Cases and Materials

on Contracts
SIXTH EDITION

Stephen Waddams
Faculty of Law
University of Toronto

Jassmine Girgis Bruce MacDougall

Faculty of Law Peter A. Allard School of Law
University of Calgary University of British Columbia

John McCamus . Jason W. Neyers

Osgoode Hall Law School Faculty of Law
York University University of Western Ontario

@ond
Toronto, Canada
2018
Copyright© 2018 Emond Montgomery Publications Limited.

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ment or failed to secure a permission, we offer our sincere apologies and undertake to rectify
the omission in the next edition.

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Library and Archives Canada Cataloguing in Publication

Waddams, S. M., 1942-, author

Cases and materials on contracts I Stephen M. Waddams, Jassmine Girgis, John D.
McCamus, Jason W. Neyers, Bruce MacDougall. - Si xth edition.

ISBN 978-1-77255-330-7 (hardcover)

1. Contracts-Canada-Cases. 2. Contracts-Commonwealth countries-Cases.

3. Contracts-United States-Cases. I. Girgis, Jassmine, author II. McCamus, John D.,
author Ill. Neyers, Jason W., author IV. MacDougall, Bruce, author V. Title.

K840.W33 2018 346 .02 C2018-901817-8

 PREFACE TO THE SIXTH EDITION

We have attempted here to offer students and teachers of Canadian contract law a collection
of materials suitable for the basic course in the subject. We have included cases from Canad-
ian, Commonwealth, a.nd American jurisdictions and relevant statutory provisions, notes,
problems, and extracts from academic writing.
There has been a lively interest during the past 30 years in the theory of contract law, and
we have taken particular account of this in the first chapter, "Perspectives on Contract Law."
The second chapter is on remedies, and the third on enforceability. We do not expect that all
users of the book will proceed through it sequentially, and we have designed it to be suitable
for dealing with the material in several different orders. Some users will wish to start with
contract formation . Others will wish to start with remedies. Oth~rs again may prefer to start
with the theoretical perspectives. We hope that all will find the book equally suitable for their
purposes.
The growing importance of the law of restitution, or unjust enrichment, and the intellectual
interest and practical importance of its relation to contracts have been reflected in the intro-
duction of separate sections on restitution in most chapters.
We have drawn from many sources in compiling this book, and acknowledge debts to our
own teachers and students and to our predecessors in the field of contracts casebooks, in
particular to the late JB Milner, who taught at the University of Toronto for many years until his
death in 1968. We are grateful to Professor Michael Trebilcock and to Professor Mary Anne
Waldron for their contributions to previous editions, the influence of which is apparent in the
present edition.

The Editors, 2018

iii
 ACKNOWLEDGMENTS

A book of this nature borrows heavily from other published material. We have attempted to
request permission from, and to acknowledge in the text, all sources of such material. We wish
to make specific references here to the authors, publishers, journals, and institutions that have
generously given permission to reproduce in th is text works already in print. If we have
inadvertently overlooked an acknowledgment or failed to secure a permission, we offer our
sincere apologies and undertake to rectify the omission in the next edition .

American Law Institute. Restatement, Second, Contracts, copyright© 1981 by the American
Law Institute. Reprinted with permission . All rights reserved.

Cambridge University Press. Stephen Waddams, The Dimensions of Private Law (Cambridge :
Cambridge University Press, 2003) . Reprinted with the permission of Cambridge
University Press.

Canadian Bar Association. Law Revision Committee, "Sixth Interim Report," Cmnd 5449
(Eng) (1937) 15 Can Bar Rev 585 . Reprinted with permission .

Capital University Law Review. Margaret J Radin, "Reconsidering Boilerplate: Confronting

Normative and Democratic Degradation " (2012) 40 Cap UL Rev 617. Reprinted with
permission.

Columbia Law Review. Randy E Barnett, "A Consent Theory of Contract" (1986) 86 Colum
LR 269. Reprinted with permission.

Columbia Law Review. Lon L Fuller, "Consideration and Form" (1941) 41 Colum LR 799.
Reprinted with permission.

Federation Press. Anthony Duggan, "Silence as Misleading Conduct: An Economic Analysis"

in M Richardson and P Williams, eds, The Law and the Market (Sydney: Federation Press,
© The Federation Press. Reprinted with permission .

Harvard University Press. Charles Fried, Contract as Promise: A Theory of Contractual

Obligations (Cambridge, MA: Harvard University Press, 1981). Copyright© 1981 by the
President and Fellows of Harvard College . Reprinted with permission .

Harvard University Press. Michael J Trebilcock, The Limits of Freedom of Contract

(Cambridge, MA: Harvard University Press, 1993). Copyright 1993 by the President and
Fellows of Harvard College . Reprinted with permission .

LexisNexis. Arthur L Corbin, Corbin on Contracts (Dayton, OH : LexisNexis, 2004). Copyright

2004 Matthew Bender & Company, Inc., a member of the LexisNexis Group. All rights
reserved . Reprinted with permission.

New York University Annual Survey of American Law. Jeffrey L Harrison, "The Influence of
Law and Economics Scholarship on Contract La w: Impressions Twenty -Fi ve Years Later"
(2012) 68 NYU Ann Surv Am L 1. Reprinted w ith permission.

New Zealand Universities Law Review. Brian Coote, "The Instantaneou s Transmission of
Acceptance" (1971) 4 NZ Univ L Rev 331. Reprinted with permission.

v
ACKNOWLEDGMENTS

Oxford University Press. Exploitative Contracts by Bigwood (2003). By permission of Oxford

University Press . Reprinted with permission .

Oxford University Press. Contract Theory by Smith (2004) . Reprinted with permission .

Thomson Reuters (Professional) Australia Limited. Peter Heffey, Jeannie Paterson & Andrew
Robertson, Principles of Contract Law (Sydney : Lawbook Co, 2005) . Reproduced with
permission .

UCLA Law Review. Jay M Feinman, "Critical Approaches to Contract Law" (1983) 30 UCLA L
Rev '829. Reprinted with permission .

University of Chicago Press. Richard A Posner & Andrew M Rosenfield, "Impossibility and
Related Doctrines in Contract Law: An Economic Analysis" (1977) 6 J Legal Stud 83 .
Reprinted with permission .

University of Pennsylvania Law Review. Arthur A Leff, "Unconscionability and the Code :
The Emperor's New Clause" (1967) 115 U Pa L Rev 485 . Reprinted with permission .

University of Toronto Press. Alan Brudner, "Reconstructing Contracts" (1993) 43 UTLJ 1.

Reprinted by permission of University of Toronto Press Inc. (<www.utpjournals.com>) .

University of Toronto Press. George G Triantis, "Contractual Allocations of Unknown Risks :

A Critique of the Doctrine of Commercial Impracticability" (1992) 42 UTLJ 4500.
Reprinted by permission of University of Toronto Press Inc. (<www.utpjournals.com>).

Wisconsin Law Review. Stewart Macaulay, "An Empirical View of Contract" (1985) Wis L Rev
465. Reprinted with permission .

The Yale Law Journal Company Inc. Fuller & Perdue, "The Reliance Interest in Contract
Damages" (1936) 46 Yale LJ 52 . Reprinted by permission of The Yale Law Journal
Company Inc.

vi
 SUMMARY TABLE OF CONTENTS

Preface to the Sixth Edition iii

Acknowledgments .. .... . v
Detailed Table of Contents ix
Table of Cases . xxiii
Frequently Cited References .. . . . . .. ... . . .. . .. .. .. . .. . .. ... . .. . . . . xxxix

Chapter One Perspectives on Contract Law .. . .. . . . . . . .. . . . . . 1

Chapter Two Remedies for Breach of Promise .. 25

I. The Interests Protected ..... . . . . . 25
II. Problems in Measuring Damages 38
Ill. Remoteness . . . . . . . . . . . . . . . . . . . ......................................... 48
IV. Intangible Injuries . .... ... ................................................ 76
V. Punitive Damages ..................................................... . 89
VI . Mitigation of Loss . . .................................. .................... 102
VII. Specific Performance . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
VIII. Time of Measuring Damages . . . . . . . . . . . . . . ......................... 137
IX. Restitution ............................................................ 144

Chapter Three The Kinds of Promises Legally Enforced 163

Bargains . . .. .. . .. . .. . . 164
II. Intention ........................ . 279
Ill. Non - Bargain Promises 289
IV. Unilateral Contracts . . 337

Chapter Four Contracts and Third Parties . .. 355

I. Third-Party Beneficiaries . 355
II. Assignment . ... . . 397
Ill. Agency . . ... . . ..... . . .. .. . .. .. . . . .. . .. . . .. .. . .. . .. . .. . . . . .. . ... . .. . .. . .... . 398
IV. Mercantile Agents 405
V. Buyers and Sellers in Possession . . . . . . . .. . .. ... . .. . .. .. ...... .. . ... . ..... . 406
VI. Mistake of Identity . .............. • .. . .. . .. . .. . .. . . . . . . . . . . . .. .. . . . . . . . ... . . . 408
VII. Documents Mistakenly Signed .... . ... . ... . . ... . .. . .. . .. . . ..•.. . ..•.. . .... . . .. 422

Chapter Five Written Documents . .. . .... ... ..... . ............. . 443

I. Unsigned Documents (The Ticket Cases) . . . ... . . . ....... .. ....... . .. . . .. . 443
II. Parol Evidence Rule .......... .. .. .. . .. .... . .. . .. . .. . ... • . .. . . •........... . .. 459
Ill. Rectification ...... .. .. . .. . •......... . . . . .. .. . . . .. ..... . . . ...... . ... . .. . . . . . 491

vii
SUMMARY TABLE OF CONTENTS

Chapter Six Protection of Weaker Parties 509

Introduction . . .... . . 509
II. Minors .. ...... . 510
Ill. Forfeitures and Penalty Clauses 516
IV. Clauses Excludi ng Liability 522
V. Unconscionability and Undue Influence 551
VI. Duress .... 607
VII. Consumer Protection 618
VI11. Restitution .. 622

Chapter Seven Public Policy ... . .. . . . . . .. . . . . .. .... . . . . . . . .. .. . .. . .. . . .. .. . . . 625

I. Introduction 625
II. The Effects of Illegality 626
Ill. Contracts Contrary to Public Policy Expressed in the Common Law 628
IV. Contracts Contrary to Public Policy Expressed in Statute . ............ . . ... . . . . . . . 646
V. Mitigating the Consequences of Illegality .......... . .. .. . . . . 653
VI. An Alternative Approach? .............. ... . . . . . . . . .. .. .... . ... . .. . .. . .. . . . 669

Chapter Eight Performance and Breach .... .. . . . . . . . . . . .. ...... . ...... . . . . . . 673

I. Repudiatory Breach . . . . . . . . . . . . . . ...... . .. . . 673
II. Waiver and t he True Condition Precedent ........ .. . 692
Ill. The Duty to Perform Contractual Obligations in Good Faith 696
IV. Th e Position of the Party in Breach ......... . .... .. .. . ..... . . .. . . . . . . . 707

Chapter Nine Mistake ... . . . . . . .... .. . . . . . 715

I. Introduction 715
II . Misrepresentations .......... . 717
Ill. The Re lationship Between Contract and Tort . .. .... . . . .. . . .. . 739
IV. Mistake About Contractual Terms ........ . .... .. . 749
V. Mistake in Assumptions ......... . 762
VI. Restitution .. 806

Chapter Ten Frustration 811

Introduction 811
II. Theoretical Perspectives on the Doctrine of Frustration 812
Ill. The Rule of Absolute Promises 817
IV. Rela xation of the Rule of Absolute Promises .. 818
V. Relief on Terms: Restitution and Reliance 860

viii
 DETAILED TABLE OF CONTENTS

Preface to the Sixth Edition iii

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Summary Table of Contents .. ....... vii
Table of Cases . ........................................................ xx iii
Frequently Cited References xxxix

Chapter One Perspectives on Contract Law . . 1

Charles Fried, Contract as Promise 1
Note .............................................. 5
Stephen A Smith, Contract Theory 5
Randy E Barnett, "A Consent Theory of Contract" 6
Margaret J Rad in, "Reconsidering Boilerplate: Confronting
Normative and Democratic Degradation" ............. 7
Michael J Trebilcock, The Limits of Freedom of Contract 10
Note. 11
Peter Cserne, "Paternalism and Contract Law" . . 12
Jeffrey L Harrison, 'The Influence of Law and Economics
Scholarship on Contract Law: Im pressions
Twenty-Five Years Later" .......................... . 13
Jay M Feinman, "Critical Approaches to Contract Law" 14
Gillian K Hadfield, "An Expressive Theory of Contract:
From Feminist Dilemmas to a Reconceptualization
of Rational Choice in Contract Law" ................ . . 16
Stewart Macaulay, "An Empirica l View of Contract" 19
Stephen Wad dams, Dimensions of Private Law 21

Chapter Two Remedies for Breach of Promise 25

The Interests Protected .. 25
Fuller & Perdue, 'Th e Reliance Interest in Contract Damages" 25
Wertheim v Chicoutimi Pulp Company . . . . . . . . . . . . 27
Bollenback v Continental Casualty Company . . . . . . . . . . 28
Problems 32
Anglia Television Ltd v Reed .. . 32
Al Ogus, Note, "Damages for Pre-Contract Expe nditure" 34
Notes and Questions . 35
Pitcher v Shoebottom 35
Notes and Questions 36
Hawkins v McGee . 36
II. Problems in Measuring Damages ......... . . 38
A. Cost of Substitute Performance, or Economic Va lue? 38
Carson v Willitts 38
Groves v John Wunder Co 39
Notes and Problems 43

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DETAILED TABLE OF CONTENTS

B. Lost Volume . . . .... ......... . . . .. . . . .. . . . . . . ...... . .. . ... . 44

Sale of Goods Act .............. . ......... . .. . ... . 44
Thompson (WL) Ltd v Robinson (Gunmakers) Ltd . 44
Charter v Sullivan 45
Note .. . . 47
C. Note on Loss of Chance 47
Il l. Remote ness 48
British Columbia and Vancouver's Island Spar, Lumber and
Saw Mill Co Ltd v Nettleship . . . . . . . ........... 48
Hadley v Baxendale 49
Note 50
JH Jackson, Contract Law in Modern Society .............. . . 50
Notes and Questions ................... 51
Fuller & Perdue, "The Reliance Interest in Contract Damages" . . . . 51
Horne v The Midland Railway Company 53
Victoria Laundry Ltd v Newman Industries Ltd . . . . . . . . . . . . . . . . . 54
Questions . . .......... 58
Munroe Equipment Sales Ltd v Canadian Forest Products Ltd 58
Scyrup v Economy Tractor Parts Ltd .. . 60
Koufos v C Czarnikow, Ltd (The Heron II) 64
Note 66
Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) 66
Cornwall Gravel Co Ltd v Purolator Courier Ltd 74
Notes and Problems ........ . 76
IV. Intangible Inj uries . 76
Addis v Gramophone Company Limited 76
Note ........ . . . . ... .. ... ... . 78
Kolan v Solicitor .......... . .. . . ... . 79
Jarvis v Swans Tours Ltd 80
Heywood v Wellers 82
Notes 83
Vorvis v Insurance Corporation of British Columbia ... 83
Fidler v Sun Life Assurance Co of Canada 85
Notes 89
V. Punitive Damages 89
Whiten v Pilot Insurance Co 89
Notes 101
VI. Mitigation of Loss . . 102
Payzu Limited v Saunders ... 102
Roth & Co v Taysen. Townsend & Co .. . . . . . .. .. . .. .. . .. . .. .. . 104
Problems . . . . . ......................... . ..... . . 106
White & Carter (Councils), Ltd v McGregor ... . .. . .. . .. . .. . .. . . 106
Note ...... . ... . ... . . 113
Finelli v Dee .. . 113
Notes and Questions ... .. . .. . . ... ... .. . . .. . . . .. . . . . . . . .. .. . 114
VII. Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . .. . ...... . 115
Civil Code of Quebec .. . ......... . .. . .. ..... ..... . . .. . ... . . 116
Fa /eke v Gray ............... . .. . . .. . . . . . . . . . .. .. . .. . .. . . . . . 116
Cohen v Roche ................. . .. . . ... . ... . .. . . • ....... . . 117
Question . . . . . . . . . . . . . . .............. . . 118
Sky Petroleum Ltd v VIP Petroleum Ltd ............. . . . . .. . .. . 119

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 DETAILED TABLE OF CONTE NTS

Gilbert v Barron ....... . .................. . 121

Tanenbaum v WJ Bell Paper Co Ltd 123
Note 128
Co-operative Insurance Society Ltd v Argyll Stores
(Holdings) Ltd . .................... . . . 128
Warner Bros Pictures Incorporated v Nelson ... . . . .. . . 130
No~s .. . . ... .. ..... . 134
Page One Records Ltd v Britton ..... .. . . . .. . . . . . . . . . . . . . . .. . . 134
Note ........ . ...................... . . . . . . . . 136
VIII. Time of Measuring Damages .. . .... . ............ . ... . ... . . .. .. . . . . .. . .. . . .. . . 137
Wroth v Tyler . 137
Question .......... . ........... . 142
RG Lawson, "Damages : An Appraisa l of Wroth v Tyler" . . 143
IX. Restitution 144
Deg/man v Guaranty Trust Co of Canada and Constantineau 146
Notes and Questions .. . ....... . 148
Notes and Questions 149
Hunt v Silk . . 150
Notes . . . 151
Attorney General v Blake . 151
Notes and Questions ...... . . . . . .. . .. .. . . . . . . ... . .. ... . .. . . . 161

Chapter Three The Kinds of Promises Legally Enforced . . . . . . . . . . . . . . . . . . . . 163

Bargains . . 164
A. Offers and Preliminary Negotiations . . . .. . .. ... . 164
Corbin on Contracts, ff 11 164
Notes ................................... . 164
Denton v Great Northern Railway Company . . 164
Questions .. . ................... . 167
Johnston Brothers v Rogers Brothers . . .. . .. . , ........ . ..... . . 167
Questions . . . . . . . . . . . . . . . . . . 169
Harvey v Facey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Questions ........................................... 170
Lefkowitz v Great Minneapolis Surplus Store . . . . . . . . . . . . . . . . . . . 171
Question . . . . . . . . . . . 173
Pharmaceutical Society of Great Britain v Boots Cash Chemists
(Southern) Ltd . .......................... 173
Swiss Federal Code of Obligations 175
Questions . ... . ............. . . . . ... . .. .. . . . .. . . . .. . 175
Storer v Manchester City Council 175
Note . . . . .. . ... . . . 178
B. The Power of Acceptance .. 178
Note . .. 178
Shatford v BC Wine Growers Ltd ... . . . 178
Manchester Diocesan Council for Education v Commercial &
General Investments Ltd . 179
Questions 180
Larkin v Gardiner 180
Dickinson v Dodds 182
German Civil Code . 184
Uniform Commercial Code 184

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DETAILED TABLE OF CONTENTS

Notes and Questions . .. . . . . . . . . . . . . .. . . . .. . . . . . 184

Felthouse v Bindley ... . ...... . . 184
Wheeler v Klaholt .. 186
Restatement of the Law of Contracts (Second) 187
Notes and Questions . . 187
Eliason v Henshaw .. ... . . .. ..... .. . 188
fvlanchester Diocesan Council for Education v Commercial &
General Investments Ltd . . 189
Hyde v Wrench . .. . ... . .. . . 189
Notes and Questions . . . ..... .. ...... . 189
Butler fvlachine Tool Co Ltd v Ex-Cell-O Corporation
(England) Ltd . .... . . . . . 190
Notes and Questions .. ..... ... . 192
Notes and Questions . . . . . ..... ... ...... . . . 193
Bristol, Cardiff, and Swansea Aerated Bread Company v fvlaggs 193
Notes and Questions . . 196
C. The Tendering Process . ... .. .. .. .. .. . . . . .. .. .. . 197
fvlJB Enterprises Ltd v Defence Construction (1951) ... 197
Notes and Questions ....... .. ... . .. . .... . . .. ... . . .. . . . .. . . . 201
D. Formalization and Certainty .. . ... . ........ ... . . . 202
British American Timber Co v Elk River Timber Co 203
Notes and Questions ... . .. .. . 206
fvlay and Butcher, Limited v The King 207
Uniform Commercial Code ... 209
Question . . .... .. ..... ... ..... .. ..... . . 210
Foley v Classique Coaches, Limited 210
Scammel/ (G) and Nephew, Limited v Ouston .. . . . . . . .. . . . .. . . . 212
Notes and Questions 214
Questions ............ . 215
Empress Towers Ltd v Bank of Nova Scotia 215
Notes and Questions 218
Stephen A Smith, Contract Theory 219
Notes 219
E. Contracts Negotiated by Correspondence .. 220
Household Insurance Co v Grant 220
Civil Code of Quebec 224
Note .. 225
Henthorn v Fraser 225
Byrne & Co v Leon Van Tienhoven & Co 226
Restatement of the Law of Contracts (Second) 228
Ho/well Securities Ltd v Hughes 229
Questions 231
Eastern Power Limited v Azienda Comunale Energia
and Ambiente . ... 232
Notes and Questions 234
Brian Coote, "The Instantaneous Transmission of Acceptances" 235
Restatement of the Law of Contracts (Second) 236
Notes and Questions 236
Electronic Commerce Act, 2000 . 237
Notes and Questions .. ..... .. . 239

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· F. Consideration: The Bargain Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Notes and Questions ................................... 240
White (Executor) v William Bluett. . . . . . . . . . . . . . . . 241
Questions 241
Hamer v Sidway .. 242
Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
Eleanor Thomas v Benjamin Thomas . . . . . . . . . . . . . . . . . . . . . . . . . 243
Notes and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
G. Mutual Promises ....... ...... . ....... . .. . .. . ...... . . 245
Notes 245
Great Northern Railway Company v Witham 245
Notes and Questions ..... . 246
Tobias v Dick and T Eaton Co . 248
Wood v Lucy, Lady Duff-Gordon ... . .... . . . 249
Questions and Problems . . . . . 250
H. Pre-existing Duty . . . . . 250
Harris v Watson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Stilk v Myrick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Notes and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Holmes, The Common Law (1881) . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Notes and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Smith v Dawson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Notes and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Raggow v Scougall and Co . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Question . . . . . . . . . . . . . . ......................... 255
Gilbert Steel Ltd v University Construction Ltd . . . . . . . . . . . . 255
Williams v Roffey Bros Ltd . . . . . . . . . . . . . 258
NAV Canada v Greater Fredericton Airport Authority Inc. 260
Richcraft Homes Ltd v Urbandale Corp . . . . . . . . . . . . . . . . . . . . . . . 266
Notes and Questions ..... . . . ............. . ...... . . . ..... . 267
Foakes v Beer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
Notes and Questions . . . . . . . . . . . . 270
Law Revision Committee, Sixth Interim Report . . . . . . . . . . . . . . . . . 270
Mercantile Law Amendment Act ... 271
Notes and Questions .. . 271
I. Compromises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. . ... .. . .... .. ... . 272
Cook v Wright .... . ............. .. .. ..... . . . .. . .. . .. ... . .. . 272
Fairgrief v Ellis ............ . . ........ . . ................. . 274
'Notes and Questions ... . .. . ............ . ....... . .. . ... . ... . 275
J. Charitable Subscriptions ......... . .............. . ........ . . . ... . ... • . . . 276
Dalhousie College v Boutilier Estate ... . . . .. . ... . . . . . . . .... . . . 276
Notes and Questions ................ . .. . .. ...... .. . . ...•... 279
II. Intention 279
Balfour v Balfour .. .... ...... ...... .. .. . . . .... . .. . . . 280
Notes and Questions .... • ............. ... 282
Merritt v Merritt ................ . ...... . .. . . .. . ... . . 282
Family Law Act ...... . . . .... . .. . .... .. . ....... .. . ... . .... . . 284
Note . .. . .. . .. ..... . .. .. . . . . . ....... . .. . .... . . 284
Jones v Padavatton ....................................... . 284
Rose and Frank Company v JR Crompton & Brothers, Limited 286
Questions 288

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DETAILED TABLE OF CONTENTS

Ill. Non-Bargain Promises 289

A. The Seal .. 289
Notes and Questions . .. 291
Fuller, "Consideration and Form" ........ .. .. .. ... .. . .. . .. . .. . 291
Alan Brudner, "Reconstructing Contracts" 292
Questions 293
Law Revision Committee, Sixth Interim Report . . . . . . . . . . . . . 293
Law Reform Commission of British Columbia, Report on Deeds
and Seals, 1988 . . . . . . . . . . . . . . . . . . . . 294
Notes and Questions .. 294
B. Past Consideration 295
Lampleigh v Brathwait ... .. .. . .. . . . . . . . .. . ..... . .. . .. . .. . .. . 295
Questions 296
Roscorla v Thomas . ... . . . .. . . . . . .... . . .. . . .. . . .. . .. . . . . . . . 296
Notes and Questions ....... . . 297
Restatement of the Law of Contracts (Second) 298
Civil Code of Quebec 298
C. Subsequent Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
KN Llewellyn, "What Price Contract? An Essay in Perspective" . 299
1. Gratuitous Undertakings . ..... . ..... ... ........... ...... ......... . . . 300
Notes and Questions 301
2. Estoppel . . ......... . ........... ...... . 302
Hughes v Metropolitan Railway Co . . . . . . . . . . . . . . . 302
Central London Property Trust Ltd v High Trees House Ltd 303
Combe v Combe . . . ............................ 305
Notes and Questions 308
John Burrows Limited v Subsurface Surveys Limited . . 309
Owen Sound Public Library Board v Mial Developments Ltd 311
Notes and Q uestions ..... ....... .. . 315
D & C Builders, Ltd v Rees . 316
Notes and Questions .. . 319
Notes and Questions .. . 320
Crabb v Arun District Council . 321
Cowper-Smith v Morgan . 327
Notes and Questions 331
Peter Heffey, Jeannie Paterson & Andrew Robertson,
Principles of Contract Law. 2nd ed 332
NM v ATA .. 334
Notes and Questions . .. 336
Warren A Seavey, "Reliance upon Gratuitous Promises or
Other Conduct" ............ .. ......... ... . 336
Notes and Questions 337
IV. Unilateral Contracts ... ....... ...... . .. .. .. .. . .. . .. . .. . .. .. . . . . .. . .... . . .. . . . 337
Williams v Carwardine . . . . . . . . . . . 338
The Crown v Clarke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
Civil Code of Quebec 340
Notes and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
Carlill v Carbolic Smoke Ball Company 340
Notes . . . . . . . . . . . . .................................... 343
Notes and Questions . . 344
Dale v Manitoba 344
Grant v Province of New Brunswick 346

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Notes and Q uestions . . . 349

Errington v Errington . 349
Dawson v Helicopter Exploration 350
Questions .. ... ..... . . . .. . . . 352
Restatement of the Law of Contracts (Second) 353
Unifo rm Commercial Code 353
Notes 354

Chapter Four Contracts and Th ird Parties . 355

Third-Party Beneficiaries . . . 355
Tweddle v Atkinson 355
Drive Yourself Hire Co Ltd v Strutt 356
Beswick v Beswick . . . 356
Question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd 364
The Satanita . . . . . . . . . . . ......... 366
Mulholland v Merriam . . . 367
Note on the Tru st Concept . 370
Jackson v Horizon Holidays Ltd . . 371
Note . . . . ....................... 374
New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd
(The Eurymedon) . . . . . . . . . . . . . . 375
Notes 380
London Drugs Ltd v Kuehne & Nagel International Ltd 380
Note ................ . . 388
Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd ... . .. . . . . 388
Notes . ... ..... ... . . ... . 392
Restatement of the Law of Contracts (Second) . . . . . . . . 392
Contracts (Rights of Third Parties) Act 1999 ................. 394
Quebec Civil Code . 396
Problem ...... . . . .... . 396
II. Assignment . 397
Conveyancing and Law of Property Ac t 397
Il l. Agency . . 398
Seavey, "The Rationale of Agency" 398
IV. Mercantile Agents 405
Factors Act 405
V. Buyers and Sellers in Possession 406
Sale of Goods Act 406
Notes and Qu estions 407
VI. Mistake of Identity . ...... . . ... . . . . . 408
Boulton v Jones . 408
Cundy v Lindsay .. 409
Note 411
King 's Norton Metal Co Ltd v Edridge, Merrett & Co Ltd . . . . . . . . . 411
Ingram v Little . . .. .. ..... . . 413
Lewis v Averay . 418
VII. Documents Mistakenly Signed 422
Foster v Mackinnon . .. . 422
Howatson v Webb . . . . . . . . . . . . . . ......... . . . 424
Saunders v Anglia Building Society (Callie v Lee) 425
Marvco Colour Research Ltd v Harris 436

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Chapter Five Written Documents 443

Unsigned Documents (The Ticket Cases) . . . . . ........ . . . 443
Parker v The South Eastern Railway Company .... . 443
Q1,Jestion ....... .. ..................... .. .. ..... .. . . . .. . . . 449
Mccutcheon v David MacBrayne Ltd . . . . . . . . . . . . . . . . . . . . . . . . . 449
Thornton v Shoe Lane Parking Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . 453
Questions . . .. ... ... . 456
British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd 456
II. Parol Evidence Rule .. . 459
Federal Commerce & Navigation Co Ltd v Tradax Export SA 460
Prenn v Simmonds .. 461
Notes ... ... ...... . 467
Farah v Barki 467
Question .... 469
Hawrish v Bank of Montreal . . . . . . . . . . . . . . . . 470
Note .................................. 473
Morgan v Griffith 473
Py m v Campbell 474 .
Note ..... .... . 476
Tilden Rent-A-Car Co v Clendenning ... . . ... .. .. . . ... .. . . . .. . 476
Gallen v Allstate Grain Co Ltd . 483
Notes ..... . 491
111. Rectification 491
USA v Motor Trucks, Limited . . 491
Performance Industries Ltd v Sylvan Lake Golf &
Tennis Club Ltd ....... . . . 495
Note ... . . . 500
Canada (Attorney General) v Fairmont Hotels Inc 500
Paget v Marshall . .. . 506
Notes and Problems 508

Chapter Six Protection of Weaker Parties 509

Introduction 509
II. Minors ......... . . 510
Rex v Rash 510
Notes . . . 511
Sale of Goods Act 511
Nash v Inman ....................................... 512
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 515
Ill. Forfeitures and Penalty Clauses . . . . . . . . . . . . . . . . . . . . . . . 516
Shatilla v Feinstein . . 516
Problem . . ................................. 517
HF Clarke Limited v Thermidaire Corp Ltd . . . . . . . . . . . . . . . . . . . . . 518
Stockloser v Johnson ............................... 518
Notes . .. 520
IV. Clauses Excluding Liability 522
Margaret J Radin, Boilerplate, the Fine Print, Vanishing Rights,
and the Rule of Law . 522
George Mitchell Ltd v Finney Lock Seeds Ltd 523
Notes .................. . 527

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Hunter Engineering Co v Syncrude Canada Ltd . . 528

Note ......................... 531
Davidson v Three Spruces Realty Ltd . . . . . . . . . . . . . . . . . 532
Delaney v Cascade River Holidays Ltd . . . . . . . . 534
Tercon Contractors Ltd v British Columbia (Transportation
and Highways) . . . . . . . . . . . . .......... 538
Notes ... . .. .. . .. ...... . .. . ............. . ....... . ...... . 548
V. Unconscionability and Undue Influence 551
Michael J Trebilcock, The Limits of Freedom of Contract .. . ... . 551
N~............ .......... .. . . . ....... . 554
Arthur A Leff, "Unconscionability and the Code :
The Emperor's New Clause" ....... . 554
Notes .. .. . . 560
Rick Bigwood, Exploitative Contracts ... 561
Post v Jones ........................ . . . . .. .. . 562
Note . . . ......................... .. .. . 564
Marshall v Canada Permanent Trust Co .. . . . . . .....• . 564
Note . . . ................. ...... . ... . 567
Mundinger v Mundinger ... . . . . .. .. . . .. . . .. .... . . . . . ..... . . . 567
Harry v Kreutziger ... .. ... . .. . .. . ... . . . ......... . . . .... . 570
Notes ........................... . . . . . ........... . ....... . 573
Lloyds Bank Limited v Bundy . . . .......... . ..... . . 574
Credit Lyonnais Bank Nederland NV v Burch .................. . 579
Royal Bank of Scotland pie v Etridge (No 2) and Other Appeals .. . 582
Notes ... 595
Macaulay v A Schroeder Music Publishing Co Ltd 599
Notes and Questions ..... . ... . ... . 601
Pridmore v Calvert ... . ....... . .... . 602
Horry v Tate .. 604
Woods v Hubley ... 606
VI. Duress 607
NAV Canada v Greater Fredericton Airport Authority Inc . 607
Notes .' ... 617
VII. Consumer Protection . . . . .... .. . . 618
Consumer Protection Act, 2002 618
Unconscionable Transactions Relief Act 621
VIII. Restitution ........ . 622

Chapter Seven Public Policy .. 625

I. Introduction .......... . 625
II. The Effects of Illegality ....... . 626
Holman v Johnson 626
Notes 628
Ill. Contracts Contrary to Public Policy Expressed in the Common Law . . . . . . . . . . . . . . . 628
Notes . . . .................. .......... 629
In the Matter of Baby "M" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630
Notes and Questions ..... . . . . . . 631
A. Contracts in Restraint of Trade ...................................... 632
Shafran v KRG Insurance Brokers (Western) Inc 632
Notes . . . 635

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B. Contracts Related to Gaming .... . . . .. . 636

Boardwalk Regency Corp v Maalouf . 636
Notes 637
C. Contracts in Furtherance of Illegal Purposes 638
Zimmermann v Letkeman 638
Note .. 640
D. Contracts Conferring Benefits Obtained as a Result of Crime .. 641
Brissette Estate v Westbury Life Insurance Co;
Brissette Estate v Crown Life Insurance Co .. .. 641
Notes and Questions .. . 643
Oldfield v Transamerica Life Insurance Co of Canada 643
Notes and Questions . 646
IV. Contracts Contrary to Public Policy Expressed in Statute 646
A. When a Contract Is Rendered Void by Statute 646
Kingshot v Brunskill 646
Question on Legal Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649
Doherty v Southgate (Township) . . . . . . . . . . . . . . . 649
B. A Common Intent to Perform a Contract Illegally . .. 651
Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd 651
V. Mitigating the Consequences of Illegality 653
A. When the Claim Is Founded on an Independent Right . . 653
Mistry Amar Singh v Serwano Wofunira Kulubya . .. .. .... . . 653
Notes and Questions . 654
B. Restitution 654
Kiriri Cotton Co Ltd v Rachhoddas Keshavji Dewani 655
Outson v Zurowski .. 659
Notes and Questions 661
C. Severance of Illegal Provisions 664
William E Thomson Associates Inc v Carpenter 665
Transport North American Express Inc v New Solutions
Financial Corp 667
Note 669
Vl. An Alternative Approach7 .. ... . .. . 669
Still vMNR 670

Chapter Eight Performance and Breach . . 673

Repudiatory Breach 673
Kingston v Preston . 673
Rules of Civil Procedure 674
Bettini v Gye 675
Questions 677
Poussard v Spiers and Pond 677
Questions .... . .. . . 680
Ce have NV v Bremer Handelgeselleschaft GmbH 680
Sale of Goods Act 688
Maple Flock Company, Ltd v Universal Furniture Products
(Wembley), Ltd 688
Restatement of the Law of Contracts (Second) 691
Questions 692

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II. Waiver and the True Condition Precedent ........................ 692

Panoutsos v Raymond Hadley Corporation of New York 692
Note . . . . . . . . . ............... 695
Turney v Zhilka . . . . . . . . . . . . . . . . . . . 695
Questions .. 696
Barnett v Harrison 696
Ill . The Duty to Perform Contractual Obligations in Good Faith 696
Bhasin v Hrynew . 698
Notes and Questions 706
IV. The Position of the Party in Breach . . . . . . . . . .. . . . . . . . . .. .. . .. . .. . . .. . . 707
Jacob & Youngs, Inc v Kent .... . ..... . ..... . . . . . . . ... . 707
Questions 709
Hoenig v Isaacs . ......... . . . .. . .. . .. . . . ...... . ... . . . .. . . . . . 710
Questions . .. ... . . .. . . . . . . . . . .. . .. . . . ... . .. . .. . . . .. . . . . .. . 711
Cutter v Powell . ..... . . . , . .. . . ......... . . 711
Note ........ .. ..... .. . .. . . .. . . . .. . .. . . . . .. . . . 712
Apportionment Act 712
Sumpter v Hedges 713
Questions . .. .. . .. . . . . .. . . . . 714

Chapter Nine Mistake . .. . . . . .... .. . .... . .. . .. . .. . .. . . ...... . 715

Introduction . . . .. . 715
II. Misrepresentations . .................... 717
Grotius, "Whether a Promise Given Under a Misapprehension Is
by the Law of Nature Binding, and to What Extent" (1625) 717
Heilbut, Symons & Co v Buckleton 717
Notes and Questions . . . . . . . . . . . . . .......... 721
Bentley (Dick) Productions Ltd v Smith (Harold) (Motors) Ltd . . . 722
Redgrave v Hurd . 723
Newbigging v Adam . . . . . . . . . 725
Kupchak v Dayson Holdings Ltd 726
Notes . . . . ... . . . .... . .... . 727
Redican v Nesbitt ... . . . . .. .. . ..... . .. ... . . .... . ........ . .. . 728
Note ....... .. ........... ... .. . .. . ...... .. . . . .. . . ...... . . . 730
Leaf v International Galleries 731
O'Flaherty v McKinley .. . .. . . 733
Murray v Sperry Rand Corporation . . . . 735
Notes . . ..... . .. . 738
Competition Act ... . . .. . . .. . .. . .. . 739
Notes . . .. .. .. . ... . ... . .. . . . . . 739
Ill. The Relationship Between Contract and Tort . . . . . . . . . ...... .. . . . . 739
Hedley Byrne & Co Ltd v Heller & Partners Ltd ..... . .. . .. . .. .. . 739
Esso Petroleum Co Ltd v Mardon . .. . ....... . . .. .. . . . .... . . . . 743
Notes and Questions 748
IV. Mistake About Contractual Terms ... .. . ......... . .. . .. . .... . 749
Hobbs v Esquimalt and Nanaimo Railway Co 749
Raffles v Wichelhaus ... .. . .. . . 751
Notes and Questions . . . 752
Staiman Steel Ltd v Commercial & Home Buildings Ltd 753
Henkel v Pape . . . . . . ... . .. . ........ . .. . 756

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Questions 757
Smith v Hughes 757
Notes and Problems . . 761
V. Mistake in Assumptions . .......... . . ...... . ........ . 762
Anthony Duggan .."Silence as Misleading Conduct:
An Economic Analysis" 762
Note . . ....... ...... . 766
Laidlaw v Organ 767
Notes and Questions .. 768
Bell v Lever Brothers Ltd 769
Solle v Butcher . . . 775
Magee v Pennine Insurance Co ... . .. . .. .. . . . . ....... . 777
N~.. ...... ... .. . . . . . . . . . . . . . . . . . . . . . ..... . . 779
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd 780
Notes and Questions . ....... ........ . 785
Miller Paving Limited v B Gottardo Construction Ltd .. 786
Lee v 1435375 Ontario Ltd 787
Scott v Coulson ... 789
Sherwood v Walker 790
McRae v Commonwealth Disposals Comm 793
Questions ..................... . 797
Wood v Boynton .. 797
R (Ont) v Ron Engineering 800
Notes and Problem s 805
VI. Restitution . . 806

Chapter Ten Frustration 811

I. Introduction 811
II. Theoreti cal Perspectives on the Doctrine of Frustration 812
George G Triantis. "Contractual Allocations of Unknown Risks:
A Critique of the Doctrine of Commercial Impracticability" 812
Richard A Posner & Andrew M Rosenfield, "Impossibility and
Related Doctrines in Contract Law: An Eco nomic Analysis" 815
Notes ... 817
Ill. The Rule of Absolute Promises 817
Paradine v Jane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817
Note . . . . . . . . . . . . . 818
IV. Relaxation of the Rule of Absolute Promise s .. 818
Taylor v Caldwell ....... . . 818
Notes 820
Amalgamated Investment and Property Co Ltd v
John Walker & Sons Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821
Capital Quality Homes Ltd v Colwyn Construction Ltd 824
Notes ........... ............. 828
Victoria Wood Development Corp Inc v Ondrey 828
Notes and Questions . . . . . . . . . . . . . . . . . .. ...... . . 829
Howell v Coupland 830
Canadian Industrial Alcohol Company v Dunbar Molasses
Company 832
Parrish & Heimbecker Ltd v Gooding Lumber Ltd 833
Krell v Henry 835

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Aluminum Co of America v Essex Group, Inc 838

Notes ... ... .. . ... . .. ..... . .. ........... . . . . . . .. . . . . . . .. . . 842
Eastern Air Lines v Gulf Oil Corp 843
Edwinton Commercial Corporation and Another v Tsavliris Russ
(Worldwide Salvage and Towage) Ltd ("The Sea Angel") 845
Notes and Question s . . . . . . . . . . . . . . . . . . . . 851
Tsakiroglou & Co Ltd v Noblee Thor/ GmbH . . . . . 852
Transatlantic Financing Corp v United States ..... . .. ...... . 853
Davis Contractors Ltd v Fareham Urban District Council 856
Notes . . 859
V. Re lief on Terms: Restitution and Re liance .. . ... . .. . .. .. . . . . .... . . .. . . . . .. . .. . . . 860
Appleby v Myers . . . . . . . . . . . . . . . . . .. . .. . .... . . 860
Fibrosa Spolka Akcyna v Fairbairn Lawson Combe Barbour Ltd 862
N~ . . . . .. ...... . .. . .. ....... ..... . 867
Frustrated Contracts Act ... . . . ... . 867
Notes and Questions .... . . .. . 868
Frustrated Contract Act . 869

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 TABLE OF CASES

A page nu mber in boldface type indicates that the text of the case or
a portion thereof is reproduced . A page number in lightface type
ind icates that the case is quoted briefly or discussed.

1539304 Ontario Inc v /CIC/ Bank Canada, 2013 ONSC 2737, [2013] OJ No 2132 (QL) 548
869163 Ontario Ltd v Torrey Springs II Associates Ltd Partnership (2005)
(sub nom Peachtree II Associates-Dallas LP v 857486 Ontario Ltd)
(2005), 76 OR (3d) 362, 200 OAC 159 . . . .. . .. . .. . 521
872899 Ontario Inc v lacovoni (1998), 163 DLR (4th) 263 (Ont CA) .. . .. . 291
978011 On tario Ltd v Cornell Engineering Co (2001), 198 DLR (4th) 615 (Ont CA),
leave to appea l refused (2001), 158 OAC 195n (SCC), additional reasons at
(2001), 148 OAC 250 (CA) ............................................... . 769
A-G for Hong Kong v Humphries Estate, [19871AC114 (PC) . . . . . . . .. .. . .. . .. . . . . . .. . 315
Acme Mills & Elevator Co v Johnson (1911), 141 Ky 718, 133 SW 784 . . . . . . ...... . 36
Addis v Gramophone Company Limited, [1909] AC 488 (HL) ........ . .. . . . . . .. . . . . . . .. .... 76
Adler v Dickson, [1955] 1 OB 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . 396
Ajayi v RT Briscoe (Nigeria) Ltd, [1964] 1 WLR 1326 (PC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319, 320
Alampi v Swartz (1964), 43 DLR (2d) 11 (Ont CA) 508
Albionex (Overseas) Ltd v Conagra Ltd, 2011 MBCA 95, [2011] MJ No 412 (OL) . . . . . . . . . . . . . 748
Alexander v Rayson, [1936] 1 KB 169 (CA) . . . . . . . . . . . . . 640
Alkok v Grymek, [1968] SCR 452 . . . ..................... . . 151
All-Up Consulting Enterprises Inc v Dalry mple, 2013 NSSC 46 . 106
Allegheny College v National Chautauqua County Bank of Jamestown,
246 NY 369 (CA 1927) ........ . . 243
Altman v Steve's Music, 2011ONSC1480 859
Aluminum Co of America v Essex Group, Inc, 499 F Supp 53 (WO Pa 1980) . 838, 841
Amalgamated In vestment & Property Ltd v Texas Commerce International Bank Ltd,
[1982] OB 84 (CA) ..... .. ... . . . . 315
Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd, [19771
1 WLR 164 (CA) . . . . . . . . . . . . . . . . . . . . . . . ......... . . . 821
Amertek Inc v Canadian Commercial Corp (2003), 229 DLR (4th) 419 (Ont Sup Ct J) 162
Anderson v British Columbia Securities Commission, 2004 BCCA 7 728
Andrews v Australia and New Zealand Banking Group Ltd, [20121 HCA 30 ..... . .. . .. . .. . ... 521
Anglia Television Ltd v Reed, [19721 1 OB 60 (CA) 32
Anglo - Ne w foundland Fish Co v Smith & Co Ltd (1902), 35 NSR 267 (SC en bane) ... 190
Antons Trawling Co Ltd v Smith, [2003] 2 NZLR 23 (CA) . . . . . . . . . . .......... 267
Appleby v Myers (1867), LR 2 CP 651 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860
Arbutus Park Estates Ltd v Fuller (1976), 74 DLR (3d) 257 (BCSC) . . . 162
Arton Holdings Ltd v Gateway Realty Ltd (1991), 106 NSR (2d) 180 (SC (TD)),
aff'd (1992), 112 NSR (2d) 180 (CA) . . . . ....... . . 698
Aruna Mills Ltd v Dhanrajmal Gobindram, [1968] 1 OB 655 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Asamera Oil Corp Ltd v Sea Oil & General Corp, [1979] 1 SCR 633 . . . . . . . . . . . . 114
Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd, [197311 WLR 828 (CA) .... . .. . .. . . .. .. 651
Atlantic City Showboat Inc v Smith, [19931 OJ No 1561 (QL) (Gen Div) . . . . . . . . . .. . . 637
Attorney General v Blake, [2000] UK HL 45, [2000] 4 All ER 385 ........ . .. . ....... 151, 161, 162

xx iii
TABLE OF CASES

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd,

[2003] HCA 18 . . . ............ ......... 598
Australian Woollen Mills Ltd v Commonwealth of Australia, [1956] 1 WLR 11 (PC) . . . . . . . . . . 349
AV v iParadigms LLC, No 08-1424 (4th Cir 2009) . . . . . . . . . . . . . . . 515
AVG Management Science Ltd v Barwell Developments Ltd (1976), 69 DLR (3d) 741 (BCSC) 142

B(DCJ v Arkin, [1996) 8 WWR 100 (Man OB), aff'd [1996) 10 WWR 689 (Man CA) 275
Baby "M," In the Matter of, 537 A 2d 1227 (NJSC 1988) ........ . 630, 631, 646
Balfour v Balfour, [1919) 2 KB 571 (CA) ............... . 280,282
Ballenas Project Management Ltd v PSD Enterprises Ltd, 2007 BCCA 166,
66 BCLR (4th) 122 . . . . ............ . ..... .... . 830
Baltic Shipping Company v Dillon (1993). 176 CLR 344 . 151
Bank of America Canada v Mutual Trust Co, 2002 SCC 43, [2002) 2 SCR 601 .. . 101, 161
Bank of BC v Wren Development Ltd (1973), 38 DLR (3d) 759 (BCSC) 768
Bank of Montreal v Courtney, 2005 NSCA 153, 261 DLR (4th) 665 .... .. . ... . ... . 595
Bank of Montreal v Duguid (2000). 47 OR (3d) 737 (CA) ..................... . 595
Bank of Montreal v Murphy, [19 86) 6 WWR 610 (BCCA) 809
Bank of Montreal v Vancouver Professional Soccer Ltd (1987). 15 BCLR (2d) 34 (CA) 500
Bank of Nova Scotia v Zackheim (1983). 3 DLR (4th) 760 (Ont CA) . . . .. 473
Barclays Bank pie v O'Brien, [1993] 4 All ER 417, [1994) 1 AC 180 595
Barnett v Harrison, [1976] 2 SCR 531, 57 DLR (3d) 225 ........... . . 696
Barrick v Clark, [1951) SCR 177. [1950) 4 DLR 529 .. . 180
Bauer v The Bank of Montreal, [19 80 ] 2 SCR 102 .. . .. 473
Bawitko Investments Ltd v Kernels Popcorn Ltd (1991), 79 DLR (4th) 97 (O nt CA) 206
Baxter v Jones (1903), 6 OLR 360 (CA) .............. . .......... . . 300
BOC Ltd v Hofstrand Farms Ltd, [1986) 1 SCR 228 .... . 76
Beauchamp v Beauchamp, [1973) 2 OR 43 (CA) . . . . . . . . . . . . . . ......... 696
Beaulieu v Day & Ross Inc, 250 DLR (4th) 533, [2005) NBJ No 77 (QL) (CA) 531
Behnke v Bede Shipping Co Ltd, [1927) 1 KB 649 . . ............ 120
Bell v Lever Brothers Ltd, [1932) AC 161 (HL) . . 761, 769, 785, 786, 806, 809
Bellamy v Debenham (1890), 45 ChD 481 .. 195
Belle River Community Arena Inc v WJC Kaufmann Co Ltd (1978), 20 OR (2d) 447,
87 DLR (3d) 761 (CA) . . . . . . . . . . . ............. 805
Bentley (Dick) Productions Ltd v Smith (Harold) (Motors) Ltd, [1965] 1 WLR 623,
[1965) 2 All ER 65 (CA) .................. ........... 722
Bercovici v Palmer (1966). 59 DLR (2d) 513 (Sask CA) ... 494
Berne Development Ltd v Haviland (1983), 40 OR (2d) 238 (H Ct J) . . . . . . . . . . . . . . . . . . . 662, 663
Bertkey Development Ltd v Incorporated Owners of Fine Mansion,
[19991 2 HKLRD 662 (CA) . 319
Bertolo v Bank of Montreal (1986). 33 DLR (4th) 610 (Ont CA) 597
Beswick v Beswick, [1966] 1 Ch 549 (CA), [1968] AC 70 (HL) ........ . 356,363
Bettini v Gye (1876). 1 QBD 183 675
BG Checo International Ltd v British Columbia Hydro and Power Authority,
[1993] 1 SCR 12, 99 DLR (4th) 577 . . . . .................................... 749
Bhasin v Hrynew 2014 SCC 71 218,491, 698, 706, 70~ 716
Bigg v Boyd Gibbons Ltd, [1971) 1 WLR 913 (CA) ... .. . . . .. ... . 170
Bigos v Boustead, [1951] 1 All ER 92 (KB) ............... . . 662
Birch v Union of Taxation Employees, Local 70030, 2008 ONCA 809, 93 OR (3d) 1 . . 521
Boardwalk Regency Corp v Maalouf (1992), 6 OR (3d) 737 (CA) . . . . . . . . . . . . . . . . 636, 646
Bollenback v Continental Casualty Company, 414 P 2d 802 (Oregon SC 1965) . . . ....... 28
Bomek v Bomek (1983), 146 DLR (3d) 139 (Man CA) ...............•. . . 597

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 TABLE OF CASES

Boomer v Muir, 24 P 2d 570 (Cal CA 1933) .... , . . , . 32

Boone v Coe, 154 SW 900 (Ky CA 1913) . . . ...... . ............ . . 148, 149
Boucher v Black & McDonald Ltd, 2016 ONSC 7220 859
Boulton v Jones (1857), 2 H & N 564, 157 ER 232, 27 LJ Ex 117 408
Bowes v Goss Power Products Ltd, 2012 ONCA 425 ..... .... ............ . 106
Bowlay Logging Ltd v Domtar Ltd (1978), 135 DLR (3d) 179 (BCCA) 35, 149
Boyer and Co v D & R Duke, [1905] 2 IR 617 (KBD) . . ......... . .... . 171, 175
Branca v Cobarro, [19471 KB 854 (CA) . 206
Brandt's Sons & Co v Dunlop Rubber Co Ltd, [1905] AC 454 (HL) 397
Brewer v Incorporated Synod of the Diocese of Ottawa of the Anglican Church
of Canada, [1996] OJ No 634 (QL) (Ont Gen Div) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
Brinkibon Ltd v Stahag Stahl GmbH, [19831 2 AC 34 (HL) 234
Brissette Estate v Westbury Life Insurance Co; Brissette Estate v Crown Life
Insurance Co, [1992] 3 SCR 87 ........ . 641
Bristol, Cardiff, and Swansea Aerated Bread Company v Maggs (1890), 44 ChD 616 193
British American Timber Co v Elk River Timber Co, [1933] 4 DLR 286 (BCCA) 203
British Columbia and Vancouver's Island Spar, Lumber and Saw Mill Co Ltd v
Nettleship (1868), LR 3 CP 499 . . . . . . . . . . . . . . . . . . . . ............... . .. .. . .. . 48
British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd, [19751 QB 303 (CA) 456
Brogden v Metropolitan Railway Company (1876-77) LR 2 App Cas 666 .. 203
Brown v Belleville (City), 2013 ONCA 148 . . . . . . . . . . . . . . ........... . . 392
Brown v Waterloo Regional Board of Commissioners of Police (1983), 43 OR (2d) 113,
150 DLR (3d) 729 (CA) 84
Bruker v Marcovitz, 2007 SCC 54, [2007] 3 SCR 607 ................ .. .... .. . .. . . . . . . . . 632
Budget Rent-A-Car of BC Ltd v Vancouver International Airport Authority,
(2009), 89 BCLR (4th) 249 (CA) .. .. . .. ............... . 202
Burin Peninsula Community Business Development Corporation v Grandy, 2010 NLCA 69. 618
Bursey v Bursey, 1999 Canlll 19021 (NLCA) ........... . 629
Bush v Canfield, 2 Conn 485 (1818) ....... ...... .. ...... . 32
Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd, [1979] 1 WLR 401,
1 All ER 965 (CA) ........ . 190
Buyers v Begg, [1952] 1 DLR 313 (BCCA) .......... ...... ..... . . . .. . .. . .. .. . ... . .. . . 214
Byrne & Co v Leon Van Tienhoven & Co, (1880), 5 CPD 344 226

C (SL) v C (CJR), 2014 BCSC 1814 573

Cain v Clarica Life Insurance Company, 2005 ABCA 437 . . ......... . 548
Calgary (City) v Northern Construction Co, [1986] 2 WWR 426 (Alta CA) .... .. ... . . 805
Calgary Fire Fighters Association (International Association of Fire Fighters, Local 255)
v Calgary (City), 2011 ABCA 121 336
Callisher v Bischoffsheim (1870), LR 5 QB 449 273
Calvan Consolidated Oil & Gas Co v Manning, [1959] SCR 253, 17 DLR (2d) 1 214
Can Aero v O'Malley, [1974] SCR 592 ............. . . 150
Canada (Attorney General) v Fairmont Hotels Inc, 2016 SCC 56, [2016] 2 SCR 720 . . 500, 728
Canada Foundry Co Ltd v Edmonton Portland Cement Co Ltd, [1913] 1 WWR 382 (Alta) . . · . . 58
Canadian Indemnity Co v Okanagan Mainline Real Estate Board, [1971] SCR 493 470
Canadian Industrial Alcohol Company v Dunbar Molasses Company,
258 NY 194 (1932) . .......... ........................ 832
Canadian Kawasaki Motors Ltd v McKenzie (1981), 126 DLR (3d) 253 ............. . .. . . . . . 597
Canadian Pacific Forest Products Ltd-Tahsis Pacific Region v Be/timber (The),
[1999] 4 FC 320, 175 DLR (4th) 449 . . . ........ . 550
Canadian Pacific Hotels Ltd v Bank of Montreal, [1987] 1 SCR 711 706

xxv
TABLE OF CAS ES

Canadian Superior Oil Ltd v Hambly, [1970] SCR 932 . ........ .. . . ... 315
Canadian Taxpayers Federation v Ontario (Minister of Finance) (2004), 73 OR (3d)
621 (S up Ct J) ......... . 288,632
Capital Quality Homes Ltd v Colwyn Construction Ltd (1975), 9 OR (2d) 617 (CA) 824
Carlill v Carbolic Smoke Ball Company, [1893] 1 OB 256 (CA) .... 340, 343
Carman Construction Ltd v Canadian Pacific Railway Co, 11982] 1 SCR 958 ... 473
Carson v Willitts (1930), 65 OLR 456 (CA) .. ... 38
Carter v Long & Bisby (1896), 26 SCR 430 . ............. . . . . . . . . . . . . . . . . . . . . . 117
Cehave NV v Bremer Handelgeselleschaft GmbH, [1976] OB 44 (CA) 680
Central London Property Trust Ltd v High Trees House Ltd, [1947] KB 130 . . . . . . . . . . . . 303, 476
Central Trust Co v Rafuse, [1986] 2 SCR 147, 31 DLR (4th) 481 . . . . . . . . . . . . . . . . . . . . . . . . 749
Century 21 Canada Limited Partnership v Rogers Communications Inc,
2011BCSC1196, 338 DLR (4th) 32 ............ . . 239,456
Chamberlin v Canadian Physiotherapy Assn, 2015 BCSC 1260 . . ...... ... .... 548, 550
Chandler v Webster, [190411 KB 493 ........ .. . . , . . . . . . . . . . . . . . 867
Chapelton v Barry Urban District Council, [194011 KB 532 (CA) . . . . . . . . . . . . . . 447
Chaplin v Hicks, [19111 2 KB 786 . . . . . . ........................ 47
Chappell & Co Ltd v Nestle Co Ltd, [1960] AC 87 (HL) . . . . . . . . . . ........... ... . 240
Charter v Sullivan, [1957] 2 OB 117 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 47
C/BC Mortgage Corp v Rowatt (2002), 61 OR (3d) 737 (CA) . . . . . . 595
C/BC Mortgages pie v Pitt, [1993] 4 All ER 433, [199411 AC 200 . . ................. 596
City and Westminster Properties (1934) Ltd v Mudd, [1959] 1 Ch 129 . . . . . . . . • . . . . . . . . . 475, 476
Clark v Marsiglia, 43 Am Dec 670 (NYSC 1843) .................. 114
Clarke, The Crown v (1927), 40 CLR 227 (Aus HC) . . ............ .... 339
Clifton v Palumbo, [19441 2 All ER 497 (CA) . 170
Cobbe v Yeoman's Row Management Ltd, [2008] UKHL 55 315, 332
Cockburn v Trusts & Guarantee Co (1917), 55 SCR 264, 37 DLR 159 106
Cockerton v Naviera Aznar SA, [19601 2 LI LR 450 (SC) .......................... . . 396
Cohen v Roche, 119271 1 KB 169 117, 118
Collier v P & M J Wright (Holdings) Ltd, [2008] 1 WLR 643 (CA) . 270, 318, 319
Combe v Combe, [19511 1 All ER 767 (CA) 305, 308
Cook v Wright (1861), 1 B & S 559, 121 ER 822 (QB) 272
Cooper v Phibbs (1867), LR 2 HL 149 809
Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd, [1998] AC 1 (HL) . . . 128
Cornwall Gravel Co Ltd v Purolator Courier Ltd (1978), 83 DLR (3d) 266 (Ont HC),
aff'd (1979), 115 DLR (3d) 511 (CA) and [1980] 2 SCR 118, 120 DLR (3d) 575 . . . . . . . . . . . 74, 76
Couldery v Bartrum (1880), 19 ChD 394 269
Coulls v Bagot's Executor and Trustee Co Ltd (1967), 119 CLR 460 .. 252
Cowan and Boyd, Re, (1921), 49 OLR 335 (AD) .. . 189
Cowper-Smith v Morgan, 2017 SCC 61 .......... . .. . .. . .. .. . 315, 327, 331, 332
Crabb v Arun District Council, [1976] Ch 179 (CA) .. . . . . . . . . . 321, 331, 336
Credit Lyonnais Bank Nederland NV v Burch, [1997] 1 All ER 144 (CA) 579
CTN Cash and Carry Ltd v Gallaher Ltd, [1994] 4 All ER 714 (CA) .. . . . . . . . ..... 618
Cumber v Wane (1721), 1 St 425; 93 ER 613 ......... 270
Cundy v Lindsay (1878), 3 App Cas 459 (HL) 409, 411, 786, 806
Currie v Misa (1875), LR 10 Ex 153, 162, aff'd 1 App Cas 554 239, 298
Curtis v Chemical Cleaning and Dyeing Co, Ltd, [1951] 1 All ER 631 (CA) ...... . . . . 469
Cutter v Powell (1795), 6 TR 320, 101 ER 573 (KB) ... . ... 711, 712

D & C Builders, Ltd v Rees, [1965] 3 All ER 837 (CA) 267, 270, 316
Dale v Manitoba (1997), 147 DLR (4th) 605 (Man CA) ........... . . . . ... .. ... .... . .. 344
Dalhousie College v Boutilier Estate, [1934] SCR 642 276, 279

xxvi
 TABLE OF CASES

Darbishire v Warran , [1963] 3 All ER 310 (CA) ... . ........... . ..... . . . ........ . .. . . . , . . . . 43
Davidson v Three Spruces Realty Ltd (1977), 79 DLR (3d) 481 (BCSC) ....... . . . . , . 532
Davis Contractors Ltd v Fareham Urban District Council, [1956] AC 696 (HL) 856
Dawson v Helicopter Exploration, [1955] SCR 868, 5 DLR 404 .......... . .. . 350, 352,353
De La Bere v Pearson, Limited, [1908] 1 KB 280 (Eng CA) .. 300
Deg/man v Guaranty Trust Co of Canada and Constantineau,
[1954] SCR 725, 3 DLR 785 ........ . . . . .. . .. ... . . .. . ...... 145, 146, 148, 149, 150, 275, 714
Delaney v Cascade River Holidays Ltd (1983), 44 BCLR 24, 24 CCLT 6 (CA) . 534
Denton v Great Northern Railway Company (1856), 5 E & B 860, 119 ER 701 (OB) 164
Design Services Ltd v Canada, [2008] 1 SCR 737 . . . . . ... . .. . .. . .. 201
Detroit Football Co v Dublinski (1956) 4 DLR (2d) 688 ..,... .... . .. 134
Devald v Zigeuner (1958), 16 DLR (2d) 285 (Ont H Ct J) . .. .. . ...... . . . . . , . . . , . . . . . . 508
Di fvlanno Estate v Valenzisi, 2007 Can LI I 57463 (Ont Sup Ct J) . . .... . , . . , . . . , .. , . . . 638
Diamond v British Columbia Thoroughbred Breeders' Society
(1965), 52 DLR (2d) 146 (BCSC) . . . . . .. . ..... . . . . 762
Dickinson v Dodds (1876), 2 ChD 463 (CA) .......... . .. , .. , . . . . . . 182, 184
Dies v British & International fvlining Financing Corp Ltd, [1939] 1 KB 724 . . . . . . . . . . . . . . . . . 624
Dillwyn v Llewelyn (1862), 6 LT 878, 4 De G F & J 517, 31 LJ Ch 658 . . . . . . . . . . . . 321, 331
Dinicola v Huang & Danczkay Properties (1998), 40 OR (3d) 252 (CA) . . .. , .. , . . 830 ·
Diotte v Consolidated Development Co, 2014 NBCA 55, 376 DLR (4th) 235 . . . . . . . . . . . . . . . 43
District of Kitimat v A/can Inc (2006), 265 DLR (4th) 462 (BCCA) 392
Doherty v Southgate (Township) (2006), 214 OAC 30, 271 DLR (4th) 59 (CA) . . . . . . . . . . . . . . . 649
Dominion Building Corporation, Ltd v The King, [1933] 3 DLR 577 (Canada PC) . . . . .. . : 181
Double N Earthmovers Ltd v Edmonton (City), [2007] 1 SCR 116 . . . . . . . . . . . . . 200, 202
Douez v Facebook, Inc, 2017 SCC 33 . . . 549, 629
Dreger, Re, (1976), 12 OR (2d) 371 (H Ct J) . ....... ... ....... 646
Drive Yourse lf Hire Co Ltd v Strutt, [1954] 1 OB 250 . . . . 356
DRL Coachlines Ltd v GE Canada Equipment Financing GP, 2011 NSCA 23,
[2011] NSJ No 93 (Ol'.) . ....................................... 595
Dundas v Schafer, 2014 MBCA 92 . 521
Dunlop Pneumatic Tyre Co Ltd v New Garage and fvlotor Co, Ltd, [1915] AC 79 . . . . . . . . 520, 521
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, [1915] AC 847 (HL) . . . . . . . . . . . . . . 239, 364
Dusik v Newton (1985), 62 BCLR 1 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721, 809
Dyck v Bashold, 2009 Can LI I 65813, [2009] OJ No 4999 (OL) (Sup Ct J) . .. , . . , . . . . 573

Eastern Air Lines v Gulf Oil Corp, 415 F Supp 429 (SD Fla 1975) . .... . . ..... . .. , . 843
Eastern Power Limited v Azienda Comunale Energia and Ambiente
(1999), 178 DLR (4th) 409 (Ont CA) .......... ...... . . . . . 232
Eastwood v Kenyon (1840), 11 Ad & E 438 .. 279, 298
Edwinton Commercial Corporation and Another v Tsavliris Russ (Worldwide Salvage
and Towage) Ltd ("The Sea Angel"), [2007] 2 All ER (Comm) 634 (CA) . . .. . . 845
Egerton v Brownlow (1853), 4 HLC 1, 10 ER 359 . . . . . . . . ......... . 628, 629
EKD v Facebook, Inc, 885 F Supp 2d 894, 2012 WL 324392, 4 (SDlll) . . .... . . .. . .. .. . . . 515
Eleanor Thomas v Benjamin Thomas (1842), 2 OB 851, 114 ER 330 . . . ...... . . 243,244
Eli Lilly & Co v Novopharm Ltd, [1998] 2 SCR 129 . . ......... . . .. . .. . . . . . .. . . 467
Eliason v Henshaw, 4 Wheaton 225 (USSC 1819) ... . ... . . . . .... .. . . ...... .. . . 188
Eisley Estate v JG Collins Ins Agencies, [1978] 2 SCR 916 . . . . ...... . . . . 520, 521
Empress Towers Ltd v Bank of Nova Scotia (1990), 50 BCLR (2d) 126 (CA) ... . .. .. . . . . . . . 215
Enderby Town Football Club Ltd v The Football Association Ltd, [1971] Ch 591 . . ... 626
England v Davidson (1840), 11 Ad & E 856, 113 ER 640 . . ...... . 253, 254
Entores, Ltd v fvliles Far East Corporation, [1955] 2 All ER 493 (CA) . . . . . 231
Erie Sand and Gravel Limited v Tri-B Acres Inc, 2009 ONCA 709 . . . . . . . . . . .. . .. . . 207

xxvii
TABLE OF CASES

Erlanger v The New Sombrero Phosphate Company (1878), 3 App Cas 1218 ... . . ... . . 807
Errington v Errington, [1952] 1 All ER 149 (CA) . . . .. .... . 349,352
Esso Petroleum Co Ltd v Mardon, [1976] QB 801 (CA) . . . . . . . . . . . . . . . . . . . . . . . . 743, 748, 749
Esso Petroleum Co Ltd v Niad, [2001] All ER (D) 324 (Ch) 161
Evia Luck, The, [1993] 2 AC 152 (HL) ............ . 618
Exelon Generation Co, LLC v General Atomics Technologies Corp. 559 F Supp
2d 892 (US Dist Ct. ND Illinois, Eastern Division. 2008) ........ ........ ... . . . 842

Fairbanks Soap Co Ltd v Sheppard, [1953] 1 SCR 314 . 711

Fairgrief v Ellis (1935), 49 BCR 413 (SC) ........ . . .. . . . . .. . ... .. . . .. . . ... .. . 274, 275
Fa/eke v Gray (1859), 29 LJ Ch 28 116
Farah v Barki, [1955] SCR 107, 2 DLR 657 .. . . . . . . . . . . . . . .. . . . .. . . .. . .. . .. . .. .. . .. . . 467
Farley v Skinner, [2002] 2 AC 732 (HL). . ... 83
Federal Commerce & Navigation Co Ltd v Tradax Export SA, [1978] AC 1 (HL) . ... .. . 460
Felthouse v Bindley (1862), 11 CB (NS) 869, 142 ER 1037 (Ex Ch) ............... . 184
Felty v Ernst & Young LLP, 2015 BCCA 445 . . . . . . . . . . . . . . . . . . . . .. . . .. . . 549
Fender v St John-Mildmay, [1938] AC 1 .... .. .... . 629
FH v McDougall, 2008 SCC 53, [2008] 3 SCR 41 ... . 728
Fibrosa Spo/ka Akcyna v Fairbairn Lawson Combe Barbour Ltd,
[1943] AC 32 (HL) 148, 862, 867
Fidler v Sun Life Assurance Co of Canada, [2006] 2 SCR 3 85, 89, 101
Finelli v Dee (1968), 67 DLR (2d) 393 (Ont CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Finlay Investments Ltd v Abraham (1983), 26 RPR 188 (BCSC) 215
First City Investments Ltd v Fraser Arms Hotel Ltd, [1979] 6 WWR 125 (BCCA) . . . . . . . . . . . . . 215
Fisher v Bell, [1960] 3 All ER 731 (OB) . . . . . . . . . . . . . . . ................... . .. 174
Fishman v Wilderness Ridge at Stewart Creek Inc, 2010 ABCA 345 . . . . . . . . . . . . . . . . . . . . 821
Fleischhaker v Fort Garry Agencies Limited (1957), 11 DLR (2d) 599 (Man CA) 809
Florida Power and Light Co v Westinghouse Electric Corp, 826 F 2d 239 (4th Cir 1987) . . 851
Foakes v Beer (1884), LR 9 App Cas 605 (HL) ............... 268, 270, 271
Foley v C/assique Coaches, Limited, [1934] 2 KB 1 (CA) . . . . . . . . . . . . . . . . . . . . . . . . 207, 210
Folia v Trelinski (1997), 36 BLR (2d) 108 (BCSC) . . . . . . . . . . 842
Folland v Reardon (2005), 136 ACWS (3d) (Ont CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Foster v Mackinnon (1869), LR 4 CP 704 422
Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd, [1999] 3 SCR 108 ... . . . ... 201, 388, 392
Freedhoff v Pomalift Industries Ltd, [19711 2 OR 773 (CA) . . . . ........... 106
Friedmann Equity Developments Inc v Final Note Ltd. 2000 SCC 34, [2001] 1 SCR 842 289

Gallen v Allstate Grain Co Ltd (1984), 9 DLR (4th) 496 (BCCA) 483
Garcia v National Australia Bank Ltd, [1998] 155 ALR 614 (Austl HC) . . 596
George Mitchell Ltd v Finney Lock Seeds Ltd, [1983] QB 284 (CA), affd [19831
2 AC 803 (HL) ... .. ........................................ . . .. . ... . . 523
Gibbons v Trapp Motors Ltd (1970), 9 DLR (3d) 742 (BCSC) 151
Gibson v Manchester City Council, [1979] 1 WLR 294 (HL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Gilbert v Barron (1958), 13 DLR (2d) 262 (Ont HC) . . . . . . . . . . . . . . . . . . . . .......... 121
Gilbert Steel Ltd v University Construction Ltd (1976), 67 DLR (3d) 606 (Ont CA) 255, 267, 308
Girouard v Druet, 2012 NBCA 40, noted (2014) 65 UNBLJ 403 ........... . 288
Glanzer v Shepherd, 223 NY 236 (1922) . 363
Globex Foreign Exchange Corporation v Keicher, 2011 ABCA 240 . 635
Gloucester Municipal Election Petition, In Re The, [1901] 1 KB 693 .. . . .. . .. . . .. . 247
Gold v Rosenberg, [1997] 3 SCR 767, 152 DLR (4th) 385 ....... .. . . . . .. . .. . .. . 595, 598
Golding's Case (1586), 2 Leon 72, 74 ER 367 . . ......... . . 239

xxviii
 TABLE OF CASES

Goldthorpe v Logan, [1943] 2 DLR 519 (Ont CA) ............................ . .. . . ..... . 343
Go/sen v ONG Western, Inc, 1988 OK 26, 756 P 2d 1209, 1221 (Okla 1988) 842
Good v Cheesman (1831), 2 B & Ad 328, 109 ER 1165 ............ . 270
Gore v Van Der Lann, [1967] 2 QB 31 . . . . . . . . . . . . . . . .. .. .. . .. . . . 396
Goss v Chilcott. [1996] AC 788 . . ........... . 151
Goss v Lord Nugent (1833), 5 B & Ad 58 . 460
Graham Industrial Services Ltd v Greater Vancouver Water District
(2004), 25 BCLR (4th) 214 (CA) . . . ....... . . 202
Grainger & Son v Gough, [1896] AC 325 (HL) ........ . . . .. . .. . ... 170, 175
Grant v Province of New Brunswick (1973). 35 DLR (3d) 141 (NB App Div) 346
Great Northern Railway Company, The. v Witham (1873), LR 9 CP 16 . . . . . . . . . . . . . . . . . . . . 245
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd, [2002]
4 All ER 689 (CA) . 762, 780, 785, 786, 809
Greater Fredericton Airport Authority Inc v NAV Canada (2008). 290 DLR (4th)
405 (NBCA) 607, 617
Green v Ainsmore Consolidated Mines Ltd, [1951] 3 DLR 632 (BCSC) 206
Green v Russell, [1959] 2 OB 226 (CA) . . . . . . . . . . . . ....... . 371
Greenberg v Lake Simcoe Ice Supply Co (1917). 39 OLR 32 (H Ct J) . . . . . . . . . . . . . . . . . . . . . . 247
Greenberg v Meffert (1985). 50 OR (2d) 755 (CA) . . . . . . . . . . . . . . . . . . . . . 218
Greenwood Shopping Plaza Ltd v Beattie, [1980] 2 SCR 228 . . . . . . . . . . . . . . . . . . . . . . . . . . 380
Groves v John Wunder Co, 286 NW 235 (Minn SC 1939) 39,43
Grundt v Great Boulder Proprietary Gold Mines Ltd (1937). 59 CLR 641 (Aus HC) 320
Guay inc c Payette. 2013 SCC 45 ..................................... . 635

Hadley v Baxendale (1854). 9 Exch 341, 156 ER 145 . . . . . . . . . . . . . . . . . . . 49, 50, 51

Halleran v O'Neill Brothers Auto Ltd (1971). 1 Nfld & PEIR 455 (CA).... . . . .. . .. . . .. .. 727
Hamer v Sidway, 27 NR 256 (NYCA (2d) 1891) ........... 242, 243
Hans v Volvo Trucks North America Inc, 2011 BCSC 1574 548
Harris v Watson (1791), Peake 102, 170 ER 94 (KB) 250, 252
Harrison v Cage (1698). 5 Mod 411. 87 ER 736 (KB) 245
Harrity and Northeast Yachts 1998 Ltd v Kennedy, 2009 NBCA 60 727
Harry v Kreutziger (1978), 95 DLR (3d) 231 (BCCA) . . . . . . . . . . 570
Hartley v Ponsonby (1857). 7 El & Bl 872, 119 ER 1471 ... 251
Harty v Gooderham (1871). 31 UCR 18 . . . . . . . . . . . . . . . . . . . ..... 169
Harvey v Facey, [1893] AC 552 (PC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169, 170
Harvey v Perry, [1953] 1 SCR 233, [1953] 2 DLR 465 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Hav-A-Kar Leasing Ltd v Vekselshtein, 2012 ONCA 826, [2012] OJ No 5592 (QL) . . . . . . . . . . 521
Hawkins v McGee, 84 NH 114, 146 A 641 (1929) . ..................... 36
Hawrish v Bank of Montreal, [1969] SCR 515 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470, 473
Hayes v James & Charles Dodd, [1990] 2 All ER 815 (CA) . . . . . . . . . . . . . ............ 83
Hedley Byrne & Co Ltd v Heller & Partners Ltd, [1964] AC 465 (HL) . . . . . . . . . . . . . . 301, 739, 748
Heilbut, Symons & Co v Buckleton, [1913] AC 30 (HL) . 717, 721
Henkel v Pape (1870), LR 6 Ex 7 . ........................... 756, 757
Henningsen v Bloomfield Motors, 32 NJ 358, 121 A2d 69 (SC 1960) 629
Henthorn v Fraser, .118921 2 Ch 27 (CA) . ........................ 229
Hewett v First Plus Financial Group Pie. [2010] EWCA Civ 312 596
Heywood v Wellers. [1976] QB 446 (CA) ....................... 82
HF Clarke Limited v Thermidaire Corp Ltd, [1976] 1 SCR 319, 54 DLR (3d) 385 . . . . . . . . . . . . . 518
Hirachand v Temple, [1911] 2 KB 330 (CA) 270
Hittinger v Turgeon, 2005 ABOS 257, 30 RPR (4th) 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567
Hoban Construction Ltd v Alexander, 2012 BCCA 75 207

xx ix
TABLE OF CASES

Hobbs v Esquimalt and Nanaimo Railway Co (1899), 29 SCR 450 . . 749

Hobbs v London & SW Rlwy (1875), LR 10 OB 111 ' .. ' . ' . . . ' . . . .. . .. .. '. 76
Hoenig v Isaacs, [19521 All ER 176 (CA) . ' .. . 710
Holman v Johnson (1775). 1 Cowp 341, 98 ER 1120 (KB) 626,628,655,662,663, 664
Ho/well Securities Ltd v Hughes, [197411 All ER 161 (CA) ....... . . 229, 236
Honda Canada Inc v Keays, 2008 SCC 39, [20081 2 SCR 362 89
Horne v The Midland Railway Company (1873), LR 8 CP 131 (Exch Ch) ' ' .. ' .. .. 53
Horry v Tate, [19821 2 Lloyd's Rep 416 (OB) . . ........... . . 604
Hounslow London Borough Council v Twickenham Garden Developments Ltd,
[197111 Ch 233 ... . .... . . 114
Household Insurance Co v Grant (1879), 4 Ex D 216 (CA) 220
Howatson v Webb, [190711 Ch 537 . 424
Howe v Smith (1884). 27 Ch D 89 (CA) . 624
Howell v Coupland (1876), 1 OBD 258 . . . , . , , . , . . . .. 830
Hudson, Re (1885), 54 LJ Ch 811 . 302
Hughes v /Vletropolitan Railway Co (1877), 2 App Cas 439 .. . .. . . . ... . 302
Hunt v Silk (1804), 5 East 449 . . . ........ . ......... . .. . . . . 150, 151
Hunter Engineering Co v Syncrude Canada Ltd, [198911 SCR 426 527, 528, 548
Hutchison v The Royal Institution for the Advancement of Learning, [19321 SCR 57 . . . . . 279
Hyde v Wrench (18 4 0), 3 Beav 334, 49 ER 132 (Rolls Ct) . . . . . . . . . 189
Hydraulic Engineering Co Ltd v /VlcHaffie (1878), 4 OBD 670 (En gland) ..... . . . , . . . . . . 53

IB ex rel Fife v Facebook, Inc, F Supp 2d 989 (ND Cal 2012) ............... . . 516
Imperial Glass Ltd v Consolidated Supplies Ltd (1960), 22 DLR (2d) 759 (BCCA) 805
Ingram v Little, [196111 OB 31 (CA) ................. . 413
lnterfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, [19891 QB 433 (CA) . 456
International Paper Industries Ltd v Top Line Industries Inc, 1996 Can LI I 3340,
135 DLR (4th) 423 (BCCA) ........................ . . ........... . .. . . 654
Inter-office Telephones, Ltd v Robert Freeman Co, Ltd, [195811QB190 (CA) 47
lnukshuk Wireless Partnership v NextWave Holdco LLC, 2013 ONSC 5631 . . . .. 235
Investors Compensation Scheme, Ltd v West Bromwich Building Society, [19981
1 WLR 896 (HL) ........................ . .. .. . ... .. . . ... . . 467
/TO v Miida Electronics Ltd, [19861 1 SCR 752 . .. 380, 550

J Nunes Diamonds Ltd v Dominion Electric Protection Company,

[19721 SCR 769, 26 DLR (3d) 699 . . . . . .. . . . . . 749
J Spurling Ltd v Bradshaw, [19561 2 All ER 121 . . . . . . . . . . . . . . . . . . . .... .. . . 448
Jackson v Horizon Holidays Ltd, [19751 3 All ER 92 (CA) 82,371,374
Jackson v Royal Bank of Scotland, [20051UKH L 3 . . . 50
Jacob & Youngs, Inc v Kent, 230 NY 239, 129 NE 889 (CA 1921) .. . . 707
James Finlay & Co v NV Kwik Hoo Tong H/VI, [192911 KB 400 . . . .. . 106
Janson v Driefontein Consolidated Mines, Ltd, [19021 AC 484 ' . . 629
Jarvis v Swans Tours Ltd, [19731 OB 233 (CA) ........... . . .. ' . . ' . .... . ' .. . 80
Jeffrey v Dofasco Inc (2007). 161 ACWS (3d) 306 (Ont Div Ct)) 859
Jet2.com Ltd v Blackpool Airport Ltd, [20121 EWCA Civ 417 . .. .. . . . .. . . . . . . . . . .. . . . . . .. . . . 217
JG Collins Insurance Agencies v Eisley, 119781 2 SCR 916 . 635
Joan Balcom Sales Inc v Poirier (1991). 106 NSR (2d) 377 (Co Ct) ....... . . . . . 234
John Burrows Limited v Subsurface Surveys Limited, [19681 SCR 607,
68 DLR (2d) 354 . . ' . 309, 315
John E Dodge Holdings Ltd v 805062 Ontario Ltd (2003), 63 OR (3d) 304 (CA) 830
Johnston Brothers v Rogers Brothers (1899 ), 30 OR 150 (Div Ct) . . . . . . . . . . . . . . . . . . . . . . 167
Jones v Padavatton, [19691 2 All ER 616 (CA) . . ............ . . .. .. . . . . ... , . , , . . 284

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Jones v Vernon's Pools, Ltd, [1938) 2 All ER 626 (KB) ........... . 287
Jostens Canada Ltd v Gibsons Studio Ltd, [1998) 5 WWR 403 (BCCA) ... . , . . , . . .... . .. . . . 162
Junkin v Junkin (1978), 86 DLR (3d) 751 (Ont H Ct J) . 623

KBK No 138 Ventures Ltd v Canada Safeway Limited, 2000 BCCA 295,
185 DLR (4th) 650 . . . . . . . . . . . . . . . . . . . . . . . . . . . ............... , . . . . . . . . . . . . 829
Kennedy v Broun (1863), 13 CB (NS) 677, 143 ER 268, 292 ............. . 295
Kinghorne v The Montreal Telegraph Co (1859), 18 UCOB 60 (Ont) 54
King's Norton Metal Co Ltd v Edridge, Merrett & Co Ltd (1897), 14 TLR 98 (CA) .............. 411
Kingshot v Brunskill, [1953) OWN 133 (CA) 646, 655, 662, 663
Kingston v Preston (1773), 2 Douglas 689, 99 ER 437 . . ............... 673, 677
Kiriri Cotton Co Ltd v Rachhoddas Keshavji Dewani, [1960) AC 192 (JCPC, on appeal
from the Court of Appeal for Eastern Africa) . . . . . . . . . . . . . . . . . . . . . . 655
Ko v Hillview Homes Ltd, 2012 ABCA 245 ........ . .. . .... , . . . . 209
Ko/an v Solicitor (1969), 7 DLR (3d) 481 (Ont HC) . . . . . . . . . . . . . . . . . ............ 79
Koliniotis v Tri Level Claims Consultants Ltd (2005), 201 OAC 282 628,662,663,664
Kolodziej v Mason, 774 F 3d 736, 741 (11th Cir 2014) ................ . . 343
Koufos v C Czarnikow, Ltd (The Heron II}, [1969) 1 AC 350 (HL) ..... . . .. . . . , .. , . . , , .. , .. 64
Krawchuk v Scherbak, 2011 ONCA 352, 106 OR (3d) 598 ............. . 748
Krell v Henry, [1903) 2 KB 740 (CA) ........................ . ............... , . . 8296,835
Kupchak v Dayson Holdings Ltd (1965), 53 WWR 65, 53 DLR (2d) 482 (BCCA) . 726,808

Lac Minerals Ltd v International Corona Resources Ltd, [1989) 2 SCR 574 .. .. . . . , . .. .... ... 353
LaFayette v WW Distributors & Co Ltd (1965), 51 WWR 685 (Sask Dist Ct) 622
Laidlaw v Organ, 15 US (2 Wheat) 178 (1817) ..................... . . , . . .. . . 767, 769
Lamkins v International Harvester Co, 182 SW 2d 203 (Ark SC 1944) 51
Lamont v Canadian Transfer Co Ltd (1909), 19 OLR 291 (CA) ......... . ....... . .. . . .. . . . . 446
Lampleigh v Brathwait (1615), Hobart 105, 80 ER 255 295
Lapointe Rosenstein Marchand Melanc;on LLP v Cassels Brock & Blackwell LLP,
2014 ONCA 497 ................ . . . . . . . ... 235
Larkin v Gardiner (1895), 27 OR 125 (Div Ct) 180
Laurwen Investments Inc v 814693 Northwest Territories Ltd (1990),
48 SLR 100 (NWTSC) ......... . 868
Lavarack v Woods of Colchester, Ltd, [1967) 1 OB 278 76
Leaf v International Galleries, [1950) 2 KB 86, [1950) 1 All ER 693 (CA) ... . . .. . .. . . .. . .... . 731
Lee v 1435375 Ontario Ltd, 2013 ONCA 516 .. 787
Lee v Muggeridge (1813), 5 Taunt 36 .................... .... . ..... ..... . . . .... . 297
Lefkowitz v Great Minneapolis Surplus Store, 86 NW 2d 689 (Minn SC 1957) 171, 173
Les Affreteurs Reunis Societe Anonyme v Leopold Walford (London) Limited,
[1919) AC 801 (Eng HL) .............. . ......... , . . , . . , . 370
L'Estrange v Graucob, [1934) 2 KB 394 ......... 459
Lewis v Averay, [1972) 1OB198 (CA) .. . . .. . . .. . . . .. . ... . . . . . . , . . . . . . . 418
Lewis v Central Credit Union Ltd, 2012 PECA 9 ............... .... 598
Lim Teng Huan v Ang Swee Chuan, [1992) 1 WLR 113 (Brunei PC) . 219
Linton v Royal Bank of Canada, [1967) 1 OR 315 (H Ct J) ...... . ... . . 290,291
Livingstone v Evans, [19251 4 DLR 269 (Alta SC) ......... . .. . .. • . . ... 190
Lloyds Bank Limited v Bundy, [1975) 1 OB 326 .............. . .. . . . . . . 574
London Drugs Ltd v Kuehne & Nagel International Ltd, [1992) 3 SCR 299 ...... .. , .. , . 380,392
Long v Smith (1911), 23 OLR 121 ............................. .. . . . .. . . . 475
Loranger v Haines (1921), 50 OLR 268 (CA) . . ........ . . 326, 331
Loychuk v Cougar Mountain Adventures Ltd, 2012 BCCA 122,
[2012) BCJ No 504 (OL) ..... . .. , . . , ..... .. . . 548, 550

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TABLE OF CASES

Lucy v Mouflet (1860), 5 H & N 229, 157 ER 1168 (Ex Ch). 185
Lumley v Gye (1853), 2 El & Bl 216 . . . . . . . . . . . . . . ..... . . . 136

Macaulay v A Schroeder Music Publishing Co Ltd, [1974] 1WLR1308 (HL) . . . . . . . . . . . . 599

Machtinger v HOJ Industries Ltd, [1992] 1 SCR 986 . . . . . . . . . . . . . . . . . . . . 706
MacKay v Scott Packing and Warehousing Co (Canada) Ltd, [1996] 2 FC 36 (CA) 550
Maddison v Alderson (1883), 8 App Cas 467, 473 . . . . . . . . . . . . . . 302
Mafo v Adams, [1970] 1 OB 548 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 716
Magee v Pennine Insurance Co, [19691 2 OB 507 (CA) ... .. . 777
Mahmud v Bank of Credit and Commerce Int SA, [1998] AC 20 (HL) 78
Mahoney v Purnell, [1996] 3 All ER 61 (OB) 623
Manchester Diocesan Council for Education v Commercial & General
Investments Ltd, [1969] 3 All ER 1593 (ChD) 179,189
Manufacturers Life Insurance Co v Huang & Danczkay Properties,
2003 CarswellOnt 2990 (Ont Sup Ct J) . . . ....... . 828
Maple Flock Company, Ltd v Universal Furniture Products (Wembley), Ltd,
[1934] 1 KB 148 (CA) . . . . . . . ......... . ... . ..... . 688
Marshall v Canada Permanent Trust Co (1968), 69 DLR (2d) 260 (Alta SC) .. . 564,623
Marshall v Harland & Wolff Ltd, [1972] 2 All ER 715 (NIRC) .............. . 859
Martel Building Ltd v Canada, [2000] 2 SCR 860 ............... . 202
Martselos Services Ltd v Arctic College, [19941 NWTJ No 4, 111 DLR (4th) 65 (OL) (CA) 698
Marvco Colour Research Ltd v Harris, 11982] 2 SCR 774, 141 DLR (3d) 577 . ........ .. . 436
Mason v Chem-Trend Ltd Partnership, 2011ONCA344 .. .... ....... . 635
May and Butcher, Limited v The King (1929), [1934] 2 KB 17n (HL) . . . .. . .. .. . . . . . 207
Maystar General Contractors Inc v Newmarket (Town), 2009 ONCA 675 ..... . .. . . 201
Mccutcheon v David MacBrayne Ltd, [1964] 1 All ER 430 (HL) .. . ... . . . . . . . . . . . . 449
McDonald v Fellows, [19791 6 WWR 544 ......................... . .. . .. .. .. . .. . ...•. 661
McDonald v Murray (1885), 11 OAR 101 (CA) . . . . . . . . . . . . . . . . . . . . . .. . .. . .. . . 674
Mcintosh v Brill (1870), 20 UCCP 426 ............. . . . 190
McKeen v The Mortgage Makers Inc and Libby, 2009 NBCA 61 ... 521
McKenzie v Bank of Montreal (1975), 55 DLR (3d) 641 (Ont H Ct J),
aff'd (1976), 12 OR (2d) 719 (CA) .......................... . 597
McLeod v Amiras, (2001), 94 BCLR (3d) 359 (SC) ... 336
McMaster University v Wilchar Construction Ltd (1971), 22 DLR (3d) 9 (Ont H Ct J),
aff'd without reasons 69 DLR (3d) 400n (CA) . . . . . . . . . . . . ......... 805
McRae v Commonwealth Disposals Comm (1951), 84 CLR 377 (Austl HC) . . . . . . . . . . . . . . . . . 793
MED/chair LP v DME Medequip Inc, 2016 ONCA 268 . 635
Meditek Laboratory Services v Purolator Courier Ltd (1995), 125 DLR (4th) 738 (Man CA) . . 550
Melnyk v Melnyk, 2010 MBOB 121, 12010] MJ No 176 (OL) ...... 573
Merritt v Merritt, [1970] 2 All ER 760 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
Midland Silicones Ltd v Scruttons Ltd, [19621 AC 446 (HL) 374
Miglin v Miglin, 2003 sec 24, 12003] 1 SCR 303 .... . . .. . .... 573
Miller Estate, Re, [1938] SCR 1 .. . 626
Miller Paving Limited v B Gottardo Construction Ltd, 2007 ONCA 422 786, 810
Mills v Wyman, 3 Pick [20 Mass] 207 (SJC 1825) . . . . . . . . . . . . . . . . . . 297
Mistry Amar Singh v Serwano Wofunira Kulubya, [1964] AC 142 (JCPC, on appeal
from the Court of Appeal for Eastern Africa) 653, 654
MJB Enterprises Ltd v Defence Construction (1951) Ltd, [1999] 1 SCR 619,
170 DLR (4th) 577 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197, 805
Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998), 81 FCR 475 ... 352
Mohamed v Alaga & Co (a firm), [1999] 3 All ER 699 (CA) .. ............. 655
Montana Mustard Seed Co v Gates (1963), 42 WWR 303 (Sask OB) 210

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Morgan v Griffith (1871), LR 6 Ex 70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473

Moses v Macferlan (1760), 2 Burr 1005, 97 ER 676. . ...... , .. . .. . . . .. 149
Mulholland v Merriam (1872), 19 Grant 288 (Ont Ch) . 367, 371
Multi-Malls Inc v Tex-Mall Properties Ltd (1980), 108 DLR (3d) 399 (Ont H Ct J),
aff'd (1981), 128 DLR (3d) 192 (CA) ..... . 48
Mundinger v Mundinger (1968), 3 DLR (3d) 338 (Ont CA) ..... . 567
Munroe Equipment Sales Ltd v Canadian Forest Products Ltd (1961),
29 DLR (2d) 730 (Man CA) . . . ................. , .. . . . . . 58
Murphy's Ltd v Fabricville Co Inc (1980), 117 DLR (3d) 668 (NSSC (TD)) 508
Murray v Sperry Rand Corporation (1979), 96 DLR (3d) 113 (Ont H Ct J) . . . . . . . . . . . . . . . . . . 735
Mustapha v Culligan of Canada, 2008 SCC 27, [2008] 2 SCR 114 . . . . . . . . . . . . . . . . . . . . . . . . . . 89
MWB Business Exchange Centres Ltd v Rock Advertising Ltd, [2016]
EWCA Civ 553 ...................... . . 270, 271, 318

Nash v Inman, [1908] 2 KB 1 (CA) .. 512, 622

National Carriers Ltd v Panalpina (Northern) Ltd, [1981] AC 675 .. ........ .. . . 828
NAV Canada v Greater Fredericton Airport Authority Inc, 2008 NBCA 28,
290 DLR (4th) 405 . . . . .............. . 260,267
Naylor Group Inc v Ellis-Don Construction Ltd, 2001 SCC 58, [2001] 2 SCR 943,
204 DLR (4th) 513 ......... . .... .. . ........ . 201, 859
New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon),
[1975] AC 154 (PC) ......... . ........ . 251, 375, 380
Newbigging v Adam (1886), 34 ChD 582 (CA) . . . . 725, 808
Nichols v Raynbred (1615), Hobart 88, 80 ER 88 (KB) ... . . . . , . . , . . . . . . . . . . . . . . . . . . . . . . 245
Niedermeyer v Charlton, 2014 BCCA 165 . . . . . . . . . . . 548, 549
Nielsen v Dysart Timbers Ltd, [2009] NZSC 43, noted (2011) 27 J of Contract L 222 180
NM v ATA, 2003 BCCA 297, 13 BCLR (4th) 73 . . . . . . . . . . . . 334, 336
Nordstrom v Baumann, [1962] SCR 147 . . . . . . . . . . . . .................. . . . . . 646
Northland Airlines Ltd v Dennis Ferranti Meters, Ltd (1970), 114 SJ 845 (OL) (CA) ............ 190
Nu-West Homes Ltd v Thunderbird Petroleums, Ltd (1975), 59 DLR (3d) 292 (Alta CA) .... 43
Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd, [1994] 1 VR 74 (SC) 225

O'F/aherty v McKinley, [1953] 2 DLR 514 (Nfld CA) . . . . . . . . . . . . . . . . . . . . . . . . 733

O'Grady v Westminster Scaffolding Ltd, [1962] 2 Lloyd's Rep 238 (OB) .......... . 43
Oldfield v Transamerica Life Insurance Co of Canada, 2002 SCC 22, [2002] 1 SCR 742 643
Olley v Marlborough Court Ltd, [1949) 1 KB 532 (CA) .............. 448
Omak Maritime Ltd v Mamo/a Challenger Shipping Co, [2010] EWHC 2026 (Comm) . . . . . . . 35
Oom v Bruce (1810), 12 East 225 (KB) ............ 655
O'Reilly v Marketers Diversified Inc (1968), 1 DLR (3d) 387 (BCCA) . . . . . . . . . . . . . . . 696
Outson v Zurowski (1985), 63 BCLR 89 (CA) . . . . . . . . . . . . . . . . ...... , .. . .. , . 659, 661, 662
Owen Sound Public Library Board v Mia/ Developments Ltd,
(1979), 102 DLR (3d) 685 (Ont CA) . 308,311, 315, 336

Paciocco v Australia and New Zealand Banking Group Limited, [2016] HCA 28 ..... . . , . . , . . 522
Padden v Bevan Ashford Solicitors, [2012] 2 Costs LO 223 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 596
Page One Records Ltd v Britton, [1968] 1 WLR 157 (Ch) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Paget v Marshall (1884), 28 ChD 255 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506, 508
Panoutsos v Raymond Hadley Corporation of New York, [1917] 2 KB 473 (CA) 692
Pao On v Lau Yiu Long, [1980) AC 614 (PC) 254, 296, 617
Paradine v Jane (1647), Aleyn 26, 82 ER 897 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817, 818
Paris v Machnick (1972), 32 DLR (3d) 723 (NSSC (TD)) .............. . 623
Parker v The South Eastern Railway Company (1877), 2 CPD 416 (CA) . 43

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TABLE OF CASES

ParkingEye Limited v Beavis. [20151 UKSC 67 ... . . . . .. .. . ... . .... . .. . . 522

ParOS pie v World/ink Group pie. [20121 EWHC 394 (Comm) . .. . .. . . . .... . 748
Parrish & Heimbecker Ltd v Gooding Lumber Ltd, [1968] 1 OR 716. 67 DLR (2d) 495 (CA).
aff'd [1968] SCR viii . .. ........ . 833
Parsons Bros Ltd v Shea (1965). 53 DLR (2d) 86 (Nfld SC) 868
Patel v Mirza. [2016] UKSC 42 (SC) 663
Payzu Limited v Saunders. [1919] 2 KB 581 (CA) .. ... . ......... . . 102
Peevyhouse v Garland Coal & Mining Co. 382 P 2d 109 (SC Okla 1962) .. . .. . . . . .. . . 43
Percival v London Etc Committee (1918). 87 LJKB 677 .......... . .. . . 247
Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd,
2002 sec 19. [200211 scR 678 .. . .. ....... . .. . 101. 495, 500
Petrogas Processing Ltd v Westcoast Transmission Co (1988). 59 Alta LR
(2d) 118 (OB). aff'd (1989). 66 Alta LR (2d) 254 (CA) ........ . ... . 828
Pettkus v Becker, [1980] 2 SCR 834 .. . 149
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd. [1953]
1 QB 401 (CA) . . ................ . 173
Phillips v Brooks, [1910] 2 KB 243 (Eng HC) 412
Photo Production Ltd v Securicor Transport Ltd, [1980] AC 827 (HL) .... .. . .. . . . . . .. . . . .. . 527
Pilkington v Wood, [1953] Ch 770 106
Pinne/'s Case (1602). 5 Coke's Rep 117a; 77 ER 237 270
Pitcher v Shoebottom [1971] 1 OR 106 (HC) . 35
Pitt v Holt. [2013] UKSC 26 ... . . . .. . .. . ... 785
Plas-Tex Canada Ltd v Dow Chemical of Canada Limited. 2004 ABCA 309 550
Posner v Scott-Lewis. [19871 Ch 25 .... . ............. . ............ . 128
Post v Jones. 60 US 150 (1857) 562
Poussard v Spiers and Pond (1876). 1 OBD 410 677, 680
Prenn v Simmonds. [197113AllER237 (HL). 461, 467
Preston v President of the Methodist Conference. [2013] UKSC 29 .. . ... . .. .. . . . . . . 288
Pridmore v Calvert (1975). 54 DLR (3d) 133 (BCSC) . ... ... . .. . .. . . 602
Printing & Numerical Registering Co v Sampson (1875). LR 19 Eq 462 . . ... . .. . .. .. . .. . . . . 626
Process Automation Inc v Norstream lntertec Inc, 2010 ONSC 3987 .......... 271
Pym v Campbell (1856). 6 E & B 370, 119 ER 903 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474

Quality Motors. Inc v Hays, 225 SW 2d 326 (Ark SC 1949) 622

Queen v Cognos Inc. [1993] 1 SCR 87. 99 DLR (4th) 626 . .. .. . . . . . .. . . . ..... .. . ... . . .. . 749

Raabe v 4042492 Manitoba Ltd, [2011] MJ No 320 (QL) (QB) 549

Raffles v Wichelhaus (1864). 2 H & C 906, 159 ER 375 751, 752
Raggow v Scougall and Co (1915). 31 TLR 564 (Div Ct) 254,267
Redgrave v Hurd (1881). 20 ChD 1 (CA) ... . .. .... . ... .. .. . .. .. . .. .. . . .. . .. ..... . . . 723, 808
Redican v Nesbitt, [1924] SCR 135 . 728
Reif v Page, 55 Wisc 496 (1882) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Rex v Rash (1923). 53 OLR 245 (CA) . 510
Richardson v Mellish (1824). 2 Bing 229 (CP) . 625
Richcraft Homes Ltd v Urbandale Corp. 2016 ONCA 622 266,267
Rick v Brandsema, 2009 SCC 10, [2009] 1 SCR 295 .......... . 573, 574, 623, 721
Rickards Estate v Diebold Election Systems Inc, 2007 BCCA 246 842
River Wind Ventures Ltd v British Columbia, 2009 BCSC 589.
rev 'd (on other grounds) 2011 BCCA 79 265,267
River/ate Properties Ltd v Paul. [1975] Ch 133 508
Rivers v George White & Sons Co. [19191 2 WWR 189 (Sask CA) 54
Rogers v Lane Realty Corp, 2005 SKOB 330 . 598

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 TABLE OF CASES

Ron Engineering. R (Ont) v. [1981) 1SCR111. 119 DLR (3d) 267 . 202.354.800,805
Roscorla v Thomas (1842), 3 OB 234. 114 ER 496. 296
Rose and Frank Company v JR Crompton & Brothers. Limited. [1923) 2 KB 261 (Eng CA) 286
Roth & Co v Taysen, Townsend & Co (1896), 1 Comm Cas 306 (CA) 104
Rowland v Divall. [1923) 2 KB 500 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Roy v 1216393 Ontario In c. 2011 BCCA 500 ................... . . 548, 549
Royal Bank of Canada v El-Bris Ltd (2008). 92 OR (3d) 779 (Ont CA) . 500
Royal Bank of Canada v Kiska (1967), 2 OR 379 (CA) ................... . 291
Royal Bank of Scotland pie v Etridge (No 2) and Other Appeals.
[2002) 2 AC 773. [2001) 4 All ER 449 (HL) . . . . .. ... ........ . . . . . .. . 582. 595. 596. 598
Rudder v Microsoft Corp (1999). 47 CCLT (2d) 168 (Ont Sup Ct J) 239
Ruxley Electronics and Construction. Ltd v Forsyth. [1996) 1 AC 344 (HL) .. . . . . .. , ....... .... 43
Ryan v Moore. 2005 SCC 38. [2005) 2 SCR 53 ..................... 320

Sail Labrador Ltd v Challenge One (The). [1999) 1 SCR 265, 169 DLR (4th) 1 . 695
Saint John Tugboat Co Ltd v Irving Refinery Ltd. [1964) SCR 6143. 49 MPR 284 187
Samson v Lockwood (1998), 40 OR (3d) 161 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727
Santelli v Bifano Enterprises (1981), 33 BCLR 266 (SC) .. .. . . . . .. .. . .. . ..... . . 215
Satanita. The [1895) P 248 (CA) ........... . ............. . . 366
Sattva Capital Corp v Creston Maly Corp. 2014 SCC 53 . . . . . . . . . . 467
Saunders v Anglia Building Society (Gallie v Lee). [1971] AC 1004 (HL) . . . . . . . . . . . . . . . . . . . . 425
Savereux v Tourangeau (1908). 16 OLR 600 (Div Ct) . . . . . . . . . . . . . . . . . . . . . .. 184
Scammell (G) and Nephew, Limited v Ouston. [1941) AC 251 (HL) .. .. ........... ... . . . . ... 212
Schebsman. Re. [1944] Ch 83 (CA) .................... .......... . 371
Schnell v Nell, 17 Ind 29 (US Sup Ct 1861) ... ... .......................... 244
Scott v Coulson, [1903] 2 Ch 249 ...................... 789
Scyrup v Economy Tractor Parts Ltd (1963), 40 DLR (2d) 1026 (Man CA) ........ . . .. .. . . . . 60
Sea/and of the Pacific Ltd v Robert C McHaffie Ltd (sub nom Sea/and of the
Pacific Ltd v Ocean Cement Ltd) (1974), 51 DLR (3d) 702 (BCCA) 749
Se/ectmove Ltd. Re. [1995] 2 All ER 531 (CA) 270
Semelhago v Paramadevan. [1996] 2 SCR 415 115
Shafran v KRG Insurance Brokers (Western) Inc. 2009 SCC 6, [2009] 1 SCR 157 . 632, 669
Shatford v BC Wine Growers Ltd, [1927] 2 DLR 759 (BCSC) ........ . . . .. 178
Shatilla v Feinstein, [1923] 3 DLR 1035 (Sask CA) 516, 517
Sherwood v Walker. 66 Mich 568, 33 NW 919 (Mich SC 1887) 790
Shogun Finance Ltd v Hudson. [200411 AC 919 (HL) ........ . . 411
Sieff v Fox. [2005] EWH C 1312 (Ch) . . .............. . . . . . . . . . .. ... 785
Simpkins v Pays, [1955] 3 All ER 10 (HC) .............. . . . 282
Simpson v London & NW Rlwy (1876), 1 OBD 274 .. . ... . .. . . . .. . .. . . . ..... .. . . 76
Sinclair v Brougham. [19141 AC 398 ............... . .. . .. . 145
Skidmore v Bradford (1869). LR 8 Eq 134 ..................... . . 302
Sky Petroleum Ltd v VIP Petroleum Ltd. [1974) 1 WLR 576 (Ch) 119
Skypower CL 1 LP v Ontario (Minister of Energy), [2012) OJ No 4458 (OL) (Div Ct) 549
Smith v Dawson (1923), 53 OLR 615 (CA) . 253. 255
Smith v Hughes (1871). LR 6 QB 597 . . ....... . . ... . . .. . . .. . . . . 757. 761
Smith v Landstar Properties Inc, 2011 BCCA 44, 320 DLR (4th) 664 . 162
Solle v Butcher. [1950] 1 KB 671 . . . 77~78~78~ 809
South Caribbean Trading Co v Trafigura Beheer BV, [2004] EWHC 2676 .. 267
South Yukon Forest Corp v Canada, 2012 FCA 165 349
Sovereign Bank. Re (1915), 35 OLR 448 (SC (AD)) . . ............. . .. . . . .. . . 511
Staiman Steel Ltd v Commercial & Home Buildings Ltd (1976), 71 DLR (3d) 17
(Ont H Ct J) 753

xx xv
 TABLE OF CASES

Statoil ASA v Louis Dreyfus Energy Services LP, [2008] EWHC 2257 (Comm) 761, 785
Stepps Investments Ltd v Security Capital Corp (1976), 73 DLR (3d) 351 (Ont H Ct J) 508
Stevens Pools Ltd v Carlsen, 2015 BCPC 23 .... 640
Stewart v Kennedy (1890), 15 App Cas 75 (HL (Scot)) ..... . .... .. . . .. . .. . . . . 115
Stilk v Myrick (1809), 2 Camp 317, 170 ER 1168 ..... . . . .. . . . .. .... . 251, 252, 267, 275
Still v MNR, [1998] 1 FC 549 (FCA) . . .. .. .. . . .. .. . .... . . . 649,663,669,670
Stockloser v Johnson, [1954] 1 OB 476 (CA) . ...... 518, 624
Stocks v Wilson, [1913] 2 KB 235 .... 622
Storer v Manchester City Council, [1974] 3 All ER 825 (CA) . .. 175, 178
Stubbs v Holywell Railway Company (1867), LR 2 Ex 311 .... .. . . . .. . .. .. .. . ... . 712
Sumpter v Hedges, [1898] 1 OB 673 (CA) .. . ... . . . . . 624, 713, 714
Susan Hilary Hurley v The Darjan Estate Company pie, [2012] EWHC 189 (Ch) 595

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd, [20091 HCA 8 ...... .. . .. . . .. . .. . . . . . .. 43
Tanenbaum v WJ Bell Paper Co Ltd (1956), 4 DLR (2d) 177 (Ont H Ct J) 123
Taylor v Caldwell (1863), 3 B & S 826, 122 ER 309 818,820
Techform Products Ltd v Wo/da (2001), 56 OR (3d) 1 (CA) ..................... . 601
Tekdata Interconnections Ltd v Amphenol Ltd, [2010] 2 All ER (Comm) 302 (CA)
(noted (2011) Can Bus LJ 307) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............... 192
Tender Choice Foods Inc v Planet Energy (Ontario) Corp, 2016 ONCA 192 473
Tercon Contractors Ltd v British Columbia .{Transportation and Highways),
2010 sec 4, [20101 1 scR 69 . . . . . . . . . . . 202, 527, 538, 548, 549, 626
Thompson (WL) Ltd v Robinson (Gunmakers) Ltd, [1955] Ch 177 44,47
Thomson Groceries Ltd v Scott, [1943] 3 DLR 25 (Ont CA) ..... . . . . . . .. .. . . .. . . . . ..... 214
Thornton v Shoe Lane Parking Ltd, [1971] 2 OB 163 (CA) . . . . . . . . . . . . . . . . 453
Thorp v Thorp (1702), 12 Mod 455, 88 ER 1448, 1450 (KB) . . . . . . . . . . . . . . 242, 245
Tilden Rent-A-Car Co v Clendenning (1978), 83 DLR (3d) 400 (Ont CA) ..... . .. .. . 476
Tinn v Hoffmann and Co (1873), 29 LTR 271 (Ex Ch) 192, 340
Titus v William F Cooke Enterprises Inc, 2007 ONCA 573 . . . . . . . . . . . . . . . . . . . . . . . 548
Tobias v Dick and T Eaton Co, [1937] 4 DLR 546 (Man KB) . . . . . . . . . . . . . . . . . . . . . . . 248, 250
Toronto Transit Commission v Gottardo Construction Ltd
(2005), 257 DLR (4th) 539 (Ont CA) .... . ......................... . . .. 805
Toronto-Dominion Bank v Fortin (No 2) (1978), 88 DLR (3d) 232 (BCSC) 275, 779
Toscano v Toscano, 2015 ONSC 487 ..... ......... 574
Transatlantic Financing Corp v United States, 363 F 2d 312 (DC Cir 1966) 853
Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas), [2009] 1 AC 61 (HL) . . . . • . . . . 66
Transport North American Express Inc v New Solutions Financial Corp,
2004 sec 7, [2004J 1 scR 249 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667
Treadwell v Martin (1976), 67 DLR (3d) 493 (NBCA) 623
Trevitt v Blanche Equipment Rentals Ltd, 2006 BCSC 94 .... . .. . ... . . .. . . . . . . . .. . .. . 859
Tribe v Tribe, [1995] 4 All ER 236 (CA) . . . . . .......... . 662,663
' Trident General Ins Co v McNiece Bros Pty Ltd (1988), 165 CLR 107 (Aus HC) 363
Trillium Motor World Ltd v General Motors of Canada Limited), affirmed
[2016] 1 SCR 851. . .......... . . . 235
Troika Land Development Corp v West Jasper Properties Inc, 2009 ABOB 590 ... .. . .. .. . 829
Troppi v Scarf. 187 NW 2d 511 (Mich CA 1971) . 106
Tsakirog/ou & Co Ltd v Noblee Thor/ GmbH, [1962] AC 93 (HL) .......... .. .. .... . ... . .. . 852
Turczinski v Dupont Heating & Air Conditioning Ltd (2004), 246 DLR (4th) 95 ... . . • ..... ... 83
Turney v Zhilka, [1959] SCR 578, 18 DLR (2d) 497 ................ . 695
Tweddle v Atkinson (1861), 1 B & S 393, 121 ER 762 355, 374, 397
Tywood Industries Ltd v St Anne-Nackawic Pulp & Paper Co Ltd
(1979), 100 DLR (3d) 374 (Ont H Ct J) . . ....... . . . .. . .... 192

xx xvi
 TABLE OF CASES

UBS Securities Canada, Inc v Sands Brothers Canada, Ltd (2009), 95 OR (3d) 93 (CA) 206
Upton-on-Severn Rural District Council v Powell, [1942) 1 All ER 220 (CA),
noted (1942) 20 Can Bar Rev 557 . . . . . . . . . . . . . . . . . 288
USA v Motor Trucks, Limited, [1924) AC 196 (Ont PC) 491

Van De Geer Estate v Penner, [2006) 7 WWR 575 (Sask CA), rev'g in part
(2004), 252 Sask R 213 (QB) . . . . . . . . . . . . . . . . ....... . .. .. . . .. . ... . . .. 567
Van Der Ros v Van Der Ros (2003), 182 BCCA 211 595
Verkaik v Verkaik (2009), 68 RFL (6th) 293 (Ont Sup Ct J) .. 574
Vernon v Bethell (1762), 2 Eden 110, 28 ER 839 (Ch) 240
Verwayen, The Commonwealth of Australia v, (1990), 170 CLR 394 (Aus HC) 320
Victoria Laundry Ltd v Newman Industries Ltd, [1949) 2 KB 528 (CA) ........... . ... . . . . 54,66
Victoria Wood Development Corp Inc v Ondrey (1977), 14 OR (2d) 723,
74 DLR (3d) 528 (HC) .................... . . 828,829
Vincent v Premo Enterprises Ltd, [1969) 2 WLR 1256 (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . 290
Vire v Blair, 2016 ONSC 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573
Vorvis v Insurance Corporation of British Columbia, [1989) 1 SCR 1085 83

Wabash v Avnet Inc, 516 F Supp 995, 999 n 5 (ND 111, 1981) 842
Walford v Miles, [1992) 2 AC 128 (HL) ...................... . .. .. . . . . 217, 218
Wallace v Allen (2009), 93 OR (3d) 723 (CA) ......................... .. . . . . 207
Waltons Stores (Interstate) Ltd v Maher (1988), 164 CLR 387 (Aus HC) ..... . .. . 307
Warner Bros Pictures Incorporated v Nelson, [1937) 1 KB 209 130
Warren v Mendy, [1989) 1 WLR 853 (CA) . 136
Webb v McGowin, 3 Div 768 (Alabama CA 1935) 296
Wells v Newfoundland, [1999) 3 SCR 199, 177 DLR (4th) 73 ........ . ... . .. .. . . . . ... . 859
Wertheim v Chicoutimi Pulp Company [1911) AC 301 at 307 (PC) . . ..... . .. . . 27
Westdeutsche Landesbank Girozentrale v Islington LBC, [1996) AC 669 (HL) . 151
Westinghouse flee Corp Uranium Contracts Litigation, Re, 517 F Supp 440,
31 UCC Rep Serv 930 ................................ . ......... . . 851
Westlake v Adams (1858), 5 CB (NS) 248, 141 ER 99, 106 ........ . . . . . .. . . . . .. . . . .... . .. . 239
Wheeler v Klaholt, 178 Mass 141, 59 NE 756 (Sup Jud Ct 1901) .......... . . 86
White & Carter (Councils), Ltd v McGregor, [1962) AC 413 (HL (Scot)) ... . . . . . . . . . 106, 113, 114
White (Executor) v William Bluett (1853), 23 LJ Ex (NS) 36 (Eng Ex Ct) 241,243
White v Jones, [1995) 2 AC 207 (H L) 363
Whiten v Pilot Insurance Co, 2002 SCC 18, [2002) 1 SCR 595 . 89, 101
Whittington v Seale-Hayne (1900), 82 LT 49 . . . . ................... . . .. . . . . . . .. . 808
Wightman Estate v 2774046 Canada Inc (2007). 57 BCLR (4th) 79 (CA) .. . ...... . . 859
William E Thomson Associates Inc v Carpenter (1989), 61 DLR (4th) 1 (Ont CA) 665
Williams v Carwardine (1833), 4 B & Ad 621, 110 ER 590 ....... ... . 338
Williams v Downey-Waterbury (1995), 120 DLR (4th) 737 (Man CA) . . . . . . . . . 573
Williams v Roffey Bros Ltd, [1991) 1 QB 1 (CA~ . 258, 267. 270. 308
Wilmot v Ulnooweg Development Group Inc (2007), 283 DLR (4th) 237 (NSCA) 859
With v O'Flanagan, [19361 Ch 575 (CA) . . . . . . . . . . . . . . . . ................. . .... 738
WN Hillas and Co, Limited v Arcos, Limited (1932), 38 Com Cas 23 (HU . . . . . . . . . . . . . . . . . . 209
Wood v Boynton, 64 Wis 265, 25 NW 42 (1885) . . . . . . . . . . . . . . . . . 797
Wood v Lucy, Lady Duff-Gordon, 118 NE 214(NYCA1917) . . . . . . . . . . . . . . . . . 249, 250
Wood v Stringer (1890), 20 OR 148 (ChD) ........ 43
Woodar Investment Development Ltd v Wimpey Construction UK Ltd, [1980)
1 WLR 277 (HL) ............................................... 374
Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd, [1972)
AC 741 (HL) ............ . . . . . . . . . . . . . . . . 320, 321

xxxvii
TAB LE OF CASES

Woods v Hubley (1995), 130 DLR (4th) 119 (NSCA) 606

Wroth v Tyler, (19741 Ch 30 . . . . . . . . . . . . . ............ . 137, 143

Xenos v Wickham (1866), LR 2 HL 296 .. 291

Xerex Explo ration Ltd v Petro-Canada, 2005 ABCA 224 .. 738

Yarra Capital Group Pty Ltd v Sklash Pty Ltd, (2006) VSCA 109 521
Yashin v National Hockey League (2000), 192 DLR (4t h) 747 134

Zavarella v Zavarella, 2013 ONCA 720 . . . . . . . . . , . . ... . . 788

Zl Pompey lndustrie v £CU - Line NV, 2003 SCC 27 . . ....... . 629
Zimmermann v Letkeman, (19781 1 SCR 1097 ....... .. .. . . . . . . 638, 640

xxxviii
 FREQUENTLY CITED REFERENCES

Benson, P, ed, The Theory of Contract Law (Cambridge: Cambridge University Press, 2001)
[Benson).

