsibility” = “Meeting of the minds” – “Consensus ad idem” = Point at which a binding contract is formedCML uses “Promise” often used instead of CVL’s neutral “Manifestation of will”“The principal function of the law of contracts is to protect reasonable expectations engendered by promises” law is more concerned with protecting promisee’s expectations than carrying out promisor’s will.Test of intention is not based in promisor’s mind, but on how promisor’s conduct would strike a reasonable person in promisee’s positionOther hand: promises only enforceable to the extent of the promisee’s reasonable understanding (can work against promisee, as it expects a reasonable promisee)

Consequences of Finding a Valid ContractThe party wishing it enforced is entitled to performanceIf the other party is unwilling, enforcing party is entitled to monetary compensation (“expectation damages”: default idea is that money can provide the party with what he/she expected to obtain through K performance – cf. RII in torts), subject to mitigation

Consequences of Finding a Void ContractNo one performs (preferable scenario for the party that wants out)Maybe a little bit of mess to clean up (e.g., unjust enrichment) – but by far the simplest solution

IntentionCML Criteria for a Valid Contract (Classical)1 – “Intention to Create Legal Relations” – if it’s not serious it is not binding (mere puff)2 – “Offer and Acceptance” or “Meeting of the Minds” (the offer and acceptance must match)3 – “Consideration”

Classical CML treats these categories as separate, but can be seen as inter-related, i.e. consideration could be given through offer and acceptance

7


2.1.Intention to Create Legal Relations

CML – Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256 (C.A.): CB 106Jurisdiction UKFacts Carbolic Smoke Ball Company promised a £100 reward to anyone who contracted influenza while using the carbolic smoke ball as directed, and

gave a deposit of £1000 at the Alliance Bank “shewing our sincerity in the matter.” They advertised that nobody who had used the carbolic smoke ball during the last epidemic of influenza had contracted the disease. The plaintiff, on the faith of this advertisement, bought one of these balls and used it as directed, but got influenza. Trial judge held that she was entitled to the £100 as promised by the company. Defendants appealed.

Issues Do the defendant's advertisement and the plaintiff's fulfilling of its conditions constitute an enforceable contract?Holding Yes Carlill.Reasoning Lindley:

The language in the advertisement is unmistakable, and there is a distinct promise made to pay £100 in certain events. £1000 had allegedly been deposited with the Alliance Bank to guarantee sincerity in the matter, according to the advertisement.

The promise made in the advertisement is an offer, made to anyone who performs the conditions; anyone who performs the conditions accepts the offer.

Performance of the conditions does not necessarily have to precede notification of acceptance, because the offer was never revoked, and by the language used in the advertisement, the person making the offer did not expect and did not require notice.

All of the elements of a binding contract are found (offer, acceptance, and consideration), despite the vagueness of the language regarding the use of the ball, and the element of consideration which is present in the sales generated by this advertisement – the defendants have benefited from making this promise.

There is detriment to the plaintiff in using the smoke ball. There is a difference between an offer to negotiate, which is not an expression of an intention to be legally bound, and an offer to be

legally liable – this is an expression of an intention to be legally bound, and thus constitutes a valid offer, which becomes a contract the moment the offeree performs the conditions necessary for acceptance.

Ratio An advertisement can be considered a serious offer if a reasonable person would take it as such. A binding unilateral contract is formed when the offeree completes the performance required by the offeror. Detriment incurred by the offeree is sufficient consideration to uphold an agreement.

Comments This form of contract was used by the court to protect Carlill from false or exaggeratory advertising (quack medicine was a huge problem at the time).

Questions raised in Carlill:Intention to create legal relations Process of Contract Formation: Offer and Acceptance Doctrine of Consideration “Mere puff”? Serious promise? Intention to be legally bound?

Offer Can be made to the public

(world) Can be made under a condition Can be revoked before

acceptance Must be “certain” (what would a

reasonable bystander consider a serious offer?)

Acceptance Can be either a counter-

promise, or, in the case of unilateral contracts, acceptance by performance

Benefit conferredOR Detriment incurred

Formation of Contract First step is to focus on “offer”and “acceptance”and the “intention to create legal relations” Remember that the question

“Is there an intention to create legal relations?”can also be phrased as“Is there an offer that expresses the willingness to be legally bound?”

It is rather doubtful whether there is need for a distinct doctrinal category (see Atiyah/Smith, Law of Contract)

Common Law: Offer defined“An offer is the expression of willingness to contract on specified terms, made with the intention that it is to become binding as soon as it is accepted by the person to whom it is addressed.“Under the objective test of agreement, an apparent intention to be bound may suffice: i.e. the alleged offeror may be bound if his words or conduct are such as to induce a reasonable person to believe that he intends to be bound, even though in fact he has no such intention.”

G.H. Treitel, The Law of Contract

Willingness to be legally bound Assumption against an intention to be legally bound:

Social and domestic arrangements“In respect of these promises each house is a domain into which the King’s writ does not seek to run, and to which his officers do not seek to be admitted.” – Balfour v. Balfour [1912]but:“Nevertheless, family arrangements do have legal consequences …” – Hardwick v. Johnson [1978]

Assumption in favour of an intention to be legally bound:

8


Business transactions These presumptions are rebuttable

CML – John D.R. Leonard v Pepsico, inc. United States District Court, Southern District of New York 88 F.Supp.2d 116 (S.D.N.Y. 1999), aff’d 210 F.3d 88 (2d Cir. 2000): CB 135Jurisdiction New York (USA)Facts Plaintiff seeking specific performance on alleged offer of Harrier Jet, featured in defendant’s television advertising campaign. Television

commercial advertised “Pepsi Stuff” catalog, featuring several items from the catalog, and concluding with a Harrier Jet for 7,000,000 Pepsi points. Plaintiff considered this an offer, obtained a “Pepsi Stuff” catalog, found that there was no Harrier Jet included in the items featured in the catalog, and raised money ($700,008.50) to purchase the Pepsi points he needed to claim the Harrier Jet. Defendant seeking summary judgment (no cause of action).

Issues Was the advertisement a valid offer?Holding No Pepsico.Reasoning Kimba J:

If the defendant’s advertisement was not a legally binding offer, there is no issue to be tried, and a summary judgment will be granted.General rule: 2nd Restatement of Contracts (US): general rule of advertisement not constituting offer

An advertisement does not constitute an offer, but merely a request to “consider and examine and negotiate” An invitation to complete an order form is not a binding offer. Filling out and returning an order form is not a binding offer either. There is no binding offer and acceptance until the recipient of the order form accepts the order form and cashes the cheque.

Exception to general rule: in certain cases, an offer can be made by advertisement, but there must be specific language of invitation to take action without further communication, as in Lefkowitz v. Great Minneapolis Surplus Store, 251 Minn. 188, 86 N.W.2d, 691 (1957)

In this case, the commercial is not a definite offer, because it referred to the catalog for details of the offer and did not include them in the commercial itself

Even if a Harrier Jet had been listed in the catalog, without any words of limitation (e.g. "first come, first served") it would still be sufficiently indefinite not to constitute a definite offer

Plaintiff’s perception of the commercial as an offer does not meet the “reasonable person” standard. An obvious joke cannot be construed as a serious offer It is clear that the offer in the commercial was not serious because of the

humorous nature of the commercial No reasonable person would have believed that a fighter jet worth $23 million dollars could be purchased for $700,000 worth of

Pepsi pointsRatio Where an advertisement lacks specific language to make it a definite invitation to action without further communication, or does not meet

the “reasonable person” standard of a serious offer, it cannot be considered as a legally binding offer.Comments Advertisements are presumed not to be contracts because it would be too onerous on the merchant (i.e. running out of supplies,

vulnerability) – the potential buyer is the one who is the offeror and the merchant is the offeree Distinguished from the Carbolic Smoke Case – no joke in the leaflet and the stipulation of 1000£ was a gesture of seriousness, also

Pepsi’s “promise” was impossible to keep whereas the Carbolic reward had conditions that could be fulfilled

CML – Kleinwort Benson Ltd. v. Malaysia Mining Corp. BHD., [1989] 1 All E.R. 785 (C.A.): CB 140Jurisdiction UKFacts KB sued for £12,260,000 including interest, damages for breach of contract, and won at trial. Defendants appealed on the ground that there

was no valid contract. MMC Metals (“Metals”) was a wholly-owned but indirect subsidiary of the appellants, and approached the respondents for a loan

for Metals’ operation on the London Metals Exchange. The appellants provided a “comfort letter” as part of the loan agreement, the letter stating,

[A] We hereby confirm that we know and approve of these [banking and exchange] facilities [granted by respondents] and are aware of the fact that they have been granted to MMC Metals Limited because we control directly or indirectly MMC Metals Limited. [B] We confirm that we will not reduce our current financial interest in MMC Metals Limited until the above facilities have been repaid or until you have confirmed that you are prepared to continue the facilities with new shareholders. [C] It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements.

The respondents offered a lower rate of interest in exchange for a guarantee or a joint and several liability on the part of the appellants, but the appellants decided not to provide this and to pay a higher rate of interest for only providing a comfort letter.

Metals went into liquidation and did not repay any of the money owed to the respondents, so the respondents went to the appellants for repayment, but were refused, which is the reason for this litigation.

Issues Did the comfort letter express an intention to be legally bound?Holding No Malaysia Mining Corp.Reasoning Gibson:

No explicit promise found in the language; moral rather than legal responsibility, moral responsibility not legally enforceable. “Confirm” is not a commitment, no future tense. KBL accepted a higher interest rate in exchange for a comfort letter rather than a contract – implies that negotiation has taken

place and risk has been allocated.Ratio A comfort letter is not an expression of an intention to be legally bound. A contract is actionable only if legal recourse is desired (and

indicated) by both parties.Comments Absence of explicit promise does not stop something from being regarded as a contract – custom has a role.

Comfort letters a wide-ranging practice – exempts shareholders from some risk Legal sanction is only one kind of sanction – a business in default gets a bad reputation Judge may have considered who was in the best position to absorb the loss (MMC already in default)

9


Advertisements Advertisements are invitations to treat, not offers (very onerous on merchants to makes sure supplies are there, etc.) thus more seen as “inviting you to

be a customer” However, due to policy reasons – (consumer protection) advertisements that are deceptive, misleading, misrepresenting can be liable under

administrative (rather than private law) Private law (i.e. Law of Contractual Obligations) requires offer and acceptance

2.2.Meeting of the Minds

CML – Raffles v. Wichelhaus (1864), 2 H. & C. 906 (Exch.): CB 142Jurisdiction UKFacts The plaintiff (seller) contended that the defendant (buyer), a cotton trader, did not purchase the delivered stock as agreed upon. The

defendant claimed that it was in fact the wrong stock, as two ships named Peerless were set to dock at Liverpool. Raffles meant to sell goods to Wichelhaus from the December ship, while Wichelhaus alleged he meant the October ship. Simpson explains that the plaintiff conceded to the defendant’s claim (on a demurrer) in which he admits that the defendants had intended to purchase from the October arrival.

Issues Was there a contract?Holding No Wichelhaus.Reasoning Since there was no agreement regarding a material term of the contract (date of delivery), there was “no contract at all”. There is

ambiguity about which ship Peerless the contract is about, and therefore no “meeting of the minds”. No contract because neither interpretation was more reasonable than the other.

Ratio Consensus ad idem (“meeting of the minds”) is necessary for contract formation. All essential elements of a contract must be present for the contract to be in existence.

Comments Pleaded on demurrer (accepts facts, contests law) but it is enough that an answer was available in law – the defendant’s argument was therefore capable of raising a defence (jury might find there was a misunderstanding) and so the demurrer fails

“For procedural reasons the court never decided whether there was a contract or not. All that was actually decided was that it was open to the defendant to show that the contract was ambiguous and that he intended the October ship. If the case had gone to trial it would then have been open to the jury to hold either that there was no contract or to hold that there was a contract either for the October ship or the December ship. In modern times this would turn on whether a reasonable man would deduce an agreement from the behaviour of the parties, but in 1864 it might well have been thought to turn on whether the parties actually intended the same ship.”

Contemporary doctrinal resistance to modifying Ks through oral evidence about what was “really” meant Decided at a time when generalized principles, rather than specific circumstances, were applied (see Atiyah above) R says it doesn’t matter which boat it came on, as long as 125 bales were provided At the time, specifying the name of the ship was normal because of timing (affected the price against which the K will be

competing) and risk (if the boat sank, neither had a claim on the other) – so including more than one ship in the K is a trickier proposition

If the suggestion persists that the seller can determine when/however the cotton will arrive, you lose the idea that the seller is making individual Ks with buyers: the seller could give himself a wide margin to wait for the best possible moment to sell (timing all in seller’s control), and if one boat sank seller could tell all parties that their boat had sunk

R genuinely believed that his K didn’t relate to a shipment on the first Peerless; W had no economic incentive to accept delivery from the second Peerless, as the price of cotton had fallen

Practically, W was now free to pay a lower price for the cotton, and R was not able to sell the cotton at the price he’d hoped for – this case would only have proceeded if the difference between expected and actual price was more than enough to pay for the litigation

The value of this holding has come to be something perhaps other than the judges had intended (no reasoning in case report) Argued for objective (not subjective) meeting of the minds (an outsider had to be able to say that there was agreement)

CVL – Terrasse Holdings v. Saunders, Quebec, 1989 CB 144Jurisdiction QuebecFacts Respondent was a rental agent working for a company that had been hired by the appellants to rent units in a building. In 1976, the

respondent earned $69 460 in commissions, and 62% of the units in the building had been rented. After a dispute between the appellants and the company employing the respondent, the appellant promised the respondent a bonus of “as high as $60 000 to $70 000” if he would stay working for them to rent the remainder of the units in the building.

Issues (1) Was there a binding contract? (2) Is there any other cause of action?Holding (1) No; (2) Yes (unjust enrichment) Respondent (Saunders)Reasoning 1) All of the elements necessary for the formation of a legally binding contract were not present

Given the absence of a fixed amount of remuneration for the respondent’s work, there was no “meeting of the minds” – this essential material term was not established

The burden of proof for the existence of a contract is on the person invoking the contract (in this case, the respondent)2) The respondent can claim damages based on unjust enrichment (1493 CCQ)

They offered to pay him this bonus because he could have made as much money elsewhere, and his work was valuable to the appellants.

The presence of unjust enrichment brings into existence a quasi-contract. Because the appellants continued to profit from the services of the respondent, he expected a certain remuneration of between

$60 000 and $70 000, which he would have earned elsewhere for similar work. In a quasi-contract, the court can determine the amounts to be awarded, which it cannot do for a contract (court cannot insert

10


material terms into a contract in dispute)Ratio Where essential elements to the formation of a contract are missing, no legally binding contract exists. However, if unjust enrichment

exists based on a quasi-agreement, the court may provide a remedy and determine the value of the unjust enrichment.Comments Notion of reliance. Saunders believed he was working on the basis that there was a contract. Would not have continued to work for

them without the incentive.

Invitation to Treat (invitatio ad offerum) Invitations to Treat are distinct from the intention to create legal relations, the invitation is the negotiation period (before an offer is made) German SC (similar to CML): “What counts is exclusively the perspective of the objective, reasonable person.” (Doesn’t matter if the offeror thinks it

isn’t an offer) Different in French Law: “It can indeed be said that in general, where French law sees a ‘public offer’, English law sees only a an invitation to treat. It is

clear, for example, that a display of goods in a shop window constitutes an offer.”

Offer and Acceptance (Classical Sense) In order to have real offer is there real acceptance Wills have to be expressed and communication needs to be noted Offer and acceptance have to match (offer contains necessary terms (main elements) of contract, agreement says) If the offeree rejects the offeror’s offer, he may make a counter-offer, thus becoming the new offeror

Negotiations Are we able to separate offer and acceptance in real life situations?

o In real life negotiations, it may not be possible to attribute the role of offeror to one of the partieso In real life negotiations, it may not be possible to identify a clear sequence that ends with a final offer and a final acceptance

Reminder: these are default rules—parties can often control these issues.

Problems with the Model

Marcel Fontaine, “Les obligations contractuelles: 1804-1904-2004 et l’avenir” CB 172 Problem with the classical model of offer and acceptance: although possible, not likely in business settings and real-life negotiations where it may not be

possible to attribute the roles of offeror and offeree Classical model is saved because someone will sign the contract at the end

Temporal and Spatial Dimensions of Offer and Acceptance Why should we care if the offer and acceptance happened at the same time? Applicable jurisdiction (Entores v. Miles Far East Corp) One party may claim that they are not bound because the particular moment of formation was never reached

eg. Pharmaceutical Boots cash Chemist Case External policy reasons (Boots Cash Chemists Poison Control Act) Possibility to back out before formation

CML – Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern), Ltd., [1953] 1 Q.B. 401 (C.A.): CB 179Jurisdiction UKFacts The defendants, Boots Cash Chemists, operated a self-serve pharmacy where customers selected the articles from the shelf and then

proceeded to the cashier to pay for them. Among the articles for sale were pharmaceutical products which, according to the Pharmacy and Poisons Act, were required to be sold only under the superivision or, or authorization by, a pharmacist. On April 13, 1951, two customers purchased a pharmaceutical product governed by the Act.

Issues Is a sale of goods completed at the moment when the customer selects an article from the shelf?Holding NoReasoning Somervell:

A display of items in a store is an invitation to treat, a non-binding invitation to receive offers. The presentation of the item by the customer to the cashier constitutes an offer to purchase the item. The contract is completed with the cashier’s acceptance of the customer’s offer. The sales in question were thus completed under the pharmacist’s supervision and, as such, were legal sales under the Act.

Ratio A display of goods on is merely an invitation to treat, not an offer.

CML – Entores v. Miles Far East Corporation, [1955] 2 Q.B. 327 (C.A.): CB 180Jurisdiction UKFacts Entores (in England) made a contract by telex (instant typewriter) with MFE (in Holland) for 100 longtons of cathodes. Telex counter-offer by

Entores (London) confirmed “received” by MFE (Amsterdam). Entores (London) wanted to confirm the price – ambiguity between tons and longtons – sent another telex to confirm the price. Dutch company replied that the price was 239.10 per longton – this completed the contract.

Issues Where was the contract made?Holding England Entores.Reasoning Denning:

There is a difference between communication by post and instantaneous communication – according to post-box rule (acceptance effective upon dispatch of notice of acceptance), the contract is made at the place where the acceptance is put in the mail.

With instantaneous communication, the acceptance is effective when received by the offeror. If there is interference, because of the instantaneous nature of the communication, the offeree should be immediately aware that

11


the acceptance was not received, and would try again until he is sure. If the offeror does not inform the offeree that there was trouble with the reception of the acceptance, and the offeree reasonably

believes that his message has been received, the offeror is bound. If the offeror, through no fault of his own, is unaware that the acceptance has been made, and the offeree reasonably believes it

has, there is no contract.Ratio When instantaneous communication is the means used for the extension of the offer and the acceptance, the contract is created in the

place where the offeror receives the acceptance. That is the proper jurisdiction for the contract.Comments Not clear who bears the risk for a communication problem – with telephone, generally nobody’s fault if communication breaks

down; with telex, idea that receiver should keep machine in good order, etc. – but Denning leaves room for a grey area when the machine just breaks down ( no K)

Perhaps Denning was more concerned with having the dispute adjudicated on British soil – this is, after all, an application for a “leave to serve notice of a writ out of the jurisdiction”

Acceptancethe offeree must also show intention to acceptA reasonable offeror must consider the conduct of the offeree as a manifestation of consentSilence as a rule is not acceptance

2.3.Revocation and Lapse

Lapse: either based on a term set by the offeror, or a “reasonable time” (1392 CCQ)Revocation: CCQ 1390-1393

Basic assumption of both Quebec Civil Law and most Common Law jurisdictions: Offer can be revoked until Acceptance becomes effective (see e.g. Art. 1390 CCQ)

WHEN is acceptance effective?1. Parties are in the presence of each other : When the offeror hears the offeree’s acceptance.2. Parties are not present, but the method of communication is instantaneous: When the offeror hears the offeree’s acceptance.3. Parties are not present: Mailbox Rule

2.3.1 Mailbox Rule

If the offeror attempts to revoke an offer after the offeree has dispatched a message of acceptance, the prevailing rule is that the acceptance is effective on mailing.

“It is often suggested that the choice of a rule is quite arbitrary, but there are sound arguments in favour of the common law rule, and the rule springs, from a rational attempt to to balance the interests and expectations of the parties.”

Mailbox Rule serves to protect the offeree who might rely on the contract after having sent the acceptance German Law: Offer is not only open for a reasonable amount of time, but, during that timespan, irrevocable! French Law: matter of contention, whether dispatch or reception Quebec Law: reception - Art. 1390 CCQ! You can revoke a contract until its accpeted (protects mostly the offeror). Quebec has no Mailbox Rule.

Revocation of Unilateral ContractsDichotomy between offers which invite acceptance through Promise ActCan the offer be revoked after the offeree has started to perform, but has not completed performance yet? Wormser’s classical example: Brooklyn Bridge Hypothetical (I promise to pay you $100 if you walk across a bridge). Formalist legal science says I can revoke

until you finish walking across the bridge, as both of us can back out of the contract until the bridge is crossed.

CML – Shatford v. B.C. Wine Growers Ltd., [1927] 2 D.L.R. (B.C.S.C.): CB 182Jurisdiction BCFacts On April 21, 1926, defendants wrote letter of offer to sell loganberries to plaintiff. April 22 – letter was mailed. April 23/24 – letter was

received. April 30 – offer accepted, contract signed, posted in the evening.Issues Did the plaintiff accept the offer within a “reasonable amount of time”?Holding No BCWC.Reasoning Murphy J:

A proposal sent by mail ordinarily calls for an acceptance, if not by return of post (i.e., immediately), at least during business hours on the day on which the offer is received (in this case, April 23/24) – Dunlop v. Higgins

In all cases, the offer must be accepted within a reasonable time Given the nature of the commodity in question – perishable goods – the plaintiff did not accept the offer within a reasonable time

of the offer – there is therefore no contractRatio When an offer has lapsed before acceptance has taken place, there is no legally binding contract. A lapse can happen either because a term

attached to the offer has expired, or because a “reasonable time” has elapsed. “Moment of Responsibility” – when the offer and the acceptance both exist at the same time, both parties are bound.

12


Comments The judgment moves from a clear ration (same-day acceptance) to murkiness (reasonable time) to even more murkiness (context must be considered)

Rules on When Acceptance Occurs (From the Entores Case)

Parties are in presence of one another (oral communication) -accepts verbally, offeror must hear it

Parties are not present have 2-way instantaneous communication -party needs to hear the acceptance, if the phone goes dead, then there is no contract

Parties mails offer and acceptance CML - “Mail Box” rule – acceptance occurs the moment the offeree has put acceptance in the mail, the offeror cannot revoke the offer once acceptance has been dispatched

Bilateral ContractsA legal agreement or contract where both parties involved agree to give each other something. For example, in a property purchase agreement the buyer pays money to the seller and the seller then transfers the property to the buyer. -Bilateral contracts require both offeror and offeree to be obligated to each other

Unilateral ContractsA one-sided agreement whereby you promise to do (or refrain from doing) something in return for a performance (not a promise)-Unilateral is only enforced upon the offeror to act once offeree’s performance has been completed-problem of a legal vacuum until performance has been completed

Brooklyn Bridge Scenario -A offers B $100 if he walks across the bridge, the contract is formed at the end of the bridge (acceptance). -however either A or B can back out at any point (A can evoke the offer) and B can stop walking-B becomes more vulnerable the more he performs, at which point A can revoke at the very last minute-B’s legal recourse is to sue for unjustified enrichment

Errington Case shows how classically the gift should have been revocable at any point until the last penny was paid on the mortgage – but courts are reluctant to see someone deeply disadvantaged by the revocation of an offer for a unilateral undertaking

Waddams, Law of Contracts CB 183 “Mailbox rule,” contract is formed when and where the acceptance is mailed by the offeree Acceptance must be communicated in the same means of communication, or one the same speed, as the medium invited by the offeror “Agency” theory of post office is rejected

Wormser, “The True Conception of Unilateral Contracts” CB 193 In common law generally, contract formed when performance (when performance = acceptance) completed. Brooklyn Bridge Hypothetical: offers 100$ to cross the bridge. He is not asking for a promise to cross, but that he crosses. Can revoke offer anytime

before arrives at the other end. CLASSIC ACCOUNT: CONCEPTUAL JURISPRUDENCE: SYMMETRY: performance is voluntary. The offeror isn’t bound until he crosses, but the offeree

hasn’t made a promise—he can back out, too. There is symmetry. Should just always apply these rulesHARD CASES MUST NOT MAKE BAD LAW! Sham argument: there is great disparity since one is just standing there and the other is actually performing. Gives a garage building example. If A changes his mind while B is building, thinks it is still fair because B could have stopped building at any time. Thinks

that B should just get the value of the enrichment to A’s land”quasi contract” Complains about a California S.C. case in which once commenced building a railway, suddenly called it a bilateral contract.

CML – Errington v. Errington and Woods, [1952] 1 K.B. 290 (C.A.): CB 197Jurisdiction UKFacts Father bought house for son and daughter-in-law to live in – put down £250 as a down payment (gift) and borrowed £500 from a building

society. House was in father’s name but he promised them the deed if they paid down the loan in weekly installments. He passed away before the house was paid and his successor wishes to repossess the house, claiming that the contract was unilateral and that performance has not been completed, so the offer may still be revoked.

Issues (1) Does the young couple have a contractual right to continue paying installments, and upon completion of payments, take title of the house? (2) Are they bound by the agreement?

Holding (1) Yes; (2) No. Errington (daughter-in-law)Reasoning Denning:

Within a unilateral contract, there is an implied promise not to revoke once performance has commenced. The father’s offer was a unilateral contract (promise to give house in exchange for payment of loan). Once the couple began

performing, it was an irrevocable offer. As long as the couple continue to pay installments, the contract remains binding on the offeror (and his estate), and the promisor’s obligation must be fulfilled upon completion of performance.

13


There is no bilateral contract here – the couple never bound themselves to pay these installments.Ratio As soon as detrimental reliance has been established with regards to a unilateral contract, the offeror can no longer revoke the offer.Comments Under Wormser’s reasoning, the couple would get their money back, but no house. Now, in CML, after B makes his first step, A may

not revoke. CML offers can be accepted by either a promise or an act. In CVL, B starting to walk is an act of acceptance (a manifestation of will) and both parties are bound. CVL sees the act as a promise,

which makes the contract bilateral. Unilaterals are not normal in CVL, except for rewards (which really cannot be seen as bilateral, even if the “offer” was never received, there is an obligation by the promisor to pay the reward).

CVL Approach to Unilateral ContractsDoes not rely on this dichotomy, would see contract as a bilateral promise – i.e. agreement to cross the bridge (the contract is formed through conduct – or a manifestation of willOnce someone begins to build a wall, he has the obligation to finish – thus both parties are protected

CML - Dawson v. Helicopter Exploration, [1955] S.C.R. 808, [1955] 5 D.L.R. 404Jurisdiction CanadaFacts Dawson (appellant/plaintiff) had mining claims in northern BC which had lapsed. Helicopter (respondent/defendant) offered Dawson a 10%

interest in the claims in return for his help in finding them. Dawson expressed his willingness to help, and then was called to fight in the Korean War, but maintained that he would take steps to secure a temporary release to help Helicopter locate the mining claims. Helicopter wrote back and said that they would not be going in that year. Helicopter sent an exploration party which located the claims and made arrangements to develop them, without the aid of the appellant.

Issues Do the respondents owe the appellant 10% interest?Holding Yes Dawson.Reasoning Helicopter argues that this was a unilateral contract, the offer thus remaining revocable until the action called for by Dawson was

completed. However, unilateral contracts depend on the complete passiveness of the offeror, and in this case, the offeror was needed to secure

a pilot for the helicopter to go on the exploration. Because of the activity demanded on the part of the offeror, this cannot stand up as a unilateral contract and must therefore be read

as a bilateral contract. This follows the general tendency of courts to treat offers as calling for bilateral rather than unilateral contracts because where they

can fairly be so construed (reference to Williston). In promising Dawson that the company would cooperate in his performance, there was an implied promise that the company would

not prevent his performance.Ratio When the offeree’s performance depends on activity by the offeror, a “unilateral contract” will be read as a bilateral, because there is an

implied promise to cooperate. Comments Unilateral contracts will be read as bilateral if this is remotely possible.

2.4.The Mirror Image Rule and the Battle of the Forms

Mirror Image RuleClassical position: Look for perfect matchOn/Off – not a problem of determining content If offer and acceptance match in every respect, the contract is formed If offer and acceptance do not match in every respect, there is NO contractFailed Acceptance may constitute a new, a Counter-Offer. Contract can be formed later, with conditions as stated in the Counter-Offer.

Remember rules hardly ever describe real-life situations, especially negotiations Theoretical concerns (MacNeil, The New Social Contract): the idea that it is possible to capture the whole content of the relationship in the one formative

moment does not do justice to “contract”as a social institution “On/off” becomes a “sliding scale of consent”

The modern position : Look for substantial correspondence (CCQ, CISG, Unidroit)If the acceptance does not correspond substantially to the to offer, it is a counter-offerIf the acceptance corresponds substantially to the offer, then the contract is formed and parties are bound

According to Uniform Commercial Code (USA): Contract even if divergence on material terms, if conduct is indicative of intention to be bound. (UCC)

UN CISG, art. 19: (Applicable only internationally)This is an effort to mitigate the absolute on/off. Under the CISG, a K is created without a mirror image: As long as the modifications in the acceptance are not “material alterations”. This makes a contract under the offeror’s terms plus the offeree’s additional

non-material terms (provided that the offeror doesn’t object) If the modifications are material terms, this constitutes a counter-offer. If the offeror accepts this “acceptance” (ie. by sending goods), there is a K on

offeree’s terms [basically the same as CCQ].

14


19(1) looks like CCQ1393 (a reply that is different from the offer is a counter-offer….unless 19(2))19(2) looks like CCQ 1393, 1387, 1388: allows there to be a contract even if not complete mirror image, as long as additional terms don’t materially alter

Uniform Commercial Code section 2-207: UCC is one step farther than the CISG, looking for conduct expressing the desire to be bound (performance) Possibility of recognizing contract even without clear indication of consensus on material terms. Usually this is by default a counter-offer situation (CCQ,

CISG) and the contract would be based on the offeree’s terms (last shot). However, the UCC tries to get away from the unfairness of this with their “knock off” option (subsection 3) – here the contract is the terms the two parties agree on and the judge fills in the rest with the defaults (no arbitration, etc).

Sales Contract: The Uniform Commercial Code CB 206§2-207 Additional Terms in Acceptance or ConfirmationA definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contractThe offer expressly limits acceptance to the terms of the offer;They materially alter it; orNotification of objection to them has already been given or is given within a reasonable time after notice of them is received.Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the parties agree, together with any supplementary terms incorporated under any other provisions of the Act.

Quebec Civil Code:

Art. 1393Acceptance which does not correspond substantially to the offer or which is received by the offeror after the offer has lapsed does not constitute acceptance.

It may, however, constitute a new offer.

Art. 1421Unless the nature of the nullity is clearly indicated in the law, a contract which does not meet the necessary conditions of its formation is presumed to be relatively null.

Non-Material TermsIs the divergence so important that it harms the crucial elements? Three possible solutions:

The contract based on the offeree’s terms (“last shot”) The contract is based on the offeror’s terms (“First shot”) The contract is based on those terms over which there is convergence. The rest is erased and the judge fills the gaps (“knock off”)

Solution Advantages DisadvantagesNo K at all [clearest expression of an autonomy interest] Most faithful to consensus ad idem Awkward (parties acted as if they had a K)First term (“first shot”) created the K Certainty on terms

Sellers can pressure buyers to change unreasonable termsNo incentive to prolong negotiations

Unfair (always a K of adhesion)Advantages the buyer (may not be bad)

Last term (“last shot”) created the K Greater consent (possibly, though empirically, people don’t really read the forms)

Prolongs negotiation (each wants to be last)UncertaintyAdvantages the seller (may not be bad)

Overlapping terms (e.g. price, quantity, usually + implied reasonable terms) create the K even if everything else is in dispute [clearest expression of an efficiency interest]

“Saves the deal” by finding a K The K that’s found goes against what either party wanted (may not want such a different K saved)Large role for the courts (well placed to decide what is reasonable)

“Acceptance”

Material Immaterial

15


No contract objection No Objection

Counter offer No Contract Offeree has bought in and it’s a Contract

UN Convention for the International Sale of Goods (1980) – CISG – Article 19 CB 206Applied between member states who have agreed to be bound by it (ratified by 70 countries) Adopted in all Canadian provinces and by the federal government: suppletive in all international Ks

CISGArticle 19A reply to an offer which purports to be an acceptance but contains, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

19.1: acceptance with modifications is a counter-offer (mirror rule of acceptance)19.2: different acceptance = acceptance unless materially different or objected to without undue delay (vague) –offeror must object orally to discrepancies or dispatch a notice to that affect otherwise is acceptance19.3: Additional or different terms in relation, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

Article 2.209 - Conflicting General conditions CB 208(1) If the parties have reached agreement except that the offer and acceptance refer to conflicting general conditions of contract, a contract is nonetheless formed. The general conditions form part of the contract to the extent that they are common in substance.(2) However, no contract is formed if one party:(a) has indicated in advance, explicitly, and not by way of general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1); or(b) without delay, informs the other party that it does not intend to be bound by such contract.(3) General conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties.

The Uniform Commercial Code (UCC) § 2-207 (Additional Terms in Acceptance or Confirmation CB 206*The Uniform Acts harmonize laws of sales and commercial transactions in the U.S. (50 states)§2-207 (1) Is a contract formed? - A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. §2-207 (2) the additional terms will become part of the contract unless the terms are material alterations (Last shot)

Sales Contracts: The Uniform Commercial Code CB 206§2-207 Additional Terms in Acceptance or ConfirmationA definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:The offer expressly limits acceptance to the terms of the offer;They materially alter it; orNotification of objection to them has already been given or is given within a reasonable time after notice of them is received.Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

Arbitration Clause under the UCC§2-207 (2) –an arbitration clause that was not in the original offer will be seen as a material alteration and thus would not be included (First shot)§2-207 (3) -conduct on both parts recognizes existence of contract is sufficient to establish a contract, contract consists of the terms that parties agree on Canceling out of contradicting terms and bring in default rues of legislature or case law (judge fills in these gaps) (Knock off)

Last Shot vs. First Shot in UCCFirst Shot

16


Offer is restrictiveCounts as material alterationOfferor objectsThe parties are not merchantsLast ShotIn every other case (if both parties are merchants)

CML – Doughboy Industries, Inc., (1962), 233 NYS 2d 488 (C.A.): CB 181Jurisdiction USAFacts Conflict between buyer’s order form and seller’s acknowledgment form for the purchase and sale of goods. Seller’s form contained arbitration

provision, and provided that silence or a failure to object in writing would be an acceptance of the terms and conditions of this form. Buyer’s form had no general arbitration provision, but contained a provision that only a signed consent would bind the buyer to further terms imposed by the seller. Parties had done business on two occasions before, each party ignoring the other party’s printed forms, but carrying out the business transaction.

Issues Is the dispute to be resolved by arbitration (as the seller wishes), or by litigation (as the buyer wishes)?Holding By litigation BuyerReasoning Breitel J:

This case involves the application of the arbitration clause in the terms and conditions attached to the buyer’s first and second acknowledgements

Courts have laid down a rule stating that the agreement to arbitrate must be direct and the intention made clear, without implication, inveiglement or subtlety

Even though on May 13, when the seller made a partial shipment, the contract was only documented by the buyer’s purchase order form, it is not dispositive – it was mutually acknowledged that further documents were to follow

There was no question at this point whether there existed a contract, but only what were the material terms of the contract Traditional theory applies here – both parties had the duty to read the contractual instruments to which they were parties, but they

did not In this case, both the seller’s and the buyer’s forms must be given effect However, because an agreement to arbitrate must be clear and direct, as set out by the courts, it should not depend solely on fine

print – it is, in fact, a material term of the contract and must be spelled out In this case, because it was not spelled out, there exists no agreement to arbitration

Ratio Material terms to a contract must be explicitly set out and agreed to, and cannot be inserted by implication, inveiglement, or subtlety in the fine print.

Comments Typically, “battle of the forms” begins when the buyer sends a purchase order telephone acknowledgement by seller mail acknowledgment, often including more terms delivery, often including more terms, and potential acknowledgement form from buyer.

J is not prepared to adopt a rule whereby the first or last form necessarily wins – rules instead that there was no successful effort to displace the dispute resolution mechanism

A sense that arbitration clauses are special (courts are jealous of their jurisdiction, not eager to enforce Ks that take their authority away – perhaps different today, when courts are more willing to recognize arbitration)

Recognition in para. 3 that both businesses are strong, and this is not a power differential case – he says this because law is a tool, and one party being deeply disadvantaged/manipulated might change the situation (unconscionability/lesion lurking in the background?)

2.5.Alternatives to Legal Contracts: The Gentlemen’s Agreement

S. Macaulay, “Contract Law Among American Businesses” CB 220 Talks about the pervasiveness of “non-contractual practices” Conducts an empirical study of contract law and saw that most people did not use contract law Not into legalistic terms rather speak in first name basis in order to secure a good relationship for the future Only resort to legal devices once a party feels he is being defrauded or the other party is bankrupt Business world is conscious of the human factor Doing bad business has consequences on reputation, internal mechanisms for sticking to the bargain Parties don’t plan contracts with contract law in mind (cynical about role of lawyers) There is a pervasiveness of non-contractual practices Most parties don’t resort to contract law to solve problems (rely on customary dealings btwn parties) – this tends to uphold business relationships and

commercial utility

Bernard Rudden, “The Gentleman’s Agreement in Legal Theory in Modern Practice” (1999) CB 209 People sometimes see the legal system as inefficient and costly Main criticism is lacking efficiency of enforcement (Kleinwort Benson) Parties sometimes choose to carefully draft agreements that deliberately opt out of the legal system, two types

o “A gentleman’s agreement is an agreement which is not an agreement entered into between two persons, neither of whom is a gentleman, with each expecting the other to be strictly bound while he himself has no intention of being bound at all.”

One step further: Drafting agreements beyond the law

17


o Contextual No-Law : i.e. contraception (too private), soldiers (too public), and religious matters (too Godly)o Deliberate No-Law ever : Gentleman’s Agreement (i.e. Kleinwort Benson’s comfort letter)o Deliberate No-Law yet : preliminary stage of creating a contract (negotiation stage); some elements of the contract are missing so the

binding aspect of the contract is suspended. Language includes “subject to contract,” “letter of intent” This includes:

o Statement of a proposed agreement: Letter of Intent (includes nonbinding part of deal about the substance the parties have in mind, and the binding part about how they are going to go about making the deal)

o Agreement complete, legal effects deliberately postponed: “subject to contract”o No final agreement reached yet: “Agreement to agree”

Common Law rule: unenforceable.

Does Freedom of Contract mean Freedom from Contract?Not always. Consumer Protection Act, Employee Protection, etc. If one company has conditions that exclude these acts, then these conditions are deemed not written as against public order.Also discusses types of contracts that can be opted out of (“Freedom from Contract” and in Civilian “rules of public order”) examples include:

Limiting someone’s liability in specific cases (i.e. harm intentionally inflicted – public order) Slavery cannot be contracted Consumer protection acts (idea that a stronger party can strong arm the terms) Employer and employee relationship – labour law created to help the structurally weaker party

Alternative Dispute Resolutions Parties have opted for arbitration by a private tribunal that makes the final decision on the dispute, the advantage is that the parties have a say on the

judge (someone they choose together who knows about business context, and is internal) process is less adversarial, more discussion, save costs on expert witnesses

Another method is mediation which involves a mediator who talks and helps relationship (family law) Diamond Dealing – smoothly working system that doesn’t go to the state or to law, instead all dealers are members of the Diamond Dealer’s Club – to

be a member you must follow the rules, if you don’t your photograph will be posted around the world shaming your trading house and company – very effective method of enforcement

2.5.1. The Option ContractGenerally one can revoke a promise until it is accepted § 25 Restatement (Second) of Contracts says “A promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.”Option Contract – one is bound and cannot revoke it and the other party is without obligationOption contract has a question of consideration – what does the party gain by the second promise Some modifications in the UCC §2-205 and §45 Restatement (second) of contracts to create option contracts or “firm offers”

UCC §2-205An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

Restatement (second) Section 45 – Option Contract Created by Part performance or Tender (way of circumventing problem of unilateral contract - thus offerer cannot revoke as soon as performance begins – option contract is born)

Restatement (second) Section 45 §901)Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

CCQ Art. 1396, 1397 “promesse unilatérale de contracter” – attaching remedies to a breach of promise

Art. 1396An offer to contract made to a determinate person constitutes a promise to enter into the proposed contract from the moment that the offeree clearly indicates to the offeror that he intends to consider the offer and reply to it within a reasonable time or within the time stated therein.

A mere promise is not equivalent to the proposed contract; however, where the beneficiary of the promise accepts the promise or takes up his option, both he and the promisor are bound to enter into the contract, unless the beneficiary decides to enter into the contract immediately.

18


Art. 1397A contract made in violation of a promise to contract may be set up against the beneficiary of the promise, but without affecting his remedy for damages against the promisor and the person having contracted in bad faith with the promisor.

The same rule applies to a contract made in violation of a first refusal agreement.

CVL – Cere c. Neely, [1980] C.S. 1160: CB 206Jurisdiction USAFacts Defendant had sold plaintiff an option (for $200, but the cheque was never cashed) to purchase a plot of land for $4000, with a term of two

years. When the plaintiff decided to exercise his option, he found that the defendant had already sold the land to a third party for $9000.Issues Was the promise to sell a legally binding obligation, the breach of which entitles the plaintiff to damages?Holding Yes Cere.Reasoning Frenette J:

The promise in question is a unilateral contract, in which the promisor is bound to sell during the term specified, while the promisee is not bound.

The sale is valid in law – the plaintiff cannot claim the property because it is now in the hands of the third party, but he can claim for lost profits. He cannot claim for notary fees or court fees because he would have paid these if he had been able to exercise his option (he cannot get both the lost profits and the expenses incurred).

Ratio If the promisor of an option of sale sells the property to a third party during the term of the option, he is liable in damages (1397 CCQ).Comments In common law, there must also be consideration – there must be something given in exchange for the option, otherwise the

obligation is not enforceable.

2.5.2. Agreements to Agree

Common Law Rule: “Where there remains a fundamental matter that is explicitly said to be subject to negotiation or agreement, the agreement fails for uncertainty.”

“A contract de praesenti to enter into what, in law, is an enforceable contract, is simply that enforceable contract, and no more and no less: and if what may not very accurately be called the second contract is not to take effect till some future date but is otherwise an enforceable contract, the position is as in the preceding illustration, save that the operation of the contract is postponed. But in each case there is eo instanti a complete obligation.“If, however, what is meant is that the parties agree to negotiate in the hope of effecting a valid contract, the position is different. There is then no bargain except to negotiate, and negotiations may be fruitless and end without any contract ensuing: yet even then, in strict theory, there is a contract (if there is good consideration) to negotiate, though in the event of repudiation by one party the damages may be nominal unless a jury think that the opportunity to negotiate was of some appreciable value to the injured party.” (Lord Wright – Hillas & Co Ltd. v. Arcos)

Pre-contractual arrangements determine conditions of negotiation: Agreements on formula or machinery for specification Requirement of good faith negotiation (possibly implied!)

Empress Towers v. Bank of Nova Scotia – agreement not void for uncertainty!

CML – Empress Towers v. Bank of Nova Scotia [1991] 73 D.L.R. (4th) 400 (B.C.C.A.): CB208dvJurisdiction BCFacts The landlord, ET, rented to the tenant, Bank of NS. Their lease of 1984 contained a renewal clause, which stated that the tenant had the right

to renew for two consecutive five year periods "excepting the rental for any renewal period, which shall be the market rental prevailing at the commencement of that renewal term as mutually agreed between the Landlord and the Tenant." In 1989, when the lease was going to expire, the tenant exercised its option to renew and suggested a rental price of $5400/month, also expressing that they would be willing to negotiate. The landlord did not respond until the day the lease was set to expire and at that time proposed that the tenant should pay $15,000 plus $5400 per month. There was also evidence that an employee of the landlord had been robbed of $30,000 in a branch of the bank and that the company's insurance had only paid $15,000, leaving a loss of $15,000 to the landlord.The landlord wanted to terminate the lease as per a term in the renewal clause. The landlord thus brought a petition against the tenant to obtain a writ of possession under the Commercial Tenancy Act. The petition was dismissed by the chambers judge who held that the landlord had not acted in good faith.

Issues (1) Was the renewal clause void for uncertainty or as an agreement to agree? (2) If not, does the clause create an obligation to negotiate?Holding (1) No; (2) Yes. Bank of Nova Scotia.Reasoning Lambert J:

The renewal clause in question stated that the landlord and the tenant must agree on the new market-value rental rate, failing which the agreement may be terminated at the option of either party. This implies an obligation to negotiate in good faith.

The landlord did not negotiate in good faith, so the writ of possession is denied and the parties are required to renegotiate.Ratio Officious bystander rule, business efficacy standards come out of this case – the clause only makes sense if the parties both negotiate in

good faith.

3. Consideration and Formalities

Formation of Agreement: “Meeting of the Minds”19


BUT: Not every agreement, not every promise should be enforced So we have “Consideration” (CML), “Cause” (French/QC CVL) and Formalities These are indications of seriousness without which the contract is not enforced. They protect you from making rash decisions (like giving away the farm for

free)

Introduction Historically, binding nature of obligations sprang from performance of a ritual or formality, not from the will to be bound Western law has moved from this formal conception to a voluntaristic conception: informal manifestation of will is binding Form remains an additional requirement in certain situations: E.g. form requirements for gifts in Civil Law jurisdictions (e.g. Art. 1824 CCQ – see Qc. Notarial

Act; Art. 931 CC; § 311b BGB)

3.1.Civil Law Cause

See Art. 1385 CCQ Exchange of consents (and capacity) Form (where required) Object and a CAUSE: Reasons for the voluntary undertaking

Art. 1385A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of information, or unless the parties require the contract to take the form of a solemn agreement.

It is also of the essence of a contract that it have a cause and an object.

History of “Cause” Roman Law: Nominate Contracts were enforceable simply because of “consensus” Medieval jurisprudence developed the idea that only nominate contracts, but also “naked pacts”– pacta nuda – could be enforced if there was a “causa”,

which was understood as reasonable motive Over time, on the Continent the idea gained ground that it is the agreement itself that gives rise to an actionable contract, not its “cause” As a consequence, German law abandoned the requirement of “cause” completely French law (and as a consequence: Quebec law) hung on to it, but limited its importance (in Quebec, it was considered to completely abandon the concept).

Function of “Cause” in modern law“Objective Cause” – Cause de l’obligation: It is what motivates the agreement, generally you are motivated to make your promise by the promise of the other party (in a reciprocal contract).

In a gratuitous contract, the cause lies in the promisor’s “intention libérale” – so pretty much every contract has an objective cause. “Cause” performs no independent function, but simply repeats characteristics of the transaction in question.

“Subjective Cause” – Cause du contrat: The motive of the contract as a whole, whether it is illegal or against public policy (art. 1131 CCQ). Starting point for the analysis whether a contract is illegal or against public policy: “Illicitness of Cause” see Art. 1131 CC, French lawyers depart from

the notion of cause, see it as only useful for subjective clause “La cause subjective est la technique dont se sert la jurisprudence pour contrôler la licéité du contrat, en annulant tout engagement don’t le but ou les

effets recherchés sont illicites or illégaux, […] C’est uniquement dans l’existence de ce contrôle que se fonde l’utilité de la cause du contrat” (Baudouin/Jobin no. 383 sq.)

“If … the term “causa” simply refers to the content of the contract as a while, it might as well be jettisoned.” Zimmermann, p. 553

CVL – Hutchinson v. The Royal Institution for the Advancement of Learning, [1932] S.C.R. 57Jurisdiction QuebecFacts H offered in 1914 to give the respondent $150 000 to build a gymnasium and the offer was accepted. In 1920, H promised to contribute $200

000 for another fund for the respondent, on the condition that the previous promise for $150 000 would be included in that amount (the gymnasium was no longer going to be built). H paid $100 000 in the next four years, but gave a promissory note to the respondent for the balance of $100 000, payable three years after the date of the note. H went bankrupt in the meantime, and the trustee in bankruptcy (defendant) disallowed the respondent’s claim for the amount of the note. The respondent sued, the trial court reversed the disallowance, the appellate court affirmed the disallowance, and the matter is now before the Supreme Court.

Issues Was there a real and lawful cause and consideration that would render the obligation to pay $200 000 legally enforceable?Holding Yes Royal InstitutionReasoning There had been cause for the first obligation, to pay $150 000 because it had been entered into with the intention of carrying it out

The release of the first obligation was the cause for the second obligation, to pay $200 000 According to the Common Law, consideration may be constituted by an antecedent debt or liability According to Quebec Civil Law, an obligation must have “a cause from which it arises” (Art. 982, CcBC), “Something which forms the

object of the contract; A lawful cause or consideration” (Art. 984(3) and (4), CcBC) (CCQ 1385) According to Pothier’s view, the desire to make the donation is sufficient cause in agreements to make charitable donations, and in

bilateral contracts, the exchange, the agreement, or the risk assumed by the parties to the contract are the cause Cause and motive are not the same thing

Ratio The intention to give freely, “l’intention libérale”, is sufficient cause to render a promise to make a charitable donation binding.Comments From the common law perspective, the first promise ($150 000 for the gymnasium) would have been a gratuitous promise, making

20


it unenforceable. This may also have rendered the second promise without consideration.

