CONTRACTS II � JAN by HC120727091717



Prof’s perspective on contract law

Will focus class at the intersection of practice and theory

-       the practice of law at its highest levels, especially in litigation, has more theoretical/doctrinal
        elements than most law students realize

        -        but the highly abstract theory of law schools has little or no impact in practice, even at the
                 Supreme Court of Canada

        -        I am interested in sophisticated thinking about legal doctrine in a way that would be of
                 interest to an intelligent judge, and am not interested in theoretical debates which are
                 nothing more than academics speaking to one another

-       so what I will try to teach in this course is:

   problems which have a real-world relevancy – and I see consistent themes in how the courts
    approach contract problems which arise in the real world, themes which I will be emphasizing in this

        -        but – without a heavy theoretical overlay

   this is not a jurisprudence/legal theory course

   you will not hear from me about law and economics, or feminism, or critical legal studies, etc

   although I am very open to such ideas and welcome them in class interventions or in papers – I am
    not necessarily impressed by those who just parrot my own ideas back to me

   exams are less of a time to be creative – more of a time to parrot

   Palfrey comment – debate in U.S. law schools about whether law schools should emphasize clinical
    legal education (broadly defined) or be something more like another humanities department of the

   I subscribe to the former

How I approach the course

       Borins/Dunlop story – the moral is that the discussion between counsel and sophisticated jurist is
        very similar to the discussion between student and teacher

       I would like to replicate that phenomenon as much as I can – using Socratic method

Themes of the course

contracts issues at the intersection of theory and practice

            o    issues that actually come up in practice
contractual interpretation as the central topic in contracts (~50% of course)

            o   “contractual interpretation”:

                        the process by which a court decides whether and how to enforce the words of an
                         agreement (almost invariably a written one)

                        how the court starts with the raw materials of a contractual dispute (the language
                         of a contract and evidence admissible in aid of its interpretation) and translates
                         that material into a meaning which is enforced by judicial decree

            o   begins with Hall’s nine fundamental precepts of contractual interpretation

                        Words and their context;

                        Contract to be construed as a whole with meaning given to all provisions;

                        The factual matrix;

                        Interpretation is an objective exercise

                        Commercial Efficacy;

                        Every Effort should be made to find a Meaning;

                        Contract is interpreted as of the date it is made;

                        The Parol Evidence Rule

                        The Contra Preferendum Rule

                        all nine focus on only one social goal – getting the meaning right

   then addresses two more topics of giving meaning to the words chosen by the parties

            o   implied terms

            o   the duty of good faith

   interpretation of specific types of contracts and clauses, testing the circumstances in which the courts
    will give effect to social goals other than getting the meaning right

            o   consumer contracts

            o   employment contracts

            o   exclusion clauses

   a grab bag of other topics, unified by the fact that they occasionally come up in the real world and by
    the fact that they will allow us to examine the extent to which courts (i) give effect to the intentions of
    the parties once they have figured out how to do so correctly; and (ii) balance other social goals

            o   misrepresentation and rescission

            o   mistake

            o   rectification

            o   frustration

            o   illegality

I       Contractual Interpretation

       contractual interpretation is different from other types of legal interpretation

            o   the social implications are less

       constitutional interpretation engages significant issues of how the Canadian state operates, with
        the result that the meaning of a written text can and does change with changing social conditions
        (the living tree analogy)

            o   the Persons case in 1929 established that the meaning of the word “person” in the BNA
                Act had to change with changing social conditions, and that has been a consistent theme
                of Canadian constitutional law particularly in the Charter era

            o   B.C Motor Vehicles established the irrelevancy of the framers’ understanding of the
                meaning of s. 7 as procedural and not substantive

            o   the Same Sex Marriage Reference invoked the living tree metaphor to justify how
                something that was unthinkable 15 or 20 years before (same sex marriage) was at least
                constitutionally permissible and quite likely constitutionally mandated – held that the
                meaning of “marriage” in s. 91(26) of the Constitution Act, 1867 was not fixed

       statutory interpretation entails putting into effect legislative purposes, with obvious policy
        elements, with the result that statutory text is interpreted purposively and can change over time

       contract interpretation is just about getting it right – enforcing what the parties agreed to be bound

       other policy concerns come into play, but relatively rarely

       in my book I identify nine fundamental precepts of contractual interpretation

        -       all nine centre on accuracy in interpretation and not broader social goals

        -       accuracy means the mutual intentions of the contracting parties, understood
        objectively, at the time of contract formation

The Nine Fundamental Precepts of Contract Interpretation (Hall)

Focus on accuracy in interpretation and not broader social goals.

A.       Words and their context

        since contractual interpretation for the most part involves no greater social goals than getting the
         meaning right, courts are obsessed with interpretive accuracy

        the courts have increasingly recognized over the past 30 years that context is central to
         interpretive accuracy

        context has two aspects

                        the context of the document

                        the surrounding circumstances

                there can be a tension between text and context

B.       A contract is to be construed as a whole with meaning given to all of its provisions

        “The normal rules of construction of a contract require that the various clauses of a contract
         cannot be considered in isolation but must be given an interpretation that takes the entire
         agreement into account.”: Canadian Newspapers Co. v. Kanda General Insurance Co. (1996),
         30 O.R. (3d) 257 (C.A.) at 270, leave to appeal refused [1996] S.C.C.A. No. 553.

        achieves interpretive accuracy

        eliminates ambiguities and inconsistencies

C.       The factual matrix

        very important aspect of contextual interpretation, which is a legacy of Lord Wilberforce

        “In order for the agreement of 6th July, 1960 to be understood, it must be placed in its context.
         The time has long passed when agreements, even those under seal, were isolated from the matrix
         of facts in which they were set and interpreted purely on internal linguistic considerations. ... We
         must ...enquire beyond the       language and see what the circumstances were with reference to
         which the words were used, and the object, appearing from those circumstances, which the person
         using them had in view.”: Prenn v. Simmons, [1971] 3 All E.R. 237 (H.L.).

        “No contracts are made in a vacuum: there is always a setting in which they have to be placed.
         The nature of what is legitimate to have regard to is usually described as ‘the surrounding
         circumstances’ but this phrase is imprecise: it can be illustrated but hardly defined. In a
         commercial contract it is certainly right that the court should know the commercial purpose of the
         contract and this in turn presupposes knowledge of the genesis of the transaction, the background,
         the context, the market in which the parties are operating.”: Reardon Smith Line Ltd. v. Hansen-
         Tangen, [1976] 3 All E.R. 570 (H.L.) at 574

        the scope is broad and essentially includes everything except evidence of subjective intentions
         and negotiations leading up to the final contract

        the factual matrix must not be allowed to overwhelm the words chosen by the parties: Black Swan
         Gold Mines Ltd. v. Goldbelt Resources Ltd. (1996), 25 B.C.L.R. (3d) 285 (C.A.) at para. 19

D.       Interpretation is an objective exercise

        “The goal in interpreting an agreement is to discover, objectively, the parties’ intention at the
         time the contract was made.”: Gilchrist v. Western Star Trucks Inc. (2000), 73 B.C.L.R. (3d) 102
         (C.A.) at para. 17

        “The contractual intent of the parties is to be determined by reference to the words they used in
         drafting the document, possibly read in light of the surrounding circumstances which were
         prevalent at the time. Evidence of one party’s subjective intention has no independent place in
         this determination.”: Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at para. 54

E.       Commercial efficacy

        commercial contracts must be interpreted in accordance with sound commercial principles and
         good business sense: Scanlon v. Castlepoint Development Corp. (1992), 11 O.R. (3d) 744 (C.A.)
         at 770-1, leave to appeal refused [1993] 2 S.C.R.

        corollary: an interpretation which is commercially absurd is to be avoided

        can result in a tension between text and context

        objective, does not consider one party’s perspective alone, considers the entire factual matrix

F.       Every effort should be made to find a meaning – not being covered by specific cases

        “Business men often record the most important agreements in crude and summary fashion; modes
         of expression sufficient and clear to them in the course of their business may appear to those
         unfamiliar with the business far from complete or precise. It is accordingly the duty of the Court
         to construe such documents fairly and broadly, without being too astute or subtle in finding
         defects; but on the contrary, the court should seek to apply the old maxim of English law, verba
         ita sunt intelligenda ut res magis valeat quam pereat [words are to be understood that the object
         may be carried out and not fail]. That maxim, however, does not mean that the court is to make a
         contract for the parties, or to go outside the words they have used, except in so far as there are
         appropriate implications of law, as for instance, the implication of what is just and
                  reasonable to be ascertained by the

        court as matter of machinery where the contractual intention is clear but the contract is silent on
         some detail.”: Hillas & Co. Ltd., Arcos Ltd (1932), 147 L.T. 503 (H.L.) at 514

        “[E]very effort should be made by a Court to find a meaning, looking at substance and not mere
         form, and that difficulties in interpretation do not make a clause bad as not being capable of
         interpretation, so long as a definite meaning can properly          be extracted.”: Marquest
         Industries Ltd. v. Willows Poultry Farms Ltd. (1968), 1 D.L.R. (3d) 513 (B.C.C.A.) at 517-518

G.      A contract is to be interpreted as of the date it was made – also not being covered in any of
the cases we will be covering

        “It is a fundamental rule of contractual interpretation that the intention of the parties is to be
         determined as of the time when the contract is made”: Davidson v. Allelix Inc. (1991), 7 O.R. (3d)
         581 (C.A.) at 587

        result: discussions in 1986 were irrelevant to the interpretation of a contract made in 1984

        reason: a contract’s meaning should not depend on the time when someone goes to court to have
         it interpreted

H.       The parol evidence rule

        extrinsic evidence is not admissible to add to, subtract from, vary or contradict a written

        however, the rule is hard to reconcile with the modern emphasis on context, and the exceptions
         tend to swallow it

        the rule does not apply when the written agreement is incomplete or there is a collateral oral

        the rule does not apply where there is ambiguity in the written document

        the rule does not apply if there is a claim for rectification

        it basically only applies to preclude evidence of subjective intention and to preclude evidence
         which contradicts the written agreement

I.       The contra proferentem rule

        an ambiguity is a precondition: Arthur Andersen Inc. v. Toronto-Dominion Bank (1994), 17 O.R.
         (3d) 363 (C.A.) at para. 17, leave to appeal refused 19 O.R. (3d) xvi (note) (S.C.C.)

        there are some judicial statements that it should only be applied as a last resort or where the party
         seeking to rely on it did not have an opportunity to modify the terms of the contract

        its only real effect in interpretation of guarantees and insurance policies

Implied terms when a court has to infer the presence of meaning which is not stated expressly

Duty of good faith

        this area of the law of contractual interpretation that is unsettled // a mess

        Is there a duty on contracting parties to perform the contractual obligations in good faith?

             o   within the spirit of the contract rather than the letter of it

        in an era in which the courts have moved significantly away from literal interpretation towards
         more contextual interpretation one would have thought that there would be a corresponding move
         towards an obligation of good faith

        a central feature of labour relations law

        a feature of Quebec civil law and the UCC in the U.S.

        yet common law courts in Canada have been remarkably resistant to finding a duty to perform
         contractual obligations in good faith

        a duty has been found to arise in some circumstances, but there is no general duty            and no
         overarching theory of when a specific duty should arise

Interpretation of specific types of contracts

        we will examine two types of contracts in which policy considerations outside of contract
                 law tend to be applied

        consumer contracts

        employment contracts

        in both cases, courts interpret contracts in a manner which bears in mind the imbalance in
         bargaining power and, more importantly, has regard for competing social interests outside of
         contract law

        consumer protection, which is clearly a legislative goal

        the protection of the dignity of vulnerable workers, which is a repeated judicial goal in labour and
         employment law cases

        there are other examples of the phenomenon – insurance contracts, franchise contracts

             o   might be good topics for research papers

        we will use the two examples to consider when a court will depart from pure contract
         considerations (getting it right in light of the intentions of the parties, objectively understood) and
         balance other goals

(a) INTRODUCTION to Contractual Interpretation

Frigaliment – plain meaning of “chicken” in K insufficient

court looks to context: K, nego, trade, market


        the meaning of the word “chicken” in the contract. Does it exclude “Stewing Hen” and only refer
         to “Young Chicken”?


        satisfy commercial utility - the meaning of the word “chicken” can involve large sums of money

        get the intended meaning right - for the most part, issues of contract interpretation have no greater
         social implication


      the court quickly looked at the plain meaning of the contested word (at 118) and quickly moved
       onto an extensive look at the context

           o   within the contract itself (at 118) => not specified young

           o   within the negotiations (at 118) => negotiation communications, cables, drafts

           o   trade usage (at 119) => buyers, chicken processing plants, market reports

           o   market price (p120) => USDA regs, reports, pricing correlated more to stewing hens

DECISION: plaintiff failed to prove the word Chicken in the contract means only Young Chicken and
excludes Stewing Hen. Action dismissed.

NEXT DAY - read – Hoffmann -            be prepared for at least (b) (meaning must be given to all words)
and (c) (factual matrix)


Hoffman Commentary -

Lawyers and judges use contractual language in particular manner
    p656 importance of legal interpretation to lawyers and judges
           o much time given to determine legal effect of words (agreements)
    Hoffman/court over last 30 years:
           o Language is a code without context
           o Language used in efficient manner, context often inferred
           o If court does not understand context, high risk of interpretive error
           o Interpretation involves forming view of background to agreement first
                    Not just dictionary definition “Daddy please buy me a coke.”
    England => very contextual
    Canada => more textual
    Intention of parties at time of contract execution is generally not admissible
           o Subjective intention is irrelevant where more than 1 party involved
                    Self serving, therefore unreliable and incomplete
                    When litigating, the subjective intentions will likely differ
                    Will introduce more evidence into litigation (undesirable)
           o The law will defer to OBJECTIVE intention for enforcement
           o For rectification, subjective intent may be considered
           o Trade usage/idiosyncratic meaning may also lend to subjective intent
    Different types of legal interpretation (672)
           o The extent to which contractual interpretation includes
                    Constitutional matters (UK: literalism v
                    Legislative interpretation
                    policy rationale
           o the court needs to keep the interpretation of the contract to what it means to the parties to
               the contract, not necessarily to the legislature, other parties and the public at large

Scanlon v Castlepoint - 1992 OCA
condo deal delayed, force majeur – commercial reasonableness in interpretation

       p 770-771 principles that play in CI – and interplay between these principles
            o meaning must be given to all words in the contract
    condo purchase case, single unit
    dispute re: closing date
    Clause 13D permitted extension of closing date if
         o Unit substantially completed and declaration and description registered
    Clause 22: force majeur clause
         o Perfornance may be delayed through no fault of the parties
                   If completion of unit of Common Element delayed by FM event, OR BY ANY
                      OTHER CAUSE, Whether or not beyond the control of the vendor
    Purchaser didn’t want to close, vendor wasn’t ready, possession not ready
    Purchaser wanted out of the deal. Real estate crash.


       Reversed TC. Purchaser unable to get out of deal, Vendor able to rely on S 22 Force Majeur to
        extend closing until construction completed.

    Applicable Rules of Construction – overarching premise: to be construed in accordance with
       sound commercial principles and good business sense.
Background of doctrine
    Agreement should be construed as a whole and effect given to all provisions Hillis Oil
    Giving Meaning to All Words/reject interpretation to render term(s) ineffective National TrustCo
    “Interpretation which from the whole of the contract would appear to promote or advance the true
       intent of the parties as of the time of entry into the contract” Consolidated Bathurst
    Court should give particular consideration “to the terms used… the context… the purpose…”
    Contra Preferentem: Contradiction/ambiguity to be construed against the author Consolidated
       Bathurst and Hillis
           o Limited to when other rules of construction fail Reliance Petroleum

     Condo/real estate development
     Purchaser and vendor knew of regulatory scheme: before closing (transfer of title), declaration
        must be made, declaration can’t be made until the building is substantially complete
     Therefore, 2-stage closing: Occupancy closing and Title Closing
     13D “manifestly designed” to provide for this 2 stage closing
     Look at whole transaction, including commercial reality:
            o Given terms of agreement, November 4, 1991 closing date could not have been met.
     Practical reality is that construction is often delayed. Hardly surprising that agreements for P&S
        are structured to accommodate construction delays
     Force Majeur clauses not uncommon – consistent with context and commercial reality
     Tension between text and context:
            o Spin on analysis does not jump off page of agreement… context is important, outside
                 evidence and context must be brought in
            o Can be problematic if you go too far
            o Court recognized constant reality that drafting errors occur:
                      AN express reference to Para 22 in 13(d) would have helped clarify, but does not
                         preclude the effect of 22.
All Words, all meaning, app provisions
     Rejects motions court judge, who read out para 22
     Can’t read Nov 4, 1991 as literal, because it removes meaning from para 22, and brings a
        commercially unreasonable arrangement

Is the case correctly decided?
      There was dissent (not read)
      To what extent was the economic reality driving the result? Result oriented approach?
             o Real estate market crashed, many cases where purchaser trying to get out of deal.
             o Evens out scales of justice. Vendor weaker party because of Economic circumstances
             o So much for consumer protection
             o So much for force majeur – there essentially was no way to hold developer to end date
      Unconscionability? Oppressive/abuse of power

             o   Like limit on liability that is not brought to attention of consumer – countered by
                 commercial reality of realestate development; that lawyers are generally involved,
                 agreement not contemplated or signed in haste, though a take it or leave it agreement.
             o   Even though broadly worded, para 22 would have to be invoked with good faith to avoid

Social policy goals at play here?
    Results oriented decision is problematic
    Functioning of market economy: certainty in contract interpretation important

Meaning to be given to all words


McClelland & Stewart v Mutual Life Assurance 1981 SCC – Contract to be read as a whole
insured suicide problem with 2 dates in K; Text & context; business reality

    Insurance case, insured committed suicide
    Policy: no benefits if suicide occurred < 2 y of effective date of policy
    Drafting problem: effective date was not defined in policy
    Policy back dated to Jan 23/68, with knowledge & consent of both parties, for pricing
    Policy purchased Feb 28/68, Suicide Jan 31/70

    Effective date for agreement was Jan 23/68. Benefits payable.

Analysis - DICKSON
    Textual and contextual tension
    Taken alone and read without context favours insurance company.
    However, Mechanical reading of agreement coming into effect “when delivered and accepted by
       me” does not tell the whole story.
    Business reality: agreement can have only one effective date. Agreement is functional hinging
       around payments/determinations using Jan 23.

     Reading of the policy and declaration in its entirety is necessary for appropriate construction.
     Look at the document as a whole.


Does it make sense to put it in the language of intention?
    Common intent depicted in language of agreement; differing intent only asserted when desirable
        to not pay obligation
    Tension for court imposed term – want it to sound like it’s the intent of the parties perhaps

Was this correctly decided?
    Dissent: Estey: accepting payment

       YES: insurance co took premiums back to that date, incongruous to switch effective date at their

Did court go too far from text? Too much emphasis on context?
     No, they were unable to resolve the agreement construction on the plain meaning of the words
       within the 4 corners of the agreement, so it was appropriate to go to context
     Plain meaning argument is almost meaningless. There is always context to the language.

Does this remove certainty?
    No, this enabled to court to impart certainty where there is ambiguity. Ideally the agreement
        would not have a discrepancy with respect to the effective date.
    The insurance co took a risk in backdating the policy: they wanted to accumulate the premiums
        earlier. Their commercial reality is they moved the effective date up and accepted the risk
        associated with that business decision.

Beneficiary was publisher: not family. To what extent did sympathy drive the result?
    Court is generally sympathetic to the insured – relative vulnerability
    Drafting of the agreement would (contra preferentem) benefit insured, if this analysis failed
    Fraud had likely been ruled out


Prenn v. Simmonds 1971 HL –to exercise option, profits need be attained by co/subsidiary
movement to a textual/contextual approach
Factual matrix includes almost everything except negotiations communique

    Simmonds contracted for 4% interest in RTT for L6K, worth L200K at time of trial
    Option could only be exercised if RTT had profits >300K over 4 years
    RTT alone did not meet threshold, but RTT + subsidiaries did.