Burrows, A & E Peel, eds, Contract Formation and Parties (Oxford: Oxford University Press,
2010) [Burrows & Peel).

Fridman, GHL, The Law of Contract in Canada, 6th ed (Toronto: Carswell, 2011) [Fridman).

MacDougall, B, Introduction to Contracts, 3rd ed (Toronto: LexisNexis, 2016) [MacDougall).

Maddaugh, PD & JD McCamus,The Law of Restitution, 2nd ed (Aurora, Ont: Canada Law
Book, 2004) [Maddaugh & McCamus).

McCamus, JD, The Law of Contracts, 2nd ed (Toronto: Irwin Law, 2012) [McCamus).

Smith, SA, Contract Theory (Oxford: Oxford University Press, 2004) [Smith).

Swan, A, & J Adamski, Canadian Contract Law, 3rd ed (Markham, Ont: LexisNexis, 2012)
[Swan & Adamski).

Trebilcock, MJ, The Limits of Freedom of Contract (Cambridge, Mass: Harvard University
Press, 1993) [Trebilcock).

Waddams, SM, The Law of Contracts, 6th ed (Aurora, Ont: Canada Law Book, 2010)
[Waddams).

xxxix
 CHAPTER ONE

PERSPECTIVES ON
CONTRACT LAW

CHARLES FRIED, Contract as Promise

(Cambridge, Mass: Harvard University Press, 1981) at 1-5, 14-17
(footnotes omitted)

The promise principle, which in this book I argue is the moral basis of contract law,
is that principle by which persons may impose on themselves obligations where
none existed before.
Security of the person, stability of property, and the obligation of contract were
for David Hume the bases of a civilized society. Hume expressed the liberal, indi-
vidualistic temper of his time and place in treating respect for person, property, and
contract as the self-evident foundations of law and justice. Through the greater part
of our history, our constitutional law and politics have proceeded on these same
premises. In private law particularly these premises have taken root and ramified in
the countless particulars necessary to give them substance. The law of property
defines the boundaries of our rightful possessions, while the law of torts seeks to·
make us whole against violations of those boundaries, as well as against violations
of the natural boundaries of our physical person. Contract law ratifies and enforces
our joint ventures beyond those boundaries. Thus the law of torts and the law of
property recognize our rights as individuals in our persons, in our labor, and in some
definite portions of the external world, while the law of contracts facilitates our
disposing of these rights on terms that seem best to us. The regime of contract law,
which respects the dispositions individuals make of their rights, carries to its natural
conclusion the liberal premise that individuals have rights. And the will theory of
contract, which sees contractual obligations as essentially self-imposed, is a fair
implication of liberal individualism.
This conception of contractual obligation as essentially self-imposed has been
under increasing pressure over the last fifty years. One essentially historicist line of
attack points out that until the eighteenth century communal controls, whether of
families, guilds, local communities, or of the general government, hardly conceded
enough discretion to individuals over their labor or property to give the liberal
conception much to work on. And beginning in the last century and proceeding
apace since, the state, unions, corporations, and other intermediate institutions have
again withdrawn large areas of concern from individual control and thus from the
scope of purely contractual arrangements. That there has been such an ebb and flow

1
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

of collective control seems fairly clear. But from the fact that contract emerged only
in modern times as a principal form of social organization, it does not follow that
therefore the concept of contract as promise (which is indeed a centerpiece of
nineteenth-century economic liberalism} was itself the invention of the industrial
revolution; whatever the accepted scope for contract, the principle of fidelity to one's
word is an ancient one. Still less does it follow that the validity, the rightness of the
promise principle, of self-imposed obligation, depended on its acceptance in that
earlier period, or that now, as the acceptance is in doubt, the validity of the principle
is under a cloud. The validity of a moral, like that of a mathematical truth, does not
depend on fashion or favor.
A more insidious set of criticisms denies the coherence or the independent viabil-
ity of the promise principle. Legal obligation can be imposed only by the community,
and so in imposing it the community must be pursuing its goals and imposing its
standards, rather than neutrally endorsing those of the contracting parties. These
lines of attack-found recently in the writings of legal scholars such as Patrick Atiyah,
Lawrence Friedman, Grant Gilmore, Morton Horwitz, Duncan Kennedy, Anthony
Kronman, and Ian Macneil, as well as in philosophical writings-will provide the foil
for much of my affirmative argument. Here I shall just set out their main thrust so
that my readers may be clear what I am reacting against.
Not all promises are legally enforced, and of those which are, different categories
receive differing degrees of legal recognition: some only if in writing, others between
certain kinds of parties, still others only to the extent that they have been relied on
and that reliance has caused measurable injury. And some arrangements that are
not promissory at all-preliminary negotiations, words mistakenly understood as
promises, schemes of cooperation-are assimilated to the contractual regime. Finally,
even among legally binding arrangements that are initiated by agreement, certain
ones are singled out and made subject to a set of rules that often have little to do with
that agreement. Marriage is the most obvious example, but contracts of employment,
insurance, or carriage exhibit these features as well. Thus the conception of the will
binding itself-the conception at the heart of the promise principle-is neither
necessary nor sufficient to contractual obligation. Indeed it is a point of some of
these critics (for example, Friedman, Gilmore, Macneil} that the search for a central
or unifying principle of contract is a will-o' -wisp, an illusion typical of the ill-defined
but much excoriated vice of conceptualism. These critics hold that the law fashions
contractual obligation as a way to do justice between, and impose social policy
through, parties who have come into a variety of relations with each other. Only
some of these relations start in an explicit agreement, and even if they do, the gov-
erning considerations of justice and policy are not bound by the terms or implica-
tions of that agreement.
Though the bases of contract law on this view are as many and shifting as the
politics of the judicial and legislative process, two quite general considerations of
justice have figured prominently in the attack on the conception of contract as
promise: benefit and reliance. The benefit principle holds that where a person has
received a benefit at another's expense and that other has acted reasonably and with
no intention of making a gift, fairness requires that the benefit be returned or paid ·
for. I discuss this idea in detail in subsequent chapters. Here I shall make my point
by the more pervasive notion of reliance. Proceeding from a theme established in
Lon Fuller and William Perdue's influential 1936 article, a number of writers have
argued that often what is taken as enforcement of a promise is in reality the com -
pensation of an injury sustained by the plaintiff because he relied on the defendant's

2
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

promise. At first glance the distinction between promissory obligation and obligation
based on reliance may seem too thin to notice, but indeed large theoretical and
practical matters turn on that distinction. To enforce a promise as such is to make a
defendant render a performance (or its money equivalent) just because he has
promised that very thing. The reliance view, by contrast, focuses on an injury suf-
fered by the plaintiff and asks if the defendant is somehow sufficiently responsible
for that injury that he should be made to pay compensation.
The latter basis of liability, the compensation of injury suffered through reliance,
is a special case of tort liability. For the law of torts is concerned with just the question
of compensation for harm caused by another: physical harm caused by willful or
negligent conduct, pecuniary harm caused by careless or deceitful representations,
injury to reputation caused by untrue statements. Now tort law typically deals with
involuntary transactions-if a punch in the nose, a traffic accident, or a malicious
piece of gossip may be called a transaction-so that the role of the community in
adjudicating the conflict is particularly prominent: What is a safe speed on a rainy
evening, what may a former employer say in response to a request for a reference?
In contrast, so long as we see contractual obligation as based on promise, on obliga-
tions that the parties have themselves assumed, the focus of the inquiry is on the
will of the parties. If we assimilate contractual obligation to the law of torts, our focus
shifts to the injury suffered by the plaintiff and to the fairness of saddling the defend-
ant with some or all of it. So, for instance, if there has been no palpable injury because
the promisee has not yet relied on the promise there seems to be nothing to com-
pensate, while at other times a generalized standard of fair compensation may move
us to go beyond anything that the·parties have agreed. The promise and its sequel
are seen as a kind of encounter, giving rise to losses to be apportioned by the com -
munity's sense of fairness. This assimilation of contract to tort is (and for writers like
Gilmore, Horwitz, and Atiyah is intended to be) the subordination of a quintessen -
tially individualist ground for obligation and form of social control, one that refers
to the will of the parties, to a set of standards that are ineluctably collective in origin
and thus readily turned to collective ends.
Another line of attack on contract as promise denies the coherenc;:e of the central
idea of self-imposed obligation. Some writers argue that obligation must always be
imposed from outside. Others work from within: For promissory obligations to be truly
self-imposed, the promise must have been freely given. If this means no more than
that the promisor acted intentionally, then even an undertaking in response to a
gunman's threat is binding. If, as we must, we insist that there be a fair choice to
promise or not, we have imported external standards of fairness into the very heart
of the obligation after all. Having said, for instance, that a promise to pay an exorbi-
tant price for a vital medicine is not freely undertaken, while a promise to pay a
reasonable price is, why not dispense with the element of promise altogether and
just hold that there is an obligation to supply the medicine at an externally fixed price
to all who need it? This and more subtle, related suggestions have been put forward
by writers who are particularly concerned about the connection between contract
as promise and the market as a form of economic organization. Some like Robert
Hale, Duncan Kennedy, and Anthony Kronman see in the concepts of duress and
unconscionability the undoing of the arguments for the free market and for the
autonomy of contract law. Others, most particularly Richard Posner, also denying
any independent force to promissory obligation, derive such force as the law gives
to contracts from social policies such as wealth maximization and efficiency, which
are usually associated with the operation of the market. ...

3
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

Once I have invoked the institution of promising, why exactly is it wrong for me
then to break my promise?
My argument so far does not answer that question. The institution of promising
is a way for me to bind myself to another so that the other may expect a future per-
formance, and binding myself in this way is something that I may want to be able
to do. But this by itself does not show that I am morally obligated to perform my
promise at a later time if to do so proves inconvenient or costly. That there should
be a system of currency also increases my options and is useful to me, but this does
not show why I should not use counterfeit money if I can get away with it. In just
the same way the usefulness of promising in general does not show why I should
not take advantage of it in a particular case and yet fail to keep my promise. That the ·
convention would cease to function in the long run, would cease to provide benefits
if everyone felt free to violate it, is hardly an answer to the question of why I should
keep a particular promise on a particular occasion.
Considerations of self-interest cannot supply the moral basis of my obligation to
keep a promise. By an analogous argument neither can considerations of utility. Fo.r
however sincerely and impartially I may apply the utilitarian injunction to consider
at each step how I might increase the sum of happiness or utility in the world, it will
allow me to break rriy promise whenever the balance of advantage (including, of
course, my own advantage) tips in that direction. The possible damage to the institu -
tion of promising. is only one fact in the calculation. Other factors are the alternative
good I might do by breaking my promise, whether and by how many people the
breach might be discovered, what the actual effect on confidence of such a breach
would be. There is no a priori reason for believing that an individual's calculations
will come out in favor of keeping the promise always, sometimes, or most of the time.
Rule-utilitarianism seeks to offer a way out of this conundrum. The individual's
moral obligation is determined not by what the best action at a particular moment
would be, but by the rule it would be best for him to follow. It has, I believe, been
demonstrated that this position is incoherent: Either rule-utilitarianism requires that
rule1? be followed in a particular case even where the result would not be best all things
considered, and so the utilitarian aspect of rule-utilitarianism is abandoned; or the
obligation to follow the rules is so qualified as to collapse into act-utilitarianism after
all. There is, however, a version of rule-utilitarianism that makes a great deal of sense.
In this version the utilitarian does not instruct us what our individual moral obligations
are but rather instructs legislators what the best rules are. If legislation is our focus, then
the contradictions of rule-utilitarianism do not arise, since we are instructing those
whose decisions can only take the form of issuing rules. From that perspective there
is obvious utility to rules establishing and enforcing promissory obligations. Since
I am concerned now with the question of individual obligation, that is, moral obliga-
tion, this legislative,perspective on the argument is not available to me .
The obligation to keep a promise is grounded not in arguments of utility but in
respect for individual autonomy and in trust. Autonomy and trust are grounds for
the institution of promising as well, but the argument for individual obligation is not
the same. Individual obligation is only a step away, but that step must be taken. An
individual is morally bound to keep his promises because he has intentionally
invoked a convention whose function it is to give grounds-moral grounds-for
another to expect the promised performance. To renege is to abuse a confidence he
was free to invite or not, and which he intentionally did invite. To abuse that confi-
dence now is like (but only like) lying: the abuse of a shared social institution that is
intended to invoke the bonds of trust. A liar and a promise-breaker each use another

4
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

person. In both speech and promising there is an invitation to the other to trust, to
make himself vulnerable; the liar and the promise-breaker then abuse the trust. ...
The obligation to keep a promise is thus similar to but more constraining than
the obligation to tell the truth. To avoid lying you need only believe in the truth of
what you say when you say it, ·but a promise binds into the future, well past the
moment when the promise is made. There will, of course, be great social utility to a
general regime of trust and confidence in promises and truthfulness. But this just
shows that a regime of mutual respect allows men and women to accomplish what
in a jungle of unrestrained self-interest could not be accomplished. If this advantage
is to be firmly established, there must exist a ground for mutual confidence deeper
than and independent of the social utility it permits.
The utilitarian counting the advantages affirms the general importance of enforc-
ing contracts. The moralist of duty, however, sees promising as a device that free,
moral individuals have fashioned on the premise of mutual trust, and which gathers
its moral force from.that premise. The moralist of duty thus posits a general obliga-
tion to keep promises, of which the obligation of contract will be only a special
case-that special case in which certain promises have attained legal as well as moral
force. But since a contract is first of all a promise, the contract must be kept because
a promise must be kept.
To summarize: There exists a convention that defines the practice of promising
and its entailments. This convention provides a way that a person may create expec-
tations in others. By virtue of the basic Kantian principles of trust and respect, it is
wrong to invoke that convention in order to make a promise, and then to break it.

NOTE
For commentary on Fried's work, see PS Atiyah, "The Liberal Theory of Contract" in Essays on
Contract (Oxford : Oxford University Press, 1986, reprinted 2001).

STEPHEN A SMITH, Contract Theory

(Oxford: Oxford University Press, 2004) at 7, 36 (footnotes omitted)

[W]hat makes a particular interpretive theory of the law a. good one? What are the
criteria, in other words, for evaluating interpretive theories? This is the most difficult
of the methodological questions faced by legal theorists. It is rarely addressed
explicitly in contract theory scholarship, although no theorist can avoid taking a
position, explicitly or not, on the answer.
In what follows, I will suggest that four criteria are of particular relevance in assess-
ing contract theories: (1) fit, (2) coherence, (3) morality, and (4) transparency ....
[The discussion of the four criteria has been omitt~d.J
The most general lesson to be taken from this chapter is that disagreements
between contract theories are often disagreements, typically unarticulated, about
the appropriate criteria for evaluating contract theories . ...
More substantively,. I explained that this book is concerned with interpretive
theories of contract law. An interpretive theory is a theory that helps us to better
understand the law by illuminating the significance of, and connections between,
its different parts. As such, interpretive theories are linked to, but different than,

5
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

historical, prescriptive, and descriptive theories. Interpretive theories are assessed

according to: (1) how well they fit the rules and decisions that make up contract law,
(2) how coherent they are, and (3) how well they explain the way that legal actors
themselves explain what they are doing. The third criterion can be subdivided into
two parts: (1) how well does the theory explain law's claims to authority (the claim
that law is a legitimate or morally justified authority), and (2) how well does the theory
explain law's claim to transparency (the claim that legal reasoning is meaningful)?
A further distinction was drawn between weak, moderate, and strong versions of
what is required to explain the above claims to authority and transparency. The weak
versions hold that any explanation is sufficient, even if it shows legal actors to be
insincere in their claims. The strong versions hold that a good explanation of the law
will show that the law's claims to authority and transparency are actually true, that
is, that the law is actually morally justified and that the reasons alleged to motivate
decision-making actually do motivate decision-making. Finally, the moderate-and,
I argued, most persuasive-versions state that a good explanation must show that
the law's claim to authority and claim to transparency might be thought to be true
(even if they are not in fact true). This can be done either by advancing a functionalist
explanation or,. more plausibly, by advancing an interpretation that shows legal
actors to have been mistaken. To fit within the latter approach, an interpretation of
the law must propose a normative justification for the law that is recognizably "moral"
'(in order to make sense of law's claim to authority) and must explain the law in terms
that are recognizably "legal" (in order to make sense of law's claim to transparency).

RANDY E BARNETT, "A CONSENT THEORY OF CONTRACT"

(1986) 86 Cotum L Rev 269 at 269-70, 304-5 (footnotes omitted)

The mere fact that one man promises something to another creates no legal duty
and makes no legal remedy available in case of non-performance. To be enforceable,
the promise must be accompanied by some other factor .... The question now to be
discussed is what is this other factor. What fact or facts must accompany a promise
to make it enforceable at law?
We look to legal theory to tell us when the use of legal·force against an individual
is morally justified. We look to contract theory, in particular, to tell us which inter-
personal commitments the law ought to enforce. Contract theory at present, how-
ever, does not provide a satisfactory answer to this question. The five best known
theories or principles of contractual obligation-the will theory, the reliance theory,
the fairness theory, the efficiency theory and the bargain theory-each have very
basic shortcomings. A consent theory of contract avoids these difficulties while
explaining coherent obligation in a plausible and coherent manner.
Theories are problem-solving devices. We assess the merits of a particular theory
by its ability to solve the problems that gave rise to the need for a theory. We do not,
however, assess a particular theory in a vacuum. No theory in any discipline, from
physics to biology to philosophy, can be expected to solve every problem raised by
the discipline. Rather, we compare contending theories to see which theory handles
problems the best.
Our criteria for comparing theories include at least three factors: (a) the number of
known problems the theory handles as well [as] or better than its rivals, (b) the cen-
trality of the problems that the theory handles well, and (c) the promise that the
theory offers for solving future problems. When we assess legal theories, the better

6
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

a particular theory explains cases where we are confident of the right outcome, the
more confident we will be with the answers it suggests for those cases at the margin
where our intuitions are less secure.
[The discussion of the assessment of current theories of contractual obligation and
most of the elements of consent theory has been omitted.]
What exact meaning must a court conclude was conveyed by a promisor to a
promisee to find that a contractual commitment was incurred7 If consent is properly
thought of as "objective" or "manifested" assent, what is it that must be assented to
for a contractual obligation to arise? It is not enou gh that one manifests a commit-
ment or promises to perform or refrain from doing some act. Such a manifestation
would be nothing mpre than a promise. Contract theory searches for the "extra"
factor that, if present, justifies the legal enforcement of a commitment or promise.
An entitlements theory specifies that consent to a transfer of rights is this factor.
The consent that is required is a manifestation of an intention to alienate rights. In a
system of entitlements where manifested rights transfers are what justify the legal
enforcement of agreements, any such manifestation necessarily implies that one
intends to be "legally bound," to adhere to one's commitment. Therefore, the phrase
"a manifestation of an intention to be legally bound" neatly captures what a court
should seek to find before holding that a contractual obligation has been created.
Charles Fried maintains that a promisor incurs a moral obligation because she
intentionally invokes a social convention whose purpose is to cause others to expect
the promised performance. By contrast, a consent theory specifies that a promisor
incurs a contractual obligation the legal enforcement of which is morally justifiable
by manifesting assent to legal enforcement and thereby invoking the institution of
contract. In the circumstances described by Fried, a promisor may have a moral
obligation to do what she promised. Without more she would not have a legal obliga-
tion and a promisee would not have a legal right to performance. She incurs a
contractual obligation to perform only when she manifests to a promisee her inten -
tion to be legally bound. The basis of contractual obligation is not promising per se.
Th e basis of contract is consent.

MARGARET J RADIN, "RECONSIDERING BOILERPLATE:

CONFRONTING NORMATIVE AND DEMOCRATIC DEGRADATION"
(2012) 40 Cap U L Rev 617 at 619-20, 621-27 (footnotes omitted)

The law considers boilerplate to be a method of contract formation . That is, the law
usually holds that a contract is formed between the firm and the recipient, and the
terms of the contract are the fine print in the boilerplate. Even when there is no
signature, such as when we click "I agree" onlirie, courts are likely to find that a
contract has been formed unless there is some other reason for invalidating the
terms. Boilerplate has really come into its own in the online environment. Firms use
other online procedures that are even further removed from the kind of consent we
normally suppose is required for a contract, such as, "By browsing our website, you
have agreed to all of the terms we have placed in the link entitled Terms of Service,
together with any changes that we make from time to time." Courts may be less likely
to find that these procedures form an enforceable contract. Firms today, however,
are hopeful that courts will rule in their favor if these procedures are challenged-
hopeful enough to use these procedures very widely....

7
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

Our basic conventional understanding of freedom of contract is at odds with this

reality. Most people still think that a contract is a voluntary transaction, a consensual
exchange. Indeed, the basis of contract law is the idea of free exchanges between
. willing parties. "Freedom of contract" is a revered ideal. Let me call the traditional
world of our conventional understanding, and of contract theory, World A. World A
is the world in which the revered ideal resides, the world of Agreement, the world of
voluntary exchanges. It is sometimes the world of actual pre-exchange negotiation,
but at minimum the world of realistic choice on whether to transact.
World Bis another world, the world of Boilerplate, of fine-print schemes. World
B does not fit the theory or the rationale of contract law, which developed to justify
the scenarios of contract enforcement of World A. Yet World B is the primary world
in which consumers transact in the marketplace. This article and the corresponding
book essentially ask: What (if anything) should be done about this disconnect
between theory and practice and between justification and reality?
Our courts consider boilerplate schemes contractual, but should they? Perhaps
they should not, or at least not always. Meanwhile, as long as boilerplate terms are
considered contractual, as our legal system currently does, that means that boilerplate
is regulated under contract law. Why is boilerplate "regulated"? It is regulated because
not everything that is called a contract actually is one. A purported contract obtained
by coercion or fraud is not an enforceable contract; nor is a contract for an illegal
purpose, a contract that is too indefinite, or a contract that lacks consideration.
If boilerplate schemes should not be regulated by contract law, that does not mean
that boilerplate should not be regulated at all, or that boilerplate should not exist. If
boilerplate schemes were not regulated at all but could still be freely used by firms to
divest people of legal rights, we would not be living under the; rule of law. If, however,
all uses of boilerplate schemes to create an alternative legal universe for a firm were
suddenly declared unenforceable, that would impose a disruption of current com-
mercial practice.
Because boilerplate is regulated by-or, in other words, evaluated under-contract
law, those who defend boilerplate schemes must argue that boilerplate schemes
somehow meet the requirements of contract law. Thus, they must argue that recipi-
ents somehow agree to, or consent to, its terms. Or they must argue that there can
be such a thing as a contract without consent. This is contrary to the basic rationale
of contract law. Some, however, would argue that a contract without consent can
be rescued by hypothetical consent. These arguments may be succeeding with U.S.
courts because judges apparently believe that a boilerplate form signifies that the
recipient has exercised freedom of contract.
Businesses that use forms to construct their own legal universe, and others who
argue in defense of this practice, usually say something like the following: "We need
to constrict recipients' legal rights to contain costs. When we reduce costs, we pass
on our .savings to recipients, so recipients benefit with lower prices. Furthermore,
recipients, if given a choice, would choose lower prices over legal rights. So we are
not really interfering with people's freedom of choice." Thus, hypothetical consent
is often premised on the idea that firms pass on to recipients the money they save
by curtailing recipients' rights. Therefore, recipients, if economically rational, '"would"
choose these passed-on savings and "would" consider it appropriate "compensation"
for their loss of rights.
There is a lot wrong with this argument. Whether savings to firms are passed on
and whether they would be equal to just the right amount of compensation is a dif-
ficult empirical question; it is not one that is properly answered by convenient
assumption. Moreover, the argument does not take into account that some rights

8
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

cannot be sold, even for just compensation. Furthermore, even if it were true that
firms pass on savings that amount to just compensation, and that the rights are
saleable, there is still the question of "private eminent domain": our legal system
normally does not allow private parties (such as firms) to divest other private parties
(such as consumers) of entitlements if compensation is paid.
We should not ignore the argument that adhesion contracts are justified as enforce-
able contracts because firms pass on to recipients the savings they realize from
boilerplate schemes that delete legal rights. The argument should be reconsidered,
however, in light of four factors: (1) the varying market circumstances that can make
its premises true or untrue; (2) the nature of the various legal rights that firms are
negating by using boilerplate schemes (for example whether the rights can be traded
off); (3) the dubious normative premises that opportunity to read incomprehensible
terms amounts to choice; and (4) that hypothetical choice is as good as real choice . ...

A. DECAY OF THE IDEA OF VOLUNTARY CHOICE

Given that firms are using boilerplate schemes to transport us into an alternative
legal universe, why don't we read these things? Here are seven possible answers.
First, we would not understand these things if we did read them, so it is not worth
our time. Second, we may need the product or service and have no access to a sup-
plier that does not impose onerous clauses, so reading the terms would not make a
difference. Industry-wide standardization is common, so alternative terms are often
not available.
Third, sometimes we do not even know that we are being made subject to these
terms, so we do not know that there is anything to read. Fourth, we trust that the com -
pany did not include anything harmful. Fifth, we think that anything harmful would
be unenforceable . Although this thought is common, it is wrong; many harmful
clauses are often enforced. Sixth, we think that the company has power over us, and
we are stuck with what it imposes on us. Finally, an important reason we do not read
boilerplate is that we do not believe we will ever be in need of exercising our back-
ground legal rights. We do not expect to have misfortune befall us. As psychological
research has shown, we are not able to make an accurate assessment of the risks.
Given the seven reasons why we do not read boilerplate schemes, they are prob-
lematic on the issue of consent. Because boilerplate schemes do not demonstrate
the kind of consent that is presupposed by the notion of freedom of contract, they
can be understood as a "normative degradation" of our legal system. Legal theorists
and market apologists have attempted to cope with this degradation in various ways
that amount to a devolution or decay of the idea of voluntary choice. This is a serious
decay because the idea of voluntary choice is at the root of the underlying commit-
ment to freedom of contract.
The boilerplate schemes in World Buse the word "agreement" because that is the
traditional word used for a contract. They are, however, using it in an Orwellian
manner. The usual software End User License Agreement (EULA) is not what normal
speakers would consider an agreement on the part of the user.
Procedures construed as acceptance have also been transmogrified. It has always
been possible in traditional contract law to signify voluntary acceptance by a speci-
fied procedure, such as, signifying agreement to purchase by retaining or modifying
a product sent on approval. Consider, however, the following (paraphrased) state-
ment: "By looking at this website, you have agreed to a lot of internal boilerplate you
do not know is there, as we\\ as whatever changes the website owner might make
from time to time." That pushes the traditional possibility of specified agreement

9
CHAPTER 1 PERSPECTIVES ON CONT RACT LAW

procedure to an absurd length. One cannot make something into an agreement just
by using that word.
The gerrymandering of the word agreement, along with the variou s other
attempts to fit World B into the World A paradigm of voluntary transfer by agreement
can be viewed as a sort of devolution or decay of the concept of voluntariness.
Agreement gets assimilated to consent, and then to assent. Assent then becomes
blanket assent to unknown terms, provided they are what a consumer m ight have
expected ....
Llewellyn excluded "unreasonable" or "indecent" terms from en forceability under
blanket assent. Whatever Llewellyn may have meant by "indecency" in this context,
his notion of blanket assent has played out in subsequent attempts to provide for
exceptions to enforceability for unknown terms not within the recipient's "reason-
able expectations," or for unknown terms not "radically unexpected." Assent devolves
to fictional or constructive assent, then to fictional or constructive opportunity to
assent, then to notice that the terms exist, and then to fictional or constructive notice
of terms. Fictional or constructive notice further devolves to as-if or hypothetical
consent, and from there to the elimination of consent entirely; that is, to mere
(allegedly) efficient rearrangement of entitlements.

MICHAEL J TREBILCOCK, The Limits of Freedom of Contract

(Cambridge, Mass: Harvard University Press, 1993) at 15-17 (footnotes omitted)

THE ECONOMIC FUNCTIONS OF CONTRACT LAW

[N]eo-classical economists have a predilection for resource allocation through

voluntary exchanges as opposed to collective decisions because they believe that
one can have a higher degree of confidence in the welfare implications of private
exch anges, where both parties stand to benefit, than in collective decisions, where
typically there are both winners and losers and it is difficult to net out gains against
losses. However, this predilection for the private exchange or market process in the
allocation of resources does not speak to the economic role of contract law. From an
economic perspective, we can identify several major functions of contract law.

CONTAINING OPPORTUNISM IN NON-SIMULTANEOUS EXCHANGES

Let us return to the earlier example of Tribe A's producing corn and Tribe B's produc -
ing beef. Even if a stable regime of property rights is established so that members of
Tribe A and members of Tribe B agree to respect each other's property rights, this in
itself does not ensure that mutual gains from trade will be realized. In other words,
we have ruled out theft, but we have not yet facilitated exchange. Suppose that Tribe
A's corn is ripe now and must be eaten within a few days and that Tribe A is prepared
to trade a quantity of this corn for a calf from Tribe B, but that the calf will not be
ready for delivery for another six weeks. If Tribe A delivers the com today against
the promise of delivery of the calf in six weeks' time, there is a serious risk of defec-
tion by Tribe B when it comes time to meet its delivery obligations. Tribe A, perceiv-
ing this risk, may be disinclined to deliver the com. In this event, the potential for a
Pareto superior exchange would not be realized. This is a variant of the Prisoner's
Dilemma. Whereas in traditional societies conventions may develop that mitigate
the problem, in contemporary societies the law of contracts-by providing remedies
in the event of breach of contractual promises-provides an essential check on

10
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

opportunism in non-simultaneous exchanges by ensuring th at the first mover, in

terms of performance, does.not run th e risk of defection, rather than cooperation,
by the second mover.

REDUCING TRANSACTION COSTS

A second economic function of the law of contracts is to supply parties to given

categories of exchanges with standard sets of implied terms, which in most cases
save the parties the transaction costs entailed in fully specifying a complete contin-
gent claims contract, but typically leave them free to contract out of these rules if
they find them inappropriate to their particular transaction. In addition to variou s
aspects of the common law of contracts, many statutes dealing with sales law and
partnership law, and perhaps certain aspects of corporation statutes, can be thought
of in these terms.

FILLING GAPS IN INCOMPLETE CONTRACTS

A related function of the law of contracts is to provide a set of default or background

rules where the explicit terms of a contract are incomplete, not because the parties
consciou sly adverted to the default or background rules and accepted them as
appropriate to their transaction, but typically because particular contingencies were
not consciously adverted to by one or the other party (or both) at all. Here, an eco-
nomic framework of analysis would tend to ask, what rule would maximize th e
parties' joint welfare, on the assumption that this rule would generally be the rule
that rational parties would have agreed to ex ante?

DISTINGUISHING WELFARE-ENHANCING AND WELFARE-REDUCING EXCHANGES

A central economic role of contract law is to formulate a set of excuses for contract
performance that permits the enforcement of efficient exchanges but discourages
the enforcement of inefficient exchanges. Individual exchanges might be evaluated
from a Paretian perspective, where one would ask whether it is reasonable to infer
that su ch exchanges are welfare-enhancing in the sense of making somebody better
off and nobody worse off. Lack of voluntariness, imperfect information, and exter-
nalities are likely to provide the principal economic bases for declining to draw such
an inference, whatever the legal forms that excuses reflecting these factors might
take. Alternatively, one could employ a Kaldor-Hicks criterion of efficiency, asking
whether society on net would be better off by permitting th e class of transaction of
which the instant transaction is representative or if, in contrast, society would be
better off on net by imposing certain legal rules or constraints on the class of trans-
action in question. As we shall see in later chapters, economists are not always precise
about which of these two concepts of efficiency should be employed and when.
Thus, neo -classical economists' predilection for private ordering turns centrally
on legal regimes of well-defined and exclusive private property rights and a regime
of contract law that facilitates the voluntary exchange of those rights. Liberal political
theories of individual autonomy generally reflect a similar predilection, though not
necessarily for the same reasons or with the same normative entailments.

NOTE

For an extensive and insightful critique of autonomy and welfare-based theories of contract law.
see Peter Benson, "The Idea of a Public Basis of Justification for Contract" (1995) 33 Osgoode Hall
LJ 273.

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CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

PETER CSERNE, "PATERNALISM AND CONTRACT LAW"

The Routledge Handbook of the Philosophy of Paternalism, ed by Kalle Grill
& Jason Hanna (Abingdon: Routledge, 2018) at 293-310

Contract regulation is a domain where the conflict between freedom of choice and
paternalistic intervention is especially easy to notice. In most countries people are
not allowed to sell or buy (although in some cases they can donate and receive) each
other's body parts; certain substances deemed dangerous or harmful are not available
for sale for the general public; individuals cannot legally commit themselves to
servitude or slavery; consumers can access certain unhealthy goods or risky financial
products only under strictly regulated terms and after having been confronted with
graphic or heavily worded warnings about the risks involved.
In this chapter, contract law is understood as a body of legal rules that pertains
to the enforcement and regulation of voluntary private agreements. Contract law
provides a normative framework for the social practice of contracting. By enabling,
regulating and selectively enforcing contracts, the state, both through legislation
and adjudication, operates as a powerful governance mechanism for private trans-
actions. The law can take various stances towards the social practice of contracting:
expressive, constitutive and regulative. It expresses generally held ideas or aspira-
tions about agency, autonomy, trust, fairness, cooperation or dependency. Although
promises and agreements can operate without law, contract law constitutes categor-
ies, conventional forms (e.g. the formalities of offer and acceptance or consideration)
in which these cooperative activities can be recognized and carried out. (I shall return
to this constitutive element below.) Most conspicuously, the law also regulates the
practice of contracting by prohibiting, limiting, or setting terms for various trans-
actions. While paternalism is most visible in the regulatory aspect of contract law, it
is traceable in the expressive and constitutive aspects as well.
For the purposes of this chapter, the term "paternalism" will refer to "[t]he interfer-
ence of a state or an individual with another person, against their will, and defended
or motivated by a claim that the person interfered with will be better off or protected
from harm" (Dworkin 2017). Given that other chapters of this Handbook focus on the
meaning, kinds and normative status of paternalism, this chapter focuses on how
the normative problems of paternalism play out in the domain of contract law.
In the following, we shall call a certain rule or doctrine of contract law or a judicial
decision paternalistic, when it limits the freedom of contract in order to protect from
harm or grant benefits to at least one of the contracting parties. The interference of
"contract law" typically happens through general rules enacted by legislators or
introduced by decisions of state authorities, be they judges or other officials. Pater-
nalism in contract law is easiest to grasp if we look at what legal rules do to contracts
ex ante, i.e. at the formation of contracts. If we look at legal rules ex post, i.e. in case
of a dispute, one of the parties willingly invokes a rule, presumably because it is in
their interest to do so. So by looking at judicial actions in an individual contract case
one would hardly find any intervention paternalistic in the sense of interfering
against the current will of the party. The paternalistic character of the interference
is clear, however, if we focus on the rule or principle that the court applies to override
(some terms of) a binding contract, thus going against the party's will at the time of
contracting.
The nature of the interference can vary from refraining from enforcing the con -
tract or some of its terms, imposing mandatory terms through legislation or various
judicial techniques, introducing default rules which, for various psychological or
practical reasons, will be "sticky," i.e. while technically non-mandatory, still difficult

12
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

to opt-out from (see below). Some rules are directly paternalistic, e.g. when they
imply mandatory terms favorable to one party. Some rules are indirectly paternalistic,
e.g. prohibiting the sale (but not the purchase) and punishing sellers (but not the
buyers) of certain goods or services in order to protect potential purchasers from
supposedly harmful goods and services.
Even the harshest sanctions of contract law do not amount to coercion ... , so
paternalistic interference by contract law is generally seen as less intrusive to auton -
omy, and in this respect, less morally troubling than coercive paternalistic interven-
tions, e.g. by criminal law.
In sum, contract law is seen as an intelligible and in part systematizable normative
practice which can be illuminated by moral and political principles. The main subject
of this chapter is to explore the role of paternalism among these principles in the
context of a body of legal rules and doctrines which relate, roughly speaking, to
judicially enforceable agreements between private parties.

JEFFREY L HARRISON,"THE INFLUENCE OF LAW AND

ECONOMICS SCHOLARSHIP ON CONTRACT LAW:
IMPRESSIONS TWENTY-FIVE YEARS LATER"
(2012) 68 NYU Ann Surv Am L 1 at 22, 24-26 (footnotes omitted)

Although the numbers suggest varying conclusions with respect to the influence of
law and economics [on contract law], an examination of actual decisions indicates
that an .economic way of thinking about issues has penetrated judicial reasoning.
Here the focus is not on the number of citations. Instead, the inquiry centers on the
development of an economically influenced manner of reasoning and discussion
and on the diverse courts which employ this reasoning. For example, although the
theory of efficient breach hardly explains the evolution of the expectancy measure
of damages, courts have an appreciation of how the theory supports expectations.
Thus as Justice Mosk of tne Supreme Court of California observed in a 1995 opinion,
"[t]he efficient breach occurs when the gain of the breaching party exceeds the loss
to the party suffering the breach, allowing movement of resources to their more
optimal use. Contract law must be careful 'not to exceed compensatory damages if
it doesn't want to deter efficient breaches."' In gauging the impact of law and eco-
nomics on the vocabulary of courts, most telling is the trend in the use of the term ...
[in this case, "efficient breach"].
More broadly, in Bidlack v. Whee/abrator Corporation, the court noted the potential
application of the backbone of law and economics-the Coase Theorem-when it
discussed the possibility that parties can contract around court -determined rules :
"We should recognize initially that, when those affected by a chosen default rule can
easily bargain around it to agree to a mutually beneficial course, the rule choice will
generally make little difference to the parties' actual agreement." Indeed courts have
recognized the relevance of the Coase Theorem forty- seven times. This may not be
an impressive number for an article as well known to economists and lawyers as
Coase's classic, but for the first twenty years of its existence-from 1960 to 1980-it
was cited but six times.
Also pertinent as a measure of the penetration of economic analysis into judicial
opinion is the use of the term "transaction costs." Transaction costs are the costs
incurred in reaching an agreement. High transaction costs deter contract formation
and low ones make contract formation more likely. The most well-known application

13
CHAPTER 1 PERSPECTIVES ON CO NTRACT LAW

of transaction costs is found in Coase's The Problem of Social Cost . ... By 1987, the
date of the initial study, the term had appeared ninety-three times. In the twenty-five
years since 1987, the usage of the term tripled over the number of times used since
1987. Clearly transaction costs have become part of the day-to-day vocabulary of courts.
These examples are far from exhaustive. The breadth of the topics addressed, as
well as the jurisdictions represented, suggest that economic reasoning, or an effort
to apply it, has become common in opinions dealing with contract matters. This is
the sort of subterranean effect that may not be fully appreciated by focusing' only on
citations.

JAY M FEINMAN, "CRITICAL APPROACHES TO CONTRACT LAW"

(1983) 30 UCLA L Rev 829 at 849-54 (footnotes omitted)

The first critical approach to the social function of contract law shares the view of
mainstream theory that law is useful to business people and that it is instrumental-
that is, it is consciously used for economic ends. The differences lie in the effects on
different groups in society and the precise source of the attempt. The essence of this
view is that contract is a device by which a dominant class imposes and perpetuates
a hierarchical capitalist economy on society. Contract law is continually refashioned
to meet the changing needs of the dominant class.
In the early nineteenth century, traditional contract law hindered the enforcement
of executory, speculative transactions. These transactions came into prominence
with the rise of national markets and large-scale enterprises. Therefore, courts
proceeded to undermine traditional notions of value and provided a system of free
contract more advantageous to the new entrepreneurs. When the development of
a mass economy made standardized transactions desirable, the courts created the
objective theory of contract to facilitate them; the theoretical loss in individual
autonomy was a necessary cost. But the defect of free contract was that from its
premises, rules of law developed that were ill-suited to actual commercial practice.
Examples include the technical development of the doctrine of consideration, such
as the unenforceability of requirements contracts. In the twentieth century, these
inconsistencies were simply swept away and a new law, more flexible and better
suited to an interdependent capitalist system, was established.
Critical functional theories vary with respect to the level at which it is appropriate
to speak of contract as an aid to capitalist domination. One approach suggests that
all that is required for domination is the basic conception of free contract, the per-
missibility and protection of formally free exchange. Particular doctrines within that
general conception are the products of peculiar historical circumstances which may
not reflect fundamental social relations. Thus, not every doctrinal development
necessarily reflects class conflict. Another approach argues that it is possible to
identify the source and effect of many individual doctrines in economic advantage
or necessity. For example, there was the nineteenth century class-biased treatment
of "entire contracts," in which builders, but not workers, who failed to complete their
contracts could recover in quantum meruit.
A basic element of an versions of critical functionalism is that it rejects pluralism,
the political theory which supports the mainstream theory. Pluralism assumes the
existence of many groups in political society, none of which has a consistent ad van -
tage over any other. In the critical approach, the political situation is defined by the
economic order. Capitalist society, by definition, is composed of two classes, capitalists

14
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

and workers, who are distinguished from each other by ownership of the means of
production. Contract law supports and legitimates the economic arrangement to
the benefit of the capitalists . ...
Examining the strengths and the defects of the instrumental theories leads to no
dear conclusion about the functional utility of contract law. Surely the claims of con -
tract's central importance are exaggerated. Yet it is hard to dismiss entirely the ways
in which contract law apparently facilitates commercial exchange. Further, the limited
fUnctional utility of contract law doctrine does not mean that the system of adjudi-
cation which uses the doctrine is irrelevant. The particular content of the doctrine
may not have much effect, prospectively or retrospectively, on the activities of private
parties, but its application in litigation may facilitate the economy. In a variation of
the mainstream account, for example, contract litigation serves as a forum for dividing
up the remains of a dead economic relation, a sort of salvage operation. It also serves
as a low cost administrative device for routine debt collection. From a critical perspec-
tive, contract litigation is a device by which economically powerful parties discipline
weaker parties. By and large, however, these functions are conveniences rather than
necessities and are little affected by the form or content of contract law doctrine.
Critical theory's particular contribution to the study of the role of contract law in
society is the recognition of a different function of the law: law as a legitimating ideol-
ogy and as an expression of legal consciousness. The initial step is to consider the
instrumental use of contract law as an ideology. In the instrumental view, contract
doctrine is created and perpetuated as a belief system to conceal the reality of eco-
nomic injustice in society. Society is composed of illegitimate hierarchies in which
dominant economic groups systematically exploit their subordinates. The dominant
class's hegemony is maintained by inducing acceptance of values and institutions
that appear to support the status quo, as wen as by using force . For example, the clas-
sical image's conceptualization of the economic world as composed of independent ·
actors transacting on a voluntary basis suggests that whatever inequality exists in
society is a product of individuals' unwise acts, not the system. On the other hand,
the modern notion of commercial convenience suggests that the world is a well-
ordered place in which people and firms carry on their affairs according to socially
acceptable modes of behavior. To the extent that people accept these suggested ways
of looking at the world, they wiU be more likely to accept their place in it.
Ideology is powerful, and contract law could well serve an instrumental function.
But critical theory has moved beyond the instrumental approach for several rea-
sons. The critical theory of ideology states that contract legitimates an illegitimate
status quo. To legitimate an unjust social order, contract law decisions and the
reasoning employed in reaching them must appear to derive from a coherent appli-
cation of accepted principles of fairness. Because contract law relies on contradictory
principles, however, it lacks coherence. The principles of contract law could be used
to reach entirely different doctrinal results, just as the results could be generated by
entirely different doctrines. Thus, there is no dear correspondence between a par-
ticular image of contract law and a particular social order. It is impossible to say that
an image of contract law legitimates particular social relations without tautologically
assigning the legitimating function to contract law throughout history.
There is also the problem of penetration. People must be aware of ideology if it
is to serve as an effective legitimation device. The penetration of contract law doc-
trines into society is not great; first-year law students' common ignorance of its
principles is annual evidence of this. On the other hand, people's general understand-
ing of the nature of the economy may allow some basic contract law principles to
penetrate deeply in society. Further, contract law as ideology may be most important

15
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

to members of the legal elite, not to the common person. Lawyers and judges h ave
the skill and the opportunity to see contract law as an instrument of inequality and
domination. If the contract ideology prevents that perception, if it justifies the law
and attorneys' and judges' role in its application to the elite, it thereby assists in the
continued functioning of the system.
Finally, some instrumental conceptions of ideology are too unsophisticated to
accord completely with reality. In its simpler form, instrumentalism requires the
development and exploitation of the ide9logy by a dominant group. Actually, con-
tract is not often the product of such conscious manipulation. Instead, its ideological
form is generated in a different manner, one that both removes the conspiratorial
aspect and opens the possibility of a more basic explanation of contract's source and
its legitimating function.
A powerful function of contract law is to present a system of belief which affirms
the legitimacy of the existing social order while denying its true nature. The law does
so not through any conscious manipulation by judges, but by judges restating the
basic facts of concrete social experience in abstract terms when they decide cases.
These facts include the mode of production and "a concomitant organic culture,
an interrelated, possibly internally contradictory, but characteristic complex of insti-
tutions, feelings, habits, beliefs, interpretations, morals, and doctrines." Judges
sympathize with the goals, purposes, and "logic" of the social order because of their
education, their favored economic position, their association with others similarly
favored, and their peculiar training and role in a formalistic precedent- and stability-
oriented legal system. In deciding cases, they fit the dispute at issue within this
advantageous view of the organic whole. That mode of resolution tends to legitimate
the basic social relations, however unjust they actually are. In the process of deciding
many cases, judges construct legal concepts that embody the social relations. The
result is a system of contract law which appears to shape economic affairs according
to normative principles, but which actually is only a recast, idealized form of the
underlying illegitimate socio-economic order.

GILLIAN K HADFIELD, "AN EXPRESSIVE THEORY OF CONTRACT:

FROM FEMINIST DILEMMAS TO A RECONCEPTUALIZATION OF
RATIONAL CHOICE IN CONTRACT LAW"
(1998) 146 U Pa L Rev 1235 at 1236-38, 1257-58, 1263-65
(footnotes omitted)

The idea of deliberate, rational choice is ... of importance in almost every field of law.
In contract law, however, the idea takes on constitutive importance: The very obliga-
tions that an individual is under in contract are a product of that individual's choice.
Indeed, this principle is what distinguishes contract from tort. In contract, one is
obligated only if one chooses to be obligated. In tort, one is obligated regardless of
one's desire to be obligated; the only choice is whether or not to run afoul of the
obligation.
Or, at least, so goes the conventional doctrine. The idea of choice as the source of
obligation in contract has come under scrutiny from a variety of scholars, most nota -
bly relational contract scholars and critical theorists such as feminists . Grant Gilmore,
for example, announced in 1974 the "death of contract" as a distinctive mode of
obligation-if obligations in "contract" arise from considerations of reliance or unjust

16
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

enrichment, from fairness or justice, rather than from the will of the contracting
parties, as Gilmore observed they do, then contract is not contract; it is tort. For
relational contract scholars, modern contract law poses this puzzle: Is it possible to
accept the idea that obligations arise from the norms of a contractual relationship
without conceding the death of contract, of "choice"? For feminist contract scholars,
the question is this: Is it possible to protect women from the oppressive consequences
of harmful, constrained choices-in surrogacy or marital separation agreements, for
example-without divesting women of agency? In all these instances, the idea of
what it is to choose comes to the fore .
In this Article, I examine how our underlying conceptions of what it is to choose
animate legal reasoning in contract. In particular, I contrast the economist's concep-
tion of rational choice-which I consider to be a sharply delineated representation of
dominant legal conceptions of rational choice-with Elizabeth Anderson's conception
of rational choice. Building on the ideas that values are plural, incommensurable,
and socially mediated, and that choice is rational when it is adequately expressive
of values, Anderson constructs a vision of what it is to choose that is a substantial
challenge to the dominant conceptions that undergird conventional contract logic.
In doing so, I argue, she provides the basis for reconceptualizing choice in contract
law in a way that should alter radically our understanding of the source of contractual
obligation.
In particular, I defend in this Article the following claim. Conventional contract
logic rests on the idea that when someone makes the choice to enter into a contract,
she does so primarily to select a preferred future state of affairs; enforcement of the
contract is then seen as a neutral act on the part of the law, which merely gives to
the chooser what she chose. If we adopt Anderson's view of what it means to make
a choice, however, this logic no longer applies. For in that vision we admit the pos-
sibility that the chooser assessed her options in light of what the choice would
express rather than what future states it would secure. That is, the conventional logic
is flawed when it asserts that the chooser has, necessarily, by deciding today to
contract, indicated her choice among future states of affairs. Rather she has indicated
her choice among current states of affairs; the choice among current states has
consequences for the future only if the law attaches them. Analytically, Anderson's
challenge to conventional rational choice theory raises a question that conventional
contract logic thinks it has answered, namely, why does a person's choice at one
point in time determine her legal obligations at another point in time? Why does a
choice in contract have legal significance? It cannot be, after Anderson, simply
because the law is a neutral arm of the state, handing out to contractors what they
have asked for. Instead, the very problem of contract enforcement is that one of the
contractors does not want what the state is giving.
Anderson's theory ... tells us that we need to identify reasons, beyond the bare fact
that a choice to enter a contract has been made, for attaching legal significance to
this particular exercise of choice. I suggest in this Article what some such reasons
might be, and in particular, explore two: the protection of reliance interests and the
protection of an instrumentally valuable convention. The principal point I defend,
however, is that reasons for enforcement are needed, and I observe that turning to
reasons such as reliance or convention would create a contract law that exhibits more
differentiation among types of contract. Faced with the need in a given type of
contract to identify a reliance interest or the instrumental value of a particular conven-
tion of contracting, we may be led to conclude that not all contracts are enforceable
and, moreover, not all are enforceable in the same way or with the same remedy. ...

17
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

ANDERSON'S CONCEPTION OF RATIONAL CHOICE AS EXPRESSIVE CHOICE ·

... The feminist dilemma lies in how to reject the implications of the economist's
model of rational choice without adopting the position that women are not rational;
that is, in Fried's view, infantile and ruled by emotion. This is the dilemma of choice,
the apparently headlong confrontation between being an agent whose autonomous
choices are respected and being an agent who seeks to avoid the legal enforcement
of her choices.
Elizabeth Anderson's conception of rational choice offers, I believe, a way out of
this dilemma by providing a foothold to a contract logic that does not see the deci-
sion to refrain from implementing a person's earlier choice as a failure to respect
her autonomy. Anderson's conception of rational choice captures a greater share of
the human experience without relinquishing rationality. Indeed, she defines ration-
ality as requiring the integration of emotion, relation, and the possibility of growth
into the process of valuing and choosing among alternatives. Moreover, she recap-
tures for rationality attributes of community and public meaning, releasing ration-
ality from its narrow confines within our separate skulls ....

IMPLICATIONS FOR CONTRACTS: SURROGACY BEGUN

If we adopt the economist's theory of rational choice, the decision to enter into a
surrogacy contract is like any other choice. A potential birth mother assesses her
personal preferences for the available options. She weighs the expected benefits of
the income or satisfaction against the expected physical, emotional, and social costs.
The woman who changes her mind about carrying through with the contract does
so, on this theory of rational choice, for one of three reasons : (1) she is opportunistic
and seeking to extort the father; (2) she erred in her calculation of the expected costs
and benefits; or (3) she did not choose rationally to begin with, because of either
diminished capacity or coercion.
According to the conventional logic, the first reason is not grounds for letting the
woman out of the contract. Neither is the second reason, unless we find an extra-
ordinary mistake. Both Fried's notion of autonomy and the fact that uncertainty is
attendant on almost any choice lead us to the position that, unless there is something
exceptional here, mere regret is no basis for release from the contract.
The third reason necessarily must be limited if we start with the economic model
of rational choice. The economic model assumes that action is premised on rational
choice and that coercion and irrationality are the exception and not the rule. Hence,
law motivated by this vision of human behavior will look for extreme forms of coer-
cion (rather than the ordinary coercion of gender or class) or irrationality. To do
otherwise would be to unr.avel the core premises on which such law is built. ...
[Now] ... we turn to Anderson's theory of rational choice .... A birth mother's deci-
sion to enter into a surrogacy contract may have been expressive of her values, and
it may have been fundamentally directed towards expressing, at that point in time,
how she saw herself in relation to the world: how she valued herself, pregnancy,
money, her family, and the intending parents. Suppose her act is not best understood
as a calculation of expected costs and benefits, but rather as a means of expressing
the values of compassion and generosity towards those unable to bear children or
an act expressing her valuation of her body as a source of life. Or perhaps it is an
expression of self-hatred, of her devaluation of herseU as a responsible mother. Or
it may be an expression of her valuation of money as evidence of her degraded value
to her family. Perhaps at the moment she decided to enter into that contract, ·she

18
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

was struggling to express to herself, her family, and the world that she was valuable
and worthy of respect.
Anderson's understanding of what it is to choose requires that we attend to the
framing of choice by, and hence the meaning of choice to, the chooser.

STEWART MACAULAY, "AN EMPIRICAL VIEW OF CONTRACT"

(1985) Wis L Rev 465 at 465-69 (footnotes omitted)

When Grant Gilmore called his lectures "The Death of Contract," he gave a name to
a body of work that includes some of mine. He ca1led me the "Lord High Executioner"
of the "Contract is Dead" movement. However, Gilmore was not very interested in
my empirical description of contract. He said this kind of work lacked theoretical
relevance. I must credit him with an attention catching title. Nevertheless, he failed
to see that the very limited practical role of what professors call contract law poses
significant theoretical problems that we are only beginning to confront.
In a way, Gilmore's title is misleading. Contract as a living institution is very much
with us. In the day-to-day flow of dealings, vast numbers of significant transactions
take place to the reasonable satisfaction of all concerned. People and organizations
bargain, they write documents, and they avoid, suppress, and resolve disputes little
influenced by academic contract law. Some cases are taken to court and the formal
process begun, although lawyers settle most of them before courts reach final deci-
sions. There are even opinions by judges relying on traditional contract law, but they
are relatively rare.
Furthermore, contract within the academy is still very much alive. Every morning
in law schools all over the United States beginning law students struggle with offer,
acceptance, and consideration. I never argued that contract law died. Rather, aca -
demic contract law is not now and never was a descriptively accurate reflection of
the institution in operation. Moreover, this inaccuracy matters in many ways.
At the end of September in 1984, there was a conference in Madison marking the
21st birthday of the publication in the American Sociological Review of my article on
non-contractual relations in business. I am pleased that the article has had a long
shelf-life and people still find something in it. After listening to others at the confer-
ence consider long-term continuing relationships, it is a good time for me to reflect
on developments over the past two decades ....
The 1963 article challenges a model of contract law's functions, explicit or implicit
in the work of contracts scholars and social theorists. This model makes contract
law far more central than its actual role in society. One version of the model suggests
that in a state of natu.re we are all selfish. Law supports needed interdependence by
coercing us to honor obligations to others. The historical story is that we begin with
trading within real communities. Capitalism breaks this up, and we become alienated
strangers. Then the legal system supplies a kind of synthetic community based on
rights and duties enforced by courts. A variant of the story is that market capitalism
changes all personal relations into autonomous market trades-capitalism replaces
a spirit of interdependence by "what's in it for me?" Contract law supplies the needed
glue to hold individualists to their bargains.
More particularly, writers assume a number of things about the institution of
contract. First there is careful planning of relationships in light of legal requirements
and the possibilities of non-performance. We must spell out everything because
parties will perform only to the letter of a contract, if they go that far. Second, contract

19
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

law is a body of clear rules so that_it can facilitate planning. It provides formal chan-
nels so that we know the right way to proceed to produce desired legal consequences.
Finally, contract litigation is a primary means of deterring breach and directly and
indirectly resolving disputes : Without contract law and the state's monopoly of the
legitimate use of force, performance of contracts would be highly uncertain.
However, all of these assumptions about history and about human relationships
are just wrong or so greatly overstated as to be seriously misleading. Contract plan-
ning and contract law, at best, stand at the margin of important long-term continuing
business relations. Business people often do not plan, exhibit great care in drafting
contracts, pay much attention to those that lawyers carefully draft, or honor a legal
approach to business relationships. There are business cultures defining the risks
assumed in bargains, and what should be done when things go wrong. People
perform disadvantageous contracts today because often this gains credit that they
can draw on in the future. People often renegotiate deals that have turned out badly
for one or both sides. They recognize a range of excuses much broader than those
accept~d in most legal systems.
There are relatively few contracts litigated, and those that are have special char-
acteristics. Few of those cases litigated produce anything like adequate compensation
for the injuries caused. Frequently, limitations on liability in written contracts block
remedies based on the reasonable expectations of the party who did not draft the
instrument. At best, formal legal procedures usually are but a step in a larger process
of negotiation. Filing a complaint and pre-trial procedure can be tactics in settlement
bargaining; appeals often prompt reversals and remands, leaving the parties to settle
or face continuing what seems to be an endless process. When final judgments are
won, often they cannot be executed because of insolvency.
How do we explain this gap between the academic model and an empirical
description of the system of contract law in action7 Academic writers often make
individualistic assumptions. Their theories rest on worlds of discrete transactions
where people respond to calculations of short-term advantage. However, people
engaged in business often find that they do not need contract planning and contract
law because of relational sanctions. There are effective private governments and
social fields, affected but seldom controlled by the formal legal system. Even discrete
transactions take place within a setting of continuing relationships and interdepend-
ence. The value of these relationships means that all involved must work to satisfy
each other. Potential disputes are suppressed, ignored, or compromised in the ser-
vice of keeping the relationship alive.
While we often read that increasing bureaucratic organization has made the world
impersonal, this is not always the case. Social fields cutting across formal lines exist
within bureaucracies, creating rich sanction systems. Individuals occupying formal
roles ignore organizational boundaries as they seek to overcome formal rationality
to achieve goals, gain rewards, and avoid sanctions. Social networks serve as com-
munications systems. People gossip and this creates reputational sanctions.
Power, exploitation, and dependence also are significant. Continuing relation-
ships are not necessarily nice. The value of arrangements locks some people into
dependent positions. They can only take orders. The actual lines of a bureaucratic
structure may be much more extensive than formal ones. Seemingly independent
actors may have little real freedom and discretion in light of the costs of offending
dominant parties. Once they face sunk costs and comfortable patterns, the possibility
of command rather than negotiation increases. In some situations parties may see
relational sanctions as inadequate in view of the risks involved. However, instead of

20
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

contract law, they usually turn to other techniques to provide security, ranging from
collateral to vertical integration.

STEPHEN WADDAMS, Dimensions of Private Law

(Cambridge, UK: Cambridge University Press. 2003) 1-2. 4-12 (footnotes omitted)

Many attempts have been made to explain the relation to each other of categories
(organizing divisions) and concepts (recurring ideas) in private law, leading, since
Blackstone's time, to a great variety of suggested maps, schemes, and diagrams;
none of these has commanded general assent or has fully explained the actual deci-
sions of the courts. In this study a number of legal issues will be examined in which
the interrelation of fundamental concepts has been crucial. It will appear that the
concepts have, when looked at from the standpoint of these legal issues, operated
not in isolation from each other, but cumulatively and in combination, and that their
relation to each other is fully captured neither by the image of a map nor by that of
a diagram. Often a legal obligation has been derived not from a single concept, but
frqm the interaction of two or more concepts in such a way as to preclude the alloca -
tion of the legal issue to a single category.
A desire for precision and order naturally leads to a search for clear categories
and good maps, but such a search, if pressed too far, may be self-defeating, for
material that is inherently complex is not better understood by concealing its com-
plexity. Schemes that have failed to account for the inherent complexity of the law
have not been conducive to good intellectual order, and have engendered both
academic scepticism and judicial resistance ....
... Blackstone ... [divided] rights into "rights of persons" and "rights of things," and
wrongs into "private wrongs" and "public wrongs," supplying titles for each of his
four volumes. Despite the enormous success of the Commentaries, this scheme
gained little following. It depended too much··o n doubtful verbal parallels and antith-
eses, and it omitted divisions that later came to be thought to be of fundamental
importance, notably the distinctions between public and private law, and within
private law between property and obligations, and within obligations between
contractual and other kinds of obligation . ...
Though Blackstone's primary purpose was not to subject English law to critical
analysis, his work paved the way for others to do so. Blackstone's scheme had found .
no explicit place for contract law. In the Commentaries, aspects of contracts formed
part of rights of persons (employment) and of rights of things (transfers of property),
general contract law being assigned to a chapter of the book on private wrongs
entitled "Of Injuries to Personal Property," and very briefly treated. In 1790 the first
English treatise on contract law gave conceptual unity to the topic, and in 1806 a
treatise on Obligations by Blackstone's French contemporary Robert Joseph Pothier
was published in English translation. So unfamiliar to English readers was the idea
of a law of obligations that the translator found it necessary to add to the title, calling
it A Treatise on the Law of Obligations or Contracts. The modern reader might naturally
suppose that the purpose must have been to enlarge the meaning of "contracts," but
the translator explained that his purpose was in fact to enlarge the meaning of
"obligations" beyond the restricted meaning (i.e., penal bond) that it had in contem-
porary English legal usage ....
Pothier did indeed devote the vast bulk of the treatise ... to contractual obligation,
but he was notably concerned that his account should be conceptually complete.

21
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

He divided obligations into "contracts" and "other causes of obligations," and though
he devoted only five pages to these "other causes" he took care to divide them in
their turn into "quasi contracts" (one and a half pages), "injuries and neglects" (two
and a half pages) and a residual class caU~d "of the law" (one page), consisting of
obligations derived directly from natural or positive law ....
The demarcation of contract law from other bases of obligation had far-reaching
implications, including a division between property and obligation, and divisions
among different classes of obligation. It also implied that the contract law of a par-
ticular legal system was a manifestation of a universal order, with which, therefore,
it might be critically contrasted and compared. This attitude is wen illustrated by
Charles Addison's preface to his Treatise on Contracts (1847), where he said that
English contract law was not "a mere collection of positive rules" or "founded upon
any positive or arbitrary regulations, but upon the broad and general principles of
universal law.'' .. .
This approach gave to contract law a high conceptual significance that had been
absent from Blackstone. But attempts to subordinate English contract law to a single
classifying concept, such as consent, have not succeeded. Actual consent to be
bound has been neither sufficient nor necessary in Anglo-American contract law:
.not sufficient, because it is ineffective in the absence of a bargain or a formality; not
necessary, because contractual words and conduct are given effect according to the
meaning reasonably ascribed to them by the promisee, not that actually intended
by the promisor. Thus, an offer may be effectively accepted even though the offeror
has intended to withdraw it. On this last question the authority of Pothier was
expressly rejected by an English court in 1880, relying on American law ... .
English contract law, as Blackstone's scheme reminds us, had developed by treat-
ing breach of contract as a species of wrong, associated with injury to property. The
nineteenth century produced a large number of treatises on English contract law,
and though the delictual and proprietary associations of the subject were neglected
they were not altogether buried: the primary right of the promisee remained a right
to compensation for loss caused by wrongdoing, overlaid on the earlier concepts of
covenant and debt, and supplemented by the power of the court of equity, where it
thought it appropriate, to decree specific performance, to issue injunctions, and to
declare and enforce trusts. These delictual and proprietary associations have been
an obstacle to schematic classification because they preclude a sharp demarcation
between contractual and other sources of obligation. Such a demarcation would
have required the abandonment, as a central concept, of breach of contract as a
wrong, the abolition of covenant and debt, the abolition of equity as a source of
contractual obligation, the dissociation of contract from property, and the substitu -
tion of a primary legal obligation of fulfilment of contracts, as in some other legal
systems. Simultaneous changes of this magnitude could scarcely have been achieved
without codifying legislation.
Most of the nineteenth-century treatises did not struggle with the precise relation
of contracts to other kinds of obligation, but Anson (1879), like Pothier, did. Anson's
attempt to reconcile conceptual completeness with the actual structure of English
contract law led him to allocate to entirely separate categories the initial obligation
to perform a contract and the obligation to pay compensation for loss caused by
breach. Anson recognized also that the obligation to pay a judgment could not read-
ily be accommodated under other headings; neither could matrimonial obligations,
nor obligations arising from trusts. He thus found it necessary to postulate six cat-
egories of obligation: contract, delict, breach of contract, judgment, quasi-contract,
and miscellaneous.

22
 CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

Anson's scheme, despite the very high repute of his book, and though carried
through seventeen editions over fifty years, attracted no following. Nor was any
similar scheme adopted. Halsbury's Laws of England (1907-17) organized the law
alphabetically under 164 titles, with no title for "public law," "private law," "property,"
"obligation," "quasi-contract," or "unjust enrichment." The highly influential Smith's
Leading Cases (12th edition, 1915) succeeded in arranging much of English private
law in the form of annotations on sixty judicial decisions. The general tendency of
English lawyers at this time was to think in terms of two general categories only of
personal obligation, namely contract and tort, and this tendency was assisted by
comparisons_with Roman law, by curricula of legal education, by a statutory provi-
sion on costs in county courts, and by the prevailing desire for clarity, predictability,
and certainty in the law. Though this was the general tendency, it did not receive
the approval of the two most prominent contemporary English academic writers.
F.W. Maitland, in a study published posthumously in 1909, after referring to the divi-
sions of Roman law, said that "[t]he attempt to distribute our personal forms under
the two heads of contract and tort was never very successful or very important."
Frederick Pollock, writing at about the same date, pointed out that "!s]ince about the
middle of the 19th century there has been a current assumption that all civil causes
of action must be founded on either contract or tort," but added flatly, "there is no
historical foundation for this doctrine."
Nevertheless the tendency to think i:n terms of only two categories went so far as to
lead the House of Lord~ in 1914 to subordinate the category of quasi-contract (obliga-
tions imposed by law for the avoidance of unjust enrichment) to that of contract. ...
The revival of unjust enrichment has been one of the most important develop-
ments of the twentieth century in Anglo-American private law. The American Law
Institute's Restatement of Restitution (1937) was welcomed in England by Lord Wright,
who took the opportunity of expanding his views in the Fibrosa case (1942) ....
... In one sense, this development may be viewed as a victory for the law of unjust
enrichment and for the influence of academic writing. But Lord Wright's language,
rejecting the notion of two categories only, and advocating "a third category," had
the effect of entrenching a particular view of categories. The notion of three cat-
egories may be superior, from a historical perspective, to that of two, but it directs
attention away from the question of whether it is necessary or desirable to think in
terms of exhaustive and mutually exclusive divisions.
Some modern writers have accepted the threefold division, but there are still many
kinds of obligation that cannot be comfortably fitted within it. For this reason, some
have proposed "trust" or "fiduciary relationship" as a separate category. Others, fol-
lowing Pothier and Anson, have admitted a residual or "miscellaneous" class, but the
need for it points to the limitations of this kind of diagrammatic classification. First,
the contents of the residual class are potentially very large-"a huge and various
assortment of rights." When the number of specimens that has to be classified as "sui
generis" is indeterminate and far larger than the number of primary "genera," doubt
is cast on the primacy and distinctiveness of the named classes. Secondly, most <?f
the kinds of obligation called "sui generis" have not been distinct from the three
primary classes, but have contained elements of two or more of them, often com-
bined with elements of property and public policy. Thirdly, the admission of a
residual class deprives the scheme of all excluding power: to establish, in response
to a claim, that there is no obligation derived from contract'. tort, or unjust enrich-
ment is inconclusive, because it leaves open the possibility that there is another
unnamed and hitherto unidentified kind of obligation that may lead to similar or
analogous legal consequences. It is equally difficult to reconcile a miscellaneous

23
CHAPTER 1 PERSPECTIVES ON CONTRACT LAW

category with the image of a map: the notion of a limitless and permanently
unknowable residual territory demonstrates the limits of the mapping metaphor in
its application to law.

24
 CHAPTER TWO

REMEDIES FOR BREACH

OF PROMISE

I. The Interests Protected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

II. Problems in Measuring Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
A. Cost of Substitute Performance, or Economic Value? . . . . . . . . . . . . . . . . . . 38
B. Lost Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
C. Note on Loss of Chance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Ill. Remoteness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
IV. Intangible Injuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
V. Punitive Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
VI. Mitigation of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
VII. Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
VIII. Time of Measuring Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
IX. Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

I. THE INTERESTS PROTECTED

FULLER & PERDUE, "THE RELIANCE INTEREST

IN CONTRACT DAMAGES"
(1936) 46 Yale LJ 52 at 53-54. 56-57, 61- 63

It is convenient to distinguish three principal purposes which may be pursued in

awarding contract damages. These purposes, and the situations in which they
become appropriate, may be stated briefly as follows:
First, the plaintiff has in reliance on the promise of the defendant conferred some
value on the defendant. The defendant fails to perform his promise. The court may
force the defendant to disgorge the value .he received from the plaintiff. The object
here may be termed the prevention of gain by the defaulting promiser at the expense
of the promisee; more briefly, the prevention of unjust enrichment. The interest
protected may be called the restitution interest. For our present purposes it is quite
immaterial how the suit in such a case be classified, whether as contractual or quasi-
contractual, whether as a suit to enforce the contract or as a suit based upon a
rescission of the contract. These questions relate to the superstructure of the law,
not to the basic policies with which we are concerned.

25
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

Secondly, the plaintiff has in reliance on the promise of the defendant changed
his position. For example, the buyer under a contract for the sale of land has incurred
expense in the investigation of the sener's title, or has neglected the opportunity to
enter other contracts. We may award damages to the plaintiff for the purpose of
undoing the harm which his reliance on the defendant's promise has caused him.
Our object is to put him in as good a position as he was in before the promise was
made. The interest protected in this case may be called the reliance interest.
Thirdly, without insisting on reliance by the promisee or enrichment of the prom-
isor, we may seek to give the promisee the value of the expectancy which the promise
created. We may in a suit for specific performance actually compel the defendant to
render the promised performance to the plaintiff or, in a suit for damages, we may
make the defendant pay the money value of this performance. Here our object is to
put the plaintiff in as.good a position as he would have occupied had the defendant
performed his promise. The interest protected in this case we may call the expecta-
tion interest . ...
It is obvious that the three "interests" we have distinguished do not present equal
claims to judicial intervention. It may be assumed that ordinary standards of justice
would regard the need for judicial intervention as decreasing in the order in which
we have listed the three interests. The "restitution interest," involving a combination
of unjust impoverishment with unjust gain, presents the strongest case for relief. If,
following Aristotle, we regard the purpose of justice as the maintenance of an equi-
librium of goods among members of society, the restitution interest presents twice
as strong a claim to judicial intervention as the reliance interest, since if A not only
causes B to lose one unit but appropriates that unit to himself, the resulting discrep-
ancy between A and B is not one unit but two.
On the other hand, the promisee who has actually relied on the promise, even
though he may not thereby have enriched the promisor, certainly presents a more
pressing case for r·elief than the promisee who merely demands satisfaction for his
disappointment in not getting what was promised him. In passing from compensa -
tion for change of position to compensation for loss of expectancy we pass, to use
Aristotle's terms again, from the realm of corrective justice to that of distributive
justice. [The reference is to Aristotle, Nicomachean Ethics, 1132a-1132b.] The law no
longer seeks merely to heal a disturbed status quo, but to bring into being a new situ-
ation. It ceases to act defensively or restoratively, and assumes a more active role.
With the transition, the justification for legal relief loses its self-evident quality. It is
as a matter of fact no easy thing to explain why the normal rule of contract recovery
should be that which measures damages by the value of the promised performance.
Since this "normal rule" throws its shadow across our whole subject it will be neces-
sary to examine the possible reasons for its existence. It may be said parenthetically
that the discussion which follows, though directed primarily to the normal measure
of recovery where damages are sought, also has relevance to the more general ques-
tion, why should a promise which has not been relied on ever be enforced at all,
whether by a decree of specific performance or by an award of damages?.
The rule measuring damages by the expectancy may also be regarded as a pro-
phylaxis against the losses resulting from detrimental reliance. Whatever tends to
discourage breach of contract tends to prevent the losses occasioned through reli-
ance. Since the expectation interest furnishes a more easily administered measure
of recovery than the reliance interest, it will in practice offer a more effective sanction
against contract breach. It is therefore possible to view the rule measuring damages
by the expectancy in a quasi-criminal aspect, its purpose being not so much to
compensate the promisee as to penalize breach of promise by the promisor. The rule

26
 I. THE INTERESTS PROTECTED

enforcing the unrelied-on promise finds the same justification, on this theory, as an
ordinance which fines a man for driving through a stop-light when no other vehicle
is in sight. ·
In seeking justification for the rule granting the value of the expectancy there is
no need, however, to restrict ourselves by the assumption, hitherto made, that the
rule can only be intended to cure or prevent the losses caused by reliance. A justifica-
tion can be developed from a less negative point of view. It may be said that there is
not only a policy in favor of preventing and undoing the harms resulting from reli-
ance, but also a policy in favor of promoting and facilitating reliance on business
agreements. As in the case of the stop-light ordinance we are interested not only in
preventing collisions but in speeding traffic. Agreements can accomplish little, either
for their makers or for society, unless they are made the basis for action. When busi-
ness agreements are not only made but are also acted on, the division of labor is
facilitated, goods find their way . to the places where they are most needed, and
economic activity is generally stimulated. These advantages would be threatened
by any rule which limited legal protection to the reliance interest. Such a rule would
in practice tend to discourage reliance. The difficulties in proving reliance and
subjecting it to pecuniary measurement are such that the business man knowing,
or sensing, that these obstacles stood in the way of judicial relief would hesitate to
rely on a promise in any case where the legal sanction was of significance to him.
To encourage reliance we must therefore dispense with its proof. For this reason it
has been found wise to mai<e recovery on a promise independent of reliance, both
in the sense that in some cases the promise is enforced though not relied on (as in
the bilateral business agreement) and in the sense that recovery is not limited to the
detriment incurred in reliance ... .
The inference is therefore justified that the ends of the law of contracts and those
of our economic system show an essential correspondence. One may explain this
either on the ground that the law (mere superstructure and ideology) reflects inertly
the conditions of economic life, or on the ground that economic activity has fitted
itself into the rational framework of the law. Neither explanation would be true. In
fact we are dealing with a situation in which law and society have interacted. The
law measures damages by the expectancy in part because the law (for reasons more
or less consciously articulated) gives protection to the expectancy.

WERTHEIM V CHICOUTIMI PULP COMPANY

[1911] AC 301 at 307 (PC)

LORD ATKINSON: ... And it is the general intention of the law that, in giving damages
for breach of contract, the party complaining should, so far as it can be done by
money, be placed in the same position as he would have been in if the contract had
been performed . ... That is a ruling principle. It is a just principle.

27
CHAPTER 2 REMED IES FOR BREACH OF PROMISE

BOLLENBACK V CONTINENTAL CASUALTY COMPANY

414 P 2d 802 (Oregon SC 1965)

HOLMAN J: Plaintiff was the holder of a policy issued by defendant under a group
health and accident plan. The effective date of the policy was August 10, 1954. Pre-
miums were due every six months and were paid by plaintiff. On September 28, 1963,
while the policy was in full force and effect, plaintiff was hospitalized for six days
with a back injury.
On November 12 he filed a claim with defendant for $107.33. He received no
answer. On December 12 he wrote to the defendant calling to its attention that he
had filed the claim and had received no acknowledgement. He still received no
answer. On January 6, 1964, he wrote to the defendant a third time calling to its
attention the filing of his claim and his previous correspondence. On January 20
both plaintiff and defendant wrote to each other. Plaintiff wrote to the assistant to
the president of defendant, calling his attention to the plaintiff's payment of pre-
miums, protesting the manner in which he was being ignored, enclosing copies of
his previous letters, and asking for action. Defendant's correspondence was an
answer to plaintiff's letter of January 6, informing plaintiff that his policy had lapsed
in 1959 for non-payment of premiums. On January 30, defendant wrote again to
plaintiff. This letter specified that it was an answer to plaintiff's letter of January 20
to the assistant to the president of defendant. This letter contained the same infor-
mation previously given plaintiff about the lapse of his policy and called to his
attention their previous notification to this effect.
On January 25, plaintiff wrote two more letters to the defendant, one to the account-
ing department requesting information from its records concerning the premiums
it had received from him and the other to the claims department requesting infor-
mation about the reason for the policy's lapse. Plaintiff had received no answer to
these letters when, on February 4, he filed the present case stating that he had elected
to rescind the contract because of its repudiation by defendant and requesting judg-
ment against defendant for all premiums previously paid under the policy in the
sum of $2,166.50.
To plaintiff's complaint defendant filed an answer denying its repudiation of the
contract, pleading the affirmative defense of mistake and tendering the amount of
plaintiff's claim into court. A trial without a jury ensued which resulted in findings
and conclusions by the judge to the effect that defendant had repudiated the contract
by non-payment of plaintiff's claim, that it had done so because of mistake and that
plaintiff was entitled to recover as prayed for in his complaint.
Defendant assigns as error the court's denial of judgment in its favor at the close
of testimony, its denial of a conclusion of law that plaintiff was not entitled to rescis-
sion, and the entering of the conclusion of law that plaintiff was entitled to recover. ...
(5) Defendant contends plaintiff has adequate redress in an action for damages
and that rescission is an extraordinary remedy available only in exceptional cases.
The right to rescission and restitution is an alternative remedy where there has been
repudiation or a material breach of the csmtract. 5 Williston, Contracts ~ 1455 , at 4064
(Rev. ed. 1937) states as follows:
The right of rescission and restitution generally exists as an alternative remedy to an action
for damages where there has been repudiation or a material breach of contract. ...

In Mohr v. Lear, 239 Or. 41 at page 48, 395 P.2d 117 at page 120 (1964), Justice Ross-
man stated for this court as follows:

28
 I. THE INTERE STS PROTECTED

.. When one party repudiates a contract or com mits a total breach thereof the injured
party has an election to pursue one of three remedies: he may treat the contract as at
an end and sue for restitution, he may sue for damages, or he may sue for specific
performance in certain cases. Armsby v. Grays Harbor Commercial Co., 62 Or. 173, 123
P. 32; Massey v. Becker, 90 Or. 461, 176 P. 425; Cornely v. Campbell, 95 Or. 345, 186 P. 563.
187 P. 1103; Paine v. Meier & Frank Co., 146 Or. 40, 27 P.2d 315, 29 P.2d 531; Macomber
v. Waxbom, 213 Or. 412, 325 P.2d 253.
(6) Before a party to a contract is justified in rescinding it because of its breach
by the other party, the breach must be substantial. Rescission is not warranted when
the breach is not substantial and does not defeat the objects of the parties. Walton v.
Denhart, 226 Or. 254, 262, 359 P.2d 890 (1961); Mohr v. Lear, supra, 239 Or. at 48, 395
P.2d 117. Have the ends the contract was designed to subserve been effectively
frustrated? Mohr v. Lear, supra at 50, 395 P.2d 117.
The purpose of the contract, in so far as plaintiff was concerned, was to obtain
protection in the form of defendant's promise to pay claims in case of his disability.
It would hardly seem arguable but that defendant's refusal to pay claims, based upon
its position that the policy has lapsed, effectively frustrated this purpose and was a
substantial breach ....
The defendant next contends the return of all the premiums is not the proper
measure of relief. The law relative to relief that can be secured by the insured when
the insurer wrongfully repudiates the contract is in much confusion. One reason
is the failure to distinguish an action for restitution.upon rescission of the contract
from an action for damages for its breach. The first is based on an annulment of the
contract, the latter upon an assertion of the contract. As an illustration of the confu -
sion the Annotation, 48 AL.R. 107 (1927), uses the following language at page 110:
As concerns the measure of damages for the wrongful cancellation, repudiation, or
termination of the contract of insurance by the insurer, there seems to be an irrecon-
cilable conflict between two principal lines of authority, as well as variations from these
two rules. The first of these rules is to the effect that the insured may recover as dam-
ages the amount of premiums paid or premiums, with interest, where there has been
a wrongful repudiation o(the contract by the insurer, and the assured has elected to
rescind the contract.rather than have it enforced. The other of these two rules is to the
effect that, if the assured is still in such a state of health that he can secure other insur-
ance of like nature and kind, his measure of damages would be the difference between
the cost of carrying the insurance which he has for the term stipulated for, and the cost
of new insurance at the rate he would then be required to pay for a like term.
(Emphasis added.) See also Annotation 107 AL.R. 1233, at 1235 (1937).
The fact is that recovery in each case is based upon a different theory. The purpose
of rescission and restitution is to return the parties as near as possible to their
respective positions prior to the formation of the contract so that each of the parties
will be free to obtain his desired performance elsewhere. The purpose of an action
for damages is to put the injured party as near as possible to the position where he
would have been had the contract actually been performed. See 5 Corbin, Contracts
~996 (1964) ... . A more consistent adherence by the courts to this distinction would
enable a more accurate analysis and classification of cases.
Whether relief for wrongful repudiation of an insurance contract is granted by
way of restitution upon rescission or upon an action for damages for breach of
contract, there is a split in authority whether or not a proper measure of recovery is
the return of all premiums. Probably the majority opinion in the United States is that

29
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

an premiums may be recovered. At least, it is referred to as the majority rule . .See

Annotation 48 A.L.R 107, at 111. Oregon is among the jurisdictions having recognized
this rule. In Hinkson v. Kansas City Life Ins. Co., 93 Or. 473, 183 P. 24 (1919) the defend-
ant issued several policies of life insurance to plaintiff and subsequently wrongfully
canceled them, claiming the premiums had not been paid when in fact they had.
Plaintiff brought an action for restitution of premiums paid under the policies and
received a jury verdict. Upon appeal this court affirmed, stating at 93 Or. at page 500,
183 P. at page 33 as follows:

The verdict was for the full amount of each alleged payment, with accrued interest.
Upon the theory that the policies were in force until such time as they were canceled
and that the plaintiff had the benefit of insurance, the defendant claims that it was
entitled to a reduction or an offset 2 Bacon on Benefit Societies and Life Insurance
(3 ed. [1904]) ll376, lays down this rule:

If a company wrongfully declares the policy forfeited and refuses to accept the
premium when duly tendered, and to give the insured the customary renewal
receipt, evidencing the continued life of the policy, the assured has his choice of
three ctourses: He mqy tender the premium and wait until the policy becomes
payable by its terms and then try the question of forfeiture; or he may sue in
equity to have the policy continued in force; or he may elect to consider the
policy at an end and bring an action to recover the just value of the policy, in
which case the measure of damages is the amount of the premiums paid with
interest on each from the time it was made.

It is apparent that this court at times has also failed to distinguish between an
action for restitution upon rescission and one for damages.
One of the cases which makes the best argument for the position that the insured
is entitled to the recovery of all premiums is American Life Ins. Co. v. McAden, 109 Pa.
399, 1 A. 256 (1885), which states at pages 404-405, 1 A. at 258, as follows:

In the case.at b_ar, the rights of the parties under the contract of insurance had attached,
but the plaintiffs had never received any actual benefit from it They may, in some sense
perhaps, be said to have enjoyed the protection which the policy afforded in the event
of the husband's death; but as that event did not occur, the policy had as yet been of
no appreciable actual advantage to the plaintiff, and no real disadvantage to the defend-
ant. The parties for anything that appears, upon the plaintiffs' recovery are placed
precisely in the same situation they were in before the contract was made; for. although
the company carried the risk, and the plaintiff May F. McAden, at all times during the
continuance of the contract upon the happening of the event provided against was
entitled to the indemnity it secured, yet the company has paid nothing and the plaintiffs
have received nothing. As in the case of any other contract, the parties were each
entitled during its continuance according to its terms.
The policy when made was admittedly valid; the premiums which were paid were
voluntarily paid upon that policy; the risk had been running for 10 years; the obligations
of the contract were long since in force on both sides; and it is clear that the plaintiffs
could not on their own mere motion rescind it, so as to recover back the premiums
paid; but if after receiving these several premiums, the company, without right, refuse
to receive further premiums as they mature, deny their obligation, and declare the
contract at an end, the plaintiff, we think, may take the defendants at their word, treat
the contract as rescinded, and recover back the premiums paid as so much money had
and received for their use. Rescission or avoidance, properly so called, annihilates the
contract and puts the parties in the same position as if it had never existed ....

30
 I. THE INTERESTS PROTECTED

There are also cases which hold that upon rescission there should be offset against
the recovered premiums the value of the coverage actually received by the insured.
The case which best illustrates the argument for this position is Watson v. Massachu-
setts Mut. Life Ins. Co., 78 U.S. App. D.C. 248, 140 F.2d 673 (1943), cert. den. 322 U.S.
746, 64 S.Ct. 1156, 88 L.Ed. 1578 (1944). It states, at page 677, as follows :
... Therefore, when the defendant disclaimed liability it committed an immediate, not
an anticipatory, breach of its contract to furnish insurance protection. Had the plaintiff
chosen to do so he could have sued for damages. which ordinarily would have been
the difference in cost between the repudiated policy and other insurance taken out
at the advanced age of the subject of the policy.
However, instead of seeking damages plaintiff has elected to rescind . We must,
therefore, consider the second question-whether his right to rescission entitles him to
return of the premiums. Some cases permit the recovery of premiums when an insurance
company repudiates its liability, without reduction for the benefit of the insurance afforded
while the policy was in force . This is in conflict with the well-established rule that if a
party seeks restitution after rescinding on account of a breach of an executory contract
he must deduct the benefits, if any, which he has received under such contract.
Only a total failure of consideration should entitle the plaintiff to recover all his pre-
miums. In this case the plaintiff was actually receiving full insurance protection prior to
defendant's repudiation . It would require the application of the principle of punitive
damages to permit him to recover the premiums which represented what it cost the
defendant to carry the insurance for his benefit. A rule allowi ng the recovery of all pre-
miums upon repud iation of an insurance contract can logically apply only to a case of
intentional misrepresentation where it is shown that the defendant was at no time during
the life of the policy willing to meet its obligation. There are no facts alleged which show
such an intentional misrepresentation. So far as we can determine from the complaint,
plaintiff received full value for all premiums paid prior to the disclaimer. His right to
rescind the contract does not carry with it the right to recover such premiums to the
extent that they represent the cost of carry ing insurance protection actually furnished
the plaintiff. No payments in excess of such costs are alleged .

(Emphasis added.)
(9) The theory of relief on an action for restitution is placing both parties in statu
quo ante. Because insurance protection cannot be returned to defendant, the theory
of recovery necessarily means the return to plaintiff of all premiums less the value of
any benefits the plaintiff has actually received under the contract. ... Defendant
contends plaintiff received the value of the protection for the ten-year period which,
upon loss, could have been asserted by plaintiff at any time despite defendant's
subsequent disavowal of the contract. Defendant's assertion upon repudiating the
contract was that the policy had lapsed in 1959. There is no reason to believe that
after that date defendant would have been any more willing to honor claims by
plaintiff than it was in 1964 when it refused payment. By its own assertion that the
policy lapsed in 1959 defendant demonstrated its unwillingness to meet contractual
obligations since that time . Plaintiff therefore could not have been receiving the
protection for which hts premiums were being paid.
(10) It is our opinion that Watson v. Massachusetts Mutual Life Ins. Co., supra, and
similar cases correctly state the amount recoverable in restitution by an action for
money had and received upon rescission of the insurance contract because of
repudiation by the other party. To the extent that Hinkson v. Kansas City Life Ins. Co.,
supra, is in conflict, it is hereby expressly overruled. There must be deducted from

31
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

the amount of premiums which are returned to him the value of the protection
plaintiff has received.
Plaintiff has not claimed that the amount of premiums paid were in excess of the
cost to defendant of carrying the risk of his policy. As was stated in Watson v. Mas-
sachusetts Mut. Life Ins. Co., supra 78 U.S. App. D.C. 248, 140 F.2d at 677, "No payments
in excess of such costs are alleged." Defendant, on the other hand, has not stated,
nor did it prove when in 1959 it terminated plaintiff's policy. Not having shown this, _
it should be considered as terminated on January 1, 1959, or the time most unfavor-
able to defendant.
(11) As a result, plaintiff is not entitled to recover for those premiums paid prior
to the year 1959 because it appears from the record that he received the protection
these payments afforded. It would be inequitable for him to recover them. Defendant
having wrongfully terminated plaintiff's policy in 1959, plaintiff is entitled to recover
all premiums paid subsequent to January 1, 1959.
[See also McCamus at 1034-41; Waddams at paras 719-27.J

PROBLEMS

1. A agreed to buy goods from B for $14,000, and paid $5,000 in advance. B failed to deliver
the goods, the value of which is $11,000. Advise A. See Bush v Canfield, 2 Conn 485 (1818) .
2. A agreed with B to construct a dam for a price of $200,000, payable in installments
according to the progress of the work. When nine-tenths of the work had been done, and A
had been paid $180,000, a dispute arose between the parties, and B wrongfully ordered A off
the construction site. A can prove that the market value of the services rendered is $400,000.
Ad vise A. See Boomer v Muir, 24 P 2d 570 (Ca l CA 1933) .

ANGLIA TELEVISION LTD V REED

[1972] 1 OB 60 (CA)

LORD DENNING MR: Anglia Television Ltd., the plaintiffs, were minded in 1968 to
make a film of a play for television entitled "The Man in the Wood." It portrayed an
American man married to an English woman. The American has an adventure in
an English wood. The film was to last for 90 minutes. Anglia Television made many
arrangements in advance. They arranged for a place where the play was to be filmed ..
They employed a director, a designer and a stage manager, and so forth. They
involved themselves in much expense. All this was done before they got the leading
man. They required a strong actor capable of holding the play together. He was to
be on the scene the whole time. Anglia Television eventually found the man. He was
Mr. Robert Reed, the defendant, an American who has a very high reputation as an
actor. He was very suitable for this part. By telephone conversation on August 30,
1968, it was agreed by Mr. Reed through his agent that he would come to England
and be available between September 9 and October 11, 1968, to rehearse and play in
this film. He was to get a performance fee of £1,050, living expenses of £100 a week,
his first class fares to and from the United States, and so forth. It was all subject to
the permit of the Ministry of Labour for him to come here. That was duly given on
September 2, 1968. So the contract was concluded. But unfortunately there was some
muddle with the bookings. It appears that Mr. Reed's agents had already booked him
in America for some other play. So on September 3, 1968, the agent said that Mr. Reed
would not come to England to perform in this play. He repudiated his contract.