CVL Law and Formality

L.L. Fuller, “Consideration and Form” Historically CVL favoured formality, as time went on this was on the decline and the concern was whether there was a contract at all In CVL Art. 1824 – a contract for donations require a notary Fuller identifies three functions for formality: Cautionary Function – this is to make sure that parties are aware of what they are entering and check for inconsiderate action)

o Parties should be cautioned before a contract can be made legally bound to get the parties to think twice about their agreement. Evidentiary Function – agreement put down in writing by lawyers, later in court it can be proven in case of controversy

o Parties have publicized their legal intent to make a commitment. However, it is a good thing for parties to evidence their acceptance of the bounding of that agreement so that it can be enforced.

Channeling Function – it provides a mold, don’t need to wonder if the parties’ intentions or type of contracto Consideration doctrine channels some contracts into baskets of enforceable and unenforceable ones. Ultimately, this is the issue in every

single case in contract law. 1 and 2 attempt to capture what the parties are doing in their pre-legal exchange. Jhering: “Form is for a legal transaction what the stamp is for a coin.”

CML and GiftsGifts seen as gratuitous promises – and are not enforceable - need to be protected from giving things for free – there need to be a form of reciprocity or ConsiderationGifts can be given without consideration by making the gift under seal – this is a deliberate act that indicates the seriousness of the gift (not done rashly), however the default is consideration

Note the parallel: form requirements for donative agreements in the CVL and consideration in the CMLConsideration as an additional requirement for the enforceability of informal promises in the Common Law (Consideration as Form – indication of seriousness, consideration can be a peppercorn!)

Exchange of consents (and capacity)Form (where required)Object Cause – reasons for the voluntary undertaking (same roots of consideration but different function)

3.2.Common Law Consideration

Immensely important (more so than cause) Note the parallel: Form requirements for donative agreements in the Civil Law, and Consideration in the Common Law! Consideration as an additional requirement for the enforceability of informal promises in the Common Law “Indication of Seriousness” Not necessary for promises “under seal” Literal and original meaning: Factors considered by the promisor when she promised; motivating reasons which induced the promisor to make the

promise (Simpson) Figurative usage: If consideration is “good”, this meant that the court found sufficient reasons for enforcing the promise (Atiyah). Atiyah recommends

against the box-checking doctrine approach, but argues it should be “the considerations” that lead a Court to enforce a promise. Development of a body of rules, a “doctrine” of certain and defined scope: Promises can have “good consideration” and still not be enforced for other

reasons.

Origins of Consideration

A.W.B. Simpson, “The Doctrine Consideration – Intro, in a History of the common law of Contract: The Rise of the Action of Assumpsit”: CB 214 Literal and original meaning was to gather reasons/factors and motive behind the promisor when she promised, later in the 19th century other issues

separated from consideration (illegality, economic duress, unconscionabilty, etc.)

Atiyah, “Consideration: A Restatement” [excerpts]: CB 215 If consideration is “good” this meant that the court found sufficient reasons for enforcing the promise; Atiyah argues that consideration need not be

abolished – but other justifications for deciding what promises are enforceable are needed. The conventional account of the “doctrine of consideration” no longer accords with the law actually enforced. Doctrine of consideration is not based on fixed rules that froze in late 19th c. The courts never tried to create a doctrine of consideration – instead they’ve decided which promises to enforce (and therein found ‘good’

consideration). So – consideration is a reason for the recognition of an obligation (assumes that consideration is necessary for enforceability and that law is rational). Nothing inconsistent now seen in finding consideration but refusing to enforce the transaction because it’s illegal or because there was no intent to

create legal relations.

21


Sometimes there are good reasons for enforcing gratuitous promises: “courts often enforce promises which are not bargains, and … they do so for reasons of justice and good policy.”

It may be wise to enforce gratuitous promises more widely (including unrelied-upon gratuitous promises), but not to the same extent as commercial promises; we need to consider more closely the kind of circumstances in which people do rationally make gratuitous promises

3.2.1. Bargain Theory

“An Act or forbearance of the one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise this given for value is enforceable.” (Sir Frederick Pollock)

Clear Situations Promise in exchange for immediate economic value: enforceable Promise in exchange for promise of economic value: enforceable Charitable/gratuitous promise: not enforceable (except if made under seal)

Does it make sense that promises to make a gift are not binding, whereas an actual gift cannot to be revoked? Why should delivery make a difference? Because delivery (actually giving something away) could be seen as performing the function of a formality: It is both evidentiary and cautionarySee Art. 1824 (2) CCQ!

“A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”

Consideration does not look at the contract as a whole, but goes to each promise to see if there was a quid pro quo for each promise given (object exchanged for an act or forbearance)

Consideration in Bilateral Contracts

In bilateral agreements: a promise is exchanged for a promise (consideration is the other’s promise); mutuality of the promise (e.g. settlement of a lawsuit is a promise whereby one party pays money in return for the other party not suing them).

Promise

A B

Consideration

(A buys B’s promise; B buys A’s promise)

Consideration in Unilateral Contracts

In unilateral agreements, the promise one wishes to enforce is exchanged for an act or forbearanceA truly unilateral agreement can be restated in this formula: If you do (or not do) x, I promise yThe doing of the requested act or complying with the request to forbear simultaneously accepts the offer and provides the consideration rendering the promise enforceable (e.g. finding a dog for a reward)Promisee must give something; promisor need not receive anything Consideration is through performance, unless A B there is performance, there is no consideration Performance

All informal promises need consideration – always ask has there been a bargain (has the promise been bought?)

CML – Holt v Feigenbaum, 52 N.Y. 2d 291 (N.Y. 1981): CB 225Jurisdiction USAFacts Plaintiffs and defendant were shareholders in a company which defaulted on a loan. Plaintiffs had signed a personal guarantee to the bank,

agreeing to be jointly and severally liable for the full amount of the loan in the event of default. The defendant had not signed this guarantee. All of the shareholders in the company, including the defendant, also entered into a cross-indemnity agreement in which each promised to contribute a pro rata share of the loss incurred by any one of them who should be held liable to the bank as a result of his personal guarantee. The company defaulted on its loan, and the bank recovered the amount owed in full from six of the company’s shareholders. The six shareholders in turn attempted to recover the monies owed to them under the cross-indemnity agreement, but the defendant did not honour his pledge, arguing that the promise was unenforceable for lack of consideration.

Issues Was the cross-indemnity agreement entered into by the defendant unenforceable for lack of consideration?

22


Holding No Holt.Reasoning Gabrielli J:

The Court says that F’s claim that he promised, but he can’t benefit and therefore there is no consideration is a faulty theory. F’s promise induced a promise from the other shareholders by which they lost something and that is enough. The others incurred a loss from relying on his promise and that means there is consideration.

Defendant argues that because he had not signed the guarantee to the bank in the first place, he did not benefit from the cross-indemnity agreement entered into with the other shareholders

Although this is true, benefit to promisor is not the only requirement: “A specific, bargained for legal detriment may enforce a promise against the promisor, notwithstanding the fact that the latter may have realized no concrete benefit as a result of the bargain.”

All contract law springs from the tort of assumpsit – this is where someone promises to undertake something, breaches the promise, and as a result, the other party incurs a detriment.

In this case, the plaintiffs incurred the detriment of being obliged to share costs with anyone who was made to fulfil the guarantee to the bank

The defendant’s promise induced reliance on the part of the plaintiffs and induced them also to enter the cross-indemnity agreement.

Ratio Consideration may be in the form of a detriment to the promisee when no benefit is incurred by the promisor.Comments There is a long historical section in this judgment about the importance of detriment. Eventually “an action in assumpsit [“he has

undertaken”] could… be maintained upon a showing of any detriment, loss, or disadvantage to the promisee arising from the bargain.”

CML – Hamer v. Sidway (1891), 124 N.Y. 538 (C.A.): CB 221Jurisdiction USAFacts A nephew had been promised by his uncle that if he did not drink, use tobacco, swear, or gamble until he 21 years of age, his uncle would pay

him $5000. The nephew agreed, and fulfilled his part of the obligation. When he turned 21, he wrote his uncle and informed him that he had performed in full and was therefore entitled to the $5000. The uncle replied, acknowledging his promise to pay him $5000, and saying that he would keep the $5000 in the bank for his nephew until he would be “capable of taking care of it”. In the postscript, he added, “You can consider this money on interest.” The nephew consented to these terms and conditions. The uncle passed away without having paid any portion of the $5000 and interest.

Issues Was there good consideration for this agreement?Holding Yes Nephew.Reasoning Parker J:

The first question is whether abstaining from drinking, using tobacco, swearing, or gambling counts as consideration. The defendants argue that because performance of these conditions in fact conferred a benefit on the promisee, rather than a detriment, they are not consideration

However, jurisprudence shows that the surrender of any legally protected right is sufficient consideration to uphold a contract. In this case, the nephew gave up his legal rights to drink, use tobacco, etc., thereby restricting his lawful freedom on the faith of his uncle’s agreement. Therefore, the first agreement was legally enforceable.

The second question was whether or not the uncle’s reply to the nephew’s claim for the $5000 constituted a continuation of the debtor-creditor relationship, or whether it created a new relationship of trustee-cestui que trust

The language of the uncle’s letter to his nephew assured him that the money would be held for him without interference, with interest, until he would be ready to take care of it. All of the elements necessary for the creation of a trust were present

Ratio Consideration “consists either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other.”

Comments Restriction of future freedom is consideration enough to make a promise enforceable. Claim in CML to enforce the contract against the estate is barred – debts are paid out of the general patrimony of a debtor, but

once a trust is formed, the property is no longer part of the settlor’s patrimony, so the judge finds that the $5000 is no longer part of the uncle’s assets (patrimony)

People regularly sell their “beneficial interest” in a trust The fact that the debt has been sold twice indicates a high degree of reliance (the person suing had paid twice for this debt).

On Consideration and Inducement“It is said that consideration must not be confounded with motive. It is true that it must not be confounded with what may be the prevailing or chief motive in actual fact. A man may promise to paint a picture for 500 dollars, while his chief motive may be a desire for fame. A consideration may be given, and accepted, solely for the purpose of making a promise binding.

But, nevertheless, it is the essence of a consideration, that, by the terms of the agreement, it is given and accepted as the motive of inducement of the promise. Conversely, the promise must be made and accepted as the conventional motive or inducement or furnishing the consideration.

The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise.” (O.W. Holmes Jr.)

3.2.2. The Bargain Test“It is said that consideration must not be confounded with motive. It is true that it must not be confounded with what may be the prevailing or chief motive in actual fact. A man may promise to paint a picture for 500 dollars, while his chief motive may be a desire for fame. A consideration may be given, and accepted, solely for the purpose of making a promise binding.

23


But, nevertheless, it is the essence of a consideration, that, by the terms of the agreement, it is given and accepted as the motive of inducement of the promise. Conversely, the promise must be made and accepted as the conventional motive or inducement for furnishing the consideration.The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise.”- O.W. Holmes Jr.

Remember the principle of “mutual inducement”Lack in cases of past consideration

1) First level of analysis: Action taken before the promise is made: “Past Consideration”No consideration under the Bargain Test!

CML – Roscorla v. Thomas (1842), 3 Q.B. 234: CB 230Jurisdiction USAFacts Roscorla (plaintiff) bought a horse from Thomas (defendant) for £30. After the sale, defendant promised that the horse was sound and not

vicious. Horse turned out to be vicious and the defendant initiated an action for breach of warranty of the soundness of a horse.Issues Was the purchase of the horse consideration for the warranty, i.e. a promise that the horse was in good condition?Holding No Thomas.Reasoning Denman J:

The sale was concluded before the promise of the horse’s fitness – the court sees the warranty as a fresh new promise with no consideration.

“The promise must be coextensive with the consideration” but it came afterwards – see evidence in the text itself (“bought” always preceding “promised”)

A promise must be bargained for – if there is no reciprocity, there is no consideration.Ratio Past consideration is no consideration.Comments Now we have consumer protection acts that imply guarantees.

2) Second level of analysis: Can there be an exception to the rule of past consideration? “Moral obligation”Mills v. Wyman, Supreme Judicial Court of Mass. (1825): Promises in consideration of moral obligations “the law has left to the interior forum, as the tribunal of conscience has been aptly called.”

Webb v. McGowin, Court of Appeals of Alabama (1935): Webb saved McGowin’s life from an accident which left Webb disabled for life. In gratitude, McGowin promised to pay Webb $15 every two weeks for

the rest of Webb’s life, payments were made for 8 years, McGowin dies and estate resists further payment.Moral obligation: “Having received a material benefit from the promisee, [promisor] was morally bound to compensate him for the services rendered.”“I do not think that law ought to be separated from justice, where it is at most doubtful.”

Is any bargained-for consideration sufficient?“It is an elementary principle that the law will not enter into an inquiry as to the adequacy of consideration.”“Severe inadequacy of consideration may be relevant to the determination of the existence of fraud or the applicability of the doctrine of unconscionability, but it does not preclude a finding of sufficient consideration.”

3.2.3. The Peppercorn Theory

Anything given in return for a promise is enough, even if it is a peppercorn. (No inquiry into the adequacy of consideration!! Consideration must be sufficient but it doesn’t have to be adequate – it doesn’t matter what is paid but as long as something is given in return – even if it’s a peppercorn. Ba dum bump.)What if the consideration is clearly “nominal”? It’s been made up to make the contract enforceable. There is an extra step here to cast the promise in the form of a bargain, and therefore, ensures seriousness/no rash decisions – remember “consideration as form”!e.g. I’ll give you my house for $1Consideration in the form of a bargain becomes a formality.

“it is an elementary principle that the law will not enter into an inquiry as tot he adequacy of consideration.”“Sever inadequacy of consideration may be relevant to the determination of the existence of fraud or the applicability of the doctrine of unconscionability, but it does not preclude a finding of sufficient consideration.”

Donations and Manufacturer’s warranties are not binding.

Is any promise given for a promise good consideration?It has to be a binding promise (there would be some kind of conditions for rescinding the promise). If it is not, then you have given nothing, not even a peppercorn.

There must be “Mutuality of Obligation” Both parties must be under a REAL obligation, even if that obligation is implied. If consideration for a promise is a promise, the essence of this consideration is not its economic value, but the fact that it is a commitment that restricts future freedom.

Is one of the promises “illusory”?

24


If the promise appears to be conditional on an event that is entirely within the promisor’s control (saying, in effect: “I will if I want to”) or if the promise is coupled with a power to terminate the agreement at will without notice, these are illusory promises.

CML – White (Executor) v. William Bluett (1853), 23 L.J. Ex. 36: CB 220Jurisdiction UKFacts The defendant had owed his father a debt. The now-deceased father’s estate is suing the son on the promissory note which acknowledged the

debt. The son claims that his father had promised to forgive the debt if the son would stop complaining that his share of the father’s property was not equal to the shares given to the other children. The son asserts that because he had kept his part of the bargain, he was entitled to the forgiveness of the debt.

Issues Was there consideration sufficient to enforce the father’s promise?Holding No White.Reasoning Pollock:

There can be no binding promise without consideration. Forbearance or abstention from doing something one has no right to do in the first place cannot serve as consideration for a

contract. (One cannot waive a right one does not have).Ratio The waiving of a right one does not have in the first place cannot count as consideration to make a promise enforceable.Comments Once there is a written relationship, flimsy consideration is going to be less effective in trying to turn over this relationship (i.e.

parties who knew to write a promissory note also knew enough to write down a change to it) Son still had a right to complain, so this is not forbearance from rights, but forbearance from action (unlikely that parties intended

to create a legally binding agreement (McCamus).

CML – Miami Coca-Cola Bottling Co. v Orange Crush Co.Jurisdiction USAFacts Orange Crush gave Miami Coca-Cola the exclusive right to bottle and distribute Orange Crush in a designated territory. Orange Crush agreed to

supply concentrate and to advertise in the territory. Miami Coca-Cola agreed to purchase a specified amount of concentrate and use its best efforts to promote sales. The agreement was a perpetual license but Coca-Cola had an option to terminate at any time. After one year Orange Crush terminated the agreement and Coca-Cola sued to compel performance. The court dismissed the case on the grounds that the contract was unenforceable for lack of mutuality of performance and Coca-Cola appealed.

Issues Was there a binding contract?Holding No Orange Crush.Reasoning Bryan J:

If a party’s obligation under a contract may be terminated at any time, the other party may terminate the contract at any time also, regardless of its contractual obligation (i.e. the contract is void).

Specific performance will be denied for want of mutuality of performance. In this case, the consideration was a promise for a promise, but Coca-Cola did not actually promise anything because they could

cancel the contract at any time – therefore, the contract lacked consideration and could not be binding.Ratio A promise for a promise is only valid when both promises are binding.Comments This is an example of an illusory promise.

Coke is seeking to enforce OC’s promise – but OC was the only party who was effectively bound by the contract, and because Coke had made no reciprocal promise to that effect, OC’s promise was not binding either.

What is the promise in question here? Must there be consideration for each promise within a promise? Power of cancellation – on entire contract – each promise in the contract is dependent on Coke’s being willing to continue. The fact

that this sole condition exists is enough to render the entire contract void.

Or can a promise insubstantial on its face be read as not being “illusory”? The principle of mutuality is satisfied where, although a party does not seem to have made a promise if regard is had only for the party’s explicit words, a promise is nevertheless implied from the party’s words or actions. In such cases, the implied promise serves as consideration just as if it were an explicit promise.

3.2.4. MutualityMutuality is satisfied where, although a party does not seem to have made a promise if regard is had only for the party’s explicit words, a promise is nevertheless implied from the party’s words or actions. In such cases, the implied promise serves as consideration just as if it were an explicit promise (Wood v Lady Duff-Gordon)Here Defendant claims that she was obliged to pay him, in case he felt like doing something – he can do work but has no obligationThe judge ruled that the promise was not illusory through an “implied duty of reasonable efforts” – this is now codified in the UCC

CML – Wood v. Lucy, Lady Duff-Gordon (1917), 118 NE 214 (C.A.): CB 228Jurisdiction USAFacts Defendant is a fashion diva – goods issued under her name have increased market value. She hired the plaintiff, who was given the exclusive

right to place her endorsement on the designs of others, place her designs on sale and to licence others to market them. She was to receive 50% of all profits and revenues. This exclusive right was to last a year, with possibility to terminate agreement by notice of 90 days. Defendant placed her endorsement on goods without his knowledge and not granting him his share. Plaintiff sued for damages.

Issues Even though the contract does not specifically mandate the plaintiff to act, is there an implied promise that constitutes consideration?Holding Yes Wood.Reasoning The question is – did W actually agree to do anything?

D-G says that there is no consideration because W does not actually have to do anything – but W could not have made money without work

There was an implied promise that W would work hard – more to the contract than meets the eye (“The law has outgrown its

25


primitive stage of formalism where the precise word was the sovereign talisman, and every slip was fatal”… the promise was “instinct with an obligation”

There was sufficient consideration in the implied promise made by the plaintiff to assume duties (monthly accounting, responsibility for patents and trademarks, etc.) in order to earn his 50% - there was business efficacy the contract is enforceable

“Without an implied promise, the transaction cannot have such business efficacy as both parties must have intended that in all events it should have” (intention to create legal relations)

Ratio Even if an express promise is lacking or “imperfectly expressed,” when both parties assume duties (test of business efficacy), there is consideration and the promise is enforceable.

Comments In a bilateral agreement, either party can sue – but if W failed to perform, would/could D-G sue him? Cardozo refers to formal written contracts as “primitive” (interesting because contractual arrangements are often seen as the

pinnacle of modernism, as opposed to “primitive” custom) Now codified in the UCC!

Uniform Commercial Code§ 2-306. Output, Requirements and Exclusive Dealings.(1) […](2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

Mutual Obligation in Unilateral CasesThe very nature of unilateral cases means that mutual obligation cannot be applied.

CML – Dahl v. HEM Pharmaceuticals Corp., United States Court of Appeals, Ninth circuit, 7 F. 3D 1399 (1993): CB 228Jurisdiction USAFacts HEM promised Dahl and other patients a year’s supply of an experimental drug at no charge in exchange for their participation in a testing

program for FDA approval. The patients submitted to the tests, but upon completion of the program, HEM ceased to provide them with the drug, arguing that because the patients had participated voluntarily and had been free to withdraw at any time, there was no binding obligation and no consideration.

Issues Was there mutual obligation and thus consideration in the contract?Holding No mutual obligation in unilateral contracts, but there was consideration Dahl.Reasoning Kleinfeld J:

HEM entered into a unilateral contract. The patients fully performed the conditions for acceptance (participation in the experimental program), resulting in a binding obligation for HEM to provide them with a year’s supply of the drug at no charge.

By incurring the detriment of undergoing “intrusive and necessarily uncomfortable testing,” the patients provided consideration for the contract.

Ratio Detriment incurred by a party performing the conditions for completion of a unilateral contract is sufficient consideration to make the contract binding upon completion.

Synthesis and analysis Very little discussion of the appropriateness of enforcing the promises in White and Hamer – judges hides behind consideration (Wood is an exception) White turned on law, not facts – but weight is given to the uncle’s statement in front of everyone in Hamer In White, abstention from complaining was found to be not consideration; in Hamer, abstention from drinking/etc was found to be valid consideration Consideration was found in Hamer and Wood – some of the reasons may be revealed in the table:

FULLER White Hamer WoodClear evidence of promise? no yes yesPromisor’s awareness of undertaking a legal obligation?

? yes yes

Typical of a commercial exchange? no no yesOTHER

Reliance, unjust enrichment? no reliance (debt had been sold) ?

CML – Stott v. Merit Investment Corp. (1988), 63 O.R. (2d) 545 (C.A.): CB 232Jurisdiction Ontario (?)Facts Stott was a salesman for Merit and purchased gold future contracts for a customer, Guyenot. Stott sold two of Guyenot's contracts when

Guyenot’s margins diminished. Guyenot complained to Stott's superior Douglas, who authorized the repurchase of the two contracts and accepted a post-dated cheque. Cheque bounced and Guyenot's accounts were sold out. Price of gold declined, Guyenot owed $66,000 to Merit. Stott was asked to sign a document stating his unconditional responsibility for the debt, which he did in exchange for forbearance of suit and continued employment at the company. Sums deducted from Stott's subsequent commissions (payable in full in the event of his resignation). Stott signed another document in which he agreed to pay $35,000 if a settlement was reached with Guyenot. Stott resigned and brought an action to recover the amount that had been deducted from his commissions.JUDICIAL HISTORY: Trial judgement: was Stott liable for Guyenot's debt to Merit? Judges found that he was not, since the losses were a result of the intervention of Stott's superior. Merit Appealed.

Issues Was there valid consideration (on the part of Merit) for Stott’s promise to pay for his client's debt?Holding Yes Merit.Reasoning Finlayson JA [majority]:

Distinguish question of fact and question of law: evidence for consideration was there.

26


Was the claim a bona fide at the time it was asserted? Stott had clearly acknowledged his indebtedness in the first document he was asked to sign. Subsequent conduct reaffirmed this. Forbearance to sue was valid consideration because both parties at the time believed it to be valid, even if it was in fact not valid. Trial judge made no finding that Merit had acted in bad faith.

Stott's concern for his future at the firm was incentive for him to sign the documents. Observe this case from a businessman's perspective: Stott's original employment conditions did not make him liable for the default

of his customer. His superior's acceptance of the post-dated cheque reduced Stott's liability for Guyenot's account, but his acknowledgment of the debt by his signature meant that he accepted responsibility.

Blair JA [dissenting]: Intervention of his superior exonerates Stott from liability on the Guyenot account. Stott was not liable in his employment contract; therefore Merit had no claim against Stott. Fall-off in market activity leading to the portion of Stott's bonus being deducted is problematic. Payment of the bonus was made

under the original contract. Manipulation of such employee benefits provides no consideration for the agreement.Ratio Where both parties are found to be in good faith, even if consideration is not valid in law, the fact of both parties believing that the

consideration was valid is enough to render the promise enforceable. (“If you’re giving up a right that you don’t actually have as consideration for a promise, you must at least be in good faith that you have that right.”)

Comments Couldn’t the doctrine of duress apply in this case? If Stott was afraid of being fired, and signed because of that fear, perhaps that could invalidate the contract.

o We are not dealing here with the duress element to this K (law will not enforce a K if someone did not sign it freely enough)

Other possible (policy) reason for having enforced this K: trying to encourage settlement-once-and-for-all Employee benefits may be exchanged as consideration in return for something from employee (promise not to fire is consideration,

but promise not to quit is not) Implicit forbearance is sufficient consideration

3.2.5. Pre-Existing Duty Rule

A promisor does not give a sufficiently substantial promise if she promises to do something she is already obliged to do. You can’t ask to be paid for something you are already obliged to do.

Has the promisor made a new commitment, adopted a new constraint? Public duty? (ie. Policemen…this is to avoid corruption) Contractual duty? (Duty owed to a third party, Duty owed to the promisee)

o Example: duty owed to a third party occurs when a party (A) promises another (B) to do something for a third party (C), there is no contract between A and C, B has an obligation with C, A tries to get extra money from C in exchange for delivery (which he was already obliged to do for A)

One-Sided Variation of the Agreement The Pre-Existing Duty Rule produces reasonable outcomes in situations where one party exploits the other party’s need to have the pre-existing duty

performed by exacting an additional fee.

CML – Harris v. Watson (1791), 170 E.R. 94 (H.L.): CB 231Jurisdiction UKFacts Plaintiff was a seaman on board a ship, of which the defendant was the commander and owner. Defendant offered additional wages for extra

work because the ship was in danger. The freight was lost. The seaman was not paid. Plaintiff brought suit.Issues Can an implied condition exist as a claim of an exception to a valid contract based on dangerous situations?Holding No Watson.Reasoning Lord Kenyon:

If the freight of a ship is lost, then all the wages are lost Matter of policy: a way of preventing seamen from extorting money in times of crisis The condition for the additional wages was for the freight to arrive successfully?

Ratio Rule based on public policy: avoid exploitation in times of crisis.Comments No doctrine of consideration at this point – this was a serious public policy question. It would have been bad public policy to

enforce this promise because it would have had an effect of sailors extorting extra pay in dangerous conditions. No doctrine of duress either

Stilk v. Myrick, [1809] EWHC KB J58, (1809) 170 ER 1168; KBJurisdiction UKFacts Plaintiff was a seaman on a ship from London to the Baltic. Two sailors deserted. As a result the captain offered to split their wages equally

among the remaining sailors if two substitutes could not be found before the ship's return to London. Plaintiff was not paid and filed an action to recover wages.

Issues Was the plaintiff entitled to additional pay for extra work on the ship in a time of emergency?Holding Fuck no Myrick.Reasoning Agreement void of consideration – extra wages were promised for a duty that had already been agreed to for the original wages

Conditions of the voyage, including times of emergency, were already agreed to Desertion of two seamen created an emergency – the rest of the crew were still bound by the terms of their original contract

Ratio Agreements stemming from a pre-existing duty are void for lack of consideration – there is no new consideration than one already given for another obligation. In other words: No consideration for contract when X is giving Y something that Y was already entitled to.

Comments It’s a hard life. Go get a union job.

27


Doctrine of consideration starting to develop.

CML – Kirksey v. Kirksey 8 Ala 131; 1845 Ala.: CB 245Jurisdiction USAFacts Plaintiff was the wife of the defendant’s brother and had several children but had been a widow, lived on her public land under a contract of

lease and was comfortably settled. The plaintiff wrote to her saying “if you will come down and see me, I will let you have a place to raise your family, and I have more open land than I can tend, and on account of your situation, and that of your family, I feel like I want you and the children to do well.” Plaintiff moves to the defendant’s residence who put her in comfortable houses and gave land to cultivate for 2 years, after that he put her in an uncomfortable house in the woods and later asked her to leave.

Issues Was the promise to give land legally binding?Holding No Defendant.Reasoning “The promise on the part of the defendant, was a mere gratuity, and that an action will not lie for its breach.”

The brother-in-law made a promise that was not induced by consideration – was just doing her a favour thus the bargain test fails, she had consideration but he did not bargain for it.

Ratio This was before the principle of promissory estoppel – today, she would have been allowed to stay in the house and on the land because of her reliance on the promise.

Comments Ormond J, even at this time, believed that the detriment incurred of moving her entire family was sufficient consideration to support the promise, but he was over-ruled by the other judges on the bench.

Her giving up her own place to live was not the price brother-in-law bargained for, therefore it didn’t count as consideration – bargain test fails

Distinguished from Hamer v. Sidway because in this case, she did not expressly restrict her future freedom But this is like a unilateral contract – “move to my place and I’ll give you a place to live” – however, her move to his place was not

the consideration intended – it was just incidental – if she moves, he will make her a gift. It’s not that he wants her to move.Williston’s Example (1920)“A benevolent says to a tramp, ‘if you go around the corner to the clothing shop there, you may purchase an overcoat on my credit.’ No reasonable person would understand that the short walk was requested as the consideration for the promise, but that in the event the tramp going to the shop the promisor would make him a gift”

CML – Gilbert Steel Ltd. v. University Construction Ltd. (1976), 12 O.R. (2d) 19 (C.A.): CB 234Jurisdiction Ontario (Court of Appeal)Facts Appeal of a dismissal of the plaintiff’s action in damages for breach of an oral agreement for steel delivery. Three steps: (1) original contract for

supply of steel to three construction sites; (2) Modification of original contract for increased price of steel for the third site; (3) Oral agreement for a second price increase for second half of steel delivery for third site – fact of oral agreement not in dispute.After third step (oral agreement), defendant accepted delivery of steel against invoices which reflected revised prices, but did not pay in full.

Issues Was there consideration for the oral promise?Holding No University Construction.Reasoning CREATIVE ARGUMENT: Mutual abandonment of former contract is consideration enough to support the new agreement, which

impliedly rescinds the old contract (rejected due to lack of evidence – a price increase is not enough in and of itself to rescind the old contract – no consideration there). It cannot be by implication only.

Plaintiff promised to give a “good price” in the future (rejected for vagueness) Promise of 60 days credit for amount owed on original prices replaced by promise of 60 days credit for amount owed on new,

higher prices is consideration (rejected because (1) no, it actually flows from the price; and (2) case used to support this claim was clearly distinguishable from the case at bar)

Estoppel – by his conduct in accepting delivery against invoices reflecting higher prices, defendant had in effect acquiesced to the increase (rejected because estoppel cannot be used as a sword – i.e., never by the offeror; it also fails because estoppel requires detriment incurred for the plaintiff)

Estoppel requires proof of (1) defendant giving up right to insist on original price; and (2) plaintiff’s reliance on this – neither happened. The oral agreement was a variation on the contract, not a new contract no consideration.

Ratio Affirmation of the pre-existing duty rule – where an agreement has already been entered into, agreement to the same performance for a different price is not supported by consideration.

Comments Bargaining power equal – savvy business people... mutual re-negotiation – why can’t this stand? We need to adapt this rule to circumstances different from the initial ship context

Business relationship, no duress in this context, other party came back to the table and wanted to re-negotiate, and the other party even agreed.

This case has been heavily criticized by K thinkers: the price of steel can’t be something that they hadn’t thought about (central to GS’s commitments) – it’s the supplier’s problem if his own supplies rise in price; doesn’t reflect a relational view of Ks

They could have included an “escalator clause” whereby the price is permitted to fluctuate – instead they kept the price fixed, so depending on price fluctuations, either party could have benefited (allocation of risk has potential upsides and downsides)

In this case, all the court had were the written documents – parties adjust documents regularly, but these parties didn’t do so formally (no seal on the adjusted [non-]K, which allowed GS to save money but eventually voided everything)

CML – Williams v. Roffey Bros and Nicholas Ltd., [1991] 1 Q.B. 1 (C.A.): CB 238Jurisdiction UKFacts Plaintiff is a carpenter, who was hired to carry out work in 27 flats by the defendants, building contractors who had entered into a contract to

refurbish a block of flats. The carpenter was hired on three separate sub-contracts that were eventually superseded by a sub-contract in writing, in which the defendants would pay him £20,000 for the work. Implied term that the carpenter would receive interim payments, related to the amount of work done, at reasonable intervals. Carpenter received £16,200 after having completed a substantial part of the work, but a few months later, he was in financial difficulty. It was found that the price of the contract was not appropriate for this type of

28


project, and the defendants agreed to pay the plaintiff the further sum of £10,300 so that the work would be completed on time. The defendants only paid £1,500 and the carpenter ceased to work. The defendants had to hire another carpenter but did not meet the deadline set by their contract with the Housing Association.

Issues (1) Was there consideration for the defendants’ promise made during the refurbishing period to pay an additional price to the plaintiff? (2) Is the renegotiated agreement enforceable?

Holding (1) Yes; (2) Yes Williams.Reasoning Roffey Bros. argue no consideration, pre-existing duty

Denning in Ward v. Byham: consideration can be found in practical benefits to the promisor, even if promisee is just doing what they have to do anyways.

Legal concept of economic duress: if a sub-contractor agrees to undertake work at a fixed rate, he could take advantage of the difficulties he will cause if he does not finish the job. The contract could therefore be void. Not found to be the case here (W didn’t hold Roffey Bros. hostage).

Estoppel not invoked, therefore not applied here. Contemporary law: if promisor doubts that promisee will be able to complete his side of the bargain, and promises more money

(not through duress or fraud) in return for having duties performed, he “obtains in practice a benefit, or obviates a disbenefit” that can count as consideration

Consideration must flow from the promisee, but this can mean a detriment to him, or a benefit to the promisor without detriment to the promisee

Ratio Consideration can be obtaining a benefit or obviating a disbenefit (actual or practical benefit is realized), even if receiving something already contracted for.

Comments “Maverick” decision – has not enjoyed success since? How can this case be distinguished from Gilbert? There was a pre-existing duty, but because the new promise conferred a benefit

(the work gets done because the carpenter doesn’t go bankrupt), and no detriment (questionable?) it is enforceable.o The only distinction between this case and the Ontario CA’s Gilbert Steel decision seems to be the idea of duress (Gilbert

Steel is trying to get a little too much money out of CUP)o W identified problem and as a result obviated disbenefit, but W didn’t demand increase in price (cf. Gilbert Steel)

What policy considerations are relevant/irrelevant/competing here? Shipmen’s/policemen’s duties (avoiding situations of extortion) vs. Sales on the open market (we want flexibility here).

Sets aside a whole set of consideration cases as not being consideration cases but duress (unreasonable pressure) cases; no duress here, so we’re trying to find consideration

Judges not clear on which of the possible options they accept as consideration – these would always be present in every scenario (the notion of benefit is stretched pretty thin)

Judge was probably sympathetic to W’s genuine financial distress (no blame; RBNL shouldn’t benefit from W’s mistake), and that W kept performing longer than RBNL (RBNL didn’t pay – broke the deal first)

3.3.Promissory Estoppel

The notion of promissory estoppel is used in relation to promises/undertakings that are not supported by consideration (and therefore not normally enforceable as contractual promises). Promissory Estoppel replaces consideration completely.

Traditionally, there is the Pre-Existing Duty Rule in the background. Through promissory estoppel, the person making the undertaking is prevented (“estopped”) from reversing her position. To say “I meant it at the time, but it’s not supported by consideration, so now I take it back” – this is unfair! We are trying to have consistency here and it

would be unjust to let them not be bound after the fact.

Lord COKE defined it as follows:"Estoppel cometh of the French word estoupe, from whence the English word stopped; and it is called an estoppel or conclusion because a man's own act or acceptance stoppeth or closeth up his mouth to allege or plead the truth."

Yes ENFORCEABLE

Promise under seal?

No

Yes ENFORCEABLE

Promise Given for Consideration

No SHIELD: ENFORCEABLEYes

Promissory Estoppel?

29


SWORD (compare Sec. 90 – reasonable foreseeability)No

UNENFORCEABLEHigh Trees is the leading case for promissory estoppelIn High Trees, Lord Denning decided that the undertaking not to claim the full rent during the war was binding, i.e. that the landlord was “estopped” from going back on his promise.Lord Denning referred to “promises which were intended to create legal relations and which, in the knowledge of the person making the promise, were going to be acted on by the party to whom the promise was made, and have in face been so acted on.”Compare Section 90 of the Restatement

CML – Central London Property Trust v. High Trees House, [1947] K.B. 130: CB 236Jurisdiction USAFacts In 1937, CLP (landlords) leased a block of apartments to HTH (tenants) for £2500 per year. In 1939 when the war broke out, most of the flats

had not been rented, the tenants could not pay, so the landlords agreed to reduce the rent to £1250. There was no duration specified for the rent reduction. By 1945, all of the apartments were rented, and the landlords wrote to ask that the full rent be paid and also claiming arrears (back rent) of £7916. The original lease had been a lease under seal.

Issues Was the promise to accept lower rent legally binding? If yes, what is the scope of that promise?Holding Partial judgment for the landlords – rent increase effective 1945, no arrears.Reasoning Denning:

Rule of equity: courts may give effect to a variation in writing to a lease under seal – in this case, to the rent reduction No consideration in the promise to give a rent reduction Promissory estoppel: in agreeing in writing to accept a lower rent, the landlord (1) intended to be legally bound; (2) knew the

tenants would act on the grounds of the promise by paying a lower rent. In fact, (3) the promise was acted upon by the tenants. Therefore, the landlord is not entitled to arrears notwithstanding the absence of consideration for the promise.

Scope of the promise to accept lower rent: applied only in wartime when the flats were not fully let – these conditions are no longer present, so the promise is no longer valid. The tenants must pay the original rent from the second half of 1945 onward.

Ratio Promissory estoppel – a promise made with the intention to be legally bound, and acted upon, cannot be gone back on after the fact, even if the promise was not supported by consideration. “The promise, intended to be binding, intended to be acted on and in fact acted on, is binding so far as its terms properly apply.”

Comments Distinguishable from Gilbert in a few ways:o Here, performance was completed to a certain extent because lowered rent was accepted for a significant period of

time, whereas in Gilbert performance (payment) was never completed (“extent of reliance”?)o Agreement here to accept less money (vs. Gilbert, where it was an agreement to pay more) – use of estoppel as a shield

(protection of reliance) rather than as a sword (to get more money out of someone “because they said”)o MOST OF THE JUDGMENT IS OBITER! (i.e. the discussion about arrears, because in this particular action they are only

looking for the payments for the last two quarters of 1945)o Leading case (Lord Denning) that creates a sub-category of estoppel (estoppel with a time limit), protecting relianceo IN ENGLAND AND IN CANADA: Estoppel cannot be used as a sword. Australia and USA are different…

There was no consideration, so no promise under CML – but 1870s merger of CML and Equity brings different rules to bear Denning gives himself authority – says that this is a natural principle (because he says so), and that the time has come (because he

has decided) “The time has come for the validity of such a promise to be recognized,” but Denning doesn’t mean that it can be sued upon by

either party later clarified in Combe v. Combe that he only meant promissory estoppel as a defence Denning might have found consideration instead (HTH not going bankrupt and continuing to lease the building, etc.) – but didn’t,

maybe because there were no terms in K2, or maybe because he felt that the law needed to develop in this way This is a “test action”: a sense that this is the first of several similar cases – but whereas CLPT was testing the two quarters in 1945

in preparation for maybe suing for more, Denning restricts the holding to a narrow victory for CLPT Distinction between accepting less for something and paying more for something under a K – so CLP’s accepting less rent and then

suing is different in two respects than CUP paying more in Gilbert Steel and then being sued: if you take the distinction seriously, then the holding might have been different if CUP had instead accepted less steel for the same price

Promissory Estoppel in Different Jurisdictions The ruling in High Trees was given a narrow scope in subsequent Anglo-Canadian decisions: promissory estoppel can only be invoked defensively/ as a shield (doesn’t work in Gilbert because it is used as a sword in that case).

“A promise to accept a small sum in discharge of a larger sum, if acted on, is binding, notwithstanding the absence of consideration...” The courts have refused to allow the party making such a promise to act inconsistently with it. Promissory estoppel, it has been said, is a “defensive

equity”. In Canada and in Great Britain, it is thus said that promissory estoppel can only be used as a “shield”: “to preclude departure from a representation by a

person in a pre-existing contractual relationship that he will not enforce his contractual rights.”

In the Absence of ConsiderationSHIELD: one-sided variation of contract in the form of a concession (giving up claims, accepting partial payment, etc.)

Situation: The party that has made the concession tries to enforce the agreement as it initially was before the concession was made. Eg. High TreesSWORD: one-sided variation of contract in the form of additional advantages

Situation: The party that benefits from the additional advantages tries to enforce the promise of additional advantages. Eg. Gilbert SteelSWORD: New relationship: promise or representation without exchange, but followed by reliance

30

ConsiderationPLAINTIFF WAS PROMISEE

Benefit to promisor:Wood v. LLDGWilliams (pay more)

Detriment to promisee:HamerStott

Failure to find consideration:White v. Bluett, Gilbert Steel

ReliancePLAINTIFF WAS PROMISOR

(another group of cases in which consideration may or may not be considered)High Trees (accept less)Tudale

Enforceable legal relation


Eg. Kirksey, Walton Stores

Synthesis and analysis

The courts here see a difference between paying more and accepting less (somewhat a function of the sword/shield distinction, but with different doctrinal history) – whether this is a good reason, it seems to be one that the courts usedIf one party agrees to pay more and then wants to pay lower price, estoppel might be seen as a swordIf one party agrees to pay less and other wants them to pay more, more likely that estoppel will be a shieldDoctrinal origin: Denning saw estoppel as an extension of equitable doctrine of waiver (one party is at liberty to reduce its rights) – so accepting less (looks like waiving rights) can be seen differently from seeking moreHamer v. Sidway doesn’t fit here, as the debt had been sold twice, so the plaintiff was the promisee but there was also a reliance interestThe reliance claim may be more compelling if you really show important actions in reliance outside the KGilbert (1978): Wilson J. found that a going transaction adjustment had no consideration (because only the price was changed – so how much else would have had to be changed?) some suggestion by commentators that Gilbert Bros were being slightly dishonest, that there was some duress exercised in raising the steel pricesWilliams (1991): consideration was found (has CML changed?) in real terms, advantage in having Williams continue his work, so a shift from the sailor cases (but the sailor cases may have been decided for policy reasons, not for consideration reasons)

Section 90 of the Restatement of ContractsUSA: Sect. 90 also recognizes that a promise made without consideration can nevertheless be enforced when it reasonably induces reliance – to the extent that “justice requires”.Applicable without a pre-existing relationship.

Section 90 of the Restatement

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach maybe limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding under Subsection (10) without proof that the promise induced action or forbearance.

Commentary: “Promissory Estoppel” – prevents a person from showing the truth contrary to a representation of fact made by him after another has relied on the

representation Promisor is affected only by reliance which he does or should foresee Enforcement must be necessary if injustice is to be avoided VERY FLEXIBLE RULE

o Also depends on the reasonableness of promisee’s relianceo Depends on the formality with which the promise is made

Reasonable reliance by a third party (“beneficiary”) on a promise between two people is also grounds for enforcement of the promise, based on same factors

Remedy might only consist of damages or relief measured by the extent of the promisee’s reliance rather than by the terms of the promiseo “Unless there is unjust enrichment of the promisor, damages should not put the promisee in a better position than performance of the

promise would have put him.” (CP p. 278) Gratuitous promises to procure insurance – applied with caution – reasonableness is taken into account

31


o Example 1: A (bank) lends B (lender) money. A mortgage on a house is security for the loan. A demands that B insure the house as a condition of the contract, but offers to take care of the insurance. B relies on the promise and does not seek insurance elsewhere. The house is destroyed by fire, and A did not take care of the insurance as promised. Even though there is no “consideration” (the promise to procure insurance on B’s behalf was a gratuitous promise), it was reasonable for B to rely, so the promise is binding.

o Example 2: A sells B an airplane, but keeps title to secure payment. A promises to keep the airplane covered by insurance for the amount of time that B needs to procure his own insurance. B could obtain insurance in three days, but doesn’t, and the airplane is destroyed after six days. A is not liable – the promise is not binding because the “term attached” was as long as B needed to obtain insurance if he acted right away. REASONABLE PERSON STANDARD.

Promises of gifts are only binding if reliance is foreseeable and reasonable, and involves a definite and substantial change in position which would not have occurred if the promise had not been made

Section 90 of the Restatement of Contracts also recognizes that a promise made without consideration can nevertheless be enforced when it reasonably induces reliance – to the extent that “justice requires”.

This is not just about what you bargain for or what you have the intention to do (cf. Lord Denning in High Trees), but also for what you should reasonably be able to foresee the promisee incurring in relying on your promise.

Broadens the application of promissory estoppel from only used in situations arising from the Pre-Existing Duty Rule to any new relationship. You can be estopped from renegging on a first promise in the States, whereas you have to be renegging on a second gratuitous promise where you already have a pre-existing duty in classical CML (ie Canada/UK)

Although the “justice requires” part is really very subjective! If you apply §90 to Kirksey, a judge now would put her in the position she would be in if she had never relied on his promise (they wouldn’t enforce the

performance). This compensation of having relied on this promise is a departure from classical CML detrimental reliance: the bro in law would have to pay for the things she lost.

Consideration is more than just form, it is the reason for enforcing a promise. This fundamental principle makes us assume that the relationship exists and enforce a promise after reliance/detriment has been incurred.

Australia – “Inching towards Section 90?” Walton Stores extended the doctrine of promissory estoppel to the enforcement of positive promises.

Where is the promise? “implied promise to complete the contract” “[M]ere reliance on an executory promise to do something, resulting in the promisee changing his position or suffering a detriment does not bring

promissory estoppel into play. There must be something more would be required.” “[T]he creation or encouragement […] of an assumption that a contract will come into existence or a promise will be performed and […] the other party

relied on that assumption to his detriment to the knowledge of the first party (and as intended by the first party).” “[A] departure from the basic assumptions underlying the transaction between the parties must be unconscionable.” Walton Stores imposes liability before both parties want to be bound: conflict of Private Autonomy and the requirement of Fairness/Good Faith

CML – Walton Stores (Interstate) Ltd. v. Maher., (1988) C.L.R. 387 (H.C.A): CB 241Jurisdiction USAFacts Maher negotiated with Walton Stores to lease a commercial property he owned. A draft lease was sent to Maher’s solicitor and amendments

were discussed. A few weeks later, Walton’s solicitor was told that it would be impossible for the new building to be completed on time unless the agreement was completed “in the next day or so”. Maher refused to demolish a part of the old building until the agreement was finalised.An executed lease “by way of exchange” (no exchange taken place yet – pre-contractual state – “gentlemen’s agreement”) was forwarded to Walton, and Maher proceeded with the demolition of the building.Walton had second thoughts and then was informed of the demolition.A few months later, building works were started by Maher, and before it was halfway completed, Walton said it did not want to proceed.Maher claimed Walton was estopped from going back on their earlier agreements about the lease.

Issues Was Walton estopped from retreating from its promise to complete the contract?Holding Yes Maher.Reasoning First factor: it was unconscionable for Walton to adopt the course of inaction which encouraged Maher to demolish the building

and build a new building. Behaviour of Walton made it seem like completion of the exchange was just a formality. Second Factor: urgency of the matter. The appellant was under an obligation to communicate with the respondents within a

reasonable time.o W “was under obligation to communicate with the respondents within a reasonable time after receiving the executed

counterpart deed and certainly when it learnt on 10 December that demolition was proceeding. It had to choose whether to complete the contract or to warn the respondents that it had not yet decided upon the course it would take. It was not entitled simply to retain the counterpart deed executed by the respondents and do nothing […] the appellant’s inaction, in all the circumstances, constituted a clear encouragement or inducement to the respondents to continue to act on the basis of the assumption which they had made. It was unconscionable for it, knowing that the respondents were exposing themselves to detriment by acting on the basis of a false assumption, to adopt a course of inaction which encouraged them in the course they had adopted. To express the point the language of promissory estoppel the appellant is estopped in all the circumstances from retreating from its implied promise to complete the contract.” p. 243

Ratio Promissory estoppel extends to representations (or promises) as to future conduct. Example of estoppel used as a sword in case where there was no pre-existing duty – detrimental reliance based on other party’s conduct is enough to support action in estoppel. BIG step away from classical doctrine.

Comments Court found an implied promise, however, there was no contract in terms of doctrine, rather case hinges on behavior of the party – just be negotiating one has entered into a promise/relationship where one must not act unconscionably

Negotiating leads to a relationship and duty to each other Parties to proposed contracts should be aware that their conduct before the contract is entered into may support an action in

estoppel by the other party should the other party rely on their representation and the estopped party have knowledge of this

32


reliance. This may be the case notwithstanding that contractual terms are still to be agreed. It was not crucial that there be an intention of the parties to enter contractual relations.

Note: court is enforcing the promise to contract. Requirement of unconscionability – normally only present in civil law...

