Contract of a Vaild Offer to Perform

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					Basic Introductory Rules ................................................................................................... 6
Volume I Ch II: the Interests Protected by Judicial Remedies .......................................... 6
  A. Rationale for Contract Remedies .............................................................................. 6
     Fuller and Perdue ....................................................................................................... 6
  B. Measuring Expectations ............................................................................................ 7
     Peevyhouse v. Garland Coal and Mining Co – CC is usual for build K, but not if
     its disproportionate & incidental term ....................................................................... 7
     Ruxley Electronics V. Foryth [1995] House of Lords – if amenity is purpose, its
     recoverable ................................................................................................................. 7
     Victoria Motors v. Badya (1977) Sask Dist Ct. – if supply > demand, recover lost
     profits ......................................................................................................................... 8
  Law & Economics: Holmes & Posner ........................................................................... 8
     Holmes: Option Contract – option to perform or pay breach / risk allocatoin ....... 8
     Posner: Functions of Contract Law – efficient breach, security for marker ......... 8
  Alternative Measure: Wasted Expenditure & Uncertain profits.................................... 9
     Anglia Television Ltd. v. Reed [1972] UK (Denning) – WE where P so claims and
     parties reasonably contemplated WE at time of K, if breached ................................ 9
     Bowlay Logging v. Domtar [1978] BC – BP must show that it was a losing venture.
     Net loss is deducted from damages to be awarded. ................................................. 10
     CCC Films Ltd. [1985] – Queens’ Bench – choice for WE and lost profits, onus on
     BP to prove losing, NBP not rewarded for bad bargain. ......................................... 10
  Your Loss or My Gain: Restitutionary Damages ........................................................ 10
     Attorney General v. Blake – Spy – disgorgement available where term was
     important to K, br negative stipulation, profit from br neg., NBP has special
     interest, lit enf ineffective ........................................................................................ 11
Volume I Ch III – Limitations on Contract Damages ..................................................... 11
  Intangible Losses ......................................................................................................... 11
     Addis v. The Gramophone Co [1909] HL – no recovery in K, use tort ................. 11
     Jarvis v. Swan Tours Ltd [1973] UK – any K to provide entertainment or enjoym.,
     damages in value of what is lost, no phys or $ loss necessary. Ct reads nature of K
      ................................................................................................................................. 12
     Farley v. Skinner [2001] House of Lords – airplane, pleasure doesn‟t have to be
     sole purpose, but should be main purpose – or breach  pyschic discomfort and
     that discomfort was RF at time of K ........................................................................ 12
     Wharton v. Tom Harris Chevrolet Oldsmobile (2002) BCCA – buzz in car – peace
     of mind important part of K (not main purpose) OR mental distress is result of
     foreseeable discomfort caused by sensory experience. ........................................... 13
  Aggravated & Punitive Damages ................................................................................ 13
     Vorvis v. ICBC (1989) SCC –fired lawyer, agrvtd McIntyre = precedent? can‟t
     precede & IAW, Pun Mc: punishment, IAW, PUN Wilson: denunc, no IAW, bad
     behav., judges judge. Mental suff: mental RF, no IAW, can preced ...................... 13
     Wallace v. United Grain Growers (1997) SCC – K for peace of mind OR IAW
     (can be seperate term) and suffering is RF. No good faith duty, but act in bad faith
      extend period. Minority different ........................................................................ 14
     Whiten v. Pilot Insurance (2002) SCC – punitive = 1)rational?, 2) IAW + high
     handed, award must be reasonable .......................................................................... 15
  Remoteness of Damage ............................................................................................... 16


                                                                    1
     Hadley v. Baxendale (1854) UK – “Reasonably foreseeable” = naturally or
     contemplation. Asquith = shouldn‟t be too harsh on D ........................................... 16
     Kerr S.S. Co v. Radio Corp of American (1927) NYCA – coded message, no actual
     knowledge that br  lost profits .............................................................................. 17
     Victoria Laundry Ltd. V. Newman Industries (1949) UK – imputed/actual “On the
     Cards”  widen scope of recovery. (Doesn‟t have to be certain or very likely)..... 17
     The Heron II (Houfos v. Czarnikow Ltd) (1969) UK – “sugar market price “Not
     Unlikely”  narrowed scope again ......................................................................... 18
     Cornwall Gravel v. Purolator (1978) Ontario – court had actual knowledge that it
     was tender. remoteness used to increase damages. .................................................. 18
  Mitigation – Burden on D, apply because minimize costs of litigation and original K,
  self rely ........................................................................................................................ 19
     Payzu Ltd. V. Saunders (1918) UK- silk dealer. reasonable person. general
     presumption that NBP can accept offer from BP .................................................... 19
     Dor-Val. v. Valley (1997) NS – (CDN) ugly furniture. took reasonable steps ....... 20
  Repudiatory Breach (Repudiation) – if br is serious enough, NBP can continue K or
  terminate and claim damages....................................................................................... 20
  Anticipatory Breach (variation on repudiatory breach) – BP indicates it will br,
  NBP can continue or accept ......................................................................................... 20
     Roth v. Taysen (1985) UK – grain on boat. BP = buyer. Writ in july, sold in sept.
     Court: issue writ = accept ant rep.  mitigate at time of br., but damages assessed
     as matter of fact, not as a rule – mitigate & NBP incurred damages. ...................... 21
     White and Carter Ltd. v. McGregor [1962] HL – garbage ads. if P can perform its
     duty w/o cooperation of D, and P has substantial interest in performance, P can sue.
     Onus on D to prove P doesn‟t have special interest. ............................................... 21
     Finelli and Dee (1968) OCA – driveway, no permission to use land ..................... 22
     Asamera Oil v. Sea Oil (1979) SCC – shares lent, sold, no spp where compens
     adequate (knew $ amount), should have mitigated even though br deprived P of $,
     mitigation & spp – SHIFT – onus to prove P wants spp on P. (white carter, onus to
     disprove is on D) but no spp in this case ................................................................. 22
Ch. IV - Literal Enforcement – 1) Spp, 2) injunction, 3) order to pay. Test = “unique”
(CD inad.), limiting factors = clean hands, mutuality, hardship for BP, unfair .............. 23
  Literal Enforcement and Land ..................................................................................... 24
     Kloepfer v. Roy [1952] SCC – land1 – spp routine land remedy, use and
     inadequacy not important. AR  validation of SPP, doesn‟t change date of perf
     (issuing writ like Roth can‟t accept br or else no entitlement to property. thus it just
     gets validation)......................................................................................................... 25
     Domowicz v. Orsa (1993) Ontario- apartment for invest. SPP for land is rebut pres,
     only where substantial interest. ONUS on D to prove that CD is adequate. ........... 25
     Semelgaho v.Paramadevan (1996) SCC – damage in lieu of (s99) = no mitigate,
     zombie K, SHIFT ONUS: P must prove that SP should be used (SPP “not a matter
     of course) ................................................................................................................. 26
  Literal Enforcement of Goods ..................................................................................... 26
     Falke v. Grey (1859) UK – general= Sp available when substitute unavailable. This
     is unclean hands. Buyer wants injunction because he had deal for cheap, knowingly.
     Not awarded because unclean hands. ...................................................................... 26



                                                                  2
      Sky Petroleum v. VIP Petroleum Ltd [1974] UK – gas = commodity, so not usual
      SPP, but examine nature of market, gas is unique, also preserve business ............. 27
      Bronx Engineering (1975) UK- machinery takes 9 months. CD are adequate,
      goods not unique, just takes time. Replaceable?  no lit Enf. for goods ............... 27
   Literal Enforcement and Employment / Service ......................................................... 27
      Warner Brothers v. Nelson – class example of employment ................................. 27
      Yule. v. Atlantic Pizza Franchise – infer neg from positive (so not forcing)
      american cyamind test: 1. prove case is not frivolous 2. irreperable harm/damages
      inadequate (reputation), 3.balance of convenience? ................................................ 28
      Kelly’s Stereo Mart v. Schneider – injuntcion = exceptional, 2 eligibility tests (not
      agreed which is best) strong prima facie or amer. cyan, then justice factors .......... 28
      CIS v. Argyll Stores [1997] HL – anchor store, SPP no good because of
      supervision, bad relationship, P enriched at expense of D (policy can override
      inadequacy of damages) .......................................................................................... 29
      The Case for Specific Performance (Schwartz) .................................................. 29
Volume I Ch. V – Private Control of Remedy and Risk ................................................. 30
   1. Liquidated Damages ................................................................................................ 31
      Dunlop Tyre v. New Garage – marketing price fix, not penalty, diff breaches, but
      only breached 1 clause of K..................................................................................... 32
      Clarke v. Thermadaire – LD is formula, all profits. SCC said penalty because not
      substantively fair. IBP doesn‟t matter. Hindsight important. ................................ 32
      Elsey v. J.G. Collins Insurance – courts can only interfere when there‟s
      oppression. relationship b/w LD and injunctions. .................................................. 32
      Philips v. Hong Kong – commercial building, Elsley approach IBP, restate
      Dunedin.................................................................................................................... 33
   2. Forfeiture ................................................................................................................. 33
      Howe v. Smith – K said advance pay is deposit and part pay. Payer breached.
      Money is forfeitable deposit if payer breaches, because then its a real risk, if no
      breach = part pay. .................................................................................................... 34
      Stockloser v. Johnson – introduce equity – courts can protect buyer/payer from
      forfeiting if penal at K and unconscionable at Br. Here, it was part payment, but
      clause said it would be forfeited. ............................................................................. 35
   3. Limitation & Exclusion Clauses .............................................................................. 35
      Karsales v. Wallace (Denning) – substantive doctrine fun br. Can‟t br the root of
      K .............................................................................................................................. 37
      Hunter v. Syncrude SCC 2-2 Split – know both Dickson = unconsc. IBP & unfair
      term, Wilson = fundamental breach & consequences. ............................................ 38
      Sale of Goods / CPA ................................................................................................ 39
Volume II Ch. I – Freedom Of Contract & Market Discrimination ................................ 39
      Christie v. York Corporation [1940] SCC – Freedom from contract ..................... 39
      Rogers v. Clarence Hotel, (1940) B.C.C.A. – common law-need reasonable cause
      not to K .................................................................................................................... 40
      Grant v. Wilcock (1991), Human Rights – refuse to K because of race offends s3
      of CHRC .................................................................................................................. 40
Volume II Ch. II – Models of Contract Formation .......................................................... 40
   Defenses to Breach of K .............................................................................................. 41
1. The Agreement Model ................................................................................................. 41


                                                                   3
      Carlill v. The Carbolic Smoke Ball Company – Unilateral K – objective test proves
      its offer ..................................................................................................................... 43
      Dawson v. Helicopter Exploration (1995) SCC – use of bilateral where possible,
      offer that includes conditional future action can become bilateral if agree that the
      action will take place eventually. Good faith 1 ....................................................... 43
      Tywood Industries v. St. Anne-Nackawic Pulp & Paper – Battle of forms. Exclude
      conflicting K term – ADR. ...................................................................................... 44
   Remedies for Failed Negotiations ............................................................................... 44
      MJB Enterprises v. Defence Construction – imply term of duty / good faith 1. D
      br. K-A, privelege clause doesn‟t count. ................................................................. 44
      Empress Towers v. Bank Nova Scotia –imply good faith in rent negotiation,
      landlord not allowed to ignore offers....................................................................... 45
2. Bargain Model - Consideration ................................................................................... 45
      Hamer v. Sidway – promise not to do something at request of other party,
      detriment, rich uncle ................................................................................................ 46
      Kirksey v. Kirksey – moving to bro in law not sufficient detriment, even beneficial
       ................................................................................................................................. 46
      Balfour v. Balfour – rebut presump that family cases don‟t intend to create legal
      relation ..................................................................................................................... 46
3. Reliance Model – Promissory Estoppel ....................................................................... 47
   Development ................................................................................................................ 47
      Hughes v. Metro Rwy – if 1 party leads other to believe it wont enforce its rights, it
      can‟t later do so based on equity.............................................................................. 47
      Central London v. High Trees (denning) – War Rent.1. intended to create legal
      rel‟s 2. promisor knows it will be relied on 3. its relied on AND “so far as terms
      properly apply” ........................................................................................................ 48
      Combe v. Combe – restate PE doctrine to narrow scope  not substitute for
      consideration. Also restates high trees principles (3 factors) ................................. 48
   Intention to change Legal Relations – Canadian Application ..................................... 48
      Burrows v. Subsurface Survey – late payments are mere indulgence. for PE there
      must be clear intention from promisor to change legal rights. ................................ 49
      Maracle v. Traveler’s Indemnity – fire insurance. PE needs clear unambiguous
      promise to change relations. REASONABLE person test: how would a RP
      interpret the „promise‟?............................................................................................ 49
   Innovation towards a principle of good faith negotiations: broad application of PE .. 49
      Crabb v. Arun District – property/access – basically same as hightrees, equity
      decision .................................................................................................................... 49
      Brewer v. Chrysler – car dealership. “intend” to “create” legal relations – no
      existing contract needed. Ps efforts during negotiations should be compensated. . 50
Volume II Ch III Unfair and Defective Contracts ........................................................... 50
   1. Contract Modification & Duress ............................................................................. 50
      Harris v. Watson (1791) UK and Stilk v. Myrick (1809) – Historical origin. Sailors.
      modification needs consideration, existing duty doesn‟t count. otherwise 
      extortion. .................................................................................................................. 50
      Gilbert Steel v. University Const. – New price not enforceable because no
      consideration, no intention to tear up old K, not prom est because shield not sword
      & no detrimental reliance ........................................................................................ 51


                                                                    4
Development of Economic Duress – A) illegitimate act that coerces? B) coerce? did
they protest, alternative option, independent advice, steps to avoid K when threat
removed ....................................................................................................................... 51
   Williams v. Roffey – roofers offered more to finish on time. SHIFT  preexisting
   duty can be consideration if the promisor gains a practical benefit from it, and the
   promise isn‟t made because of duress. .................................................................... 52
   Techform Products v. Wolda – inventor. Signs agreement. Consideration =
   continuance of employment. Duress?  No, there may have been pressure, but not
   illegitimate. .............................................................................................................. 52
Contract changes: summary ..................................................................................... 52
2. Misrepresentation .................................................................................................... 53
   Esso Petroleum v. Mardon – 1st Hedley, (seeks damages  diff from rescission
   test) opinion from expertise is actionable if other isn‟t expert, tort theory of
   recovery – position if it hadn‟t happened. ............................................................... 54
   Grinberg v. Law Development –– merge objective/subjective into 1 material test
   for rescission, Windows Condo, exc. clause too broad, wouldn‟t apply anyway
   because not pointed out ........................................................................................... 55
3. Standard Form Contract ...................................................................................... 55
   Tilden Rent a Car v. Clendenning – can‟t rely on stringent/unusual terms if you
   know the signor hasn‟t read it, and it would conflict with their expectations (so you
   can‟t believe they agreed to it) but unusual  common .......................................... 56
   Trigg v. MI Movers - even if there is time, onerous term must be brought to
   attention. alerting party after signing isn‟t good without consideration. ................. 56
Exploitation and Unfairness – Unconscionability ................................................... 58
   Lloyds Bank v Bundy – IBP is a general principle to allow rescission where: IBP,
   no ILA, unfair terms or grossly inadequate consideration ...................................... 58
   Harry v. Kretziger – court uses unconsc. MacIntyre: IBP (based on ignorance/
   need), unfairness, onus on D to prove its reasonable. But unconc  stereotyping.
   Lambert: “community standards” ............................................................................ 59
5. Family Guarantees ................................................................................................... 59
   Fehlberg, The Husband, Bank, Wife & Signature ................................................ 60
   Barclays Bank v. O’Brien –Guarantee enforceable unless misrep, undue influence
   or legal wrong. Bank on constructive notice of legal wrong unless they can show
   that they took reasonable steps to determine otherwise: separate meeting, warn of
   risk and $ liability, advise for legal advice. ............................................................. 60
   Royal Bank of Scotland v. Etridge (2001) – modifies Conscriptive Notice ......... 61
   Bertolo v. BMO – mother mortgage home for Son‟s business. Bundy
   unconscion/IBP principle applied to surety spouse. IBP, no legal advice............... 61
   Bank of Montreal v. Featherstone 1989 OCA – surety enforceable despite no ILA
   because bank had no reason to believe there was misrep, undue influence or legal
   wrong (no constructive notice) ................................................................................ 61




                                                              5
                              Basic Introductory Rules

Characteristics of Contract
o Private and voluntary obligations
o Based on the notion of strict liability

Ideology of Freedom of contact
1. Individuals are free from contractual obligations unless they choose to assume them
2. Individuals are free to contract with whomever they like
3. Individuals are free to put whatever terms they wish in contact as long as other party
   agrees
o Note: Conflict with some judicial intervention in planned remedies etc…

Starting Point is the Basic Compensation Rule → Expectation Damages
o “The rule of the common law is that, where a party sustains a loss by reason of
   breach of contract, he is, so far as money can do it, to be placed in the same position
   with respect to damages as if the contract had been performed”
       - Robinson v. Harman (1948)


         Volume I Ch II: the Interests Protected by Judicial Remedies

                        A. Rationale for Contract Remedies

Fuller and Perdue

Purposes of Awarding Contract Damages
1. Restitution Interest → prevent unjust enrichment of BP from breach
2. Reliance Interest → Protect reliance on the contract
   o Goal → Compensate NBP for losses relying on the promise
   o Measure of damages → NBP is placed in position as good as they were in before
      the promise was made.
3. Expectation interest → Meet expectations from the contract – Standard rule of
   contract law
   o Goal → Compensate NBP for what they expected to gain from the contract
   o Measure of damages → Expectancy damages. Put the NBP in the position they
      would have been in had the contract been performed.
   o Note: Inherently protects the reliance interest

Why promote the use of contracts?
1. Facilitation of markets leads to economic explanation
2. Contract are a method of risk allocation
3. Contacts facilitate planning and enable resources to be used efficiently

Why not compensate only the reliance interest?