32
 I. THE INTERESTS PROTECTED

Anglia Television tried hard to find a substitute but could not do so. So on Septem-
ber 11 they accepted his repudiation. They abandoned the proposed film. They gave
notice to the people whom they had engaged and so forth.
Anglia Television then sued Mr. Reed for damages. He did not dispute his liability,
but a question arose as to the damages. Anglia Television do not claim their profit.
They cannot say what their profit would have been on this contract if Mr. Reed had
come here and performed it. So, instead of claiming for loss of profits, they claim for
the wasted expenditure. They had incurred the director's fees, the designer's fees,
the stage manager's and assistant manager's fees, and so on. It comes in an to £2, 750.
Anglia Television say that an that money was wasted because Mr. Reed did not
perform his contract.
Mr. Reed's advisers take a point of law. They submit that Anglia Television cannot
recover for expenditure incurred before the contract was concluded with Mr. Reed.
They can only recover the expenditure after the contract was concluded. They say
that the expenditure after the contract was only £854.65, and that is an that Anglia
Television can recover.
The master rejected that contention: he held that Anglia Television could recover
the whole £2,750; and now Mr. Reed appeals to this court.
Mr. Butler, for Mr. Reed, has referred us to the recent case of Perestrel/o & Com-
panhia Limitada v. United Paint Co. Ltd., The Times, April 16, 1969, in which Thesiger J.
quoted the words of Tindal C.J. in Hodges v. Earl of Litchfield (1835) 1 Bing. N.C. 492,
498: "The expenses preliminary to the contract ought not to be allowed. The party
enters into them for his own benefit at a time when it is uncertain whether there will
be any contract or not." Thesiger J. applied those words, saying: "In my judgment
pre-contract expenditure, though thrown away, is not recoverable.''
I cannot accept the proposition as stated. It seems to me that a plaintiff in such a
case as this has an election: he can either claim for loss of profits; or for his wasted
expenditure. But he must .elect between them. He cannot claim both. If he has not
suffered any loss of profits-or if he cannot prove what his profits would have been-
. he can claim in the alternative the expenditure which has been thrown away, that
is, wasted, by reason of the breach. That is shown by CuUinane v. British "Rema" Manu-
facturing Co. Ltd. [1954] 1 Q.B. 292, 303, 308.
If the plaintiff claims the wasted expenditure, he is not limited to the expenditure
incurred after the contract was concluded. He can claim also the expenditure incurred
before the contract, provided that it was such as would reasonably be in the contem-
plation of the parties as likely to be wasted if the contract was broken. Applying that
principle here, it is plain that, when Mr. Reed entered into this contract, he must have
known perfectly wen that much expenditure had already been incurred on director's
fees and the like. He must have contemplated-or, at any rate, it is reasonably to be
imputed to him -that if he broke his contract, an that expenditure would be wasted,
whether or not it was incurred before or after the contract. He must pay damages for
an the expenditure so wasted and thrown away. This view is supported by the recent
decision of Brightman J . in Lloyd v. Stanbury [1971] 1 W.L.R. 535. There was a contract
for the sale of land. In anticipation of the contract-and before it was concluded-the
purchaser went to much expense in moving a caravan to the site and in getting his
furniture there. The seller afterwards entered into a contract to sen the land to the
purchaser, but afterwards broke his contract. The land had not increased in value, so
the purchaser could not claim for any loss of profit. But Brightman J. held, at p . 547,
that he could recover the cost of moving the caravan and furniture because it was
"within the contemplation of the parties when the contract was signed." That deci-
sion is in accord with the correct principle, namely, that wasted expenditure can be

33
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

recovered when it is wasted by reason of the defendant's breach of contract. It is true

that, if the defendant had never entered into the contract, he would not be liable,
and the expenditure would have been incurred by the plaintiff without redress; but,
the defendant having made his contract and broken it, it does not lie in his mouth
to say he is not liable, when it was because of his breach that the expenditure has
been wasted.
I think the master was quite right and this appeal should be dismissed.

AI OGUS, NOTE, "DAMAGES FOR PRE-CONTRACT

EXPENDITURE"
(1972) 35 Mod L Rev 423

[Two] questions arise for consideration.

(1) Should the plaintiff have the right to elect between his reliance interest and
his expectation interest? The principle of election is stated broadly without
qualification and yet concealed behind the question is a policy issue of fun-
damental importance. If the plaintiff is allowed recovery on the basis of his
reliance interest the award will seek to put him in the position he would have
been in if the contract had not been made. He may as a result be put in a better
position than if the defendant had performed his contract. He may, in short,
be able _to protect himself against the consequences of having made a bad
bargain . It may be sought to defend this result on the ground that it does not
lie in the mouth of a person who has broken his contract to comp lain if the
plaintiff is put in the position he would have been in if he had not entered into
a con tract with the defendant. But this view involves, by im plication a punitive
consideration . The opposing view, that a plaintiff should never be put in a
better position than if the contract had been performed , seems to be more
consistent with the doctrine of compensation. If this latter view were to be
preferred then the principle of election enunciated by Lord Denning M.R.
would be subject to the qualification that recovery of reli ance inte rest damages
should not exceed the value of the expecta.tion.
(2) Should pre-contract expenditure form part of the reliance interest award? Hav-
ing allowed the plaintiff to elect between the reliance and expectation interests,
Lord Denning M.R. decided that an award of reliance interest damages might
include pre-contract expenditure. This is, with respect, a doubtful proposition.
The measure of damages so envisaged would not put the plaintiffs in the pos-
ition they would have been in if the contract had not been made, for the
expenses would still have been incurred . The expenses were incurred not in
reliance on the defendant's promise to perform-they w ere incurred merely
in the hope that agreement with the defendant would be secured. There was
indeed no causal connection between the loss (the w asted expenses) and
either the making of the contract or its breach . In the United States of America
these theoretical objections have proved decisive: all attempts to recover
pre-contract expenditure (where there was no special agreement bind ing the
defaulting party to pay) have failed .

[See also McCamus at 890-95; MacDouga\\ at 338 -47; Waddams at paras 712-15.]

34
 I. THE INTERESTS PROTECTED

NOTES AND QUESTIONS

1. In Bowlay Logging Ltd v Domtar Ltd (1978), 135 DLR (3d) 179 (BCCA), a logging contract
was terminated by the timber owner's breach. The contract price for full performance was
$150,000. The logger's claim for expenses was held to be limited by proof that losses would
have been incurred even if the contract had not been terminated . Seaton JA said : "On the
evidence it seems clear that the appellant was losing heavily; not because of the respondent's
breach, but because of an improvident contract and grossly inefficient work practices. The
appellant's claim that it expended $232,905 partially completing a project that was to yield
$150,000 demonstrates the extent to which it was losing money. The result of the breach was
to release the appellant from further losses . In short, no damage was sustained by the appel-
lant as a consequence of the respondent's breach ."
2. The owners of a ship enter into a charterparty-that is, a contract to rent the carrying
capacity of a ship-for five years and incur expenses to install special equipment for the par-
·ticular needs of the charterer. Then the charterer repudiates the contract. Market rates for ship
charters are now much higher than the contract rate, so that the owners recharter the ship at
a higher rate and suffer no net loss, even taking account of the expenses of the special equip-
ment, which is now useless. Are the owners entitled to recover damages? See Omak Maritime
Ltd v Mamo/a Challenger Shipping Co, [2010) EWHC 2026 (Comm).

PITCHER V SHOEBOTTOM
[1971] 1OR106 (HC)

[Prior to August 1958, the plaintiff made an oral agreement with the defendant, S, to
buy certain land. This agreement was reduced to writing in the summer of 1959, and
the plaintiff made some payments to S under the agreement. In 1960, S, in breach
of the agreement, sold the land to a third person.
The plaintiff brought an action against S for specific performance of the agree-
ment for the sale of land, for a declaration that the subsequent purchasers had no
interest in the land, or, alternatively, for damages against all the defendants. The
claims for specific performance and for damages against the other purchasers were
dismissed, but the claim for damages against S was allowed.]
LIEFF J : .. . I find Shoebottom liable to the plaintiff for breach of contract but I also find
that there is not sufficient evidence before me to ascertain the damages which the
plaintiff suffered as a result of the breach. The only evidence led in this regard was
contained in Kingshott's testimony where he stated that the value of the Pitcher
lands is now more than $8,000 and in 1958 the value was $2,000. I therefore think it
is necessary to direct a reference to the local Master at Parry Sound to ascertain the
quantum of damage suffered by the plaintiff . ...
Therefore in the present case the Master must ascertain the value of the Pitcher
lands at the date when the Pitcher agreement was to close, and the difference
between that value and the contract price represents the loss of bargain damage to
which I find the plaintiff to be entitled. The plaintiff is also entitled to the return of
the moneys which he paid on account of the purchase price but he is not entitled
to any expenditures relating to investigating title or any other expenditures which
had been necessary if the transaction had been closed as planned. On the other hand,
the cost of the survey which the plaintiff would have acquired must be deducted if
in fact he did not need to have that survey made as a result of the vendor's breach.
These items all flow from the principle that damages are being awarded to put the
plaintiff in the same position he would have been in at the time when the contract

35
CHAPTER 2 REMEDI ES FOR BREACH OF PROMISE

was breached by the vendor. Thus any items of expenditure which would have been
necessary in order to close the deal must be taken ,into consideration.
The last problem relates to the problem that the agreement of purchase and sale
did not specify a closing date. In such a circumstance, a reasonable time is implied
(Shackleton v. Hayes, (1954] 4 D.L.R. 81 at p. 89, per Cartwright J.). Hence, a reasonable
time for closing the transaction would have been early 1960. It is a fact that a survey
could not have been carried out prior to the spring of 1959 due to weather conditions.
Therefore, early 1960 is the date which the Master should use in ascertaining the
market value of the land at the date of the breach.

NOTES AND QUESTIONS

1. Assuming that the land had increased in value between 1960 and 1970, why was the
plaintiff not entitled to recover that increase? This aspect is discussed in Section VIII , below.
2. In April, A agreed to sell 2.000 bushels of wheat to B at $1.03 a bushel. to be delivered
July 25. On July 13, A sold the wheat to C at $1.16 a bushel. By July 25, the market price of
wheat had dropped to 97¢ a bushel. B claims damages for breach of contract. Will B succeed7
See Acme Mills & Elevator Co v Johnson (1911), 141 Ky 718. 133 SW 784.

HAWKINS V MCGEE
84 NH 114, 146 A 641 (1929)

Assumpsit against a surgeon for breach of an alleged warranty of the success of an

operation. Trial by jury. Verdict for the plaintiff. The writ also contained a count in
negligence upon which a nonsuit was ordered, without exception.
The defendant ... moved to set aside the verdict upon the grounds that it was
contrary to the evidence; ... and because the damages awarded by the jury were
excessive. The trial court ... found that the damages were excessive, and made an
order that the verdict be set aside, unless the plaintiff elected to remit all in excess of
$500. The plaintiff having refused to remit, the verdict was set aside "as excessive
and against the weight of the evidence," and the plaintiff excepted.
[The case was transferred to the Supreme Court.]
BRANCH J: The operation in question consisted in the removal of a considerable
quantity of scar tissue from the palm of the plaintiff's right hand and the grafting of
skin taken from the plaintiff's chest in place thereof. The scar tissue was the result
of a severe burn caused by contact with an electric wire, which the plaintiff received
about nine years before the time of the transactions here involved. There was evi-
dence to the effect that before the operation was performed the plaintiff and his .
father went to the defendant's office, and that the defendant, in answer to the ques-
tion, "How long will the boy be in the hospital?" replied, "Three or four days, not over
four; then the boy can go home and it will be just a few days when he will go back
to work with a good hand." Clearly this and other testimony to the same effect would
not justify a finding that the doctor contracted to complete the hospital treatment
in three or four days or that the plaintiff would be able to go back to work within a
few days thereafter. The above statements could only be construed as expressions
of opinion or predictions as to the probable duration of the treatment and plaintiff's
resulting disability, and the fact that these estimates were exceeded would impose no
contractual liability upon the defendant. The only substantial basis for the plaintiff's
claim is the testimony that the defendant also said before the operation was decided

36
 I. THE INTERESTS PROTECTED

upon, "I will guarantee to make the hand a hundred per cent perfect hand or a hun -
dred per cent good hand." The plaintiff was present when these words were alleged
to have been spoken, and, if they are to be taken at their face value, it seems obvious
that proof of their utterance would establish the giving of a warranty in accordance
·with his contention.
The defendant argues, however, that, even if these words were uttered by him,
no reasonable man would understand that they were used with the intention of
entering "into any contractual relation whatever," and that they could reasonably be
understood only "as his expression in strong language that he believed and expected
that as a result of the operation he would give the plaintiff a very good hand." It may
be conceded, as the defendant contends that, before the question of the making of
a contract should be submitted to a jury, there is a preliminary question of law for
the trial court to pass upon, i.e. "whether the words could possibly have the meaning
imputed to them by the party who founds his case upon a certain interpretation";
but it cannot be held that the trial court decided this question erroneously in the
present case. It is unnecessary to determine at this time whether the argument of
the defendant, based upon "common knowledge of the uncertainty which attends
all surgical operations," and the improbability that a surgeon would ever contract to
make a damaged part of the human body "one hundred per cent perfect," would, in
the absence of countervailing considerations, be regarded as conclusive, for there
were other factors in the present case which tended to support the contention of the
plaintiff. There was evidence that the defendant repeatedly solicited from the plain-
tiff's father the opportunity to perform this operation, and the theory was advanced
by plaintiff's counsel in cross-examination of defendant that he sought an oppor-
tunity to "experiment on skin grafting," in which he had had little previous experience.
If the jury accepted this part of plaintiff's contention, there would be a reasonable
basis for the further conclusion that, if defendant spoke the words attributed to him,
he did so with the intention that they should be accepted at their face value, as an
inducement for the granting of consent to the operation by the plaintiff and his father,
and there was ample evidence that they were so accepted by them. The question of
the making of the alleged contract was properly submitted to the jury.
The substance of the charge to the jury on the question of damages appears in
the following quotation: "If you find the plaintiff entitled to anything, he is entitled
to recover for what pain and suffering he has been made to endure and for what
injury he has sustained over and above what injury he had before." To this instruction
the defendant seasonably excepted. By it, the jury was permitted to consider two
elements of damage: (1) Pain and suffering due to the operation; and (2) positive ill
effects of the operation upon the plaintiff's hand. Authority for any specific rule of
damages in cases of this kind seems to be lacking, but, when tested by general prin -
ciple and by analogy, it appears that the foregoing instruction was erroneous ....
The present case is closely analogous to one in which a machine is built for a
certain purpose and warranted to do certain work. In such cases, the usual rule of
damages for breach of warranty in the sale of chattels is applied, and it is held that
the measure of damages is the difference between the value of the machine, if it had
corresponded with the warranty and its actual value, together with such incidental
losses as the parties knew, or ought to have known, would probably result from a
failure to comply with its terms ....
We therefore conclude that the true measure of the plaintiff's damage in the
present case is the difference between the value to him of a perfect hand or a good
hand, such as the jury found the defendant promised him, and the value of his hand
in its present condition, including any incidental consequences fairly within the
contemplation of the parties when they made their contract ... .

37
CHAPTER 2 REMED IES FOR BREAC H OF PROM IS E

The extent of the plaintiff's suffering does not measure this difference in value.
The pain necessarily incident to a serious surgical operation was a part of the con -
tribution which the plaintiff was willing to make to his joint undertaking with the
defendant to produce a good hand. It was a legal detriment suffered by him which
constituted a part of the consideration given by him for the contract. It represented
a part of the price which he was willing to pay for a good hand, but it furnished no
test of the value of a good hand or the difference between the value of the hand
which the defendant promised and the one which resulted from the operation ....
It was also erroneous and misleading to submit to the jury as a separate element
of damage any change for the worse in the condition of the plaintiff's hand resulting
from the operation, although this error was probably more prejudicial to the plaintiff
than to the defendant. Any such ill effect of the operation would be included under
the true rule of damages set forth above, but damages might properly be assessed
for the defendant's failure to improve the condition of the hand, even if there were
no evidence that its condition was made worse as a result of the operation.
It must be assumed that the trial court, in setting aside the verdict, undertook to
apply the same rule of damages which he had previously given to the jury, and, since
this rule was erroneous, it is unnecessary for us to consider whether there was any
evidence to justify his finding that all damages awarded by the jury above $500 were
excessive ....
New trial ordered.

II . PROBLEMS IN MEASURING DAMAGES

A. COST OF SUBSTIT UTE PERFO RMANCE, OR ECONOMIC VALUE?

CARSON V WILLITTS
(1930), 65 OLR 456 (CA)

[A contract was entered into to bore three oil wells. The defendant bored one well
and then refused to carry on.]
MASTEN JA: Then what is the basis on which this court should now direct the dam-
ages to be assessed? In my opinion, what the plaintiff lost by the refusal of the
defendant to bore two more wells was a sporting or gambling chance that valuable .
oil or gas would be found when the two further wells were bored. If the wells had been
bored and no oil or gas of value had been found, the effect would be that the plaintiff
has lost nothing by the refusal of the defendant to go on boring. On the other hand,
if valuable oil or gas had been discovered, by the boring of these two wells, he had
lost substantially. It may not be easy to compute what that chance was worth to the
plaintiff, but the difficulty in estimating the quantum is no reason for refusing to
award any damages.
In Mayne on Damages, 10th ed., p. 6, it is said:
Adistinction must be drawn between cases where absence of evidence makes it impos-
sible to assess damages, and cases where the assessment is difficult because of the nature
of the damages proved. In the former case only nominal damages can be recovered.
In the latter case, however, the difficulty of assessment is no ground for refusing sub-
stantial damages.

38
 II. PROBLEMS IN MEASURING DAMAGES

GROVES V JOHN WUNDER CO

286 NW 235 (Minn SC 1939)

STONE J (for the court): Action for breach of contract. Plaintiff got judgment for a
little over $15,000. Sorely disappointed by that sum, he appeals.
In August 1927, S.J. Groves and Sons Company, a corporation (hereinafter men-
tioned simply as Groves), owned a tract of 24 acres of Minneapolis suburban real
estate. It was served or easily could be reached by railroad trackage. It is zoned as
heavy industrial property. But for lack of development of the neighborhood its
principal value thus far may have been in the deposit of sand and gravel which it
carried. The Groves company had a plant on the premises for excavating and screen -
ing the gravel. Near by defendant owned and was operating a similar plant.
In August 1927, Groves and defendant made the involved contract. For the most
part it was a lease from Groves, as lessor, to defendant as lessee; its term seven years.
Defendant agreed to remove the sand and gravel and to leave the property "at a
uniform grade, substantially the same as the grade now existing at the roadway ...
on said premises, and that in stripping the overburden ... it will use said overburden
for the purpose of maintaining and establishing said grade."
Under the contract defendant got the Groves screening plant. The transfer thereof
and the right to remove the sand and gravel made the consideration moving from
Groves to defendant, except that defendant incidentally got rid of Groves as a com -
petitor. On defendant's part it paid Groves $105,000. So that from the outset, on
Groves' part the contract was executed except for defendant's right to continue using
the property for the stated term. (Defendant had a right to renewal which it did not
exercise.)
Defendant breached the contract deliberately. It removed from the premises only
"the richest and best of the gravel" and wholly failed, according to the findings, "to
perform and comply with the terms, conditions, and provisions of said lease ... with
respect to the condition in which the surface of the demised premises was required
to be left." Defendant surrendered the premises, not substantially at the grade
required by the contract "nor at any uniform grade." Instead, the ground was "broken,
rugged, and uneven." Plaintiff sues as assignee and successor in right of Groves.
As the contract was construed below, the finding is that to complete its perform-
ance 288,495 cubic yards of overburden would need to be excavated, taken from the
premises and deposited elsewhere. The reasonable cost of doing that was found to
be upwards of $60,000. But, if defendant had left the premises at the uniform grade
required by the lease, the reasonable value of the property on the determinative date
would have been only $12,160. The judgment was for that sum, including interest,
thereby nullifying plaintiff's claim that cost of completing the contract rather than
difference in value of the land was the measure of damages. The gauge of damage
adopted by the decision was the difference between the market value of plaintiff's
land in the condition it was when the contract was made [broken?] and what it would
have been if defendant had performed. The one question for us arises upon plaintiff's
assertion that he was entitled, not to that difference in value, but to the reasonable
cost to him of doing the work called for by the contract which defendant left undone.
1. Defendant's breach of contract was wilful. There was nothing of good faith
about it. Hence, that the decision below handsomely rewards bad faith and deliberate
breach of contract is obvious. That is not allowable . Here the rule is well settled, ...
that where the contractor wilfully and fraudulently varies from the terms of a con -
struction contract h e cannot sue tli.ereon and have the benefit of the equitable
doctrine of substantial performance. That is the rule generally. ...

39
CHAPTER 2 REMEDI ES FOR BREACH OF PROMISE

2. In reckoning damages for breach of a building or construction contract, the

law aims to give the disappointed promisee, so far as money will do it, what he was
promised ....
Never before, so far as our decisions show, has it even been suggested that lack
of value in the land furnished to the contractor who had bound himself to improve
it any escape from the ordinary consequences of a breach of the contract. ...
Even in case of substantial performance in good faith, the resulting defects being
remediable, it is error to instruct that the measure of damage is "the difference in
value between the house as it was and as it would have been if constructed according
to contract." The "correct doctrine" is that the cost of remedying the defect is the
"proper" measure of damages ....
Value of the land (as distinguished from the value of the intended product of the
contract, which ordinarily will be equivalent to its reasonable cost) is no proper part
of any measure of damages for wilful breach of a building contract. The reason is
plain.
The summit from which to reckon damages from trespass to real estate is its
actual value at the moment. The owner's only right is to be compensated for the
deterioration in value caused by the tort. That is all he has lost. But not so if a contract
to improve the same land has been breached by the contractor who refuses to do
the work, especially where, as here, he has been paid in advance. The summit from
which to reckon damages for that wrong is the hypothetical peak of accomplishment
(not value) which would have been reached had the work been done as demanded
by the contract.
The owner's right to improve his property is not trammeled by its small value. It
is his right to erect thereon structures which will reduce its value. If that be the result,
it can be of no aid to any contractor who declines performance. As said long ago in
Chamberlain v. Parker, 45 N.Y. 569, 572:

A man may do w hat he will w ith his own, ... and if he chooses to erect a monument to
his caprice o r folly on his premises, and employs and pays another to do it, it does not
lie with the defendant who has been so employed and paid for building it, to say that
his own performance w ould not be beneficial to the plaintiff.

To the same effect is Restatement, Contracts, s. 346, p. 576, Illustrations of Sub-

section (1), par. 4. [See dissenting judgment, below.I
Suppose a contractor were suing the owner for breach of a grading contract such
as this. Would any element of value, or lack of it, in the land have any relevance in
reckoning damages? Of course not. The contractor would be compensated for what
he had lost, i.e., his profit. Conversely, in such a case as this, the owner is entitled to
compensation for what he has lost, that is, the work or structure which he has been
promised, for which he has paid, and of which he has been deprived by the contrac-
tor's breach.
To diminish damages recoverable against him in proportion as there is presently
small value in the land would favor the faithless contractor. It would also ignore and
so defeat plaintiff's right to contract and build for the future. To justify such a course
would require more of the prophetic vision than judges possess. This factor is
important when the subject matter is trackage property in the margin of such an
area of population and industry as that of the Twin Cities ....
[Under] a construction contract, the thing lost by a breach such as we have there
is a physical structure or accomplishment, a promised and paid for alteration in land.
That is the "injury" for which the law gives him compensation. Its only appropriate
measure is the cost of performance.

40
 II. PROBLEM S IN MEASURING DAMAGES

It is suggested·that because of little or no value in his land the owner may be

unconscionably enriched by such a reckoning. The answer is that there can be
no unconscionable enrichment, no advantage upon which the law will frown, when
the result is but to give one party to a contract only what the other has promised;
particularly where, as here, the delinquent has had full payment for the promised
performance.
3. It is said by the Restatement, Contracts, s. 346, Comment b :
Sometimes defects in a completed structure cannot be physically remedied without
tearing down and rebuilding, at a cost that would be imprudent and unreasonable. The
law does not require damages to be measured by a method requiring such economic
waste. If no such waste is involved, the cost of remedying the defect is the amount
awarded as compensation for failure to render the promised performance.

The "economic waste" declaimed against by the decisions applying that rule has
nothing to do with the value in money of the real estate, or even with the product
of the contract. The waste avoided is only that which would come from wrecking a
physical structure completed, or nearly so, under the contract. ... Absent such waste,
as it is in this case, the rule of the Restatement, Contracts, s. 346, is that "the cost of
remedying the defect is the amount awarded as compensation for failure to render
the promised performance." That means that defendants here are liable to plaintiff
for the reasonable cost of doing what defendants promised to do and have wilfully
declined to do ....
The judgment must be reversed with a new trial to follow.

JULIUS J. OLSON J (dissenting) (Holt J concurring) : ... Since there is no issue of fact,
we should limit our inquiry to the single legal problem presented: What amount in
money will adequately compensate plaintiff for his loss caused by defendant's failure
to render performance? ...
As the rule of damages to be applied in any given case has for its purpose com-
pensation, not punishment, we must be ever mindful that, "if the application of a
particular rule for measuring damages to given facts results in more than compensa-
tion, it is at once apparent that the wrong rule has been adopted." Crowley v. Burns
Boiler Co., 110 N.W. 969, 973.
We have here then a situation where, concededly, if the contract had be~m per-
formed, plaintiff would have had property worth, in round numbers, no more than
$12,000. If he is to be awarded damages in an amount exceeding $60,000 he will be
receiving at least 500 per cent more than his property, properly leveled to grade by
actual performance, was intrinsically worth when the breach occurred. To so con -
elude is to give him something far beyond what the parties had in mind or contracted
for. There is no showing made, nor any finding suggested, that this property was
unique, specially desirable for a particular or personal use, or of special value as to
location or future use different from that of other property surrounding it. Under the
circumstances here appearing, it seems clear that what the parties contracted for
was to put the property in shape for general sale. And the lease contemplates just
that, 'for by the terms thereof defendant agreed "from time to time, as the sand and
gravel are removed from the various lots ... leased, it will surrender said lots to the
lessor" if of no further use to defendant "in connection with the purposes for which
this lease is made."
The theory upon which plaintiff relies for application of the cost of performance
rule must have for its basis cases where the property or the improvement to be made
is unique or personal instead of being of the kind ordinarily governed by market

41
CHAPTER 2 REMED IES FOR BREACH OF PROMISE

values. His action is one at law for damages, not for specific performance. As there
was no affirmative showing of any peculiar fitness of this property to a unique or
personal use, the rule to be applied is, I think, the one applied by the court. The cases
bearing directly upon this phase so hold. Briefly, the rule here applicable is this:
Damages recoverable for breach of a contract to construct is the difference between
the market value of the property in the condition it was when delivered to and
received by plaintiff and what its market value would have been if defendant had
fully complied with its terms ....
No one doubts that a party may contract for the doing of anything he may choose
to have done (assuming what is to be done is not unlawful) "although the thing to
be produced had no marketable value." In Restatement, Contracts, s. 346, pp. 576, 577,
Illustrations of Subsection (1), par. 4, the same thought is thus stated:
A contracts to construct a monumental fountain in B's yard for $5,000, but abandons the
work after the foundation has been laid and $2,800 has been paid by B. The contem-
plated fountain is so ugly that it wou.ld decrease the number of possible buyers of the
place. The cost of completing the fountain would be $4,000. B can get judgment for
$1,800, the cost of completion less the part of price unpaid .

But that is not what plaintiff's predecessor in interest contracted for. Such a pro-
vision might well have been made, but the parties did not. They could undoubtedly
have provided for liquidated damages for nonperformance ... or they might have
determined in money what the value of performance was considered to be and
thereby have contractually provided a measure for failure of performance.
The opinion also suggests that this property lies in an area where the owner might
rightly look for future development, being in a so-called industrial zone, and that as
such he should be privileged to so hold it. This he may of course do, but let us assume
that on May 1, 1934, condemnation to acquire this area had so far progressed as to
l~ave only the question of price (market value) undetermined; that the area had been
graded in strict conformity with the contract but that the actual market value of the
premises was only $12,160, as found by the court and acquiesced in by plaintiff what
would the measure of his damages be7 Obviously, the limit of his recovery could be
no more than the then market valUe of his property. In that sum he has been paid
with interest and costs;. and he still has the fee title to the premises, something he
would not possess if there had been condemnation. In what manner has plaintiff
been hurt beyond the damages awarded? As to him "economic waste" is not appar-
ent. Assume the defendant abandoned the entire project without taking a single yard
of gravel therefrom but left the premises as they were when the lease was made,
could plaintiff recover damages upon the basis here established? The trouble with
the prevailing opinion is that here plaintiff's loss is not made the basis for the amount
of his recovery but rather what it would cost the defendant. No case has been decided
upon that basis until now. Plaintiff asserts that he knows of no rule "giving a different
measure of damages for public contracts and for private contracts in case of non-
performance." It seems to me there is a clear distinction to be drawn with respect to
the application of the rule for recoverable damages in case of breach of a public
works contract from that applicable to contracts between private parties. The con-
.struction of a public building, a sewer, drainage ditch, highway, or other public work,
permits of no application of the market value doctrine. There simply is and can be
no "market value" as to such. And for this cogent reason there can be but one rule
of damages to apply, that of cost of completion of the thing contracted to be done.
I think the judgment should be affirmed.

42
 II. PROBLEMS IN MEASURING DAMAGES

NOTES AND PROBLEMS

1. If the "rea sona ble va_lue of the property on the determinative date would have been only
$12.160," why did the plaintiff originally obtain judgment for $15,000 representing the $12,160
plus interest? The defendant surrendered the land to the plaintiff; must it not have some va lue?
Should this value not be deducted from the $12.1607 Professors Dawson and Harvey in their
casebook Contracts and Contract Remedies (Brooklyn, NY: Foundation Press, 1959) report
(at 28) that the case was compromised and the defendant paid $55,000 in cash settle ment. In
1953, three-fifths of the land was sold for $45,000 after $6,000 had been spent on levelling
that portion. It was left at a higher level than planned, but was still suitable for a railroad siding.
2. See also Peevyhouse v Garland Coal & Mining Co, 382 P 2d 109 (SC Okla 1962). in which
the Supreme Court of Oklahoma refused to follow Groves v John Wunder Co in a case where the
plaintiff sought damages for breach of a promise to restore a strip-mining site and where the cost
of restoration was about 100 times the estimated increase in land value.
3. See also McCamus at 898-905; MacDoLigall at 358-60; Waddams at paras 766-67.
4. J owned a 1980 Ford car to which he was sentimenta lly attached and which he referred
to affectionately as "Esmerelda. " As the resu lt of an accident. Esmerelda's fender was in need
of repair. and K agreed to repair it for $500. K now finds that the cost of repair will actually be
$2,000 and, in breach of contract. she refuse s to do the repairs. J has the repairs done else-
where for $2,000, and sues K for $1.500. It is proved that the market value of the car now (as
repaired) is $1,000; in its damaged condition it was $800, but J was so attached to Esmerelda
that he would not consider buying another car. Advise K. See O 'Grady v Westminster Scaffold-
ing Ltd, [1962] 2 Lloyd's Rep 238 (OB); Darbishire v Warran. [1963] 3 All ER 310 (CA); Nu-West
Homes Ltd v Thunderbird Petroleums, Ltd (1975), 59 DLR (3d) 292 at 307-8 (Alta CA).
5. A. a carpenter. agreed with B, acting on behalf of a church organization. to build pews
for a church. When the work was completed it was discovered that the pews did not meet
specifications; they were too narrow and made of weak material. To replace the pews w ith the
proper ones wou ld cost $200. The difference in cost between the material used and that speci-
fied is about $50. B sues for damages. Advise A. See Wood v Stringer (1890), 20 OR 148 (ChD)
6. A agrees with B to construct a swimming pool. to be 7 feet 6 inches in depth. When the
pool is complete it is discovered that the depth is only 6 feet. The evidence is that this does not
diminish the suitability of the pool for diving and that it does not affect the va lu e of B's land.
Nevertheless, B, who particularly wanted the specified depth, is distressed, and demands
$100,000, the cost of rec onstructing the pool to the contractual specifications. See Ruxley
Electronics and Construction, Ltd v Forsyth, [1996] 1 AC 344 (HU.
7. The lease of an office building provides that the lessee will not alter the premises without
written permission from the lessor. In breach of this provision. the lessee replaced the floor in
the foyer, destroying the previous floor that had been made of rare stone. The evidence is that
the alteration reduced the va lue of the building by $35,000. The cost of restoring the floor to
its original condition would be $580,000 and involve the loss of $800,000 in rent w hile the
restoration was carried out. What is the proper measure of damages? Does it make any differ-
ence whether the breach is deliberate or accidental? See Tabcorp Holdings Ltd v Bowen
Investments Pty Ltd. [2009] HCA 8.
8. D agrees w ith C to build an office building and garage. On completion of the work, the
garage is found to be smaller than required under the contract. The evidence is that it wou ld
cost $54,000 to enlarge the garage, but that such work would add nothing to the va lue of the
property. What is the measure of damages? See Diotte v Consolidated Development Co. 2014
NBCA 55, 376 DLR (4th) 235.

43
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

B. LOST VOLUME

SALE OF GOODS ACT

RSO 1990, c S.1

48(1) Where the buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may maintain an action against the buyer for damages ·for
non-acceptance.
(2) The measure of damages is the estimated loss directly and naturally resulting
in the ordinary course of events from the buyer's breach of contract.
(3) Where there is an available market for the goods in question the measure of
damages is in the absence of evidence to the contrary to be ascertained by the dif-
ference between the contract price and the market or current price at the time or
times when the goods ought to have been accepted, or, if no time was fixed for
acceptance, then at the time of the refusal to accept.
49(1) Where the seller wrongfully neglects or refuses to deliver the goods to the
buyer, the buyer may maintain an action against the seller for damages for non -
delivery.
(2) The measure of damages is the estimated loss directly and naturally resulting
in the ordinary course of events from the seller's breach of contract.
(3) Where there is an available market for the goods in question, the measure of
damages is ~n the absence of evidence to the contrary to be ascertained by the dif-
ference between the contract price and the market or current price of the goods at
the time or times when they ought to have been delivered, or, if no time was fixed,
then at the time of the refusal to deliver.

THOMPSON (WL) LTD V ROBiNSON (GUNMAKERS) LTD

[1955] Ch 177

[The defendants had contracted to buy a standard model car from the·plaintiffs, who
were dealers in cars. The defendants, in breach of contract, refused to accept delivery
of the car, and the plaintiffs returned it to their .suppliers, who took it back. The
plaintiffs claimed that they had lost the profit that they would have made if the
defendants had bought the car; the defendants relied on s 48 of the Sale of Goods
Act (s 50 of the English Act).] .

UPJOHN J: This action raises a question of some importance to the motor trade as
to the true measure of damages where the buyer of a motor-car, in this case a Stan-
dard "Vanguard," refuses to complete his bargain and take delivery.
[His Lordship stated the facts and continued:] The law is not really in doubt; it is
set out in section 50 of the Sale of Goods Act, 1893. That section was declaratory of
the existing law, and the general principle which has been observed in all cases [is
this:] "Subject to these observations I think that there are certain broad principles
which are quite well settled. The .first is that, as far as possible, he who has proved a
breach of a bargain to supply what he contracted to get is to be placed, as far as
money can do it; in as good a situation as if the contract had been performed." That
is the general rule.
Apart altogether from authority and statute it would seem to me on the facts
which I have to consider to be quite plain that the plaintiffs' loss in this case is the

44
 II. PROBLEMS IN MEASURING DAMAGES

loss of their bargain. They have sold one "Vanguard" less than they otherwise would.
The plaintiffs, as the defendants must have known, are in business as dealers in
motor-cars and make their profit in buying and selling motor-cars, and what they
have lost is their profit on the sale of this "Vanguard." ...
The main case, however, put by the defendants is this: they submit that subsection
(3) of section 50 applies, because they say that there is an available market for the
goods in question, and in that available market we know that the price of the "Van -
guard" is fixed. It is fixed by the manufacturers. Therefore, they say, the measure of
damages must necessarily be little more than nominal. Had the plaintiffs kept the
car and sold it to another at a later stage, no doubt they would have been entitled to
the costs of storage in the meantime, possibly interest on their money laid out, and
so on, but as they had in fact, mitigated their damages by getting out of the contract,
damages are nil. ... ··
Had the matter been res integra I think that I should have found that an "available
market" merely means that the situation in the particular trade in the particular area
was such that the particular goods could freely be sold, and that there was a demand
sufficient to absorb readily all the goods that were thrust on it, so that if a purchaser
defaulted, the goods in question could readily be disposed of. Indeed, such was the
situation in the motor trade until very recently. It was, of course, notorious that
dealers all over the country· had long waiting lists for new motor-cars. People put
their names down and had to wait five or six years, and whenever a car was spared
by the manufacturer from export it was snatched at, and if any purchaser fell out
there were many waiting to take his place, and it was conceded that if those circum-
stances were still applicable to the "Vanguard" motor-car the claim for damages must
necessarily have been purely nominal. But on the assumed facts circumstances had
changed in relation to "Vanguard" motor-cars, and in March of this year there was
not a demand in the East Riding which could readily absorb all the "Vanguard" motor-
cars available for sale. If a purchaser defaults, that sale is lost, and there is no means
of readily disposing of the "Vanguard" contracted to be sold so that there is not even
on the extended definition an available market. But there is this further considera-
tion: even if I accepted Mr. Platts-Mills's broad argument that one must now look at
the market as being the whole conspectus of trade, organization and marketing, I
have to remember that subsection (3) provides only a prima facie rule, and if on
investigation of the facts one finds that it is unjust to apply that rule, in the light of
the general principles mentioned above, then it is not to be applied. In this case, as
I said in the earlier part of my judgment, it seems to me plain almost beyond argu-
ment that in fact the loss to the plaintiffs is the sum of £61. Accordingly, however
one interprets subsection (3), it seems to me on the facts that I have to consider one
reaches the same result.
Judgment for the plaintiffs.

CHARTER V SULLIVAN
[1957] 2 QB 117 (CA)

[The defendant refused to accept delivery of a standard model car that he had con -
tracted to buy from the plaintiff car dealer. There was evidence that the plaintiff could
sell all the cars of this sort that he could get; and he did in fact resell the particular
car in question.]

45
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

JENKINS LJ: I turn now to consider what, on the undisputed facts of the case, is in
the eye of the law the true measure of the damages, if any, over and above merely
nominal damages, which the plaintiff has suffered through the defendant's failure
to take and pay for the car he agreed to buy.
Consideration of this question must inevitably begin with a reference to section
50 qf the Sale of Goods Act, 1893.

[His Lordship reads 50 and continued:]

Mr. Collard, for the defendant, argued that in the present case there was an available
market for "Hillman Minx" de luxe saloon cars within the meaning of section 50(3)
of the Act, and accordingly that the measure of damages ought, in accordance with
the prima facie rule laid down by that subsection, to be ascertained by the difference
between the contract price and the market or current price at the time of the defen -
dant's refusal to perform his contract.
The result of this argument, if accepted, would be that the plaintiff could claim
no more than nominal damages, because the market or current price could only be
the fixed retail price, which was necessarily likewise the price at which he sold to
the defendant and resold to Wigley.
But the plaintiff is a motor-car dealer whose trade for the present purpose can be
described as consisting in the purchase of recurrent supplies of cars of the relevant
description from the manufacturers, and selling the cars so obtained, or as many of
them as he can, at the fixed retail price. He thus receives, on each sale he is able to
effect, the predetermined profit allowed by the fixed retail price, and it is obviously
in his interest to sell as many cars as he can obtain from the manufacturers. The
number of sales he can effect, and consequently the amount of profit he makes, will
be governed, according to the state of trade, either by the number of cars he is able
to obtain from the manufacturers, or by the number of purchasers he is able to find.
In the former case demand exceeds supply, so that the default of one purchaser
involves him in no loss, for he sells the same number of cars as he would have sold
if that purchaser had not defaulted. In the latter case supply exceeds demand, so that
the default of one purchaser may be said to have lost him one sale ....
In Thompson (W.L.) Ltd. v. Robinson (Gunmakers) Ltd. Upjohn J . had before him a
claim for damages in a case resembling the present case to the extent that the dam-
ages were claimed in respect of the defendants' refusal to perform a contract with
the plaintiffs for the purchase from the plaintiffs of a car (in that instance a "Standard
Vanguard" car) which, like the car in the present case, could only be sold by the
plaintiffs at a fixed retail price. It is, however, important to note that the case to which
I am now referring proceeded on certain admissions, including an admission to the
effect that in the relevant district at the date of the contract (which was also the date
of the breach) "there was no shortage of 'Vanguard' models to meet all immediate
demands in the locality," which I take to mean, in effect, that the supply of such cars
exceeded the demand. In these circumstances the plaintiffs by agreement with their
suppliers rescinded their contract with them, and returned the car. In the ensuing
action the plaintiffs claimed from the defendants damages amounting to the profit
the plaintiffs would have made on the sale of the car to the defendants if the defend-
ants had duly completed their purchase of it, and the judge held them entitled to
those damages. The defendants raised the same argument as had been raised by the
defendant in the present case, namely that there was an available market for a car
of the kind in question, within the meaning of section 50(3), that there was a market
or current price in the shape of the fixed retail price, and that as the fixed retail price
was the same as the contract price the plaintiffs had suffered no damage ....

46
 II. PROBLEMS IN MEASURING DAMAG ES

It remains, therefore, to ascertain the loss (if any) "naturally resulting in the ordin-
ary course of events" from the defendant's breach of contract, and the measure of
that loss must, in my opinion, be the amount, if any, of the profit the plaintiff has
lost by reason of the defendant's failure to take and pay for the car he agreed to buy.
This accords with the view taken by Upjohn J. in Thompson (W.L.) Ltd. v. Robinson
(Gunmakers) Ltd., and also with the principle stated in In re Vic Mill Ltd. which Upjohn J.
applied.
I should next refer to evidence of which I have deferred consideration earlier in
this judgment. ...
Notwithstanding Mr. Aldous's submission to the contrary on the plaintiff's behalf,
I think we should assume that the judge accepted as accurate the plaintiff's sales
manager's own description of the state of the plaintiff's business in "Hillman Minx"
cars. Moreover, I think we should take that description as signifying, according to
the ordinary meaning of the language used, that the plaintiff could always find
purchasers for all the "Hillman Minx" cars he was able to get. ...
The matter therefore stands thus. If the defendant had duly performed his bargain,
the plaintiff would have made on that transaction a profit of £97 15s. The calculation
accordingly starts with a loss of profit, through the defendant's default, of £97 15s.
That loss was not cancelled or reduced by the sale of the same car to Wigley, for if
the defendant had duly taken and paid for the car he agreed to buy, the plaintiff could
have sold another car to Wigley, in which case there would have been two sales and
two profits: see In re Vic Mill Ltd., and particularly per Hamilton L.J. and Buckley L.J.
But the matter does not rest there. The plaintiff must further show that the sum
representing the profit he would have made if the defendant had performed his
contract has in fact been lost. Here I think he fails, in view of Winter's evidence to
the effect that the plaintiff could sell all the "Hillman Minx" cars he could get.
I have already expressed my opinion as to the meaning of this statement. It comes,
I think, to this, that according to the plaintiff's own sales manager the state of trade
was such that the plaintiff could always find a purchaser for every "Hillman Minx"
car he could get from the manufacturers; and if that is right it inevitably follows that
he sold the same number of cars and made the same number of fixed profits as he
would have sold and made if the defendant had duly carried out his bargain.
Upjohn J.'s decision in favour of the plaintiff dealers in Thompson 's case was
essentially based on the admitted fact that the supply of the cars in question exceeded
the demand, and his judgment leaves no room for doubt that if the demand had
exceeded the supply his decision would have been the other way.
Appeal allowed. Damages reduced to nominal sum.

NOTE
The problem in Thompson v Robinson and Charter v Sullivan, sometimes called the "lost
volume" problem, is not confined to contracts for the sale of goods. See e.g. Inter-office
Telephones, Ltd v Robert Freeman Co, Ltd, [1958] 1OB190 (CA), which concerned a contract
fo r the hire of goods.

C. NOTE ON LOSS OF CHANCE

In Chaplin v Hicks, [1911] 2 KB 786, the plaintiff, one of 50 persons shortlisted for 12 positions,
was depri ved by breach of contract of an opportunity to be interviewed. The English Court of
Appeal held that she was entitled to proportionate damages for loss of the chance. The case

47
CHAPTER 2 REMEDIES FOR BREAC H OF PROMISE

has been frequently followed in Canada. In Multi-Malls Inc v Tex-Mall Properties Ltd (1980),
108 DLR (3d) 399 (Ont H Ct J), aff'd (1981). 128 DLR (3d) 192 (CA), the defendant's breach of
contract resulted in the loss of a 20 percent chance of rezoning the plaintiffs property for a
valuable use; proportionate damages were awarded. In Folland v Reardon (2005), 136 ACWS
(3d) (Ont CA), Doherty JA said:

The imposition of liability grounded in the loss of a chance of avoid ing a harm or gaining a
benefit is controversial in tort law, particularly where the harm alleged is not purely eco-
nomic: see Laferriere v. Lawson, [1991] 1 S.C.R. 541, at 600-606 .... Whatever the scope of
the lost chance analysis in fixing liability for tort claims based on personal injuries, lost
chance is well recognized as a basis for assessing damages in contract. In contract, proof of
damage is not part of the liability inquiry. If a defendant breaches his contract with the plain-
tiff and as a result a plaintiff loses the opportunity to gain a benefit or avoid harm, that lost
opportun ity may be compensable. As I read the contract cases, a plaintiff can recover dam-
ages for a lost chance if four criteria are met. First, the plaintiff must establish on the balance
of probabilities that but for the defendant's wrongful conduct, the plaintiff had a chance to
obtain a benefit or avoid a loss. Second, the plaintiff must show that the c hance lost was
sufficiently real and significant to rise above mere specu lation. Third, the plaintiff must dem-
onstrate that the outcome, that is, whether the plaintiff would have avoided the loss or made
the gain, depended on someone or something other than the plaintiff himself or herself.
Fourth, the plaintiff must show that the lost chance had some practical value: Chaplin v.
Hicks, [1911] 2 K.B. 786; Spring v. Guardian Assurance Pie., [1995] 2 A.C. 296 per Lord Lowry
at 327 (H.L.); Eastwa/sh Homes Ltd. v. Anatal Developments Ltd. (1993), 12 O.R. (3d) 675 at
689-90 (C.A.) ... ; fl.1ulti-fl.1alls Inc. v. Tex-Mall Properties Ltd.

Ill. REMOTENESS

BRITISH COLUMBIA AND VANCOUVER'S ISLAND SPAR,

LUMBER AND SAW MILL CO LTD V NETTLESHIP
(1868), LR 3 CP 499 at 508

WILLES J : Cases of this kind [involving remoteness of damages] have always been
found to be very difficult to deal with, beginning with a case said to have been decided
about two centuries and a half ago, where a man going to be married to an heiress,
his horse having cast a shoe on the journey, employed a blacksmith to replace it,
who did the work so unskilfully that the horse was lamed, and, the rider not arriving
in time, the l ady married another; and the blacksmith was held liable for the loss of
the marriage. The question is a very serious one; and we should inevitably fall into
a similar absurdity unless we applied the rules of common sense to restrict the extent
of liability for the breach of a contract of this sort. ...

[On this example FE Smith commented as follows: "It is hardly necessary to observe
that the man of the anvil, even with notice of his customer's errand, could hardly
have apprehended in the bride an animus nubendi so imperious and undiscriminat-
ing" ((1900) 16 Law Q Rev 279).]

48
 Ill. REMOTENESS

HADLEY V BAXENDALE
(1854), 9 Exch 341, 156 ER 145

[The plaintiff owned a steam-powered mil\ at Gloucester. The shaft having broken,
the plaintiff had to send it to Greenwich, near London, to serve as a pattern for the
manufacture· of a new one. The defendant was in the business of carrying goods.
The plaintiff sent the shaft for an agreed price, but its delivery at Greenwich was
delayed beyond what was found to be a reasonable delivery time. The final delivery
of the new shaft to the plaintiff was consequently delayed, and the plaintiff brought
an action against the defendant for the profits lost due to the mil\ standing idle during
that period of delay. At the trial, the jury awarded a sum of money (beyond a sum for
which the defendant had formally admitted liability) in respect of the lost profits. The
defendant sought an order for a new trial.]
ALDERSON B: We think that there ought to be a new trial in this case; but, in so doing,
we deem it to be expedient and necessary to state, explicitly the rule which the Judge,
at the next trial, ought, in our opinion, to direct the jury to be governed by when they
estimate the damages.
It is indeed, of the last importance that we should do this; for, if the jury are left
without any definite rule to guide them, it will, in such cases as these, manifestly
lead to the greatest injustice . ...
Now we think the proper rule in such a case as the present is this: Where two
parties have made a contract which one of them has broken, the damages which the
other party ought to receive in respect of such breach of contract should be such as
may fairly and reasonably be considered either arising naturally, i.e., according to the
usual course of things, from such breach of contract itself, or such as m ay reasonably
be supposed to have been in the contemplation of both parties, at the time they made
the contract, as the probable result of the breach of it. Now, if the special circum-
stances under which the contract was actually made were communicated by the
plaintiffs to the defendants, and thus known to both parties, the damages resulting
from the breach of such a contract, which they would reasonably contemplate, would
be the amount of injury which would ordinarily follow from a breach of contract under
these special circumstances so known and communicated. But, on the other hand,
if these special circumstances were wholly unknown to the party breaking the
contract, he, at the most, could only be supposed to have had in his contemplation
the amount of injury which would arise generally, and in the great multitude of cases
not affected by any special circumstances, from such a breach of contract. For, had
the special circumstances been known, the parties might h ave specially provided
for the breach of contract by special terms as to damages in that case; and of this
advantage it would be very unjust to deprive them. Now the above principles are
those by which we think the jury ought to be guided in estimating the damages
arising out of any breach of contract. ...
Now, in the present case, if we are to apply the principles above laid down, we
find that the only circumstances here communicated by the plaintiffs to the defend-
ants at the time the contract was made, were, that the article to be carried was the
broken shaft of a mil\, and that the plaintiffs were the millers of that mil\. But how do
these circumstances shew reasonably that the profits of the mil\ must be stopped by
an unreasonable delay in the delivery of the broken shaft by the carrier to the third
person? Suppose the plaintiffs had another shaft in their possession put up or putting
up at the time, and that they only wished to send back the broken shaft to the engin -
eer who made it; it is clear that this would be quite consistent with the above cir-
cumstances, and yet the unreasonable delay in the delivery would have no effect

49
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

upon the intermediate profits of the mill. Or again, suppose that, at the time of the
delivery to the carrier, the machinery of the mill had been in other respects defective,
then, also, the same results would follow. Here it is true that the shaft was actually
sent back to serve as a model for a new one, and that the want of a new one was the
only cause of the stoppage of the mill, and that the loss of profits really arose from
not sending down the new shaft in proper time, and that this arose from the delay
in delivering the broken one to serve as a model. But it is obvious that, in the great
multitude of cases of millers sending off broken shafts to third persons by a carrier
under ordinary circumstances, such consequences would not, in all probability, have
occurred; and these special circumstances were here never communicated by the
plaintiffs to the defendants. It follows, therefore, that the loss of profits here, cannot
reasonably be considered such a consequence of the breach of contract as could have
been fairly and reasonably contemplated by both parties when they made this con-
tract. For such loss would neither have followed naturally from the breach of this
·contract in the great multitude of such cases occurring under ordinary circumstances,
nor were the special circumstances, which, perhaps, would have made it a reasonable
and natural consequence of such breach of contract, communicated to or known
by the defendants. The Judge ought, therefore, to have told the jury that, upon the
facts then before them, they ought not to take the loss of profits into consideration
at all in estimating the damages. There must therefore be a new trial in this case.

NOTE
In Jackson v Royal Bank of Scotland, [2005] UKHL 3, Lord Walker of Gestinghope sa id :
In my opinion the familiar passage from the judgment of Baron Alderson ... cannot be con-
strued and applied as if it were a statutory text. nor are its two limbs mutually exclusive. The
first limb ... tends to beg the question, since it makes the damages recove rable under the first
limb depend on how the breach of contract is characterised. If for instance (by reference to
the facts of Hadley v. Baxendale itself) the breach is described sim ply as a carrier's failure to
convey goods from Gloucester and deliver them to Greenwich within two days as promised,
it is a matter of speculation what damages would arise naturally and in the ordinary course.
If on the other hand the breach is described as a delay in deli veri ng to the manufacturer at
Greenwich a broken crankshaft to serve as a model for a new crankshaft urgently required
for the only steam engine at a busy flour mill at Gloucester (which was standing idle until the
new crankshaft arrived) then loss of business profits is seen to be an entirely natural conse-
quence. The appropriate characterisation of the breach depends on the terms of the con-
tract, its business context, and the reasonable contemplation of the parties.

JH JACKSON, Contract Law in Modern Society

(St Paul, Minn : West. 1973) at 10-11

The role of the jury has always had considerable effect on the law of contract. Before
the eighteenth century, writes one noted scholar, "... [T]he jury by and large, had a free
discretion when money damages were claimed, to determine the amount of the
award." In theory the amount of damages was a "question of fact" and in England
the itinerant trial justice sent out from London was little disposed to challenge the
"yeoman of the neighborhood" who had knowledge of the affair. Because of outra -
geous or excessive verdicts, however, judges began to exercise control over the jury
by rulings on evidence, by granting new trials, and by instructing the jury about the

so
 Ill. REMOTENESS

amount which was proper. Thus legal doctrine began to grow. The famous 1854 case
of Hadley v. Baxendale ... demonstrates this tendency and it is commonly said that
the modern law of contract damages dates only from the middle of the nineteenth
century.

NOTES AND QUESTIONS

1. Suppose th at the plaintiffs had taken their shaft in at 10 o'clock in the morning, and that
at 11 o'clock the plaintiffs' servant came in again and said: "The mi ll is stopped; we can't make
any flour until we get that shaft back. Please hurry it. " Then suppose that at 12 noon s·am uel
Stranger came in and the defendants agreed to take a chest in the on ly ava ilable conveyance
to Penza nce in time for Stranger's daughter's wedding the next day. Suppose that Stranger
offered to pay £5, twice th e usual rate. If the defenda nts accepted this proposal and returned
the plaintiffs their £2 4s., should this deliberate breach of the prom ise after the work stoppage
was known affect the ca lculation of damages? Corbin on Contracts (vol 5, s 1008) suggests
tha t we distinguish between wilfu l and non-wilful breach, and in the former case make the
material time for notice of unusual loss the time the defendant chose to commit the wilful
breach. Th e distinction has not been adopted in Canad ian or English cases. Principles, Defin-
itions and Model Rules of European Private Law: Draft Common Frame of Reference (2009)
provides, in book Ill, ch 3, s 703 : "The debtor in an obligation which arises from a contract ... is
liable on ly for loss which the debtor foresaw or could reasonably be expected to have fore-
seen at th e time when the obligation was incurred as a li kely result of the non-performance,
un less the non-performance was intentional, reckless or grossly negligent. "
2. Who, of Hadley and Baxendale, could more easily insure against the loss that occurred7
Shou ld such a question be relevant to the court's conclusion?
3. Able, a farmer, ordered tractor headlights from Baker's Department Store Ltd., at their
usua l price. He told the clerk in the store that he needed the lights to operate his tractor to
harvest his crop at night, and that if the lights were not supplied he would lose part of hi s crop .
The clerk promised that the lights would be supplied in time. The lights were not supplied, and
Able lost half the crop, being unable to procure substitu te lights in time. Is Baker's Department
Store liable fo r the loss7 See Lamkins v International Harvester Co, 182 SW 2d 203 (Ark SC 1944) .

FULLER & PERDUE, "THE RELIANCE INTEREST

IN CONTRACT DAMAGES"
(1936) 46 Ya le LJ 52 at 84-88

[Reprinted by permission of The Yale Law Journal Company and Fred B. Rothman
& Company from The Yale Law Journal.]

Before we discuss the relation between the reliance interest and Hadley v. Baxendale
it will be necessary to state briefly what seems to us to be involved in that famous
case, considering it not so much as an event in legal history but as the accepted
symbol for a set of problems. The case may be said to stand for two propositions:
(1) that it is not always wise to make the defaulting promisor pay for al\ the damage
which follows as a consequence of his breach, and (2) that specifically the proper
test for determining whether particul ar items of damage should be compensable i s
to inquire whether they should have been foreseen by the promisor at the time of
the contract. The first aspect of the case i s much more important than the second.
In its first aspect the case bears an integral relation to the very bases of contract lia-
bility. It declares in effect that just as it i s wise to refuse enforcement altogether to

51
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

some promises (considerationless, unaccepted, "social" promises, etc.) so it is wise

not to go too far in enforcing those promises Which are deemed worthy of legal
sanction. The answer to the question of Hadley v. Baxendale (where shall we stop?)
must inevitably be as complex as the answer to the question (where shall we begin?)
which is implicit in the law of mutual assent, consideration and the rules governing
the formation of contracts generally.
In its second aspect Hadley v. Baxendale may be regarded as giving a grossly simpli-
fied answer to the question which its first aspect presents. To the question, how far
shall we go in charging to the defaulting promisor the consequences of his breach,
it answers with what purports to be a single test, that of foreseeability. The simplicity
and comprehensiveness of this test are largely a matter of illusion. In the first place,
it is openly branded as iriappropriate in certain situations where the line is drawn
much more closely in favor of the defaulting promisor than the test of foreseeability
as normally understood would draw it. There are, therefore, exceptions to the test,
to say nothing of authorities which reject it altogether as too burdensome to the
defaulter. In the second place, it is clear that the test of foreseeability is less a definite
test itself than a cover for a developing set of tests. As in the case of all "reasonable
man" standards there is an element of circularity about the test of foreseeability. "For
what items of damage should the court hold the defaulting promisor? Those which
he should as a reasonable man have foreseen? but what should he have foreseen as
a reasonable man? Those items of damage for which the court feels he ought to pay."
The test of foreseeability is therefore subject to manipulation by the simple device
of defining the characteristics of the hypothetical man who is doing the foreseeing.
By a gradual process of judicial inclusion and exclusion this "man" acquires a complex
personality; we begin to know just what "he" can "foresee" in this and that situation,
and we end, with not one test but with a whole set of tests. This has obviously hap-
pened in the \aw of negligence, and is happening, although less obviously, to the
reasonable man postulated by Hadley v. Baxenda le.
Even if the reasonable man who does the foreseeing is a juristic construct,
endowed precisely with those qualities which the court feels he ought to have for
the purpose at hand, it does not seem that there is a complete petitio principii in the
test of foreseeability. When we import into a question of liability the "reasonable
man" standard we do at least two things. In the first place we increase the chance
that the case will ultimately be determined by the jury. Though the court may define
the reasonable man, it cannot be sure that its definition will be regarded by the jury,
and any test which speaks of the reasonable man decreases the court's chance of
removing the case from the jury. In the second place, whether the case is ultimately
decided by the judge or the jury, stating the problem in terms of the reasonable man
creates a bias in favor of exempting normal or average conduct from legal penalties.
The reasonable man is not necessarily the average man, but he tends to be, and the
notion of what is normal and average puts a bridle on the judicial power of defining
reasonableness. But the restraint is far from complete. It becomes i\\usory in those
situations where the concepts "normal" and "average" are without definite content:
where the "average man" is as much a juristic construct as the "reasonable man." The
restraint is often thrown off even in those fields where, because rather definite lay
ways of thought and action are discoverable in them, the notion of the "normal" and
"average" has some objective reality. The courts have not hesitated to invest the
reasonable man with capacities either greater or less than those of the average man.
For an example of this judicial autonomy within the reign of fact one need look no
further than the case which originated the test of foreseeability, Hadley v. Baxendale
itself. ("Thus, in Hadley v. Baxendale itself, the carrier was told of the use to which the

52
 Ill. REMOTENESS

broken shaft was to be put and that the mill was shut down, but it was held that this
was not enough, since it was not told that another shaft was not available!" McCor-
mick, Damages (1935) ~140.)

HORNE V THE MIDLAND RAILWAY COMPANY

(1873), LR 8 CP 131 (Exch Ch)

[The plaintiffs, shoe manufacturers in Kettering, were under contract to supply a

quantity of shoes to a firm in London for the use of the French army, at the unusually
high price of 4s. per pair. By the terms of the contract with the London firm, the
plaintiff was bound to deliver the shoes by February 3, 1871, and to meet this provi-
sion he sent the shoes to the defendant's station at Kettering in time to be delivered
in the usual course in the evening of that day, when they would have been accepted
and paid for by the consignees. Notice was given to the station master (which notice
was, for the purpose of the case, deemed to be notice to the company) at the time
the shoes were delivered to him that the plaintiffs were under contract to deliver the
shoes by February 3 and that unless they were so delivered they would be thrown
on their hands. The shoes were not delivered in London until the morning of Febru-
ary 4, when the consignee refused them, and the plaintiffs were obliged to sell them
at the best price obtainable-namely, 2s. 9d. per pair.
In an action against the defendants for the delay in delivering the shoes, they
paid into court a sum of £20, which would be sufficient to cover any ordinary loss
such.as expenses incidental to the resale, but the plaintiffs further claimed the sum
of £267 as the difference between the price at which they had contracted to sell the
shoes and the price which they ultimately received.
On a stated case to the Court of Common Pleas, the defendant received a judg-
ment (LR 7 CP 583), which was affirmed in this appeal.]
BLACKBURN J: ... Then if there was no special contract, what was the effect of the
notice? In the case of Hadley v. Baxendale it was intimated that, apart from a\\ question
of a special contract with regard to the amount of damages, if there were a special
note of the circumstances the plaintiff might recover the exceptional damages. This
doctrine has been adverted to in several subsequent decisions with more or less
assent, but they appear to have all been cases in which it was held that the doctrine
did not apply because there was no special notice. It does not appear that there has
been any case in which it has been affirmatively held that in consequence of such
a notice the plaintiff could recover exceptional damages. The counsel for the plaintiff
could not refer to any such case, and I know of none. If it were necessary to decide
the point, I should be much disposed to agree with what my Brother Martin has
suggested, viz., that in order that the notice may have any effect, it must be given
under such circumstances, as that an actual contract arises on the part of the defend-
ant to bear the exceptional loss. Before, however, deciding the point, I should have
wished to take time to consider.

Hydraulic Engineering Co Ltd v McHaffie. (1878), 4 QBD 670 (England). BRAMWELL

LJ: It has occurred to me that the true explanation is that a person contemplates the
performance and not the breach of his contract; he does not enter into a kind of
second contract to pay damages, but he is liable to make good those injuries which
he is aware that his default may occasion to the contractee. COTTON LJ: It cannot be

53
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

said that damages are granted because it is part of the contract that they shall be
paid: it is the law which imposes or implies the term that upon breach of a contract
damages must be paid.

Rivers v George White & Sons Co. [1919] 2 WWR 189 (Sask CA). HAULTAIN CJS: It
may be observed that this theory "of a kind of second contract to pay damages" has
been mainly developed in actions against carriers on the ground that a common
carrier has no discretion to decline a contract.

Kinghorne v The Montreal Telegraph Co. (1859), 18 UCQB 60 (Ont). In an action for
failure to deliver a telegram that cost 60¢ and might have led to a contract that might
have been carried out, the jury awarded £57 13s. 7d. as damages. On a motion for a
non-suit, held, for the defendant, McLEAN J: It is, in my opinion, extremely doubtful
whether in any such case a party who avails himself of the facilities affo;rded in
communicating by telegraph can expect that a telegraph company shall be respon-
sible for all damages, no matter what amount, which may arise in the hurry of
transmitting a message from any verbal inaccuracy of an operator, or from an omis-
sion in forwarding or delivering it when received. It ought not to be expected that
so great facilities are to be afforded for so small a remuneration, and at a risk which
might bring ruin upon any company if obliged to indemnify for every possible loss.

VICTORIA LAUNDRY LTD V NEWMAN INDUSTRIES LTD

[1949] 2 KB 528 (CA)

ASQUITH LJ (for the court): This is an appeal by the plaintiffs against a judgment of
Streatfeild J., in so far as that judgment limited the damages to £110 in respect of an
alleged breach of contract by the defendants which is now uncontested. The breach
of contract consisted in the delivery of a boiler sold by the defendants to the plaintiffs
some twenty odd weeks after the time fixed by the contract for delivery. The short
point is whether, in addition to the £110 .awarded, the plaintiffs were entitled to claim
in respect of loss of profits which they say they would have made if the boiler had
been delivered punctually.
The defendants are and were at all material times a limited company which
described itself on its invoices as "Electrical and Mechanical Engineers and Manu-
facturers." They did not manufacture the boiler in question. They just happened to
own it. The plaintiffs were at all material times a limited company carrying on the
business of laundrymen and dyers in the neighbourhood of Windsor. In January,
1946, the plaintiffs were minded to expand their business, and to that end required
a boiler of much greater capacity than the boiler they then possessed .... Seeing an
advertisement by the defendants on Jan. 17, 1946, of two boilers, which appeared
suitable ... they negotiated for the purchase of one of them, and by Apr. 26, 1946, had
concluded a contract for its purchase at a price of £2,150, loaded free on transport
at Harpenden.
Seeing that the issue is as to the measure of recoverable damages and the applica -
tion of the rules in Hadley v. Baxendale it is important to inquire what information the
defendants possessed at the time when the contract was made as to such matter!' as
. the time at which, and the purpose for which, the plaintiffs required the boiler. The

54
 Ill. REMOTENESS

defendants knew before and at the time of the contract that the plaintiffs were laundry-
men and dyers and required the boiler for purposes of their business as such. They
also knew that the plaintiffs wanted the boiler for immediate use. On the latter point
the correspondence is important. The contract was concluded by, and is contained
in, a series of letters ... and finally, on Apr. 26, in the concluding letter of the series by
which the contract was made : "We are most anxious that this" (that is, the boiler)
"should be put into use" -we call attention to this expression- "in the shortest possible
space of time." Hence, up to and at the very moment when a concluded contract
emerged, the plaintiffs were pressing on the defendants the need for expedition, and
the last letter was a plain intimation that the boiler was wanted for immediate use.
This is none the less so because when, later, the plaintiffs encountered delays in
getting the necessary permits and licences, the exhortations to speed come from
the other side, who wanted their money, which, in fact, they were paid in advance
of delivery. The defendants knew the plaintiffs needed the boiler as soon as the delays
should be overcome, and they knew by the beginning of June that such delays had
by then, in fact, been overcome. The defendants did not know at the material time
the precise role for which the boiler was cast in the plaintiffs' economy, e.g., whether
(as the fact was) it was to function in substitution for an existing boiler of inferior
capacity, or in replacement of an existing boiler of equal capacity, or as an extra unit
to be operated side by side with and in addition to any existing boiler. It has, indeed,
been argued strenuously that, for all they knew, it might have been wanted as a "spare"
or "standby," provided in advance to replace an existing boiler, when, perhaps some
time hence the latter should wear out, but such an intention to reserve it for future
use seems quite inconsistent with the intention expressed in the letter of Apr. 26 to
"put it into use in the shortest possible space of time." In this connection, certain
admissions made in the course of the hearing are of vital importance. The defendants
formally admitted what in their defence they had originally traversed, namely, the
facts alleged in para. 2 of the statement of claim. That paragraph reads as follows:
At the date of the contract hereinafter mentioned the defendants well knew as the fact
was that the plaintiffs were launderers and dyers carrying on business at Windsor and .
required the said boiler for use in their sa id business and the sa id contract was made
upon the basis that the said boiler was required for the said purpose.
On June 5, the plaintiffs, having heard that the boiler was ready, sent a lorry to
Harpenden to take delivery. Mr. Lennard, a director of the plaintiff company, pre-
ceded the lorry in a car. He discovered on arrival that four days earlier the contractors
employed by the defendants to dismantle the boiler had allowed it to fall on its side,
receiving damage. Mr. Lennard declined to take delivery of the damaged boiler in its
existing condition and insisted that the damage must be made good. He was, we think,
justified in this attitude, since no similar article could be bought on the market. After a
long wrangle, the defendants agreed to perform the necessary repairs, and, after further
delay through the difficulty of finding a contractor who was free and able to perform
them, completed the repairs by Oct. 28. Delivery was taken by the plaintiffs on Nov. 8
and the boiler was erected and working by early December. The plaintiffs claim, as
part-'-the disputed part-of the damages, loss of the profits they would have earned
if the machine had been delivered in early June instead of November.
Evidence was led for the plaintiffs with the object of establishing that, if the boiler
had been punctually delivered, then, during the twenty odd weeks between then and
the time of actual delivery (1) they could have taken on a very large number of new
customers in the course of their laundry business, the demand for laundry services at
that time being insatiable-they did, in fact, take on extra staff in the expectation of its

55
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

delivery-and (2) that they could and would have accepted a number of highly lucra-
tive dyeing contracts for the Ministry of Supply. In the statement of claim, para. 10,
the loss of profits under the first of these heads was quantified at £16 a week and
under the second at £262 a week. The evidence, however, which promised to be
voluminous, had not gone very far when counsel for the defendal:'lts submitted that
in law no loss of profits was recoverable at all, and that to continue to hear evidence
as to its quantum, was mere waste of time. He suggested that the question of remote-
ness of damage under this head should be decided on the existing materials, includ-
ing the admissions to which we have referred. The learned judge accepted counsel's
submission, and on that basis awarded £110 damages under certain mino~ heads,
but nothing in respect of loss of profits, which he neld to be too remote. It is from
that decision that the plaintiffs now appeal. It was a necessary consequence of the
course which the case took that no evidence was given on behalf of the defendants,
and only part of the evidence available to the plaintiffs. It should be observed par-
enthetically that the defendants had added as third party the contractors who, by
dropping the boiler, so causing the injuries to it, prevented its delivery in early June
and caused the defendants to break their contract. Those third party proceedings
have been adjourned pending the hearing of the present appeal as between the
plaintiffs and the defendants. The third party, nevertheless, was served with notice
of appeal by the defendants and argument was heard for him at the hearing of the
appeal.
The.ground of the learned judge's decision ... may be summarised as follows. He
took the view that the loss of profit claimed was due to special circumstances, and,
therefore, recoverable, if at all, only under the second rule in Hadley v. Baxendale, and
not recoverable in the present case because such special circumstances were not at
the time of the contract communicated to the defendants. He also attached much
significance to the fact that the object supplied was not a self-sufficient profit-
making article, but part of a larger profit-making whole . ...
What propositions applicable to the present case emerge from the authorities as a
whole, including those analysed above? We think they include the following: (1) It is
well settled that the governing purpose of damages is to put the party whose rights
have been violated in the same position, so far as money can do so, as if his rights had
been observed. This purpose, if relentlessly pursued, would provide him with a
complete indemnity for all loss de facto resulting from a particular breach, however
improbable, however unpredictable. This, in contract at least, is recognised as too
harsh a rule. Hence: (2) In cases of breach of contract the aggrieved party is only
entitled to recover such part of the loss actually resulting as was at the time of the
contract reasonably foreseeable as liable to result from the breach. (3) What was at
that time reasonably foreseeable depends on the knowledge then possessed by the
parties, or at all events, by the party who later commits the breach. (4) For this purpose,
knowledge "possessed" is of two kinds-one imputed, the other actual. Everyone, as
a reasonable person, is taken to know the "ordinary course of things" and con-
sequently what loss is liable to result from a breach of that ordinary course. This is
the subject-matter of the "first rule" in Hadley v. Baxendale, but to this knowledge,
which a contract-breaker is assumed to possess whether he actually possesses it or
not, there may have to be added in a particular case knowledge which he actually
possesses of special circumstances outside the "ordinary course of things" of such a
kind that a breach in those special circumstances would be liable to cause more loss.
Such a case attracts the operation of the "second rule" so as to make additional loss also
recoverable. (5) In order to make the contract-breaker liable under either rule it is not
necessary that he should actually have asked himself what loss is liable to result from

56
 Ill. REMOTENESS

a breach. As has often been pointed out, parties at the time of contracting contem -
plate, not the breach of the contract, but its performance. It suffices that, if he had
considered the question, he would as a reasonable man have concluded that the loss
in question was liable to result ... (6) Nor, finally, to make a particular loss recoverable,
need it be proved that on a given state of knowledge the defendant could, as a rea -
sonable man, foresee that a breach must necessarily result in that loss. It is enough
if he could foresee it was likely so to result. It is enough ... if the loss (or some factor
without which it would not have occurred) is a "serious possibility" or a "real danger."
For short, we have used the word "liable" to result. Possibly the colloquialism "on the
cards" indicates the shade of meaning with some approach to accuracy.
If these, indeed, are the principles applicable, what is the effect of their application
to the facts of the present case? We have, at the beginning of this judgment, sum-
marised the main relevant facts. The defendants were an engineering company
supplying a boiler to a laundry. We reject the submission for the defendants that an
engineering company knows no more than the plain man about boilers or the pur-
poses to which they are commonly put by pifferent classes of purchasers, including
laundries. The defendant company were not, it is true, manufacturers of this boiler
or dealers in boilers, but they gave a highly technical and comprehensive description
of this boiler to the plaintiffs by letter of Jan. 19, 1946, and offered both to dismantle
the boiler at Harpenden and to re-erect it on the plaintiffs' premises. Of the uses or
purposes to which boilers are put, they would clearly know more than the unin -
structed layman. Again, they knew they were supplying the boiler to a company
carrying on the business of laundrymen and dyers, for use in that business. The
obvious use of a boiler, in such a business, is surely to boil water for the purpose of
washing or dyeing. A laundry might conceivably buy a boiler for some other purpose,
for instance, to work radiators or warm bath water for the comfort of its employees
or directors, or to use for research, or to exhibit in a museum. AU these p,urposes are
possible, but the first is the obvious purpose which, in the case of a laundry, leaps to
the average eye. If the purpose then be to wash or dye, why does the company want
to wash or dye, unless for purposes of business advantage? ...
We agree that in order that the plaintiffs should recover specifically and as such
the profits expected on [the lucrative dyeing contracts], the defendants would have
had to know, at the time of their agreement with the plaintiffs, of the prospect and
terms of such contracts. We also agree that they did not, in fact, know these things.
It does not, however, follow that the plaintiffs are precluded from recovering some
general (and perhaps conjectural) sum for loss of business in respect of dyeing
contracts to be reasonably expected any more than in respect of laundering contracts
to be reasonably expected . .
We are, therefore, of opinion that the appeal should be allowed and the issue
referred to an official referee as to what damage, if any, is recoverable in addition to
the £110 awarded by the learned trial judge. The official referee would assess those
damages in consonance with the findings in this judgment as to what the defendants
knew or must be taken to have known at the material time, either party to be at liberty
to call evidence as to the quantum of the damage in dispute.
Appeal allowed.

57
CHAPT ER 2 REMEDIES FOR BREACH OF PROMISE

QUESTIONS
Asquith LJ cited the British Columbia Saw Mill case, but he did not quote Bovill CJ, who said:
"It is to be observed that the defendant is a carrier, and not a manufacturer of goods supplied
for a particular purpose." Stuart J drew attention to this distinction in Canada Foundry Co Ltd
v Edmonton Portland Cement Co Ltd, (1913] 1 WWR 382 (Alberta), and he also said: "The re are
indeed numbers of cases in which loss of profits has been awarded fo~ breach of contract. ...
In actions against carriers the Courts have perhaps hesitated more than they have in actions
against manufacturers and builders." Is the distinction valid? Should a distinction be made
between a carrier, a seller, and a manufacturer?

MUNROE EQUIPMENT SALES LTD V CANADIAN

FOREST PRODUCTS LTD
(1961), 29 DLR (2d) 730 (Man CA)

[The plaintiff agreed early in December 1956 to rent a second -hand Allis Chalmers
HD 15 tractor to the defendant at the rate of $1,500 a month. The defendant wanted
the tractor to be used along with his other equipment (including other tractors) in
road-clearing operations that winter, so that his pulpwood could be brought to
market. When the contract was made the defendant stressed that the tractor was
needed to open roads, that time was short, and that frost had set in. Nevertheless,
the contract was made on December 13 when the defendant's superintendent "acci-
dentally bumped into" a salesman of the plaintiff. The tractor broke down within two
days and thereafter its performance was sporadic and it was not much used until
January 20, 1957. During this time the defendant made no effort to get a replacement,
largely because the plaintiff's salesman thought the tractor could be repaired sooner
than it could be replaced. Two subcontractors got additional equipment "when they
became tired of waiting for the HD 15." The final breakdown occurred on February 20,
and from then until the end of the season the tractor was abandoned. By agreement,
no.rent was charged for the month ending January 17, but in this action the plaintiff
claimed $6,667.99. The trial judge allowed him $2,075, made up of $1,500 for one
month's rent and freight charges. But he also allowed a counterclaim of $6,958.37
(the defendant asked for $14,298.12), most of which was based on lost profits because
the defendant was prevented from removing 3,500 cords of pulpwood. He relied on
Hadley v Baxendale and found the defendant's loss "was a natural and probable
consequence that ought to have been in plaintiff's contemplation." On appeal the
court divided three to two in modifying the verdict by reducing the plaintiff's award
to $1,826.43 and dismissing the counterclaim altogether.]
MILLER CJM (Guy JA concurring): With respect, I do not think Victoria Laundry (Wind-
sor) Ltd. v. Newman Industries Ltd., (1949] 1 All E.R. 997, 2 KB. 528, quoted by the
learned trial Judge, is of much help to defendant. In any event, that decision is not
binding on this Court. I prefer the reasoning of the trial Judge to that of the Judges
of appeal so far as the application of the law to the facts is concerned . ... [Anson on
Contract, 21st ed at 460-63, quoted and adopted.]
It seems to me that in the case at bar the defendant cannot succeed on its counter-
claim unless it establishes that the special circumstances in connection with the use
_o f the tractor were communicated and made known to the plaintiff company. There
was nothing discussed in the negotiations for the tractor which would indicate whether
the defendant company intended to remove 100 cords or 100,000 cords of wood;
nor, so far as the knowledge of, or the knowledge imparted to, the plaintiff company

58
 Ill. REMOTENESS

was concerned, how much wood was cut and ready to be moved. Nor was it in any
way indicated to the plaintiff that an the wood which the defendant company had
cut by itself or its subcontractors had to be moved that year. The fact that the defend-
ant had labour trouble in the fall of 1956, as deposed by Knelman the general manager
of defendant, was not disclosed to plaintiff, or that, as a result thereof, the defendant
was going to attempt to remove an wood that season. As stated above, it is not
uncommon in the business in question to leave a substantial portion of 1 year's cut
in the bush for removal in another year. Neither was it made known to the plaintiff
company that the defendant company had a sale for any specific quantity of wood.
The rental contract covering the HD 15 was of indeterminate duration and presum -
ably could have been determined by either party at virtually any time.
It seems to me that the defendant company was seeking-and urgently seeking-a
tractor, and was glad to obtain this rebuilt tractor. The defendant (not the plaintiff)
was the originator of the contract in issue.
It appears to me that if it were a matter of such urgency to the defendant company
that this tractor should bear the brunt of the roadwork, the defendant company would
not have left the securing of same until as late as December 1956 when hauling
operations were ready to begin. It also seems logical to me that if the defendant
company were going to hold the plaintiff company responsible in such large dam-
ages for any failure to a second-hand rebuilt unit, the defendant company should
have made clear to the plaintiff the extent of the work to be done. I do not believe
the plaintiff acted in any improper way and I do believe that any representations the
salesman of the plaintiff company may have made were made innocently, in good
faith, and were not intended as a guarantee: but, as above pointed out, the learned
trial Judge found that the salesman had guaranteed the tractor to be in good mech-
anical condition-whatever that may have meant with respect to a second-hand
unit. There is no warranty or guarantee in the written rental agreement ex. 3.
In my opinion it is unreasonable to expect that such a burden of responsibility
for damages as now claimed by the defendant should be assumed from the rental
of a second-hand unit. Surely no reasonable person could contemplate, under the
circumstances of the renting of this machine, that the lessor of one second-hand
tractor was underwriting and virtually insuring the removal of an this pulpwood
from the bush . ...
Had the plaintiff contemplated possible liability for such damage as claimed by .
the counterclaim, it is scarcely conceivable that it would have risked letting a second-
hand tractor bear such responsibility; nor would any reasonable person do so. Such
damages do not ordinarily flow from the fact that a second-hand tractor does not
"stand-up," and therefore in order to fix the plaintiff with responsibility for such
damages the defendant, at the time of making the contract, should have made clear
its versi_o n of the extraordinary responsibility the defendant might seek to impose
upon the plaintiff. At least it should have warned the plaintiff of its (defendant's)
intention to remove an wood that season, the quantity involved, the sale contracts
for wood that defendant had made, and such like. If this had been done it is probable
the defendant would not have secured the tractor or the plaintiff would have insisted
upon contracting itself out of any liability.

59
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

SCYRUP V ECONOMY TRACTOR PARTS LTD

(1963), 40 DLR (2d) 1026 (Man CA)

MILLER CJM (dissenting) (Guy JA concurring): This is an appeal from the judgment
of Maybank J., who allowed plaintiff judgment for $2,001.14 damages. The damages
were agreed upon as being out-of-pocket expenses amounting to $541.14 (against
which there was a credit of $190, leaving a balance of $351.14) plus loss of profits of
$1,650.
The action arose out of a purchase by plaintiff from defendant of a second-hand
La Plante Hydraulic attachment for a D8 caterpillar tractor.
Plaintiff had, or expected to secure, a contract from Supercrete Limited to do
certain work with this equipment in a gravel pit. His equipment was needed to
replace that owned and operated by Supercrete during a period when Supercrete's
equipment was being repaired. Plaintiff testified that he had entered into the contract
before he ever attempted to purchase the equipment from defendant, although some
doubt was raised on this point by the evidence of an employee of Supercrete Ltd.,
who indicated the deal between plaintiff and Supercrete was made just a few days
before July 10, 1961, whereas the equipment was ordered by plaintiff in May or early
in June, 1961.
With a view to obtaining the desired equipment the plaintiff approached defend-
ant company in Winnipeg, but as suitable equipment was not available from defendant
in Winnipeg, plaintiff was referred to defendant's parent company in Fargo, North
Dakota, called Surplus Tractor Parts Inc., from which it was finally secured.
After delivery was made to plaintiff, he settled with defendant for the equipment
at around $1,000, plus import duty. Plaintiff duly assembled the attachment and
placed it on his tractor but when he commenced to work with it in July it did not
operate properly and it now appears that var.i ous parts, including hoses and pumps,
were either missing or were practically useless. When plaintiff communicated with
defendant regarding these deficiencies, the defendant or its parent company co-
operated and supplied the missing parts. The pumps were immediately replaced
(actually during the course of the trouble the pumps were replaced more than once).
The defendant company, under instructions from the parent company in Fargo, made
an adjustment of $40 for hoses and a further $150 was later paid plaintiff in·compensa-
tion for the repairs made, including repairs to defective pumps. Finally Supercrete
became impatient because plaintiff's equipment was not in proper condition and
hired someone else to do the job, with the result that plaintiff lost the contract.
Plaintiff testified that he had told defendant and also Surplus Tractor Parts Inc.
that he had this contract and needed the equipment for the purpose of the contract.
The following appears on pp. 13 and 14 of the evidence:
0 . What did you tell the Defendant? A. I told him I needed the hydraulic dozer as
soon as possible. I had picked out one down in Farg·o.
0. Before we get to there, what did you tell the Defendant while you were in Win-
nipeg? A. I told him I had a job to go to with a hydraulic dozer.·He told me fine, we
have dozers like that in Fargo, North Dakota ..
0. I believe this was a conversation with Mr. Swartz you are still referring to7 A. Yes,
lam.
0. Did you tell him who you·r job was with? A. Yes I did.
And at p. 19 of the evidence:
0. What happened then? A. I explained to Mr. Goodman that I had to have this
piece of equipment in quite a hurry and it had to be in good working order. He showed

60
 Ill. REMOTENESS

me this one that I have purchased and it was not all ... there was pieces missing here
and there which he said . .. .
A. Yes. but he said he had those parts to go with it and that it would be all checked
over before delivery in good working order.

And at p. 22 of the evidence:

0 . What did he say? Tell us what he said, not just what you understood but what
was actually said. A. I explained to him that I did not want it unless it was going to be
in good working order and he agreed with me that it would be all checked over and in
good working order. There wasn 't a pump at the time on the machine that the hydraulic
system was on but he said if they did not have one they would make up a good pump
for it. And I explained the necessity of having all parts becau se I w ould be quite a w ays
from the city putting this machine together when it did arrive.

This does not indicate too clearly that much information was given defendant as
to the scope of the contract, including whether it was a small or large contract, what
type of work was involved, where or when it was to be performed, or its duration. In
other words, the paucity of essential information communicated to defendant by
plaintiff see.m s to me to be fatal to plaintiff's claim for profits.
The representative of the Surplus Tractor Parts in Fargo gave evidence that plain-
tiff only intimated to him that he possibly had a contract; but the learned trial Judge
believed plaintiff and it must therefore be assumed by this Court that the communi-
cation, to the extent set out in the quoted evidence at least, was made by plaintiff to
defendant. ·
The learned trial Judge found as follows :
I have no doubt that judgment herein should be for the plaintiff. I accept the evidence
of him and his witnesses w herever it is in co nflict w ith other evidence. The defendant
sold to the plaintiff the equipment detailed in the statement of claim and w arranted it
fully. The machinery was quite defective. It w ould not work. The defendant was apprised
at the time of the purchase that the plaintiff wanted the apparatus for use on a contract
of work he had just obtained . When the apparatus was found to be inoperative this
contract w as lost to the plaintiff. Such loss was clearly foreseeable at the time the plain-
tiff dealt with the defendant for the purchase of the said machinery.

These are strong findings, conclusions, and inferences in favour of plaintiff. I am

of the opinion that the "foreseeability" inferred by the learned trial Judge is not sup-
ported by the evidence, and that indeed on the evidence it is not supportable in law.
With respect, I feel it is very doubtful that this second-hand machinery should be
saddled with a claim for damages for loss of profits unless it was clearly indicated to
defendant at the time the equipment was purchased exactly what kind of contract
was being entered into by plaintiff, the type of work that was to be done and the
magnitude of the operation. All the evidence in this case discloses is that plaintiff
wanted the equipment because he had a contract. It might have been a contract of
a very minor nature so far as the evidence is concerned; it might have been a con-
tract involving $100 or one involving $100,000; or a contract that would take a week
or a month, or two years. In other words, it is doubtful whether the evidence discloses
that sufficient information was given defendant to indicate the responsibilities to be
assumed by this second-hand equipment.
This Court recently dealt with a somewhat similar problem in Munroe Equipment
Sales Ltd. v. Canadian Forest Products Ltd. (1961), 29 D.L.R. (2d) 730. (This was not cited
to the learned trial Judge nor incorporated in either factum, but was referred to us
in defendant's oral submission.) In that case the various decisions dealing with the

61
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

principle involved in such claims, particularly Hadley v. Baxendale (1854), 9 Exch. 341,
156 E.R. 145, were examined. Hadley v. Baxendale first established the rule or rules
governing liability for damages in circumstances such as existed in the instant case.
The followi ng quotations from the Munroe Equipment case seem pertinent to the
appeal now before us, page 731 (headnote):

Held, on appeal by a majority, defendant hirer failed to establish the damages which would
ordinarily flow from the failure of the tractor to come up to expectations, and the large
damages awarded were not reasonably foreseeable as flowing from the failure of the
tractor. No reasonable person could contemplate in the circumstances that the owner
of the second-hand tractor was virtually insuring the removal of the timber from the
bush .
Nor was it established that the special circumstances in connection with the use of
the tractor were communicated and made known to the owner, either as to the amount
of wood cut, or the amount to be removed. Since the tractor broke down almost
immediately, defendant hirer was under a duty to mitigate damages and it was its duty
in the circumstances to seek another tractor from plaintiff or elsewhere rather than pin
its faith on a broken down article for a short winter season when so much was at stake.

Page 739:

It seems to me that in the case at bar the defendant cannot succeed on its counterclaim
unless it establishes that the special circumstances in connection with the use of the
tractor were communicated and made known to the plaintiff company. There was
nothing discussed in the negotiations for the tractor which would indicate whether the
defendant company intended to remove 100 cords or 100,000 cords of w ood; nor, so
far as the knowledge of, or the knowledge imparted to, the plaintiff ·company was
concerned, how much w ood was cut and ready to be moved . Nor was it in any way
ind icated to the plaintiff that all the wood which the defendant company had cut by
itself or its subcontractors had to be moved that year.

Pages 741-2:

I cannot see how any person or company dealing in second-hand machinery would
contemplate for a moment that if the rebuilt machine broke down the vendor or lessor
thereof would be liable for the type of damages claimed and allowed in this action.
Had the plaintiff contemplated possible liability for such damage as claimed by the
counterclaim, it is scarcely conceivable that it would have risked letting a second-hand
tractor bear such responsibility; nor would any reasonable person do so. Such damages
do not ordinarily flow from the fact that a second-hand tractor does not "stand-up," and
therefore in order to fix the plaintiff with responsibility for such damages the defendant,
at the time of making the contract, should have made clear its version of the extraordin-
ary responsibility the defendant might seek to impose upon the plaintiff. At least it should
have warned the plaintiff of its (defendant's) intention to remove all wood that season,
the quantity involved, the sale contracts for wood that defendant had made, and such
like. If this had been done it is probable the defendant would not have secured the tractor
or the plaintiff would have insisted upon contracting itself out of any liability.

The rule referred to in the Baxendale case is discussed in Hammond & Co. v. Bussey
(1887), 20 0 .B .D . 79, and a quotation from the latter appears in the Munroe Eq~ipment
Sales case, supra. Burrard Dry Dock Co. v. Canadian Union Line Ltd., [1954] 3 D.L.R. 561,
[1954] S.C.R. 307; Victoria Laundry (Windsor) Ltd. v. Newman Industries, Ltd., [1949] 1
All E.R. 997, [1949] 2 K.B. 528; Anson on Contract, 21st ed., pp. 460-3 and Overseas
Tankship (UK.}, Ltd. v. Morts Dock & Engineering Co., [1961] 1 All E.R. 404, were all

62
 Ill. REMOTENESS

reviewed in Munroe Equipment Sales, supra, and clearly established the tests to be
applied on such a claim for damages as the one with which we now have to deal.
Counsel for plaintiff argued before us that these damages for loss of profit natur-
ally flow from breach of contract by defendant and therefore come under the first
rule in the Baxendale case; that these would be in the same category as damages for
the repair costs of the defective parts. I am unable to accept this argument. I do not
think that damages for loss of profit naturally flow from the defective character of
the equipment or that they could have been reasonably foreseen or anticipated by
defendant, because, as I have said above, defendant was not given sufficient infor-
mation regarding the actual contract in which plaintiff was interested to permit it to
determine the scope of its liability if the machine did not work satisfactorily. Defend-
ant was not given an opportunity, by full disclosure or communication, to be put in
the position where it could reasonably have anticipated damages for loss of profit
by plaintiff on this particular contract and had no opportunity to contract itself out
of liability if unwilling to be subjected to damages of unascertained magnitude. That
being so, I would not allow the judgment against defendant for loss of profits of
$1,650 to stand. The damages, $351.14, allowed to plaintiff for the balance of the repair
costs is proper because they flow naturally from the breach of contract disclosed in
the evidence.
I would therefore allow the appeal and vary the judgment by reducing the amount
awarded from $2,001.14 to $351.14. Defendant should have its costs of appeal in this
Court.
FREEDMAN JA (Schultz and Monnin JJA concurring): This is an appeal by the defend-
ant from a judgment of Maybank J., holding the defendant liable to the plaintiff for
damages for breach of contract arising from the sale of a hydraulic dozer attachment
for.the plaintiff's DB caterpillar tractor.
There was contradiction in the testimony concerning the facts. The learned trial
Judge resolved this in favour of the plaintiff, saying "I accept the evidence of him
and his witnesses wherever it is in conflict with other evidence." The brief recital of
facts which follows takes due account of that finding.
Prior to the matters in question in this case the plaintiff had entered into a con-
tract, requiring the use of his tractor, with a company known as Supercrete Ltd. It
was to make the tractor fit and suitable for the Supercrete job that the plaintiff needed
the hydraulic dozer attachment. It is common ground that he purchased this attach-
ment from the defendant. The plaintiff's evidence establishes that he made known
to the defendant the fact that the attachment was for a tractor which was to be used
by him on a job with Supercrete Ltd. He also made it plain that he needed this equip-
ment i!L a hurry and that it had to be in good working order.
The attachment was duly sold and delivered by the defendant to the plaintiff. But
the learned trial Judge found, on substantial evidence, that the equipment did not
measure up to the terms of the contract. The plaintiff first discovered that certain
parts were missing. Then, after these were replaced, it was found that the hydraulic
attachment would not function. Tests showed that the hydraulic pump did not
generate sufficient pressure to operate the unit. The plaintiff later received in turn,
three replacing pumps, not one of which proved adequate. Finally the plaintiff had
to rebuild one of the pumps in order to make the attachment operable.
In consequence of the attachment equipment being defective the caterpillar could
not function. For Supercrete Ltd., it was imperative to have a tractor effectively work-
ing at its gravel pit. Since the plaintiff's tractor, in the condition it then was, could
not do the job, Supercrete cancelled the contract with the plaintiff and hired another
tractor from a third party to do the work. The plaintiff's loss of profit, which he would

63
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

have earned on tli.e Supercrete contract, represents the main item of the damages
which he now claims from the defendant.
Both plaintiff and defendant referred to Hadley v. Baxendale, 9 Exch. 341, 156 E.R.
145, and to several of the cases which later considered that earlier decision, including
Victoria Laundry (Windsor), Ltd. v. Newman Industries Ltd., [1949) 1 All E.R. 997, [1949)
2 KB. 528. I do not think it necessary in the present case to make any lengthy exam-
ination of the jurisprudence on this subject. The guiding principles are clear. It is
usual to think of Hadley v. Baxendale as enunciating two rules, or, at all events, one
rule with two branches. Under the first rule (or branch) damages for breach of con-
tract should be such as arise naturally-that is, according to the usual course of
things-from the breach of contract itself, or such as may reasonably be supposed
to have been in the contemplation of the parties, at the time they made the contract,
as the probable result of its breach. Under the second rule, if there are special cir-
cumstances relating to the contract-and these are actually communicated by the
plaintiff to the defendant-damages reasonably contemplated would be the amount
of injury which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated.
The Victoria Laundry v. Newman case, in considering the Hadley v. Baxendale rules,
made it clear that damages for breach of contract should be measured by what was
reasonably foreseeable as liable to result from the breach. That in tum would depend
on the knowledge possessed by the parties or, at all events, by the party who later
commits the breach. Knowledge could be either imputed or actual. Imputed know-
ledge is sufficient to bring into play the first rule; actual knowledge is required for
the second.
Reasonable foreseeability is the test under both rules. Indeed it is not always easy
to make a rigid division between the two rules, and one writer comments that "the
modem restatement of the rule as a totality is a salutary trend": vide Mayne & McGregor
on Damages, 12th ed., p. 127.
It seems to me that whether we say there is one rule or two, or one rule with two
branches, the test of reasonable foreseeability in either case operates here in favour
of the plaintif"f. For if imputed knowledge under the first rule is sufficient, it is not
unrealistic to ascribe to the defendant an awareness that his breach of contract in
selling this defective equipment to the plaintiff would in the ordinary course of events
result in damages in the form of loss of profits as here sustained. If, on the other hand,
actual knowledge of special circumstances attaching to the contract is required, the
evidence on the record shows that the defendant had such knowledge.
I would accordingly agree with the learned trial Judge that the defendant is liable
as claimed. The amount of the damages had been agreed to, subject to liability being
established.
I would therefore dismiss the appeal and affirm the judgment of the Court below,
with costs.
Appeal dismissed.

KOUFOS V C CZARNIKOW, LTD (THE HERON II)

[1969] 1 AC 350 (H L)

LORD REID: My Lords, by charterparty of October 15, 1960, the respondents chartered
the appellant's vessel, Heron II, to proceed to Constanza, there to load a cargo of 3,000
tons of sugar; and to carry it to Basrah, or, in the charterer's option, to Jeddah. The

64
 Ill. REMOTENESS

vessel left Constanza on November 1, 1960. The umpire has found that "a reasonably
accurate prediction of the length of the voyage was twenty days." But the vessel had
in breach of contract made deviations which caused a delay of nine days.
It was the intention of the respondents to sell the sugar "promptly after arrival at
Basrah and after inspection by merchants." The appellant did not know this, but he
was aware of the fact that there was a market for sugar at Basrah. The sugar was in
fact sold at Basrah in lots between December 12 and 22, 1960, but shortly before that
time the market price had fallen, partly by reason of the arrival of another cargo of
sugar. It was found by the umpire that if there had not been this delay of nine days
the sugar would have fetched £32 10s. Od. per ton. The actual price realised was only
£31 2s. 9d. per ton. The respondents claim that they are entitled to recover the dif-
ference as damage for breach of contract. The appellant admits that he is liable to
pay interest for nine days on the value of the sugar and certain minor expenses but
denies that fall in market value can be taken into account in assessing damages in
this case.
McNair J ., following the decision in The Parana (1877), 2 P.D. 118, decided this
question in favour of the appellant. He said: "In those circumstances, it seems to me
almost impossible to say that the shipowner must have known that the delay in pros-
ecuting the voyage would probably result, or be likely to result, in this kind of loss."
The Court of Appeal by a majority (Diplock and Salmon L.JJ., Sellers L.J. dissenting)
reversed the decision of the trial judge. The majority held that The Parana laid down
no general rule, and, applying the rule (or rules) in Hadley v. Baxendale as explained
in Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. they held that the loss due
to fall in market price was not too remote to be recoverable as damages.
It may be well first to set out the knowledge and intention of the parties at the
time of making the contract so far as relevant or argued to be relevant. The charterers
intended to sell the sugar in the market at Basrah on arrival of the vessel. They could
have changed their mind and exercised their option to have the sugar delivered at
Jeddah but they did not do so. There is no finding that they had in mind any particular
date as the likely date of arrival at Basrah or that they had any knowledge or expect-
ation that in late November or December there would be a rising or a falling market.
The shipowner was given no information about these matters by the charterers. He
did not know what the charterers intended to do with the sugar. But he knew there
was a market in sugar at Basrah, and it appears to me that, if he hac:i thought about
the matter, he must have realised that at least it was not unlikely that the sugar would
be sold in the market at market price on arrival. And he must be held to have known
that in any ordinary market prices are apt to fluctuate from day to day; but he had
no reason to suppose it more probable that during the relevant period such fluctua -
tion would be downwards rather than upwards-it was an even chance that the
fluctuation would be downwards.
So the question for decision is whether a plaintiff can recover as damages for
breach of contract a loss of a kind which the defendant, when he made the contract,
ought to have realised was not unlikely to result from a breach of contract causing
delay in delivery. I use the words "not unlikely" as denoting a degree of probability
considerably less than an even chance but nevertheless not very unusual and easily
foreseeable ....
In cases like Hadley v. Baxendale or the present case it is not enough that in fact the
plaintiff's loss was directly caused by the defendant's breach of contract. It clearly was
so caused in both. The crucial question is whether, on the information available to the
defendant when the contract was made, he should, or the reasonable man in his pos-
ition would, have realised that such loss was sufficiently likely to result from the breach

65
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

of contract to make it proper to hold that the loss flowed naturally from the breach or
that loss of that kind should have been within his contemplation.
The modem rule of tort is quite different and it imposes a much wider liability.
The defendant will be liable for any type of damage which is reasonably foreseeable
as liable to happen even in the most unusual case, unless the risk is so small that a
reasonable man would in the whole circumstances feel justified in neglecting it. And
there is good reason for the difference. In contract, if one party wishes to protect
himself against a risk which to the other party would appear unusual, he can direct
the other party's attention to it before the contract is made, and I need not stop to
consider in what circumstances the other party will then be held to have accepted
responsibility in that event. But in tort there is no opportunity for the injured party to
protect himself in that way, and the tortfeasor cannot reasonably complain if he has
to pay for some very unusual but nevertheless foreseeable damage which results from
his wrongdoing. I have no doubt that today a tortfeasor would be held liable for a type
of damage as unlikely as was the stoppage of Hadley's mill for lack of a crankshaft:
to anyone w ith the knowledge the carrier had that may have seemed unlikely but
the chance of it happening would have been seen to be far from negligible . But it
does not at all follow that Hadley v. Baxendale would today be differently decided ....
[Lord Reid and the other law lords held that the shipowner was liable for the loss
claimed.]

Appeal dismissed.

NOTE
The effect of The Heron II was summed up in Aruna Mills Ltd v Dhanrajmal Gobindram, [1968]
1 OB 655 at 668:
DONALDSON J: In the course of the speeches in the Czarnikow case their Lordships
expressed varying degrees of enthusiasm for the Victoria Laundry case; but, subject to two
possible qualifications, it seems to me to remain unimpaired as the classic authority on the
topic. These two qualifications are as follows . First, reference in the judgment in the Victoria
Laundry case to a loss being "reasonably foreseeable" should perhaps be taken as referring
to the loss having been within "actual or assumed contemplation" (see the speech of Lord
Reid) . Second, the phrase "liable to result" is not correctly paraphrased by the use of the
expression "on the cards," but conveys the relevant shade of likelihood by its own wording
(Lord Hodson) or when defined (as it was in proposition (6) in the Victoria Laundry case) as
indicating that a loss is a "serious possibility" or "real danger" (see Lord Pearce and Lord
Upjohn), words that, among others, had the approval of Lord Morris of Borth-y-Gest.

TRANSFIELD SHIPPING INC V MERCATOR SHIPPING INC

{THE ACHILLEAS)
[2009] 1 AC 61 (HL)

LORD HOFFMANN:
[1] The Achi/leas is a single - decker bulk carrier of some 69,000 dwt built in 1994.
By a time charter dated 22 January 2003 the owners let her to the charterers for
about five to seven months at a daily hire rate of US$13,500. By an addendum dated

66
 Ill. REMOTENESS

12 September 2003 the parties fixed the vessel for a further five to seven months at
a daily rate of US$16,750. The latest date for redelivery was 2 May 2004.
[2] By April 2004, market rates had more than doubled compared with the previ-
ous September. On 20 April 2004 the charterers gave notice of redelivery between
30 April and 2 May 2004. On the following day, the owners fixed the vessel for a new
four to six month hire to another charterer, following on from the current charter,
at a daily rate of US$39,500. The latest date for delivery to the new charterers, after
which they were entitled to cancel, was 8 May 2004.
[3] With less than a fortnight of the charter to run, the charterers fixed the vessel
under a subcharter to carry coals from Ouingdao in China across the Yellow Sea to
discharge at two Japanese ports, Tobata and Oita. If this voyage could not reasonably
have been expected to allow redelivery by 2 May 2004, the owners could probably
have refused to perform it: see Torvald Klaveness A/ S v. Arni Maritime Corpn (The
Gregas) [1995] 1 Lloyd's Rep 1. But they made no objection. The vessel completed
loading at Quingdao on 24 April. It discharged at Tobata, went on to Oita, but was
unfortunately delayed there and not redelivered to the owners until 11 May.
[4] By 5 May it had become clear to everyone that the vessel would not be available
to the new charterers before the cancelling date of 8 May. By that time, rates had
fallen again. In return for an extension of the cancellation date to 11 May, the owners
agreed to reduce the rate of hire for the new fixture to $31,500 a day.
[SJ The owners claimed damages for the loss of the difference between the ori-
ginal rate and the reduced rate over the period of the fixture. At US$8,000 a day, that
came to US$1,364,584.37. The charterers said that the ow ners were not entitled to
damages calculated by reference to their dealings with the new charterers and that
they were entitled only to the difference between the market rate and the charter
rate for the nine days during which they were deprived of the use of the ship. That
came to $158,301.17.
[6] The arbitrators, by a majority, found for the owners. They said that the loss on
the new fixture fell within the first rule in Hadley v. Baxenda/e.(1854) 9 Exch. 341, 354
as arising "naturally, ie according to the usual course of things, from such breach of
contract itself." It fell within that rule because it was damage "of a kind which the
[charterer], when he made the contract, ought to have realised was not unlikely to
result from a breach of contract [by delay in redelivery]" : see Lord Reid in C. Czarnikow
Ltd. v. Koufos (The Heron II) [1969] 1 A.C . 350, 382-383. The dissenting arbitrator did
not deny that a charterer would have known that the owners would very likely enter
into a following fixture during the course of the charter and that late delivery might
cause them to lose it. But he said that a reasonable man in the position of the charter-
ers would not have understood that he was assuming liability for the risk of the type
of loss in question. The general understanding in the shipping market was that
liability was restricted to the difference between the market rate and the charter rate
for the overrun period and "any departure from this rule [is] likely to give rise to a
real risk of serious commercial uncertainty which the industry as a whole would
regard as undesirable."
[7] The majority arbitrators, in their tum, did not deny that the general under-
standing in the industry was that liability was so limited. They said (at para. 17):
The charterers submitted that if they had asked their lawyers or their Club w hat damages
they would be liable for if the vessel was redelivered late, the answer would have been
that they would be liable for the difference between the market rate and the charter
rate for the period of the late delivery. We agree that lawyers w ould have given such an
answer.