Pre-Contractual DutiesImposing liability before both parties want to be bound: conflict of Private Autonomy and the requirement of Fairness/Good Faith See the German doctrine of Culpa in ContrahendoTo be continued in next section…

4. Contract Drafting and Interpretation

German Doctrine of “Culpa in Contrahendo” The wrong committed in the process of developing contract Idea that there is a duty of negotiating with good faith – being mindful of the other party’s interests, not just at the contract’s conclusion, but during

negotiation

German Civil Code (2002)

Section 311Obligations created by legal transaction and obligations similar to legal transactions(1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute.(2) An obligation with duties under section 241 (2) also comes into existenceby the commencement of contract negotiationsthe initiation of a contract where one party, with regard to a potential contractual relationship, gives the other party the possibility of affecting his rights, legal interests and other interests, or entrusts these to him orsimilar business contacts,[…]

Section 241Duties arising from an obligation(1) By virtue of an obligation an obligee is entitled to claim performance from the obligor. The performance may also consist in forbearance.(2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party.

CCQ 1425-1432, 1379, 1434-1436, 1377, 1384

Fact Pattern from Class

CML – Royal Bank of Canada v. KiskaJurisdiction CanadaFacts John’s brother signed a Bank agreement just after turning 18, guaranteeing John’s hairstyling business. John had already given security to the

Bank. The brother gained nothing personally, the Bank guarantee containing no promise to the brother. However, the Bank guarantee did say [SEAL] next to his name and after the brother left, the Bank applied a wafer to the paper. The Bank is suing to enforce this guarantee.

Issues Is Kiska liable for the guarantee of the debt?Holding Yes RBC.Reasoning Majority:

Is the agreement made under seal? No, the promisor has to apply his seal to indicate his seriousness. There must be the impression that you want to be bound to a

sealed document. There should be some formality preserved (the Bank can’t just apply the seal later). “The respective words are merely anticipatory of a formality which must be observed and are not a substitute for it. I am not

tempted by any suggestion that it would be a modern and liberal view to hold that a person who signs a document that states it is under seal should be bound accordingly although there is no seal on it. I have no regret in declining to follow this path in a case where a bank thrusts a printed form under the nose of a young man for his signature. Formality serves a purpose here and some semblance of it should be preserved, especially when it is recalled that the common law did not require either a testimonium or an attestation clause to make a sealed instrument enforceable; the operative act was the affixing or adoption of a seal.”

Is there an intention to create legal relations? Yes. The brother realized that this was a legal document and that it entailed some risk. Just because he hopes he won’t be held to

the contract, doesn’t mean he didn’t intend to create any legal relations. He wanted to help his brother and this was the only way to do it.

Is there an offer? Yes. There is a unilateral offer of contract from the brother to the bank. This is where the dissent goes off (because this unilateral

offer that the majority reads into the agreement is crap).Is there an acceptance?

Yes. The Bank starts to forbear from suing his brother immediately (and thus, the brother cannot revoke this promise at all).33


Is there consideration?1) Is the recital of consideration enough?

No. Recitals are never enough; this is not a peppercorn. They merely shift the burden of proof – now you must prove you didn’t get anything instead of the other proving he did give you something.

2) Does this pass the Bargain Test? Yes. The brother gave a guarantee and in return the Bank performed – they didn’t sue John for a “reasonable” length of time.

(compare with Stott – idea of forbearance) The brother may not have personally gained; however, consideration can confer benefit or act as a detriment. The brother bargained for the bank’s detriment (in forbearing to sue John). Consideration must flow from the promisee, but not necessarily to the promisor.

“No court of common law has ever said that there should be a consideration directly between the persons giving and receiving the guaranty. It is enough if the person for whom the guarantor becomes surety has benefit, or the person to whom the guaranty is given suffer inconvenience, as an inducement to the surety to become guaranty for the principal debtor.“

“In such a case as this it is not necessary that there should be an arrangement for forbearance for any definite or particular time. It is quite enough if you can infer from the surrounding circumstances that there was an implied request for forbearance for a time, and that forbearance for a reasonable time was in fact extended to the person who asked for it.”

3) Mutuality of obligation? Not required for a unilateral contract.

Is the contract enforceable? Yes. “Reduced to its simplest terms, what took place was this. The guarantee signed by the defendant, even though not a contract

under seal, was an offer of what the defendant was prepared to do in exchange for future action on the part of the plaintiff and was offered to the plaintiff for the purpose of inducing the plaintiff to do some act or refrain from doing some act. At the time the defendant made this offer the plaintiff could have (a) ceased to deal with the brother; (b) demanded repayment and sued to recover the amount due to it by the brother, and (c) realized upon the other security held by it. The defendant's offer was made on or about March 16, 1963, and was not withdrawn down to the date of the institution of this action on or about February 25, 1965. Subsequent to March 16, 1963, the plaintiff for two and a half months refrained from realizing upon the security it held. For an even longer period, at least down to September 17, 1964, when the brother made an assignment in bankruptcy, the plaintiff refrained from instituting action to recover from the brother the money due to it. It is obvious that some forbearance did occur after the offer was made. It is a reasonable inference from the conduct of the plaintiff that there was forbearance.“

DISSENT: “It is desirable to note at the outset that the plaintiff's claim is based squarely on a written guarantee, and there is no room for any

transformation of the transaction between the parties into an offer of a unilateral contract by the defendant, calling for an act of forbearance by the plaintiff.”

“The plain fact is that the bank cannot have it both ways. It cannot rely on the subsequent fact of forbearance to bind the defendant (who expected but did not get a promise of forbearance in return for his guarantee) and at the same time sue the defendant on the written document. Indeed, the bank never had forbearance in mind when the defendant signed the guarantee form. What it had in mind was to bind the defendant by a deed.”

Only because they failed to make the person properly seal the document, the judges construct a unilateral contract. The bank had in mind that it would bind Kiska by the deed.

Ratio A formal seal can make the contract absolutely binding even without consideration but the formalities must be followed.Forbearance to call in a loan is consideration.

Comments Even if the Bank does not actively mislead or put pressure on the Def. Is the knowledge/experience of the Bank superior to such a degree that in light of this inequality of bargaining power it seems unfair for the Bank not to war / inform the inexperienced Def.?

In other words was the Bank under a Duty to do something? Requirement of Good Faith, banks have a “Fiduciary Duty”

Contracts are voluntary creations of obligations by consent (“Private autonomy, freedom of will”). When is entering into a contract not a “voluntary act”?Duress:

Paradigm of coercion that “vitiates consent” (Actual or threatened violence) Modern modification: Economic Duress (Remember the Pre-existing Duty Rule – economic duress fits the policy rationale behind this old rule better, but

it’s only recognized in England.) Duress is also called VIS COMPULSIVA If you put your hand on top of their hand to force them to write their name, this is not even duress, nothing is voluntary. This is VIS ABSOLUTA

Undue Influence: “Unconscientous use by one person of power possessed by him over another” – typically, vitiation of consent by the abuse of a relationship of trust and

confidence One person is in a “position to dominate the will” of another, the other person is not able to act independently Such influence is assumed in relationships between doctor and patient, parent and child, attorney and client

Unconscionability: One person taking undue advantage of another, by reason of considerable inequality of bargaining power Needs to be such an unfair deal that it “shocks the conscience of the Court”

Back to Kiska: Duress? No Undue influence? Not exerted by the Bank! No evidence of knowledge or even conspiracy Unconscionability? No evidence of misrepresentation/persuasion; transaction in itself not shockingly unfair All we know is that the Bank did nothing - e.g. inform the Def. about the possible risks/consequences or provide legal advice. Even if the Bank does not actively mislead or put pressure on the Def., is the knowledge/experience of the Bank superior to such a degree that in light of

this inequality of bargaining power it seems unfair for the Bank not to warn / inform the inexperienced Def.?

34


In other words: was the Bank under a DUTY to do something ? Requirement of GOOD FAITH – this brings up a spectrum, how far down this road does the bank need to go? Time to read and ask questions, a lawyer,

etc Bank has a “Fiduciary Duty” to its clients not to give them an unfair agreement (this is somewhere between undue influence and unconscionability)

Institutionalized Protection of Weaker Parties Situative : Contract of Adhesion (see, e.g., definition in Art. 1379 CCQ). Like a fly in the flypaper, you are stuck (Leff); you cannot bargain. These are

usually standard form contracts. Are these even contracts in the legal sense? Is there still a meeting of the minds? Is yes or no enough? Or is this something else? Are you still able to negotiate parts of the contract?

o Consumer contracts are mostly contracts of adhesion (take it or leave it)Contracts of Adhesion:

Horizontal Ordering? The Case of the “contract of adhesion” Does a “contract of adhesion? In any way reflect the actual “consensus”? See Art. 1379 CCQ What is Leff’s polemic catch phrase supposed to express? Should the document “contract” equal the “contract” in the legal sense?

Art. 1379

A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties on his behalf or upon his instructions, and were not negotiable.Any contract that is not a contract of adhesion is a contract by mutual agreement.

Functional : Consumer Contracts (see, e.g., definition in Art. 1384 CCQ). Not necessarily a Contract of Adhesion, but most are.

Art. 1384, CCQ

A consumer contract is a contract whose field of application is delimited by legislation respecting consumer protection whereby one of the parties, being a natural person, the consumer, acquires, leases, borrows or obtains in any other manner, for personal, family or domestic purposes, property or services from the other party, who offers such property and services as part of an enterprise which he carries on.

In Europe, need justification to come up with measures to modify private terms on loans contracts, bargains by merchants, time shares – most countries try to adhere to the idea of consumer protection as exceptions – outcry against giving up autonomy through consumer protection.Structural inequality – completely fundamental to consumer protection – even business savvy consumers are still vulnerable as private persons.

Interpretation contra proferentem – Art. 1432 CCQ (against the person proffering the terms)

Art. 1432

In case of doubt, a contract is interpreted in favour of the person who contracted the obligation and against the person who stipulated it. In all cases, it is interpreted in favour of the adhering party or the consumer.

No integration of surprising and unfair terms – Art. 1435 Fine print terms that say that the offeror is never liable These terms need to be very clear (give notice)

Art. 1435

[…]

In a consumer contract or a contract of adhesion, however, an external clause is null if, at the time of formation of the contract, it was not expressly brought to the attention of the consumer or adhering party, unless the other party proves that the consumer or adhering party otherwise knew of it.

Representation If representation is present, if misrepresent then the party proffering the terms cannot rely on the printed contract – the contract might say any oral

parts can’t be relied upon therefore not printed terms

Arthur Allen Leff, “Contract as Thing” on Adhesion – CB p. 325Contract as Contract

Contract developed as a way to identify certain “contemplated trading transactions” for a particular and predictable treatment Developed as part of the free-enterprise, free-will, free-market economic system Different elements that might be part of identifying something as a “contract”:

35


o Species of interpersonal behaviour (between two people, rather than between a person and a thing)o Communicative behaviouro Mostly expressed in future tense, subject is future behaviour and expected role of partieso Dealing with bargain or trade, rather than gifts and gratuitous matterso Limited terms, limited relationship between parties (not entering into close interpersonal relationships)o Process: joint creative efforto Result: not an expression of the will of any one of the parties – a combination of both of their willso Result: most often a piece of paper with words on it that express the terms of the agreement

Most likely that if all of the above elements are present, the agreement will be classified as a “contract” However, certain transactions have split off from this series of identifying elements – e.g. labour contracts, insurance contracts, and sales transactions –

each of these developed a different set of identifying criteria

Contract as Contract of Adhesion One party gives the other a piece of paper with terms of the deal, the other party has to take it or leave it The “joint creative effort” is missing “Joint creative effort” did not necessarily create fairer terms, but rather lessened the probability of “monolithic one-sidedness” This became difficult in sectors of commerce where one party could impose most of its own terms – nothing to prevent highly disproportionate

contracts from being created Terms imposed by one party, not by both parties or by custom Law tried to deal with these

o Regulation of insurance policies (textual)o Interpretation in the court – against the actual meaning of the contracto Fraud and duress stretchedo Consideration doctrine expanded

Thorough and systematic solution very difficult Creation of a new category: contracts of adhesion

o If seller is not a monopolist, buyer is still exercising choice by “leaving it” Practical application of this category of contract is “a disaster” – why? no legal theory that is sufficient to deal with one-sided consumer deals Leff postulates that “Contracts of Adhesion” are not actually contracts at all!

o All that is left of the elements of a contract from before are: They are still communicative Still mercantile Still bounded (relationship at arm’s-length)

o However, process is missing Phrase “contract of adhesion” focuses on the fact that an adhered-to document gives no protection against the over-reaching and unfair terms that

would be avoided by a process of negotiation Doesn’t answer the question of WHEN to enforce contracts of adhesion, and when not to

o What separates a bad contract of adhesion from a good one?

Contract as Thing Leff suggests that pre-fabricated, mass-produced goods that are purchased by a person who has no way of knowing whether the goods are defective

are “goods of adhesion” rather than goods crafted in the presence of the buyer, who has the opportunity to object when he disagreed with the process Leff uses this as a metaphor for contracts contracts of adhesion are more like “goods” than they are “contracts” They are produced by one side and either “bought” or “rejected” by the other The government acts as the “quality control” for contracts of adhesion

o When goods are dangerous or worthless, the government interveneso So when a contract is too unfair or too unsafe, the government steps in

Problems with this approach:o Paternalismo Government interfering too much with the free market, that has natural self-correcting mechanisms? (Is this true?)o Shouldn’t people be allowed to make bad deals if they want to?

Leff suggests that direct efforts to regulate quality of contracts are less effective than freely providing good-quality information for people to make their decisions

Form RequirementsCommon Law: Consideration AS form; in certain cases additional requirement for agreements to be in writing: Statute of Frauds (1677) – still applies in Canada?

o Contracts in consideration of marriageo Contracts which cannot be performed within one yearo Contracts for the transfer of an interest in lando Contracts by the executor of a will to pay a debt of the estate with their own moneyo Contracts for the sale of goods above a certain valueo Contracts in which one party becomes a surety (acts as a guarantor) for another party’s debt or other obligation

Consumer Protection Acts, Family Law ActsCivil Law: no requirement of “consideration”, in certain cases requirement of notarial form (e.g. Art. 1824 CCQ – see Qc. Notarial Act; Art. 931 CC; s. 311b BGB) or writing (e.g. Qc. Consumer Protection Act)

36


Art. 1824

The gift of movable or immovable property is made, on pain of absolute nullity, by notarial act en minute, and shall be published.

These rules do not apply where in the case of the gift movable property, the consent of the parties is accompanied by delivery and immediate possession of the property.

Agreements in WritingHow does the written document, the physical object “contract” relate to the juridical construct “contract”? What are the reasons to put an agreement in writing?

Written document may be required for evidence Written document may be useful as record for the parties, even in the absence of litigation Written document may be useful in achieving consistency and certainty in recurring transactions Written document in necessary to plan complex transactions Written document might be useful to impose one’s own terms

However, judges still add implied terms or treat the contract as an offer, etc, sometimes. They have to translate the contract into the language of contract law.

2.3.1.1.1 Contract Planning: MacNeil, “A Primer of Contract Planning”One step back: is contract the instrument of choice?Horizontal coordination = exchange coordinationVertical coordination = command coordination

Nature of the Relationship (Macneil) Sliding scale – criticism of traditional conception of “on/off” switch – whole contract can be captured in the nature of the relationship rather than in the

written contract itself Relational Theory of Contracts: contracts are always defined through the relationship. One of the main problems he points out with the 19th century

contract law arsenal of rules is that every transaction is viewed as the same kind of action – too limitedo E.g. Contract Formation: pinpointing the exact moment of contract formation; rules regarding non-performance; stages of planning

also crucialo The closer the relationship between the parties, the more need there is for careful contract planning

Problem: Dealing with the contingency of future events Planning/non-planning Performance/risk planning “What happens if this contract fails?”

How do parties choose how much to put into a written contract? Nature of the relations between the parties

o The closer the relationship, the more difficult it is to put terms into writing Costs of negotiating every single detail Virtues of leaving some aspects unwritten Acceptance or rejection of default rules

Typically, civil law contracts rely more heavily on default rules and are simply shorter!

Performance/Risk PlanningDescribing Performance:

Primary Duties/Rights Boilerplate Terms, e.g.: Place of performance, Means of transportation

Dealing with Risk: Remedial side (what are the remedies? Who is liable for what?) Boilerplate Terms, e.g.: Force majeur, Forum, Arbitration

“Contract” v. “Contract” Translating “contract as thing” (the written document) into “contract as juridical construct” in general: Does a certain term contain a “promise” in a

legal sense? Should every term of the written agreement be integrated into the legal construct “contract”?

o A term that one party did not know about, that was in a different document but referred to in the contract, a term that was very difficult to understand

Should the law take oral communication etc. external to the written agreement into account? To what extent is the written contract a reduction of negotiated terms into exclusively what the parties wanted to be understood

as legally bindingo Civil Law: Art. 1436 CCQ: “In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the

interpretation which has already been given to it by the parties or which it may have received, and usage, are all taken into account.”o Common Law: Parol evidence rule (a written agreement that seems complete on its face is not intended to allow recourse to other

kinds of evidence) – this is why common law contracts are so exhaustive To what extend can judges re-write the contract in court? Burden of proof

37


Art. 1436

In a consumer contract or a contract of adhesion, a clause which is illegible or incomprehensible to a reasonable person is null if the consumer or the adhering party suffers injury therefrom, unless the other party proves than adequate explanation of the nature and scope of the clause was given to the consumer or adhering party.

4.1.Incorporation of Terms

Signed Documents“When a document containing contractual terms is signed, then, in the absence of fraud or misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.” (L’Estrange v. Gaucob)

No connection to actual assent anymore – could be explained as ritual, or simply as a matter of imputationo Should the rule be mitigated?

Notice requirements are migrating into the context of signed agreements Signing signifies that you want to be bound and the other party should be able to rely on this (although with Consumer Protection Acts we are

starting to tell people there are some things they can’t bind themselves to, regardless of age/capacity). Usually signatures define “will” – that the person wants to enter into the contract.

Signature does not manifest consent to terms that the other party “had no reason to believe were assented to” by the signing party (Tilden Rent-a-Car v. Clendenning)

Unusually onerous provisions “inconsistent with the true object of the contract” are cancelled out, as long as severable from the remaining contract

o Alternative: specific protective legislative measures (consumer protection!)

Classical Contract Law says if you sign it, you are bound Modern development of law does through each provision to see if they were reasonable, also consumer protection legislation means that one is not

necessarily unconditionally bound Since the 1960’s social considerations have allowed consumers to revoke contracts (contracts online, contracts that involve loans, involve installments,

etc.) 1970’s labour law helped unequal relationship between boss and workers

CVL - Dell Computer Corp. v. Union des consommateurs, [2007] SCC - Deschamps J.Jurisdiction QuebecFacts Arbitration clause in hyperlink – hyperlink clause external? (Ext. cl must be brought to attn in consumer k’s or k’s of adhesion). No, hyperlinked

docs not external – where link is accessible / functional and clearly visible.Dell mistakenly listed lower prices for two models of handheld computers, and blocked access to the order pages. M. Dumoulin and several others place an order though a still-accessible link, Dell refuses to honour lower price, the Union des Consommateurs and Dumoulin claim against Dell; Dell applies for referral of the claim to arbitration. The terms and conditions of sale, which could be accessed by hyperlink, contained an arbitration clause.

Issues Is the arbitration clause an external clause within the meaning of article 1435, CCQ?Holding No Dell.Reasoning “In the case at bar, the Union argues that, pursuant to art. 1435 C.C.Q., the arbitration clause is null because it is an external clause

and because it has not been proven that Mr. Dumoulin knew of its existence.”Accessibility:

The consumer could access the arbitration clause directly, it is therefore not an external one. (clauses that are readily accessible form part of the contract)

With respect to paper documents, there is a test of physical separation for clauses to be treated as external. (test not transposed to internet)

Bastarache & LeBel (not dissenting on this point): Rather than concluding that hyperlinked clauses are always or never external, it is reasonable to look at whether or not the

hyperlink is functional and clearly visible. Furthermore, it the case at bar, Dell was consistent with industry standards and a reasonable consumer engaged in e-commerce would have expected to find a company’s terms and conditions at the bottom of a web page.

Ratio A hyperlink that is clearly visible is not an external clause in a contract of adhesion or a consumer contract if it can be accessed directly.Comments 1435. An external clause referred to in a contract is binding on the parties.

In a consumer contract or a contract of adhesion, however, an external clause is null if, at the time of formation of the contract, it was not expressly brought to the attention of the consumer or adhering party, unless the other party proves that the consumer or adhering party otherwise knew of it.”

Incorporation of Terms: Unsigned Documents“Ticket-Cases”Typical Content is the exclusion or restriction of liability. This is a harsh term that requires larger signs and highlighting (microscopic print isn’t good enough, the judge will say that is designed to conceal rather than inform). Tickets typically come after they have been paid for.

38


How incorporated into the “contract”? If the recipient knows that there are conditions and that they are supposed to be part of the contract, assent can be established (assent by signature) If the recipient doesn’t know, the test to be met is:

Can the issuer REASONABLY assume the other party knows either because of the nature of the transaction or because reasonable notice has been given. In theory, notice means you can make an informed decision and withdraw if you want.

THE HARSHER THE TERMS, THE HIGHER THE REQUIREMETS FOR NOTICE!Where does conduct come in? Once you get the ticket and your attention has been brought to the terms and conditions, you can still “leave it” – if you proceed, your conduct implies

consent to the termso This does not work in the context of ordering tickets online, or even in parking tickets when one is dealing with a machine

Judges look at the size of the print, (“designed to conceal rather than to inform), whether there were other purposes for the document (receipt, thus not read as a contract), signs

Notice should be given where contract is formed Sliding scale – different standards for different terms Taking away of binding quality of signature, adding extra conditions even if signed Problem of parking meters that are electronic – cannot withdraw Terms that are very onerous (eg limited liability for skydivers) need to create waivers, strong and clear notice (signs with large font, etc.)

CML – Thornton v. Shoe Lane Parking Ltd., [1971] 2 Q.B. 163 (C.A.)Jurisdiction UKFacts T suffered damages to his person/ property in SLP’s parking garage. There was a sign at the entrance indicating “All cars parked at owner’s

risk”, and the ticket stated that it was “subject to the conditions of issue as displayed on the premises.”Issues Were the conditions legally binding?Holding No Thornton.Reasoning Offer accepted when T drove his car up to ticket booth and the ticket was issued. It could not after that fact be altered by any

words printed on the ticket (i.e. to exempt the company from liability). The “condition” can only be binding if (a) the customer is aware that the ticket is issued subject to it, or; (b) the company has done

what was reasonably sufficient to give him notice of it (e.g. printing it “in red ink with a red hand pointing to it, or something equally startling”)

Ratio A condition that is wide and limiting of rights can only be binding if it has been explicitly drawn to the customer’s attention.Comments The harsher the terms, the higher the requirements for notice.

The document might serve other purposes (e.g. receipt) that obscure its nature as a “contract”. Use of signs to inform customers of terms and conditions – depend on their visibility – reasonable person standard

“In cases where incorporation is based on circumstances that do not likely include actual knowledge of the content of the terms by the other party, the party proffering a document containing surprisingly harsh terms has less reason to assume that the other party is assenting to the incorporation of such terms.” – McCamus, p. 189

This gives a flexible standard of reasonableness The more onerous the term, the higher the standard of notice

Previous Dealings:Can the party issuing written conditions reasonably assume the other party knows that the conditions should be part of the contract?Are unsigned contracts where parties have previously dealt with one another binding?

Yes – for British Crane (in similar business, similar bargaining power) Industry Standard No – McCutcheon “Without knowledge there is nothing.” pg 288

CML – McCutcheon v. David MacBrayne, Ltd., [1964] 1 All E.R. 430 (H.L.): CB 287Jurisdiction UKFacts Appellant (plaintiff) shipped goods by respondent’s (defendant’s) carrier, and the vessel sank because of the respondent’s negligence. A & R

had entered into contracts together before, which were all small print, and which A had never actually read. The contracts contained a “risk note” limiting the carrier’s liability. This time, A had not signed the contract.

Issues Is A still bound by the terms and conditions of the contract because he forgot to sign it?Holding No McCutcheon.Reasoning Lord Devlin:

If form had been signed, A would have no case: terms of contract are binding if the contract is signed, whether or not the signer was aware of the terms and conditions

R argues that previous dealings and A’s conduct imply consent to the terms despite lack of signature rejected: previous dealings relevant only if they imply knowledge of terms no knowledge, no signature means terms not binding

“There can be no conditions in any K unless they are brought into it by expression, incorporation, or implication. They are not brought into it simply because one party has inserted them into similar transactions in the past…”

Without recourse to estoppel, signature to K is conclusive (L’Estrange v. F. Graucob, Ltd.) Effect of estoppel is limited to the K in relation to which the representation was made (cannot aid party in relation to other

transactions) no demonstration here that M knew/understood conditions (i.e. he is NOT estopped from saying that he signed previous Ks without knowing what was in them) previous dealings are NOT evidence of knowledge

Ratio Conditions of a contract cannot be binding unless (a) the offeree has signed the contract, read or unread (b) the contract is made by conduct and the offeree is aware of the terms and conditions.

Comments Fine print – designed to conceal rather than to inform. At the time, a signature was binding, even if there was no actual knowledge

39


(policy consideration – to allow people to get out of signed contracts by pleading ignorance, whole institution of contract making might be undermined. I guess it is more subtle these days, and the institution of contract making has become more flexible.)

Why not go through torts – why is this case a contracts case? Because one can waive one’s recourse to tortuous liability in a contract. That is exactly what we are dealing with here actually.

Much time devoted to the nature of the K, considering that the case turns on the fact that it was never signed The issue here is whether prior dealings have constituted a notice of prior terms; some sense that prior dealings have to have a

certain frequency, here unsatisfied Devlin’s assessment of prior dealings here is purely subjective – he seems to be on his own here, both in the HofL and in his own

subsequent jurisprudence: prior dealings are usually not totally subjectively indicated Typically, the question is whether notice has been given that there are other terms out there, and that you agree to abide by them

(a sense that terms are usually there, whether or not people have read and understood them) The parties were not operating in a normative void: if conditions were not incorporated, then there was still a K with those terms

implied by law The case eventually turns on the lack of signature – but the reasoning makes you wonder if a similar result would have been

achieved even with a signature Gives considerable indication that the signature/notice-of-terms distinction is unreasonable, and the legislature should act

CML – British Crane Hire Corporation Ltd. v. Ipswich Plant Hire Ltd., [1975] Q.B. 202 (C.A.): CB 290Jurisdiction UKFacts BC rented a heavy machine and a driver to IP in a hurry. The contract was made over the phone, the contract to be sent later, without the

contract being signed. The machine got stuck in a marsh. Its removal was expensive. It was established that neither party was negligent. The parties had done business before, and were aware of the terms and conditions usually signed for.

Issues Who is liable for the costs of extracting the machine?Holding IP is liable British Crane.Reasoning Denning:

Even though the contract was unsigned, the parties were both aware of the terms and conditions that would normally govern this sort of transaction. There was no reason to expect that the crane would be hired without terms and conditions attached.

Both parties in similar business, with similar bargaining power; IPHL imposed similar conditions on rental of its own equipment – so “the conditions on the form should be regarded as incorporated into the K”

Negligence on the part of the driver would have exempted the plaintiff from responsibility. There was no negligence established on either side in the sinking of the crane, so the defendant is responsible based on contractual liability for damage to the crane.

Ratio Conditions of an agreement entered into by conduct, even if the document is unsigned, are binding when both parties can reasonably be expected to be aware of the conditions. Past transactions can be a basis for the reasonable expectation of awareness of the terms and conditions of a contract.

Comments This situation is quite distinguishable from McCutcheon for a few reasons. (1) The contracting parties were in a different relationship. Here, they are both professionals who are expected to be aware of the standard contracting terms. In McCutcheon, one party was a customer (no specialty in the area of shipping) whereas the other was a professional. (2) Here, there was knowledge of the terms and conditions. In McCutcheon, there was no knowledge of the terms and conditions.

Industry standard: if both parties know that certain reasonable conditions are habitually imposed on certain transactions, and if both parties know the substance of these conditions, then these conditions can be held to form part of the K – even if indicia of consent to condition not found on a particular occasion.

Denning rejects two interactions as not enough to show prior dealings – but how many times would be enough?

SynthesisMutuality: if there is going to be an enforceable bilateral K, it could go both ways

A party seeming not to accept the mutuality of the K is seen in both of these cases In McCutcheon, no signature no K; in British Crane, a sense that Ipswich themselves wanted the deal to proceed quickly Incorporated terms are written somewhere (can dispute wording) – implied are vaguer (can dispute only content, not wording

Incorporation of Terms: Signed Documents It is obvious that incorporation cannot be based on actual knowledge and assent –rules are mitigated Notice requirements mitigate signed agreements Signature does not manifest consent to terms that the other party “had no reason to believe were assented to” by the signing party ( Tilden Rent-a-Car

v. Clendenning) Unusually onerous provisions “inconsistent with the true object of the contract” are cancelled out, as long as severable from the remaining contract

4.2.Doctrine of Good Faith

Flexible standard of Good Faith – There is almost no way to determine what “good faith” means – but it is required to avoid the appalling results that can come from strictly rigid rules.

o Especially used in cases of uneven bargaining power. Looking beyond the letter of the contract to the spirit of good faith.o Can come up at any stage of the relationship, even during negotiations (Empress)o Used as a shield against the “abusive” exercise of rights

Bargaining in good faith Implied duty to perform in good faith Good faith as a standard of interpretation Defence against unfair behaviour

40


Flexible standard that enables the judge to reshape the parties’ agreement and to override inflexible rules Often an implied duty (Empress Towers, Lady Duff-Gordon) Judge can basically reshape contracts with Good Faith (in order to override unfair rules). It comes down to the conscience of the judge making the

decision. Here the fundamental principles that clash are Fairness v. Certainty The contract needs to be fair for both parties (in the particular dispute), but the main idea of the rule of law is to decide like cases alike. You should

know what the results of doing something will be every time. FAIRNESS, EQUITY, AND JUSTICE into the formal field of contract law – to temper results that are felt to be unfair

o Seems to be a good thing?o Where are the weaknesses of this idea… subjectivity? Lack of predictability? If it goes too far, it can undermine the institution of contract law

– changes the relationship between the parties? Contract law should be rigid. Interference by a third person (judge) into an inherently bilateral relationship – PATERNALISTIC

Clash of fundamental principles of “justice”:o Fairness (fair outcome regarding the particular, unique dispute) vs. Certainty (standardization of adjudication by creating fixed rules –

“treating like cases alike”)o Not knowing how the judge will interpret clauses in a contract is a source of insecurity when drafting a contract – one cannot be sure

how one will be allowed to exercise one’s contractual rightso “Certainty in fairness” vs. “Fairness in certainty”

Compare this process of relaxing and then tightening the rules with the idea of the pre-existing duty rule (doctrine of consideration) and promissory estoppel (equitable doctrine, shield/sword)

Schermaier, Bona Fides in Roman LawSummum ius, summa iniuna (absolute law, absolute injustice)

Two cases, one where a Citizen sold his house knowing there was an order to make the house smaller. He sold without telling the buyer that he had to make it smaller, and the judge deemed that this was in Bad Faith – you have to tell the buyer all the defects with the house. The other case was where a Citizen bought a house and a little while later, sold it back to the initial owner. The initial owner tried to sue for the Citizen not telling him it had a defect, but the initial owner should already know, as he sold it in the first place.

Cicero’s point is that this Good Faith standard has to stay flexible so that it doesn’t become unfair itself.

4.2.1. Good Faith in the Civil LawAs an overarching, general principle, the doctrine of Good Faith is typically Civilian, grown out of the Roman tradition. Modern Civil Contract Law developed from the “bonae fidei iudicia”: the binding force of contracts is actually rooted in Good Faith

In Houle, there is reference to good faith as implied in Roman law; not true – good faith was the starting point for contractual obligations The closer the relationship between the parties, the higher the duty

o Brief encounter – “Arm’s length” exchanges – lower standard for dutyo Duration, degree of dependence correlated with the duty of good faith

Quebec – Civil CodeArt. 6Every person is bound to exercise his civil rights in good faith.

Art. 7No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith

Art. 1375The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished.

France – Code Civil 1804

Art. 1134Les conventions légalement formées tiennent lieu de loi à ceux qui les ont faites. Elles ne peuvent être modifiées ou révoquées que de leur consentement mutuel, ou pour des raisons que la loi autorise.

Elles doivent être exécutées de bonne foi.(all contracts executed in good faith)

Germany – German Civil Code - 1900

Section 242 BGBThe debtor is bound to perform according to the requirement of good faith, ordinary usage being taken into account.

Section 157 BGB

41


Contracts shall be interpreted according to the requirements of good faith, ordinary usage being taken into consideration.

UNIDROIT Principles of International Commercial Contracts, Art. 1.7 (61 member states)(1) Each party must act in accordance with good faith and fair dealing in international trade(2)The parties may not exclude or limit this duty

Principles of European Contract lawArt. 1.201 – Good Faith and Fair Dealing(1)Each party must act in accordance with good faith and fair dealing.(2) the parties may not exclude or limit this duty.

Art. 1.202 – Duty to Co-operateEach party owes to the other a duty to co-operate in order to give full effect to the contract.

4.2.2. Good Faith in the Common Law CML courts frequently take recourse to “Good Faith.” However, English and Canadian Common Law is reluctant to acknowledge a general principle of

Good Faith underlying of all obligations. There is not Good Faith doctrine in the CML except in the USA:

Good Faith: USAException – US Contract Law acknowledges a general principle of Good Faith:UCC §1-203. Obligation of good faith.Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.Section 205, Restatement of Contracts (2nd)Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

Good Faith: Clash of Ideologies – See “Harvard Law Review” article (receuil p. 97-101) Dealing at arm’s length (adversary)

Versus Assuming responsibility for the other party (partner) joint endeavour, “fraternité contractuelle”

Individualism v. Altruism Historical Background:

o The Rise of the “Social” – the infusion of “social” ideals into the “individualistic”, will-based private law of the 19th century Goes beyond the ideas of “duress” or “undue influence”, “incapacity”, etc, which were already existing, recognized as

compromising the autonomy of the will Problem: Paternalism – inroad for any kind of policy and ideology – the State knows best – meddling into private transactions

o Most extreme example: TOTALITARIANISM Germany the fight against the “individualistic”, “anti-social” and “Roman law” of the 19th century style civil code (BGB)

was an integral part of the agenda of the Nazi party since its formation in 1920. Wanted something more “community” based… at the expense of ethnic minorities

In the 20th century, the belief in “private autonomy” and “freedom of the will” has often been depicted as outdated; but many scholars have also defended these paradigms as bulwarks against totalitarian paternalism and abuse

Backlash – e.g. Ayn Rand, Charles Fried, “Contract as Promise” – straightforward liberal ideas This doctrine of Good Faith overrides everything but is open-ended – this is dangerous (i.e. “reinterpretation” of German Civil Code in Nazi

Germany)o Germany – originally Nazi’s were against the “individualistic”, “anti-social” and “Roman” law of the 19th century-style civil code

(BGB), however, through Good Faith and interpretation, the BGB was an integral part of the agenda of the Nazi party since its formation in 1920. – the law became an instrument of oppression (if public policy is perverted, then good faith will be perverted –German and Aryan ideals)

In the 20th century, the belief in “private autonomy” and “freedom of the will” has often been depicted as outdated; but many scholars have also defended these paradigms as bulwarks against totalitarian paternalism and abuse

Good Faith in Quebec Case Law The CCLC (1866) rejected Art 1134 of French Code, faith was implied Later codified Good Faith in 1991 (Art. 6, 7, 1375) Cornerstone of development of Good Faith was BCN c. Soucisse and Houle c. CNB

BCN v. Soucisse - Corporations as legal persons

42


art. Text1440

A contract has effect only between the contracting parties; it does not affect third persons, except where provided by law.

Chief reason to create a corporation (incorporate) is to set the corporation’s patrimony apart from those of the shareholders (limited liability) – so shareholders cannot be sued for corporation’s debt

With small corporations, banks will often lend money but require security on the loan from the shareholders – but in theory the patrimonies are separateo Advantage: shareholders cannot be sued for corporation’s debto Disadvantage: if someone has committed a fault against the corporation, only the corporation (not the shareholders) can sue (the corporate veil);

minority shareholders are often voiceless in deciding about a suit Corporations are treated and taxed as persons (cf. income trusts, which aren’t persons, so the money is only taxed when the unit holders receive it,

rather than at the corporation and shareholder levels) We speak about when the corporation “knew” or “learned” of something, as if the corporation were really a person – but one branch of a bank

“knowing” something may not mean that the whole bank “knows”

CVL – B.C.N. v. Soucisse, [1981] 2 S.C.R. 339: CB 295Jurisdiction QuebecFacts Respondents are heirs of Dr. Groulx who signed one promissory note (for $1400) and 2 letters of suretyship guaranteeing repayment to

Appellant bank of Maurice Robitaille’s (son in law) current and future debts. When Dr. G died, suretyship passed on to his heirs under Art. 1937 CCLC; Bank only informed heirs of promissory note obligation; heirs were not made aware of suretyship or possibility of revocation. Advances were made by bank to Maurice Robitaille’s company before ($15,000) and after ($107,000) the death of the surety. Bank is suing heirs (under inherited suretyship) for these debts.JUDICIAL HISTORY:S.C.: Allowed Bank’s action in entirety (debts before and after death); C.A.: Reversed decision – allowed action only for debts before death (juridical construction – “legal gymnastics”).

Issues Should the heirs be made to repay advances made after Dr. G’s death by a creditor (the Bank) who was aware of the death when the heirs, who were completely unaware of the suretyship, were unable to revoke it?

Holding No Soucisse. Decision of Court of Appeal affirmed (but different reasoning)Reasoning C.A. found that the “obligation of coverage” (ob to cover future debts) is not a true suretyship (this is totally made up! It is, in fact, a

surety, according to the CcB-C) and so not passed to heirs under 1937. SCC says that it is.Beetz J:

Bank had an obligation as soon as it learned of the death to disclose to the heirs of the surety that these suretyships existed and were revocable – this obligation results from the principle that agreements must be performed in good faith

Obligation of good faith is an implicit clause of the contract under 1024. In this case, obligation of good faith translates into an obligation to disclose

The Bank took the initiative to inform the heirs. However, by only giving partial information, (advised of one guarantee but not the revocable suretyships) the bank unilaterally altered the situation to its advantage by making the suretyship essentially irrevocable. This puts them at fault.

Because it was at fault, the Bank could not carry out its action. Respondents could plead a fin de non-recevoir (the doctrinal vehicle that protects the party “hard done by”) based on the fact that “no complaint can be based on, nor advantage derived from, one’s own action, negligence, imprudence or incapacity, much less fault, to the detriment of another.”

Alternative, based on Belgian/French jurisprudence – counterbalancing claims. Bank can collect on heirs’ liability, and then the heirs can claim back their losses from the bank for its violation of a contractual duty of good faith. (this detour was not taken, is not jurisprudentially valid in Canadian civil law)

Ratio There is an obligation of good faith in all contracts. It is grounded in Article 1024 (equity). The obligation of good faith translates into a different obligation in all cases. (here: the obligation to disclose). [Note that here contract is silent…the obligation is implied]

Comments Here “good faith” is not yet in the code (it is now in the CCQ). On the spectrum, this falls between reliance and loyalty. The whole issue of a debtor being able to extend the suretyship past death is academic, because CCQ 2361 now says that death of

the surety ends the suretyship Beetz cites a large amount of doctrine – likely trying to justify an extension of good faith doctrine that he’s nervous about

undertaking – starts with Roman law (cannot benefit from your own fault –procedural instrument), says it is close to estoppel (which is CML)

Beetz accepts that the document clearly showed that the suretyship was to be binding after death This is seen as a watershed decision – yet if the bank effectively changed the K, the decision is really just normal (we’re not too far

into good faith) First instance – found for the bank, reluctance for the finding, but judge just applied rules of the code, and had no leeway Court of Appeal – found for the family – subtle construct, different types of debts to avoid liability SCC – for the family, relied on good faith, only here can the concept be invoked

CVL – Houle v. CNB, [1990] 3 S.C.R. 122: CB 314Jurisdiction QuebecFacts Hervé Houle Ltd. was a company with a rotating line of credit and a letter of credit to CNB (bank). HHL’s shareholders planned to sell their

shares to another party (Wedell), but CNB decided to recall the loan and realize on the guarantees; time span from first notification to liquidation of assets was three hours. Shareholders now in a weak negotiating position; obtained fair less than prior estimated value of shares.

Issues Did CNB abuse its K’ual rights? Is CNB liable for difference in shares’ value?Holding Yes and yes Houle.

43


Reasoning L’Hereux-Dubé J:Breach of K leading to delictual liability (1st possibility): CCQ 1440, 1457

K’ual, not delictual, liability is the foundation for abuse of K’ual rights Fairly tenuous to argue that someone breaching a K generated ECO liability to a third party – esp. because tort law is aimed at RII,

but K’ual damages are for expectations Refusal to lift corporate veil

Abuse of rights leading to delictual liability (2nd possibility): CCQ 6, 7, 1375, 1457 Doctrine of abuse of rights increasingly accepted; good faith and reasonableness permeate the theories of rights and obligations Doctrine of abuse of rights serves social and economic functions in controlling the exercise of K’ual rights (presumption of good

faith preserved) “The time has come to assert that malice or the absence of good faith should no longer be the exclusive criteria to assess whether a

K’ual right has been abused” “Reasonableness” is an acceptable and applicable standard underlying all Ks

Case at bar CNB had the right to recall the loan on demand and realize securities without notice (key security for a creditor institution) after a

reasoned decision – but had to exercise its right in a reasonable manner If the “length of the delay between the demand for payment and the realization of the securities or liquidation of assets be found

to be unreasonable, an abuse of such K’ual right may still occur” Reasonable length of time must consider all contextual and circumstantial factors: “reads down” CNB’s K’ual discretion “Flagrant abuse of the bank’s K’ual right to realize its securities after the demand for payment of its loan was not met” BUT: shareholders were not parties to the K, and cannot anchor their claims (CCQ 1440) – corporate veil cannot be lifted, so no

right of action based on the K itself INSTEAD: “a K’ing party may also incur delictual liability towards a third party who is outside the K’ual sphere” CNB knew of the upcoming sale of shares, had 50 years of dealings with HHL, and acquired ECO obligation to “provide a reasonable

delay” faultRatio Implied obligation of good faith in every K that may override an express clause. A K’ual party can be liable to third parties extra-K’ually.

Adds an additional criterion to assess breach of K rights: lack of good faith (unreasonableness) and bad faith (acting with malicious intent)Comments Much effort to show that there are deep roots in CVL for doing what L’Heureux-Dubé is about to do

CCQ now deals with this case in some provisions (reasonable delay [CCQ 1596]; Book 6 of Hypothecs [CCQ 2757, 2758] on seizure of property serving as security) – so this case is less about the specific points of law than the duty of good faith

L’Heureux-Dubé’s discussion is one big obiter, designed to adjust the law of K; she references her own decisions in the QC CA In theory, the new shareholders could sue the Bank for the (found) breach of K’ual duty – multiple payments for same action, which

is why courts are reluctant to find breach of K leading to delictual liability CNB’s behaviour is so egregious that assessing reasonableness is easy (though there is no particular regime for assessing such

reasonableness expressed by L’Heureux-Dubé) Good faith may not ultimately help the consumer, if constraints involving good faith inspire banks to raise interest rates to maintain

security

CVL – Provigo Distribution v Supermarche ARG. [1998] R.J.Q. 47 (C.A.): CB 344Jurisdiction QuebecFacts Supermarche ARG (the Gagnon Group) owned 4 supermarkets affiliated with Provigo. Under their franchising agreement, Gagnon bought 90%

of everything from Provigo and in return, they benefited from Provigo's advertising expertise and business practices. Provigo opened a discount grocery warehouse (Heritage) in Granby that was in direct competition with the Gagnon Group. Provigo aggressively marketed their new Heritage store without any concern for their franchisee's interests in the region, brushing off Gagnon's concerns. The franchising agreement allowed the opening of new stores in competition with existing franchisees.

Issues Did Provigo breach their good faith obligations to the Gagnon Group?Holding Yes Supermarche ARG.Reasoning No clause about no-competition policy can be found in any of the contract between Provigo and Gagnon, but parties' obligations

are not restricted to those mentioned in contracts: they derive from the nature of the contract, equity, custom or the law. In this case, violation of these implicit obligations, liability is not extra-contractual, but contractual in nature. Not a fiduciary duty from the part of Provigo: this common law principle is not relevant to civil law. 1376 CCQ: Good faith: contracts should be negotiated, executed and terminated in good faith. 6 CCQ: Good faith as the basis for contractual morality.

4 Faults:1) P forced G to keep its price up as the result of G's obligation to buy 90% of its products from P.2) P radically changed its commercial strategy.3) P refused to give certain marketing tools that would have enabled G to fight competition.4) Aggressive advertising campaign against G's store.

Fault is not competition: P cannot systematically refuse to compete, otherwise massive economic losses. Fault lies in the fact that P did not fulfill its duty as a franchisor: technical and commercial assistance in a context of partnership,

hence collaboration throughout the contract. P had the expertise and had to maintain the whole network at a high level of performance.

Causality: The necessary condition to the existence of a contractual obligation is the presence of causality. Determine if P's actions have led to low sales for G: this was not determined for the first G store, but was established for the second

store.Ratio Provigo and Gagnon's contract is a partnership. Under this contract, Provigo had a good faith obligation to provide Gagnon with assistance

when they opened their new Heritage store. If they couldn't prevent economic prejudice for the Gagnon Group, they had at least an obligation to minimize the impact of the store on the Gagnon stores in the immediate region (3 of the 4). Provigo failed in their contractual

44


duties towards the Gagnon Group and thus, owe compensation.Comments Explicitly refused to go to CML fiduciary duty, but similar to Honda. Under the new CCQ.

What does Good Faith Mean? Opposite of bad faith (no middle ground); anytime where there is no malice that can be proven; concerned with deterring malice, avoiding intentional

harm (subjectively assessed) “Reasonableness” in relation to the interests of others (fair dealing, avoid disappointing reliance, etc) Art. 6 and 7, CCQ – Houle

Altruistic Behavior – fiduciary relationships: act exclusively in the interests of the other It could even lead to an extension of duties owed to each other to the pre-contractual phase (Walton) “The role of Good Faith is […] hard to define. Good Faith is ubiquitous […]. Canadian [sc.: Common Law] courts have had tremendous problems with

the concept of Good Faith, particularly in the context of negotiations.” Swan, Canadian Contract Law, 4.2.2.1 Increasingly demanding standard is tied, in all jurisdictions, to an assessment of the relationship

Special relationship in Houle, McKinlay, Provigo (the closer the relationship – the higher the standard of Good Faith) Instance of each are found in all jurisdictions, but Common Law jurisdictions typically imposes a lower standard of Good Faith on parties to a contract. Good Faith is a Sliding scale ranging from Harm to Altruism Rigid Rules are sign of trying to minimize the arbitrariness (role of the judge), but rigid rules can lead to unfair results

Sliding Scale of Good Faith Extreme Fiduciary Duty, i.e. Banks provide independentMcKinlay v Honda Walton v Maher BCN v Soucisse legal counsel

No Malice, Acting selflesslyDishonesty, Taking account of Loyalty and in the interestBad Faith: reliance of other part cooperation of the otherDolus (Promissory Estoppel) party

Common Law and Good Faith No general duty of good faith in a CML K: some contradictory developments, but no consistent jurisprudence in favour But: discretionary powers must be used reasonably (McKinlay); cooperation is expected to bring the K forward; unethical strategies to get out of K are

punishable CML also edgy about compensating pure economic loss

CML – McKinlay Motors Ltd. v. Honda Canada Inc. (1989), 46 B.L.R. 62 (Nfld. S.C.): CB 308Jurisdiction NewfoundlandFacts MML had a dealership K with HCI, had a good reputation, and sold many cars. MML’s premises were old and poorly designed, but originally

approved by Honda – but new zone manager requested improvements. MML began improvements, but not very quickly (in light of expected import restrictions). Under new allocation system, each dealer assigned fewer and fewer cars zone manager had more cars to allocate by discretion, and he sent few to MML. HCI gives notice of termination to MML.

Issues Did HCI act in bad faith in allocating cars to MML? Is HCI liable for damages?Holding Yes and yes McKinlay Motors Ltd.Reasoning Wells J:

MML’s delays were based on prudent business practice and the reduced allocation of cars. Poor sales performance was not a genuine factor in the termination - the determining factor leading to termination was

dissatisfaction with the premises (decided beforehand). Allocation system lacked a means by which a dealer could increase his allocation through good performance – only through

discretion (and zone manager didn’t like MML – wanted MML to be out of business). “The system was being deliberately operated to the disadvantage of McKinlay.” Damages need to be awarded for losses arising from the breach (expected earnings from cars that would have been sold)

Ratio Necessary requirement that business dealings be conducted in good faith, even if not explicitly mentioned in contract.Comments In CVL (CCQ 1375), could find good faith duty in enforcement and termination of K; here, Wells is nervous about the possibility of

finding a good faith duty in termination (esp. given that there is a termination clause in the K) – but he is willing to find that there were implications to use the discretion provided by the K reasonably.