                                             6
1. Under compensates individuals because it is costly to prove reliance which is unfair
      a. Difficult to prove costs associated with contract (i.e. lost time)
      b. Difficult to prove opportunity costs on a B of P
2. Acts as drag on market because people would be reluctant to enter contracts


Rationale for Expectation Measure
Better than reliance measure in protecting the reliance interest
1. Accounts for opportunity costs because it assumes people are rationale and enter into
   contacts that a) cover incurred costs and b) are better than other opportunities
2. Easier and less costly to administer
3. Fully protects reliance
4. Promotes efficient breach

Note: EM takes into account loses from immediate benefit of the contract (note
measurement issues: cost of cure or diminution in value), consequential losses (lost
profits and wasted expenditure) subject to remoteness and mitigation

                                 B. Measuring Expectations

Peevyhouse v. Garland Coal and Mining Co – CC is usual for build K, but not if its
disproportionate & incidental term
Facts: P enters into contract to stripmine land and fulfills their ends of the contact.
Breached contract term requires D to fix land after work is complete. P sues for
estimated cost to fix land.
Issue: P argues cost to fix land. D argues diminution in value.

Majority:
o Diminution in value is the correct approach where
      1. Contract term breached is incidental to the main purpose of the contract
      2. Cost of performance is grossly disproportionate to the benefit due to
          economic waste and a windfall for the P

Dissent: P is right and would not have entered contract if not fixed the land. D have
entire benefits and P is worse off. Courts shouldn‟t remake contracts.

Ruxley Electronics V. Foryth [1995] House of Lords – if amenity is purpose, its recoverable
Facts: Swimming pool built 7‟ shallower than depth specified by contract but doesn‟t
impact use of the pool. The only method to solve is re-installation. P asks for cost of
cure, D asks for diminution in value. Issue of loss of amenity also addressed.

HL:
Cost of Cure
o Cost of cure should be awarded unless it is unreasonable according to a cost benefit
   calculation



                                              7
o Nature of contract as personal preference is taken into account on the benefit side of
   assessments
o Intention to reinstate is normally not an issue but matters where there is no
   diminution in value → otherwise, you are in a no different of a position
Loss of Amenity
   o Breach of a contract for amenity deprives you of the possibility of fun and that is
       a loss which can be awarded. (SHIFT IN THE LAW)
  Significance: Where damages may be assessed in more than one way, courts should
choose the measure that provides reasonable compensation for the material loss actually
               suffered by the NBP. Loss of amenity can be compensated.

Lost Volume Claims

o How should the law respond when the seller feels they would have had two
  transactions if the breach had not occurred?
o Mitigation doesn‟t capture the loss because the seller has lost the profit from one
  sale?

Victoria Motors v. Badya (1977) Sask Dist Ct. – if supply > demand, recover lost profits
o D refuses to take delivery of car, P sells to a 3rd party and claims lost profit from
   buyer.

Test
o Measure of damages is the estimated loss directly and naturally resulting in the
   ordinary course of events from the breach of contract
o Available market test doesn‟t apply where there would be an injustice by producing
   an accurate measure of the loss
o Available market test
       o D>S , available market exists and measure of damages is difference between
          market price and contract price → not a lost volume claim b/c not a lost sale, nominal
       o S>D, --- If S>D, recover the lost profits b/c no available market (CD)

                          C. Law & Economics: Holmes & Posner

Holmes: Option Contract – option to perform or pay breach / risk allocatoin
o Contract law is a method of risk allocation in the event the contract is breached
o BP has two options (central obligation): fulfill contact or pay for the breach
o Breach is morally neutral
o Contract law is liberty enhancing – allocation of risk and don‟t contract freedom
   because it doesn‟t/shouldn‟t compel performance
o “The universal consequence” is the promisor‟s to choose: a duty to do, or pay

Posner: Functions of Contract Law – efficient breach, security for marker
o Relies on Holmes to justify expectation measure of damages




                                               8
o Basic notion is that an unhindered market will result in resources being directed to
  their most valued use – where D can breach and after paying damages to P, still has
  profit
o Argues contract law increased market security (reduces risk) and provides risk
  allocation for situations not specifically addressed in the contract
o Contract law provides incentive to communicate accurately
o Expectation measure encourages efficient breach assuming full information and
  remedy
      - Departure from Holmes moral neutrality because assumes some breach is
          good (efficient)
o Bank of America Canada v. Clarica Trust [2002] SCC – Major J – efficient breach
  should not be discouraged by the courts
o But there are criticisms that a P is never fully compensated, perhaps this suggests
  more interest in the market than individuals
      - think Peevyhouse

Holmes & Posner v. Fuller & Purdue
o Fuller & Purdue promote reliance, but Holmes & Posner say that the promisor
   shouldn‟t be too constrained


             D. Alternative Measure: Wasted Expenditure & Uncertain profits

o Two modes of measurement: lost profits or wasted expenditure
o P can chose either lost profits (expectation – includes costs and profit) or wasted
  expenditure (costs incurred in reliance on the contract) → generally, rationale party
  chooses lost profits
o Elects WE where a) profits are uncertain b) made a bad deal (WE = usually is
  reliance measure)
o Is the outcome a good compromise between the morality of contractual promises,
  incentives to encourage reliance and deterrence of inefficient contracts and
  performances?

Anglia Television Ltd. v. Reed [1972] UK (Denning) – WE where P so claims and parties
reasonably contemplated WE at time of K, if breached
Facts: Anglia incurred a number of costs in making a movie before contacting Reed as
the lead actor. A few weeks before filming, Reed withdrew and Anglia sued for WE
including costs incurred before the contract (unable to assess profits without making the
film).
Issues: Can P claim WE? Can they claim for expenses before the contract is made?

Court
o Reed was aware that expenditures had been incurred before he contracted and ought
   to have known if he broke the contract, the expenditure could be wasted
o Test: P may recover pre-contact expenditure where
1. P claims wasted expenditure AND



                                                  9
2. the parties reasonably contemplated at the time the contract was made that pre-
   contractual costs would be wasted if D breached (similar to remoteness)
3.
o NOTE: P is able to shift the risk of the pre-contractual expenditure to the D. P is
   better off.
o Note: This is similar to reliance measure, and also represents lost opportunity cost.
Significance: Opens up the possibility of wasted expenditure.
Criticism: Does this encourage film companies to incur huge costs before signing K?
Should they be partly liable for waiting so long to sign actor?

Bowlay Logging v. Domtar [1978] BC – BP must show that it was a losing venture. Net loss is
deducted from damages to be awarded.
Facts: One year money losing contract (PW argues it should be interpreted as potential
for multi year contract and would accept loses in the first year). Contract is breached. P
claims WE, but was losing money.

Rule: In instances of part performance in a losing contract where NBP would have
entertained a net loss if the contract had been performed, you deduct those losses from
the amount of damages to be awarded. NOTE: The onus of proving that contract
expenditures would not have been recovered had the contract been performed is on the
BP
Rationale: Market considerations and efficiency – don‟t compensate NBP for entering
into a bad bargain.
Court is reluctant to apply Anglia principle because:
(1) it would put P in a better position than if the contract was performed
(2) it would reward P‟s inefficiency
(3) compensate for a bad bargain, rather than a loss caused by breach
(4) result in P shifting risk of bad bargain to D (remember Holmes)
Significance: Places limits on claims for wasted expenditure

CCC Films Ltd. [1985] – Queens’ Bench – choice for WE and lost profits, onus on BP to prove
losing, NBP not rewarded for bad bargain.
- affirms Bowlay on
(1) NBP choice between wasted expenditure and lost profits
(2) Onus to prove wasted expenditure wouldn‟t be recovered if contract completed is on
the BP
(3) NBP will not be rewarded for entering a bad bargain

                      E. Your Loss or My Gain: Restitutionary Damages

o Options contract and efficient breach shouldn‟t be universal application because they
     - trivialize contract and
     - inhibit reliance on performance
o Restitutionary damages are appropriate in some cases
     - BP who profits from breach should pay some or all of that profit to NBP
o Note: UK law commission says RD should be available between fiduciaries but not
  central principle (disgorge v. compensation). In general shouldn‟t be awarded


                                              10
      - Uncertainty in determining type of breach
      - Provides incentive not to mitigate
      - Accounting difficulties
      - De facto specific performance
o Friedmann: Restitutionary damages should be available where breach of K deprives
  the NBP of an interest that “belonged to him”.

Attorney General v. Blake – Spy – disgorgement available where term was important to K, br
negative stipulation, profit from br neg., NBP has special interest, lit enf ineffective
Facts: Former ESIS member turned spy. Escaped prison and sold memoirs from Russia.
Part of contract forbade divulging info but already public and no damage to Britain. AG
wanted restitutionary damages.
House of Lords
o Restitutionary damages are exceptional but available when Ld. Steyn‟s test is met
o Test: Disgorgement of profits is available where the term was important to the
    contract and
    1. Breach of a negative stipulation (i.e. BP promised not to do something)
    2. BP profited from breaching negative stipulation / doing exactly what not
        supposed to do
    3. NBP has special interest over and above the hope of a benefit to be assessed in
        monetary terms
    4. Literal enforcement remedies are ineffective or virtually ineffective

                 Volume I Ch III – Limitations on Contract Damages
o Three main limits on contract damages
  1. Intangible losses
  2. Remoteness of damage
  3. Mitigation

                                          A1. Intangible Losses

o To what extent does the law compensate experiential losses from breach of contract?

Addis v. The Gramophone Co [1909] HL – no recovery in K, use tort
Significance:
o Starting point for intangible losses
o Standard rule: Contract law is concerned only with financial losses from breach

Facts: Employer breached contract by dismissing employee without cause, and, in
effect, without notice (6 months provided in contract). Employee claimed for notice
period and humiliation.

Issue: Is mental distress from wrongful dismissal compensable as a harm from breach of
contract?

House of Lords


                                                      11
Denies compensation of mental distress (awarded in lower court).
(1) Recognition of mental loss would amount to punishment of D and not compensation.
Contact law should not punish. This shows the court doesn‟t view Addis as suffering
injury – he never argued punitive damages.
(2) No compelling reason to treat breach of employment contract differently than other
contracts where mental injuries are not available
(3) Losses are compensable in tort – keep categories separate for predictability of law
(4) Avoid uncertainty and unpredictability for employers. Minimize cost for employers.
(5) Courts should not impose terms to a contract that parties did not explicitly assume
(6) Contracts are impersonal relationships between “rugged individuals”, no emotional
ties.
(7) Motives of the parties are irrelevant to contract law

Jarvis v. Swan Tours Ltd [1973] UK – any K to provide entertainment or enjoym., damages in
value of what is lost, no phys or $ loss necessary. Ct reads nature of K
Facts: Plaintiff plans skiing holiday based on brochure. Many of the things offered in
the brochure were not there. Sues for breach of contract resulting in disappointment and
other mental damages.
Issue: Can a Plaintiff be awarded damages resulting in a breach of contract for mental
distress? If so, how should those damages be quantified?
Held:
** Dismisses Addis – out of date
(1) “In a proper case damages for mental distress can be recovered in k.”
(2) “One such case is a k for a holiday, or any other contract to provide entertainment or
enjoyment.”
(3) Measure of “mental distress” damages are made in reference to the value of what was
promised
(4) Mental distress can be recovered when there is no physical or monetary loss
Note: (1) application of the expectation measure is broadened – contract hasn‟t been
fully performed if you don‟t get the pleasure you expected
(2) Court reads the nature of the contract as material to the damages awarded – future
appeals to the ratio will have to reason on this basis

Farley v. Skinner [2001] House of Lords – airplane, pleasure doesn‟t have to be sole purpose,
but should be main purpose – or breach  pyschic discomfort and that discomfort was RF at time of K
Facts: P hired the defendant to inspect a vacation property he wanted to by. P was
worried about noise from an airport and specifically requested D investigate the aircraft
noise. P claimed 1) diminution in value and 2) non-pecuniary damages for loss of
pleasure and mental suffering

House of Lords
  1. No diminution in value. Market price had taken into account proximity to the
      airport. The price Farley paid reflected market value.
  2. For mental damages:
          a. Although pleasure isn‟t the sole purpose of contract, it is an important
              purpose (SHIFT from Jarvis)



                                                     12
           b. D is liable though the contract standard was reasonable care and not a
                strict liability contract. D found not to have taken reasonable care.
Ratio/ Test for damages (re-interpreted from Watts v. Morrow)
o Although the general rule in contract damages is no compensation for intangible
   injuries, the BP will be liable for psychic harms:
       (1) peace of mind was a major/important purpose of the breached k; AND/OR
       (2) NBP suffers psychic injuries directly related to inconvenience/discomfort
       caused by “sensory experience” consequent on the breach; AND
       (3) psychic injuries/inconvenience/discomfort are, at the time of the contract,
       reasonably foreseeable consequences of the breach
Only one of the tests must be proved.

Wharton v. Tom Harris Chevrolet Oldsmobile (2002) BCCA – buzz in car – peace of mind
important part of K (not main purpose) OR mental distress is result of foreseeable discomfort caused by
sensory experience.
Facts: Buzzing sound in a brand new car. Attempted repairs took place over 2 years that
could not fix it. Plaintiff suffered frustration and anxiety.
Significance: Canadian appeal court applying Farley v. Skinner approach to amenity
damages.
o First identifies Addis as the starting point, then 2, separate exceptions are:
   1. peace of mind is an important part of the K (doesn‟t have to be main part)
   2. mental distress that is directly related to foreseeable inconvenience and
       discomfort, where the foreseeable inc. and discomfort derive from a sensory
       experience

                              A2. Aggravated & Punitive Damages

Vorvis v. ICBC (1989) SCC –fired lawyer, agrvtd McIntyre = precedent? can‟t precede & IAW, Pun
Mc: punishment, IAW, PUN Wilson: denunc, no IAW, bad behav., judges judge. Mental suff: mental RF,
no IAW, can preced
Facts: P was a lawyer fired without cause after 7 years. Two years before being fired, P
harassed by boss which cased medical stress. Offered 8 months severance if accepted
cause but refused getting 1 month. Claimed breach of contract and emotional
consequences.

Note: Three theories of recovery
   1. Aggravated damages (McIntyre - majority)
   2. Punitive damages (McIntyre and Wilson)
   3. Foreseeable mental suffering (Wilson J - dissent)

Aggravated Damages – McIntyre (Vorvis Test)
o Exceptional compensatory remedy that takes into account intangible injuries
o Test for recovery (Vorvis fails on all elements):
   1. Precedent → Precedents against recovery don‟t necessarily defeat a claim, but
      precedents in favour of recovery will be looked at favourably
   2. Conduct causing intangible injury can‟t precede the breach and must aggravate
      the breach


                                                   13
    3. Conduct causing the intangible injury must be an independently actionable wrong
       – could bring an independent action and receive a legal remedy (eg/ torts –
       intentional infliction of emotional damage etc.).


Punitive Damage
        (a) McIntyre                             (b) Wilson
(i) punitive damages = punishment                  (i) punitive damages = denunciation
(ii) requires independently actionable wrong        (ii) no IAW – behaviour vindictive,
high handed, reprehensible
(iii) judges should not award if they disapprove    (iii) judges are competent to judge
behaviour or conduct
(iv) no recovery for Vorvis                        (iv) recovery for Vorvis

Foreseeable Mental Suffering
P can recover when:
1. Intangible injuries would have been in the reasonable contemplation of the parties as
    a consequence of breach at the time of formation
2. No IAW requirement
3. Conduct preceding the breach may be taken into account
Note: Vorvis would not recover b/c fails #1 (job market which restricts entry)

Values:
o Majority wants to keep a strict, clean contract regime that focuses on commercial
   interests and does not extend duties to each other that they didn‟t intend in the
   contract
o Minority sees contract relations, esp. employment contracts, as inevitable arena for
   intangible, psychological harms. Since we compensate for these injuries in tort
   between complete strangers, its appropriate to compensate in contract between
   parties.