Were profits levels reached? By Holding company or by co and subsidiaries?

    Preventing simmonds purchase was inconsistent with the commercial reality of the deal, based on
       economic reality of the group of companies, not just RTT.
          o Commercial efficacy invokation

    “in order for the agreement … to be understood, it must be place in its context. The time has long
       passed when agreements, even those under seal, were isolated from the matrix of facts in which
       they were set and interpreted purely on internal linguistic considerations.”
    Cordozo: “the genesis and aim of the transaction” the US version of the factual matrix.
    Also, Wigmore on evidence: unrealistic to restrict interpretation to document where to do so
       would be futile.
How much context to look at?
    Cannot look to evidence of negotiations (Simmonds wanted this to be examined)
           o Negotiation evidence is unhelpful, because it is a dialogue in time

       Cannot look to one party’s subjective intent – no evidence of common intent
       Factual matrix includes prior interactions between Prenn and Simmonds – Simmonds interest and
        interactions secured by agreement, purpose was to give Simmonds a share of the company,
        provided company interests were protected first.
            o Consolidated accounting statements to be produced. Consolidated profits incentivised
                 Simmond’s ongoing consulting with Prenn’s RTT.

Is the prohibition on admission of evidence of negotiation reasonable?
          Yes, because the negotiation process is a process, and the package of rights are negotiated, as
             trade-offs that may not reflect the outcome.
          Cost of litigation is high enough already – evidence of negotiation is complex and costly to
          Subjective intent of the parties during the process is not admissible anyhow, it is the objective
             intent as determined by a third party reading the final agreement.

Radical shift in the law: referring to US and old CL to justify decision in commercial context. Does this
affect commercial certainty?
     Goes both ways
     Judges never like to go in a new direction
     Commercial setting requires small steps – moving away from textual approach to contextual
         approach gets more accurate results
     Why not be honest about the evolution

Does Wilberforce get the right balance? Has he gone too far in looking at the context, not just the
     Hard to criticize this example.

Thesis: is this getting the contract right? Were there policy matters at play?
    Decided on the part of the more vulnerable party, but this is a natural outcome, not policy based.

Reardon Smith Line v Hansen-Tangen Sanko Steamship 1976 HL – tanker built in alternate yard
Factual matrix must reflect the commercial purpose of K and the information in it

    New oil tanker to be built in Japan. Market had crashed.
    Purchaser tried to get out of buying the completed ship by asserting the ship was not that which
      was contracted for
    Specification in contract: to deliver a ship built at a particular Osaka shipyard
    Osaka couldn’t build a ship that big, so it was built at Oshima

    Was the ship built at Oshima fulfull the contract?
    What was the scope of the factual matrix?

    The Oshima ship was OK, purchaser had to purchase it.


      “When it comes to ascertaining whether particular word apply to a factual situation… it is
       undoubtedly proper and necessary to take evidence as to the factual situation.” Factual Matrix
    Need not be constrained to 4 corners of the document… the agreement does not exist in vacuum
    Objective analysis of the contract, not subjective analysis
    Factual matrix: commercial purpose of the agreement: what is commercially reasonable here?
          o To build a tanker and allow Reardon Smith and Hansen-Tangen to it
          o That it be built at a specific yard was not essential to the contract, but important for
              tracking and financing. Location was a substitute for a name/description.
          o Information re: location of shipyard was not negotiation, but declaration/identification


Was this decision right?
    Yes, it is not the courts job to protect parties from entering into deals that are bad.

Why should the purchaser get out of the deal?
   Market tanked, they didn’t want a tanker hanging around
   Objective intention of the parties should be considered: in retrospect, this is a bad deal. If it was
      a good deal, no one would care where the ship was built.
   Delivery of ship was the intent of the agreement
          o Everyone knew the ship couldn’t have been built at Osaka… therefore it could not have
               been a material part of the agreement

Does the court’s decision render the “name” of the ship meaningless?
    Not inconsistent with the Objective meaning of the agreement
    Sophisticated parties, could have been more careful in their drafting and named the ship
    The name didn’t mean anything anyhow, the specs were the important part, not the name

Thesis: social policy existing beyond the interpretation of the contract?
    Not really at play here.
    Holding people to deals – certainty of agreement and international trade is important it itself


Investors Compensation v. West Bromwich Building Society 1997 HL – Home income mortg
assignment problem
Highwater mark for UK factual matrix – court to take interpretive role, highly contextual
DOES NOT REPRESENT CANADIAN LAW – we use Lilly v. Novopharm

    Bad drafting causing problem, with backdrop of economic circumstances
    Scheme for compensation for folks harmed by investment advisors
    Claims from Home Income Plans – elderly retired – proceeds from mortgages invested in equity
      driven bonds
    Assignment provision: can’t double dip by claiming against ICS and against advisor.
    S4 at issue, proviso in 3B, explanatory note further clarified

    Claim form language: was the assignment valid?

    Assignment of all rights against advisors to ICS

    Factual matrix:
          o Per Simmonds: changed law to allow examination of the factual matrix in contract
          o Interesting that Hoffman goes in a different direction from Wolberforce in that decision!
    Assimilate legal interpretation with everyday interpretation
    Principle: court must place itself in the interpretive role
          o Interpretation ins the ascertainment of the meaning which document would convey to a
             reasonable person having all the bkgd knowledge would reasonably have been available
             to the parties in the situation in which they were at the time of the contract
          o BKGD is anything that should have been reasonably available to the parties (TOO FAR
             FOR CANADA)
          o Law excludes previous negotiations
          o Meaning that a document would convey to a reasonable man is not the same as dictionary
             meaning – the parties should use the document and the factual matrix
          o Rule is words should have natural and ordinary meaning, and we do not accpt that
             persons easily make linguistic mistakes in formal documents
    Finds text almost irrelevant


Make sense? Should factual matrix include everything Hoffman alludes to?
    Not good CDN law, but it presses the limits in UK
    Supremacy of the judiciary: Judge has to figure out relevancy, even if they are not expert in that
    Lengthy proceedings and broad interpretation framework don’t reflect the care and constraints of
       a well crafted agreement.
    Vast majority of contracts are not litigated

Interpretive exercise: does plainmeaning exist?
     Certain precepts only come into effect where ambiguity exists: contra preferentem
     Eli Lilly focuses more on the text.
             o Parties choose language to govern their relationship
             o Unhinging the context from the text is rejected by CDN courts

Sympathies: is this unfair
    Old folks want to maintain separate actions
    Question of social reality: social policy rationale for no double dipping
    Resembles insurance coverage/sole representative

    Does it make sense to look outside the claim form (including the errors therein) to put meaning in the
    written agreement? Are there other ways to get to this result?
         Contra preferentem would favour claimant

       20080128


TD Bank v. Li Instruments 1999 ONCA – letter of comfort -
Objective analysis of text: what would the parties to the K reasonably have understood?
    extended litigation, despite remarkably simple facts
    Plecis – large multinational
    TD was anxious to do business with P. Lent to Li instruments, Plecis took over Li, giving “letters
        of comfort” to TD.
    Issue: proper interpretation of the letters
    “it is our policy that our wholly owned subsid are in the position to fulfil their financial
    Li went insolvent, TD went to Plecis for monetary assumption of liability
    TD lost at TC, CA
    NOTE court’s analysis was ENTIRELY OBJECTIVE
             o What would reasonable 3rd party surmise if reading the K?
    Unlike Investor’s compensation case, here the analysis is reversed.
             o Court looked at Words first, then Context.
                      typical Canadian approach to primarily look to text, less so to context
    p 267 look at the words, all the words in the context of the agreement, and in the surrounding
    CA looked at textural analysis
             o “Be managed” - passive voice does not imply Plecis would manage, but that someone
                 else would do the management.
             o Policy that Plecis subsidiaries should manage their OWN affairs to meet their obligations
             o If Plecis intended to make a guarantee, they are sophisticated enough that they would
                 have done so
    Factual bkgd: sophisticated parties, familiar with the value and purpose of letter of comfort.
    TD was eager, Plecis made it plain they would not provide a guarantee. TD was looking for an
        alternate reassurance
    Commercial efficacy point p 268
             o Court tries to make sense of letter of comfort that does not
             o “in this marketplace, each party finds itself parent refuses to provide guarnatee… bank
                 agrees to accept something less…”
             o Court finds the letters were valueless
             o TD out $45Million.

       Is it compelling that the sophistication of the parties and their asserted intent compared to what
        the letter actually said. Less than corporate guarantee was intentional.
       Court would likely have treated the change of position (wouldn’t do the deal without the
        guarantee, when the letter is clear that it is not guaranteeing) with harshness
       What is a letter of comfort good for? Standard procedure to ask for corporate guarantee.
       Court makes a somewhat weak argument about the text and supports it with contextual analysis.
        This may be because it is harder to
       Did the court rely on anything less than objective facts?
             o Bank wants to get the new business (subjective), but objectively manifested ? slim line
                 between subjective and objective and what is surrounding circumstance and what is
                 material negotiation.
             o No reference to subject intentions

       Is there anything social policy about this:
             o Commercial policy goal: these are less than a guarantee. If they had found differently,
                 this would change commercial transactions and the nature of the comfort letter.
             o Not expressly stated in the reasons.
       Maintaining separate and proper corporate structure – reinforces Salomon v Salomon.
       Under pressure, people identify social policy goals that go beyond getting the meaning of the
        contract right in effort to convince the court. Exam exam exam

Context/Textual interpretation

Eli Lilly v. Novopharm 1998 SCC – license/subslicense agreement
parties intention NOT RELEVANT to interpretation
highly Textual approach, but after Lilly CA moved back to contextual approach

       One of the only SCC contracts decisions
       Very textural approach
       Divergent from UK lord Hoffman approach where the context is heavily weighted
       After Lily, CA quickly moved back to where they were before… SCC has not pushed this back to
       Ratio:
            o Text is key
            o subjective intention is not admissible
       Amendements to patent act in early 1990s, taking away compulsory licensing of drugs to generics
       Business people cooked up a deal that went to SCC
       Did the supply agreement between Novopharm and Apotex constitute a sublicense?

       Allegation that the agreement was drafted without counsel – court doesn’t really buy it - see use
        of “apparent”

       This is important because if it is a sublicense, license between Lily and Novopharm could be
        terminated. If it was a supply agreement,

       P 141 preamble: “and whereas the parties have this agreed that they will share their rights under
            o This is sublicensing in the IP field
       P 148 – Mr. Dan filed affidavit they intended to create supply agreement, not sublicense
       TC believed Mr. Dan.
       CA affirmed the TC
       SCC: evidence regarding subjective intention is not admissible
            o TC judge was criticized
       Para 54 p 166
            o “The contractual intent of the parties is to be determined by reference to the word they
                 used in drafting the document, possibly read in light of the surrounding circumstances
                 which were prevalent at the time. Evidence of one party’s subject intention has no
                 independent place in this determination.”
       Reliance on the parole evidence rule
       Language of the agreement is so important, Iaccobucci: “it is unnecessary to consider any
        extrinsic evidence at all when the document is clear and unambiguous on its face.”
       Any evidence of surrounding circumstances not necessary (para59), even if it was, the evidence
        proffered here would not have been sufficient.

     Para61: in light of no extrinsic evidence, what does the text of the agreement say?
          o Apotex is not entitled to the independent use of the compulsory license granted to
     Note contradiction: won’t look beyond the contract, but looks at the context of the entire
      agreement, including the recital.
          o Para 63 Discounts the recital by looking at the entire contract, which does not meet the
               requirement of a license para 6 of the agreement.
          o Para 64 para 7 does not affect onus imparted in para 6.
     Contra preferentum rule: to be construed against the drafter of the agreement. Acts to protect one
      the recipient from ambiguity in the contract written by the drafter.
          o Not the purpose of this analysis, but SCC reiterates it is protect a party to the agreement
               from the other party.
          o Third parties cannot rely on contra preferentum rule for their protection. ?is this a privity
     This Supply agreement seemingly is to get around changes to the patent act. Iaccobucci para 57,
      discounts that argument.
          o Policy goal of parliament has nothing to do with the interpretation of this contract
          o Iaccobucci may not like the legislation
          o Even if the interpretation of the contract is correct, should the court impose a policy issue
               on this action? The court should be limited to the issue before them: regarding the
          o Parliament did not make the legislation retroactive, left a hole for the existing
               agreements. Why, when faced with the circumstances, did the legislature leave the hole?
          o Courts aren’t the elected government… should let the government govern.
          o Genesis of the agreement is part of the factual matrix of the contract.
                    Court ignores that entirely.

     Iaccobucci uses some of the contextual language, but not all. Where language in contract is
      unclear, goes to contextual analysis. If clear, no context.
     Lower courts have since slid back to the Hoffman contextual analysis
     Is this an artificial line?

     Subjective intention: Mr. Dan used this supply/license agreement to save his business from loss.
         o Gave Lily opportunity to challenge the agreement
         o Dan’s evidence was heavily self-interested, therefore suspect
         o Excluding subjective intention from evidence is the only way to get away from “he said
              she said” arguements.
         o Counter argument: should the evidence not be adduced and the court (trier of fact) makes
              a finding of fact and weight?
                    How hard is it for trier of fact to ignore evidence once heard.
     Court put a lot of weight on the fact that there was no legal advice.
         o Courts seem to be allowing room for error in the text. To get to their answer, they have
              to have support for it.
         o Need to be able to do business without lawyers
                    Unusual that an agreement of this magnitude would not have been reviewed
                    Sherman and Dan were sophisticated anyhow
     Seems disingenuous that the court said NO CONTEXTUAL facts, yet looked to the context of
      how the agreement was written – without lawyers. That was a contextual fact.


KFC v. Scotts ONCA – franchise agreement restriction on SH mobility
Interpretation of K informed by commercial efficacy: should avoid int that would result in absurdity;
imputed intention important.

   Important statement from ONCA re: principles of contractual interpretation
   Franchise agreement
        o Does it give KFC power to change SHA for franchisee (Scott)?
   Scotts controlled 50% of franchises in Canada. Had been franchisee since 1969.
   Previous franchise agreement did not contain any restrictions on shareholder mobility.
   KFC agreements with other franchisees did (?) not have restrictions on changes of ownership.
   Scotts had entered into a transaction with Laidlaw that would require KFC consent if the restriction
    was enforceable.
   Commercial efficacy case

   Para 27 (p 636)”court should avoid an interpretation that would result in a commercial absurdity” (not
    controversial) … “care must be taken to do this objectively rather than from the perspective of one
    contracting party or the other, since what might make good business sense to one party would not
    necessarily do so for the other.”

   CA: The parties had operated for 20y without this control/restriction on shareholders.
   This was an unusual situation where franchisor and franchisee had equal bargaining power
   [note: this case was argued before Lily, but decided afterwards – does this analysis comply with
    iaccobucci’s analysis? Not really!]
   Gouge J: sets out general interpretaive approach at para 25
        o “whole the task of interpretation must begin with the words of the document and the ordinary
             meaning, the general context that gave birth to the document or is factual matrix will also
             provide the court with useful assistance.” [supported by Smith]
        o Scope to be taken
        o Para 32
        o Para 33 – looks to standard form Franchise agreement, which contained restrictions, but used
             different language.
        o Para 34 Superfluous if consent necessary
   Practical reality: court did not look at Lily.

   Commercial efficacy:
        o imputed intention to promote business success – no one would agree to enter into a contract
            that was not commercially sensible.
   Did the courts outcome maintain commercial efficacy?
        o Business model: uniform product
        o Franchisor must assert considerable control over franchisee
        o GH: lots to be said for TC: uniformity through franchisee conformity is important.
        o May make sense to allow for some flexibility to penetrate the market
        o Limited amount of freedom within franchise relationship, does shareholder composition
            really affect business operations?
   Standard franchise agreement was important to court
        o Scott’s was not a party to that agreement
        o Court uses it to derail the conformity argument from KFC,
                  Seems probative
        o Previous language trade off – who knows what the origin of the standard language was. Why
            give weight to some other agreement

   Traditional contract principle: evidenced of negotiation is not admissible
       o However, great evidenced of the factual matrix: who put forward what position, how was it
            negotiated? Should this be admitted?
                 Contracts are negotiated as a whole, could be other trade offs
                 Would lead to very protracted trial
   Focus on equality of bargaining power: different situation from standard franchisor-ee relationship.
    Should this impact contractual interpretation?

City of Toronto v WH Hotel - < 1971 ONCA - Lease K w option to purchase – price fluctuation
Contextual approach: looks to deal parties should have entered into
Note: before Prenn v. Simmonds factual matrix

   Lease agreement: Interpretation of an option to purchase within the agreement
   2 formulas to determine purchase price. Interpretation of the formulas at issue
        o First part of formula okay
        o <18 months, $417K + present value of buildings and land
        o >18months, PV building + value of lands (less buildings) as parties shall agree (or by
           arbitration 9p 545)
        o Arbitrator determined land value $784K, based on vacant land
        o CA: $417,081 depressed value because of redevelopment permit and other restrictions
   SCC agreed with CA, by reference to the commercial efficacy precept

   See p. 548 “to refer to the latter conclusion, I agree that this transaction being an ordinary commercial
    transaction it is the duty of the Court in interpreting that document to avoid such an interpretation
    as would result in commercial absurdity.”

   Toronto argues that the value of the contract would have jumped for WHH. Court couldn’t fathom
    that WHH would agree to a transaction where the party would pay more than a third party.

   Contract text: “value the lands, excluding the buildings” – court looks at the deal the parties should
    have entered into, not the deal they actually entered into. CONTEXTUAL approach.

   Why is it so unreasonable the price would go up? We might expect this to happen today. Why not
        o Not commercially absurd from the perspective of the city. Just from the perspective of
        o Can you get there from a textual method? If the city had to compensate existing leaseholders,
            there was a provision in the option for them to recoup this amount.
   Pre- pren v. simmonds case.
        o Revolution to factual matrix had not occurred yet.
   Often cited for proposition of commercial efficacy.


   3 cases
   Under pressure from the factual matrix rule
   Consistent with Iaccobucci’s Lily re: text/context:
   Don’t take comfort from PER unless you have a Bank of montreal case on your side, or the TDBank
    and the extrinsic evidence on your side has to do with the subjective intention.

Hawrish v. Bank of Montreal 1969 SCC – Cheese factory personal guarantee w entire agreement clause
Parole Evidence: agreement limited to the document itself, excluded verbal K
Hawrish principle: external evidence which is contradictory to K is not admissible

      Cheese factory, SK
      LOC at BoM almost exhausted, BoM asked for guarantee re:personal indebtedness up to 6K
      Cheese factory went under
      Bank went to Guarantor
      Hawrish went to court: oral promise from BoM that guarantee would be released after a joint
       guarantee was rec’d from the company.
      Key provisions:
           o CB 439 – liability could be terminated by written notice
           o Entire written agreement clause
      Hawrish loses.
      Parole Evidence: agreement limited to the document itself
           o An express and plain contradiction between oral evidence and the agreement
           o Collateral agreement cannot be proven where there is a direct contradiction

Analysis and Thoughts
           o Tension between subjective intention and objective agreement
    What if Horache said he didn’t read the document?
           o Court would create perverse incentive if it didn’t hold up this type of agreement
           o Persons should read what they sign
           o Bank should act in good faith – bank manager may have made a verbal representation to
               an unsophisticated party, an not take advantage of him.
           o “if we believe” his evidence… this circumvents the analysis of that evidence. Make it
               simple, look to the document.
    Certainty – if you want to know your liability, read the document.
           o Don’t want to have to rely on the memories of persons – assignment of contracts,
               reliance, etc.
           o Weaker parties – should they be protected in contractual negotiation and execution?
           o Negligent Misrepresentation/recision
    Commercial efficacy: not the focus of this case, but think about transactions in this context
           o People don’t necessarily read things, should they have to?
    Effect of the entire agreement clause: should that affect the result?
           o It would not be in the agreement if it didn’t mean anything… have to give it weight.
           o Lender: bank tries to control its risks. Can it control it’s managers? Maybe, but it can
               control its agreement
           o Policy perspective: if the written agreement does go before, give effect to it!
    Factual Matrix: was sufficient weight given to it?