Wells is also very quick to reject the idea of punitive damages (narrow idea of good faith) The K’ual text does state that Honda left itself a lot of discretion, the allocation formula was perhaps too complex to adjudicate its

fairness, and business practices often require harsh dealings. HCI worked hard to “oust” MML, even when they had generous termination possibilities arising from the K – so were they admitting

a certain obligation, or just trying to maintain that “they don’t fire dealers”?45


It was a bad business decision to oust MML (because he sold well), but we may not want judges to adjudicate bad business decisions

If it was a breach of K not to use discretion in good faith, MML could have sued for breach even before termination of K.

CML – Martel v. Canada, [2000] 2 S.C.R. 860: CB 336Jurisdiction OntarioFacts Gvt leased space in Martel's building. When lease was coming to an end, Gvt expressed interest in renewing lease and asked for a proposed

rental rate. Various meetings were held and Martel was made to understand that Gvt wouldn't proceed to tender if lease could be renegotiated with Martel. Martel made strong effort to renegotiate lease to satisfy gvt's request, but gvt proceeded with tendering. Martel bid on the project but it was not awarded the K.MBL sued in K (Department breached implied term to renew the lease) and in tort (Department breached duty to negotiate in good faith, was negligent in negotiation and tender processes).

Issues 1) Duty of care not to harm those who could suffer damages, does this duty apply to negotiations? 2) Does the tort of negligence extend to pure economic loss incurred during negotiation? 3) Did Gvt Dept breach a duty of care in the tendering process?

Holding 1) No; 2) No; 3) No. Canada.Reasoning Iaccobucci and Major JJ:

Duty of Care in Negotiations Purely economic loss has a high scrutiny threshold in CML, and is usually confined to categories, which MBL’s claim falls outside;

new categories should only be admitted based on policy considerations. Anns Test for duty of care in an area not previously categorised: 1) was there sufficient proximity so that carelessness might

damage the other party (yes); 2) are there limiting policy considerations (yes).o 1) Proximity: Was there a sufficiently close relationship between M and Gvt so that the latter's carelessness might cause

damage to M? If proximity established, Gvt is under an obligation to be mindful of M's legitimate interests = prima facie duty of care. In this case, there was proximity due to pre-contractual arrangements and communication between the parties.

o 2) Policy: there are policy reasons to conclude that one commercial party should not have to be mindful of the other's interests in negotiation. Although department is Gvt, it was exercising operational rather than policy functions. Gains are realized at the expense of the other negotiating party. Although one party may suffer, another gains: transfer of wealth that does not make society worse off. Extending duty of care to negotiations could deter socially and economically useful conduct. Advantageous bargaining position as a result of withholding information not possessed by the opposing party: key to successful negotiation. Martel could have concluded that the Department was not serious or interested in concluding a renewal of the lease: suffered from innocence and optimism. Extend tort of negligence into commercial negotiations would force courts to scrutinize commercial relations too much. Fraud, misrepresentation and deceit already supervised by the courts in negotiation. Multiplicity of lawsuits in tort of negligence.

No duty to bargain in good faith in CML: negotiation works against recovery (and there is exchange rather than net loss); would deter socially useful conduct (like hard bargaining based on monopoly on information); would make tort law insurance against failures to act with due diligence; would make courts regulate negotiations minutely; would encourage needless litigation

“Any prima facie duty is significantly outweighed by the deleterious effects that would be occasioned through an extension of a duty of care into the conduct of negotiations”

o 4 of the 5 reasons: (1) unlike other torts, society as a whole is not worse off if one party loses. This is just a transfer of wealth; (2) the very essence of negotiations suggests that there are good reasons NOT to disclose certain information (i.e. it allows a party to maintain a competitive advantage); (3) there are other causes of action available to provide rederess against bargains obtained (or not obtained) as a result of improper negotiation (e.g. undue influence, duress, unconscionability, negligent misrepresentation, fraud) (4) there is an efficient outcome.

Case at Bar: Martel’s claim resembles the assertion of a duty to bargain in good faith. A duty to bargain in good faith has not been recognized to

date in Canadian CML. Implied duty of care to treat all bidders fairly (custom, usage, officious bystander) Department had wide K’ual latitude in evaluating tenders, and used it consistent with a duty of care MBL cannot be given special consideration based on its previous relationship with the Department Not Department’s unfair addition of costs, but rather other expenses, that made MBL’s bid more expensive – no causation here K analysis subsumes any duty under tort – but even tortious claim would fail because it relies on the same duty of care

Ratio There is no obligation of good faith (K) or duty of care (tort) in the context of negotiations in the common law. There are many other ways to protect parties who suffer in the context of negotiations (undue influence, duress, unconscionability, negligent misrepresentation, fraud).

Comments Just goes to show, much more open to Good Faith in the CVL than the CML Cf. CVL duty of good faith (CCQ 1375) even when Ks formed, and cf. all the CVL cases above: more willingness to intervene Also different from the majority judgment in Empress Towers Perhaps a sense that if the government treats Ottawa landlords too badly, it’ll pay for it in the long run This case alternates between claims in K and in tort – you can do this in CML (not in CVL: CCQ 1458 para. 2 – but here there is more

freedom to sue in K: CCQ 6, 7, 1375) SCC is a lot less willing to recognize good faith than other courts

Calls for tendersOften calls for tenders inspire huge effort – can seem unfair if there are no norms regulating what happens when these proposals are received; must be a sense that there are some criteriaTraditional: call for tenders is not offer, but an invitation for others to make offerNow: KA and KB (see Martel above), BUT the source of obligation in KA is contractual, depending on interpretation of tender documents possible to limit/exclude liability by drafting well enough

46


Duty of “good faith” in tendering is more about tenderers’ reasonable expectations than intention/motive of business calling for tenders

CML – Transamerica Life Canada Inc. v. ING Canada Inc., [2004] 68 O.R. 457 (C.A.): CB 352Jurisdiction Ontario (Court of Appeal)Facts ING sold one of their subsidiaries to Transamerica. After closing, Transamerica claimed that ING misrepresented the company through error

(ING claimed that TA had been wilfully blind and had gone ahead with it anyway). ING claimed that Transamerica had a good faith obligation to disclose their error to them before closing, since they knew about it as a result of their due diligence.

Issues Can ING use good faith to have the Court imply a term of disclosure into their contract?Holding Yes ING.Reasoning O’Connor JA:

Breach of good faith (though very discretionary – “given the complex and sophisticated nature of the agreement and the extensive dealings between the parties before the closing of the transaction, the issue of the admissibility of this type of evidence is better left to the trial.”

Laskin JA [dissenting]: ING and Transamerica are both large companies with equal bargaining power. They have a 69-page agreement meticulously

detailing everything, including three articles about good faith and one about ING’s responsibility for disclosure. It’s not like they just missed Transamerica’s good faith obligations or disclosure.

The court is not meant to use “the rubric of good faith to rewrite their bargain for them.” DOCTRINAL ARGUMENT: Terms can only be implied into a contract if they are quite obvious, such as if they are 1) based on

custom/usage; 2) they are incidental to a particular type of contract; 3) if the term is necessary to give the contract business efficacy (something both parties intended/assumed, but didn’t state).

RatioComments

Breach of good faith (though very discretionary – “given the complex and sophisticated nature of the agreement and the extensive dealings between the parties before the closing of the transaction, the issue of the admissibility of this type of evidence is better left to the trial.” Ratio:Comments(Dissent by Laskin) Does not wish to read in Good Faith“ING asserts an implied duty of good faith not just to police performance of an existing obligation but also to add a substantive term to the parties’ express bargain. […] This is not a contract between unequals where one party is vulnerable to the bargaining strength of the other. Both ING and Transamerica are large, powerful insurers. Both were represented on the transaction by major Toronto law firms. And together they negotiated a sophisticated share purchase agreement, which sets out each party’s rights and obligations in excruciating detail. Yet nowhere in their single spaced 69-page agreement is Transamerica under an obligation to disclose to ING errors it may discover during the Interim Period, though as a practical matter one may ask why it would opt not to do so and instead “lie in the bushes” until after closing.” (352)ING had clause to disclose information, but not so for the other party, as Laskin points out sophisticated business agreement, drawn up by legions of lawyers – one can’t correct and rewrite the left out duty of disclosure because it is up to the seller to disclose everythingDuty is there because the seller is in a better position hence due diligence (if you come up with something before closing the deal, you can disclose it – to find something and not disclose is strange)“It is not for the courts, under the rubric of good faith, to rewrite their bargain for them.” 353Classical Common Law test - business efficacy and the officious bystander test – Empress Towers (good faith, negotiation, duty – need the officious bystander test)The dissent shows extreme reluctance for good faith – interpretation problem –in creating promises or implying new things we are crossing the line

Public Policy, Nullity and Voidness

Review – Last SemesterContract Enforcement: Lending State Authority to the Will of the PartiesContracts must have the following to be bindingOffer and Acceptance (meeting of the minds)Intention to create legal relationsFormalities if required by law or the parties (more in CVL)Consideration (CML)State will not enforce a contract if the contract is objectionable to public policy, or if the consent has been vitiated (flawed formation – fraud or duress).Regarding public policy: there is a certain line that a contract must not cross if the state will lend its authority to its enforcement

5. Policing the Agreement

Contract Enforcement: Lending State Authority to the Will of the PartiesContracts must have the following to be binding

1. Offer and Acceptance (meeting of the minds)2. Intention to create legal relations3. Formalities if required by law or the parties (more CVL)4. Consideration (CML)

State will not enforce a contract if the contract is objectionable to public policy, or if the consent has been vitiated (flawed formation – fraud or duress). Regarding public policy: there is a certain line that a contract must not cross if the state will lend its authority to its enforcement

47


Vitiated Consent – Flawed FormationContract as the voluntary creation of obligations by consent (“private autonomy, freedom of will”)

In what situations is entering into a contract not a “voluntary act”? 3 cases:1. Duress: Paradigm of coercion that “vitiates consent”

Actual or threatened violenceModern Modification: Economic Duress

2. Undue Influence:“Unconscientious use by one person of power possessed by him over another” – typically, vitiation of consent by the abuse of a relationship of trust and confidence3. Unconscionability:One person taking undue advantage of another, by reason of considerable inequality of bargaining power

Absolute Nullity and Objectionable Contracts, Public Policy and Community Values:The State will not lend its authority to agreements that run afoul of its own public policy and “community values” (definition can be open-ended)Statutory Illegality: A rule declaring certain transactions void“General Clauses”“Ordre public” or “Bonnes Moeurs” in the Civil LawDoctrine of Common Law Illegality (as opposed to Illegality by Statute): Contracts contrary to Public Policy

The concern here is with the nature of the activity, the goals and motivations, not with the process of formation. This is how the public policy test is different from the question of whether there was unvitiated consent.

Refusal to enforce contacts:State exercising its legitimate power to define valuable relationshipsBUT This restrains Freedom of Contract – tension that must be negotiatedStandards of morality change sexual morality, family law

5.1.Public Policy and Community ValuesWho Decides?LegislatorSpecific Statutes (e.g. minimum wages, surrogacy)Definition of Community Values (e.g. Charter, Constitution)JudgeBased on what? “Spirit of the law” vs. “Letter of the law” Hart vs. Fuller (Morality of Law)Application of open-ended concepts (“General Clauses”) such as “Ordre public” see Art. 1373, 1411, 1413 CCQ or “Common Law Illegality”Danger of Arbitrariness – criticisms of subjectivity, difficulty of predictability

Art. 1373The object of an obligation is the prestation that the debtor is bound to render to the creditor and which consists in doing or not doing something.

The debtor is bound to render a prestation that is possible and determinate or determinable and that is neither forbidden by law nor contrary to public order.

Article 1411A contract whose cause is prohibited by law or contrary to public order is null.

Article 1413A contract whose object is prohibited by law or contrary to public order is null.

Possible Justifications:Harm principle: “It directly hurts someone”Paternalistic: “It’s good for you” (e.g. Art. 8 CCQ)E.g. “Dwarf-tossing” – court denied little person the right to sign away his human dignity

Article 8No person may renounce the exercise of his civil rights, except to the extent consistent with public order.

Collective Good: “it’s not good for us”

Subject Areas for Objectionable ContractPolitical/Institutional public order - “undermining the institution of marriage”Economic public order - “covenants in restraint of trade” have been held unenforceable in CML (this argument attempted later on in Warner Bros. v. Nelson) – value of protection of competition, but also problem with employment (Cameron), problems of expanding market – commodification of life and the human body (Baby M) Shared Values: shift in language from “good morals” to “fundamental rights” – very discretionary*issues are in flux, seen in examples on marriage and sexual immorality

48


Legal and Moral JudgmentCivil Code abandoned the concept of “bonne moeurs” (Art. 13 CCBC)Still found in the French (Art. 1133 CC) “La cause est illicite, quand elle est prohibée par la loi, quand elle est contraire aux bonnes moeurs ou à l’ordre public.”

Policing Function of “Cause,” Art. 1385, 1411 CCQ “Subjective Cause – “Cause du contrat” Enforcement of Contracts that are deemed “immoral”, still may be considered to be contrary to public policyShows indeterminacy of the “general clauses” – “[L’]opinion personelle du juge risque peser lourd…” – Baudouin, p. 205Example from Montreal: sale of a piano was considered void because the piano was destined to be put into a brothel

Article 1385A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties require the contract to take the form of a solemn agreement.

It is also of the essence of a contract that it have a cause and an object.

Article 1411A contract whose cause is prohibited by law or contrary to public order is null.

Consequences?If a contract (in the Civil Law: its cause, Art. 1411, or object, Art. 1413) is contrary to public order it is VOID and NULL – unenforceable, never existed: see Art. 1416, 1417, 1422

Article 1416Any contract which does not meet the necessary conditions of its formation may be annulled.

Article 1417A contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest.

Article 1422A contract that is null is deemed never to have existed.

In such a case, each party is bound to restore to the other the prestations he has received.

What if only parts of the contracts – one or more clauses – are found to be contrary to public policy?If one part of the contract is void for public policy reasons, we look to see whether or not it is a material termIf yes, the contract is nullIf no, we look to see whether or not the contract makes sense without that particular part…Civil Law: Art. 1438 CCQ (Severability)Common Law: Doctrine of SeveranceProblem: this is now a contract that the parties would never have madeDoes this undermine the “meeting of the minds”?Judges do re-write contracts, and couch these manoeuvres in language that implies that they are not doing thisThere is no hard-and-fast rule to how these problems are ultimately solved tendency of the law to protect certain groups

5.1.1 CVL - SeverabilityCVL: Severability Art. 1438If a clause is found to be contrary it can be severed from the contract as a whole, as long as it is divisible to the whole of the contractAlso applies to risk allocation and liability stipulations if they prove to be too onerous

Article 1438A clause which is null does not render the contract invalid in other respects, unless it is apparent that the contract may be considered only as an indivisible whole.

The same applies to a clause without effect or deemed unwritten.

5.1.2 CML – Doctrine of SeveranceCan the remainder of the contract be sensibly enforced?Would the parties have entered into the contract without the clause?Traditionally: Blue Pencil Test (Judge could cross out the words, see if it still makes sense – she will not add words, it doesn’t make sense, then it is void)Canada has not adopted such a strict approach, instead the judge looks at the contract as a whole and then tries to capture the spirit of the contract by adding wordsThis approach is more lenient and a more paternalistic approach

Is the Contract Void (CML) or Absolutely Null (CVL)?

Relative Nullity vs Absolute Nullity (CVL)

49


1419: Relative Nullity, only to be invoked by the party whose consent was vitiatedArticle 1419A contract is relatively null where the condition of formation sanctioned by its nullity is necessary for the protection of an individual interest, such as where the consent of the parties or of one of them is vitiated.

1420 (2): Possibility of confirmationArticle 1420The relative nullity of a contract may be invoked only by the person in whose interest it is established or by the other contracting party, provided he is acting in good faith and sustains serious injury therefrom; it may not be invoked by the court of its own motion.

A contract that is relatively null may be confirmed.

Contrast: 1417, 1418: Absolute Nullity in cases of general interestArticle 1417A contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest.

Article 1418The absolute nullity of a contract may be invoked by any person having a present and actual interest in doing so; it is invoked by the court of its own motion.

A contract that is absolutely null may not be confirmed.

Nullity vs. voidness – CVL vs. CMLCVL concept of nullity asserts that a null K was never formed (NOT equivalent to CML’s “void” [null] and “voidable” [J can set them aside] Ks)“Voidness” is an old CML remedy; “voidability” is an Equitable doctrine and involves many other principles we won’t addressNullity as a fully developed theory; “void” looks functionally similar, but isn’t developed doctrinally/legislatively in the same way (don’t confuse the two)

Black’s Law Dictionary Definition of “Void”:void, adj. 1. Of no legal effect; null. • The distinction between void and voidable is often of great practical importance. Whenever technical accuracy is required, void can be properly applied only to those provisions that are of no effect whatsoever -- those that are an absolute nullity. -- void, avoid, vb. -- voidness, n.facially void. (Of an instrument) patently void upon an inspection of the contents. -- Also termed void on its face.void ab initio (ab i-nish-ee-oh). Null from the beginning, as from the first moment when a contract is entered into. • A contract is void ab initio if it seriously offends law or public policy, in contrast to a contract that is merely voidable at the election of one party to the contract.void for vagueness. 1. (Of a deed or other instrument affecting property) having such an insufficient property description as to be unenforceable. 2. (Of a penal statute) establishing a requirement or punishment without specifying what is required or what conduct is punishable, and therefore void because violative of due process. -- Also termed void for indefiniteness. See VAGUENESS DOCTRINE2. VOIDABLE. • Although sense 1 above is the strict meaning of void, the word is often used and construed as bearing the more liberal meaning of "voidable."

Villa c. Brasserie LabattCharter as Source of Values to assess a private Agreement

The Quebec Charter of Human Rights and Freedoms (R.S.Q.C-12)

Section 5Every person has a right to respect for his private life.

Section 10Every person has a right to full and equal recognition and exercise of his human rights and freedoms, without distinction, exclusion or preference based on race, colour, sex, pregnancy, sexual orientation, civil status, age except as provided by law, religion, political convictions, language, ethnic or national origin, social condition, a handicap or the use of any means to palliate a handicap. Discrimination exists where such a distinction, exclusion or preference has the effect of nullifying or impairing such right.

Section 20A distinction, exclusion or preference based on the aptitudes or qualifications required for an employment, or justified by the charitable, philanthropic, religious, political or educational nature of a nonprofit institution or of an institution devoted exclusively to the well-being of an ethnic group, is deemed non-discriminatory.

CVL - Brasserie Labatt v. Villa, [1995] C.A. Que – CB2: 5Jurisdiction QuebecFacts Labatt dismissed Villa for failing to comply with a mutually agreed-upon term of employment stating that he was to live permanently in

Montreal with his wife and children. Villa moved to Montreal, but his wife and children did not. Labatt dismissed Villa solely for failing to comply with this term of employment and not for any other reason.

50


Issues (1) Was the term of employment requiring Villa’s family to move valid? (2) Was his dismissal valid?Holding (1) No. (2) No. Villa. Damages awarded for wrongful termination.Reasoning Gendreau and Fish JJ:

An employer cannot impose a contractual obligation on the employee’s conduct of his marital and family life. This is against public order (1373 CCQ), and article 5 of the Quebec Charter (right to respect for private life) – novel interpretation of this section of the Charter.

Baudouin J (concurring): The condition is contrary to article 10 of the Charter, discriminatory on the basis of civil status (an unmarried employee would not

have had this term of employment) and contrary to public order.Ratio A term of employment that violates an employee’s rights under the Charter of Human Rights and Freedoms or that is against public order,

is null.Comments Although the condition of Villa moving his family was not part of the written contract, the court held that it was part of the

employment agreement because both parties acknowledged that it was understood between them to be part of the agreement. NOTE: it is not a material term of the contract, and can be severed. [Note: Gendreau J. uses this argument to make it more broad because say for example the K said that if you have a girlfriend she is

required to move, this would kill Beaudouin’s argument]. Charter can help in the interpretation of the words, “public order” Instance of severability: the invalidity of the particular clause of the agreement did not render the rest of the agreement null,

leaving Villa with the opportunity for recourse (indemnity)

Cameron c. Canadian FactorsEmployee restraint covenants invalid due to their unreasonable duration or territorial ambit – see Art. 2089 CCQ:

Article 2089:The parties may stipulate in writing and in express terms that, even after the termination of the contract, the employee may neither compete with his employer nor participate in any capacity whatsoever in an enterprise which would then compete with him.

Such a stipulation shall be limited, however, as to time, place and type of employment, to whatever is necessary for the protection of the legitimate interests of the employer.

The burden of proof that the stipulation is valid is on the employer.

Dissent: Question of Divisibility “In principle, a contract the object of which is to prohibit a resigning employee from working for a competitor of his former employer, or from soliciting the latter’s client is legal. It only becomes invalid if it impairs freedom of employment by reason of excessive limitations in terms of time and space, and with regard to the nature of the activities forbidden to the employee. But must such a contract be declared invalid as a whole, because, in certain respects that do not apply in this instance, it goes beyond what is compatible with a proper conception freedom of employment?””Cameron is in breach of the covenants which are not excessive although there are excessive limitations within the same paragraph - divisible? Can a reasonable core be found in an unreasonable clause?Are both divisible?Can the Employer be treated as if he had chosen reasonable limitations in the first place?No – be careful when drafting your contracts!

CVL - Cameron v. Canadian Factors, [1971] SCC – CB2: 10Jurisdiction Quebec (SCC)Facts Cameron’s employment contract with Canadian Factors contained a restraining covenant. He promised (1) not to induce any client to take

their business elsewhere; (2) not to take employment, in any capacity whatsoever, directly or indirectly, in Canada, with a similar business or competitor, or with any prospect; (3) to pay $10 000 if he contravened either of the above two provisions. Three weeks later, Cameron resigned and went to work for a direct competitor. The trial judge dismissed the action for lack of evidence of a breach; the judgment was reversed on Appeal. Cameron argues that because the clauses were excessively restrictive, he should not be bound by them at all.

Issues (1) Were any of the clauses unlawful as contravening public order? (2) Were they severable if one or the other are invalid? (3) Is either one, taken alone, partially valid and hence enforceable, although parts of it may be invalid? (4) Is the burden of proof relevant to this case?

Holding (1) Yes; (2) Yes; (3) No; (4) No. (3-2) CameronReasoning Laskin J:

In both CML and CVL, “employee restraint covenants may be held invalid because of their unreasonable duration or because of their unreasonable territorial ambit”.

It is necessary to balance the interests of the employer in protecting his business and the employee in economic mobility. Five years was too long a duration – one year would have been reasonable. Canada-wide was too wide an ambit – Quebec would have been reasonable. Forbidding Cameron to work “in any capacity” was also unreasonable. The court cannot rewrite the agreement, but only sever clauses, which it must do here.

Pigeon J (dissenting): Breach of (1) is disputed; breach of (2) is admitted. Rejects formalistic reasoning of the majority – believes that each obligation within clauses should be severable from the rest. Believes that the court should read down the clauses to a reasonable interpretation, thereby giving the employer protection from

Cameron’s bad conduct, rather than to strike them down altogether, thereby letting Cameron to get away with his abusive 51


behaviour.Ratio Clauses that are unlawful or contrary to public order can be stricken from the contract if they are severable. The court is extremely hesitant

to rewrite the contract to favour a party, even if they have been screwed over.Comments Pigeon’s approach is more equitable, because it tries to read in only the reasonable part, according to the reprehensible actions of

the employee. Clauses are not necessarily against public order just because the balance is off between employer and employee. Art. 2089 CCQ now deals with this situation.

CML – Baby M“We suggest that her consent is irrelevant. There are, in a civilized society, things money cannot buy.”Note the drafting:1. Obligation not to form a parental relationship4. (A) $10,00010. Miscarriage / StillbirthAltruistic / Commercial Surrogacy?Note that the solution of the AHRA defines a minimum standard: Art. 541 CCQ

Article 541Any agreement whereby a woman undertakes to procreate or carry a child for another person is absolutely null.

Quebec’s approach: ban both. Art. 541 CCQ – any surrogacy contract is null and void.

CML - In The Matter of Baby M, [1988] Supreme Court of New Jersey CB2: 19Jurisdiction New JerseyFacts Mrs. Whitehead agreed to carry Mr. Stern’s baby for $10 000. The surrogacy contract they signed stipulated that as soon as the baby was

born, she would take all necessary steps to terminate her maternal rights in the child. Mr. Stern had paid $7500 to the fertility clinic that arranged the surrogacy. Although the clinic’s psychological assessment of Mrs. W showed some doubt about her ability to part with the child once it was born, this was not disclosed. When the child was born, Mrs. W had a lot of trouble parting with it and an ugly legal battle begun to enforce performance of the contract. Finally, Mrs. W fled to Florida with the baby. She became depressed, suicidal, and extremely emotionally unstable as a result of the ordeal.

Issues Is the surrogacy contract valid?Holding No Contract declared void, but Mr. Stern awarded custody due to best interests of the baby.Reasoning Wilentz J:

“We invalidate the surrogacy contract because it conflicts with the law and public policy of this State… we find the payment of money to a “surrogate” mother illegal, perhaps criminal, and potentially degrading to women.”

Custody granted to father only because it was found to be in the best interests of the child. Parental rights of Mrs. W not terminated, adoption by the stepmother voided.

Judge found that Mrs. W did not give valid consent – she did not have all of the required information, not having had the baby and not knowing how she would react when the baby was finally born.

“Coercion of contract” – “the natural mother’s irrevocable agreement, prior to birth, even prior to conception, to surrender the child to the adoptive couple. Such an agreement is totally unenforceable in private placement adoption.” The agreement can only occur after birth, and after the birth mother has been offered counseling.

Contract in direct conflict with family law statutes, which emphasize best interests of the child Conflict of interest found with fertility centre, who were receiving money from the Sterns – incentive to hide facts that might

undermine the deal “Almost every evil that prompted the prohibition on the payment of money in connection with adoptions exists here.”

Ratio Babies should not be commodified. Surrogacy contracts for money are illegal, and any contracts to that effect will not be enforced by the state. There are, in a civilized society, some things that money cannot buy.

Comments Paid surrogacy contracts are illegal in Canada Had this surrogacy contract been held valid, and specific performance not enforced, the court would have had to consider awarding

damages. This would have had the effect of a) putting a price tag on the baby, and; b) putting a de facto pressure on the natural mother to give up her baby.

52


Rakhi Ruparelia, “Giving Away the Gift of Life: Surrogacy and the Canadian Assisted Human Reproduction Act” Article about altruistic vs. commercial surrogacy In Canada altruistic contracts are legal, but commercial contracts against the law Assumption that commercialization means coercion and altruism means freedom of choice is a faulty one – both altruistic and commercial surrogacy

must be looked at critically No imposition of criminal penalties for surrogates in commercial arrangements Problem with altruistic surrogacy is that the mother is not protected – family and social pressures might be the driving factor – “emotional coercion” View of surrogacy as “women’s labour” which should be compensated – “To ban their ability to use their reproductive capacity in a market economy

denies these women the benefits of legitimate employment.” Flip side of coercion argument – the poor and vulnerable women are those who stand to benefit the most from financial compensation Suggestion that regulation of the activity and compensation for the women involved is the best way to deal with the risks involved with all surrogacy Altruistic surrogacy cannot be monitored – “the same family pressures that may have pushed a woman to act as a surrogate in the first place will

continue after the baby is born.” – but recognition that these pressures cannot be alleviated through regulation Criminalization of surrogacy is the wrong way to go for many policy reasons – creation of a black market and marginalization of women who do it out

of vulnerability

5.2.Vitiation of Consent

Mistake and the CMLMistake leads to void contracts in the CML, error in CVL is relatively null

Two categories for our purposes: misunderstanding and common error/mistakeMore information further in summary

Is the Contract Voidable / Relatively Null? Vitiated Consent – Flawed Formation Vitiated consent is tied up with public policy (i.e. unconscionability). In German surety cases, arguments can fall under public policy or flawed formation (vitiated consent). It is up to the judges to characterize an issue.

Introduction: Vitiated Consent in CVL, CCQ 1398-1407 In the CVL the following vitiates consentConsent without Capacity 1398, 1409Consent that is not Free and Enlightened will (1319)Error (1400)Dol (Fraud) (1401)Fear (1402)Lesion (1405)

Remedies:1407, 1408

The CCQ as a Map: 1398-1407Identify the different types of “vices du consentement”Identify the remedy (or remedies) that is sought by the person invoking a defect of consentDoes the Civil Code focus on fairness in process, or fairness in outcome?

1. Consent“Capable of binding himself”, 1398, 1409Capacity means that a minor cannot bind himself, must be mentally able (Thibodeau)

Article 1398Consent may be given only by a person who, at the time of manifesting such consent, either expressly or tacitly, is capable of binding himself.Article 1409The rules relating to the capacity to contract are laid down principally in the Book on Persons.

“Free” and “Enlightened” (1399)Article 1399Consent may be given only in a free and enlightened manner.

CVL – Thibodeau c. Thibodeau, [1961] – SCC – CB2 :39Jurisdiction QuebecFacts Contract between brothers. Thibodeau agreed to sell his immovables, but it became apparent that he was suffering from mental problems –

he had no control over his mind. As “curatrice”, his wife wished to have the notarial acts nullified for lack of free and enlightened consent due to a lack of capacity.

Issues Were his mental problems enough to vitiate his consent?Holding Yes contract annulled.Reasoning Not necessary for the claimant to be completely insane in order to be deemed incapable of contracting – all that is necessary is the

lack of will to resist, the inability to weigh the obligations demanded by the agreement, or the inability to appreciate the

53


consequences – this is a lack of free and enlightened consent Thibodeau showed signs of mental derangement and intellectual instability prior to entering the contracts Presumption of capacity reversed as a result of evidence showing incapacity

Ratio Where a party to a contract can show [evidentiary standards!!!] that at the time of entering the contract they were not mentally capable of appreciating the consequences of their actions, there is vitiation of consent.

Comments No sympathy for the co-contractant, but also no attribution of fault in the question of capacity The law protects the incapable over the innocent co-contractant

2. Error (1400)Article 1400Error vitiates consent of the parties or of one of them where it relates to the nature of the contract, the object of the prestation or anything that was essential in determining that consent.

An inexcusable error does not constitute a defect of consent.

3. Dol / Fraud (1401)Article 1401Error on the part of one party induced by fraud committed by the other party or with his knowledge vitiates consent whenever, but for that error, the party would not have contracted, or would have contracted on different terms.

Fraud may result from silence or concealment.

4. Fear (1402)Article 1402Fear of serious injury to the person or property of one of the parties vitiates consent given by that party where the fear is induced by violence or threats exerted or made by or known to the other party.

Apprehended injury may also relate to another person or his property and is appraised according to the circumstances.

The CML equivalent is duress – paradigm of coercion that “vitiates consent”

5.3. Fear/Crainte (CVL)/Duress(CML)

5.3.1. Fear/Crainte (CVL)

1. Physical constraint (persons and goods) Physical violence

o Vis absoluta – violence that is absolute (e.g. taking your hand and guiding your hand to form your signature)o Vis compulsiva – using violence as a means to coerce a decision

Threats of physical violence – there is no test for measuring violence, so judges exercise a lot of discretion, look at the relationship of the parties2. Moral constraint: threat of defamation, “chantage”, etc.

Blackmail, some kind of information will lead to defamation, prosecution3. Causation: “fear” must have deprived the party of the free choice to enter into the contract4. Serious injury: “un certain caractère de gravité”5. Fear must be “reasonable”: subjective standard!

Both aspects combined are supposed to make sure that “fear” is not a purely subjective sentiment6. Constraint must be illegitimate

Consequences for Fear/CrainteNullité relative, Art. 1419Contract is deemed to have never existed, Art. 1422

Article 1422A contract that is null is deemed never to have existed.

In such a case, each party is bound to restore to the other the prestations he has received.

Unperformed obligations are unenforceableAlready exchanged prestations returned through Restitution Art. 1422, 1699

Article 1699Restitution of prestations takes place where a person is bound by law to return to another person the property he has received, either unlawfully or by error, or under a juridical act which is subsequently annulled retroactively or under which the obligations become impossible to perform by reason of superior force.

The court may, exceptionally, refuse restitution where it would have the effect of according an undue advantage to one party, whether the debtor or the creditor, unless it deems it sufficient, in that case, to modify the scope or mode of the restitution instead.

CVL - J.J. Joubert Ltd. v Lapierre - Fear

54


“Violence économique”Relation between “means” and “ends,” in particular when exercising a rightThreat of economic violence equated to physical violenceDoes the violence have to result in a financially disadvantageous transaction? NO it is an issue of autonomy.Restitution: Unwinding the transaction

5.1.3 CVL – J.J. Joubert c. Lapierre et Lapierre, [1972] CS Que. CB2 : 41Jurisdiction QuebecFacts Joubert, the employer, decided to change all employees’ status to independent contractor in order to thwart the union whose collective

agreement was expiring. He threatened not to renew Lapierre’s contract unless he agreed to sign on to the new arrangement, which included the purchase of equipment.

Issues Is the contract invalid due to duress?Holding Yes Lapierre – contract annulled – restitution orderedReasoning This is a question of autonomy – Lapierre did not give free and enlightened consent – threat of economic violence viewed as on par

with physical violence – reasonable fear of a serious injury resulting in vitiation of consent In order for use of constraint to be legitimate, both the means and the ends must be legitimate. In this case, the means

(threatening to let contract of employment expire) was legitimate, but the ends (union busting) were not – only violence used to enforce a right to which the party is entitled is legitimate

It does not matter if the contract would have left Lapierre better off – a unilateral decision on the part of one party to change the arrangements and the other party’s acquiescence due to fear cannot be condoned even if it was a good deal (in this case, it was not a better deal anyway) – it is up to each party to decide whether the contract is advantageous or not

Ratio Economic violence is on par with physical violence. Violence is only permissible when both the means and the ends are legitimate.

5. Lesion (1405)Article 1405Except in the cases expressly provided by law, lesion vitiates consent only in respect of minors and persons of full age under protective supervision.

Vitiated Consent: Remedies CVL1407, 1408: Application for Annulment (in case of lesion also reduction)Difference between public policy voids and vitiation consent – in public policy, parties have no choice – the contract is void, in vitiation consent, the party whose consent was vitiated has a choice of voiding it or not by applying for annulment

Article 1407A person whose consent is vitiated has the right to apply for annulment of the contract; in the case of error occasioned by fraud, of fear or of lesion, he may, in addition to annulment, also claim damages or, where he prefers that the contract be maintained, apply for a reduction of his obligation equivalent to the damages he would be justified in claiming.

Article 1408In the case of a demand for the annulment of a contract on the ground of lesion, the court may maintain the contract where the defendant offers a reduction of his claim or an equitable pecuniary supplement.

1419: Relative Nullity, only to be invoked by the party whose consent was vitiated1420 (2): possibility of confirmation

Article 1419A contract is relatively null where the condition of formation sanctioned by its nullity is necessary for the protection of an individual interest, such as where the consent of the parties or of one of them is vitiated.

Article 1420The relative nullity of a contract may be invoked only by the person in whose interest it is established or by the other contracting party, provided he is acting in good faith and sustains serious injury therefrom; it may not be invoked by the court of its own motion.

A contract that is relatively null may be confirmed.

General Introduction to Vitiated Consent in CML – Flawed Formation Contract as the voluntary creation of obligations by consent (“Private autonomy, freedom of will”)In what situations is entering into a contract not a “voluntary act”?1. Duress: Paradigm of coercion that “vitiates consent”

Actual or threatened violence Modern modification: Economic Duress

2. Undue Influence: “Unconscientious use by one person of power possessed by him over another” – typically, vitiation of consent by the abuse of a relationship of trust and

confidence3. Unconscionability:

One person taking undue advantage of another, by reason of considerable inequality of bargaining power55


Note how particularly in the last category, public policy considerations play a crucial role!In Germany, cases of unconscionability have been dealt with as “contra bonos mores”, 138 BGB

5.3.2. Duress (CML)

“Coercion of the will so as to vitiate consent” Contracts formed under duress are voidable

o Unperformed obligations unenforceableo Possibility of restitutionary recovery

Traditional Types:Duress to the Person: Actual or threatened violence – reasonable belief of threat also necessaryDuress of Goods: Bundy case – agreement made under urgent need of goods (e.g. pawnbroker holding goods and extorting more money than is justly due from the actual owner of the goods)Economic Duress: this is assessed on a continuum - “in a contractual situation economic pressure is not enough.”

CML - Atlas Express: Economic Duress Explanation rooted in classic Will Theory:

“Duress is coercion of the will so as to vitiate consent. […] In a contractual situation economic pressure is not enough. […] Compulsion had to be such that the party was deprived of his ‘freedom of exercising his will’” – Lord Scarman in Pao On

“Overborne Will” – “must have had no alternative course open to him”Modification in Universe Tankships (gave a very high threshold for economic duress);

Pressure amounting to compulsion of the will“The victim’s intentional submission arising from the realization that there I no other practical choice open to him”

Illegitimacy of the pressure exertedShift away from a “psychological” test

Both economic duress and consideration (pre-existing duty rule) are applicable but the shift has been toward economic duress as this encompasses policy issues at stake

Note: policy reason for the pre-existing duty rule was duress! (Remember the ship cases). Now, a legitimate criticism of the pre-existing duty rule is that it is over-inclusive – parties now cannot rewrite a contract even if they want to! (Creative lawyering may have a part to play here though – note obiter in Roffey Bros. – if it had been made explicit that “Consideration for this agreement is the annulment of the previous agreement,” it may have worked to get around the pre-existing duty rule)What is “illegitimate” pressure?“Nature of the demand” can render a threat illegitimate, even if the act one threatens to commit is in itself not considered unlawful, such as a breach of contract (e.g. if there is a “hint of blackmail”?)Note that, just as we have seen in the CCQ, the contract is rendered voidable, which means that it can be affirmed (such as happened in Stott v. Meritt)! This means that immediate action must be taken.Re. Industry culture – this is not so much in regards to whether or not there was duress, but rather just in regards to the question of whether the employer believed itself to have a legitimate claim to payback for the lossesRemember the pre-existing duty rule!

CML – Atlas Express Ltd. v. Kafko Ltd., [1989] QB 833, CB2: 44Jurisdiction UKFacts Kafko contracted with Atlas Express to transport its basketware to Woolworth’s by a certain deadline. An Atlas representative took a look at

the containers (of many different sizes) and quoted a per-carton rate based on the estimated capacity of the trucks (400 cartons per truck). On the shipping date, Atlas discovered that the cartons were actually larger than expected, reducing the capacity of each truck to only 200 cartons. Atlas refused to transport the cartons unless a new agreement, with a per-load fee, was signed. Kafko had nowhere else to turn – could not find another shipper on such short notice, and would be in breach of its agreement with Woolworth’s if Atlas did not take the shipment. They signed, but did not pay the outstanding amount. Atlas sued.

Issues Was the agreement to pay the new rate valid?Holding No Kafko. – unperformed obligations not enforced.Reasoning The Atlas representative was not in any way misled by Kafko. He saw a representative sampling of the cartons to be shipped, and

quoted a rate after being given every opportunity to calculate. It was absolutely essential to Kafko’s survival as a company that it make this delivery on time. Atlas knew this and used this to force

Kafko to sign the new agreement. Kafko’s director signed the agreement unwillingly. Kafko’s consent was “induced by pressure which was illegitimate” through economic duress – consent was vitiated – he was told to

“take it or leave it”, had no bargaining power, no “free and equal say” Economic duress is different from commercial pressure – duress is a “coercion of the will so as to vitiate consent” – it must be

enough that the party entered the contract against his will, without any alternative course of action, facing serious threat of injury Also – pre-existing duty (no fresh consideration)

Ratio Where a contract is signed under economic duress, consent it vitiated and the contract is voidable.Comments Court could have stopped at the pre-existing duty rule – but took this opportunity to discuss economic duress

There is a realm of legitimate tough dealing in business

5.4. Undue Influence (CML)

(No direct equivalent in the CVL)

56


Undue Influence: “Unconscientious use by one person of power possessed by him over another” – typically, vitiation of consent by the abuse of a relationship of trust and

confidence One person is in a “position to dominate the will” of another, the other person is disabled from acting independently

Undue Influence categories (articulated in Barclays Bank)Class 1 – “actual undue influence”Class 2 – “presumed undue influence”

No need to prove actual exertion of undue influenceClass 2A: legal presumption in certain relationshipsClass 2B: Relationship of Trust and Confidence has to be proven: existence of such a relationship assumption of undue influence

If a someone uses undue influence to get a party into a contract with a 3rd party (i.e. a bank), then court voids the contract unless there is “constructive notice” (Lloyds Bank, Barclays Bank)(In CVL the third party is only responsible if he knows about the induced fear)

CML - Lloyds Bank Ltd. V. Bundy – Undue Influence, Duress, Unconscionability Overview of situations in which CML recognizes situations of pressure as problematic Note the dimension of economic pressure in the traditional category of “duress of goods” Majority calls the case one of undue influence, but Denning says common denominator: “inequality of bargaining power” Note the importance of the relationship: motive of “undue influence”

“… rather […] a demonstration that the categories of grounds for rescission are interrelated and based on a common foundation.” J.A. Lambert in Harry v. Kreutzinger

CML – Lloyds Bank Ltd. v. Bundy, [1975] QB 326 (CA), CB2:47Jurisdiction UKFacts Bundy entered a contract with Lloyd’s Bank, with whom he had a relationship going back many years, to guarantee his son’s company’s

overdraft. Bundy’s first guarantee contract was made with the advice of a solicitor. His son’s company got into worse and worse financial trouble, however, and another bank manager came over to persuade Bundy to sign a new guarantee mortgaging his farm to the hilt. Bundy trusted the bank manager, and signed the new guarantee then and there with no independent advice.

Issues Was the new guarantee valid?Holding No Bundy.Reasoning Denning J:

General rule: “no bargain will be upset which is the result of the ordinary interplay of forces” – common law does not usually interfere in people’s agreements.

Exceptions can be made in cases where there is a great disparity in bargaining power – this judgment seeks “to find a principle to unite them”

o “Duress of goods” – holder of goods exacts unfair terms from party who needs the goods – voidable; “colore officii” – strong bargaining position of one because of his official position – both used to gain more than is justly due from the other party

o “Unconscionable transaction” – person in need of special care and protection exploited from another far stronger person to get property at gross undervalue – any case where an unfair advantage has been gained by the unconscientious use of power by a stronger party

o “Undue influence” – either fraud/wrongful act or exploitation of a special relationship between the parties in order to gain some gift or advantage from the weaker party

o “Undue pressure” – coercion – one party has no choice but to submit – no considerationo Salvage agreements – rescuer exacting terms from party in distress

Unifying thread – inequality of bargaining power No necessity of any wrongdoing – “the one who stipulates for an unfair advantage may be moved solely by his own self-interest,

unconscious of the distress he is bringing to the other.” Consideration moving from bank “grossly inadequate” – no actual benefit flowing to the father or to the son. Relationship of trust and confidence between the bank and the father. The bank knew the father was relying on them for advice. The relationship between the father and the son also greatly influenced the father. Conflict of interest on the part of the bank which should have prompted them to suggest he get independent advice.

Ratio “The English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.”

Comments Kerwin’s point in class: the bank knew that the son’s business was a “sinking ship” and got the father to back it anyway, by mortgaging his property “to the hilt”

Father was being given advice by the bank that was not in his best interest Denning does not take the traditional doctrinal approach towards unbinding Ks – tries to bind all types of voidable Ks into a

“unifying thread” – not followed by those after him (but still useful) Methodologically, we continue to apply the separate categories, which have some analytical value: we can imagine undue influence

in a particular relationship where we might not find it helpful to think of a disproportion of bargaining power (e.g. solicitor/client relationship)

The process of signing a K can be given strength by the presence of independent legal advice (Bundy, O’Brien), because it means that the person had a clear sense of what they’re taking on, and what consequences ensue (if they consulted and did it anyways, they’re more likely to be held to the K)

57


If we’re willing to void a K even where there was advice, we’re being substantive Considerable slippage on whether Denning is intervening on procedural or substantive grounds (“independent advice” is

procedural; “unfair terms” are substantive; “grossly inadequate consideration” is substantive; “impaired bargaining power” is procedural; “undue influence” is procedural)

All of these adjectives are very strong, as capitalism assumes that people can make bargains and should make them freely big range of acceptable influence, acceptable unfairness, but here we see the outer limits: the adjectives are strong because we don’t want to start policing “inadequate” consideration, but we can police “grossly inadequate” consideration

Denning is at pains to show that he’s dealing with an exceptional case, but we only know the scope of these adjectives when the case is applied

Late in the case, discussion of a relationship of “trust and confidence” between LBL and B: “fiduciary relationship” is when one person is expected to act in consideration of this trust finding hints of a fiduciary relationship between LBL manager and client takes the relationship far from the expected/typical relationship between bank and client

CML- Barclays Bank plc. O’Brien – Undue InfluenceNo general protection of wives as a “specially protected class of sureties” (husband-wife relationship no longer belongs in Class 2A)Husband and Wives and banks

“Constructive Notice” – bank is considered to be aware of the husband-wife relationship of potential undue influence, giving rise to a duty towards the wife.

o This is an equitable tool to hold the bank responsible for the wife’s actions Rule in Canadian CML

o ALWAYS the duty of the bank to ensure that independent legal counsel has been obtained by the co-signing party – if not, unconscionability

CML – Barclays Bank v. O’Brien, [1994] 1 AC 180 (HL), CB2: 51Jurisdiction UKFacts O’Brien guaranteed his company’s debts (overdraft of £135 000) using his house as collateral, requiring his wife’s signature for the security

agreement. The bank did tell O’Brien that they should read and fully understand the documents before signing them, and that they should get independent legal advice if they were in doubt, but O’Brien did not read the documents. O’Brien signed the documents and took them home for his wife to sign. The company’s debt grew and the bank brought possession proceedings against the O’Briens. The wife claims that the husband put undue pressure on her to sign, and that he misrepresented the effect of the legal charge – she thought the security was limited to £60 000.

Issues Was the wife’s consent valid?Holding No O’Brien. Liability limited to £60 000.Reasoning Lord Browne-Wilkinson:

Law should protect people who are subject to undue influence – in this case, wives subject to undue influence by their husbands; however, the court also has a responsibility to ensure that assets can be used for economic gains – to secure financial transactions – to keep capital flowing to enterprises.

Types of Undue Influence:Class 1: actual undue influence (burden of proof on claimant)Class 2: presumed undue influence based on relationship of trust and confidence (prima facie undue influence: burden of proof on wrongdoer to prove that the claimant entered into the impugned transaction freely)

Class 2A: certain relationships of influence (e.g. solicitor-client, doctor-patient, etc.: husband-wife relationship no longer in this class)Class 2B: de facto relationships of influence (claimed here)

The Bank knew that the husband was married, and should have ensured that the wife was informed as to her potential liability and advised to take legal advice

Legal charge on home securing liability can therefore be set asideRatio In a suretyship relationship between co-habitees: (1) the suretyship is valid except where undue influence occurs (2) unless creditor can

satisfy himself that surety entered into the obligation freely and in knowledge of true facts by (3) informing surety of her potential liability and advising her to seek legal advice.

Comments Constructive notice: creditor fixed with constructive notice of the surety’s right to set aside the transaction. Barclays Bank had enough information to suspect that the wife would be subject to undue influence from her husband, and this created a positive duty to ensure that she entered the contract knowingly and without that undue influence.

Unlike Soucisse or Houle, there is here a frank policy discussion: relationship between husband and wife has changed; joint ownership of homes cannot mean that people cannot put up their houses as collateral

5.5. Lesion (CVL)/Unconscionability (CML)

One person taking undue advantage of another, by reason of considerable inequality of bargaining power with a very unfair result (must shock the conscience of the court)-broader concept, inequality of prestations, plus inequality of bargaining power-contracts of adhesion can be an indicator of unconscionabilityRemedy: Recission

5.5.1. Unconscionability (CML)

CML - Harry v. Kreutzinger Leading case of unconscionability in Canada

58


Uses very paternalistic and offensive language “Inequality in the position of the parties due to the ignorance, need or distress of the weaker, which would leave him in the power of the stronger” One party is incapable of protecting his or her interests (vulnerability of one person due to old age, lack of experience, disabilities, emotional distress,

illiteracy etc.) “Coupled with a substantial unfairness of the bargain” = undue advantage Doesn’t matter that Harry could have sought legal advice? “… he was overborne by the respondent because of the inequality of their positions” J.A. Lambert: “Sufficiently divergent from the Community standards of commercial morality” Note closeness to public policy reasoning

CML – Harry v. Kerutzinger, [1979] 9 BCLR 166 (CA), CB2 : 53Jurisdiction British ColumbiaFacts Harry, an inexperienced, hearing-impaired First Nations fisherman with a grade 5 education and six children, sold his fishing boat, to which a

very valuable (Class “AI” – available to Indians only) fishing license was attached, for a quarter of its worth ($4500 for a $16 000 value). Kreutzinger assured him he would be able to procure another license, which was not true. Kreutzinger aggressively pressured Harry, to complete the sale, which he finally did. When he discovered that he could no longer get a comparable fishing license, Harry sued for unconscionability. At trial, the court said the contract was fair because Harry could have sought independent legal advice but didn’t, so he couldn’t complain that the price was unfair.