Wallace v. United Grain Growers (1997) SCC – K for peace of mind OR IAW (can be seperate
term) and suffering is RF. No good faith duty, but act in bad faith  extend period. Minority different
Facts: P was headhunted by D at age 45 and expressed concern of job security. At 59, P
dismissed allegedly for cause with no notice after being told to keep up the good week
the previous day. P experience emotional trauma and did not find another job.

Issues: (1) Aggravated Damages? (2) Definition of IAW (3) Implied Term of Good
Faith?

Majority (Iacobucci J)
o Applies Vorvis and interpretation is → no recovery for intangible injuries unless
  1. Contract is for peace of mind (amenity/fun enjoyment) OR
  2. there is an IAW apart from the breach that is the subject of the claim (Can be
      separate term, but can‟t be duty of good faith), and mental suffering is RF


                                                    14
o No duty of good faith in contract/tort that limits ability to fire workers
o BUT NEW RULE: “Bad faith conduct in the manner of dismissal is properly
   compensated for by an addition to the notice period.”
      o Therefore, if no IAW, P is not without recourse
Majority Decision: Extend notice period because firing breached good faith, but no
damages for mental distress or damage to reputation because no IAW.

Minority (McLaughlin J)
o Implied duty of good faith should be included in termination of employment K
o Applies Vorvis test and finds an IAW (implied term employers will dismiss people
   properly – bad faith termination is second breach)
o Does not agree with the majority because there was no cause of action for extra
   notice period, inconsistent with authorities and uncertain → better to see implied
   term and bad faith breach

Policy
o Majority
       - Avoid allowing mental issues to dominate in contracts and IAW is a way to
           limit litigation under foreseeable mental stress
       - Iacobucci‟s intransigence on implied term of bad faith is because he believes
           it will release the floodgates but wants to recognize exceptional
           circumstances intangible injuries can be recovered
o Minority
       - responding to the incoherence of the majority‟s solution
       - want to see mental distress as an actionable claim under contract

Whiten v. Pilot Insurance (2002) SCC – punitive = 1)rational?, 2) IAW + high handed, award
must be reasonable
o Note: differs from Vorvis and Wallace because it a) awards PD and b) not
  employment context
o Insurance always has an implied term of good faith

Facts: Fire destroyed P‟s home. Insurance company was trying to force them into a
settlement claiming arson but had no proof.
Issues: Is D liable for PD? If so, is $1M too high?

Majority
o Punitive damages are available when are for a rational purpose
  1. Rationality Test →Was the misconduct of the defendant so outrageous that
      punitive damages were rationally required to act as a deterrent / retribution /
      denunciation
  2. If yes, technical test for PD (drawn from Vorvis)
         a) IAW (can be another contract term, like Wallace)
         b) D‟s conduct is high handed, malicious, arbitrary misconduct that is
              markedly different from normal behaviors



                                             15
o Awards should be reasonable (rationality test), rational (no higher than to serve
  purpose) and proportional (D‟s blameworthiness, P‟s vulnerability and uniqueness of
  interest harmed by D‟s misconduct) (want it to be sufficiently high than it‟s not just a
  license to breach)
o $1M is upheld (on the high side but rationale) – sends powerful message of
  retribution, deterrence and denunciation.

Dissent
o Agrees with PD serving a rational purpose but too high. This is not a systemic
   problem and no need for deterrence.
o Disproportionate to the purpose (punishment) and is irrational
o Consistency and predictability are important to damages (think Holmes‟ option of
   risk), and PD eliminates predictability

                                B. Remoteness of Damage
o Remoteness of damage is a limiting principle in contract law
o Damages only recoverable if considered either arising “naturally” (in the usual
  course of events) or as was reasonably supposed to have been in the contemplation of
  the parties at the time of formation.

Hadley v. Baxendale (1854) UK – “Reasonably foreseeable” = naturally or contemplation. Asquith
= shouldn‟t be too harsh on D
Facts: Contract with couriers for one day delivery of plaintiff‟s broken crank shaft.
Delivery was several days late and as a result, plaintiff‟s mill was idle for a longer than it
would have been had the contract been fulfilled. Hadley sues for breach of contract
asking for damages in the form of lost profits. Because the loss was covered under #2
and not told at the time it was a probably consequence of breach, P doesn‟t recover.

Issues:
(1) Did B. know that timely performance was essential because the mill could not
operate until the replacement was received?
(2) Should Baxendale compensate Hadley for the lost profits?

Principle: Damages for breach should be:
1. As may fairly and reasonably be considered either arising “naturally”, i.e., in the
    usual course of events (i.e. not direct but predicatable), OR
2. Such as may reasonably be supposed to have been in the contemplation of the parties
    at the time of formation as a probable result of the breach
** First branch in Hadley can be considered as imputed knowledge and the second stage
is actual knowledge (see Victoria Laundry)

o Key concept is predictability. If it is a predictable consequence of breach – damages
  will be paid.
o Consequences are predictable when:
  1. BP is presumed to know; OR
  2. Because of information that the BP received from the plaintiff



                                              16
NOTE: Can recover based on ought to have been known (based on the nature of the
contract) and what D did know given the information communicated at the time of
contracting. At this point, there must be evidence of communication about the special
circumstances i.e. written into the contact (changes in the 70‟s)
Policy: Who is better suited to bear the risk and the loss. In this case its the courrier.
Because their business is delivery, they can handle the risk. They are a large company
that could add on a small fee to each delivery, to cover themselves for bearing the loss.

Kerr S.S. Co v. Radio Corp of American (1927) NYCA – coded message, no actual knowledge
that br  lost profits
o D breached contract by failing to transmit a coded business message by P. P lost
  profits as a result.
o No liability because D didn‟t have sufficient knowledge to predict the breach would
  lead to lost profits
o Policy: concern that altering the rule would disrupt market activity – adjust rates,
  insurance spreads the cost of risk. Judge say‟s plaintiff should bear the risk by
  paying extra for special service, or insurance.

Victoria Laundry Ltd. V. Newman Industries (1949) UK – imputed/actual “On the Cards” 
widen scope of recovery. (Doesn‟t have to be certain or very likely)
o D is late in delivery on a boiler for P it knew was to be used immediately but
    unaware of precise purpose. P claims lost profits and a lost contract from the
    government.
o Court limits damages to what would be reasonably foreseeable at time of contracting
    to protect D‟s (otherwise too harsh)
o Note: Whether the loss was reasonably foreseeable, depends on the knowledge of
    parties (imputed knowledge = stage 1, actual knowledge = special circumstances)
    1. Lost profits is awarded → impute since D is an engineering firm can foresee the
        boiler will be used for business purposes (liability on first part of H. v. B. rule)
    - Notion that courts can impute knowledge as a reasonable actor in the business (if
        no basis to impute knowledge, look at actual knowledge what is communicated at
        time of contracting (extension of H v. B)
    2. Unable to recover for lost contract from the government because (non-
        communicated special circumstance) – D had no actual knowledge (type v.
        extent, this is arguably a different type)
o D is responsible for losses that are reasonably foreseeable as “liable to result” or on
   the cards (3/10 would suffice – Lord Asquith)
         Shift from Hadley, which had to be very likely.
         Therefore, Victoria Laundry widens the scope of recovery.
Slide Diagram: First, it must be established that D had imputed or actual knowledge of
“X”. If yes, then we ask, would a reasonable person who knew of X have predicted
consequence Y?

Ratio: When D has expert knowledge of P‟s business and breaches a contract for timely
delivery of an item central to P‟s business, D is liable P‟s foreseeable business losses on
the basis of imputed knowledge but not for extraordinary loss unless the D has actual
knowledge.


                                                    17
The Heron II (Houfos v. Czarnikow Ltd) (1969) UK – “sugar market price “Not Unlikely” 
narrowed scope again
Facts: Shipping contract to deliver sugar. P plans to sell after arrival at port. In breach
of k, D (shipowner) deviated from planned voyage, which delayed arrival at port.
Market price for sugar fell during the delay. K did not state date of arrival. At the time
of contract, there was no expectation about whether the market would go up or down. D
did not know specifically what P intended to do with the sugar, but it did know there was
a market for sugar at the port.
P sues for difference in market price of the sugar between the contracted date and the
date of arrival (lost profits)

House of Lords
o P wins → Damages are not too remote. Court finds a reasonable D would have
  about the market for sugar and that its not unlikely that a delay could result in a
  lower price
o D knew of market and known market prices would fluctuate (imputed knowledge)
o Ratio: Under the imputed loss branch of the principles, P may recover for losses of
  a kind which the defendant ought to have realized were not unlikely as a result of a
  breach (predictable, less than probable but not fantastic)

Summary
o Compensation is limited by the fact D‟s will not be liable for losses that are too
  remote
o Losses are too remote when D did not know and can‟t reasonably be expected to
  know the loss was “not unlikely” consequence of breach

Reasonably Foreseeable: The starting point in Hadley v. Baxendale
On the Cards: widens the scope; doesn‟t have to be certain or even very likely
Not Unlikely: Narrows scope slightly: less than an even chance, but not very unusual.

Kleinzle v. Stringer: ambiguity in these terms means its all about policy

Cornwall Gravel v. Purolator (1978) Ontario – court had actual knowledge that it was tender.
remoteness used to increase damages.
o P bidding on contract and calls D for delivery of the tender. P tells D importance,
  notes on bill of lading it is a tender and delivery is scheduled for noon. D breached
  and P‟s tender is considered (it would have been the lowest). P sues for lost profits
Court
o Court finds P would have been awarded the contract
o D is liable for the contract because the special circumstances were communicated
  and the loss was within D‟s reasonable contemplation
o Test: What did D know at the time of the contract? What consequences should a
  reasonable D have anticipated flowing from breach?
o Ratio: Courier is responsible for loss of profit on a potential contract if it knows of
  the nature of a package and its important and it should have realized that late



                                              18
    delivery could result in the loss of the contract. Court expands damages with the
    remoteness principle.

                                            C. Mitigation
            Burden on D, apply because minimize costs of litigation and original K, self rely

o Doctrine of mitigation limits recovery by excluding avoidable losses
o NBP behaviours after breach is concern to courts (i.e. limit D‟s liability based on
  NBP‟s behaviours after breach)
o Mitigation is a question of fact and circumstances
o Reasonableness standard
o General rule: duty to mitigate arises upon breach (P may be able to delay depending
  on facts)
o Burden is on the D ( the BP) to prove that P (the NBP) failed to mitigate his losses

Two tricky applications
1. Troublesome relationship between mitigation and doctrine of anticipatory
   repudiation
2. “Lost volume” claims – see Victoria Motors

Why Apply the Doctrine of Mitigation?
o Default rule for joint cost minimization
  - Minimizes costs of transaction and breach
  - Duty to mitigate reduces costs b/c NBP has incentive to lower costs
  - Risk premium is built into the price and NBP gets the best price
o Self-reliance → Individuals have limited responsibility to each other and mitigation
  is an expression of this notion
o Remoteness →losses that result from rejecting a “reasonable alternative” are too
  remote to collect as damages
o Causation – mitigation expresses the idea that losses that were avoidable by
  reasonable conduct are caused by the P‟s inaction rather than the D‟s wrong

Standard Application of Mitigation Principle

Payzu Ltd. V. Saunders (1918) UK- silk dealer. reasonable person. general presumption that NBP
can accept offer from BP.
Facts: P and D (silk dealer) have an instalment sales contract on credit terms. The first
payment is received late and D refuses to supply unless P pays cash for future deliveries
(i.e. repudiates contract). Market price rises and P sues for different between contract
and market price.
Court
o Test: What would a reasonable person have done to mitigate loss arising from
     breach?
     - Note: Assumption about behaviour of business actor (self reliant and robust)
o P‟s compensation limited by failure to mitigate, general presumption that it’s
     reasonable to accept an offer from BP (can be rebutted)
o P chose to accept repudiation


                                                   19
o P allowed to recover loss it would have suffered if accepted D‟s offer
Significance: Standard application of the mitigation principle

Dor-Val. v. Valley (1997) NS – (CDN) ugly furniture. took reasonable steps.
o P manufacturers highly customized ugly furniture for D who doesn‟t pay 2x when
   attempt delivery (they had a purchase order). P tries to make delivery for a year and
   then had difficulty selling the goods. Sues for damages (dif in price, incidental costs
   of re-sale and interest) which D challenges on failure to mitigate. P wins.
o P used his best efforts to sell the goods – fulfilled his duty to mitigate and the prices
   he charged were fair and reasonable under the circumstances. No available market
   for the goods – P made every effort
o P is only obliged to take reasonable steps to mitigate his loss

Repudiatory Breach (Repudiation) – if br is serious enough, NBP can continue K or terminate
and claim damages

General Principle: Despite breach of contract the obligations of the contract continue
and BP must compensate NBP for losses arising from breach
o NBP and BP must continued a long term or on-going contract despite breach

Exception: When the breach is serious (i.e. of an important term), NBP has two choices:
   1. Continue with contract
   2. NBP may chose to terminate the contract AND claim damages for losses
       incurred to date for breach

Repudiation →

Anticipatory Breach (variation on repudiatory breach) – BP indicates it will br, NBP can
continue or accept

General Principle: Contract duties exist from the date the contract is formed. Duty to
delivery doesn‟t materialize until the date specified in the contract.

Anticipatory Breach → BP indicates before the performance is due that it will not
perform the contract or an important term in the contract
o Actual breach has not occurred yet
o BP can indicate via clear refusal OR incapacitating itself (i.e. selling a “sold” house)

NBP may elect to stay in the contract and see what happens on date of performance OR
elect to accept the breach with two consequences
1. Both parties are released from obligation to perform the contract
2. NBP can sue for damages immediately (does not have to wait for performance date)


Two issues
1. How does the doctrine of mitigation interact with repudiatory breach (esp.
   anticipatory version)?


                                             20
2. To what extent may law „influence‟ NBPs‟s choices by making judgments that losses
   are „avoidable (i.e. should one be forced to accept AR to mitigate - which
   undermines the right of election - or does doctrine of election prevail)

Roth v. Taysen (1985) UK – grain on boat. BP = buyer. Writ in july, sold in sept. Court: issue writ
= accept ant rep.  mitigate at time of br., but damages assessed as matter of fact, not as a rule.
Facts: Contract created on May 29, whereby the buyer (D) agreed to buy grain from a
seller (P) at a certain price. Key term of the contract is that buyer can cancel if ship is
not loaded by Aug 15. On May 29, before the agreed date of performance, the D
informs the P of his intention to breach (anticipatory repudiation). On July 24 the P
initiates legal action against the D (before the date of performance, accepting the
anticipatory breach). Ship loaded by Aug 15.
Issue: Seller (NBP) resells maize on Sept 5 at a loss and claims full loss. BP claims they
should have mitigated as of May 29. When should damages be asessed?
Court
o Issuing writ is acceptance of anticipatory breach and from that date, contract is
     terminated
o NBP had responsibility to mitigate as of breach acceptance date, damages awarded
     as of that date
Ratio: When there is a repudiation which the NBP chooses to treat as a breach:
(1) the primary rule is that damages are the difference between the contract price and the
market price of the goods on the date of the breach [here the date when the writ was
issued]
(2) If the repudiation takes place before the day of delivery/performance, the NBP has
the right to bring an action immediately, and he has the right to have his damages
assessed at the time he brings an action
         (a) in such a case the damages are NOT the difference between the contract and
the market price on the day the action is brought – jury assesses them – matter of fact.
- NBP is bound to do what is reasonable to make sure damages are not inflamed or
increased.

White and Carter Ltd. v. McGregor [1962] HL – garbage ads. if P can perform its duty w/o
cooperation of D, and P has substantial interest in performance, P can sue. Onus on D to prove P doesn‟t
have special interest.
Facts: P and D had contract for ads on garbage bins. Before the end of the contract,
manager erroneously signs a new contract for three years of advertising. Owner attempts
to repudiate immediately after formation but P refuses to accept. P performed the
contract and tries to collect. P brings action for contract price. D claims P should have
mitigated.
       o Note: P has action for debt which is a form of specific performance and not
           subject to mitigation (as opposed to compensation)

Issues
1. When one party repudiates a contract immediately after formation and before the
    other party has begun to perform, is P entitled to go ahead and perform and sue for
    contract price?



                                                     21
2. Does mitigation principle imply that P can only sue for those damages it could not
   have avoided taking reasonable steps in response to notice of intention to breach?