   Bauer v. Bank of Montreal 1980 SCC – principal guarantees loan; failure to perfect security favors
   G; bank exchanged book debt for guarantee, debt didn’t cover creditors; Bauer liable.
   Factual analysis: “sufficiency not for court to judge”; applied Hawrish Principle

      Similar to Hawrish
      Facts: Bauer guaranteed loan to co where he was principle SH, Bank erred: took book debt – on
       insolvency, book debt didn’t cover creditors.
      Law of Guarantee: Failure to perfect the security would protect the guarantor
           o Problem for guarantor: bank drafted the following relevant clause

            o P 442
            o “it is further agreed that said bank (without exonerating) may …
       Does the contract preserve the bank’s standing, notwithstanding events that would at law alter it?
       Bauer: giving the guarantee was contingent on the book debt being
       SCC: rejected it, as it was a direct contradiction to the language of the document, therefore
            o Seems to turn on the weakenss of the evidence
       P442 “trial judge would have to rely on evidence”…
            o “what else would he say?”
       Factual “sufficiency is not for this court to rejudge”
       McIntyre: inadmissible under the Hawrich principle: if evidence is in direct contradiction with
        the contract, it is inadmissible.

       Are there big policy goals at play here?
            o Probably did get it right
            o Reliability of the contract – commercial certainty, commercial lending practices
       See first question of the notes:
            o The use of parole evidence rule was surrogate for SCC lack of evidence re: outside
                 contractual agreement.
            o Courts never talk about reasonable expectation in contract law cases.
            o However, Courts have a results oriented approach – the reasonable expectation is
                 wrapped up in the results.
            o Not expressly stated in the reasons… Court upheld the finding of fact at trial – there was
                 a representation to Bauer, but found the evidence inadmissible.
            o SCC didn’t believe the evidence was strong enough. Was the SCC disingenuous in
                 excluding this evidence, because they didn’t believe it?
            o SCC: do not overrule a finding of fact, unless there is a preponderance of evidence of
            o If the condition of the guarantee was a deal breaker
            o Did the SCC use a different rule to arbitrarily get the evidence out of the way? Results
                 oriented judgement implies they make the decision then make the evidence conform to
                 their position. Judges would probably be offended at the suggestion.

Gallen v. Butterley 1984 BCCA – seeds didn’t grow as promised
Evidence of oral promise/contract admitted, mitigates liability disclaimer re: yield in K
Weakens PE after Bauer

   After Bauer, but more illustrative of how weak the parole evidenced rule is and currently applied
   Farmers bought some buckwheat seed, on assurance from seller that buckwheat would smother weeds
   Didn’t work out. Crop failed.
   Issue: liability for crop loss excluded by agreement:
   Seller “gave no warranty … and will not be in any manner responsible for the crop”
   BCCA: clause did not exclude liability
   Lambert J. 8 comments re: parole evidence rule
        o Net effect: weakens rule to a presumption with a bunch of holes in ot
        1.        Rule of Parole Evidence, principle of substantive law: root as an exception to evidence
                  a. 2 contracts made at same time, dealing with same subject matter
                  b. Oral agreement was never made (?)
        2.        Principle cannot be absolute
                  a. Cannot be used by unscrupulous to dupe the unaware
        3.        evidence principle (Harch, Bauer and x) was not absolute

        4.      clearly accepted exception: if oral contract is the basis of a written agreement that
                contracts, the written does not stand
        5.      f
        6.      if HBC are ok, Weterrburn – parole evidence rule is a presumption
        7.      rigorous presumption where parties have produce individually negotiated document as
                opposed to form agreement
        8.      presumption: less strong where oral agreement conflicts with general limitation of
                liability clause in

   seems to make a lot of categorical statements from the 3 cases, where
   looks to facts: no contraction between oral statement and Clause 23:
        o “no responsibility for crop” means yield.
   Even if 23 is wrong, Clause 33 gives the whole agreement, harmonious meaning to all provisions.
   GH: this decision does some violence to parole evidence rule, HBC and the agreement
   Other majority decision finds:
        o “not responsible for the crop” not specific enough
        o HBC cases not helpful as didn’t deal with limitation on liability clauses

   Minority: seller passing on best available information, with sophisticated buyer
   Language C 23 could not be construed to permit a warranty that the clause would not be at risk to
   Difficult to imagine what the deal would have looked like had the seller taken responsibility for the
    crop outcome.

   Certainty is an important aim in contract law.

   From perspective of contractual interpretation: who is preferred? Majority, minority?
        o Minority: text is clear – seller trying to convey information, not taking on the entire risk of
            crop failure. Have to look at the surrounding circumstances of how seed selling typically
        o Should seller have to take on that liability? Probably not.
   Majority approach makes seller into an insurer
   Absence of commercial efficacy here
   Are Swann & Ryder right here? Should sellers be held to their word, and policy argument
    constructed to find on behalf of the farmers?
   Text/context? – was a limit on liability
   Parole evidence rule may not be so strong – trade offs occur.


<20 minutes late>

(g) Contra Preferentum RULE

Arthur Anderson v. TD Bank – bank structured consolidation account and mirrored it for construction
customers - resulted in bank liability for construction lien trust fund claims
Ambiguity in std form K is construed to the detriment of the drafter,
objective evaluation

Majority: looks to factual matrix – p. 372
Court also looked to Commercial efficacy:
    Commercial reality: TD governed itself per the agreement
            o Honoured cheques per the consolidation account, rather than individual accounts

Focus on the intention of the parties
    Mirroring account structure didn’t totally jive with Construction lien act
    Trust provisions in construction lien act: for contractors/subC
    Banks arrangement swept these funds in trust into the consolidated total
    P370: “could result in the Bank being liable to the construction trust fund claimants, this issue is
       irrelevant to the interpretation of the agreement”
Degree to which third party interest were/were not taken into account
    P.373

Majority: the meaning of the agreement is prejudicial to third parties and counter-policy.
     Is it only about getting the meaning right?
     Does the majority care about other policy concerns
     Commercial efficacy v. Construction Lien act protection of contractors
     Presumed intention of the parties: court assumes the parties are going to act in commercially
        beneficial manner. Preserves the purity of the intention of the parties
     Is the contract partly illegal? Stretch here, need direct contradiction with a law.
     Bank is a sophisticated party, it would have known it would be liable for construction liens and
        taken it into account in entering into the agreement.
     If the court doesn’t like it, they can put it to Legislature to amend the construction lien act.
     Commercial efficacy from the perspective of the corp: 19 companies were set up to diversify
        risk: yet the banking arrangement made it back into one company
            o Successful endeavours subsidized the unsuccessful
            o Unsuccessful projects brought down the successful ones in bankruptcy

What is the point of the Contra Preferentum anyway?
   Collateral effects, the fact that one party drafts an agreement may be random
   Intent of rule: to govern fairness of the agreement NOT to govern intent
             o It is the only rule that doesn’t account for intent
   May fit outside the general objective approach to the rues
   Assume the worst, not the best
   Contrary argument: reinforces objective approach by looking to the reasonable observer: what is
        the intent of the party according to the reasonable person…

       Enables departure from written text, for objective third party evaluation

Does there have to be an in-ability to modify contract for CP to be invoked?
    Comes out in Abella’s dissent
    CP applies most heavily to standard form contracts – per Abella dissent
    Drafting party includes an ambiguity (subjective intent) that is to their advantage
    Controlling that behaviour is desirable, but here there is no negotiation possible
    Accepting party may be acting on the basis of verbal assurances
    Courts don’t like “gotcha” agreements – something in the agreement that wasn’t seen
    Ambiguity is different, more than one interpretation
    Think about if there has to be intent – I’m not so sure these ambiguities arise from deliberate acts,
       lawyers do their best but it is hard to take care of every eventuality
    Does this obviate the consumer from due diligence? It shouldn’t.

In a negotiated contract, it is arbitrary who wrote it, or it is hard to tell who drafted a given part.
     Therefore, hard to apply the rule to negotiated agreement

Vulnerable parties: information imbalance, inequality of bargaining power – court needs to sweep in and
protect the vulnerable. Do they need to sweep in where parties are of equal ability?
     Consider banks, insurance companies, etc.

Consolidated Bathurst v. Mutual Boiler – SCC - corrosion of boiler covered by insurance
Ambiguity in accident with direct/indirect effect – interpreted to the advantage of CB – looks to scope of
whole agreement
Dissent would have CP apply only as last resort doctrine

       Insurance case
       CB – pulp and paper co, plant in QC
       Needed heat exchanger for operations, which failed due to corrosion by seawater
       Resulted in damages
            o Heat exchanger
            o Consequential losses
       Claim made against insurer Mutual, who did not cover the losses

Note: strong textual argument in favour of the insurer p 895
     “to pay the Insured for the loss of or damage to property… caused by such Accident…”
     “accident shall mean any sudden and accidental occurrence… but shall not mean depletion,
         deterioration, corrosion or erosion…”
Judicial History:
TC, CA for MB

Reversed decision, found for CB.
    Estey relied on Contra Preferentum rule
    P. 899 – 2 possible interpretations
           o Accident does not mean that which directly or indirectly results from corrosion
           o Won’t replace the thing that corrodes, but will cover the results of failure of corroded part
    Insurance contracts … “where an ambiguity is found to exist… shall be construed against the
       insurance carrier as being the author”

Dissent (Ritchie):
     Alternate formulation of the CP rule: p 892
     Last resort gloss: when all other rules fail to assist the court in determining the true meaning of
        the policy
            o Somewhat consistent to
            o 2 step rule:
                    Look at document
                    If ambiguous, use construction against drafter

Note: Estey looked at the entire agreement, focus on “Accident” definition, construction of the
problematic clause
     Suggested alternate construction that could have helped p. 898
     “accident” definition, including exclusion for corrosion
     Other exclusions have specific “direct or indirect” cause language employed specifically.
     If director o indirect corrosion was intended to be an exclusion, drafter should have used
       consistent language to put that into effect.
            o ambiguity found in the non- application of the “direct or indirect” language
     P 901
            o Normal rules of construction apply: interpretation that advances true intent of parties at
                the time of entry into contract
            o Literal meaning should NOT be applied where it woulf bring an unrealistic or non-
                commercial outcome
            o Ambiguity should be interpreted to bring out a Fair result
            o Or in the Fair commercial outcome
            o Insurer should not be able to pocket premium without risk: otherwise what is insurance
                for if it can never be collected
     Note contextualist interpretation –

Tension between text and context: did Estey go too far?
     Insurance works that way: the contract is drafted to control risk, which is a commercial reality
        for the insurance company
     Hard to imagine the insurance company had in mind paying out for accidents that happen because
        there was a part that wore out on the normal course of operations

Consolidated Bathurst is most followed, to give departure from the strict language of the policy to the
scope of the whole agreement
     Does it have a lot of influence? Not really. (!!)
     Estey’s ambiguity is hard to locate, must pull the agreement apart to find it
     This is a typical approach: agreement is tested by court in a way it might not be tested in the real
     Drafting difference: catastrophic even is treated differently from everyday events (corrosion)
     Why should language that is not there mean more than language that is there?
            o Difference is important, war and nuclear fall out are rare events, and are covered by the
               direct and indirect language. Why did the insurer not take the same effort to cover an
               event that is more likely to occur.

Note: this is the new old SCC: departing from historical position to a new one where they are concerned
about getting the right result, not just applying rules. Estey is old guard.

What about the intention of the parties? Is it meaningful to talk about the intention in this case?
   GH: Ridiculous to say a legislative body has a coherent intent about anything at the operational
           o Leg can create sections in staute for application, can do the same in contract
   Is it different in the contractual sense?
   Is purpose the same as intention? Arguable that for leg, the purpose is the intention
   The fact that it is being litigated, means that the insured didn’t intend to pay for that kind of
   Purpose of insurer to enter into this kind of agreement is to pay out as infrequently as possible.
       This will always colour their interpretation and intent.

      Test well defined
      3 part test for Implied Term p 634-635 from CPHotels
           o Based on custom or usage
           o As the legal incident of a particular class or kind of contract
           o Based on presumed intention of the parties to give business efficacy to a contract or as
                otherwise meeting the “officious bystander” test
                      Note: INTENT, business efficacy, objective nature of the exercise

MJB Enterprises v. Defence Construction- 1951 – tender selected was challenged for not complying
Implied term: lowest compliant bidder will be accepted

       Tender process = well defined process to submit bid in response to a bid package
       MJB was second lowest bidder, lost tender
       “any tender shall not necessarily be accepted”
       Lowest bidder had added a not to clarify/alter pricing depending. Requirement of Contract A
       MJB argues that Implied Term that lowest compliant bid will be accepted

Judicial history
TC: for

SCC (Iaccobucci):
   An appropriate basis for (3), presumed intention. Unclear if both branches are required, or if one or
       the other is sufficient
   Iaccobucci doesn’t go there
   Roots the intention of the parties to the ACTUAL parties, the reasonable test is what the parties
       would do if they are (were) reasonable.
   Only a compliant tender would be accepted is different from para 13:
           “the lowest or any tender shall not necessarily be accepted”

Did Iaccobucci get it wrong?
    Why have a tender process if not going to comply with its terms?
    I have a problem with business being told they can’t accept a bid
    I’d include “may disqualify” bid rather than automatically disqualifying non-compliant bid
    Is it relevant that it was or was not a material term of the bid?

Why not go to the custom and usage basis?

(i) Duty of GOOD FAITH

Puzzling area of the law: Businesses are not precluded from acting not in good faith.
It is COMPLETELY unclear what the scope of the duty is, and how it plays itself out.
      TC are occasionally fanatical about Good Faith performance.
      Appellate courts are cautious and reluctant to extend the duty.
            o Avoid the determination of scope or be very vague

Duty of Good faith articulated in:
Basis in Civil Law, Universal Commercial Code (adopted by almost all US states)

    Central aspect of other areas of law – Labour Relations, Contract law: insurance, etc
    Why is this therefore not a generalized duty in Contracts?

    Duty to good faith performance exists in certain circumstances (see list below). 2 schools of thought
       on the application:
            the duty should ONLY exist in those cases re: conduct
            the duty should exist everyone

Examples of where DOGF exists:
   Power of discretion given to one party – Greenberg v. Meffert
            Where an employment contract gives employer discretion to award a bonus, must be awarded
                 in good faith, can’t just ignore it.
   In complying with a condition precendent
   Agreements for real property may include a recision clause
            If vendor can’t make good title, agreement may be recinded, but
   Employment Wallace United Green Growers
            If bad faith in performance of termination, damages are due
   If in the context of an existing contract (BUT NOT CONSISTENTLY)
            Price to be agreed in good faith
            Agreement to agree is problematic
            May have to do with bargaining power, equity, but inconsistent

Gateway Realty v. Arton Holdings- Zellers/Arton failed to find good assignee for lease in NS mall
Reasonable extension of anglo-CDN law to act in good faith. Not a new obligation under K.
Sympathetic Gateway plaintiff

Caused a great stir at TC when duty imparted

       Shopping centre war of Bridgewater NS
       Bridgewater Plaza (Gateway) v Bridgwater Mall (Arton)
       Arton looking to increase its stature, found anchor tenant – zellers
       Zellers was a Gateway tenant
       Arton took assignment of Zellers lease in Gateway mall, relocated them to Arton mall

       In assigning lease, Arton failed to exercise the right of assignment in good faith

       From contractual standpoint, appeared zellers had the ability to assign lease to third party.

Kelly J:
     Breach of duty of good faith of performance
     Framed it as “Not a radical departure” from existing law, which it clearly was.
     Para 38:
            o “the law requires the parties to contract exercise their rights under that agreement
                 honestly fairly and in good faith.”
     Good faith part of anglo cdn law for 300 y
     Para 42-
     Para 59: Kelly anticipates objections to a generalized rule, dismisses with quote from Belobab
         paper: “not impos[ing] new contractual obligation or responsibilities”
     Para 65
     Para66 law and economics scholars
            o Removed from reality: but inferring commercial relationship
            o More real: long perm contracts cannot always anticipate future economic commercial and
                 merchandising trends
            o Climate where clients urge clients to act in good faith (or not in bad faith), is a climate
                 where business disputes will more likely be resolved
                       Not policy argument: good faith action is less litigious
                       GH: makes sense: acting in good faith /problems worked out are better
     How did Kelly define bad faith?
            o Para 60: nebulous terms
                       “where one party acts in relation to the contracts in a manner where the result
                         would be substantially nullify the bargained objective or benefit to the other

    Breach in the agreement, breach of duty of good faith performance
    Long analysis re: finding alternate tenant para 67
    Para79: Mr Rodney was a sympathetic plaintiff
          o assignment agreement was not at issue, fulfilment by Arton was

Did Kelly get it right, should there be a duty to act in good faith?
     Business morality imposed by the court is nebulous
     Mr Rodney was sympathetic, if Cadillac Fairview was on the other side, would it have been
        decided the same?
     Parties are acting in their own best interest,
     Breaches do not have morality associated with them, duty of good faith imports a concept of
        morality into contractual arrangements
     Contractual terms can take care of these conflicts in many cases: the contract could have been
        renegotiated to include a no-vacancy clause, or best efforts. Did the court have to rely on the duty
        of good faith to get to the same finding?

French law: generalized rule, so it does not help
     Where seller raises price, buyer finds no support from court regarding commercial certainty

Lots of policy making
     Franchise: Arthur Wishart act: came into effect at same time common law made the same finding

       Labour relations: good faith by legislation

Con: In addition to uncertainty, + duty may impose obligations not bargained for by both parties
Undermines the fact that parties are acting in their best interests
   Maybe zellers entered into the contract
   Morality – arbitrary: is good faith about reasonableness or about morality?
   “community standards” application of morality means you have to wait to litigate to see what
        standard the court applies

Is there a clear demarcation between Duty of Good Faith and Fiduciary Duty?
      Arguably, good faith could be more narrow, resting on the contract, whereas the FD is a
         generalized relationship

Outcome of the case is problematic: requires competitors to not act as competitors, but in the best interest
of the other. Antithetical to market economy.

Competitors need not undermine the business of the other. Fair competition can exist without injury to
the other.

Where does it cross the line to anti-competitive behaviour?

Contract law may not be about big policy issues, it may be about getting it right in the context of the

Next week:
Finish duty of good faith 3 more cases
Topic J interpretation of specific types of contracts


DUTY of GOOD FAITH continued

Peel Condo Corp 505 v. Cam-Valley Homes OCA 2001 – condo rec facility never built, purchaser PCC
Reverses TC, no CL to support, fiduciary duty inappropriate unless DOGF specifically imposed in K
Consumer protection balanced against commercial reality
Some DOGF imposed: unequal bargaining power

       CamValley was the developer of a multi-phase condo project
       CV wanted to build condos on the land designated for recreational facility
       Purchaser Peel 505 sued
            o CV had inteneded the reasonable purchaser would conclude the lands would be RF or
       Disclosure statement stated CV did not warrant any phase would be built
            o Contained proviso that recreational facility would not be built until after the terraced apts,
                 and that they might never be built
       Budget stated CV was under no obligation to complete recreation facility
       Reciprocal Agreement (cost sharing) provided that if a facility was not constructed, the agreement
        was deemed amended (and reference to it would be deleted), CV was under no obligation with
        respect to it.