67
CHAPTER 2 REMEDIES FOR BREACH OF PR O MI SE

[8] But the majority said that this was irrelevant. A broker "in a commercial situ-
ation" would have said that the "not unlikely" results arising from late delivery would
include missing dates for a subsequent fixture, a dry docking or the sale of the vessel.
Therefore, as a matter of law, damages for loss of these types was recoverable. The
understanding of shipping lawyers was wrong.
[9] On appeal from the arbitrators, Christopher Clarke J . [2007] 1 Lloyd's Rep. 19
and the Court of Appeal (Ward, Tuckey and Rix L.JJ.) [2007] 2 Lloyd's Rep. 555 upheld
the majority decision. The case therefore raises a fundamental point of principle in
the law of contractual damages: is the rule that a party may recover losses which
were foreseeable ("not unlikely") an external rule of law, imposed upon the parties to
every contract in default of express provision to the contrary, or is it a prima facie
assumption about what the parties may be taken to have intended, no doubt applic-
able in the great majority of cases but capable of rebuttal in cases in which the
context, surrounding circumstances or general understanding in the relevant market
shows that a party would not reasonably have been regarded as assuming respon -
sibility for such losses?
[10] Before I come to this point of principle, I should say something about the
authorities upon which the understanding of shipping lawyers was based. There is
no case in which the question now in issue has been raised. But that in itself may
be significant. This cannot have been the first time that freight rates have been vola-
tile. There must have been previous cases in which late redelivery caused the loss of
a profitable following fixture. But there is no reported case in which such a claim has
been made. Instead, there has been a uniform series of dicta over many years in
which judges have said or assumed that the _d amages for late delivery are the differ-
ence between the charter rate and the market rate .... Nowhere is there a suggestion
of even a theoretical possibility of damages for the loss of a following fixture .
[11] The question of principle has been extensively discussed in the literature.
Recent articles by Adam Kramer ("An Agreement-Centred Approach to Remoteness
and Contract Damages") in Cohen and McKendrick (ed), Comparative Remedies for
Breach of Contract (2004) pp. 249-286, Andrew Tettenborn ("Hadley v. Baxendale
Foreseeability: A Principle Beyond its $ell-by Date") in (2007) 23 Journal of Contract
Law 120-147, and Andrew Robertson ("The basis of the remoteness rule in contract")
(2008) 28 Legal Studies 172-196 are particularly illuminating. They show that there is
a good deal of support in the authorities and academic writings for the proposition
that the extent of a party's liability for damages is founded upon the interpretation
of the particular contract; not upon the interpretation of any particular language in
the contract, but (as in the case of an implied term) upon the interpretation of the
contract as a whole, construed in its commercial setting. Professor Robertson consid-
ers this approach somewhat artificial, since there is seldom any helpful evidence
about the extent of the risks the particular parties would have thought they were
accepting. I agree that cases of departure from the ordinary foreseeability rule based
on individual circumstances will be unusual, but limitations on the extent of liability
in particular types of contract arising out of general expectations in certain markets,
such as banking and shipping, are likely to be more common. There is, I think, an
analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City
Council v. Irwin [1977) A.C. 239, 257-258 between terms implied into all contracts of
a certain type and the implication of a term into a particular contract.
[12) It seems to me logical to found liability for damages upon the intention of
the parties (objectively ascertained) because all contractual liability is voluntarily
undertaken. It must be in principle wrong to hold someone liable for risks for which

68
 Ill. REMOTENESS

the people entering into such a contract in their particular market, would not reason -
ably be considered to have undertaken.
(13] The view which the parties take of the responsibilities and risks they are
undertaking will determine the other terms of the contract and in particular the price
[that] is paid. Anyone asked to assume a large and unpredictable risk will require
some premium in exchange. A rule of law which imposes liability upon a party for
a risk which he reasonably thought was excluded gives the other party something
for nothing. And as Willes J. said in British Columbia Saw Mill Co. Ltd. v Nett/eship
(1868) L.R. 3 C.P. 499, 508:
I am disposed to take the narrow view, that one of two contracting parties ought not
to be allowed to obtain an advantage which he has not paid for.
(14] In their submissions to the House, the owners said that the "starting point"
was that damages were designed to put the innocent party, so far as it is possible, in
the position as if the contract had been performed: see Robinson v. Harman (1848) 1
Exch 850, 855. However, in Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co.
Ltd. (sub. nom South Australia Asset Management Corpn v. York Montague Ltd.) (1997]
AC. 191, 211, I said (with the concurrence of the other members of the House):
I think that this was the wrong place to begin. Before one can consider the principle on
which one should calculate the damages to which a plaintiff is entitled as compensation
for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A
correct description of the loss for which the valuer is liable must precede any consider-
ation of the measure of damages.
(15] In other words, one must first decide whether the loss for which compensa-
tion is sought is of a "kind" or "type" for which the contract-breaker ought fairly to
be taken to have accepted responsibility. In the South Australia case the question was
whether a valuer, who had (in breach of an implied term to exercise reasonable care
and skill) negligently advised his client bank that property which it proposed to take
as security for a loan was worth a good deal more than its actual market value, should
be liable not only for losses attributable to the deficient security but also for further
losses attributable to a fall in the property market. The House decided that he should
not be liable for this kind of loss:
In the case of an implied contractual duty, the nature and extent of the liability is defined
by the term which the law implies. As in the case of any implied term, the process is
one of construction of the agreement as a whole in its commercial setting. The con-
tractual duty to provide a valuation and the known purpose of that valuation compel
the conclusion that the contract includes a duty of care. The scope of the duty, in the
sense of the consequences for which the valuer is responsible, is that which the law
regards as best giving effect to the express obligations assumed by the valuer: neither
cutting them down so that the lender obtains less than he was reasonably entitled to
expect, nor extending them so as to impose on the valuer a liability greater than he
could reasonably have thought he was undertaking . (p. 212)
(16] What is true of an implied contractual duty (to take reasonable care in the
valuation) is equally true of an express contractual duty (to redeliver the ship on the
appointed day). In both cases, the consequences for which the contracting party will
be liable are those which "the law regards as best giving effect to the express obliga-
tions assumed" and "[not] extending them so as to impose on the [contracting party]
a liability greater than he could reasonably have thought he was undertaking.''

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

[17] The effect of the South Australia case was to exclude from liability the damages
attributable to a fall in the property market notwithstanding that those losses were
foreseeable in the sense of being "not unlikely" (property values go down as well as
up) and had been caused by the negligent valuation in the sense that, but for the
valuation, the bank would not have lent at all and there was no evidence to show
that it would have lost its money in some other way. It was excluded on the ground
that it was outside the scope of the liability which the parties would reasonably have
considered that the valuer was undertaking.
[18] That seems to me in accordance with the careful way in which Robert Goff J.
stated the principle in Satef-Huttenes Albertus Sp.A. v. Paloma Tercera Shipping Co.
S.A. (The Pegase) [1981] Lloyd's Rep. 175, 183, where the emphasis is upon what a
reasonable person would have considered to be the extent of his responsibility:
The test appears to be: have the facts in question come to the defendant's knowledge
in such circumstances that a reasonable person in the shoes of the defendant would,
if he had considered the matter at the time of making the contract, have contemplated
that. in the event of a breach by him, such facts were to be taken into account when
considering his responsibility for loss suffered by the plaintiff as a result of such breach.
[19] A similar approach was taken by the Court of Appeal in fv1ulvenna v. Royal
Bank of Scotland pie. [2003] E.W.C.A. Civ 1112, mentioned by Professor Robertson in
the article to which I have referred. This was an application to strike out a claim for
damages for the loss of profits which the claimant said he would have made if the
bank had complied with its agreement to provide him with funds for a property
development. The Court of Appeal held that even on the assumption that the bank
knew of the purpose for which the funds were required and that it was foreseeable
that he would suffer loss of profit if he did not receive them, the damages were not
recoverable. Sir Anthony Evans said:
The authoriUes to which we were referred ... demonstrate that the concept of reasonable
foreseeability is not a complete guide to the circumstances in which damages are
recoverable as a matter of law. Even if the loss was reasonably foreseeable as a conse-
quence of the breach of duty in question (or of contract, for the same principles apply),
it may nevertheless be regarded as "too remote a consequence" or as not a conse-
quence at all, and the damages claim is disallowed . In effect. the d1ain of consequences
is cut off as a matter of law. either because it is regarded as unreasonable to impose
liability for that consequence of the breach (The Pegase [1981) 1 Lloyd's Rep. 175 Robert
Goff J.}, or because the scope of the duty is limited so as to exclude it (Banque Bruxelles
S.A. v. Eagle Star [1997) A.C. 191), or because as a matter of commonsense the breach
cannot be said to have caused tlie loss. although it may have provided the opportunity
for it to occur..
[20] By way of explanation for why in such a case liability for lost profits is
excluded, Professor Robertson (at p . 183) offers what seem to me to be some plausible
reasons:
It may be considered unjust that the bank should be held liable for the loss of profits
simply because the bank knew of the proposed development at the time the refinancing
agreement was made. The imposition of such a burden on the bank may be considered
unjust because it is inconsistent with commercial practice for a bank to accept such a
risk in a transaction of this type, or because the quantum of the liability is disproportion-
ate to the scale of the transaction or the benefit the bank stood to receive.

70
 Ill. REMOTENESS

[21] It is generally accepted that a contracting party will be liable for damages for
losses which are unforeseeably large, if loss of that type or kind fell within one or
other of the rules in Hadley v. Baxendale: see, for example, Staughton J. in Transworld
Oil Ltd. v. North Bay Shipping Corpn (The Rio Claro) [1987] Lloyd's Rep 173, 175 and
Jackson v. Royal Bank of Scotland pie. [2005] 1 W.L.R. 377. That is generally an inclusive
principle: if losses of that type are foreseeable, damages will include compensation
for those losses, however large. But the South Australia and Mulvenna cases shows
that it may also be an exclusive principle and that a party may not be liable for fore-
seeable losses because they are not of the type or kind for which he can be treated
as having assumed responsibility.
[22] What is the basis for deciding whether loss is of the same type or a different
type? It is not a question of Platonist metaphysics. The distinction must rest upon
some principle of the law of contract. In my opinion, the only rational basis for the
distinction is that it reflects what would have reasonably have been regarded by the
contracting party as significant for the purposes of the risk he was undertaking. In
Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 KB. 528, where the
plaintiffs claimed for loss of the profits from their laundry business because of late ·
delivery of a boiler, the Cou·rt of Appeal did not regard "loss of profits from the laundry
business" as a single type of loss. They distinguished (at p. 543) losses from "particu-
larly lucrative dyeing contracts" as a different type of loss which would only be
recoverable if the defendant had sufficient knowledge of them to make it reasonable
to attribute to him acceptance of liability for such losses. The vendor of the boilers
would have regarded the profits on these contracts as a different and higher form of
risk than the general risk of loss of profits by the laundry.
[23] If, therefore, one considers what these parties, contracting against the back-
ground of market expectations found by the arbitrators, would reasonably have
considered the extent of the liability they were undertaking, I think it is clear that
they would have considered losses arising from the loss of the following fixture a
type or kind of loss for which the charterer was not assuming responsibility. Such
a risk would be completely unquantifiable, because although the parties would regard
it as likely that the owners would at some time during the currency of the charter
enter into a forward fixture, they would have no idea when that would be done or
what its length or other terms would be. If it was clear to the owners that the last
voyage was bound to overrun and put the following fixture at risk, it was open to them
to refuse to undertake it. What this shows is that the purpose of the provision for timely
redelivery in the charterparty is to enable the ship to be at the full disposal of the owner
from the redelivery date. If the charterer's orders will defeat this right, the owner may
reject them. If the orders are accepted and the last voyage overruns, the owner is
entitled to be paid for the overrun at the market rate. All this will be known to both
parties. It does not require any knowledge of the owner's arrangements for the next
charter. That is regarded by the market as being, as the saying goes, res inter alios acta.
[24] The findings of the majority arbitrators shows that they considered their
decision to be contrary to what would have been the expectations of the parties, but
dictated by the rules in Hadley v. Baxendale as explained in The Heron II [1969] 1 AC.
350. But in my opinion these rules are not so inflexible; they are intended to give
effect to the presumed intentions of the parties and not to contradict them.
[25] The owners submit that the question of whether the damage is too remote is
a question of fact on which the arbitrators have found in their favour. It is true that
the question of whether the damage was foreseeable is a question of fact: see Monarch
Steamship Co Ltd. v. Karlshamns Oljefabriker (A!B) [1949] AC . 196. But the question of

71
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

whether a given type of loss is one for which a party assumed contractual respon -
sibility involves the interpretation of the contract as a whole against its commercial
background, and this, like all questions of interpretation, is a question of law.
[261 The owners say that the parties are entirely at liberty to insert an express term
excluding consequential loss if they want to do so. Some standard forms of charter
do. I suppose it can be said of many disputes over interpretation, especially over
implied terms, that the parties could have used express words or at any rate expressed
themselves more clearly than they have done. But, as I have indicated, the implica-
tion of a term as a matter of construction of the contract as a whole in.its commercial
context and the implication of the limits of damages liability seem to me to involve
the application of essentially the same techniques of interpretation. In both cases,
the court is engaged in construing the agreement to reflect the liabilities which the
parties may reasonably be expected to have assumed and paid for. It cannot decline
this task on the ground that the parties could have spared it the trouble by using
clearer language. In my opinion, the findings of the arbitrators and the commercial
background to the agreement are sufficient to make it clear that the charterer cannot
reasonably be regarded as having assumed the risk of the owner's loss of profit on
the following charter. I would therefore allow the appeal.

LORD RODGER OF EARLSFERRY:

[60] Returning to the present case, I am satisfied that, when they entered.into the
addendum in September 2003, neither party would reasonably have contemplated
that an overrun of nine days would "in the ordinary course of things" cause the
owners the kind of loss for which they claim damages. That loss was not the "ordin-
ary consequence" of a breach of that kind. It occurred in this case only because of
the extremely volatile market conditions which produced both the owners' initial
(particularly lucrative) transaction, with a third party, and the subsequent pressure
on the owners to accept a lower rate for that fixture. Back in September 2003, this
loss coulq not have been reasonably foreseen as being likely to arise out of the delay
in question. It was, accordingly, too remote to give rise to a claim for damages for
breach of contract.

BARONESS HALE OF RICHMOND :

[89] My Lords, this could be an examination question. Although the context is a
specialised one, the answer has mainly to be found in the general principles to be
derived from the well- known authorities to which your Lordships have all referred,
principally Hadley v. Baxendale (1854) 9 Exch. 341, Victoria Laundry (Windsor) Ltd. v.
Newman Industries Ltd. [1949] 2 K.B. 528 and, above all, C. Czarnikow Ltd v. Koufos
(The Heron II) [1969] 1 AC. 350. There is no obviously right answer : two very experi-
enced commercial judges have reached one answer, your lordships have reached
another. There is no obviously just answer: the charterer's default undoubtedly
caused the owner's loss, but a loss for which no "one has ever had to pay before. The
examiners would surely have given first class marks to all the judges who have
answered the question so far .

[921 Another answer to the question, given as I understand it by my noble and

learned friends, Lord Hoffmann and Lord Hope, is that one must ask, not only
whether the parties must be taken to have had this type of loss within their contem-
plation when the contract was made, but also whether they must be taken to have
had liability for this type of loss within their contemplation then. In other words, is

72
 Ill. REMOTENESS

the charterer to be taken to have undertaken legal responsibility for this type of loss?
What should the unspoken terms of their contract be taken to be? If that is the ques-
tion, then it becomes relevant to ask what has been the normal expectation of parties
to such contracts in this particular market. If charterers would not normally expect to
pay more than the market rate for the days they were late, and ship-owners would
not normally expect to get more than that, then one would expect something extra
before liability for an unusual loss such as this would arise. That is essentially the
reasoning adopted by the minority arbitrator.
[93] My Lords, I hope that I have understood this correctly, for it seems to me that
it adds an interesting but novel dimension to the way in which the question of
remoteness of damage in contract is to be answered, a dimension which does not
clearly emerge from the classic authorities. There is scarcely a hint of it in The Heron
II, apart perhaps from Lord Reid's reference, at p. 385, to the loss being "sufficiently
likely to result from the breach of contract to make it proper to hold that the loss
flowed naturally from the breach or that loss of that kind should have been within
his contemplation" (emphasis supplied). In general, The Heron I/ points the other
way, as it emphasises that there are no special rules applying to charterparties and
that the law of remoteness in contract is not the same as the law of remoteness in
tort. There is more than a hint of it in the judgment of Waller L.J. in Mulvenna v. Royal
Bank of Scotland pie. [2003] E.W.C.A. Civ. 1112, but in the context of the "second limb" ·
of Hadley v. Baxendale where knowledge of an unusual risk is posited. To incorporate
it generally would be to introduce into ordinary contractual liability the principle
adopted in the context of liability for professional negligence in South Australia Asset
Management Corpn v. York Montague Ltd. [1997] AC. 191, 211. In an examination, this
might well make the difference between a congratulatory and an ordinary first class
answer to the question. But despite the excellence of counsels' arguments it was not
explored before us, although it is explored in academic textbooks and other writings,
including those cited by Lord Hoffmann in paragraph 11 of his opinion. I note, how-
ever, that the most recent of these, Professor Robertson's article on "The basis of the
. remoteness rule in contract" (2008) 28 Legal Studies 172 argues strongly to the con-
trary. I am not immediately attracted to the idea of introducing into the law of
contract the concept of the scope of duty which has perforce had to be developed
in the law of negligence. The rule in Hadley v: Baxendale asks what the parties must
be taken to have had in their contemplation, rather than what they actually had in
their contemplation, but the criterion by which this is judged is a factual one. Ques-
tions of assumption of risk depend upon a wider range of factors and value judg-
ments. This type of reasoning is, as Lord Steyn put it in Aneco Reinsurance
Underwriting Ltd v. Johnson & Higgins Ltd. [2002] 1 Lloyd's Rep. 157, para 186, a "deus
ex machina." Although its result in this case may be to bring about certainty and
clarity in this particular market, such an imposed limit on liability could easily be at
the expense of justice in some future case. It could also introduce much room for
argument in other contractual contexts. Therefore, if this appeal is to be allowed, as
to which I continue to have doubts, I would prefer it to be allowed on the narrower
ground identified by Lord Rodger, leaving the wider ground to be fully explored in
another case and another context.
Appeal allowed.

[Lord Hope agreed in substance with Lord Hoffmann. Lord Walker agreed with all
three of Lords Hoffmann, Hope, and Rodger.]

73
CHAPTER 2 REMEDIES FOR BREACH OF PROM ISE

CORNWALL GRAVEL CO LTD V PUROLATOR COURIER LTD

(1978). 83 DLR (3d) 266 (Ont HC). aff'd (1979). 115 DLR (3d) 511 (CA) and
[1980] 2 SCR 118. 120 DLR (3d) 575

R.E. HOLLAND J: This is an action for damages for breach of contract and negligence
brought by Cornwall Gravel Company Limited (Cornwall Gravel) against Purolator
Courier Ltd. (Purolator) and Bernard Levert and Rheal Boisvenue who, at the material
time, were employees of Purolator, arising out of the late delivery of a tender pre-
pared by the plaintiff for submission to the Ontario Ministry of the Environment.
It is admitted that had the tender been delivered in time Cornwall Gravel would
have been awarded a contract for $698,246.79 and would have made a profit on the
contract of $70,000.
The information for tenderers which governed the submission of the tender
provided that tenders were to be delivered on or before 3 p .m. Toronto time on
October 2, 1973, at the office of the contracts officer of the Ministry in Toronto and
further that under no circumstances would any tender be considered which was
received after that time. The tender in question was delivered by Purolator at 3:17
p.m. on October 2, 1973, and was therefore rejected.
The tender was ready for delivery at Cornwall shortly after 6 p .m. on October 1,
1973. Cornwall Gravel had used the services of Purolator to deliver tenders on prior
occasions. Ronald Paymemp, who was at the time the controller of Cornwall Gravel,
telephoned the office of Purolator around noon on October 1st to advise that there
was a pick-up for Toronto that evening . ...
When the tender was picked up by Boisvenue, there was a conversation between
Paymemp, John Fleming, who was an engineer employed by Cornwall Gravel and
who had worked on the tender. and Boisvenue. Paymemp and Fleming wished to
make sure that the tender would be delivered on time. If there was any question
about late delivery one or the other of them would have driven with the tender to
Toronto. They were assured by Boisvenue that there would be no problem with
delivery. Paymemp h ad inserted the time as 12 noon rather than 3 p.m. to make the
time consistent with other tenders that had previously been delivered to Toronto for
oth er departments where the time for delivery was 12 noon. There was no conversa -
tion with Boisvenue or anyone from Purolator as to the amount of the tender.
Boisvenue was not called as a witness at the trial and I was advised by counsel
that he was no longer in the employ of Purolator and his whereabouts were
unknown. He was examined for discovery and part of his examination was read in
by counsel for the plaintiff. He admitted that he was told that the document was very
important, that he had read the bill of lading and had noticed the incorrect date
which he changed. He was then asked these questions .and made these answers:
0. I see. at that time you left the office of Cornwall Gravel with this parcel. did you know it was
a tender7
A. I think so because I had read it. yes.
0. Did you at that time know what a tender was?
A. As a rule I do. yes .
0. What did you understand?
A. Well. I know that it has-it-
0. Generally, when someone says, "here is a tender."
A. Yes?
0. Did you believe you understood what a .tender was7
A. Yes .
0. What did you understand it to be?
A. That it is fairly important and it has to be there a certain time to my own personal knowledge ..

74
 Ill. REMOTENE SS

[Holland J then discussed a clause in the contract, and regulations under a statute,
and concluded that neither was effective to limit the defendant's liability.]
,
There remains the question whether or not this loss was in the contemplation of
the parties and this takes us back to Hadley et al. v. Baxendale et al. (1854), 9 Ex. 341,
156 E.R. 145. At pp. 354-5, Alderson, B., said this:
Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such breach of contract should be
such as may fairly and reasonably be considered arising naturally, i.e., according to the
usual course of things, from such breach of contract itself, or such as may reasonably
be supposed to have been in the contemplation of both parties, at the time they made
the contract, as the probable result of the breach of it. Now, if the special circumstances
under which the contract was actually made were communicated by the plaintiffs to
the defendants, and thus known to both parties, the damages resulting from the breach
of such a contract. which they would reasonably contemplate, would be the amount of
injury which would ordinarily follow from a breach of contract under those special cir-
cumstances, so known and communicated. But, on the other hand, if those special
circumstances were wholly unknown to the party breaking the contract, he, at the most,
could only be supposed to have had in his contemplation the amount of injury which
would arise generally, and in the great multitude of cases not affected by any specia l
circumstances. from such a breach of contract. For, had the special circumstances been
known, the parties might have specially provided for the breach of contract by special
terms as to the damages in that case; and of this advantage it would be very unjust to
deprive them .
In the present case Purolator, through its employee, Boisvenue, knew that the
item to be transported was a tender and that it was required to be delivered by 12
noon on October 2, 1973. Boisvenue was told of the importance of the document
and must have realized that if delivered late the tender would be worthless and a
contract could well be lost. In these particular circumstances it is my opinion that
"the special circumstances under which the contract was actually made were com -
municated by the plaintiff to the defendant" and the damage which in fact flowed
from the breach of such contract was damage "which they would reasonably con-
template ... which would ordinarily follow from a breach of contract under those
special circumstances, so known and communicated."
It is not necessary, in view of my findings, to deal w ith the allegation that there
is liability for the misrepresentation of Boisvenue that the tender would be delivered
by 12 noon the next day.
For the above reasons there will be judgment for the plaintiff for $70,000, with
interest in accordance withs. 38 of the Judicature Act, R.S .O. 1970, c. 228, as amended,
from the date of the coming into force of s . 3 of the Judicature Amendment Act, 1977
(No. 2), 1977, c. 51, to the date of judgment, together with costs against the defendant
Purolator. The action as against the individual defendants will be dismissed without
costs.
Judgment for plaintiff.

[Appeal to the Court of Appeal and Supreme Court of Canada dismissed without
written reasons.]
[See also McCamus at 912-25; MacDougall at 348-53; Waddams at paras 734-42.]

75
CHAPTER 2 REMEDIES FOR BREACH OF PROM IS E

NOTES AND PROBLEMS

1. A bought a ticket on the midnight train to Sudbury. The train did not go on to Sudbury as
it was supposed to do, but stopped severa l miles outside the city, where A was forced to dis-
embark. Because no transport or accommodation was available, A walked the 5 miles to her
home through freezing rain . As a result, she caught a severe cold and was off work for severa l
days. A sues for pain and suffering and loss of wages. Will she succeed? See Hobbs v London
& SW Rlwy (1875), LR 10 OB 111.
2. C visits horse shows in order to display and promote the sale of his products. At the
London fair, he met the agent of D, a railway company, w ho was at the fair for the purpose of
delivering and receiving goods. C delivered his samples to the agent for delivery at the Toronto
fair, and marked the consignment note "must be at Toronto by Monday certain ." Th e samples
were not delivered in time for the fair. C sues for loss of profits . Will he succeed? See Simpson
v London & NW Rlwy (1876), 1 OBD 274.
3. X contracted to employ Y for five years at a salary of $10,000 a year plus any bonuses X
might give, as X saw fit. After two years, X wrongfully dismissed Y. Th e next year, X discon-
tinued the bonus system, and instead increased employees' salaries by $1,000 a year. Y claims
that her damages shou ld include the extra $2,000 she would have received. Advise her. See
Lavarack v Woods of Colchester, Ltd, [196711 OB 278 .
4. In BOC Ltd v Hofstrand Farms Ltd, [1986] 1 SCR 228, the plaintiff sued a courier for failing
to deliver a document that the plaintiff desired to register by a certain date in a land registry
office. There was no contract between the plaintiff and the courier, and the action was in tort
for negligence. The plaintiff's loss was held to be too remote. Th e court distinguished the
Cornwall Gravel case: "There the courier had been told that the package contained a tender
and that delivery had to be made before a certain time . In the ordinary course of events it
would be obvious that unless the tender arrived before the deadline, a contract could be lost.
Therefore, the defendant had actual knowledge of 'special circumstances,' and this fact justi-
fied holding it liable for the plaintiff's lost profit."

IV. INTANGIBLE INJURIES

ADDIS V GRAMOPHONE COMPANY LIMITED

[1909] AC 488 (HL)

[The plaintiff was employed by the defendants as manager of their business in

Calcutta at £15 per week as salary and a commission on the trade done. He could be
dismissed by six months' notice.
In October 1905, the defendants gave him six months' notice, but at the same
time they appointed Mr. Gilpin to act as his successor, and took steps to prevent the
plaintiff from acting any longer as manager. In December 1905, the plaintiff came
back to England.
The plaintiff brought this action in 1906, claiming an account and damages for
breach of contract. That there was a breach of contract is quite clear. If what hap-
pened in October 1905 did not amount to a wrongful dismissal, it was, at all events,
a breach of the plaintiff's right to act as manager during the six months and to earn
the best commission he could make.
When the action came to trial it was agreed to refer the matters of account to
arbitration. The causes of action for breach of contract were tried by Darling J and a
jury. The jury found for the plaintiff in respect of wrongful dismissal £600, and £340

76
 IV. INTANGIBLE INJURIES

in respect of excess commission over and above what was earned by the plaintiff's
successor between October 1905 and April 1906.
The Court of Appeal by a majority held that on their views of the facts there was
(apart from the account which must be taken) no cause of action, and they entered
judgment for the defendants.]
LORD ATKINSON: My Lords, I entirely concur with the judgment of my noble and
learned friend on the woolsack. Much of the difficulty which has arisen in this case
is due to the unscientific form in which the pleadings, as amended, have been framed,
and the loose manner in which the proceedings at the trial were conducted.
The rights of the plaintiff, disembarrassed of the confusing methods by which
they were sought to be enforced, are, in my opinion, clear. He had been illegally
dismissed from his employment. He could have been legally dismissed by the six
months' notice, which he, in fact, received, but the defendants did not wait for the
expiry of that period. The damages plaintiff sustained by this illegal dismissal were
(1) the wages for the period of six months during which his formal notice would have
been current; (2) the profits or commission which would, in all reasonable probability,
have been earned by him during the six months had he continued in the employ-
ment; and possibly (3) damages in respect of the time which might reasonably elapse
before he could obtain other employment. He has been awarded a sum possibly of
some hundreds of pounds, not in respect of any of these heads of damage, but in
respect of the harsh and humiliating way in which he was dismissed, including,
presumably, the pain he experienced by reason, it is alleged, of the imputation upon
him conveyed )::Jy the manner of his dismissal. This is the only circumstance which
makes the case of general importance, and this is the only point I think it necessary
to deal with.
I have been unable to find any case decided in this country in which any coun-
tenance is given to the notion that a dismissed employee can recover in the shape
of exemplary damages for illegal dismissal, in effect damages for defamation, for it
amounts to that, except the case of /Vlaw v. Jones (1890), 25 O.B.D. 107.
In that case Matthew J., as he then was, during the argument, while counsel was
urging ... that the measure of damages for the improper dismissal of an ordinary
domestic servant was a month's wages and nothing more, no doubt interjected in
the shape of a question the remark, "Have you ever heard the principle applied to a
case where a false charge of misconduct has been made?" But the decision was that
the direction of the judge at the trial was right.
Now, what was the character of that direction? The defendant had power to dis-
miss his apprentice, the plaintiff, on a week's notice, and had also power to dismiss
him summarily if he should show a want of interest in his work. He dismissed the
apprentice summarily without notice, assigning as a reason that he had been guilty
of frequent acts of insubordination and that he had gone out at night without leave.
The judge at the trial told the jury that they were not bound to limit the damages
to the week's notice he had lost, but that they might take into consideration the time
the plaintiff would require to get new employment-the difficulty he would have as
a discharged apprentice in getting employment elsewhere-and it was on this pre-
cise ground the direction was upheld. I do not think that this case is any authority
what ever for the general proposition that exemplary damages may be recovered for
wrongful dismissal, still less, of course, for breach of contract generally; but, such as
it is, it is the only authority in the shape of a decided case which can be found upon
the first-mentioned point.
I have always understood that damages for breach of contract were in the nature
of compensation, not punishment. ...

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

For instance, in actions of tort, motive, if it may be taken into account to aggravate
damages, as it undoubtedly may be, may also be taken into account to mitigate them,
as may also the conduct of the plaintiff himself who seeks redress. Is this rule to be
applied to actions of breach of contract? There are few breaches of contract more
common than those which arise where men omit or refuse to repay what they have
borrowed, or to pay for what they have bought. Is the creditor or vendor who sues
for one of such breaches, to have the sum he recovers lessened if he should be shown
to be harsh, grasping, or pitiless, or even insulting, in enforcing his demand, or
lessened because the debtor has struggled to pay, has failed because pf misfortune,
and has been suave, gracious, and apologetic in his refusal? On the other hand, is
that sum to be increased if it should be shewn that the debtor could have paid readily
without any embarrassment, but refused with expression of contempt and contu-
mely, from a malicious desire to injure his creditor?
Few parties to contracts have more often to complain of ingratitude and baseness
than sureties. Are they, because of this, to be entitled to recover from the principal,
often a trusted friend, who has deceived and betrayed them, more than they paid on
that principal's behalf? If circumstances of aggravation are rightly to be taken into
account in actions of contract at all, why should they not be taken into account in
the case of the surety, and the rules and principles applicable to cases of tort applied
to the full extent?
In many other cases of breach of contract there may be circumstances of malice,
fraud, defamation, or violence, which would sustain an action of tort as an alternative
remedy to an action for breach of contract. If one should select the former mode of
redress, he may, no doubt, recover exemplary damages, or what is sometimes styled
vindicative damages; but if he should choose to seek redress in the form of an action
for breach of contract, he lets in all the consequences of that form of action. One of
these consequences is, I think, this: that he is to be paid adequate compensation in
money for the loss of that which he would have received had his contract been kept,
and no more.
I can conceive nothing more objectionable and embarrassing in litigation than
trying in effect an action of libel or slander as a matter of aggravation in an action
for illegal dismissal, the defendant being permitted, as he must in justice be permit-
ted, to traverse the defamatory sense, rely on privilege, or raise every point which
he could raise in an independent action brought for the alleged libel or slander itself.
In my opinion, exemplary damages ought not to be, and are not according to any
true principle of law, recoverable in such an action as the present, and the sums
awarded to the plaintiff should therefore be decreased by the amount at which they
have been estimated, and credit for that item should not be allowed in his account.

NOTE
In /Vlahmud v Bank of Credit and Commerce Int SA, [1998] AC 20 (HL), it was held that, in a
contractual action, bank employees could claim compensation for damage to their reputation
caused by improper activities of the bank. The holdings in Addis on intangible loss and exem-
plary damages have also been substantially modified, as seen in the following material.

78
 IV. INTANGIB LE INJURIES

KOLAN V SOLICITOR
(1969), 7 DLR (3d) 481 (Ont H Ct J)

[The plaintiff brought an action for damages against her solicitor. The solicitor failed
to discover that premises purchased by the plaintiff were subject to a city demolition
order. The plaintiff proved that consequent anxiety had caused injury to her health.]

LACOURCIERE J (on the question of damages): In the present case the plaintiff relies
on Cook v. S. [1967] 1 All E.R. 299, a decision of the Court of Appeal dealing with the
measure of damages against a solicitor as a result of his negligence. It had been
pleaded that the plaintiff suffered an anxiety state and could not work, and that the
defendant knew that she was peculiarly liable to nervous shock. The plaintiff was
awarded damages but nothing with respect to her claim for mental distress. It was held
as summarized in the headnote:

[T]he plaintiffs breakdown in health owing to anxiety was not a reasonably foreseeable
consequence of the defendant's negligence, and, although damages for reasonably
foreseeable injury in health due to nervous shock or an xiety could be recovered for
breach of duty to use care and skill where, as in the present case, the cause of action
lay in contract. yet in this case the ruling of the trial judge that the damage was too
remote should stand ....

The following dictum appears in the judgment of Lord Denning, M .R., at p . 303 :

In these circumstances I think that, just as in the law of tort, so also in the law of contract.
damages can be recovered for nervous shock or anxiety state if it is a reasonably fore-
seeable consequence .
So the question became this: when a client goes to a solicitor, is it a reasonably
foreseeable consequence that. if anything goes wrong with the litigation owing to the
solicitor's negligence, there will be a breakdown in health? It can be foreseen that there
will be injured feelings ; mental distress; anger, and annoyance. But for none of these can
damages be recovered. It was so held in Groom v. Crocker on the same lines as Addis v.
Gramophone Co. Ltd. ([1908 -10] All E.R. Rep. 1, [1909] A.C. 488) . Is it reasonably foresee-
able that there may be an actual breakdown in health? I do not think so. It was suggested
in this case that there were special circumstances in that the plaintiff was peculiarly liable
to nervous shock. I am afraid that she was. The history of her life shows one nervous
breakdown after another. If this special circumstance was brought home to the defendant,
it might enlarge the area of foreseeability so as to make him liable; but it was not pleaded.
Moreover w hen counsel for the plaintiff put questions to the defendant, he did· not
succeed in showing that special circumstances were brought home to him . All the
defendant knew was that she was a woman obviously highly strung and worried as any
woman would be in the circumstances. That does not mean, however. that he should
foresee that, if he was negligent, she would suffer injury to health. In all these cases of
nervous shock and breakdown in mental health, it is very difficult to draw the line. In
King v. Phillips ([1953] 1 All E.R. 617, at p. 624) I asked : "Where is the line to be drawn?"
I found the answer given by Lord Wright: "Only where 'in the particular case the good
sense of the ... judge, decides."' In this present case the judge thought that the damages
for the breakdown in health were too remote. I am not prepared to disturb his ruling .
On this point the appeal fa ils.

In the case at bar, it is undisputed that the plaintiff did suffer physical illness, and
the question is therefore whether such illness was reasonably foreseeable to the
defendant at the time of the contract. Mr. Starr argued that such consequence was

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

foreseeable in that Mrs. Kolan was a widow of modest means who was using her lim-
ited cash reserve to complete the purchase of an old potentially substandard house,
and that a demolition order of the Housing Standards Board would therefore place her
in a critical position where a woman of her age and in her position would suffer illness.
I am not prepared to find that the health breakdown of the plaintiff was a reasonably
foreseeable consequence of the defendant's negligence, and I am not prepared to
award the plaintiff any damages under that heading or refer any for assessment.

JARVIS V SWANS TOURS LTD

[1973] OB 233 (CA}

LORD DENNING MR (Edmund Davies and Stephenson LJJ concurring): Mr. Jarvis is
a solicitor, employed by a local authority at Barking. In 1969 he was minded to go
for Christmas to Switzerland. He was looking forward to a skiing holiday. It is his one
fortnight's holiday in the year. He prefers it in the winter rather than in the summer.
Mr. Jarvis read a brochure issued by Swans Tours Ltd. He was much attracted by
the description of M6rlialp, Giswil, Central Switzerland. I will not read the whole qf
it, but just pick out some of the principal attractions:
House Party Centre with special resident host. ... M6rlialp is a most wonderful little resort
on a sunny plateau ... Up there you will find yourself in the midst of beautiful alpine
scenery, which in winter becomes a wonderland of sun. snow and ice, with a wide
va riety of fine ski-runs. a skating rink and exhilarating toboggan run ... Why did we
choose the Hotel Krone ... mainly and most of all because of the "Gemutlichkeit" and
friendly welcome you will receive from Herr and Frau Weibel. ... The Hotel Krone has
its own Alphutte Bar which wi ll be open several evenings a week .... No doubt you will
be in for a great time. whe n you book this house-party holiday ... Mr. Weibel. the cha rm-
ing owner, speaks English .
.On the same page, in a special yellow box, it was said:
Swans House Party in M6rlialp. All these House Party arrangements are included in.the
price of your holiday. Welcome party on arrival. Afternoo n tea and cake for 7 days. Swiss
dinner by candlelight. Fondue party. Yodler evening . Chali farewell party in the "Alphutte
Bar." Service of representative.
Alongside on the same page there was a special note about ski-packs. "Hire of
Skis, Sticks and Boots ... Ski Tuition ... 12 days £11.10."
In August 1969, on the faith of that brochure, Mr. Jarvis booked a 15-day holiday,
with ski-pack. The total charge was £63.45, including Christmas supplement. He was
to fly from Gatwick to Zurich on December 20, 1969, and return on January 3, 1970.
The plaintiff went on the holiday, but he was very disappointed. He was a man of
about 35 and he expected to be one of a house party of some 30 or so people. Instead,
he found there were only 13 during the first week. In the second week there was no
house party at all. He was the only person.there. Mr. Weibel could not speak English.
So there was Mr. Jarvis, in the second week, in this hotel with no house party at all,
and no on e could speak English, except himself. He was very disappointed, too, with
the skiing. It was some distance away at Giswil. There were no ordinary length skis.
There were only mini-skis about 3 ft. long. So he did not get his skiing as he wanted
to. In the second week he did get some longer skis for a couple of days, but then,
because of the boots, his feet got rubbed and he could not continue even w ith the
long skis. So his skiing holiday, from his point of view, was pretty well ruined.

80
 IV. INTANGIBLE INJURIES

There were many other matters, too. They appear trivial when they are set down
in writing, but I have no doubt they loomed large in Mr. Jarvis's mind, when coupled
with the other disappointments. He did not have the nice Swiss cakes which he was
hoping for. The only cakes for tea were potato crisps and little dry nut cakes. The yodler
evening consisted of one man from the locality who came in his working clothes
for a little while, and sang four or five songs very quickly. The "Alphutte Bar" was an
unoccupied annex which was only open one evening. There was a representative,
Mrs. Storr, there during the first week, but she was not there during the second week.
The matter was summed up by the judge: "During the first week he got a holiday
in Switzerland which was to some extent inferior ... and, as to the second week, he
got a holiday which was very largely inferior" to what he was led to expect.
What is the legal position? I think that the statements in the brochure were rep-
resentations or warranties. The breaches of them give Mr. Jarvis a right to damages.
It is not necessary to decide whether they were representations or warranties:
because since the /vlisrepresentation Act 1967, there is a remedy in damages for mis-
representation as well as for breach of warranty.
The one question in the case is: What is the amount of damages? The judge seems
to have taken the difference in value between what he paid for and what he got. He
said that he intended to give "the difference between the two values and no other
damages" under any other head. He thought that Mr. Jarvis had got half of what he
paid for. So the judge gave him half the amount which he had paid, namely, £31.72.
Mr. Jarvis appeals to this co.urt. He says that the damages ought to have been much
more . ...
What is the right way of assessing damages? It has often been said that on a
breach of contract damages cannot be given for mental distress. Thus in Hamlin v.
Great Northern Railway Co. (1856) 1 H. & N. 408, 411 Pollock C.B. said that damages
cannot be given "for the disappointment of mind occasioned by the breach of con-
tract." And in Hobbs v. London & South Western Railway Co. (1875) L.R. 10 O.B. 111, 122,
Mellor J. said that "for the mere inconvenience, such as annoyance and loss of
temper, or vexation, or for being disappointed in a particular thing which you have
set your mind upon, without real physical inconvenience resulting, you cannot
recover damages."
The courts in those days only allowed the plaintiff to recover damages if he suf-
fered physical inconvenience, such as having to walk five miles home, as in Hobbs's
case; or to live in an over-crowded house, Bailey v. Bullock [1950] 2 All E.R. 1167.
I think that those limitations are out of date. In a proper case damages for mental
distress can be recovered in contract, just as damages for shock can be recovered in
tort. One such case is a contract for a holiday, or any other contract to provide enter-
tainment and enjoyment. If the contracting party breaks his contract, damages can
be given for the disappointment, the distress, the upset and frustration caused by
the breach. I know that it is difficult to assess in terms of money, but it is no more
difficult than the assessment which the courts have to make every day in personal
injury cases for loss of amenities. Take the present case. Mr. Jarvis has only a fort-
night's holiday in the year. He books it far ahead, and looks forward to it all that time.
He ought to be compensated for the loss of it.
A good illustration was given by Edmund Davies L.J. in the course of the argu-
ment. He put the case of a man who has taken a ticket for Glyndboume. It is the only
night on which he can get there. He hi:res a car to take him. The car does not turn
up. His damages are not limited to the mere cost of the ticket. He is entitled to general
damages for the disappointment he has suffered and the loss of the entertainment
which he should have had. Here, Mr. Jarvis's fortnight's winter holiday has been a
grave disappointment. It is true that he was conveyed to Switzerland and back and

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

had meals and bed in the hotel. But that is not what he went for. He went to enjoy
himself with all the facilities which the defendants said he would have. He is entitled
to damages for the lack of those facilities, and for his loss of enjoyment.
A similar case occurred in 1951. It was Stedman v. Swan's Tours (1951) 95 S.J. 727.
A holiday-maker was awarded damages because he did not get the bedroom and
the accommodation which he was promised. The county court judge awarded him
£13 .15. This court increased it to £50.
I think the judge was in error in taking the sum paid for the holiday £63.45 and
halving it. The right measure of damages is to compensate him for the loss of enter-
tainment and enjoyment which he was promised, and which he did not get.
Looking at the matter quite broadly, I think the damages in this case should be
the sum of £125 . I would allow the appeal, accordingly.
[See also Jackson v Horizon Holidays Ltd, Chapter 4.]

HEYWOOD V WELLERS
(1976] QB 446 (CA)

[H, a woman, instructed a firm of solicitors to seek an injunction to restrain a man, M,

from molesting her. The solicitors failed to institute the proper proceedings, and
M continued to molest H. H sued the solicitors for the return of the fees she had paid
and for damages for negligence. The trial judge ordered repayment of the fees, but
refused to award further damages. H appealed (conducting the appeal in person).]
LORD DENNING MR (James and Bridge LJJ concurring) : So the solicitors were entitled
to nothing for costs; and Mrs. Heywood could recover the £175 as money paid on a
consideration which had wholly failed. She was, therefore, entitled to recover it as
of right. And she is entitled to recover as we\\ damages for negligence. Take this
instance. If you engage a driver to take you to the station to catch a train for a day
trip to the sea, you pay him £2-and then the car breaks down owing to his negli-
gence. So that you miss your holiday. In that case you can recover not only your £2
back but also damages for the disappointment, upset and mental distress which you
suffered: see Jarvis V: Swan 's Tours Ltd. [1973] O.B. 233 and Jackson v. Horizon Holidays
Ltd. [1975] 1 W.L.R. 1468.
So here Mrs. Heywood employed the solicitors to take proceedings at law to protect
her from molestation by Mr. Marrion. They were under a duty by contract to use
reasonable care. Owing to their want of care she was molested by this man on three
or four occasions. This molestation caused her much mental distress and upset. It
must have been in their contemplation that if they failed in their duty she might be
further molested and suffer much upset and distress. This damage she suffered was
within their contemplation within the rule in Hadley v. Baxendale (1854) 9 Exch. 341.
That was the test applied by Lawson J. in the recent case of Cox v. Philips Industries
Ltd. (October 15, 1975) reported only in The Times, October 21, 1975. Mr. Keith Simpson
urged that damages for mental distress were not recoverable. He relied on Groom v.
Crocker [1939] 1 KB. 194 and Cook v. Swinfen [1967] 1 W.L.R. 457, 461. But those cases
may have to be reconsidered. In any case they were different from this. Here the
solicitors were employed to protect her from molestation causing mental distress-
and should be responsible in damages for their failure.
It was suggested that even if the solicitors had done their duty and taken the man
to court he might still have molested her. But I do not think they can excuse them-
selves on that ground. After all, it was not put to the test: and it was their fault that it

82
 IV. INTANGIBLE INJURIES

was not put to the test. If they had taken him to court as she wished-and as they
ought to have done-it might well have been effective to stop him from molesting
her any more. We should assume that it would have been effective to protect her,
unless they prove that it would not: see Coldman v. Hill (191911 KB. 443, 457 by Scrut-
ton L.J. and Scottish Co-operative Wholesale Society Ltd. v. Meyer (1959] AC. 324, 367.
So the remaining question is: What damages should be awarded to Mrs. Heywood
for the molestation she suffered on three or four occasions and the mental distress
and upset she suffered? The judge, unfortunately, did not quantify the damages. In
her claim as amended she put them at £150. I would allow her that sum.

NOTES

1. In Hayes v James & Charles Dodd, (1990] 2 All ER 815 (CA), the plaintiffs were a married
couple in business together. The defendants, the plaintiffs' solicitors, wrongly advised them
that there was a right of way attached to a property they proposed to buy for their business.
They bought the property, and suffered loss when access to it was restricted. The plaintiffs'
claim for damages for mental distress was rejected. Staughton LJ said: "I am not convinced
thatit is enough to ask whether mental distress was reasonably foreseeable as a consequence,
or even whether it should have been contemplated as not unlikely to result from a breach of
contract. It seems to me that damages for mental distress in contract are, as a matter of policy,
limited to certain classes of case. I would broadly follow the classification ... 'where the con-
tract which has been broken was itself a contract to provide peace of mind or freedom from
distress.' It may be that the class is somewhat wider than that. But it should not, in my judg-
ment, include any case where the object of the contract was not comfort or pleasure, or the
relief of discomfort, but simply carrying on a commercial activity with a view to profit. So I
would disallow the item of damages for anguish and vexation.''
2. In Turczinski v Dupont Heating & Air Conditioning Ltd (2004), 246 DLR (4th) 95, the
Ontario Court of Appeal said that "generally before damages for mental distress can be awarded
for breach of contract, the contract must be one where peace of mind is what is being con-
tracted for, such as a contract for a holiday .. . or for insurance," adding that "there are persuasive
reasons to confine within narrow limits the circumstances when damages will be awarded for
exacerbation of mental illness for breach of a consumer contract." On the other hand, in Farley
v Skinner, (2002] 2 AC 732 (HL), it was held that it was not necessary for the contract as a
whole to be one for peace of mind so long as one important object of it was peace of mind.

VORVIS V INSURANCE CORPORATION OF BRITISH COLUMBIA

[1989] 1 SCR 1085

McINTYRE J: This appeal raises questions concerning the amount and nature of
damages which may be payable in an action for wrongful dismissal from employ-
ment. The appellant is a fifty-four year old solicitor who commenced employment
as a juniOr solicitor in the respondent's legal department in September of 1973. His
employment terminated on January 20, 1981. The respondent initially purported to
dismiss for cause, that is, incompetence, but, as the trial judge determined, it had no
cause for dismissal. The trial judge therefore found that the plaintiff was wrongfully
dismissed and that he was entitled to damages. Upon his dismissal the appellant .
received salary until February 15, 1981, a period of about one month, and he was able
to obtain new employment, but not as a lawyer, on September 15, 1981, some seven
months since his last payment. At trial, it was agreed by counsel that damages should
be assessed on the basis of a seven-month notice requirement, because the plaintiff

83
CHAPTER 2 REMED IES FOR BREACH OF PROMISE

was able to mitigate his loss by finding other employment at a similar salary by
September 15, 1981. ...
In this Court, the appellant ... argued that the court was in error in denying his
claim for punitive damages. Damages for mental distress, properly characterized as
aggravated damages, were not claimed in this Court as a separate head but it was
argued that they were included in the general concept of punitive damages ....
Before dealing with the question of punitive damages, it will be well to make clear
the distinction between punitive and aggravated damages, for in the argument
before us and in some of the materials filed there appeared some confusion as to the
distinction. Punitive damages, as the name would indicate, are designed to punish.
In this, they constitute an exception to the general common law rule that damages are
designed to compensate the injured, not to punish the wrongdoer. Aggravated damages
will frequently cover conduct which could also be the subject of punitive damages, but
the ro)e of aggravated damages remains compensatory. The distinction is clearly set
out in Waddams, The Law of Damages (2nd ed. 1983), at p. 562, para. 979 . ... Aggravated
damages are awarded to compensate for aggravated damage. As explained by Waddams,
they take account of intangible injuries and by definition will generally augment
damages assessed under the general rules relating to the assessment of damages.
Aggravated damages are compensatory in nature an.d may only be awarded for that
purpose. Punitive damages, on the other hand, are punitive in nature and may only
be employed in circumstances where the conduct giving the cause for complaint is
of such nature that it merits punishment. The issue which is faced by this Court is
whether punitive damages may be awarded by the Court in an action for breach of
contract, based on wrongful dismissal of an employee, and, if so, whether the cir-
cumstances of this case would merit such an award. Also, before the Court is a similar
question with respect to aggravated damages ....
From the foregoing authorities, I would conclude that while aggravated damages
may be awarded in actions for breach of contract in appropriate cases, this is not a
case where they should be given. The rule long established in the Addis and Peso
Silver /Vtines cases has generally been applied to deny such damages, and the
employer/employee relationship (in the absence of collective agreements which
involve consideration of the modern labour law regime) has always been one where
either party could terminate the contract of employment by due notice, and therefore
the only damage which could arise would result from a failure to give such notice.
I would not wish to be taken as saying that aggravated damages could never be
awarded in a case of wrongful dismissal, particularly where the acts complained of
were also independently actionable, a factor not present here ....
[Weatherstone JA said, in Brown v Waterloo Regional Board of Commissioners of Police
(1983), 43 OR (2d) 113, 150 DLR (3d) 729 (CA): "Damages, to be recoverable, must flow
from an actionable wrong. It is not sufficient that a course of conduct not in itself
actionable be somehow related to an actionable course of conduct."]
Furthermore, while the conduct complained of, that of Reid, was offensive and
unjustified, any injury it may have caused the appellant cannot be said to have
arisen out of the dismissal itself. The conduct complained of preceded the wrongful
dismissal and therefore cannot be said to have aggravated the damage incurred as
a result of the dismissal. Accordingly, I would refuse any claim for aggravated dam-
ages in respect of the wrongful dismissal.
[See also McCamus at 875-79; MacDougall at 355-57; Waddams at paras 743 -54.]

84
 IV. INTANGIBLE INJURIES

FIDLER V SUN LIFE ASSURANCE CO OF CANADA

[2006] 2 SCR 3

McLACHLIN CJC and ABELLA J (for the court):

[1] For more than five years, Sun Life Assurance Company of Canada denied
Connie Fidler the long-term disability benefits to which she was entitled. The trial
judge found that, while there was no bad faith on the part of the insurer justifying
an award of punitive damages, the denial caused Ms. Fidler significant mental dis-
tress. Sun Life was found liable to pay Ms . Fidler $20,000 in damages for mental
distress resulting from Sun Life's breach of a group disability insurance contract. In
the Court of Appeal for British Columbia, that award was upheld. In addition, a
majority of the Court of Appeal found that, in reaching the conclusion that there
was no bad faith, the trial judge had made a palpable and overriding error and
awarded $100,000 in punitive damages to Ms. Fidler.
[2] Since mental distress of the kind experienced by Ms. Fidler was reasonably
within the contemplation of the parties when they entered into the contract of dis-
ability insurance, we see no reason to deny her compensation for the damages for
mental distress directly flowing from the breach. However, the trial judge's finding
that Sun Life did not act in bad faith should not be interfered with and precludes an
award of punitive damages. Accordingly, we reverse the Court of Appeal's order as
to punitive damages and restore the award made by the trial judge.

DAMAGES FOR MENTAL DISTRESS FOR BREACH OF CONTRACT

[27] Damages for breach of contract should, as far as money can do it, place the
plaintiff in the same position as if the contract had been performed. However, at
least since the 1854 decision of the Court of Exchequer Chamber in Hadley v. Bax -
endale ... , it has been the law that these damages must be "such as may fairly and
reasonably be considered either arising naturally ... from such breach of contract
itself, or such as may reasonably be supposed to have been in the contemplation of
both parties."
[28] Until now, damages for mental distress have not been welcome in the family
of remedies spawned by this principle. The issue in this appeal is whether that
remedial ostracization continues to be warranted.
[29] In Hadley v. Baxendale, the court explained the principle of reasonable expect-
ation as follows:
Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such breach of contract shou ld be
such as may fairly and reasonably be considered either arising naturally, i.e., according
to the usual course of things, from such breach of contract itself, or such as may
reasonably be supposed to have been in the contemplation of both parties, at the time
they made the contract, as the probable result of the breach of it. [Emphasis added.) .

[30] Hadley v. Baxendale makes no distinction between the types of loss that are
recoverable for breach of contract. The principle of reasonable expectation is stated
as a general principle. Nevertheless, subsequent cases purported to rule out damages
for mental distress for breach of contract except in certain defined situations.
(31] While courts have always accepted that some non-pecuniary losses arising
from breach of contract are compensable, including physical inconvenience and
discomfort, they have traditionally shied away from awarding damages for mental
suffering caused by the contract breach.

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

(32] This tradition of refusing to award damages for mental distress was launched
in Hobbs v. London and South Western Rail. Co. (1875), L.R. 10 O.B. 111, and Hamlin v.
Great Northern Railway Co. (1856), 1 H. & N. 408, 156 E.R. 1261 (Ex.). In 1909, in the case
of Addis v. Gramophone Co .... the House of Lords "cast a long shadow over the com-
mon law" when it rejected a claim for mental distress because the conduct said to
cause the distress was not actionable ... .
(33] To this day, Addis is cited for the proposition that mental distress damages
are not generally recoverable for breach of contract.
[34] In short, the foundational concepts of reasonable expectations had a ceiling:
mental distress ....
(35] A number of policy considerations have been cited in support of this restric-
tion. One is the perceived minimal nature of mental suffering:
[A]s a matter of ordinary experience, it is evident that, ·while the innocent party to a
contract will generally be disappointed if the defendant does not perform the contract,
the innocent party's disappointment and distress are seldom so significant as to attract
an award of damages on that score.
(Baltic Shipping Co. v. Dillon (1993), 176 C.L.R. 344 (Aust\. H.C.) at p. 365, per Mason C.J.)
(36] Others have suggested that a "stiff upper lip" expectation in commercial life
is the source of the prohibition. In McGregor on Damages (17th ed. 2003), the author
explains:
The reason for the general rule is that contracts normally concern commercial matters
and that mental suffering on breach is not in the contemplation of the parties as part
of the business risk of the transaction . [p. 63]
This resonated in Johnson v. Gore Wood & Co., (2001] 2 W.L.R. 72 (H.L.) at p. 108,
where Lord Cooke observed: "Contract-breaking is treated as an incident of com-
mercial life which players in the game are expected to meet with mental fortitude."
(37] This Court's jurisprudence has followed the restrictive interpretation of Addis,
generally requiring that a claim for compensation for mental distress be grounded
in independently actionable conduct. The general rule that damages for mental
distress should not be awarded for breach of contract was thus preserved: Peso Silver
Mines Ltd. (N.P.L) v. Cropper, (1966] S.C.R. 673 ....
(38] Without resi\ing from the general rule that damages for mental suffering
could not be awarded at contract, the courts in the 1970s acknowledged that the
reasons of principle and policy for the rule did not always apply, and began to award
such damages where the contract was one for pleasure, relaxation or peace of mind.
The charge was led, as so many were, by Lord Denning. In Jarvis v. Swans Tours Ltd.,
(1973] 1 AU E:R. 71 (C.A.), the plaintiff had contracted with the defendant to arrange a
holiday. The defendant breached the contract by providing' a terrible vacation.
Acknowledging but declining to follow what he referred to as the "out of date" deci-
sions in Hamlin and Hobbs, which had sired Addis, Lord Denning held that mental
distress damages could be recovered for certain kinds of contracts:
In a proper case damages for mental distress can be recovered in contract, just as
damages for shock can be recovered in tort. One such case is a contract for a holiday,
or any other contract to provide entertainment and enjoyme nt. If the contracting party
breaks his contract, damages can be given for the disappointment, the distress, the
upset and frustration caused by the breach. [p. 74]
(39] This holding in Jarvis emerged from the common law chrysalis as the "peace
of mind exception" to the general rule against recovery for mental distress in contract

86
 IV. INTANGIBLE INJURIES

breaches. This exception was confined to contracts which had as their object the
peace of mind of a contracting party. Bingham L.J. in Watts v. Morrow stated: "Where
the very object of [the] contract is to provide pleasure, relaxation, peace of mind or
freedom from molestation, damages will be awarded" (para. 1445).
[40] More recently, the House of Lords in Farley v. Skinner, [2001] 4 AU E.R. 801,
[2001] UKHL 49, loosened the peace of mind exception so as to permit recovery of
mental distress not only when pleasure, relaxation, or peace of mind is "the very
object of the contract," but also when it is a "major or important object of the contract"
(para. 24) .
[41] The right to obtain damages for mental distress for breach of contracts that
promise pleasure, relaxation or peace of mind has found wide acceptance in
Canada ..
[43] The view taken by this Court in Vorvis that damages for mental distress in
"peace of mind" contracts should be seen as an expression of the general principle
of compensatory damages of Hadley v. Baxendale, rather than as an exception to that
principle, is shared by others .... Professor J.D. McCamus in The Law of Contracts (2005)
argues at p. 877 that once peace of mind is understood as a reflection of, or "proxy"
for the reasonable contemplation of the contracting parties, "there is no compelling
reason not to simply apply the foreseeability test itself." At this point, the apparent
inconsistency between the general rule in Hadley v. Baxendale and the exception
vanishes . ...
[44] We conclude that damages for mental distress for breach of contract may, in
appropriate cases, be awarded as an application of the principle in Hadley v. Baxendale:
see Vorvis. The court should ask "what did the contract promise?" and provide com -
pensation for those promises. The aim of compensatory damages is to restore the
wronged party to the position he or she would have been in had the contract not
been broken. As the Privy Council stated in Wertheim v. Chicoutimi Pulp Co., [1911]
AC . 301 at p. 307: "the party complaining should, so far as it can be done by money,
be placed in the same position as he would have been in if the contract had been
performed." The measure of these damages is, of course, subject to remoteness
principles. There is no reason why this should not include damages for mental
distress, where such damages were in the reasonable contemplation of the parties
at the time the contract was made. This conclusion follows from the basic principle
of compensatory contractual damages: that the parties are to be restored to the pos-
ition they contracted for, whether tangible or intangible. The law's task is simply to
provide the benefits contracted for, whatever their nature, if they were in the rea -
sonable contemplation of the parties.
[45] It does not follow, however, that all mental distress associated with a breach
of contract is compensable. In normal commercial contracts, the likelihood of a
breach of contract causing mental distress is not ordinarily within the reasonable
contemplation of the parties. It is not unusual that a breach of contract will leave the
wronged party feeling frustrated or angry. The law does not award damages for such
incidental frustration. The matter is otherwise, however, when the parties enter into
a contract, an object of which is to secure a particular psychological benefit. In such
a case, damages arising from such mental distress should in principle be recoverable
where. they are established on the evidence ·and shown to have been within the
reasonable contemplation of the parties at the time the contract was made. The basic
principles of contract damages do not cease to operate merely because what is
promised is an intangible, like mental security.
[46] This conclusion is supported by the policy considerations that have led the
law to eschew damages for mental suffering in commercial contracts. As discussed

87
CHAPTER 2 REMEDIES FOR BREACH OF PROM ISE

above, this reluctance rests on two policy considerations-the minimal nature of the
mental suffering and the fact that in commercial matters, mental suffering on breach
is "not in the contemplation of the parties as part of the business risk of the trans -
action" .... Neither applies to contracts where promised mental security or satisfaction
is part of the risk for which the parties contracted.
[47] This does not obviate the requirement that a plaintiff prove his or her loss.
The court must be satisfied: (1) that an object of the contract was to secure a psych-
ological benefit that brings mental distress upon breach within the reasonable
contemplation of the parties; and (2) that the degree of mental suffering caused by
the breach was of a degree sufficient to warrant compensation. These questions
require sensitivity to the particular facts of each case.
[48] While the mental distress as a consequence of breach must reasonably be
contemplated by the parties to attract damages, we see no basis for requiring it to
be the dominant aspect or the "very essence" of the bargain . ... Principle suggests
that as long as the promise in relation to state of mind is a part of the bargain in the
reasonable contemplation of the contracting parties, mental distress damages arising
from its breach are recoverable. This is to state neither more nor less than the rule
in Hadley v. Baxendale.
(49] We conclude that the "peace of mind" class of cases should not be viewed as
an exception to the general rule of the non-availability of damages for mental distress
in contract law, but rather as an application of the reasonable contemplation or
foreseeability principle that applies generally to determine the availability of damages
for breach of contract. ...
[54] It follows that there is only one rule by which compensatory damages for
breach of contract should be assessed: the rule in Hadley v. Baxendale. The Hadley
test unites an forms of contractual damages under a single principle. It explains why
damages may be awarded where an object of the contract is to secure a psychological
benefit, just as they may be awarded where an object of the contract is to secure a
material one .... In an cases, these results are based on what was in the reasonable
contemplation of the parties at the time of contract formation. They are not true
aggravated damages awards .
[55] The recognition that Hadley is the single and controlling test for compensa-
tory damages in cases of breach of contract therefore refutes any argument that an
"independent actionable wrong" is a prerequisite for the recov.ery of mental distress
damages. Where losses arise from the breach of contract itself, damages will be
determined according to what was in the reasonable contemplation of the parties .
at the time of contract formation. An independent cause of action will only need to
be proved where damages are of a different sort entirely: where they are being sought
on the basis of aggravating circumstances that extend beyond what the parties
expected when they concluded the contract. ...
[58] People enter into disability insurance contracts to protect themselves_from
this very financial and emotional stress and insecurity. An unwarranted delay in
receiving this protection can be extremely stressful. Ms. Fidler's damages for mental
distress flowed from Sun Life's breach of contract. To accept Sun Life's argument
that an independent actionable wrong is a precondition would be to sanction the
"conceptual incongruity of asking a plaintiff to show more than just that mental
distress damages were a reasonably foreseeable consequence of breach." ...
[59] The second question is whether the mental distress here at issue was of a
degree sufficient to warrant compensation. Again, we conclude that the answer is yes.
The trial judge found that Sun Life's breach caused Ms. Fidler a substantial loss which
she suffered over a five-year period. He found as a fact that Ms. Fidler "genuinely

88
 V. PUNITI VE DAMAGES

suffered significant additional distress and discomfort arising out of the loss of the
disability coverage" (para. 30 (emphasis added)) . This finding was amply supported
in the evidence, which included extensive medical evidence documenting the stress
and anxiety that Ms. Fidler experienced. He concluded that merely paying the arrears
and interest did not compensate for the years Ms. Fidler was without her benefits.
His award of $20,000 seeks to compensate her for the psychological consequences
of Sun Life's breach, consequences which are reasonably in the contemplation of
parties to a contract for personal services and benefits such as this one. We agree
with the Court of Appeal's decision not to disturb it.
[An award of punitive damages of $100,000 given by the BC Court of Appeal was set
aside.]

NOTES
1. In fv1ustapha v Culligan of Canada, 2008 SCC 27, [2008] 2 SCR 114, the court set aside a
substantial award of damages granted at trial to the buyer of a bottle of drinking water who
saw a dead fly in the unopened bottle. The court's reasons dealt mainly with the action in tort.
On the contractual action, the court said (para 19), "I have concluded that personal injury to
Mr. Mustapha was not reasonably foreseeable by the defendant at the time of the alleged tort.
The same evidence suggests that Mr. Mustapha's damage could not be reasonably supposed to
have been within the contemplation of the parties when they entered into their agreement. "
2. In Honda Canada Inc v Keays, 2008 SCC 39, [2008] 2 SCR 362, awards of damages for
mental distress and punitive damages were set aside in a wrongful dismissal case, the Supreme
Court finding that there was no bad fa ith or very improper conduct on the employer's part. The
court, referring to para 48 of the Fidler case, said (at para 58) that "as long as the promise in
relation to state of mind is a part of the bargain in the reasonable contemplation of the con-
tracting parties, mental distress damages arising from its breach are recoverable. "

V. PUNITIVE DAMAGES

WHITEN V PILOT INSURANCE CO

2002 sec 1s, 1200211 scR 595

[1] BINNIE J (McLachlin CJC, L'Heureux-Dube, Gonthier, Major, and Arbour JJ

concurring): This case raises once again the spectre of uncontrolled and uncontrol-
lable awards of punitive damages in civil actions. The jury was clearly outraged by
the high-handed tactics employed by the respondent, Pilot Insurance Company,
following its unjustified refusal to pay the appellant's claim under a fire insurance
policy (ultimately quantified at approximately $345,000) . Pilot forced an eight-week
trial on an allegation of arson that the jury obviously considered trumped up. It forced
the appellant to put at risk her only remaining asset (the insurance claim) plus
approximately $320,000 in legal costs that she did not have. The denial of the claim
was designed to force her to make an unfair settlement for less than she was entitled
to. The conduct was planned and deliberate and continued for over two years, while
the financial situation of the appellant grew increasingly desperate. Evidently con-
cluding that the arson defence from the outset was unsustainable and made in bad
faith, the jury added an award of punitive damages of $1 million, in effect providing

89
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

the appellant with a "windfall" that added something less than treble damages to her
actual out-of-pocket loss. The respondent argues that the award of punitive damages
is itself outrageous.
[2] The appellant, Daphne Whiten, bought her home in Haliburton County,
Ontario, in 1985. Just after midnight on January 18, 1994, when she and her husband
Keith were getting ready to go to bed, they discovered a fire in the addition to their
house. They and their daughter, who had been upstairs, fled the house wearing only
their nightclothes. It was minus 18 degrees Celsius. Mr. Whiten gave his slippers to
his daughter to go for help and suffered serious frostbite to his feet for which he was
hospitalized. He was thereafter confined to a wheelchair for a period of time. The
fire totally destroyed the Whitens' home and its contents, including their few valuable
antiques and many items of sentimental value and their three cats.
[3] The appellant was able to rent a small winterized cottage nearby for $650 per
month. Pilot made a single $5,000 payment for living expenses and covered the rent
for a couple of months or so, then cut off the rent without telling the family, and
thereafter pursued a hostile and confrontational policy which the jury must have
concluded was calculated to force the appellant (whose family was in very poor
financial shape) to settle her claim at substantially less than its fair value. The alleg-
ation that the family had torched its own home was contradicted by the local fire
chief, the respondent's own expert investigator, and its initial expert, all of whom
said there was no evidence whatsoever of arson. The respondent's position, based
on wishful thinking, was wholly discredited at trial. Pilot's appellate counsel con-
ceded here and in the Ontario Court of Appeal that there was no air of reality to the
allegation of arson.
[4] A majority of the Ontario Court of Appeal allowed the appeal in part and
reduced the punitive damage award to $100,000. In my view, on the exceptional
facts of this case, there was no basis on which to interfere with the jury award. The
award, though very high, was rational in the. specific circumstances disclosed in the
evidence and within the limits that a jury is allowed to operat~. The appellant was
faced with harsh and unreasoning opposition from an insurer whose policy she had
purchased for peace of mind and protection in just such an emergency. The jury
obviously concluded that people who sell peace of mind should not try to exploit a
family in crisis. Pilot, as stated, required the appellant to spend $320,000 in legal costs
to collect the $345,000 that was owed to her. The combined total of $665,000 at risk
puts the punitive damage awards in perspective. An award of $1 million in punitive
damages is certainly at the upper end of a sustainable award on these facts but not
beyond it. I would allow the appeal and restore the jury award of $1 million punitive
damages . ...
[5] The facts surrounding the fire itself have already been briefly mentioned. The
origin of the fire was never discovered but everyone who investigated the fire in the
six months after it occurred concluded that it was accidental. The first persons to
investigate the fire were the fire chief and firefighters called to the scene. The fire
chief thought, and he was eventually shown to be correct, that the fire was caused
at a single point of origin by a malfunctioning kerosene heater in the porch of the
addition. This was where the fire was first observed and also the area which had
sustained the most fire damage. The firefighters saw no evidence of arson and
therefore they did not request the Fire Marshal's office to investigate.
[6] Pilot retained an experienced independent insurance adjuster, Derek Francis,
to investigate the loss. Francis inspected the site and interviewed the Whitens, who
freely acknowledged that they had both been unemployed and had financial diffi-
culties. Francis also interviewed the firefighters about the speed at which the fire

90
 V. PUNITIVE DAMAGES

spread, a key indicator of arson. Both the physical evidence and the Whitens' conduct
satisfied Francis that the fire was accidental and on February 3, 1994 he reported to
Pilot that "there is no suspicion of arson on behalf of the insureds or any members
of their family."

[25] The Whitens lived in a small community. People were aware that their home
was not being rebuilt because the insurer was alleging arson. The stigma persisted.
Pilot continued to allege arson throughout the trial. Pilot now concedes that the
evidence as a whole unequivocally demonstrates that the fire was accidental.

[36] Punitive damages are awarded against a defendant in exceptional cases for
"malicious, oppressive and high-handed" misconduct that "offends the court's sense
of decency": Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130; 126 D.L.R.
(4th) 129, at para. 196. The test thus limits the award to misconduct that represents
a marked departure from ordinary standards of decent behaviour. Because their
objective is to punish the defendant rather than compensate a plaintiff (whose just
compensation will already have been assessed), punitive damages straddle the
frontier between civil law (compensation) and criminal law (punishment).
[37] Punishment is a legitimate objective not only of the criminal law but of the
civil law as well. Punitive damages serve a need that is not met either by the pure
civil law or the pure criminal law. In the present case, for example, no one other than
the appellant could rationally be expected to invest legal costs of $320,000 in lengthy
proceedings to establish that on this particular file the insurer had behaved abomi-
nably. Overcompensation of a plaintiff is given in exchange for this socially useful
service.
[38] Nevertheless, the hybrid nature of punitive damages offends some jurists
who insist that legal remedies should belong to one jurisprudential field or the other.
That is one major aspect of the controversy, often framed in the words of Lord
Wilberforce's comments, dissenting, in Broome v. Cassell & Co., [1972] AC. 1027 (H.L.),
at p.1114:

It cannot lightly be taken for granted, even as a matter of theory, that the purpose of
the law of tort is compensation, still less that it ought to be, an issue of large social
import, or that there is something inappropriate or illogical or anomalous (a question-
begging word) in including a punitive element in civil damages, or, conversely, that the
criminal law, rather than the civil law, is in these cases the better instrument for convey-
ing social disapproval, or for redressing a wrong to the social fabric, or that damages in
any case can be broken down into the two separate elements. As a matter of practice
English law has not committed itself to any of these theories: it may have been wiser
than it knew.

[39] A second major aspect of the controversy surrounding punitive damages is

related to the quantum. Substantial awards are occasionally assessed at figures
seemingly plucked out of the air. The usual procedural protections for an individual
faced with potential punishment in a criminal case are not available. Plaintiffs, it is
said, recover pm:iitive awards out of all proportion to just compensation. They are
subjected, it is said, to "palm tree justice": Cassell, supra, at p . 1078. They are handed
a financial windfall serendipitously just because, coincidentally with their claim, the
court desires to punish. the defendant and deter others from similar outrageous.
conduct. Defendants on the other hand say they suffer out of all proportion to the
· actual wrongs they have committed. Because the punishment is tailored to fit not

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CHAPTER 2 REMEDIES FOR BREACH O F PROMISE

only the "crime" but the financial circumstances of the defendant (i.e., to ensure that
it is .big enough to "sting"), defendants complain that they are being punished for
who they are rather than for what they have done. The critics of punitive awards
refer in terrorem to the United States experience where, for example, an Alabama jury
awarded $4 million in punitive damages against a BMW dealership for failure to
disclose a minor paint job to fix a cosmetic blemish on a new vehicle in BMW of
North America, Inc. v. Gore, 517 U.S. 559 (1996). In 1994, a jury in New Mexico awarded
81-year-old Stella Liebeck $160,000 in compensatory damages and $2.7 million in
punitive damages against McDonald's Restaurants for burns resulting from a spilled
cup of coffee, notwithstanding that she tried to open the cup while balancing it on
her lap in the passenger seat of a car (Liebeck v. McDonald's Restaurants, P.TS. Inc.,
1995 WL 360309 (N.M. Dist.)). Critics of punitive damages warn against an "Ameri-
canization" of our law that, if adopted, would bring the administration of justice in
this country into disrepute.
[40] These are serious concerns, but in fact, the punitive damage controversies
have little if anything to do with Americanization of our law. Jury awards of punitive
damages in civil actions have a long and important history in Anglo-Canadian
jurisprudence. They defy modern attempts at neat classification of remedies. The
jury is invited to treat a plaintiff as a public interest enforcer as well as a private inter-
est claimant. Almost 240 years ago, government agents broke into the premises of
a Whig member of Parliament and pamphleteer, John Wilkes, to seize copies of a
publication entitled The North Briton, No. 45, which the Secretary of State regarded
as libellous. Lord Chief Justice Pratt (later Lord Camden L.C.) on that occasion swept
aside the government's defence. "If such a [search] power is truly invested in a
Secretary of State," he held, "and he can delegate this power, it certainly may affect
the person and property of every man in this kingdom, and is totally subversive
of the liberty of the subject." As to punitive damages, he affirmed that:
[A) jury have it in their power to give damages for more than the injury received. Dam-
ages are designed not only as a satisfaction to the injured person, but likewise as a
punishment to the guilty, to deter from any such proceeding for the future, and as a
proof of the detestation of the jury to the action itself.

(Wilkes v. Wood (1763), Lofft. 1, 98 E.R. 489 (K.B.), at pp. 498-99.)

[41] Long before the days of Lord Pratt C.J., the related idea of condemning a
defendant to a multiple of what is required for compensation (in the present appeal,
as stated, the punitive damages were roughly triple th~ award of compensatory
damages) reached back to the Code of Hammurabi, Babylonian law, Hittite law (1400
B.C.), the Hindu Code of Manu (200 B.C.), ancient Greek codes, the Ptolemaic law in
Egypt and the Hebrew Covenant Code of Mosaic law (see Exodus 22 :1: "If a man shall
steal an ox, or a sheep, and kill it, or sell it; he shall restore five oxen for an ox, and
four sheep for a sheep."). Roman law also included provisions for multiple damages.
Admittedly, in these early systems, criminal law and civil law were not always clearly
differentiated ..The United States Supreme Court in BMW, supra, referred at p. 581 to
"65 different enactments [in English statutes] during the period between 1275 an<:l
1753 [that] provided for double, treble, or quadruple damages."
[42] Even in terms of quantum, the use of punitive damages in the eighteenth
century was aggressive. In Huckle v. Money (1763), 2 Wils. K.B. 205, 95 E.R. 768 (K.B .),
the journeyman Huckle (who had actually printed the pamphlet The North Briton,
No. 45 at issue in Wilkes, supra) won a cause of action for trespass, assault and false
imprisonment and received 300 pounds in damages from the jury despite the com-
fortable and short six-hour duration of his confinement. The government's motion

92
 V. PUNITIVE DAMAGES

for a new trial on the basis that the award was "outrageous" was denied, even.though
actual damages totalled only 20 pounds (i.e., a multiplier of 15) (p. 768 E.R.). The Lord
Chief Justice, in introducing the expression "exemplary damages,'' thought there
was no precedent for judges "intermeddling" with damages awarded by juries.
[43] The three objectives identified by Lord Chief Justice Pratt, in Wilkes, supra -
punishment, deterrence and denunciation ("proof .of the detestation")-are with us
still, even though some scholarly critics have argued that these rationales "have very
particular and divergent implications" that occasionally wind up undermining each
other: B. Chapman and M. Trebilcock, "Punitive Damages: Divergence in Search of a
Rationale" (1989), 40 Ala. L. Rev. 741, at p . 744. No doubt, as a matter of language, the
word "punishment" includes both retribution and denunciation, and the three object-
ives should perhaps better be referred to as retribution, deterrence and denunciation.
[44] The notion of private enforcers (or "private Attorneys General"), particularly
where they act for personal gain, is worrisome unless strictly controlled. Thus, while
the availability of punitive damages in Canada was affirmed early on by this Court
in Collette v. Lasnier (1886), 13 S.C.R. 563, a patent case, they were not widely awarded
until the 1970s. Since then the awards have multiplied in number and escalated in
amount. A report on punitive damages by the Ontario Law Reform Commission,
issued in 1991, which examined research begun in 1989, predicted limited and
principled development in the law of punitive damages in Canada: Ontario Law
Reform Commission, Report on Exemplary Damages, June 1, 1991, at pp. 93 and 98.
By 1998, the report's research director, Dean Bruce Feldthusen, conceded that the
law was "certainly developing quite differently in Canada than one would have
predicted only a short time ago" and that "many of the doctrinal pillars on which the
Report's predictions of limited and principled development in the law governing
punitive damages were based have since cracked or collapsed": B. Feldthusen, "Puni-
tive Damages: Hard Choices and High Stakes," [1998] N.Z.L. Rev. 741, at p. 742. Con-
trary to expectations, the awards were much larger, more frequent, appeared to rely
more often on the defendant's wealth in support, and included more high profile
jury awards. The kinds of causes of action had expanded; punitive damages were
the "norm" and had "proliferated" in actions in sexual battery, were now "clearly
available" for breach of fiduciary duty, and "persisted" in contract actions. Prior crim-
inal convictions, he concluded, no longer automatically barred punitive awards. He
added: "Perhaps most significantly, the courts seem to have accepted general deter-
rence, not retributive punishment, as the dominant purpose behind punitive damage
awards in a number of important decisions" (p. 742).
(45] This Court more recently affirmed a punitive damage award of $800,000 in
Hill, supra. On that occasion some guidelines were set out to keep this remedy within
reasonable limits. The Court on this occasion has an opportunity to clarify further
the rules governing whether an award of punitive damages ought to be made and,
if so, the assessment of a quantum that is fair to all parties.

[66] For. present purposes, I draw the following assistance from the experience
in other common law jurisdictions which I believe is consistent with Canadian
practice and precedent.
[67] First, the attempt to limit punitive damages by "categories" does not work and
was rightly rejected in Canada in Vorvis, supra, at pp. 1104-6. The control mechanism
\.ies not in restricting the category of case but in rationally determining circum -
stances that warrant the addition of punishment to compensation in a civil action.
It is in the nature of the remedy that punitive damages will largely be restricted to
intentional torts, as in Hill, supra, or breach of fiduciary duty as in fv1.(K.J v. fv1 .(H.J, (1992]

93
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

3 S.C.R. 6, 96 D.L.R. (4th) 289, but Vorvis itself affirmed the availability of punitive
damages in the exceptional case in contract. In Denison v. Fawcett, [1958] O.R. 312,
12 D.L.R. (2d) 537, th e Ontario Court of Appeal asserted in obiter that on proper facts
punitive damages would be available in negligence and nuisance as well. In Robitaille
v. Vancouver Hockey Club Ltd. (1981), 124 D.L.R. (3d) 228, the British Columbia Court
of Appeal awarded punitive damages in a negligence case on the principle that they
ought to be available whenever "the conduct of the defendant [was] such as to merit
condemnation by the [c]ourt" (p. 250). This broader approach seems to be in line
with most common law jurisdictions apart from England.
[68] Second, there is a substantial consensus that coincides with Lord Pratt C.J.'s
view in 1763 that the general objectives of punitive damages are punishment (in the
'sense of retribution), deterrence of the wrongdoer and others, and denunciation (or,
as Cory J. put it in Hill, supra, at para. 196, they are "the means by which the jury or
judge expresses its outrage at the egregious conduct").
[69] Third, there is recognition that the primary vehicle of punishment is the
criminal law (and regulatory offences) and that punitive damages should be resorted
to only in exceptional cases and with restraint. Where punishment has actually been
imposed by a criminal court for an offence arising out of substantially the same facts,
some jurisdictions, such as Australia and New Zealand, bar punitive damages in
certain contexts ... but the dominant approach ... is to treat it as another factor, albeit
a factor of potentially great importance .... The Ontario Law Reform Commission ...
recommended that the "court should be entitled to consider the fact and adequacy
of any prior penalty imposed in any criminal or other similar proceeding brought
against the defendant." ...
[70] Fourth, the incantation of the time-honoured pejoratives ("high-handed,"
"oppressive," "vindictive," etc.) provides insufficient guidance (or discipline) to the
judge or jury setting the amount. Lord Diplock in Cassell, supra, at p. 1129, called these
the "whole gamut of dyslogistic judicial epithets." A more principled and less exhorta -
tory approach is desirable.
[71] Fifth, all jurisdictions seek to promote rationality. In directing itself to the
punitive damages, the court should relate the facts of the particular case to the under-
lying purposes of punitive damages and ask itself how, in particular, an award would
further one or other of the objectives of the law, and what is the lowest award that
would serve the purpose, i.e., because any higher award would be irrational.
[72] Sixth, it is rational to use punitive damages to relieve a wrongdoer of its profit
where compensatory damages would amount to nothing more than a licence fee
to earn greater profits through outrageous disregard of the legal or equitable rights
of others.
· [73] Seventh, none of the common law jurisdictions has adopted (except by
statute) a formulaic approach, as advocated by the intervener the Insurance Council
of Can ada in this appeal, such as a fixed cap or fixed ratio between compensatory
and punitive damages. The proper focus is not on the plaintiff's loss but on the
defendant's misconduct. A mechanical or formulaic approach does not allow suf-
ficiently for the many variables that ought to be taken into account in arriving at a
just award.
[74] Eighth, the governing rule for quantum is proportionality. The overall award,
that is to say compensatory damages plus punitive damages plus any other punish-
ment related to the same misconduct, should be rationally related to the objectives for
which the punitive damages are awarded (retribution, deterrence and denunciation).
Thus there is broad support for the "if, but only if" test formulated, as mentioned, in
Rookes, ... , and affirmed here in Hill, supra.

94
 V. PUNITIVE DAMAGES

[75] Ninth, it has become evident that juries can and should receive more guid-
ance and help from the judges in terms of their mandate. They should be told in
some detail about the function of punitive damages and the factors that govern both
the award and the assessment of a proper amount. Juries should not be thrown into
their assignment without any help, then afterwards be criticized for the result.
[76] Tenth, and finally, there is substantial consensus (even the United States is
moving in this direction) that punitive damages are not at large (as pointed out by
Cory J . in Hill, supra ... ) and that an appellate court is entitled to intervene if the award
exceeds the outer boundaries of a rational and measured response to the facts of the
case.
[77] With the benefit of these general principles, I now turn to the specific issues
raised by this appeal.

(1) PUNITIVE DAMAGES FOR BREACH OF CONTRACT

[78] This, as noted, is a breach of contract case. In Vorvis, supra, this Court held
that punitive damages are recoverable in such cases provided the defendant's con-
duct said to give rise to the claim is itself "an actionable wrong" (p. 1106). The scope
to be given this expression is the threshold question in this case, i.e., is a breach of
an insurer's duty to act in good faith an actionable wrong independent of the loss
claim under the fire insurance policy? Vorvis itself was a case about the employer's
breach of an employment contract. This is how Mcintyre J . framed the rule at pp.
1105-6:
When then can punitive damages be awarded? It must never be forgotten that when
awarded by a judge or a jury, a punishment is imposed upon a person by a Court by the
operation of the judicial process. What is it that is punished? It surely cannot be merely
conduct of which the Court disapproves, however strongly the judge may feel. Punish-
ment may not be imposed in a civilized community w ithout a justification in law. The
only basis for the imposition of such punishment must be a finding of the commission
of an actionable wrong which caused the injury complained of by the plaintiff. [Empha-
sis added.]

This view, Mcintyre J. said (at p. 1106), "has found approval in the Restatement on the
Law of Contracts 2d in the United States," which reads as follows :

Punitive damages are not recoverable for a breach of contract unless the conduct
constituting the breach is also a tort for which punitive damages are recoverable.
[Emphasis added .]

Applying these principles in Vorvis, Mcintyre J . stated, at p. 1109:

Each party had the right to terminate the contract without the consent of the other,
and where the employment contract was terminated by the employer, the appellant
was entitled to reasonable notice of such termination or payment of salary and benefits
for the period of reasonable notice. The termination of the contract on this basis by the
employer is not a wrong in law and, where the reasonable notice is given or payment
in lieu thereof is made, the plaintiff-subject to a consideration of aggravated damages
which have been allowed in some cases but which were denied in this case-is entitled
to no further remedy .... [Emphasis added .]

Wilson J., with whom L'Heureux-Dube J. concurred, dissented . She did not agree
"that punitive damages can only be awarded when the misconduct is in itself an
'actionable wrong.'" She stated, at p. 1130:

95
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

In my view, the correct approach is to assess the conduct in the context of all the cir-
cumstances and determine whether it is deserving of punishment because of its shock-
ingly harsh, vindictive, reprehensible or malic)ous nature. Undoubtedly some conduct
found to be deserving of punishment will constitute an actionable wrong but other
conduct might not.

[79] In the case at bar, Pilot acknowledges that an insurer is under a duty of good
faith and fair dealing. Pilot says that this is a contractual duty. Vorvis, it says, requires
a tort. However, in my view, a breach of the contractual duty of good faith is
independent of and in addition to the breach of contractual duty to pay the loss. It
constitutes an "actionable wrong" within the Vorvis rule, which does not require an
independent tort. I say this for several reasons.
[80] First, Mcintyre J. chose to use the expression "actionable wrong" instead of
"tort" even though he had just reproduced an extract from the Restatement which
does use the word tort. It cannot be an accident that Mcintyre J . chose to employ a
much broader expression when formulating the Canadian test.
[81] Second, in Royal Bank of Canada v. W. Got & Associates Electric Ltd., [1999] 3
S.C.R. 408, 178 D.L.R. (4th) 385, at para. 26, this Court, referring to Mcintyre J.'s hold-
ing in Vorvis, said "the circumstances that would justify punitive damages for breach
of contract in the absence of actions also constituting a tort are rare" (emphasis
added). Rare they may be, but the clear message is that such cases do exist. The Court
has thus confirmed that punitive damages can be awarded in the absence of an
accompanying tort. ,
[82] Third, the requirement of an independent tort would unnecessarily compli-
cate the pleadings, without in most cases adding anything of substance. Central Trust
Co. v. Rafuse, [1986] 2 S.C.R. 147, 31 D.L.R. (4th) 481, held that a common law duty of
care sufficient to found an action in tort can arise within a contractual relationship,
and in that case proceeded with the analysis in tort instead of contract to deprive an
allegedly negligent solicitor of the benefit of a limitation defence. To require a plain-
tiff to formulate a tort in a case such as the present is pure formalism. An independent
actionable wrong is required, but it can be found in breach of a distinct and separate
contractual provision or other duty such as a fiduciary obligation.
[83] I should add that insurance companies have also asserted claims for punitive
damages against their insured for breach of the mutual "good faith" obligation in
insurance contracts.

[91] The appellant also pleaded that Pilot's manner of dealing with her claim had
created "hardship" of which "the Defendants, through their agents and employees
always had direct and ongoing knowledge" (para. 8). In para.14 she pleaded that "as
a result of the actions of the Defendants, the Plaintiff has suffered and continues to
suffer great emotional stress" (although there was no claim for aggravated damages).
The respondent specifically denied acting in bad faith (Statement of Defence and
Counterclaim of the Defendant, at para. 6). The statement of claim was somewhat
deficient in failing to relate the plea for punitive damages to the precise facts said to
give rise to the outrage, but Pilot was content to go to trial on this pleading and I do
not think it should be heard to complain about it at this late date.
[92] As to the respondent's objection that the pleading does not allege separate and
distinct damages flowing from the independent actionable wrong, the respondent's
argument overlooks the fact that punitive damages are directed to the quality of the
defendant's conduct, not the quantity (if any) of the plaintiff's loss. As Cory J. observed
in Hill, supra, at para. 196: "Punitive damages bear no relation to what the plaintiff should
receive by way of compensation. Their aim is not to compensate the plaintiff, but

96
 V. PUNITIVE DAMAGES

rather to punish the defendant. It is the means by which the jury or judge expresses
its outrage at the egregious conduct of the defendant." In any event, there is a good
deal of evidence of emotional stress and financial cost over and above the loss th at
would have been incurred had the claim been settled in good faith within a reason -
able time ....

(3) WAS THE JURY CHARGE ADEQUATE?

(93] The respondent argues that the trial judge did not give the jury adequate
guidance on how to assess punitive damages. There is considerable merit in this
submission. The judge's charge on this point was skeletal. It is my view, for the
reasons already discussed, that the charge on punitive damages should not be given
almost as an afterthought but should be understood as an important source of
control and discipline. The jurors should not be left to guess what their role and
function is.
(94] To this end, not only should the pleadings of punitive damages be more
rigorous in the future than in the past .. but it would be helpful if the trial judge's
charge to the jury included words to convey an understanding of the following points,
even at the risk of some repetitio1:'1 for emphasis. (1) Punitive damages are very much
the exception rather than the rule, (2) imposed only if there has been high-handed,
malicious, arbitrary or highly reprehensible misconduct that departs to a marked
degree from ordinary standards of decent behaviour. (3) Where they are awarded,
punitive damages should be assessed in an amount reasonably proportionate to such
factors as the harm caused, the degree of the misconduct, the relative vulnerability of
the plaintiff and any advantage or profit gained by the defendant, (4) having regard to
any other fines or penalties suffered by the defendant for the misconduct in question.
(5) Punitive damages are generally given only where the misconduct would other-
wise be unpunished or where other penalties are or are likely to be inadequate to
achieve the objectives of retribution, deterrence and denunciation. (6) Their purpose
is not to compensate the plaintiff, but (7) to give a defendant his or her just desert
(retribution), to deter the defendant and others from similar misconduct in the future
(deterrence), and to mark the community's collective condemnation (denunciation)
of what has happened. (8) Punitive damages are awarded only where compensatory
damages, which to some extent are punitive, are insufficient to accomplish these
objectives, and (9) they are given in an amount that is no greater than necessary to
rationally accomplish their purpose. (10) While normally the state would be the
recipient of any fine or penalty for misconduct, the plaintiff will keep punitive dam -
ages as a "windfall" in addition to compensatory damages. (11) Judges and juries in
our system have usually found that moderate awards of punitive damages, which
inevitably carry a stigma in the broader community, are generally sufficient.
(95] These particular expressions are not, of course, obligatory. What is essential
in a .particular case will be a function of its particular circumstances, the need to
emphasize the. nature, scope and exceptional nature of the remedy, and fairness to
both sides.
(96] The trial judge should keep in mind that the standc;trd of appellate review
applicable to punitive damages ultimately awarded, is that a reasonable jury, properly
instructed, could have concluded that an award in that amount, and no less, was
rationally required to punish the defendant's misconduct, as discussed below.
(97] If counsel can agree on a "bracket" or "range" of an appropriate award, the
trial judge should convey these figures to the jury, but at the present time specific
figures should not be mentioned in the absence of such agreement (Hill, supra, per
Cory J., at paras. 162-63. This prohibition may have to be re-examined in future,

97
CHAPTER 2 REMED IES FOR BREAC H O F PROMISE

based on further experience). Counsel should also consider the desirability of asking
the trial judge to advise the jury of awards of punitive damages made in comparable
circumstances that have been sustained on appeal.
[98] The foregoing suggestions are put forward in an effort to be helpful rather ·
than dogmatic. They grow out of the observation in Hill that punitive damages are
not "at large" (para. 197). Unless punitive damages can be approached rationally they
ought not to be awarded at a\\. To the extent these suggestions are considered useful,
they will obviously have to be both modified and elaborated to assist the jury on the
facts of a particular case. The point, simply, is that jurors should not be left in any
doubt about what they are to do and how they are to go about it.
[99] It is evident that I am suggesting a more ample charge on the issue of puni-
tive damages than was given in this case. Finlayson J.A. said that he was "not entirely
happy with the trial judge's charge to the jury on the issue of punitive damages"
(p. 661), and Laskin J.A. agreed that "[t]he trial judge might have given the jury more
help than he did" (p. 656). However, both Finlayson and Laskin JJ.A. agreed that the
jury charge covered the essentials, however lightly. This conclusion is reinforced by
the fact that no objection was made by either counsel. With some hesitation, I agree
with the Court of Appeal, unanimous on this point, that in the circumstances this
ground of appeal should be rejected ....

(4) REVIEWING THE JURY AWARD

(A) WHETHER THE AWARD OF PUNITIVE DAMAGES IN THIS CASE WAS A RATIONAL
RESPONSE TO THE RESPONDENT'S MISCONDUCT

[100] The applicable standard of review for "rationality" was articulated by Cory J .
in Hill, supra, at para. 197:
Unlike compensatory damages, punitive damages are not at large. Consequently, courts
have a much greater scope and discretion on appeal. The appellate review should be
based upon the court's estimation as to whether the punitive damages serve a rational
purpose. In other words, was the misconduct of the defendant so outrageous that
punitive damages were rationally required to act as deterrence?
[101] The "rationality" test applies both to the question of whether an award of
punitive damages should be made at a\\, as we\\ as to the question of its quantum.
[1021 The respondent claims that an insurer is entirely within its rights to thor-
oughly investigate a claim and exercise caution in evaluating the circumstances. It
is not required to accept the initial views of its investigators. It is perfectly entitled
to pursue further inquiries. I agree with these points. The problem here is that Pilot
embarked on a "train of thought" as early as February 25, 1994 ... that led to the arson
trial, with nothing to go on except the fact that its policyholder had money problems.
[103] The "train of thought" mentioned in the letter to Pilot from Derek Francis
kept going long after the requirements of due diligence or prudent practice had been
exhausted. There is a difference between due diligence and wilful tunnel vision. The
jury obviously considered this case to be an outrageous example of the latter. In my
view, an award of punitive damages (leaving aside the issue of quantum for the
moment) was a rational response on the jury's part to the evidence. It was not an
inevitable or unavoidable response, but it was a rational response to what the jury
had seen and heard. The jury was obviously incensed at the idea that the respondent
would get away with paying no more than it ought to have paid after its initial inves-
tigation in 1994 (plus costs) . It obviously felt that something more was required to
demonstrate to Pilot that its bad faith dealing with this loss claim was not a wise or

98
 V. PUNITIVE DAMAGES

profitable course of action. The award answered a perceived need for retribution,
denunciation and deterrence.
(104] The intervener, the Insurance Council of Canada, argues that the award. of
punitive damages will over-deter insurers from reviewing claims with due diligence,
thus lead to the payment of unmeritorious claims, and in the end drive up insurance
premiums. This would only be true if the respondent's treatment of the appellant is
not an isolated case but is widespread in the industry. If, as I prefer to believe, insurers
generally take seriously their duty to act in good faith, it will only be rogue insurers or
rogue files that will incur such a financial penalty, and the extra economic cost inflicted
by punitive damages will either cause the delinquents to mend their ways or, ultim-
ately, move them on to lines of work that do not call for a good faith standard of
behaviour.
[105] The Ontario Court of Appeal was unanimous that punitive damages in some
amount were justified and I agree with that conclusion. This was an exceptional case
that justified an exceptional remedy. The respondent's cross-appeal will therefore
be dismissed.

(ii) Proportionate to the Degree of Vulnerability of the Plaintiff

(115] I add two cautionary notes on the issue of vulnerability [of the plaintiff]. First,
this factor militates against the award of punitive damages in most commercial situ-
ations, particularly where the cause of action is contractual and the problem for the
Court is to sort out the bargain the parties have made. Most participants enter the
marketplace knowing it is fuelled by the aggressive pursuit of self-interest. Here, on
the other hand, we are dealing with a homeowner's "peace of mind" contract.
(116] Second, it must be kept in mind that punitive damages are not compensa-
tory. Thus the appellant's pleading of emotional distress in this case is only relevant
insofar as it helps to assess the oppressive character of the respondent's conduct.
Aggravated damages are the proper vehicle to take into account the additional harm
caused to the plaintiff's feelings by reprehensible or outrageous conduct on the part
of the defendant. Otherwise there is a danger of "double recovery" for the plaintiff's
emotional stress, once under the heading of compensation and secondly under the
heading of punishment.

(6) CONCLUSION ON "RATIONALITY"

(128] I would not have awarded $1 million in punitive damages in this case but
in my judgment the award is within the rational limits within which a jury must be .
allowed to operate. The award was not so disproportionate as to exceed the bounds
of rationality. It did n ot overshoot its purpose. I have already outlined the reasons
why I believe this to be the case.
(129] The jury followed the "if but only if" model, i.e., punitive damages should be
awarded "if but only if" the compensatory award is insufficient. The form and order
of the questions put to the jury required them first of all to deal with compensation
for the loss of the plaintiff's house (replacement or cash value), its contents, and any
increase in her living and moving expenses. Only after those matters had been dealt
with was the jury instructed to tum their minds to a final question on punitive dam-
ages. They were clearly aware that compensatory damages might well be sufficient
punishment to avoid a repetition of the offence and a deterrent to others. In this
case, the jury obviously concluded that the compensatory damages ($345,000) were

99
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

not sufficient for those purposes. It was no more than the respondent had contrac-
tually obligated itself to pay under the insurance policy. In this case, the power
imbalance was highly relevant. Pilot holds itself out to the public as a sure guide to
a "safe harbour." In its advertising material it refers to itself as "Your Pilot" and makes
such statements as:
At Pilot Insurance Company, guiding people like you into safe harbours has been our
mission for nearly 75 years.

Insurance contracts, as Pilot's self-description shows, are sold by the insurance

industry and purchased by members of the public for peace of mind. The more
devastating the loss, the more the insured may be at the financial mercy of the insurer,
and the more difficult it may be to challenge a wrongful refusal to pay the claim.
Deterrence is required. The obligation of good faith dealing means that the appel-
lant's peace of mind should have been Pilot's objective, and her vulnerability ought
not to have been aggravated as a negotiating tactic. It is this relationship of reliance
and vulnerability that was outrageously exploited by Pilot in this case. The jury, it
appears, decided a powerful message of retribution, deterrence and denunciation
had to be sent to the respondent and they sent it.
[130] The respondent points out that there is no evidence this case represents a
deliberate corporate strategy as opposed to an isolated, mishandled file that ran amok.
This is true, but it is also true that Pilot declined to call evidence to explain why this
file ran amok, and what steps, if any, have been taken to prevent a recurrence.
[131] The respondent also argues that at the end of the day, it did not profit finan-
cially from its misbehaviour. This may also be true, but if so, that result was not for
want of trying. The respondent clearly hoped to starve the appellant into a cheap
settlement. Crabbe's letter of June 9, 1994, quoted earlier, suggests as much. That it
failed to do so is due in no small part to appellant's counsel who took a hotly con-
tested claim into an eight-week jury trial on behalf of a client who was effectively
without resources of her own; and who obviously could have been starved into
submission but for his firm's intervention on her behalf.
[132] While, as stated, I do not consider the "ratio" test to be an appropriate indica -
tor of rationality, the ratio .of punitive damages to compensatory damages in the
present case would be either a multiple of three (if only the insurance claim of
$345,000 is considered) or a multiple of less than two (if the claim plus the award of
solicitor-client costs is thought to be the total compensation). Either way, the ratio
is well within what has been considered "rational" in decided cases.
[133] The majority opinion of the Ontario Court of Appeal recognized that puni-
tive damages are not "at large" and appellate courts have "much greater scope and
discretion on appeal" than they do in the case of general damages (Hill, supra, at para.
197). If the court considers the award or its quantum to be irrational, it is its duty to
interfere.
[134] This was the view taken by the majority judgment of Finlayson J.A. The
appellant complains that Finlayson J.A. applied a standard of "simply too high"
(p. 661). It is true that he thought the award was too high, but that observation must
be understood in light of other comments made in the course of his reasons. Fin -
layson J.A. concluded there was "no justification for such a radical departure from
precedent" (pp. 661-62); which revealed awards in the range of $7,500 to $15,000 ... .
Finlayson J.A. looked at "the degree of reprehensibility of the defendant's conduct"
(p. 666) and concluded that "[t]his case does not demonstrate that there was such
insidious, pernicious and persistent malice as would justify an award of this mag-
nitude" (p. 666).

100
 V. PUNITIVE DAMAGES

[135] With respect to precedent, it must be remembered that the respondent's trial
counsel objected to any range or "bracket" of appropriate figures being given to the
jury. Had the jury been given the information, it may have influenced their views.
The respondent itself appears to have been unimpressed by the size of prior awards
of punitive damages. In its factum, commenting on Crabbe's letter of June 9, 1994,
counsel states, "However, it should also be noted that Mr. Crabbe was clearly attempt-
ing to a\\ay Pilot's concern about the Whiten's bad faith claim at a time.when punitive
damage awards against insurers were in the range of $7,500-$15,000." Pilot's concern
may have been easy to a\\ay when the expected exposure to punitive damages was
only $15,000.
[136] The respondent objects that, prior to this judgment, the highest previous
award in an insurer bad faith case was $50,000. However, prior to the $800,000 award
of punitive damages upheld in Hill, supra, the highest award in punitive damages in
a libel case in Canada was $50,000 .... One of the strengths of the jury system is that ·
it keeps the \aw in touch with evolving realities, including financial realities ....
[140] Having accepted with some hesitation the adequacy of the trial judge's
instructions to the jury, and there being no convincing demonstration that the jury's
subsequent imposition and assessment of punitive damages were irrational, I would
affirm the award of punitive damages . ...
[141] I would a\\ow the appeal and restore the jury award of $1 mi\\ion in punitive
damages, with costs in this Court and in the Court of Appeal on a party-and-party basis.
[142] The respondent's cross-appeal against the award of any punitive damages
is dismissed with costs to the appe\\ant, also on a party-and-party basis.

LeBEL J (dissenting):
[147] The purpose of this part of our legal system remains to make good the loss
suffered, no less, no more ....
[148] The award of punitive damages in discussion here leads us far away from
that principle. It tends to turn tort law upside down. It transmogrifies what should have
remained an incident of a contracts case into the central issue of the dispute. The main
purpose of the action becomes the search for punishment, not compensation ....
[See also McCamus at 944-63; MacDouga\\ at 378-79; Waddams at paras 740-41.J

NOTES

1. In Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd, [2002] 1 SCR 678,
decided concurrently with Whiten, the court unanimously upheld the setting aside of an award
of $200,000 punitive damages for fraud, on the ground that the award would serve no rational
purpose. Binnie J said (at para 87) that "fra ud is generally reprehen sible, but only in exceptional
cases does it attract punitive damages."
2. The economic concept of "efficient breach" asserts that it is not always desirable to deter
breach of contract, because breach may in some cases enhance the joint welfare of the con-
tracting parties: the plaintiff (on receipt of full compensatory damages) is no worse off than she
would have been on performance, and the defendant, if he finds a more va luable use of his
resources, is better off. In Bank of America Canada v /V1utual Trust Co, [2002] 2 SCR 601, decided
two months after Whiten, the court sa id that "[e]fficient breach should not be discouraged by
the courts. This lack of disapproval emphasizes that a court will usually award money damages
for breach of contract equal to the va lue of the bargain to the plaintiff."
3. Punitive damages were refused by the Supreme Court of Canada in both Fidler and
Keays, above.