Issues Was the contract void for unconscionability?Holding Yes (3-0) Harry. Contract rescinded. Parties ordered to return their prestations.Reasoning McIntyre JA:

The trial judge distinguished this case from Lloyds Bank v. Bundy because the appellant did not agree as a result of one session of bargaining – he had the opportunity to consider the decision, so should not complain that the consideration was inadequate.

Principles of unconscionability differ from those of undue influence. Articulated in Morrison v. Coast Finance Ltd.: “A plea of undue influence attacks the sufficiency of consent; a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker.”

Proof of inequality in the position arising out of the ignorance, need or distress of the weaker Proof of substantial unfairness of the bargain obtained by the stronger Equitable remedy – to set aside the contract In this case, the respondent was in a far superior position in terms of experience, education and full knowledge of the value of a

commercial fishing license – the appellant “was overborne by the respondent because of the inequality in their positions, and the principles of the cases cited apply.”

Lambert JA (concurring): Not satisfied that the principle stated in Morrison v. Coast Finance Ltd. is sufficient to exhaust all cases where rescission could be

ordered under the rubric of unconscionable bargain. Return to Denning J’s reasoning in Lloyds Bank – “the categories for grounds for rescission are interrelated and based on a common

foundation, so that cases of one of the five types may provide guidance on another of the types.” Is this transaction, seen as a whole, sufficiently divergent from commercial standards of morality that it should be rescinded? In

this case, it was, and this should be the grounds on which it is set aside.Ratio Inequality of position + Substantial unfairness Presumption of fraud, reversible by proof by the stronger party that the bargain was fair

and reasonable.Comments Note the closeness of the “commercial morality” argument to public policy reasoning

CML – Toker v. Westerman (US) – Unconscionability through Price

Situation of the parties: Seller: Door to door sales – less overhead Buyer: Welfare recipient Shows a move from will to fairness in the U.S. Court in effect rewrites the bargain, looks at market price and sees that W had paid more than the market value already – the difficulty is what is a “fair”

price Note: English/Canadian courts have been reluctant to partly enforce contracts Note the similarity to ‘lesion” Uniform Commercial Code is the law according to which this case is adjudicated

Uniform Commercial Code is a model code, adopted by nearly every state in the U.S.

UCC § 2-302 Unconscionable contract or Clause(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

59


CML – Toker v. Westerman, 1970, 274 A.3d 78 (NJDC) CB2 : 60Jurisdiction USAFacts Westerman bought a fridge from Toker for $1230 when it was actually valued at between $350 and $400. They paid all but $574 of the

purchase price, for which they are now being sued by Toker. They claim they should not have to pay it because it was an unconscionable contract.

Issues Can the court refuse to enforce payment on grounds of unconscionability?Holding Yes Westerman.Reasoning McKenzie J:

New Jersey statute provides the court with the power to refuse to enforce a contract or a clause which is deemed unconscionable in order to avoid an unconscionable result

Uniform Commercial Code does not define “unconscionable”, but other states have judged that purchase price alone can be found unconscionable, although the seller should still be permitted to “reasonable profit”.

In this case, the court finds the price “shocking, and therefore unconscionable” – it is 2.5 times its reasonable retail value. “Although courts continue to recognize that persons should not be unnecessarily restricted in their freedom to contract, there is an

increasing willingness to invalidate unconscionable contractual provisions which clearly tend to injure the public in some way.”Ratio In the USA, an exorbitant purchase price is enough to render a contract unconscionable.Comments Even when courts apply existing rules, there seems to be a need at least to state that not everyone can just get out of their

contracts This case is not representative of CML case law.

5.5.2. Lesion (CVL) (Similar to CML unconscionability)3 categories:

1) Art. 1405 (very limited)2) Art. 1406 (limited)3) S. 8 of CPA and Art. 1437 (not limited)

Historical Development of Lesion Thomas Aquinas, Summa Theologia II-II q. 77 a. 1.

“[…] Et ideo carius vendere aut vilius emere rem quam valeat est secundum se iniustum et illicitum.”o Iustum pretium – roots in Medieval idea of just pricing (Christian morality)

Thomas Hobbes, Leviathan, Part I, Chap. 15“The value of all things contracted for, is measured by the appetite of the contractors: and therefore the just value, is that to which they consented to give.”

Baudoin/Jobin, Obligations, p. 316, on the CCBC, 1865:“La conception radicale de l’autonomie de la volonté de cette époque ne laissait pas de place à law lesion, car le contrat était nécessairement juste puisqu’il avait été voulu par les parties”

1) Article 1405: Lesion and Capacity

Article 1405Except in the cases expressly provided by law, lesion vitiates consent only in respect of minors and persons of full age under protective supervision.

Art. 1405 – vitiates consent only in respect toMinorsAdults under protective supervisionBesides that: only in cases “expressly provided by the law”

Consumer Protection Act – Statute K’s of Loan. Art 2332 of the CCQ or what was 1040c CCLC

Article 2332In the case of a loan of a sum of money, the court may pronounce the nullity of the contract, order the reduction of the obligations arising from the contract or revise the terms and conditions of the performance of the obligations to the extent that it finds that, having regard to the risk and to all the circumstances, one of the parties has suffered lesion.

2) Art. 1406: Lesion and Exploitation

Article 1406Lesion results from the exploitation of one of the parties by the other, which creates a serious disproportion between the prestations of the parties; the fact that there is a serious disproportion creates a presumption of exploitation.

In cases involving a minor or a protected person of full age, lesion may also result from an obligation that is considered to be excessive in view of the patrimonial situation of the person, the advantages he gains from the contract and the general circumstances.

Elements:1. Exploitation PROCEDURAL, subjective Look at who parties are and circumstances they entered into K. 2. Prestation Disproportion SUBSTANTIVE, objective is this a fair deal?3. Rebuttable Presumption of exploitation defn in Art 1373

60


General Principle from Art. 1406 (exploitation, serious disproportion) Disproportion creates presumption of exploitation Other Provisions Dealing with Lesion

Art. 424, 472 – renunciation of rights during separation (family law), Art. 2332 - loansArticle 424Renunciation by one of the spouses, by notarial act, of partition of the family patrimony may be annulled by reason of lesion or any other cause of nullity of contracts.Article 472Acceptance and renunciation are irrevocable. Renunciation may be annulled, however, by reason of lesion or any other cause of nullity of contracts.

Application of the “Principle of Lesion” now: Situations in which there is an assumption of structural inequality of bargaining power Equilibrium is re-established by favouring the interests of the weaker party (see Gareau quoting L’Hereux-Dubé) Art. 8, 9 Consumer Protection Act – Gareau Art. 1437 CCQ – abusive clauses in consumer contracts and contracts of adhesion – Slush Puppie

3.Lesion through Statute - Consumer Protection Act Art. 1405 allows lesion in cases where the law provides – CPA s. 8 is such a law With the rise of consumer protection, there has been a greater assuming of ‘structural inequality of bargaining power’ Equilibrium is re-established by favouring the interests of the weaker party (see Gareau quoting L’Heureux-Dubé)

Art. 8, 9 Consumer Protection ActConsumer Protection ActTitle I – Contracts regarding goods and servicesChapter I – General ProvisionsAnnulment of contract, reduction of obligations

8. The consumer may demand the nullity of a contract or a reduction in his obligations thereunder where the disproportion between the respective obligations of the parties is so great as to amount to exploitation of the consumer or where the obligation of the consumer is excessive, harsh or unconscionable.

Degree of consumer’s consent.9. Where the court must determine whether a consumer consented to a contract, it shall consider the condition of the parties, the circumstances in which the contract was entered into and the benefits arising from the contract for the consumer.

S. 8 of CPA has TWO TYPES of lesion (rather than two requirements for lesion)

[1] Objective lesion - disproportion of prestations is so great as to amount to exploitation. [note…exploitation is here a fait accompli; it is not just a presumption as in art. 1406; not even rebuttable!]

Just having a severe disparity b/n the prestations of the parties, there is lesion. Presumes that consumers are NEVER able to appreciate the economic value of what they are buying

Arguments against objective lesion: Should the court have to be the smart shopper? This is not the place for the law it is the place of the market, how can judge say that b/c it was twice the price (and only that fact) that it is lesion.

OR

[2] Subjective lesion - the obligation of the consumer is excessive, harsh, unconscionable. (Compare this to 1406 which requires both disproportion of prestations AND exploitation of one party by another). Reminiscent of art 1406 and incapable majors and minors by effectively giving consumers the tool of subjective lesion.

CVL - Gareau Auto c. B.C. Impériale de Commerce Extensive interpretation of Art. 8. of CPA “Old and still respectable principles of freedom of contract, based on the autonomy of the will” versus “justice contractuelle” Art. 8: two types of lesion

o Disproportion – “objective lesion”o Excessive/abusive/exorbitant – “subjective lesion” (different from the 1040c CCBC)

Burden of proof on the merchant (presumption of exploitation) This is where Art. 9 CPA comes into play! Hence Art. 9 CPA, three elements

o Condition of the partieso Circumstances in which the contract was entered intoo Benefits arising from the contract for the consumer

What does this mean for the merchant?o The merchant has to make sure that the consumer is in a position to enter into the contract without lesion

How does the nullity of the contract between Gareau and Carbonneau affect the relationship between Carbonneau and the bank?o Consumer Protection Act – Rights of assignee of debt.

61


Art 103. The assignee of a debt owed to a merchant under a contract to which the latter is a party cannot have more rights than the merchant and is solidarily responsible with the merchant for the performance of the merchant’s obligations up to the amount of such debt at the time it is assigned to him or, if he assigns it in turn, up to the amount of payment he has received.

CVL – Gareau Auto v. B.C. Impériale de Commerce, [1989] RJC 1091 (CA), CB2 : 61Jurisdiction QuebecFacts Lawsuit following the nullification of a consumer contract. Gareau Auto Inc. sold a boat (which it had acquired from an uninvolved third party)

to Guy Carbonneau for about $11 174, payable on a cash advance and 30 monthly installments. The seller assigned its claim against the buyer to CIBC (see 1637 CCQ). Carbonneau decided he didn’t want the boat anymore, regretting his decision almost immediately and only having used the boat once.The bank sued Gareau for the amount paid for the bad debt, and Gareau sued Carbonneau for the amount of the boat. The trial judge ruled against Gareau on both counts Carbonneau lawsuit didn’t go through due to Art. 8 and 9 of the Loi sur la protection du consommateaur, and Gareau was found responsible for the bad debt to the bank as a result. Gareau appealed.

Issues Was the contract of sale of the boat null for lesion, thus making the debt sold to CIBC a bad debt?Holding Yes (3-0) CIBC.Reasoning Chevalier J:

Appellant argued that ss. 8 and 9 should be interpreted restrictively because art. 1040c has been interpreted restrictively rejected because the old concepts of contractual freedom founded on the autonomy of the will are not enough to satisfy the equally imperative notion of contractual justice.

S. 8 has two forms of lesion:o [1] Disproportion of prestations: when determining this, court should ask if (1) there is a disproportion, and; (2) if the

disproportion is considerable. In this case, there was no disproportion because the boat was sold at a fair commercial price.

o [2] Obligations for consumer excessive or abusive or exorbitant: Judge interprets this as subjective lesion (based on the wording of s. 9). This depends on the means of each consumer – burden of proof is on the consumer that it will be disastrous for their patrimony. Do not have to show that the obligation is objectively exorbitant or excessive – consumer can be relieved of the obligation even if the price is fair.

S. 9 – in order to establish [2] of s. 8, three elements must be considered:o [1] Condition of the parties: economic situation of the individual consumer – is the obligation excessive?o [2] Circumstances in which the contract was concluded: circumstances surrounding the negotiation and conclusion of

the contract, not the personal circumstances of the consumer (marital difficulties, etc.) – matter of evidence.o [3] The advantages of the contract for the consumer: A court might consider the purchase of something the consumer

actually needs as acceptable, even if the obligation assumed is quite excessive. However, if the object is totally unneeded/not useful, the court may annul the contract, even if the obligations are only relatively onerous.

In this case, Carbonneau was on worker’s compensation, married with 3 children, with a mortgage and not much equity. The boat is of no use to him because he doesn’t have a chalet and does not participate in water sports. He obviously cannot afford the boat – he had to get his brother to lend him $500 for the deposit. The contract will have detrimental consequences for him and should be annulled.

Gareau has to pay back CIBC because it was his responsibility to ensure that the sale would be fair.Ratio S. 8 of the CPA includes both objective and subjective lesion. Objective lesion is an inquiry into the price paid and whether it was fair.

Subjective lesion is an inquiry into the individual consumer’s circumstances and the effect of the obligations upon the consumer, weighed against the benefit gained from the contract.

Lesion Through Art. 1437 (Contracts of Adhesion)Art. 1437 alludes to lesion (Jonathan Nuss) also protection for contracts of adhesion (not just for consumer contracts – Slush Puppie)

Article 1437An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.

An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith; in particular, a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause.

CVL Slush PuppieNot a consumer situation, but still a contract of adhesion: Art. 1437 CCQExclusive delivery – close relationship, dependency – good faithNo possibility to contest the test results: “act of faith”Note Art. 1623 CCQ: Penalty Clause

Article 1623A creditor who avails himself of a penal clause is entitled to the amount of the stipulated penalty without having to prove the injury he has suffered.

However, the amount of the stipulated penalty may be reduced if the creditor has benefited from partial performance of the obligation or if the clause is abusive.

CVL – Slush Puppie c. 153226 Canada Inc., [1994] RJQ 1703 (CQ), CB: 67Jurisdiction QuebecFacts Slush Puppie provided a slushie freezer to depanneur on the contractual condition that the depanneur only use Slush Puppie’s products. Slush

62


Puppie had the right under the contract to test the product and unilaterally decide whether or not the depanneur had conformed to the conditions of the contract. There was a $2500 penalty if Slush Puppie found the client in default. Slush Puppie came to the store one day, and took away the freezer to test it, and found the client in default. They didn’t provide any proof, but are suing based on the clauses of the contract that allow them to do this.

Issues Are the clauses in the contract abusive, and should they be annulled?Holding Yes, and yes 153226 Canada Inc.Reasoning Vermette J:

Slush Puppie refuses to disclose how the test works Slush Puppie also wants to rely on the contractual provision that says that tests conducted by Slush Puppie are taken to be

conclusive and cannot be contested by the store This provision is abusive/unconscionable according to CCQ 1437 because it relieves Slush Puppie of all burden of proof of

establishing a breach of the contract by the store. It is excessively and unreasonably detrimental to the adhering party – the court will not recognize it.

Slush Puppie did not provide any substantial evidence of breach their claim must therefore fail for lack of proof. Ratio Abusive/unconscionable clauses Comments It can be messy to invalidate just one part of a contract, because a good contract will have all of the parts integrated

Is this really LESION? It seems more like unconscionability to me – it is not an inequality of prestations, and the depanneur is not in an extremely disadvantaged position except by the contract provision itself (will is not overborne as in CML)

KechichianInterpretation of Art. 1437 CCQ as a specific case of Lesion“Fundamental idea” – “instrument of exploitation”?Threefold test:ExcessiveUnreasonable (Disproportion of Prestations)“Not in Good Faith”Note: Clause not contrary to ordre public (i.e. illegal – relate to notions discussed earlier)

CVL – Quebec (PG) c. Kechichan, [2000] JQ no 2049 (CA), CB2: 70Jurisdiction QuebecFacts Kechichian and her husband sponsored her parents to come into the country. Shortly after they came, the grandparents applied for welfare.

The government sued the sponsors for $14 000, as they had guaranteed to provide for the necessities of life for their parents for a period of 10 years. The defendants claim that it is a contract of adhesion, and that the clause requiring them to pay for their parents is an abusive clause.

Issues Was the clause guaranteeing the sponsored party abusive?Holding No Quebec.Reasoning This is a contract of adhesion it is pre-determined, in form and substance. It is therefore valid to open this contract up to scrutiny

by the court for illegibility, incomprehensibility, or abusiveness. The court is trying to balance the concerns of the sponsor with the concerns of the government. Art. 1437 – threefold test: (1) Excessive? (2) Unreasonable (disproportion of prestations)? (3) Not in good faith? The clause passes

this test and is not contrary to l’ordre public. “Le contrat ne comporte pas, au sens de l’article 1437 CCQ, de désavantage pour l’adhérent à moins de considérer que toute

obligation en est un en soi. Les inconvénients économiques qu’il peut subir doivent s’apprécier par rapport au bénéfice que lui rapport l’entreprise, soit la venue de personnes chères qui autrement n’auraient pas pu émigrer.”

Ratio Contracts of adhesion which impose a great burden but are not excessive or contrary to public order will not necessarily be found to be abusive.

Comments

CLOSING THOUGHTS Emphasis is on sanctioning an unfair process on its own (how was the contract formed?) Reluctance to police an unfair outcome (don’t want to police the outcome)

o HOWEVER: Unconscionability and lesion look at the outcome Consumer law – seen as rectification of structural inequality Remember closeness to public policy/order public These doctrines must be kept separate in legal argumentation – don’t get them confused just because the remedies are similar (relative nullity, setting

aside of the contract, etc.)

5.6. Fraud/Dol , Error (CVL)/Misrepresentation/Mistake (CML)

Error/Mistake (Dol/Misrepresentation) affects the intellectual formation of the decision (how “enlightened” it is)What is at stake?

Protection of “true consent” – will theory Stability of Contract (see e.g. Art. 1400 CCQ) Reliance!

But also: account for wrongdoing fraud or deception should be sanctioned! Reflected by Choice of Remedies:

o Recission/Restitution in case of Error/Mistakeo Dol/Fraudulous Misrepresentation: Damages (or Reduction, Art. 1407 CCQ)

63


FRAUDULENT ACTS – A summary of Dol and Misrepresentation Fraudulent acts in forming a contract in CVL and CML are covered by the doctrines of Dol and Misrepresentation.

In CVL, finding dol gives rise to the relative nullity of the contract (1401 CcQ). Three questions must be satisfied:

1) existence of error?2) error induced by fraud?; and, 3) but-for the error, would the parties have contracted? (Creighton v. Grynspan).

If dol is found, but the aggrevied party has ratified or acquiesced the contract, then the opportunity to annul the contract is lost (Tremblay v Les Petroles).

In CML, misrepresentation exists where the material statement of fact is false.Three steps must be satisfied:

1) statement of present/past false fact2) materiality to agreement in question based on reasonable person test; and, 3) that the false fact induced the agreement (Sarvis v Vermont State Colleges).

The Doctrine of Hedley Byrne instructs that negligent misrepresentation can lead to tortious liability. In Esso v Mardon, it was found where one party has special knowledge or skills and induces another to contract in reliance on the information, the former may liable for contractual and delictual damages, based on a duty of care. In Mason v Bank of Nova Scotia, D, a third party to the contract, was found delictually liable for inducing P into a contract with another based on false financial information.

5.6.1. Fraud/Dol (CVL)

1398 CCQ Consent may be given only by a person who, at the time of manifesting such consent, either expressly or tacitly, is capable of binding himself.1399 CCQConsent may be given only in a free and enlightened manner.It may be vitiated by error, fear or lesion.1400 CCQError vitiates consent of the parties or of one of them where it relates to the nature of the contract, the object of the prestation or anything that was essential in determining that consent.An inexcusable error does not constitute a defect of consent.1401 CCQError on the part of one party induced by fraud committed by the other party or with his knowledge vitiates consent whenever, but for that error, the party would not have contracted, or would have contracted on different terms.Fraud may result from silence or concealment.1407 CCQA person whose consent is vitiated has the right to apply for annulment of the contract; in the case of error occasioned by fraud, of fear or of lesion, he may, in addition to annulment, also claim damages or, where he prefers that the contract be maintained, apply for a reduction of his obligation equivalent to the damages he would be justified in claiming.

Causality: “but for that error” I would not have entered the contract, error was induced by the other party’s lies, maneuvers, concealment, silence – behaviour. If someone misleads a party to enter into a contract with a 3rd party, it is not dol unless the 3rd party was aware of the error (Rawleigh v. Dumoulin) Exaggeration/inflation (bon dol) vs. fraud; the law does not protect parties from their own imprudence, recognizes exaggeration inherent to contracts

(Related to the CML fraudulent misrepresentation)Three-Step Analysis:

1) Was there an error?2) Was it induced by fraud?3) But-for that error, would parties have contracted?

a. If fraud creates relative nullity, was the K acquiesced or ratified by aggrieved party? (Tremblay v Les Petroles)

CVL – Creighton v. Grynspan, [1987] R.J.Q. 527 (C.A.): CB2 76Jurisdiction G and partner offer to purchase C’s property, mentioning a survey plan with a square footage “more or less”, and including a strip of land

belonging to the City; negotiations follow and a K is signed. G discovers that definition of plot does not conform to description, refuses to execute deed of purchase and sues C for annulment of offer and damages, as C wilfully misrepresented the true state of affairs.

Facts Did C commit fraud by wilfully misleading G?Issues Yes Grynspan.Holding No Holt.Reasoning McCarthy J:

C ought to have drawn G’s attention to true state of affairs – not enough to omit specific inclusion of strip of land and insert “more or less”

G could have checked, but can’t be blamed for starting preparations for development G would not have offered to purchase if he had known the true state of affairs (but-for) therefore, contract is null Law of fraud shouldn’t be used to protect people from all imprudence G was led to believe that C had acquired the strip of land, and always made it clear that he wanted that strip Expiration clause also invalid because of fraud G can still bring the suit

Concurrence (LeBel) Silence and willful misleading, even though C knew the importance of this strip of land to G G had experience with land purchase, and should have known better (he and partner were “imprudents et inattentifs”)

64


“Le droit civil traditionnel, après tout, ne protège pas les imprudents contre eux-mêmes. Il se préoccupe surtout de la protection du contractant normalement diligent ou prudent.”

CA and SCC have recognised that commercial transactions often involve exaggeration or excessive representations One hesitates to conclude that a contracting party should have to inform the other party of its errors in all circumstances – but here

there was fraudRatio If party A’s knowingly false representation is the “but for” condition for party B to K, A has committed fraud. Fraud can apply to all pre-

K’ual conduct. Possible to have ECO liability for fraud because there isn’t yet a K.

STEP 1: WAS THERE ERROR?The error was in the identification of the parcel of land to be purchased – C and G actually were not talking about the same piece of land

STEP 2: WAS THE ERROR INDUCED BY MISREPRESENTATION?Yes C had misrepresented the land to be sold by omitting details and writing ambiguous terms (e.g. “more or less”) into the contract when the offer was modified

STEP 3: BUT-FOR THAT ERROR...G would not have purchased the land if the terms had been clear (i.e. if the misrepresentation had not occurred)Judgment in Grynspan’s favour a result of the relative culpability of the parties – whereas G was “imprudent and inattentive”, C was deliberately misleading to the point of being fraudulent, so the judgment goes against him.

Tremblay v. Les Pétroles Inc Causality: “...but for that error” Lies, manoeuvres, concealment, silence What is simply an exaggeration/inflation (bon dol), what amounts to fraud? How much do we expect from the victim? Necessity to ask, inquire? Can subsequent behaviour confirm the contract despite the fraud?

o Continuing to “enjoy the benefits” of the contract? Damages: What is the proper measure of damages?

CVL – Tremblay v. Les Pétroles Inc., [1961] B.R. 856 (C.A.): CB2 80Jurisdiction QuebecFacts T leased a garage from LPI, being led to believe that he could make a profit but was unable to see the books (instead, only some data from the

last year’s operations). After half a year of operation (and having paid 2 months’ rent and bought uniforms/cards/etc), T realized that he could not possibly make a profit. T sues to annul the contract, cancel the hypothec guarantee, recover his deposit, and recover losses – all because of fraud.

Issues Was there fraud? Did T ratify the K through his subsequent actions?Holding Yes. No. Tremblay.Reasoning Hyde J (3-2):

TPI’s representatives’ statements were not just lawful exaggeration but baseless representations that induced T to K in error Baseless representations: the garage was operating at a loss for the past six or seven years!!! T would not have entered into lease if he’d known that the garage had operated at a loss for six or seven years there was fraud,

and T can request resiliation of K Once T established fraud, burden was on LPI to show ratification Defrauding became apparent only by degrees T didn’t realize until half-a-year later that he could not make a profit, and it was

natural for him to try to make a profit first – he did act on his realization of the misinformation as soon as he realized it Also – there were price wars between petrol companies that would have made it especially difficult to make a profit.

Dissent (Bissonnette J): Yes. Yes. Doctrinal distinction between wilful fraud and the vendor’s ability or buyer’s naïveté Fraud occurs when it induces consent where the truth would not have – which is the case here Fraud creates relative nullity, so acquiescence or ratification can render it moot T brought his case too late, and also acted on his obligations, despite knowing from the first weeks that he could not make a profit;

he also prepared for a future by ordering uniforms and cards T’s actions suggest valid consent was given to the K

Dissent (Badeaux J): No. (And, even so, yes.) LPI’s representatives acted in a manner not suggestive of willful fraud T could have judged from the last year’s data that the dollar figures he thought he’d heard were wrong T was the victim of his own inexperience, negligence, commercial conditions rather than LPI’s actions, a price war, extravagance,

and imprudence – LPI did not act so as to willfully mislead himRatio Baseless representations (beyond lawful exaggeration but short of active lying) that induce another party to K in error (“but for”) can

constitute fraud. It is natural for business managers in trouble to “try to make the business work”, which does not qualify as ratifying the K.Comments Would have been easy for Tremblay to have gotten the correct information and noticed the error

Here and Esso v. Mardon (below): tension between acting as per the law, and the natural tendency to try to make things work “better” if they’re not going well (confirming the K?)

Bissonnette J. comes dangerously close to recognizing lesion CCQ 1401 should only be pled carefully, showing why there was fraud

65


Difficulties with Dol Hard to know the line between where the victim not being diligent enough, vs. the role of the other party in misleading There has been a shift in paradigm in consumer law in which the assumption is that people are not smart and that they don’t have a team of lawyers

examining their contracts (due diligence) There is a time limit for these kind of claims, but one cannot be barred from bringing in a claim if they don’t know that fraud exists

5.6.2. Misrepresentation (CML)

(Equivalent to dol in the CVL) If a party has been induced into a contract through misrepresentation he may rescind the contract. The following constitutes misrepresentation:

o “Material statement of fact that is false”o Statement of present or past fact that is false

To be distinguished from:o Sales talk (exaggeration, puffery – perspective of the objective observer – has the line been crossed?)o Opinion (question of expertise – has it been made clear that it is only a subjective opinion and is not to be relied on, or is legitimate reliance

reasonably foreseeable from the perspective of the objective observer?)o Intention (prediction about the future, promise or statement about a present intention)

Very difficult to draw the line in abstract terms here – to be very carefully interpreted and weighed in the light of the surrounding circumstances

Only in relation to present or past fact – any statement in terms of future fact (to be distinguished from intention, which may be a promise, therefore binding) is merely a projection or “prophecy” (HD)

Law v. Fact – is it a legal opinion which is being stated? If yes, it could result in legitimate reliance. Materiality

o Misrepresentation must relate to a matter that by a RP would be considered relevant for the decision to enter the agreement in questiono (Same consideration in CVL – it must be regarding a material term of the contract)

Inducemento Misrepresentation must have constituted an inducement upon which the representee reliedo Not necessarily exclusive or predominant inducemento Actual relianceo No duty to engage in “due diligence”o If, but for the inducement, the contract would not have been entered into.

Misrepresentation and Sarvis v. Vermont College1) Statement: was false (did not retire, but had been in jail)2) Materiality: passes reasonable person relevance test, he misrepresented to teach business ethics!

o His omissions and deceit were regarding direct qualifications for the job – if he had been honest about his past, he would not have been hired.

3) Inducement: relied on misrepresentation for contract, was discouraged to pursue referenceso Court may say that “pure silence” can be misleading – but in that case, it is necessary to establish a positive duty to disclose – we will get into

this later. Goes back to the idea of due diligence

CML – Sarvis v. Vermont State Colleges, 172 Vt. 76, 772 A.2d 494 (2001) – CB2 87Jurisdiction VermontFacts P convicted of 5 counts of bank fraud, went to jail for almost 3 years; applied for a job teaching business ethics with fake CV. Received 3

business contracts, then parole officer informed school about criminal record, school fired P.Issues Was the termination of the contract of employment just?Holding Yes Vermont State Colleges.Reasoning Court found that P had fraudulently induced misrepresentation

P had created false impressions, not silence, also discouraged D from checking references Recission of the contract – school voided the contract and was in its rights to do so

Ratio Partial disclosure can lead to a wrong impression thus vitiating consent. Once there is partial disclosure, there is a duty to reveal everything (material).

Comments Defendant made up facts and omitted others – very similar to Greenspan c. Creighton – no question of an actual “duty to disclose”, but rather of active misrepresentation

This case (US CML) governed by the Restatement of Contracts 2nd ↓

Definition of Misrepresentation in Restatement Contracts 2ndRestatement Contracts 2 nd §162 When a Misrepresentation is fraudulent or Material

(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion

(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to

66


induce the recipient to do so

Remedies: Innocent misrepresentation

o Recission (voidable – choice between voiding, or keeping the contract “equitable remedy”)o Question becomes the degree of culpability of the misrepresenting party

What was the nature of the misinformation – could the misinforming party help it? “Innocent” if they couldn’t help it

Fraudulent misrepresentationo Recission + Damageso Tort of Deceit - includes misrepresentations made “recklessly, careless whether it be true or false”

Negligent Misrepresentationo Recission + Damageso If can’t claim for tort of deceit, can claim for tort of negligenceo Problem: Pure Economic Loss – establishing liability – lack of proximity? “special relationship” must exist

Esso Petroleum (pre-contractual) V.K. Mason Construction

Esso Petroleum v Mardon (UK) Damages based on negligence – does have a contract, but even if there is no actual warrantee, the misrepresentation leads to a claim for torts Applicable between parties who entered a contractual relationship?

Lord Reid in Hedley Byrne: “Where there is a contract [...], the question is whether there is a warranty.” Note the shift in Esso: “If a man who has or professes to have special knowledge or skill makes a representation by virtue thereof to another – be it

advice, information or opinion – with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care” (Lord Denning)

Hedley Byrne doctrine: negligent misrepresentation can lead to a tortious liability

A B(misrepresentation)

C (Bank)

B made a representation to A that led A to contract with C Negligent misrepresentation by one of the parties to the contract can extend to damages incurred (in tort) as a result of the other contract

Esso collapses the triangle – there may be both contractual and tortious liability

CML – Esso Petroleum Co. Ltd. v. Mardon, [1976] Q.B. 80 (C.A.): CB2 89Jurisdiction UKFacts EPC bought a site to build a service station, but the planning authority only allowed them to build it facing the back road; EPC built but did not

accordingly revise its estimates. EPC found M as a tenant for the station, and dispelled M’s worries that the station could not meet the higher figure. M signed a 3-year lease, started work, did everything possible, and lost money, new agreement signed for one year at lower rent, but M still could not make money. M appealed to EPC to help; EPC did nothing, but seized his tanks; M gave up and sued for recission and damages (for breach of promise).

Issues Did EPC make a collateral warranty? Did EPC make a negligent misrepresentation?Holding Yes. Yes. (K valid but $ECO)Reasoning Denning J:

THIS HINGES ON WHAT THE ACTUAL PROMISE CONTAINED. DENNING GOES THROUGH SOME COMPLICATED REASONING.Collateral Warranty (Liability in K)

Innocent misrepresentation gives no right to damages, but if elevated to collateral warranty or fraudulent misrepresentation it can EPC submits that its figure was an opinion rather than a fact – but EPC had special knowledge to calculate accurately, made with

reasonable care and skill If “collateral warranty” is found to exist, the damages to which M would be entitled would be restoration to the position in which

he would have been if the contract had not been breached – i.e., “full expectancy” – the difference between what he actually made and what was “promised” that he would make by the collateral warranty

Denning reads the collateral warranty not that M will sell 200,000 gallons, but rather that they have done their homework and it is a sound and reliable forecast so the damages to which M would have been entitled would have been exactly the same as with tortious liability – their “reasonable forecast” would have been 70,000 gallons, M would not have entered the contract, and he is entitled to be restored to the position he was in before the K.

Negligent misrepresentation (liability in tort) EPC submits that when negotiations lead to a K, relations are governed by K law and not tort – but Denning says that with

professionals, the duty to use care arises not only in K, but also in law outside K, and so is actionable in tort Professionals giving advice in pursuance of a voluntary assumption of responsibility and is under a duty to use reasonable care K creates a duty, and neglect to perform that duty is grounds of action on a tort plaintiff can recover in tort or in K In this case, in tort, the plaintiff would be entitled to damages that restore him to the position he would have been in had the tort

not have occurred – what his actual loss was. “Had I known, I would not have entered the contract” – so restoration to original position.

Damages67


M not to be compensated for loss of bargain (loss of expectation of huge profits from original figure) Compensation for being induced to enter into a disastrous K damages to be measured by loss Must compare future if he’d never entered into K with his current position M acted reasonably, and should be compensated for effects of misrepresentation even after renegotiation of tenancy

Ratio With professionals, the duty of care exists not only in but outside the K; where one party has access to special knowledge or skill, its negligent misrepresentation can lead to liability in tort

Damages are calculated by loss relative to the position that the party would have been in without the K ECO liability can be found to result in similar damages to K’ual liability

Comments Possibility here to find damages in tort or in K (not open in the CVL in the same way: CCQ 1458 provides that in circumstances of K, one cannot avoid K law by opting for more favourable rules)

So: in CVL, where no K was formed because of fraud/error/etc, CCQ 1458 has no effect delictual damages available – so CCQ 1407 lists damages arising from the ordinary civil law of fault (already available under CCQ 1457)

V.K. Mason Construction Ltd. v. Bank of Nova Scotia Since there is no contract, it is a torts case. Parallel to Kleinwort Benson, there is no contract or real intention to be bound (bank to Mason) “If it were possible in English law to construct a contract without consideration, the question would be, not whether on the facts of the case there was a

special relationship [sc.: giving rise to a duty of care], but whether on the facts of the case there was a contract.” – Lord Devlin in Hedley Byrne Hedley Byrne Doctrine (if C with special knowledge gives a warranty for A, A contracts with B (based on this warrantee), C has a duty of care to B.

Negligent Misrepresentation can lead to a tortious liability) Note measure of damages: profit under the contract actually made as a “reasonable estimate” of what Mason might have gained had he engaged in

another project (lost opportunity) – RELIANCE DAMAGES?

CML – V.K. Mason Construction Ltd. v. Bank of Nova Scotia, [1985] 1 S.C.R. 271: CB2 93Jurisdiction Canada (SCC)Facts Mason signed a fixed price contract with Courtot but only because he was told by the Bank that Courtot was adequately financed to meet his

payments. Both Courtot and the bank knew that the bank’s loan would not meet the cost of completion, the bank failed to inform Mason that they had not included the soft costs in their loan to Courtot. The bank’s financing for Courtot was only a “bridge loan” so that they could secure other financing, which they failed to do.

Issues Is D contractually liable? Is D liable for Negligent misrepresentation?Holding No. Yes, damages awarded under torts (Wilson J.)Reasoning Wilson J:

We are in tort because the person misrepresenting is not the contracting party All requirements for negligent misrepresentation are met in this case;

3 requirements for liability for neg misrep: (1) untrue statement; (2) statement must have been made negligently; (3) special relationship = duty of care; (4) reliance which is foreseeable. All the requirements are met in this case:[1] Falsity - Mason sought assurance over and above terms of loan; Bank gave assurance relying solely on terms of loan. [2] Negligence - b/c Bank made statement of assurance w/o revealing that it was based on loan arrangement which Mason had already said

was not sufficient assurance. [3] Special Relationship - Bank was inducing Mason to sign K with Courtot (distinguish this from Bank merely making representations to third

party about one of its clients)[4] Reliance - Mason relied on it and such reliance was foreseeable.Damages: Mason gets his lost profit because he is suing for reliance interest of his loss of opportunity: had it not been for the misrepresentation he would have contracted with another lost opportunity costs. QUESTIONABLE ON EVIDENTIARY GROUNDS...

Ratio Third parties may be liable through torts; negligent misrepresentation in such cases may be assessed in terms of actual loss + anticipated profit.

Class ExerciseB collects coins. Vendor V offers him a certain piece for $1,000, stating that coins of this kind have recently been sold at auctions abroad for immense prices, and that the market here will pick up on it soon. This - as V knows – is not true. B, however, believes V and accepts the offer. To “seal the deal”, he makes a down payment of $100. When V, one week later, delivers, the coin, B refuses to pay. A friend has told him in the meantime that the information conveyed by V must have been inaccurate, and possibly intentionally so. The coin is worth its price, but B only bought it because he thought he was making a great investment.

Rights of the parties?

V B – Price

Fraudulent misrepresentation of opportunity, not of market value of coin“But for” cause – B would not have entered into the agreement without that informationCould B have gotten the information elsewhere? “Legitimate reliance”?

Art. 1734 Obligation to take delivery of the object sold and pay the price agreed upon-Contract formed, Art. 1385 sqq? (+)-Nullity could be invoked, Art. 1422Art. 1416 – if contract didn’t meet necessary conditions of formation, contract can be annulledArt. 1417? Any reasons for absolute nullity? Against the public interest...Art. 1419, 1420: Relative Nullity could be invoked by B – leads us to 1407 – was his consent vitiated? What are his rights if consent has been vitiated?

68


Art. 1422 – absolute nullity could also be invoked (returning of prestations)Art. 1407: Right to apply for annulment if “consent was vitiated”(Art. 1406, Art. 8. 9 Consumer Protection Act?)Art. 1401, fraud?* Error?* Induced by Fraud?* Would not have contracted but for the error? QUESTION OF CAUSALITY must be proven.

COURT SEES THE MECHANICAL EXCHANGE OF CONSENTS AS AN AGREEMENT THAT HAS BEEN REACHED.DEFAULT: CONTRACT EXISTS, MUST BE FULFILLED, UNLESS IT CAN BE ANNULLED.

Art. 1422 (+): Contract deemed never to have existedArt. 1734 (-): No obligation to pay the price

B V: Money back

Art. 1422 (2), 1699: Restitution (returning of prestations)-If contract is absolutely null get back your down payment

Art. 1407: Damages-In case of fraud restoration to position in which you would have been before entering into the contract OR expectancy? DEPENDS ON THE PROMISE – in this case, no guarantee had been made about what he would make on the coin... just an implication that the market would pick up

Therefore, restoration to pre-contract position (return of the $100)

Alternative: Quasi-contractual Liability

Section 311 German Civil Code

Obligations created by legal transaction and obligations similar to legal transactions(1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute.(2) An obligation with duties under section 241(2) also comes into existence bythe commencement of contract negotiationsthe initiation of a contract where one party, with regard to a potential contractual relationship, gives the other party the possibility of affecting his rights, legal interests and other interests, or entrusts these to him orsimilar business contacts. (3) An obligation with duties under section 241 (2) may also come into existence in relation to persons who are not themselves intended to be parties to the contract. Such an obligation comes into existence in particular if the third party, by laying claim to being given a particularly high degree of trust, substantially influences the pre-contract negotiations or the entering into of the contract.

Section 241 German Civil Code

Duties arising from an obligation(1) By virtue of an obligation an obligee is entitled to claim performance from the obligor. The performance may also consist in forbearance.(2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party.

5.7. Duty to Disclose

A duty to disclose is recognized in both CVL and CML jurisdictions.In CVL, both the CCQ and statutory provisions outline the extent to which a merchant must disclose. The CVL tends to be more lenient than the CML in voiding Ks, and is increasingly becoming, as seen in Bail v. BMO, “more attentive to inequalities in terms of information.”Conversely, the CML does not recognize any general duty to disclose. A duty to disclose will be relevant when it pertains to reliance; when it affects the object which induced the parties to contract.

IntroductionQuestion: “vitiation of consent” or “spontaneous mistake”?Silence: When is it “dol” and when is it “misrepresentation”?When does a failure to disclose give rise to a claim for damages?

5.7.1. CVL Duty to Disclose

Art. 1401 CCQ explicitly mentions “silence” – difficult in negotiations to reveal everything, but not saying something might amount to dol“(1) Error on the part of one party induced by fraud committed by the other party or with his knowledge vitiates consent whenever, but for that error, the party would not have contracted, or would have contracted on different terms. (2) Fraud may result from silence or concealment.”

69


More lenient to voiding contract that CML

Statutory provisions (i.e. Consumer Protection laws)Article 218 of CPATo determine whether or not a representation constitutes a prohibited practice, the general impression it gives, and, as the case may be, the literal meaning of the terms used therein must be taken into account.

Article 219 of CPA No merchant, manufacturer or advertiser may, by any means whatever, make false or misleading representations to a consumer.

Article 220, CPANo merchant, manufacturer or advertiser may, falsely, by any means whatever, (a) ascribe certain special advantages to goods or services; (b) hold out that the acquisition or use of goods or services will result in pecuniary benefit; (c) hold out that the acquisition or use of goods or services confers or insures rights, recourses or obligations.

Article 228 of CPANo merchant, manufacturer or advertiser may fail to mention an important fact in any representation made to a consumer.

CommentsGood Faith means information must be provided during negotiation (even if there no K (recall Soucisse and Houle c. CNB vs. Martel Building v. Canada)In Soucisse, the P was in an ongoing contractual relationship so needed to discloseHoule – the Bank knew that brothers were going to sell, but foreclosed it anyway, thus affecting the cost of shares, even though there was no contract between parties limiting when the Bank could seize assets, there was an obligation to act in good faith (an extra-contractual case)Bail is also a torts case, not a contracts case, Martel there was no duty to negotiate with the other party’s interest in mind (do not have disclose info.)

CVL - Bail v. Bank of Montreal, [1992] SCC CB2: 103Jurisdiction QuebecFacts Duty of Hydro, as the owner, to disclose information in its possession concerning soil conditions to a subcontractor Laprise in its request for

tender. Laprise, who, in consequence suffered great financial damage (bankruptcy) by continuing the work. Here, Laprise is a third party (his contract was with Bail, not Hydro) represented by the bank post bankruptcy. He sues extra-contractually, tortiously, delictually.

Issues Was there a duty to disclose the info to the third party (subcontractor in this case)?Holding Yes – gets reliance damages (Gonthier J)Reasoning Gonthier J:

(Cites the CCQ which is soon to be enforced – like Doughboys)Hydro took advantage of its position of strength to induce the continuance of the work. Farther along the spectrum of misrepresentations than mere silence. Third case in the Soucisse-Houle-Bail trilogy that adds an obligation of good faith in the pre-contractual stage in the form of a duty to disclose. 3 necessary element for a duty to disclose:1. Knowledge of the information (actual or presumed)2. Information has to be important3. Impossible for the other party to get it or he has legitimately relied on it

Parties to a K are extra-K’ually liable for the damage the may cause to 3rd parties in the context of their K’ual relationship. Standard of reasonableness: the duty to act reasonably encompasses a duty to disclose in certain circumstances otherwise you are in breach of Art 1375.Expansion of the pre-contractual sphere of obligations that already contains duress, fear, misrepresentation etc.

Ratio A duty to disclose comes up when the three conditions set up in this test are present. Failure to disclose amounts to dol when there is bad faith.

Comments DEDEK’s QuestionsWho wants what from whom?

Duty to disclose? In which relationship? Significance of contractual relationship for Hydro’s relationship to Laprise? Significance of Good Faith? “Shift in the Civil Law”: “more attentive to inequalities in terms of information” Significance of the possibility to obtain information regardless of being informed by Hydro Quebec?

In Soucisse – court will imply an obligation of good faith in performance. Add an obligation.In Houle – Allows court to override a positive obligation for the reason of good faith in performance (recalling a loan)Here, in Bail, extends concept of good faith to formation of the K. Translated into art 1375

5.7.2. CML Duty to Disclose

“Statement of material fact” also includes half-truths: partial disclosure of true facts creating a misleading impression, i.e., Sarvis v. Vermont BUT: No general duty to disclose.

Sense of good faith doesn’t exist in CML, as seen in Martel – no duty to negotiate in good faith, seen as too far in CML “The common law in Canada has yet to recognize that in the negotiation of a contract, there is a duty to have regard to the other party’s interests,

namely, to act in good faith.” (978011 Ontario Ltd. v. Cornell Engineering)

70


BUT there is a willingness to make exceptions: the law might require more than just self-interested dealing where,

(1) a party “relies on the other for information necessary to make an informed choice and(2) the party in possession of the information has an opportunity, by withholding (or concealing) information, to bring about the choice made by the other party” (978011 Ontario Ltd. v. Cornell Engineering)

Legitimate reliance + Inducement Duty to Disclose

Duty to Disclose in CML Where a party is obviously relying, and the other party has valuable information – withholding information leads to vitiation of consent In U.S. Restatement §161 Non-Disclosure is equivalent to an assertion (idea of vulnerability of one party because of lesser possibilities to access info

which the other party can)

Restatement §161. When Non-Disclosure is Equivalent to an AssertionA person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:(a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation of from being fraudulent or material.(b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.

Statutory necessities to reveal information In special relationships – utter most fides or trust (i.e. doctor and patient)

Theorists on Economic Efficiency and the Duty to Disclose in CML and CVL

CML Example: Kronman, “Mistake, Disclosure, Information and the Law of Contracts” (1978): CB 122

K’ual agreements are predicated on factual assumptions that might be mistaken; mistakes represent cost“Information is the antidote to mistake”; rational action will assign risk or mistake to party that is the cheaper information-gatherer; where risk is assigned it must be respected, but where not assigned, courts should impose it on the cheaper gatherer

Socially desirable that information about a change in circumstances reaches market ASAP (allocative efficiency)Thus we should encourage people gaining more information, 2 distinctions for duty of disclosure“Deliberately acquired information” – this information was found through cost, because it was costly, the party who has found it should have property right over it and should not be denied any benefits for disclosing his information, to deny the benefit would discourage parties to look for information (and information is beneficial to the market and society in general)“Casually Acquired information” – this information did not incur expenses and so the party should disclose, because he didn’t incur any expense to get the info

Denying buyer a property right in deliberately acquired information discourages both buyer and seller from searching for information

5.1.3.1.1 French CVL: Fabre-Magnan, Muriel, “Duties of Disclosure and French Contract Law: Contribution to an Economic Analysis” CB 126

argues that Duty to Disclose and good faith can be economically efficient – if information is not disclosed there might be problems in the future which is more expensive for everyoneshould disclose if it is your prestation because you know more about it (i.e. you know your own house better than the buyer, and it is cheaper for you to do the research)we should honour due diligence (let the party with more resources pay)

Issues with the Duty to disclose What are the economic considerations? Mistaken factual assumption poses RISK Allocation of Risk Deliberate v. casual acquisition of information Information concerning one’s own or the other party’s “prestation”

5.8. Error (CVL)/Mistake (CML)

General Issues to consider when voiding a contract due to mistake (not misled, influenced by the other party) Autonomy of Will v. Stability of Contracts Reliance of the other party (in the absence of undue influence, fraud etc.)

71


5.8.1. Error (CVL)CVL Error Concept is broader than CML’s concept of mistake (CML reluctant to grant relief grounded on (unilateral) mistake)

Error can give rise to a right to apply for annulment (even if unilateral), as long as it is Significant; and, Excusable.

Art. 1400 CCQError vitiates consent of the parties or of one of them where it relates to the nature of the contract, the object of the prestation or anything that was essential in determining that consent.

An inexcusable error does not constitute a defect of consent.

3 types of error based on: Nature of contract: A wants to conclude a contract of sale, B wants to conclude a lease (Rawleigh) Object of Prestation: A wants to buy X, B wants to sell Y “Anything that was essential in determining that consent” (Huot v. Ouelette)

Erreur sur la substanceSee Huot v. Ouelette – other party shouldering the risk as to some motive for entering the KSheer mistakes as to motive are not enough to pass as an error in terms of the Civil Code – example of the wedding ring, and then the wedding falls through

Erreur sur la personne

Inherited from French CVL, Roots in Roman Law Ulpian, Sabinus, book 28, On wine and vinegar, “I think that there is no sale by reason of the error over the material.” i.e. any “essential quality” of a person or a thing HD argues this opens the Floodgates DIFFERENCE BETWEEN Old French “Erreur obstacle” – a mistake that means there was no contract in the first place

Error regarding qualities of a person: Not only identity (which is the approach of the CML) but also personal attributes, qualities, if these qualities are essential within the particular

contractual relationship – which is the case in contracts “intuitu personae” If they’re a professional, you want them actually to be a professional Identity – if they are who you think they are

Error regarding qualities of a thing: Any essential quality but not VALUE

o Coherence with the regulation of lesion Problem: MOTIVE – example – X buys a wedding ring; what happens if the wedding falls through? How subjective can an error be – at which point do we say: this must not, to the detriment of the relying party, interfere with the contractual obligation

Attempt at distinction by Baudouin & Jobin: Does the error pertain to: Characteristic of the objectDoes the characteristic objectively amount to a “substantial” characteristic?Or is it unrelated to a quality of the object?E.g. You buy a house in Sherbrooke because you think you’ll get a job there; turns out you don’t!What can you do as a party if you want your motives to be taken into account? specify these motives in the contract and allow for them so that both parties are aware!

Consequences of an Error in substantiaClassical French (and Quebec) doctrine distinguished betweenErreur-obstacle (no consent at all):Nature of contract, identity of objectErreur-vice de consentement (consent, but vitiated)Error regarding substance or quality of person

** Modern Quebec law does not make this distinction any more – erased from the new Code: “Uniformity of Sanction” Burden of proof that the error was “inexcusable” and therefore not grounds for annulment is on the other party (who does not want annulment)!