     Was CV under a duty of good faith to execute the contract in full and build the recreational
     Is there a fiduciary duty owed by CV to PCC505 in executing the contract?

Judicial History
     TC Epstein J. dismissed PCC505’s claim to ownership
     Permanently enjoined CV from developing the recreational lands for residential purposes
             o CV was under no obligation to build RF, but had not reserved the right to build condos
     Contrary to priciples of good faith between contracting parties
     Contrary to consumer protection objectives of the Condo Act
     Contrary to developer’s fiduciary obligation to purchasers to relay on obscure contractual
         provisions in a way that defeats the reasonable expectations of the purchaser.
     CV appealed, PCC505 cross appealed

OCA Decision
    Appealed allowed, removed injunction.
            o No fiduciary duty between developer and purchaser
    Provision in contract reserved to CV the right to build on the land
    Ambiguity re: purpose of land previously designated for RF DOES NOT support specific
       performance or an injunction
    TC failed to distinguish between the developer and the purchaser before signing the agreement –
       there can be no fiduciary duty between the 2.
    Consumer protection of Condo Act needs to be balanced with commercial reality of condo
    No supporting caselaw re: fiduciary duty/trust between developer and purchase
Note: wiler’s concurring decision

       Stronger than usual views on duty of good faith
       Agrees that Schedule F provides for right of CV to build on the land
       Words of contract were not enough… DOGF had to be superimposed upn that.
            o Changes should be communicated in K
       See with her analysis, preventing the owner from using the land in a way that is acknowledged in
        the written contract
       Fiduciary duty means A must give at least as much consideration to B’s interest in deciding
       Fiduciary duty subordinates A’s interests to B, Different from Duty of good faith
       GH: interesting in principle, but hard to execute in real-life

       In QC, duty of good faith exists per Martel (torts)
       Martel tort case involving suggesting that there was a TORT of bad faith in negotiation, SCC
        disagreed, uncertain if it should apply to a contracts law case
       SCC left open implied duty of goof faith at common law in performance of existing contracts.

       In CV, courts already take a regulatory function, policy concerns from Martel are not at play here

       Suggests a more general theory of good faith
       Para 97 Employment contract duty of good faith :
            o Not a contract between equals
            o Employee lacks information to attain sufficient
       Lack of information & unequal bargaining power in this situation makes it appropriate for
        imposition of duty of good faith
            o Similarly for insurance contracts
       Para 100 puts same general duty of goof faith on condo contract per
            o Unequal bargaining power
            o Purchaser lacks sufficient info to attain more favourable terms

    Wiler spoke for herself, no other cases support
         o Note: conflicts with principles of Dynamic

Was she talking about generalized duty of good faith? Or just another pigeon hole for condo contracts?
    Focusing on the condo context,
    Common law develops incrementally, maybe she’s setting it up from

Tension text: context. Wiler does purchaser’s analysis, seems to drift from text
    Superimposes new obligations on parties that were not intended
    Does this
    Contextual analysis: whole understanding of the parties, purchaser understood that they would be
       getting RF or trees, not more condos to look at.
    Counter argument: why include the clause if you don’t want it to have the effect?

GH thesis: Outside policy concerns play little with inprepretation of contract
    Is Wiler imposing other policy concerns outside the law of contract?
    Protection of condo purchase comes from Condo Act
            o Wiler applies outside concern, but not creating judicial policy, as it already exists in
                Condo Act.
    Could be argued that She is just looking at the contract.

            o   Bargaining inequality, lack of information ~ insurance DOGF is very well established.
                Ties it back to deal between the parties and info both directions

TransAmerican Light v. ING- ONCA - share purchase price discrepancy, TAL sues ING for damages;
ING counter sues TAL for not disclosing concerns during dueD
DOGF claim re-inserted into pleadings to be determined by TC

Good illustration of how DOGF actually works
Inconsistency between appellate panels doing different things
Procedural context: went up to CA on pleadings motion. No power of court to find fact on pleading
motion, so great tendency to send back to trial.

Facts (33 min)
     Sophisticated parties on both parts
     TAL bought shares effecting purchase of NNLife
     Long period of due diligence – TAL should have been able to get the info it needed
     Share purchase agreement at issue:
            o No fair to close then sue later because price adjustment mechanism existed in contract to
                take care of these concerns
            o Suing defeats the purpose of the contractual clause
     TAL sued ING for damages
     ING counter sues TAL for breach of duty of good faith in not disclosing its complaints during
        due diligence process
     TAL argues that DOGF only exists (para 46) in certain situations

Judicial History
     TC struck pleadings
     CA: put them back in
             o Doesn’t really decide re: DOGF

OCA Decision
   Applies only to commercial contracts, not to contracts in other areas of law
   Per McCamus: remains open question if DOGF adds anything in addition to available
     commonlaw doctrines that apply to contracts
   **Canadian Courts HAVE NOT recognized a stand-alone DOGF that is independent of terms
     expressed in contract or the opjectives that emerge from these provisions
   Can’t use DOGF to create new, unbargained-for rights
   Can use DOFG to prevent a party from eviscerating the contract (defeating the sprit of the
   They can’t decide on the basis of the facts of this case,

Laskin dissents in part, would have struck out a number of these pleas of good faith.

       There should be a generalized duty

Analysis and Discussion

You can bargain for duty of good faith.

       If not stated for all provisions, should it be inferred?
       Should we let contracting parties decide? Not the courts

Merits of case –
    There as the provision for the price determination in the contract
            o Counter argument: were there reps and warranties
    If Problems were non-material, may not have triggered price adjustment clause
    Incoherence of body of case law -
    O’connor is probably more coherent than Wiler.

Why are Courts reluctant to come to decision on this?
  Provincial appellate courts reluctant to do so
  Incremental development of common law v reluctance of court to change the law
  Evidence from other jurisdictions (QC, US, France) to impose duty of GF
  Law is unstable now, should court not make a decision? Rather than just articulate a process?

Dynamic Transport v. OK Detailing (1978) SCC EDM land purchase, subdiv approval not attained
DOGF imposed: vendor to fulfil condition precedent prior to closing. Didn’t do it as $ went up.

       Fulfillment of a condition precedent
       SCC seemed to have little trouble in imposing duty of good faith

       OKD sued Dynamic for specific performance re: purchase of land in Edmonton
       Purchase contract required attainment of subdivision control approval
       Contract did not specify who was to attain the approval

Judicial history:
     ABCA found no duty

SCC decision:
    Duty of good faith exists for the vendor to fulfil a condition precedent to the deal closing

    Parties had a binding contract, were aware subdivision approval was required
    Approval was condition precedent
    Supported by case law that one party is inferred to be held to undertake the approval
       (Hargereaves, Smallman, etc.)
    “the vendor is under a duty of good faith and to take all reasonable steps to complete the sale”
    This is the only way to impose business efficacy to their agreement
    The whole point of the deal is to subdivide and sell the land. The

Is this imposing terms on the parties?
      Vendor should not have contracted to sell land if he didn’t have the ability to subdivide
Is this the case of a vendor who sold for too little and wanted to get out of it?

       Probably. If the price had gone down, he’d have been willing to undertake the subdivision ‘
       If specific performance not available, this becomes an Option for the vendor to sell

Did Dickson need the Duty of GF?
     Seemed like there was enough in the contract to get the vendor to apply for subdivision
     Might have been necessary to ensure the vendor put in a good effort

What is the extent of the duty? Not a fiduciary duty, does this make it easier for Dickson to impose
   Not as penetrating as CamValley
   What the duty is a particular case may vary.
   Without the DOGF, the contract doesn’t work

Does specific performance defeat the principle of efficient breach?
    I’d argue that this is not a case where the vendor would be entitled to efficient breach: the only
       detriment he would experience in fulfilling the sale contract is failure to realize maximum
    Efficient breach relies on principles of law and economics
            o Maybe LE Profs should set default rules that parties don’t have to negotiate

Consumer Contracts

Tilden Rent-A-Car Co. v. Clendenning, 1978 OnCA - care renter not liable for accident
Consumer must read and understand important terms of std form K to acquiesce.

    Mr. C rented car, asked for additional coverage, signed contract, did not read
    While avoiding a collision with another driver, acting out of sudden emergency, hit a pole
    Plead guilty to impaired driving on advice of counsel, but was capable of proper control

       Contract: small type
           o CDW: libility limited to 0 provided customer adheres to provisions of agreement
                     Elsewhere in agreement: customer agrees not to use vehicle in violation of law,
                         or while/after drinking or taking drugs in any quantity
           o Mr C asked what it meant on other occasion: “payment provided full non-deductible
           o Mr. C: if he knew what the contract said, he wouldn’t have entered into it

    IS Mr. C liable for damage to car by reasons of exclusionary provisions of the contract?

Judicial History
     TC: Mr. C had NOT acquiesced to the contract, not liable for damages due to activity of CDW

OnCA Decision
    Majority: dismissed appeal
          o noted key facts:
          o Tilden clerk was not to explain clause unless asked about it
          o Harsh contractual provisions made renter liable for ALL damage even for minor
              infraction (1 km/h overlimit)
    Apparent Mr. C had not read contract, no disclosure of details, no formality
    Clauses relied on in this case are inconsistent with the overall purpose of the contract, as entered
      into by hirer

       Consumer isn’t invited to turn their mind to contract provisions

<< missed 5 min>>

Note dissent by Lacourciere

    Drift from the text of the contract to the context of the understood agreement between the parties

     Its always easy to derive an absurd hypothetical
     Consider the seawater machinery case: if not insurance
     Good faith context: persons who enter into contract should read them, commercially reasonable
        to expect persons to read what they are getting for their 2$.
     No ambiguity in the contract, why dumb down the consumer

Harsh language:
    From point of view of Tilden: not a lot of $ for good coverage. Is it harsh to expect specific terms
    Would it be impossible to run the business on a $2 premium? It becomes a direct cost of
        business. Hard to say what the real risk is and if $2 is the appropriate price.
    Does this put the cart before the horse? Is it harsh before it’s enforced or after?

Craven v. Strand Holidays (Canada) Ltd., OnCA 1982 – trip org not liable for injury to vacationers per
exclusionary clause
Where consumer is able to review and consider terms of K, they will be bound

Same court, different decision, 4 y after Tilden, different reasons

    Respondents injured on bus roll-over in Colombia
    Trip arranged by Strand

     Is there an exclusionary clause in the contract that absolves Strand of liability?

Judicial History:
TC: jury trial, yes there was negligence, not saved by exclusionary language in contract

      Lacourchiere J: sent back for new trial
      Cravens were unaware of the condition: Strand can’t control sub-contractors, and therefore
         limited liability regarding actions of subcontractors
      UKLIKE tilden: this is not a standard form contract, in circumstances where no one can read it
      Sophisticated travellers, with the opp to discuss T&C of contract with Strand
Is this Lacourcheire getting back for Tilden, or is this really different?
      Tilden contract evicerated if contract read strictly, Craven ?
      Contract facts differ in context, therefore different outcome
             o Different allocation of risk for car rental v. tour
      Seems inequitable, but Cravens can go sue the Colombian bus company directly

           o Should Strand have control/liability relationship with its subcontractors?
    Different between putting tour together and assuming risk for traveller’s trip
Seems to be a bit better balance between text and context

What did Craven and Strand really intend?
     What is priced into the deal?
Incentives to be careful? Does Craven give more direction to the consumer?
     Greater price leads to greater degree of care required/expected
     Commercial efficacy… get same result consumer has ability to buy outside insurance
     In reality, consumers are not that careful
     Consumer protection act: court could have been more strong on behalf of the consumer
     BUT, tour companies don’t absolve the consumer of taking responsibility for themselves
             o If their liability was unlimited, no companies would plan trips
     Clendenning: as a business if you aren’t liable, you have to tell the consumer.
     Did tour company do their best? Due diligence in selecting a bus driver doesn’t mean there is no
        risk, just decreased risk.
     Once you drift from the text, it is hard for the court to determine HOW MUCH context to import.

Employment Contracts
Ceccol v. Ontario Gymnastic Federation, on termination, EE wanted severance
K must establish contractor relationship, performance must confirm K

        Employment law very concerned re: dignity of work and vulnerability of workers at termination
        Interpretive process affected by employment law concerns
        Ceccol head of Gymnastic Fed, 1 year contract renewed 16 times
        Provision:1.1
            o Agreement for 12 months employment ending June 30, 1997
        December3. 1996: notice to all employees that no renewal after June 30, 97
        May 9, 1997 – plaintiff informed her contract would not be renewed

     Was the contract really for an indefinite term?
     If so, Employment Act standards would kick in for termination and notice

Judicial History:

TC, CA: unanimous in finding

Analysis: p 624 para 24
    Fixed term contracts will be enforced if clear
            o “the courts require unequivocal and explicit language to establish such a contract and will
                interpret any ambiguities strictly against the employers interest.”
    Para 14
    1.1 of the contract could bear more than one interpretation
            o 12 mo term, but could be longer/shorter
            o Renewal, if acceptable performance, and parties agree on terms
            o Therefore arguable that renewals are not optional
            o Ambiguity reinforced by the conduct of the parties
                     the contract had been renewed 15 times

Did he get it right? Bringing in employment law concepts contorts agreement
     Termination context: federation warned people in December… looks like a common law
        reasonable notice – looks more like permanent employee rather than term contract
     Can we read courtesy (in long notice) against the employer?
     Some Stretching of language to find
     Labour law principle: action of the parties will be more demonstrable of the actual relationship
        than written agreement
     Arguable that she should have tried to convert contract to permanent employment
     Should be up to parliament to plug loophole, not court –

How explicit should the contract have been?
    To invoke the contractor relationship, the contract has to be very explicit, but parties also have to
      perform appropriately to back it up.


This class being recorded
Check Hall website for updated class notes
Make up class for Friday March 14, 12:30 (?204)

Today: finish Contractual Interpretation
    Employment contracts
            o Puts stress on thesis: contract about getting the contract right
            o Interpretation often influenced by policy considerations
            o Machtinger v. Hoj
    Exclusion clauses
            o Law has evolved to an interpretaive approach
            o 3 casees
    Misrepresentation and Recision

Machtinger v. Hoj SCC – EE contract notice was shorter than statute
Implied terms will be applied where NECESSARY CP Hotels
Rebuttable implication

   The employment contract purportedly provided a notice period that was shorter than the statutory
    minimum notice period
   Can’t contract out of statutory minimums
   The effect of the unenforcability of this provision perplexed the court
       o Common law notice period was longer than the statutory period

 CL notice period should apply, but it is rebuttable
 McLachlin decision

Judicial History
 Strong textual impetus to go with the statutory notice period
         o What was the intent of the party? They clearly wanted a short period
         o OnCA – went with Statutory minimum
         o Appealed to SCC

SCC Decision
 Focus on implied terms
        o Terms implied in fact – reflect intentions of the parties
                Like MJB
        o Terms implied in law- imposed on parties regardless of their intent
 Here: McL reminds us certain factors (Bartle Factors) implied into every employment contract
 Test for implication of a term is NECESSITY
        o Necessity defined in a broad sense CP Hotels
        o Necessary in a practical sense to the fair functioning of the agreement Tai Hing Cotton Mill
 CA erred in grounding its analysis in the intention of the parties, this is a matter of a “legal obligation
   of the employer, implied in law as a necessary incident of this class of contract.”

   Note: McL is not a majority decision, but an interesting and useful analysis


Does McL get the right balance?
 Unequal bargaining power: if the employer could contract for shorter terms, then they would. This
   may seem punitive, but it is hard to imagine benefit from the employee’s perspective that a notice
   period be short.
McL likes implied term analysis… see Wallace v United Greengrowers
 Badfaith conduct by employer at termination can lead to increased notice period
 Majority did not go with the implied term analysis
 Less force for ?
 ?results driven decision
       o How do we get to a position
       o McL could have gone with the Rebuttable presumption (w majority), except that then it
           would have been rebuttable
       o Nothing in contract to support policy rationale of imposing long notice term, so McL had to
           provide back-up that would be free standing

 Has the effect to limit liability of one party under K for breach of K or liability that would arise at law
  (including Tort) CL or K

Hunter Engineering v. Syncrude SCC 1989 – maker of Bad gearboxes not liable for system losses
Formerly: Lord Denning approach: unfair/unreasonable to allow breaching party to rely on liability
Shift to more contractualist approach focus on intention of parties per Photoproduction (Dickson J)
TEST: was K provision unconscionable given the circumstances? Pure interpretive approach.
Sophistication of parties important

 Gearboxes were no good
 Syncrude contracted w Hunter for gearboxes – provided by Hunter and allied Chalmers
 Limitation on liability clause included in both contracts

 Before 1980, 2 competing views on limitation of liability, centring around fundamental breach
       o Reasonableness requirement: if a fundamental breach occurs, the breaching party was
            precluded from using a limitation on liability clause, where to do so would be unfair and
            unreasonable (DENNING PROPONENT)
       o Contstruction approach: look at actions of parties, if event covered by limitation clause, then
            apply the clause to the facts. (House of Lords) Suisse Atlantique, Photo production
 Canada: need to adopt photo production with Interpretation Approach to examining the facts and the
Dickson J:
    Adopts PhotoProduction
    Treats fundamental breach as a matter of contract construction
    Replace FB with a rule that holds the parties to the terms of the agreement, provided the
       agreement is not unconscionable
    See 565

       Not all exclusion clauses are UNREASONABLE, and should reflect the price of the contract
       It is not unreasonable that Hunter wouldn’t want to take on $billions of liability for holding up the
        tarsands project, for a $million price for gearboxes. If they were to assume liability for the whole
        project, their price would be higher.
     Pure interpretative approach: It is preferable to interpret the terms of the contract in an attempt to
        determine exactly what the parties ageed. If on its true construction, the contract excludes
        liability for the kind of breach that occurred, the party in breach will generally be saved from
Here, we have sophisticated parties, they new what they were getting into, the contract limited liability,
and the breach is covered by the contract as drafted.

Wilson J:
    Her view has not prevailed.
    Photoproduction not directly applicable in Canada
    UK has additional statute to protect contractors from unfair terms. Therefore Canada judiciary
       needs more latitude.


Did the court get it right in doing away with the fundamental breach approach?
     would this provide support for commercial efficacy? Wouldn’t the contrat
     if it is not unconscionable, why not allow the limit on liability to stand?
     in hindsight: expected performance
     does this expand the unconscionablity doctrine? Clearly the parties wouldn’t bargain for that, so
        therefore the court will imply unequal bargaining power

    More results oriented reasoning?

    Is it problematic that the general principle of fundamental breach is gone for the purposes of
    contracts? Is the courts discretion to strike down the limitation in the case of unconscionability,
    unfairness sufficient?

    Law an economics approach: how hard would it be to negotiate the terms in the framework of strong
    limit on liability in a competeitive marketplace? Wouldn’t allowing those competitors who do bad
    bargains to get out of them allow them to stay in the marketplace, when they should fold?

Fraser Jewellers v. Dominion Electric Protection(ADT) (1989) – robbery => ADT return premium, not
liable for other loss per K
Hunter test applied; sophistication different from consumer context; commercial efficacy
          conflated Dickson and Wilson – to one test uner the Unconscionabliltity approach
          remember Tilden v. Clendenning? This is a different approach to the interprettive exercise

       Fraser operated store in Cornwall, contracted w Dominion for burgler alarm
       Contract contained limit on liability clause to annual service charge or $10K
       After burglary, ADT waited 10 minutes to respond. 50K loss. Court found ADT negligent
       Are they stuck with limit on liability?