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CHAPTER 2 REMEDIES FOR BREACH OF PROMIS°E

VI. MITIGATION OF LOSS

PAYZU LIMITED V SAUNDERS

[1919] 2 KB 581 (CA)

[By a contract in writing, dated November 9, 1917, the defendant, who was a dealer
in silk, agreed to sell the plaintiffs 200 pieces of crepe de Chine at 4s. 6d. a yard and
200 pieces at Ss. lld. a yard, "delivery as required January to September, 1918; condi-
tions 21/z perce~t 1 month," which meant that payment for goods delivered up to the
20th day of the month should be made on the 20th day of the following month,
subject to a 21/2 percent discount. At the request of the plaintiffs, the defendant deliv-
ered, in November 1917, a certain quantity of the goods under the contract, the price
of which amounted to £ 76 less the 2 112 percent discount. On December 21 the plain -
tiffs drew a cheque i.n favour of the defendant in payment of these goods, but the
cheque was never received by the defendant. Early in January 1918, the defendant
telephoned to the plaintiffs asking why she had not received a cheque. The plaintiffs
then drew another cheque, but owing to a delay in obtaining the signature of one of
the plaintiffs' directors, this cheque was not sent to the defendant until January 16.
On that day the plaintiffs gave an order by telephone for further deliveries under the
contract. The defendant, in the belief, which was in fact erroneou s, that the plaintiffs'
financial position was such that they could not have met the cheque that they alleged
had been drawn in December, wrote to the plaintiffs on January 16, refusing to make
any further deliveries under the contract, unless the plaintiffs paid cash with each
order. The plaintiffs refused to do this, and after some further correspondence
brought this action claiming damages for breach of contract. The damages claimed
were the difference between the market price in the middle of February 1918 and the
contract price of the two classes of goods, the difference alleged being respectively
ls. 3d. and ls. 4d. a yard. ]
McCARDIE J: ... [I]n my opinion, the defendant's letter of January 16 did in fact and in
law amount to an unjustifiable refusal by her to carry out her contractual obligations,
for she announced in clear terms that she would thenceforth deliver no further goods
to the plaintiffs under the contract unless the plaintiffs paid cash to cover each invoice.
The market price of these goods was rising from the beginning of January and con-
tinued to rise up to the middle of February. The plaintiffs claim to be entitled to
damages based on the market price at that date. I find as a fact that the market prices
in February were respectively 6d. and 7d. per yard in excess of the contract prices.
The plaintiffs did not in fact purchase goods as against their contract with the
defendant. They asserted that the market was so bare of goods as to render purchases
impracticable.
Now a serious question of law arises on the question of damages. I find as a fact
that the defendant was ready and willing to supply the goods to the plaintiffs at the
times and places specified in the contract, provided the plaintiffs paid cash on
delivery. Mr. Matthews [of ~ounsel for the plaintiffs] argued with characteristic vigour
and ability that the plaintiffs were entitled to ignore that offer on the ground that a
person who has repudiated a contract cannot place the other party to the contract
under an obligation to diminish his loss by accepting a new offer made by the party
in default.
The question is one of juristic importance. What is the rule of law as to the duty
to mitigate damages7 I will first refer to the judgment of Cockburn C.J., in Frost v.
Knight (1872), LR. 7 Ex. 111, 115, where he said: "In assessing the damages for breach

102
 VI. MITIGATION OF LOSS

of the performance, a jury will of course take into account whatever the plaintiff
has done, or has had the means of doing and, as a prudent man, ought in reason to
have done, whereby his loss has been or would have been, diminished." ...
The question, therefore, is what a prudent person ought reasonably to do in order
to mitigate his loss arising from a breach of contract. I feel no inclination to allow fn
a mercantile dispute an unhappy indulgence in farfetched resentment or an undue
sensitiveness to slights or unfortunately worded letters. Business often gives rise to
certain asperities. But I agree that the plaintiffs in deciding whether to accept the
defendant's offer were fully entitled to consider the terms in which the offer was
made, its bona tides or otherwise, its relation to their own business methods and
financial position, and all the circumstances of the case; and it must be remembered
that an acceptance of the offer would not preclude an action for damages for the
actual loss sustained. Many illustrations might be given of the extraordinary results
which would follow if the plaintiffs were entitled to reject the defendant's offer and
incur a substantial measure of loss which would have been avoided by their accept-
ance of the offer. The plaintiffs were in fact in a position to pay cash for the goods
but instead of accepting the defendant's offer, which was made perfectly bona fide,
the plaintiffs permitted themselves to sustain a large measure of loss which as pru-
dent and reasonable people, they ought to have avoided. But the fact that the plain-
tiffs have claimed damages on an erroneous principle does not preclude me from
awarding to them such damages as they have in fact suffered, calculated upon the
correct bases .... They have suffered serious and substantial business inconvenience,
and I conceive that I am entitled to award them damages for that. ... Moreover, even
if the plaintiffs had accepted the defendant's offer, they would nevertheless have lost
a very useful period of credit which the contract gave them. Taking into considera -
tion all the circumstances of the case I have come to the conclusion that the right
sum to award as damages is £50. I give judgment for the plaintiffs for that amount,
and in view of the important points involved, I give costs on the High Court Scale.
[The plaintiffs appealed to the Court of Appeal on the question of damages.]
BANKS LJ: At the trial of this case the defendant, the present respondent, raised two
points: first, that she had committed no breach of the contract of sale, and secondly
that, if there was a breach, yet she had offered and was always ready and willing to
supply the pieces of silk, the subject of the contract, at the contract price for cash;
that it was unreasonable on the part of the appellants not to accept that offer, and
that therefore they cannot claim damages beyond what they would have lost by
paying cash with each order instead of having a month's credit and a discount of
21/z per cent. We must take it that this was the offer made by the respondent. The case
was fought and the learned judge has given judgment on that footing. It is true that
the correspondence suggests that the respondent was at one time claiming an
increased price. But in this court it must be taken that the offer was to supply the
contract goods at the contract price except that payment was to be by cash instead
of being on credit.
In these circumstances the only question is whether the appellants can establish
that as a matter of law they were not bound to consider any offer made by the
respondent because of the attitude she had taken up . ...
It is plain that the question what is reasonable for a person to do in mitigation of
his damages cannot be a question of law but must be one of fact in the circumstances
of each particular case. There may be cases where as matter of fact it would be
unreasonable to expect a plaintiff to consider any offer made in view of the treatment
he had received from the defendant. If he had been rendering personal services and

103
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

had been dismissed after being accused in presence of others of being a thief, and if
after that his employer had offered to take him back into his service, most persons
would think he was justified in refusing the offer and that it would be unreasonable
to ask him in this way to mitigate the damages in an action of wrongful dismissal.
But that is not to state a principle of law, but a conclusion of fact to be arrived at on
a consideration of all the circumstances of the case. Mr. Matthews complained that
the respondents had treated his clients so badly that it would be unreasonable to
expect them to listen to any proposition she might make. I do not agree. In my view
each party was ready to accuse the other of conduct unworthy of a high commercial
reputation and there was nothing to justify the appellants in refusing to consider
the respondent's offer. I think the learned judge came to a proper conclusion on the
facts, and that the appeal must be dismissed.
SCRUTTON LJ: I am of the same opinion. Whether it be more correct to say that a
plaintiff must minimize his damages, or to say that he can recover no more than he
would have suffered if he had acted reasonably, because any further damages do
not reasonably follow from the defendant's breach, the result is the same .... In certain
· cases of personal service it may be unreasonable to expect a plaintiff to consider an
offer from the other party who has grossly injured him; but in commercial contracts
it is generally reasonable to accept an offer from the party in default. However, it is
always a question of fact. About the law there is no difficulty.
Appeal dismissed.

[Parts of the opinions reproduced, as well as Eve J's opinion, are omitted.]

ROTH & CO V TAYSEN, TOWNSEND & CO

(1896), 1 Comm Cas 306 (CA)

[This was an action for damages for the non-acceptance by the defendants, Grant
and Grahame, of a cargo of maize. The alleged contract was contained in telegrams
that passed between the parties on May 23, 1895, and the trial judge and the Court
of Appeal found it to be a contract to ship the cargo by a named ship, the ship to be
ready to load o.n July 15, and the buyers to have the power of cancelling on August 15
if the ship was not ready to load by that day. On May 29 the defendants repudiated.
The plaintiff did not sue until July 24 and did not resell the cargo until September 5,
the last day in which a delivery might have been made under the contract. The resale
on September 5 was at a loss of £3807 3s. 8d. The trial court (Matthew J) fixed the
damages at £1,557, which would have been the amount of the loss if the cargo had
been sold on July 24, when the plaintiffs issued the writ.
Against this judgment the defendants, Grant and Grahame, appealed on the ground
that there was no binding contract between the parties, and that the damages were
excessive. The damages, they contended, if payable, were £688 only, the amount of
the loss if the cargo had been sold on May 29, when they repudiated the contract.
The plaintiffs entered a cross-appeal, claiming by way of damages £3,807 3s. 8d., the
amount of the loss sustained by the sale of the cargo on September 5.]
LORD ESHER MR: ... Then comes the question of damages. When there is a repudiation
which the other party chooses to treat as a breach, the primary rule is that the dam -
ages are the difference between the contract price and the market price of the goods
at the date of the breach. If the repudiation takes place before the day of delivery, the

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 VI. MITIGATION OF LOSS

other party has the right to bring an action immediately, and it follows that he has
the right to have his damages assessed at the time he brings his action. In such a
case the damages are not the difference between the contract and market price on
the day the action is brought. It is the duty of the jury to assess them, having regard
to, and making allowance for, the fact that the party plaintiff is receiving damages
before the date of delivery has arrived. There is this further rule. The party who has
treated a repudiation as a breach is bound to do what is reasonable to prevent the
damages from being inflamed or increased. Now, did the plaintiffs do what was
unreasonable in decliµing to sen till September 5? ...
The evidence before the judge was that the market was falling steadily from day
to day and from week to week, and was still falling when the writ was issued. Any
one acquainted with the market must have seen the strong probability that the
market would continue to fall. The plaintiffs had no right to suppose that the market
would begin to rise, and no ordinary business man who was not a speculator would
have thought that it was likely to do so. Buyers were refusing to come forward, being
of opinion that they would have to sen at a still lower price. The judge had the right
to come to the conclusion, as a jury, that ordinary business men (such as the plain -
tiffs), who were desirous of diminishing the loss, would have sold the maize at an
earlier date, and I cannot undertake to say that his finding was wrong. The appeal
and the cross-appeal therefore fail .
LOPES LJ: ... What are the plaintiff's rights? Ever since the case of Hochster v. De La
Tour (1852), 118 E.R. 922, it has been the rule that if a payor repudiates a contract and
the payee accepts his repudiation, the payee may bring an action. If no time has
been fixed for the fulfilment of the contract, the plaintiff is entitled to such damage
as he has sustained calculated at the date of the breach; if a time has been fixed for
fulfilment, the damages are the loss of the plaintiff calculated as at the date of fulfil-
ment. Here the breach was on July 24. The plaintiffs were bound to take reasonable
steps to mitigate the damages; and, if they could have sold the cargo at any time
previous to the date of fulfilment of the contract, or about the time of the breach, they
ought to have done so. The learned judge held that they might have sold, and that
they ought to have done so, about July 24. It is said for the plaintiffs that, though there
is that rule of law, there was no evidence upon which a judge or jury could hold that
it would have been prudent for the plaintiffs to sen. Of course, it is true that if the
plaintiffs had sold and the market had then risen, they might have been told that they
were wrong to sell; but I think that they were indiscreet in holding on when the market
was falling, and that they would have been wen advised if they had sold at an earlier
date. The learned judge has held that they did not act reasonably, and I am not prepared
to say that he was wrong. I think the amount of damages which he awarded was right.
RIGBY LJ: ... The only question, then, is as to the measure of damages. Now, taking
in its full effect in favour of the plaintiffs the rule laid down in Roper v. Johnson (1873),
L.R. 8 C.P. 167, it may be that prima facie, this being the breach of a contract to deliver
goods, the damages are to be assessed as at the agreed date of delivery. But here the
plaintiffs put an end to the contract at an earlier date. Judges have always held that
a person availing himself of his right to accept repudiation of a contract must take
measures to mitigate the damages which he has sustained by the breach. It is true
that by so doing he may take some risk upon himself, but the tribunal will take that
fact into consideration. In the present case there seems to be sufficient evidence
though it is not conclusive, to justify the learned judge in holding that the plaintiffs
ought to have sold tne cargo when they put an end to the contract by accepting the
defendants' repudiation. I gather that there was evidence that the market was falling,

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and that the state of things did not render a recovery of prices probable within a
reasonable time. I cannot accept the argument of Mr. Bigham [of counsel for the
plaintiffs] that it is sufficient to show that the plaintiffs acted to the best of their judg-
ment. The standard which one must use in these cases is the conduct of an ordinary
prudent man under similar circumstances. The result i s that both appeals must be
dismissed.

Appeal and cross-appeal dismissed.

[Only that part of the case dealing with the question of damages is reproduced.]

PROBLEMS

1. C bought a house w ith the assistance of her solicitor, D. A year later, a defect in the title
of the house came to light, and C sued D for negligence. D admitted the negligence, but on
the question of damages, claimed that C should have mitigated her loss by suing the vendor,
E. Advise C. See Pilkington v Wood, [1953] Ch 770.
2. P was employed as general manager of Q Company. He had an employment contract for
five years at $5,000 a year. After three years, Q Company went bankrupt and P was dismissed.
At this point, P bought certain goods from Q Company, and sold them to make $11,000 profit.
P now sues for damages for wrongful dismissal. Advise 0 Company. See Cockburn v Trusts &
Guarantee Co (1917), 55 SCR 264, 37 DLR 159.
3. Pharmacist B supplied tranquilizers instead of birth control pills to C, a married woman
with seven children. As a result, an unwelcome eighth child was born . B claims that C has suf-
fered no damages, or, alternatively, that she should have mitigated her loss either by abortion or
by giving the child up for adoption . Advise C. See Troppi v Scarf, 187 NW 2d 511 (Mich CA 1971).
4. F, who operated a ski resort, bought a ski lift from P. The lift proved defective, F lost all
his customers, and his business was ruined. He could not mitigate those losses because he had
no money to purchase another ski lift. Is P liable for the loss of the business? See Freedhoff v
Pomalift Industries Ltd, [1971] 2 OR 773 (CA); All-Up Consulting Enterprises Inc v Dalrymple,
2013 NSSC 46 at para 215.
5. A, in breach of contract, delivers defective goods to B, w ho has agreed to supply them
to C, an old customer. The contract between B and C contains a clause in fine print exempting
B from liability to C, and obliging C to pay for the goods even if defective. B buys sound goods
from another seller and delivers them to C. In B's action against A, A argues that B shou ld have
mitigated his loss by foisting the defective goods on C in accordance with B's strict rights. B
replies that he could not so treat an old and valued customer. Advise A. See James Finlay & Co
v NV Kwik Hoo Tong HM, [1929] 1 KB 400 .
6. B enters into an employment contract providing that if B's employment is terminated
w ithout cause, B w ill recei ve six months' notice or pay in lieu thereof. B's employment is ter-
minated w ithout cause, and B immediately finds alternative employment at the same salary. Is
B entitled to six months' pay7 See Bowes v Goss Power Products Ltd, 2012 ONCA 425 .

WHITE & CARTER (COUNCILS), LTD V MCGREGOR

[1962] AC 413 (HL (Scot))

LORD REID: My Lords, the pursuers supply to local authorities litter bins which are placed
in the streets. They are allowed to attach to these receptacles plates carrying adver-
tisement and they make their profit from payments made to them by the advertisers.
The defender carried on a garage in Clydebank and in 1954 he made an agreement

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 VI. MITIGATION OF LOSS

with the pursuers under which they displayed advertisements of his business on a
number of these bins. In June 1957, his sales manager made a further contract with
the pursuers for the display of these advertisements for a further period of three
years. The sales manager had been given no specific authority to make this contract
and when the defender heard of it later on the same day he at once wrote to the
pursuers to cancel the contract. The pursuers refused to accept this cancellation.
[The contract itself stated that it could not be cancelled by the advertiser.]
They prepared the necessary plates for attachment to the bins and exhibited them
on the bins fro~ Nov. 2, 1957, onwards.
[It was found by the Court of Session and the Sheriff Court that the appellants made
no effort to minimize their loss by procuring another advertiser to take up the
advertising space included in the contract.)
The defender refused to pay any sums due under the contract and the pursuers
raised the present action in the Sheriff Court craving payment of £196 4s., the full
sum due under the contract for the period of three years. After sundry procedure the
sheriff-substitute on Mar.15, 1960 dismissed the action. He held that the sales man-
ager's action in renewing the contract was within his apparent or ostensible authority
and that is not now disputed. The ground on which he dismissed the action was that
in the circumstances an action for implement of the contract was inappropriate. He
relied on the decision in Langford & Co., Ltd. v. Dutch, [1952] S.C. 15, and cannot be
criticised for having done so.
The pursuers appealed to the Court of Session and on Nov. 29, 1960, the Second
Division refused the appeal. The present appeal is taken against their interlocutor of
that date. That interlocutor sets out detailed findings of fact and, as this case began
in the Sheriff Court, we cannot look beyond those findings. The pursuers must show
that on those findings they are entitled to the remedy which they seek.
The case for the defender (now the respondent) is that, as he repudiated the
contract before anything had been done under it, the appellants were not entitled
to go on and carry out the contract and sue for the contract price: he maintains that
in the circumstances the appellants' only remedy was damages, and that, as they do
not sue for damages, this action was rightly dismissed.
The contract was for the display of advertisements for a period of 156 weeks from
the date when the display began. This date was not specified but admittedly the
display began on Nov. 2, 1957, which seems to have been the date when the former
contract came to an end. The payment stipulated was 2s. per week per plate together
with 5s. per annum per plate both payable annually in adYance, the first payment
being due seven days after the first display. The reason why the appellants sued for
the whole sum due for the three years is to be found in cl. 8 of the conditions:
8. In the event of an instalment or part thereof being due for payment, and remaining
unpaid for a period of four weeks or in the event of the advertiser being in any way in
breach of this contract then the whole amount due for the 156 weeks or such part of
the said 156 weeks as the advertiser shall not yet have paid shall immediately become
due _and payable.
A question was debated whether this clause provides a penalty or liquidated
damages but on the view which I take of the case it need not be pursued. The clause
merely provides for acceleration of payment of the stipulated price if the advertiser
fails to pay an instalment timeously. As the respondent maintained that he was not
bound by the contract he did not pay the first instalment within the time allowed.

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Accordingly, if the appellants were entitled to carry out their part of the contract
notwithstanding the respondent's repudiation, it was hardly disputed that this clause
entitled them to sue immediately for the whole price and not merely for the first
instalment.
The general rule cannot be in doubt. It was settled in Scotland at least as early as
1848 and it has been authoritatively stated time and again in both Scotland and
England. If one party to a contract repudiates it in the sense of making it clear to the
other party that he refuses or will refuse to carry out his part of the contract, the other
party, the innocent party, has an option. He may accept that repudiation and sue for
damages for breach of contract whether or not the time for performance has come;
or he may if he chooses disregard or refuse to accept it and then the contract remains
in full effect: ...
I need not refer to the numerous authorities. They are not disputed by the respond-
ent but he points out that in all of them the party who refused to accept the repudiation
had no active duties under the contract. The innocent party's opinion is generally
said to be to wait until the date of performance and then to claim damages estimated
as at that date. There is no case in which it is said that he may, in face of the repudi-
ation, go on and incur useless expense in performing the contract and then claim
the contract price. The option, it is argued, is merely as to the date as at which dam-
ages are to be assessed. Developing this argument, the respondent points out that
in most cases the innocent party cannot complete the contract himself without the
other party doing, allowing or accepting something and that it is purely fortuitous
that the appellants can do so in this case. In most cases by refusing co-operation the
party in breach can compel the innocent party to restrict his claim to damages. Then
it was said that even where the innocent party can complete the contract without
such co-operation it is against the public interest that he should be allowed to do so.
An example was developed in argument. A company might engage an expert to go
abroad and prepare an elaborate report and then repudiate the contract before
anything was done. To allow such an expert then to waste thousands of pounds in
preparing the report cannot be right if a much smaller sum of damages would give
him full compensation for his loss. It would merely enable the expert to extort a
settlement giving him far more than reasonable compensation.
The respondent founds on the decision of the First Division in Langford & Co.,
Ltd. v. Dutch. There an advertising contractor agreed to exhibit a film for a year. Four
days after this agreement was made the advertiser repudiated it but, as in the present
case, the contractor refused to accept the repudiation and proceeded to exhibit the
film and sue for the contract price. The sheriff-substitute dismissed the action as
irrelevant and his decision was affirmed on appeal. In the course of a short opinion
the Lord President (Lord Cooper) said:
It appears to me that, apart from who lly exceptional circumstances of which there is
no trace in the averments on this record, the law of Scotland does not afford to a person
in t he position of the pursuers the remedy whic h is here sought. The pursuers could
not force the defender to accept a year's advertisement wh ich she did not want, though
they could of course claim damages for her breach of contract. On the averments the
only reasonable and proper course, which the pursuers should have adopted, would
have been to treat the defender as having repudiated the contract and as being on that
account liable in damages, the measure of which we are, of course, not in a position to
discuss.

The Lord President cited no authority and I am in doubt what principle he had
in mind. In the earlier part of the passage which I have quoted he speaks of forcing

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 VI. MITIGATION OF LOSS

the defender to accept the advertisement. Of course, if it had been necessary for the
defender to do or accept anything before the contract could be completed by the pursu -
ers, the pursuers could not and the court would not have compelled the defender to
act, the contract would not have been completed, and the pursuers' only remedy
would have been damages. But the peculiarity in that case, as in the present case,
was that the pursuers could completely fulfil the contract without any co-operation
of the defender. The Lord President cannot have meant that because of non -
acceptance the .contract had not been completely carried out, because that in itself
would have been a complete answer to an action for the contract price. He went on
to say that the only reasonable and proper course which the pursuers should have
adopted would have been to treat the defender as having repudiated the contract,
which must, I think, mean to have accepted the repudiation. It is this reference to
"the only reasonable and proper course" which I find difficult to explain. It might be,
but it never has been the law that a person is only entitled to enforce his contractual
rights in a reasonable way and that a court will not support an attempt to enforce
them in an unreasonable way. One reason why that is not the law is no doubt
because it was thought that it would create too much uncertainty to require the court
to decide whether it is reasonable or equitable to allow a party to enforce his full
rights under a contract. The Lord President cannot have meant that. ...
Langford & Co. Ltd. v. Dutch is indistinguishable from the present case. Quite
properly the Second Division followed it in this case as a binding authority and did
not develop Lord Cooper's reasoning: they were not asked to send this case to a
larger court. We must now decide whether that case was rightly decided. In my
judgment it was not. It could only be supported on one or other of two grounds. It
might be said that, because in most cases the circumstances are such that an inno-
cent party is unable to complete the contract and earn the contract price without
the assent or co-operation of the other party, therefore in cases where he can do so
he should not be allowed to do so. I can see no justification.tor that.
The other ground would be that there is some general equitable principle or ele-
ment of public policy which requires this limitation of the contractual rights of the
innocent party. It may well be that, if it can be shown that a person has no legitimate
interest, financial or otherwise, in performing the contract rather than claiming
damages, he ought not to be allowed to saddle the other party with an additional
burden with no benefit to himself. If a party has no interest to enforce a stipulation
he cannot in general enforce it: so it might be said that if a party has no interest to
insist on a particular remedy he ought not to be aUowed to insist on it. And, just as
a party is not allowed to enforce a penalty, so he ought not to be allowed to penalise
the other party by taking one course when another is equally advantageous to him.
If I may revert to the example which I gave of a company engaging an expert to
prepare an elaborate report and then repudiating before anything was done, it might
be that the company could show that the expert had no substantial or legitimate
interest in carrying out the work rather than accepting damages. I would think that
the de minimis principle would apply in determining whether his interest was
substantial and that he might have a legitimate interest other than an immediate
financial interest. But if the expert had no such interest then that might be regarded
as a proper case for the exercise of the general equitable jurisdiction of the court.
But that is not this case. Here the respondent did not set out to prove that the appel-
lants had no legitimate interest in completing the contract and claiming the contract
price rather than claiming damages, there is nothing in the findings of fact to support
such a case, and it seems improbable that any such case could have been proved. It
is, in my judgment, impossible to say that the appellants should be deprived of their

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right to claim the contract price merely because the benefit to them as against claim -
ing damages and reletting their advertising space might be small in comparison
with the loss to the respondent: that is the most that could be said in favour of the
respondent. Parliament has on many occasions relieved parties from certain kinds
of improvident or oppressive contracts, but the common law can only do that in very
limited circumstances. Accordingly, I am unable to avoid the conclusion that this
appeal must be allowed and the case remitted so that decree can be pronounced as
craved in the initial writ.
LORD MORTON OF HENRYTON (dissenting): My Lords, the facts of this case have already
been fully stated. It is plain that the respondent (defender in the action) repudiated
the contract of June 26, 1957, immediately after his sales manager had entered into it
and some months before the time for performance of it by the appellants, and per-
sisted in his repudiation throughout. Notwithstanding this, the appellants proceeded
with the preparation of plates advertising the respondent's garage business and, as
the sheriff-substitute held, they "made no effort to procure another advertiser to take
up the advertising space included in said contract and thus minimise their loss.''
The plates were first exhibited on the litter bins on Nov. 2, 1957, and they remained
on display during the whole of the contract period of 156 weeks. The respondent
throughout made it clear that he did not want the advertisements and refused to pay
for them. The present action is brought to recover £196 4s., the full sum payable
under the contract. Alternatively, the appellants claim the same sum as liquidated
damages. The respondent contends that in the circumstances of the present case
the only remedy of the appellants was damages, to be assessed according to ordinary
principles.
My Lords, I think that this is a case of great importance, although the claim is for
a comparatively small sum. If the appellants are right, strange consequences follow
in any case in which, under a repudiated contract, services are to be performed by
the party who has not repudiated it, so long as he is able to perform these services
without the co-operation of the repudiating party. Many examples of such contracts
could be given. One, given in the course of the argument and already mentioned by
my noble and learned friend, Lord Reid, is the engagement of an expert to go abroad
and write a report on some subject for a substantial fee plus his expenses. If the
appellants succeed in the present case, it must follow that the expert is entitled to
incur the expense of going abroad, to write his unwanted report, and then to recover
the fee and expenses, even if the other party has plainly repudiated the contract
before any expense has been incurred.
It is well established that repudiation by one party does not put an end to a con -
tract. The other party can say "I hold you to your contract, which still remains in
force ." What, then, is his remedy if the repudiating party persists in his repudiation
and refuses to carry out his part of the contract? The contract has been broken. The
innocent party is entitled to be compensated by damages for any loss which he has
suffered by reason of the breach, and in a limited class of cases the court will decree
specific implement. The law of Scotland provides no other remedy for a breach of
contract, and there is no reported case which decides that the innocent party may
act as the appellants have acted. The present case is one in which specific implement
could not be decreed, since the only obligation of the respondent under the contract
was to pay a sum of money for services to be rendered by the appellants. Yet the
appellants are claiming a kind of inverted specific implement of the contract. They
first insist on performing their part of the contract, against the will of the other party,
and then claim that he must perform his part and pay the contract price for unwanted
services. In my opinion, my Lords, the appellants' only remedy was damages and

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 VI. MITIGATION OF LOSS

they were bound to take steps to minimise their loss, according to a well-established
rule of law. Far from doing this, having incurred no expense at the date of the repudi-
ation, they made no attempt to procure another advertiser, but deliberately went on
to incur expense and perform unwanted services with the intention of creating a
money debt which did not exist at the date of the repudiation.
The only cases cited in which a claim of the kind now put forward has been
considered are Langford & Co. Ltd. v. Dutch when it was rejected by the Court of Ses-
sion, and White & Carter (Councils) Ltd. [that is, the present appellants] v. A.R. Harding
(May 21, 1958; unreported). The latter case, is, I think, distinguishable from the pres-
ent case; but, if it cannot be distinguished, it was, in my opinion, wrongly decided
by the Court of Appeal. The former case is directly in point and was, in my opinion,
rightly decided, and rightly followed by the Court of Session in the present case.
The facts in Langford's case have been stated by my noble and learned friend,
Lord Reid. The Court of Session held that the law of Scotland did not "afford to a
person in the position of the pursuers the remedy which is here sought." These words
are quoted from the short opinion of the Lord President (Lord Cooper), and he
continued:
[T)he pursuers.could not force the defender to accept a year's advertisement which she
did not want, though they could of course claim damages for her breach of contract.
These two sentences embodied, I think the basis of the learned Lord President's
opinion, but he added:
On the averments the only reasonable and proper course, which the pursuers should
have adopted, would have been to treat the defender as having repudiated the contract
and as being on that account liable in damages the measure of which we are, of course,
not in a position to discuss .
. My Lords, I think that this last sentence was merely a comment on the behaviour
of the pursuers, which applies with equal force to the appellants in the present case.
The course of action followed by the appellants seems to me unreasonable and
oppressive, but it is not on that ground that I would reject their claim. I would reject
it for the reasons which I have already given ....
I would dismiss the appeal.
LORD KEITH OF AVONHOLM (dissenting) : ... The contract was to come into operation
on Nov. 2, 1957, when the previous contract expired. But it involved, in the absence
of other advertising matter supplied by the defender, the display by the appellants of
at least the name, business and address of the advertiser. I should hesitate to say that
any contractor was entitled to display these particulars of the defender against his
wish, even if the withholding of his assent be in breach of contract.
Some play was made by counsel for the appellants with an expression used by
Asquith L.J., in Howard v. Pickford Tool Co., Ltd., [19511 1 K.B. 417 at p. 421 that "[a]n
unaccepted repudiation is a thing writ in water ...."A graphic phrase or expression
has its uses even in a law report and can give force to a legal principle, but it must
be related to the circumstances in which it is used. Howard was a managing director
with a six years contract of service. He thought that the company with which he was
serving had shown by the conduct of its chairman that it no longer intended to be
bound by its agreement. He brought an action which, as amended, sought a declar-
ation that the company by so acting had repudiated the contract and excused the
plaintiff from further performance and his obligations under it. Evershed M.R., said
atp. 420:

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It is quite plain . . that if the conduct of one party to a contract amounts to a repudiation,
and the other party does not accept it as such but goes on performing his part of the
contract and affirms the contract, the alleged act of repudiation is wholly nugatory and
ineffective in law.

Asquith LJ. said:

An unaccepted repudiation is a thing writ in water and of no value to anybody: it confers
no legal rights of any sort or kind.

The declaration was held to be academic and the claim struck out. These observa-
tions must be read in the light of the facts which they relate. They were directed to
an alleged repudiation unaccepted by the man who said there was a repudiation
before any cause of action had arisen. At best the case was no more than one of an
intended repudiation, for performance was going on. The servant was still serving
and the employer was continuing to employ him. What the court was saying was
that the plaintiff had at that time no cause of action. But in the case of repudiation
of a contract when performance is tendered, or due to be given by the other party,
the repudiation cannot be said to be writ in water. It gives rise immediately to a cause
of action. This does not involve acceptance of the repudiation. There has been a
breach of contract which the complaining party denies the other had any right to
commit. I know of no authority for saying that the offended party can go quietly on
as if the contract still continued to be fully operative between both parties. He is put
to his remedy at the date of the breach. It has been said that when an anticipatory
repudiation is not treated as a cause of action the contract remains alive. It does until
the contract would become operative, when the repvdiation, if still maintained, then
becomes a cause of action and all pleas and defences then existing are available to
the respective parties.
The party complaining of the breach also has a duty to minimize the damage he
has suffered, which is a further reason for saying that after the date of breach he cannot
continue to carry on his part of an executory contract. A breach of a contract of
employment will serve to illustrate the nature of this duty. A person is engaged to
serve for a certain period, say three months, to commence at a future date. When
that date arrives the prospective employer wrongfully refuses to honour the engage-
ment. The servant is not entitled to see out the three months and then sue the
recalcitrant employer for three months' wages. He must take steps by seeking other
employment to minimize his loss. It is true, of course, that a servant cannot invoke
a contract to force himself on an unwilling master, any more than a master can
enforce the service of an unwilling servant. But if the appellants' contention is sound,
it is difficult to see why, by parity of reasoning, it should not apply to a person who
keeps himself free to perform the duties of his contract of service during the whole
period of the contract and is prevented from doing so by the refusal of the other
contracting party. Yet in Hochster v. De La Tour, from which the whole law about
anticipatory repudiation stems, Lord Campbell C.J., plainly indicated that if the
courier in that case, instead of accepting as he did the repudiation of his engagement
as a cause of action, before it was due to commence, had waited till the lapse of the
three months of the engagement he could not have sued as for a debt. The jury, he ·
said, would be entitled to look at all that might "increase or mitigate the loss of the
plaintiff down to the day of trial." There is no difference in this matter between the law
of England and the law of Scotland . ...
This brings me to Langford & Co. Ltd. v. Dutch. I took part in the judgment in this
case, though the only opinion delivered in the case was given by the Lord President
(Lord Cooper), with whom I and the other judges of the division concurred. The

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judgment was not a reserved judgment and the case was not, I think, so fully argued
as the case now before your Lordships. It is, if rightly decided, determinative of the
present appeal and is, so far as I am aware, the only other case in which the question
raised on this appeal has ever been considered . ... I have reconsidered the decision
in Langford & Co. Ltd. v. Dutch in the light of the further argument on this appeal. I
have come to the conclusion that it was rightly decided and that the Second Division
in the present case was bound to follow it. ...
[Lord Tucker agreed with Lord Hodson, whose decision is omitted, in allowing the
appeal. The opinion of Lord Keith is considerably cut.]

NOTE
White & Carter v McGregor was criticized by Goodhart in (1962) 78 LOR 263. Goodhart gives
the example of an order placed for the building of an expensive machine. and then immedi-
ately cancelled. If the law is that the seller can disregard the cancellation. build the machine
(now useless to the buyer) and claim the full price, it follows that the seller would be in the
position to demand a very large sum from the buyer as payment for the surrender of the right
to build the machine. Professor Goodhart points out that American authority almost unani-
mously holds that the innocent party to an anticipatory breach of contract must take reason-
able steps to mitigate his loss, and that the American Law lnstitute's Restatement of Contracts
is to this effect (s 388). Goodhart concludes: "In the present case there can be no question that
if the pursuers had sued the defender on the day when he gave notice of repudiation they
could have recovered as damages only the reasonable profits they would have made; it seems
odd that by deliberately doing something that was of no value to the defender they could
increase the damages he had to pay."

FINELLI V DEE
(1968), 67 DLR (2d) 393 (Ont CA)

LASKIN JA (orally): This case arises out of a written contract between the plaintiffs
and the male defendant, for the paving of the driveway at the defendants' home. The
contract was made on June 18, 1966, and while a price was fixed and other terms
included, it did not fix any particular time for the commencement or completion of
the work. It appears from the evidence that the parties agreed that the work would
not begin immediately because the defendant was then in no position to pay for it,
but that it would be performed sometime in October or about that time, in 1966.
There is evidence, which was accepted by the trial judge, that the defendant
telephoned the office of the plaintiffs, after the contract was made and before any
performance was contemplated, cancelling the contract, and that the plaintiff's sales
manager at the office who received the telephone call, agreed that it would be can-
celled. On or about November 1, 1966, when the defendants were away from home,
the plaintiffs carried out the contract and the defendants were confronted with the
completed work on their return to their premises in the evening. The plaintiffs sued
for the price of the work done under the contract but their claim was rejected by the
trial judge.
On appeal, a question was raised whether the cancellation of the contract
amounted to rescission or simply represented a repudiation by the defendant. Of
course, if there was rescission (and I should say that, notwithstanding the contrary
argument of the plaintiffs' counsel, rescission could be effected by oral agreement

113
CHAPTER 2 REMEDIES FOR BREAC H OF PROMISE

even though the contract in question was in writing), then there would be no basis
on which an action to enforce the provision as to price could be founded . If, on the
other hand, the cancellation amounted to repudiation, a question arises as to the
applicability of the principles canvassed by the House of Lords in White & Carter
(Councils), Ltd. v. McGregor, [1961] 3 All E.R. 1178. It was the view of the majority of
that Court that a repudiation by one party to a contract does not preclude the innocent
party from carrying out the contract and suing for the price, at least where this can
be done without the assent or cooperation of the party in breach. I am not, of course,
bound by this judgment, but, respecting as I do the considered opinion of the major-
ity, I must say that I am attracted by the reasons of the two dissenting members of
the Court. Repudiation is not something that calls for acceptance when there is no
question of rescission, but merely excuses the innocent party from performance and
leaves him free to sue for damages. But, even accepting the majority view in the
McGregor case, I should point out that it was a case in which the innocent party
could carry out the contract notwithstanding the repudiation, without the assent or
cooperation of the party in breach. This is not the situation here.
In the first place, it was necessary for the plaintiffs to enter upon the defendants'
land in order to perform; and without wishing to embark on any issue as to trespass,
the plaintiffs, in my view, were obliged to give previous intimation to the defendant
that they were prepared to do the work called for by the contract and proposed to do
it on a certain day. This, of course, was not done.
It follows that whether the cancellation amounts to rescission or merely to repudi-
ation by the defendant, the plaintiffs are not entitled to recover the contract price.
Accordingly, I would dismiss the appeal with costs and with a counsel fee of $25 to
the defendants.
Appeal dismissed.

NOTES AND QUESTIONS

1. In Hounslow London Borough Council v Twickenham Garden Developments Ltd, [1971]

1 Ch 233, the defe ndant, a bu ilding contractor, refused to leave the plaintiffs building site
and continued to work, despite the council's demand that he depart. The plaintiffs repudiation
was found to be in breach of contract, but the plaintiff sought an interim injunction to keep
the defendant off the site. The court, although holding that White & Carter v McGregor did not
apply, refused to grant the injunction on the basis that equity would not assist a breach of
contract.
2. C delivered some pictures to M to be cleaned . After M had begun work on the pictures,
C changed his mind and asked M to stop. M refused, completed cleaning the pictures, and
now sues C for the full price agreed . Advise C. Wou ld it make any difference if C's repudiation
was based on expert advice that cleaning the pictures would reduce their va lue on the art
market? Would M be liable in tor.t for that reduction in va lue? See Clark v Marsiglia, 43 Am Dec
670 (NYSC 1843).
3. In Asamera Oil Corp Ltd v Sea Oil & General Corp, [1979] 1 SCR 633, the defendant had
wrongfully failed to return shares in 1960. Th eir value then was 29¢ . They subsequently rose
to a va lue of $46.50, falling back by the time of the trial to $22.00 . The Supreme Court of
Canada held that damages were to be assessed at the date when, acting reasonably, the plain -
tiff could have purchased substitute shares. In the circumstances, this led to damages based
on a share value of $6.50. Estey J referred to White & Carter v McGregor as follows:

114
 VII. SPECIFIC PERFORMANCE

It is, of course, an eminently reasonable position to take if, as Lord Reid suggests in White &
Carter (Councils) Ltd. v. McGregor, [1962] A.C. 413, in the case of anticipatory breach, there
is a substantial and legitimate interest in looking to performance of a contractual obligation.
So a plaintiff who has agreed to purchase a particular piece of real estate, or a block of
shares which represent control of a company, or has entered into performance of his own
obligations, and where to discontinue performance might aggravate his losses, might well
have sustained the position that the issuance of a writ for specific performance would hold
in abeyance the obligation to avoid or reduce losses by acquisition of replacement property.
Yet, even in these cases, the action for performance must be instituted and carried on with
due diligence. This is but another application of the ordinary rule of mitigation which insists
that the injured party act reasonably in all of the circumstances . Where those circumstances
reveal a substantial and legitimate interest in seeking performance as opposed to damages,
then a plaintiff will be able to justify his inaction and on failing in his plea for specific per-
formance might .then recover losses which in other circumstances might be classified as
avoidable and thus unrecoverable; but such is not the case here.

See also McCamus at 926-31; MacDougall at 361-67; Waddams at paras 769-70.

VII. SPECIFIC PERFORMANCE

In the preceding sections, the remedy awarded by the courts usually resulted in the payment
of money damages. It was not an "order" to pay a particular sum promised in a contract,
although in some cases, of course, the award may have been calculated by direct reference to
such a sum . The successful litigant "recovered " damages. If the defendant failed to pay the
damages the state's long arm could reach out and seize his property (if any) to be sold to raise
the amount. Generally speaking, this was the extent of the remedy and its sanction in the com-
mon law courts .
However, along with the development of the "law" in the common law courts, there also
developed a supplementary system commonly called "equity." If an aggrieved party wanted to
have her expectation interest more specifically satisfied, if she wanted to have the promise
actually performed, she could turn to equity. Equity was administered by the Court of Chancery.
Generally speaking, its remedies were available when it considered the remedies of the common
law inadequate. The Chancery Court commonly ordered specific performance of contracts for
the sa le of land on the theory that any land is unique and no amount of damages could com-
pensate for its loss, but in Semelhago v Paramadevan, [1996] 2 SCR 415, it was held that specific
performance was only available where land was unique, and where damages were inadequate.
Equitable orders can be enforced by imprisonment for contempt of court. Today in most
jurisdictions the two systems have been merged by merging the courts and providing that
where the rules of law and equity conflict, the rules of equity prevail.

Stewart v Kennedy. (1890), 15 App Cas 75 (HL (Scot)). LORD WATSON: I do not think
that upon this matter any assistance can be derived from English decisions; because
the laws of the two countries regard the right to specific performance from different
standpoints. In England the only legal right arising from a breach of contract is a
claim of damages; specific performance is not a matter of legal right, but a purely
equitable remedy, which the Court can withhold when there are sufficient reasons
of conscience or expediency against it. But in Scotland the breach of a contract for
the sale of a specific subject such as landed estate, gives the party aggrieved the 1ega1
right to sue for implement, and, although he may elect to do so, he cannot be com-
peUed to resort to the alternative of an action of damages unless implement is shewn

115
CHAPTER 2 REMEDI ES FOR BREACH OF PROMISE

to be impossible, in which case, loco facti imprestabi/is subit damnum et interesse.

Even where implement is possible, I do not doubt that the Court of Session has
inherent power to refuse the legal remedy upon equitable grounds, although I know
of no instance in which it has done so. It is quite conceivable that circumstances
might occur, which would make it inconvenient and injust to enforce specific per-
formance of a contract of sale; but I do not think that any such case is presented in
this appeal. The fact that the construction of a term in the contract is attended with
doubt and difficulty, evidenced it may be by the different meanings attributed to it
by Courts or individual judges, ought not, in my opinion, to prevent its receiving its
full legal effect, according to the interpretation finally put upon it by a competent
tribunal. The argument that, in this case, a decree for specific performance would
necessarily impose upon the appellant the duty of performing a long series of per-
sonal acts under the supervision of the court does not appear to me to have a solid
basis in fact. The acts which· such a decree enjoins would be entirely within his
power, and practically might be performed uno flatu, viz., by his signing a conveyance
in favour of the respondent, and at the same time giving instructions to his agents
to take the necessary steps for obtaining its approval by the Court.

CIVIL CODE OF QUEBEC

LRO, c C-1991

1601. A creditor may, in cases which admit of it, demand that the debtor be forced
to make specific performance of the obligation.

FALCKE V GRAY
(1859), 29 LJ Ch 28

[In a suit for specific performance of a contract giving Mr. Falcke the option of
purchasing two valuable china jars, it appeared that Mr. Falcke had rented a house
from Mrs. Gray and had accepted an option to buy some furniture including what
Mr. Falcke's counsel described as "a couple of large Oriental jars, with great ugly Chinese
pictures upon them." The jars were valued by agreement at £40. Later, Mrs. Gray was
offered £200 by Messrs. Watson, to whom she promptly sold them. Mrs. Gray stated
the jars were left her by a lady who had been offered £100 for them by King George IV.
Mr. Falcke was a dealer in the same trade as Messrs. Watson and should have known
the actual value of the jars.]
KINDERSLEY VC: The defendants insist, in the first place, that this bill cannot be main-
tained on the ground that the plaintiff can have no right to the specific performance
of a contract relating solely to chattels. On this question, my opinion is entirely in
favour of the plaintiff, that the C::ourt will not refuse such relief. In the eye of this
Court, there is no difference between real and personal estate in the performance of
a contract; and a contract for one stands in no position different from a contract for
the other. The principle upon which this Court decrees specific performance, as
enunciated by Lord Redesdale, in Harnett v. Yielding, 2 Sch. & Lef. 549, is, that a Court
of laws deals with the contract, and gives such a decree as it is competent to give in
consequence of non-performance-that is, by giving compensation in the shape of
damages for the non-performance. But a Court of equity says that it is not enough;
and in many cases the mere remuneration and compensation in damages is not

116
 VII. SPECIFIC PERFORMANCE

sufficient satisfaction. Apply that principle to chattels-and why is it less applicable

to them than to real estate? In ordinary contracts, as for the purchase of ordinary
articles of use and consumption, such as coals, corn or consols, this Court will not
decree specific performance. And why? Because you have only to go into the market
and buy another equally good article, and so you can get your compensation. It is
not because it is a chattel, but because you can get adequate compensation for it.
Now, here these articles are of unusual distinction and curiosity, if not unique; and
it is altogether doubtful what price they will fetch. I am of opinion, therefore, that this
is a contract which this Court can enforce; and if the case stood alone upon that
ground I would decree specific performance ....
[The bi\\ was dismissed on another ground, and part of the judgment of the vice-
chance\\or is omitted.]

Carter v Long & Bisby. (1896), 26 SCR 430. STRONG CJ: Although not ordinarily
interfering in the case of chattels, courts of equity would always take jurisdiction in
two cases viz., where the chattel was of particular value so that damages would be
no adequate compensation .... The other ground was where a fiduciary relationship
existed between the parties; there, irrespective altogether of the nature and value of
the property, the jurisdiction of equity could always be invoked for the protection
of the cestui que trust.

COHEN V ROCHE
[1927) 1 KB 169

[At an auction sale, Hepplewhite chairs (lot 145), which belonged to the auctioneer
himself, the defendant, were knocked down to the plaintiff. After the sale the auc-
tioneer refused to hand over the chairs to the plaintiff. Thereupon the plaintiff
brought an action against the defendant in which he claimed for the delivery up of
the chairs and alternatively damages for alleged breach of 9ontract.J
McCARDIE J: ... I now take the final point in the case. The plaintiff sued in detinue
only. The writ and statement of claim contain no alternative demand for damages
for breach of contract. They ask (a) for delivery up of the chairs or payment of their
value, and (b) damages· for detention. I have however allowed an amendment
whereby the statement of claim asks damages for breach of contract. The plaintiff
vigorously contends that he is entitled as of right, once a binding contract is estab-
lished, to an order for the actual delivery of the chairs, and that he is not limited to
damages for breach of bargain. This point raises a question of principle and practice.
Here I may again state one or two of the facts . The Hepplewhite chairs in lot 145
possessed no special feature at al\. They were ordinary Hepplewhite furniture. The
plaintiff bought them in the ordinary way of his trade for the purpose of ordinary
resale at a profit. He had no special customer in view. The lot was to become a part
of his usual trade stock.
The form of order in detinue cases for the delivery of goods is, in substance, this:
"It is this day adjudged that the plaintiff do have a return of the chattels in the state-
ment of claim mentioned and described (here set out description) or recover against
the defendant their value (here set out value) ... and damages for their detention." ...
By order XLVIII., r. 1, however, the Court has power to direct that execution shall issue
for the delivery of the goods without giving to the defendant the option to retain the

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

property upon payment of the assessed value. Now in the case before me, the plaintiff
desires to secure a warrant for the compulsory and specific delivery of the chairs
to him . ...
But at this point there arise other considerations. In Chinery v. Viall (1860), 5 H. & N.
288, it'was laid down that as between buyer and seller the buyer cannot recover larger
damages by suing in tort instead of contract. ... Bearing Chinery v. Viall in mind, it is
necessary to mention next s. 52 of the Sale of Goods Act, 1893, which provides that
in any action for breach of contract to deliver specific or ascertained goods the Court
may, if it thinks fit, on the application of the plaintiff, direct by its judgment that the ·
contract shall be performed specifically without giving the defendant the option of
retaining the goods on payment of damages. It has been held that s. 52 applies to all
cases where the goods are ascertained, whether the property therein has passed to
the buyer or not: see Parker J. in Jones v. Earl of Tankerville, [1909] 2 Ch. 440, 445. It
seems clear that the discretionary provisions of s. 52 cannot be consistent with an
absolute right of a plaintiff to an order for compulsory delivery under a detinue
judgment in such a case as the present. How, then, does the law stand as to detinue?
In my view the power of the Court in an action of detinue rests upon a footing which
fully accords withs. 52 of the Sale of Goods Act, 1893. In Whitely, Ltd. v. Hilt, [1919] 2
K.B. 808, 819 (an action of detinue), Swinfen Eady, M.R. said: "The power vested in
the Court to order the delivery up of a particular chattel is discretionary, and ought
not to be exercised when the chattel is an ordinary article of commerce and of no
special value or interest, and not alleged to be of any special value to the plaintiff,
and where damages would fully compensate." In equity, where a plaintiff alleged and
proved the money value of the chattel, it was not the practice of the Court to order
its specific delivery: see Dowling v. Betjemann (1862), 2 J . & H. 544. The law is thus, I
am glad to find, consistent in its several parts. In the present case the goods in ques-
tion were ordinary articles of commerce and of no special value or interest and no
grounds exist for any special order for delivery. The judgment should be limited to
damages for breach of contract. The plaintiff in his evidence said that the chairs were
worth from £70 to £80. With this I agree. I assess the damages at the sum of £15.
For the reasons given I therefore enter judgment for the plaintiff for £15 damages
for breach of contract ...
[The statement of facts is abridged, and part of the judgment of McCardie J dealing
with the Statute of Frauds is omitted. Section 50 of the Sale of Goods Act, RSO 1990,
c S.1 is substantially the same as s 52 of the English Act, which has been adopted in
all the common law provinces of Canada.]

QUESTION
Suppose the plaintiff buyer in Cohen v Roche had agreed to sell the chairs to someone else at
a specially lucrative price, which, naturally enough, she had not mentioned to the defendant
seller. Should specific performance be granted to enable the plaintiff to take advantage of the
contract at no extra expense to the defendant where the advantage might not be accounted
for in calculating damages'

118
 VII. SPECIFIC PERFORMANCE

SKY PETROLEUM LTD V VIP PETROLEUM LTD

[1974] 1 WLR 576 {Ch)

[The plaintiffs had entered into a contract with the defendants to purchase from the
defendants, at fixed prices, their entire requirements of motor gasoline and diesel
fuel for the plaintiffs' filling stations, with a minimum annual quantity being stipu-
lated. At a time when the supply of petroleum was restricted and the plaintiffs had
no prospect of finding an alternative source of supply, the defendants purported to
terminate the contract on the ground that the plaintiffs had exceeded the credit
provisions in the contract.]
GOULDING J: This is a motion for an injunction brought by the plaintiff company,
Sky Petroleum Ltd., as buyer under a contract dated March 11, 1970, made between
the defendant company, V.I.P. Petroleum Ltd., as seller of the one part and the plain-
tiffs of the other part. That contract was to operate for a period of ten years, subject
to certain qualifications, and thereafter on an annual basis unless terminated by
either party giving to the other not less than three months' written notice to that
effect. It was a contract at fixed prices, subject to certain provisions which I need not
now mention. Further, the contract obliged the plaintiffs-and this is an important
point-to take their entire requirement of motor gasoline and diesel fuel under the
contract, with certain stipulated minimum yearly quantities. After the making of the ·
agreement, it is common knowledge that the terms of trade in the market for pet-
roleum and its different products changed very considerably, and I have little doubt
that the contract is now disadvantageous to the defendants. After a long correspond-
ence, the defendants, by telegrams dated November 15 and 16, 1973, have purported
to terminate the contract under a clause therein providing for termination by the
defendants if the plaintiffs fail to conform with any of the terms of the bargain. What
is alleged is that the plaintiffs have exceeded the credit provisions of the contract
and have persistently been, and now are, indebted to the defendants in larger
amounts than were provided for. So far as that dispute relates, as for the purposes of
this motion it must, to the date of the purported termination of the contract, it is
impossible for me to decide it on the affidavit evidence. It involves not only a ques-
tion of construction of the contract, but also certain disputes on subsequent arrange-
ments between the parties and on figures in account. I cannot decide it on motion,
and the less I say about it the better.
What I have to decide is whether any injunction should be granted to protect the
plaintiffs in the meantime. There is trade evidence that the plaintiffs have no great
prospect of finding any alternative source of supply for the filling stations which
constitute their business. The defendants have indicated their willingness to continue
to supply the plaintiffs, but only at prices which, according to the plaintiffs' evidence,
would not be serious prices from a commercial point of view. There is, in my judg-
ment, so far as I can make out on the evidence before me, a serious danger that
unless the court interferes at this stage the plaintiffs will be forced out of business.
In those circumstances, unless there is some specific reason which debars me from
doing so, I should be disposed to grant an injunction to restore the former position
under the contract until the rights and wrongs of the parties can be fully tried out.
.It is submitted for the defendants that I ought not to do so for a number of reasons.
It is said that, on the facts, the defendants were entitled to terminate and the plaintiffs
were in the wrong. That, of course, is the very question in the action, and I have
already expressed my inability to resolve it even provisionally on the evidence now
before me. Then it is said that there are questions between the parties as to arrange-
ments subsequent to the making of the contract, in particular regarding the price to

119
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

be paid, and that they give rise to uncertainties which would make it difficult to
enforce any order made by way of interlocutory relief. I do not think I ought to be
deterred by that consideration, though I can see it has some force. In fact, during
September and October, to go no further back, the defendants have gone on sup-
plying and the plaintiffs have gone on paying. There has been nothing apparently
impracticable in the contract, although the defendants say, of course, that the
plaintiffs have not been paying large enough sums quickly enough.
Now I come to the most serious hurdle in the way of the plaintiffs which is the
well known doctrine that the court refuses specific performance of a contract to sell
and purchase chattels not specific or ascertained. That is a well-established and
salutary rule, and I am entirely unconvinced by Mr. Christie, for the plaintiffs, when
he tells me that an injunction in the form sought by him would not be specific
enforcement at all. The matter is one of substance and not of form, and it is, in my
judgment, quite plain that I am, for the time being, specifically enforcing the contract
if I grant an injunction. However, the ratio behind the rule is, as I believe, that under
the ordinary contract for the sale of non-specific goods, damages are a sufficient
remedy. That, to my mind, is lacking in the circumstances of the present case. The
evidence suggests, and indeed it is common knowledge that the petroleum market
is in an unusual state in which a would-be buyer cannot go out into the market and
contract with another seller, possibly at some sacrifice as to price. Here, the defend-
. ants appear for practical purposes to be the plaintiffs' sole means of keeping their
business going, and I am prepared so far to depart from the general rule as to try to
preserve the position under the contract until a later date. I therefore propose to grant
an injunction.
Dealing first with its duration, it will restrain the defendants (in terms I will come ·
to in a moment) until judgment in the action or further order, but not in any event
beyond June 30, 1974, without further order of the court. I say that because of a
provision in the contract which requires further steps to be taken in relation to the
price of supply after that date. The terms which I suggest must, with certain qualifica -
tions, follow the notice of motion. If counsel are able to arrive at something more
convenient and easier to enforce, they may mention the matter to me at an early
date and the wording can be reconsidered, but for the moment I will order that the
defendants by themselves, or their servants or agents, in the usual form be restrained
from withholding supplies of "motor gasoline and DERV" from the plaintiffs in
accordance with the terms of the contract dated March 11, 1970, and such other
arrangements, if any, as were agreed between the parties before the issue of the writ
in this action. There will be a proviso that the plaintiffs are not to require delivery of
more than a specified number of gallons in any one month, and that number is to
be ascertained by taking the arithmetical mean of the three months of supply, Aug-
ust, September, and October. That will, I hope, prevent any abuse of the injunction
by the plaintiffs.
I would be sympathetic to any application by the defendants for the provision of
security in some particular sum and form. I do not know whether the plaintiffs can
make any specific offer in that respect, or whether the best thing is that all the details
should be considered by counsel.
Order accordingly.

Behnke v Bede Shipping Co, Ltd. [1927] 1 KB 649. An action for specific performance
of a contract for the sale of a ship. WRIGHT J: In the present case .there is evidence
that the City was of peculiar and practically unique value to the plaintiff. She was a

120
 VII. SPECIFIC PERFORMANC E

cheap vessel, being sold, having been built in 1892, but her engines and boilers were
practically new and such as to satisfy the German regulations, and hence the plaintiff
could, as a German shipowner, have her at once put on the German register. A very
experienced ship valuer has said that he knew of only one other comparable ship,
but that may now have been sold. The plaintiff wants the ship for immediate use, and
I do not think damages would be an adequate compensation. I think he is entitled
to the ship and a decree of specific performance in order that justice may be done.
[It had been contended that the plaintiff had the option of inspecting the vessel and
of requiring the sellers to repair any damages found and because the court would
not order performance of a contract to do work the option constituted a bar to spe-
cific relief. Wright J rejected the contention. The sellers were not dry dock owners
nor ship-repairers and anyway the plaintiff might not require ·the inspection.]

GILBERT V BARRON
(1958), 13 DLR (2d) 262 (Ont HC)

WILSON J: ... The company, Amerwood (Eastern) Canada Ltd., is incorporated as a

public company under the Ontario Companies Act by letters patent of this Province
·d ated October 26, 1948. Under agreement with an American company it manufac-
tures and sells a plywood product known as Amerwood, and since 1954 it also
manufactures and distributes another product known as Cellotex. The dispute in
this action arises out of a struggle for control of the ownership of the shares of the
Ontario company, hereinafter called Amerwood.
The plaintiff MacDonald, a successful salesman who resides in the City of Toronto,
is responsible for the organization of Amerwood. He sold much treasury stock at
Owen Sound, where the company, when organized, carried on its manufacturing
operations. As was natural, he became one of the principal shareholders. The other
two principal shareholders were one Parkes and the plaintiff Gilbert, an investment
broker of many years' standing, who resides in Toronto. Gilbert became a shareholder
in 1948, and at the annual meeting in February 1950 he was elected a director. In
June 1954 h e was elected president, an office he held until he was succeeded by
Barron in 1956 in the circumstances hereinafter related. Shortly after his election as
a director in 1948, he and Parkes, who was the general manager of the company
from its inception until his resignation and retirement on account of ill- health on
January 1, 1954, and MacDonald, who was a director and vice-president from the
organization of the company until the annual meeting in 1957, entered into an
agreement with the object of holding and preservi~g among the three of them stock
control of the company. The terms of this agreement were that if any one of the three
should purchase shares in the company, he would offer one-third to each of the
other two at cost price. The agreement did not necessarily require the two sharehold-
ers to take up the offer but at least they had this right to purchase. This agreement
· was acted upon when Parkes' son sold his shares to his father. Gilbert and Macdonald
agreed that they should be sold to Parkes Sr. because the quantity of shares made no
real difference as to the balance of control.
Early in 1953 Parkes became ill, and subsequent to his resignation in January 1954,
he died. In January 1954, before his resignation, he sold most of his shares to the
defendant Barron, with the approval of Gilbert and MacDonald, after Barron agreed
to the same arrangement with respect to the acquisition of future shares as had
existed among Parkes, Gilbert and MacDonald. This agreement was made before
Barron acquired his shares. The exact date of the agreement is not of great importance.

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

I am satisfied it was made before Barron acquired Parkes' shares. Moreover, as appears
later, the agreement was acted upon, and, later again, acknowledged on a Sunday in
February 1955 at a meeting, at which Barron, MacDonald and Gilbert were present
in Barron's office at Port Credit. I find that Barron acted upon the agreement when
he purchased in December 1954 the shares which were known a!> the 500 Russell
shares. This number did not lend itself to an even division, and after negotiation
among .t he three they were divided 150 shares to each of Gilbert, MacDonald and
Barron and 50 shares to a member of the staff, Miss Dorothy Gilbank.
By February 1956, without the knowledge of his two fellow shareholders Gilbert
and MacDonald, Barron had decided to secure control of the company. He purchased
options to buy enough shares to give him voting control of the company and at the
annual meeting he had enough proxies and shares in his name to give him voting
control of it. After the meeting he took up the options thus acquiring stock control.
Gilbert and MacDonald learned of this control just before the annual meeting and
in due course made demands upon Barron for their shares in accordance with the
agreement among them. These demands were not replied to, and on February 8,
1957, this action was commenced. In the interval between this annual meeting and
the commencement of the action the plaintiffs were acting upon legal ad.vice . ...
[After considering and rejecting three defences, (1) a denial of the agreement, (2) no
consideration, and (3) the Statute of Frauds, Wilson J continued:]
The plaintiffs are entitled to specific performance of the agreement in respect of
all shares claimed by them. He must tender one-third-that is to say, 816 common
and 816 preferred - to each of the plaintiffs who will, upon such tender, pay for them
in accordance with the agreement.
The plaintiffs also ask an injunction restraining the defendants from voting the
shares to which they are entitled, and from selling, pledging or transferring them.
They will have judgment for this relief (directly and indirectly) in respect of Barron.
He has apparently placed the shares in the name of Port Credit Lumber Co., of which
he has voting share control. However, it is quite apparent that Barron was only using
this company as well as his co-defendants as his agent to break the agreement with
the plaintiffs. In any event, Barron has not pleaded that it is impossible for him to
· comply with the contract.
The plaintiffs also ask damages. To this they are entitled as against Barron. No
evidence was adduced to prove the amount of damages suffered. I should think there
would be some at least loss of salary as directors, but I am unable to conclude there was
more. I think the sum of $200 to each of the plaintiffs as nominal damages would
suffice. These are the directors' fees they appear to have lost. In other circumstances,
even though the task seems an impossible one from the practical point of view, the
damages could be assessed at a much higher figure.
In addition to the costs already dealt with, the plaintiffs will have their costs of the
action against the defendant Barron, which includes the costs they have incurred
against the other defendants.
[See also Waddams at para 681.l

122
 VII. SPECIFIC PERFORMANC E

TANENBAUM V WJ BELL PAPER CO LTD

(1956). 4 DLR (2d) 177 (O nt H Ct J)

[W.J . Bell Paper Co. Ltd., in October 1951, purchased a parcel of land, marked parcel
"A" on th e sketch, from one Tanenbaum, as a site for its new head office and plant.
Tanenbaum retained th e parcel "C" on the sketch, and the contract of sale contained
a promise by Bell Paper that it would construct "a roadway not less th an twenty-eight
feet in width, similar to th at at present constructed on Wicksteed Avenue" along the
western boundary of parcel "A," and that Tanenbaum should have a right o.f way over
it. Bell Paper also agreed to install sewer and water pipes of unspecified size along
the new road to provide service for parcel "C," which was to be used for "industrial
operations.'' Wicksteed Avenue, a street built by the Town of Leaside, is 28 feet wide,
without sidewalks. It had an 8-inch Portland cement base with 21/2 inches of asphalt
"hot-mix" top. The surface was 26 feet wide and on each side were 12-inch brick
gutters and concrete curbs. After some delay Bell Paper actually constructed a road
with an 8-inch crushed stone base and with i1h to 3 inches of asphalt, hot or cold
mix, on top, with no gutters or curbing. The road was finished in May 1953, at a cost
of about $25,000. Bell Paper also installed a 2-inch water main from its own plant to
the northern limits of parcel "C." The road proved troublesome and in this action for
specific performance and damages the court interpreted the contract as calling for
a road like Wicksteed Avenue, with a concrete base and gutters and curbs, and a
water main at least 6 inches in diameter.]

WICKSTEED AVEN UE

- ----- -

SITE OF ;IJ
PROPOSED }>

LAND OF I BUILDING FOR <

W. J. BELL
HUG H RUSSELL "
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0 PAPER CO. LTD. z
AND SONS LTD.
"
0
Vl
rn

rn I
0 l ______ .J
;IJ
0
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0

PARCEL •A" (8.251 acres)

PARCEL "C" (2.466 acres)

---
R Av I N__E_I
1
______ _ _______ _
DIAGRAMMATIC ONLY ----

123
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

GALE J: ... The defendant must, therefore, be held accountable for the breach of
contract. The plaintiff asks for specific performance of the covenants but the defend-
ant urges that such relief would be inappropriate and too drastic in the circumstances
of this case. ·
Generally the Court will not order a contract to build or to repair to be specifically
performed. But an exception to that rule is now recognized and it is my understand-
ing of the authorities that specific performance ought to be decreed where a person
undertakes accommodation works on lands possessed by him in consideration for
obtaining.those lands or in consideration of the purchase-price of other lands sold
by him, if the particulars of the work are sufficiently clear and defined and the Court
comes to the conclusion that damages will not provide an adequate remedy for the
breach of the contract. ...
' That the Court will enforce building contracts in certain circumstances was firmly
established in Wolverhampton Corp. v. Emmons, [1901] 1 KB. 515. That was a decision
of the English Court of Appeal and may wen be regarded as the leading modern
authority on the subject. In pursuance of a scheme of improvement the plaintiffs,
an urban sanitary authority, conveyed to the defendant some lands abutting on a
street. The defendant covenanted that he would erect buildings thereon within a
certain time. Subsequently the nature and particulars of the houses to be erected were
agreed upon, but the defendant failed to fulfil his covenant to build. The plaintiffs
thereupon brought the action and were held entitled to a decree of specific perform-
ance. That was not a case involving a railway company. Romer L.J. at pp. 524-5
describes the exception to which I have alluded as follows :
There is no doubt that as a general rule the Court will not enforce specific performance
of a building contract, but an exception from the rule has been recognised. It has, I
think, for some time been held that, in order to bring himself within that exception, a
plaintiff must establish three things. The first is that the building work, of which he seeks
to enforce the performance, is defined by the contract; that is to say, that the particulars
of the work are so far definitely ascertained that the Court can sufficiently see what is
the exact nature of the work of which it is asked to order the performance. The second
is that the plaintiff has a substantial interest in having the contract performed, which is
of such a nature that he cannot adequately be compensated for breach of the contract
by damages. The third is that the defendant has by the contract obtained possession of
land on which the work is contracted to be done.
The exception so defined by Romer L.J. was considered and expanded somewhat
by Farwell J., as he then was, in Carpenters Estates Ltd. v. Davies, [1940] Ch. 160. In
that case the defendant sold certain land to the plaintiffs for building development ·
and agreed to install roads, mains, sewers and drains on other lands retained by her.
The covenant having been broken, the plaintiffs succeeded in an action for specific
performance. After setting out, inter alia, the passage in the Emmons case which I have
quoted above, Farwell J . seemed to express himself as being of the view that if the
conditions as to clarity and inadequacy of damages were present, the plaintiff would
be entitled to succeed on his quest for a decree by showing merely that the defendant
was in possession of the lands upon which the work was to have been done, and the
exception may now perhaps be regarded as being as broad as that. I do not have to
settle that question here.
It may be that the learned Judge did not intend to carry the extension of the
exception so far because later in his judgment he said at p. 165: "The defendant has
contracted to do the work on her own land in consideration of the purchase price
of other land belonging to her, and if the other two conditions are fulfilled, I am

124
 VII. SPECIFIC PERFORMANCE

unable to see why the Court should be debarred from granting relief by way of specific
performance." He was not, however, prepared to accept as being completely exhaust-
ive the statement of Romer L.J. and for the moment, therefore, I prefer to express the
exception to the general rule as I have done.
Perhaps it is scarcely necessary to add that the exception which I have outlined
has been worked into the fabric of the law of Canada. It was acknowledged and
applied by two of the three Judges in Colton v. Rook/edge (1872), 19 Gr. 121, and was
reasserted by Idington J. in one of the judgments of the Supreme Court of Canada
in Gross v. Wright, [1923] 2 D.L.R. 171, S.C.R. 214. In the latter case the litigants entered
into a party-wall agreement under which the defendant was to build a wall 2 ft. or
more in thickness with its middle line to coincide with the boundary-line. The wall
erected by the defendant complied with the agreement to the level of the second
storey but was narrowed from there up on the defendant's side, while remaining
perpendicular on the plaintiff's side. The latter discovered this situation some years
after the wall · formed part of the defendant's building and sued for a mandatory
injunction to compel the latter to pull down that which had been erected and for
specific performance of the agreement. The majority of the Court granted a manda -
tory injunction on the theory that having obtained a licence to enter on the land for
a particular purpose and having breached that licence, the defendant was commit-
ting a trespass. However, Idington J. expressly awarded the decree which was sought
on the ground that the court had jurisdiction to grant specific performance of the
-agreement itself. Indeed at p. 176 D.L.R., p. 219 S.C.R., he stated that in his opinion
specific performance was the only appropriate remedy in the circumstances and
certainly the other members of the court did not take the position that the relief being
ordered could not have been based on the claim for specific performance of the
contract between the parties.
Here the defendant argues that specific performance is not available to the plaintiff,
firstly because the terms of the agreement, ex. 1, as to the road and watermain are not
sufficiently explicit; secondly, because the plaintiff can be appropriately compen-
sated in damages if those works do not comply with the provisions of the agreement;
and lastly, because the plaintiff has had some performance from the defendant.
As already indicated, I am of the opinion that the road and watermain which
were to have been installed by the defendant were sufficiently described by the
contract and that the defendant failed to fulfil its obligations in that respect. It is
very difficult, if not impossible, to set down a general formula as to what degree of
certai.n ty is required in a contract before the Court will enforce its performance, so
much depends upon the facts of each case. But I think it may be said with confidence
that the certainty which is essential must be a reasonable one, having regard to the
nature and subject-matter of the undertaking and the attendant conditions under
which and with regard to which it was entered into. The authorities on this point
substantiate such a conclusion ....
All the defendant had to do here was to have copied the essential elements of a
named street and to have installed a main which, in view of what must have been
in the minds of the parties, would be at least 6 ins. in diameter. There was no room
for doubt as to what was to be done and accordingly I hold that the plaintiff is not to
be denied his decree by reason of any suggestion of uncertainty or ambiguity as
to the nature of the work.
Probably the most serious objection to the granting of specific performance
comes from the submission that if the road and watermain do not meet the terms
of the agreement, the plaintiff can be properly and sufficiently compensated in
damages. Let me say at once, however, that it is my view that such relief, even if

125
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

capable of being calculated, would be quite inadequate to atone for the inadequacy
of the watermain. As long as that pipe remains its sole source of water, parcel "C"
cannot be put to its full use and certainly its potential sale value cannot be· realized.
I suspect that counsel for the defendant was aware of the hopelessness of his argu -
ments that a pecuniary award could counterbalance the lack of a suitable main,
because, while stoutly resisting all efforts to have the road replaced, he conceded
that the installation of a new watermain would not be a very.serious matter.
The question whether damages ought to be substituted for performance with
respect to the road has not been easy to decide but here again I do not subscribe to
the idea that an award of damages would give the proper relief. It would be futile to
attempt to lay down a general rule as to when damages will be ordered in lieu of
enforcing performance ....
The best statement on the subject that I have been able to find appears in Williston
on Contracts, rev. ed., vol. 5, s. 1423, pp. 3976-7, where this appears:

In contracts other than those ordinarily designated as contracts of service, it is generally

true so far as affirmative relief is concerned, that "Equity will not award specific per-
formance where the duty to be enforced is continuous and reaches over a long period
of time, requiring constant supervision by the court." Therefore, "There is no doubt that
as a general rule the Court will not enforce specific performance of a building contract."
. The basis of equity's disinclination to enforce building contracts specifically is the dif-
ficulty of enforcing a decree without an expenditure of effort disproportionate to the
value of the result. But where the inadequacy of damages is great, and the difficulties
not extreme, specific performance will be granted and the tendency in modern times
has been increasingly towards granting relief, where under the particular circumstances
of the case damages are not an adequate remedy.
In this instance certainly the difficulties which would follow a decree of specific
performance would not be extreme. The present roadway would have to be taken
up and replaced with what should have been installed there in the first place and
that would, of course, be an expensive undertaking. Indeed, the defendant protests
strenuously that the cost of having to supplant the present road would not only be
substantial but would also be out of all proportion to the advantages to be achieved
by doing so. However, in many judgments upon the subject it has frequently been
declared that mere hardship on the party in default should not be allowed to over-·
come the exercise of the Court's discretion in favour of ordering performance.
Needless to say, if damages could be easily ascertained and were relatively insignifi-
cant in amount, I would pause long before making an order which might seriously
prejudice the defendant's existence. Obviously that is not the situation here. As I
shall point out in a moment, any attempt to assess damages is likely to prove abortive
and the cost of building a proper road, while heavy by some standards, will by no
means cripple the defendant company. And it must never be forgotten that if the
decree were withheld the Court would, in one sense, be permitting the defendant to
take advantage of its own wrong . ...
If for no other reason ... the conduct of the defendant and its contractor would
probably induce me to grant that relief, for, as I have already mentioned, the' reckless
and almost wilful manner in which the plaintiff's rights were put aside would cause
any Court to deal with the defendant quite dispassionately.
However, perhaps the most formidable obstacle to the granting of damages comes
from the fact that to try to calculate those damages would be an almost insuperable
task. They arise in several ways. The plaintiff should have an amount equivalent to
the difference between the estimated cost of repairing the private roaaway and that

126
 VII. SPECIFIC PERFORMANCE

of repairing one like Wicksteed Ave. during the life span of the latter. Counsel for the
defendant urged that a monetary allowance for that difference would represent the
full loss sustained by its adversary, but I do not agree, for clearly the enjoyment of
parcel "C" and its disposal-value will continue to be adversely affected so long as the
present road is there . I propose to examine those two sources of damages to deter-
mine whether either can be properly ascertained.
In the first place, it is questionable who will be making any future repairs. Cer-
tainly the defendant has the right to rebuild or repair the road but it is not obliged to
do so since the agreement contains no covenant to that effect. Conversely, the
plaintiff has no right to alter or rebuild that which is there. But can he repair the road?
On behalf of the defendant it was said that Mr. Tanenbaum could enter upon it to
make minor repairs at his own expense and counsel for the plaintiff concurred in
that suggestion. It is extremely difficult to say, however, to what extent that privilege
can be exercised. For example, the plaintiff could not cloi;e off the road at any time
for that purpose without obtaining permission, for the defendant has already granted
further rights of way over it to the Russell company and perhaps to others. It occurs
to me, therefore, that it would not be easy to define in advance the scope of the
repairs which the plaintiff might make; assuredly he could not make material alter-
ations to that which is there.
Even assuming that the plaintiff is at liberty to mend the surface of the road as it
deteriorates, how could the present value of the cost of doing so be reckoned? The
evidence proved beyond doubt that Wicksteed Ave. would not require as much in
the way of maintenance as the private road but that on occasions when repairs will
have to be made the cost of doing so will exceed that which will have to be expended
for individual repairs to the private road. That being so, anyone fastened with the
unenviable duty of assessing damages would be required to determine the life-
expectancy of a cement-based road and then try to estimate what the repairs to this
road over that period of time would amount to. I am completely convinced that it
would be quite impossible to do that with any degree of accuracy because the extent
of future repairs and their frequency will depend on the volume and weight of the
traffic the road will be called upon to carry and the speeds at which the vehicles will
pass over it. Even if the magnitude and volume of repairs could be predicted, how
could anyone come to a conclusion as to what those repairs would cost, bearing in
mind that no one can know when they will be needed? Prices ten years hence may
bear no relation to to-day's prices. And if all of these data could in some miraculous
way be calculated, they would still have to be compared with similar data concerning
an imaginary cement ~ based road.
If the damages relating to the comparative cost of repairs could be determined
the struggle would not be over, for there would still have to be a decision as to the
amount of damages accruing to the plaintiff because the present road causes and
will continue to cause some reduction in the disposal~value of parcel "C." ...
The defendant finally contended that specific performance ought not to be
granted because the plaintiff has been provided with a hard-surfaced road which
can be used. In other words, counsel suggested that since the plaintiff has had some
measure of performance, he is precluded from obtaining anything but damages.
Once again I do not agree and I am substantiated by the authorities. In Lane v. New-
digate (1804), 10 Ves. 192, 21 E.R. 818, the decree was made and again in Gross v.
Wright, (1923] 2 D.L.R. 171, S.C.R. 214, the Court, and particularly Idington J ., did not
hesitate to order the demolition of a substantial part of an existing building and the
reconstruction of a wall which had been built but did not comply with the agree-
ment between the parties. If it were otherwise, it would mean that a person who has

127
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

determined upon non-observance of a contract could arbitrate on what was to be

done. I concede, of course that specific performance would probably be refused if
the disparity of execution were slight, but that is not the situation here. The differences
between the two roads are notable and the fact that the plaintiff will always be out of
possession of the lands on which the road is laid and that he has no certain or clear
right to effect even minor repairs to it is one which should never be overlooked.
For those reasons I order the defendant to cause to be installed along the westerly
boundary of its lands a roadway similar to Wicksteed Ave. and by that I have in mind
that there should be laid a road at least 28 ft. wide, having an 8-in. Portland cement
base, a 2112-in. asphaltic standard highway hot-mix top, two brick gutters 12 ins. in
width and consisting of 3 courses of brick and cement curbs. That roadway should
extend, of course, from the southerly limit of Wicksteed Ave. to the north rail of the
present railway siding. In addition, the defendant must also cause to be installed a
6-in. watermain leading from or close to the defendant's hydrant which is approxi-
mately 363 ft. south of the Town main to parcel "C." If the plaintiff desires to have an
8-in. main he will have to pay the difference between the installation of one of that
dimension and the 6-in. main I have ordered. I se·e no reason why both of these
works cannot be completed within 4 months from the date of this judgment. ...
[A large part of the judgment dealing with damages arising from the delay in per-
formance and the resulting inaccessibility of steel stored on Tanenbaum's land is
omitted.]
[See also McCamus at 998-1003; Waddams at para 680.J

NOTE
In Posner v Scott-Lewis, [1987] Ch 25, the court, departing from an 1893 case, decreed specific
performance of a landlord's obligation to employ a resident porter to provide certain services to
tenants. Mervyn Davies J: "Damages here cou ld hardly be regarded as an adequate remedy."

CO-OPERATIVE INSURANCE SOCIETY LTD V

ARGYLL STORES (HOLDINGS) LTD
[1998] AC 1 (HL)

[The defendant operated a supermarket in the plaintiff's shopping centre, and under-
took, by a lease entered into in 1979, to keep it in operation for a term of 35 years. In
1995, the defendant announced that the store would close, and proceeded to close
it over the plaintiff's protest. The plaintiff sought a decree of specific performance,
which was refused at first instance, but granted by the Court of Appeal. On further
appeal the House of Lords restored the order of the judge of first instance.]
LORD HOFFMANN: Specific performance is traditionally regarded in English law as
an exceptional remedy, as opposed to the common law damages to which a suc-
cessful plaintiff is entitled as of right. There may have been some element of later
rationalisation of an untidier history, but by the 19th century it was orthodox doctrine
that the power to decree specific performance was part of the discretionary juris-
diction of the Court of Chancery to do justice in cases in which the remedies avail-
able at common law were inadequate. This is the basis of the general principle that
specific performance will not be ordered when damages are an adequate remedy....

128
 VII. SPECIFIC PERFORMANCE

The most frequent reason given in the cases for declining to order someone to
carry on a business is that it would require constant supervision ... . It is the possibility
of the court having to give an indefinite series of ... rulings in order to ensure the
execution of the order which has been regarded as undesirable. Why should this be
so? A principal reason is that ... the only means available to the court to enforce its
order is the quasi-criminal procedure of punishment for contempt. This is a powerful
weapon; so powerful, in fact, as often to be unsuitable as an instrum.e nt for adjudicat-
ing upon the disputes which may often arise over whether a business is being run
in accordance with the terms of the court's order. The heavy-handed nature of the
enforcement mechanism is a consideration which may go to the exercise of the court's
discretion in other cases as well, but its use to compel the running of a business is
perhaps the paradigm case of its disadvantages .... First, the defendant, who ex hypo-
thesi did not think that it was in his economic interest to run the business at all, now
has to make decisions under a sword of Damocles which may descend if the way
the business is run does not conform to the terms of the order ... . Secondly, the
seriousness of a finding of contempt for the defendant means that any application
to enforce the order is likely to be a heavy and expensive piece of litigation ... in terms
of cost to the parties and the resources of the judicial system ....
There is a further objection to an order requiring the defendant to carry on a
business .... This is that it may cause injustice by allowing the plaintiff to enrich
himself at the defendant's expense. The loss which the defendant may suffer through
having to comply with the order (for example by running the business at a loss for
an indefinite period) may be far greater than the plaintiff would suffer from the
contract being broken. As Professor Sharpe explains in "Specific Relief for Contract
Breach," ch. 5 of Studies in Contract Law (1980), edited by Reiter and Swan, p. 129:
In such circumstances, a specific decree in favour of the plaintiff will put him in a bar-
gaining position vis-a-vis the defendant whereby the measure of what he will receive
will be the value to the defendant of being released from performance. If the plaintiff
bargains effectively, the amount he will set will exceed the value to him of performance
and will approach the cost to the defendant to complete .
.. . It is true that the defendant has, by his own breach of contract, put himself in such
an unfortunate position. But the purpose of the law of contract is not to punish wrong-
doing but to satisfy the expectations of the party entitled to performance. A remedy
which enables him to secure, in money terms, more than the performance due to him
is unjust. From a wider perspective, it cannot be in the public interest for the courts to
require someone to carry on business at a loss if there is any plausible alternative by
which the other party can be given compensation. It is not only a waste of resources
but yokes the parties together in a continuing hostile relationship. The order for spe-
cific performance prolongs the battle. If the defendant is ordered to run a business,
its conduct becomes the subject of a flow of complaints, solicitors' letters and affida-
vits. This is wasteful for both the parties and the legal system. An award of damages,
on the other hand, brings the litigation to an end. The defendant pays damages, the
forensic link between them is severed, they go their separate ways and the wounds
of conflict can heal.
The cumulative effect of these various reasons, none of which would necessarily
be sufficient on its own, seems to me to show that the settled practice is based upon
sound sense.

129
CHAPTER 2 REMEDIES FOR BREACH OF PROM ISE

WARNER BROS PICTURES INCORPORATED V NELSON

[1937] 1 KB 209

BRANSON J: The facts of this case are few and simple. The plaintiffs are a firm of film
producers in the United States of America. In 1931 the defendant then not well known
as a film actress [Bette Davis], entered into a contract with the plaintiffs. Before the
expiration of that contract the present contract was entered into between the parties.
Under it the defendant received a considerably enhanced salary, the other conditions
being substantially the same. This contract was for fifty-two weeks and contains
options to the plaintiffs to extend it for further periods of fifty-two weeks at ever-
increasing amounts of salary to the defendant. No question of construction arises
upon the contract, and it is not necessary to refer to it in any great detail; but in view
of some of the contentions raised it is desirable to call attention quite generally to
some of the provisions contained in it. It is a stringent contract, under which the
defendant agrees "to render her exclusive services as a motion picture and/ or legit-
imate stage actress" to the plaintiffs, and agrees to perform solely and exclusively for
them. She also agrees, by way of negative stipulation, that "she will not, during such
time" -that is to say, during the term of the contract- "render any services for or in
any other photographic, stage or motion picture production or productions or busi-
ness of any other person ... or engage in any other occupation without the written
consent of the producer being first'had and obtained."
With regard to the term of the contract there is further clause, clause 23, under
which, if the defendant fails, refuses or neglects to perform her services under the
contract, the plaintiffs "have the right to extend the term of this agreement and all
of its provisions for a period equivalent to the period during which such failure,
refusal or neglect shall be continued."
In June of this year the defendant, for no discoverable reason except that she
wanted more money, declined to be further bound by the agreement, left the United
States and, in September, entered into an agreement in this country with a third
person. This was a breach of contract on her part, and the plaintiffs on September 9
commenced this action claiming a declaration that the contract was valid and bind-
ing, an injunction to restrain the defendant from acting in breach of it, and damages.
The defence alleged that the plaintiffs had committed breaches of the contract which
entitled the defendant to treat it as at an end; but at the trial this contention was
abandoned and the defendant admitted that the plaintiffs had not broken the con -
tract and that she had; but it was contended on her behalf that no injunction could
as a matter of law be granted in the circumstances of the case.
At the outset of the considerations of law which arise stands the question, not
raised by the pleadings but urged for the defendant in argument, that this contract
is unlawful a.s being in restraint of trade. The ground for this contention was that the
contract compelled the defendant to serve the plaintiffs exclusively and might in
certain circumstances endure for the whole of her natural life. No authority was cited
to me in support of the proposition that such a contract is illegal, and I see no reason
for so holding. Where, as in the present contract, the covenants are all concerned
with what is to happen whilst the defendant is employed by the plaintiffs and not
thereafter, there is no room for the application of the doctrine of restraint of trade ....
I turn then to the consideration of the law applicable to this case on the basis that
the contract is a valid and enforceable one. It is conceded that our Courts will not
enforce a positive covenant of personal service; and specific performance of the
positive covenants by the defendant to serve the plaintiffs is not asked in the present
case. The practice of the Court of Chancery in relation to the enforcement of negative

130
 VII. SPECIFIC PERFORMANCE

covenants is stated on the highest authority by Lord Cairns in the House of Lords in
Doherty v. Allman (3 App. Cas. 709) . His Lordship says :

My Lords, if there had been a negative covenant, I apprehend, according to well-settled

practice, a Court of equity would have had no discretion to exercise. If parties, for valu-
able consi.deration, with their eyes open, contract that a particular thing shall not be
done, all that a Court of Equity has to do is to say, by way of injunction, that which the
parties have already said by way of covenant, that the thing shall not be done; and in
such case the injunction does nothing more than give the sanction of the process of
the Court to that which already is the contract between the parties. It is not then a
question of the balance of convenience or inconvenience, or of the amount of damage
or of injury-it is the specific performance, by the Court, of that negative bargain which
the parties have made, with their eyes open, between themselves.

That was not a case of a contract of personal service; but the same principle had
already been applied to such a contract by Lord St. Leonards in Lumley v. Wagner (1852),
1 De G.M, & G. 604; 42 E.R. 687. The Lord Chancellor used the following language :

Wherever this Court has not proper jurisdiction to enforce specific performance, it
operates to bind men's consciences, as far as they can be bound, to a true and literal
performance of their agreements; and it.will not suffer them to depart from their con-
tract at their pleasure, leaving the party with whom they have contracted to the mere
chance of any damages which a jury may give. The exercise of this jurisdiction has, I
believe, had a wholesome tendency towards the maintenance of that good faith which
exists in this country to a much greater degree perhaps than in any other; and although
the jurisdiction is not to be extended, yet a judge w ould desert his duty who did not act
up to what his predecessors have handed down as the rule for his guidance in the
administration of such an equity. ...

The defendant, having broken her positive undertakings in the contract without
any cause or excuse which she was prepared to support in the witness-box, contends
that she cannot be enjoined from breaking the negative covenants also. The mere
fact that a covenant which the Court would not enforce, if expressed in positive
form, is expressed in the negative instead, will not induce the Court to enforce it. .. .
The Court will attend to the substance, and not to the form of the covenant. Nor
will the Court, true to the principle that specific performance of a contract of personal
service will never be ordered, grant an injunction in the case of such a contract to
enforce negative covenants if the effect of so doing would be to drive the defendant
either to starvation or to specific performance of the positive covenants . ...
[In] Rely-a-Bell Burglar and Fire Alarm Co., Ltd. v. Eisler, [1926] Ch. 609 which was
strongly relied upon by the defendant, ... Russell, J., as he then was, said,

It was said that the covenants .. . were so framed that the servant, if the covenants were
enforced, could make his living nei.ther by serving nor by carrying on business independ-
ently; whereas in the present case the covenant only prohibited serving . Therefore, it
was said, he was still free to start in business on his own account, and it could not be
said, if an injunction were granted in the terms of the covenant, that he would be farted
to remain idle and starve. That distinction seems to me somewhat of a mockery. It would
be idle to tell this defendant, a servant employed at a wage, that he must not serve
anybody else in that capacity, but that the world was still open to him to start business
as an independent man. It seems to me that if I were to restrain this man according to
the terms of the covenant, he would be forced to remain idle and starve.

Had it not been for that view of the facts, I think that the learned Judge would have
granted an injunction in that case.

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

The conclusion to be drawn from the authorities is that, where a contract of

personal service contains negative covenants the enforcement of which will not
amount either to a decree of specific performance of the positive covenants of the
contract or to the giving of a decree under which the defendant must either remain
idle or perform those positive covenants, the Court will enforce those negative
covenants; but this is subject to a further consideration. An injunction is a discretion -
ary remedy and the Court in granting it may limit it to what the Court considers
reasonable in all the circumstances of the case.
This appears from the judgment of the Court of Appeal in William Robinson & Co.,
Ltd. v. Heuer, [1898] 2 Ch. 451. The particular covenant in that case is set out at p. 452
and provides that "Heuer shall not during this engagement, without the previous
consent in writing of the said W. Robinson & Co., Ltd.," and so forth, "carry on or be
engaged either directly or indirectly, as principal agent, servant, or otherwise, in any
trade, business or calling, either relating to goods of any description sold or manufac-
tured by the said W. Robinson & Co., Ltd .... or in any other business whatsoever." ...
Before parting with that case, I should say that the Court there proceeded to sever
the covenants and to grant an injunction, not to restrain the defendant from carrying
on any other business whatsoever, but framed so as to give what was felt to be a·
reasonable protection to the plaintiffs and no more. The plaintiffs waived an option
which they possessed to extend the period of service for an extra five years, and the
injunction then was granted for the remaining period of unextended time ....
The case before me is, therefore, one in which it would be proper to grant an
injunction unless to do so would in the circumstances be tantamount to ordering
the defendant to perform her contract or remain idle or unless damages would be the
more appropriate remedy.
With regard to the first of these considerations, it would, of course, be impossible
to grant an injunction covering all the negative covenants in the contract. That would,
indeed, force the defendant to perform her contract or remain idle; but this objection
is removed by the restricted form in which the injunction is sought. It is confined
to forbidding the defendant, without the consent of the plaintiffs, to render any
services for or in any motion picture or stage production for anyone other than the
plaintiffs.
It was also urged that the difference between what the defendant can earn as a
film artiste and what she might expect to earn by any other form of activity is so
great that she will in effect be driven to perform her contract. That is not the criterion
adopted in any of the decided cases. The defendant is stated to be a person of intel-
ligence, capacity and means, and no evidence was adduced to show that, if enjoined
from doing the specified acts otherwise than for the plaintiffs, sh.e will not be able
to employ herself both usefully and remuneratively in other spheres of activity,
though not as remuneratively as in her special line. She will not be driven, although
she may be tempted to perform the contract, and the fact that she may be so tempted
is no objection to the grant of an injunction. This appears from the judgment of Lord
St. Leonards in Lumley v. Wagner where he used the following language:
It.was objected that the operation of the injunction in the present case is mischievous.
excluding the defendant J. Wagner from performing at any other theatre while this Court
had no power to compel her to perform at Her Majesty's Theatre. It is true, that I have not
the means of compelling her to sing, but she has no cause of complaint. if I compel her
to abstain frorn the commission of an act which she has bound herself not to do, and
thus possibly cause her to fulfil her engagement. The jurisdiction which I now exercise
is wholly within the power of the Court and being of the opinion that it is a proper case
for interfering, I shall leave nothing unsatisfied by the judgment I pronounce. The effect,

132
 Vil. SPECIFIC PERFORMANCE

too, of the injunction, in restraining J. Wagner from singing elsewhere may, in the event
of an action being brought against her by the plaintiff, prevent any such amount of
vindictive damages being given against her as a jury might probably be inclined to give
if she had carried her talents and exercised them at the rival theatre : the injunction may
also, as I h_ave .said, tend to the fulfilment of her engagement; though, in continuing the
injunction, I disclaim doing indirectly what I cannot do directly.

With regard to the question whether damages is not the more appropriate remedy,
I have the uncontradicted evidence of the plaintiffs as to the difficulty of estimating
the damages which they may suffer from the breach by the defendant of her contract.
I think it is not inappropriate to refer to the fact that, in the contract between the
parties, in clause 22, there is a formal admission by the defendant that her services,
being "of a special, unique, extraordinary and intellectual character" gives them a
particular value "the loss of which cannot be reasonably or adequately compensated
in damages" and that the breach may "cost the producer great and irreparable injury
and damage," and the artist expressly agrees that the producer shall be entitled to the
remedy of injunction. Of course, parties cannot contract themselves out of the law;
but it assists, at all events, on the question of evidence as to the applicability of an
injunction in the present case, to find the parties formally recognizing that in cases
of this kind injunction is a more appropriate remedy than damages.
Furthermore, in the case of Grimston v. Cunningham, [1894] 1O.B.125, which was
also a case in which a theatrical manager was attempting to enforce against an actor
a negative stipulation against going elsewhere, Wills, J., granted an injunction and
used the following language:

This is an engagement of a kind which is pre-eminently subject to the interference of

the Court by injunction, for in cases of this nature it very often happens that the injury
suffered in consequence of the breach of the agreement would be out of all proportion
to any pecuniary damages which could be proved or assessed by a jury. This circum-
stance affords a strong reason in favour of exercising the discretion of the court by
granting an injunction.

I think that that applies to the present case also, and that an injunction should be
granted in regard to the specified services.
Then comes the question as to the period for which the injunction should operate.
The period of the contract, now that the plaintiffs have undertaken not as from
October 16, 1936, to exercise the rights of suspension conferred upon tl).em by clause
23 thereof, will, if they exercise their options to prolong it, extend to about May, 1942.
As I read the judgment of the Court of Appeal in Robinson v. Heuer the Court should
make the period such as to give reasonable protection and no more to the plaintiffs
against the ill effects to them of the defendant's breach of contract. The evidence as
to that was perhaps necessarily somewhat vague. The main difficulty that the plain-
tiffs apprehend is that the defendant might appear in other films whilst the films
already made by them and not yet shown are in the market for sale or hire and thus
depreciate their value. I think that if the injunction is in force during the continuance
of the contract or for three years from now, whichever period is the shorter, that will
substantially meet the case.
The other matter is as to the area within which the injunction is to operate. The
contract is not an English contract and the parties are not British subjects. In my
opinion all that properly concerns this Court is to prevent the defendant from com -
mitting the prohibited acts within the jurisdiction of this Court, and the injunction
will be limited accordingly.

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

Bette Davis, The Lonely Life (1962). Chapter 11 and the first part of chapter 12 of this
· autobiography tell in some detail the story of Warner Bros v Nelson from Mrs. Nelson's
point of view. When she left the United States she had already won an Academy
Award, and felt confined by her contract and convinced that Warner Brothers had
no serious intention of letting her choose her own parts or find parts she would
approve. A few other actors and actresses were also battling the restrictive terms of
the standard form of actor's contract Mrs. Nelson mentions familiar names, James
Cagney, Margaret Sullivan, Carole Lombard, and Eddie Cantor. In a comparatively
new industry, the "stars" were beginning to realize their contribution and were rebel-
ling against the "slavery" of the contract designed to serve the convenience of a more
experienced business management Apparently Mrs. Nelson thought she could not
be stopped from working abroad. The litigation cost her over $30,000.

NOTES
1. In Detroit Football Co v Dublinski (1956). 4 DLR (2d) 688, McRuer CJHC held that an
injunction in favour of the Detroit Football Club restraining Dublinski from playing for the
Toronto Argonauts was not appropriate because the clubs were in separate leagues, and
Dublinski's playing for Toronto "did the plaintiff no more harm than if he had remained idle."
The Court of Appeal awarded damages but did not deal with the question of the injunction :
(1957), 7 DLR (2d) 9.
2. In Yashin v National Hockey League (2000). 192 DLR (4th) 747, a hockey player agreed
to play exclusively for a period of time for the Ottawa Senators Hockey Club. An arbitrator's
decision .that the player did not become a free agent under NHL rules until he had fulfilled his
contract was upheld by the Ontario Superior Court. According to reports, Yashin tried to sign
with a Swiss team, but the International Ice Hockey Federation prevented him from playing
internationally until the NHL dispute was resolved .

PAGE ONE RECORDS LTD V BRITTON

[1968} 1 WLR 157 (Ch)

[On February 1, 1966, Charles Christopher Britton, Ronald James Bullis, Reginald
Maurice Ball, and Peter Lawrence Staples, a group of "pop" musicians known as "The
Troggs," appointed Page One Records Ltd. (the first plaintiff) to be their managers,
and on April 22 and 25 they made two further agreements, one an agency and the
other a recording agreement, with the plaintiff. On January 3, 1967, they made a
publishing agreement with the second plaintiff, Dick James Music Ltd. In March
1967, the first plaintiff appointed Harvey Block Associates Ltd. as booking agents for
the Troggs fo r ballrooms, but subsequently the Troggs considered inviting that
company to become their manager and agent in place of the first plaintiff. On June
19, 1967, by two letters written one to the first plaintiff and the other to the second
plaintiff, the Troggs purported to determine the four agreements they had made with
the plaintiffs.
The first plaintiff sought an injunction to restrain the Troggs until trial from
engaging anyone else as their manager or agent or from publishing any music
performed by them otherwise than through the medium of the plaintiffs. The plain -
tiffs also sought an injunction against the second defendant restraining it from
inducing any breaches of the agreements between the plaintiffs and the Troggs.

134
 VII. SPECIFIC PERFORMANCE

The defendants alleged that, even if the plaintiffs had acted impeccably toward
the group at all times, which they denied, no injunction amounting to specific per-
formance of a contract for personal services could be granted. Nor should any
employer be prevented by injunction from dismissing an agent who occupied a
fiduciary position. They also claimed that because the group could nothave brought
an action against their manager for specific performance of its agreement, no
injunction could be granted against them.
The facts are stated more fully in the judgment.]
STAMP J: The defendants have not, in my judgment, established a prima facie case
for the view that there were such breaches by the first plaintiff of its duty to the
Troggs as to justify the Troggs in repudiating the agreements they made with it. If
all I had .to do was to determine whether the plaintiffs had made out a prima facie
case of breach of contract entitling them to damages, I would hold that they had,
entitling the plaintiffs to make a heavy claim for damages against the defendants.
But it does not follow that because the plaintiffs have made out a prima facie case
for succeeding in recovering damages in the action, that they have made out a prima
facie case, or any case; for an interlocutory, or any, injunction.
The plaintiffs, replying on Lumley v. Wagner and the cases which followed it, claim,
as regards the first plaintiff, an order that the first four defendants and each of them
be restrained until trial from engaging as their managers or agents, or personal rep-
resentatives in the branches of the entertainment industry referred to in clause 1 of
the agreement of February 1, 1966, or from engaging as their managers conducting
all their affairs relating to their professional careers in any medium of professional
entertainment, any person, firm or corporation other than the first named plaintiff,
and further, an injunction restraining each of the four Troggs acting as a group, from
publishing or causing to be published any music performed by them, otherwise than
through the medium of the first or second named plaintiffs. Then for an order that
the second named defendant be restrained until the trial from inducing or procuring
any breach or further breach by the Troggs as a group or otherwise of agreements
between the plaintiffs and the Troggs for the management of the Troggs by the first
plaintiff or the publication by either plaintiff of the music of the first-named defend-
ants in accordance with the terms of the four written agreements, to which I have
referred.
Sir Andrew Clark submits that even if the plaintiffs had throughout acted impec-
cably towards the Troggs, no such injunction as is asked for ought to be granted. He
advances three propositions on behalf of the Troggs. (1) Specific performance is
never granted to enforce a contract for personal services. (2) An injunction is never
granted which would have the effect of preventing an employer discharging an
agent who is in a fiduciary position vis-a-vis the employer. He emphasises that here
the first plaintiff, as manager and agent of the Troggs, is in the position of an
employee. (3) An injunction is never granted at the suit of the party against whom
the party to be restrained could not obtain specific performance.
It is urged-and, in my judgment, correctly-that the Troggs could have no action
for specific performance of the management or agency agreements against the first
plaintiff.
The present case is clearly distinguished, in principle, from such cases as Lumley
v. Wagner, for there the only obligation on the part of the plaintiffs seeking to enforce
the negative stipulation was an obligation to pay remuneration and an obligation
which could clearly be enforced by the defendants. But here the obligations of the
first plaintiff, involving personal services, were obligations of trust and confidence

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

and were obligations which, plainly, could not be enforced at the suit of the Troggs.
Here, indeed, so it seems to me, the totality of the obligations between the parties
are more a joint venture, almost approaching the relationship of partners than
anything else, involving mutual confidence and reciprocal obligations on all sides ....
So it was said in this case that if an injunction is granted the Troggs could, without
employing any other manager or agent, continue as a group on .their own or seek
other employment of a different nature. So far as the former suggestion is concerned,
in the first place I doubt whether consistently with the terms of the agreements
which I have read, the Troggs could act as their own managers; and, in the second
place, I think I can, and should, take judicial notice of the fact that these groups, if
they are to have any great success, must have managers. Indeed, it is the plaintiffs'
own case that the Troggs are simple persons, of no business experience, and could
not survive without the services of a manager. As a practical matter on the evidence
before me, I entertain no doubt that they would be compelled, if the injunction was
granted, on the terms that the plaintiffs seek, to continue to employ the first plaintiff
as their manager and agent and it is, I think, on this point that this case diverges
from Lumley v. Wagner and the cases which have followed it, including the Warner
Brothers case: for it would be a bad thing to put pressure upon these four young men
to continue to employ as a manager and agent in a fiduciary capacity one who,
unlike the plaintiff in those cases (who had merely to pay the defendant money) has
duties of a personal and fiduciary nature to perform and in whom the Troggs, for
reasons good, bad or indifferent, have lost confidence and who may, for all I know,
fail in its duty to them.
On the facts before me on this interlocutory motion, I should, if I granted the
injunction, be enforcing a contract for personal services in which personal services
are to be performed by the first plaintiff. In Lumley v. Wagner, Lord St. Leonards, in
his judgment, disclaimed doing indirectly what he could not do directly; and in the
present case, by granting an injunction I would, in my judgment, be doing precisely
that. I must, therefore, refuse the injunction which the first plaintiff seeks. The claim
of the second plaintiff seems to me to be inextricably mixed up with the claim by
the first plaintiff and no separate argument has really been addressed to me on the
basis that the second plaintiff might succeed although the first plaintiff failed to
obtain an injunction at the trial.
Motion dismissed.

NOTE
This case was approved in Warren v Mendy, [1989] 1 WLR 853 (CA), where, in similar circum-
stances, the court refused to grant an injunction restraining a prospective new manager from
committing the tort of inducing breach of contract (a tort first recognized in Lumley v Gye
(1853), 2 El & Bl 216). See also McCamus at 1016-26; MacDougall at chapter 24; Waddams at
paras 682-83.