Limiting Factors in CVL and ErrorState of the mind of the other party? Error does not have to be known to the other partyError inexcusable?Which standard applies?“L’erreur inexcusable [est] un exception à la nullité pour erreur”Restrictive interpretation (Baudouin/Jobin); personal circumstances (age, intelligence, professional experience, etc.) taken into accountEvidentiary Standards: Substantiated proof (this is difficult to do when you say “I just made a mistake” – it pertains to a psychological process)Judges often find it necessary to look at all of the external evidence (testimony of third parties, evidence of mindset)

72


Unilateral or Subjective Error/MistakeIt is only one party which is mistaken. How does this matter? Is it more justified if both parties are mistaken? Civil law sees it as a defect of consent. Your consent is not free and enlightened. Can get out regardless of whether it is unilateral or bilateral error. (In Rawleigh unilateral or bilateral is good enough)Art 1400 where it says both parties or one of them…..Common Law (as in Smith v. Hughes which is not decided as offer and acceptance – go to CBp. 110). There is no doctrine of unilateral mistake in the Common law. Whether or not you think A, it is how you conduct yourself – the objective manifestation of your consent. Smith v. Hughes buyer took the sample for 24 hours and said “I want these” but did not make ‘old oats’ a part of the obligational content. How do you appear to the world?

CVL – Rawleigh v. Dumoulin, [1926] S.C.R. 551: CB2: 97Jurisdiction QuebecFacts D and another signed a K of guarantee for all moneys due or owing by Charland to R, who sold Charland goods for resale. Charland told D that

he was only signing a reference; D did not understand the English K. Charland’s indebted account was closed, then he declared bankruptcy; R pursues D for the guarantee.

Issues Is the K void for fraud (CCLC 993)? Is the K void for error (CCLC 992)?Holding (5-0): No. Yes. DumoulinReasoning Mignault J:

Fraud cannot be maintained here because R wasn’t party to the fraud The document actually at issue is K of suretyship between D and R, so R is not a third party to anything, and D is entitled to raise an

error his not having understood the K (error as to K’s nature) Fin de non-recevoir (similar to estoppel) was suggested by lower courts because D didn’t read before signing CCLC 992 holds error as a cause of nullity, regardless of cause of error and judged subjectively Usually, if a K is vitiated for error, a party that acted imprudently must indemnify the other party that acted in good faith R wasn’t really a third party, but a party to the K of guarantee made in his favour No authority admitting a fin de non-recevoir with regards to an action or defence based in error Fins de non-recevoir can only be created by law – none listed in CCLC, but rather implicitly excluded English law has no estoppel for this circumstance D signed contract because of error as to nature of the K, so can’t be made to pay money to R Concerns that unscrupulous people will use this idea to escape Ks can be avoided by legislation and skilled trial judges

Ratio Fraud is relational. Damage to one party is no reason to maintain a K otherwise vitiated by error.Comments Today, the question is whether not reading a K would be an excusable or inexcusable error

Once K is nullified, there never was a K – door is opened to an ECO remedy

Test for Rawleigh v. Dumoulin1. There was an error2. The error was not inexcusable3. Seen though evidence4. Code says non-inexcusable errors lead to relative nullity5. Court struggles with if there was never a contract, or if it is null6. consequence is nullification – and restitution (money goes to notaries)7. damages – there is no claim because there was no fault, even though seller relied and lost opportunity closes, the law is trying to balance both sides

(thus both lose due to subjective error)

CVL – Huot v. Ouellette, [1981] C.S. 872: CB2 : 141Jurisdiction QuebecFacts H (plaintiff) signs an offer to buy O’s property. A few days later, a notary informs H that there is a gas line (servitude) under the property, but H

signs the mortgage in the meantime because the notary suggested that Gaz Metropolitain would probably be able to cancel the servitude. H’s wife has a certified phobia of gas, and the notary cannot arrange to have the gas line moved, so H refuses to buy the property. H claims return of his deposit (restitutionary claim) and damages (claiming that they should have been told); O counterclaims damages (because they had bought another house, and had sold this house at a loss – needed money quickly to finance their new house), wants K upheld.

Issues Was O obliged to tell H about the existence of the gas line? Does the existence of the gas line constitute a sufficient reason to nullify the K?Holding No. Yes. Huot.Reasoning Bourgeouis J:

The servitude appeared in the public registers and was never hidden; both parties acted in good faith H knew or ought to know about the servitude The only public utility servitudes (which as a class were mentioned in the offer) that were visible were for water and phones If the gas line were not there, H would buy the property immediately Judge takes the psychiatrist’s evidence that the wife said she would have no hesitation about the sale if the gas line was not there Given his wife’s phobia, impossible for H to undertake the mortgage to buy the property Impossible for the Court to conclude that H or his wife knew or were presumed to know about the gas line before the notary told

them QC law can provide for subjective reasons not to follow through on an offer to buy: here, H cannot have given valid consent to the K

(lack of an essential element) Even if there was a K, it was executed in error Where the error is absolute, the K is nullified (never existed), and the court must apply RII in assigning damages (torts)

73


Both parties lost out, so O only condemned to pay back H’s deposit Damages claim falls through – because no dol – no inducement on the sellers’ part

Ratio Substantial subjective error can vitiate consent.Comments The mistake is subjective, and protects an individual’s consent (in the QC regime), one person’s purely idiosyncratic concern is seen

as cause to nullify a K CCQ 1400 does give people margin to make a mistake if sufficiently linked to the

Huot v Ouellette under New Code Under Art. 1400, error needs to be in the object of the contact, here the error was not to the physical place, but to the change in quality Thus we don’t go with error Instead we look at the residual category of “anything essential” The P claims that had they known about the gas line, they would not have signed the contract Disposition says it wasn’t fraud, that the D had done all he needed to disclose To see if the error is essential must fall into one of two categories

o Erreur sur la substanceo Erreur sur la personne

Note the importance of the evidence: who knew what at what point? Note how court finds that an agreement never existed – compare modern regulation which leaves no doubt as to “relative nullity” THIS IS NOT HOW THIS WOULD BE HANDLED TODAY – today, the Code provides that relative nullity can always be invoked when there is error, except

when the error is inexcusable Restitution? YES Damages? NO the other party has not benefited from the additional loss of money, and they were not at fault In CML, unilateral mistake is not grounds for annulment

Analysis1. Essential quality of substance – they though they were bargaining for a house without a gas line – it is essential because of the phobia

o French and Quebec law lenient for allowing recourses to subjective motivation because the protection of consensus is paramount in CVL2. If there is an error, it must be not inexcusable

o Assumption that the seller will disclose servitudes, didn’t say specifically that were was a gas line, but notary said the it will be removed, this could not be done

o As a buyer looking at the object, could not have seen the gas line (underground), therefore the error was not inexcusable

CVL – Yoskovitch v. Tabor, [1995] R.J.Q.1397 (Sup. Ct.).Jurisdiction QuebecFacts Plaintiff, Yoskovitch sold her baking business to Mrs Tabor for 50,000. Payable at $500 a week with the balance after 1 yr. Defendant Tabor

was a cleaning lady earning 250-300$ a week, could not read or write English and was uneducated. The assets of the business consisted of: a small used stove (D-3); two small used hand mixers; 14 aluminium trays, whose cost new was less than $1 each; two recipes for the two products (P-4); and a list of 12 customers (D-4). The financial reporting were suspected of being overstated and understated.

Issues Was there a problem of consideration? Was there lesion? Was there fraud/artifice? Did error vitiate Mrs. T’s consent? Was the obligation to pay $50,000 an “abusive clause”?

Holding No. No. No. Yes. Yes. Tabor.Reasoning Cause exists, for Mrs. Tabor's obligation to pay the price, namely the sale and delivery of the business, and a cause for the contract,

namely the sale of a business, which was not illegal or contrary to public order.Lesion? No

Mrs. Tabor was neither a minor, nor a person under protective supervision, when the agreement was signed. Her attorney has not invoked any express provision of law which would permit the Court to apply the concept of lesion as a ground of nullity of the agreement.

Fraudulent representation? No The Court is unable to conclude that there were any express fraudulent representations made by plaintiffs or by Mr. Yoskovitch to

Mrs. Tabor to induce her to sign the agreement P-1.Did Error Vitiate Mrs. Tabor's Consent? Yes[1] Error as to the Nature of the ContractIn the present case, the proof does not establish that Mrs. Tabor was unaware she was signing a sale agreement, i.e. that there was error on her part as to the nature of the contract.[2] Error to the Object of the "Prestation"

Could be the object of the vendor's obligation, namely the transfer and delivery of the baking business, There was no error proved here as to the nature of the baking business. ‘and’ Could be the object of the purchaser's obligation, namely the price payable. However, as regards the second object, defendant claims to have misunderstood the amount of the price.

[3] Error as to an Essential Element Required for Consent Plaintiffs and Mr. Yoskovitch took undue advantage of Mrs. Tabor's lack of business experience her limited education and understanding of the English language, and their relation as employers to her As a result, her consent to the agreement was not fully informed. Through her failure to understand the value of the business sold,

the price to be paid, and its manner of payment, her consent was vitiated by an error as to an essential element of the contract. Under the circumstances mentioned above under (i) to (viii), the Court believes that Mrs. Tabor's error was excusable.

Abusive clauses? Yes, but irrelevant74


Contract of Adhesion? (1437 CCQ) In the Court's opinion, the agreement P-1 was clearly a "contract of adhesion". It was entirely prepared by the Yoskovitchs, without any significant prior consultation or discussion with Mrs. Tabor. No changes were made to the draft submitted to her by plaintiffs. She was unable to obtain the advice of her son thereon prior to its signature, because of plaintiffs' requirement that it be signed

immediately or never. Because of her limited education, her inadequate knowledge of English, her lack of business experience, and the pressure placed on

her by plaintiffs to sign, Mrs. Tabor was effectively unable to negotiate the terms of the agreement. The first question which arises from art. 1437 Q.C.C. is whether it was merely intended to permit the annulment of a specific clause

which imposed excessive and unreasonable obligations upon the adhering party, or whether it can also be applied as against an essential clause in the contract, such as the price, the annulment of which would prevent the contract from being performed?

In view of the conclusions under V-C above, the Court need not decide this question.Dismisses plaintiffs' action, with costs; Grants defendant's cross-demand and annuls the agreement between the parties dated July 27, 1990 (P-1), and confirms defendant's tender of the stove and other equipment received thereunder back to plaintiffs, with costs.

Ratio

5.8.2. Mistake (CML)

Subjective misgiving should not destroy a contract when someone has made a contract, and there is reliance Common law focuses on promises, in CVL the focus is sanctity of consent Reluctance to grant relief grounded on (unilateral) mistake

“The most important feature to understand about the law of mistake is that it is a residual category, i.e., it is the argument that counsel falls back on when all else fails. […] This feature results in its failure to develop a principle analysis of the cases and problems and in there being no consistency even in the kinds of cases that will be regarded as “mistake” cases.John Swan, Canadian Contract Law, p. 565

Problem is that mistake is conceptually underdeveloped, hard to find commonalities that are in residual categories, hard to have consistent rules, many rules are not crystallized like codal provisions

“Assuming that fraud, duress, or any wrongdoing, why does the existence of a mistake ever justify a court in releasing from their obligations?”o “This suggestion does not account for the common law’s refusal to give relief for unilateral mistakes – if consent is the concern, it should be

sufficient to show that one party made a mistake.” Atiyah/Smith, Law of Contract, p. 175

Two Categories (for our purposes):1. Misunderstandings: mutual or unilateral mistake, mistakes negativing consent

No “consensus ad idem”, contract void2. Mistaken Assumptions: common or shared mistake, mistakes nullifying consent

Consent vitiated: Consequences?

CML Contract void in certain cases (not “voidable”)Fundamental mistake shared by both parties

Res sua Res extincta “existence of the subject matter”

Voidability in Equity beyond those classes of cases? These attempts have now been rejected – forget about this...

1. Misunderstandings – Contract is VOID No real agreement has been reached on the contract (compare the CVL idea of the erreur-obstacle!)

1. Ambiguity: there is no reasonable interpretation that prevails over the other (Raffles v. Wichelhaus – ambiguity of which Peerless ship was meant in contract)

o Perspective of the “reasonable objective observer” – no objective interpretation that would take one party’s interpretation over the other, so ambiguity

2. Mistake as to Terms: One party is mistaken as to a contractual stipulation, and the other party is aware of that mistake (corrective to the reasonable-man-standard) – if the mistake is known by the other party – cannot use the reasonable standard to enforce the reasonable interpretation (eg. With the Swiss man making a deal with francs –he thinks it is swiss francs, even though the reasonable interpretation would be of French francs; person at an auction waving hello to someone – if the auctioneer knows you’re waving, you can’t be bound, even though the reasonable observer may think you were bidding)

o In this case, knowledge of the mistake means that both parties are not boundo “You cannot invoke the reasonable man if you know better”

3. Mistake as to Identity: A is induced by B to enter into a contract with B, believing that B is someone elseo Erreur de la personne does not enter into CML at all – only the IDENTITY of the co-contractor is importanto This seems superfluous – fraud would be claimed instead

Depends on whether or not you want the contract to be “void” (never existed) or “voidable” (can be annulled) – This sort of mistake would be claimed in contracts involving a third person – someone else was fraudulent, and the mistake carries on (recovery of title for property from a third person – calling something void from the start means that title did not pass; calling it voidable means that the title actually passed and the original titleholder has no recourse)

75


4. Non est factum: as signature was a forgery – only in extreme cases, applied to illiterate/blind people now also invoked if someone is fraudulently induced into signing a document they don’t know the contents of. Again, mistake is invoked to render the contract VOID, so that Ks involving third parties are not enforceable

o This has been extended to literate people who have signed things by mistake, but it has to be proven that the signature was not the result of a careless error on the part of the signer

2. Mistaken Assumptions (“Common Mistake”) Lord Denning “The parties, whatever their inmost state of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter…” but the parties err as to underlying assumptionsBUTThe parties reach an agreement on the terms of their contract, but share an error with respect to some important contextual circumstance that has motivated one or both parties to enter the agreement.

Basic Rule Mistake must be fundamental and Shared by both parties (different from CVL!)

Contract is VOID in two “classical” types of cases “Res extincta”

Unbeknownst to the parties, the sold goods have ceased to exist before the contract was made “Res sua”

Purchase already owned the subject matter of the saleThis is taken care of by the doctrine of consideration (thank you Joey!)

“Beyond these two categories, the scope of the common law has been and, indeed, remains rather unclear.” McCamus, The Law of Contracts, p. 527These categories are very unlikely, but these categories are more a stepping stone to where the CML is now.This doctrine is very limited in its scope of application.

CML – Sherwood v. Walker and Extension of Res Extincta This case stretches the res extincta doctrine (mistaken assumption) – “The thing sold and bought had in fact no existence” “There was no contract to sell or sale of the cow as she actually was”

o Contract referred to a different object altogether: Remember the reasoning employed by the Roman jurists – when is a thing different in kind, when just of different (lesser) quality? Is this wine that has gone sour (difference in quality), or is it just vinegar (different kind)?

Particulary given the fact that one cow had been singled out and chosen: “Rose 2nd of Aberlone” was sold and delivered Dissenting opinion: “It if be only a difference in some quality or accident, [the contract] will remain binding.” Focus is not on the subjective ideas of the parties, but interpret the object of sale as the “barren cow” – reflective of the court spinning the facts

CML – Sherwood v. Walker (1887), 22 NW 919 (Mich S.C.): CB2: 99Jurisdiction USAFacts S called W to buy a cow and didn’t find one that suited him; W told S to visit W’s other farm, where the cows were barren, and choose one; S

did so, and W agreed to telephone a price. S and W agreed to the price, and the deal was confirmed in writing. S went to W’s farm to pick up the cow, but the employees wouldn’t deliver it; S sued for replevin and obtained the cow. Cow was sold for small (non-breeder) sum, but soon had a calf; W sues to recover the cow.

Issues Is the K void for error?Holding (3-1-?) Yes Walker.Reasoning Morse J:

Both parties believed cow to be barren: misapprehension went to whole substance of agreement, which wouldn’t have been made except upon the understanding they had

Mistake wasn’t as to quality but as to very nature – if the cow had been known to be fertile, there wouldn’t have been a K – they were bargaining for a barren cow, this is not a difference in quality or kind – but in substance

No K for the sale of the cow as she actually was[Dissent]:

Neither party knew cow’s condition at time of sale; S thought she could be made to breed; each party entered into the K on their own understanding

No conditions attached to the K; “as absolute as it could well be made” Courts’ duty is not to destroy Ks when called on to enforce them No difference/misapprehension as to thing bargained for – each party took a chance

Ratio When a misapprehension goes to the substance of a K (“but for”), K is nullified.Comments Like Raffles, but here mistake was mutual (so why shouldn’t S have the windfall?)

Majority and dissent have different concepts of what is a K of sale and why people sell things Majority chose a moral fascia of sale (likely drawn from the 17th/18th c.-style sale of land) whereby K applies to thing with fixed

value about which there’s 100% certainty – static, assumes perfect information – no risk allocation (who should have known, who should bear risk, etc.)

Dissent thinks that one reason for people to buy/sell is that not all information is known, and situations may change (more similar to today’s conception)

CML – Bell v. Lever BrosRecital of the Law of Mistakes:Mistakes nullifying consent – res extincta/res sua

76


Mistake as to quality: “As to the existence of some quality which makes the thing essentially different from the thing it was believed to be.”Is the agreement actually concluded “different in kind” from the agreement as it was believed to be?Different theory: implied term? Implication only if “new state of facts makes contract something different in kind from the contract in the original state of facts.”Dissent: Broader formulation of the test

CML - Bell v. Lever Bros., [1932] A.C. 161 (H.L.) CB2: 138Jurisdiction UKFacts Bell is contracted with Lever to work as director of company. During employment, he engages in profiteering (with insider info). Company

merges and cancels the first work contract replaces it with a severance contract. Lever Bros (Pl) uncover profiteering and claim back severance based on mutual mistake – ie, had they known of profiteering, would not have given severance.

Issues Was there mutual mistake?Holding No BellReasoning Lord Atkin:

Mistake will only get a party out of a K when the truth actually destroys the identity of the subject matter as it was in the original state of facts. That is, mistake as to the quality of the subject matter of the thing K-ed for will not affect assent unless it is MUTUAL and is as to the existence of some quality which makes the thing essentially different from the thing as it was believed to be. ASK did the mistaken parties get what they bargained for (more or less) or something fundamentally different?

Mistake existed prior to the severance contract: both parties believed that they were entitled to severance. The employers bargained for a severance k & got exactly what they bargained for. In this case, the identity of the subject-matter was not destroyed by the mutual mistake. And it is perfectly normal that the

employees did not disclose their wrongful behaviour.Dissent:

Erroneous assumption (that the employees were entitled to severance) was fundamental to the bargain – it would not have been made without the erroneous assumption – this is reasoning along the lines of the CVL error.

RatioComment Def’n of Mistake: “The parties must be mistaken in the identity of the K’ing parties, or in the existence of the subject-matter of the K at the

date of the K, or in the quality of the subject-matter of the K. Note also that there is no Legal consideration for the severance there was no reason to give him severance. But…there is factual

consideration - had bona fide belief that they owed severance like Stott v. Meritt where no real obligation for Stott to actually pay back the money.

Also: there was no misrepresentation on the part of the employees

Jukier on Bell v. Lever Bros. Application of Lord Atkin’s test is practically impossible to meet. The doctrine exists but is very difficult to satisfy. When is it so substantially different

that it changes the subject matter of the thing?

Risk Assumption Applying the rules established by the doctrine of mistake presupposes that the parties have not made a stipulation – explicit or implied – as to the

allocation of risk of their assumptions being incorrect. Example: Warranty regarding the existence of the “subject matter” (that there was a shipwreck to be salvaged) – no recourse to the doctrine of the

“non-existent subject matter” McRae v. Commonwealth Disposals Commission – assumption of risk that the shipwreck existed was on the party that said there was one

CIVIL LAW

A condition of A condition of formation formation related to protecting an individual the general interest interest

Defects of consent

Absolute Nullity Relative Nullity

* May be invoked by any * Generally may only be invoked by a interested party or judge protected person * May not be confirmed * May be confirmed; some discretion

for judge (1408)

K Unenforceable + Restitution* Contract deemed never to have existed, Art. 1422

ANGLO AND CANADIAN LAW – VOID AND VOIDABLE77


Common Law Equity(strict rules) (discretion)Void ab initio Voidable

Unenforceable+

Restitution

* Contract may be confirmed* Remedy subject to terms

Classroom Exercise

B collects coins. Vendor V offers him a certain piece for $ 1,000, B accepts. B pays the price and V hands over the coin. 1) Both V and B had assumed the coin was an original. It now turns out that it is fake. CVL1) B is making a claim in restitution. Must apply for annulment.No problem with formation of contract.No problem with objective nullity. Prove that the contract is relatively null.Error vitiates consent?Art. 1400 – nature of contract and object of the prestation (which specific coin) is ok; problem is with an essential element (erreur sur la substance, erreur sur la personne); inexcusable errorSubjective nature of the error – but-for test – if B had known it was fake, he would not have bought the coinIs it an error on the price? Not technically – both parties knew it was $1000Is it an error on the value? Yes – the fact that the coin is fake means it is not worth $1000What about lesion? Questions of value bring in questions of lesionWas error inexcusable? Burden of proof is on the vendor.CML1) B is making a claim for resiliation of the contract. Must prove mutual mistake.This is not a misunderstanding – both parties agreed on what was being sold and for how much. The question is whether or not there were shared false assumptions.This is an extension of res extincta – does the thing bargained for exist at the time of formation of the contract? no. The thing bargained for is radically different from that which is actually received.Question from cow case – is it different merely in quality, or is it a different thing altogether?

2) B believed that coins of this kind had recently been sold at auctions abroad for immense prices, and that the market here would pick up on it soon. B was hoping for future profits. V did not know about B’s expectations. It turns out that B was mistaken as to the identity of the coins sold abroad.

CML2) B’s expectations have been inflated by his own misunderstanding of the facts abroad. This leads him to make a bad investment, but it has no bearing on the contract whatsoever. This is not a mutual error either TOO BAD FOR B.

CVL2) Claim for annulment of the contract basis on error on an essential element of the consent given. Too subjective and far removed from the responsibilities of the vendor/subject matter of the bargain. Also – this is not a question of value, but just of a miscalculation of the investment.

6. Change in Circumstance, Frustration, Hardship

Supervening Events and Change of CircumstancesAt stake is Stability of Contracts and Sanctity of Consent vs. FairnessThree scenarios1. Impossibility (a thing perishes after sales contract, but before it is handed over).2. Performance is possible, but due to change of circumstances, no longer useful to the party (Coronation Parade cases).3. Performance is not impossible, but due to change of circumstances it is no longer commercially practical or extremely onerous (Changes in the market,

Gilbert Steel).

Solutions? Parties anticipated the issue in the contract: Drafting and interpretation of such clauses Parties did not anticipate the issue in the contract, but are willing to negotiate adjustments post-formation (sometimes must litigate to force a party

gaining a windfall to renegotiate) The judge decides

o Enforce the contract (you promised, so too bad - very 19th century)

78


o Terminate the contract (accept the excuse of non-performance, debtor discharged – extremely anti-classical)o Order parties to renegotiate in good faith (weak because one party doesn’t want to negotiate)o Adapt the contract to changed circumstances (rewriting the contract – most encroaching to autonomy)

6.1.Impossibility of Performance in CVL

Article 1693A debtor is released where he cannot perform an obligation by reason of a superior force and before he is in default, or where, although he was in default, the creditor could not, in any case, benefit by the performance of the obligation by reason of that superior force, unless, in either case, the debtor has expressly assumed the risk of superior force.

The burden of proof of superior force is on the debtor.

Article 1694A debtor released by impossibility of performance may not exact performance of the correlative obligation of the creditor; if the performance has already been rendered, restitution is owed.

Where the debtor has performed part of his obligation, the creditor remains bound to perform his own obligation to the extent of his enrichment.

CVL Impossibility Test1) Contract established.2) Event occurs after the contract has been signed, destroying the vendor’s object.3) Buyer sues the vendor for performance.4) Vendor needs to prove impossibility of performance due to superior force (no fault of the vendor can contribute to the superior force).5) If the superior force was foreseeable and the vendor did not take precautionary actions – then it is his fault, also check the contract to see if anyone has

assumed the risk.6) If he meets the criteria, the vendor doesn’t need to perform – VOID, but there is restitution for the money that the buyer has already given.7) If the buyer has stipulated in the K (Otis).

Otis Elevator v. ViglioneBeyond impossibility, the Code does not recognize hardship or impracticability as excuseNo liability in case of delay “due to any cause beyond your and our reasonable control”The strike was not impossibility, but since there was a stipulation saying that strikes are force majeure, Otis was not held liable

CVL – Otis Elevator Co. Ltd. v. A. Viglione & Bros. Inc., Mtl., 500-09-000316-786 (C.A.): CB2 22Jurisdiction QuebecFacts K b/n Otis (appellant) and A. Viglione & Bros.(respondent) for installation of elevators. Clause in K read that neither party would be liable to

the other party for any loss, damage or delay due to any cause beyond the party's reasonable control, including but not limited to, strikes, lockouts… Otis started work in January. In February, workers' productivity slowed. By late April, all elevator workers had gone on strike. Viglione sued for damages suffered as result of non-execution.

Issues Was the strike a force majeure that excused Otis from performance?Holding Not a force majeure but explicit term deals with strikes and releases Otis from obligation.Reasoning A strike doesn't constitute a case of force majeure. Parties may contractually specify that some event, though it doesn't render execution

absolutely impossible, will be a case of force majeure. C.S. found that Otis didn't prove the absolute impossibility of the execution of the K; thus, the Court did not liberate Otis from its

obligations under the K. Damages were awarded for loss of rents and other expenses. The delay was the result of strike or lockout. Strikes and lockouts are not, in and of themselves, cases of force majeure. However, K

in this case, explicitly specified strikes and lockouts as causes outside of the reasonable control of the party. The aplt is thus not responsible to the rspdt for such the delay because it was a cause outside the reasonable control of the aplt.

RatioComments In absence of force majeure clause would have found against Otis - b/c strike is not a force majeure.

Why is strike not force majeure? TEST: Impossibility - may be possible to get other employees (on K) to fulfill duties. BUT…even if not impossible Unforeseeability - co. with unionized workers = foreseeable that they would go on strike.

Quebec law does not accept “l’imprévision” or “hardship” as an excuse for non-performance or as a reason to adjust the contract Germany and France use “l’imprévision” as an excuse for hardship (history of inflation during the 20’s – tripled each year) Quebec doesn’t have this history, ongoing discussion whether Quebec law should adopt the approach of other Civil Law systems, model codes, etc. Could possibly use good faith as a way of ensuring that each party is cooperating and trying to ensure the best outcome for both parties (when a

contract is too onerous, one can renegotiate in good faith)

79


6.2.CML Frustration

Paradine v. Jane (1647): Rule of “absolute contracts,” in this case a tenant was driven off his home, but the landlord still wanted rent (long term lease) – the court enforced the contractTaylor v. Caldwell (1863): “Impossibility by destruction of specific subject matter” – in this case a music hall burned down, but it still had contracts of rental, the court did not oblige the owners to rebuild the hall to honour the contract

Impossibility will discharge promisor if without his fault Where a contract requires the existence of a thing, the thing perishes or becomes unavailable Where a contract requires personal performance, the promisor dies or is incapacitated Legal impossibility – prohibited/prevented by law (trade restrictions) – excused as if physically impossible

Mistake vs. Frustration in CML Mistake – for existing facts Frustration – wrong predictions about future developments fall in the scope of application of the doctrine of frustration, which deals with supervening

eventso Both about underlying assumptions not voiced in the contracto Difficulty of drawing the line… -the key is mistake goes to conditions at the point of establishing the contract, frustration is an event that

happens after contract has been established

CML – Alcoa v. Essex Group“The court finds the parties’ mistake in this case to be one of fact rather than one of simple prediction of future events. […] this mistaken assumption was essentially a present actuarial error.”

CML – Alcoa v. Essex Group, 499 F.Supp. 53 (Penn S.C. 1980): CB2 224Jurisdiction QuebecFacts A agreed to process aluminum for EG, under a K that include an escalator clause. 1973 OPEC actions raised price of oil and therefore of

electricity; A would have lost $60 million under original K.Issues Can Alcoa have terms of K modified on basis of mistake or frustration?Holding Yes (mistake) AlcoaReasoning Teitelbaum J:

Mistake of fact (actuarial error in indexing), not of prediction; when K was formed both parties knew that future was uncertain but tried to make a long-term K anyways, with each assuming that the index was adequate

They used an “actuarial prediction of the outside limits of variation in the relation between two variable figures”, whose capacity to work was a question of fact

A must still prove (beyond mistake of fact) that mistake was mutual, related to a basic assumption underlying the K, and caused a severe imbalance in prestations

Both parties believed the uncertainty to be limited within a designated range, with outcomes outside that range highly unlikely J proposes a complex formula for determining the price A will receive Policy concerns: long-term Ks gone badly wrong must be eligible for remedies, or people would avoid them or bog them down with

detail (business community) Risk limitation is sought by responsible business managers, especially corporate managers with a fiduciary duty – when they’ve

sought to limit risk, courts should protect that purposeRatio “Both consciously undertook a calculated risk rather than a limitless one. Their mistake concerning its calculation is thus fundamental…”

Where parties have sought to limit risk, courts should protect that purpose.Comments If prices had tanked instead, would J have similarly intervened to share the windfalls with the purchaser?

CML - Amalgamated Investment v. John Walker No mistake as to present fact: not the quality of being suitable for and capable of being developed is what counts, but whether the property is included

in the list or not The crucial date is the one of signature by the head of the department, which gives legal effect to the listing Therefore just a misguided belief as to the future fact that the property would not be included in the list. No frustration either: the risk of being listed as a landmark is inherent to ownership – if the parties had intended otherwise, they should have included

such a re-allocation of risk in the contract Note the test established by Lord Radcliffe in Davis Contractors

o Can it be said that the parties must have made their contract on the footing that the warehouse would not be listed in the future?o Is the contract which the parties made, on its true construction, wide enough to apply to the situation which arose when the property was

listed?o Would the thing undertaken, if performed, be a different thing from that contracted for? Or, again, can the plaintiffs say, “This was not the

bargain that we made”? (Non haec in foedera veni)

CML – Amalgamated Investment and Property v. John Walker & Sons Ltd., [1976] 3 All E.R. 509 (C.A.): CB2 225Jurisdiction QuebecFacts AIP Ks to buy property from JW&SL with intention of developing it; K subject to General Conditions of Sale (1973) refusing permission to

vendor to compel purchaser to convey property different substantially from the property agreed if such difference would constitute prejudice towards one party. 3 days after K signed, Department of the Environment writes JW&SL notifying them that property has been selected for inclusion in the statutory list of building so special architectural or historic interest – implications for development. Property now worth about

80


15% of original purchase price.Issues Can K be rescinded for common mistake? For frustration?Holding No. No. John Walter & Sons Ltd.Reasoning Buckley J:

Mistake: AIP insists that both parties undertook a transaction for a property ripe for development, so common mistake applies here Decision to list the house just an administrative step, and list didn’t take legal effect until after K signed No mistake as to the circumstances, only as to the expectations

Frustration JW&SL’s obligation was to sell the property, and they didn’t warrant that planning permission could be obtained No factual basis for finding frustration Risk of property being listed as being of architectural or historic interest is “a risk which inheres in all ownership of buildings”; AIP

should’ve known this, as they knew that planning permission was still necessary Court will not interfere unless there is a radical change – Davis Case, but the threshold for “radical” is very high

Ratio Must show that mistake existed at date of K. “Frustration occurs whenever the law recognizes that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”.Hardship, inconvenience, or disappointed expectations do not necessarily constitute frustration.

This (above) is the state of the law for English and Canadian CML… Only take into account change of circumstances that make performance more onerous only if it completely changes the nature of the obligation.

6.3.CML Impracticability

Black’s Law Dictionary:Impracticability1. A fact or circumstance that excuses a party from performing an act, esp. a contractual duty, because (though possible) it would cause extreme and unreasonable difficulty. • For performance to be truly impracticable, the duty must become much more difficult or much more expensive to perform, and this difficulty or expense must have been unanticipated. [Cases: Contracts 309(1). C.J.S. Contracts §§ 520-522, 524.] 2. The doctrine by which such a fact or circumstance excuses performance. Cf. FRUSTRATION (2); IMPOSSIBILITY (4).Commercial impracticability. The occurrence of a contingency whose nonoccurrence was an assumption in the contract, as a result of which one party cannot perform. [Cases: Contracts 309(1). C.J.S. Contracts §§ 520-522, 524.]"The doctrines of Impossibility, Commercial Impracticability or as the Uniform Commercial Code knows it, Excuse by Failure of Presupposed Conditions, comprise unclimbed peaks of contract doctrine. Clearly, all of the famous early and mid-twentieth century mountaineers, Corbin, Williston, Farnsworth and many lesser men have made attempts on this topic but none has succeeded in conquering the very summit.... In spite of attempts by all of the contract buffs and even in the face of eloquent and persuasive general statements, it remains impossible to predict with accuracy how the law will apply to a variety of relatively common cases. Both the cases and the Code commentary are full of weasel words such as 'severe' shortage, 'marked' increase, 'basic' assumptions, and 'force majeure.' " James J. White & Robert S. Summers, Uniform Commercial Code § 3-9, at 155 (3d ed. 1988).

H.R. & S. Sainsbury Ltd. v. Street This is an example of a “crop failure” case Reluctance to alter the contractual agreement or excuse non-performance: “Circumstances in which performance is called for would render it a thing radically different from which was undertaken by the contract. Non haec in

foedera veni. It was not this that I promised to do” Lord Radcliffe in Davis Contractors See Sainsbury v. Street, example of part frustration, part breach American CML more forthcoming! See S. 261 of the Restatement

CML – H.R. & S. Sainsbury Ltd. v. Street, [1970] 3 All E.R. 1126 (Q.B.): CB2 233Jurisdiction QuebecFacts Street (farmer) K’d with Sainsbury (grain dealer) to sell entire crop of barley, expected at about 275 tons, at £20/ton. Harvest was poor and

price of barley rose; Street harvested only 140 tons. Street sold 100 tons to another grain dealer for £27.5 per ton, kept 40 tons for himself. Sainsbury bought barley against the K (meaning what? ) at £30/ton, and sued S for breach of K. Buyer is asking for damages – wants the difference for what he contracted for and what he paid.

Issues Was Street entitled to discharge from the K?Holding No H.R. & S. Sainsbury Ltd.Reasoning MacKenna J:

Implied condition of the K that if through misfortune Street could not deliver the stipulated tonnage, he should not be required to pay damages

No condition that he need not deliver any if through misfortunate he could not deliver the whole (unreasonable) S argues that because HRSSL would’ve been free only to accept 275 tons if price went down, S should be free to sell to another

buyer if price went up – unconvincing Sale of Goods Act ss. 6-7, dealing with destruction of existing goods, has been held not to apply to Ks for sale of growing crops Conditions precedent and subsequent are functionally identical here Presumed intention of parties (and of reasonable men) applies

81

http://ecarswell.westlaw.com/find/default.wl?vc=0&ordoc=IMPRACTICABILITY&rp=%2Ffind%2Fdefault.wl&DB=0156372&SerialNum=0289515354&FindType=Y&AP=&fn=_top&rs=WLCA9.03&pbc=B2141947&ifm=NotSet&mt=Westlaw&vr=2.0&sv=Split



http://ecarswell.westlaw.com/digest/default.wl?rp=%2Fdigest%2Fdefault.wl&CMD=NOKEY&DocName=95k309(1)&AP=&fn=_top&rs=WLCA9.03&pbc=B2141947&ifm=NotSet&mt=Westlaw&vr=2.0&sv=Split

http://ecarswell.westlaw.com/digest/default.wl?rp=%2Fdigest%2Fdefault.wl&CMD=NOKEY&DocName=95&AP=&fn=_top&rs=WLCA9.03&pbc=B2141947&ifm=NotSet&mt=Westlaw&vr=2.0&sv=Split




http://ecarswell.westlaw.com/digest/default.wl?rp=%2Fdigest%2Fdefault.wl&CMD=NOKEY&DocName=95k309(1)&AP=&fn=_top&rs=WLCA9.03&pbc=B2141947&ifm=NotSet&mt=Westlaw&vr=2.0&sv=Split

http://ecarswell.westlaw.com/digest/default.wl?rp=%2Fdigest%2Fdefault.wl&CMD=NOKEY&DocName=95&AP=&fn=_top&rs=WLCA9.03&pbc=B2141947&ifm=NotSet&mt=Westlaw&vr=2.0&sv=Split


US Sales Act expressly allows the buyer to require such performance as remains possible after partial destruction of subject-matter of a sale or K to sell

Farmer is actually liable for paying is the 140 tons x the £7.5 change in price = L 1050 (not the entire 275 tons) So the farmer is not excused from failing to deliver the 140 tons of grain to the buyer, but is not forced to pay all of the damages

suffered by the dealer – surprising! The dealer loses as well… it’s a lose-lose solution… restitutional measure (“claim for disgorgement(?)”

Ratio In some cases it is unreasonable to compel buyer to accept an odd volume. Can resolve by implying a condition that K shall be wholly discharged, or that where seller is excused buyer has option to accept part delivery.

Comments Farmers make deals all the time to sell their product, and their estimations are often different from their actual produce (e.g. if it’s a bad year, it’s a bad year for everyone price rise, so your K will enforce a lower-than-market price

But we see that HRSSL has stopped asking for full amount that S grew, even though S promised this much (no reason S couldn’t have gone onto market and purchased the amount he had K’ed to deliver to HRSSL – but a sense that farmers are different from, e.g., speculators who would be held to the full quantity)

Farmers are seen has having a special economic role – not like other actors; also totally at the mercy of the weather

Frustration: general term (heading) Impossibility: can’t perform – leads to frustration of contract (subheading) Hardship: makes performance onerous – also an example of frustration (subheading)

UNIDROIT Principles of International Commercial Contracts: Arts. 6.2.1, 6.2.2, 6.2.3

Section 2 HardshipArticle 6.2.1Contract to be observedWhere the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.

Article 6.2.2Definition of hardshipThere is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and

a) the events occur or become known to the disadvantaged party after the conclusion of the contract;b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; c) the events are beyond the control of the disadvantaged party; andd) the risk of the events were not assumed by the disadvantaged party.

Article 6.2.3Effects of hardship

a) In the case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.

b) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.c) Upon failure to reach agreement within a reasonable time either party may resort to the court.d) If the court finds hardship it may, if reasonable,

i. terminate the contract at a date and on terms to be fixed or ii. adapt the contract with a view to restoring its equilibrium

Restatement (Second) of Contracts §261

Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Principles of European Contract Law Article 4.102Initial ImpossibilityA contract is not invalid merely because at the time it was concluded performance of the obligation assumed was impossible, or because a party was not entitled to dispose of the assets to which the contract relates.

Excuse Due to an Impediment1) A party’s non-performance is excused if it proves that it is due to an impediment beyond its control and that it could not reasonably have been

expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences.

2) Where the impediment is only temporary the excuse provided by this article has effect for the period during which the impediment exists. However, if the delay amounts to a fundamental non-performance, the obligee may treat it as such.

82


3) The non-performing party must ensure that notice of the impediment and of its effect on its ability to perform is received by the other party within a reasonable time after the non-performing party knew or ought to have known of the circumstances. The other party is entitled to damages for any loss…

7. Breach of Contract

Breach of Contract - IntroductionPreliminary considerations:When does the “life” of a contract come to an end? (CVL: See Art. 1671)

Discharge by Performance: parties perform exactly as they should (CVL: CCQ 1553) Discharge by Agreement: “what has been created by agreement may be extinguished by agreement” (CVL: CCQ 1439, 1687 – creditor has the power to

release the debtor) Discharge due to Frustration/Impossibility: Non-performance is excused (CVL: CCQ 1671, 1693)

Breach of Contract - REMEDIES Gives rise to claim for damages – an obligation to make good for disappointing the other party May entitle to specific performance May give rise to the right to terminate the contract

o Breach does not “automatically” terminate the contract must apply to court?

What is a breach? A party does not honour the obligations arising from the contractTo determine whether the contract has been breached, it is necessary to thoroughly analyze the contract and what has been promised.

Types of BreachTo see what type of breach, look at the content of the contract, determine the nature and scope of promises / undertakings / obligations1. Total Failure to Perform2. Late Performance3. Partial Performance4. Defective Performance

7.1.Termination Flowing from Breach – CML

Repudiation (bringing contract to an end) – may give rise to “recission” – which is what happens when you invoke your right to terminate the contract…o When a party intimates by words or conduct that she does not intend to honour her obligations when they fall due in the future

(“anticipatory breach”) Fundamental Breach (“material”, “repudiatory” – i.e. bringing the contract to an end – this is the most common term in Canadian CML)

o Of what nature must a breach be to be called “fundamental”?

Breach and Hong Kong Fir Court says to first look at the breach to see if it is fundamental Contract says that the ship needs to returned in sea working condition, the KKKL were incompetent and spent weeks repairing – slowing down the HK,

question is what is sea worthy condition – court found that HK repudiated contract too early, the ship was still ok (though performance wasn’t perfect), and that they were taking advantage of the cheap chartering ship market

Who breached first? Distinction Condition/Warranty Court refuses to pigeonhole every contractual term according to that dichotomy Open-ended criterion: result of the breach depriving the party not at fault of substantially the whole benefit of the contract Compare 1604 CCQ: “He is not entitled to resolution… if the default of the debtor is of minor importance”

CML – Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26: CB2 258Jurisdiction UKFacts KKKL bought ship and chartered it to HFSC, promising to pay for repairs but not time when ship in port. HFSC used ship, but the “voyage was a

catalogue of disasters”; HFSC repudiated the K and claimed damages; KKKL sued for wrongful repudiation. Between time of chartering and repudiation, sharp fall in the rate of sea freight and KKKL could only charter a ship for less than half of what HK was paying.

Issues Did KKKL fundamentally breach the contract, thus giving HK have grounds to repudiate the contract?Holding No KKKLReasoning Diplock:

“Where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties from further performance of his undertakings, it is for the court to determine whether the event has this effect or not”

Test is: “does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?”

83


Where the event occurs because of one party’s default, that party cannot rely on it as relieving him of performance, and other party (though entitled to) need not treat it as relieving him of obligations; where event occurs because of neither party’s default, each is relieved of further performance

Many K’ual undertakings are more complex, neither “categories” nor “warranties”: only some breaches will give rise to this event, and legal consequences (unless express in K) depend on nature of event and don’t flow from prior classification

Judge must look at events occurring from breach as they were at time of breach, and decide whether these events deprived one party of substantially the whole benefit it was both parties’ K’ual intention it should receive in exchange for own undertakings

Mere occurrences of events that ship was in some respects unseaworthy (delay, either at date or acceptance of rescindment) did not deprive HFSC of whole benefit that it and KKKL intended that HFSC should obtain from performance of obligations

Ratio The frustration test is not easily met. Other points as listed above.Comments Whole analysis is whether a party has been deprived of a ship under the K, as the ship provided was so bad as not to be a ship –

this applies whether there is fault or no fault (if no fault, can look for recourse under the Frustrated Contracts Act; if fault, can seek damages)

Notion of frustration is supposed to be easier to access (lower threshold) than civilian idea of superior force (unforeseeable, irresistible) – but examples we’ve seen of frustration claims have meant that it isn’t easy to claim either (here, fact that the boat was in dire need of repair wasn’t enough)

It’s clear by a certain point that both parties have stopped performing; the question becomes who stopped first (not just who breached a little bit)

Some people think that this outcome was unfair because the ship really was a disaster – but timeline of events shows that the lessee of the ship announced that the deal was over long before the delays got really bad

Ks aren’t breached in a binary on/off fashion: interpretation of a clause involves a range of (non-performance); can often only assess a K once problems have occurred

There is a distinction between warranty and category – a warranty is a promise, and if it is breached, it gives rise to a claim in damages, but not to recission. Other promises, “conditions,” are promises that if they are breached, the whole contract fails.

Cancellation clause inserted into contract may give the parties the option to cancel if timely delivery is not made by the owner.

Fundamental Breach and Cehave NV1. Cehave claimed that the breach was a breach of a condition (not a warrantee), thus is fundamental, thus Cehave could repudiate2. Denning says in light of Hong Kong Fir there are different kinds of conditions that are unclear, so we must look at the consequences of the breach to see the seriousness of it (i.e. did the breach “deprive substantially the whole benefit of the contract”)This is different, because before breaches were assessed by type, never by looking at its consequences

CML – Cehave NV v. Bremeer Handelgeselleschaft mbH, [1975] 3 All E.T. 739: CB2 254Jurisdiction QuebecFacts BHm agreed to sell CNV citrus pellets for cattle feed, in installments; by time of shipment, market price had fallen. Fifth installment arrived, but

some damaged; CNV rejected all cargo, arranged for a middleman to buy it at a much lower price and then sell it to them, and then used it to make feed.

Issues Was there a breach? Can CNV reject the entire K for this breach (was the breach fundamental)?Holding Yes. No. Bremeer Handelgeselleschaft mbHReasoning Denning:

Post-Sale of Goods Act 1893, distinction between “condition” (if promisor breaks in any respect, other party is relieved of obligations and can sue for damages; if other party has by conduct waived it, in which case other party is bound to perform future obligations but can sue for damages) and “warranty” (if promisor breaks in any respect, other party is not relieved of obligations, but can sue for damages)

This division not exhaustive: many stipulations are neither, but are intermediate, with effect depending upon breach; if breach goes to root of K, other party is discharged; if not, he is not

Anticipatory breach: if one party, before performance, shows by words or conduct that he will not perform in a vital respect when that day comes, other party is discharged

So here: Was there a condition? If not, how bad was the breach? Was there anticipatory breach? “Shipped in good condition” (from K of sale): a clause as to quality; buyer cannot reject whole lot unless divergence is “serious

and substantial” and attributable to seller; an intermediate stipulation; here, breach did not go to root damages but not rejection

“Merchantable” (from Sale of Goods Act 1893): goods are merchantable if they are as fit for the purposes for which goods of this kind are commonly bought as it is reasonable to expect given context; this is a condition; merchantability would depend on a reasonable commercial man’s expectation; these pellets were fit for cattle food, as they were used for that purpose later, so they were merchantable no breach of 1893 Act

CNV entitled to damages, but not to reject goods case remitted to board for assessmentRatio There is a middle ground between warranty and condition, where damages may be due and K is terminated – or some other combination

(room for judicial discretion).

Termination of Contract (Resolution) Discourage strategic behaviour on the part of the party not at fault (Cehave) Limit the scope of uncertainty for the party at fault

o Specific list of circumstances which lead to termination Contractual clauses

o Criterion focusing on the nature of the obligation in question Conditions vs. Warrantees

84


o An open-ended criterion focusing on the seriousness of the breach and of its consequences

7.2.CVL Breaches of Contract

CVL - Breaches of Contract

Article 1458.Every person has a duty to honour his contractual undertakings.

Where he fails in this duty, he is liable for any bodily, moral or material injury he causes to the other contracting party and is liable to reparation for the injury; neither he nor the other party may in such a case avoid the rules governing contractual liability by opting for rules that would be more favourable to them.

Article 1553Payment means not only the turning over of a sum of money in satisfaction of an obligation, but also the actual performance of whatever forms the object of the obligation.

CVL – Agreement, Release, etc. Art. 1671

Article 1671Obligations are extinguished not only by the causes of extinction contemplated in other provisions of this Code, such as payment, the expiry of an extinctive term, novation or prescription, but also by compensation, confusion, release, impossibility of performance or discharge of the debtor.

CVL – Termination due to Non-Minor Default Art. 1604

Article 1604Where the creditor does not avail himself of the right to force the specific performance of the contractual obligation of the debtor in cases which admit of it, he is entitled either to the resolution of the contract, or to its resiliation in the case of a contract of successive performance.

However and notwithstanding any stipulation to the contrary, he is not entitled to resolution or resiliation of the contract if the default of the debtor is of minor importance, unless, in the case of an obligation of successive performance, the default occurs repeatedly, but he is then entitled to a proportional reduction of his correlative obligation.

All the relevant circumstances are taken into consideration in assessing the proportional reduction of the correlative obligation. If the obligation cannot be reduced, the creditor is entitled to damages only.

The CVL categorizes obligations according to their content:Obligation de moyen

Debtor promises to exercise reasonable care to achieve the purpose of a contract Example: going to a doctor who agrees to treat – he/she is only agreeing to provide treatment Breach: would entail the doctor not undertaking the means agreed upon (“reasonable care”)

Obligation de résultat Debtor promises to achieve an actual result Example: sale and delivery of goods Breach: no delivery performed

Obligation de garantie Debtor guarantees a result, no matter how circumstances change

Compare to CML: Relies on interpretation of the promise in question, without the same abstract categories But not the parallel: Lord Denning in Esso v. Mardon, delineating the content of the “warranty”:

o What was the scope of the promise? To guarantee a result

OR To promise that reasonable care was exercised when information was conveyed?