Court
o P is entitled to sue for contract price provided
  1. Contract is such that P can perform its side of the bargain without co-operation of
      D
  2. P has substantial and legitimate interest in performance rather than damages
      (court says this is true of the case, but it really isn‟t)
  3. Onus on D to show P doesn‟t have a substantial and legitimate interest ( D didn‟t
      prove it here)


Ratio: In the event of an AR, where it is possible for NBP to perform without D‟s co-
operation and before D‟s performance is due and the BP can‟t show a lack of substantial
interest in performance, NBP can perform and sue for the contract price.

Note: Dissent →Anticipatory breach becomes actual when time of performance arrived,
which here means when D makes it clear that it wouldn‟t perform. Wasteful for P to
incur costs in delivering services that the D does not want simply to increase the remedy
available to P. Additional issues are lack of mutuality (D doesn‟t have access to
powerful remedy), arbitrary (P has to perform before D is due to perform).
What about use of name without consent?

Finelli and Dee (1968) OCA – driveway, no permission to use land
Facts: Contract for driveway paving with time for commencement or completion of the
work. D cancelled and P‟s manager agreed but then performed while D‟s not at home.
Court:
o Laskin follows dissent from White and Carter and distinguishes on the basis that
   need the permission of D to do the work on his home
o Therefore not able to recover the contract price – only damages.
o AR gives choice of immediate suit (accept) or wait for breach of performance. By
   waiting, a party is not likely to incur unnecessary expenses performing its side of the
   bargain, unless it has some “real, fair and substantial interest”.


Asamera Oil v. Sea Oil (1979) SCC – shares lent, sold, no spp where compens adequate (knew $
amount), should have mitigated even though br deprived P of $, mitigation & spp – SHIFT – onus to prove
P wants spp on P. (white carter, onus to disprove is on D) but no spp in this case
Facts: P loaned D 125,000 shares, with a promise that D would return the shares by the
end of 1959 to P. D‟s broker sold the shares. P was granted an injunction to prevent D
from selling the shares, but the shares were already sold, so the injunction is interpreted
to mean that D was obligated to buy 125,000 shares and give them to P. P sued for
breach of contract to return the 125,000 shares and lost of value at max value of shares
(essentially literally enforcement). D claims P didn‟t mitigate by acquiring sub shares
and is only entitled to minimum guarantee price.



                                                  22
Issue:
1) Specific Performance or damages?
o Specific performance is only available when damages are inadequate to compensate
    for the loss → in this case, compensatory damages are sufficient
2) How to assess Damages (impact of mitigation principle)
o P argues that the breach deprived him of an asset, money, to buy other shares with.
   SCC says no rule of law overrides the mitigation principle. Its based on facts.
3) When to assess damages? Interaction of mitigation and SP
o P argued it could rely on injunction, therefore standard mitigation rule of mitigating at
   breach date does not apply. i.e. If there was a legal order for D to not sell shares, why
   would P go buy more?
o SCC rejected this based on facts. But, reinforced White and Carter: if there‟s a
   specific interest in performance, D can justify inaction (and therefore not have to
   mitigate). Not the case here, though.
o Onus to prove interest in SP on P, shift from being on D in White v. Carter


                                Ch. IV - Literal Enforcement –
    1) Spp, 2) injunction, 3) order to pay. Test = “unique” (CD inad.), limiting factors = clean hands,
                                     mutuality, hardship for BP, unfair

Literal Enforcement → a second type of remedy that secures the performance that was
promised under the contract for the NBP which the court has the discretion to give
    o Rationale → in some circumstances, compensatory damages are not an adequate
       remedy for breach
    o Alternative to compensatory damages → not available as a right like
       compensatory damages
    o Equitable remedies and, as a result, are discretionary

Three Types of Literal Enforcement Remedies
1. Specific Performance → order to perform contract duty
2. Injunction → order not to breach a contract duty (NOTE: usually framed as a
   negative covenant)
3. Orders to pay → different than compensatory damages because there is no duty to
   mitigate for literal enforcement
   o Note → we are generally talking about SP and injunctions

Test for Literal Enforcement

Uniqueness Test (Principle Test) → Literal enforcement remedies are availably only if
the NBP shows that compensatory damages are inadequate to make up for loss from
breach. (Note – the court may still deny literal enforcement remedies)
    o Courts may also take discretionary factors into account when determining if an
       NBP can get literal enforcement remedies

1. “Clean Hands” → i.e. did the NBP behave improperly in some way



                                                    23
       -   Falke v. Grey → NBP was aware it was a bad price and court will not order
           SP because the NBP was not coming to court with clean hands
       - Acceptable to judge behavior in LE unlike in CD
2. Mutuality → Courts are prepared to give LE when an equivalent remedy is available
   to the other party
3. SP results in excessive hardship for BP →
4. Specific performance would be unfair
Rationale for Specific Performance
o Argument for → compensatory damages under-compensate (measurement of loss
   may not take into account subjective values, some losses excluded by remoteness or
   mitigation)

Rationales against Specific Performance
1. Coercion/Power → LE gives the NBP too much power and restricts liberty of BP
   (contrary to Holmes option contract).
      - Conflicts with the ideology of freedom of contract because failure to SP can
           result in contempt of court (sanction/prison)
2. Administrative Costs → Standard justification for why building contracts and
   contracts to run a business aren‟t normally specifically enforceable
      - Costs of supervision
      - Distaste of courts for being involved in running a business
3. Pragmatic concerns and integrity of law → The integrity of the law will be
   undermined if courts make orders that can‟t be fulfilled properly.

Types of Contracts and Availability of Literal Enforcement
1. Land → rebuttable presumption literal enforcement is available (shifts over time to
   presumption that P needs to prove damages would be inadequate)
2. Goods → generally, LE is not available unless a substitute is unavailable.
3. Services for Contract and Employment → generally, not specifically enforceable
       a. Coercion → law shouldn‟t coerce people into working with each other when
          the relationship has broken down
       b. Supervision of angry/unqilling partners → difficult to work together as the
          breach indicates the relationship has broken down
       c. Mutuality objective → akin to slavery to force an unwilling worker to go
          back to work. If not available for employee, shouldn‟t be available for
          employer.
4. Services → Canadian courts have granted injunctions for services contracts in some
   respects that may be similar to employment
5. Building Contracts → traditionally not specifically enforced

Literal Enforcement and Land

Original Position: Literal enforcement is the routine remedy

Rationales for the Original Position




                                          24
1. Land is inherently unique → tied to characteristics of land and subjective value. The
   idea has been challenged because in some sense and for some purposes land is a
   commodity.
2. Land is linked to personal identity and development → notion that the relationship to
   land (esp. domestic property) helps contribute to identity. Challenged by the fact
   other forms of contract that contribute to identity (i.e. employment) do not have LE.
3. Historical role of land in the economic system → Land was significant power (right
   to vote, social power) that has diminished over time.

Kloepfer v. Roy [1952] SCC – land1 – spp routine land remedy, use and inadequacy not important.
AR  validation of SPP, doesn‟t change date of perf (issuing writ like Roth can‟t accept br or else no
entitlement to property. thus it just gets validation)
Specific Performance routine remedy for breach of land K (almost the rule)
Facts: Parties enter into contact for investment land purchase and before performance is
due, seller says it won‟t perform (anticipatory breach). Buyer has choice to bring
contract to an end or stay. 19 days before performance is due, buyer commences legal
proceedings. Seller claims the buyer accepted repudiation, should mitigate and get CD.
Buyer wants specific performance.

Court
o Specific performance applies to all land contracts regardless of use and does not have
  to show damages are inadequate
o AR gives option in the case of land to sue before performance date but only gets a
  declaration of validity (can‟t force seller to perform earlier than contact date) → no
  duty to mitigate
o Rejects sellers argument → fairness demands shouldn‟t be able to defeat buyers SP
  remedy because action brought before performance date (land would be sold by then)
o When AR for contract of land, NBP may seek declaration of validation and SP from
  time of AR. Does NOT move up the date of performance.
o Note: Deviation from rule in White and Carter

Domowicz v. Orsa (1993) Ontario- apartment for invest. SPP for land is rebut pres, only where
substantial interest. ONUS on D to prove that CD is adequate.
Facts: Failed transaction for an apartment building purchased for investment. Court
rejects P‟s claim for SP.

Court
o The generally superior efficiencies associated with monetary relief for breach of
  contract dictate that promisees must have a substantial interest in specific
  performance before it is awarded
o Asserts the presumption of SP for land is a rebuttable presumption
o SP should be given only where plaintiff has a substantial interest in performance
  (damages would be inadequate)
o Onus to rebut presumption of SP is on the D
o Mentions policy issue of SpP locking parties into a relationship




                                                    25
o NBP does not show why CD isn‟t compensable → investment property, not
  distinctive and purpose of acquisition was entrepreneurial, not sufficient to say
  profits would be more superior in one building b/c can be compensated by CD

Semelgaho v.Paramadevan (1996) SCC – damage in lieu of (s99) = no mitigate, zombie K,
SHIFT ONUS: P must prove that SP should be used (SPP “not a matter of course)
Facts: Contract for sale of partially completed residential property. Buyer takes
mortgage on existing house to finance new one. Seller breaches; both buyer‟s house and
land in question increase in value. Buyer sues for SP and asks for damages at date of
trial instead of date of breach.

Court
o Buyer should get the increased value of the house at the date of trial for the land he
  contracted to buy. No consideration for increased value of owned property.
o Damages awarded under s.99 of Courts of Justice Act which allow for damages in
  lieu of specific performance (no mention of remoteness/mitigation but interpreted as
  not normally required because mimicking specific performance)
o “Where, after breach of contract for sale of land, the P claims damages in lieu of SP
  damages are to be assessed at date of trial” (zombie K)
o Zombie: when SpP is claimed, the BP can fix the breach well after the date of
  performance by fulfilling its bargain. This can happen right up until the trial.
  Therefore, the contract “lives” beyond the date of action, and subsequently, damages
  should be assessed at trial date.
o Specific performance should NOT be granted as a matter of course absent evidence
  that the property is unique to the extent that a substitute would not be readily
  available (shifts onus to P to prove that SP should be available)
o In the case of anticipatory repudiation, NBP has two options:
      1. may accept repudiation, file for damages
      2. decline repudiation and insist on performance – neither party is relieved of
          their obligations (no need to mitigate)
      Note: Contract that has been AR D, but not accepted by the P, remains in effect
      not just until the date of performance, but until the date of trial arguing for literal
      enforcement – this runs afoul of the logic of White and Carter

Literal Enforcement of Goods

General Presumption →generally, LE is not available unless a substitute is
unavailable, damages are the norm because they are compensable
o Courts may award injunction for SP if the nature of the transaction seems that LE is
   appropriate

Falke v. Grey (1859) UK – general= Sp available when substitute unavailable. This is unclean hands.
Buyer wants injunction because he had deal for cheap, knowingly. Not awarded because unclean hands.
Facts: Contract to sell two china jars for 40 pounds. Buyer aware of their true worth,
which was higher. Seller breaches, selling jars for 200 pounds. Buyer (P) seeks an
injunction to prevent D from selling the jars.



                                                 26
Court
o Specific performance is available for goods where the products are unique
o Unfairness (i.e. unclean hands, “hard bargain”, evasion, hiding superior knowledge
  or skill) on the part of the NBP can defeat claim to SP

Sky Petroleum v. VIP Petroleum Ltd [1974] UK – gas = commodity, so not usual SPP, but
examine nature of market, gas is unique, also preserve business
Facts: Application for temporary injunction for a commodity that has become scarce.
Fixed term, 10 year exclusive supply contract for oil and gas. OPEC raises prices,
contract becomes disadvantageous for the D (supplier). D seeks to terminate the contract
relying on a clause that allows the D to terminate if P fails to conform with any terms of
the bargain (D alleges that P‟s extended credit satisfies this). P (buyer) wants SP–
contract is exclusive so without D‟s supply, P will go out of business.

Court
o Not normally a case for SP because gas is a commodity but rationale for rule, that
  damages are adequate, doesn‟t work (gas market makes this impossible)
o Examine the market context to determine whether a standard commodity such as gas
  should be treated as unique for the purposes of awarding an interim injunction
o Court was also concerned about business preservation and preservation of status quo
  until trial

Bronx Engineering (1975) UK- machinery takes 9 months. CD are adequate, goods not unique,
just takes time. Replaceable?  no lit Enf. for goods
Facts: Alleged breach of contract for sale of custom built machinery. Production was
supposed to take 9 months and it is unclear who is in breach by trial. Application for
interim injunction by the buyer to prevent sale of machinery until trial. Alleges the
machine is unique because it takes 9-12 months for a replacement and it is custom
ordered.

Court
o Injunction denied. Compensatory damages are sufficient.
o Goods are not unique → replacement is available even if it takes time to build
o Court applies test → Are the goods replaceable? If yes, no LR for an injunction.

Literal Enforcement and Employment / Service

Position → No specific performance of employment contracts, injunctions may be
possible depending on the circumstances

Rationale against SP in Employment Contracts
o Coercion
o Supervision Problems
o Possible lack of mutuality

However, Injunction can sometimes be awarded:
Warner Brothers v. Nelson – class example of employment


                                                   27
It may be possible to get around prohibition of literal enforcement on employment
contracts with the grant of an injunction “not to work for someone else” (negative
covenant) if that can be justified as having different consequences than an order for SP.


Yule. v. Atlantic Pizza Franchise – infer neg from positive (so not forcing) american cyamind test:
1. prove case is not frivolous 2. irreperable harm/damages inadequate (reputation), 3.balance of
convenience?

Facts: Availability of interim injunction for alleged breach of services. P granted the
right to sell exclusive franchises for a fixed 5 year term. 2 years into the contract D
claims problems and wants to terminate P‟s contract. Relationship between franchise
and employment (court hold that the relationship is operated through corporations and
different from a personal services contract).

Court
o Injunction is an important remedy that should remain flexible
o Infers a negative covenant from a positive covenant (i.e. has the right to do X, will
  not terminate the right to X) in order to grant injunction (view only can do so only
  with a negative covenant) (they don‟t want to “force” something, but can prevent
  something else
      - Promise of exclusive territory for P (positive covenant) has the negative
          corollary of a promise that D makes not to sell territory to any one else
          (negative covenant)
o P needs to demonstrate irreparable harm and test for injunction, 3 tests are available
  for injunction and selects American Cyamind approach

Final Test
1. Must prove that the case is not frivolous. Then:
2. Is there irreparable harm – are damages inadequate?
3. what is the balance of convenience and effect of injunction on the parties

Application to Yule
- showed case wasn‟t frivolous. Damages are inadequate for damaged reputation.
Convenient for employer to do SpP, because P was profitable to him, but not convenient
for P to lose his job.
Rejected Injunction Tests
1) Multi-requisite: (rejected for being tough on person claim injunction)
        (a) P must establish strong prima facie case
        (b) If P fails, application is dismissed without consideration of other factors
(2) Multi-factor
        (a) weigh P‟s performance on a number of factors
        - P may fail in some without failing to meet test outright

Kelly’s Stereo Mart v. Schneider – injuntcion = exceptional, 2 eligibility tests (not agreed which is
best) strong prima facie or amer. cyan, then justice factors




                                                     28
Facts: Franchise contract – restrictive covenant preventing D from operating a business
similar to the one that was subject to the franchise agreement. D alleges P repudiated and
breached, D opens similar business. P seeks interim injunction restraining the D from
continuing to operate.

Court
o Injunction is a drastic remedy that should only be granted in exceptional
   circumstances because it is being ordered before trial
Two pronged test
1. Eligibility threshold – does not determine one (Does not decide between a strong
   prima facie case or American Cyanamid approach → hold the P did cross threshold
   whatever it is -- means met prima facie case since it is the harder test)
2. After passing eligibility threshold, look at “justice factors”
       - Irreparable harm, proof of damage, preservation of the status quo, balance of
           convenience (which plays a large role)
       - Applies Balance of convenience test and does not grant injunction because
           the D could be ruined as a result but P will survive injunction or not

NOTE: How to handle two approach on the exam
o Cite that there are competing approach which have not been overruled and both can
  be argued. Similarities in issues of the parties and the court takes different steps to
  protect a business.

CIS v. Argyll Stores [1997] HL – anchor store, SPP no good because of supervision, bad
relationship, P enriched at expense of D (policy can override inadequacy of damages)
Facts: Literal enforcement of a contract for commercial lease to operate a retail store. D
breach its long-term contract to operate a Safeway store at the site specified in the lease.
Plaintiff seeks mandatory injunction (basically same as s.p.-historical difference) to
prevent closing of store as it is an anchor store. Such an order would require constant
supervision by the court.