Hunter Analysis p 577
    Is the clause, in light of the overall contract, unconscionable (Dickson) or unfair or unreasonable

      Didn’t matter that Fraser didn’t read the clause
      In the absence of fraud, a person is bound by its terms, even if they choose to leave them unread.
      Contrast to Tilden v Clendenning - consumer context has different standard. Need to bring terms
       to the attention of the consumer.
    Small business wasn’t enough to depart from contractual context for commercial endeavours
    Mere inequality of bargaining power does not give the vulnerable party the right to imputiate the
       contract. The question is: was there an abuse of the bargaining power?
Analysis: interpretaive approach
    Commercial efficacy analysis – doesn’t make sense for ADT to provide unlimited liability
    ADT is not an insurer
            o Explicit in clause that ADT is not an insurer
            o Premiums were too small to provide insurance in addition to monitoring
            o Limit on liability expressly states negligence is limited to 10K or premiums
    Inventory could vary: ADT had no control over that, so why should they be liable for it?
    Fraser didn’t have auxillary insurance, but didn’t argue that there was an auxillary verbal
       agreement regarding insurance, etc.

       TC: para E was unfair
       OnCA: reversed decision,

Is it confusing that commercial setting is different from Consumer setting? Tilden is still good law.
      Is the sophistication of the parties an artificial distinction? Some consumers are very
      Tilden: Clendenning thought he was getting coverage. What was Fraser’s expectation? Is
         Fraser’s expectation (intent) relevant?

Is the evolution back to textual analysis,

What about good faith performance? Would that help here?
   The issue was not performance, there was negligence here… the issue is the purported/agreed
       limit on liability
   Contracting out of liability from one’s own negligence requires express and specific language.
       There was quite a bit of language in the contract that addressed this… the TC may have felt
       tension regarding this point. However, negligence is specifically included in the limitation

Solway v. Davis Moving & Storage (Kennedy) (2002 OnCA, SCC leave refused) theft from moving van
=> liability for movers, despite limit on liability clause
Hunter Test applied, unconscionable given verbal disclosure, consumer (not commercial) relationship

More difficult analysis than Fraser, but built on Hunter analysis
Consumer case

       Solway contracted with Kennedy
       TC: unconscionable and unreasonable limit on liability,
       Split decision, but upheld at On CA
       3 important facts

           o Kennedy
       Hunter Engineering test applied

OnCA Labrosse J:
    Majority upheld the TC with few comments
    Dissent Carthy JA
         o TC used Minor transgression of performance to get rid of the exemption clause
         o Commercial certainty: all parties are better served by getting what they contract for
         o Did a nice analysis of evolution of statutory reforms – based on semnible business and
             commercial rationale
         o Takes issue with the assurance of Kennedy:
                  Bailment includes an implied agreement to take care of goods, limit on liability
                     should still apply as it is explicit


The statute proscribes limit on liability to 60cents per pound. How can a statute be unconscionable?
If the statute operates in a way that is unfair, can use that as an argument.

These consumers straddle line between sophisticated and not… they clearly understood the contract and
asked for additional assurances. Was the court compensating the consumer from the additional promises
of the Mover? Did the mover know of the statutory limitation and fail to convey it to the consumer? If
so, Tilden is easier to follow. Can’t call a statute harsh or unfair, but if “hidden” or misrepresented, may
be appropriate to deviate.

Hall: thinks Carthy’s analysis is better, but we still need to understand how this was decided

Maybe we need increased Commercial certainty - even if at the expense of borderline cases.

Moving on to other interpretive topics:

1. Misrepresentation and rescission
2. Mistake
3. Rectification – the only one that really comes up in the realworld
4. Frustration
5. Illegality

These topics start from different perspective from inprepretation:

Formed contract: can it be enforced? All 5 start from different points… 1 and 2 stem from defect in
formation of contract or party trying to alter terms based on defect

4 and 5 involve intervening event (frustration) or outside policy event (illegality)

Rectification falls more closely with Interpretation… involves a contract that is properly formed, no one
is trying to get out of it… but party(s) are trying to ensure the recording of the deal is appropriate.

Misrepresentation and Rescission:

A right to rescind the contract – to void ab initio the contract – on the basis of a representation that
induced the contract is found to be a material misrepresentation.

The cases explore:
    Does the negligence of the representee affect that party’s right to rescind?
    Is opinion sufficient to give right to rescind?
    Silence. If one party has a wrong impression that is not corrected, is that sufficient?

Redgrave v. Hurd (1881 UK CA)

       Lawyer selling house & practice to younger lawyer (specific performance)
       Young lawyer (purchaser) asked what the income yield was… 300-400 L,
       On further discussion, seller produced documents to show 200L income.
       More discussion, other papers produced (but not reviewed) showed additional 5L income
       Purchaser moved in, but after short period, decided to not complete contract

NOTE: at issue: the information is a pre-contractual representation, NOT a term of the contract

TC: found for the plaintiff (seller)

       Reversed decision, let the purchaser off and terminate the contract
       Due diligence is NOT a defence
       A man is not to be allowed to get a benefit from a statement which he now admits to be false.
       There were no records, so the defendant could not have verified the representation


Mutual intention of parties: to buy and sell law practice and house.
    Did they have mutual intentions if one intention was based on (deliberately) faulty information.

Has the nature of the contract evolved past this?
If it was an important term, why didn’t it get put into the contract?
Asymmetry of information is important in this decision…

Now we may ask for reps and warranties, include the background information in the recitals, entire
agreement clause, etc.
Practice standards would have been important. We’ve had 130 years of evolution of contract practice.
Maybe that is why we don’t have any modern cases to examine.

One does not lie to one’s colleague, that the deal was between 2 solicitors is probably important.
Egregious behaviour!

Misrepresentation must be proven, must have been relied on, damage must have been suffered. Here, we
have inferred reliance. Onus on the party who relied on the (mis)information … fraud not required.

Smith v. Land & House Property Corp (1884 CA)

       Fleck was tenant in Hotel, but in arrears for rent
            o Under distress, paid some rent, but
            o Shortly after sale, Mr Fleck went into bankruptcy
       Plaintiffs (Smith) trying to sell hotel
       Defendant backed out of sale after they realized Fleck was not “a most desirable tenant”
       Plaintif sued for specific performance

Issue: was statement “a most desirable tenant” an opinion or a statement of fact?

Bowen J:
    Fallacious that an opinion cannot contain material facts
    Statement wasn’t a guarantee that tenant would go on paying rent, but was a guarantee that
      nothing came into play in the relationship between Plaintiff and Fleck that would classify him as
      an “UNdesirable tenant”
    Seller was being unreasonable about opinion of the status of the tenant
    Therefore, misrepresentation found, so rescission appropriate

Opinion re Fleck: maybe the buyer didn’t ask enough questions… what does “most desirable tenant”
mean? Does it mean he pays his rent on-time, or is he fun to hang around?

Why was there not more onus placed on the purchaser to complete their due diligence?

Is this a result oriented reasoning that characterizes this statement as FACT rather than OPINION?
Perhaps… can this be examined under the objective lens?

There is no duty to negotiate in good faith Martell
Can’t usually create the duty in a contract
Is this decision consistent?
          Could silence have been a better approach? No duty to say anything… maybe
          Mutual intentions f the parites: don’t have a mutual meaning of the minds.
          At the time, there was no tort line for duty of good faith anyhow.

Next day:
3 cases: misrepresentation
All 4 cases under mistake as to terms.



Redgrave v. Hurd, Boyle and Percy, 379

Smith v. Land and House Property Corp., Boyle and Percy, 382

Difference between SILENCE (which can not give rise to misrepresentation) and actual

Remedies where specific performance not available

Remedy for fraud. Fraud vitiates all, and leads to powerful and flexible remedies

Innocent misrepresentation, weakness of remedy for it.

Bank of British Columbia v. Wren Developments Ltd. 1973 BCSC – bankloan w security & personal
guarantee by Allen, officer of Wren. Prez Smith releases security. Allen renews unsecured guarantee.

Unilateral mistake by Allen, no liability for loan. Misled by Smith (and bank) when 2nd guarantee signed.

    Small private co Wren Developments (SH: Smith Prez, Allen is an officer)
    Loan from bank with personal guarantee and shares for security
    Smith (without knowledge of Allen) asked bank to release security. Bank did so, without taking
      proceeds to release the loan
    Allen executed new guarantee:
          o June 2 1971 – demand letter from bank re: outstanding payments
          o June 21 Allen meets w bank. Told of Smith’s arrangement to pay loan, new guarantee.
             Want him to sign the new guarantee, too.
          o Allen did not know collateral shares had been released
    Loan default, Bank wanted Allen to pay, as per his personal guarantee

   Mr. Allen not required to pay on the guarantee
   Unilateral mistake on the part of Allen, because he was misled by Smith.
         o He believed there had been no change in the collateral securities held by the plaintiff.
         o He asked about the shares, the bank said they’d look into it, never got back to him
         o He was asked to co-sign a guarantee
         o This misrepresentation induced him to enter into the guarantee.

Does increased level of diligence required by the bank lead to unstable transactions?
    Actually, I think informed parties make better decisions and increased level of understanding
       increases stability.

Does the lack of level of information on Mr. Allen’s part vitiate things?
        Allen could/should have asked the Bank for the info re: the shares before executing the

Is the court trying to rectify an unfair situation?
          Dividing line between silence and misrepresentation

Should silence be enough to lead to misrepresentation?
        Depends on the circumstances
        The question was asked of the bank, they didn’t produce the information
        The bank allowed the security to be liquidated, without the countersignature.

Is silence enough to attract a charge of acting in bad faith?

Kupchak v. Dayson Holdings Ltd. 1965 BCCA – K &D exchanged properties; earnings misrepresented;
K withheld $, D sold part interest and tore down building to forestall specific performance

CA reversed and granted rescission in response to FRAUD – equitable remedy unless impractical or

    Remedy for fraud in recission is powerful
    Kupchak took Hotel in exchange for 2 properties (including mortgages and chattels) to Dayson.
    On closing, Kupchak found earnings for hotel were misrepresented, so cut off mortgage payment
    Next, Dayson sold ½ interest in a Kupchak apt building, tore down a building

Judicial History:
     TC: refused rescission, because a property was redeveloped, so the parties couldn’t have been put
         in the same position before the agreement
     BCCA reversed in 2:1 decision

     Davey J: Dayson’s action ought not bar rescission, unless it be impractical or unjust
     “rescission is an equitable remedy, and in my opinion equity has the same power operating on
        the conscience of the parties, in order one to pay compensation to the other in order to effect
        substantial restitution under a decree for rescission as it has to order one party to pay money on
        account, or by way of indemnity.”
     “in the case of fraud, the Court will do its best to unravel the complexities of any particular case,
        which may involve adjustments on both sides. The easiest way to effect adjustments is by the
        allowance of money.”
     Go for an equitable remedy, if that is not totally possible, adjust with $.
     Keep in mind LATCHES, if there is a delay, equitable remedy may not be appropriate.
     Kupchak’s sued within a few months, so delay getting to court was okay.
     Dayson found out about claim of fraud, THEN moved to redevelop the property, to change
        position and avoid claim of rescission.
     Sheppard J:
     Found there had been affirmation by the Kupchaks retained shares


Dissent: there is no disagreement of the law… but application of the law to the facts. Troubling where
courts are applying the law to different sets of facts.
     Is there a problem with application of FLEXIBLE equitable remedy?

       Where one party acts fraudulently, and therefore can attract punishment
       Have to come to court with clean hands…
       But Commercial certainty leads to good deals higher standards etc.
       Choose certainty or bright line rules?

If Dayson had been the victim of misrepresentation after changing their position… would they be eligible
for rescission?
      Not if they changed their position knowing of the error.
      If they are redeveloping to mitigate loss, can they argue economic efficiency? The victim of the
         misrepresentation can’t change the property that it seeks to return. Must act like they want to
         return the property.

Formation: misreprestatnion is about formation of a contract that misfires. Inconsistent with persons
changing their positions after the contract is formed.

Is the power and flexibility of the remedy for fraud troublesome? The onus to prove fraud is HIGH. If
you lose, cost consequences are severe. If you win, the remedy is powerful and flexible.
      It’s OK by me.
      Perhaps troubling when the remedy for fraudulent misrepresentation is harsh, but the remedy for
         innocent misrepresentation is not. See Redican.

Redican v. Nesbitt 1924 SCC – No electricity in leasehold.

Innocent misrepresentation = no rescission

NOTE: Definition of Fraud:

    Defendant’s acquired of leasehold interest
    Delivered cheque, signed lease, accessed property
    2 days later, no electricity, claimed misrepresentation, cheque not cashed, payment stopped
    Jury trial: innocent misrepresentation
    TC: no rescission available for innocent misrepresentation after completion of the contract, unless
      the misrepresentation renders the substance of the sale different from what was contracted.

    Is rescission available on innocent misrepresentation? NO
    Is there a new trial required on the issue of FRAUD: YES

Innocent misrepresentation:
     Foundation: a contract will not be rescinded for innocent misrepresentation per CL is obscure.
     “although the execution of the contract does not afford an answer to a claim for rescission in
       cases of fraudulent misrepresentation, inability to effect restitution in integrium unless that has
       become impossible owing to action of the wrongdoer, will ordinarily preclude rescission.”
     Contract for sale had been completed.
     Remedy for innocent misrepresentation was therefore not available

     TC judge failed to instruct the jury regarding the breadth of FRAUD:
         o If the actual knowledge if the statement is false

            o   Or a statement made without belief in its truth
            o   Or a statement made recklessly without care of whether it was true or not.


Is the evaporation of the equitable remedy of rescission after execution of contract (in case of innocent
misrep) seem unfair?
      Commercial certainty
      Something misfired, a party still suffers, should they not be compensated?

Difference between mens rea: fraud and innocent misrepresentation lead to different remedy. Does this
dividing line make a lot of sense? Does it matter if the representation was innocent or otherwise? What if
the representee thought they were getting something, but were mistaken?
     Caveat emptor: buyer beware. Puts onus on buyer to undertake some due diligence.
     Is the court exercising policy argument? People are assumed to protect themselves, unless there
        is a representation to the detriment of the party, no finding of wrongoing.
     Innocent => negligent => fraudulent
     1964: tort of misrepresentation found by HL. Much of our caselaw pre-dates this case.
     Commercial morality: superior information: who is best able to get the information, how are the
        transaction costs minimized? Law and economics argument to put the onus on the party who can
        minimize the costs.
     If you say it, get it right; it is much more difficult to prove fraud.

Where does the dividing line between innocent and negligent or fraudulent misrepresentation?
   Where there is no way for the party to know, it makes sense to impart innocent misrep.
   Where the party knew but didn’t say because they weren’t asked, MAYBE
   Where they could/should have known but didn’t, or didn’t say, NO


(a) Mistake as to terms

       Conceptually difficult and confusing
       Cases not consistent
       Overarching theories not present, terminology is confusing
       Is there a separate doctrine of mistake?
             o Some results can be better explained by other doctrines, including misrepresentation
       Sometimes perceived as last vestige of the desperate, unlikely to succeed

       May make more sense if you carve out contract formation and performance separately
       If Formation is the problem: there isn’t agreement between parties regarding the contract:
            o Vitiates the contract
       If Performance is the problem:
            o Remedies available
       Other doctrines overarch.

Mistake as to terms: AKA mistake re: contract formation

    When is a mistake so fundamental that the contract is not formed?
Mistake as to performance:
    What happens when there is a mistake by a party, and objectively, the contract is formed, but
       there are terms that were not intended by one party?
    What do you do when the counterpart to the agreement KNEW and did nothing about it?

Smith v. Hughes 1871 QB – purchaser of new oats thought he was getting old
Minds must be ad idem for K to form properly

    Trainer of racehorses v farmer contracting for oats
    Conflict in the evidence re: what had been said
         o Trainer said he was ready to buy old oats, received a sample
         o Farmer denied there was discussion that oats were old or new
    Factual matrix: considered by court
         o Trainer had testified that trainers always used old oats
         o Farmer denied knowledge
         o Market price was high price for new oats, but market was tight at time
         o Looking to the general understanding of the parties to the transaction, the market
    Objective approach to contract formation = close to objective test for contract interpretation
    TEST: What would a reasonable third party observer have thought of these parties’ actions?
    Defect in contract formation based on mistake will vitiate the contract
    Mistakes as to assumptions will not vitiate the contract

Cockburn J: New trial
     Minds were not ad idem re: new/old oats: motive or assumption
           o Question if they were old or new oats
     Minds WERE at idem regarding that there was an agreement for sale of oats.
Blackburn J:
     Parties can be stuck with bad/deals they didn’t intend, if they manifest the intent to be bound as
       assessed by the objective third party test.
     “still the purchase is bound unless the vendor was guilty of some fraud or deceit upon him”
     Formulation of contract formation, even when there is a mistake: per Freeman v. Cook: if a party
       conducts himself in a manner that would lead the observer to believe he intended to be bound, he
       will be bound.
     BUT, that’s only if you’re ad idem about the substance of the contract.
Hannen J
     If parties to a contract thought they were each taking about a different ship, there is no contract.
     Per Raffles v. Wichelhaus, where parties are not agreed on the subject matter of the ships:
       Peerless ship or Peerless II. Mistake as to the terms, defect of formation = no contract.

IS the rule fair? Should people be stuck with something they don’t want because of the mistake in
     Objectivity is difficult to apply
     Contracts potentially become unstable where the party who reasonably who thinks they have a
         deal can’t rely on them
     Perhaps this can be better understood as an Innocent, Negligent or Fraudulent Misrepresentation
         case… not a Mistake case
     Perhaps a term

       Was there allocation of risk in response to pricing that can help us lead the court to this decision?
       Note: parallel to Fragilent (Chickens) case

Would results oriented reasoning help explain:
What is the dividing line between mistake re: terms and mistake re: assumption?
   You get terms from assumptions
   You get assumptions from the ridiculous notion of reasonableness

Could better commercial practice have avoided this mistake/problem?
    Easier to set aside the contract if this had been a written contract instead of oral?
    Is that there was a sample the trainer relied on problematic?
            o Goes back to the difference between mistake and mirepresentation

Lindsey v. Heron & Co. 1921 OnCA – Heron quoted $ for wrong shares
Objective 3rd party observer test per Freeman v Cooke applied.
Brokerage made innocent mistake. Broker must pay.

    Plaintiff Lindsey wanted to sell shares of Eastern Cafeterias of Canada, called Heron re: price and
    Heron: called back and offered $10.50 for a share of Eastern Cafeterias. Lindsey accepted the
    Exchange of $ and securities
    Heron manager said he wanted to buy Eastern Cafeterias, not EC Canada

MiddletonJ: majority
    If his words or acts indicate intent to contract, it is immaterial if he was mistaken
    Objective test: what would the reasonable third party observer take from the transaction?
    Per Freeman .v. Cooke
    The company bought the shares
Lennox J: dissent
    Also applies Freeman v. Cooke HOWEVER, no consensus ad idem
            o Though they were each buying/selling different things

Who got it rights?
    Another example of how sloppy commercial practice leads to contractual uncertainty and

This is not justice disagreeing about the rules, but on the application of the rules? Is this judicial
     If the facts are clear and the principles are clear, the decision should be clear.
     It really does depend on the facts, about there shouldn’t be disagreement, in reality there probably
         will be problems.

Who is the objective person?
   A fictional character, but with some degree of sophistication with respect to the business area and

       Law and economics: the least cost solution is for the broker to be certain about what they are
       Consumer relationship at play here: seller should bear responsibility for their mistakes, can
        insure against loss due to mistakes.

How about doctrine of mistake: is this a misrepresentation? Interpretation?
     Can be argued that its an interpretation case?
     Facts lend themselves to an innocent mistake. Who made the mistake?
Risk allocation:
     Who should be more responsible for being precise?

Staiman Steel Ltd. v. Commercial & Home Builders Ltd. 1921 HC – auctioned steel not all building
quality; C wouldn’t deliver until waiver signed
Objective analysis: Innocent mistake on both parts – S insists on delivery, C provides steel, S may have
claim for building steel, must take delivery first.