136
 VIII. TIME OF MEASURING DAMAGES

VIII. TIME OF MEASURING DAMAGES

WROTH V TYLER
[1974] Ch 30

[The plaintiffs, a young married couple, made an agreement to purchase the defen-
dant's house. The day after the agreement was made, the defendant's wife registered
a charge against the title under the Matrimonial Homes Act, 1967, an English statute
designed to protect the wife from eviction from the matrimonial home. The regis-
tration of such a charge was binding on a subsequent purchaser. The plaintiffs
consequently demanded removal of the charge. The defendant's wife refused to
remove the charge and the plaintiffs sued for specific performance with compensa -
tion, or damages. The portion of the judgment reproduced here concerns the proper
time for measurement of damages, an important question because the value of the
house rose dramatically between the date agreed for conveyance and the date of
the trial. The contract price was £6,000; the value at the date agreed for conveyance,
£7,500; and the value at the date of trial, £11,500. The plaintiff's action for specific
performance was dismissed on the ground that a decree of specific performance
would split the family (the wife, only, being entitled by statute to stay in the house).]
MEGARRY J: It was common ground that the normal rule is that the general damages
to which a purchaser is entitled for breach of a contract for the sale of land are basi- ·
cally measured by the difference between the contract price and the market price of
the land at the date of the breach, normally the date fixed for completion. On the facts
of this case, the damages under this rule would be of the order of £1,500. The real
issue was whether that rule applies to this case, or whether some other rule applies.
Now the principle that has long been accepted is that stated by Parke B. in Robinson
v. Harman (1848) 1 Exch. 850, in which, incidentally, the rule in Flureau v. Thornhill, 2
Wm. Bl. 1078, was considered. Parke B. said, at p . 855: "The rule of the common law
is, that where a party sustains a loss by reason of a breach of contract, he is, so far as
money can do it, to be placed in the same situation, with respect to damages, as if
the contract had been performed."
In the present case, if the contract had been performed, the plaintiffs would at
the date fixed for completion have had the house, then worth £7,500 in return for the
contractual price of £6,000. If in lieu of the house they had been paid £1,500 damages
at that date, they could, with the addition of the £6,000 that they commanded, have
forthwith bought an equivalent house. I am satisfied on the evidence that the plain-
tiffs had no financial resources of any substance beyond the £6,000 that they could
have put together for the purchase of the defendant's bungalow, and that the defend-
ant knew this when the contract was made. The plaintiffs were therefore, to the
defendant's knowledge, unable at the time of the breach to raise a further £1,500 in
order to purchase an equivalent house forthwith, and so, as events have turned out,
mitigate their loss. Today, to purchase an equivalent house they need £5,500 in
addition to their £6,000. How, then, it may be asked, would the award today of £1,500
damages place them in the same situation as if the contract had been performed?
The result that would have been produced by paying £1,500 damages at the date of
the breach can today be produced only by paying £5,500 damages, with in each
case the return of the deposit. On facts such as these, the general rule of assessing
damages as at the date of the breach seems to defeat the general principle, rather
than carry it out. In the ordinary case of a buyer of goods which the seller fails to
deliver, the buyer can at once spend his money in purchasing equivalent goods from

137
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

another, as was pointed.out in Gainsford v. Carroll (1824) 2 B. & C. 624, and so the rule
works well enough; but that is a very different case. It therefore seems to me that on
the facts of this case there are strong reasons for applying the principle rather than the
rule. The question is whether it is proper to do so.
I do not think that I need inquire w hether such an award could be made at com -
mon law. It may be that it could. The rule requiring damages to be ascertained as at
the date of the breach does not seem to be inflexible, and in any case the rule may
be one which, though normally carrying out the principle, does on occasion fail to
do so; and on those occasions the rule may have to be modified so as to accord with
the principle. However, as I have said, I do not think I need explore that; for it seems
to me that this case, in which there is a proper claim for specific performance, falls
within the Chancery Amendment Act 1858 (better known as Lord Cairns' Act), and
that damages assessed under that Act are to be ascertained in accordance with that
Act on a basis which is not identical with that of the common law. That Act provides,
by section 2:
In all cases in wh ich the Court of Chancery has ju risd iction to entertain an application
for an injunction against a breach of any covenant. contract. or agreement, or against
the commission or continuance of any wrongful act, or for the specific performance
of any covenant, contract, or agreement. it shall be lawful for the same court, if it shall
think fit, to award damages to the party injured. either in addition to or in substitution
for such injunction or specific performance, and such damages may be assessed in such
manner as the court shall direct. [Section 112 of the Ontario Courts of Justice Act is in
similar terms). .
On the wording of the section, the power "to award damages to the party injured, .
in substitution for such ... specific performance," at least envisages that the damages
awarded wi\\ in fact constitute a true substitute for specific performance. Further-
more, the section is speaking of the time when the court is making its decision to
award damages in substitution for specific performance, so that it is at that moment
that the damages must be a substitute. The fact that a different amount of damages
would have been a substitute if the order had been made at the time of the breach
must surely be irrelevant. In the case before me, I cannot see how £1,500 damages
would constitute any true substitute for a decree of specific performance of the
contract to convey land which at the time of the decree is worth.£5,500 more than
the contract price. A choice between the inadequate and the equivalent seems to
me to be no real choice at all. It may seem strange that nearly 115 years should have
elapsed before this aspect of Lord Cairns' Act should have emerged; but the eco-
nomic conditions which reveal its significance have not been with us long.
There are dicta in Leeds Industrial Co-operative Society Ltd. v. Slack [1924] AC. 851
which support this view, or are at least consistent with it. In a speech with which
the Earl of Birkenhead expressed his agreement, Viscount Finlay said, at p. 859: "... the
power to give damages in lieu of an injunction must in all reason import the power
to give an equivalen t for what is lost by the refusal of the injunction; for this purpose
compensation only for what has passed would be futile."
He added:
It has been urged that the word "damages" must be used as denoting compensation
for what has already happened. It is, of course, true that a court of common law gives
damages as compensation for past wrongs, but the word "damages" is perfectly apt to
denote compensation for the damage which wi ll be sustained if a building is allowed
to proceed so as to obstruct ancient lights. If an inj unction is granted the obstruction

138
 VIII. TIME OF MEASURING DAMAGES

will never take place. If damages are given instead of the injunction. they must be in
respect of an injury which is still in the future.

Lord Dunedin expressly concurred in Lord Finlay's speech; but he also said, at
p. 865, that the words referring to damages in substitution for an injunction "clearly
point to a pecuniary payment equalling the loss to be occasioned by the act against
which, but for the provision in question, an injunction would have been obtained .... "
I must, of course, have care in applying dicta uttered in a case where the problem
before me was obviously not in view, even though section 2 of the Act lays down
the same rule for injunctions and specific performance alike. Yet on principle I would
say simply that damages "in substitution" for specific performance must be a substi-
tute, giving as nearly as may be what specific performance would have given. There
are, moreover, certain other authorities which provide assistance . In Fritz v. Hobson
(1880) 14 Ch.D. 542 it was held that damages awarded under the Act in substitution
for an injunction were not confined to damages down to the issue of the writ, as at
law, but included damages down to the hearing. Fry J . said, at p. 556: "Now it is
manifest that damages cannot be an adequate substitute for an injunction unless
they cover the whole area which would have been covered by the injunction ... ."
In Chapman, Morsons & Co. v. Guardians of Auckland Union (1889) 23 O.B.D. 294,
the Court of Appeal approved the view taken by Fry J . in Fritz v. Hobson, 14 Ch.D. 542,
556. In Dreyfus v. Peruvian Guano Co. (1889) 43 Ch.D. 316, 342, Fry L.J. said of Lord
Cairns' Act: "I am clear that the statute often enables the court, where a wrong has
been done, to give damages upon a different scale from what was done by the Courts
of Common Law, because it may give them in substitution for an injunction ...."
Cotton L.J., who had previously delivered the leading judgment, then said that
he agreed with what Fry L.J. had said about Lord Cairns' Act.
I should say at once that these additional authorities were not discussed before me,
but as they support the view which I took without their aid, it seems proper for me to
cite them without incurring the costs and de1ay of restoring the case for further
argument. There seems to me to be adequate authority for the view that damages
under Lord Cairns' Act may be awarded in cases in which there is no claim at all at
law, and also that the quantum of damages is not limited by the rules at law. No doubt
in exercising the jurisdiction conferred by the Act a court with equitable jurisdiction
will remember that equity follows the law, and will in general apply the common law
rules for the assessment of damages; but this is subject to the overriding statutory
requirement that damages shall be "in substitution for" the injunction or specific
performance. In the words of Cardozo C.J., "Equity follows the law, but not slavishly
nor always": Graf v. Hope Building Corporation (1930) 254 N.Y. 1, 9. Obedience to
statute, whether in its precise words or in its spirit, is an excellent and compelling
reason for not following the law.
In my judgment, therefore, if under Lord Cairns' Act damages are awarded in
substitution for specific performance, the court has jurisdiction to award such dam-
ages as will put the plaintiffs into as good a position as if the contract had been
performed, even if to do so means awarding damages assessed by reference to a
period subsequent to the date of the breach. This seems to me to be consonant with
the nature of specific performance, which is a continuing remedy, designed to secure
(inter alia) that the purchaser receives in fact what is his in equity as soon as the
contract is made, subject to the vendor's right to the money, and so on. On the other
hand, a decree may be sought before any breach of contract has occurred, and so
before any action lies for common law damages; and on the other hand the right to
a decree may continue long after the breach has occurred. On the facts of this case,
the damages that may be awarded are not limited to the £1,500 that is appropriate

139
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

to the date of the breach, but extend to the £5,500 that is appropriate at the present
day, when they are being awarded in substitution for specific performance. I should
add that no contention has been advanced (in my judgment, quite rightly) that the
case does not fall within Lord Cairns' Act. The sale of a house is a case par excellence
in which the court "has jurisdiction to entertain an application ... for the specific
performance" of a contract, and the plaintiffs have done nothing to disentitle them-
selves to a decree. The undesirability of granting the decree if any suitable alternative
exists springs from the position of the defendant and his wife.
That brings me to a subsidiary point which Mr. Lyndon-Stanford urged upon me.
He contended that an award of damages of the order of £5,500 was precluded by the
operation of what is often called the "second rule" in Hadley v. Baxendale (1854) 9
Exch. 341, relating to what was in the contemplation of the parties. I was very properly
referred to that case in the light of the discussion in later cases set out in McGregor
on Damages, 13th ed. (1972) principally at pp. 124-132. It was beyond question that a
rise in the price of houses was in the contemplation of the parties when the contract
was made in this case. But Mr. Lyndon-Stanford took it further. He contended that
what a plaintiff must establish is not merely a contemplation of a particular head of
damage, but also of the quantum under that head. Here, the parties contemplated a
rise in house prices, but not a rise of an amount approaching that which in fact took
place. A rise which nearly doubled the market price of the property was, as the evi-
dence showed, outside the contemplation of the parties, and so it could not be
recovered. Thus ran the argument.
I do not think that this can be right. On principle, it seems to me to be quite wrong
to limit damages flowing from a contemplated state of affairs to the amount that the
parties can be shown to have had in contemplation, for to do this would require
evidence of the calculation in advance of what is often incalculable until after the
event. The function of the so-called "second rule" in Hadley v. Baxendale, 9 Exch. 341,
seems to me to be not so much to add to the damages recoverable as to exclude from
them any liability for any type or kind of loss which could not have been foreseen
when the contract was made. No authority was put before me which appeared to
me to provide any support for the alleged requirement that the quantum should have
been in contemplation. So far as it went, the language used in the authorities that
were cited seems to me to have been directed to the heads of damage rather than to
quantum. Thus one finds phrases such as "special circumstances" and the "type" or
"kind" of damage. I would therefore on principle reject the defendant's contention,
and hold that a plaintiff invoking the so-called "second rule" in Hadley v. Baxendale,
9 Exch. 341, need show only a contemplation of circumstances which embrace the
head or type of damage in question, and need not demonstrate a contemplation of
the quantum of damages under that head or type. Accordingly, in my judgment, this
subsidiary contention of the defendant's fails, even if it is one that would apply, either
directly or by analogy, to damages under Lord Cairns' Act.
During the argument it seemed to me surprising that the point should not be
covered by authority; yet the only authority put before me that seemed to bear on
the point was Vacwel/ Engineering Co. Ltd. v. B.D.H. Chemicals Ltd. (197111 Q.B. 88.
Mr. Lyndon-Stanford referred me to this case in performance of his duty of assisting
the court, although it was against him. The point does not seem to have been argued
there in terms, but it was held that where the parties to a contract could reasonably
have foreseen that there might be a small or minor explosion, with some damage to
property, if a proper warning was not given as to the precautions to be taken in
handling the chemical sold, but could not reasonably have foreseen the major explo-
sion which in fact occurred, killing a scientist and doing extensive damage to property,

140
 VIII. TIME OF MEASURING DAMAGES

the vendors were nevertheless liable for the whole of the damage done. As Rees J .
said, at p. 110: "... the explosion and the type of damage being foreseeable, it matters
not in the law that the magnitude of the former and the extent of the latter were not."
An appeal was settled: see (1971] 1O.B.111, 112 (note).
That case, however, does not stand alone. In Great Lakes Steamship Co. v. /Vlaple Leaf
Milling Co. Ltd. (1924) 41 T.L.R. 21, the respondents, in breach of contract, had failed "to
lighter immediately" the appellants' vessel on its arrival at the respondents' wharf on
Lake Erie. Three days later, before any lightering had taken place, the vessel settled
on the bottom as a result of a fall in the level of the water in the lake that was within
the contemplation of the parties. Unknown to either party, a large anchor was resting
on the bottom at that point, projecting two feet above the rock floor which there
formed the bottom. This anchor caused serious injuries to the hull, for which the
appellants claimed over $40,000 damages. In delivering the advice of the Judicial
Committee, Lord Carson said, at p. 23:
There can be no doubt that it was from breach of the contract immediately to lighter
that the vessel grounded by reason of the lowering of the water, the very thing which
it was anticipated might occur and which rendered the immediate lightering so import-
ant. and it must. in their Lordship's opinion, be held that it was the breach of contract
in not lightering the vessel which was the immediate cause of the damage, and the fact
that such damage might not have occurred if the anchor had not been sunk can make
no difference. If grounding takes place in breach of contract, the precise nature of the
damage incurred by grounding is immaterial.
That case seems to me to provide strong support for the view that I take. In the
present case, the argument is directed purely to quantum. The precise head of dam -
age, a general rise in the price of houses, was admittedly in contemplation: all that
could be said to be outside the contemplation was the full amount, or the higher
stages of the rise from £6,000 to £11,500. In Great Lakes Steamship Co. v. Maple Leaf
Milling Co. Ltd., 41 T.L.R. 21, what was in contemplation was the fact that delay in
lightering might cause the vessel to rest on the bottom by the wharf, a bottom con-
sisting of rock; nobody contemplated the anchor, yet the damages recoverable
included those stemming from the anchor. On the authority of that case, the case
before me seems a fortiori. I therefore find confirmation in that case of the view that
at the hearing I took without its aid.
The conclusion that I have reached, therefore, is that as matters stand I ought to
award damages to the plaintiffs of the order of £5,500, in substitution for decreeing
specific performance, with all the doubts and difficulties and probably-undesirable
consequences that a decree in either form would produce. An award of damages on
this scale, I accept, will bear hardly on the defendant. Though able in one way or
another to raise £1,500 without selling his bungalow, £5,500 is another matter; in all
probability he could not raise that sum without selling the bungalow with vacant
possession, and he has no power to do this. If, however, he becomes bankrupt, then
his trustee in bankruptcy can sell the bungalow free from the wife's rights, even
though they are registered: see section 2(5) of the Act of 1967. With the money so
raised, the trustee in bankruptcy will then be able to pay the plaintiffs their damages,
one hopes in full; or it may be possible for the plaintiffs to take the bungalow in
satisfaction of their claim. This is a dismal prospect for the defendant, but if the
plaintiffs obtain neither a decree of specific performance nor £5,500 by way of dam-
ages, theirs also is a dismal prospect. Having made a binding contract to purchase
for £6,000 a bungalow now worth £11,500, they would recover neither the bungalow
nor damages that would enable them to purchase anything like its equivalent. It is

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

the plaintiffs who are wholly blameless. Nothing whatever can be said against them,
or has been, save as to the contention that delay barred them from a decree of specific
performance; and that I have rejected. Nor do I think that there was any delay on
their part that could affect the measure of damages.
The ultimate truth as between the defendant and his wife I do not know. As the
evidence stands, his wife did nothing whatever to warn the plaintiffs that she was
not willing to leave the bungalow, but conducted herself so as to lead them to believe
that she concurred in the sale. So far as the defendant was concerned, his wife was
· very cool about the move, and it may well be that the move was one which a strong-.
willed husband was in effect imposing on a reluctant yet secretive wife. Nevertheless,
the consequences of disputes between husband and wife, whether open or con-
cealed, ought not to be visited upon innocent purchasers.
In these circumstances, I think that what I ought to do is to make no order today,
but, subject to what counsel may have to say, to adjourn the case until the first day of
next term. In ordinary circumstances, I would adjourn the case for only a week, but
unfortunately the impending vacation makes this impossible. During the adjourn-
ment I hope that the defendant and his wife will take advice, separately or together.
When I resume the hearing, it may be that the defendant's wife will not have changed
her mind about her charge. In that case, I shall award the plaintiffs damages against
the defendant of the order of £5,500, even though the probable consequence will
be the bankruptcy of the defendant and the sale of the bungalow with vacant pos-
session by his trustee in bankruptcy, free from the wife's rights. On the other hand,
the defendant's wife may by then have changed her mind, and rather than force her
husband into bankruptcy without avoiding having to vacate the bungalow, she may
have taken effective steps to enable the defendant to convey the bungalow to the
plaintiffs free from her rights. In that case I shall decree specific performance of the
contract. In this way the plaintiffs will obtain either the bungalow that they bought
or else an amount of damages which will enable them to purchase its equivalent. I
may add that of course I give each side liberty to apply in the meantime; and I should
say that I shall be available until 4 p.m. today. As I have indicated, I feel much sym-
pathy for the defendant as well as for the plaintiffs at being embroiled in this way.
Yet as between the two sides both the law and the merits seem to me to point to the
plaintiffs as being the parties who should be as little hurt as possible; and they have
already suffered considerably, not least in relation to their temporary accommodation
pending these proceedings. Counsel will no doubt assist me with any submissions
that they may have on this proposed adjournment, which was not mooted during
· the argument.
January 11., 1973. The defendant's wife refused to remove the notice. Damages of
£5,500 assessed as at January 11, 1973, were awarded in li~u of specific performance,
with costs.
Order accordingly.

QUESTION
What if the land is an apartment building, and the purchaser has ample funds on hand to
purchase another as soon as the vendor defaults? See AVG Management Science Ltd v Barwell
Developments Ltd (1976), 69 DLR (3d) 741 (BCSC), affd on this point, [1979] 2 SCR 43 .

142
 VIII. TIME OF MEASURING DAMAGES

RG LAWSON, "DAMAGES: AN APPRAISAL OF WROTH V TYLER"

(1975) 125 New LJ 300

Damages for breach of contract, Parke B. once suggested, should place the innocent
party in the position he would have occupied had the contract been performed
(Robinson v. Harrian (1848) 1 Ex. 850, 855). Generally speaking, this is done by award-
ing a measure of compensation based on the difference in sale price and market
price at the date of breach. A buyer fortified with such damages, the theory goes, is
able to purchase equivalent goods in the market, and so occupy the position origin -
ally promised him by the seller.
Of course, if the market price at the date of judgment exceeds the market price at
the date of breach, compensation based on the earlier date may be unsatisfactory.
The objection that the buyer should mitigate his loss by making a substitute purchase
before the date of judgment is valid only if he has sufficient cash in hand. This may
not be so; particularly if he paid the defaulting seller in advance.
The situation canvassed above had rarely engaged authoritative attention. In
Gainsford v. Carroll (1824) 2 B. & C. 624, the buyer was denied the rate prevailing at
judgment: he had not prepaid, and could have made a replacement purchase at the
date of breach. Although this indicates that the latter date would have been apposite
where advance payment had been made, a later court ruled otherwise where pre-
cisely this had happened: Startup v. Cortazzi (1835) 2 C.M. & R. 165.
When the matter later arose, the facts, as Megarry J. put it, were "as simple as the
law is complex" (Wroth v. Tyler [1973] 1 All E.R. 897, 901). Put briefly, the plaintiff sought
specific performance of a contract for the sale of land. This was refused. Megarry J.
then proceeded to award damages: but the date chosen was not the £7,500 at the
date of breach, but the £11,500 which the land was worth at the date of judgment.
In Wroth v. Tyler, the damages were assessed under the Chancery Amendment
Act, 1858 ("Lord Cairns' Act"). They were not awarded as common law damages, but
were awarded under this statute in lieu of specific performance. Section 2 speaks of
damages being awarded "in substitution" for specific performance which "at least
envisages that the damages awarded will in fact constitute a true sub.s titute for spe-
cific performance. Furthermore, the section is speaking of the time when the court
is making its decision to award damages in substitution, so that it is at that moment
that the damage must be a substitute" (ibid. at 920).
Perhaps an even clearer statement had come from Sholl J. in Bosaid v. Andrey
[1963] V.L.R. 465.. Damages would be given by a Chancery Court in lieu of specific
performance, he believed, "on the hypothesis that the contract came to an end by
the act of the Court itself in withholding specific performance-that is to say, at the
time (usually of the decree) when the Court substituted an order for damages, even
if it did not at once assess them."
If it follows inexorably from this reasoning that damages under Lord Cairns' Act
are based as at the date of judgment, it is not self-evident that the same approach .
would obtain at law. Megarry J. was content to say only that it might; but he did add
that the "rule requiring damages to be ascertained as at the date of breach does not
seem to be inflexible," and that the normal principle of common law damages "may
have to be modified so as to accord with the principle."
In Horsier v. Zorro [1973] 2 W.L.R. 183, Megarry J . was content once more to leave
open the question whether damages at law could be awarded as at the date of judg-
ment. Goff J., too, in Grant v. Dawkins (1973] 3 All E.R. 897, 900, has gone no further
than to say that "there may be exceptions" to the normal date of assessment for
damages at law. But in Souster v. Epsom Plumbing Contractors Ltd. (1974] 2 N.Z.L.R. 515

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

McMullin J. put the view, obiter dicta, that the same measure of damages would be
allowable at common law since Lord Cairns' Act was merely a procedural section
designed to permit the employment of common law remedies in Courts of Equity.
This is doubtless so; but it is no support for the further argument that damages at
law may also be assessed as at the date of judgment. The special factor in Lord Cairns'
Act, and this was recognised by McMuUin J. as wen as Megarry and Sholl JJ., is that
the contract is terminated only when the Court judges that specific performance is
inappropriate. Such considerations are absent when damages are sought at law.
There is, furthermore, the flatly contradictory decision in Chitho/ie v. Nash & Co.
(1974) 229 E.G. 786. This was an action where the defendants conceded that they had
no authority to act for the vendor in the sale of a dwelling-house. Talbot J. refused
to award damages on the higher rate prevailing at the date of judgment. He was
bound, so the report runs, "to follow the normal common law rule as to the measure
of damages for breach of a contract for sale of land ... to depart from that normal rule
would be to place upon the shoulders of the defendants the burden of a higher award
of damages due not to their breach, but to events which had occurred after the
breach and over which they had no control."

[See also McCamus at 1011-16; MacDougaU at 360-61; Waddams at paras 700-5.J

IX. RESTITUTION
In previous sections of this chapter, we have examined the traditional remedies available to the
victim of a breach of contract-damages, specific performance, and the injunction. These
remedies are considered to be contractual remedies in the sense that they form a part of that
branch of the law commonly referred to as the law of contracts. As we have seen, some of
these remedial principles were developed by courts of common law. Others were developed
by the courts of equity. In this section we turn to consider remedies that might be available to
the victim of a breach of contract under what is now treated as a third branch of the law of
obligations, in addition to contract and tort, the law of restitution.
The professional convention or practice of treating the doctrines of common law and
equity relating to the enforcement of promises as a subject or branch of the law known as
"contracts" emerged in the early 19th century as the first treatises on this subject were written
and absorbed into the professional understanding of these materials . Treatises drawing
together the great variety of doctrines relating to compensation for harms resulting from
wrongful conduct and labelling them "torts" appeared only in the last decades of the century.
Emergence of restitution or, as it is sometimes called, "unjust enrichment" as a third branch of
the private law of obligations occurred only in the 20th century.
Recognition of the subject came first in the United States with the publication of the Amer-
ican Law lnstitute's Restatement of Restitution in 1937. It was the thesis of the Restatement that
common law and equity doctrines concerning the recovery of benefits obtained by the defend-
ant in various circumstances could be usefully restated as a new branch of the law. The restated
jurisprudence concerned such matters as the recovery of benefits conferred by the plaintiff (1) by
mistake; (2) under duress or other forms of coercion; (3) under ineffective transactions; (4) to
preserve the life, health, or property of another; or (5) to discharge a duty owed by another and,
additionally, a broad range of rules that have as their object the recovery of benefits obtained
by the defendant as a result of some form of wrongdoing recognized either at common law
or in equity. The theoretical premise of the Restatement of Restitution was that this rather large
and seemingly disparate body of material could be seen to have the unity of a branch of law
because the various doctrines in question could be said to be grounded on a general principle

144
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in favour of preventing unjust enrichment. Thus, the first article of the Restatement set out the
general underlying principle of the Restatement in the following terms:

A person who has been unjustly enriched at the expense of another is required to make
restitution to the other.

It was the view of the authors of the Restatement that the common law material dealing
with these matters suffered from an unfortunate and misleading connection with the law of
contracts. For reasons that need not be explored here, the nature of common law restitutionary
doctrine or, as it was often called, quasi-contract, rested on the court's ability to imply a contrac-
tual obligation to restore the benefit received by the defendant to the plaintiff. In other words,
the liability imposed in a restitutionary claim was, on this view, essentially contractual in nature.
In its extreme version, this theory would lead to the conclusion that if for some reason an actual
contract could not be factually inferred from the circumstances or, if inferred, would prove to be
unenforceable as a matter of contract law for some reason, restitution must be denied. A leading
illustration of the phenomenon is Sinclair v Brougham, [1914] AC 398, a decision of the House
of Lords arising from the insolvency of a building society (a financial institution similar to the
Canadian credit union or caisse populaire) that had been carrying on an unlawful banking busi-
ness. The banking business was ultra vires-that is, beyond the lawful powers or capacity of the
society. It was held that moneys advanced to a building society under ultra vires and therefore
unenforceable deposit agreements could not be recovered by the depositors in a restitutionary
claim. If a contract to return the funds were inferred, in the sense that an actual contract was
implied to exist, such a contract would also be ultra vires the building society. On this view, then,
the depositors who had been encouraged by the building society to deposit their money in
accounts that proved to be beyond the capacity of the building society wou ld have no restitu-
tionary claim for the value of their deposits. On the basis of the unjust enrichment theory, by way
of contrast, it would be possible to conclude that although the contract of deposit is unenforce-
able in such a case, it is a separate question w hether the building society should be allowed to
retain the deposits or, on the principle that otherwise the building society would be unjustly
enriched, should be subject to an obligation to restore the deposits to the depositors.
The Restatement offers a similar explanation for conceptual difficulties manifest in the
traditional law concerning equitable restitutionary claims that involved the awarding of con-
structive trust relief. At the risk of oversimplification, it may be said that, under the traditional
English view, the constructive trust was considered to be a type of actual trust and therefore
available only where the relationship between plaintiff and defendant bore some of the hall-
marks of or was reaso nably analogous to the relationship recognized in equity between a
trustee and a beneficiary of a trust. Thu s, under English law, constructive trust relief was
essentially restricted to cases where the plaintiff and defendant had a so - ca lled fiduciary rela-
tionship . Under the approach taken by the Restatement, the constructive trust was considered
to be merely a remedy imposed to prevent unjust enrichment and, accordingly, could be
considered to be more broadly available in restitution cases.
In a remarkable series of cases, beginning with Deg/man v Guaranty Trust Co and Constan-
tineau, below, in 1954, the Supreme Court of Canada essentially adopted the basic theory of
the Restatement and accepted the view that basic to both quasi-contract and constructive
trust is the principle against unjust enrichment. For a detailed account of this line of jurispru-
dence, see Maddaugh & McCamus, ch 3.
In Deg/man, the restitutionary claim concerned .the value of benefits conferred in the form
of services rendered by a nephew to his aunt under an agreement that was unenforceable by
reason of the Statute of Frauds. The English Statute of Frauds, enacted in 1677 and copied in
most common law jurisdictions, although later varied and repealed in some, provided that no
action could be brought on a number of kinds of agreements unless evidenced by a note or
memorandum in writing signed by the party to be charged. The classes of agreement to which

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CHAPTER 2 REMEDI ES FOR BREACH OF PROMISE

the original statute applied were contracts for the sale of land, guarantees, contracts for the
sale of goods over a certain price, agreements not to be performed within a year, contracts in
consideration of marriage, and promises by executors or administrators to assume personal
liability. Judicial interpretation of the statute has given rise to many complexities. See generally
Waddams, ch 6.

DEGLMAN V GUARANTY TRUST CO OF

CANADA AND CO?IJSTANTINEAU
[1954) SCR 725, 3 DLR 785

RAND J (Rinfret CJC and Taschereau J concurring) : In this appeal the narrow question
is raised as to the nature of part performance which will enable the Court to order
specific performance of a contract relating to lands unenforceable at law by reason
of s. 4 of the Statute of Frauds, R.S.O. 1950, c. 371. The respondent Constantineau
claims the benefit of such a contract and the appellant represents the next-of-kin
other than the respondent of the deceased, Laura Brunet, who resist it.
The respondent was the nephew of the deceased. Both lived in Ottawa. When he
was about 20 years of age, and while attending a technical school, for 6 months of
the school year 1934-35 he lived with his aunt at No. 550 Besserer St. Both that and the
house on the adjoining lot, No. 548, were owned by the aunt and it was during this
time that she is claimed to have agreed that if the nephew would be good to her and
do such services for her as she might from time to time request during her lifetime
she would make adequate provision for him in her will, and in particular that she
would leave to him the premises at No. 548. While staying with her the nephew did
the chores around both houses which, except for an apartment used by his aunt, were
occupied by tenants. When the term ended he returned to the home of his mother
on another street. In the autumn of that year he worked on the national highway in
the northern part of Ontario. In the spring of 1936 he took a job on a railway at .a
point outside of Ottawa and at the end of that year, returning to Ottawa, he obtained
a position with the city police force. In 1941 he married. At no time did he live at the
house No. 548 or, apart from the 6 months, at the house No. 550.
The performance consisted of taking his aunt about in her own or his automobile
on trips to Montreal and elsewhere, and on pleasure drives, of doing odd jobs about
the two houses, and of various accommodations such as errands and minor services
for her personal needs ....
[Rand J considered the argument that the agreement was enforceable on the basis of
the doctrine of part performance, which he rejected, reversing the courts below and
holding the contract unenforceable under the Statute of Frauds, and continued:]
There remains the question of recovery for the services rendered on the basis of
a quantum.meruit. On the findings of both Courts below the services were not given
gratuitously but on the footing of a contractual relation: they were to be paid for.
The statute in such a case does not touch the principle of restitution against what
would otherwise be an unjust enrichment of the defendant at the expense of the
plaintiff. This is exemplified in the simple case of part or full payment in money as
the price under an oral contract; it would be inequitable to allow the promisor to keep
both the land and the money and the other party to the bargain is entitled to recover
what he has paid. Similarly is it in the case of services given.
This matter is elaborated exhaustively in the Restatement of the Law of Contract
issued by the American Law Institute and Professor Williston's monumental work

146
 IX. RESTITUTION

on Contracts, 1936, vol. 2, s. 536 deals with the same topic. On the principles there
laid down the respondent is entitled to recover for his services and outlays what the
deceased would have had to pay for them on a purely business basis to any other
person in the position of the respondent. The evidence covers generally and perhaps
in the only way possible the particulars, but enough is shown to enable the Court to
make a fair determination of the amount called for; and since it would be to the benefit
of the other beneficiaries to bring an end to this litigation, I think we should not hesi-
tate to do that by fixing the amount to be allowed. This I place at the sum of $3,000.
The appeal will therefore be allowed and the judgment modified by declaring the
respondent entitled to recover against the respondent administrator the sum of
$3,000; all costs will be paid out of the estate, those of the administrator as between
solicitor and client.
CARTWRIGHT J (Estey, Locke, and Fauteux JJ concurring): ... I agree with the conclu-
sion of my brother Rand that the respondent is entitled to recover the value of these
services from the respondent administrator. This right appears to me to be based,
not on the contract, but on an obligation imposed by law.
In Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC. 32, at
p. 61, Lord Wright said:
It is clear that any civilized system of law is bound to provide remedies for cases of what
has been called unjust enrichment or unjust benefit, that is to prevent a man from
retaining the money of or some benefit derived from another which it is against con-
science that he should keep. Such remedies in English law are generically different from
remedies in contract or in tort, and are now recognized to fall within a third category
of the common law which has been called quasi-contract or restitution.
And atp. 62:
Lord Mansfield does not say that the law implies a promise. The law implies a debt or
obligation which is a different thing. In fact, he denies that there is a contract; the obliga-
tion is as efficacious as if it were upon a contract. The obligation is a creation of the law,
just as much as an obligation in tort. The obligation belongs to a third class, distinct
from either contract or tort, though it resembles contract rather than tort.
Lord Wright's judgment appears to me to be in agreement with the view stated
in Williston on Contracts referred to by my brother Rand ....
In the case at bar all the acts for which the respondent asks to be paid under his
alternative claim were clearly done in performance of the existing but unenforceable
contract with the deceased that she would devise 548 Besserer St. to him, and to infer
from them a fresh contract to pay the value of the services in money would be ... to
draw an inference contrary to the fact.
In my opinion when the Statute of Frauds was pleaded the express contract was
thereby rendered unenforceable, but the deceased having received the benefits of the
full performance of the contract by the respondent, the law imposed upon her, and
so on her estate, the obligation to pay the fair value of the services rendered to her.
If this is, as I think, the right view of the nature of the obligation upon which the
respondent's claim rests it follows that the Limitations Act can have no application ....
In my opinion the obligation which the law imposes upon the respondent admin-
istrator did not arise until the deceased died intestate. It may well be that throughout
her life it was her intention to make a will in fulfillment of the existing although
unenforceable contract and until her death the respondent had no reason to doubt
that she would do so. The statutory period of limitation does not commence to run
until the plaintiff's cause of action has accrued; and on the facts of the case at bar

147
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

the cause of action upon which the respondent is entitled to succeed did not accrue
until the death of the. deceased intestate.
For the above reasons I would dispose of the appeal as proposed by my brother
Rand.

NOTES AND QUESTIONS

1. As illustrated by the well-known passage from the reasons of Lord Wright in the Fibrosa
case, quoted by Cartwright J in Deg/man, some English observers welcomed the American
Law lnstitute's in itiative . Such views remained heterodox in England, howeve r, until the last
decade or so of the 20th century when the American unjust enrichment analysis was finally
absorbed into English restitutionary doctrine.
2. How does t he measure of relief made available in Deg/man differ from the measure of
relief available for damages for breach of contract-that is, expectancy damages7
3. What should have been the result if the va lue of the nephew's services had exceeded the
value of the house?

Boone v Coe. 154 SW 900 (Ky CA 1913). The plaintiffs, Boone and J.T. Coe, were
farmers 'in Kentucky. The defendant, J.F. Coe, a farmer in Texas, orally promised
them a lease of his farm for a year, to commence on their arrival at the farm in Texas.
He also promised to build them a dwelling ready for occupancy on their arrival, to
provide materials for a stock and grain barn, and to share with them a portion of the
crop that the plaintiffs were to sow and cultivate. The plaintiffs did move to Texas,
with their families, wagons, horses, and camping outfit, taking about 55 days, at an
expense of $1,387.80, including $8 a day for the 55 days and 22 days while they
remained in Texas; cash outlay en route $361.80; $100 for loss of time on the return
trip, which took 4 days; and $150 for losses suffered in abandoning their homes and
businesses in Kentucky. They returned because the defendant J.F. Coe failed to carry
out any of his promises . In an action for damages the court held the contract was
unenforceable under the Statute of Frauds, which required a promise for a lease for
more than a year to be in writing and refused relief. CLAY c said:
In the case under consideration the plaintiffs merely sustained a loss. Defendant received
no benefit. Had he rece ived a benefit, the law would imply an obligation to pay therefor.
Having received no benefit, no obligation to pay is implied. The statute says that the
contract of defendant made with pla intiffs is unenforceable. Defendant therefore had
the legal right to decline to carry it out. To require him to pay plaintiffs for losses and
expenses incurred on the faith of the contract, without any benefit accruing to him,
would, in effect, upho ld a contract upon which the statute expressly declares no action
shall be brought. The statute was enacted for the purpose of preven ting frauds and
perjuries. That it is a valuable statute is shown by the fact that similar statutes are in force
in practically all, if not all, of the states of the Union. Being a valuable statute, the purpose
of the lawmakers in its enactment should not be defeated by permitting recoveries in
cases to which its provisions were intended to apply.

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NOTES AND QUESTIONS

1. Why is the Statute of Frauds not intended to apply when the plaintiff confers a benefit,
but is intended to apply when the plaintiff confers no benefit? What does Boone v Coe tell us
about the nature of restitutionary relief?
2. If Deg/man v Guaranty Trust represents the triumph, for the purposes of Canadian law,
of the unjust enrichment theory over the implied contract theory of restitutionary relief, it is of
interest to note that, in an earlier era, some English judges adopted a similar view of the nature
of restitutionary relief.

Moses v Macferlan. (1760), 2Burr1005, 97 ER 676. LORD MANSFIELD: If the defendant

be under an obligation, from the ties of natural justice to refund; the law implies a
debt, and gives this action, founded in the equity of the plaintiff's case, as it were
upon a contract (quasi ex contractu, as the Roman law expresses it) .... This kind of
equitable action, to recover back money, which ought not in justice to be kept, is
very beneficial, and therefore much encouraged. It lies only for money which, ex
aequo et bono, the defendant ought to refund ... it lies for money paid by mistake; or
upon a consideration which happens to fail; or for money got through imposition
(express or implied); or extortion; or oppre.ssion; or an undue advantage taken of the
plaintiff's situation, contrary to laws made for the protection of persons under those
circumstances.
In one word, the gist of this kind of action is that the defendant, upon the cir-
cumstances of the case, is obliged by the ties of natural justice and equity to refund
the money.

The adoption of the unjust enrichment theory as an explanation for restitutionary recovery
may thus be considered, in part at least, to achieve a restoration of the view of Lord Mansfield
that common law relief in so-called quasi-contractual cases did not require the factual infer-
ence of a contractual obligation to restore the value received to the plaintiff.
The critical modern Canadian case adopting the unjust enrichment theory as an explana-
tion for equity jurisprudence involving the imposition of a "remedial constructive trust" is
Pettkus v Becker, [1980] 2 SCR 834, a case making constructive trust relief available to a female
partner in a cohabiting relationship so as to require the male partner to share the assets
acquired by the couple through their joint effort but with respect to which title had been taken
exclusively by the male partner.
In subsequent chapters, we will examine the restitutionary remedies available in the context
of ineffective transactions of various kinds w here transactions have been rendered unenforce-
able by principles of either common law or equity. In the present chapter, however, it is perti-
nent to consider the restitutionary remedies that might be available to the victim of a breach
of contract.
As a preliminary point, we might consider why a victim of a breach of contract might prefer
to pursue restitutionary relief rather than damages for breach of contract. Keeping in mind that
the measure of relief in a restitution claim is benefit-based rather than expectancy-based, one
can imagine circumsta nces in wh ich restitutionary relief might be preferable to the victim.
Assume, for example, that a plaintiff entered into an unprofitable contract for the purchase of
an asset at a rather disadvantageous price, paying a substantial deposit to the seller. In the event
of the seller's default, the plaintiff might prefer to sue for restitutionary recovery of the deposit
rather than be subject, in a contract damages claim, to the negative effects of the expectan.cy
principle. See e.g. Bowlay Logging Ltd v Domtar Ltd (1982), 135 DLR (3d) 179 (BCCA). Alterna -
tively, it may be that the complexity of proving expectancy damages may be such that the

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plaintiff would prefer the convenience of proof of the value of benefits conferred on the
defendant in a resti tutionary claim.
A further element of complexity is introduced, however, when it is revealed that the resti-
tutionary doctrines drawn together in the Restatement of Restitution involve two different
types of benefit-based liability. Many claims, such as that illustrated by Deg/man, involve the
recovery of benefits acquired by the defendant directly from or at the expense of the plaintiff.
Other cases, however, both at common law and in equity, award recovery of benefits obtained
by the defendant as a result of wrongful conduct constituting the breach of a duty owed to the
plaintiff. Such relief is often referred to by contemporary scholars as di sgorgement relief and
involves the defendant disgorging to the plaintiff benefits acquired in this fashion. To illustrate,
it is well established that in the context of some kinds of tortious wrongdoing and in the con-
texts of breach of fiduciary obligation and breach of confidence, the plaintiff is entitled to
recover the value of benefits secured by the defendant through the w rongful conduct.
It is a distinguishing feature of disgorgement relief that its availability is not dependent on a
demonstration by the plaintiff that, were it not for the defendant's breach of duty, the plaintiff
would have acquired a similar benefit. Thus, where, for example, the defendant has, in breach
of a fiduciary obligation owed to the plaintiff, secured benefits or profits that could not, in any
event, have been enjoyed by the plaintiff, the defendant may nonetheless be required to dis-
gorge such benefits to the plaintiff. See e.g. Can Aero v O'Malley, [1974] SCR 592 . A question
much debated in the law reviews in recent decades is whether, in the context of a breach of
contract, the victim of the breach of contract may bring a restitutionary claim in the disgorge-
ment measure to recover profits secured through the breach even though the plaintiff wou ld
not have secured such profits if the contract had been performed . For an analysis of the argu-
ments for and against such relief, see L Smith, "Disgorgement of the Profits of Breach of
Contract: Property, Contract and 'Efficient Breach'" (1994) 24 Can Bus LJ 121. Recovery in both
measures of relief-recovery of the value of benefits conferred on the defendant by the plain -
tiff and the disgorgement of benefits secured through breach-are considered in the cases set
out below.

HUNTVSILK
(1804), 5 East 449

The defendant landlord agreed to rent a house to the plaintiff, to repair it and to
execute the lease within ten days in return for the plaintiff's initial payment of £10.
The plaintiff paid the £10 and took immediate possession of the premises. The
defendant, however, refused to make the repairs or to execute the lease, notwith-
standing several requests from the plaintiff after expiry of the ten-day period. The
plaintiff quit the premises and sought recovery of the £10.

LORD ELLENBOROUGH CJ: ... [I]nstead of making his stand, as he might have done,
on the defendant's non-performance of what he had undertaken to do, [the plaintiff]
waived his right, and voluntarily paid the money, giving the defendant credit for his
future performance of the contract, and afterwards he continued in possession
notwithstanding the defendant's default. Where a contract is to be rescinded at all,
it must be rescinded in toto, and the parties put in statu quo. But here was an inter-
mediate occupation, a part execution of the agreement, which was incapable of
being rescinded. If the plaintiff might occupy the premises two days beyond the
time when the repairs were to have been done and the lease executed, and yet
rescind the contract, why might he not rescind it after a twelvemonth on the same
account? This objection cannot be got rid of: the parties cannot be put in statu quo.

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NOTES
1. The unwillingness of the court in Hunt v Silk to apportion and then deduct the benefit
received by the tenant appears archaic in the light of the complex kinds of va luations that we
have seen the courts ma king in some of the damages cases examined in this chapter. None-
theless, the "total failure of consideration" requirement has remained a part of the English law
of restitution for recovery of money payments in cases like Hunt v Silk until quite recently. To
be sure, the requirement has sometimes been applied in a somewhat manipulative fashion.
Thus, it has been held in a line of English cases that a buyer of goods may recover deposits
paid to a seller, notwithstanding the fact that the buyer has enjoyed interim use of the goods,
in cases where the seller has been unable to make title. Failure to make title is said to be a "total
failure of consideration " because the transferring of title is the main object of the agreement.
See e.g . Rowland v Dival/, [1923] 2 KB 500 (CA).
2. The capacity of the rule to work an injustice is neatly illustrated by the decision of the Aus-
tralian High Court in Baltic Shipping Company v Dillon (1993), 176 CLR 344. The plaintiff had paid
a deposit on a 14-day cruise. On the 8th day of the cruise the ship struck a rock and sank. The
plaintiff sued to recover, inter alia, the deposit paid, but this aspect of her claim failed on the basis
that, inasmuch as she had received the first half of the cruise, there existed no total failure of
consideration. The plaintiff was allowed, however, a cla im for damages for breach of contract.
3. More recently; it has been suggested by the House of Lords that, at least in cases where
the benefit received by the plaintiff is money, as in the case of an annuity, the total failure of
consideration requirement does not constitute a bar for relief. See Westdeutsche Landesbank
Girozentrale v Islington LBC, [1996] AC 669 (HL) . More important, in Goss v Chilcott, [1996] AC
788, the Privy Council held that a restitutionary claim for moneys paid to the defendant could
succeed, notwithstanding the fact that the plaintiff had received some benefit in return, "at least
in cases in which an apportionment can be carried out without difficulty" (at 798) .
4. It is unlikely that a contemporary Canadian court would apply the total failure of con-
sideration requirement so as to defeat a restitutionary claim for moneys paid under a contract
discharged by the defendant's breach. Certainly, the requirement has been ignored in the con-
text of contracts for the sale of goods, where the buyer has enjoyed interim use of the goods
but has nonetheless successfully sued to recover moneys paid, subject to an appropriate
deduction for the value of the interim enjoyment. See e.g. Gibbons v Trapp Motors Ltd (1970),
9 DLR (3d) 742 (BCSC). Moreover, for historical reasons, the requirement was applied only in
the context of money claims and is not applied, for example, w here the plaintiff has supplied
goods and services to a defendant who has breached the contract. See e.g. Alkok v Grymek,
[1968] SCR 452. Could it be argued that this anomalous distinction should no longer be
applied once the underlying unjust enrichment basis of these claims is recognized? Further,
the requirement seems to be routinely ignored in money claims in contexts other than claims
for moneys paid under agreements discharged by the defendant's breach of contract. For a
more detailed account, see generally Maddaugh & McCamus, ss 4 :200.10 and 19:200 .

ATTORNEY GENERAL V BLAKE

(2000] UKHL 45, (2000] 4 All ER 385

LORD NICHOLLS OF BIRKENHEAD : George Blake is a notorious, self-confessed traitor.

He was employed as a member of the security and. intelligence services for 17 years,
from 1944 to 1961. In 1951 he became an agent foi the Soviet Union. From then until
1960 he disclosed valuable secret information and documents gained through his
employment. On 3 May 1961 he pleaded guilty to five charges of unlawfully com-
municating information contrary to section l(l)(c) of the Official Secrets Act 1911. He

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was sentenced to 42 years' imprisonment. This sentence reflected the extreme

gravity of the harm brought about by his betrayal of secret information.
In 1966 Blake escaped from Wormwood Scrubs prison and fled to Berlin and then
to Moscow. He is still there, a fugitive from justice. In 1989 he wrote his autobiogra-
phy. Certain parts of the book related to his activities as a secret intelligence officer.
By 1989 the information in the book was no longer confidential, nor was its disclos-
ure damaging to the public interest. On 4 May 1989 Blake entered into a publishing
contract with Jonathan Cape Ltd. He granted Jonathan Cape an exclusive right to
publish the book in this country in return for royalties. Jonathan Cape agreed to pay
him advances against royalties: £50,000 on signing the contract, a further £50,000
on delivery of the manuscript, and another £50,000 on publication. Plainly, had Blake
not been an infamous spy who had also dramatically escaped from prison, his
autobiography would not have commanded payments of this order.
The book, entitled No Other Choice, was published on 17September1990. Neither
the security and intelligence services nor any other branch of the Government were
aware of the book until its publication was announced. Blake had not sought any
prior authorisation from the Crown to disclose any of the information in the book
relating to the Secret Intelligence Service. Jonathan Cape has, apparently, already
paid Blake about £60,000 under the publishing agreement. In practice that money
is irrecoverable. A further substantial amount, in the region of £90,000, remains
payable. These proceedings concern this unpaid money....
Blake's disclosure of the information in his autobiography to his publishers was
a breach of section 1(1) of the Official Secrets Act 1989:
A person who is or has been .. a member of the security and intelligence services ... is
guilty of an offence if without lawful authority he discloses any information ... relating
to security or intelligence which is or has been in his possession by virtue of his position
as a member of any of those services ....
... On 16August1944 Blake signed an Official Secrets Act declaration. This declaration
included an undertaking:
... I undertake not to divulge any official information gained by me as a result of my
employment, either in the press or in book form . I also understand that these provisions
apply not only during the period of service but also after employment has ceased.
This undertaking was contractually binding. Had Blake not signed it he would not
have been employed. By submitting his manuscript for publication without first
obtaining clearance Blake committed a breach of this undertaking. The Court of
Appeal suggested that the Crown might have a private law claim to "restitutionary
damages for breach of contract," and invited submissions on this issue. The Attorney
General decided that the Crown did not wish to advance argument on this point in
the Court of Appeal. The Attorney General, however, wished to keep the point open
for a higher court. The Court of Appeal expressed the view, necessarily tentative in
the circumstances, that the law of contract would be seriously defective if the court
were unable to award restitutionary damages for breach of contract. The law is now
sufficiently mature to recognise a restitutionary claim for profits made from a breach
of contract in appropriate situations. These include cases of "skimped" performance,
and cases where the defendant obtained his profit by doing "the very thing" he
contracted not to do. The present case fell into the latter category: Blake earned his
profit by doing the very thing he had promised not to do.
This matter was pursued in your Lordship's House .... This is a subject on which
there is a surprising dearth of judicial decision. By way of contrast, over the last 20 years

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 IX. RESTITUTION

there has been no lack of academic writing .... Most writers have favoured the view that
in some circumstances the innocent party to a breach of contract should be able to
compel the defendant to disgorge the profits he obtained from his breach of contract.
However, there is a noticeable absence of any consensus on what are the circumstances
in which this remedy should be available .... The broad proposition that a wrongdoer
should not be allowed to profit from his wrong has an obvious attraction. The corollary
is that the person wronged may recover the amount of this profit when he has suffered
no financially measurable loss .... [T]he corollary is not so obviously persuasive ....

INTERFERENCE WITH RIGHTS OF PROPERTY

So I turn to established, basic principles. I shall first set the scene by noting how the
court approaches the question of financial recompense for interference with rights
of property. As with breaches of contract, so with tort, the general principle regarding
assessment of damages is that they are compensatory for loss or injury. The general
rule is that, in the oft quoted words of Lord Blackburn, the measure of damages is to
be, as far as possible, that amount of money which will put the injured party in the
same position he would have been in had he not sustained the wrong: Livingstone
v. Rawyards Coal Co. (1880) 5 App. Cas. 25, 39. Damages are measured by the plaintiff's
loss, not the defendant's gain. But the common law, pragmatic as ever, has long
recognised that there are many commonplace situations where a strict application
of this principle would not do justice between the parties. Then compensation for
the wrong done to the plaintiff is measured by a different yardstick. A trespasser who
enters another's land may cause the landowner no .f inancial loss. In such a case
damages are measured by the benefit received by the trespasser, namely, by his use
of the land. The same principle is applied where the wrong consists of use of
another's land for depositing waste, or by using a path across the land or using pas-
sages in an underground mine. In this type of case the damages recoverable will be,
in short, the price a reasonable person would pay for the right of user: see Whitwam
v. Westminster Brymbo Coal Co. [1892] 2 Ch. 538, and the "wayleave" cases such as
/Vlartin v. Porter (1839) 5 M. and W. 351 and Jegon v. Vivian (1871) L.R. 6 Ch. 742. A more
recent example was the non-removal of a floating dock, in Penarth Dock Engineering
Co. Ltd. v. Pounds [1963] 1 Lloyd's Rep. 359.
The same principle is applied to the wrongful detention of goods. An instance is the
much cited decision of the Court of Appeal in Strand Electric and Engineering Co. Ltd.
v. Brisford Entertainments Ltd. [1952] 2 O.B. 246, concerning portable switchboards.
But the principle has a distinguished ancestry. Earl of Halsbury L.C. famously asked in
The /Vlediana [1900] AC. 113, 117, that if a person took away a chair from his room and
kept it for 12 months, could anybody say you had a right to diminish the damages by
showing that I did not usually sit in that chair, or that there were plenty of other chairs
in the room? To the same effect was Lord Shaw's telling example in Watson, Laidlaw &
Co. Ltd. v. Pott, Cassels, and Williamson (1914) 31 R.P.C. 104, 119. It bears repetition:
If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish
or without his knowledge, rides or drives it out, it is no answer to Afor B to say: "Against
what loss do you want to be restored? I restore the horse. There is no loss. The horse
is none the worse; it is the better for the exercise ."
Lord Shaw prefaced this observation with a statement of general principle:
[W]herever an abstraction or invasion of property has occurred, then, unless such
abstraction or invasion were to be sanctioned by law, the law ought to yield a recom-
pense under the category or principle ... either of price or of hire.

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That was a patent infringement case. The House of Lords held that damages should
be assessed on the footing of a royalty for every infringing article.
This principle is e?tablished and not controversial. More difficult is the alignment
of this measure of damages within the basic compensatory measure. Recently there
has been a move towards applying the label of restitution to awards of this character:
see, for instance, Ministry of Defence v. Ashman [1993] 2 E.G.L.R. 102, 105, and Ministry
of Defence v. Thompson [1993] 2 E.G.L.R. 107. However that may be, these awards
cannot be regarded as conforming to the strictly compensatory measure of damage
for the injured person's loss unless loss is given a strained and artificial meaning.
The reality is that the injured person's rights were invaded but, in financial terms, he
suffered no loss. Nevertheless the common law has found a means to award him a
sensibly calculated amount of money. Such awards are probably best regarded as an
exception to the general rule.
Courts of equity went further than the common law courts. In some cases equity
required the wrongdoer to yield up all his gains. In respect of certain wrongs which
originally or ordinarily were the subject of proceedings in the Court of Chancery,
the standard remedies were injunction and, incidental thereto, an account of profits.
These wrongs included passing off, infringement of trade marks, copyrights and
patents, and breach of confidence. Some of these subjects are now embodied in
statutory codes. An injunction restrained the continuance of the wrong, and the
wrongdoer was required to account for the profits or benefits he had obtained from
breaches or infringements which had already occurred. The court always had a
discretion regarding the grant of the remedy of an account of profits, and this
remains the position. Further, the circumstances in which an account of profits is
available under the statutes vary. For instance, an account of profits may not be
ordered against a defendant in a patent infringement action who proves that at the
date of the infringement he was not aware, and had no reasonable grounds for sup-
posing, that the patent existed: Patents Act 1977, section 62(1) .
In these cases the courts of equity appear to have regarded an injunction and
account of profits as more appropriate remedies than damages because of the dif-
ficulty of assessing the extent of the loss. Thus, in 1803 Lord Eldon L.C. stated, in
Hogg v. Kirby 8 Ves. Jun. 215, 223, a passing off case:

[W]hat is the consequence in Law and in Equity? ... [A] Court of Equity in these cases is
not content with an action for damages; for it is nearly impossible to know the extent
of the damage; and therefore the remedy here, though not compensating the pecuniary
damage except by an account of profits, is the best: the remedy by an injunction and
account.
Whether this justification for ordering an account of profits holds good factually in
every case must be doubtful. Be that as it may, in these types of case equity consid-
ered that the appropriate response to the violation of the plaintiff's right was that the
defendant should surrender. all his gains, and that he should do so irrespective of
whether the violation had caused the plaintiff any financially measurable loss. Gains
were to be disgorged even though they could not be shown to correspond with any
disadvantage suffered by the other party. This lack of correspondence was openly
acknowledged. In Lever v. Goodwin (1887) 36 Ch. D. 1, 7, Cotton L.J. stated it was "well
known" that in trade mark and patent cases the plaintiff was entitled, if he succeeded
in getting an injunction, to take either of two forms of relief: he might claim from
the defendant either the damage he had sustained from the defendant's wrongful
act or the profit made by the defendant from the defendant's wrongful act.
Considered as a matter of principle, it is difficult to see why equity required the
wrongdoer to account for all his profits in these cases, whereas the common law's

154
 IX. RESTITUTION

response was to require a wrongdoer merely to pay a reasonable fee for use of another's
land or goods. In all these cases rights of property were infringed. This difference in
remedial response appears to have arisen simply as an accident of history.
In some instances the common law itself afforded a wronged party a choice of
remedies. A notable example is the wrong of conversion. A person whose goods
were wrongfully converted by another had a choice of two remedies against the
wrongdoer. He could recover damages, in respect of the loss he had sustained by
the conversion. Or he could recover the proceeds of the conversion obtained by the
defendant: see United Australia Ltd. v. Barclays Bank Ltd. [1941] AC. 1, 34, per Lord
Romer. Historically, the latter alternative was achieved by recourse to an element of
legal fiction, whereby the innocent party "waived the tort." The innocent party could ·
suppose that the wrongful sale had been made with his consent and bring an action
for money "had and received to his use": see Lamine v. Dorrell (1701) 2 Ld. Raym.1216,
1217. Holt C.J. observed that these actions had "crept in by degrees."

BREACH OF TRUST AND FIDUCIARY DUTY

I should refer briefly to breach of trust and breach of fiduciary duty. Equity reinforces
the duty of fidelity owed by a trustee or fiduciary by requiring him to account for
any profits he derives from his office orposition. This ensures that trustees and
fiduciaries are financially disinterested in carrying out their duties. They may not
put themselves in a position where their duty and interest conflict. To this end they
must not make any unauthorised profit. If they do, they are accountable. Whether
the beneficiaries or persons to whom the fiduciary duty is owed suffered any loss
by the impugned transaction is altogether irrelevant. The accountability of the army
sergeant in Reading v. Attorney General [1951] AC. 507 is a familiar application of this
principle to a servant of the Crown.

DAMAGES UNDER LORD CAIRNS' ACT

I must also mention the jurisdiction to award damages under section 2 of the Chan-
cery Amendment Act 1858, commonly known as Lord Cairns' Act. This Act has been
repealed but the jurisdiction remains. Section 2 empowered the Court of Chancery
at its discretion, in all cases where.it had jurisdiction to entertain an application for
an injunction or specific performance, to award damages in addition to or in sub-
stitution for an injunction or specific performance. Thus section 2 enabled the Court
of Chancery, sitting at Lincoln's Inn, to award damages when declining to grant
equitable relief rather than, as had been the practice since Lord Eldon's decision in
Todd v. Gee (1810) 17 Ves. 273, sending suitors across London to the common law
courts at Westminster Hall.
Lord Cairns' Act had a further effect. The common law courts' jurisdiction to award
damages was confined to loss or injury flowing from a cause of action which had
accrued before the writ.was issued. Thus in the case of a continuing wrong, such as
maintaining overhanging eaves and gutters, damages were limited to the loss suf-
fered up to the commencement of the action: see Battishill v. Reed (1856) 18 C.B. 696.
Lord Cairns' Act liberated the courts from this fetter. In future, if the court declined
to grant an injunction, which had the effect in practice of sanctioning the indefinite
continuance of a wrong, the court could assess damages to include losses likely to
follow from the anticipated future continuance of the wrong as well as losses already
suffered. The power to give damages in lieu of an injunction imported the power to
give an equivalent for what was lost by the refusal.of an injunction: see Leeds Indus-
trial Co-operative Society Ltd. v. Slack [1924] AC. 851, 859, per Viscount Finlay L.C. It

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CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

is important to note, however, that although the Act had the effect of enabling the
court in this regard to award damages in respect of the future as well as the past, the
Act did not alter the measure to be employed in assessing damages : see Johnson v.
Agnew [1980] AC. 367, 400, per Lord Wilberforce. Thus, in the same way as damages
at common law for violations of a property right may be measured by reference to
the benefits wrongfully obtained by a defendant, so under Lord Cairns' Act damages
may include damages measured by reference to the benefits likely to be obtained in
future by the defendant. This approach has been adopted on many occasions. Recent
examples are Bracewell v. Appleby [1975] Ch. 408 and Jaggard v. Sawyer [1995] 1 W.L.R.
269, both cases concerned with access to a newly-built house over another's land .
. The measure of damages awarded in this type of case is often analysed as dam -
ages for loss of a bargaining opportunity or, which comes to the same, the price
payable for the compulsory acquisition of a right. This analysis is correct. The court's
refusal to grant an injunction means that in practice the defendant is thereby permit-
ted to perpetuate the wrongful state of affairs he has brought about. But this analysis
takes the matter now under discussion no further forward. A property right has value
to the extent only that the court will enforce it or award damages for its infringement.
The question under discussion is whether the court will award substantial damages
for an infringement when no financial loss flows from the infringement and, more-
over, in a suitable case will assess the damages by reference to the defendant's profit
obtained from the infringement. The cases mentioned above show that the courts
habitually do that very thing.

BREACH OF CONTRACT

Against this background I turn to consider the remedies available for breaches of
contract. The basic remedy is an award of damages. In the much quoted words of
· Baron Parke, the rule of the common law is that where a party sustains a loss by reason
of a breach of contract, he is, so far as money can do it, to be placed in the same
position as if the contract had been performed: Robinson v. Harman (1848) 1 Ex. 850,
855. Leaving aside the anomalous exception of punitive damages, damages are
compensatory. That is axiomatic. It is equally well established that an award of dam-
ages, assessed by reference to financial loss, is not always "adequate" as a remedy
for a breach of contract. The law recognises that a party to a contract may have an
interest in performance which is not readily measurable in terms of money. On
breach the innocent party suffers a loss. He fails to obtain the benefit promised by
the other party to the contract. To him the loss may be as important as financially
measurable loss, or more so. An award of damages, assessed by reference to financial
loss, will not recompense him properly. For him a financially assessed measure of
damages is inadequate.
The classic example of this type of case, as every law student knows, is a contract
for the sale of land. The buyer of a house may be attracted by features which have
little or no impact on the value of the house. An award of damages, based on strictly
financial criteria, would fail to recompense a disappointed buyer for this head of
loss. The primary response of the law to this type of case is to ensure, if possible, that
the contract is performed in accordance with its terms. The court may make orders
compelling the party who has committed a breach of contract, or is threatening to
do so, to carry out his contractual obligations. To this end the court has wide powers
to grant injunctive relief. The court will, for instance, readily make orders for the
specific performance of contracts for the sale of land, and sometimes it will do so in
respect of contracts for the sale of goods. In Beswick v. Beswick [1968] AC. 58 the court

156
 IX. RESTITUTION

made an order for the specific performance of a contract to make payments of

money to a third party. The law recognised that the innocent party to the breach
of contract had a legitimate interest in having the contract performed even though
·he himself vyou\d suffer no financial loss from its breach. Likewise, the court will
compel the observance of negative obligations by granting injunctions. This may
include a mandatory order to undo an existing breach, as where the court orders the
defendant to pull down building works carried out in breach of covenant.
Al\ this is trite law. In practice, these specific remedies go a long way towards
providing suitable protection for innocent parties who will suffer loss from breaches
of contract which are not adequately remediable by an award of damages. But these
remedies are not always available. For instance, confidential information may be
published in breach of a non-disclosure agreement before the innocent party has
time to apply to the court for urgent relief. Then the breach is irreversible. Further,
these specific remedies are discretionary. Contractual obligations vary infinitely. So
do the circumstances in which breaches occur, and the circumstances in which
remedies are sought. The court may, for instance, decline to grant specific relief on
the ground that this would be oppressive.
An instance of this nature occurred in Wrotham Park Estate Co. Ltd. v. Parkside
Homes Ltd. [1974] 1 W.L.R. 798. For social and economic reasons the court refused to
make a mandatory order for the demolition of houses built on land burdened with
a restrictive covenant. Instead, Brightman J. made an award of damages under the
jurisdiction which originated with Lord Cairns' Act. The existence of the new houses
did not diminish the value of the benefited land by one farthing. The judge considered
that if the plaintiffs were given a nominal sum, or no sum, justice would manifestly
not have been done. He assessed the damages at five per cent of the developer's
anticipated profit, this being the amount of money which could reasonably have
been demanded for a relaxation of the covenant.
In reaching his conclusion the judge applied by analogy the cases mentioned
above concerning the assessment of damages when a defendant has invaded
another's property rights but without diminishing the value of the property. I con-
sider he was right to do so. Property rights are superior to contractual rights in that,
unlike contractual rights, property rights may survive against an indefinite class of
persons. However, it is not easy to see why, as between the parties to a contract, a
violation of a party's contractual rights should attract a lesser degree of remedy than
·a violation of his property rights. As Lionel Smith has pointed out in his article
"Disgorgement of the Profits of Contract: Property, Contract, and 'Efficient Breach"'
(1994), 24 Can. B.L.J. 121, it is not clear why it should be any more permissible to
expropriate persona\ rights than it is permissible to expropriate property rights ....
[Lord Nicholls then considered and rejected as unsatisfactory a decision of the Court
of Appeal that was inconsistent with the decision in Wrotham Park.]
The Wrotham Park case, therefore, still shines, rather as a solitary beacon, showing
that in contract as we\\ as tort damages are not always narrowly confined to recoup-
ment of financial loss. In a suitable case damages for breach of contract may be
measured by the benefit gained by the wrongdoer from the breach. The defendant
must make a reasonable payment in respect of the benefit he has gained. In the
present case the Crown seeks to go further. The claim is for al\ the profits of Blake's
book which the publisher has not yet paid him. This raises the question whether
an account of profits can ever be given as a remedy for breach of contract. The
researches of counsel have been unable. to discover any case where the court has
made such an order on a claim for breach of contract. ...

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CHAPTER 2 REMED IES FOR BREACH OF PROMISE

There is a light sprinkling of cases where courts have made orders having the
same effect as an order for an account of profits, but the courts seem always to have
attached a different label. A person who, in breach of contract, sells land twice over
must surrender his profits on the second sale to the original buyer. Since courts regu-
larly make orders for the specific performance of contracts for the sale of land, a
seller of land is, to an extent, regarded as holding the land on trust for the buyer: Lake
v. Bayliss [197411W.L.R.1073. In Reid-Newfoundland Co. v. Anglo-American Te legraph
Co., Ltd. [19121 A.C. 555 a railway company agreed not to transmit any commercial
messages over a particular telegraph wire except for the benefit and account of the
telegraph company. The Privy Council held that the railway company was liable to
account as a trustee for the profits it wrongfully made from its use of the wire for
commercial purposes. In British Motor Trade Association v. Gilbert [19511 2 AU E.R. 641
the plaintiff suffered no financial loss but the award of damages for breach of contract
effectively stripped the wrongdoer of the profit he had made from his wrongful
venture into the black market for new cars.
These cases illustrate that circumstances do arise when the just response to a
breach of contract is that the wrongdoer should not be permitted to retain any profit
from the breach. In these cases the courts have reached the desired result by strain -
ing existing concepts. Professor Peter Birks has deplored the "failure of jurisprudence
when the law is forced into this kind of abusive instrumentalism": see (1993) 109
L.O.R. 518, 520. Some years ago Professor Dawson suggested there is no inherent
reason why the technique of equity courts in land contracts should not be more
widely employed, not by granting remedies as the by-produd of a phantom "trust"
created by the contract, but as an alternative form of money judgment remedy. That
well known ailment of lawyers, a hardening of the ·categories, ought not to be an
obstacle: see "Restitution or Damages" (1959) 20 Ohio L.J. 175.
My conclusion is thq.t there seems to be no reason, in principle, why the court
must in all circumstances rule out an account of profits as a remedy for breach of
contract. I prefer to avoid the unhappy expression "restitutionary damages." Rem -
edies are the law's response to a wrong (or, more precisely, to a cause of action) .
When, exceptionally, a just response to a breach of contract so requires, th e court
should be able to grant the discretionary remedy of requiring a defendant to account
to the plaintiff for the benefits he has received from his breach of contract. In the
same way as a plaintiff's interest in performance of a contract may render it just and
equitable for the court to make an order for specific performance or grant an injunc-
tion, so the plaintiff's interest in performance may make it just and equitable that the
defendant should retain no benefit from his breach of contract.
The state of the authorities encourages me to reach this conclusion, rather than
the reverse. The law recognises that damages are not always a sufficient remedy for
breach of contract. This is the foundation of the court's jurisdiction to grant the
remedies of specific performance and injunction. Even when awarding damages,
the law does not adhere slavishly to the concept of compensation for financially
measurable loss. When the circumstances require, damages are measured by refer-
ence to the benefit obtained by the wrongdoer. This applies to interference with
property rights. Recently, the like approach has been adopted to breach of contract.
Further, in certain circumstances an account of profits is ordered in preference to
an award of damages. Sometimes the injured party is given the choice: either com-
pensatory damages or an account of the wrongdoer's profits. Breach of confidence
is an instance of this. If confidential information is wrongfully divulged in breach
of a non-disclosure agreement, it would be nothing short of sophistry to say that an
account of profits may be ordered in respect of the equitable wrong but not in respect

158
 IX. RESTITUTION

of the breach of contract which governs the relationship between the parties. With
the established authorities going thus far, I consider it would be only a modest step
· for the law to recognise openly that, exceptionally, an account of profits may be the
most appropriate remedy for breach of contract. It is not as though this step would
contradict some recognised principle applied consistently throughout the \aw to the
grant or withholding of the remedy of an account of profits. No such principle is
discernible.
The main argument against the availability of an account of profits as a remedy
for breach of contract is that the circumstances where this remedy may be granted
will be uncertain. This will have an unsettling effect on commercial contracts where
cer·t ainty is important. I do not think these fears are we\\ founded. I see no reason
Why, in practice, the availability of the remedy of an account of profits need disturb
settled expectations in the commercial or consumer world. An account of profits will
be appropriate only in exceptional circumstances. Normally the remedies of damages,
specific performance and injunction, coupled with the characterisation of some
contractual obligations as fiduciary, will provide an adequate response to a breach
of contract. It will be only in exceptional cases, where those remedies are inadequate,
that any question of accounting for profits will arise. No fixed rules can be prescribed.
The court will have regard to al\ the circumstances, including the subject matter of
the contract, the purpose of the contractual provision which has been breached, the
circumstances in which the breach occurred, th~ consequences of the breach and
the circumstances in which relief is being sought. A useful general guide, although ·
not exhaustive, is whether the plaintiff had a legitimate interest in preventing the
defendant's profit-making activity and, hence, in depriving him of his profit.
It would be difficult, and unwise, to attempt to be more specific. In the Court of
Appeal Lord Woolf, M.R. suggested there are at \east two situations in which justice
requires the award of restitutionary damages where compensatory damages would
be inadequate: see [1998] Ch. 439, 458. Lord Woolf was not there addressing the
question of when an account of profits, in the conventional sense, should be avail-
able. But I should add that, so far as an account of profits is concerned, the suggested
categorisation would not assist. The first suggested category was the case of "skimped"
performance, where the defendant fails to provide the full extent of services he has
contracted to provide. He should be liable to payback the amount of expenditure he
saved by the breach. This is a much discussed problem. But a part refund of the price
agreed for services would not fa\\ within the scope of an account of profits as ordin-
arily understood. Nor does an account of profits seem to be needed in this context.
The resolution of the problem of cases of skimped performance, where the plaintiff
does not get what was agreed, may best be found elsewhere. If a shopkeeper supplies
inferior and cheaper goods than those ordered and paid for, he has to refund the
difference in price. That would be the outcome of a claim for damages for breach of
contract. That would be so, irrespective of whether the goods in fact served the
intended purpose. There must be scope for a similar approach, without any straining
of principle, in cases where the defendant provided inferior and cheaper services
than those contracted for.
The second suggested category was where the defendant.has obtained his profit
by doing the very thing he contracted not to do. This category is defined too widely
to assist. The category is apt to embrace al\ express negative obligations. But some-
thing more is required than mere breach of such an obligation before an account of
profits will be the appropriate remedy.
Lord Woolf, at [1998] Ch. 439, 457, 458, also suggested three facts which should
not be a sufficient ground for departing from the normal basis on which damages

159
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

are awarded: the fact that the breach was cynical and deliberate; the fact that the
breach enabled the defendant to enter into a more profitable contract elsewhere;
and the fact that by entering into a new and more profitable contract the defendant
put it out of h is power to perform his contract with the plaintiff. I agree that none of
these facts would be, by itself, a good reason for ordering an account of profits.

THE PRESENT CASE

The present case is exceptional. The context is employment as a member of the

security and intelligence services. Secret information is the lifeblood of these ser-
vices. In the 1950s Blake deliberately committed repeated breaches of his undertaking
not to divulge official information gained as a re.sult of his employment. He caused
untold and immeasurable damage to the public frtterest he had committed himself
to serve. In 1990· he published his autobiography, a further breach of his express
undertaking. By this time the information disclosed was no longer confidential. In
the ordinary course of commercial dealings the disclosure of non-confidential
information might be regarded as venial. In the present case disclosure was also a
criminal offence under the Official Secrets Acts, even though the information was
no longer confidential. Section 1 of the Official Secrets Act 1989 draws a distinction
in this regard between members of the security and intelligence services and other
Crown servants. Under section 1(3) a person who is or has been a Crown servant is
guilty of an offence if without lawful authority he makes "a damaging disclosure" of
information relating to security or intelligence. The offence is drawn more widely
in the case of a present or past member of the security and intelligence services.
Such a person is guilty of an offence if without lawful authority he discloses "any
information" relating to security or intelligence which is or has been in his posses-
sion by virtue of his position as a member of those services. This distinction was
approved in Parliament after debate when the legislation was being enacted . ...
When he joined the Secret Intelligence Service Blake expressly agreed in writing
that he would not disclose official information, during or after his service, in book
form or otherwise. He was employed on that basis. That was the basis on which he
acquired official information. The Crown had and has a legitimate interest in pre-
venting Blake [from] profiting from the disclosure of official information, whether
classified or not, while a member of the service and thereafter. Neither he, nor any
other member of the service, should have a financial incentive to break his under-
taking. It is of paramount importance that members of the service should have
complete confidence in all their dealings with each other, and that those recruited
as informers should have the like confidence. Undermining the willingness of pro-
spective informers to co-operate with the services, or undermining the morale and
trust between members of the services when engaged on secret and dangerous
operations, would jeopardise the effectiveness of the service. An absolute rule against
disclosure, visible to all, makes good sense.
In considering what would be a just response to a breach of Blake's undertaking
the court has to take these considerations into account. The undertaking, if not a
fiduciary obligation, was closely akin to a fiduciary obligation, where an account of
profits is a standard remedy in the event of breach. Had the information which Blake
has now disclosed still been confidential, an account of profits would have been
ordered, almost as a matter of course. In the special circumstances of the intelligence
services, the same conclusion should follow even though the information is no
longer confidential. That would be a just response to the breach. I am reinforced in
this view by noting that most of the profits from the book derive indirectly from the
extremely serious and damaging breaches of the same undertaking committed by

160
 IX. RESTITUTION

Blake in the 1950s. As already mentioned, but for his notoriety as an infamous spy
his autobiography would not have commanded royalties of the magnitude Jonathan
Cape agreed to pay.

LORD HOBHOUSE (dissenting) : ... I must also sound a further note of warning that if
some more extensive principle of awarding non-compensatory damages for breach
of contract is to be introduced into our commercial law, the consequences will be
very far-reaching and disruptive. I do not believe that such is the intention of your
Lordships but if others are tempted to try to extend the decision of the present
exceptional case to commercial situations so as to introduce restitutionary rights
beyond those presently recognized by the law of restitution, such a step will require
very careful consideration before it is acceded to ... . The policy which is being
enforced is that which requires Blake to be punished by depriving him of any benefit
from anything connected with his past deplorable conduct. Your Lordships consider
that this policy can be given effect to without a departure from principle. I must
venture to disagree.

[The court granted an order declaring that the attorney general was entitled to be
paid a sum equal to whatever amount was due and owing to Blake from Jonathan
Cape under the publishing agreement. Lord Hobhouse dissented on the ground that
no principle was available to support the result favoured by the .majority.]

NOTES AND QUESTIONS

1. What is the nature of the test identified by Lord Nicholls for determining whether a· case
is an appropriate one for the awarding of the disgorgement remedy7 Would it apply to the
following fact situation? Esso adopted a "Pricewatch" program to deal with the intermittent
type of price war that breaks out among service stations. Service stations participating in Essa's
program received an extra discount on gas supplied by Esso to them in return for an under-
taking to participate in the program, which required the provision of information concerning
prices charged by competitors and an agreement to charge prices required, from time to time,
by Esso under the program. The defendant agreed to participate but then failed to charge the
prices required by Esso with resulting profit. Should Esso be entitled to recover such profit
under the test set out in Attorney General v Blake? See Essa Petroleum Co Ltd v Niad, [2001]
All ER (D) 324 (Ch) (applying Blake and allowing such relief)
2. Did the attorney general or the Crown suffer a financially compensable loss7 If not, on
the basis of what policy considerations can the recovery of profits made by Blake be justified7
3. In Bank of America Canada v Mutual Trust Co, 2002 SCC 43, [2002] 2 SCR 601, the Supreme
Court of Canada acknowledged, without discussion of the innovative nature of the point, the
existence of a discretion to award disgorgement relief in the context of a breach of contract
case. Major J (for the court) observed :

Contract damages are determined in one of two ways. Expectation damages, the usual
measure of contract damages, focus on the value which the plaintiff would have received if
the contract had been performed. Restitution damages, which are infrequently applied, focus
on the advantage gained by the defendant as a result of his or her breach of contract.

With respect to the latter, Major J observed :

The other side of the coin is to examine the effect of the breach on the defendant. In con-
tract, restitution damages can be invoked when a defendant has, as a result of his or her own
breach, profited in excess of his or her expected profit had the contract been perform ed but

161
CHAPTER 2 REMEDIES FOR BREACH OF PROMISE

the plaintiff's loss is less than the defendant's gain. So the plaintiff can be fully paid in dam-
ages with a surplus left in the hands of the defendant. This occurs with what has been
described as an efficient breach of contract. In some but not all cases, the defendant may
be required to pay such profits to the plaintiff as restitution damages ....
Courts generally avoid this measure of damages so as not to discourage efficient breach
(i.e., where the plaintiff is fully compensated and the defendant is better off than if he or she
had performed the contract) .... Efficient breach is what economists describe as a Pareto
optimal outcome where one party may be better off but no one is worse off, or expressed
differently, nobody loses. Efficient breach should not be discouraged by the courts. This lack
of disapproval emphasizes that a court will usually award money damages for breach of
contract equal to the value of the bargain to the plaintiff. ·

4. Canadian courts, both before and after Blake, have occasionally awarded disgorgement
relief for breach of contract. See e.g. Arbutus Park Estates Ltd v Fuller (1976), 74 DLR (3d) 257
(BCSC); Jostens Canada Ltd v Gibsons Studio Ltd, [1998] 5 WWR 403 (BCCA); Amertek Inc v
Canadian Commercial Corp (2003), 229 DLR (4th) 419 (Ont Sup Ct J)
5. For discussion of the concept of efficient breach, see R Posner, Economic Analysis of
Law, 5th ed (New York: Aspen Law & Business, 1998) at 130-40; D Friedmann, 'The Efficient
Breach Fallacy" (1989) 18 J Legal Stud 1; R O'Dair, "Restitutionary Damages for Breach of Con-
tract and Efficient Breach: Some Reflections" (1993) 46 CLP 113; L Smith, above.
6. For discussion of the Blake decision, see M Mcinnes, "Gain-Based Relief for Breach of
Contract: Attorney General v Blake" (2001) 35 CBLJ 72; J McCamus, "Disgorgement for Breach
of Contract: A Comparative Perspective" (2003) 36 Loy LAL Rev 943; J Edelman, Gain-Based
Damages (Oxford: Oxford University Press, 2002) ch 5; Maddaugh & McCamus, ch 25.
7. In Smith v Landstar Properties Inc, 2011 BCCA 44, 320 DLR (4th) 664, the plaintiff had
advanced moneys ·to the defendant on a loan that was agreed to be secured by a registered
charge on the defendant's property. The defendant never intended to perform his contractual
obligation to provide security and did not do so. The loan was, however, fully repaid with inter-
est. The plaintiff successfully claimed the difference between the interest actually paid and the
interest that would have been paid on an unsecured loan. Is this a disgorgement claim? Is it
relevant that the plaintiff would not have loaned the money to the defendant on an unsecured
loan?

162
 CHAPTER THREE .

THE KINDS OF PROMISES

LEGALLY EN FORCED

I. Barga ins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

A. Offers and Preliminary Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
B. The Power of Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
C. The Tendering Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
D. Formalization and Certainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
E. Contracts Negotiated by Correspondence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
F. Consideration : The Bargain Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
G. Mutual Promises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
H. Pre-existing Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
I. Compromises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
J . Charitable Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
II. Intention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Ill. Non-Bargain Promises .... .. . . .. . .. . .... .. ......... , . . . . . . . . . . . . . . . . . . . . . 289
A. The Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
B. Past Consideration . .... ; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
C. Subsequent Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
1. Gratuitous Undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 .
2. Estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
IV. Unilateral Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337

The materials in this chapter are divid ed into barga ins and non- ba rg ain pro mi ses. A bargain is
an ag reed -on excha nge, and the existence of a ba rgain has been th e chi ef criterion fo r the
enforcea bility of pro mises in th e com mon law. The constituent parts of a bargai n are intenti on,
mutua l assent to sufficien tly certain terms (co mmonly called offer and accepta nce), and an
exchange of va lue (commonly ca lled co nsideration). In t he 19th century, the view develo ped
that all contracts were bargains-that is, th at t he ex istence of a ba rg ain w as th e only rea son fo r
the enforce ment of prom ises. Th e materials in Secti o n Ill, below, howeve r, suggest tha t th e
barga in theory may not be a full account o f contract law and t hat th ere m ay be other reasons
for the en fo rcement of promises.

163
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

I. BARGAINS
A. OFFERS AND PRELIMINARY NEGOTIATIONS

CORBIN ON CONTRACTS, fi 11
(St Paul, Minn: West, 1952)

OFFER DEFINED

An offer is an expression by one party of his assent to certain definitive terms, pro-
vided that the other party involved in the bargaining transaction will likewise express
his assent to the identically same terms. An offer looks forward to an agreement-to
mutual expression of assent. ...
[W]hat change in legal relations is brought about by the making of an offer? It is
believed that the best short description of this change is that the offer creates a power
of acceptance in the offeree. It will not be disputed by any one that, after an offer is
made, a voluntary expression of assent by the offeree is all that is necessary to create
what we call contract. This is what is meant, and it is all that is meant, by saying that
an offer creates a power of acceptance in the offeree ....
What kind of act creates a power of acceptance and is therefore an offer? It must
be an expression of will or intention. It must be an act that leads the offeree reason-
ably to believe that a power to create a contract is conferred upon him . ... It is on this
ground that we must exclude invitations to deal or acts of mere preliminary negotia -
tions, and acts evidently done in jest ... .
An expression of willingness to make a contract is not operative as an offer unless
it is made in such a manner as justifies another person in thinking that it is directed
to him for his acceptance ....
In order to be legally operative and to create a power of acceptance, it is necessary
that the offer shall contain all the terms of the contract to be made. It is not enough
for one party to say what he himself will promise to do; he must also· say what he
will do it for, that is, what the other party must do in exchange. If A says to B: "I will
sell and convey Blackacre to you," and B replies: "I will pay you $5,000," no contract
has been made yet.

NOTES
1. What you have just read is one academic's attempt to synthesize, in a forma l manner.
some of the basic rules relating to offers. As you examine the cases and materials excerpted
below, ask yourself whether Corbin 's postulates are an accurate reflection of the law.
2. Issues relating to offers and unilateral contracts are dealt with in Section IV, below.

DENTON V GREAT NORTHERN RAILWAY COMPANY

(1856), 5 E & B 860, 119 ER 701 (OB)

The plaintiff being in London in March, 1855, and having business at Peterborough on
the 25th March, 1855, and at Hull on the 26th March, 1855, consulted the printed time
tables issued in the usual way by the defendants for that month. In these time tables
a train was advertised to leave London at 5 p.m. and reach Peterborough about 7 p.m.
and thence to proceed, amongst other towns, to Hull, to arrive there about midnight.
At the bottom of the time tables was the following notice:

164
 I. BARGAINS

The Companies make every exertion that the trains shall be punctual, but their arrival
or departure at the times stated will not be guaranteed, nor will the companies hold
themselves responsible for delay or any consequences arising therefrom.

The time tables advertising this t~ain were, till after 26th March, exhibited by the
defendants at their stations, where the plaintiff had seen them; and were printed and
circulated; and on the 25th March the plaintiff had one in his possession.
The plaintiff, having made his arrangements on the faith of these time .tables,
went down to Peterborough by an early train of the defendants, transacted his busi-
ness at Peterborough, and went to the defendants' station at Peterborough in due
time to take a ticket to Hull by the evening train so advertised: but there was no such
train to Hull; nor had there b~en one during any part of the month of March. The
explanation of this was that the whole line of railway from Peterborough to Hull was
not the property of the defendants, their line ending at Askerne on the route from
Peterborough to Hull. They had running power over the line of the Lancashire and
Yorkshire Railway Company from Askerne to Milford Junction, where the line of the
North Eastern Railway Company joins that of The Lancashire and Yorkshire Railway
Company. There had been, in February, an arrangement between the three com-
panies by which passengers booked at the stations on the line of The Great Northern
Railway Company were carried in the carriages of that company to Milford Junction,
and thence were conveyed by The North Eastern Railway Company to Hull by a train
departing a few minutes after the arrival of the train leaving Peterborough about
7 p.m. Toward the end of February, prior to the publication by the defendants of their
time tables, but after they had been prepared and printed, The North Eastern Railway
Company gave notice to the defendants that, after the 1st day of March, the train
from Milford Junction to Hull would be discontinued. The defendants nevertheless
made no alteration in their time tables, which were published and issued for March.
The plaintiff consulted them and was misled as above stated. In consequence of the
absence of this train the plaintiff could not get to Hull in time for an appointment
which he had made for the morning of the 26th March, and sustained damage to
the amount of £5 10s. It did not appear in or by the time tables whether the train from
Peterborough to Hull was or was not entirely under the control of the defendants ....
LORD CAMPBELL CJ: This is a case of some importance, both as regards the public
and the railway companies. It seems to me that the representations made by railway
companies in their time tables cannot be treated as mere waste paper; and in the
present case I think the plaintiff is entitled to recover, on the ground that there was
a contract with him, and also on the ground that there was a false representation by
the Company.
It seems to m.e that, if the Company promised to give tickets for a train, running
at a particular hour to a particular place, to any one who would come to the station
and tend.er the price of the ticket, it is a good contract with any one who so comes.
I take it to be clear that the issuing of the time tables in this way amounts in fact to
such a promise; any one who read them would so understand them. Then, is it a good
contract in law? The consideration is one which is a prejudice to the person who
makes his arrangements with a view to the fulfilment of the contract, and comes to
the station on the faith of it. Is it not then within the principle of those cases in which
it has been held that an action lies on a contract to pay a reward? There the promise
is to the public at large, exactly as it is here; it is in effect the same as if made to each
individual conditionally; and, on an individual fulfilling the condition, it is an abso-
lute contract with him, and he may sue. That being so, there is, I think, a contract
and there is no excuse shown for breaking it. It is immaterial that the defendants are

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

not owners of the line the whole way to Hull. It is admitted to have been often rightly
held that, where there is a ticket taken out to go to a station, the contract binds the
company issuing the ticket, though it is not specified how much of the line over
which the journey is to be belongs to that company. Then reliance is placed on the
class of cases which decide that an absolute contract must be fulfilled whatever
happens, which, it is said, shows that there cannot be a contract here. But from the
nature of the contract I think that there might be implied exceptions. A carrier by
sea excepts the perils of the sea. It may be from the nature of this contract that the
perils of the railroad are excepted. I see no inconvenience likely to arise from holding
this a contract. It is put, as an example of inconvenience, that a shipowner who has
advertised that his ship is bound for Calcutta as a general ship, and that he will take
on board goods brought to her, would be liable to an action if when goods were
brought on the faith of the advertisement he said he had got a better freight, and was
now bound for Jamaica; but I see no reason why he should not be liable. It seems to
me, therefore, that this is a contract, and that the plaintiff who has acted on it has
his remedy on that ground. But on the other ground there is no doubt. The statement
in the time tables was untrue, and was made so as to be what the law calls a fraudu -
lent representation. It was not the original printing that was blamable; but, after
notice that the train was withdrawn, the defendants continue, down to the 25th
March, to issue these tables. Was not that a representation that there was such a train?
And, as they knew it had been discontinued for some time, was it not a false repre-
sentation' It is all one as if a person, duly authorized by the company, had, knowing
it was not true, said to the plaintiff: "There is a train from Milford Junction to Hull at
that hour." The plaintiff believes this, acts upon it, and sustains loss. It is well estab-
lished law that, where a person makes an untrue statement, knowing it to be untrue,
to another who is induced to act upon it, an action lies. The facts bring the present
case within that rule.
WIGHTMAN J: It seems to me that the publication of these time tables amounted to
a promise to any one of the public who would come to the station and pay for a
ticket, that he shall have one by the train at seven. It is said that this will make the
Company liable though there be inevitable accidents. But the provision at the foot
of the time tables protects the Company in cases of delay by accident, though the
proviso does not apply to the present case where the train is altogether taken off.
But, whether there be a contract or not, the defendants are liable as having
induced the plaintiff by a continued knowingly false representation to believe that
there was a train at seven to Hull, which he, believing, acted upon to his prejudice.
All the essentials for an action for a false representation are here. The representation
is untrue; it is known by the persons making it to be untrue; it is calculated to induce
the plaintiff to act; and he, believing it, is induced to act accordingly.
CROMPTON J: I think also that the plaintiff is entitled to judgment.
I entirely agree in what has been said by my Lord and my brother Wightman, that
an action in the nature of an action for deceit lies here. The Company make a fresh
statement at every moment whilst they continue to hold out these time tables as
theirs. I am besides much inclined to think that they are liable also on the ground
that they have committed a breach of their duty as public carriers. A public carrier
of goods must carry according to his public profession; I think, however, that there
has been no decision that carriers of passengers are under the same obligation:
though in Story on Bailments, s. 591, it is said they are. I cannot doubt that the defend-
ants publicly professed to be carriers of passengers by this train; and therefore I am
inclined to think an action would lie on that ground.

166
 I. BARGAINS

But I am not prepared to say that there is a contract. As I agree that the defendants
are liable, there is no occasion to decide this; and it is true that the cases as to the
recovery of rewards have an analogy to this case. But there is a difference; where a
reward i~ offered, it is generally offered to procure a service which is entirely per-
formed by the party claiming the reward. I never was able to see any good reason
why in such cases he might"not sue for work and labour done at the request of the
defendant. But in the present case, or in that which might be put of a shopkeeper
advertising that he had cheap goods in his shop, I doubt if the labour of coming to
the station, or of crossing the.threshold of the shop, really is part of the consideration
at all. If it be, it is a very small one. I agree, however, that any consideration, however
small, will support a promise; and perhaps the difference between me and my Lord
and my brother Wightman is rather as to the fact than the law. I doubt whether the
promise here in fact was in consideration of coming to the station. If it was, I see
difficulty in saying that the shopkeeper does not promise to have his wares for those
who will take the trouble to leave the street and come into his shop. But it is quite
unnecessary for the decision of this case to come to a determination on that. I am
clearly of opinion that the action lies as for a false representation. I think, though
less decidedly, that it lies on the ground of their duty as public carriers of passengers
to act up to their public profession. But I doubt whether they are answerable on a
contract to do all that may be found in the time tables, if there be anything there
beyond what would be implied as part of their duty as carriers.
Judgment for the plaintiff.

QUESTIONS

1. Are the decisions of Lord Campbell CJ and Wightman J consistent with the case law that
follows?
2. What offer was made by the railway company?

JOHNSTON BROTHERS V ROGERS BROTHERS

(i899), 30 OR 150 (Div Ct)

An appeal by the defendants from the judgment of William Elliott, senior Judge of
the County Court of Middlesex, in favour of the plaintiffs in an action in that Court,
the facts of which are fully set out in the following [portion of the] opinion delivered
by that Judge: ·
The plaintiffs are bakers, and seek to recover damages from the defendants for
breach of a contract for the sale and delivery of a quantity of flour.
The following letter is the basis of the plaintiff's claim:
Toronto, April 26, 1898.
Dear Sir,-We wish to secure your patronage, and, as we have found the only proper
way to get a customer is to save him money, we therefore are going to endeavour to
save you money.
It is hardly prudent for us to push the sale of flour just now, as prices are sure to
advance at least 50 cents per barrel within a very few days, and to give you the advan-
tage of a cut from 20 to 25 cents per barrel seems a very foolish thing, but nevertheless
we are going to do it, just to save you money and secure your patronage.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

We quote you· (R.O.B . or F.O.B.) your station. Hungarian $5.40, and strong Bakers
$5.00, car lots only, and subject to sight draft with bill of lading .
We would suggest your using the wire to order. as prices are so rapidly advancing
that they might be beyond reach before a letter would reach us.
Yours respectfully,
Rogers Bros.
This communication was received by the plaintiffs on the 27th April. The plaintiffs
telegraphed the defendants the same morning as follows:
London, April 27, 1898.
To Roge rs Bros .. Confederation Life Building, Toronto.
We will take two cars Hungarian at your offer of yesterday.
Johnston Bros.
On the same day, namely, the 27th April, the plaintiffs received the following com -
munication by telegraph :
Toronto. Ont.. April 27, 1898.
Flour advanced sixty. Will accept advance of thirty on yesterday's quotations. Further
advance certain.
Rogers Bros.
Then followed a letter, dated the 28th April, from Messrs. Hellmuth & Ivey, solici-
tors for the plaintiffs, calling upon the defendants to fulfil the order "according to the
offer contained in your letter of the 26th and duly accepted by them by wire on April
27th; and upon your refusal damages will be demanded."
FALCONBRIDGE J (for the court): ... The real crux of the case is whether there is a
contract.
Leaving out the matters of inducement (in both the legal and the ordinary sense)
in the letter of the 26th, the contract, if there is one, is contained in the following
words:
Letter. Defendants to Plaintiffs
27th April, 1898.
We quote you, F.O.B. your station, Hungarian $5.40, and strong Bakers $5.00, car lots
only, and subject to sight drafts with bills of lading .
Telegram. Plaintiffs to Defendants
27th April, 1898.
We will take 2 cars Hungarian at your offer of yesterday.
I should expect to find American authority as to the phrase "we quote you" which
must be in very common use among brokers, manufacturers, and dealers in the
United States; but we were referred to no decided case, and I have found none where
that phrase was used.
In the American and English Encyclopedia of Law, 2nd ed., vol. 7, p . 138, the law is
stated to be: "A quotation of prices is not an offer to sell, in the sense that a complete
contract will arise out of the mere acceptance of the rate offered or the giving of an
order for merchandise in accordance with the proposed terms. It requires the accept-
ance by the one naming the price, of the order so made, to complete the transaction.
Until thus completed there is no mutuality of obligation.''

168
 I. BARGAINS

Of the cases cited in support of this proposition, /VJouton v. Kershaw (1884), 59 Wis.
316, 48 Am. Rep. 516, is the nearest to the present one, but in none is the word "Quote"
used.
The meaning of "quote" is given in modern dictionaries as follows :
Standard (Com.)-To give the current market price of, as bonds, stocks, commod-
ities, etc.
Imperial, ed.1884-In com., to name as the price of an article; to name the current
price of; as, what can you quote sugar at?
Century (Com.)-To name as the price of stocks, produce, etc.; name the current
price of.
Webster (Com.)-To name the current price of.
Worcester-To state the price as the price of merchandise.

See also Black's Law Dictionary, sub tit. "Quotation."

There is little or no difference between any of these definitions. Now if we write
the equivalent phrase into the letter- "We giv.e you the current or market price, F.O.B.
your station, of Hungarian Patent $5.40"-can it be for a moment contended that it
is an offer which needs only an acceptance in terms to constitute a contract?
The case of Harty v. Gooderham (1871), 31 U.C .R. 18, is principally relied on by the
plaintiffs. But that case presents more than one point of distinction. There the first
inquiry was .f rom the plaintiff, which, I think, is an element in the case. He writes
the defendants to let him "know your lowest prices for 50 O.P. spirits," etc. To which
defendants answered, mentioning prices and particulars: "Shall be happy to have an
order from you, to which we will give prompt attention," which the court held to be
equivalent to saying "We will sell it at those prices. Will you purchase from us and let
us know how much?" And so the contract was held to be complete on the plaintiff's
acceptance.
But there is no such offer to sell in the present defendant's letter. Harvey v. Facey,
[1893] AC. 552, is strong authority against the plaintiffs.
I have not overlooked the concluding paragraph of the letter, viz., "We would
suggest your using the wire to order, as prices are so rapidly advancing that they
might be beyond reach before a letter would reach us." The learned Judge considers
this to be one of the matters foreign to a mere quotation of prices. I venture, on the
contrary, to think that this suggestion is more consistent with a mere quotation of
prices, which might vary from day to day or from hour to hour. There could be no
question of the prices becoming "beyond reach" in a simple offer to sell at a certain
price.
In my opinion, the plaintiffs have failed to establish a contract, and this appeal
must be allowed with costs, and the action dismissed with costs.

QUESTIONS
1. Suppose the p'taintiff in Harty v Gooderham had ordered more "spirits," etc. than the
defendant could rea·sonably have possessed or acquired. Is Harvey v Facey such a strong
authority against the plaintiffs? What is Harvey v Facey authority for? See (1923) 1 Can Bar Rev
at 398ff and 694, 713.
2. What problems do you foresee if this quote of flour prices was an offer? Could you think
of any way to overcome the problem?

169
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

HARVEY V FACEY
(1893] AC 552 (PC)

LORD MORRIS: The appellants are solicitors carrying on business in partnership at

Kingston, [Jamaica], and it appears that in the beginning of October, 1891, negotiations
took place between the respondent L.M. Facey and the Mayor and council of Kingston
for the sale of the property in question; that Facey had offered to sell it to them for the
sum of £900; that the offer was discussed by the Council at their meeting on the 6th
of October, 1891, and the consideration of its acceptance deferred; that on the 7th of
October, 1891, L.M. Facey was travelling in the train from Kingston to Porus, and that
the appellants caused a telegram to be sent after him from Kingston addressed to him
"on the train for Porus,'' in the following words: "Will you sell us Bumper Hall Pen?
Telegraph lowest cash price-answer paid"; that on the same day L.M. Facey replied
by telegram to the appellants in the following words: "Lowest price for Bumper Hall
Pen £900"; that on the same day the appellants replied to the last-mentioned tele-
gram by a telegram addressed to L.M. Facey "on train at Porus" in the words following:
"We agree to buy Bumper Hall Pen for the sum of nine hundred pounds asked by
you. Please send us your title deed in order that we may get early possession." The
above telegrams were duly received by the appellant and by L.M. Facey . ... Their
Lordships concur in the judgment of Mr. Justice Curran that there was no concluded
contract between the appellants and L.M. Facey to be collected from the aforesaid
telegrams. The first telegram asks two questions. The first question is as to the will-
ingness of. L.M. Facey to sell to the appellants; the second question asks the lowest
price, and the word "Telegraph" is in its collocation addressed to that second question
only. L.M. Facey replied to the second question only, and gives his lowest price. The
third telegram from the appellants treats the answer of L.M. Facey stating his lowest
price as an unconditional offer to sell to them at the price named. Their Lordships
cannot treat the telegram from L.M. Facey as binding him in any respect, except to
the extent it does by its terms, viz., the lowest price. Everything else is left open, and
the reply telegram from the appellants cannot be treated as an acceptance of an offer
to sell to them; it is an offer that required to be accepted by L.M. Facey. The contract
could only be completed if L.M. Facey had accepted the appellants' last telegram. It
has been contended for the appellants that L.M. Facey's telegram should be read as
saying "yes" to the first question put in the appellants' telegram, but there is nothing
to support that contention. L.M. Facey's telegram gives a precise answer to a precise
question, viz ., the price. The contract must appear by the telegrams, whereas the
appellants are obliged to contend that an acceptance of the first question is to he
implied. Their Lordships are of the opinion that the mere statement of the lowest
price at which the vendor would sell contains no implied contract to sell at that price
to the persons making the inquiry.

QUESTIONS

1. What if Facey's telegram had said. "I am prepared to offer you Bumper Hall Pen for
£900"7 See Clifton v Palumbo, [1944]2 All ER 497 (CA)
2. In another case, the vendor's letter said, "For a quick sale, I would accept £26,000." Was
that an offer7 See Bigg v Boyd Gibbons Ltd. [1971] 1 WLR 913 (CA).

Grainger & Son v Gough. [1896] AC 325 (HL). LORD HERSCHELL: The transmission
of such a price list does not amount to an offer to supply an unlimited quantity of
the wine described at the price named, so that so soon as an order is given there is

170
 I. BARGAINS

a binding contract to supply that quantity. If it were so, the merchant might find
himself involved in any number of contractual obligations to supply wine of a par-
ticular description which he would be quite unable to carry out, his stock of that
wine being necessarily limited.

Boyer and Co v D & R Duke. [1905] 2 IR 617 (KBD). MADDEN J: It is a matter of common
knowledge that quotations of prices are scattered broadcast among possible custom-
ers. Business could not be carried on if each such recipient of a priced catalogue
offering a desirable article-say a rare book-at an attractive price, were in a position
to create a contract of sale by writing that he would buy at the price mentioned. The
catalogue had probably reached many collectors. The order of one only can be hon-
oured. Has each of the others who write for the book the right of action7 Wholesale
dealers have not in stock an unlimited supply of the articles the price of which they
quote to the public at large. This stock usually bears some proportion to the orders
which they may reasonably expect to receive. Transactions of the kind under con-
sideration are intelligible and business-like, if we bear in mind the distinction between
a quotation, submitted as a basis of a possible order, and an offer to sell which, if .
accepted, creates a contract for the breach of which damages may be recovered.
These observations seem to apply with special force to a quotation furnished by
a manufacturer, in the position of the defendants, stating the terms on which he is
prepared to work, as to price and time for completion: He may receive and comply
with many applications for quotations on the same day. If his reply in each case can
be turned into a contract by acceptance, his looms might be burdened with an amount
of work which would render it impossible for him to meet his engagements. In my
opinion, a merchant, dealer, or manufacturer, by furnishing a quotation invites an offer
which will be honoured or not according to the exigencies of the business. A quota -
tion based on current prices usually holds good for a limited time. But it remains a
quotation on the basis of which an offer will not be entertained after a certain date.

LEFKOWITZ V GREAT MINNEAPOLIS SURPLUS STORE

86 NW 2d 689 (Minn SC 1957)

MURPHY J: This is an appeal from an order of the Municipal Court of Minneapolis

denying the motion of the defendant for amended findings of fact, or, in the alterna -
tive, for a new trial. The order for judgment awarded the plaintiff the sum of $138.50
as damages for breach of contract.
This case grows out of the alleged refusal of the defendant to sell to the plaintiff
a certain fur piece which it had offered for sale in a newspaper advertisement. It
appears from the record that on April 6, 1956, the defendant published the following
advertisement in a Minneapolis newspaper:

Saturday 9 A.M. Sharp

3 Brand New
Fur Coats
Worth to $100.00
First Come
First Served
$1
Each

171
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

On April 13, the defendant again published an advertisement in the same news-
paper as follows:
Saturday 9 A.M.
2 Brand New Pastel
Mink 3-Skin Scarfs
Selling for $89.50
Out they go
Saturday. Each ... $1.00
1 Black Lapin Stole
Beautiful,
worth $139.50 ... $1.00
First Come
First Served.

The record supports the findings of the court that on each of the Saturdays fol-
lowing the publication of the above-described ads, the plaintiff was the first to
present himself at the appropriate counter in the defendant's store and on each
occasion demanded the coat and the stole so advertised and indicated his readiness
to pay the sale price of $1. On both occasions, the defendant refused to sell the
merchandise to the plaintiff, stating on the first occasion that by a "house rule" the
offer was intended for women only and sales would not be made to men, and on the
second visit that the plaintiff knew defendant's house rules.
[After agreeing with the trial judge that the plaintiff could not recover damages for
the coats because their value "Worth to $100.00" was too vague, the court also found
that the value of the Lapin stole was sufficiently certain to form the basis of a damage
award. The court continued as follows:]
The defendant contends that a newspaper advertisement offering items of mer-
chandise for sale at a named price is a "unilateral offer" which may be withdrawn
without notice. He relies ·upon authorities which hold that, where an advertiser
publishes in a newspaper that he has a certain quantity or quality of goods which
he wants to dispose of at certain prices and on certain terms, such advertisements
are not offers which become contracts as soon as any person to whose notice they
may come signifies his acceptance by notifying the other that he will take a certain
quantity of them. Such advertisements have been construed as an invitation for an
offer of sale on the terms stated, which offer, when received, may be accepted or
rejected and which therefore does not become a contract of sale until accepted by
. the seller; and until a contract has been so made, the seller may modify or revoke
such prices or terms.
[Authorities cited omitted.]
The test of whether a binding obligation may originate in advertisements
addressed to the general public is "whether the facts show that some performance
was promised in positive terms in return for something requested." 1 Williston,
Contracts (Rev. ed.) s. 27 . ...
Whether in any individual instance a newspaper advertisement is an offer rather
than an invitation to make an offer depends on the legal intention of the parties and
the surrounding circumstances ... . We are of the view on the facts before us that the
offer by the defendant of the sale of the Lapin fur was clear, definite, and explieit,
and left nothing open for negotiation. The plaintiff having successfully managed to
be the first one to appear at the seller's place of business to be served, as requested

172
 I. BARGAINS

by the advertisement, and having offered the stated purchase price of the article, he
was entitled to performance on the part of the defendant. We think the trial court
was correct in holding that there was in the conduct of the parties a sufficient mutu -
ality of obligation to constitute a contract of sale.
The defendant contends that the offer was modified by a "house rule" to the effect
that only women were qualified to receive the bargains advertised. The advertise -
ment contained no such restriction. This objection may be disposed of briefly by
stating that, while an advertiser has the right at any time before acceptance to modify
his offer, he does not have the right, after acceptance, to impose new or arbitrary
conditions not contained in the published offer.
Affirmed.