House of Lords
o Denies specific performance for reasons of supervision
o Courts historically don‟t award SP because it is overly coercive and difficulties with
    supervision
1. A waste of scare judicial resources to manage a supervisory role
2. Heavy handed enforcement does not support the creation of a successful business
3. Likely result in a lot of legal action which is a waste (compliance orders)
4. Supervision cost is not such a serious objection when the goal is specific – but it is a
    problem when the order is for a long period of time/process (here, 20 year lease)
5. Objectionable when P are enriched at the expense of D
(Note: court is relying on policy concerns – therefore even if damages are inadequate,
policy can prevent SpP)
LORD HOFFMAN: Supervision is a waste of resources, when its a process, not result.
The Case for Specific Performance (Schwartz) – CD  undercomp NBP, why can‟t
BP use CD to perform, negotiation guarantees satisfaction with no limits (remoteness)



                                                   29
o Argues that specific performance should the normal remedy for breach of contract as
  justified by economic efficiency
o BP‟s breach because CD under compensates and SD would sent better signals
o if NBP gets compensation to go buy a new fridge, what is to stop BP from acquiring
  the same fridge?
o if SpP is impossible, parties must negotiate, which implicitly compensates, without
  limitations of mitigation, remoteness, etc.



            Volume I Ch. V – Private Control of Remedy and Risk

Role of the Court: Supervising or regulating remedies (and limitation on remedies) that
the parties have created for themselves and put into the contracts.
 Should the parties be held to what the contract provides OR are there reasons to reject
the parties‟ own remedies?

Three Forms of Planned Remedies
   1. Liquidated damages and penalty clauses
   2. Forfeiture
   3. Limitation and Exclusion clause

Basic Scenarios
   1. Liquidated damages: Contract specifies a sum to be paid upon breach. The BP
       claims the sum is too much.
       - outcome depends on whether the clause is a liquidated damages clause or a
           penalty clause
   2. Forfeiture: Contract states that money paid a) at start or b) in installments during
       the performance of a longterm K can be kept by the NBP if the payer breaches,
       even if its more than the loss
   3. Limitation/exclusion: K states that NBP will not get the remedy that they would
       have received if the ordinary common law rules apply.

Rationale for Judicial Regulation of agreed damage clauses
Note: Courts don‟t like interfering with autonomy. They don‟t want to rectify a bad
deal. So why do they intervene in remedies?
   1. Inequality of Bargaining Power (IBP)
            NBP often have more power
            undermines efficient breach because breaching party has to pay to br
   2. Bounded Rationality
            People are less rational than we assume
            Eisenberg: people are overly optimistic, don‟t think about the reality of a
             breach, so the actual damages are usually greater than what they agreed to
   3. Paternalism
            state knows better, protect fools from foley
   4. Public interest in remedies for breach


                                            30
            K have social value because of contribution to market. We don‟t want
             poor choices to affect this. Courts have power to oversee. But why only in
             remedies?


                                A. Liquidated Damages

Liquidated Damage:
    A term by which the parties agree that a sum of money is payable on breah of
      contract.
    Where enforceable, its a substitute for all other remedies
    Doctrines such as mitigation are inapplicable to a valid LD clause

Rationale for use of LD
   1. Reduce uncertainty  enhanced control and planning.
          a. minimize litigation risks
          b. predict consequences of br.
   2. Creates incentives to perform by specifying the consequence of a br
   3. Parties don‟t always insist on them upon breach  often just a starting point

Why do Courts enforce LD (pro-LD)?
   Don‟t relieve parties of risks they‟ve taken
   LD encourages risk taking and assists planning
   Look at K as a package  enforce LD because one party has already benefited
     from it (i.e. better price)
   Just results – clause is likely as accurate as the court‟s estimate.
   Enforcing  fewer breaches, fewer actions, etc.

When is LD a Penalty (mini summary)
Dunlop: look at time of contracting
     “extravagant and unconscionable”
     if br= non-payment and sum is more than owed
     rebuttable presumption of penalty if its 1 sum for diff. breaches
     must be genuine estimate of losses
Clarke v. Thermadaire: Hindsight / Courts should be active – sober second look?
     IBP less important than an LD being fair and reasonable
     even if procedurally fair, it must be substantively fair at time of br.
Elsey v. J.G. Collins Insurance – note NBP arguing against LD
     courts can only interfere where there is oppression – should not be overly active
Philips v. Hong Kong
     IBP is central to when to be active
     restate Dunedin rule (Dunlop) – must be genuine estimate at time of K




                                           31
Dunlop Tyre v. New Garage – Dunedin marketing price fix, not penalty, diff breaches, but only
breached 1 clause of K
Facts: P uses LD as a means of maintaining price distribution system. Resale price
clause states that price can‟t be resold for less than the list price. LD term to pay $5 for
each breach. Further term stated that any K between reseller and another reseller must
include the original LD term. Middleman bought from P and sold to D. D breached.
     P asks for injunction and damages for breach already incurred.
     D Argues not an LD, but a penalty.
     The language in L does not determine if its LD, or Pen, so court must decide
Principles:
    1) Interpret K based on info & circumstances at time of contracting
    2) Penalties are excessive sums that are “extravagant & unconscionable”
    3) LD is a genuine pre-estimate of loss, judged at time of entering contract
    4) Penalty if the breach is non-payment, and the sum is more than owed
    5) Rebuttable presumption of penalty if clause stipulates single sum for different
        breaches, which have different consequences
    6) inability to predict precise consequences of br. does not make a clause penal
             just must be genuine pre-estimate
Decision:
     not a penalty: Dunlop had to protect its scheme
     D argued P was claiming a simgle sum for diff breaches. Judge disagreed:
        Interpreted LD clause as only applying to clause 2.


Clarke v. Thermadaire – LD is formula, all profits. SCC said penalty because not substantively fair.
IBP doesn‟t matter. Hindsight important.
Facts: P is exclusive distributor of D‟s products in specified area. K included a term
that P could not compete during the K and for a period after it ended. K damages were
not fixed, instead they used a formula – gross trading profits that Clarke realized from
selling competitive products during the 3 years following completion. Sum was over
$200,000. P claims it should not have to pay it because its penal – D‟s losses were only
$92,000 as a result of P‟s competition.
SCC:
     Clause is penal  unenforceable
     Whether a K is penal isn‟t about IBP, but fairness and reasonableness.
            o criticism: impedes freedom of K
     hindsight approach  didn‟t look bad at time of making K, but bad now
            o protect fools from folly & public interest rationale
     Usually a term will stand if it‟s procedurally fair, but here Laskin is concerned
        with substantive fairness

Elsey v. J.G. Collins Insurance – courts can only interfere when there‟s oppression. relationship
b/w LD and injunctions.
Facts: NBP argues that agreed damages clause is penal because LD is too low. Clause
intended for remedy for breach of promise not to compete.




                                                 32
Note: other ways P can argue is 1) the sum is too high for some breaches and too low for
others (breach Duneiden‟s rule) 2) can also argue that penal at the time it was set up,
even if too low at time of breach – because supposed to be judged at time of K
SCC:
    Court‟s penalty jurisdiction is a blatant interference with freedom of K – thus,
        courts should only do it where there is oppression
    No oppression = no penalty. (vs. Clarke rule: no concern for IBP)
    Penalty/LD clauses that are too low are just a ceiling on damages, like excl. cl.
Relationship b/w LD and Injunction
    plaintiff must choose b/w LD and injunction – can‟t have both
    If P takes LD, he gets LD regardless of actual loss, but if its a penalty, P gets
        provable loss
    if P chooses injunction P can get s99 equitable damages, for loss sustained before
        injunction was (or should have been) awarded
    Where LD is for “each and every breach”, P may claim LD for past breaches and
        get injunction for future (this is not seen as 2 remedies for same breach)
    NBP has to argue that it‟s too low – only way to prove it‟s penal

Philips v. Hong Kong – commercial building, Elsley approach IBP, restate Dunedin
Facts: K between P and Hong Kong. D had contracted directly with all the contractors.
P had $51million share in $640mil job. Each K had its own programme of completion
and K terms were specified to indicate the effects of one party‟s delay. LD payable if 1)
contractor didn‟t meet a key date (daily rate based on effect on others) 2) obligation to
pay a sum if missed deadline. Important because its a commercial K. Damages would be
difficult to assess (what happens if road isn‟t built), so it fits Dunedin‟s guideline.
Privy Council
     prefers Elsley approach to Thermadaire (penalty jurisdiction centers on IBP)
     Restate Dunedin (genuine estimate of losses at time of K, not extravagant /
        unconscionable)
     not impressed with hypotheticals

                                      B. Forfeiture

BP who has made advance payments in the form of forfeitable deposits or insallment:
      - losses advance pay
      - does not keep goods, land or service
      - may be liable for additional compensatory damages ex. consequential losses
However, advance payment in form of non-forfeitable installment:
      - BP may recover the installments, but will be liable for damages (ex. counter-
          claim)


Courts Rationale: Should they worry about Forfeiture?
No
    Freedom of K
    Certainty of K


                                           33
        Don‟t rescue parties from bad bargains
Yes
        Unfairness
        Restricts efficient breach

Traditional Common law response: No relief against forfeiture
Traditional Equity response: Courts have discretion to extend time for payment, but no
other relief possible

Deposits
    “Guarantee” the K will be performed by created incentive for the buyer to
       perform (noted in Howe v. Smith)
    General principle: Where a court finds the advance payment is intended to
       function as a deposit, the sum is normaly forfeited if the payer breaches (but not
       automatically forfeitable)
           o true even if its a substantial deposit
           o notion that compelling performance appears to be one of the purposes of
               forfeiture of deposits (contrast to penalty clauses)
Part Payment
    Advance payment not intended to function as a deposit is generally classified as a
       part payment on the price
    Starting point: payments should be returned even if the payer breachs if this will
       help return the parties to their starting point. Remedies can then be calculated
       after K as been unravelled
    If part payment was put towards, labour/materials, and can‟t be retuned, the
       payment can be kept.

Scenarios
   1. K states expressly what should happen to the money if the payer breaches
   2. K doesn‟t state what should happen but indicates if the advance payment is a
      deposit or part payment. sometimes there are disputes over the true intention, but
      generally this works for courts.
   3. K label the advance payment as a deposit and part performance (Howe v. Smith)
   4. Installed payments with indication that if payer breaches, the installments should
      be forfeited (Stockloser v. Johnson)
    Classification mostly depends on intentions
    problematice: freedom of K allows people to change the normal rules, as long as
      change is expressly stated.

Howe v. Smith (1884) UK – K said advance pay is deposit and part pay. Payer breached. Money is
forfeitable deposit if payer breaches, because then its a real risk, if no breach = part pay.
Facts: Real estate: Prospective purchaser pays 500 upon entering K which states it was
paid as a deposit and part performance but no mention of what happens if not completed,
yet had other planned remedies (included LD). P didn‟t perform for a long priod of time
and vendor refused to complete transaction. P sues for specific performance OR return
of advance payment.


                                                      34
    P argues it is a part payment and D argues it is a deposit and should be forfeited
Analysis:
    Where a K provides that an adance payment is both a deposit and part payment
       but the K doesn‟t expressly state what is to happen to the advance payment if the
       payer breaches, and then the payer breaches, the sum is forfeite
    If the payer doesn‟t breach, it is a part payment, not an earnest guarantee (not a
       deposit)
Rationale
    in the case of breach, forfeiture is intended to incent the payer to perform.
       Incentive can only be made meaningful if there is reall risk.
           o conceptual diff b/w deposit (create incentive) and penalty (supposed to
               estimate loss, not be unfair incentive)
           o no reason to believe that forfeited money correlates with NBP‟s loss –
               court does not ask whether it is genuine pre-estimate of loss
           o Howe is used as authority for proposition that deposits aren‟t subject to
               review n the same manner as LD clauses

Stockloser v. Johnson – introduce equity – courts can protect buyer/payer from forfeiting if penal at
K and unconscionable at Br. Here, it was part payment, but clause said it would be forfeited.
Facts: Machinery sold under K that provided for installed payments as a lease. K
expressly stated that paid installments would be forfeited if the buyer was in default.
Buyer didn‟t make payments, as result, loss machinery. P is suing to have installments
returned.
Issue: Can Courts protect a BP against forfeiture of an advance payment? Shift from
Howe. Does freedom of K allow a party to put unfair forfeiture terms in k? (Remember,
general rule: part pay must be returned)
Analysis
     No redress in common law, but available in equity if 2 conditions are met
    1. Clause must be penal in nature – judged at time of K – is t disproportionate or
       reasonable estimate of loss?
    2. It must be unconscionable for payee to retain $ - judged at time of breach
     Denning finds the clause penal, but not unconcscionable as the buyer had made
       use of the machinery
     Therefore: IT IS DIFFICULT TO HAVE FORFEITURE CLAUSE STRUCK
       DOWN IN COURT – needs hindsight (penal) and foresight

Note: s.98 Courts of Justice Act (ON)
    A court may grant relief against penalties and forfeiture, on such terms as to
       compensations or otherwise are considered just .
           o codifies equity jurisdiction

                                C. Limitation & Exclusion Clauses

    K term which denies, excludes or restricts NBP‟s normal remedy for breach
    Attempt to control liability for economic and physical losses from Br.
Three Types


                                                    35
   1. Exclusion of Duty: - BP claims “no remedy because I did not breach any
      contractual duty or obligation”. Tries to exempt one party from a substantive
      obligation which he would otherwise be subject to under K law.
   2. Exclusion of Remedy: BP claims that although it breached the K, the K does not
      give a remedy to NBP for the breach. ex. repair or replace at seller‟s option
   3. Limitation of Remedy for Breach: Attempt to qualify the duty of the party in
      default and indemnify the other party by limiting the amount of damages
      recoverable. (ex. courier says can only get up to $100 for broken shipment)
Examples of all: Airline tix, dry-cleaning, retail, skiing, fitness studios

Problematic because:
    they can make K extremely unbalanced and unfair
    often no opportunity for negotiation of K and most people don‟t know about their
      rights.

Judicial Control Techniques

    1. Non-incorporation argument: Not part of K, therefore no remedy available
    2. Construction: When the K is properly constued the clause does not cover the br.
    3. Doctrine of fundamental breach as rule of law: there is a breach, but there is
       unfairness
    4. Doctrine of unconscionability: there is a breach but there is unfairness.
    5. Statutory invalidity in some consumer transactions

1. Non-Incorporation Argument
     Claim the clause was not part of the K!
     Interpreting K, therefore not interfering with freedom of K
     Default rules of K law state a clause can be incorporated by
          o Signiture rule
          o Reasonable notice of unsigned K
          o Court of Dealings

a. Signiture Rule (L‟estrange v. Graucob)
      General rule: signiture on K is prima facie consent regardless of whether it was read or not
          (Canadian courts try to get around this)
      limited exceptions = fraud / misrep OR where signed in hurried manner, and person knows signor
          isn‟t aware of clause (Tilden)
               o this party must take steps to make the other aware – consider in SFK

    b. Unsigned K - Reasonable Notice:
     Person seeking to rely on clause must have taken reasonable steps to bring them to the other
        party‟s attention during formation
     always a question of fact
     more unusual the clause, the more the reliant party has to do to make the other aware
            o Shift in last 50 years: consumer just had to be told that clauses were in K somewhere,
                  now they need to be pointed out directly.

    c. Course of dealings




                                                  36
      Two contracting parties have long dealt with eachother on same terms, which include exemption
       or limitation clauses, but on one occasion the document is not signed, the clauses may be held to
       be incorporated.

2. Construction

      contra proferentem: read the K against the interests of person seeking reliance
      attempt to read clause as narrowly as possible, limit effect of clause
      hostility to exclusion clauses for liability for negligence
           o if negligence is the only possible basis for liability, general exlusion
               clause may be held to cover it
           o if negligence is not the only possible basis for liability, general excl.
               clause does not normally apply to negligence
                     significance – in scenario 1, negligence is only basis, therefore
                       clause clearly was meant to exclude it, but in 2, clause could have
                       been meant to protect against something else, so courts don‟t want
                       to reward negligence.
Ex. Andrews v. Singer
Clause said that all conditions, warranties and liabilities by statute, common law, or
otherwise are excluded. The court determined that the promise to deliver a car was an
express promise, but the exclusion clause applied to implied terms, therefore it didn‟t
apply.

3. Fundamental Breach
     response to the limitation of other methods as ways of protecting against
       exclusion clauses because it is easier for K developers to get around other
       methods (i.e. knowing about narrow construction, they write specific clauses)
     Two Types
          o Substantive rule of law: Impossible to exclude liability for particularly
              serious breaches, no matter what the clause states (Karsales)
          o Rule of Construction: exemption clause won‟t protect a BP when the
              breach is very serious unless the K indicates a clear intention that the
              clause is supposed to apply in such circs (Wilson in Hunter v. Syncrude)

4. Unconscionability

      Two elements:
           o unfair term
           o IBP
      Concerned with ideas of information failure (small print, rational ignorance),
       distributive motives and paternalism

Karsales v. Wallace (Denning) – substantive doctrine fun br. Can‟t br the root of K
Facts: Man purchases car which was fine on test drive but not in working condition
when delivered. D refused to pay for the car and P sued D for lease payments based on
clause which stated “no condition or warranty that the vehicle is roadworthy or is to its
age, condition or fitness for purpose is given by the owner express or implied”.