    Can be looked at as a mistake case, or an interpretation case
    Defendants sold steel at auction
    Plaintiff (Staiman) bought, thought it was used AND building steel
    Commercial included only used steel in lot
    Commercial refused to deliver steel unless Staiman included a waiver that there was no building
      steel in the lot
    Staiman sues Commercial for non-completion

Southey J:
    Objective approach to contract/terms
    Unconcerned re: subjective intents of parties
    Reasonable man would infer
           o no building steel
           o that Staiman assented to purchase of that lot
    contract not substantially repudiated by Staiman
    Commercial had right to insist Staiman pay for and take delivery of lot
           o No right to require Staiman give up its right to claim the contract was for building steel.

Did the court get it right?
Is this a matter of interpretation?
      Innocent mistake on both parts.
      Different expectations regarding how to resolve?
      Should we be protecting the reasonable expectations of either party?
      Almost by definition, if you end up in court, you have different expectations
      Is this a warped case of efficient breach: more efficient to not deliver and be sued than to deliver
          and be sued?
      Factual matrix: auction: caveat emptor, full due diligence not available

Glasner v. Royal LePage Real Estate Services Ltd., 1992 BCSC – redrafted K for sketchy V warranty in
UFFI house sale
Mistake by purchaser//Misrepresentation by vendor: results both for purchaser.

    Vendor (plaintiff) sold house
    Purchaser offer included warranty re: UFFI insulation
    Vendor unable to provide the warranty (previously had UFFI)
    Vendor drafted new agreement which warranted only that home did not presently contain UFFI
      and instructed Realestate agent not to say anything about it
    RA told the defendants the house had once contained UFFI
    Defendants refused to compete.
    Plaintiff sued to keep the deposit.

SpencerJ: ACTION DISMISSED summary judgement
    Plaintiff comes to equity seeking specific performance of a contract, the courts may refuse
       performance because of the defendant’s mistake about a material term of which the plaintiff was
       or should have been aware.

Is this a mistake case?
      Is this misrepresentation?
      That analysis gets to the same place.
Why wouldn’t parties have the obligation to draw something to the attention of the other side?
      Blacklines help
Commercial efficacy reasons: sense of propriety re: professional behaviour.

Reasonable expectation of the parties?
    Purchaser: no UFFI
    Vendor: better price/past UFFI

Think about 4 mistake cases

     If as mistake to tersm: no contract
     Mistake to assumption: contract, someone has a loss
          o Does not apply where counter party knows of the mistake, but sits idly by (gladner)
          o Is there an overarching theory to explain?
                   Is it just misrepresentation
                   Is the court making results driven decisions, and using mistake to justify


(b) Mistaken Assumptions

Restrictive CL test from 1930s challenged by more equitable doctrine in 50s
CL test prevailed in UK, not so in Can – EQ and CL doctrines do survive

Area confused and difficult
If interpretation is central theme… it may be a key to understanding these cases moreso than the doctrine
of mistake

Mistaken identity: different. Fraudster leads to liability for innocent party
Very relevant issue

Bell v. Lever Brothers, 1932 HL – ER signs severance K, discovers could have terminated
TEST to vitiate the contract on basis of mistaken assumption:
-        mistake of both parties AND
-        mistake that a particular quality of the thing contracted for is DIFFERENT from what was
         understood by BOTH PARTIES

        Leading case on CL doctrine of mistake
        NOTE: narrow application, limited scope for folks to get out of contract, even with wrong
        Focuses on contract formation process (rather than execution of contract)

    Faithless fiduciaries and persons who put their own interests above the corp
    Lever bros bought out, lost jobs due to corporate reorg
    After golden parachutes negotiated, employer found out that they could have dismissed them for
    Sued to recover the severance packages

        Compensation agreements void for mistake
     Reversed, reinstated contract with 3:2 decision
Atkin J: leading decision
     MISTAKE as to the quality of the thing contracted for does not vitiate the contract unless it is the
        mistake of both parties AND it is mistake as to a particular quality that makes the thing
        contracted for DIFFERENT from what was understood by BOTH PARTIES
Consider the formation of the contract:
     If mistake operates, it only nullifies consent to contract formation
             o May be mistaken in ID of contracting parties
             o Existence of subject matter of K of date
             o Mistake as to the quality of the subject matter of the contract
     3. means: if there was a contract and a party was unable to supply what was contracted for
             o Leads to inability to carry out the contract
             o If total Failure for consideration: $ can be returned to the other party
     Recognition that 3 is narrow and unfair, but this is secondary to the certainty of contract
     P610: if parties honestly comply with the essential of the formation of contracts, they are bound
        and must rely on the contract for protection from the effect of facts unknown to them

       If persons fail to protect themselves, the court will not step in to help them

Was the contract to terminate the EEs
    Is an agreement to terminate an unbreached contract different from terminating a breached
    NO
    The contract release would be identical: Leaver would get release from the contract.
    Immaterial that the party contracting the release could have gotten the same place in a different
    If they had included a provision to claw the $ back, they would have had recourse. However this
       was not in the contract, so they are stuck with it.


Did Atkins J get it right? Are the contracts to terminate a breached K same as for an unbreached K?
     There is some difficulty – seems unfair
     The termination contract can be looked at as separate form the employment contract –

What about the sancitity of contracts?
   Want to have finality – don’t want there to be ways for parties to weasel out of contracts by
       appealing to HL
   Certainty seems to be an important principle
           o Set the ground rules – put your protections in the contract
           o HL is the final appellate court, they want to get the rule right

The case illustrates the difference between rules and standards
    Bright line rule: you can only get out of the K in these narrow circumstances
    Potential for injustice near the line

Seems unfair, but the company’s eagerness to terminate Bell may have lead to their lack of due diligence.
The court is not to compensate them for making that mistake.
The parties were ad idem when they executed the contract. That the corp changed their mind afterwards,
ends up being the price of doing business. Corp paid to get rid of Bell at the time. Bell accepted the
terms of the contract. No mistake or misrepresentation. Lack of clawback clauses make this seem unfair,
but it is a matter of meeting a practice standard in a transaction that was probably executed rapidly. There
was no fundamental flaw in the contract

Are there external policy concerns at play? Or is this about getting the interpretation of the K?
     Employment law: favour the EE
     Facts are incidental: certainty is it – not at all concerned that the solution was correct between the
        parties – think about this
     Getting it right – does not mean all parties are happy about it.

McRae v. Commonwealth Disposals Commission Austr HC 1951 – missing shipwreck
Faults (Failure to do due diligence) is NOT mistake.
Mistake won’t save you from your own stupidity anyway.
No ship = no bargain = no contract. A contractual interpretation case.

Hall likes this case
Court is dismissive of folks stupidity, even if it didn’t look stupid at the time

    Shortly after the war, CDC was charged with disposing of wrecked ships
    CDC contracted with McRae to salvage a tanker – McRae paid L285 for the right to salvage the
    There was no tanker
    Seemed like CDC acted on a rumour
    McRae sought damages

TC: no tanker, so no contract, but P could get damages for deceit. P appealed

Was there a contract?
    Couturier v.Hastie 1856
            o Shipment of grain, shipper picked them up, sold enroute, delivered invoice, wanted to be
            o Court: Not about mutual mistake, its an interpretation case
            o Was the K void: goods were sold enroute! Was fee payable on delivery of goods or on
               delivery of shipping documents?!?!?
            o Is there an implied term that the goods were in existence and to be delivered?
    C v H does not stand for mutual mistake invalidating the K
    What did the promisor really promise? Reasonable inference from all surrounding circumstances.
            o Note: reference to factual matrix and what the contractors actually meant to contract for.
    Can’t imply a term of condition precedent on the formation of the contract
    CAN imply a term on the contract that there was a tanker in the position specified.
            o Tanker not there, so breach of contract
    Even if this is a mistake case…
            o The CDC can’t rely on its’ own mistake to get out of the K, as induced by its own
               reckless behaviour in representing its ability to sell something that didn’t exist.


tIs the decision right? Should the CDC pay for the K? Did they warrant the tanker existed? Did McRae
undertake risk at accepting the contract?

Dubious as an interpretation matter – is this a mistake case?
    CDC sells something they don’t own, it doesn’t exist

     Salvage rights: CDC could have protected themselves by making the fee contingent on finding
        the ship
     Economics bent: least cost provider should be burdened by the obligation: Seller: presumably
        has more information about the ship, so they should have the burden of risk
     However, the fee for the salvage was low, so was the risk assumed by McRae?
     But McRae’s risk may be reduced to the value of the ship, not whether the ship exists.

Mistake analysis:
    Mistaken assumption
    McRae thought they were buying a ship, CDC thought they were selling the ship
    There was no ship – was there no contract? IS THE CONTRACT VITIATED?
    Gets back to issue of damages. If no contract, McRae gets ther L285 back , but they relied to
       their detriment and want damages

Alternative analysis: mistake would not vitiate the K because the actions of CDC were reckless
     Does this encourage careful business contracting?
     In equity there should be relief
     It is foreseeable folks will be mistaken
     Court doesn’t like the outcome – results oriented reasoning (Sole v. Butcher)
            o Where CL result doesn’t get you where you want, so reason around it
     Is this Negligent Misrepresentation?
            o Assuming there was enough of a representation, can we get rid of the doctrine of mistake
                and go to tort claim of negligent misrep?

Note: C v Hastie
    Highly formalist analysis of this case
    Now, we see development of first principles from binding cases
    Hall notes: UK: analysis tends to be formalist. Doctrine come first. US: legal realist: policy
       comes first. Canada: between the 2.
    Is it compelling to rehash a 100 y old case and apply a new doctrine?
    Think about this.
    Formalist approach reflects on strength of precedent.
    Do doctrines change over time? Do decisions really go out of date? Need we play with the
       precedent to make it work?

Toronto-Dominion Bank v. Fortin (No. 2), Boyle and Percy, 618
BCSC 1978

       Mistake doctrine used (but you could substitute misrepresentation
       Is K about K between parties, or
       Officer of the court did something untoward

    Receiver appointed re: Chimo Industries and Chimo Construction
    R sought to sell companies as going concern to satisfy creditors
    Purchaser backed out
    R Sigurdsen found 2nd buyer Flynn, but court didn’t approve the deal as it wasn’t authorized
    Sigurdsen said he wouldn’t return the entire deposit 24K to Flynn, but would return 10K.
    TC upheld the K and the 10K compensation.
    Flynn Appealed to BCSC

Contract mistake doctrine
Insolvency law doctrine precludes officer of the court from taking an inequitable position

Mistake analysis
    Looks to
    “the basic rule respecting a compromise agreement is that it cannot be attached by reason of
       common mistake of law provided the claim compromised is a bona fide or hones claim…”
           o Supported by CL policy: effect reasonable settlements. This is frustrated if compromise
                of a doubtful claim can be set aside on demonstrating the claim won’t succeed

         The contract of sale was void ab initio – would have been set aside later in equity, but not a

         “at some point a mistake can be so fundamenta tha the compromise agreement cannot stand”


    Attacks the issue as a mistake issue
    Was there a proper contract formed because of the mistake?

    If looked at as an interpretation case, is the argument more convincing?
          Is it necessary to include a term in the contract that the seller (Receiver) has the ability to sell
            the asset?

Can you get the same result as a misrepresentation case?
        Was this an innocent misrepresentation case?
        Need to prove fraud to assess damages

Rules v. standards?
    Rules with respect to compromise agreements
    When does it become fundamental that the agreement be upheld
    fundamental problems: receiver couldn’t sell the assets
    not a compelling argument
    why was there no escape valve: providing that if the sale didn’t go through, that the FULL
        deposit be returned?

Hall: external policy concern has hugh impact. Contract doctrine analysis first,
Is this like an employment contract that is influenced by ELaw context… should a contract in the vicinity

If the purchaser had not backed out of the agreement, the contract would never have gone through, so
there is no reason to penalize the purchaser
      Have to look at the contract in its entire context, not just as a settlement activity
      This is not a defect in the actions of the purchaser.

Why is the contract analysis even here? Less compelling than looking at the behaviour of the Receiver.
Can’t compensate yourself for settling a contract you didn’t have the authority to enter into in the first


Great Peace Shipping v. Tsavliris Salvage All ER CA 2002 – UK version of Miller. Comes to opposite
conclusion to Bell v. Lever. Damaged boat terminated K with far away GPS re: salvage.

Equitable doctrine – champion of Lord Denning (Butcher) – followed until GPS.

    The Cape Providence suffered damage en route Brazil to China

       TS salvage (defendant) retained to help. They recruited Marint to help.
       M negotiated with GPS to help, as they were in “close proximity”. K could be cancelled on
        payment of 5 day fee
       It was discovered GPS was too far away. Probable cancellation communicated.
       Another vessel was nearby (Nordfarer)
       M cancelled K with GPS, recommended 2-day cancel fee, TS refused to pay any cancellation fee
       GPS claimed 5 day fee under K.
       TS Argued that “close proximity” shared assumption was not met, and therefore K was void in
        CL or voidable in equity

No mistake about the terms, but assumption used to enter into the K was mistaken.
This case ends the equitable doctrine of mistake in UK.

P 626
      No meaningful difference between fundamental mistake (Equitable test) and (CL test)
      Solle v Butcher was wrongheaded: intended to supplement the CL test
      Bell v Lever was WRONG and impossible to reconcile with Butcher.
      Further, there were no CL development in the intervening 50y, only academic discussion
      Therefore, overruled the equitable doctrine – now only the CL doctrine exists
      NOTE: unfairness may exist in undividual cases, and maybe parliament should do something
       about it!
           o Suggest that Denning found in Bell v. Lever that equitable recission on common
                fundamental mistake gives greater flexibility than CL which holds the contract void.
     the doctrine of common mistake test:
     cannot be explained by implied terms.

       Analysis:
       CT to determine if unforeseeable circumstances do not allow contract to be performed?
       If so: Has the K allocated the risk to one party or another? (not explained by implied terms)
       If not: then go to the mistake doctrine.

       Underscores that mistake doctrine is a last resort doctrine.

If you’re not dealing with supervening events, then the parties will have dealt with those events in their

    o   Great weight: the K was not terminated immediately – terminated only after they found a second
        K. This was key in applying the CL test. If the intervening event had not occurred, the GP would
        have performed the K, just later.
    o   K was not of a character different than contemplated by the parties, therefore no reason to vitiate


Termintation clause: does it give you a reason to look at it as an interpretation case? Didn’t we get there
by pure interpretation. YES

Maybe a mistake case is not different from arguing about the intention of the parties.

       Here, where you determine mistake as not at play, you revert to the contract to determine the

Judicial law making: CA don’t like to overrule prior decisions
     By using a different rule, they can get around it
     By putting the onus on the legislature to fix the problem,
            o Are they denying their choice of policy consideration?
            o Is it not disingenuous to say: parliament: you fix it?!>!
            o Is it a positive move: getting away from ridiculous equitable position
            o Law & equity refused 150 y ago, let’s get back to CL rule
     They recognize they are making a policy decision, but put the blame on parliament for not
         making the appropriate changes
            o Not acting in their self interest – divesting themselves of power
            o However, they are trying to force the parliament to do what they want, is that really

Miller Paving Ltd. v. B. Gottardo Construction Ltd., 2007 OCA – short invoice for paving materials.
Release signed.
Self-induced mistake (poor business practices) in billing no reason to re-open a K for more payment.

Hall: nice case, well decided.
Different judicial policy choice than GPS

    Plaintiff (miller) supplied materials to D (Gottardo) for construction project
    Agreement: P acknowledges that had been paid in full for materials supplied.
    P Later discovered they failed to bill for some materials (most had been invoiced and paid.
    P issued another invoice, D refused to pay

TC: agreement stood as complete bar to plaintiff’s claim. P appealed.
OCA: Appeal dismissed, no recourse for Miller to present/Gottardo to pay the additional invoice.

Goudge J:
    This is a case of common mistake – they both thought the entire K was delivered, invoiced and
    Contract formation OK

CL test:
    Mistake (NOT) leading to defect in contract formation will (NOT) be remedied

Equitable test:
    Should be relief where it would be unconscientious for one party to attain legal advantage

       CL should prevail
       Para 26: unnecessary judicial policy making
            o Whether or not GPS applied, the appellant does not succeed in setting aside the Dec 20
       Dec 20 agreement allocates risk to Miller
       As much a mistake case as an interpretation case:

            o  “When the contract is read in the context of this Factual matrix, I conclude that the
               contract clearly allocates to Miller the risk that payment in full has not been received.”
       No mistake would avoid the risk allocation that the release agreement effects.

Miller loses no matter which way you do the analysis.

Certainty is important – both parties needed to know that the contract was complete and obligations
fufulled under it. More important for Gottardo, probably
This looks like Bell v. Leaman Bros in that contracting for certainty carries with it risk of assumption of
liability where full due diligence is not carried out. Not the role of the court to compensate Miller for
poor business practice
     There were other ways to deal with contingencies: can be built into the cost of the contract, and
          Miller did not have to sign the release agreement if they were not sure

Choice of the Rule: Gouge went out of his way to confirm McCamus: UK wrong to put out the Equitable
doctrine, and confirm that it still exists in Canada.
     Is it a good thing to have that flexibility?
     True equity would probably have split the difference… this was not contemplated by the court
     Gottardo had no knowledge of the missing invoices, and no reason to anticipate an outstanding
        amount. They weren’t undertaking the release to impose an unfair Miller
     This is a vague, imprecise test. Application of it is problematic from the certainty perspective.
        There will be injustice using the CL test on borderline cases, is it good to have the ability to make
        an equitable ruling to aright these situations? Necessary escape valve?
            o I like the idea of equity for widows and orphans, but not for big dumb businesses.
            o Rely on court to apply equity for extreme unconscionability

Does it matter what the rule is, if there are only 3 cases in 100 years? Uncertainty 3x per century is okay?
Much ado about nothing.
    Fairness is not just about the outcome, its about the process. Did the K exist in a fair context?


Shogun Finance v. Hudson – UKHL 2003- false ID and sale of lease car to H: K not signed by true party
Mistake of the ID of contracting party: does not bind that party; Purchaser H was OK, keeps car.

split over the appropriate rule and the outcome

    Rogue bought car with false ID, in the name of Mr. Patel.
    Rogue entered into a hire-purchase agreement (does not exist in Canada) for L22K
    Sold the car to Mr. Hudson for L17K, defaulted on the HPC and disappeared.
    Dealer went after Hudson.

Lord Phillips:
    Formation of the K
    Parties undertaking a K must be in agreement regarding the intention of the K: parties, terms
    Identity of the hirer: Patel, was not aware, therefore no K. (Dissent disagreed: want the K to be
       formed, but voidable, if there is a misrepresentation re: identity)
            o Can’t reconcile 2 different rules: F2F v written
            o K is about intention of the parties

            o    Where the parties deal in person, the intent is to deal with each other. No such
                 assumption when the K is in writing.
            o    Issue: interpretation: who were the parties?

First principles:
     Loss that must be covered. How to allocate the risk?
     Dealer: they had the ability to avoid the sale & protect themselves
             o Cost of doing business, ability to insure against loss
     Should Hudson assume some risk, having bought stolen car?
     Legislature intervenes: final purchaser has good title, better registry system.

Next week: rectification, first 4 frustration cases.