This speaks directly to the amount of damages a plaintiff may be entitled to – very important to determine what has been promised

CVL - Remedies to Breach No distinction between warrantee and condition in CVL

Article 1590An obligation confers on the creditor the right to demand that the obligation be performed in full, properly and without delay.

Where the debtor fails to perform his obligation without justification on his part and he is in default, the creditor may, without prejudice to his right to the performance of the obligation in whole or in part by equivalence,

1) force specific performance of the obligation;

85


2) obtain, in the case of a contractual obligation, the resolution or resiliation of the contract or the reduction of his own correlative obligation;3) take any other measure provided by law to enforce his right to the performance of the obligation.

Consequences of Breach of Contract – 1590 CCQ

Breach of Contract(inexecution)

Terminate the Obtain an Order from Get damages Contract the Court for Perfomance as performance by (Résolution – one K) in kind equivalence(Résiliation – successive Ks)

8. Remedies to Breach

8.1.Specific Performance Civil Law: Specific Performance means enforcing the primary obligation arising from the contract as the most obvious reaction to a breach – see the

organization of the Code: Top of the list! Common Law: Specific Performance is an equitable remedy, only available if adequate relief AT LAW is not available (very extreme measure)

8.1.1. Specific Performance in CVL

The rule, not the exception: Art. 1590 Art. 1601: However, note the restriction – “in cases which admit of it”

Art. 1601A creditor may, in cases which admit of it, demand that the debtor be forced to make specific performance of the obligation.

Obligations to do (faire) are more problematic than obligations to give (donner), but are still possible (enforced en nature) Obligation to keep your word vs. strong interference with personal freedom Important exceptions

o Personal services (intuitu personae) – employment contractso Actual performance is impossible

Damages!!

CVL Construction c. Golden Griddle Which contractual obligation does the plaintiff seek to enforce? Which defense does Golden Griddle invoke? Note the struggle of a Civilian judge in a mixed jurisdiction – what is an “equitable remedy” in the Civil Law? “nemo praecise cogi ad factum” –No one can force someone to do something (Roman law), court gets beyond this, saying that a natural person is

different from a cooperation (the maxim is about personal liberty)o Should this still be the rule?

Art. 1855 (lessee) does not require a lessee to actual remain in the rented area, as long as he pays rent – here P are forcing defendants to not only pay rent, but carry on business

CVL - La Compagnie de Construction Belcourt c. Golden Griddle Pancake House Ltd. 1988 CB2: 272Jurisdiction QuebecFacts The owners of a shopping centre have instituted this action for permanent injunction to enforce the continuous operation provision of a lease

and compel a tenant who ceased operations to reopen and operate is restaurant, and for arrears of rental. The tenant alleges misrepresentation and counter-claims the cancellation of the lease.

Issues Should an injunction be granted when it involves a positive obligation? (i.e. reopen the restaurant)Holding Yes – see bold in belowReasoning Misrepresentations:

The impact of any misrepresentation is subjective since the state of mind and knowledge of the pretended victim are relevant. A contracting party who does not rely upon a representation cannot subsequently seek relief on the ground that the representation was false. (Degree to which it relied on representations)

The court concluded that the officers and managers of Golden Griddle fully understood the meaning and significance of the offer to

86


lease GG asserts that there were a number of representations made by Belcourt:

Traffic Representations: If they intended to rely on specific representation as to the volume of customer trafficProjections: Although a stipulation of percentage rental may in certain circumstances suggest certain implied obligations with respect to the promotion of a shopping centre, it does not imply a warranty by landlord of minimum sales by the tenantVisual Representations: special provision on “similar structures” being erected does not give rise to any recourse, and close play area is not a disadvantage.Signage Representations: There has been no written evidence to substantiate the existence of representations with respect to signageTenant Misrepresentations: GG asserted but failed to prove that specific representations of tenant mix and the location of premises to be occupied by Bank of MontrealMarketing Misrepresentations: GG asserted centre was closed during certain hours of operation, but the proof made was insufficient to justify a claim

For the foregoing reasons GG’s cross demand for lease cancellation of the lease on the grounds of misrepresentations is rejectedInjunction:

The original lease subjected the tenant to a penalty for failing to operate its business continuously, as well landlord had the right to obtain injunctive relief

According to the K, injunction would be appropriate, but just because a stipulation in an agreement permits one to seek injunctive relief that does not automatically create a right to such a remedy.

Art. 1065 CC. provides the creditor of the obligation with the right, at his option, to require SP of the obligation, subject only to the qualification that the situation be one of the cases “cases which admit of it.” It is not the role of the court to predetermine the creditors recourse, but rather to respond to his election

3 types of SP: (1) The substitution of a judgment of the Court for an act of the debtor ex. Judgments conveying property titles (2) The substitution of the act of creditor for that of the debtor ex. Art. 1644 After having informed or attempted to inform the lessor and if the latter does not act in due course, the lessee may undertake urgent and necessary repairs for the preservation or use of the immoveable leased…(3) Compulsion of the debtor by the court order to perform a positive obligation he has undertaken to do or cease doing that which he has undertaken not to do.

Courts do not consider subjective factors such as hardships or personal consequencesConclusion:

GG cannot obtain relief from its obligation to operate on the grounds that it had failed to generate a satisfactory level of sales Judgment condemned them to pay damages for arrears of rent, as well an injunction was granted ordering them to reopen the

restaurantRatio A court may be reluctant to order an injunction if compliance cannot be easily measured, but where the act or series of acts can be readily

defined and subsequently assessed, a court should not hesitate to issue the order

8.1.2. Specific Performance in CML

CML rarely gives specific performance, main remedy is damagesOrigin of specific performance was Court of Equity (chancellery) – before, there was a court of law in which claimants had to issue claims through established writs – but if there was no writ available to their particular situation, the claimant could petition the Court of Equity, to come up with a more equitable remedy

CML- Co-operative Insurance v. Argyll Stores P seeks mandatory injunction to enjoin D to “carry on a business” Curative role of specific performance as equitable remedy Test is first are Damages inadequate? (irreparable injury at law – US language, can injury not is repaired taking recourse to damages?) Additionally: Will “continued supervision of the court” be necessary? Not sending officers on-site, but the “possibility of the court having to give an indefinite series of rulings in order to ensure the execution of its order.” Distinction between obligations to achieve a result and obligations to carry on an activity Co-op claims that rent is not enough because of the potential losses, but they can’t give a set amount of money that they will lose as it is uncertain, so

they seek specific performance Court is concerned that if they order an injunction they might entail litigation (if Argyle doesn’t comply) –questions of how many staff members needed,

what needs to be on the shelf CVL would just say that drafting the injunction would ensure no more litigation

CML - Co-Operative Insurance Society v. Argyll Stores (Holdings) Ltd. CB2: 268Jurisdiction UKFacts Defendant signed a 35-year lease with plaintiffs to operate a supermarket, and the lease contained a covenant to keep the premises open for

retail trade during the usual hours of business, in 1979. In 1994 they announced they would be closing the losing business, and the plaintiffs offered a rent concession, and without reply the defendants closed and stripped the business. The plaintiffs brought action ordering them to perform the covenant and maintain the business, and the summary judge granted an order for damages to be assessed but refused to order specific performance, and the COA ordered specific performance.

Issues Can specific performance be granted through the use of an injunction in this case?Holding No Damages.Reasoning Not as dramatic as Golden Griddle, because the defendants assigned the lease, however there is still the issue of rent arrears.

“No authority has been quoted to show that an injunction will be granted enjoining a person to carry on a business, nor can I think that one ever would be, certainly not where the business is a losing concern” (Lord Goddard in AG v. Colchester Corporation 1955)

Argyll admitted their breach and consented to an order for damages to be assessed A decree of SP is a discretionary remedy and the question is whether the COA was entitled to set aside the summary judge’s

87


discretion The settled and invariable practice of this court is to never grant mandatory injunctions requiring persons to carry on business Specific performance should only be used where damages prove to be inadequate (in contracts to CVL where the plaintiff is entitled

to SP) There are even reasons which justify the refusal to grant an injunction to continue to operate business (1) it would have to be

constantly monitored by the courts, according to Dixon J “specific performance in applicable when the continued supervision of the court is necessary to ensure the fulfillment of the contract”; (2) it’s too complicated to write an injunction.

The defendant who didn’t want to run the biz anymore now must do so under a “Sword of Damocles” which may descend if the way he runs the biz does not conform to the court order and (2) the seriousness of a finding of contempt for the defendant means that any application to enforce the order is likely to be a heavy and expensive piece of litigation (as it would likely be a repeated process over time, as opposed to one time damages)

Further objection: injustice by allowing the plaintiff to enrich himself at the defendants expense (the loss the plaintiff must endure by complying with an order for SP may be far greater than that the defendant will lose from a broken contract

It is not in public interest for the courts to require someone to carry on a business at a loss if there is any plausible alternative by which the other party can be given compensation

Ratio The settled practice of courts not granting a mandatory injunction requiring the carrying on of a business is soundly based upon the possibility of wasteful litigation and the possibility of the unjust enrichment of the party seeking the injunction.

Tests for Specific Performance in CML1. Inadequacy of Damages Test2. Is the subject matter of the contract “unique”?3. Is the assessment of appropriate damages problematic?

Examples:o Sale of land:

In Canada there is a presumption of uniqueness (Semelhago v. Paramadevan [1996] 2 S.C.R. 415)o Sale of Goods:

Presumption that damages is sufficient; buyer has to demonstrate that the subject matter of the contract is unique or sufficiently rare.

If the inadequacy of Damages Test is met, the court will grant specific performance, unless certain exceptions apply, for example:i) Difficulty in Supervisionii) Public Policy: Employment Contracts

The court will not turn contracts of employment into contracts of “slavery” The court will not force upon the employer a relationship that requires trust and confidence, if this trust and confidence has been

undermined Note: There is generally a greater reluctance towards enforcing positive acts than negative obligations

o The execution of the latter can more easily be supervisedo And perceived as a less intense restriction of personal freedom

Warner Brothers and Specific Performance Positive stipulation: Obligation to render services Contract of Services: Performance is “unique” Cannot be enforced – “slavery” argument P seeks enforcement of the negative stipulation: obligation not to work – as an actress – for anybody else – prohibitory injunction

Questions for specific performance: Would enforcement of the negative stipulation equal the enforcement of the positive stipulation?

o Yes, if she faces the alternative of working for the plaintiff or remaining idle: an injunction would “drive the defendant either to starvation or to specific performance”

o No, if she is “able to employ herself both usefully and remuneratively in other spheres of activity, though not as remuneratively as her special line.” This might “tempt” her, but does not “drive” her to perform the contract.

o Is that reasonable? Compare Lumley v. Wagner: The engagement was supposed to last three months only, and Wagner could afford to sing neither for the Lumley nor for the Gye. Bette Davis’ contract was an unending contract with her employer, the court at least limits it to 3 year injunction

Are damages inadequate?o There’s only one Bette Davis…

CML – Warner Bros. Pictures v. Nelson, [1937] 1 K.B. 209: CB2 261Jurisdiction [1936] England – Branson J.Facts Defendant (Bette Davis) agrees to perform solely and exclusively for Warner - ends up breaching K. K has negative covenant: D agrees that

during term of K she will not engage in any other work w/o the written consent of the producer. Plaintiff asking for specific performance of the restrictive covenant not to act for another company. They didn’t ask for a mandatory injunction for her to fulfill her obligations to act for them. PL claimed declaration that K valid and binding, injunction to restrain D from acting in breach of it and damages.

Issues Will an injunction be granted in favour of a negative covenant in a K ie will specific performance of negative covenant be granted?Holding Injunction granted for three years and only in the jurisdiction of the court (ie England)Reasoning General rule is that courts will not enforce specific performance of a positive covenant of personal service (or a positive covenant

framed in negative terms). Should not grant an injunction if to do so would be tantamount to ordering the D to perform her K or remain idle OR unless damages would be a more appropriate remedy.

Cannot order mandatory injunction for positive covenant – Nemo Praecise cogi potest ad factum (intuitu personae) – cannot order someone to act as it would infringe their personal liberty.

88


Court finds that it is reasonable here because it only restricts her from working for a motion picture company and it is the only effective remedy for the breach.

Such an injunction would not force the D to perform her K (although it might tempt her to b/c she could not get as much $ in another occupation) [Jukier is critical of this - could she really wait tables?]

Damages are not a more appropriate remedy. The parties explicitly recognized (in the K) the appropriateness of an injunction over damages. Also, damages would be very hard to evaluate (b/c of the nature of her occupation - she is valuable b/c of who she is) [she is a "unique good" - damages cannot replace her]

Ratio Specific performance Comment Court did not apply the rule cogently: specific performance here is almost equated to a mandatory injunction because she has no

choice but to accept to work for Warners. Comments Reputation factors would induce her to perform well, as would K’ual provisions for rising salary Finding this K enforceable had wider effects – set the precedent for a growing industry Still understood as good law for most principles involved Connect this case to public order (Cameron: non-compete clauses) – similar philosophical concern Some of these type of Ks might be considered unenforceable today for unconscionability (esp. provisions allowing for wholly one-

sided renewal with no prospect of exit)

Alternative Exercise with Warner Bros1. Was there a valid contract (offer and acceptance, intention, consideration?))? Yes2. Is it voidable? Maybe unconscionability

a. Need structural imbalanceb. Shocks the conscience of the court?c. Un fairness – one party exploited economically

Here Bette Davis makes a lot of $, can’t judge if contract is unconscionable without looking at whole contract

3. Public Policy argument – look at specific clauses (restriction of trade argument – i.e. Cameron where a contract of non-competition was found to be against public order)

8.2.Damages

Mechanisms to limit recovery:Common law [1] Remoteness/Foreseeability (Hadley, Victoria Laundry, The Heron II)[2] Mitigation of Damages: Victim can only recover for losses he could not have avoided by taking reasonable steps[3] Reasonableness of damages (Ruxley)

Civil law [1] Foreseeability and Cause (Art. 1607, Art. 1613)[2] Mitigation of Damages (Art. 1479)

8.2.1. Damages in CVLRestitution: unwinding the terms of the contract, one is not richer after the contractDamages flowing from an injury Art. 1607, 1611 –right to profits that he has been deprived of

Art. 1607 – same damages for contracts and extra-contractual obligationsArticle 1607The creditor is entitled to damages for bodily, moral or material injury which is an immediate and direct consequence of the debtor’s default.

Art. 1611 – allows for loss of profitArticle 1611The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived.

Future injury which is certain and able to be assessed is taken into account in awarding damages.

Art. 1613In contractual matters, the debtor is liable only for damages that were foreseen or foreseeable at the time the obligation was contracted, where the failure to perform the obligation does not proceed from intentional or gross fault on his part; even then, the damages include only what is an immediate and direct consequence of the non-performance.

Art. 1479 - Obligation on victim to do what is reasonable to avoid the loss or mitigate damagesArt. 1479

89


A person who is liable to reparation for an injury is not liable in respect of any aggravation of the injury that the victim could have avoided.

Note that generally speaking, most contentious damages are LOSS OF PROFITS. Note that goal of damages is COMPENSATION. No damages awarded if no loss.

CVL - Why do we give expectation damages?One reason Efficient Breach: Party breaches knowing that cost of breach < benefit of breaching. It will rarely be more efficient to breach if you are forced to pay expectation damages (vs. just paying for losses).

Mitigation of Damages - ExamplesFarmer has K to buy seeds - they are not delivered. Can he sue for entire loss of profits from crop? NO. He could have mitigated his loss by finding another source of seeds and claiming damages (i.e. difference in price)

CVL - Ciment Quebec Inc. v. Stellaire Construction, 2002 Cour d’appel, CB2: 299Jurisdiction QuebecFacts A Hydro Quebec dam needed to be reconstructed. Stellaire was hired to do the job, Hydro engineers supervised while Ciment was hired to

deliver the cement. Very specific type of cement was needed; 20SF which was uncommon in the industry, written into the contract with Ciment. Stellaire man came to pick up cement, saw the word “silicone,” asked about the discrepancy and was told by Guimont it was the same thing. It was deemed both truly knew nothing about the product. Stellaire treated the product as cement and used it in construction. It was only after it dried that the error was realized by hydro and a whole reconstruction was needed. Stellaire sued Ciment for costs and loss of gains ($1 million in lost profits, $431 000 in additional costs of breaking down and rebuilding). The value of the concrete was $160, Ciment now being sued for $1.4 million.

Issues Was there fault resulting from breach of contract? Is Stellaire entitled to costs? Is Stellaire entitled to loss of gains?Holding Holding Yes, Yes, NoReasoning Chamberlain J:

Fault: Ciment faulted because both parties involved in obtaining the cement were unaware of its difference with silicone, even if so, it

takes a lab to distinguish the two. Only Ciment was in a position to detect that error. Agrees with trial judgeDamages:

Agrees with trial judge that Stellaire should be entitled to costs associated with deconstruction and reconstruction because the above fault was foreseeable to the reasonable cement dealer and was a direct and immediate consequence of the fault (see below).

Loss of Gain Damages: Loss of insurance, orders and reduction of Ks followed, for Stellaire argued they were penalized for being a young company with

incidental finance troubles. Stellaire must prove that the loss of gains was a direct and immediate consequence (1607 CcQ) of Ciment’s fault and that it was

foreseeable (1613 CcQ). Determination dependent on judicial discretion (draws line in possible never-ending chain of causation) It differs from the extra-contractual standard because it is adapted to contracts where risks should be foreseen and contracted for Test is whether the reasonable and prudent contractor would have foreseen the consequences of his actions stemming from the

breach There is no doubt that there is a correlation between the error and loss of insurance however there were other factors that crept in

too; e.g. weak capitalization, which ruptured this chain. Stellaire brought forth no proof of a direct connection to this end and it was not foreseeable that a slip up in a small quantity of cement would lead to these disastrous consequences.

Direct and immediate are strongly linked to foreseeability; the damage is not direct and immediate because the company’s fragile state intervened, and it is not foreseeable because the diligent contractor would not know that his actions would lead to a loss of insurance

Ratio The quantum of contract damage must be a direct and immediate cause of the contracting fault AND it must be reasonably foreseeable to

the diligent and prudent contractor in the shoes of he who is at fault.Comment An exception to this rule comes through when there is intent behind the fault. When there is bad faith, even if the damage is not

reasonably foreseeable, the bad faith party is still found to be liable for whatever happens.

8.2.2. Damages in CML

General Rule: Hadley v. Baxendale: Amount of damages a party can get when K breached is EXPECTATION DAMAGES - what it would have gotten if K had been kept. [Use $ to put plaintiff in position he would have been in but for breach]

BUT…not all profits will be recoverable law has mechanisms to limit scope of recovery (the breach is not supposed to allow the plaintiff to enjoy a windfall.)

We have to limit liability, so that someone cannot make outrageous claims about the amount of money that could have been accrued were it not for breach.

Mechanisms to limit recovery:Common law [1] Remoteness/Foreseeability (Hadley, Victoria Laundry, The Heron II)[2] Mitigation of Damages: Victim can only recover for losses he could not have avoided by taking reasonable steps[3] Reasonableness of damages (Ruxley)

90


CML – Limiting Liability – Remoteness

2 principles from Hadley 1. (objective element) Rule of the loss being “reasonable foreseeablity” by the parties at time of entering the agreement

Baron Alderson from Hadleyo “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of

such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonable be supposed to have been in the contemplation of both parties, at the time they made the contract as the probable result of the breach of it.”

High threshold “usual course of things,” “probable result” of what was within “the contemplation of both parties”2. (subjective element) Damages must not be too remote, would only be foreseeable if the fact had been communicated to the breaching party

o “For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them”

“Hadley-rule” still starting point of the analysis of “remoteness” What kind of damages?

o Consequential damages (this is now moving beyond the realm of expectancy, perfect performance) What are the two branches of the Hadley rule?

o “Naturally flowing damages” – within the natural course of thingso Damages reasonably foreseeable (in the contemplation) by both parties at the time of entering into the contract

What was communicated? If something specific, then that would be within the scope of liability. What reasons are given for the distinction?

o Carrier has no knowledge of the workings of a mill can’t be held liable for damages he would not foresee Is the ruling surprising? Does the type of contract influence the outcome?

o You would think that if someone needed a part replaced “urgently”, that it would be expected that they would be impeded from continuing their enterprise... but would a carrier have to know that?

o There was no sophisticated corporate law that would limit liability, no bankruptcy law to ensure that you would not be ruined as a result of this sort of liability courts wanted to protect carriers from excessive penalties

CML – Hadley v. Baxendale (1854), 9 Exch. 341: CB2 211Jurisdiction UKFacts H (flour mill owner) sent shaft by B’s shipping company to be replaced. B ships the part by canal instead of by rail. H did not explain that

without the shaft the mill could not operate. Shipping was delayed; H had to close its mill for five days, tries to hold B liable for lost profits.Issues Is B responsible for lost profits? How should damages be calculated?Holding No. See ratio. BaxendaleReasoning Plaintiffs only told defendants that they wanted to ship a broken mill shaft, not that urgency was needed or that profits were at

stake. Loss of profits can’t be considered a consequence of breach, given reasonable expectations in ordinary circumstances, since the

sending of a broken shaft to third parties by a carrier under ordinary circumstances would not produce the stoppage of the mill. If special circumstances are known to both parties, damages owing from breach would be those that would ordinarily follow under

these circumstances; where special circumstances are not known by both parties, damages are those that would be expected to arise generally.

Ratio Where a K is breached, damages should be 1) those arising “naturally” (i.e. “according to the usual course of things, from such breach of contract itself”) or 2) such as both parties, when making K, may be supposed to have considered would result from breach

Comments Continues to be the leading authority for breach No reason not to think that slow shipping would have consequences – this was not the kind of product that is reasonably expected

to be essential for the operation of a busines First part of rule is objective; second part is subjective This was in the early days of working out the relationship between a company and its agent, i.e., when a company “knows”

something (today, if an agent is given information, that’s enough) The threshold for damages in Hadley is quite high because at the time, the defendant would not enjoy limited liability, but rather

would be found personally liable for the damage (there was no bankruptcy law in England at the time). Thus, the court wanted to protect the individual from liability. We see a lowering of threshold in the 20th century Victoria Laundry case.

91


R. Danzig: “Hadley v. Baxendale: A study in the industrialization of the law CBII: 212

The circumstances of the breach in this case reflect a half-way modernized society, since the breach occurred because the broken shaft was sent via an early industrial transport form. Indeed, the facts of the case offer a glimpse of an economic world in transition. For example, as opposed to claiming damages based on a specific contract, Hadley sought damages based on Baxendale’s failure to effect delivery “within a reasonable time.” This is inconsistent with a move from status to contracts in the mid-1800s.

In the case, the carrier, Baxendale, is held liable for the act of a clerk. Danzig argues that there was an uncertainty in the rudimentary law of agency as it existed at the time, which plays itself out in determining whether a carrier can be liable for the act of an employee. The case was “probably seen and shaped by its authors in the context of uncertainties about the law of agency and conflicts about the shape of the law of liability which are now forgotten.”

Moreover, the case emerged at a time when limiting liability was the most hotly contested legal issue in England. Under these circumstances we can understand why there is a severe restriction of scope of damages in this contract action. There was a growing acceptance of limited liability and yet the case was a situation of unlimited personal liability for commercial misfeasance.

The case’s importance is also a product of the bifurcation of the County and Superior Court systems in England. In drawing out new jurisdictions for each court system, previously unimportant considerations of damages began to receive attention, not because these rules were considered important as matters of substantive law but because they were important as rules of jurisdiction. By identifying the criteria for damages, the court in Hadley, enhanced the predictability of damages and therefore the correct allocation of cases between the County and Superior Courts.

Also, the courts’ large dockets pushed them to seek to establish a “crystallized delineation of instructions for dispute resolution.” The crystallization of the damages rule established in Baxendale was heavily influenced by the fact that 2 of the 3 the judges hearing the case had ties to Pickfords, Baxendale’s company. By establishing a clear rule of procedure, the case shifted power from juries to the judges who articulated the rule. Thus, the case served to limit the costs and biases of juries, while offering “substantial rewards to the judges who promulgated and later reaffirmed the rule established in the case.”

CML- Modern Doctrine on Limiting Liability Victoria Laundry – defines actual and imputed knowledge (1.actual – is knowledge of special circumstances outside the ordinary course of things that, if

communicated to the other party, may attract second rule in Hadley, 2. imputed – reasonable man standard of what everyone is presumed to know Lowers threshold of liability from requirement that consequences of breach be foreseeable to the extent that it is naturally arising, to a standard that

consequences a “serious possibility” or a “real danger” or “on the cards” Articulates 6 principles (listed in case summary) Modern formulation of the Hadley-rule: What is the distinction made here as to the knowledge of the parties? What kind of damages were sought? lost profits Which branch of the Hadley rule applies? knowledge of specific circumstances giving rise to liability (under the first branch of Hadley, nothing would

have been awarded) Note the discussion of Hadley! Significance of the “type” of contract What is “reasonably” foreseeable? “It is enough if he could foresee that it was likely so to result” Note that only a “type” of damage has to be foreseeable, not the particular extent of the loss sustained

o Subtle distinction – what damages are awarded here? not everything (lost contracts, extremely lucrative business) but loss of normal profits – only that which is in the scope of foreseeability

Take this very BROADLY WORDED test – and apply it to the specific facts at hand, and apply the general foreseeability (from the first branch of the test) to the second branch of the test as well.

CML – Victoria Laundry v. Newman Industries Ltd., [1949] 2 K.B. 528: CB2 220Jurisdiction UKFacts NIL K’d with VL to deliver a boiler, knowing that VL wanted it for immediate use in a laundry business but did not know the precise role for

which the boiler was needed. NIL was slow in delivering, damaged the boiler, etc. 20+ weeks late. Plaintiff claims loss of profits they would have received had the boiler been delivered on time, including the regular business that they would have enjoyed and the additional revenue that they would have earned because of a number of lucrative dyeing contracts that they could have gotten.

Issues Can VL claim for loss of profits that they would have made were the boiler to have been delivered on time? Could VL claim loss of lucrative dyeing contracts?

Holding Yes/No Victoria Laundry.Reasoning Asquith J:

Hadley v. Baxendale applies. British Columbia, etc., Saw Mill Co. v. Nettleship added to Hadley that where knowledge of special circumstances is relied on to

enhance damages, this knowledge must have been “brought home” to defendant at time of K in circumstances where defendant agreed to bear special losses connected with these circumstances.

Cory v. Thames Ironworks Co. added that when parties are not ad idem in their contemplation of the use to which an article will be put, damages will be based on the “ordinary” use.

No supplier would reasonably not foresee that loss of business would result from delayed delivery of an item like this [implication: we assume that anything bought or sold could be used for profit].

VL claims damages for loss of specific Ks that NIL didn’t know about – doesn’t preclude some general recovery for lost business. Case referred to a referee to assess damages. The purpose of boiling water for washing or dyeing is the obvious one. The notion that the boiler might only be needed as a stand-

by was negatived by the letter sent by VL that said that they wanted to put the boiler to immediate use. A reasonable person in defendants shoes most be taken to foresee that a laundry which invested a lot of $ in a boiler which they

92


intended to put to immediate use would be likely to suffer financially because of a 5 month delay in delivery. The defendant would have had to know about the specific terms of the dyeing contract, for the plaintiff to recover damages for them, however, the plaintiff can still recover a general sum for loss of business in respect of dyeing Ks and laundering Ks to be reasonably expected.

Moreover, more damages are rewarded in cases where defendant defaults in supplying a self-contained profit-earning whole than when he defaults in supplying a part. The boiler was a self-contained whole.

This case is distinguished from Hadley because here “there was ample means of knowledge on the part of the defendant that business loss of some sort would be likely to result to the plaintiff from the defendants’ default in performing their K.”

Ratio 1) Governing purpose of damages is to put the creditor in a position as if his rights had been observed – but this can be too harsh, so2) Creditor is only entitled to damages equating with loss reasonably foreseeable, at time of K, arising from breach3) Reasonable foreseeability depends on knowledge of parties (or of breaching party)4) Knowledge can be imputed (“ordinary”: Hadley rule #1) or actual (special circumstances: Hadley rule #2 possibility for additional recovery)5) Debtor need not have asked self what loss was liable to result from breach – damages based on what he would have contemplated, as a reasonable man, had the question been asked6) Need not prove that debtor could have foreseen that a breach would necessarily result in that loss – enough that the loss was likely to result. The loss “has to be on the cards.”

Comments Seems to reduce the second rule from Hadley in favour of the first; suggests that parties should take it upon themselves to think fairly imaginatively about how their goods can/will be used

Normal profits are compensable; exceptionally lucrative profits (the special dyeing Ks) are not

In the case, the court contemplates what is “foreseeable.” Does being foreseeable require a certain amount of probability? It has to be likely, “on the cards,” a “serious possibility” or a “real danger.” These expressions lower the liability threshold from Hadley and give rise to significant dispute in the House of Lords.

We thus see a slight reformulation of the Hadley rule. In Victoria, foreseeability comes into the court’s assessment of both the subjective and objective elements of the Hadley test since the court only needs to show that with a given state of knowledge, loss is reasonably foreseeable. Thus, Hadley can be reformulated with foreseeability coming into play twice:1 - What would have been foreseeable given no notice? 2- what was foreseeable given the information that was known?

Note that only a “type” of damage has to be foreseeable, not the particular extent of the loss sustained

Heron II and Limiting Liability Heron has extensive but inconclusive question on Asquith L.J.’s Victoria Laundry formulation of a lower threshold – but in the end survived Decided that the standard of foreseeabilty in a contract claim of higher degree than that required in a tort claim, as the victim of a breach can secure

protection from an unusual risk by signifying the existence of the risk to the other part – but in tort law, the victim cannot seek this kind of protection In Heron it was entirely foreseeable that he would earn less money if it was delivered late – market is fluctuating After this case, carriers added liability clauses to their contracts “The formulation of the rule in Hadley set forth in Victoria Laundry appears to have survived the scrutiny of the House of Lords in Koufos unscathed. At

the same time, no clear consensus has emerged from the court as to whether the foreseeability threshold has been reduced over time.” It is, however, clear that

o It is not necessary to establish “odds-on liability” – not necessary to only award damages for something that was more likely to happen (so market falling would still be within the scope, even if it was more likely that the market would go up)

o The threshold is, however, higher than in torts cases. Why? In contracts, parties can allocate risk – they have the option of insuring themselves by an explicit agreement, they could have

communicated their expectations In torts, foreseeability only excludes the most unlikely events

Critics of Heron II ( Koufos )

What if the market was up in when they delivered it late? The carrier does not get the windfall, but he is liable if the market is down “Reasonableness” can be spun as the judge likes Drafters of contracts beware!

CML – Koufos v. C. Czarnikow (The Heron II), [1969] 1 A.C. 350: CB2 224Jurisdiction UKFacts K chartered CC’s boat to deliver a load of sugar. CC arrived nine days late; in the meantime, price of sugar had fallen and K lost money relative

to what he would have made if CC had arrived on time.Issues Is CC liable for fall in market value (i.e. should damages include this fall)?Holding Yes Koufos.Reasoning CC must have realized that it was not unlikely for market price to fall (though could equally have risen), and it was not unlikely that

the sugar would be sold in the market at market price on arrival. Hadley intended to lay down a rule that a result which, though foreseeable as a substantial possibility, would happen in a small

minority of cases should not be regarded as having been in the parties’ contemplation. In cases like Hadley, or the present case, the crucial question is whether on the info available to the defendant when the K was

made, he should, or a reasonable man would, have realized that such loss was sufficiently likely to result from the breach of K to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within contemplation.

93


Modern tort rules impose much wider liability Victoria Laundry goes beyond established authorities by bringing a tort concept, reasonably foreseeability, into assessment of

damages. It has never been enough in contracts that a loss was “foreseeable as a serious possibility or a real danger or as being on the cards.” To use these notions from VL would be to extend liability for breach of K beyond what is reasonable or desirable.

Damages are not to be considered too remote just because they might arise from a situation with a “less than even chance” – it’s enough that event was not unlikely

Thus, without relying on VL, and taking the principle from Hadley into account, the loss of profit in this case would not be too remote

Concurrence (Lord Pearce) Underlying CML rule is that damage will place creditor in same position as if K had been performed – but this is too harsh, so Hadley

has stepped in to limit liability. Some cases debate which of Hadley’s two rules applies – sometimes both apply It is argued that Victoria Laundry was an erroneous departure from Hadley in that it allowed damages where the loss was a serious

possibility or a real danger instead of holding that loss must be probable. These expressions, however were used correctly, not inconsistent with Hadley, as the language in Victoria clarifies the vague notion of the “natural course of things” in Hadley.

Where sale of goods is delayed, prima facie rule is that damage is difference between value of article K’d for at time when it ought to have been and time when actually delivered

Facts of present case lead to the view that the loss of market arose naturally according to the usual course of things from the ship-owners deviation.

Some argue that shipment by sea is different because of The Parana (1877) and uncertain timing, but the rule should be no different, and modern technology permits more accurate estimation of sea travel

Loss of market will usually be found within contemplation of partiesRatio Damages for a breach of K will be assessed based on events or circumstances that the debtor considered not to be unlikely.Comments Central issue: is a falling market part of the foreseeable loss? (here, yes)

This is in contrast to the older idea of Ks as exchanging things (in which case you wouldn’t expect immediate resale) – how normal is it that things should be resold?

Think of what would have happened if something had gone slightly differently: if ship had arrived late and market had risen, buyer would have kept the windfall (no basis for sharing)

Two Js disagree over whether Asquith’s judgment in Victoria was a radical reformulation or a correct interpretation of Hadley

The judges in Heron II engage in semantic discussion of what constitutes “probability.” The judges don’t erect a threshold for establishing foreseeability but they say that however low the threshold is in K law, it is higher than in ECO law because in K law, parties enter into agreement voluntarily and can therefore plan for certain contingencies. If parties know that losses might occur then they are expected to include appropriate clauses in contract to protect against losses. Thus, there must be a higher foreseeability threshold in awarding damages in contracts than in ECO.

It is very hard to synchronize the law of damages with will theory, since will theory is premised on the notion that you are required to give what you promise in an agreement. It is hard for 19th century K ideology to understand why someone should be liable for value beyond what they have promised in an agreement. In the realm of damages we see an inherent limitation of will theory.

How to calculate expectancy? Comparing situations – actual situation after the breach in comparison to the situation expected upon performance of the contract

o “Where a party sustains a loss by reason of breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

Expression of a “more fundamental principle, [...] to make ‘compensation’ for ‘injuries’”o Leads to a granting the expectancy as the typical measure for contract damages

Example: Contract for the Sale of GoodsSeller breaches by unexcused non-delivery:Damages = (market price for substitute goods) - (contract price)

Rationale: “I negotiated a better price than what the market offered me, so I should get the profit” If a seller doesn’t deliver oranges, get substitutes which means I pay market price I am deprived of the benefits of the deal If the market price is cheaper, then you should be happy (Cehave) bad deal, cannot claim deprived of a benefit

Buyer breaches by unexcused non-acceptance:Damages = (contract price) - (market price)

Promisee must not benefit from a windfall – you are only entitled to liquidated damages if you are in a worse position as a result of the breach

Alternative measure of damages: Reliance Measureo Put the innocent party in the position as if he had never relied (Security Stove)o It cannot be more than the expectancy – you cannot benefit from someone breaching the contract (cannot be put in a better position than

you would be if the contract had been performed)o THE PROMISEE CANNOT HAVE BOTH – can’t benefit from the contract AND save the expenses!

Torts Damages vs. Contracts Damages

94


Tort Claim for Damages (Restitutio in integrum)

* Party has incurred a loss as a result ofbreach of contract* Is entitled to damages to the restore

Pre contract himself to the position in which he would havebeen had the contract never existed* Principle of restitutio in integrum, party

Post Contract does not benefit from the breach

Contractual Claim for Damages

* Party has received some of the benefit heExpectancy bargained for but through the breach or

partial or inadequate performance of the other party, he has been deprived of a

benefitPost-Contract * He is entitled to the difference of what was

expected and what he actually received Pre-Contract

Hawkins v. McGee Claim for DamagesExpectancy

* The boy has a claim for the100% Good Hand difference between a burned hand

and a 100% good hand

Pre-Contract Burned Hand

Post Contract Burned and Hairy Hand

EXPECTANCY IS ALWAYS THE UPPER LIMIT OF DAMAGES IN A CONTRACTS CASE

Hawkins v. McGee First step – need to interpret the intention of the party (use reasonable man standard – was the promise to give a 100% good hand a legally binding

warranty) – Yes, was an expert, induced the father by repeating the warranty “The rule of the common law is, that were a party sustains a loss by reason of breach of contract, he is, so far as money can do it, to be placed in the

same situation, with respect to damages, as if the contract had been performed.” Baron Parke, Robinson v. Harmano Doesn’t receive pain and suffering from the surgery, because he would have incurred this price for the perfect hando The “injury” is that the boy didn’t get a %100 hand (the breach is the not fulfilling the promise)o “Compensation for a breach, measured in the terms of the contract” (Hawkins v. McGee)

CML - Hawkins v. McGee Supreme Court of New Hampshire 1929 - CB2: 245Jurisdiction USAFacts Before performing an operation to remove and replace scar tissue from a patient’s hand, he guaranteed to make the hand 100 percent

perfect. Proof of their utterance would establish the giving of a “warranty.” Defendant argues that no “reasonable man” would understand that these words were used with the intention of entering into any “contractual relation” and they simply expressed his belief in strong words that the operation would be a success. Also for the plaintiff there was the fact that the defendant repeatedly solicited the patient’s father to perform the operation, which leads us to believe he was in fact making a guarantee to the patient.

Issues What damages is the plaintiff entitled to recover?Holding Entitled to the difference in value of a perfect hand to what he has, plus the difference between what he had before the surgery (burned hand)

and what he has now (hairy hand), thus he has a tortious restitution claim for damages, and a contractual claim for damages (not being enriched)

Reasoning Authority for any specific rule of damages is lacking, but when tested by general principle and by analogy it appears the instructions were erroneous

In contract law, “damages” is intended compensation for breach, measured in terms of the contract (Davis v. Company) The purpose of law is to “put the plaintiff in as good a position as he would have been had the defendant kept his contract” (Hardie

Co. v. Company) As a general rule, the measure of the vendee’s damages is the difference between the value of the goods as they would have been

if the warranty as to quality had been true, and the actual value at the time of the sale, including gains prevented and losses sustained, and such other damages as could be reasonably anticipated by the parties as likely to be caused by the vendors failure to

95


keep his agreement, and could not by reasonable care on the part of the vendee have been avoided (Union Bank v. Blanchard) Therefore damages in this case difference between the value to him of a perfect hand / good hand, such as the jury found he

was promised, and the value of his hand in its present condition, including any incidental consequences fairly within the contemplation of the parties when they made their contract

RatioComments What might be problematic?

What about the “positive ill effects”? What about pain & suffering? We have the pain and suffering regardless of whether or not the result of the operation was favourable – he would have suffered

even in the event of perfect performance Additional pain and suffering, caused by the faulty performance, was not addressed – mental anguish, etc. Exact calculation – uncertainty? How could uncertainty be prevented?

What about limitations? Reasonableness – not held liable for every possible consequence – limits to civil liability (scope of risk) (e.g. if the kid wanted to be a

hand model and is claiming lost future income) Limits by statute?

Is being deprived of an “expectancy” truly an “injury” the creditor has to be “compensated” for?Idea of inducement into the contract by the expectancy -

The Reliance Interest in Contract Damages – L.L. Fuller and William R. Perdue – CB2: 167Very influential contracts articleEven though the title is Reliance Interest, it’s actually Expectation Interest that is explored in detail: it is the default rule of contract damages. The authors explore the reasons why this is.

Expectation Interest is an unusual form of “compensation” in the sense that the courts are compensating the plaintiff for something he never had (versus tort law, which seeks to restore the plaintiff back to his previous state).

There are three broad main purposes in awarding contract damages: 1) Restitution Interest: promisor is not to be unjustly enriched. If the promisor has received something from the promisee, but has not fulfilled his promise, he must disgorge it. (In the event of payment before performance, this is also reliance interest.)2) Reliance Interest: to compensate the promisee for any detrimental reliance (the promisee changed his position) based on the assumption that promisor would perform (e.g. the promisee did not enter into other contracts as a result of the promisor’s promise [“gains prevented”]; or the promisee had to spend money investigating the seller’s title [“losses caused”]). The object is to put the promisee in as good a position as before the promise was made.3) Expectation Interest: to grant awards that put promisee in position he would have been in had the contract been performed. This could be specific performance or the equivalent money value. (Nb: this could, like reliance, also include “gains prevented” or “losses caused” [as awarded in V.K. Mason]. An example of “losses caused” that would be covered by expectation: the defendant failed to put his ads on billboards as promised; the plaintiff had to pay to place “fillers” on the boards.)

Lost opportunity cost could be under reliance interest (if we have proof to show that there was another opportunity, we can get the cost for performance. If we don’t have proof, we can seek damages through expectation interest). For example, doctors will charge full price for a missed appointment: they can prove they would have filled that slot with another patient. (The doctor has relied on the patient, but this also falls under expectancy.)

Why is expectation seen as an injury? 1) There is a psychological sense of disappointment (when we’re promised something, we feel “injured” when it’s not fulfilled).2) Will theory holds that law gives contracting parties a private legislative power, which should be enforced. 3) “Economic or institutional approach” – locates rationale for the expectancy principle in modern credit economy. The essence of a credit economy is that future values collapse into present values (your future promise has current value to me) – thus future breach constitutes a present loss in the sense that economic modes of thought underlying the credit economy will have attributed value to the promise of future conduct that has now been lost – thus law is not creature but, by enforcing the value of promises, is a creator of social institutions.4) “Juristic” explanation – the courts have found it wise to enforce expectation interests, for the following reasons:

1) Expectancy actually offers the most effective protection of reliance interest (reliance includes opportunity cost). It’s hard to prove existence of opportunities, which can be necessary for reliance: thus expectancy is generally better (e.g. ignoring the fact that you could have entered into another contract if the promiser hadn’t lied, how much should you have made from the contract you actually entered into? It’s generally easier to put a price tag on this, and [I think] it’s assumed that the opportunities you forewent were worth less than the one you ultimately went with. So expectancy can put you in a better position than the opportunities you missed out on).

2) Expectancy acts as a better sanction against breach of contract, since it’s more easily administered, and this stimulates business activity (because we can enter into contracts of an economic nature with confidence).

Section 90 of (Old) Restatement - Idea of inducement into the contract by the expectancy Ground for liability is reliance – I changed my position for the worse because I relied on you (lack of consideration) to my detriment – natural measure of damages is expectation

2nd Restatement - Promise Reasonably Inducing Action or Forebearance

96


(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

CML – Security Stove The defendant must pay for all the expenses that the plaintiff incurred in preparing for the show (these include expenses he made even before he

entered into the contract) – reliance measures as he was not expecting to make money off the stove, but the opportunity to meet future customers (this expectancy is impossible to calculate)

Dedek is very critical of this case – why should a shipper be held liable for promises made before their contract, why should the carrier pay for all the expenses – he did not bargain for this

Dedek sees this case as lack of reciprocity, closer to past consideration Dedek says that the court sees damages flowing from the breach, but strictly speaking the loss does not flow from the breach

CML - Security Stove & Mfg. Co. v. American Ry. Express Co., USA – CB2: 181Jurisdiction USAFacts Security Stove (plaintiff) wanted to ship a new furnace to a convention. They contracted American Ry. Express (defendant) to do so, and clearly

stipulated the date by which the furnace must arrive. The defendant failed to ship an essential part: the plaintiff could not display their furnace, thus the whole trip to the convention was useless for them. The plaintiff is seeking damages to compensate for the costs they incurred in sending the president and another employee to the convention, and the cost of the rental fee for the convention booth.

Issues Did the defendant owe damages in the form of lost expenses?Holding Yes Security StoveReasoning Ordinarily the rule for damages where the carrier fails to deliver within a reasonable time, is the difference in market value of the

goods at the time of delivery and the time when they should have been delivered However where the carrier has notice of peculiar circumstances under which the shipment is made which will result in an unusual

loss, the carrier is responsible for the real damage sustained from such delay if the notice is given is of such character, and goes to the extent, in informing the carrier of the shipper’s situation, that the carrier will be presumed to have contracted with reference thereto

The general rule is that where there is a breach of contract, the party suffering the loss can recover only that which he would have had, had the contract not been broken, and this is what the defendant relies on (although in some instances the injured party may recover expenses incurred in relying upon the contract)

The problem is that there are no lost profits here, as the plaintiff was not planning to make a sale. The only way to measure damages here is in terms of the plaintiff’s expenses

“Unless the plaintiff is entitled to recover the expenses that it went to, which were a total loss to it by reason of its inability to exhibit the furnace and equipment, it will be deprived of any substantial compensation for its loss”

Although certain expenses were initiated before the contract, (rental fee) they were done in reliance on the product being shipped in a timely fashion, it can therefore be fairly said that the damages or loss suffered by pltf grew out of the breach of contract, for had the shipment arrived on time, he would have had the benefit of the contract, which was contemplated by all parties.

Ratio While expectancy interests are the default rule for damages, in some cases (e.g. when expectancy interests don’t produce a dollar figure) reliance interests may be used instead: “the injured party may recover expenses incurred in relying upon the contract, although such expenses would have been occurred had the contract not been breached.”

Comments BRITISH CASE LAW: Pre-contractual expenses – will usually be reimbursed, see Anglia Television v. Reed [1972] 1 Q.B. 60 (C.A.)

ANNAMARIA: the court should consider when the last point was that the plaintiff could have cancelled his expenses (if he had been unable to find a carrier willing to transport his product)

Recall that the default rule in damages is expectancy, but if it is impossible to quantify expectancy, such as in this case, you can shift to reliance damages.

There is a limit to reliance damages – they cannot exceed the expected benefit of the promise!! (If you relied $1million as a result of a contract that would benefit you $100, you cannot claim $1million in reliance damages!!)

7.3 Non-Pecuniary Damages (CML) “Classical” Approach: Contract damages must be

o Compensatoryo Tangibleo Estimable

Compensatory, not punitive: punishing the wrongdoer is the purpose of criminal, not private law Tangible, not intangible: only what can be measured in money counts – again, the paradigm of the commercial transaction:

“The reasonable expectations of the parties are that the disappointed party will bear himself with a measure of fortitude, and be satisfied if he can recoup his financial loss.” (Wilson J in Vorvis)

Paradigm is outdated. Law has tried to keep up by instituting new measures:o Aggravated damages: Compensate, but also compensate for intangibleso Punitive damages: Punish and deter nature of damages no longer compensatory, but punitive. Crossing the line of compensation.

“Designed to address the purposes of retribution, deterrence and denunciation.” Fidler v. Sun Life But – remember the main paradigm for awarding damages in private law: NO WINDFALL!! Waddams: Plaintiff is, by definition, “overcompensated”

Problematic? Aggrieved party not entitled to a windfall according to classic contract law theory question is why should the innocent party benefit from this “fine” that has to be paid?

97


Expectation Measures: Ruxley Electronics v. Forsyth In measuring expectation we look at what the promisee bargained for and subtract its value from what the promisee received, i.e. a party bargained for

Quality A oranges, but got Quality B oranges. Quality A oranges are more valuable, compare the difference in value and the measure of expense of diminution of the price

In this case, Forsyth did not get what he bargained for, but the difference in value was worth 0 dollars He claimed for 21 000 pounds to break down and rebuild the pool – problem with reinstatement is that is disproportionate and seems unreasonable ,

also cannot force someone to spend the money the way he says he would But then Forsyth gets nothing, so court comes up with a third solution – amenity (cost for an extra bit of fun) – 2500 pounds This is NOT a typical remedy, but the court uses it to give a sense of justice because the alternatives are either too much or too little

Ruxley and Specific Performance What if Forsyth had asked for S.P.? court will generally not award S.P. where to do so would put great hardship on debtor (as in this case - work

required would be significant) Civil Law Is this a case “that admits of” specific performance (pursuant to Art. 1601)? Yes. Judges in CVL reject defence of hardship. But D might be able to claim P’s abuse of right. Note that CML courts care about hardship with reference to S.P, but not with reference to damages (will award COC if reasonable, even if there is

hardship). This seems inconsistent

CML - Ruxley Electronics v. Forsyth, [1995] H.L., Common Law – CB2: 374Jurisdiction UKFacts Ruxley and Forsyth had a contract for construction of pool – to be 7 feet 6 inches (agreed to increase from 6’9” half-way at no extra charge).

Completed pool was only 6 feet 9 inches (still safe for diving; value of pool not less as a result of lesser depth). Forsyth sued for damages for breach of contract. Trial judge awarded 2500 for loss of amenity. C.A. awarded 21,000 for reinstatement (cost of building new pool).

Issues Is Forsyth entitled to damages amounting to cost of reinstatement?Holding No cost of reinstatement (“cost of cure”). Trial judge’s decision restored. Reasoning General principle: use $ to put ptf in situation he would have been in if contract was performed. Doesn’t mean that ptf will always be able to

obtain $ equiv of S.P. Fundamental goal is compensation, thus no loss = no damages to be awarded

Building cases: pecuniary loss measured in 1 of 2 ways difference in value of the work done or cost of reinstatement. Cost of reinstatement is the ordinary measure.

The present depth was safe for diving. So, the fact of the stipulated depth did not reduce the value of the pool. Also, the judge found it was unreasonable to demolish and rebuild pool, as the cost would be wholly disproportionate to the advantage to be achieved. Also, the judge was sceptical that the work would be undertaken.