                                                  37
Denning creates substantive doctrine of fundamental breach
Analysis
    Exemption clauses are not allowed to be used for misconduct or indifference or
      to enable seller to turn a blind eye to negotiations
    exemption clauses do not apply when the BP is guilty of a breach that goes to the
      root of the K.
    Test
          o Look at the K apart from the exempting clauses and see what the terms,
              express and implied obligate the parties to do
          o is the breach in question one of those obligations? If so, it is a breach of
              the root of the K and exemption clauses cannot be applied.

Hunter v. Syncrude SCC 2-2 Split – know both Dickson = unconsc. IBP & unfair term, Wilson
= fundamental breach & consequences.

Dickson: Reject fundamental breach. Use unconscionability.
Wilson: Doesn‟t like Denning‟s substantive fundamental breach, or unconscionability.
If there is a breach that is fundamental and the consequences are serious, the courts can
use dispensing power to not apply the term. (also calls this fundamental breach)

Facts: Two contracts for supply of gearboxes. Both had 12 months warranty and
product failed at 14 months, while expected life is 10 years. D did the necessary repairs
and sued for damages. P (Syncrude) claims breach was fundamental because it ran to
the root of the seller‟s obligation to provide functioning gearboxes that should last.
Note: none of the justices believed the seller should be liable to the buyer. Hunter forgot
implied statutory regulations could have applied.

Dickson:
    Don‟t use Fundamental breach from Karsales because courts should not interfere
      with parties‟ decisions about risk allocation. It‟s impossible to read the K
      without the term to figure out when a breach is fundamental
    Use Unconscionability. court can strike down clause where
         o IBP
         o harsh/unfair term
    Decision: no IBP here, so no recovery.

Wilson:
    Courts should retain power to strike down clause if in light of a fundamental
      breach it would not be fair or reasonable to uphold it
    Thus, decide whether to uphold it in light of the consequences of breach
    hint: compare this to Clarke v. Thermadaire in Laskin
    Courts have responsibility to baliance conflicting interests of parties, in order to
      uphold the nature of K law.

Difference b/w Unconcsionability & Fundamental Breach



                                            38
       Unc. looks to circumstances at time of entering K. Wilsons F.B. (WFB) looks to
        time of breach
       Unc. requires IBP, WFB does not
       WFB limited to exclusion/limitation clauses, Unc. may potentially apply to any
        “harsh” term where IBP exists.

Statutory Responses to Exclusion Clauses
   1. Sale of Goods Act: Implied condition in every sales K. Product must:
          a. comply with description (ads)
          b. be merchantable (not defective)
          c. fit for purpose when buyer makes the purpose known and relies on the
              seller‟s expertise
   2. Consumer Protection Act.
          a. Seller cannot havea clause that excludes implied conditions of the Sale of
              Goods Act, when selling to an end consumer (not a business, or for
              business use).
          b. Extends equivalent protections to lease and Service K;s



       Volume II Ch. I – Freedom Of Contract & Market Discrimination

Freedom & Contract
   1. One person‟s freedom may collide with another person‟s freedom
   2. The choices courts make about which person‟s freedom to protect have
      implications for economic and social exclusion
   3. The shift from Christie  Human Rights Code does not change the principle of
      freedom of contract, but changes the values underlying its interpretation and
      application.
Freedoms in Contract Law
   1. Freedom to contract
   2. Freedom from contract
   3. Freedom to choose the terms of the contract

Christie v. York Corporation [1940] SCC – Freedom from contract
Facts: P was denied service at a popular bar in Montreal because he was black. He sued
on the basis of being prevented from entering into a contract (bar implicitly offers to sell,
he accepted) and for the humiliation he suffered. P argued that the public nature of the
bar supported his argument. D says there was no contract and he doesn‟t have to enter
into one.

SCC Majority:
 General principle of law of Quebec is complete freedom of commerce, which means
  freedom from contract. Merchant can deal with whomever he chooses
 Only restriction would the a rule contrary to the good morals or public order  not
  necessary in this case



                                             39
Essentially, SCC enlarges freedom of the merchant and narrows freedom of Mr. Christie
and other “coloured” people.

Dissent:
 The government licenses the tavern. Respondent therefore can only restrict based on
   exclusions or restrictions of the regime.

Rogers v. Clarence Hotel, (1940) B.C.C.A. – common law-need reasonable cause not to K
Facts: Hotel in BC refuses to serve Black man, but they had a sign welcoming patrons.
Dissent
 Common law doesn‟t allow providers who offer services (as bar did) to deny service
    to anyone expect for reasonable cause
 Race is not a reasonable cause  English common law = equality of subjects
Significance: This case didn‟t have to select discrimination as the main argument, but it
did. It established that common law can choose from various arguments; discrimination,
freedom of K.

Grant v. Wilcock (1991), Human Rights – refuse to K because of race offends s3 of CHRC
Facts: D has a cottage for sale. P‟s wife looks at it, she likes it and the seller seems
happy. She returns with her Black husband, seller makes up an excuse re: not selling.
Their mother investigates, it is still for sale. Brings a claim under the OHRA, not for
damages but for corrective justice. Limitation on freedom of contract and response to
market discrimination.
Law: Human Rights Code
services s1: Every person has the right to equal treatment with respect to services
without discrimination because of race, ncestry place of origin, color, sex, orientation,
age, marital status, same sex partnership, disability, etc.
contracts s3: Same as above, but for right to contract
Ruling:
 Unable to refuse to contract – D put ad in paper, which means that he is willing to
    contract with anybody. He can‟t take away that offer based on race – offends s3
 Damages are awarded but law can‟t prevent these occurences.


                Volume II Ch. II – Models of Contract Formation
   1. Agreement Model (Offer and Acceptance)
   2. Bargain Model (Consideration)
   3. Reliance Model (Promisory Estoppel)

Tests for the existence of contractual obligations:
Primary tests
 Offer and Acceptance approach  K as an agreement or product of negotiation
        o we focus on communications and negotiations. Which communications
            count towards formation?
 Consideration approach  contract as enforceable promise



                                            40
       o K not an agreement but enforceable promise
       o law should enforce bargained promises
Other Tests
 Intention to create legal relations  K in familial situations
 Promissory estopple  limited form of obligation arising from reliance

Change / Modify Linear Mindmap: Change to K terms...
 is fully enforceable on basis of consideration when
       o PSE, at promisor‟s request incurs detriment / provides benefit beyond that
           originally promised, (Hamer v. Sidway) OR
       o PSE promises to perform existing duty so long as promisor derives practical
           benefit from performance (Roffey Bros) (pse = unpaid workers)
               1) Note: advent of duress allows the former to be a doctrine
 is partially enforceable on the basis of promissory estoppel when
       o Parties clearly intended to change K terms / legal relations, AND
       o Parties intend PSE to rely on change, and PSE does, AND
       o Inequitable to revert to original relations
 Is voidable despite the presence of consideration when
       o PSE applies illegitimate pressure, eg. threat or act, AND
       o illegitimate pressure coerces the Promisor into agreeing to the change. Ask It
           Promisor:
               2) protested against the threat or pressure
               3) had options other than compliance eg. legal remedy
               4) could obtain independent advice
               5) acted to avoid K (rescind it) once the threat was removed

                               Defenses to Breach of K
   1. There is no contract – formation arguments
         a. Offer and Acceptance – if no K exists, D cannot be liable for breach
                  i. Tension b/w remedial approach / result oriented reasoning v.
                     freedom of K. = businesses don‟t want to have to serve everyone
         b. Consideration
                  i. there must be sufficient considertation in the formation of a K, or
                     to modify the terms of K
         c. Promissory Estopple
   2. The Contract was unfair
         a. Misrepresentation
         b. Standard form contracts
         c. Unconscionability
         d. Guarantees


                               1. The Agreement Model

 Consent is the basis of K obligations.
     o unconditional agreements on all terms of the contract


                                           41
      o objective test: at what point, if any, to the individuals reach
              1) unconditional,
              2) certain and
              3) final agreements?
 3 types of communication: offer, acceptance, invitation to treat
 Reflects a preference for freedom of contract

Offer
 Expression of willingness to K, if accepted.
 Made in certain terms with the
 express or implied intention that it will become binding as soon as it is accepted by
   the person to whom it is addressed.
 Elements of an offer:
        o MUST be definite and in certain terms
        o May be communicated by words or conduct
        o May be addressed to specific individual or general
        o May be revoked if revocation is communicated before acceptance
        o May set out the means of acceptance
Acceptance
 Final and unqualified expression of agreement to the terms of an offer
(note: consider “battle of forms” in Tywood, or “conditional K‟s” in Dawson)
        o Must be more than a simple expression of interest
        o Must correspond precisely to the terms of an offer (note: this can be a
            problem when parties use their own Standard Form K‟s)
        o Acceptance by statement bilateral contract, conduct usually  unilateral
            K.
1) Bilateral
    - K in which both parties are subject to the binding contractual obligations
    - Each party has the option to sue if performance doesn‟t occur
    - K exists when agreement is concluded (though not yet performed)
2) Unilateral
    - K where only one party is bound into the future
    - the other party is not required to do anything at all
    - obligation/duty is one sided
    - see Carlill
 Normal rule = Acceptance must be communicated
        o Silence not sufficient because courts don‟t want to impose obligations
            without genuine consent. Makes burden on party who has been offered
            something to say no, (like a reverse burden).
 Note: in a continuing relationship, acceptance may be inferred from conduct. – St.
   John Tugboat v. Irving refinery
 Exceptions
        o postal rule: postal acceptance takes effect when letter of acceptance is posted
                offeror chooses post method, so should take risk of non-
                   communication
                protect offeree‟s reliance


                                           42
         o Unilateral K – offeror can waive requirement – see Carlill
         o Offeror prevents communication i.e. no answer phone

Invitation to Treat
 preliminary statements and inquiries that aren‟t sufficiently certain or conditional to
   count as an offer
 Ask how the reasonable person would understand the communication to determine if
   its ITT or offer
        o what is the intention of the party making the statement and assess it in terms
           of how a reasonable person would understand it
 Rebuttable presumption that marketing tools are ITT
        o protect seller against over-subscription
        o maximise sellers‟ freedom of K
 Diff b/w counter offer & ITT = ITT doesn‟t have conditional terms, can‟t be
   accepted

Battle of the Forms
 Difference in seller and buyer‟s standard form K
        o ex. 1 K proposes ADR, other doesnt (Tywood)
 Courts will:
        o “mirror image rule”  inconsistent forms imply no K
        o “Last past post”  this is common
        o Construct K on agreed terms, don‟t use conflicting terms (Tywood)
Carlill v. The Carbolic Smoke Ball Company – Unilateral K – objective test proves its offer
Facts: Ad states it will pay sum to anyone who catches influenza after using their
product. Ad states D deposited sum into a bank to use for payments. P takes medicine,
gets flu.
 unilateral K
 offer, or ITT?
Decision:
 use objective test to interpret communications: Ad wasn‟t too vague to count as an
    offer because a reasonable person would read it as an offer due to the $1000 put
    away into bank
 offer made “to the world” is legit
 if offer is to be accepted by conduct, offeror may waive requirement of notification
    of acceptance
 use of unilateral K protects consumer‟s reliance
 REMEDIAL decision. Common law has potential to enforce honesty in advertising.

Dawson v. Helicopter Exploration (1995) SCC – use of bilateral where possible, offer that
includes conditional future action can become bilateral if agree that the action will take place eventually.
Good faith 1.
Facts: deal to finance and support by helicopter to reach mineral deposits in which P had
interest. Exchange letters, uncertain terms (if you, then I), but promise for p to get 10%
interest. D uses someone else. P sues for breach. D says no K.
Issue: no clear dates, many proposals are conditional


                                                     43
Options:
    1) no K
    2) unilateral K which was withdrawn
    3) bilateral K (most recent communications)
SCC:
 treats K as bilateral
 remedial, because no conditional final agreement, but wanted to give P remedy
 implied good faith? early sign of good faith. Thus, K will have different obligations
    when good faith is implied.
Imporant:
An offer which contemplates further action by the offeror as well as action by the
offeree may be interpreted as an offer of a bilateral K and be accepted by a promise
to act
this means that if there is an offer which states that there will be future action, and its
agreed that the action will eventually be performed (even if that action isn‟t conditional
yet) this can be bilateral agreement.
 Illustrates courts preference for using bilateral agreement when it can be
construed. Businesses may not like this because the remedial thinking leads to less
certainty in the freedom of K.

Tywood Industries v. St. Anne-Nackawic Pulp & Paper – Battle of forms. Exclude conflicting
K term – ADR.
Facts: Two parties K on their own Standard form K. Issue over arbitration – ADR.
Issue: Which “battle of the forms” to use?
Decision: use the exclude conflicting term option
Test: Decide what each party to the K would reasonable conclude from the utterances,
writings and conduct of eachother. See where the documents conflict and remove those
terms. In this case, no arbitration.

Remedies for Failed Negotiations

MJB Enterprises v. Defence Construction – imply term of duty / good faith 1. D br. K-A,
privelege clause doesn‟t count.
Facts: Tender for work with a privilege clause stating lowest or any tender shall not
necessarily be accepted, but must conform to standard. Contract awarded to party that
does not conform. Court finds MJB would have been lowest, and won, if D didn‟t
choose non-conforming party.
Issue: No K, can P still claim a remedy?
Analysis:
 2 K:
 A = invitation to bid is an offer to consider valid bids for contract B, and accepted
   when bid is sent (unilateral). There is a promise to consider only conforming bids.
 B = the actual job being tendered for. Note: submission of tender is also offer for B
 Holding:
       o Promise to consider only conforming bids = IMPLIED term




                                             44
         o privilege clause narrowly construed does not allow for non-conforming bid to
            be accepted
         o thus, owner breached K-A.
Court found that MJB would have been awarded K-B if not for the breach. Award lost
profits.
Criticism: why not award wasted expenditure? How can SCC be sure they would have
actually profited? WE must be in contemplation at time of K, certainly owner would
have realized that a breach of K-A would be wasteful to the potentially winning bidder.

Empress Towers v. Bank Nova Scotia –imply good faith in rent negotiation, landlord not allowed
to ignore offers
Facts: Renewal of commercial lease with K provision that the renewed rent is to be the
market rental rate as mutually agreed by landlord (LL) and tenant. Bank (tenant)
proposes new rate but gets no response until the day before the lease is up. Essentially
the LL could evict tenant. is the renewal term enforceable as a contractual “agreement”
or is it simply a contractually ineffective “agreement to agree”.
Majority
 LL cannot be forced to enter a renewed tenancy at a rent which it has not accepted as
    the market value, but
 this also means there is an implied term to negotiate in good faith, with objective of
    reaching an agreement on a rate which would not be unreasonably witheld
          o implied term under presumed intention: “officious bystander, business
             efficacy test”
 LL didn‟t negotiate in good faith, therefore can‟t claim possession of building
 Courts must try to give effect to the agreement that the parties have made
Dissent:
 Should not imply a term of good faith negotiation. Not necessary to give business
    efficacy to the agreement
 Not for courts to make agreements for parties.
 Concerns about vagueness and subjectivity of good faith standards
 why can‟t a business just say “final offer”  would the majority imply that there
    must be an agreement?


                           2. Bargain Model - Consideration
Note: formation requires offer, acceptance and consideration
   - consideration increases certainty for court
   - it alleviates concern that the promise may have been procured by bad behaviour
       ex. highway robbery

 A tool for deciding which agreements to enforce
      o based on the notion of reciprocity
      o key elements: request, exchange and something of value
      o benefit to promisor or detriment to promisee
               promise to confer a benefit



                                              45
 Basis of contractual obligations is the requested exchange of value for a promise.
      o if consideration consists of a requested promise that is traded for a promise
          the resulting K is bilateral
      o if consideration consists of a requested act that is performed in exchange for
          a promise, the resulting K is unilateral
 Rules
      o consideration is required to enforce a K – note offer and acceptance K have
          more than 1 promise
      o detriment to promisee, or benefit to promisor (detriment – hamer sidway)
      o courts don‟t look at adequacy of consideration
      o nominal consideration may be ok
      o past consideration is no good
      o promise to perform existing duty is not normally good consideration (Stilk,
          gilbert Steel), but exception = Roffey Bros

Two types of Cases
  1. Family settings
  2. Modification of business contracts
          a. modifications to existing K  promissory estoppel has reduced
              significance of consideration in these cases
          b. cases that involve two parties King on terms that affect a third party

Hamer v. Sidway UK– promise not to do something at request of other party, detriment, rich uncle
Facts: Uncle promises nephew he will give him $5K if he abstains from partying until
21. He does. Uncle acknowledges, then dies. Nephew never paid. Note there are
creditors involved, which is why style of cause is so.
Analysis:
 Restriction of freedom was detriment as requested by promisor that is good
   consideration
 RATIO: where a promisee, at request of promisor, restricts lawful freedom, this
   constitutes a detriment sufficient to enforce the promise.