      Note how doctrine is related to interpretation
      it is also a class of Mistake – mistake in recording a prior oral agreement with easier test
             o UNLIKE Mistake, test for Rectification is easier
             o Why is this type of mistake easier to grapple with?
             o Rectification stands a lot of interpretation doctrines on their head – why?
                       Parole evidence rule
                       No restriction on consideration of subsequent conduct on contract interpretation
      In US called Reformation

Bercovici v. Palmer 1966 Sk QB, SaskCA – B sold resort. Mistake in K included RobRoy.
Parties in agreement in terms, error in recording them in K

    Credibility
    Interpretation principles do not apply in their normal manner
    Real estate case – MsB owned a resort, open in summer
    Written agreement for sale of resort. Included a description of a Rob Roy cottage
    Ms B wished to rectify the contract to clarify that Rob Roy was not included in the sale

   For the plaintiff, confirmed on appeal

Features of Rectification:
     Rectification to be used with great caution, only after the court is satisfied beyond fair and
        reasonable doubt. Per Hart v Boutilier
     Rectification is concerned with contracts and documents, not with intentions. It is necessary to
        show that the parties were in complete agreement on the terms of their contract, but by an error
        wrote them down wrongly.
     Evidence of subsequent conduct is of limited value in interpretation of a contract
            o Interpretation cases not applicable
            o BUT with rectification, subsequent conduct is of value and permitted
     Parole evidence is valuable and admissible

       Scope of evidence examined by TC: no concern for parole evidenced or subsequent conduct to
        determine if contract should be rectified
            o Satisfied beyond any fair and reasonable doubt
            o Refers to the intention of BOTH parties
                     No evidence of mention of Rob Roy in negotiation
                              Not admissible for interpretation, but OKAY for rectification
                     Economics make sense for Rob Roy to be excluded
                     Subsequent conduct
                              Purchasers didn’t demand possession of Rob Roy
                              didn’t pay tax or insure
                     parties didn’t get along, fought about everything except Rob Roy right from the
                        start, including invoices for smaller amounts
                     Defendant’s solicitors letter refers to “both properties” not all 3.
                     Contents of other buildings listed in Agreement, not Rob Roy

                     Seller did nothing before or after agreement inconsistent with inclusion of Rob
                      Roy in agreement
       Overwhelming case found for Rectification

Rectification would apply retroactively


Intention of BOTH parties must be examined
     Interpretation of the agreement to the benefit to one party informs their intentions going forward.

Onus of proof: high – painstaking review of evidence and circumstances
– should it be this high
     Concern re: sanctity of written contracts
     Rectification is radical rewriting of the contract
     Civil case: onus of proof never matters – this burden here is inconsistent
     Discretionary nature of the remedy is equitable
             o Therefore if there is any doubt that the party looking to rely on rectification must have
                 acted properly – there should be no problem with

Interpretive principles – out the window! If you have parole evidence you want to introduce, plead
rectification. Even if it fails, you’ll get the evidence in
     Why is rectification more important than getting it right in the first place?
     Oral agreement: no interpretive endeavour, other than figuring out what the terms are. Rules of
         interpretation are addressing written agreement

At some point the parties stop having a common intent, and one party starts deriving benefit from the
mistake – courts using their equitable power to resolve this fraudulent bent.

Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd.2002 SCC – golf course/land
development recorded yd as ft.
Commercial reality and Parole Evidence admitted

    Sylvan and Bell want to operate a golf course together
    S to operate for 5 years, with option to purchase land surrounding 18th green for housing
    Agreement listed option as 110ft, not 100yards. 110 feet doesn’t make sense from a development
    Sylvan didn’t read agreement until there was a problem exercising the option – his building
      permits/plans weren’t consistent with the option language.

Due diligence is NOT a precondition to rectification
Affirms TC findings
     Existence and content of oral agreement, fraudulent misrepresentation, precise form of agreement
        can be rectified, convincing proof BARD met.

Punative damages NOT awarded


Rectification is an equitable remedy whose purpose is to prevent a written document from being used as
an engine of fraud or misconduct “equivalent to fraud”.

       Now applicable to unilateral mistake
       To be used with great caution per Hart
       Tied to the doctrine of certainty in contracts
       Floodgates concept justifies the high onus

Conditions precedent to Rectification
   1. Plaintiff must show existence and content of the inconsistent prior oral agreement. Error may be
        fraudulent or innocent.
   2. defendant knew or ought to have known of the mistake
            a. Only where allowing the defendant to take advantage of the error would be fraud or
                 equivalent to fraud, is rectification available.
   3. Defendant must show “the precise form” in which the written instrument can be made to express
        the prior intention
            a. Rectify the agreement to the point of the original bargain, not to get one out of a bad deal
   4. foregoing must be to the proof beyond a reasonable doubt.

Binnie ties this to equity: if it is inequitable that a party is trying to rely on the mistaken recordation of
the oral agreement, then rectification is available.

       Doesn’t make sense for the agreement to be for 100 FEET not YARDS. Prior oral agreement
       O’Connor’s solicitor wrote the agreement, fraudulently represented the document as accurate
        depiction of oral agreement
       Bell was trying to exercise the option – he was relying on the oral agreement for 110 FEET in his
        plans. O’Connor was being cagy and trying to prolong the exercise exercise in order to preclude
        Bell from his rights. Apparent knowledge.
       Bell’s loss would be O’connor’s gain – sould come into sole possession of the land.
       Met BARD

       BARD Necessary to promote the doctrine of certainty of contract and close the floodgates
       Court recognizes marginal cases will be lost – acceptable under BARD.

Appellant asked for addition of requirement of party seeking rectification to undertake due diligence.
    Disentitlement of remedy of rectification where negligence in undertaking due diligence
    Inconsistent with policy and principle
            o Hard to imagine many cases of unilateral mistake that didn’t involve some form of
            o Would make it a bar to remedy
            o Still relevant to the equitable remedy

Due diligence
    Isn’t fatal to the analysis
    Court should try to hold parties to reasonable DD, but almost always a degree of carelessness in
        unilateral mistake. Rectification should still be available.
    Still relevant to the decision to grant the remedy
            o If problem is more attributable to plaintiff’s lack to DD, then discretion could be
                exercised by the court to NOT grant relief.


Was Binnie right NOT to add the 5th requirement?
    Facts driven analysis – these were not strangers, there was an agreement before the writing of the
       contract. Where there was an actual prior agreement, the court sticks to that agreement.
           o Did “punish” the plaintiff a bit for not using DD – no award of Punitive damages
    Was it short sighted? Could still have imparted the DD requirement and still found for the

Certainty – equitable nature of remedy: that you can get through the hurdles and then lose on the court’s
discretion: unclean hands or lack of DD or negligence. Does that lead to uncertainty at the margins?
     No need to promote reliance on rectification – extraordinary circumstances

Rectification less controversial than other mistakes. Won’t let someone out on a mistake in assumption,
why let them out on a mistake in terms? Why is this relief easier than others?
    Intentions of party diverge after the oral agreement
    Nature of the remedy:
            o Rectification: turn things back to what the agreement was originally (orally)
                      Rules sufficiently onerous to afford this remedy
                      Conceptually easier to hold folks to their first bargain
                      Not overriding the parties intention, allocation of risk, etc – going back to what
                         the parties originally intended
            o Mistake in terms: defect in contract formation, so void the agreement
                      Courts don’t like to void the agreement

Rectification is an important area re: what happens in real world.
    Does come up in real world
            o Get around parole evidence rule
            o Parties do make these mistakes and litigate them


Like rectification, this is a class of mistake
     Mistake as to certain unanticipated future events AFTER execution of the agreement
     Supervening event befalls parties prior or during performance which affects the environment of
        the contract

Frustration is:
     Generally available if subject matter of contract is physically destroyed before performance
     Not applicable where the parties planned for the eventuality and allocated the risk
             o Interpretation doesn’t work for Frustration: because the contract must be silent on the
                matter, and the court must fill the gap
     Importance of characterizing what the contract was about
             o Potential for manipulation: allocation of risk
             o Does the supervening event change what the contract is about?

Taylor v. Caldwell QB 1863 – rented music hall destroyed before concert

Implied term analysis: both parties released from obligation under K

    Destruction of subject matter of contract
    Plaintiffs agreed to lease the music hall for 4 concerts.
    Fire destroyed building before concerts, through no fault of either party
    No provision re: if hall burned down before concert took place

   Both parties discharged from their obligations \
         o P didn’t have to pay for the lease after the fire\
         o D didn’t have to perform their promise to give use of the Hall and Gardens.

   Implied term analysis:
                 Subject to an implied condition that the parties shall be excused in case, before
                    breach, performance becomes impossible from the perishing of the thing without
                    default of the contractor.
   Tied into concepts of interpretation


Destruction of subject matter (without allocation of risk in contract) leads to dissolving of the contract.
Does this make sense?
    Economically efficient
            o Makes sense if a simple scenario -
    Why not force parties to turn their minds to the foreseeable risks?
            o Not possible to plan for every eventuality

Who bears costs of these breaches?
   Is it a risk of doing business that your property might burn down? Perhaps they should bear the
      risk of consequential damages in the case of cancellation due to loss?

Should there be a difference between the consumer situation and the business situation?

Can. Govt. Merchant Marine Ltd. v. Can. Trading Co. 1922 SCC – strike delayed ship for transport
Frustration not available where event forseeable

    CGMM contracted with CTC for CGMM to transport lumber from BC to AUS.
    When the contract signed, the 2 ships were under construction, near completion
    Dispute between CGMM & shipbuilders results in delay, the shipment could not occur.
    CTC sued for non-performance, CGMM claimed the contract was frustrated
    TC found for CTC – no frustration. CGMM appeals.

   Upholds TC decision.
   Frustration not applicable


Duff J:
    To rely on frustration, must consider
         o Nature of contract
         o Circumstances in which it was made
                  Did the parties make their bargain on the footing that a particular thing or state of
                      facts should be in existence when the time for performance should occur.
         o Contract thought to be performable, unless otherwise anticipated

       No evidence to indicate that delay was due to extraordinary occurrence, outside ordinary course
        of events
       Nothing in the facts known to CTC made it unreasonable for them to expect default
       Nothing in the evidence that disproves the impossibility arose due to lack of energy or supineness
        or indifference on the part of Gov’t or CGMM.
             o This impossibility is not anticipated by TvC

Mignault J (concurring)
    need true gap in not being able to execute the contract AND no allocation of risk for that
    What happened was foreseeable, the appellant undertook the risk of the contingency of non-
            o It was foreseeable that the ships might not have been completed.

Importance of interpretation of contract: only if there is a pure gap that renders performance impossible
that frustration will be granted.


Is the case correctly decided?
      Distinguished from Taylor v Caldwell
      How is a strike or labour shortage different or more foreseeable from a fire?
      Ship under construction – this in itself was uncertain
             o CGMM was in a better position to know the status of the ship
                       Law and economics argument that they should bear the risk

Other options available: could they not have contracted another ship? How is the characterization of the
contract important?
     Contract to transport the lumber of this ship v contract to transport lumber to AUS
     If the latter, frustration analysis is easier to apply

If somewhat at fault: CGMM would have been partially at fault in a labour disruption, more so than

What is this case really about? Does contractual interpretation inform the risk? Is there evidence that the
contract was silent because no one could have turned their minds to it?
     Frustration is a pretty restrictive doctrine that doesn’t apply very much
     Does not apply where parties are trying to shirk their responsibilities?

How about the nature of the default:
            TvC lost the ability to perform the contract through an intervening act

               CGMM never gained the ability to perform the contract
                     o Could have used force majeur
               It’s not the lumber that was destroyed, so it couldn’t be delivered
                     o Would that give rise to frustration? No, lumber fire would be forseeable

Claude Neon General Advertising Ltd. v. Sing, 1942 NS SC – rented neon sign made illegal by statute
Contract character not frustrated – sign was delivered. K didn’t cover specific use.

    Sing rented neon sign
    Unable to use it when lighting restrictions were introduced during WWII
    Sing failed to pay the lease for the sign, arguing he couldn’t use it.

   For NEON. Sing should pay for the sign.

   Contract was for a sign.
         o Specifically constructed for the defendant
         o Delivered and functional for some time before
         o Monthly rental was to amortize the cost of the sign over 16 months
   Coronation cases analysis: difficult cases to apply, because ease to manipulate the character of the
         o Krell v Henry – 1902 rental of hotel room to watch royal parade. King got sick, so
              procession did not occur. Contract not for hotel room, but for hotelroom to watch
              coronation procession. Frustration applies
         o Herne Steam Boat v. Hutton – Contract for boat tour along the Thames to see a naval
              revue following the coronation. Not a total failure, because cruise around the fleet could
              have still happened. No Frustration.
   Sign was constructed for the defendant’s purpose.

Note importance of characterizing contract in deciding if Frustration applies.

Why was this case about performance and not about risk?
   The contract has been fulfilled, it is just illegal to use it is a certain manner.
   Risk should be allocated to the consumer that the consumer may not be able to use the product in
      the future.
   Economic reality and consumer freedom
   Matter for efficient breach – the café owner should be prepared to breach if the agreement is not
      longer suiting his purposes

Why is this not a risk for the signco?
   This is a forward risk for signco – it is unfair to punish them for their success in the past.
   The risk is that they will not sell signs in the future

The facts of this case are good, but the analysis is weak.
    Loss has to be borne by SOMEONE by a true supervening event.
    However, look at the contract: the performance (of making, delivering the sign) has already

Davis Contractors Ltd. v. Fareham U.D.C., 1956 HL builder late on fixed price K, sues.
Forseeable problems do not invoke frustration

       Note: test for frustration
       Rejects TvC implied term analysis
       Deals with frustration on a more doctrinal/theoretical basis
       An unexpectedly bad deal is not sufficient to give rise to frustration

    Post war UK
    1946, 8 months, build 78 houses, fixed price
    Took 22 months to complete because of labour and supply shortages
    Davis claimed frustration, entitled to $ on quantum merit basis in addition to contract price
    Arbitrator’s decision awarded quantum merit, as circumstances rendered fixed price contract

   Sympathy for contractor
   But NO Frustration
         o Problem foreseeable
                UK 1946 – nothing was working very well
                Contractor failed to protect itself
         o Possibility of delay didn’t have symmetrical effect
                Contractor’s risk re: fixed date of performance
                Don’t want to use frustration to change terms of agreement after the fact

   It is not this that I promised to do
   Implied term analysis was protracted in the past: gave effect to the intent of the parties
         o Logical difficulty here, where ascription of frustration to an implied term obscures the
              application of an objective rule of the law of contract to the contractual obligations the
              parties imposed on themselves
   Lord Radcliffe’s radically different test:
         o Has either party become incapable performing K because the circumstances of
              performance would render the object radically different from what was undertaken in K?
         o The meaning of K must be not what the parties intend but what the fair and reasonable
              person would surmise, based on the K.


Implied term analysis: is it better to get rid of it? (Hall thinks so) Courts shouldn’t root it in the intentions
of the parties.

How is the contract characterized?
             Contract for 8 months work or for x houses?

In the real world, the deal is re-negotiated.

Rewriting a bad deal (and claiming Frustration) does not go over well with the court.
             Defensive doctrine (shield) not a sword to get damages – cause of action v defence.

Can delays give rise to Frustration?
            ?

Is there sympathy for the contractor?
             Loss to be borne by someone…
             Raised price discrepancy several times, on refusal to increase payment continued the
             Is this likte to paving case? Where through the poor planning of the contractor he suffers
                a loss,
             Was this really unforeseeable?



These 3 cases: virtually identical fact patterns. Real estate deals, with intervening legislative changes
between signing and closing, different outcomes in court.

Is there a coherent test for frustration?
Are these difficult cases near the line and judges using their discretion, not justifiable by doctrine?

Capital Quality Homes Ltd. v. Colwyn Construction Ltd. OnCA 1975 lot sold w intent to subdivide.
Intervening legislation re: subdivision control; vendor couldn’t get permits fast enough, P refused to close
Frustration of K by Leg, purchase of 26 lots no longer possible.

    Agreement dated Jan 15/69 for purchase of 26 building lots
    Closing July 30/1970
    Parties knew of buyer’s intent to build/sell separate homes with separate conveyances.
    entitlement to Building lot with initial payment
    Entitlement to 26 separate deeds of conveyances with full payment
    June 27 1970 – legislative change regarding subdivision control.
    Vendor no longer able to convey 26 separate lots. Not enough time to get appropriate consents,
      so purchaser refused to close.

   FRUSTRATION found.

   Case of frustration due to supervening event: change in law. Unanticipated in the contract.
     Leading to frustration by changing the fundamental nature of the contract.
   2 prerequisites and third branch:
        o Can be no frustration if the supervening event is due to a voluntary act by one of the
        o If the possibility of the event was anticipated by the parties and provided for in the
            agreement, the agreement applies.
                  Does the EFFECT of the event change the fundamental nature of the agreement
                     so as to no longer reflect the original basis of the agreement.
   Prerequisites WERE met, as was the third branch
        o Supervening event was “Planning legislation” -- not in the control of either party
        o Not anticipated in the agreement
                  Purchaser intended to buy 26 separate building lots. This was no longer possible


Assuming test was correctly stated, did the court get it right?
    The consents might have been possible, that they were not obtained
    The whole land could have been conveyed
    Vendor knew purchaser needed 26 separate conveyances. Not able to provide, due to leg.

       Distinguished from Dynamic: court implied obligation on vendor to get the planning approval.
        Here, K did not anticipate either party having to do it.
       No provision: if there is a change in land use regulation, it will be dealt with in this manner…

DEGREE: Gov’t regs change all the time. When does a change cross the line from an inconvenience to a
change in fundamental nature of the contract. How fundamental is fundamental? When should the line be
     That is why there is the third branch… discretion?
     Problem with as stated: 2 variables. Much wiggle room.
            o Effect of the change
            o Agreement no longer reflects original bargain

Isn’t this about allocation of risk? Land use planning regs change all the time. Who is going to bear that
risk? Here the vendor loses.
     Courts analysis completely misses that in the analysis
     At the time, things didn’t change as much. Can’t put our current environment on that era

Was the fundamental nature of the contract to convey 26 parcels of land?

Victoria Wood Development Corp. v. Ondrey OnHC TC 1977 – leg prevented redevelopment of land
NO frustration – K for land was not for redevelopment. Purchase still possible.

    3 years later than Capital Quality
    Apr 1973 contract to close 31 Oct 1973
    Supervening legislation that effectively prohibited the land from being redeveloped

   Distinguished from Capital Quality

   Agreement was not conditional upon purchaser to redevelop.
   Agreement was to purchase land as is.
   Legislation didn’t change the agreement’s ability to do that.
   Risk analysis: developer knew there was a risk that changes may occur and should guard against
     that possibility in the agreement. That wasn’t done here.


Was this correctly decided?
    Capital Quality differed in the inclusion of the 26 subdivided lots. Here, purchaser only
       contracted to land acquisition.

Risk analysis: puts it ENTIRELY on the purchaser. Why?
     If contracted differently, the vendor could adjust his price to account for the increased risk. Law
        and economics theory at work.
     The way the contract works, the vendor is prohibited from selling to third parties. The benefit of
        the land was shifted to the purchaser, so should the risk shift. The problem that arose between the
        contracting and the closing was not a fault of either party.