QUESTION
The argument that the contract was formed, in the case of the first visit by Mr. Lefkowitz to the
store, before the inclusion of the "house rule" as a term still leaves open the question of why
the words of the defendant were not effective to modify the second offer when, by that time,
Mr. Lefkowitz knew of the rule. On what basis could the court decide that the "house rule" was
also not part of the second contract'

PHARMACEUTICAL SOCIETY OF GREAT BRITAIN

V BOOTS CASH CHEMISTS (SOUTHERN) LTD
(1953] 1 OB 401 (CA)

[The Pharmaceutical Society is charged with the enforcement of the Pharmacy and
Poisons Act, 1933, s 18 of which provides in part that no person shall "sell any poison
included in Part I of the Poisons List, unless ... the sale is effected by, or under the
supervision of, a registered pharmacist." "Boots," well-known chain store druggists
(chemist's shops) in England, operated a shop in Edgware where substances included
in Part I of the Poisons List were displayed in a self-service area. A customer taking
one of these substances could only escape from the area by passing a cashier's desk
that was near and under the supervision of the pharmacist. The cashier and the
pharmacist were instructed to prevent any customers from removing any drug from
the shop if the pharmacist thought fit. The Pharmaceutical Society brought this
action on an agreed statement of facts to determine whether, as the Society con-
tended, the sale took place when the customer helped himself from the shelf, or as
Boots maintained, the sale took place when the cashier decided whether she would
accept the payment. The Society supposed that if the sale had already taken place it
had not taken place under the supervision of a registered pharmacist and that Boots
could not, therefore, refuse to accept payment or stop the customer from leaving
with the prescribed drugs, Lord Goddard CJ decided that the sale took place when
the cashier accepted payment and under proper supervision. The Society appealed.]
SOMERVELL LJ: It is not disputed that in a chemist's shop where this self-service
system does not prevail a customer may go in and ask a young woman assistant,
who will not herself be a registered pharmacist, for one of these articles on the list,
and the transaction may be completed and the article paid for, although the regis-
tered pharmacist, who will no doubt be on the premises, will not know anything
himself of the transaction, unless the assistant serving the customer, or the customer,

173
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

requires to put a question to him. It is right that I should emphasize, as did the Lord
Chief Justic.e, that these are not dangerous drugs. They are substances which contain
very small portions of poison, and I imagine that many of them are the type of drug
which has a warning as to what doses are to be taken. They are drugs which can be
obtained, under the law, without a doctor's prescription.
The point taken by the plaintiff is this: it is said that the purchase is complete if
and when a customer going round the shelves takes an article and puts it in the
receptacle which he or she is carrying, and that therefore, if that is right, when the
customer comes to the pay desk, having completed the tour of the premises, the
registered pharmadst, if so minded, has no power to say: "This drug ought not to be
sold to this customer." Whether and in what circumstances he would have that power
we need not inquire, but one can, of course, see that there is a difference if super-
vision can only be exercised at a time when the contract is completed.
I agree with the Lord Chief Justice in everything that he said, but I will put the
matter shortly in my own words. Whether the view contended for by the plaintiffs
is a right view depends on what are legal implications of this layout-the invitation
to the customer. Is a contract to be regarded as being completed when the article is
put into the receptacle, or is this to be regarded as a more organized way of doi.n g
what is done already in many types of shops-and a bookseller is perhaps the best
example-namely, enabling customers to have free access to what is in the shop, to
look at the different articles, and then, ultimately, having got the ones which they
wish to buy, to come up to the assistant saying "I want this"? The assistant in 999
times out of 1,000 says "That is all right," and the money passes and the transaction
is completed. I agree with what the Lord Chief Justice has said, and with the reasons
which he has given for his conclusion, that in the case of an ordinary shop, although
goods are displayed and it is intended that customers should go and choose what
they want, the contract is not completed until, the customer having indicated the
articles which he needs, the shop-keeper, or someone on his behalf, accepts that
offer. Then the contract is completed. I can see no reason at all, that being clearly
the normal position, for drawing any different implication as a result of this layout.
The Lord Chief Justice, I think, expressed one of the most formidable difficulties
in the way of the plaintiffs' contention when he pointed out that, if the plaintiffs are
right, once an article has been placed in the receptacle the customer himself is bound
and would have no right, without paying for the first article, to substitute an article
which he saw later of a similar kind and which he perhaps preferred. I can see no
reason for implying from this self-service arrangement any implication other than
that which the Lord Chief Justice found in it, namely, that it is a convenient method
of enabling customers to see what there is and choose, and possibly put back and
substitute, articles which they wish to have, and then go up to the cashier and offer
to buy what they have so far chosen. On that conclusion the case fails, because it is
admitted that there was supervision in the sense required by the Act and at the
appropriate moment of time. For these reasons, in my opinion, the appeal should
be dismissed.
[The judgments of Birkett and Romer LJJ, who agreed, are omitted.]

Fisher v Bell. [1960] 3 All ER 731 (QB). [A 1959 statute made it an offence for anyone
to "manufacture, sell or hire or offer for sale or hire, or lend or give to any other per-
son" a spring 'blade knife, commonly known as a "flick knife." The respondent had
such a knife displayed in his shop window, with a price tag "Ejector knife-4s."
attached. A police constable gave the respondent his opinion that it was a flick knife,

174
 I. BARGAINS

to which the respondent asked: "Why do the manufacturers still bring them round
for us to sell?" The constable told the respondent he would be reported for offering
for sale a flick knife, to which he said: "Fair enough.'' On a prosecution, held, for the
respondent. The display of the knife was a mere invitation to treat, not an "offer for
sale."]
LORD PARKER CJ: I think that most lay people would be inclined to the view (as,
indeed, I was myself when I first read these papers), that if a knife were displayed in
a window like that with a price attached to it, it was nonsense to say that that was
not offering it for sale. The knife is there inviting people to buy it, and in ordinary
language it is for sale; but any statute must be looked at in the light of the general
law of the country, for Parliament must be taken to know the general law. It is clear
that, according to the ordinary law of contract, the display of an article with a price
on it in a shop window is merely an invitation to treat. ... [In] many statutes and orders
which prohibit selling and offering for sale of goods, it is very common, when it is
so desired, to insert the words, "offering or exposing for sale," "exposing for sale"
being clearly words which would cover the display of goods in a shop window. ... I,
for my part, though I confess reluctantly, am driven to the conclusion that no offence
was here committed.

SWISS FEDERAL CODE OF OBLIGATIONS

7. ... The display of merchandise with a price tag is considered as a rule as an offer.

QUESTIONS

1. If the decision in Boots had gone the other way, would it follow that once a customer
had handled a product she wou ld have to pay for it?
2. Is there any reason why the decision in these quasi-criminal cases should depend on the
contractual concept of "offer"7 Are not the courts here dealing with entirely different prob-
lems? If you were legislative counsel, what would you do? For a discussion, see Waddams at
para 57; McCamus at 38-41; MacDougall at 24-25.
3·. Given that many civil law systems have a rule similar to that of the Swiss Federal Code
of Obligations, could it be said that the common law's "invitation to treat" presumption regard-
ing advertisements and the display of merchandise is arbitrary? For just such an argument, see
Smith at 188; JM Feinman & SR Brill, "Is an Advertisement an Offer? Why It Is, and Why It Mat-
ters" (2006) 58 Hastings LJ 61. Would the judges who decided Grainger & Son v Gough and
Boyer and Co v 0 & R Duke, above, have agreed that the common law is arbitrary?

STORER V MANCHESTER CITY COUNCIL

(1974] 3 All ER 825 (CA)

LORD DENNING MR: In May, 1971 there was a change in the control of the defendants,
Manchester Corporation. Previously the Conservatives had been in control. After-
wards it was Labour. The change had legal repercussions. During the Conservative
administration the policy of the corporation was to sell their council houses to ten -
ants on favourable terms. They were willing to sell to any sitting tenant who had
been in occupation more than a year. The sale price was to be the market value of
the house if sold with vacant possession, but with a reduction for the tenant accord-
ing to the length of time he had been in the premises as a tenant. He might get a

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

reduction of from 10 to 20 per cent on the price. Furthermore, the corporation were
ready to give him a 100 per cent mortgage.
When the Labour administration took over in May, 1971 that policy was reversed.
The Labour-controlled administration decided that they would not sell council houses
to tenants. But they realised that they could not go back on existing contracts. So they
gave instructions to their officers that they were to fulfil existing contracts but not to
make any fresh contracts. Now in many cases tenants had filled in various forms
applying to buy their houses, but the contracts of sale had not been exchanged. The
tenants claim that firm contracts had been made even though the contracts had not
been exchanged. But the town clerk thought that the contracts were only binding
when contracts of sale had been exchanged. So he wrote this letter to the tenants:
"At their meeting on the 7th July, 1971 the Council decided to discontinue the Scheme
for the sale of Council houses, and to proceed only with those cases where Contracts
have been exchanged. As Contracts have not been formally exchanged in this case,
I am unable to proceed with the proposed sale." Now the plaintiff, Mr. Storer, one of
the tenants, has brought this action to test that ruling.
The facts are these. Mr. Storer was a tenant of a council house, 167 Moorcroft Road,
Wythenshawe. On 15th November 1970 he filled in a request for information asking
for the price and details of any mortgage. On 14th January 1971 the corporation wrote
saying that they "may be prepared to sell the house to you at the purchase price of
-£2,750," less a discount of 17 per cent (as h e had had a council house for several years),
making a net sum of £2,282. If he were granted a mortgage, it would be for £2,279
repayable over 25 years. They said in their letter: "This letter should not be regarded
as a firm offer of a mortgage." Later on, however, they did make a firm offer, as I will
show.
On 11th February 1971 Mr. Storer filled in an application form to buy a council
house. He said : "I ... now wish to purchase my Council house.'' In it he asked for a
loan on mortgage. On 9th March 1971 the city treasurer wrote to him: "Th.e Corpor-
ation will lend £2,279 repayable over 25 years with interest at 8112% ... the total monthly
instalment payable will be £14.98." On the same day, 9th March 1971, the town clerk
himself wrote a letter which is of crucial importance in the case:
Dear Sir,
Sale of Council Houses
I understand you wish to purchase your Council house and enclose the Agreement for
sale. If you will sign the Agreement and return it to me I will send you the Agreement
signed on behalf of the Corporation in exchange. From the enclosed list of Solicitors,
who are prepared to act for you and advise you on the purchase, please let me know
the name of the firm that you select, as soon as possible .
Enclosed with that letter there was a form headed: "City of Manchester. Agreement
for Sale of a Council House." The corporation had filled in various details, such as
the name of the purchaser, the address of the property, the price, the mortgage,
amount, and the monthly repayments. There was this item left blank: "7. Date when
your tenancy ceases and mortgage repayments will commence,'' followed by these
clauses:
8. Freehold to be conveyed or tr'ansferred by the Corporation.
9. There will be no abstract or investigation of title . .
10. Deeds of Conveyance or Transfer and Mortgage to be in the Corporation's standard forms
including conditions against use except as a private dwelling -house and against advertising
and a restriction not to sell or lease the property for five years.

176
 I. BARGAINS

11. Warning. As from the date mentioned in 7 above the property is at your risk . If you are
taking a mortgage from the Corporation it will be insured for you but the cost recharged
to you. If you are not taking a Mortgage insure it at once. Your responsibility for repairs
and for payment of rates also sta rt from that day. My solicitors are ...

Mr. Storer filled in that form. He filled in the name of solicitors, Messrs. Hargreaves
& Co. He signed the form himself and returned it on 20th March 1971. So he had done
everything which he had to do to bind himself to the purchase of the property. The
only thing left blank was the date when the tenancy was to cease.
The sale would have gone through, no doubt, within a short time but for the cor-
poration and the town clerk's office being so pressed. The housing manager passed
a note to the town clerk suggesting that the sale be completed with effect from
Monday 22nd March or Monday 12th April. But nothing more was done before the
election which brought a change of control in the corporation. The town clerk's staff
were, apparently, overworked and did not deal with the matter in time. Then in May,
1971 there was the election. In July, 1971 the corporation, under the new control,
resolved that there were to be no more sales to council tenants; but the corporation
recognised that they had to go on with the cases where the corporation were legally
bound.
Thereupon the town clerRwrote to Mr. Storer and other tenants in like situation
a letter saying: "As Contracts have not been formally exchanged in this case, I am
unable to proceed with the proposed sale.'' Mr. Storer took the advice of Messrs.
Hargreaves & Co. Some 120 other tenants also took advice. They were advised that there
was a binding contract, even though formal contracts had not been exchanged. So this
case of Mr. Storer has come as a test case for Manchester Corporation. It is to decide
whether or not "exchange" is necessary in order to form a concluded contract.
When parties arrange for a sale "subject to contract," that means, as a rule, that
there is no binding contract until the contracts of sale have been formally exchanged.
That is clear from Eccles v. Bryant. But where there is no arrangement "subject to
contract," the only question is whether a contract has been concluded: see Bigg v.
Boyd Gibbins Ltd. One example is where one solicitor is acting for both sides, such
as in Smith v. Mansi. It is "artificial nonsense," Danckwerts LJ. said, to have an
exchange of contracts where there is only one solicitor acting. The present case is,
I think, another example. The corporation put forward to the tenant a simple form
of agreement. The very object was to dispense with legal formalities. One of the
formalities-exchange of contracts-was quite unnecessary. The contract was con-
cluded by offer and acceptance. The offer was contained in the letter of 9th March
in which the town clerk said: "I ... enclose the Agreement for Sale. If you will sign the
Agreement and return it to me I will send the Agreement signed on behalf of the
Corporation in exchange." The acceptance was made when the tenant did sign it, as
he did, and return it, as he did on 20th March. It was then that a contract was con -
eluded. The town clerk was then bound to send back the agreement signed on behalf
of the corporation. The agreement was concluded on Mr. Storer's acceptance. It was
not dependent on the subsequent exchange.
I appreciate that there was one space in the form which was left blank. It was cl.
7 for "Date when your tenancy ceases." That blank did not mean there was no con -
eluded contract. It was left blank simply for administrative convenience. A similar
point arose in Smith v. Mansi where Russell L.J. said:
There was nothing left for the parties themselves to do but agree the date. Its insertion in the
already signed document-in the hands of the common solicitor·-could surely be nothing
but an administrative tidying up to be done, if at all, at the solicitor's convenience.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

So here the filling in of the date was just a matter of administrative tidying up, to
be filled in by the town clerk with a suitable date for the change-over-the date on
which the man ceased to be a tenant and become a purchaser.
A further point was taken. It was said that the town clerk had not actually signed
the form of agreement. No matter. He had signed·a letter of 9th March 1971 and that
was sufficient. It was a note or memorandum sufficient to satisfy the Law of Property
Act 1925, s. 40.
The final point was this. Counsel for the corporation said that the town clerk did
not intend to be bound by the letter of 9th March 1971. He intended that the corpor-
ation should not be bound except on exchange. There is nothing in this point. In
contracts you do not look into the actual intent in a man's mind. You look at what he
said and did. A contract is formed when there is, to all outward appearances, a con -
tract. A man cannot get out of a contract by saying: "I did not intend to contract," if
by his words he has done so. His intention is to be found only in the outward expres-
sion which his letters convey. If they show a concluded contract that is enough.
It seems to me that the judge was quite right in holding that there was a binding
contract in this case, even though there was no exchange. It is a proper case for
specific performance; and I would dismiss the appeal.

NOTE
In a subsequent case, Gibson v Manchester City Council, [1979] 1 WLR 294 (HU. negotiations
had not proceeded as far as in Starer's case. The Counc il had written to Gibson saying, "[T]he
Corporation may be prepared to sell the house to you at ... £2,180." The House of Lords held
that this was not an offer. See also Waddams at para 25; McCamus at 37-38; MacDougall at
24-26.

B. THE POWER OF ACCEPTANCE

It is frequently said that the rules of "offer" and "accepta nce" in contract are technical and arbi-
trary. The following cases, however, illu strate the difficulties in determining whether an assent
has been given to a proposed bargain . Apart from determin ing whether a bargain has been
made, when an acceptance has been given can have other implications as well. In some cases,
acceptance has been used to determine where a contract has been made and therefore which
courts can claim jurisdiction over disputes arising out of the contract. In others, the timing of
acceptance has been used to help determine actual terms of the contract bargained between
the parties. Consider these issues as you examine the materials that follow.

NOTE
Issues of acceptance in relation to unilateral contracts are dealt with in Section IV, below.

SHATFORD V BC WINE GROWERS LTD

(1927] 2 DLR 759 (BCSC)

MURPHY J : Plaintiff's case, on his pleadings, is that the letter of April 21, 1926 (ex. 3)
with enclosure is an offer from the defendants to plaintiff for the purchase of logan -
berries .... I think plaintiff's action must fail because he did not accept this offer
within a reasonable time. The causes of this delay are immaterial. The facts are that

178
 I. BARGAINS

ex. 3 was mailed on April 22, and was received probably on the 23rd, or, at latest, on
the 24th. Plaintiff did not sign the contract enclosed with ex. 3 until April 30-a delay
of at least some six days. He mailed the signed document to defendant on the even-
ing of April 30. Ordinarily a proposal sent by mail calls for an acceptance, if not by
return of post, at least during business hours of the day on which such offer is
received (Dunlop v. Higgins (1848), 1 H.L. Cas. 381, 9 E.R. 805). In all cases the offer
must be accepted within a reasonable time. Here, having regard to the commodity
being bargained for, the time of year of the offer, and the necessity, under the cir-
cumstances, as shown by the evidence of prompt decision, as to whether an offer
would be accepted or not, I hold the plaintiff did not accept defendants' offer within
a reasonable time. Action dismissed with costs.

MANCHESTER DIOCESAN COUNCIL FOR EDUCATION

V COMMERCIAL & GENERAL INVESTMENTS LTD
[1969] 3 All ER 1593 (ChD)

BUCKLEY J: .. . It has long been recognised as being the law that, where an offer is
made in terms which fix no time limit for acceptance, the offer must be accepted
within a reasonable time to make a contract (Chitty on Contracts (22nd edn.), vol. 1,
p. 47, para. 89; Williams on Vendor and Purchaser (4th edn.), vol. 1, p. 16; 8 Halsbury's
Laws of England (3rd edn.), p. 71, para. 124). There seems, however, to be no reported
case in which the reason for this is explained.
There appear to me to be two possible views on methods of approaching the
problem. First, it may be said that by implication the offer is made on terms that, if
it is not accepted within a reasonable time, it must be treated as withdrawn. Alterna-
tively, it may be said that, if the offeree does not accept the offer within a reasonable
· time, he must be treated as having refused it On either view the offer would cease
to be a live one on the expiration of what in the circumstances of the particular case
should be regarded as a reasonable time for acceptance. The first of these alternatives
inv olves implying a term that if the offer is not accepted within a reasonable time,
it shall be treated as withdrawn or lapsing at the end of that period if it has not then
been accepted; the second is based on an inference to be drawn from the conduct
of the offeree, that is, that having failed to accept the offer within a reasonable time
he has manifested an intention to refuse it If, in the first alternative, the time which
the offeror is to be treated as having set for acceptance is to be such a time as is
reasonable at the date of the offer, what is reasonable must depend on circumstances
then existing and reasonably likely to arise during the continuance of the offer; but
it would be not unlikely that the offeror and offeree would make different assess-
ments of what would be reasonable even if, as might quite possibly not be the case,
they based those judgments on identical known and anticipated circumstances. No
doubt a court could resolve any dispute about this, but this approach clearly involves
a certain degree of uncertainty about the precise terms of the offer. If on the other
hand the time which the offeror is to be treated as having set for acceptance is to be
such a time as turns out to be reasonable in the light of circumstances then existing
and of circumstances arising thereafter during the continuance of the offer, whether
foreseeable or not, an additional element of uncertainty is introduced. The second
alternative on the other hand involves simply an objective assessment of facts and
the determination of the question whether on the facts the offeree should in fairness
to both parties be regarded as having refused the offer.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

It does not seem to me that either party is in greater need of protection by the law
in this respect than the other. Until his offer has been accepted it is open to the offeror
at any time to withdraw it or to put a limit on the time for acceptance. On the other
hand, the offeree can at, any time refuse the offer or, unless he h as been guilty of
unreasonable delay, accept it. Neither party is at a disadvantage. Unless authority
constrains me to do otherwise, I am strongly disposed to prefer the second alterna -
tive to the first.

QUESTIONS
1. If Buckley J is correct that the second alternati_ve is to be preferred, does this mean that
the same offer macle to different people might lapse at different times? For a discussion, see
MacDougall at 34-35.
2. On November 15, B wrote to C, offering to sell C his farm fo r $150,000 . The letter sa id
that the deal could be closed immediately and that the title wou ld be transferred on January
1. and ended, "Tru sting to hear from yo u as soon as possible." C was away when the letter
arrived, and did not accept the offer until December 10; meanwhile, B sold the farm to H. Both
C and H claim the farm. How wo uld you advise C? See Barrick v Clark, [1951] SCR 177, [1950]
4 DLR 529.
3. A sends an offer to B to sell goods, asking for a reply within a week. Eight days after
receiving the offer, B replies accepting it. Two days later B changes hi s mind and withdraws his
acceptance . How would you advise A. who has incurred expense in preparing the goods for
shipment7
4. D sues N to enforce N's guarantee of the indebtedness of a related company. The Court
of Appeal finds that N owes D approximately $315,000. N applies for leave to appea l to the
Supreme Court. After N has filed the leave application and D has responded to it, N makes D
an offer to settle the case for $250,000. A few hours after the settlement offer has been made
(and sooner than e ither party had expected). the Supreme Court advises the parties that leave
to appea l has been granted. D purports to accept N's offer to settle. Is D able to accept the
offer or has it lapsed because of a fundamental change in circumstances7 For a discussion, see
Nielsen v Dysart Timbers Ltd, [2009] NZSC 43, noted (2011) 27 J of Contract L 222 .

LARKIN V GARDINER
(1895). 27 OR 125 (Div Ct)

This was an action for the specific performance of a contract for the sale of land,
brought by Jane Larkin, alleging herself to be the vendor, against the defendant, who
had, as she alleged, entered into a contract with her.
The defendant denied the making of any contract, and alleged a want of title in
the vendor and a cancellation of the contract if any existed.
The property had been placed in the hands of one Nesbitt, a land agent, by the
plaintiff for sale on her behalf. The defendant went to Nesbitt and offered $1, 900 for
the property. Nesbitt stated, as the fact was, that he was not authorized to sell at that
price, but that if the defendant would sign an agreement to purchase at that price,
he would submit the matter to the plaintiff. Thereupon Nesbitt prepared a form of
agreement, beginning "I, Jane Larkin of Toronto, married woman, agree to sell,
through John A. Nesbitt as my agent, and I, David Gardiner of the city of Toronto,
baker, agree to buy, all that certain parcel," etc.
This was signed by the defendant at about seven p .m. on the 22nd April, 1895,
and left by him with Nesbitt. Early next morning Nesbitt went to the plaintiff's house

180
 I. BARGAINS

and she signed the agreement. At about one o'clock on the same day, the defendant
gave written notice to Nesbitt withdrawing from the offer he had made. At the time
he received his notice, Nesbitt had taken no step to communicate to the defendant
the fact that the plaintiff had accepted his offer or had signed the agreement. The
agreement with the two signatures attached to it, had simply remained in his pos-
session as agent for the plaintiff without communication to any one of the fact that
the plaintiff had completed it by her signature. Subsequently the defendant, while
always repudiating the existence of any agreement on his part to purchase, and
expressly without prejudice to that position, upon being served with an abstract of
title, made objections to it, and upon these not being satisfactorily answered, refused
to do anything further ..whereupon the present action was brought.
STREET J: The instrument signed by the defendant, although drawn in the form of
an agreement, must, in my opinion, be treated as a mere offer to .purchase which
might be withdrawn before it had been accepted by the plaintiff; and the only ques-
tion to be determined is, whether the mere signature of the plaintiff without anything
more was a sufficient acceptance.
In Brogden v. /vletropolitan R. W. Co. (1877), 2 App. Cas. 666, Lord Blackburn, at
p. 691, says: "I have always believed the law to be this, that whenever an offer is made
to another party, and in that offer there is a request express or implied that he must
signify his acceptance by doing some particular thing, then as soon as he does that
thing, he is bound." And he goes on to say, at p. 692, "But when you come to the
general proposition which Mr. Justice Brett seems to have laid down, that a simple
acceptance in your mind, without any intimation to the other party and expressed
by a mere private act, such as putting a letter into a drawer, completes a contract, I
must say I differ from that."
Now, I think it would be unreasonable to hold in the present case that the defend-
ant having made his offer to purchase, did not impliedly stipulate that in some form
or other he should be made aware of the plaintiff's decision with regard to it-either
by a letter informing him of the fact, or by the delivery to him of the contract signed
by the plaintiff. I do not think it would be consistent with what we must assume the
intention of the parties to have been that the mere signature of the plaintiff not
communicated to him, should convert his offer into a binding contract. If I am right
in so viewing the matter, then it follows that until the plaintiff had done something
irrevocable towards communicating to him her acceptance of his offer, he was at
liberty to withdraw it. The posting of a letter to him, or the verbal communication to
him, of the fact that she had signed the contract, would have been sufficient. But the
delivery to her own agent of the contract with her signature to it, was a revocable
act until it had been communicated to the defendant, and was of no more force than
if she had kept the instrument in her own drawer after signing it. If it had been pos-
sible to hold that Nesbitt was agent for the defendant to receive notice of the comple-
tion of the contract, his knowledge that the plaintiff had signed, would of course
have bound the defendant, but there is not the slightest ground for any such
finding.
In my opinion, therefore, the defendant was within his rights when he withdrew
the offer he had made, and no contract binding upon either party ever existed.
[The judgment of Armour CJ is omitted. Falconbridge J concurred.]

Dominion Building Corporation, Ltd v The King. [1933) 3 DLR 577 (Canada PC).
One, Forgie, on July 27, 1925 offered in writing to purchase from His Majesty property

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

at the corner of King and Yonge Streets in Toronto. The offer concluded with these
words: "This offer of purchase, if accepted by Order of His Exc~\lency the Governor
General in Council, shall constitute a binding contract of purchase and sale, subject
to all the terms and provisions thereof and which contract shall enure to the benefit
of the undersigned [Forgie], his heirs, etc. and to the benefit of His Majesty, etc." An
Order in Council was duly passed and a certified copy sent to Forgie, who could not
remember when he received it or whether he had received a covering letter with it.
The Exchequer Court held there was a biniiing contract, which decision the Supreme
Court unanimously reversed on the ground that (here was no written acceptance.
The Privy Council then reversed the decision of the Supreme Court.
LORD TOMLIN: Their Lordships think that if any notification of acceptance of the
offer was necessary, the only possible inference upon the evidence is that there was
a notification of acceptance by the sending to the appellant Forgie of a certified copy
of the Order in Council.
But in fact, in their Lordships' opinion, there was not upon the true construction
of the contract any need for a notification of acceptance. The language of the offer
is ... not the language of precision, but the meaning which can most naturally be and
ought, in their Lordships' opinion, to be attributed to it, is that the offer shall be
deemed to have been accepted when the necessary Order in Council has been made.

DICKINSON V DODDS
(l876), 2 ChD 463 (CA)

On Wednesday, the 10th of June, 1874, the defendant John Dodds signed and deliv-
ered to the plaintiff, George Dickinson, a memorandum, of which the material part
was as follows:
to
I hereby agree sell to Mr. George Dickinson the whole of the dwelling houses, garden
ground, stabling, and outbuildings thereto belong.ing, situated at Croft, belonging to
me, for the sum of £800. As witness my hand this tenth day of June, 1874. John Dodds.
P.5.-This offer to be left over until Friday, 9 o'clock, a.m. J.D. (the twelfth), 12th June,
1874. (signed) J. Dodds.

The bill alleged that Dodds understood and intended that the plaintiff should have
until Friday, 9 a.m., within which to determine whether he would or would not pur-
chase, and that he should absolutely have, until that time, the refusal of the property
at the price of £800, and that the plaintiff in fact determined to accept the offer on
the morning of Thursday, the 11th of June, but did not at once signify his acceptance
to Dodds, believing that he had the power to accept it until 9 a.m. on the Friday.
In the afternoon of Thursday the plaintiff was informed by a Mr. Berry that Dodds
had been offering or agreeing to sell the property to Thomas Allan the other defend-
ant. Thereupon the plaintiff, at about half-past seven in the evening, went to the
house of Mrs. Burgess, the mother-in-law of Dodds, where he was then staying, and
left with her a formal acceptance, in writing, of the offer to sell the property. Accord-
ing to the evidence of Mrs. Burgess, this document never in fact reached Dodds, she
having forgotten to give it to him.
On the following (Friday) morning, at about seven o'clock, Berry, who was acting
as agent for Dickinson, found Dodds at the Darlington railway station, and handed
to him a duplicate of the acc.eptance by Dickinson, and explained to Dodds its pur-
port. He replied that it was too late, as he had sold the property. A few minutes later

182
 I. BARGAIN S

Dickinson himself found Dodds entering a railway carriage, and handed him another
duplicate of the notice of acceptance, but Dodds declined to receive it, saying, "You
are too late. I have sold the property."
It appeared that on the day before, Thursday, the 11th of June, Dodds had signed
a formal contract for the sale of the property to the defendant Allan for £800, and
had received from him a deposit of £40.
Bacon V.C . deqeed specific performance in favor of the plaintiff, on the ground
that by the original offer or agreement with the plaintiff, and by relation back of the
acceptance to the date of the offer, Dodds had lost the power to make a sale to Allan.
From this decision the defendants appealed.

JAMES LJ: ... That shows it was only an offer. There was no consideration given for
the undertaking or promise, to whatever extent it may be considered binding, to
keep the property unsold until 9 o'clock on Friday morning; but apparently Dickinson
was of opinion, and probably Dodds was of the same opinion, that he (Dodds) was
· bound by that promise, and could not in any way withdraw from it, or retract it, until
9 o'clock on Friday morning, and this probably explains a good deal of what after-
wards took place. But it is clear settled law, on one of the clearest principles of law,
that this promise, being a mere nudum pactum, was not binding, and that at any
moment before a complete acceptance by Dickinson of the offer, Dodds was as free
as Dickinson himself. Well, that being the state of things, it is said that the only mode
in which Dodds could assert that freedom was by actually and distinctly saying to
Dickinson, "Now I withdraw my offer." It appears to me that there is neither principle
nor authority for the proposition that there must be an express and actual withdrawal
of the offer, or what is called a retraction. It must, to constitute a contract, appear
that the two minds were at one at the same moment of time; that is, that there was
an offer continuing up to the time of the acceptance. If there was not such a continu-
ing offer, then the acceptance comes to nothing. Of course it may well be that the
one man is bound in some way to let the other know that his mind with regard to
the offer has been changed; but in this case, beyond all question, the plaintiff knew
that Dodds was no longer minded to sell the property to him as plainly and clearly
as if Dodds had told him in so many words, "I withdraw the offer." This is evident
from the plaintiff's own statements in the bill.
The plaintiff says, in effect that, having heard and knowing that Dodds was no
longer minded to sell to him, and that he was selling or had sold to someone else,
thinking that he could not, in point of law, withdraw his offer, meaning to fix him
to it, and endeavoring to bind him, "I went to the house where he was lodging, and
saw his mother-in-law, and left with her an acceptance of the offer, knowing all the
while that he had entirely changed his mind. I got an agent to watch for him at 7
o'clock the next morning, and I went to the train just before 9 o'clock, 'in order that
I might catch him and give him my notice of acceptance just before 9 o'clock, and
when that occurred he told my agent, and he told me, you are too late, and he then
threw back the paper." It is to my mind quite clear that, before there was any attempt
at acceptance by the plaintiff, he was perfectly well aware that Dodds had changed
his mind, and that he had in fact agreed to sell the property to Allan. It is impossible,
therefore, to say there was ever that existence of the same mind between the two
parties which is essential in point of law to the making of an agreement. I am of
opinion, therefore, that the plaintiff has failed to prove that there was any binding
contract between Dodds and himself.

[The decision of Mellish LJ is omitted. Baggallay JA concurred.]

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CHAPTER 3 THE KIN DS OF PROMISES LEGALLY ENFORCED

GERMAN CIVIL CODE

Section 145. An offer to contract is binding upon the offeror unless he has pro-
vided for the contrary.

UNIFORM COMMERCIAL CODE

American Law Institute, 1978

SECTION 2-205. FIRM OFFERS

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

NOTES AND QUESTIONS

1. What are the actual facts of Dickinson v Dodds? Mellish LJ remarked that "Berry does not
tell us from w hom he heard it. but he says that he did hear it. that he knew it. and that he
informed Dickinson of it." Later he referred to the offeree receiving notice "in some way" that
the property has been sold. What "way" would be effective? If Dickinson had heard of the revo-
cation from a friend of his who had heard from a friend of the defendant that the deal was off,
would that be an effective revocation?
2. It was held in Dickinson v Dodds to be "clear settled law" that a promise to hold an offer
open for a certain time is unenforceable unless there is consideration for the promise or unless
it is under seal. James LJ thought that both parties assumed the contrary, and it has often been
suggested that business practice is not in accord w ith the law in this matter. Should common
law jurisdictions adopt the rules proposed by the German Civil Code or Uniform Commercial
Code? Would your opinion change if you were informed that German businesses customarily
"provide for the contrary" (which is said to be the case)?
3. If a promise to hold an offer open is made under seal, it is enforceable even though there
. is no consideration for it. But the offeree may still not be in quite as good a position as he
would have been in had he accepted the offer before revocation because equity will not gen-
erally grant specific performance in the absence of consideration. Thus the seal makes the
promise enforceable at law, but is not recognized by equity as a substitute for consideration:
see Savereux v Tourangeau (1908), 16 OLR 600 (Div Ct).
4. For a discussion of the firm offer problem, see Waddams at paras 114, 127-29; McCamus
at 86-90; MacDougall at 30-32.

FELTHOUSE V BINDLEY
(1862), 11 CB (NS) 869, 142 ER 1037 (Ex Ch)

Action for the conversion of a horse. A verdict was found for the plaintiff, damages
£33, leave being reserved to the defendant to move to enter a nonsuit. A rule nisi
was obtained.

WILLES J : I am of opinion that the rule to enter a nonsuit should be made absolute.
The horse in question had belonged to the plaintiff's nephew, John Felthouse. In
December, 1860, a conversation took place between the plaintiff and his nephew

184
 I. BARGAINS

relative to the purchase of the horse by the former. The uncle seems to have thought
that he had on that occasion bought the horse for £30, the nephew that he had sold
it for 30 guineas: but there was clearly no complete bargain at that time. On the 1st
of January, 1861, the nephew writes, "I saw my father on Saturday. He told me that
you considered you had bought the horse for £30. If so, you are labouring under a
mistake, for, 30 guineas was the price I put upon him, and you never heard me say
less. When you said you would have him, I considered you were aware of the price."
To this the uncle replies on the following day, "Your price, I admit, was 30 guineas.
I offered £30; never offered more: and you said the horse was mine. However, as
there may be a mistake about him, I will split the difference. If I hear no more about
him, I consider the horse mine at £30 15s.'' It is clear that there was no right to com -
plete the bargain on the 2nd of January; and it is also clear that the uncle had no
right to impose upon the nephew a sale of his horse for £30 15s. unless he chose to
comply with the condition of writing to repudiate the offer. The nephew might, no
doubt, also have retracted his offer at any time before acceptance. It stood an open
offer: and so things remained until the 25th of February, when the nephew was about
to sell his farming stock by auction. The horse in question being catalogued with
the rest of the stock, the auctioneer (the defendant) was told that it was already sold.
It is clear, therefore, that the nephew in his own mind intended his uncle to have
the horse at the price which he (the uncle) had named, £30 15s.: but he had not
communicated such his intention to his uncle, or done anything to bind himself.
Nothing, therefore, had been done to vest the property in the horse in the plaintiff
down to the 25th of February, when the horse was sold by the defendant. It appears
to me, that, independently of the subsequent letters, there had been no bargain to
pass the property in the horse to the plaintiff, and therefore that he had no right to
complain of the sale. Then, what is the effect of the subsequent correspondence?
The letter of the auctioneer amounts to nothing. The more important letter is that
of the nephew, of the 27th of February, which is relied on as shewing that he intended
to accept and did accept the terms offered by his uncle's letter of the 2nd of January.'
The letter, however, may be treated either as an acceptance then for the first time by
him, or as a memorandum of a bargain complete before the 25th of February, suffi-
cient within the statute of frauds . It seems to me that the former is the more likely
construction: and if so, it is clear that the plaintiff cannot recover. But, assuming that
there had been a complete parole bargain before the 25th of February, and that the
letter of the 27th was a mere expression of the terms of that prior bargain, and not a
bargain then for the first time concluded, it would be directly contrary to the decision
of the Contract of Exchequer in Stockdale v. Dunlop (1840), 6 M. & W. 224; 151 E.R. 391,
to hold that that acceptance had relation back to the previous offer so as to bind third
persons in respect of a dealing with the property by them in the interim . ...
[Byles J agreed, as did Keating J, who said, "Had the question arisen as between uncle
and nephew, there would probably have been some difficulty." The record shows
that Bindley simply forgot that the horse had been sold. The decision was affirmed
by the Court of Exchequer Chamber in (1863), 7 LT 835.J

Lucy v Mouflet. (1860), 5 H & N 229, 157 ER 1168 (Ex Ch). POLLOCK CB : Now though
is it true that if a stranger were to write and say to a person, "If I do not hear I will send
goods," the omission to reply would be no evidence of a contract, yet it is different
where two persons are actually engaged in dealing or under contract with each other.
Then, if a proposal is made to which assent might be reasonably expected amongst
men of business, and no answer is sent to it, acquiescence may be presumed.

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WHEELER V KLAHOLT
178Mass141. 59 NE 756 (Sup Jud Ct 1901)
I
HOLMES CJ: This is an action for the price of one hundred and seventy four pairs of
shoes, and the question raised by the defendants' exception is whether there was
any evidence, at the trial, of a purchase by the defendants ....
The evidence of the sale was this. The shoes had been sent to the defendants on
the understanding that a bargain had been made: It turned out that the parties dis-
agreed, and if any contract had been made it was repudiated by them both. Then,
on September 11, 1899, the plaintiffs wrote to the defendants that they had .written
to their agent, Young, to inform the defendants that the latter might keep the goods
"at the price you offer if you send us net spot cash at once. If you cannot send· us
cash draft by mail please return the goods to us immediately via Wabash & Fitchburg
Railroad, otherwise they will go through New York City and it would take three or four
weeks to get them." On September 15, the defendants enclosed a draft for the price
less four per cent, which they said was the proposition made by Young. On Septem-
ber 18 the plaintiffs replied, returning the draft, saying that there was no deduction
of four per cent, and adding, "if not satisfactory please return the goods at once by
freight via Wabash & Fitchburg Railroad." This letter was received by the defendants
on or before September 20, but the plaintiffs heard nothing more until October 25,
when they were notified by the railroad company that the goods were in Boston.
It should be added that when the goods were sent to the defendants they were in
good condition, new, fresh, and well packed, and that when the plaintiffs opened
the returned cases their contents were more or less defaced and some pairs of shoes
were gone. It fairly might be inferred that the cases had been opened and the con-
tents tumbled about by the defendants, although whether before or after the plain-
tiff's final offer perhaps would be little more than a guess.
Both parties invoke Hobbs v. Massasoit Whip Co. (1893), 33 N.E. 495, the defendants
for the suggestion on page 495, that a stranger by sending goods to another cannot
impose a duty of notification upon him at the risk of finding himself a purchaser
against his own will. We are of opinion that this proposition gives the defendants no
help. The parties were not strangers to each other. The goods had not been foisted
upon the defendants, but were in their custody presumably by their previous assent,
at all events by their assent implied by their later conduct. The relations between the
parties were so similar to those in the case cited, that if the plaintiffs' offer had been
simply to let the defendants have the shoes at the price named, with an alternative
request to send them back at once, as in their letters, the decision would have applied,
and a silent retention of the shoes for an unreasonable time would have been an
acceptance of the plaintiffs' terms, or, at least would have warranted a finding that
it was.
The defendants seek to escape the effect of the foregoing principle, if held applic-
able, on the ground of the terms offered by the plaintiffs. They say that those terms
made it impossible to accept the plaintiffs' offer, or to give the plaintiffs any reason-
able ground for understanding that their offer was accepted, otherwise than by
promptly forwarding the cash. They say that whatever other liabilities they may have
incurred they could not have purported to accept an offer to sell for cash on the spot
by simply keeping the goods. But this argument appears to us to take one half of the
plaintiffs' proposition with excessive nicety, and to ignore the alternative. Probably
the offer could have been accepted and the bargain have been made complete before
sending the cash. At all events we must not forget the alternative, which was the
immediate return of the goods.

186
 I. BA RGAIN S

The evidence warranted a finding that the defendants did not return the goods
immediately or within a reasonable time, although subject to a duty in regard to
them. The case does not stand as simple offer to sell for cash received in silence, but
as an alternative offer and demand to and upon one who was subject to a duty to
return the goods, allowing him either to buy for cash or to return the shoes at once,
followed by a failure on his part to do anything. Under such circumstances a jury
would be warranted in finding that a neglect of the duty to return importe·d an
acceptance of the alternative offer to sell, although coupled with a failure to show
that promptness on which the plaintiffs had a right to insist if they saw fit, but which
. they also were at liberty to waive.
Exceptions overruled.

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND)

American Law Institute, 1981

69(1) Where an offeree fails to reply to an offer, his silence and inaction operate
as an acceptance in the following cases only:
(a) Where an offeree takes the benefit of offered services with reasonable
opportunity to reject them and reason to know that they were offered with the
expectation of compensation.
(b) Where the offeror has stated or given the offeree reason to understand that
assent may be manifested by silence or inaction, and the offeree in remaining
silent and inactive intends to accept the offer.
(c) Where because of previous dealings or otherwise it is reasonable that the
offeree should notify the offeror if he does not intend to accept.
(2) An offeree who does any act inconsistent with the offeror's ownership of
offered property is bound in accordance with the offered terms unless they are
manifestly unreasonable. But if the act is wrongful against the offeror it is an accept-
ance only if ratified by him.

NOTES AND QUESTIONS

1. Modern consumer protection statutes indicate that, in general, a consumer has no legal
obligation in respect of the use or disposal of unsolicited goods or services and that if the
consumer has paid for such goods or services, he or she may demand a refund . See Consumer
Protection Act, 2002, SO 2002, c 30, s 13; Business Practices and Consumer Protection Act,
SBC 2004, c 2, ss 11-14.
2. A writes to B: "I hereby offer to sell you volume 1 of the Acme Encyclopaedia for the
bargain price of $39.99. If I do not hear from you by Monday I shall assume that you wish to
buy it. " B, who wishes to buy the volume, does nothing, but A refuses to supply it. How would
you advise B?
3. T made a contract with I, whereby Twas to supply standby tugboat services at a speci-
fied pay rate. After the contract expired, T continued to supply the tugs and send invoices. I
continued to use the service, but did not pay the bills. How would you advise Tl See Saint
John Tugboat Co Ltd v Irving Refinery Ltd, [1964] SCR 6143, 49 MPR 284. See also Waddams
at paras 92-96; Fridman at 52-57.

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CHAPTER 3 THE KINDS OF PROM IS ES LEG AL LY ENFORCED

ELIASON V HENSHAW
4 Wheaton 225 (USSC 1819)

WASHINGTON J (for the Court): It is an undeniable principle of the law of contracts

' that an offer of a bargain by one person to another imposes no obligation upon the
former, until it is accepted by the latter according to the terms in which the offer was
made. Any qualification of or departure from those terms invalidates the offer, unless
the same be agreed to by the person who made it. Until the terms of the agreement
have received the assent of both parties, the negotiation is open, and imposes no
obligation upon either.
In this case, the plaintiffs in error offered to purchase from the defendant two or
three hundred barrels of flour, to be delivered at Georgetown by the first water, and
to pay for the same $9.50 per barrel. To the letter containing this offer·they required
an answer by the return of the wagon by which the letter was despatched. This
wagon was at that time in the service of the defendant, and employed by him in
hauling flour from his mil\ to Harper's Ferry, near to which place the plaintiffs then
were. The meaning of the writers was obvious. They could easily calculate, by the
usual length of time which was employed by this wagon in travelling from Harper's
Ferry to Mil\ Creek, and back again with a load of flour, about what time they should
receive the desired answer; and, therefore, it was entirely unimportant whether it
was sent by that or another wagon, or in any other manner, provided it was sent to
Harper's Ferry, and was not delayed beyond the time which was ordinarily employed
by wagons engaged in hauling flour from the defendant's mil\ to Harper's Ferry.
Whatever uncertainty there might ]::lave been as to the time when the answer would
be received, there was none as to the place to which it was to be sent; this was dis-
tinctly indicated by the mode pointed out for the conveyance of the answer. The
place, therefore, to which the answer was to be sent constituted an essential part of
the plaintiff's offer.
It appears, however, from the bi\\ of exceptions, that no answer to this letter was
at any time sent to the plaintiffs at Harper's Ferry. Their offer, it is true, was accepted
by the terms of a letter addressed Georgetown, and received by the plaintiffs at that
place; but an acceptance communicated at a place different from that pointed out
by the plaintiffs, and forming a part of their proposal, imposed no obligation binding
upon them, unless they had acquiesced in it, which they declined doing.
It is no argument that an answer was received at Georgetown; the plaintiffs in
error had a right to dictate the terms upon which they would purchase the flour; and,
unless they were complied with, they were not bound by them. Al\ their arrange-
ments may have been made with a view to the circumstances of place, and they
were the only judges of its importance. There was, therefore, no contract concluded
between these parties; and the Court ought, therefore, to have given the instruction
to the jury which was asked for .
Judgment reversed.

188
 I. BARGAINS

MANCHESTER DIOCESAN COUNCIL FOR EDUCATION V

COMMERCIAL & GENERAL INVESTMENTS LTD
(1969] 3 All ER 1593 (ChD)

BUCKLEY J: It may be that an offeror, who by the terms of his offer insists on acceptance
in a particular manner, is entitled to insist that he is not bound unless acceptance is
effected or communicated in that precise way, although it seems probable that, even
so, if the other party communicates his acceptance in some other way, the offeror
may by conduct or otherwise waive his right to insist on the prescribed method of
acceptance. Where, however, the offeror has prescribed a particular method of accept-
ance, but not in terms insisting that only acceptance in that mode shall be binding,
I am of opinion that acceptance communicated to the offeror by any other mode
which is no less advantageous to him will conclude the contract. Thus in Tinn v.
Hoffman & Co., where acceptance was requested by return of post, Honeyman J. said:
"That does not mean exclusively a reply by letter by return of post, but you may reply
by telegram or by verbal message, or by any means not later than a letter written and
sent by return of post ...." If an offeror intends that he shall be bound only if his offer
is accepted in some particular manner, it must be for him to make this clear.

HYDE V WRENCH
(1840); 3 Beav 334, 49 ER 132 (Rolls Ct)

LORD LANGDALE MR: Under the circumstances stated in this bill, I think there exists
no valid binding contract between the parties for the purchase of the property. The
defendant offered to sell it for £1,000, and if that had been at once unconditionally
accepted, there would undoubtedly have been a perfect binding contract; instead
of that, the plaintiff made an offer of his own to purchase the property for £950, and
he thereby.rejected the offer previously made by the defendant. I think that it was
not afterwards competent for him to revive the proposal of the defendant, by tender-
ing an acceptance of it; and that therefore there exists no obligation of any sort
between the parties; the demurrer must be allowed.

Re Cowan and Boyd. (1921), 49 OLR 335 (AD). A's lease being about to expire, he wrote
his landlord Bon March 17 about a renewal. B replied on March 24, offering a renewal
at an advanced rent of $75. A replied on March 31, saying that he was paying as high
a rent as he felt he should pay, "(S]o if you do not see your way clear to renew at the
present rental we would appreciate an early reply." On April 5, B wrote that he would
call and see A at the end of the month. On April 19, A wrote B, saying, "I have decided
to accept your terms of $75 per month." Held, the letter of April 5 left the offer open.

NOTES AND QUESTIONS

1. Must a counteroffer of necessity reject a previous offer? Compare the following sugges-
tion by H Oliphant, "The Duration and Termination of an Offer" (1920) 18 Mich L Rev 201:
"Suppose, in reply to an offer by A B writes, 'I shall want to consider your offer for more than
the time which you have allowed me for that purpose because I am so situated now that I
cannot return an immediate answer. However, the situation is such that if you want to settle
the matter at once, I will close with you now at 5 percent less than the price you name. "' See

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

also the following suggestion in the same article : "Suppose the offeror says w hen making the
offer, 'I expect you to reject this offer upon first consideration, but I want you to consider it
further because I think you will accept when you have thought about it a while .' The offeree
immediately sends a rejection, which the offeror ignores. On further thought, the offeree sends
an acceptance. " Is the offeror bound?
2. D offered to sell an airplane to N for £27,000, £5,000 payable in advance . No de livery
time was specified . N replied accept ing the offer, stipulating delivery within 30 days, and sent
£5,000 to .D's bank to be payable on delivery. D thought there was a contract but later repudi-
ated . How would you ad vise N? See Northland Airlines Ltd v Dennis Ferranti Meters, Ltd (1970),
114 SJ 845 (OL) (CA) .
3. E offered to sell his land to L for $1,800. L replied by telegram, saying, "Send lowest cash
price . Will give $1,600 cash ." E answ ered by telegram, "Cannot reduce price," upon w hich L
wrote accepting the original offer. E refused to sell. How w ould you advise L? See Livingstone
v Evans, [1925] 4 DLR 269 (Alta SC) .
4. Sometimes it may not be easy to tell whether, in fact, a counteroffer has been made . In
Anglo-New foundland Fish Co v Smith & Co Ltd (1902), 35 NSR 267 (SC en bane), the plaintiffs
agreed to buy cod cleaned "free from black skin ." The defendants objected, but, upon receiv-
ing a justification from the plaint iffs, replied that they would do their best to remove the black
skin . The plaintiffs ordered "according to previous arrangement as to quality and price. " The
defendants failed to deliver and contended there w as no contract. The court divided, tw o
judges holding that there w as no material difference betw een the plaintiffs and defendants;
two holding. that the defendants' reply was a counteroffer. In the result, the appeal failed and
the decision of th e low er court that had held for the plaintiffs stood . How ever, contrast Mcin-
tosh v Brill (1870), 20 UCCP 426, in which the response to an offer to sell butter w as "I will take
your butter, if good ." No agreement was found by the court. For a discussion, see Waddams at
para 60; Fridman at 58-59.

BUTLER MACHINE TOOL CO LTD V EX-CELL-0

CORPORATION (ENGLAND) LTD
[1979] 1 WLR 401, 1 All ER 965 (CA)

[On May 23, 1969, Butler Machine Tool Co. Ltd. ("the seller") offered to sell a machine
to Ex -Cell-O Corporation (England) Ltd. ("the buyer") for £75,535. The offer was stated
to be subject to terms and conditions that "shall prevail over any terms and condi -
tions in the Buyer's order." These conditions included a price variation clause that
provided for an increase in the price if there was an increase in production costs .
On May 27, the buyer placed an order for the machine. The order was stated to be
subject to terms and conditions that were materially different from those put forward
by the seller and which contained no price variation clause. On the bottom of the
buyer's order there was a tear-off acknowledgment slip that stated: "We accept your
order on the Terms and Conditions stated thereon." On June 5, the seller completed
and signed the acknowledgment slip and returned it to the buy er. An accompanying
letter stated that the buyer's order was being "entered in accordance with our revised
quotation of 23rd May for delivery in 10/11 months." When the seller deliv ered the
machine, it claimed that the price had increased by £2,892 and that it was entitled
to this amount due to the price variation clause. The buyer refused to pay the
increase because it claimed that the contract had been formed on the basis of its
terms and conditions. The seller sued and was awarded judgment. The buyer then
appealed.]

LORD DENNING MR : No doubt a contract w as ... concluded. But on w hat terms? ...

190
 I. BARGAINS

If those documents are analysed in our traditional method, the result would seem
to me to be this: the quotation of 23rd May 1969 was an offer by the sellers to the
buyers containing the terms and conditions on the back. The order of 27th May 1969
purported to be an acceptance of that offer in that it was for the same machine at the
same price, but it contained such additions as to cost of installation, date of delivery
and so forth, that it was in law a rejection of the offer and constituted a counter-offer.
That is clear from Hyde v. Wrench (1840) 3 Beav. 334. As Megaw J. said in Trollope &
Coils Ltd. v. Atomic Power Constructions Ltd. [1962] 3 AU E.R. 1035at1038, [1963] 1 W.L.R.
333 at 337: "... the counter-offer kills the original offer." The letter of the sellers of 5th
June 1969 was an acceptance of that counter-offer, as is shown by the acknowledg-
ment which the sellers signed and returned to the buyers. The reference to the
quotation of 23rd May 1969 referred only to the price and identity of the machine .
... The judge held that the sellers were entitled to the sum of £2,892 under the price
variation clause. He did not apply the traditional method of analysis by way of offer
and counter-offer. He said that in the quotation of 23rd May 1969 "one finds the price
variation clause appearing under a most emphatic heading stating that it is a term
or condition that is to prevail." So he held that it did prevail.
I have much sympathy with the judge's approach to this case. In many of these
cases our traditional analysis of offer, counter-offer, rejection, acceptance and so
forth is out-of-date . ... The better way is to look at all the documents passing between
the parties and glean from them, or from the conduct of the parties, whether they
have reached agreement on all material points, even though there may be differences
between the forms and conditions printed on the back of them ....
Applying this guide, it will be found that in most cases when there is a "battle of
forms " there is a contract as soon as the last of the forms is sent and received without
objection being taken to it. ... The difficulty is to decide which form, or which part of
which form, is a term or condition of the contract. In some cases the battle is won
by the man who fires the last shot. He is the man who puts forward the latest term
and conditions: and, if they are not objected to by the ·o ther party, he may be taken
to have agreed to them . ... In some cases, however, the battle is won by the man who
gets the blow in first. If he offers to sell at a named price on the terms and conditions
stated on the back and the buyer orders the goods purporting to accept the offer on
an order form with his own different terms and conditions on the back, then, if the
difference is so material that it would affect the price, the buyer ought not to be
allowed to take advantage of the difference unless he draws it specifically to the
attention of the seller. There are yet other cases where the battle depends on the
shots fired on both sides. There is a concluded contract but the forms vary. The terms
and conditions of both parties are to be construed together. If they can be reconciled
so as to give a harmonious result, all well and good. If differences are irreconcilable,
so that they are mutually contradictory, then the conflicting terms may have to be
scrapped and replaced by a reasonable implication.
In the present case the judge thought that the sellers in their original quotation
got their blow in first; especially by the provision that "These terms and conditions
shall prevail over any terms and conditions in the Buyer's order." It was so emphatic
that the price variation clause continued through all the subsequent dealings and
that the buyer must be taken to have agreed to it. I can understand that point of view.
But I think that the documents have to be considered as a whole . And, as a matter
of construction, I think the acknowledgment of 5th June 1969 is the decisive docu -
ment. It makes it clear that the contract was on the buyers' terms and not on the
sellers' terms: and the buyers' terms did not include a price variation clause.
I would therefore allow the appeal and enter judgment for the buyers.

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LAWTON LJ: The modern commercial practice of making quotations and placing
orders with conditions attached, usually in small print, is indeed likely, as in this case,
to produce a battle of forms. The problem is how should that battle be conducted?
The view taken by the judge was that the battle should extend over a wide area and
the court should do its best to look into the minds of the parties-and make certain
assumptions. In my judgment, the battle has to be conducted in accordance with
set rules. It is a battle more on classical 18th century lines when convention decided
who had the right to open fire first rather than in accordance with the modern
concept of attrition.
The rules relating to a battle of this kind have been known for the past 130-odd
years ... [I]f anyone should have thought they were obsolescent, Megaw J. in Trollope
& Coils Ltd. v. Atomic Power Constructions Ltd. [1962] 3 AU E.R. 1035, [1963] 1 W.L.R.
333 called attention to the facts that those rules are still in force.
When those rules are applied to this case, in my judgment, the answer is
obvious ... .

[BRIDGE LJ gave a concurring judgment which stated that the case was "plainly
governed by ... the classical doctrine that a counter-offer amounts to a rejection of
an offer and puts an end to the effect of the offer."]

NOTES AND QUESTIONS

1. Do you agree with Lord Denning that the cu rrent rules of offer and acceptance are
outmoded? For a philosophical defence of these rules, see Benson at 139-49.
2. Would the result of the case have been different if the seller had not signed and returned
the tear-off acknowledgment slip? See Tywood Industries Ltd v St Anne-Nackawic Pulp &
Paper Co Ltd (1979), 100 DLR (3d) 374 (Ont H Ct J) and the discussions in Waddams at para 76;
McCamus at 62-64; MacDougall at 21-23; Fridman at 60-61.
3. What remedies would a seller have if the court concluded that no contract had been
formed? See E McKendrick, "The Battle of the Forms and the Law of Restitution" (1988) 8
Oxford J Legal Stud 197; M Spence, Protecting Reliance (Oxford: Hart, 1999) at 114-17.
4. In Tekdata Interconnectio ns Ltd v Amphenol Ltd, [2010] 2 All ER (Comm) 302 (CA)
(noted (2011) Can Bus LJ 307), the court concluded that there could be circumstances in
whic h th.e traditional "battle of the forms" analysis would be displaced if it could be shown that
the parties had intended that the sta ndard form terms printed on the "counter offer" were to
be ignored (such that there was an acceptance on the terms of the original offer). The court
noted that the most plausible way for the litigants to prove this intention would be to reference
the conduct of th e parties over a long-term relati onship. The court insisted, however, that it
would be difficult to displace the usua l analysis and that a finding that the contract was on the
term s of the original offer would be rare .
5. For a discussion of other solutions to "battle of the forms" problems in both consumer
and commercial contexts, see DB King, "New Perspective on Standard Form Contracts: A
Subject Revisited" (1993) Comm Law Ann 87. See also Waddams at paras 80-89, and McCamus
at 64-68, w here it is suggested that more flexibility can be achieved by using traditional prin-
. ciples of contract formation .

Tinn v Hoffmann and Co. (1873), 29 LTR 271 (Ex Ch). BRETT J: If I write to a person
and say, "If you give me 6000 [pounds] for my house, I will sell it to you," and on the
same day, and before the letter reaches him, he writes to me saying, "If you sell me
your house for 6000 [pounds] I will buy it," that would be two offers crossing each
other, and cross offers are not an acceptance of each other, therefore there will be

192
 I. BARGAINS

no 'offer of either party accepted by the other. That is the case where the contract is
to be made by the letters, and by the letters only. I think it would be different if there
were already a contract in fact made in words, and then the parties were to write
letters to each other, which crossed in the post, those might make a very good
memorandum of the contract already made, unless the Statute of Frauds intervened.
But where the contract is to be made by the letters themselves, you cannot make it
by cross offers, and say that the contract was made by one party accepting the offer
which was made to him. It seems to me, therefore, in both views, that the judgment
of the court below was right.
HONYMAN J (dissenting): What, then is the effect of when the letters are written on
the same day and crossed each other in the post? Does it make any difference? ... I
cannot see why the fact of the letters crossing each other should prevent their mak-
ing a good contract. If I say I am willing to buy a man's house on certain terms, and
he at the same moment says that he is willing to sell it, and these two letters are
posted so that they are irrevocable with respect to the writers, why should that not
constitute a good contract. The parties are ad idem at one and the same moment.
On these grounds it appears to me that the judgment of the court below was wrong,
and ought to be reversed, I speak with some hesitation in this case when I find that
the opinion of the majority of my brothers is against me.

NOTES AND QUESTIONS

1. Whose reasoning do you find more persuasive? For an argument that the majority pos-
ition is to be preferred, see Benson at 139-49.
2. For an argument that it might be possible to form a contract witho ut acceptance follow-
ing offer, see Corbin on Contracts, ll12.

BRISTOL, CARDIFF, AND SWANSEA AERATED

BREAD COMPANY V MAGGS
(1890), 44 ChD 616

This was an action by the Plaintiffs, the Bristol, Cardiff, and Swansea Aerated Bread
Company (Limited), against the Defendant, a baker and confectioner carrying on
business at 15, Duke Street, Cardiff, for the specific performance of a contract alleged
to be constituted by two letters. The first was written by the Defendant to Colonel
Guthrie, a director of the Plaintiff company, and was as follows:

Cardiff, 29th of May, 1889

Dear Sir,-1 beg to submit to you the following conditions for disposal of my business
carried on at 15, Duke Street, Cardiff. Lease and goodwill, £450 (lease from the 29th of
September, 1888, for fourteen years). All fixtures, fittings, utensi ls, & c., stock-in-trade
connected with the premises to be taken at valuation.
Yours truly,
R. Maggs.
This offer to hold good for ten days.

The letter did not on the face of it shew to whom it was written. Colonel Guthrie,
writing with the authority of the board of directors of the company, replied as
follows :

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

Cardiff, 1st of June, 1889.

Dear Sir,-011 behalf of the Bristol, Cardiff, and Swansea Aerated Bread Company (Lim-
ited), I accept your offer for shop and lease, & c., 15, Duke Street, Cardiff.
Yours truly,
John Guthrie,
For B., C., and S. Aerated Bread Company.
Mr. R. Maggs,
15, Duke Street, Cardiff.

On the 2nd of June, 1889, the Defendant's solicitor sent Colonel Guthrie a formal
memorandum of agreement for approval, with an accompanying letter. This memo-
randum was altered by the Plaintiff's solicitors, mainly by the insertion of a clause
preventing the vendor for five years from carrying on a like business within the
borough of Cardiff or within a distance of five miles from the Townhall. The memo-
randum so altered was returned on the 4th of June, with a letter of the Plaintiff's
solicitors. On the 5th of June the Defendant's solicitor wrote sending the draft again
to the Plaintiffs' solicitors, with a modification of the proposed additional clause. On
the 6th of June the Plaintiffs' solicitors wrote that they could not themselves agree to
the proposed modification, but that they had asked Colonel Guthrie to call about it.
On the 7th the Defendant's solicitor wrote that he regretted the Plaintiffs' solicitors
had not agreed to the terms of the draft contract, and continued: "Colonel Guthrie
has not been near me, and by my client's instructions I beg to inform you that he
declines to proceed further in the matter."
On the 8th Colonel Guthrie saw the Defendant's solicitor and said he had come
to settle the agreement, which had been returned to him. The answer was that he
was too late; the Defendant had made other arrangements. Colonel Guthrie replied
he was prepared to sign the agreement leaving out the disputed clause. The solicitor
declined; and Colonel Guthrie went immediately to the Defendant, who told him
that he wished to have the agreement cancelled, because his son was very much
against his parting with the shop. The Defendant, it appeared, did not suggest that
there was no agreement, but asked Colonel Guthrie to use his influence with his
co-directors to get the sale cancelled. The memorandum of agreement contained
several terms not expressed in the letters; for example, it provided for the book debts
and books of account being reserved to the vendor and for the payment of a deposit
of £45; it fixed the 24th of June as the day for completion of the purchase and deliv-
ery of possession; it provided for delivery of abstract of title and the date from which
it was to commence, and for other matters, all of which were more or less of a formal
nature.
KAY J (after stating the facts, continued): The contested stipulation in the memoran-
dum of agreement as to restricting the vendor from carrying on a like business to
that which he had sold was not by any means a matter of form. After some conflict
of opinion, it has been decided by the Court of Appeal, in Pearson v. Pearson (1884),
27 Ch.D. 145, that a man who sells the goodwill of a business may not only set up a
similar business next door and say that he is the person who carried on the old busi-
ness, but that he may also solicit the customers of the old business to continue to
deal with him, although by these proceedings he might not only destroy all benefit
to the purchaser of the thing which he had bought, but might recover to himself the
actual possession of it. Such a fraudulent proceeding, according to the decision,
cannot be prevented by any Court of Law or Equity. It follows that the stipulation
which the company's solicitors introduced into the draft was one which they were
not entitled to insert if the two letters which I have read were a complete contract.

194
 I. BARGAINS

In other words, they were trying to obtain an additional and most important conces- ·
sion from the vendor. Now ... suppose this to pass in conversation: A offers to B. his
business, lease, and goodwill for £450. B. says, "I accept." A day or two afterwards B.
asks A to engage not to carry on a similar business within a distance of five miles.
A answers, "I cannot agree to that, but I will if you say three miles." B. takes time to
consider, saying he will send an agent next day to settle the terms. The agent does
not go next day, and A accordingly says to B., "I put an end to the matter." No one
could doubt that would be a continuous negotiation, and that B. could not say, "I will
disregard all that followed the acceptance of the first offer, and insist on there being
a complete contract by that acceptance." Well, then, still leaving out of sight the
statute and authorities suppose all this to take place by letters between A and B.
instead of conversation; it is obvious the result must be the same. Some of the letters
being by the principals and some by the solicitors could not make any difference.
It was suggested that the ten days during which the offer was to remain open
had not expired when it was withdrawn. But this can make no difference. The offer
was not a contract, and the term that it should remain open for ten days was therefore
not binding. It has often been held that such an offer may, notwithstanding, be
withdrawn within the time limited ....
I decide this case against the Plaintiffs upon the ground, that although the two
letters relied on would, if nothing else had taken place, have been sufficient evidence
of a complete agreement, yet the Plaintiffs have themselves shewn that the agree - ·
ment was not complete by stipulating afterwards for an important additional term,
which kept the whole matter of purchase and sale in a state of negotiation only, and
that the Defendant was therefore at liberty to put an end to the negotiations, as he
did, by withdrawing his offer ....
[Part of the opinion dealing with the Statute of Frauds has been omitted.]

Bellamy v Debenham. (1890), 45 ChD 481. NORTH J: Some of the phrases used by
Mr. Justice Kay, in Bristol, Cardiff, and Swansea Aerated Bread Co. v. /vlaggs seem to
me to go further than that. By way of illustration he put a case of a definite offer to
sell a business, lease, and goodwill, and a definite acceptance, and after that negotia -
tions between the parties as to whether a new term, limiting the area within which
the vendor of the business was to carry on a similar business, should be introduced,
and said that in such a case he thought that the purchaser could not disregard all
that followed the acceptance of the prior offer, and insist on there being a complete
contract by that acceptance ....
In my opinion, subsequent negotiations, first commenced on new points after a
contract complete in itself has been signed, cannot be regarded as constituting a part
of the negotiations going on at the time when it was signed, because, ex hypothesi,
the Court has arrived at the conclusion that they were not going on then-that they
were not thought of at that time, but related to matters first thought of subsequently.
I do not in any way dissent from the view which Mr. Justice Kay took of the case
then before him; but those remarks of his, if they meant as much. as they might
possibly mean, seem to me to go too far, and I should not be prepared to follow them.

Harvey v Perry. [1953] 1 SCR 233, [1953] 2 DLR 465. Negotiations were spread over
several months leading to an alleged contract for the sale of eight oil leases in Alberta.
Correspondence starting in January 1950 included a letter from Perry dated May 2,

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

rejecting terms so high that "we cannot handle it at all" and continuing, "However,
you might consider the following and if you feel that you could accept these terms,
I am sure we could put a deal over for you." On May 8, Harvey wrote, "I will accept
your proposition." On May 15, Perry wrote, "We will proceed immediately to try and
consummate a deal for you at the earliest possible moment. There will, in all probabil-
ity, be a counter proposal or two from our clients, and if such is the case, we will
submit them to you at once." On August 24, Perry's solicitor wrote that "Mr. AC. Perry
... advises that he is in a position to take these leases under the terms and conditions
contained in his letter to you of the 2nd May and your letter to his firm dated May
8th, 1950. Mr. Perry has asked us to prepare the Assignment .. . it will be necessary
that we have access to the above leases now in your possession." In due course
Harvey forwarded the leases. On August 26, the solicitor again wrote, "[S]ome discus-
sion between you will be necessary before adequate instructions can be given to
draw such an Agreement." On the same day Perry himself wrote that "Mr. Howatt of
Howatt and Howatt, my solicitor, is sending through a copy of the proposed agree-
ment. However you and I will get together and complete the terms." The "get
together" took place on September 1, when, Perry contended, "[W]e had made a deal
... and we shook hands on that deal right there and then in front of the Hotel." On
September 2, Perry's solicitor sent a letter and draft agreement with some variations
from the oral agreement, which Harvey's solicitors objected to on September 7, and
to the correction of which Perry's solicitor agreed, on September 9, saying, "[T]he
terms are acceptable." On September 13, Perry forwarded a second agreement in
identical terms with the first, and containing another variation from the oral agree-
ment of September 1. Neither Harvey nor his solicitors made any further communi-
cation and Perry's letters remained unanswered. About September 15, Harvey
announced that he would drill his own wells, which concluded the negotiations. The
trial judge found a contract in the letters of May 2, 8, 15, and August 24, and in Har-
vey's sending the leases. The Alberta Court of Appeal agreed. The Supreme Court of
Canada, following the /vlaggs case, reversed, ESTEY J saying, "The letter of September
2nd, the proposed agreement enclosed therewith and respondent's solicitors' letter
of September 9th, might support a conclusion that the parties had agreed, but, when
read, as they must be, with respondent's solicitors' letter of September 13th and the
proposed agreement enclosed therewith, it is clear that the respondent had not
agreed .... There was no consensus ad idem because the respondent was still nego-
tiating for better terms."

NOTES AND QUESTIONS

As the cases above illustrate, the problem of when a contract has actually been formed is a
difficult one that can have far-reaching consequences. Consider the following set of facts. X
and Y have entered into a contract for the sale of X's house to Y. As is normal practice when
property is bought and sold, numerous formal documents must be prepared by the parties'
solicitors to effect the actual legal transfer of the property. To one of these documents, Y's
lawyer adds the term: "And the vendor warrants that the house has not been insulated with
Urea Formaldehyde Foam." Is there a contract? On which terms? For a discussion of the sub -
sequent negotiation problem, see Waddams at para 29; McCamus at 53-56.

196
 I. BARGAINS

C. THE TENDERING PROCESS

The process of contract formation has also been crucial to the development of the tender
system for construction contracts. A contractor or owner sends out a call for tenders under
which it asks interested parties to submit a bid for a particular job. The party calling for the
tenders usually provides extensive terms and conditions for the tender, including detailed
specifications for the work to be done. Once the bid process has closed, the tenders are con-
sidered and one is selected, again according to the criteria set out in the original call for ten-
ders. The contract is awarded to the successful bid. To make this process work, the parties
submitting the tender must be unable to amend or revoke their tenders during the considera-
tion period. Further, they must be willing to accept the job if awarded. How can this be accom-
plished using the parad igm of offer and acceptance? Consider the following case.

MJB ENTERPRISES 'LTD V DEFENCE CONSTRUCTION (1951)

(1999] 1 SCR 619, 170 DLR (4th) 577

[The defendant (the respondent) invited tenders for construction and received four
tenders, including one from the plaintiff (the appellant). The contract was awarded
to Sorochan Enterprises Ltd. The specifications in the tender documents contem-
plated a lump-sum price, notwithstanding the fact that a significant cost to the
project would be the cost of material to backfill pipeline trenches. A choice among
several possible materials would be made later by the site engineer and the result of
that choice would considerably alter the cost of performance of the construction
contract. This imposed a significant cost risk on the tendering company. The suc-
cessful bid addressed this risk by accompanying its tender with a handwritten note
that stated: "Unit Prices per metre are based on native backfill (Type 3). If Type 2
material is required ... add $60.00 per metre." The tenderers argued that this note
invalidated the tender, but the respondent accepted the bid and relied on a "privilege"
clause in the tender documents that stated: "The lowest or any tender shall not
necessarily be accepted.'' M.J.B. Enterprises sued for breach of contract.]
IACOBUCCI J:

l INTRODUCTION
The central issue in this appeal is whether the inclusion of a "privilege clause" in the
tender documents allows the person calling for tenders (the "owner") to disregard
the lowest bid in favour of any other tender, including a non-compliant one. The
leading Canadian case on the law of tenders is R. in Right of Ontario v. Ron Engineering
& Construction (Eastern) Ltd., [1981] 1S.C.R. 111,119 D.L.R. (3d) 267, which concerned
the obligations of a contractor who submitted a bid in response to a call for tenders.
This Court held that, upon the submission of this tender, a contract arose between
the contractor and the owner in that case and imposed certain obligations upon the
contractor. The contract, referred to as "Contract A," was distinguished from the
construction contract, "Contract B," to be entered into if the tender was accepted.
Contract A imposed certain obligations upon the contractor. The present appeal
instead asks whether contract A arose in this case and what obligations, if any, it
imposes on the owner. It is the contention of M.J.B. Enterprises Ltd. (the "appellant")
that in the circumstances of this case Defence Construction (1951) Limited (the
"respondent") was obligated to accept the lowest valid tender. The respondent argues
that the privilege clause precludes the finding of such an obligation.

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CHAPTER 3 THE KINDS OF PROMI SES LEGALLY ENFORCED

V. ANALYSIS

A. GENERAL PRINCIPLES

As I have already indicated, any discussion of contractual obligations and the law of
tendering must begin with this Court's decision in Ron Engineering, supra. That case
concerned whether the owner had to return the contractor's tender deposit, a sum
of $150,000. The terms and conditions attaching to the can for tenders had included
the statement (at pp. 113-14) that:

Except as otherwise herein provided the tenderer guarantees that if his tender is with-
drawn before the commission shall have considered the tenders or before or after he
has been notified that his tender has been recommended to the Commission for
acceptance or that if the Commission does not for any reason receive within the period
of seven days as stipulated and as required herein, the Agreement executed by the
tenderer, the Performance Bond and the Payment Bond executed by the tenderer and
the surety company and the other documents required herein, the Commission may
retain the tender deposit for the use of the Commission and may accept any tender,
advertise for new tenders, negotiate a contract or not accept any tender as the Com- ·
mission may deem advisable.

Other terms and conditions included the ability to withdraw a tender, under seal,
until the official closing (at p. 120). In rushing to compile its tender, the contractor
omitted to add its own labour costs to its bid, but only discovered its error after the
close of the tender can. It was the lowest out of eight bids. The contractor did not
seek to withdraw its tender, but instead maintained that because it gave notice of
this error to the owner prior to the acceptance of its tender by the owner ... the owner
could not, in law, accept its tender, and therefore had to return the contractor's
$150,000 deposit.
Estey J .. for the Court, held that a contract arose upon the contractor's submission
of the tender. This contract, which Estey J. termed "Contract A," was to be distin-
guished from the construction contract to be entered into upon the acceptance of
one of the tenders, which Estey J . termed "Contract B." The terms of Contract A were
governed by the terms and conditions of the tender call, which included that the con -
tractor submit a deposit that could only be recovered under certain conditions ....
This Court therefore held that it is possible for a contract to arise upon the submis-
sion of a tender and that the terms of such a contract are specified in the tender
documents. The submissions of.the parties in the present appeal appear to suggest
that Ron Engineering stands for the proposition that Contract A is always formed
upon the submission of a tender and that a term of this contract is the irrevocability
of the tender; indeed, most lower courts have interpreted Ron Engineering in this
manner. There are certainly many statements in Ron Engineering that support this
view. However, other passages suggest that Estey J. did not hold that a bid is irrevo-
cable in an tendering contexts and that his analysis was in fact rooted in the terms
and conditions of the tender can at issue in that case ....
Therefore it is always possible that Contract A does not arise upon the submission
of a tender, or that Contract A arises but the irrevocability of the tender is not one of
its terms, an of this depending upon the terms and conditions of the tender can. To
the extent that Ron Engin eering suggests otherwise, I decline to follow it. ...
What is important, therefore, is that the submission of a tender in response to an
invitation to tender may give rise to contractual obligations, quite apart from the obliga-
tions associated with the construction contract to be entered into upon the acceptance
of a tender, depending upon whether the parties intend to initiate contractual relations

198
 I. BARGAINS

by the submission of a bid. If such a contract arises, its terms are governed by the
terms and conditions of the tender call ....
So this brings us to ask whether Contract A arose in this case and, if so, what were
its terms?

B. CONTRACT A
Both parties in the present appeal agree with the Contract A/Contract B analysis
outlined in Ron Engineering and that the terms of Contract A, if any, are to be deter-
mined through an examination of the terms and conditions of the tender call. In
particular, they agree that Contract A arose, but disagree as to its terms. However, this
agreement is influenced by an interpretation of Ron Engineering that I have rejected.
Because of this, it is important to discuss whether contract A arose in this case.
As I have already mentioned, whether or not Contract A arose depends upon
whether the parties intended to initiate contractual relations by the submission of a
bid in response to the invitation to tender. In the present case I am persuaded that
this was the intention of the parties. At a minimum, the respondent offered, in invit-
ing tenders through a formal tender.i ng process involving complex documentation
and terms, to consider bids for Contract B. In submitting its tender, the appellant
accepted this offer. The submission of the tender is good consideration for the
respondent's promise, as the tender was a benefit to the respondent, prepared at a not
insignificant cost to the appellant, and accompanied by the Bid Security. The question
to be answered next is the precise nature of the respondent's contractual obligations.
The main contention of the appellant is that the respondent was under an obliga -
tion to award Contract B to the lowest compliant tender. As the Sorochan bid was
invalid, Contract B should have been awarded to the appellant. In this regard, the
appellant makes two arguments: first, that it was an explicit term of Contract A that
the construction contract be awarded to the lowest compliant bid and second, that
even if such a term was not expressly incorporated into the tender package it was
an implied term of Contract A ...
[The court concluded that Contract A contained no such explicit term, nor was it
possible to imply such a term. The court proceeded to consider the effect of the
"privilege" clause.]

(b) Effect of the Privilege Clause

Although the respondent has not disputed the trial judge's finding that the Sorochan
tender was non-compliant, the respondent argues that the privilege clause gave it
the discretion to award the contract to anyone, including a non-compliant bid, or
to not award the contract at all, subject only to a duty to treat all tenderers fairly. It
argues that because it accepted the Sorochan tender with the good faith belief that
it was a compliant bid, it did not breach its duty of fairness.
The words of the privilege clause are clear and unambiguous. As this Court stated
in Cartwright & Crickmore, Ltd. v. Macinnes, [1931] S.C.R. 425 at p. 431, [1931] 3 D.L.R .
693, "there can be no recognized custom in opposition to an actual contract, and
the special agreement of the parties must prevail." However, the privilege clause is
only one term of Contract A and must be read in harmony with the rest of the Tender
Documents. To do otherwise would undermine the rest of the agreement between
the parties.
I do not find that the privilege clause overrode the obligation to accept only
compliant bids, because on the contrary, there is a compatibility between the priv-
ilege clause and this obligation ....

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFO RC ED

Therefore even where, as in this case, almost nothing separates the tenderers
except the difierent prices they submit, the rejection of the lowest bid would not
imply that a tender could be accepted on the basis of some undisclosed criterion.
The discretion to accept not necessarily the lowest bid, retained by the owner
through the privilege clause, is a discretion to take a more nuanced view of "cost"
than the prices quoted in the tenders ....
The additional discretion not to award a contract is presumably important to cover
unforeseen circumstances, which is not at issue in this appeal. ...
Therefore I conclude that the privilege clause is compatible with the obligation
to accept only a compliant bid. As should be clear from this discussion, however, the
privilege clause is incompatible with an obligation to accept only the lowest compli-
ant bid. With respect to this latter proposition, the privilege clause must prevail. ...

C. BREACH OF CONTRACT A

Applying the foregoing analysis to the case at bar, I find that the respondent was
under no contractual obligation to award the contract to the appellant, who the
parties agree was the lowest compliant bid. However, this does not mean that Con-
tract A was not breached.
Sorochan was only the lowest bidder because it failed to accept, and incorporate .
into its bid, the risk of knowing how much of Type 2, Type 3, and Type 4 fill would
be required. As the Court of Appeal outlined, this risk was assigned to the contractor.
Therefore Sorochan's bid was based upon different specifications. Indeed, it is con-
ceded that the Sorochan bid was non -compliant. Therefore, in awarding the contract
to Sorochan, the respondent breached its obligation to the appellant, and the other
tenderers, that it would accept only a compliant tender.
The respondent's argument of good faith in considering the Sorochan bid to be
compliant is no defence to a claim for breach of contract: it amounts to an argument
that because it thought it had interpreted the contract properly it cannot be in breach.
Acting in good faith or thinking that one has interpreted the contract correctly are
not valid defences to an action for breach of contract. ...
[The court determined that the damages for breach of the contract should protect
the expectation interest of the plaintiff. The court was convinced on a balance of
probabilities that had the defective tender been ignored, the bid of M.J.B. would have
been the successful bid, thus making the expectancy loss the profit it would have
realized on Contract B. The court further held that this loss was not too remote.]

Double N Earthmovers Ltd v Edmonton (City). [2007] 1 SCR 116. CHARRON J (dis-
senting) : The parties agree that these two implied terms formed part of Contract A:
the City was obliged to accept only a compliant bid ... and the City was also obliged
to treat all bidders fairly and equally... . The test for compliance in the tendering pro-
cess is "substantial" rather than strict. Estey J.'s remark in Ron Engineering that it would
be "anomalous indeed if the march forward to a construction contract could be halted
by a simple omission" is often cited in support of the substantial compliance test ....
Although Estey J. made this remark in reference to the Contract B stage of the ten-
dering process, there is no reason to doubt that these same considerations apply to
the Contract A stage as well. It would make tendering unworkable if an·owner and
bidder were prevented from entering into Contract B based on an unchecked box.
Substantial compliance requires that all material conditions of a tender, determined

200
 I. BARGAINS

on an objective standard, be complied with .... A bid is substantially compliant if any

departures from the tender call concern mere irregularities.

Maystar General Contractors Inc v Newmarket (Town). 2009 ONCA 675. FELD-
MAN JA: The law governing the tender process for public construction contracts has
been discussed and explained by the Supreme Court of Canada in a number of
cases ... . Some basic principles for interpreting and applying the terms of tender
documents have emerged from these cases. Ron Engineering established the two
layers of contractual relations that arise in the tender process. When a contractor
submits a tender that complies with the requirements set out by the owner in the
tender documents, a contract arises, known as Contract A The owner then enters
into the construction contract, known as Contract B, with the Contract A contractor
whose bid is the best bid in terms of price and other factors that the owner is entitled
to take into account under the terms of the tender. The terms of Contract A are found
in the express provisions of the tender requirements or can also be implied where
the criteria for the implication of terms in a contract are met. In M.J.B. Enterprises,
the Supreme Court found from the presumed intentions of the parties based on the
express terms of the contract, that there was an implied term that the owner is
obliged to accept only compliant bids. At para. 41, the court reasoned that it would
not make sense for contractors to engage in the tendering process, which is expensive
and time-consuming, if the owner could then "circumscribe this process and accept
a non-compliant bid." In Double N Earthmovers ... the court clarified that the compli-
ance required is "substantial compliance" with the tender documents. and that
substantial compliance requires compliance with all material conditions of a tender.
In [Martel Building Ltd v Canada, [2000] 2 SCR 860] ... the court found that in order to
give business efficacy to the tendering process, it was necessary to imply a term that
the owner must treat all bids fairly and equally.

NOTES AND QUESTIONS

1. What are the terms of the offers that are being made by the parties in these cases? For a
discussion, see Waddams at paras 36-41; McCamus at 150-59; Fridman at 36-40; MacDougall
at 28-30.
2. As Maystar notes, the Contract A/Contract B theory of tendering has been the subject of
much recent litigation and refinement in the Supreme Court of Canada. Does this indi cate that
the ana lysis might be flawed in some respect? Is the court's reasoning backward?
3. Industry guidebooks often advise users not to enforce the legal rights created under
Contract A. Does this mean that the current tendering ru les are inconsistent with common
sense and the reasonable expectations of business people? Fo r just such an argument. see P
Sandori, "Construction Bidding and Tendering" (2015) 44 Construction L Report (4th) 62.
4. In Naylor Group Inc v Ellis-Don Construction Ltd, [2001] 2 SCR 943, the Supreme Court
decided that the Contract A/Contract B analysis can also apply to the relationship between a
main contractor (who assembles a bid) and the subcontractors (who supply sub-bids) when
both parties implicitly or explicitly intended that such an analysis should apply. For a discussion
of the case, see N Rafferty, "Developments in Contract and Tort Law: The 2001-2002 Term"
(2002) 18 SCLR (2d) 154.
5. Could a subcontractor who suffered economically as a result of an owner's breach of
Contract A with the head contractor sue in tort to recoup these losses? For judicial rejection
of this possibility, see Design Services Ltd v Canada, [2008] 1 SCR 737. Could the subcontractor
make a claim under the principled exception of privity of contract outlined in Fraser River Pile

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

and Dredge Ltd v Can-Dive Services Ltd, excerpted in Chapter 47 For just such an argument,
see Swan & Adamski at 216.
6. Although Charron J was in the dissent in Double N Earthmovers Lt<;/, there was no dis-
pute as between the majority and dissent as to the test for a compliant bid. The dispute instead
focused on w hether the failure to provide serial numbers and licence registration numbers for
the vehicles to be supplied under Contract B in the tender documents prevented substantial
compliance on the facts of the case. See WD Goodfellow, "Double N Earthmovers Ltd: A New
Direction for the Supreme Court of Canada7" (2007) 61 Colum L Rev (3d) 163.
7. For a situation where a tender call or request for proposals (RFP) was not held to consti-
tute Contract A, see Budget Rent-A-Car of BC Ltd v Vancouver International Airport Authority
(2009), 89 BCLR (4th) 249 (CA). In that case the RFP stated: "This RFP does not constitute an
offer. No agreement shall result upon submission of Proposals. [The owner] sha ll not be under
obligation to enter into any agreement with anyone in connection with this RFP and responses
received. [The owner] w ill not have any obligation to anyone in connection w ith this RFP
unless [the owner] executes and delivers an agreement in writing approved by [the owner's]
senior management."
8. Would the following exclusion clause included in an RFP be effective to negate liability
for breach of Contract A? "Except as expressly and specifically permitted in these Instructions
to Proponents, no Proponent shall have any claim for any compensation of any kind whatso-
ever, as a resu lt of participating in this RFP, and by submitting a proposal each proponent shall
be deemed to have agreed that it has no claim." For a negative answer, see Tercon Contractors
Ltd v British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 SCR 69, excerpted
in Chapter 6, Section IV.
9. Can a clause contained in an RFP giving the owner the sole discretion to accept any bid,
including a materially non-compliant one, allow the creation of Contract A between the owner
and the non-compliant bidder? Would the creation of Contract A in such a situation be con-
sistent with the rules of offer and acceptance as generally understood7 For a negative answer
to both these questions, see Graham Industrial Services Ltd v Greater Vancouver Water Dis-
trict (2004), 25 BCLR (4th) 214 (CA).
10. What should a tender-calling authority do if the lowest bid is over its budget for the
project7 Shou ld it matter legally if the bid is slig htly over budget (requiring a 15 percent or less
reduction) or significantly over budget7 For a discussion of the legal rules, the practice of
industry, and the suggestion of industry guidebooks, see WD Goodfellow, "Adva nced Tender-
ing" (2016) JCCCL 105.
11. Should a distinction be made between situations involving private entities and those
involving public entities7 Has the Supreme Court's failure to make such a differentiation dis-
torted the private law of contract? Would a legislative regime governing public procurement be
preferable to the Contract A/Contract B analysis7 For a discussion, see S Waddams, "Canad ian
Contract Law, 1970-2010" (2010) 50 Can Bus LJ 409; BA De Rubeis, "Public Procurement in
Canada: A Comparative View of Remedies and the Tendering Contract" (2011) JCCCL 307.
12. For more on the tendering process, see R (Ont) v Ron Engineering, excerpted in Chap-
ter 9, Section V, and the discussion of the Supreme Court in Martel Building Ltd v Canada,
[2000] 2 SCR 860.

D. FORMALIZATION AND CERTAINTY

The cases below illustrate a tension between the way business is carried out and the legal
requirements o f an enforceable agreement. For exam ple, business people often negotiate only
the main terms of the deal, assuming that their solicitors will "work out the details later." Like-
w ise, business people often wa nt a degree of flexibility in their contracts to deal with future
contingencies, such as fluctuating prices. It is, however, a fundamental principle of contract
law that offer and acceptance must state the significant terms of the proposed contract w ith

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sufficient certainty and definitiveness; otherwise, there will be no contract. After reading the
cases below, ask yourself whether the courts have properly dealt with this tension .

Brogden v Metropolitan Railway Company. (1876-77) LR 2 App Cas 666. LORD

CAIRNS: My Lords, there are no cases upon which difference of opinion may more
readily be entertained, or which are always more embarrassing to dispose of, than
cases where the Court has to decide whether or not, having regard to letters and
documents which have not assumed the complete and formal shape of executed
and solemn agreements, a contract has really been constituted between the parties.
But, on the other hand, there is no principle of law better established than this, that
even although parties may intend to have their agreement expressed in the most
solemn and complete form that conveyancers and solicitors are able to prepare, still
there may be a consensus between the parties far short of a complete mode of
expressing it, and that conserisus may be discovered from letters or from other docu-
ments of an imperfect and incomplete description; I mean imperfect and incomplete
as regards form.

BRITISH AMERICAN TIMBER CO V ELK RIVER TIMBER CO

[1933] 4 DLR 286 (BCCA)

MACDONALD CJBC: The parties entered into what is contended to be a binding and
enforceable contract, as far as it went, to purchase timber limits, dated June 15, 1931.
The said contract has been partially performed. Shortly it provides for a survey and
cruise of the limits as preliminary, it is contended, to a formal agreement of sale to
be drawn up in fulfilment of cl. 10 of the agreement. That clause reads as follows:
10. So soon as the cruise and survey as hereinbefore provided for shall have been
completed, a formal contract shall be executed between the parties hereto according
to tne usual form adopted in such cases in the Province of British Columbia and contain-
ing inter alia, such of the provisions of this agreement as shall be applicable.
The formal agreement was not drawn up and the plaintiff sues for specific per-
formance of the executed agreement of June 15, 1931. The appellant submits that
the execution of the formal agreement was a condition precedent to the respondent's
right to sue. It is necessary to consider the said agreement and particularly the said
cl. 10. It will be noted that the clause provides that so soon as the cruise and survey
have been completed, and this was on September 5, 1931, a "formal contract shall be
executed between the parties according to the usual form adopted in such cases in
the Province of British Columbia and containing inter alia, such of the provisions
of this agreement as shall be applicable." I do not think that there is any such thing
as a "usual form" of agreement in cases of this kind in British Columbia. The parties
have agreed to the terms of such a form whether it exists or not and have not left
any of the terms of the formal agreement for further negotiation. That usual form of
agreement may be merely an imaginary one, but whatever it is its terms have been
agreed upon by both parties. But in addition to that usual form it is to include "such
of the provisions of this agreement (that of June 15) as shall be applicable."
The provision.s of "this agreement" show an agreement of sale and purch,ase
describing the timber to be sold; the parties to the agreement; the purchase-price;
and the time of payment of the purchase-price. Leaving cl. 10 out of consideration
for the moment, I think that agreement would be a complete and enforceable agree-
ment of sale. Clause 10 does not permit of anything being introduced into the formal

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agreement except what they have assented to, namely, terms usual in formal agree-
ments of that character to which with the added terms of June 15, the parties are in
actual accord. There is to be embodied in that agreement the terms of the agreement
of June 15, 1931, which are applicable to the transaction and nothing more . It was
contended, however, on the argument by appellant's counsel that the agreement of
June 15 did not specify a time fixed for payment of the purchase-money. This sub-
mission, I think, is not sustainable.
By cl. 2 of said agreement the purchase-money is "to be payable as to $25,000.00
in cash so soon" as the survey and cruise have been completed which was on Sep-
tember 5, 1931; and the balance in annual instalments the times of payment whereof
were already agreed upon. I think, therefore the times of payment are clearly estab-
lished. Those provisions of cl. 2 are clearly applicable to the formal agreement. There
being no formal agreement what is left is the agreement of June 15 and nothing
additional which must be supposed to be included in it. The purchase-money is to
be paid in cash upon the execution cif the formal agreement and the formal agree-
ment is to be executed so soon as a cruise and survey have been made. This, I think
sufficiently fixes the time for payment of the purchase-money. AU the other provi-
sions, except those already performed are, I think, applicable to the formal agreement
and are to be deemed to be incorporated in it.
Therefore, I think, it is clear that the parties have agreed to al\ the terms of the sale.
Nothing has been left for further negotiation and in these circumstances the Courts
have had regard to the fact that the parties were ad idem with regard to the essentials
of their contract. The agreement of June 15 is the whole agreement and includes al\
they agreed upon or intended to agree upon. When an agreement is complete in
itself the fact that a formal contract is to be drawn up embodying its terms does not
render it unenforceable.
We have been referred to a very large number of authorities which I do not think
it necessary to consider in detail, but I shall refer to one or two as reflecting substan-
tially the others. One of very high authority indeed is that of the House of Lords-Love
& Stewart Ltd. v. lnstone & Co. Ltd. (1917), 33 T.L.R 475, at p. 476. In that case the
agreement had been come to by correspondence except in one particular. Lord
Loreburn, in his opinion said that he had come to the conclusion
that the parties agreed on price and quantity and period of delivery and time of payment,
and he thought also on the port of shipment. It seemed also that they intended to make
a firm bargain and not to make it conditional upon the completion of the formal docu-
ment. But had come to the coriclusion that they also bound themselves to have a strike
clause in the formal contract.
The inclusion of such a term would make no difficulty if it could be said that by usage
or by previous dealing or by law these parties, in binding themselves to a strike clause,
bound themselves to something certain, because id certum est quad certum reddi potest.
But no one said, and no proof was given, that it was so. There might be various kinds
of strike clauses. No doubt both parties would have agreed as to the strike clause to be
inserted in the formal document had the business ... (eventuated], but they had not agreed
upon such a clause at the time when the business came to be broken off. If, therefore,
their Lordships were to say these parties had made a binding contract not subject to
the completion of the formal document they must hold that a contract could be binding
when the parties were not ad idem with regard to one of the intended terms of it,

and he held that the contract was not complete in the absence of a formal agreement
including a strike clause. The same view was taken by the other members of the
House.

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 I. BARGAINS

In Chinnock v. Marchioness of Ely, 4 De G.J. & S. 638, at pp. 645-6, 46 E.R. 1066, the
Lord Chancellor said:
I entirely accept the doctrine contended for by the Plaintiff's counsel, and for which
they cited the cause of Fowle v. Freeman (9 Ves. 351 [32 ER 638)), Kennedy v. Lee (3
Mer. 441 [36 ER 170)), and Thomas v. Dering (1 Keen, 729 [48 ER 488)), which establish
that if there had been a final agreement, and the terms of it are evidenced in a manner
to satisfy the Statute of Frauds, the agreement shall be binding, although the parties
may have declared that the writing is to serve only as instructions for a formal agree-
ment, or although it may be an expr.ess term that a formal agreement shall be prepared
and signed by the parties. As soon as the fact is established of the final mutual assent
of the parties to certain terms, and those terms are evidenced by any writing signed by
the party to be charged or his agent lawfully authorized, there exist all the materials,
which this Court requires, to make a legally binding contract.
It was held in that case that the agent who had made the contract had no authority
to make it and that therefore it could not be enforced, but that the mutual assent to
terms of an informal agreement may be sufficient where a formal agreement is
contemplated notwithstanding the failure to execute it.
In this case there is a contract to which all the parties assented and intended to
be bound by. It was intended to be put in legal form which was not done but no term
in the contract was left as a matter for negotiation and further their informal agree-
ment was complete. The rule of law is also referred to in Chitty on Contracts, 18th
ed., at p. 13, in these words :
If the terms in which the proposal is accepted show that the parties intended that a
formal instrument should be prepared and agreed upon between them, and that, until
that be done, no contract should arise : they will not be bound, until such formal instru-
ment has been agreed upon. But where certain terms have been mutually assented to,
the mere fact that the parties have expressly stipulated that a formal instrument shall
be prepared, embodying those terms, does not, by itself, show that they have not come
to a final agreement, nor does the fact that the acceptance contains a statement that
the acceptor has instructed his solicitor to prepare the necessary documents.
In support of that is cited inter alia Rossiter v. Miller (1878), 3 App . Cas. 1124, and
Chinnock v. Marchioness of Ely, supra. There are cases in our own Courts which show
that a contract which has been duly assented to by the parties but in which.they
stipulate for a formal agreement has been itself enforceable. In Horsnail v. Shute (1919),
27 B.C.R. 474, at p . 478, this is quoted with approval from Rossiter v. Miller (p. 1149):
But when an agreement embracing all the particulars essential for finality and complete-
ness, even though it may be desired to reduce it to shape by a solicitor, is such that
those particulars must remain unchanged, it is not, in my mind, less coercive because
of the technical formality which remains to be made.
To the same effect are quotations made by McPhillips, J.A., from Love & Stewart
Ltd. v. lnstone & Co., supra. It was argued that where an informal agreement is made
subject to a formal contract being drawn up it cannot be enforced unless the condi-
tion is performed. I am not sure that that is strictly correct. It is not correct when all
the terms have been assented to according to law. But it does not matter in this case
since the drawing up of the formal contract was provided for by agreement and not
put in the form of a condition.
I therefore think that the appeal must be dismissed since the parties, I am con -
vinced, came to a concluded contract an d the respondent's attempt to now recede
from it cannot be countenanced.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

[Macdonald JA agreed. He made this comment on the appellant's motives:]

Appellant, rueing its bargain, doubtless because of depressed economic condi-
tions, refused to execute the formal contract and claims that, without it, and a
consensus as to its terms, the agreement cannot be enforced. In reality it submits
that it may capriciously refuse to agree to terms and resist performance. That is the
true deduction notwithstanding any contrary pretentions. I do not overlook the fact
that appellant professed willingness to discuss a formal contract on the basis that it
was not already bound and that its terms should be mutually agreed to. If it ever had
in mind the arrival at a consensus in this regard (and I doubt it) it would be, not by
carrying out the terms of the main contract but by materially altering it. That could
not be considered by respondent. I make no further comment; we are concerned
with the legal aspect of the case.

Green v Ainsmore Consolidated Mines Ltd. [1951] 3 DLR 632 (BCSC). A letter outlin-
ing in some detail clauses for an agreement was approved by the plaintiff and signed
by the appropriate officers of the defendant company. It requested that the plaintiff
"submit to us a draft form of agreement" and concluded with the words: "This memo-
randum shall be subject to a formal agreement of sale and underta_k ing being pre-
pared, satisfactory in form to the solicitors of both parties." WILSON J found that the
agreement submitted by the plaintiff, prepared by overzealous attorneys, did not
conform to the meaning of the letter but that this difficulty might have been over-
come by further honest discussion, and that the refusal of the defendant company
to execute a written agreement was entirely due to advice given it by its solicitor that
the chief disadvantage to the company arose out of resulting income tax liability.
He held that the letter was not an enforceable contract, following Chillingworth v
Esche, [1924] 1 Ch 97. "It is [not] open to me to review the reasonableness or bona
fides of the refusal to execute a formal contract."

NOTES AND QUESTIONS

1. A signed an agreement to purchase B's farm . The document ended: "This is a provisional
agreement until a fully legalized agreement, drawn up by a solicitor, and embodying all the
conditions herewith stated, is signed." No "lega lized " agreement was. ever signed. Do A and B
have a contract7 See Branca v Cobarro, [1947] KB 854 (CA) .
2. The defendant company was in the business of selling franchise rights to retail stores. It
provided the plaintiff company with an information package, including a draft franchise agree-
ment in standard form. The agreement was 50 pages long and the plaintiff was advised to get
professional advice. At a meeting, the compan ies' agents agreed on some changes to the
standard agreement and the meeting closed with the defendant's representative stating that
they "had a deal." The final document that was submitted to the plaintiff company did not
comply fully with the oral terms. The plaintiff refused to sign and the defendant withdrew from
the transaction. At trial, the plaintiff's representative testified that he had no idea what was in
the 50-page draft except for the specifically agreed-on terms. Was there a binding contract7
See Bawitko Investments Ltd v Kernels Popcorn Ltd (1991), 79 DLR (4th) 97 (Ont CA).
3. For another case dealing with the issue of formalization, this time in relation to the
purchase and sale of shares, see UBS Securities Canada, Inc v Sands Brothers Canada, Ltd
(2009), 95 OR (3d) 93 (CA). In that case, the court held that because it is customary in the
securities industry to make binding contracts orally, a written document was not necessary in
order for the parties to be bound because they had agreed to all the material terms (that is, the

206
 I. BARGAINS

price, quantity, and closing date) via telephone. See also Hoban Construction Ltd v Alexander,
2012 BCCA 75 . .
4. What effect does the subsequent conduct of the parties have on the courts' willingness
to enforce agreements reached before the preparation of formal documents? See Wallace v
Allen (2009), 93 OR (3d) 723 (CA), where the court held that a letter of intent was binding and
enforceable because the parties' conduct (such as announcing the plaintiff as the new owner)
demonstrated that they considered themselves bound before execution of the formal pur-
chase agreement. See also Erie Sand and Gravel Limited v Tri-8 Acres Inc, 2009 ONCA 709
and the discussion in Foley v Classique Coaches, Limited, below.

MAY AND BUTCHER, LIMITED V THE KING

(1929), [1934] 2 KB 17n (HL)

[The suppliants, May & Butcher, Ltd., who were general contractors, alleged in a
petition of right that it was mutually agreed between them and the controller of the
Disposals Board for the purchase by the suppliants of the whole of the tentage that
might become available in the United Kingdom for disposal up to March 31, 1923.
The material letters for the purposes of the case were dated June 29, 1921 and January
7, 1922. J',ly the earlier of these letters written by the controller to the suppliants it was
stated that "in consideration of your agreeing to deposit with the [Disposals & Liquid-
ation] Commission the sum of £1000 as security for the carrying out of this extended
contract, the Commission hereby confirm the sale to you of the whole of the old
tentage which may become available ... up to and including December 31, 1921, upon
the following terms":
(1) The Commission agrees to sell and [the suppliants) agree to purchase the total stock of old
tentage ....
(3) The price or prices to be paid, and the date or dates on which payment is to be made by
the purchasers to the Commission for such old tentage shall be agreed upon from time to
time between the Commission and the purchasers as the quantities of the said old tentage
become available for disposal, and are offered to the purchasers by the Cor:nmission.
(4) Delivery ... shall be taken by the purchasers in such period or periods as may be agreed
upon between the commission and the purchasers when such quantities of old tentage
are offered to the purchasers by the Commission ....
(10) It is understood that all disputes with reference to or arising out of this agreement will be
submitted to arbitration in accordance with the provisions of the Arbitration Act. 1889.

By the second letter dated January 7, 1922, the disposals controller, referring to
verbal negotiations that had taken place for an extension of the agreement between
the Commission and the suppliants, confirmed the sale to the latter of the tentage
that might become available for disposal up to March 31, 1923. This letter, which
varied in certain respects the earlier terms, stated that "the prices to be agreed upon
between the Commission and the purchasers in accordance with the terms of clause
3 of the said earlier contract shall include delivery free on rail ... nearest to the depots
at which the said tentage may be lying .... "
Some time later the proposals made by the suppliants for purchase were not
acceptable to the controller, and in August 1922, the Disposals Board said it considered
itself no longer bound by the agreement, whereupon the suppliants filed their petition
of right claiming an injunction restraining the Commission from disposing elsewhere
than to the suppliants of the remainder of the tentage; an account of the tentage that
had become available; and compensation for the damage done to them.