Kirksey v. Kirksey – moving to bro in law not sufficient detriment, even beneficial
Facts: P‟s brother in law tells her to sell her land and move to his land with her kids.
After 2 years he tells her to leave. Trial judge finds sufficient detriment for
consideration.
analysis: Appeal court says there is detriment, but not sufficient detriment for
consideration. They said it was even a benefit to her to live on the land. But should this
unintended benefit stop the claim?

Balfour v. Balfour – rebut presump that family cases don‟t intend to create legal relation
Facts: While married, P&D agree that P will get an allowance. Husband (D) doesn‟t
pay and she brings an action.
Analysis:


                                                46
 Family cases may need to show an intention to create legal obligations in addition to
  offer, acceptance and consideration (these were all present, but court reluctant to
  make obligations in such a case)
 rebuttable presumption that in family cases there‟s no intention to create legal
  relations as home is the domain of privacy (not open to K remedies)

                             3. Reliance Model – Promissory Estoppel

Relationship between consideration and PE
    - courts require consideration for full enforcement of agreements to form a K,
        modify a K
    - But a problem is that in real world of business there needs to be flexibility, and
        there is not always consideration. Businesses have to adapt and rely on
        concessions
    - ISSUE: when and to what extent should courts facilitate flexible adaptation of
        Ks?
General principles: PE is a shield not a sword (but see Roffey), and a party cannot act
inconsistently with a promise it has made that it intended to be binding, intended to be
acted on, and was acted on. Also a matter of equity and reliance.
- note: Crabb v. Arun, Brewer v. Chrysler are exception to shield v. sword.

Three cases show development of PE
    1. Hughes v. Metro Rwy – waiver to rights for penalties enforceable if inequitable
        to ignore
    2. High Trees – apartments in war – can‟t act inconsistently with promise if...
    3. Combe v. Combe – Husband & wife maintenance after divorce – shield not
        sword
Intention to change legal relation
    1. Burrows – late payment to creditor leads him to think he can cancel K
    2. Maracle – didn‟t claim insurance in time because they thought there was change
        in legal relations
Innovation towards a principle of good faith negotiations:
    1. Crabb v. Arun – sale of backland with no access point
    2. Brewer v. Chrysler – implied good faith to reward work with dealership

Development

Hughes v. Metro Rwy – if 1 party leads other to believe it wont enforce its rights, it can‟t later do so
based on equity
Facts: P is landlord who told tenant to repair in 6mos or forfeit. D tried to sell lease
back to P, but didn‟t occur. After 6mos P claimed lease was forfeited. D claims that
while under negotiations, did not expect to have to fulfill K duties (repair)
Analysis:
 If parties who have K with clear terms re: forfeiture / penalties,
 enter into negotiations which has the effect of leading one of the parties to suppose
   that the strict rights arising under the K will not be enforced,


                                                   47
 the party cannot enforce them, because it would be inequitable.
Significance: If a party leads another party to believe that it will not enforce its rights, it
cannot later do so, as per equity.

Central London v. High Trees (denning) – War Rent.1. intended to create legal rel‟s 2.
promisor knows it will be relied on 3. its relied on AND “so far as terms properly apply”
Facts: P leased block of apts to D. Not enough tenants because of war. D asks for
lowered rent until things get better. Agreed. Now that things are better, P claims for
backrent.
Analysis:
 No consideration, but Denning uses PE as defense for tenant
 Notes that it is not a cause for action
 A promise must be performed when it is intended to create legal relations (even
    absent consideration) when three conditions are met:
         o it is intended to create legal relations
         o the person making the promise knows it will be relied upon by the promisee
         o the promisee acts on it
 note: it will be binding so far as its terms properly apply
Decision: No back rent because the promise not to charge during that time met the 3
conditions. But “so far as terms properly apply” meant that now that the war is over, the
rent is back up.

Combe v. Combe – restate PE doctrine to narrow scope  not substitute for consideration. Also
restates high trees principles (3 factors)
Facts: Wife seeks maintenance from ex-husband. There is no consideration for it. Wife
claims under hightrees principle.
Decision: No recovery
Analysis:
    1. P.E. does not create new causes of action, it simply prevents promisor from
       insisting on strict legal rights where this would be unjust due to dealings
    2. restates hightrees principle – PE only modifies existing K‟s where
            a. promisor makes promise by words or conduct that intends to change legal
                relations
            b. intends to be acted on
            c. is acted on
            Promisor can‟t go back on this promise
    3. It is not a substitute for consideration
    4. shield not sword

Intention to change Legal Relations – Canadian Application
    - What does it mean to “intend to change legal relations”?
            o PE requires relying party (PSE) to show clear intention on part of the
               promisor to give up legal rights, more than “a mere indulgence”
               (Burrows)
            o Need evidence of clear, unambiguous promise intended (words or
               conduct) to effect relations. The standard is how a reasonable person
               would understand the promisor‟s intention (Maracle)


                                                    48
Burrows v. Subsurface Survey – late payments are mere indulgence. for PE there must be clear
intention from promisor to change legal rights.
Facts: K where debtor pays creditor in installments. Late payments entitle creditor to
receive full debt in entirety. However creditor (P) did not always enforce this. Sues D
eventually, after falling out and late pay. D argues for PE because based on past he
shouldn‟t have to pay.
SCC
 Late payments were a mere indulgence but not a contractual change
 No evidence that past actions led D to believe P suspended rights
Significance:
 PE requires PSE to show clear intention on the part of promisor to give up legal
   rights. Mere indulgence isn‟t intention to forgo rights.

Maracle v. Traveler’s Indemnity – fire insurance. PE needs clear unambiguous promise to change
relations. REASONABLE person test: how would a RP interpret the „promise‟?
Facts: P has fire loses everything. P doesn‟t file insurance claims in time and D refuses
coverage. P argues that because D claimed liability and they were negotiating, D led P
to believe that they waived their legal rights.
SCC:
 admission of liability during negotiations isn‟t a promise to forgo rights. This is an
    inference that needs support from other evidence
 PE needs clear, unambiguous „promise‟ from words or conduct.
        o Standard = how would a reasonable person interpret P‟s promise.


Innovation towards a principle of good faith negotiations: broad application of PE
- Seems that PE can be used as a shield when one party leads another to believe that he
will not enforce his strict legal rights, knows the other will act on that belief, and the
other does act. Courts don‟t expressly say there is a duty to negotiate in good faith, but
that‟s what it seems like. Is this like Empress, but without pre-existing K?

Crabb v. Arun District – property/access – basically same as hightrees, equity decision
Facts: P had been negotiating a right of access of back portion of land. during
negotiations, P sells portion with front access, but does not include a back route. After
he sells, council closes off access and negotiations cease. P claims access, based on PE.
Note: There is no K, and PE is being used as sword in this case.
Analysis:
 Claims a proprietary estoppel gives rise to action
 where a person by his words or conduct so behaves as to lead another to believe that
    he will not insist on his strict legal rights
 knowing or intending that the other will act on that belief
 and he does so act
 there is an equity in favour of the other, and the court will decide what to do
Decision: Awards P access rights without requiring P to pay. This satisifies equity
Significance:


                                                  49
     -   no K in place, so not a modification (against restatement of principles made in
         Combe)
     -   Used as sword, not shield


Brewer v. Chrysler – car dealership. “intend” to “create” legal relations – no existing contract
needed. Ps efforts during negotiations should be compensated.
Facts: Failed negotiations for a car dealership after D solicits P. P quits job and gets
capital to buy dealership. Negotiations take long, dealership not ready in time, P has to
live off capital, so can‟t afford it when D is ready. D won‟t sell. Note: no contract in
place.
Analysis:
 no intention to form K for dealership But,
 Court infers a promise that D would compensate P for P‟s efforts and outlays during
    negotiations, which were akin to services rendered in the expectation that P would be
    compensated by getting the dealership.
 Although the dealership didn‟t work out, P should be directly compensated for his
    losses in reliance
 NOTE: they used High Trees principle that a promise must be honoured when it‟s
    intended to create legal relations. – doesn‟t say “alter legal relations


                   Volume II Ch III Unfair and Defective Contracts


1.   Contract Modification and Duress
2.   Misrepresentation
3.   Standard Form Contracts
4.   Exploitation and Fairness - Unconscionability
5.   Family Guarantees

                                1. Contract Modification & Duress

 Courts historically didn‟t award enforcement for non-consideration modifications in
  order to prevent opportunism and advantage taking.
 Thus this section looks at this historical doctrines of modification (Stilk v. Merrick,
  Harris v. Watson & Gilbert Steel), and then examine how the rise of the doctrine of
  duress changed the role of consideration.

Harris v. Watson (1791) UK and Stilk v. Myrick (1809) – Historical origin. Sailors.
modification needs consideration, existing duty doesn‟t count. otherwise  extortion.
Facts: Captain of a ship offers further pay to sailors for doing their pre-existing duty
(and extra) because other sailors default or die. Captain doesn‟t pay and they try to
claim. Note: TW thinks policy and class discrimination (against sailors) also played a
role)
Significance: Historical starting point for the doctrine of consideration


                                                   50
Rule:
 (i) a change to the terms of a contract is unenforceable unless the promisee provides
   consideration and
 (ii) promise to perform what is already required by the contract is not good
   consideration -- ie., performance or a promise to perform an existing contractual duty
   is NOT good consideration.
Policy:
 fear that allowing modification without consideration could lead to extortion – Harris
        o (Stilk just followed this rule 20 years later)

Gilbert Steel v. University Const. – New price not enforceable because no consideration, no
intention to tear up old K, not prom est because shield not sword & no detrimental reliance
Facts: P and D have a fixed price contract where P supplies Steel. P‟s costs rise so he
asks if he can charge D more, and D agrees. He invoices for new price but D won‟t pay.
Issue: Was the K modified / a new one created, or can P sue anyway?
P argues:
1. Oral agreement was a new K
2. Offered P good price in future dealings (vague benefit is not substantial)
3. Extended credit is consideration (not a true benefit, more necessity due to high price)
4. If no modification, use estoppel.
Analyis:
Agreement to pay higher price not a contract because:
 No intention to “tear up” old contract
 Not enforceable because no consideration
Promissory Estoppel is not available because:
 Shield not Sword
 No “Detrimental” reliance by P.
         o NOTE: in Maracle there is a reference to “Reliance” but not “detrimental
            reliance”

Development of Economic Duress – A) illegitimate act that coerces? B) coerce? did they protest,
alternative option, independent advice, steps to avoid K when threat removed
A doctrine of economic duress was created in order to directly tackle extortion.

NOTE: The effect of economic duress is to render the contested terms “voidable”, ie.,
these K terms may be cancelled or rescinded.

Economic Duress Test
   1. Illegitimate act / pressure (including threat to break contract) that...
   2. “Coerces” the victim into K terms it would not have agreed to without the
      pressure

“Economic duress involves „coercion of the will so as to vitiate consent” – Pao On
“Victim consents but is compelled to choose between unpleasant alternatives” - Dalzell

Coercion Test (From Pao On v. Lau Yiu)



                                                    51
We must ask if the person alleging coercion
  1. Protested against the threat
  2. Had alternative, legal options
  3. Had access to independent advice
  4. Took steps to avoid the K after entering it, when the threat was removed

This doctrine leads to a shift in thinking, whereby consideration can be more liberally
inferred, as long as there is no duress, which i highly functional for commercial
relationships.

Williams v. Roffey – roofers offered more to finish on time. SHIFT  preexisting duty can be
consideration if the promisor gains a practical benefit from it, and the promise isn‟t made because of
duress.
Facts: Contractors hired carpenters for a roofing job with a deadline, which was
important because they planned on selling. Fearing they wouldn‟t complete the job, they
offer extra cash for each place finished on time (they could hire more crew). Didn‟t pay,
took action.
Significance: Reaffirms rule that consideration is needed to enforce a modification, but
shift in attitude (because of duress doctrine) that consideration can be found in
preexisting duty, if promise to do so creates a certain benefit for payer.
Analysis: The contractors received a benefit in the form of a promise to have the work
done on time. This type of benefit, or the riddance of a disbenefit, is sufficient
consideration to enforce a contract as long as there is no duress.
Techform Products v. Wolda – inventor. Signs agreement. Consideration = continuance of
employment. Duress?  No, there may have been pressure, but not illegitimate.
Facts: D worked as an employee and then a consultant. He signed agreement to transfer
ownership rights of his inventions while working for P. Given a few days to read
agreement and protested at the time. Later tried to sell an invention to D. P dismissed
and D brings action for declaration it owned invention.

OCA
o Finds consideration in the continuation of employment under the new contract
o No economic duress and even if found pressure under Pao On, it was not illegitimate
  he did not have to sign on the spot.
o Pressure needs to be illegitimate in addition to coercion.


Contract changes: summary
 Do the facts indicate an intention to change the contract?
       o If yes, ask Is there consideration for the change?
               apply standard rules, (including Stilk v. Myrick, Gilbert Steel; think
                  about how courts analysed the facts in Williams v. Roffey, Techform
                  Products v Wolda)
 If consideration does exist, consider whether economic duress is a viable argument,
 If economic duress does not exist then change supported by consideration is
  enforceable.
 If economic duress does exist, the change may be voidable


                                                    52
 If consideration does not exist then consider whether the elements of promissory
  estoppel are met.
       o Promise / assurance, intention to change legal relations, reliance, inequitable
           to return to the original contract, estoppel being used as a shield not a sword.
 If the elements of promissory estoppel exist, then the change is enforceable at least as
  a defence to an action for breach of the original contract.

                                   2. Misrepresentation

Unfairness issues tend to be articulated as a problem of formation.
The remedy isn‟t necessarily about a breach, but an issue of formation.
Court says “show us a problem in formation”.

Judicial Techniques
 Misrepresentation (Esso Petroleum, Ginsberg)
 Unconscionability (Lloyd‟s Bank, Harry v. Kreutziger)
 Undue Influence – family guarantee cases
 Exclusion (non-incorporation) of unfair terms

Pro‟s and Cons of Judicial Activism
Pro: System integrity  lying undermines reliance which is not good for the market
Con: Freedom of K (rugged individual) each person should do their own homework

General rule: no duty to disclose but if one party does say something false and a
reasonable person would rely on it, the person can ask for rescission upon learning the
truth.

Early Doctrine of Misrepresentation
 Contract is good unless contractor shows that his decision to K or to terms were
   based on reliance of a false statement of fact
 No duty to disclose important info
 No relief is decision was based on a statement of opinion
Thus the early Doctrine of Misrepresentation test was:
       1. A false statement of fact is made
       2. The statement is material objectively, to reasonable person
       3. The statement was relied on subjectively


Traditional Common Law: Fraudulent and non-fraudulent Misrepresentation
o Fraudulent Misrepresentation → Did the person know the statement was false, not
   believe it to be true or was reckless about it (courts are reluctant to find)
        - Remedy
                  o Rescission
                  o Damages
                  o Punitive damages possible



                                            53
o Non-Fraudulent Misrepresentation →
     - Remedy
              o May be able to rescind contract under equity (no damages at
                  common law)
     - Note: Standard bars to rescission: impossible to restore status quo, 3rd party
        interests, and delay

Modern Thought: The fact that plaintiffs can‟t receive damages for innocent
misrepresentation is problematic as courts are reluctant to find fraud. Therefore two
doctrines are put forward:

Modern Doctrines of Misrep  allows for damages

 Collateral Warranty
      o a “side” or collateral warranty is made when a term isn‟t in a K but can be
          inferred as a promise.
               i.e. buy a car with rolled back odometer. You don‟t want to give it
                  back (rescind) but you paid too much and want damages. There was
                  a collateral warranty that the car only had 50,000Km damages
 Negligent Misrepresentation
      o When a person in a special relationship with special knowledge makes
          negligent statements, and the other relies on it and suffers a detriment
          thereupon. (Based on Hedley Byrne – can be opinion)

Esso Petroleum v. Mardon – 1st Hedley (seeks damages  diff from rescission test), opinion from
expertise is actionable if other isn‟t expert, tort theory of recovery – position if it hadn‟t happened.
Facts: Esso negligently informed a potential site manager of bad estimates of business
that his potential location would do. He relied on this info and invested. He lost his
investment and the opportunity cost of other investments.
Significance: First case to use Hedley Byrne in K. Also uses collateral warranty. Court
willing to make opinion actionable where it is based on expertise at least where the other
party lacks expertise. Tort theory applied (for both coll. warr. and neg misrep) : put the
person in the position s/he would be in if the contract had not been made.