Cost of reinstatement must only be awarded if it is reasonable. If not reasonable, award is for diminution of value (if no diminution, no loss = no compensation)

The fact that the diminution in value of the works is nil (as in this case) does NOT make reinstatement any more reasonable. Lord Jauncey explained that the reasonableness of doing the work could be taken into account in determining the true nature of

the loss suffered. As it was unreasonable to do the work in question, the pf’s loss did not extend to the cost of reinstatement. At the same time, Jauncey indicated that if one were to award merely the diminution in value, this would enable the contractor

(promisor) to not comply with the wishes of the promisee, which, as embodied in the K, form part of the consideration for the price.

Court doesn’t care about what the dft does with his award of damages BUT intention is relevant to the reasonableness of the particular damage award – the reasonableness of awarding reinstatement depends on the genuineness of the intention to actually carry out the reinstatement work. In this case, judge found as a fact that ptf had no intention to rebuild the pool.

Court was unanimous in view that these two measure of relief are not exhaustive and that the modest award at trial for loss of amenities was a satisfactory device for compensating pf for his actual loss.

Loss of amenity: when the contract is for the provision of a pleasurable amenity, the ptf is entitled to damages for loss of pleasure/amenity (for disappointed expectations).

Ratio Cost of cure (reinstatement) will only be awarded where it is reasonable. Reasonableness depends on (1) if expenditure would be out of proportion to benefit obtained; and (2) whether ptf intends to use damages to carry out reinstatement (and thus whether he actually has suffered a loss). The fact that diminution in value of the works is nil doesn’t make reinstatement any more reasonable.

Comment If the court had awarded expectancy damages (the cost for rebuilding the whole new pool) – there was no guarantee that the plaintiff would use it to demolish and build a whole new pool. The chances of the plaintiff keeping the money and living with the pool was so great that they decided just to award damages for loss of amenity.

What was really in issue? Was it the missing inch? Cost of cure: unreasonable but the value difference is zero, and that would be a “gross injustice”. Not awarding anything would

also let contractors get away with building things that were not to their customers’ satisfaction. (Reasonability and Intention to use damages to get what originally wanted)

Alternative measure? Reasons? damages for loss of amenity This raises questions of measuring loss that is intangible – does it depend on the specific type of contract?

So... the aggrieved party must not be put in a better position than he would have been in had the contract been performed!The breach must not lead to a “windfall”Expectancy limits reliance, if defendant can prove that contract was unprofitable for the plaintiff

CML – Jarvis v. Swan Tours, [1972] 1 A.L.L. ER 71: CB2 241Jurisdiction UKFacts J books a 15-day vacation. It was his only holiday of the year. He expected 30 people at the resort, as well as adequate ski facilities, and an

98


English-speaking host. In each of these regards, the resort did not meet expectations. “During the first week he got a holiday which was to some extent inferior, and during the second week he got a holiday which was very largely inferior” [to what he expected]. He went to enjoy facilities, which were not at the resort.

Issues What is the right measure of damages for the loss of entertainment and enjoyment?Holding The right measure of damages is to compensate him for loss of entertainment and enjoyment he was promised.Reasoning Denning:

Traditionally there are no damages awarded for mental distress. Such limitations are however out of date. J has only a 2 weeks of holiday in a year, he booked it far in advance, he went to enjoy himself with all the facilities which D said he

would have. He is entitled to damages for lack of those facilities and loss of enjoyment. It is difficult to assess loss of enjoyment in monetary but it is no more difficult than the assessment the court makes in personal

injury cases in rewarding damages for loss of amenities. Ratio If the contracting party breaks a K, damages can be given for the disappointment, the distress, the upset and the frustration caused by the

breach.

Farley v. Skinner [2001] UKHL 49, [2002] 2 AC 732 (H.L.)Jurisdiction UKFacts Farley wanted to buy a retirement cottage: Riverside House, 15 miles from Gatwick airport. Raison d’être of the property acquisition: peace

and tranquility. F engaged surveyor, S, to investigate whether the property would be affected by airport noise. F didn’t want a property affected by airport noise. Surveyor reported: “We were not conscious of (noise) during the time of our inspection, and think it is unlikely that the property will suffer greatly from such noise, although some planes will inevitably cross the area, depending on the direction of the wind and the positioning of the flight paths.” F, reassured, bought the property, then spent £125,000 refurbishing and modernizing it, then moved in. After moving in, F realized the “noise on the tranquility of the property was marked.” He didn’t move out of the house.JUDICIAL HISTORY:Queen’s Bench: considered whether the defendant (S) was negligent: yes, could have checked the property’s position vis a vis Gatwick Airport, and F would not have bought. Didn’t award F with damages for diminution of property value because it was sold at the market price, considering the noise from the airport. Non-pecuniary damage: F’s enjoyment of property was significantly and negatively affected, awarded £10,000.

Issues (1) Can F recover non-pecuniary damages from S for S’s negligent failure to discover the property was afflicted by airport noise? (2) Is it sufficient to defeat F’s claim for damages that only a “major or important part of” the object (and not the entire object of the contract) of the contract was to give pleasure, relaxation, peace of mind? (3) Is it sufficient to defeat F’s claim for damages that S didn’t guarantee achievement of such an object? (4) Is it sufficient to defeat F’s claim for damages that F didn’t move out of the house?

Holding (1) Yes; (2) No; (3) No; (4) No. Farley.Reasoning “Where the very object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will

be awarded if the fruit of the contract is not provided or if the contrary result is procured instead.” (para. 14) Since F reasonably expected that S would thoroughly investigate airport noise, S is liable for loss of amenities F made it crystal clear to S that the impact of aircraft noise was a matter of importance to him. “It is sufficient if a major or important object of the contract is to give pleasure, relaxation, or peace of mind.” Issue 2: “There is no reason in principle or policy why the scope of recovery …should depend on the object of the contract as

ascertained from all its constituent parts. It is sufficient if a major or important object of the contract is to give pleasure, relaxation or peace of mind.”

Issue 3: “It is a singularly unattractive result that a professional man, who undertakes a specific obligation to exercise reasonable care to investigate a matter judged and communictated by his customer to be important can “please himself whether or not to comply with the wishes of the promise which, as embodied in the contract, formed part of the consideration for the price.”

Issue 4: F’s not moving out did not divest him from making a claim for non-pecuniary damages. S failed to show that F cannot claim non-pecuniary damage

Ratio Evolution of the “peace of mind” idea does not have to be the object. Can now be an essential element.

8.2.3. Evolution of Damages in Canadian CML

Recovery where distress is within the reasonable contemplation of the parties (applying the Hadley Test): Vorvis to Fidler Compare Art. 1458 & 1613 CCQ

o Comparison of a case like Jarvis to a normally commercial transaction business people striking a deal is a different animal than a person taking a vacation

o People in business carry themselves “with fortitude” and are satisfied with money damages, but the difference between a vacation and a business transaction is that the business transaction has money as its object, but the vacation has intangibles (pleasure, enjoyment, etc.) as their object. Pleasure is commercialized, because you buy a vacation, but compensation for the loss is not just getting a measure back of the price paid – the compensation must take the loss into account somehow.

CML – Vorvis v. Insurance Corporation of British Columbia [1989] S.C.R.Jurisdiction BCFacts Appellant: 54 year old solicitor who was dismissed for incompetence, but as the trial judge determined, it had no cause for dismissal.

JUDICIAL HISTORY:Trial: Damages awarded for wrongful dismissal but rejected certain other claims for lost pension rights, mental distress, and aggravated and punitive damages.Appeal: Allowed the appeal in so far as it related to the 6 weeks’ additional salary, but it unanimously dismissed the appellant’s claim for mental distress. The judge would have allowed punitive damages in the amount of $5,000 because of the conduct in terminating the employment contract.

99


IssuesHoldingReasoning McIntyre J:

Pension Rights Respondent had established a pension plan for its employees with a vesting period of 10 years. The appellant was not in the

employment for the required 10-year period. The appellant was dismissed 2 years and 7 months before the time for vesting, when reasonable notice could not have exceeded one year. His right was to have a refund of his contributions with interest to the date of termination.

The law has long been settled that in assessing damages for wrongful dismissal the principle consideration is the notice given for the dismissal. A contract of employment does not in law have an indefinite existence.

I. Aggravated damages Appellant claims for mental distress as the result of the termination of his contract of employment in those terms: distress, anxiety,

vexation and frustration. Distinction between punitive and aggravated damages:

1) Punitive: are designed to punish and constitute an exception to the general common law rule that damages are designed to compensate the injured, not to punish the wrongdoer. Only used when the conduct merits punishment.2) Aggravated: frequently cover conduct which could also be the subject of punitive damages, but the role of aggravated damages remains compensatory, but take full account of the intangible injuries, such as distress and humiliation, that may have been caused by the defendant’s insulting behaviour.

Reference to the case Addis v. Gramophone Co. in which the plaintiff was wrongfully dismissed from his employment and although the employer gave him appropriate notice, his replacement arrived right away and prevented him from performing and earning his full remuneration. This termination was deemed to be injurious to the plaintiff’s business reputation and caused distress.

Majority of the Court found that the jury could not award more than salary lost during the notice period. In a case of wrongful dismissal, damages are limited to the earnings lost during the period of notice to which the employee is entitled and cannot include damages for the manner of dismissal. Contrast this judgment with cases such as Jarvis v. Swans Tours Ltd. in which damages for distress have been allowed. In the present case, we should follow the rule established by Addis v. Gramophone Co. However, Court is cautious when dealing with aggravated damages: they can be awarded in some cases, particularly when the acts complained of are also independently actionable (not the case here).

If a course of conduct by one party causes loss or injury to another, but it is not actionable, that course of conduct may not be a separate head of damages in a claim in respect of an actionable wrong. Damages, to be recoverable, must flow from an actionable wrong.

Conduct of the employer was offensive and unjustified, any injury it may have caused the appellant cannot be said to have arisen out of the dismissal itself.

Conduct complained of preceded the wrongful dismissal and therefore cannot be said to have aggravated the damage incurred as a result of the dismissal.

II. Punitive Damages Scope of punitive damages was restricted in the CML namely to abuse of power and torts committed for profit. In Canada,

jurisdiction to award punitive damages is not so limited (ex: defamation). Cannot be awarded for conduct that the Court strongly disapproves: need for a justification in law. The only basis: a finding of the commission of an actionable wrong which caused the injury complained of by the plaintiff. Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which

punitive damages are recoverable (ex: conduct refusing medical care is abusive and tortuous in nature because of a negligent disregard to provide care).

Was the trial judge right in concluding that no punitive damages can be granted? Conduct must be extreme (harsh, vindictive, reprehensible and malicious), but cannot be found in the defendant.

Conclusion: appeal should be dismissed with costs.

Wilson J (dissenting in part):Lost pension: agree with McIntyre that the claim for lost pension rights is without merit.

Punitive Damages Differ in result with McIntyre only on the issue of punitive damages. If exemplary damages can be awarded in a wrongful dismissal case, Wilson J would award them here. Mr Reid (Vorvis’ superior) was indifferent to the plaintiff’s feelings, set up productivity meetings, which became an inquisition.

Pressure on the plaintiff who became tense, agitated and distressed and resorted to medical treatment 2 months before his dismissal.

Long standing prohibition against punitive damages in contract based on the sole notion that contract damage is to compensate the plaintiff Uncertainty in the jurisprudence.

Therefore the general rule that punitive damages are forbidden in claims in contract should be reserved. Canadian courts, as well as courts in Australia and New Zealand have not adopted the restrictive approach to punitive damages in

tort. Wilson does not share the view that punitive damages can only be awarded when the misconduct is in itself an “actionable wrong”.

Instead: assess the conduct in the context of all the circumstances and determine whether it is deserving of punishment because it is shockingly harsh, vindictive, reprehensible or malicious nature.

Closeness engendered by some contractual relationships in which there is a marked disparity of power between the parties seems to give added point to the duty of civilized behaviour.

100


In this case: reprehensible conduct form the part of the respondent toward a sensitive and dedicated employee: inquisitorial practices, duress, attempt to damage the plaintiff’s reputation, persistent allegations of incompetence.

Trial judge’s decision to award $5,000 is a reasonable one. It reflects the court’s awareness and condemnation of flagrant wrongdoing and indifference to the legal rights of other people.

Damages for Mental Suffering Agree that in distinction to punitive damages, they are essentially compensatory. Different reasoning to determine whether they can be awarded in this case. Believes that although it has been established that damages for mental suffering are not available in breach of contract because

damages in contracts must be tangible and estimable, this approach is “no longer the law”. Notion that the parties should reasonably have foreseen mental suffering as a consequence of a breach of the contract at the time

the contract was entered into: test based on Denning’s judgement for the Jarvis case: difficulty of assessment should not deter the courts when the plaintiff has a just cause.

Such damages are properly awardable in contract provided they conformed to the normal rules of remoteness of damage in contract.

Rule from Restatement of the Law of Contracts: “Damages will be awarded for mental suffering caused by the wanton or reckless breach of a contract to render a performance of

such a character that the promisor had reason to know when the contract was made that breach would cause such suffering, for reasons other than pecuniary loss”

Most important type of contract in which damages for mental distress have been awarded is the employment contract. Wilson disagrees that conduct advanced in support of a claim for damages for mental suffering must constitute a separate

“actionable wrong”. She also disagrees that because the conduct complained of preceded the wrongful dismissal it cannot aggravate the damages

resulting from that dismissal. Instead, we should apply basic principles relating to remoteness of damage: in this case, mental suffering would not have been in

the reasonable contemplation of the parties at the time of employment contract was entered into as flowing from the appellant’s unjust dismissal. such damages should be denied.

Ratio

CML – Fidler v. Sun Life Assurance Co. of Canada [2006] SCC 30Jurisdiction Ontario?Facts Fidler, employee at Bank, got sick and could not work, thus was entitled to insurance from Sun Life. Contract said she was entitled to insurance

benefits for 2 years if she could not do her own job, and longer if she could not do ANY job. Sun Life engaged in “non medical investigation” of Fidler to ascertain the extent of her disability. Found that she was active, leading Sun Life to conclude that she could work. Sun Life thus denied benefits, even though Fidler’s doctor told her she was still disabled. Fidler commenced action against Sun Life for arrears of insurance payment, aggravated damages, and punitive damages.JUDICIAL HISTORY:TRIAL: Sun Life granted the insurance money just before trial, so action was for aggravated damages and punitive damages only. 20,000 awarded for aggravated damages. No punitive damages granted.APPEAL: Court concluded this was a “peace of mind contract” thus there were recoverable damages (aggravated damages upheld). $100,000 awarded for punitive damages (in dissent: Sun Life was not malicious, so no punitive damages!)

Issues Is Fidler entitled to Insurance Benefits from Sun Life? Was the object of this contract to secure a psychological benefit? Was Fidler’s suffering, as a result of Sun Life cutting off benefits, sufficient to warrant compensation?

Holding Yes; Yes; Yes Fidler.Reasoning Classically, no compensation for mental distress/suffering as a result of contractual breach

Hadley test: was the damage “such as may be reasonably supposed to have been in the contemplation of both parties at the time they made the contract as the possible breach of it”

This is a general principle, so there is no distinction between mental damage and economic damage. If a contract is for pleasure, relaxation, peace of mind, and it is not delivered, then the court will award damages for aggravated

damages. Jarvis: “peace of mind exception” Farley: lowered the standard from “the very object of a contract” to “a major or important part of a contract.” Vorvis: peace of mind contracts should be seen as an expression of the general principle of compensatory damages in Hadley rather

than as an exception to that principle. The court should ask “What did the contract promise?” Peace of mind case. NOT ALL mental distress is compensable. Only if the object of the contract was to secure psychological benefit

Classically, courts reluctant to grant damages for mental distress for two reasons:(1) Mental suffering is not in the contemplation of the parties at time of contract.(2) Mental anguish can come from things OTHER than the breach of contract.

Hadley: Unites all forms of damage under a single principle.

Question 1: Was the object of this contract to secure psychological benefit? YES This was not a mere commercial contract It was to ensure intangible benefit: income security (money peace of mind) Peace of mind was reasonably foreseeable as a result of performing Mental distress flowed from the breach

Question 2: Was the suffering sufficient to warrant compensation? YES

101


Fidler suffered a substantial loss over a period of five years. While arrears were paid, it did not compensate for the anguish of those five years spent in financial uncertainty.

Punitive Damages

Sun Life did not act in bad faith Punitive damages are for retribution, deterrence, and denunciation In order to qualify as bad faith, the actions must depart from ordinary standards of decency Incorrectly denying an insurance claim is not bad faith Sun Life’s conduct was troubling, but not sufficiently so to justify granting punitive damages.

Ratio If, in a contract for peace of mind, it is a foreseeable consequence for both parties that breach of contract would lead to mental distress, then the plaintiff is entitled to collect for aggravated damages, as per the Hadley test.

8.2.4. Penalties and Liquidated Damages (CML)

Liquidated damages are enforceable Penalties, which are only meant to deter from a breach (“in terrorem”) are not enforceable

o How to distinguish? The classic common law test:

Is the stipulation a bona fide attempt to pre-estimate damages? In that case, the clause is a liquidated damages clause enforceable

Penalties vs. Liquidated Damages:

Why do parties include stipulations as to possible damages in their contracts?o So they don’t get “stuck with something ridiculous” (Feldman)o So there is a foreseeable amount of damage that the court doesn’t have to (expensively) try to work it outo To induce adherence to the contract

Why are courts concerned with the decisions the parties make regarding those stipulations?o Potential abusive nature of the penaltieso (We are typically worried about this stuff in cases of lesion, etc., where there is a significant differential in bargaining power)o Because this STILL goes against the rule that there should be no windfall for the innocent party

Why doesn’t the civil law care about the distinction between liquidated and punitive damages?o General obligation of good faith not opposed to the institution of penalty – you can agree to a penalty in a civil law contracto However, in the common law, the test is “Is it liquidated damages?” if yes, you’re fine; “Is it a penalty?” if yes, you’re fucked

penalties are ALWAYS UNENFORCEABLE!!

Clarke v. Thermidaire

Does Laskin apply the classic test? What is the modification? “Reasonability” Why is it of any concern whether Thermidare previously sought an injunction or not?

o Duty to mitigate damages – take steps to fix the problemo Strikes Dedek as a weird transfer of responsibility from the party in breach to the innocent partyo However what about intention? If the breach was so detrimental, wouldn’t Thermidaire have wanted to stop it right away?

How should the parties quantify “intangibles”?

H.F. Clarke Ltd v. Thermidaire Corporation Ltd., [1976] 1 S.C.R. 319Jurisdiction CanadaFacts HF Clarke was Thermidaire’s exclusive distributor in a large territory in Canada. In 1966, the parties replaced their original contract with a 2nd

contract. First contract contained restrictive covenants, one regarding competition during the contract and the second regarding competition during the 3 years after termination or cancellation.1966 (2nd) contract:(1) Omitted references to the territory and to the 3 year period. It simply stated that HF Clarke promised not to sell any competitive products during the currency of the contract. (2) HF Clarke was liable for liquidated damages in the amount of gross trading profit realized from the sale of competitive products if he terminated or breached the contract, and promised not to compete with Thermidaire for three years after the date of cancellation. Thermidaire terminated the contract and HF Clarke sued for wrongful termination. Thermidaire counter-claimed for damages under the non-competition clauses. HF Clarke had continued to sell competitive products contrary to the terms of the contract, and dropped his claim for wrongful termination.JUDICIAL HISTORYTrial and CA: both contracts and the formula for awarding damages were found reasonable. At trial and appeal, Clarke was found to have broken the contract by selling competitive products during the term of the contract, and by selling competitive products after termination.

Issues (1) Were the covenants valid? (2) Was the formula for damages a measure of liquidated damages or a penalty? (3) Should certain products not be taken into account in assessing damages?

Holding (3-2) Appeal allowed for HF Clarke Thermidaire entitled only to claim for provable damages for breach, not the amount to which it would have been entitled under the formula established for the calculation of liquidated damages.

102


Reasoning Laskin CJ, Judson and Spence JJ:(1) Were the covenants valid due to no territorial limitation?

CA had rectified the absence of territorial limitation due to mutual mistake, and the covenant was amended by including the words “in the territory”.

Majority did not find any reason to interfere with the rectification, and found the covenants valid and reasonable.(2) Was the formula for damages a measure of liquidated damages or a penalty?

HF Clarke broke the contract during its currency by selling competitive products and had also sold competitive products in the 3 year period after termination of the contract. Thermidaire was found to have been entitled to terminate the contract.

Thermidaire had not asked for an injunction to stop HF Clarke from selling competitive products during the 3 year anti-competition period. It might have avoided some of the damages it is now claiming for.

HF Clarke continued to sell competitive products, and thus put itself at the risk of being called to account under the formula for post-contract damages.

Thermidaire is entitled to damages for breach during the currency of the contract loss suffered by Thermidaire by reason of sales by HF Clarke of competitive products and not bought from Thermidaire.

The appeal was whether or not the formula used represeneted “a genuine attempt by the parties to pre-estimate the loss as best as they could within their special knowledge of the circumstances.

represented a keen effort by the parties, however if the court finds that the result was a penalty, it can step in and figure out what the actual liquidated damages would have been. formula of gross trading profit (about $240,000) is not reasonable because it does not take into account elements of costs and expenses which would be taken into account to arrive at net profit (calculated at about $92,000). In this case, the exaction of gross trading profits is considered a penalty because it is a “grossly excessive and punitive response to the problem to which it was addressed; and the fact that the appellant subscribed to it, and may have been foolish to do so, does not mean that it should be left to rue its unwisdom”. Martland and Dickson JJ, dissenting

Agree with the holding of the Court of Appeal – would dismiss the appeal with costs.Ratio A lump sum or amount arrived at by a formula, if considered unreasonable and excessive by the court, will be considered a penalty and not

“liquidated damages”, even if both parties have agreed that it should be called “liquidated damages”. The court can re-assess what liquidated damages would have been, and refuse to award the amount arrived at by the parties on their own. Liquidated are meant to reflect the dollar amount of damages arising from the breach of the contract. A penalty does not have to reflect actual loss – it is a punitive measure that the parties agree to.

Liquidated Damages, Penalties, and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach – C.J. Goetz & R.E. Scott (p. 300)

The authors present an economic efficiency argument for changing the penalty enforcement rules in contract law to allow parties to “insure against otherwise non-compensable consequences of breach”.

Modern contract law is concerned with “efficiency” rather than “fairness” – it gives an incentive for “efficient breaches” to be made by refusing to award penalties. However, the authors argue, letting one party breach and pay damages that the law limits to demonstrable losses directly resulting from the breach is not necessarily any fairer or more efficient. The authors argue that penalty clauses, were they to be enforced, would split the gains between the breaching party and the innocent party, or give the gains to the innocent party, redistributing the costs of the breach and leaving society no better and no worse off.

Breach happens when one party believes that paying compensation is a better alternative for him than performance. This leaves the innocent party at a disadvantage, especially when performance would have given him gains that are difficult to quantify. If the parties agree ahead of time on substantial overcompensation as a penalty for breach, this leaves the innocent party better off. It also gives the innocent party bargaining power to induce specific performance. This hypothesis assumes the absence of significant negotiation costs.

The current penalty rule imposes additional transaction costs on cases where true losses from breach are uncertain, because the party who is disadvantaged by the breach has to try to prove their losses

8.2.5. Penalties vs. Liquidated Damages (CVL)

QC CVL: does the distinction matter? Quebec Civil Law: Does the distinction matter?

ANTICIPATED ASSESSMENT OF DAMAGES 1622 CCQ: A penal clause is one by which the parties assess the anticipated damages by stipulating that the debtor will suffer a penalty if he fails to

perform his obligation.A creditor has the right to avail himself of a penal clause instead of enforcing, in cases which admit of it, the specific performance of the obligation; but in no case may he exact both the performance and the penalty, unless the penalty has been stipulated for mere delay in the performance of the obligation.

1623 CCQ: A creditor who avails himself of a penal clause is entitled to the amount of the stipulated penalty without having to prove the injury he has suffered.

103


However, the amount of the stipulated penalty may be reduced if the creditor has benefited from partial performance of the obligation or if the clause is abusive.

“Abusiveness” is taken into account even if the contract in question is neither a consumer contract nor a contract of adhesion 151276 Canada c. Gilles Verville: Reduction of an abusive clause (discretionary)

151276 Canada Inc c. Verville Clause is valid, but the court reduces the sum that is asked by the owner. They found a new tenant, it’s not like they could not rent out the place

anymore. They should not benefit from the tenants’ breach of the contract. No sophisticated doctrine, it all comes down to good reasoning by the courts. Clauses can be included, but they have to be somewhat fair. A reduced penalty clause might make more sense economically. Different from the CML

which forbids all penalty clauses. But story is more complicated, because the owner was to rent a more expensive locale to the person who eventually rented the space in question.

151276 Canada Inc. c. Verville [1994] R.J.Q.Jurisdiction QuebecFacts The defendants (151276 Canada Inc) rented a commercial space from V, but left less than 1 year into the 5-year lease, damaged the property

on the way out, and stopped paying rent. The plaintiffs asked for payment of the entire amount due under the lease, including the rent unpaid up to the date of abandonment, and, according to the penal clause, “as liquidated damages and indemnity equal to the total aggregate amount of all the rentals for the remainder of the period of this lease.” Defendants claimed that they had agreed with the plaintiffs’ rep that the lease would be at an end if they paid $6000, and that the plaintiffs had another tenant lined up to take over the space. The plaintiffs deny that they had agreed on this, and said that the defendants had asked for resiliation of the lease upon payment of $3000, which the plaintiffs did not agree to. The defendants subsequently abandoned the premises and stopped paying rent.

Issues (1) Does the landlord have the obligation to mitigate damages? (2) Can the landlord claim double payment of the rent in damages? (3) Are the parties bound by the amount discussed as a removal fee?

Holding The court awards the landlord 14 months of rent in damages, plus 6 months as a penalty.Reasoning The tenants are not beginners and know what’s up with a commercial lease

It’s enough for the creditor to allege and prove that the debtor has not fulfilled his obligation to give rise to the agree-upon penalty. He is not held to prove that he has suffered losses.

The contract is law between the parties except if they can show that it is against public order or partially or wholly invalid. However, in order to be valid, the penalty clause must stipulate a clear object or sum of money.

Articles 1622 to 1625 CCQ 1623 CCQ Jean-Louis Beaudouin: “il restera à la jurisprudence à definer et préciser ce que l’on doit entendre ici par abus.” 3 sorts of abusive clauses:

1) Lesion – disproportion between the penalty and the damage actually suffered2) Abuse resulting from exploitation or bad faith3) Abuse resulting from an unreasonable stipulation at the moment of breach

In this case, the third kind of abuse is happening. Has the landlord lost money? He was supposed to rent a bigger space for more money to a third party who has taken over the lease

of the defendants loss In this context, the penalty clause was for the equivalent of 4 years and 2 months of rent at the moment of breach, this amount

was clearly unreasonable The court awards the landlord 14 months of rent in damages, plus 6 months as a penalty.

RatioComments Reduction of a penalty clause might make more (economic) sense than a blanket ban of all “in terrorem” clauses, period.

There is no “sophisticated doctrine” about this – it comes down to good reasoning and judicial discretion based on persuasion.

9. Third Parties and the Relative Effect of Contracts

CVL and CML diverge on the idea of the effect of K on 3rd parties. Starting point: Both systems agree that a K is born in the will of the parties It creates obligations and rights based on assent Should then a person who is not a party to the K, they did not have a chance to assent to it, be effected by K?

9.1.CVL ApproachCVL Approach:

A person who receives a right or benefit from a K should be able to enforce that benefit in their own right. The K'ing parties chose to give 3rd party a right. The right belongs to them. See CCC 1443 and 1444. 3rd parties may enforce terms of agreement that provide them a benefit. Note that no one may bind a third person without their consent. This would be slavery.

CVL - General Motors Products of Canada Limited v. Kravitz [1979] 1 S.C.R. p. 323 CBJurisdiction Quebec

104


Facts Kravitz bought car from GM dealer, Planmodon. Complained of defects on receipt of car. Planmodon made repairs to vehicle with GM's knowledge on several occasions, never able to fix problem. Kravitz returns car, is reimbursed purchase price. Brought action against Planmodon and GM seeking nullity of K of sale, refund of purchase price and damages. Superior court found in favor of Kravitz, reduced damages. Court of Appeal upheld judgment. GM appealed to SCC on point of law, questioning extent of liability of manufacturer to purchaser for latent defects.

Issues Are manufacturers liable for latent defects in products? Can this liability be actioned by subsequent purchasers?Holding Yes and YesReasoning Reasoning: manufacturers liable for latent defects in products: Code Civil du bas-Canada article 1527 (don't have CCC on me, someone look up

the concordance?) Can Kravitz avail himself of this article? Raises 3 issues: 1) GM has a no warranty stipulation in K of sale 2) GM offers conventional warranty which allows only replacement or repair, not damages 3) K between GM and Planmodon contains implied warranty of a. 1527. Kravitz not party to K.

No warranty stipulation: Stipulation in K seeks to repudiate 1527. Important not to allow a professional seller (either GM or Planmodon) to take advantage of a non-professional buyer. Manufacturer and seller have duty to inform non-professional buyer of defects in product, 1527 creates presumption they know of latent defects. This duty can not be contracted out of.Conventional warranty: Conventional warranty effectively contracts out of duty imposed by 1527. Illegal and therefore null and void. Does 1527 apply only between manufacturer and seller, or can customer avail himself? Some rights so closely associated with a thing as to follow it. Warranty against latent defects is tied to the thing, follows it to successive purchasers.

Ratio Manufacturers are liable to subsequent purchasers for latent defects.

9.2.CML Approach

All contracts must be bargained for – the consideration is the price of the contract Rights and obligations must mirror each other – the benefit must follow from the consideration and vice versa 3rd parties receive a benefit without consideration There is therefore no K to which 3rd person is a party – they are a stranger to the contract Accordingly, third parties have no right to sue for damages or performance. The contracting party must sue for them. Related problem: Damages restore the aggrieved party to the state they were in but for the breach. Where A has promised to B to --pay C for B's

service, if A does not pay, what is B's loss? Nothing! B was not to receive any payment at all. Therefore, B can only receive nominal damages. This is seen as grossly unfair: A gets benefit of the bargain without cost. CML solution has been to allow B to sue for specific performance in equity.

CML - Beswick v. Beswick, [1966] 3 WLR 396Jurisdiction UKFacts Peter Beswick was a coal merchant in Lancanshire – no business premises, just scales and weights. His nephew, Joseph Beswick, helped him in

the business. As Peter was old and ill, Joseph wanted to have the business transferred to him before Peter died so they drafted an agreement. Business would be transferred to Joseph who had to employ Peter as a consultant for L6 a week and after Peter’s death, pay widow an annuity of L5 a week from the business. Joseph honoured the agreement including paying widow once P died but stopped paying her after a while. She sued, claiming specific performance (want the appointment of a receiver)

Issues Can wife sue in her own right or is she barred by privity and thus sue only as administratrix of estate?Holding Appeal allowed Nephew must pay widow the annuityReasoning Denning J:

Specific performance enforced The rule that “no third person can sue on a contract to which he is not party” is just a procedural rule: “It goes to the remedy, not

to the underlying right” Denning believes that the contract was binding unless there was fraud or inducement of some sort Refers to Dutton v. Poole (CML) in 1678 where a father promised a son that he wouldn’t cut down the trees on the land as long as

the son paid L10 000 to the daughter. When the father died, the son refused to pay and the daughter sued and won case showed that both the executor and the one harmed can sue

Although a third person cannot as a rule sue in his/her own name, s/he can bring the action in the name of the contracting party suing the other party for breach of the promise

CML says you have to pay – third person can sue in equity to enforce the contract Promise by nephew to pay widow was “thing in action” s. 205 of Law of Property Act statute and could be enforced by action of the

contracting party He cannot deny her the benefit of the contract simply because she was not a party to it The Widow can enforce the promise in her own right But for procedural reasons, she has to sue in the name of the contracting party (in this case: the estate) or jointly

Ratio CASE OVERTURNED IN HOUSE OF LORDS…CML - Beswick v. Beswick, [1968] HLJurisdiction UKFacts Same as above.Issues Can the widow enforce the agreement when she was not a party to the agreement? Can she enforce specific performance?HoldingReasoning Lord Reid:

The contract does not confer a right on the third person (the widow) The widow, therefore, cannot sue in her own right, but only in her capacity as administratrix of her deceased husband’s estate. This leads to problems because it can only give rise to damages, which were nonexistent because there was no loss to the estate as

105


a result of the breach The CML has been radically altered by s. 56(1) of the Law of Property Act 1925 and the section entitles to sue in her personal

capacity and to recover the benefit provided for her in the agreement although she was not a party to it Specific performance awarded because it would be unjust not to award it – there is no tangible damage, except to the widow, who

has no standing to claim. This is an equitable remedy.Ratio Third parties cannot sue in their own name.Comments In suing as administratrix, she would be suing for damages, not for specific performance damages would be… what? Nothing, if

the service contracted for was a service to a third party. The estate didn’t suffer any loss, so can’t claim damages.

CML - London Drugs Inc. v. Kuehne & Nagel International Ltd. [1992] 3 S.C.R. 299.Jurisdiction QuebecFacts LD delivered transformer to K&N to store. Signed agreement for storage with limitation of liability clause stating warehousemens' liability on

any package limited to $40, unless pay additional charge. LD does not pay extra. 2 employees of K&N attempt to move transformer, but negligent in care. Transformer is damaged in process. LD sues alleging breach of K and negligence. Trial court held employees personally liable for damage to transformer. On appeal, employees found not liable. Appealed by LD to SCC on issue of liability of employees.

Issues Did employees owe duty of care to LD and if so, can they avail themselves of limitation of liability clause in K between LD and K&N?Holding Yes and Yes K&N.Reasoning Q1 not discussed in casebook.

Q2: Privity of K established rule of law. Courts may not make radical changes to law, but have duty to make incremental changes to keep in line with social values. Relaxing Privity is not a major change and one courts should make in this case.

No concerns about double recovery, floodgates, reciprocity or right to vary or rescind K.

“Where an employer and a customer enter into a K for services and include a clause limiting the liability of the employer for damages arising from what will normally be conduct contemplated by the contracting parties to be preformed by the employer's employees... there is simply no valid reason for denying the benefit of the clause to employees who perform the contractual obligations.” (p. 313 CB).

Allowing liability in tort would circumvent the limitation of liability clause's purpose. SCC held in Central Trust co. v. Rafuse that this is impermissible. Allowing liability in tort despite limitation clause would effect fundamental alteration of K.

Policy reasons: Limitation of liability makes good commercial sense; encourages parties to appropriately allocate risk via insurance. Employees do not expect to be subject to unlimited liability.

Ratio Employees can benefit from a limited liability clause in K between employer and customer where: 1) clause must expressly or impliedly extend benefit to employees seeking to rely on it and 2) employees acting in course of employment and performing very service provided for in K when loss occurs.

Contracts (Rights of Third Parties) Act [1999] C. 31British Act of Parliament. Key sections:

s.1 (1) 3rd parties may enforce terms in own right if K expressly provides he may or b) term purports to confer a benefit on him

– 1b) does not apply if appears parties did not intend term to be enforceable.3rd party must be expressly ID'd in K(5) 3rd party has rights available as if party to K(6) limitations of liability apply to 3rd parties(7)(2)(1) where 3rd party has right under 1, parties to K may not vary or rescind without consent of 3rd party if 3rd party has assented to term of promise, promisor is aware 3rd has relied on term, promisor can be reasonably expected to have foreseen 3rd party would rely on term and 3rd party has so relied. (7)(2)(2) “Assent” includes words or conduct, if sent by post or other means, not regarded as communicated to promisor until received by him. (7)(2)(3) – 7.2.1 does not apply where term expressly allows rescission or revision w/o consent of 3rd party or parties create other conditions for consent, replacing s.1 a-c.(4) courts or tribunals may dispense with consent where 3rd party can not be reached or is mentally incapable of giving consent, or where unable to ascertain if 3rd party reasonably relies on term. if court dispenses with consent, may impose terms or conditions feels appropriate.

106


Oliver Wendel Holmes, 1987. The Path of the Law. The Harvard Law Review X8. CB p. 340

Article deals with separation between law and morality and “the business of law.”

Business of law is prediction of “the incidence of the public force through the... courts.”In order to be good at predicting the law, we need to think clearly about itchief bar to this is to confuse morality with lawwords often share both contexts, i.e. negligence, malice, but have different meaning. Correct standard to take in understanding law is the “bad man.” cares not a whit for morals or ethics, is only deterred by threat of public force.In interpreting law, we look only to what is likely to engage this force.Example: Ask fundamental question, “what is the law.” Some reply with logical axioms or divine law. Bad man cares nothing for these. Only cares about rules applied by district court. Therefore, law is the rules applied by district court. Or malice: In morals imports an intent to harm and ill will. In law, need only false statements calculated to cause harm, no need for ill-will.

Grant Gillmore. The Death of Contract. 1974. Ohio State University Press. CB p. 348.

Contract law in state of doctrinal disintegration. Not an invaluable thing. “Our observation of how the general theory of contract was put together and how it fell apart may stand us in good stead when next we feel ourselves in a mood to build something.”Analogy to literary studies to situate current state of lawClassical and Romantic periods.Classical concerned with constructing elaborate theories of everythingRomantic with breaking all the rules and focusing on creativitythe two are cyclical. We are likely heading into a romantic period, but there will come a new “classical Langdell” to rebuild K theory.

107


I INTRODUCTIONCVL - Bruker v. Marcovitz [2007] STATUTE: 2nd Restatement § 1, 1372, 1378, 1385, 1410-1414, 1590, 1607 CcQDOCTRINE: Smith, Watson, Brierley, Berger, Kennedy, Kidner, Ibbetson, Zimmermann, L'Heureux-Dubé, Gordley

II Formation of Contract: Moment of Responsibility IntentionCML – Carlill v. Carbolic Smoke Ball Co. [1893] 1 Q.B. 256 (C.A.): CB 113CML – John D.R. Leonard v Pepsico, Inc. US District Court, NY (2000): CB 108CML – Kleinwort Benson Ltd. v. Malaysia Mining BHD. [1989] 1 All E.R. 785 (C.A.): CB 1

Offer and AcceptanceTemporal and Spatial Dimensions of Offer and AcceptanceCML – Pharmaceutical Soc. of G.B. v. Boots Cash Chemists Ltd. [1953] 1 Q.B. 401 (C.A.): CB 211CML – Entores v. Miles Far East Corporation, [1955] 2 Q.B. 327 (C.A.): CB 191CML – Shatford v. B.C. Wine Growers Ltd., [1927] 2 D.L.R. (B.C.S.C.): CB 190

CML – Errington v. Errington and another, [1952] 1 K.B. 290 (C.A.): CB 193CVL – Dawson v. Helicopter Exploration Co. [1955]CVL Approach to Unilateral Contracts

The Mirror Image and the Battle of the FormsCVL – C.U.Q. v. Construction Simard-Beaudry, [1987] R.J.Q. 2020 (C.A.): CB 185CML – Doughboy Industries Inc. (1962) 233 NYS 2d 488 (C.A.): CB 181CML – Raffles v. Wichelhaus (1864) 2 H. & C. 906 (Exch.): CB 142CVL - Terrace Holdings v. Saunders [1989]

Alternatives to Legal ContractsThe Option Contract 18CVL – Cere c. Neely, [1980] C.S. 1160: CB 206Agreements to Agree 19CML – Empress Towers v. Bank of Nova Scotia (1991), (B.C.C.A.): CB208

III Consideration and FormalitiesThe Civil Law and FormalismCauseCVL - Hutchison v. Royal Institution (McGill), [1932]

The Common Law and ConsiderationAtiyah, “Consideration: A Restatement” [excerpts]: CB 215

The Bargain Theory in Clear SituationsCML – Holt v Feigenbaum, 52 N.Y. 2d 291 (N.Y. 1981): CB 225CML – Hamer v. Sidway (1891), 124 N.Y. 538 (C.A.): CB 221

Past Consideration and the Bargain TestCML – Roscorla v. Thomas (1842), 3 Q.B. CB 230

Bargain Test and the Peppercorn TheoryCML – White (Executor) v. William Bluett (1853), 23 L.J. Ex. 36: CB 220CML – Miami Coca-Cola Bottling Co. v Orange Crush Co.

MutualityCML – Wood v. Lucy, Lady Duff-Gordon (1917), U.K. (C.A.): CB 228

Mutual Obligation Unilateral CasesCML – Dahl v. HEM Pharmaceuticals Corp., (1993), U.S. (C.A.): CB 228CML – Stott v. Merit Investment Corp. (1988), U.S. (C.A.): CB 232

Pre-Existing DutyCML – Harris v. Watson (1791), 170 E.R. 94 (H.L.): CB 231CML – Kirksey v. Kirksey 8 Ala 131; 1845 Ala.: CB 245

Promissory EstoppelCML – Gilbert Steel Ltd. v. University Construction Ltd. (1976), (C.A.): CB 23CML – Williams v. Roffey Bros and Nicholas Ltd., [1991] 1 Q.B. 1 (C.A.): CB 238

108


CML – Central London Property Trust v. High Trees House, [1947] K.B. 130: CB 236

Synthesis and analysisCML – Walton Stores (interstate) Ltd. v. Maher., (1988) C.L.R. 387 (H.C.A): CB 241

IV Contract Drafting and Contract InterpretationGerman Doctrine of “Culpa in Contrahendo”Fact Pattern from Class: CML – Royal Bank of Canada v Kiska

Policing the AgreementInstitutionalized Protection of Weaker PartiesContract Planning: MacNeil, “A Primer of Contract Planning”CVL - Dell Computers v. Union des consommateurs, [2007]

Problems with Not Understanding or Not Reading TermsIncorporation of Terms: Unsigned DocumentsCML - Thonton v. Shoe Lane Parking, [1971]CML – British Crane Hire Corp. v. Ipswich Plant Hire Ltd., [1975] Q.B. 202 (C.A.): CB 290CML – McCutcheon v. David MacBrayne Ltd. [1964] 1 All E.R. 430 (H.L.): CB 287

Doctrine of Good FaithScermaier, BONA FIDESDoctrine of Good Faith: The Civil LawDoctrine of Good Faith: Common LawCML –Bentley Ltd. v. Harold Smith Motors Ltd., [1965] 2 All E.R. 65 (C.A.): CB 294

Good Faith in Quebec Case LawCVL – B.C.N. v. Soucisse, [1981] 2 S.C.R. 339: CB 295CVL – Houle v. CNB, [1990] 3 S.C.R. 122: CB 314CVL – Provigo Distribution v Supermarche ARG. [1998] R.J.Q. 47 (C.A.): CB 344CML traditionsCML – McKinlay Motors Ltd. v. Honda Canada Inc. (1989), 46 B.L.R. 62 (Nfld. S.C.): CB 308CML – Martel v. Canada, [2000] 2 S.C.R. 860: CB 336

Calls for tendersCML – Transamerica Life Canada Inc. v. ING Canada Inc., [2004] CB 352

V. Policing The Agreement

Is the Contract Void or Absolutely Null? Relative Nullity vs Absolute NullityAbsolute Nullity and Objectionable Contracts, Public Policy and Community ValuesCVL - SeverabilityCVL - Brasserie Labatt v. Villa [1995] C.A. Que – CB2: 5 52CVL - Cameron v. Canadian Factors [1971] SCC – CB2: 10 53CML - In The Matter of Baby M [1988] Supreme Court of New Jersey CB2: 19 54

2. Is the Contract Voidable / Relatively Null? Vitiated Consent – Flawed FormationIntroduction: Vitiated Consent in CVL, CCQ 1398-14071. ConsentCVL - Thibodeau v. Thibodeau [1961] SCC – Taschereau – CB2492. Error (1400)3. Dol / Fraud (1401)4. Fear (1402)CVL - J.J. Joubert Ltée v. Lapierre et Lapierre – CB2: 565. Lesion (1405)

Introduction: Vitiated Consent in CMLCML – Atlas Express Ltd. v. Kafko Ltd., [1989] Q.B. 833: CB2: 53

CML – Lloyds Bank Ltd. v. Bundy, [1975] Q.B. 326 (C.A.): CB2 45CML – Barclays Bank plc v. O’Brien, [1994] 1 A.C. 180: CB2 51CML – Harry v. Kreutzinger [1979], 9 B.C.L.R. 166 (C.A) pg. 82CML – Toker v. Westerman (1970), 274 A.2d 78 (N.J.D.C.): CB2 72

CVL - Lesion

109


CVL – Gareau Auto v. B.C. Impériale de Commerce, [1989] R.J.Q. 1091 (C.A.) - CB2: 73CVL – Slush Puppie c. 153226 Canada Inc., [1994] R.J.Q. 1703 (C.Q.): CB2 79CVL - Quebec (Procureur general) c Kechichian [2000] J.Q. no 2049 (C.A.) CB2: 89

Introduction: Misrepresentation – Dol – Mistake – Error1.CVL - Dol (Fraud)CVL – Creighton v. Grynspan, [1987] R.J.Q. 527 (C.A.): CB2 95CVL – Tremblay v. Les Pétroles Inc., [1961] B.R. 856 (C.A.): CB2 99MisrepresentationCML – Sarvis v. Vermont State Colleges, 172 Vt. 76, 772 A.2d 494 (2001) – CB2 11

CML – Esso Petroleum Co. Ltd. v. Mardon, [1976] Q.B. 80 (C.A.): CB2 106CML – V.K. Mason Construction Ltd. v. Bank of Nova Scotia, [1985] 1 S.C.R. 271: CB2 11

Duty to DiscloseCVL - Bail v. Bank of Montreal [1992] SCC – Gonthier J. – CB2: 122CML Duty to DiscloseKronman, “Mistake, Disclosure, Information and the Law of Contracts” (1978): CB 142Fabre-Magnan, Muriel, “Duties of Disclosure and French Contract Law” CB 145

Error / Mistake CVL Law on ErrorCVL – Rawleigh v. Dumoulin, [1926] S.C.R. 551: CB2 116CVL – Huot v. Ouellette, [1981] C.S. 872: CB2 200CML on MistakeCML – Sherwood v. Walker (1887), 22 NW 919 (Mich S.C.): CB2 118CML – Bell v. Lever Bros., [1932] H.L. Risk AssumptionCVL – Yoskovitch c. Tabor [1995] R.J.Q 1397 CB2, 146

VI. Change in Circumstance, Frustration, Hardship Supervening Events and Change of Circumstances1. Impossibility of Performance in CVL

CVL – Otis Elevator Co. Ltd. v. A. Viglione & Bros. Inc., (C.A.): CB2 222.Commercial Impracticality – CVL

1.CML Frustration 85CML – Alcoa v. Essex Group, 499 F.Supp. 53 (Penn S.C. 1980): CB2 224CML – Amalgamated Investment v. John Walker & Sons Ltd., [1976] (C.A.): CB2 225CML – H.R. & S. Sainsbury Ltd. v. Street, [1970] 3 All E.R. 1126 (Q.B.): CB2 233

UNIDROIT Principles of International Commercial Contracts: Arts. 6.2.1, 6.2.2, 6.2.3Restatement (Second) of Contracts §261Principles of European Contract Law

VII. Breach and Remedies – Has a Breach Occurred?CML – Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26: CB2 258CML – Cehave NV v. Bremeer Handelgeselleschaft mbH, [1975] CB2 254CVL - Breaches of Contract

VIII Remedies to Breach SPECIFIC PERFORMANCECVL - Belcourt c. Golden Griddle Pancake House Ltd. 1988 CB2: 272

CML - Co-Operative Insurance Society v. Argyll Stores (Holdings) Ltd. CB2: 268

CML – Warner Bros. Pictures v. Nelson, [1937] 1 K.B. 209: CB2 261

DAMAGES 97CVL - Ciment Quebec Inc. v. Stellaire Construction, 2002 Cour d’appel, CB2: 299

CML - Hawkins v. McGee, S. C. of New Hampshire 1929 - CB2: 245

CML -The Reliance Interest in Contract Damages – L.L. Fuller and Willima R. Perdue – CB2: 235

CML - Security Stove & Mfg. Co. v. American Ry. Express Co., USA – CB2: 249

CML - Ruxley Electronics v. Forsyth, [1995] H.L., Common Law – CB2: 374

110


CML – Hadley v. Baxendale (1854), 9 Exch. 341: CB2 279

CML – Victoria Laundry v. Newman Industries Ltd., [1949] 2 K.B. 528: CB2 288

CML – Koufos v. C. Czarnikow (The Heron II), [1969] 1 A.C. 350: CB2 292

Non-Pecuniary LossCML – Jarvis v Swan Tours [1973]

CML – Farley v Skinner [2002]

CVL – Fidler v Sun Life [2006]

Liquidated DamagesH.F. Clarke v Thermidaire Corp., [1976]

151276 Canada Inc. v Verville, [1994]

IX - Third Parties and the Relative Effects of ContractsPrivity of Contract and third party beneficiariesCML - Beswick v Beswick, [1966]CML – Beswick v Beswick, [1968]

CML – London Drugs v Kuehne & Nagel, [1992]

GM Canada v Kravitz [1979]Conclusions Holmes, Path of the LawGilmore, Death of Contract

111