      Implicit assumption of risk. However, no obligations put on the vendor, so why should they
       assume additional risk.
      Buyer beware? Should the purchaser bear the entire burden of insuring they get what they want
       to buy?
           o Sophisticated purchaser in this case. Should have known
           o Can ask for representations/warranties if it is critical to the deal.
           o A sudden increase in the value of the land doesn’t allow the vendor to get out of the
               contract for frustration because the deal can still be done, albeit at less than ideal profit

KBK No. 138 Ventures Ltd. v. Canada Safeway Ltd. BCCA 2000 – property rezoned
Frustration – K didn’t anticipate downzoning and such leg unusual.
Property no longer as described in agreement for P/S

    Safeway (V) wanted to sell property in EVan.
    Marketed the property as “prime redevelopment opportunity”
    Contract for sale 28 Oct 1996 (8.8Mil or more) for closing
         o Property described as C2, FSR 3.22 and parts as FSR 2.5
    Nov 29, 1990, Director of Planning applied to rezone the property from C2 to CD1 to decrease
      FSR to 0.3
    P and V objected. Rezoning went through
    KBK advised of frustration
    S Deal #2 (5.4mil)


   Distinguished Victoria Wood
        o S had more than “mere knowledge” that the purchaser intended to redevelop
        o Agreement stated that intent was redevelopment
        o Price reflected redevelopment – vendor would benefit from the redevelopment by getting
            better price
        o Deal therefore structured to facilitate the redevelopment
        o Non-compete obligated purchaser to do something OTHER than operate grocery. This
            was not contemplated in subsequent sale.
   Radical Change Test
        o Does the supervening event make the deal, as it will be completed, fundamentally
            different than originally contemplated
   Risk analysis as suggested by safeway:
        o CA rejected that Agreement anticipated downzoning
                 Agreement NOT conditional on non-re-zoning
                 Rezoning was unusual
   Change in deal meant an anticipated 230K ft2 development now could only be 30K ft2.
        o Fundamental change in the contract to something new and not anticipated


Did the court get it right?
     Limit on liability clause, no warranty for zoning

            o   Court justified it by saying the risk re: current zoning is different than the risk re: re-
       Nature of the agreement reflected redevelopment, redevelopment
            o Contract for purchase of land advertised for redevelopment
            o How different is the potential redevelopment before and after legislative change?
       Subsequent conduct: should this have been included in the analysis? Hard to justify.
       Market pricing reflects fundamental change in the deal. The new market under the stricter zoning
        would be different
            o Economic risk would normally pass to the purchaser
       Reasonable expectations of the parties? Advertised as redevelopment opportunity.
       $150K is not a big amount in light of the $8.8Million price. Maybe that should be the risk
        assumed by the purchaser.

Price: BCCA had a problem with the difference in pricing between 8.8 and 5 million. They thought this
was a fundamental difference. Where is the line between fundamental and non-fundamental difference?
     Does it depend on how foreseeable the risk is of change in value?
     Standards are contextual – need to refer to the intent and context on the contract. Condo
        developer not interested in the land, even if change in monetary value of property meant they
        could get the property at lower price.
     Global real estate market change might affect pricing. This would not inform a frustration
        argument. Absent the representation: you can’t lose $ on this
     Why wasn’t Safeway suing for the difference between 5 and 8.8. May have been a counterclaim.

Drastic difference in development density (230K v 30K) – when does a change become fundamental and
change the agreement?
    Difficult -- not answered by the court.
    Maybe the magnitude of the change informed the court’s analysis: >700% change
    A more marginal case might have a different outcome

Third branch of frustration analysis is the problematic part.

Kesmat Invt. Inc. v. Indust. Machinery Co. & Canadian Indemnity Co NSCA 1986
Rezoning and EA not undertaken because of expense.
NO frustration: $ inconvenience ≠ frustration

    In exchange for easement from K, IM would undertake subdivision and rezoning. 50K deposit,
      refundable on attaining rezone/subd.
    Subd and rezoning was problematic, required Environmental assessment – would have been
      expensive. EA not done, so no rezoning.
    K retained deposit, IM sued for its return, claiming frustration of the agreement.

   TC: frustration

   When the impossibility for performance of the contract is COMMERCIAL impossibility
   Inconvenience, more onerous, more expensive does not mean frustration
   Impracticality due to EXTREME difficulties, expense, etc could lead to frustration

       Where is the line?
          o Reverts to the reasonable person test
                     The cost of the study was not so enormous that “no man of common sense would
                        incur the outlay” per Moss v. Smith
          o Requirement for EA was not unheard of


Is this a non-frustrating case?
      Meets the test.
      Parties anticipated the value of the risk at 50K – the study was estimated to cost 25 to 50K
      When does onerous become frustrating event?
      reasonable person should be objective person with some business knowledge.
             o Almost every contract increase in onerous-ness would be impracticable

Why do we need the test?
   Need to dispel cases before court, so parties can solve their own problems
   Should be worried about cases at margin.

Allocation of risk: who should pay for the EA? IM assumed risk to obtain EA. Is this about
interpretation/risk allocation and not frustration?
     Agreed. It is an interpretation thing. IM expressly assumed the risk.
     But if not argued as an interpretation case, the court need not do the analysis. The outcome is the
         same anyhow.

(b) Self-induced frustration

Maritime National Fish Ltd. v. Ocean Trawlers Ltd PC 1935 – no license issued for charted boat, breach
of K.
NO frustration where other options available to avoid breach.

    Agreement July 1932 for contract of trawler for 1 year starting in OCT 1932
    March 1933, new leg to license trawlers
    At time of contract, parties knew of pending legislation for license requirement
    Owner (OT) applied for licenses, granted several, chose NOT to apply one to the trawler leased to
      MNF, end of April 1933 it was no longer legal to lease the trawler
    May 1, OT Gave notice to MNF that trawler was no longer available for charter
    MNF sues for breach of contract, OT claims frustration

   TC: No Frustration
   PC: Affirmed: NO FRUSTRATION

   2 prerequisites:
        o Can be no frustration if the supervening event is due to a voluntary act by one of the
        o If the possibility of the event was anticipated by the parties and provided for in the
            agreement, the agreement applies.

                       Does the EFFECT of the event change the fundamental nature of the agreement
                        so as to no longer reflect the original basis of the agreement.
       Because of an intervening change in the law, OT had to license its boats before charter. Result:
        not enough licenses, and not able to continue to charter to MNF
       However, OT made the choice to not apply a license to that boat, so it’s self-induced, not due to a
        supervening event.
       OT chose to remove the boat from being an eligible charter. This was in control of OT.

Would the case have been differently decided if the gov’t had decreed which boats were to be licensed
    Yes: frustration because OT couldn’t choose to license THAT boat.
    No: if the contract was for charter of a Trawler, because there could have been a substitute boat.
       OT should have accounted for it in its contracts. They knew there would be legislative change.
       And should have anticipated this was a risk.
    ?? hard to decide. Not if you imply assumption of risk.

Maybe the frustrating event is the choice of which boat to licence. The impediment to licensing all boats
is a legal impediment, not a choice. But implied allocation of risk because they contracted anyway.

Do people have to expressly advert to the risk? How foreseeable was it that all 5 licenses wouldn’t be
granted? Did OT license it’s own boats and not license the charted vessels?

Note: inequities with CL as Frustration terminates the contract at the time of frustration by the terminating
event. Lose out on damages prior to the frustrating event.
Frustrated Contracts Act – Court can order restitution under frustrated contracts.

(c) Force majeure clauses

Does a FM really extend the doctrine of frustration, or is it something different?
Interpretation: tend to be narrowly construed per Atlantic Paper for truly supervening events outside the
contrct – without regard to intents of the parties, and construed very narrowly. Therefore, interpretation
of FM becomes consistent with doctrine of frustration.

Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co SCC 1976 – shortage of waste paper
FM not triggered; crummy business planning ≠ supravening event
Court does not relieve commercial impractibility

    St Anne contracted to purchase for waste paper to make corregated CB for 10 years
    St Anne attemped to rely on FM to get out of 10 year contract due to
    FM clause: minimum purchase of waste paper
         o Included exemption for the non-availability of markets
    This structure of FM is common

   TC – FM
   CA – FM effective
   SCC – FM not triggered

   Interpretive approach brings analysis of the FM clause in line with frustration analysis
   “generally operates to discharge a contracting party when a supervening, sometimes supernational
     event beyond control of either party makes performance impossible”
   Discharging condition must be limited to an event beyond the control of the parties
         o Interpretation: if there is a list, interpret analogously with the rest of the list.
                  Non-availability of markets must be read in respect to the rest of the list.
   St Anne = crummy business planning is not supervening event. Spend $16million on a product
     without knowing when/where it would be sold.
   Reasonable person wouldn’t enter into such a contract where market was not stable or proven.
   St Anne cannot rely on a condition which it brought upon itself.


2 important ratios:
interpretation of FM and line with Frustration.

Commercial impracticability – court does not relieve this.

Different than non-availability of markets due to war (Neon signs)

FM list are usually conditions subsequent. Frustration looks at how a supervening event arises.

If application of FM looks like frustration, why have it separately?
      Does give the parties some flexibility, and allows the specification of the consequences of FM
         event. Frustration = release from contract. FM may not result in termination, but other damages.
      Even though interpreted similarly to frustration, language can go more broadly.
      Language re: available markets CAN be interpreted per ejudem generis as narrow – per an event
         over which the claimant has no control.
      Certainty: allocates risk

Is there an element of acting in good faith here? Had St Annes diligently pursued the market, would the
court still have denied them the use of FM?


Illegality – extra cases
Overview of Course to bring together themes

Exam format: problem based: some choice 3/5



Kingshot v. Brunskill (1953) selling ungraded apples was illegal so rendered contract unenforcable.

    Kingshot owned orchard and sold to neighbour
    Brunskill purchased apples (including K), graded and sold to market
    Leg at time provided that “no person shall SELL produce unless GRADED, PACKED and
      MARKED in accordance with the Act.”
    K sold ungraded apples in several lots to Brunskill, not to public
    B knew the apples had not been graded
    B paid for apples over time
    Dispute arose re: quality of apples
    B withheld some of purchase price
    K declined to accept partial payment in lieu of full payment

Issue: can the apples/proceeds be recovered, if they were ungraded and their sale was illegal?

DECISION: Lost at TC, CA due to illegality: selling ungraded apples was illegal so rendered contract

Bright line rule:
     If the sale was forbidden by the regulations, it was illegal.
     P cannot recover in an action for the apples. Any property conveyed under the contract cannot be
     Conceivable that farmer 1 could sell to farmer 2 before grading; legislation does not provide for
         this, and court cannot read into the regs this example.


Seems unfair: B acquired apples for free and made a profit. K got nothing.
    Court seemed to recognize this eventuality, however inequitable
    No punishment for B accepting the apples illegally seems unfair.
    No ability to return the apples to K? would use court resources

Giving effect to the contract:
     Intent of the parties was to sell the apples. Court goes against this intent, per the contract.
     Ignorance is no excuse, must be aware of the regs.

Giving effect to the regs
     Court should use civil process to give effect to the Regs - YES
     Should court resources be used to enforce illegal transactions? NO
     No-win situation where the regs seem arbitrary and inflexible.

Law & Economics
    Proportional effect: many get away with illegal contracts… need to enforce small and large
      contracts to protect the public.

Telling argument, modern statutory interpretation argument: no person shall sell [to the consumer]
ungraded produce
     Still gives the public protection, allows for fairness in this contractual interpretation

Damages in contracts are compensatory (for the most part) and there is no morality to contracting, or to
efficient breach.
      Damages a party incurs are eligible for reimbursement: if penalty is out of proportion to the
         wrongdoing, lose the equitable interpretation of contracts.
      Presumably, B would be fined by Prov regulator for buying ungraded apples.

B had been buying ungraded apples for a long time and only relied on illegality when it didn’t go his way.
    Agreement between 2 farmers, once in the hands of a lawyer seems to have been re-interpreted.

Why does the court use rigid interpretation of the statute, where illegality is a CL doctrine?
   Because the court can’t [easily] override a statute.
   Bright line rule: applied for certainty - clear rules – legislature should make riles that are fair, and
      not rely on court to make fair rulings in an unfair environment (OBITER)

St John Shipping v. Joseph Rank (1956) K for shipment that was overweight is outside the ambit of the
statute regulating shipping conditions. Modern Contextualized Analysis.

ISSUE: criminal sanction for violation of rule, based on court assessment of revenue lost to max of

    Boat overloading
    Value of extra freight exceeded value of fine
    JR (among others) overloaded ship run by SJS. SJS was fined L2300.
    SJS withheld L2300 of freight from JR, who then withheld payment for freight L2000
    SJS sued JR for incomplete payment.
    JR argued the contract was unenforceable because the shipment was illegal under Merchant
      Shipping Act.


   Bright line rule (classical approach to contracts/illegality) means contract for act which is illegal
     under statue is unenforcable.
   Policy rationale of statute: implications of everyone overing their freight means the entire
     shipment can be lost. Therefore, discourage overaging.

    2 principles in modern approach of analysis of illegal contracts:
    1. Contract which is entered into with the object of committing an illegal act is unenforceable
                      Must have intent to commit illegal act
                      If mutual, unenforceable, if unilateral, only the party with intent loses the ability
                        to enforce
    2. A court will not enforce a contract which is express or impliedly prohibited by statute
                      No intent required by the parties
                      Hinges on nature of contract
                      This is a contract that is illegal, not a contract that is performed illegally

       #2 applies here
       Look to the intent of the Statue AND what contracts it seeks to prevent
                      Protect the public
1. Does the statue intend to prevent contracting entirely?
                               NO, just contracts that are illegal
2. Does this contract belong in the class which is prohibited by the statute?
                               No, contact was not for the shipment in an illegal manner.

POLICY rationale:
    This approach especially necessary where regs may be easily broken without wicked intent.
    Collateral contracts are outside the ambit of the legislation
    Purchaser should not get windfall for a situation that is manipulable.


Court illustrates the bright line rule with hypothetical: can’t have absurd results due to slight infractions.
Is that fair analysis?
      Bright line rule: benefit of CERTAINTY and EASE of APPLICATION
      Injustice invariably results at the margins.

If Statute should directly render contract illegal, doctrine of illegality applies.
      This contract was not for the illegal shipment, but for the shipment which became illegal by JR’s

Law & Economic arguments:
    Shipper is in a better position to know the weight of freight on board? Should not have accepted
      the excess freight, so should be responsible for the consequences of the overage.

Common Law test should be flexible enough that it is not inequitably applied.
Disgorgement of profits realized due to the illegal act might be more equitable.
Conveyance of stolen property is prohibited by the criminal code

Contextualized approach

Still v. Minister of National Revenue – Modern approach to analysis of illegal contract
(1997) FCCA

    Still applied for permanent resident permit. Married CDN citizen
    Received paper that she thought absolved her from needing a work permit
    Worked as housekeeper 2 years.
    Received Perm Residency
    Laid off. Applied for UI. Refused, on basis her employment was illegal before PM rec’d.

   TAX COURT: upheld UI refusal
   FCCA: reversed on the Modern Approach


       Evolution AWAY from Kingshott toward modern approach.
       History of CL of illegality:
       Many exceptions to CL rule that illegal contract is void ab initio
       Holman 1775 – contracts can be rendered unenforceable on grounds that they are contrary to
        public policy. DID NOT lay down rule that ANY contract tainted with illegality is void ab initio
       Cope v Rowlands 1836 Ab inito voiding of K

     Different types of illegality:
          o CL illegality: courts regard contract as illegal and unenforceable due to nature of K
          o Statutory illegality – illegality arises from statute
     Highwayman case: Everet v Williams court or equity refused to enforce K between rogues and
      put their lawyers in gaol for contempt
     Evolution from 18c flexible approach to rigid “brite-line” rule in 20c
     St John K illegal in formation DIFFERENT from K illegal in performance [not an illegal K]
     Series of exceptions mitigate against harshness of CL rule where:
          o claimant is left at fault
          o claimant is repentant before performance
          o independent right to recover under other doctrine (tort)
     Kingshott – classical model – “easy” to find illegal K, but hard to swallow
     Royal Bank v Grobman 1977 – Modern approach – court weighs consequence of invalidation;
      social utility of those consequences;
    MODERN APPROACH: because K prohibited by statue, does not make it void ab initio
       K may be declared illegal but relief is granted under guise of exception OR
       K is not illegal and therefore enforceable

    Under classical model: employment under illegal K can’t be insured under UI regime
        o Too many exceptions which developed over time
    Modern approach: illegality/unenforceability
        o Purpose of statute – does statute expressly or impliedly prohibit the employment K?
        o Remedy being sought
        o Consequence which flow from finding of illegality
                  Denial of UI benefit is disproportional to breach
                  Paid into UI fund, acted in good faith
                  Public policy favours legal immigrants who act in good faith
    Note: highly contextual and flexible analysis
        o Certainty must give way to flexibility: leg can reform UI statute if they don’t like the
             way the courts apply it.
        o Opposite of Kingshott


Does this make sense? Should the classical approach have been used?
    I read the document as she should apply for authorization to work or go to school. Therefore, the
        classical approach should have been used as the same degree of equity does not play. Her failure
        to get the appropriate authorization is her responsibility.
    She was acting illegally – this is an adverse incentive to dupe UI system. Public policy result of
        allowing UI benefits to persons acting illegally
Contextual approach: moves away from bright line rule, flexible enough for court to find appellant

Hogg: constitutional application: SCC dialogue w leg: both respect each other views… but where scc
strikes statute for unconstitutionality, leg usually re-legislates around the prohibition.

Private law: court enunciates policy, if leg doesn’t like it, they can legislate around it.

Is there a workable test, or is it too flexible?
      Certainty is going to be a problem
      But, if violating a regulation doesn’t void the contract, is that not increased certainty?
      Public policy probs, per Still.


No grand theory of Contractual interpretation, so need multiple theories

Topics covered:

Contract interpretation







Intersection of Practice and Theory
     “principled” doctrinal sophistication and reflects real world problems
     Good class debate roughly = corporate debate
     Interpretation; Rectification – real problem
     M/R, M, F, I – don’t come up often in modern law

Role of Context
    Prenn v. Simmonds courts move to more contextual analysis “Factual Matrix”
    Context limited - Rarely involves anything outside policy concerns
    M/R – fraudulent misrep v innocent misrep, context dependent; slow moving field; tortious
        context means contract law is left beind and not all cases make sense
    Mistake rectification: contextualized analysis of parties: did they intend the language they ended
        up with? Did they get the meaning right?
    F – contextualized analysis if frustrating, supervening event
    I – HIGHLY contextual approach rejects bright line test

Rules v standards
    Should the law be bright line rule or standard?
    Certainty v equity/justice near the line?
    Mistake – debate in UK and ON re: narrow CL Lever Bros approach or equitable doctrine for
        standard where unconscionability
            o UK: Great Peace – rule based
            o Can: Miller v Gottardo – standards based approach
    Illegality
            o Rule (Kingshott) based jettisoned for standards (Still) [attempt to achieve “justice”]
    Interpretation; Rect; F = rules based
            o US: weak courts: rules are easier; Can strong courts, so standards can work

Central theme of contract interpretation
     Getting the meaning right: what the parties meant at the time the contract was written in the proper context,
         with little outside social policy influence
     Interpretation – yes
     Mistake – could have been reformulated as interpretation; seen as consistent with the theme of disputing
     Rectification – overrides the written doc by having parties true intent prevail
     Frustration – only applies if K has not expressly allocated risk of supravening event; so party’s intents need
         to be empty for court to impose a different result on the K.
     Misrep – a bit of a stretch
     Illegality – law of imposing something from outside K, hard to impose intention on interpretation

Reasonable expectation
     Swan: Contract law is about giving effect to the reasonable expectation of the parties
     Did not arise in any of the cases we studied
     Mistake –
     Rectification -
     Illegality – is it a reasonable expectation that illegal K will be voided?
     Works in interpretation – give effect to parties intention = expectation

Contracts theories arose in context of complex activities, therefore multiple themes arose.

     Interpretation – right result = fair
     Misrep/recis – unfair to allow parties to take advantage of K based on untrue info
     Mistake – unfair to enforce K when K is based on mistaken bargain
     Rectification – unfair to enforce K when K does not represent true agreement (Sylvan)
     Frustration – unfair when unforeseen event arises
     Illegality – fairness is subjective and hard to apply

Duty of good Faith in Performance?
     Interpretation – right result = what the parties are to do; takes it 1 step farther
     Misrep/recis –K based on untrue info -
     Mistake –K is based on mistaken bargain – good faith disclosure
     Rectification –K does not represent true agreement -
     Frustration –unforeseen event arises – not appl, except
     Illegality – pre-requisite for modern analysis

EXAM – 3 hours
See McCamus
No choice
3 q’s equal weight
Problem based
Answer q – give advice, what would court do, where law has evolved/evolving illustrate this process, where public
policy intersects
Provide argument and take a position to bring result one way or the other


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