Analysis:
o Collateral Warranty → interprets the gallon forecast as collateral warranty because it
  was made by a party with special skill and knowledge (although no term in the
  contract, he entered into the contract relying on misrepresentation)
      - If a party with experience makes a forecast intending the other acts on it and
          he does so, it can be interpreted as a warranty the forecast is sound
      - Find a contrived side contract
o Negligent misrepresentation →
          o If a person who has, or claims to have special knowledge (advice,
             information or opinion,
          o makes a representation of it to another, with the intention of inducing him
             to K,
          o he is under a duty to use reasonable care to make sure the info is correct,


                                                       54
        o if he negligently gives unsound representation, and induces the other to K
        o he is liable for damages
o Remedy → damages, rescission – being put in the position as if the contract hadn‟t
  been made
        o He got reliance damages for lost money, lost profits he would have if he
           invested otherwise (because he was a good businessman) etc.

Landmark decision for adopting HB principle to deal with misleading statements made
during pre-contractual negotiations. Collateral warranty and HB theories at work.

Grinberg v. Law Development –– merge objective/subjective into 1 material test for rescission,
Windows Condo, exc. clause too broad, wouldn‟t apply anyway because not pointed out
Facts: P contracts to buy condos based on marketing materials which show 23 windows.
During construction he sees that only 14 windows are included, leaving out the large
attractive ones. P wants rescission. D wants to rely on exclusion clauses that alternative
floor plans are subject to conditions, and that purchaser accepts that any necessary
changes can be made without consent to plans, colours, materials, finishes, equipment,
fixtures and specifications.
Issues:
 Is Rescission available and what is the test?
 Do the exclusion clauses sufficient to limit D‟s liability ?
Analysis:
 Remember original test 1) is it a false statement 2) is it material in that it was
    reasonable to rely on it? 3) did P rely on it, subjectively?
 Court merges the objective and subjective elements into one test for materiality
         o ex. It is material if it was reasonable to rely on it and P did.
         o page 146 para 10 “The case law indicates that there is both a subjective and
             objective component in materiality.”
 There is evidence that it passed both branches of materiality, therefore court allows
    rescission
 Exclusion clause which states D can modify plans, colour, materials, etc. is not broad
    enough to include the number of windows. Although it discusses structural elements,
    it consistently emphasizes the “materials, finishes and equipment”. Therefore, “read
    in whole” it does not apply.
         o Even if it did apply, D is precluded from relying on it because he didn‟t take
             appropriate steps to bring the provision and the risk to P‟s attention (Tilden
             Rent-a-Car)
         o note: the onus to point out such a clause is even a heavier burden when its in
             a standard form K (Tilden)


                                 3. Standard Form Contract

Most common form is where one party sets terms and other can either accept, or not get
product. Non-negotiable, freedom to set the terms is one sided. Known as “contracts of
adhesion”


                                                55
 Useful for business because of cheap costs, routinization, and cheap transaction costs
 Problematic for courts
      o typically they want to uphold a deal on the basis that there was an intention to
          be bound by the terms. How, then, can they hold a person to a SFK when
          they know that there was no bargaining, no choice?
      o Note that SFK are also used in industry applications, but they do not present
          the same type of potential unfairness as contracts of adhesion and as such, are
          not dealt with in cases.
      o Typically, the signiture rule is the general rule but we will see exceptions
               Criticism of rule: In the real world, SFK‟s aren‟t meant to be read,
                 nevermind understood. Its akin to a handshake” – Lord Devlin

Tilden Rent a Car v. Clendenning – can‟t rely on stringent/unusual terms if you know the signor
hasn‟t read it, and it would conflict with their expectations (so you can‟t believe they agreed to it)
Facts: Car renter signed SFK for renting a car with extra daily insurance but there was a
clause that he couldn‟t recover if broke the law, and a clause stating “I have read and
agree to all terms”. He‟s in an accident after some alcohol and Tilden brings a claim.
Issue: Did his signature bind him to these terms and exclusion clauses?
Analysis: Not incorporated because
 Signed in a rushed / hurried manner
 Clause is inconsistent with the overall purpose of the K
 Clause is onerous and unusual – UNUSUAL can be more important because it
    creates surprise, however if a term is used enough, it becomes common!
 Ratio: where a contractor who puts forward a sfk knows the other party has not
    read the document before signing it, the person putting forward the sfk cannot
    rely on stringent and onerous terms which it has no reason to believe that the
    other was assenting to and which conflict with the other party’s reasonable
    expectations.

Dissent: signature is decisive unless fraud, misrep etc.
 Does not like majority approach b/c it disrupts risk planning.
 Cts shd stay away from deciding „reasonableness‟ in „businesses which compete
   freely in the market‟. Ie., assumes firms will compete on contract terms and
   competitive market will solve problems.

Trigg v. MI Movers - even if there is time, onerous term must be brought to attention. alerting party
after signing isn‟t good without consideration.
Signed   k, buyer did not read K term although he had lots of time to review k. Supplier
initially misrepresented effect of limitation clause (as not covering loss due to suppliers
negligence when it did), but corrected misrepresentation after k signed but before goods
shipped.
OCA holds clause not incorporated b/c onerous term that was not specifically brought
to the buyers‟ attention before he entered the k. Subsequent notice ineffective to
incorporate term – not clear enough + no consideration for a modification. T/f clause
does not protect supplier (clause is not enforceable).




                                                      56
MacKay v. Scott Packing Fed. C.A. 1996 - sophisticated buyer
Signed k, experienced and sophisticated buyer who „is familiar with sfks and that a
limitation of liability clause is often included‟. Signs k without reading conditions. No
explanation, -- no time pressure. T/f clause applies to protect supplier -- Buyer bound by
the exclusion/limitation clause.
App knew K contained limiting conditions
 Excl clause is wide enough to include negligence
Exclusion clause is not unconscionable nor does it fail Wilson‟s „fair and reasonable‟
test.

Interfoto Library Ltd. v. Stiletto 1988 –unsigned k documents – Big Red Hand, like
Tilden needs notice if unusual or onerous. Dissent says “fair dealing” which  good
faith
questionable term in delivery note sent with the goods  not a signed document.
Dillon LJ., draws from precedent, general principle that: reas steps must be taken to
notify the other party of contractual conditions; if a clause is unusual or onerous, the
person who wants to enforce it must show that the particular clause was fairly drawn to
the attention of the other party. May require „big red hand‟
Bingham LJ frames issue of incorporation in terms of principles of fair dealing and reas
expectations. Key q “is it fair in all circs to hold person bound to term?”. Notice is only
one factor, need to consider also the nature of the transaction and the character of the
parties. Where clause is not what a party would expect (unreasonable and extortionate) it
is fair to hold a party bound only if the owner of the sfk took specific steps to bring it to
the other‟s attention. “This may yield a result not very different from the civil law
principle of good faith” p.165-6.


Kanitz v Rogers, 2002
Rogers wishes to stay class action (in cts) on basis that contracts include binding
arbitration agreement
No arbitration cl in orig K
Orig K states Rogers may amend it at any time; by notice of amendment posted to
website; customer „accepts‟ amendment by continuing to use service after amendment
notice is posted.
Arbitration agreement inserted and notice of amendment posted to web site in January
2001.
Issue: Is P bound by clause?
Did P have sufficient notice for the cl to be incorporated into K?
Is the clause unconscionable?


Kanitz holding
Clause is incorporated.
D gave reas notice of the amendment. Reas to provide notice electronically and expect
consumers to check from time to time
Clause was not buried in fine print. Not equivalent to fine print on back of car rental K
(contra Tilden).
Clause is not unconscionable.


                                             57
Ss.7-8 Consumer Protection Act, 2002 in effect reverses Kanitz IN ONTARIO on the
enforceability of the arbitration clause but leaves untouched its holding on reasonable
notice




                        4. Exploitation and Unfairness – Unconscionability

Note: In these 2 cases, its argued that rescission or damages could not be based on any of
our standard doctrines like misrep. Thus, the courts had to try to logically explain how
to allow remedy where they thought it was owed. Thus, there is a tension with freedom
of K.

Lloyds Bank v Bundy – IBP is a general principle to allow rescission where: IBP, no ILA, unfair
terms or grossly inadequate consideration
Facts: A father guarantees loans against his home in order to support his sons failing
business. He signs a guarantee when a bank manager comes to his home with the sheets
ready to be signed. The father did not understand what he was signing. Furthermore the
father knew the previous bank manager very well, so he trusted the bank.
Significance:
Judgment states that the usual rule is that courts will not interfere with a bargain which
has been formed by the usual means.
 However there are numerous exceptions and underlying all of these exceptions is an
    Inequality of Bargaining Power
        o Several specific exceptions to rule, including: duress of goods; expectant
            heirs, the unconscionable transaction; undue influence; undue pressure;
            salvage agreements…, pp.193-195
 The doctrine of IBP (in this case) states that relief is available where:
        o impaired / unequal bargaining power; and
        o no independent advice for weaker party; and (helps to think of this as a factor
            in proving whether there was IBP)
        o Very unfair terms / grossly inadequate consideration.
Application to Facts:
 Relationship between bank and father is one of trust and confidence (impaired /
    unequal)
 Father‟s natural affection for son would make him accept guarantee (impaired /
    unequal)
 Bank did not suggest the father get independent legal advice before signing
 Consideration by bank grossly inadequate (no promise to maintain overdraft)
Alternative Holdings
 Father‟s intention to sign K was induced by unacceptable forms of persuasion
    (Barclay v. O‟Brien)


                                                58
 ILA needed even if the bank acted in good faith

Harry v. Kretziger – court uses unconsc. MacIntyre: IBP (based on ignorance/ need), unfairness, onus
on D to prove its reasonable. But unconc  stereotyping. Lambert: “community standards”
Facts: A man was pursuing the purchase of a boat from a first nations man, who on
numerous occasions rejected the offer. The value of the actual boat was very low,
however the fishing license was transferrable with the deed to the boat, so in BC the
value of the boat and license was $15,000. Eventually, the buyer told the seller that he
could get another license easily, and this eventually induced him to sell. (Prof. thinks this
could have been settled with misrep). He found out the true nature of the situation and
seeks rescission.
Issue:
 Tension b/w freedom of K and the Courts ability to use unconscionability
Majority: MacIntyre
A contract is unconscionable when there is
        o inequality of bargaining power due to the ignorance, need or distress of one
            party, which leaves him / her in the power of the stronger, AND
        o substantial unfairness in the terms of the bargain
        o Onus on D to prove bargain was fair and reasonable
        o Unconscionability makes the K “voidable” (able to be rescinded / vaild but
            legally voidable)
Criticism:
 This requires one party to be stereotyped as stupid, incompetent, poor, weak, etc.
 Not a good means to reach a “just” end
Lambert: (concurring in part)
 Is the transaction sufficiently divergent from community standards of commercial
   morality that it should be rescinded?
        o Is this like good faith? – TW
 This has potential to be better approach but...
        o Can courts determine the “community standards”?
        o if it diverges from standards to take advantage of a less competent person, is
            that not just like returning to unconcsionability?

                                   5. Family Guarantees
Constructive notice is a different way of challenging a guarantee term (as opposed to
unconsc  consider that unconscionability works against the person who made undue
influence, which in Bundy is the bank, but in these cases, its the family, and the wife
isn‟t going to sue the husband, so they say the bank needs to take action)

Basic Scenario:
A debtor and creditor have a contractual relationship. The creditor requires that a third
party guarantees the loan. A spouse / partner or relative will often do this, frequently
using the family home against the debt. The business fails, or the loan is not paid back
and the bank forecloses on the home.
Concern: This scenario establishes the potential for exploitation of relationships
between intimates, and family members, which usually leads to harsh consequences.


                                                 59
Fehlberg, The Husband, Bank, Wife & Signature
A paper which discusses evidence re: the role of spouses in sureties
1. What is the role of the guarantor spouse in the business?
    support / token role. Wive‟s not likely to see themselves as equal in the business
2. What is the nature of the pressure to sign a guarantee?
    Not always immediate/overt  more so in having to live with consequences of
       refusing to co-operate.
3. What about independent legal advice
    ILA does not mean that a spouse received adequate advice
    Consider the intimidation factor
    Usually the only people qualified to give contextually accurate advice (as
       opposed to general broad statements) are working together
4. Reform?
    Chances are that even if the above were reconsidered, spouses will still become
       sureties due to emotional attachment.

Barclays Bank v. O’Brien –Guarantee enforceable unless misrep, undue influence or legal wrong.
Bank on constructive notice of legal wrong unless they can show that they took reasonable steps to
determine otherwise: separate meeting, warn of risk and $ liability, advise for legal advice.
Facts: A husband was the principle debtor on a loan for his business. His wife
guaranteed the loan. However, the husband misrepresented the nature of the loan and
the scope of the guarantee to his wife (the amount).
Issue: Can the W establish the misrepresentation to free herself from liability to the
bank?
Analysis:
     The bank is put on constructive notice (that they were aware of unfair dealing) if
        there is no financial benefit to the spouse AND there is a risk that the husband
        committed „legal wrong‟ in this kind of transaction. This applies to all
        cohabitors with emotional relationships (i.e. relatives)
     Constructive notice: bank is deemed to know about misrep / undue influence if it
        turns out that this existed.
     But court can avoid it if they reasonably seek to find out if this existed.
Summary / Rules
     Surety guarantee is enforceable unless the principle debtor procured the consent
        of a cohabitee by way of misrepresentation, undue influence or other legal
        wrong.
     It will be enforceable, even if there was misrep, undue influence or legal wrong
        if creditor took reasonable steps to satisfy itself that guarantor had all the
        knowledge and contracted freely.
     Generally, reasonable steps are: at a separate meeting from the principle debtor,
        the creditor must inform spouse of the amount of potential liability, the
        risks involved and advises the spouse to obtain independent legal advice.
Policy




                                                   60
         Courts recognize that (despite gender equality) one partner often trusts the other
          with all business dealings and follows advice, practically blindly. (thus creating
          the opportunity for legal wrongs and prompting court activity)
         However, stringent controls by the courts on credit arrangements against the
          family home may limit and infringe the supply of credit to small businesses.

Royal Bank of Scotland v. Etridge (no 2) (2001) – modifies Conscriptive Notice
     Culmination of strategic litigation by banks post Barclays.
                Banks had “accepted” the constructive notice element of Barclays, but
              refused to hold the need of a private interview…
     HL -- Bank avoids risk of liability if it writes to the spouse warning her that she
         needs ILA and obtains solicitor‟s letter confirming that spouse received ILA. Ie.,
         shifts risk of incompetent advice from bank to lawyer.
                 Detailed guidance for solicitors about the content and delivery of ILA.
Significance: Banks don‟t want risk of negligent statements made in the private meeting
 better for them to tell clients to seek ILA and shift burden to the lawyers.
Shift because now ILA must be advised at all times, not just when there is risk of undue
influence.

Canadian Cases

Bertolo v. BMO – mother mortgage home for Son‟s business. Bundy unconscion/IBP principle applied
to surety spouse. IBP, no legal advice
Facts: Elderly mother mortgaged her home and signed a promissory note on her son‟s
bank loan to finance his business. Business failed and BMO seeks the payment from
her. Mother was not fluent in English, did not understand the transaction. She
mortgaged her home with no benefit to herself and she became the primary debtor, not
guarantor. Received ILA, but from same lawyer that represented bank and the son.
Bank goes directly to mother (like Bundy  so they use unconsc)
Significance: The son did not conduct any legal wrong. But this is still a case that
“requires the intervention of equity”. Thus, they employ the unconscionability doctrine
from Lloyd Bank v. Bundy.
Application:
     Mother was in disadvantageous bargaining situation
     She didn‟t receive ILA (advice was not independent)
     It would be unconcsionable for the bank to take advantage of surety.
     Note: (no real mention of unfair term)



Bank of Montreal v. Featherstone 1989 OCA – surety enforceable despite no ILA because bank
had no reason to believe there was misrep, undue influence or legal wrong (no constructive notice)
Facts: Wives become guarantors of loans for husband‟s business. No misrep, undue
influence or legal wrong. The bank had no reason to believe there was, because they
knew that the wives were informed of the status of the business and the loan.
Significance:



                                                   61
       Lack of Independent legal Advice does not automatically allow for rescission of
        K, where there is no misrepresentation, undue influence, or other legal wrong.
       Court seeking proof of ILA is usually used to defend itself against claims of
        legal wrongs, therefore, if there is no defence claim that a legal wrong induced
        the signing, there is no need to disallow it because no legal advice was sought.


In english cases, Courts are willing to assume that a spouse is being taken advantage of,
they are suspicious / paternalistic.
But Canadian courts assume that wives are involved and benefit from loan. They expect
the wives to have the burden to prove there was undue influence.
On exam, we should argue that its a policy issue if we want to use English or Canadian
position, and that it comes down to these “values” inherent in the position.
Note: the Canadian court seems to look for problem between court and couple, not
husband and wife.




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