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By the demurrer, answer, and plea the attorney general said that the petition of
right disclosed no sufficient and binding contract for the sale to the suppliants of
any tentage, and further that it was a term of the contract (if any) that the suppliants
should pay a reasonable price for the tentage and that the suppliants were not at the
material time ready and willing to pay a reasonable price.
Rowlatt J held that the letters of June 29, 1921 and January 7 and 18, 1922 consti-
tuted no contract but contained merely a series of clauses for adoption if and when
contracts were made, because the price, date of payment, and period of delivery had
still to be agreed; and that the arbitration clause did not apply to differences of
opinion upon these questions. The Court of Appeal (Scrutton LJ dissenting) affirmed
Rowlatt J's decision. The suppliants appealed.]
LORD BUCKMASTER : ... In my opinion there never was a concluded contract between
the parties. It has long been a well recognized principle of contract law that an agree-
ment between two parties to enter into an agreement in which some critical part of
the contract matter is left undetermined is no contract at all. It is of course perfectly
possible for two people to contract that they will sign a document which contains
all the relevant terms, but it is not open to them to agree that they will in the future
agree upon a matter which is vital to the arrangement between them and has not
yet been determined. It has been argued that as the fixing of the price has broken
down, a reasonable price must be assumed. That depends in part upon the terms of
the Sale of Goods Act, which no doubt reproduces, and is known to have reproduced,
the old law upon the matter. That provides ins. 8 that
the price in a contract of sale may be fixed by the contract, or may be left to be fixed
in manner thereby agreed, or may be determined by the course of dealing between the
parties. Where the price is not determined in accordance with the foregoing provisions
the buyer must pay a reasonable price
while, if the agreement is to sell goods on the terms that the price is to be fixed by
the valuation of a third party, and such third party cannot or does not make such
valuation, s. 9 says that the agreement is avoided. I find myself quite unable to under-
stand the distinction between an agreement to permit the price to be fixed by a third
party and an agreement to permit the price to be fixed in the future by the two parties
to the contract themselves. In principle it appears to me that they are one and the
same thing . ...
The next question is about the arbitration clause, and there I entirely agree with
the majority of the Court of Appeal and also with Rowlatt J . The clause refers "dis-
putes with reference to or arising out of this agreement" to arbitration, but until the
price has been fixed, the agreement is not there. The arbitration clause relates to the
settlement of whatever may happen when the agreement has been completed and
the parties are regularly bound. There is nothing in the arbitration clause to enable
a contract to be made which in fact the original bargain has left quite open ....
VISCOUNT DUNEDIN: ... In the system of law in which I was brought up, that was
expressed by one of those brocards of which perhaps we have been too fond, but
which often express very neatly what is wanted: "Certum est quod certum reddi
potest." [That is certain that can be made certain.] Therefore, you may very well agree
that a certain part of the contract of sale, such as price, may be settled by some one
else. As a matter of the general law of contracts all the essentials have to be settled.
What are the essentials may vary according to the particular contract under con-
sideration. We are here dealing with sale, and undoubtedly price is one of the
essentials of sale, and if it is left still to be agreed between the parties, then there is

208
 I. BARGAINS

no contract. It may be left to the determination of a certain person, and if it was so

left and that person either would not or could not act, there would be no contract
because the price was to be settled in a certain way and it has become impossible to
settle it in that way, and therefore there is no settlement. No .doubt as to goods, the
Sale of Goods Act, 1893, says that if the price is not mentioned and settled in the
contract it is to be a reasonable price. The simple answer in this case is that the Sale
of Goods Act provides for silence on the point and here there is no silence, because
there is a provision that the two parties are to agree. As long as you have something
certain it does not matter. For instance, with regard to price it is a perfectly good
contract to say that the price is to be settled by the buyer. I have not had time, or
perhaps I have not been industrious enough, to look through all the books in England
to see if there is such a case; but there was such a case in Scotland in 1760, where it
was decided that a sale of a landed estate was perfectly good, the price being left to
be settled by the buyer himself.
[Lord Warrington of Clyffe also delivered reasons for dismissing the appeal.]

UNIFORM COMMERCIAL CODE

American Law Institute, 1978

SECTION 2-204. FORMATION IN GENERAL

(3) Even though one or more terms are left open, a contract for sale does not fail
for indefiniteness if the parties have intended to make a contract and there is a
reasonably certain basis for giving an appropriate remedy.

Ko v Hillview Homes Ltd. 2012 ABCA 245. COTE JA: Many writers imply that uncer-
tainty of contractual terms is a technical defence, virtually unethical. ... Certainty of
terms is not a separate self-contained defence, like failure to register a mortgage in
a registry, or failure to have an Alberta guarantor appear before a notary public. Quite
the contrary; certainty is an integral part of the very heart of contract. ... In contracts,
as in many areas of the law, all the rules interlock. The rules of certainty of terms and
the rules of offer and acceptance overlap .... Why are there various "topics" in con-
tracts law which overlap? That is because one cannot teach all aspects of contracts
at once, especially to first-year law students. (See Justinian's Institutes, Book I, Title
1.) So law teachers have worked out a convenient instructional design, explaining
different concepts separately and in an order easy to understand .... Requiring that
a contract be certain is thus far from a freestanding concept; it is the diametric
opposite of a technical requirement divorced from principle, policy, or logic.

WN Hillas and Co, Limited v Arcos, Limited. (1932), 38 Com Cas 23 (HL). LORD
WRIGHT: Business men often record the most important agreements in crude and
summary fashion; modes of expression sufficient and clear to them in the course
of their business may appear to those unfamiliar with the business far from complete
or precise. It is accordingly the duty of the Court to construe such documents fairly
and broadly, without being too astute or subtle in finding defects; but, on the con -
t;ary, the Court should seek to apply the old maxim of English law, Verba ita sunt

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intelligenda ut res magis va/eat quam pereat [words are to be so understood that the
subject matter may be preserved rather than destroyed]. That maxim, however, does
not mean that the Court is to make a contract for the parties, or to go outside the
words they have used, except in so far as there are appropriate implications of law,
as for instance, the implication of what is just and reasonable to be ascertained by
the Court as matter of machinery where the contractual intention is clear but the
contract is silent on some detail. Thus in contracts for future performances over a
period, the parties may neither be able to nor desire to specify many matters of detail,
but \eave them to be adjusted in the working out of the contract. Save for the legal
implication I have mentioned, such contracts might we\\ be incomplete or uncertain:
with that implication in reserve they are neither incomplete nor uncertain. As
obvious illustrations I may refer to such matters as prices or times of delivery in
contracts for the sale of goods, or times for loading or discharging in a contract of
sea carriage. Furthermore, even if the construction of the words used may be difficult,
that is not a reason for holding them too ambiguous or uncertain to be enforced if
the fair meaning of the parties can be extracted ....
.. . Some confusion has been imported, as I think, into the question by dwelling
on the exact words-"The option of entering into contract," and it is said that this is
merely a contract to enter into a contract. The phrase is epigrammatic, but may be
either meaningless or misleading. A contract de praesenti to enter into what, in law,
is an enforceable contract, is simply that enforceable contract, and no more or no
less; and if what may not very accurately be called the second contract is not to take
effect ti\\ some future date but is otherwise an enforceable contract, the position is
as in the preceding illustration, save that the operation of the contract is postponed.
But in each case there is eo instanti a complete obligation. If, however, what is meant
is that the parties agree to negotiate in the hope of effecting a valid contract, the
position is different. There is then no bargain except to negotiate, and negotiations
may be fruitless and end without any contract ensuing yet even then, in strict theory,
there is a contract (if there is good consideration) to negotiate, though in the event
of repudiation by one party the damages may be nominal, unless a jury think that
the opportunity to negotiate was of some appreciable value to the injured party.

QUESTION
M, a dealer in mustard seed, agreed with G, a mustard farmer, to buy his entire 1961 crop. In
the contract, the only price specified was for "Grade #1 seed only." G found that his seed was
not Grade #1, and, believing that the contract was therefore not enforceable, he sold his crop
on the open market at an increased price. Does M have a claim for breach of contract? See
Montana Mustard Seed Co v Gates (1963), 42 WWR 303 (Sask OB) .

FOLEY V CLASSIQUE COACHES, LIMITED

(1934] 2 KB 1 (CA)

SCRUTTON LJ: In this appeal I think that the Lord Chief Justice's decision was right,
and I am glad to come to that conclusion, because I do not regard the appellant's
contention as an honest one.
The nature of the case is this: the respondent, the plaintiff in the action, had some
land, part of which was occupied by petrol pumps. Adjoining that \and was some
vacant land belonging to him which the appellants wanted to use as the headquarters

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for their charabancs, and they approached the respondent, who was willing to sell
on the terms that the appellants obtained all their petrol from him. It is quite clear
that unless the appellants had agreed to this they would never have got the land.
There was a discussion whether this term about the petrol and the agreement to
purchase the land should be put in one document or in two, but ultimately it was
decided to put them in two documents of even date . One relates specifically to the
sale and purchase of the land, and that was to ·go through on condition that the
appellants undertook to enter into the petrol agreement, the terms of which had
been already agreed. On the same day the second agreement was signed reciting
that it was supplemental to the agreement of even date, that is the agreement for the
sale of the land. The petrol agreement included a clause that if any dispute or differ-
ence should arise on the subject-matter or construction "the same shall be submitted
to arbitration in the usual way."
[The petrol agreement also includ~d a clause that stated: "The vendor shall sell to the
company and the company shall purchase from the vendor all petrol which shall be
required by the company for the running of their said business at a price to be agreed
by the parties in writing and from time to time."]
It is quite clear that the parties intended to make an agreement, and for the space
of three years no doubt entered the mind of the appellants that they had a business
agreement, for they acted on it during that time. The petrol supplied by the respond-
ent was non-combine petrol, but he had also combine petrol pumps. The non-
combine petrol was supplied to the appellants at a price lower than that paid by the
public, and an account was rendered periodically in writing and paid. In the third
year some one acting for the appellants thought he could get better petrol elsewhere,
and on September 29, 1933, their solicitor, thinking he saw a way out of the agree-
ment, wrote on behalf of the appellants the letter of September 29, 1933, repudiating
the agreement. Possibly the solicitor had h eard something about the decision of the
House of Lords in /vlay and Butcher, Limited v. The King but probably had not heard
of Braithwaite v. Foreign Hardwood Co. [1905] 2 K.B. 543, in which the Court of Appeal
decided that the wrongful repudiation of a contract by one party relieves the other
party from the performance of any conditions precedent. If the solicitor had known
of that decision he would not have written the letter in the terms he did. Thereafter
the respondent brought his action claiming damages for breach of the agreement,
a declaration that the agreement is binding, and an injunction to restrain the appel-
lants from purchasing petrol from any other person. The Lord Chief Justice decided
that the respondent was entitled to judgment, as there was a binding agreement by
which the appellants got the land on condition, that they should buy their petrol
from the respondent. I observe that the appellants' solicitor in his letter made no
suggestion that the land would be returned, and I suppose the appellants would have
been extremely annoyed if they had been asked to return it when they repudiated
the condition.
A good deal of the case turns upon the effect of the two decisions of the House
of Lords which are not easy to fit in with each other. The first of these cases is /vlay
and Butcher, Limited v. The King, which related to a claim in respect of a purchase of
surplus stores from a Government department. In the Court of Appeal two members
of the Court took the view that inasmuch as there was a provision that the price of
the stores which were to be offered from time to time was to be agreed there was no
binding contract because an agreement to make an agreement does not constitute
a contract, and that the language of clause 10 that any dispute as to the construction
of the agreement was to be submitted to arbitration was irrelevant, because there

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was not an agreement, although the parties thought there was. In the second case,
Hi/las & Co. v. Arcos, there was an agreement between Hillas & Co. and the Russian
authorities under which Hillas & Co. were to take in one year 22,000 standards of
Russian timber, and in the same agreement they had an option to take in the next
year 100,000 standards, with no particulars as to the kind of timber or as to the terms
of shipment or any of the other matters one expects to find dealt with on a sale of a
large quantity of Russian timber over.a period. The Court of Appeal, which included
Greer L.J. and myself, both having a very large experience in these timber cases,
came to the conclusion that as the House of Lords in May and Butcher, Limited v. The
King considered that where a detail had to be agreed upon there was no agreement
until that detail was agreed, we were bound to follow the decision in May and Butcher,
Limited v. The King and hold that there was no effective agreement in respect of the
option, because the terms had not been agreed. It was, however, held by the House
of Lords in Hi/las & Co. v. Arcos that we were wrong in so deciding and that we had
misunderstood the decision in May and Butcher, Limited v. The King. The House took
this line: it is quite true that there seems to be considerable vagueness about the
agreement but the parties contrived to get through it on the contract for 22,000
standards, and so the House thought there was an agreement as to the option which
the parties would be able to get through also despite the absence of details. It is true
that in the first year the parties got through quite satisfactorily; that was because
during that year the great bulk of English buyers were boycotting the Russian sellers.
In the second year the position was different. The English buyers had changed their
view and were buying large quantities of Russian timber, so that different conditions
were then prevailing. In Hi/las & Co. v. Arcos the House of Lords said that they had
not laid down universal principles of construction in May and Butcher, Limited v. The
King, and.that each case must be decided on the construction of the particular docu-
ment, while in Hi/las & Co. v. Arcos they found that the parties believed they had a
contract. In the present case the parties obviously believed they had a contract and
they acted for three years as if they had; they had an arbitration clause which relates
to the subject -matter of the agreement as to the supply of petrol, and it seems to me
that this arbitration clause applies to any failure to agree as to the price. By analogy
to the case of a tied house there is to be implied in this contract a term that the petrol
shall be supplied at a reasonable price and shall be of reasonable quality. For these
reasons I think the Lord Chief Justice was right in holding that there was an effective
and enforceable contract, although as to the future no definite price had been agreed
with regard to the petrol. ...
The appeal therefore fails, and no alteration is required in the form of the injunc-
tion that has been granted.
[The judgments of Greer and Maugham LJJ have been omitted.]

SCAMMELL (G) AND NEPHEW, LIMITED V OUSTON

[19411 AC 251 (HL)

[On December 8, 1937, Ouston agreed to purchase a Commer van from Scammell and
Nephew, Limited for £268 in exchange for a 1935 Bedford van and "the balance of
purchase price ... on hire-purchase terms over a period of two years." Later Scammell
wrote to Ouston: "(W]e have now received advice from the United Dominion Trust
Co. Ltd. of their acceptance of the hire-purchase in connection with the vehicle we
are supplying, and we will, in due course, forward the documents to you." A few days

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 I. BARGAINS

later on February 10, 1938 Scammell reported that the van would be ready for collec-
tion in a few days "subject to mutual acceptance of the hire-purchase agreement."
He added, "We make it a condition of the supply of vehicles on hire-purchase terms
that we approve terms of agreement before supply." Before the hire-purchase agree-
ment was entered into, Scammell refused to go ahead on the ground that the Bedford
van was a 1934 model and not in satisfactory condition. This ground was abandoned
at the subsequent trial. Tucker J awarded damages, the Court of Appeal dismissed
the appeal, and Scammell accordingly appealed to the House of Lords.]
LORD WRIGHT: ... There are in my opinion two grounds on which the court ought to
hold that there was never a contract. The first is that the language used was so
obscure and so incapable of any definite or precise meaning that the court is unable
to attribute to the parties any particular contractual intention. The object of the court
is to do justice between the parties, and the court will do its best, if satisfied that there
was an ascertainable and determinate intention to contract, to give effect to that
intention, looking at the substance and not mere form. It will not be deterred by mere
difficulties of interpretation. Difficulty is not synonymous with ambiguity so long
as any definite meaning can be extracted. But the test of intention is to be found in
the words used. If these words, considered however broadly and untechnically and
with due regard to all just implications, fail to evince any definite meaning on which
the court can safely act, the court has no choice but to say that there is no contract.
Such a position is not often found . But I think that it is found in this case. My reason
for so thinking is not only based on the actual vagueness and unintelligibility of the
words used, but is confirmed by the startling diversity of explanations, tendered by
those who think there was a bargain, of what the bargain was. I do not think it would
be right to hold the appellants to any particular version. It was all left too vague. There
are many cases in the books of what are called illusory contracts, that is, where the
· parties may have thought they were making a contract but failed to arrive at a definite
bargain. It is a necessary requirement that an agreement in order to be binding must
be sufficiently definite to enable the court to give it a practical meaning. Its terms
must be so definite, or capable of being made definite without further agreement of
the parties, that the promises and performances to be rendered by each party are
reasonably certain. In my opinion that requirement was not satisfied in this case.
But I think the other reason, which is that the parties never in intention nor even
in appearance reached an agreement, is a still sounder reason against enforcing the
claim. In truth, in my opinion, their agreement was inchoate and never got beyond
negotiations. They did, indeed, accept the position that there should be some form
of hire-purchase agreement, but they never went on to complete their agreement
by settling between them what the terms of the hire-purchase agreement were to
be. The furthest point they reached was an understanding or agreement to agree
upon hire-purchase terms .... It is here necessary to remember what a hire-purchase
agreement is. It is not a contract of sale, but of bailment. ... Terms must accordingly
be arranged in respect of the period of the bailment as to user, repairs, insurance,
rights of retaking possession on the hirer's default and various other matters. A hire-
purchase agreement is therefore in practice a complex arrangement. ...
[After discussing the three.possible ways that a hire-purchase agreement could be
structured his Lordship continued:]
... [TJhe court has in proper circumstances found itself able to determine what is
a reasonable price when the .Price is not specified in the contract as was done in
Foley's case, rightly, as I think, distinguishing May & Butcher's case, or to determine
what is a reasonable time, or what are reasonable instalments. Many other examples

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of this principle might be given. And in addition the court may import terms on the
proof of custom or by implication. But it is in my opinion a very different matter to
make an entire contract for the parties .... The law has not defined and cannot of
itself define what are the normal and reasonable terms of a hire-purchase agreement.
Though the general character of such an agreement is familiar, it is necessary for
the parties in each case to agree upon the particular terms. It may, perhaps, be that
this might be done in particular circumstances by general words of reference. For
instance if it were stipulated that there should be "a usual" hire-purchase agreement,
the court might be able if supplied with appropriate evidence to define what are the
terms of such an agreement. But there was nothing of the sort in this case.
I think this appeal should be allowed.
[The judgments of Viscount Simon LC, Viscount Maugham, and Lord Russell of
Killowen, who concurred in allowing the appeal, are omitted.]

NOTES AND QUESTIONS

1. An agreement to finance the purchase of real property by a future agreement containing

the "usual terms" was held to be too uncertain to constitute an enforceable agreement. See
Buyers v Begg, [1952] 1 DLR 313 (BCCA). The current Land Title Act (RSBC 1996, c 250) of that
province now contains a set of required mortgage terms. Would an agreement to p·rovide a
mortgage in the "usual form" be enforceable? On what factors might your answer depend?
See Thomson Groceries Ltd v Scott, [1943] 3 DLR 25 (Ont CA).
2. When will the court consider that the boundary line between filling a contractual gap by
reference to some implied term and making a new contract for the parties has been crossed?
3. Have factors such as detrimental reliance and bad faith been taken into account by the
courts when deciding issues of certainty? Are these factors that should have been taken into
account?
4. The question of illusory promises is dealt with in more detail in Section l.G, Mutual Prom-
ises, below.

Calvan Consolidated Oil & Gas Co v Manning. [1959] SCR 253, 17 DLR (2d) 1. An
agreement provided for the exchange of part interests in petroleum and natural gas
permits. Calvan was to have power to deal with a permit in which Manning had a
20 percent interest. The possibility was envisaged that Calvan might itself want to
develop the land instead of selling or farming it out. In such a case it was provided
that an operating agreement would be drawn up, and if the terms of such an oper-
ating agreement could not be agreed on, they were to be settled by arbitration. The
agreement concluded: "It is also agreed that a formal agreement will be drawn up as
soon as possible." A few days later a clause was added: "It is agreed that the terms of
the formal agreement are to be subject t() our mutual agreement, and if we are unable
to agree, the terms of such agreement are to be settled for us by arbitration by a single
arbitrator, pursuant to [t]he Arbitration Act of the Province of Alberta." It was argued
that the agreement was unenforceable, first because the terms of the envisaged
operating agreement had not been settled, and, second, because the reference to a
.1,ater formal contract indicated that the present agreement was not meant to be
binding. On the first point, JUDSON J for the Supreme Court, said, "The learned trial
Judge was of the opinion that the provision for arbitration in relation to a possible
operating agreement was meaningless and unenforceable. If this were so, the con-
sequence would be that contracting parties in the position of Calvan and Manning
who do not know what their ultimate intentions may be if they retain the property

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 I. BARGAINS

must provide in detail for a contingency that may never arise unless they wish to
run the risk of having the rest of their contractual efforts invalidated and declared
unenforceable. I agree with the opinion of the Court of Appeal that such a situation
may be dealt with by an agreement to arbitrate and I can see no legal or practical
difficulty in the way. No more could the learned author of Russell on Arbitration,
16th ed., p. 10, when he said: 'Since an arbitrator can be given such powers as the
parties wish, he c·a n be authorised to make a new contract between the parties. The
parties to a commercial contract often provide that in certain events their contract
shall be added to or modified to fit the circumstances then existing, intending
thereby to create a binding obligation although they are unwilling or unable to
determine just what the terms of the new or modified agreement shall be. To a court
such a provision is ineffective as being at most a mere "agreement to agree"; but a
provision that the new or modified terms shall be settled by an arbitrator can without
difficulty be made enforceable."'
On the second point, JUDSON J said: "Only two questions remain to be considered
and these arise from the provision in the amending agreement for arbitration ori the
terms of the formal .agreement. The questions are, first, whether this indicates an
intention not to be bound until the formal agreement is executed, and, second, what
terms may be incorporated in the formal agreement by the arbitrator. My opinion is
that the parties were bound immediately on the execution of the informal agreement,
that the acceptance was unconditional and that all that was necessary to be done by
the parties or possibly by the arbitrator was to embody the precise terms, and no
more, of the informal agreement in a formal agreement. This is not a case of accept-
ance qualified by such expressed conditions as 'subject to the preparation and
approval of a formal contract,' 'subject to contract' or 'subject to the preparation of a
formal contract, its execution by the parties and approval by their solicitors.' Here
we have an unqualified acceptance with a formal contract to follow. Whether the
parties intend to hold themselves bound until the execution of a formal agreement
is a question of construction and I have no doubt in this case."

QUESTIONS

1. Would an agreement to sign a loan agreement containing certain agreed-on terms and
"such other terms as the lender's solicitor reasonably may require" be enforceable? See First
City Investments Ltd v Fraser Arms Hotel Ltd, [1979] 6 WWR 125 (BCCA).
2. It is generally the case that most contractual rights can be "sold" (assigned) by the party
owning them. Would an agreement between "ABC Property Ltd. and X or nominee" be
enforceable? What if the agreement read "Between ABC Property Ltd. and one of X. Y. or Z"7
See Santelli v Bifano Enterprises (1981), 33 BCLR 266 (SC) and Finlay Investments Ltd v Abra-
ham (1983), 26 RPR 188 (BCSC)
3. Can some of the problems with flexibility be solved by making an "agreement to negoti-
ate in good faith"?

EMPRESS TOWERS LTD V BANK OF NOVA SCOTIA

(1990), 50 BCLR (2d) 126 (CA)

LAMBERT JA: The landlord, Empress Towers Ltd., brought a petition under s. 18 of the
Commercial Tenancy Act against the tenant, the Bank of Nova Scotia, seeking to
obtain a writ of possession under s. 21 of the Act.

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The first lease between the parties was made in 1972. It expired in 1984. A new
lease was made. It contained this clause :
The landlord hereby grants to the Tenant right of renewal of this Lease for two succes-
sive periods of five (5) years each, such rights to be exercisable by three (3) months'
written notice from the Tenant, subject to all the terms and conditions herein contained
excepting any right of renewal beyond the second five (5) year period and excepting
the rental for any renewal period, which shall be the market rental prevailing at the
commencement of that renewal term as mutually agreed between the Landlord and
the Tenant. If the Landlord and the Tenant do not agree upon the renewal rental within
two (2) months following the exercise of a renewal option, then this agreement may be
terminated at the option of either party.
The 1984 lease was due to expire on 31st August 1989. On 25th May 1989 the bank
exercised its option to renew the lease for a further term of five years from 1st Sep-
tember 1989. On 23rd June 1989 the bank proposed a rental rate of $5,400 a month
up from $3,097.92 under the lease that.was about to expire. No written reply was
received from Empress Towers. There may have been a telephone response. On 26th
July 1989 the bank wrote again to Empress Towers. It said that its proposal of $5,400
a month was a rate which independent appraisers had advised the bank was appro-
priate. It said it was willing to negotiate. Also on 26th July the solicitor for.Empress
Towers wrote to the bank saying that his client was still reviewing the offer. On 23rd
August the bank asked whether Empress Towers was making progress in its delibera-
tions and it said that it remained ready to discuss the matter at Empress Towers'
convenience. On 31st August, on the day when the first five year term was due to
expire, Empress towers made its response. It said it would allow the bank to remain
on a month-to-month basis if $15,000 was paid before 15th September 1989 and a
rent of $5,400 a month was paid thereafter. The tenancy that Empress Towers wished
to create in that way was to be terminable on 90 days written notice. (There was
evidence that an employee of Empress Towers had been robbed of $30,000 in a
branch of the bank and that Empress Towers' insurance had paid only $15,000, leav-
ing a loss to Empress Towers of $15,000.) ...
The principal question in the appeal is whether the renewal clause was void either
for uncertainty or, what is fundamentally the same, as an agreement to agree. The
obverse of that question is: If the renewal clause is not void, what does it mean? ...
The law is generally to the same effect in England. It is discussed by Mr. Justice
Megarry in Brown v. Gould, [1972] 1 Ch. 53, where three categories of options are
analyzed. The first category is where the rent is simply "to be agreed." Usually such a
clause cannot be enforced. The second category is where the rent is to be established
by a stated formula but no machinery is provided for applying the formula to produce
the rental rate. Often the courts will supply the machinery. The third category is
where the formula is set out but is defective and the machinery is provided for apply-
ing the formula to produce the ren.tal rate. In those _c ases the machinery may be used
to cure the defect in the formula. What is evident from a consideration of an three
categories is that the courts will try, wherever possible, to give the proper legal effect
to any clause that the parties understood and intended was to have legal effect.
In this case, if the parties had intended simply to say that if the tenant wished to
renew it could only do so at a rent set by or acceptable to the landlord, then they
could have said so. Instead, they said that if the tenant wished to renew it could do
so at the market rental prevailing at the commencement of the renewal term. If
nothing more had been said, then the market rental could have been determined on
the basis of valuations and, if necessary, a court could have made the determination.

216
 I. BARGAINS

It would have been an objective matter. But the clause goes on to say that not only
must the renewal rental be the prevailing market rental but also it must be the pre-
vailing market rental as mutually agreed between the landlord and the tenant It
could be argued that the additional provision for mutual agreement meant only that
the first step was to try to agree, but if that step failed, then other steps should be
adopted to set the market rental. However, the final sentence of cl. 23, which con-
templates a failure to agree giving rise to a right of termination, precludes the
acceptance of that argument. In my opinion, the effect of the requirement for mutual
agreement must be that the landlord cannot be compelled to enter into a renewal
tenancy at a rent which it has not accepted as the market rental. But, in my opinion,
that is not the only effect of the requirement of mutual agreement. It also carries
with it, first, an implied term that the landlord will negotiate in good faith with the
tenant with the objective of reaching an agreement on the market rental rate and,
second, that agreement on a market rental will not be unreasonably withheld . ...
Those terms are to be implied under the officious bystander and business efficacy
principle in order to prevent the renewal clause, which was clearly intended to have
legal effect, from being struck down as uncertain. The key to implying the terms that
I have set out is that the parties agreed that there should be a right of renewal at the
prevailing market rental. (I do not have to decide in this casewhether a bare right of
renewal at a rental to be agreed carries with it an obligation to negotiate in good faith
or not to withhold agreement unreasonably.)
[Lambert JA accepted the finding of the trial judge that Empress Towers had not
negotiated in good faith. He therefore dismissed the claim for the writ of possession
under the Commercial Tenancy Act. Taggart JA concurred. The dissenting judgment
of Wallace JA is omitted. Leave to appeal to the SCC refused 79 DLR (4th) vii; 133 NR
238n.J

Walford v Miles. (1992] 2 AC 128 (HL). LORD ACKNER: The reason why an agreement
to negotiate, like an agreement to agree, is unenforceable is simply because it lacks
the necessary certainty. The same does not apply to an agreement to use best
endeavours. This unce.r tainty is demonstrated in the instant case by the provision
which it is said has to be implied in the agreement for the determination of the
negotiations. How can a court be expected to decide whether, subjectively, a proper
reason existed for the termination of negotiations? The answer suggested depends
upon whether the negotiations have been determined "in good faith." However, the
concept of a duty to carry on negotiations in good faith is inherently repugnant to
the adversarial position of the parties when involved in negotiations. Each party to
the negotiations is entitled to pursue his (or her) own interest, so long as he avoids
making misrepresentations. To advance that interest he must be entitled, if he thinks
it appropriate, to threaten to withdraw from further negotiations or to withdraw in
fact in the hope that the opposite party may seek to reopen the negotiations by
offering him improved terms .... A duty to negotiate in good faith is as unworkable
in practice as it is inherently inconsistent with the position of a negotiating party. It
is here that the uncertainty lies.

Jet2.com Ltd v Blackpool Airport Ltd. (2012] EWCA Civ 417. MOORE-BICK LJ: In
general an obligation to use best endeavours, or all reasonable endeavours, is not in
itself regarded as too uncertain to be enforceable, provided that the object of the

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endeavours can be ascertained with sufficient certainty ... . In my view the obligation
to use best endeavours to promote [a] business is no more uncertain than the obliga -
tion to use best endeavours to develop a railway's traffic (Sheffield District Railway Co.
v Great Central Railway Co.), or to promote the sales of fountain pens and ink bottles
(Terrell v Mabie Todd and Co. Ltd) . There may be argument about what constitutes
best endeavours in any particular circumstances (see, for example, Terrell v Mabie
Todd and Co. Ltd.), but that is a different matter.

Greenberg v Meffert (1985), 50 OR (2d) 755 (CA). ROBINS JA, interpreting a contract
whereby the payment of a commission to a terminated real estate agent was "at the
sole discretion" of the company, held as follows: In my opinion, the company's
discretion in this matter is not unbridled, firstly, because the nature of this contract
and the subject-matter of the discretion are such that the company's decision should
be construep as being controlled by standards and secondly, because the exercise
of the discretion, whether measured by subjective or objective standards, is subject
to a requirement of honesty and good faith. Provisions in agreements making pay-
ment or performance subject to "the discretion," "the opinion" or "the satisfaction"
of a party to the agreement or a third party, broadly speaking, fall into two general
categories. In contracts in which the matter to be decided or approved is not readily
susceptible of objective measurement-matters involving taste, sensibility, personal
compatibility or judgment of the party for whose benefit the authority was given-
such provisions are more likely construed as imposing only a subjective standard.
On the other hand, in contracts relating to such matters as operative fitness, struc-
tural completion, mechanical utility or marketability, these provisions are generally
construed as imposing an objective standard of reasonableness .... In any given
transaction, the category into which ·such a provision falls will depend upon the
intention of the parties as disclosed by their contract. In the absence of explicit
language or a clear indication from the tenor of the contract or the nature of the
subject-matter, the tendency of the cases is to require the discretion or the dissat-
isfaction to be reasonable .... This construction imposes the least hardship in that it
produces a result that cannot be said to be unfair or unjust to either of the parties.
Other things being equal, I think it preferable that provisions of this kind be con-
strued as implying the less arbitrary standards of the objective test.

NOTE S AND Q UE ST IO NS
1. Lambert JA appears to believe that the parties intended that the landlord could not be
required to accept a rent that it did not accept as market. What is the effect of implying a clause
that the landlord would not unreasonably withhold its agreement? Who would decide whether
the landlord had acted unreasonably? Is there any difference in the effect of the clause, with the
implied terms, and a clause by which the parties agreed that the rent would be market value7
2. Good faith was recognized as an organizing principle of Canadian contract law in Bhasin
v Hrynew 2014 SCC 71 (which is excerpted and discussed in Chapter 8). Does this recognition
mean that Lord Ackner's statement of principle in Walford is no longe~ cogent in Canada7 For
a general discussion of good faith, see McCamus, ch 5; Swan & Adamski at 312-30; Mac Dou-
gall at 67-70; Waddams at paras 500-14.
3. Are the rules relating to certainty too rigidly enforced? Consider this question as you
read the following excerpt dealing with issues of pre-contractual liability.

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 I. BARGAINS

STEPHEN A SMITH, Contract Theory

(Oxford: Oxford University Press, 2004) at 194-95 (footnotes omitted)

NON-CONTRACTUAL PROTECTION

In considering [the rigidity question] ..., the possibility that disappointed parties may
have recourse to non-contractual protection must also be kept in mind. If the full
range of such protection is not recognized by courts, a neutral application of the offer
and acceptance rules may indeed lead to harsh results. Equally, a failure by critics to
appreciate such protection may lead to unfair criticism of the offer and acceptance
rules. Three sources of non-contractual protection are particularly important.
The first is unjust enrichment law, which supports claims to recover the value of
benefits conveyed in anticipation of a contract that did not materialize. A claim for
what is sometimes called quantum valebat (for goods) and quantum meruit (for services)
is reasonably well-established in common law, although the late recognition that
such claims are part of a general duty to reverse unjust enrichments has meant this
source of liability has not always been foremost in the minds of contract scholars.
A second source of non-contractual protection is a duty to pay for requested
services. A party that has provided services requested in anticipation of a contract
may be able to recover on this basis if he has not been paid. There is a debate
amongst scholars as to whether such an action is part of unjust enrichment law or
part of a distinct species of obligation, but for our purposes it is sufficient to acknow-
ledge that plaintiffs normally can recover the value of services provided in anticipa -
tion of a contract.
Finally, a disappointed plaintiff may try to recover on the basis not that he con -
veyed a benefit to the defendant, but that he incurred expenses in justifiable reliance
on the defendant's representations that he would be paid. In other words, the plaintiff
may seek protection on the basis of a claim in estoppel. This is potentially the widest
basis for relief, since the plaintiff has the possibility of claiming for all reliance-
induced losses, regardless of whether those losses transmit to a benefit for the
defendant. The main hurdle to making such a claim, at least in England, is the rule
that estoppel may not be used to found a cause of action. In a contractual setting,
estoppel is generally available only to prevent plaintiffs from insisting on their
· already-existing contractual rights. Some common law jurisdictions have abandoned
this controversial limitation, and even in England there are exceptions to the rule.

NOTES

1. For an example of estoppel mitigating the rigours of offer and acceptance, see Lim Teng
Huan v Ang Swee Chuan, [1992] 1WLR113 (Brunei PC). In that case, the Privy Council decided
that a plaintiff might rely on proprietary estoppel to enforce a promise to exchange interests
in land even though the promise was contained in a contract that was too uncertain to be
enforceable. The contract was said to be void because one of the interests was in an unspeci-
fied piece of land expected to be allotted by the government at some uncertain future date .
Proprietary estoppel is discussed in Section 111.C.2, below. See also M Spence, Protecting Reli-
ance (Oxford: Hart, 1999) at 99-106.
2. For a more detailed discussion of pre-contractual liability from an unjust enrichment
perspective, see, inter alia, P Birks, Unjust Enrichment, 2nd ed (Oxford: Oxford University Press,
2005), 143ff; Maddaugh & McCamus, chs 17 and 21; J Edelman, "Liability in Unjust Enrichment
Where a Contract Fails to Materialize" in Burrows & Peel 159; M Mcinnes, The Canadian Law
of Unjust Enrichment and Restitution (Toronto: LexisNexis Canada, 2014) ch 13.

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3. For a more detailed discussion of how the law of tort informs pre-contractual liability,
see P Giliker, "A Role for Tort in Pre-Contractual Negotiations? An Examination of English,
French, and Canadian Law" (2003) 52 ICLO 969.

E. CONTRACTS NEGOTIATED BY CORRESPONDENCE

When negotiations for a contract are carried on through the medium of the mail, telephone,
email, or fax, certain technical difficulties may cause problems. Mail may be misdelivered;
telephones may fail ; fax machines may run out of paper. Are special rules needed to deal with
these situations? Consider the following excerpts.

HOUSEHOLD INSURANCE CO V GRANT

(1879), 4 Ex D 216 (CA)

THESIGER LJ: In this case the defendant made an application for shares in the plain-
tiffs' company under circumstances from which we must imply that he authorized
the company, in the event of their allotting to him the shares applied for, to send the
notice of allotment by post. The company did allot him the shares, and duly
addressed to him and posted a letter containing the notice of allotment, but upon
the finding of the jury it must be taken that the letter never reached its destination.
In this state of circumstances Lopes J. has decided that the defendant is liable as a
shareholder. ...
The leading case upon the subject is Dunlop v. Higgins (1848), 9 E.R. 805 .... [In that
case] the Lord Justice General directed the jury in point of law that, if the pursuers
posted their acceptance of the offer in due time according to the usage of trade they
were not responsible for any casualties in the post office establishment. This direc-
tion was wide enough in its terms to include the case of the acceptance never being
delivered at all; and Lord Cottenham, in expressing his opinion that it was not open
to objection, did so after putting the case of a letter containing a notice of dishonour
posted by the holder of a bill of exchange in proper time, in which case he said,
"Whether that letter be delivered or not is a matter quite immaterial, because for acci-
dents happening at the post office he is not responsible." In short, Lord Cottenham
appears to me to have held that, as a rule, a contract formed by correspondence
through the post is complete as soon as the letter accepting an offer is put into the
post, and is not put an end to in the event of the letter never being delivered. My view
of the effect of Dunlop v. Higgins is that taken by James L.J., in Harris' Case (1872), 7
Ch. App. 587, where he speaks of the former case as "a case which is binding upon
us, and in which every principle argued before us was discussed at length by the Lord
Chancellor in giving judgment." He adds, the Lord Chancellor "arrived at the conclu-
sion that the posting of the letter of acceptance is the completion of the contract;
that is to s~y, the moment one man has made an offer, and the other has done
something binding himself to that offer, then the contract is complete and neither
party can afterwards escape from it." ... Now, whatever in abstract discussion may be
said as to the legal notion of its being necessary, in order to the effecting of a valid
and binding contract, that the minds of the parties should be brought together at
one and the same moment, that notion is practically the foundation of English law
upon the subject of the formation of contract. Unless therefore a contract constituted
by correspondence is absolutely concluded at the moment that the continuing offer
is accepted by the person to whom the offer is addressed, it is difficult to see how
the two minds are ever to be brought together at one and the same moment. This

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 I. BARGAINS

was pointed out by Lord Ellenborough in the case of Adams v. Lindsel/ (1818), 106 E.R.
250 which is a recognized authority upon this branch of the law. But on the other
hand it is a principle of law, as wen established as the legal notion to which I have
referred, that the minds of the two parties must be brought together by mutual com -
munication. An acceptance, which only remains in the breast of the acceptor without
being actually and by legal implication communicated to the offeror, is no binding
acceptance . ... How then are these elements of law to be harmonized in the case of
contracts formed by correspondence through the post? I see no better mode than
that of treating the post office as the agent of both parties .... But if the post office be
such common agent, then it seems to me to follow that, as soon as the letter of
acceptance is delivered to the post office, the contract is made as complete and as
final and absolutely binding as if.the acceptor had put his letter into the hands of a
messenger sent by the offeror himself as his agent to deliver the offer and receive
the acceptance. What other principle can be adopted short of holding that the con-
tract is not complete by acceptance until and except from the time that the letter
containing the acceptance is delivered to the offeror, a principle which has been
distinctly negatived . ... The acceptor, in posting the letter, has, to use the language
of Lord Blackburn, in Brogden v. Directors of Metropolitan Ry. Co. (1877), 2 App. Cas.
666, 691, "·put it out of his control and done an extraneous act which clenches the
matter, and shows beyond an doubt that each side is bound." How then can a casualty
in the post, whether resulting in delay, which in commercial transactions is often as
bad as no delivery, or in non-delivery, unbind the parties or unmake the contract?
To me it appears that in practice a contract complete upon the acceptance of an offer
being posted, but liable to be put an end to by an accident in the post, would be more
mischievous than a contract only binding upon the parties to it upon the acceptance
actually reaching the offeror, and I can see no principle of law from which such an
anomalous contract can be deduced.
There is no doubt that the implication of a complete, final, and absolutely binding
contract being formed, as soon as the acceptance of an offer is posted, may in some
cases lead to inconvenience and hardship. But such there must be at times in every
view of the law. It is impossible in transactions which pass between parties. at a
distance, and have to be carried on through the medium of correspondence, to adjust
conflicting rights between innocent parties, so as to make the consequences of
mistake on the part of a mutual agent fall equally upon the shoulders of both. At the
same time I am not prepared to admit that the implication in question will lead to
any great or general inconvenience or hardship. An offeror, if he chooses, may
always make the formation of the contract which he proposes dependent upon the
actual communication to himself of the acceptance. If he trusts to the post he trusts
to a means of communication which, as a rule, does not fail, and if no answer to his
offer is received by him, and the matter is of importance to him he can make inquir-
ies of the person to whom his offer was addressed. On the other hand, if the contract
is not finally concluded, except in the event of acceptance actually reaching the
offeror, the door would be opened to the perpetration of much fraud, and, putting
aside this consideration, considerable delay in commercial transactions, in which
despatch is, as a rule, of the greatest consequence, would be occasioned; for the
acceptor would never be entirely safe in acting upon his acceptance until he had
received notice that his letter of acceptance had reached its destination.
Upon balance of conveniences and inconveniences it seems to me, applying with
slight alterations the language of the Supreme Court of the United States in Tayloe
v. Merchants Fire Insurance Co.' (1850), 9 Howard S. Ct. Rep. 390, more consistent.with
the acts.and declarations of the parties in this case to consider the contract complete

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and absolutely binding on the transmission of the notice of allotment through the
post, as the medium of communication that the parties themselves contemplated,
instead of postponing its completion until the notice had been received by the
defendant. Upon principle, therefore, as well as authority, I think that the judgment
of Lopes J. was right and should be affirmed, and that this appeal should therefore
be dismissed.
BRAMWELL LJ (dissenting): The question in this case is not whether the post office
was a proper medium of communication from the plaintiffs to the defendant. There
is no doubt that it is so in all cases where personal service is not required. It is an
ordinary mode of communication, and every person who gives anyone the right to
communicate with him, gives the right to communicate in an ordinary manner and
so in this way and to this extent, that if an offer were made by letter in the morning
to a person at a place within half-an-hour's railway journey of the offeror, I should
say that an acceptance by post, though it did not reach the offeror till the next morn-
ing, would be in time. Nor is the question whether, when the letter reaches an offeror,
the latter is bound and the bargain made from the time the letter is posted or des-
patched, whether by post or otherwise. The question in this case is different. I will
presently state what in my judgment it is. Meanwhile I wish to mention some ele-
mentary propositions which, if carefully borne in mind, will assist in the determin -
ation of this case.
First. Where a proposition to enter into a contract is made and accepted, it is
necessary, as a rule, to constitute the contract that there should be a communication
of that acceptance to the proposer, per Brian C.J., and Lord Blackburn: Brogden v.
Metropolitan Ry Co., 2 App. Cas. at p. 692.
Secondly. That the present case is one of proposal and acceptance.
Thirdly. That as a consequence of or involved in the first proposition, if the accept-
ance is written or verbal, i.e., is by letter or message, as a rule, it must reach the
proposer or there is no communication, and so no acceptance of the offer.
Fourthly. That if there is a difference where the acceptance is by a letter sent
through the post which does not reach the offeror, it must be by virtue of some
general rule or some particular agreement of the parties. As for instance, there might
be an agreement that the acceptance of the proposal may be sending the article
offered by the proposer to be bought, or hanging out a flag or sign to be seen by the
offeror as he goes by, or leaving a letter at a certain place, or any other agreed mode,
and in the same way there might be an agreement that dropping a letter in a post
pillar box or other place of reception should suffice.
Fifthly. That as there is no such special agreement in this case, the defendant, if
bound, must be bound by some general rule which makes a difference when the
post office is employed as the means of communication.
Sixthly. That if there is any such general rule applicable to the communicatiop of
the acceptance of offers, it is equally applicable to all communications that may be
made by post. Because, as I have said, the question is not whether this communi-
cation may be made by post. If, therefore, posting a letter which does not reach is a
sufficient communication of acceptance of an offer, it is equally a communication
of everything else which may be communicated by post, e.g., notice to quit. It is
impossible to hold, if I offer my landlord to sell him some hay and he writes accepting
my offer, and in the same letter gives me notice to quit, and posts his letter which,
however, does not reach me, that he has communicated to me his acceptance of my
offer, but not his notice to quit. Suppose a man has paid his tailor by cheque or
banknote, and posts a letter containing a cheque or banknote to his tailor, which
never reaches, is the tailor paid? If he is, would he be if he had never been paid before

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in that way? Suppose a man is in the habit of sending cheques and banknotes to his
banker by post, and posts a letter containing cheques and banknotes, which never
reaches. Is the banker liable? Would he be if this was the first instance of a remittance
of the sort? In the cases I have supposed, the tailor and banker may have recognized
this mode of remittance by sending back receipts and putting the money to the credit
of the remitter. Are they liable with that? Are they liable without it? The question then
is, is posting a letter which is never received a communication to the person
addressed, or an equivalent, or something which dispenses with it? It is for those
who say it is to make good their contention. I ask why is it? My answer beforehand,
to any argument that may be urged is, that it is not a communication, and that there
is no agreement to take it as an equivalent for or to dispense with a communication.
That those who affirm the contrary say the thing which is not. That if Brian C.J. had
had to adjudicate on the case, he would deliver the same judgment as that reported.
That because a man, who may send a communication by post or otherwise, sends
it by post, he should bind the person addressed, though the communication never
reaches him, while he would not so bind him if he had sent it by hand, it is impos-
sible. There is no reason in it; it is simply arbitrary. I ask whether anyone who thinks
so is prepared to follow that opinion to its consequence; suppose the offer is to sell
a particular chattel, and the letter accepting it never arrives, is the property in the
chattel transferred? Suppose it is to sell an estate or grant a lease, is the bargain
completed? The lease might be such as not to require a deed, could a subsequent
lessee be ejected by the would -pe acceptor because he had posted a letter? Suppose
an article is advertised at so much, and that it would be sent on receipt of a post office
order. Is it enough to post the letter7 If the word "receipt" is relied on, is it really meant
that that makes a difference? If it should be said let the offeror wait, the answer is,
maybe he may lose his market meanwhile. Besides, his offer may be advertisement
to all mankind. Suppose a reward for information, information posted does not reach,
someone else gives it and is paid, is the offeror liable to the first man?
It is said that a contrary rule would be hard on the would-be acceptor, who may
have made his arrangements on the footing that the bargain was concluded. But to
hold as contended would be equally hard on the offeror, who may have his arrange-
ments on the footing that his offer was not accepted; his non-receipt of any com-
munication may be attributable to the person to whom it was made being absent.
What is he to do but to act on the negative, that no communication has been made
to him7 Further, the use of the post office is no more authorized by the offeror than
the sending an answer by hand, and all these hardships would befall the person post-
.ing the letter if he sent it by hand. Doubtless in that case he would be the person to
suffer if the letter did not reach its destination. Why should his sending it by post
relieve him of the loss and cast it on the other party? It was said, if he sends it by
hand it is revocable, but not if he sends it by post, which makes the difference. But
it is revocable when sent by post, not that the letter can be got back, but its arrival
might be anticipated by a letter by hand or telegram, and there is no case to shew
that such anticipation would not prevent the letter from binding. It would be a most
alarming thing to say that it would. That a letter honestly but mistakenly written and
posted must bind the writer if hours before its arrival he informed the person
addressed that it was coming, but was wrong and recalled; suppose a false but honest
character given, and the mistake found out after the letter posted, and notice that it
was wrong given to the person addressed.
Then, as was asked, is the principle to be applied to telegrams? Further, it seems
admitted that if the proposer said, "unless I hear from you by return of post the offer
is withdrawn," that the letter accepting it must reach him to bind him. There is indeed

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a case recently reported in the Times before the Master of the Rolls, where the offer
was to be accepted within fourteen days, and it is said to have been held that it was
enough to post the letter on the 14th, though it would and did not reach the offeror
till the 15th. Of course there may have been something in that case not mentioned
in the report. But as it stands it comes to this, that if an offer is to be accepted in June,
and there is a month's post between the places, posting the letter on the 30th of June
will suffice, though it does not reach till the 31st of July; but that case does not affect
this. There the letter reached, here it has not. If it is not admitted that "unless I hear
by return the offer is withdrawn" makes the receipt of the letter a condition, it is to
say an express condition goes for nought. If it is admitted, is it not what every letter
says7 Are there to be fine distinctions, such as, if the words are "unless I hear from
you by return post, & c.," it is necessary the letter should reach him, but "let me know
by return of post," it is not; or if in that case it is, yet it is not where there is an offer
without those words . Lord Blackburn says that Mellish L.J. accurately stated that
where it is expressly or impliedly stated in the offer, "you may accept the offer by
posting a letter," the moment you post this letter the offer is accepted. I agree; and
the same thing is true of any other mode of acceptance offered with the offer and
acted on-as firing a cannon, sending off a rocket, give your answer to my servant
the bearer. Lord Blackburn was not dealing with the question before us; there was
no doubt in the case before him that the letter had reached . ...
I am of opinion that this judgment should be reversed. I am of opinion that there
was no bargain between these parties to allot and take shares, that to make such
bargain there should have been an acceptance of the defendant's offer and a com-
munication to him of that acceptance. That there was no such communication. That
posting a letter does not differ from other attempts at communication in any of its
consequences, save that it is irrevocable as between the poster and post office. The
difficulty has arisen from a mistake as to what was decided in Dunlop v. Higgins, and
from supposing that because there is a right to have recourse to the post as a means
of communication, that right is attended by some peculiar consequences, and also ·
from supposing that because if the letter reaches it binds from the time of posting,
it also binds though it never reaches. Mischief may arise if my opinion prevails. It
probably will not, as so much has been said on the matter that principle is lost sight
of. I believe equal if not greater, will, if it does not prevail. I believe the latter will be
obviated only by the rule being made nugatory by every prudent man saying, "[Y]our
answer by post is only to bind if it reaches me ." But the question is not to be decided
on these considerations . What is the law? What is the principle 7 If Brian C.J. had had
to decide this a public post being instituted in his time, he would have said the law
is the same, now there is a post, as it was before, viz., a communication to affect a
man must be a communication, i.e., must reach him.
[Judgment affirmed. The opinion of Baggallay LJ, who agreed with Thesiger LJ, is
omitted.]

CIVIL CODE OF QUEBEC

LRO. c C-1991

Article 1387. A contract is formed when and where acceptance is received by the
offeror, regardless of the method of communication used.

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 I. BARGAINS

NOTE
The only "circumstances" from which Thesiger LJ thought he must imply that the defendant had
authorized the plaintiff company to use the post would appear to be that the defendant handed
to one Kendrick, the plaintiff company's local agent, a written application for shares, which
Kendrick duly forwarded, presumably by post, to his principals in London.

Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd. [1994] 1 VR 74 (SC). HEDIGAN
J: Notwithstanding that we live in the electronic age of telephones, telexes, facsimile
transmissions, courier services and document exchange facilities, the use of the
post, perhaps less reliable and speedy for all its modern equipment, is still com-
monplace. The rule has not been expanded but it has not been abandoned either.

HENTHORN V FRASER
[1892] 2 Ch 27 (CA)

[After two futile attempts by Henthorn to purchase property in Birkenhead from

Fraser, the secretary of the Huskisson Benefit Building Society in Liverpool (the two
cities are across the mouth of the Mersey River from each other), Fraser, on July 7,
orally offered to sell it for £750 and handed Henthorn a written note stating, "I hereby
give you the refusal of the Flamank Street property at £750 for fourteen days." On
July 8 Fraser agreed to sell the same property to someone else, subject to his being
able to cancel if he could not cancel his offer to Henthorn. Fraser posted a letter to
Henthorn about noon that day, but it was not delivered to Henthorn's address until
five o'clock and Henthorn did not in fact have it until he returned home about eight
o'clock. Meanwhile Henthorn's solicitor had posted a letter in Birkenhead at ten to
four that afternoon accepting the offer. The letter of acceptance was delivered at ·
eight thirty that evening and was received by Fraser the next morning. Fraser denied
the contract and Henthorn sued for specific performance in the Court of the County
Palatine. His action was dismissed and he appealed.]
LORD HERSCHELL : ... If the acceptance by the plaintiff of the defendant's offer is to
be treated as complete at the time the letter containing it was posted, I can entertain
no doubt that the society's attempted revocation of the offer was wholly ineffectual.
I think that a person who has made an offer must be considered as continuously
making it until he has brought to the knowledge of the person to whom it was made
that it is withdrawn ... . The grounds upon which it has been held that the acceptance
of an offer is complete when it is posted have, I think, no application to the revoca-
tion or modification of an offer. These can be no more effectual than the offer itself,
unless brought to the mind of the person to whom the offer is made. But it is con-
tended on behalf of the defendants that the acceptance was complete only when
received by them, and not on the letter being posted. It cannot, of course, be denied,
after the decision in Dunlop v. Higgins (1848), 9 E.R. 805, in the House of Lords, that
where an offer has been made through the medium of the post, the contract is
complete as soon as the acceptance of the offer is posted, but that decision is said
to be inapplicable here, inasmuch as the letter containing the offer was not sent by
post to Birkenhead, but handed to the plaintiff in the defendant's office at Liverpool.
The question therefore arises in what circumstances the acceptance of an offer is to
be regarded as complete as soon as it is posted. In the case of the Household Insurance
Company v. Grant (1879), 4 Ex. D. 216, Lord Justice Baggallay said: "I think that the

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principle established in Dunlop v..Higgins is limited in its application to cases in which

by reason of general usage, or of relations between the parties to any particular
transactions, or of the terms in which the offer is made, the acceptance of such offer
by a letter through the post is expressly or impliedly authorized." ... Applying the law
[there] laid down by the Court of Appeal I think in the present case an authority to
accept by post must be implied. Although the plaintiff received the offer at the
defendant's office in Liverpool, he resided in another town, and it must have been
in contemplation that he would take the offer, which by its terms was to remain open
for some days with him to his place of residence, and those who made the offer must
have known that it would be according to the ordinary usages of mankind that if he
accepted it he should communicate his acceptance by means of the post. I am not
sure that I should myself have regarded the doctrine that an acceptance is complete
as soon as the letter containing it is posted as resting upon an implied authority by
the person making the offer to the person receiving it to accept by those means. It
strikes me as somewhat artificial to speak of the person to whom the offer is made
as having the implied authority of the other party to send his acceptance by post.
He needs no authority to transmit the acceptance through any particular channel;
he may select what means he pleases, the post -office no less than any other. The
only effect of the supposed authority is to make the acceptance complete as soon
as it is posted, and authority will obviously be implied only when the tribunal consid-
ers that it is a case in which this result ought to be reached .
. I should prefer to state the rule thus : Where the circumstances are such that it
must have been within the contemplation of the parties that, according to the ordin -
ary usages of mankind, the post might be used as a means of communicating the
acceptance of an offer, the acceptance is complete as soon as it is posted. It matters
not in which way the proposition be stated, the present case is in either view within
it. The learned Vice -Chancellor appears to have based his decision to some extent
on the fact that before the acceptance was posted the defendants had sold the prop-
erty to another person. The case of Dickinson v. Dodds (1876), 2 Ch. D. 463, was relied
upon in support of that defence. In that case, however, the plaintiff knew of the
subsequent sale before he accepted the offer, which, in my judgment, distinguishes
it entirely from the present case. For the reasons I have given I think the judgment
must be reversed, and the usual decree for specific performance made. The respond-
ents must pay the costs of the appeal and of the action.
[The judgments of Lindley and Kay LJJ to the same effect are omitted.]

BYRNE & CO V LEON VAN TIENHOVEN & CO

(1880), 5 CPD 344

LINDLEY J: This was an action for the recovery of damages for the non -delivery by
the defendants to the plaintiffs of 1,000 boxes of tin plates, pursuant to an alleged
contract, which I will refer to presently. The action was tried at Cardiff before myself
without a jury; and it was agreed at the trial that in the event of the plaintiffs being
entitled to damages they should be £375.
The defendants carried on business at Cardiff and the plaintiffs at New York, and
it takes ten or eleven days for a letter posted at either place to reach the other. The
alleged contract consists of a letter written by the defendants to the plaintiffs on the
1st of October, 1879, and received by them on the 11th, and accepted by telegram
and letter, sent to the defendants on the 11th and 15th of October respectively. These
letters and telegrams were as follows:

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 I. BARGAINS

[On October 1, 1879, the defendants wrote the plaintiffs offering them 1,000 boxes
of tin plates at 15s. 6d. per box. On October 11, 1879, the plaintiffs cabled the defend-
ants accepting this offer and on October 15 wrote the defendants confirming their
previous cable of acceptance. On October 8, however, the defendants wrote a letter
to the plaintiffs informing them that because there had been a big run on the tinplate
market in the last few days, causing prices to rise considerably, they withdrew their
offer and considered it cancelled from this date.]
... There is no doubt that an offer can be withdrawn before it is accepted, and it is
immaterial whether the offer is expressed to be open for acceptance for a given time
or not. ... For the decision of the present case, however, it is necessary to consider
two other questions, viz., 1. Whether a withdrawal of an offer has any effect until it
is communicated to the person to whom the offer has been sent? 2. Whether posting
a letter of withdrawal is a communication to the person to whom the letter is sent?
It is curious that neither of these questions appears to have been actually decided
in this country. As regards the first question, I am aware that Pothier and some other
writers of celebrity are of opinion that there can be no contract if an offer is with-
drawn before it is accepted, although the withdrawal is not communicated to the
person to whom the offer has been made. The reason for this opinion is that there
is not in fact any such consent by both parties as is essential to constitute a contract
between them. Against this view, however, it has been urged that a state of mind not
notifie_d cannot be regarded in dealings between man and man; and that an uncom -
municated revocation is for an practical purposes and in point of law no revocation
at all. This is the view taken in the United States: see Tayloe v. Merchants Fire Insurance
Co. (1850), 9 How. Sup. Ct. Rep. 390, cited in Benjamin on Sales, pp. 56-58, and it was
adopted by Mr. Benjamin. The same view is taken by Mr. Pollock in his excellent
work on Principles of Contract, 2nd ed., p. 10, and by Mr. Leake in his Digest of the
Law of Contracts, p. 43. This view, moreover, appears to me much more in accordance
with the general principles of English law than the view maintained by Pothier.
I pass, therefore, to the next question, viz., whether posting the letter of revocation
was a sufficient communication of it to the plaintiff. The offer was posted on the 1st
of October, the withdrawal was posted on the 8th, and did not reach the plaintiff
until after he had posted his letter of the 11th, accepting the offer. It may be taken as
now settled that where an offer is made and accepted by letters sent through the
post, the contract is completed the moment the letter accepting the offer is posted:
Harris' Case (1872), 7 Ch. App . 587; Dunlop v. Higgins (1848), 1 H.L.C. 381; 9 E.R. 805,
even although it never reaches its destination. When, however, these authorities are
looked at, it will be seen that they are based upon the principle that the writer of the
offer has expressly or impliedly assented to treat an answer to him by a letter duly
posted as a sufficient acceptance and notification to himself, or, in other words, he
has made the post office his agent to receive the acceptance and notification of it.
But this ·principle appears to me to be inapplicable to the case of the withdrawal of
an offer. In this particular case I can find no evidence of any authority in fact given
by the plaintiffs to the defendants to notify a withdrawal of their offer by merely
posting a letter; and there is no legal principle or decision which compels me to hold,
contrary to the fact, that the letter of the 8th of October is to be treated as communi-
cated to the plaintiff on that day or any day before the 20th, when the letter reached
them. But before that letter had reached the plaintiffs they had accepted the offer,
both by telegram and by post; and they had themselves resold the tinplates at a profit.
In my opinion the withdrawal of the defendants on the 8th of October of their offer
of the 1st was inoperative and a complete contract binding on both parties was
entered into on the 11th of October, when the plaintiff accepted the offer of the 1st,

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which they had no reason to suppose had been withdrawn. Before leaving this part
of the case it may be as well to point out the extreme injustice and inconvenience
which any other conclusion would produc;e. If the defendants' contention were to
prevail no person who had received an offer by post and had accepted it would know
his position until he had waited such a time as to be quite sure that a letter withdraw-
ing the offer h ad not been posted before his acceptance of it. It appears to me that
both legal principles, · and practical convenience require that a person who has
accepted an offer not known to him to have been revoked, shall be in a position
safely to act upon the footing that the offer and acceptance constitute a contract
binding on both parties.
[The facts have been considerably abbreviated, and only that part of the case is given
that deals with revocation of the offer.]

F Pollock, Principles of Contract at Law and in Equity. (London: Stevens, 1876) at

9-10. A proposal is revoked only when the intention to revoke it is communicated
to the other party. Therefore a revocation communicated after acceptance, though
determined upon before the acceptance, is too late .... The civilians differ on the
point. Pothier lays down a directly contrary rule in a well-known passage (Contrat
de Vente, s. 32) .... He does not fail to see the manifestly unjust consequences of
letting a revocation take effect, though the other party has received, accepted, and
acted upon the proposal without knowing anything of the proposer's intention to
revoke it; but he escapes .them by imposing an obligation on the proposer upon
grounds of natural equity independent of contract, to indemnify the party so accept-
ing against any damage resulting to him from the transaction. [Pollock describes
this solution as "cumbrous and inelegant" and continues:] The declaration of an
animus contrahendi [intention of contracting] (whether by way of proposal or of
acceptance) when once made must be regarded as continuing so long as no revo-
cation of it is communicated to the other party. A revocation not communicated is
in point of law no revocation at all. In this respect the revocation of a proposal or
acceptance must be governed by the same rules as the proposal or acceptance itself.
These principles, it seems to us, are entirely right if tested by common sense and
convenience, and are in accordance with the authorities of the common law when
rightly understood.

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND)

American Law Institute, 1981

40. Rejection or counter-offer by mail or telegram does not terminate the power
of acceptance until received by the offeror, but limits the power so that a letter or
telegram of acceptance started after the sending of an otherwise effective rejection
or counter-offer is only a counter-offer unless the acceptance is received by the
offeror before he receives the rejection or counter-offer.

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 I. BARGAINS

HOLWELL SECURITIES LTD V HUGHES

[1974] 1 All ER 161 (CA)

[By clause 1 of an agreement dated October 19, 1971 made between the defendant of
the one part and the plaintiffs of the other, the plaintiffs were granted an option to
purchase certain freehold property from the defendant. Clause 2 of the agreement
provided: "The said option shall be exercisable by notice in writing to the [defendant]
at any time within six months from the date hereof." On April 14, 1972, the plaintiffs'
solicitors wrote a letter to the defendant giving notice of the exercise of the option.
The letter was posted, properly addressed, and prepaid, on April 14, but it was never
in fact delivered to the defendant or to his address. No other written communication
of the exercise of the option was given or sent to the defendant before the expiry of
the time limit on April 19.J
RUSSELL LJ : It is not disputed that the plaintiffs' solicitors letter dated 14th April 1972
addressed to the defendant at his residence and place of work, the house which was
the subject of the option to purchase, was posted by ordinary post in a proper way,
enclosing a copy of the letter of the same date delivered by hand to the defendant's
solicitors. It is not disputed that the letter and enclosure somehow went astray and
never reached the house nor the defendant. It is not disputed that the language of
the letter and enclosure would have constituted notice of exercise of the option had
they reached the defendant. It is not contended that the handing of the letter to the
solicitor constituted an exercise of the option.
The plaintiffs' main contention below and before this court has been that the
option was exercised and the contract for sale and purchase was constituted at the
moment that the letter addressed to the defendant with its enclosure was committed
by the plaintiffs' solicitors to the proper representative of the postal service, so that
its failure to reach its destination is irrelevant.
It is the law in the first place that prima facie acceptance of an offer must be com -
municated to the offeror. On this principle the law has engrafted a doctrine that, if
in any given case the true view is that the parties contemplated that the postal service
might be used for the purpose of forwarding an acceptance of the offer, committal
of the acceptance in a regular manner to the postal service will be acceptance of the
offer so as to constitute a contract, even if the letter goes astray and is lost. Nor. as
was once suggested, are such cases limited to cases in which the offer has been
made by post. It suffices I think at this stage to refer to Henthorn v. Fraser. In the
present case, as I read a passage in the judgment below, Templeman J. concluded
that the parties here contemplated that the postal service might be used to com-
municate acceptance of the offer (by exercise of the option); and I agree with that.
But that is not and cannot be the end of the matter. In any case, before one can
find that the basic principle of the need for communication of acceptance to the
offeror is displaced by this artificial concept of communication by the act of posting,
it is necessary that the offer is in its terms consistent with such displacement and
not one which by its terms points rather in the direction of actual communication.
We were referred to Henthorn v. Fraser and to the obiter dicta of Farwell J. in Bruner
v. Moore, which latter was a case of an option to purchase patent rights. But in neither
of those cases was there apparently any language in the offer directed to the manner
of acceptance of the offer or exercise of the option.
The relevant language here is, "The said option shall be exercisable by notice in
writing to the Intending Vendor ..., " a very common phrase in an option agreement.
There is, of course, nothing in that phrase to suggest that the notification to the
defendant could not be made by post. But the requirement of "notice ... to," in my

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

judgment, is language which should be taken expressly to assert the ordinary situ-
ation in law that acceptance requires to be communicated or notified to the offeror,
and is inconsistent with the theory that acceptance can be constituted by the act of
posting, referred to by Anson as "acceptance without notification."
It is of course true that the instrument could have been differently worded. An
option to purchase within a period given for value has the characteristic of an offer
that cannot be withdrawn. The instrument might have said "The offer constituted
by this option may be accepted in writing within six months": in which case no doubt
the posting would have sufficed to form the contract. But that language was not
used, and, as indicated, in my judgment the language used prevents that legal out-
come. Under this head of the case hypothetical problems were canvassed to suggest
difficulties in the way of that conclusion. What if the letter had been delivered
through the letterbox of the house in due time, but the defendant had either delib-
erately or fortuitously not been there to receive it before the option period expired?
This does not persuade me that the artificial posting rule is here applicable. The
answer might well be that in the circumstances the defendant had impliedly invited
communication by use of an orifice in his front door designed to receive
communications.
LAWTON LJ: Counsel for the plaintiffs submitted that the option was exercised when
the letter was posted, as the rule relating to the acceptance of offers by post did apply.
The foundation of his argument was that the parties to this agreement must have
contemplated that the option might be, and probably would be, exercised by means
of a letter sent through the post. I agree. This, submitted counsel, was enough to
bring the rule into operation. I do not agree. In Henthorn v. Fraser Lord Herschell
stated the rule as follows: "Where the circumstances are such that it must have been
within the contemplation of the parties that, according to the ordinary usages of
mankind, the post might be used as a means of communicating the acceptance of
an offer, the acceptance is complete as soon as it is posted." It was applied by Farwell
J. in Bruner v. Moore to an option to purchase patent rights. The option agreement,
which was in writing, was silent as to the manner in which it was to be exercised.
The grantee purported to do so by a letter and a telegram.
Does the rule apply in all cases where one party makes an offer which both he
and the person with whom he was dealing must have expected the post to be used
as a means of accepting it? In my judgment, it does not. First, it does not apply when
the express terms of the offer specify that the acceptance must reach the offeror. The
public nowadays are familiar with this exception to the general rule through their
handling of football pool coupons. Secondly, it probably does not operate if its
application would produce manifest inconvenience and absurdity. This is the op in -
ion set out in Cheshire and Fifoot's Law of Contract. It was the opinion of Bramwell
B. as is seen by his judgment in British & American Telegraph Co. v. Colson, and his
opinion is worthy of consideration even though the decision in that case was over-
ruled by this court in Household Fire and Carriage Accident Insurance Co. Ltd. v. Grant.
The illustrations of inconvenience and absurdity which Bramwell B. gave are as apt
today as they were then. Is a stockbroker who is holding shares to the orders of his
client liable in damages because he did not sell in a falling market in accordance
with the instructions in a letter which was posted but never received? Before the
passing of the Law Reform (Miscellaneous Provisions) Act 1970 (which abolished
actions for breach of promise of marriage), would a young soldier ordered overseas
have been bound in contract to marry a girl to whom he had proposed by letter,
asking her to let him have an answer before he left and she had replied affirmatively
in good time but the letter had never reached him? In my judgment, the factors of

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 I. BARGAINS

inconvenience and absurdity are but illustrations of a wider principle, namely, that
the rule does not apply if, having regard to all the circumstances, including the nature
of the subject-matter under consideration, the negotiating parties cannot have
intended that there should be a binding agreement until the party accepting an offer
or exercising an option had in fact communicated the acceptance or exercise to the
other. In my judgment, when this principle is applied to the facts of this case it
becomes clear that the parties cannot have intended that the posting of a letter
should constitute the exercise of the option.

QUESTIONS

1. The rule that acceptance is effective when posted has sometimes been justified on the
basis that the post office was the "agent" of the offeror. The Canada Post Corporation Act, RSC
1985, c C-10, s 2(2), which provides that mail is the property of the addressee when deposited
in a post office, has also been argued to support the rule. The first justification seems little
more than a restatement of the rule that acceptance is effective when posted; the second
does not have much rational connection with the question of when it is reasonable to find that
a contract has been completed. What other justifications for the rule can you find in the case
law7 For an argument that the postal acceptance rule is arbitrary, because all possible ratio-
nales for the rule are unpersuasive, see Smith at 188-92.
2. Given that the postal acceptance rule imposes a degree of risk on the offeror, what
would justify the imposition of such risk7
3. Does the existence of the postal acceptance rule mean that the common law is not
concerned with consensus ad idem7 For a discussion, see Waddams at para 145; Mac Dougall
at 50-51.
4. What would happen if A mailed an acceptance of an offer, but subsequently changed
her mind and posted a rejection? Assume that due to the vagaries of the mail the rejection
arrived first. Given that the postal acceptance rule protects the offeree, should the offeree now
be permitted to reject it7 Why or why not7 See also Waddams at paras 99-107; Mac Dougall at
41-45.

Entores, Ltd v Miles Far East Corporation. [1955] 2 All ER 493 (CA). DENNING LJ:
[T]ake a case where two people make a contract by telephone. Suppose, for instance,
that I make an offer to a man by telephone and, in the middle of his reply, the line
goes "dead" so that I do not hear his words of acceptance. There is no contract at that
moment. The other man may not know the precise moment when the line failed.
But he will know that the telephone conversation was abruptly broken off, because
people usually say something to signify the end of the conversation. If he wishes to
make a contract, he must therefore get through again so as to make sure that I heard.
Suppose next that the line does not go dead, but it is nevertheless so indistinct that
I do not catch what he says and I ask him to repeat it. He then repeats and I hear his
acceptance. The contract is made, not on the first time when I do not hear, but only
the second time when I do hear. If he does not repeat it, there is no contract. The
contract is only complete when I have his answer accepting the offer. ...
But suppose that [the offeree] does not know that his message did not get home.
He thinks it has. This may happen if the listener on the telephone does ncit catch the
words of acceptance, but nevertheless does not trouble to ask for them to be
repeated: or if the ink on the teleprinter fails at the receiving end, but the clerk does
not ask for the message to be repeated: so that the man who sends an acceptance
reasonably believes that his message has been received. The offeror in such circum-
stances is clearly bound, because he will be estopped from saying that he·did not

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

receive the message of acceptance. It is his own fault that he did not get it. But if
there should be a case where the offeror without any fault on his part does not receive
the message of acceptance-yet the sender of it reasonably believes it has got home
when it has not-then I think there is no contract.

EASTERN POWER LIMITED V AZIENDA COMUNALE

ENERGIA AND AMBIENTE
(1999), 178 DLR (4th) 409 (Ont CA)

[Eastern Power Ltd. (EP) negotiated with Azienda Comunale Energia & Ambiente
(ACEA) with a view to concluding a joint venture agreement to construct and operate
an electricity generation plant in Italy. ACEA, which was located in Italy, signed a
letter of intent and faxed it to EP, which was located in Ontario. EP signed the letter
of intent and faxed it back to ACEA. The parties were unable to conclude the joint
venture agreement and EP brought an action in the Ontario courts for breach of
contract. ACEA moved to stay the action on forum non conveniens grounds. The
motions judge granted the motion and EP appealed.]
MacPHERSON JA (for the court):

INTRODUCTION

[1] This is an appeal from the judgment of Juriansz J. dated November 26, 1998
in which he set aside service in Italy of a statement of claim by an Ontario company
and stayed the company's action in Ontario on forum non conveniens grounds. In
addition to the standard forum non conveniens factors that need to be addressed,
the appeal poses the interesting question of where a contract is formed when the
acceptance of an offer is communicated by facsimile transmission. Is the contract
formed, in accordance with the general rule of contract law, in the place where the
acceptance is received? Or should the postal exception to the general rule, which
says that a contract is formed when and where an acceptance is placed in the mail,
apply to acceptances communicated by facsimile transmission? ...
[After discussing the factors to be taken into account when staying actions on the
basis of forum non conveniens, MacPherson JA continued:]

(A) LOCATION WHERE THE CONTRACT WAS SIGNED

[21] The contract which forms the basis of EP's action in contract and tort against
ACEA is the Co-operation Agreement: see Statement of Claim, paragraphs 5, 26, 30
and 31. The motions judge found that the Co-operation Agreement was made in
Italy because "acceptance was communicated to Italy." Since EP's acceptance was
communicated by facsimile transmission, this raises the interesting question of the
legal relationship between a faxed acceptance of an offer and the place where a
contract is formed.
[22] The general rule of contract law is that a contract is made in the location
where the offeror receives notification of the offeree's acceptance: see Fridman, The
Law of Contract in Canada, 3rd ed., (1994), at p. 65; and Re Viscount Supply Co., (1963]
1 O.R. 640, 40 D.L.R: (2nd) 501 (S.C .). However, there is an exception to this general
rule. It is the postal acceptance rule. As expressed by Ritchie J. in Imperial Life Assur-
ance Co. of Canada v. Colmenares, [1967] S.C.R. 443 at 447, 62 D.L.R. (2d) 138:

232
 I. BARGAINS

It has long been recognized that when contracts are to be concluded by post the place
of mailing the acceptance is to be treated as the place w here the contract was made.

See also: Fridman, The Law of Contract in Canada, supra, at pp. 67-68.
[23J EP contends that the rule with respect to ·facsimile transmissions should
follow the postal acceptance exception. With respect, I disagree. EP has cited no
authority in support of its position. There is, however, case authority for the prop-
osition that acceptance by facsimile transmission should follow the general rule,
which would mean that a contract is formed when and where acceptance is received
by the offeror.
[24] In Brinkibon Ltd. v. Stahag Stahl G.m.b.H., [1983] 2 A.C. 34 (H.L.), a contract was
concluded when the buyer in London transmitted its acceptance to the seller in
Vienna. The mode of acceptance was a message sent by telex, a form of instantan -
eous communication like the telephone. The law lords were unanimous in conclud-
ing that the contract was formed in Vienna where the acceptance was received by
the offeror. Lord Brandon of Oakbrook analyzed the issue in this fashion, at p. 48:
Mr. Thompson's second and alternative case, that the contract was concluded by the
buyers transmitting to the sellers their telex of May 4, 1979, seems to me to be the
correct analysis of the transaction. On this analysis, however, the buyers are up against
the difficulty that it was decided by the Court of Appeal in Entores Ltd. v. Miles Far East
Corporation [1955] 2 0.8. 327 that, when an offer is accepted by telex, the contract
thereby made is to be regarded as having been so made at the place where such telex
was received (in this c·ase Vienna) and not in the place from w hich such telex was sent
(in this case London) .
Mr. Thompson invited your Lordships to hold that the Entores case was wrong ly
decided and should therefore be overruled . In this connection he said that it was well -
established law that, when acceptance of an offer was notified to an offeror by post or
telegram, the concluding of the contract took place when and where the letter of
acceptance was posted or the telegram of acceptance was despatched . He then argued
that the same rule should apply to cases where the acceptance of an offer was com-
municated by telex, with the consequence that the contract so made should be
regarded as having been made at the place from which the telex was sent and not the
place where it was received .
My Lords, I am not persuaded that the Entores case [1955] 2 0 .8. 327 was wrongly
decided and should therefore be overruled. On the contrary, I think that it was rightly de-
cided and should be approved . The general principle of law applicable to the formation
of a contract by offer and acceptance is that the acceptance of the offer by t he offeree
must be notified to the offeror before a contract can be regarded as concluded, Carlill
v. Carbolic Smoke Ball Co. [1893] 1 0.8. 256, 262, per Lindley L.J . The cases on accept-
ance by letter and telegram constitute an exception to the general principle of the law
of contract stated above. The reason for the exception is commercial expediency: see,
for example, Imperial Land Co. of Marseilles, In re (Harris' Case) (1872) L.R. 7 Ch . App.
587, 692 per Mellish L.J. That reason of commercial expediency applies to cases where
there is bound to be a substantial interval between the time when the acceptance is sent
and the time when it is received . In such cases the exception to the general rule is more
convenient, and makes on the whole for greater fairness, than the general rule itself
would do. In my opinion, however, that reason of commercial expediency does not have
any application w hen the means of commu nication employed between the offeror and
the offeree is instantaneous in nature, as is the case when either the telephone or telex
is used. In such cases the general principle relating to the formation of contracts remains
applicable, with the result that the contract is made where and when the telex of accept-
ance is received by the offeror.

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CHAPTER 3 THE KINDS OF PR OMISES LEGALLY ENFORCED

[25] In my view, this analysis is equally applicable to facsimile transmissions,

another form of instantaneous communication. Indeed, there is at least one Can -
adian authority that has reached this conclusion. In Joan Balcom Sales Inc. v. Poirier
(1991), 49 C.P.C. (2d) 180 (N.S. Co . Ct.), an acceptance of a real estate listing offer was
communicated by two vendors in Ottawa to a real estate company in Berwick, Nova
Scotia. The mode of communication was a facsimile transmission. The vendors'
position was that the contract was formed in Ottawa; they argued that the "mailbox
doctrine" should be applied to communication by facsimile transmission.
[26] Haliburton Co. Ct. J. did not accept the vendors' argument. He reviewed the
English academic writing about the postal acceptance exception to the general rule
of contract formation. He then concluded, at p. 187:
The writers then discuss the practical need of special rules to be applied to contracts
entered into by post in the age when post was the primary method of commercial
communication. The considerations which made it highly practical, if not imperative,
in the interests of commerce, for the offeree to have knowledge in a timely fashion that
he had a firm contract do not apply to facsimile transmissions. The communication is
instantaneous. The offeree could easily have confirmed within minutes that they had a
binding contract.
I, therefore, find that the contract was executed at Berwick. [Emphasis in original.]

[271 I agree with this analysis, and with the analysis of the law lords in Brinkibon .
I would hold that in contract law an acceptance by facsimile transmission should
follow the general rule of contract formation, not the postal acceptance exception.
[28] I do not say that this rule should be an absolute one; like Lord Wilberforce in
his separate speech in Brinkibon, "I think it a sound rule, but not necessarily a uni-
versal rule." (p. 42) . Lord Wilberforce discussed some of the factors that might suggest
caution about applying the general rule to telex communications in all cases, includ-
ing the many variants in such communications and whether the message was sent
and received by the principals to the contemplated contract. However, he concluded,
at p . 42:
The present case is ... the simple case of instantaneous communication between prin-
cipals, and, in accordance with the general rule, involves that the contract (if any) was
made when and where the acceptance was received.
[29] In my view, the present appeal is also "the simple case." The acceptance was
faxed by the principals of EP in Ontario to the principals of ACEA in Italy. There is
nothing to suggest that the communication between these principals was not instan-
taneous. Hence, applying the general rule, the contract was formed in Italy.
[The judgment has been significantly shortened to remove further discussion of
forum non conveniens issues.]

NOTES AND QUESTIONS

1. As Eastern Power indicates, forms of instantaneous communication, such as the tele-
phone, are usually treated differently than mail, despite possible technical failures . The justifi-
cation appears to be that the offeree will realize that her acceptance has not been received.
Of course, this will not always be true: see Joan Balcom Sales Inc v Poirier (1991), 106 NSR (2d)
377 (Co Ct) .
2. In his judgment in Brinkibon (which is partially quoted in Eastern Power), Lord Wilber-
force added : "No universal rule can cover all such cases; they must be resolved by reference

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 I. BARGAINS

to the intentions of the parties, by sound business practice, and in some cases by a judgment
where the risks should lie." Do you agree with this statement?
3. The problem before the court in Eastern Power was whether it should take jurisdiction
over the dispute. For the purpose of solving that problem, is it relevant to consider whether an
offeror is bound by an acceptance that fails to arrive? Is not the latter an entirely different
problem? Compare the differing answers given to these questions by the Ontario Court of
Appeal and Supreme Court of Canada in Lapointe Rosenstein Marchand Melanr;:on LLP v Cassels
Brock & Blackwell LLP, 2014 ONCA 497 (sub nom Trillium Motor World Ltd v General Motors
of Canada Limited), affirmed [2016] 1 SCR 851.
4. In lnukshuk Wireless Partnership v NextWave Holdco LLC, 2013 ONSC 5631, Newbould J
held that, in relation to the postal acceptance rule, "an e-mail is no different than a fax. Both
are instantaneous communications" (para 25) . Do you agree? Should the reliability of email be
a factor? Fo r a discussion, see D Capps, "Electronic Mail and the Postal Rule" (2004) 15 Intl Co
& Com L Rev 207; V Watnick, 'The Electronic Formation of Contracts and the Common Law
'Mailbox Rule"' (2004) 56 Baylor L Rev 175; E Mik, "The Effectiveness of Acceptances Commun i-
cated by Electronic Means, Or: Does the Postal Acceptance Rule Apply to Email?" (2009) J of
Contract L 68; DP Nolan, "Offer and Acceptance in the Electronic Age " in Burrows & Peel 61.
5. A sent B by fax an offer to purchase B's property. B accepted by the same method. It was
the procedure in A's office to clear the fax machine and distribute the transmissions on ly twice
a day: once in the morning and once after lunch . B's fax arrived at 3:00 p.m . That even ing, B
received a better offer for her property, which she accepted. She immediately telephoned A to
reject A's offer. The telephone message was left on A's answering machine and A received it at
10:00 p.m. that night. The fa x accepting A's offer was handed to A as he came into the office
at 8:45 a.m . the next morning . Do A and B have a contract? In answering th is question con-
sider the excerpts below.

BRIAN COOTE, "THE INSTANTANEOUS

TRANSMISSION OF ACCEPTANCES"
(1971) 4 NZULR 331 at 338-40 (footnotes om itted)

[I]t is submitted that there is no universal rule that an acceptance must in fact be
received by the offeror before a contract can be formed, to which rule communica -
tion_s by post and telegraph form the only exceptions. There are gaps in the law, bu t
there are al so available well established el ements from which a gener_al system of
rules could be constructed and the gaps filled ....
From these elements the following rules can be posited:

(1) Where offeror and offeree are face to face in instantaneous comm unication
with each other, an acceptance must either actually be received by the offeror
or reasonably appear to the offeree to have been so received.
(2) Where the offeror and o fferee are apart and not in instantaneous communi-
cation w ith each other then, unless the offeror has stipulated for actual receipt,
the co ntract will be formed once the offeree, using a mode of transmission
contemplated by the parties for the purpose, has done all he can to ensure
communication to the offeror . ...

Applying these rules, an acceptance by post or telegraph, if correctly addressed,

would take effect as hitherto when posted or l odged, because this would be as far as
the offeree could control its transmission. Should the parties be at each end of a
telephone link, acceptance would take effect, again as hitherto, once the offeror had
appeared to hear and understand it.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

In the case of a telex link, the contract would be formed at that point in time when
the party transmitting the acceptance (or his operator) could reasonably assume that
the message had been received (if there were an operator at the other end) or
recorded (if there were no such operator). It would follow in such a case that the
acceptance could be.binding even though not in fact received by the operator or
recorded and this, too, would be consistent with the dicta of Denning L.J. in the
Entores case. The rationale would, however, be different. The acceptance would take
effect even though not received or recorded, not, as Denning L.J. suggested, as a
consequence of the offeror's fault or neglect, but because the offeree would have
given the degree of notice required by law and the risks would accordingly have
passed to the offeror. Similarly, the acceptance could take effect when received by
the operator, or recorded, even though it did not subsequently come to the mind of
the offeror himself. The same would apply in the case of acceptances dictated into
a telephone recording device at the offeror's address provided the offeree could not
reasonably have been aware of any defect in the recording apparatus, if any should
exist.
Under these same rules, an acceptance delivered by hand at the offeror's ordinary
address for service would take effect from delivery to his door if the post were a
contemplated mode of transmission. If it were not, the result would depend on the
mode of transmission contemplated in the particular case. Delivery to a receptionist
at the offeree's address would, for example, ordinarily be sufficient, unless the parties
had in the particular circumstances contemplated delivery into the hands of the
offeror.

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND)

American Law In stitute, 1981

63. Unless the offer provides otherwise,

(a) an acceptance made in a manner and by a medium invited by an offer is
operative and completes the manifestation of mutual assent as soon as put out
of the offeree's possession, without regard to whether it ever reaches the offeror;
but
(b) an acceptance under an option contract is not operative until received by
the offeror.
64. Acceptance by telephone or other medium of substantially instantaneous
two-way communication is governed by the principles applicable to acceptances
where the parties are in the presence of each other.
65. Unless circumstances known to the offeree indicate otherwise, a medium of
acceptance is reasonable if it is the one used by the offeror or one customary in
similar transactions at the time and place the offer is received.

NOTES AND QUESTIONS

1. According to Coote, the important question is not whether the parties are using a form
of instantaneous communication but whether the parties are in instantaneous communication
with each other. Thus, for him the key is not the technology used but rather how it is used .
Would such a distinction be helpful in justifyi ng why the court in Eastern Po w er stated that the
rule relating to facsimi les was not absolute?
2. How would Coote answer the hypothetica l posed by Russell LJ in Ho/well Securities,
above, concerning placing acceptances through a letterbox in the door of a house7

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 I. BARGAINS

3. How does the Restatement's formulation differ from that of Coote7 Which formulation
do the Commonwealth cases support7 Why, for example, does the Restatement have a sep-
arate rule for option contracts?

ELECTRONIC COMMERCE ACT, 2000

so 2000, c 17
DEFINITIONS

1(1) In this Act,

"electronic" includes created, recorded, transmitted or stored in digital form or in
other intangible form by electronic, magnetic or optical means or by any other
means that has capabilities for creation, recording, transmission or storage similar
to those means and "electronically" has a corresponding meaning;
"electronic agent" means a computer program or any other electronic means used
to initiate an act or to respond to electronic documents or acts, in whole or in part,
without review by an individual at the time of the response or act; ...

ELECTRONIC TRANSACTIONS AND ELECTRONIC AGENTS

FORMATION AND OPERATION OF ELECTRONIC CONTRACTS

19(1) An offer, the acceptance of an offer or any other matter that is material to
the formation or operation of a contract may be expressed,
(a) by means of electronic information or an electronic document; or
(b) by an act that is intended to result in electronic communication, such as,
(i) touching or clicking on an appropriate icon or other place on a computer
screen, or
(ii) speaking.

CONTRACTING OUT

(2) Subsection (1) applies unless the parties agree otherwise.

LEGAL RECOGNITION OF ELECTRONIC CONTRACTS

(3) A contract is not invalid or unenforceable by reason only of being in electronic

form.

INVOLVEMENT OF ELECTRONIC AGENTS

20. A contract may be formed by the interaction of an electronic agent and an

individual or by the interaction of electronic agents.

ERRORS, TRANSACTIONS WITH ELECTRONIC AGENTS

21. An electronic transaction between an individual and another person's elec-

tronic agent is not enforceable by the other person if,
(a) the individual makes a material error in electronic information or an elec-
tronic document used in the transaction;
(b) the electronic agent does not give the individual an opportunity to prevent
or correct the error;

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

(c) on becoming aware of the error, the individual promptly notifies the other
person; and
(d) in a case where consideration is received as a result of the error, the
individual,
(i) returns or destroys the consideration in accordance with the other
person's instructions or, if there are no instructions, deals with the consider-
ation in a reasonable manner, and
(ii) does not benefit materially by receiving the consideration.

TIME OF SENDING OF ELECTRONIC INFORMATION OR DOCUMENT

22(1) Electronic information or an electronic document is sent when it enters an

information system outside the sender's control or, if the sender and the addressee
use the same information system, when it becomes capable of being retrieved and
processed by the addressee .

.CONTRACTING OUT

(2) Subsection (1) applies unless the parties agree otherwise.

PRESUMPTION, TIME OF RECEIPT

(3) Electronic information or an electronic document is presumed to be received

by the addressee,
(a) if the addressee has designated or uses an information system for the pur-
pose of receiving information or documents of the type sent, when it enters that
information system and becomes capable of being retrieved and processed by
the addressee; or
(b) if the addressee has not designated or does not use an information system
for the purpose of receiving information or documents of the type sent, when
the addressee becomes aware of the information or document in the addressee's
information system and it becomes capable of being retrieved and processed by
the addressee.

PLACES OF SENDING AND RECEIPT

(4) Electronic information or an electronic document is deemed to be sent from

the sender's place of business and received at the addressee's place of business.

CONTRACTING OUT

(5) Subsection (4) applies unless the parties agree otherwise.

PLACE OF BUSINESS

(6) If the sender or the addressee has more than one place of business, the place
of business for the purposes of subsection (4) is the one with the closest relationship
to the underlying transaction to which the electronic information or document
relates or, if there is no underlying transaction, the person's principal place of
business.

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 I. BARGAINS

HABITUAL RESIDENCE

(7) If the sender or the addressee does not have a place of business, the person's
place of habitual residence is deemed to be the place of business for the purposes
of subsection (4).

NOTES AND QUESTIONS

1. All common law provinces have legislation in force to deal with issues surrounding
e-commerce. Moreover, the legislation is substantially similar because each act is based on the
Uniform Electronic Commerce Act (UECA) developed by the Uniform Law Conference of
Canada. (The UECA itself was based on a model act promulgated by the United Nations Com-
mission on International Trade Law.) For a discussion of the UECA and the various legislation,
see BJ Freeman, "Electronic Contracts Under Canadian Law-A Practical Guide" (2000) 28 Man
LJ 1; JD Gregory, "Canadian Electronic Commerce Legislation " (2002) 17 BFLR 277; McCamus
at 76-82 .
2. Does the Electronic Commerce Act (ECA) apply to fa xes or email?
3. Can you think of ways in which to rebut the presumption of receipt created bys 22(3) of
the ECA? Can you think of a reason why the legislator used the word "presumed" rather than
"deemed"?
4. Was the ECA necessary or should the common law have been left to deal w ith these
issues? For examples of the common law in action, see Rudder v Microsoft Corp (1999), 47
CCLT (2d) 168 (Ont Sup Ct J); Century 21 Canada Limited Partnership v Rogers Communica-
tions Inc, 2011 BCSC 1196, 338 DLR (4th) 32. For a discussion of these cases, see MacDougall
at 38-41.

F. CONSIDERATION: THE BARGAIN THEORY

Golding's Case. (1586), 2 Leon 72, 74 ER 367. EGERTON SG : In every action on the
case [on an assumpsit], there are three things considerable : consideration, promise
and breach of promise.

Currie v Misa. (1875), LR 10 Ex 153, 162, aff'd 1 App Cas 554. LUSH J: A valuable con-
sideration, in the sense of the law, may consist either in some right, interest, profit,
or benefit accruing to the one party, or some forbearance, detriment, loss or respon -
sibility, given, suffered, or undertaken by the other.

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co. [1915] AC 847, 855. LORD DUNEDIN :
My Lords, I am content to adopt from a work of Sir Frederick Pollock, to which I have
often been under obligation, the following words as to consideration: "An act or
forbearance of one party, or the promise thereof, is the price for which the promise
of the other is bought, and the promise thus given for value is enforceable" (Pollock
on Contracts, 8th ed., p . 175).

Westlake v Adams. (1858), 5 CB (NS) 248, 141 ER 99, 106. BYLES J : It is an elementary
principle, that the law will not enter into an enquiry as to the adequacy of the
consideration.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

Hobbes, Leviathan. (1651). The value of all things contracted for is measured by the
appetite of the contractors, and therefore the just value is that which they be con -
tented to give.

Chappell & Co Ltd v Nestle Co Ltd. [1960] AC 87 (HL). LORD SOMERVELL: A contract-
ing party can stipulate for what consideration he chooses. A peppercorn does not
cease to be good consideration if it is established that the promisee does not like
pepper· and will throw away the corn.

Vernon v Bethell. (1762), 2Eden110, 28 ER 839 (Ch). NORTHINGTON LC: [N]ecessitous

men are not, truly speaking, free men, but, to answer a present exigency, will submit
to any terms that the crafty may impose upon them. [This attitude is representative
of a court of equity, in this case deciding that a mortgagee had made "an undue use
of the influence of a mortgage."]

PS Atiyah, Consideration in Contracts . (Canberra: Australian National University

Press, 1971). To talk of abolition of the doctrine of consideration is nonsensical. Con-
sideration means a reason for the enforcement of a promise. Nobody can seriously
propose that all promises should become enforceable; to abolish the doctrine of
consideration, therefore, is simply to require the courts to begin all over again the
task of deciding what promises are to be enforceable.

PS Atiyah, Essays on Contract. (Oxford: Oxford University Press, 1986). I would

today wish to qualify the suggestion that consideration "means" a reason for the
enforcement of a promise. It now seems to me to be more accurate to suggest that
consideration really was and is a reason for the recognition of an obligation, rather
than a reason for the enforcement of a promise. Given that ... reliance and benefit
are often themselves good reasons for recognition of obligations in the law .. . and
given that many cases in contract law are based on implied promises which seem
more or less fictitious, the wider formulation of the function of consideration seems
more accurate.

NOTES AND QUESTIONS

1. It is obvious that numerous difficulties will arise in the application of these defini tion s:
What is an exchange7 Must it be equal in value to the promise? If so, who is to decide the rela-
tive values7 Must it be contemporaneous with the promise? And so on. These difficu lties are
raised by the cases in this section. On thi nking about them, it is important to remember that
many people feel (as a matter of intuition) that a person who makes a serious promise ought
to keep it, whether he exacted anyth ing in exchange or not. The result is that courts are usually
under some pressure to enforce a "barren" promise by "implying " a requested excha nge, or
"interpreting" the facts to show that there was one in circumstances where it is quite easy to
reach the opposite conclusion.
2. When reading the cases below one should also keep in mind that the requirement of
consideration is one that is not shared by the civil law tradition ; see e.g. Civil Code of Quebec,
art 1371ff. Does this fact render the doctrine of consideration suspect?

240
 I. BARGAINS

3. For general theoretical discussions of the theory of consideratio n, see Trebilcock, ch 8;

Benson at 153-85; Smith at 215-32; MacDougall, ch 8; M Chen-Wishart, "In Defence of Con-
sideratio n" (2013) 13 OUCLJ 209.

WHITE (EXECUTOR) V WILLIAM BLUETT

(1853), 23 LJ Ex (NS) 36 (Eng Ex Ct)

This is an action upon a promissory note made payable to John Bluett; the testator:
Plea that Bluett was the father of the defendant, and that in his lifetime, the defendant
William Bluett complained to his father that he had not received at his hands so
much money or so many advantages as the other children and controversies arose
between them. Bluett afterward admitted the defendant's complaints were well
founded, and it was agreed that the defendant should forever cease to make such
complaints, and that in consideration thereof, and in order to do justice to the
defendant, and also out of Bluett's natural love and affection toward the defendant,
he, Bluett, would discharge the defendant of and from an liability in respect of the
promissory note.
Demurrer and joinder.
[Parke B, during the argument, asked: "Is an agreement by a father in consideration
that his son will not bore him, a binding contract7"J
POLLOCK CB: The plea is clearly bad. By the argument a principle is pressed to an
absurdity, as a bubble blown until it bursts. Looking at the words merely, there is
some foundation for the argument, and, following the words only, the conclusion
may be arrived at. It is said the son had a right to an equal distribution of his father's
property, and did complain to his father because he had not an equal share, and said
to him, "I will cease to complain if you will not sue upon this note." Whereupon the
father said, "If you will promise me not to complain I will give up the note." If such
a plea as this could be supported, the following would be a binding promise: A man
might complain that another person used the public highway more than he ought
to do, and that the other might say, "Do not complain, and I will give you £5." It is
ridiculous to suppose that such promises could be binding. So, if the holder of a bill
of exchange were suing the acceptor, and the acceptor were to complain that the
holder had treated him hardly, or that the bill ought never to have been circulated,
and the holder were to say, "Now if you will not make any more complaints I will not
sue you." Such a promise would be like that now set up. In reality, there was no con -
sideration whatever. The son had no right to complain, for the father might make
what distribution of his property he liked; and the son's abstaining from doing what
he had no right to do can be no consideration.
Judgment for the plaintiff.

QUESTIONS

1. In the sentence beginning "The son had no right to complain," what does the word "right"
mean7 Is Pollock CB saying that the son could not succeed in an actio n against his father, or
his father's estate, for a share of that estate; or is he saying that the son was not entitled to
annoy his father with his complaints? If the word "right" involves this ambiguity, would it not
be better to find two words instead of one? Try "claim" for the first and "privilege" for the sec-
ond . Could giving up a privilege at the request of the promisor constitute consideration7

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

2. Would a promise by the son to be happy be a va lid consideration? If not, could White be
explained on this basis? For a discussion, see Benson at 155-56.
3. Can a promise to accept a gift be consideration for a promise to give a gift? Consider this
question in the light of Thorp v Thorp, below.
4. Could White be explained on the basis that the promise was made under duress or that the
parties lacked the intent to enter legal relations? See Smith at 226-27; MacDougall at 106-7.

HAMER V SIDWAY
27 NR 256 (NYCA (2d) 1891)

[At a family celebration, Storey Sr. promised his nephew, Storey Jr., that if the young
man would refrain from drinking, using tobacco, swearing, and playing cards until
age 21, the uncle would give his nephew $5,000. The promise was made in front of
the invited guests. Upon attaining 21, the nephew wrote to his uncle to inform him
that the conditions had been fulfilled. The uncle replied by letter that the money had
been set aside for the nephew, that he would certainly have it, but that the uncle
would hold the money until he considered the young man capable of taking care of
it. In a postscript, the uncle wrote that his nephew could consider the money "on
interest." The uncle died without having paid the nephew. This claim was brought
against the executor of the estate of Storey Sr. by a woman who had acquired the
debt from a third party after the nephew had sold his claim to another.)
PARKER J: The defendant contends that the contract was without consideration to
support it, and therefore invalid. He asserts that the promisee, by refraining from the
use of liquor and tobacco, was not harmed, but benefited; that which he did was best
for him to do, independently of his uncle's promise-and insists that it follows that,
unless the promisor was benefited, the contract was without consideration-a con-
tention which, if well founded, would seem to leave open for controversy in many
cases whether that which the promisee did or omitted to do was in fact of such
benefit to him as to leave no consideration to support the enforcement of the promi-
sor's agreement. Such a rule could not be tolerated and is without foundation in the
law. The exchequer chamber in 1875 defined "consideration" as follows: "A valuable
consideration, in the sense of the law, may consist either in some right, interest,
profit, or benefit accruing to the one party, or some forbearance, detriment, loss or
responsibility given, suffered, or undertaken by the other." Courts "will not ask
whether the thing which forms the consideration does in fact benefit the promisee
or a third party, or is of any substantial value to any one. It is enough that something
is promised, done, forborne, or suffered by the party to whom the promise is made
as consideration for the promise made to him." ...
Now, applying this rule to the facts before us, the promisee used tobacco, occa-
sionally drank liquor, and he had a legal right to do so. That right he abandoned for
a period of years upon the strength of the promise of the testator that for such for-
bearance he would give him $5,000 .... It is sufficient that he restricted his lawful
freedom of action within certain prescribed limits upon the faith of his uncle's
agreement, and now, having fully performed the conditions imposed, it is of no
moment whether such performance actually proved a benefit to the promisor, and
the court will not inquire into it; but, were it a proper subject of inquiry, we see noth-
ing in this record that would permit a determination that the uncle was not benefited
in a legal sense.

242
 I. BARGAINS

Allegheny College v National Chautauqua County Bank of Jamestown. 246 NY

369 (CA 1927). CARDOZO JA: A classic form of statement identifies consideration
with detriment to the promisee sustained by virtue of the promise (Hamer v. Sidway ...
[above]). So compendious a formula is little more than a half truth. There is need of
many a supplementary gloss before the outline can be so filled in as to depict the
classic doctrine. "The promise and the consideration must purport to be the motive
each for the other, in whole or at least in part. It is not enough that the promise
induces the detriment or that the detriment induces the promise if the other half is
wanting" (Wisc. & Mich. Ry. Co. v. Powers, 191 U.S. 379 .. .). If A promises B to make him
a gift, consideration may be lacking, though B has renounced other opportunities
for betterment in the faith that the promise will be kept. ... As far back as 1881, Judge
Holmes in his lectures on the Common Law (page 292), separated the detriment,
which is merely a consequence of the promise from the detriment, which is in truth
the motive or inducement.

QUESTIONS
1. Compare and contrast White v Bluett and Hamer v Sidway. In both cases, the person
making the promise had died. In which case would you be more certain a promise had actually
been made as alleged? Why7
2. Suppose in each case that the deceased's estate had numerous creditors who would not
be paid in full. In which of the two cases would it seem fairer to include the claim of the plain-
tiff with the other creditors? Why7
3. Is the motive inquiry one that is subjective or objective? The issue of motive is also dis-
cussed in Section IV, below.

ELEANOR THOMAS V BENJAMIN THOMAS

(1842), 2 OB 851, 114 ER 330

[The def.endant was executor with Samuel Thomas (since deceased) of the will of
John Thomas, who had intended that his widow, the plaintiff, should have some
further protection and orally expressed a wish that she should have the house he
lived in, with all its contents, or £100 instead. Shortly after his death his executors
attempted to put his wish into effect. A written agreement was executed by the par-
ties reciting this desire and the desire of the executors to fulfill it, and the executors
promised "in consideration of such desire and of the premises" to convey the house
to the widow for life or as long as she continued unmarried, "provided nevertheless,
and it is hereby further agreed and declared, that the said Eleanor Thomas ... shall ...
at all times during which she shall have possession of the said dwelling house ... pay
to the ... executors ... the sum of £1 yearly towards the ground rent ... and shall ... keep
the said ... house ... in good ... repair." The plaintiff was left in possession for some
time, but the defendant, after the death of the co-executor, refused to execute a
conveyance and ejected the plaintiff. The plaintiff sued on the agreement. Verdict
for plaintiff. A rule nisi was obtained to enter a non suit.]
LORD DENMAN CJ: There is nothing in this case but a great deal of ingenuity, and a
little wilful blindness to the actual terms of the instrument itself. There was nothing
whatever to show that the ground-rent was payable to a superior landlord; and the
stipulation for the payment of it is not a mere proviso, but an express agreement.
(His Lordship here read the proviso.) This is in terms an express agreement, and

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

shows a sufficient legal consideration quite independent of the moral feeling which
disposed the executors to enter into such a contract. Mr. Williams' definition of con -
sideration is too large: the word causa in the passage referred to means one which
confers what the law considers a benefit to the party. Then the obligation to repair
is one which might impose charges heavier than the value of the life estate.
PATTESON J: It would be giving to causa too large a construction if we were to adopt
the view urged for the [plaintiff]; it would be confounding consideration with motive.
Motive is not the same thing with consideration. Consideration means something
which is of some value in the eye of the law, moving from the plaintiff: it may be
some detriment to the plaintiff, or some benefit to the defendant; but at all events it
must be moving from the plaintiff. Now that which is suggested as the consideration
here-a pious respect for the wishes of the testator-does not in any way move from
the plaintiff: it moves from the testator; therefore, legally speaking, it forms no part
of the consideration. Then it is said that, if that be so, there is no consideration at all,
it is a mere voluntary gift: but when we look at the agreement we find that this is not
a mere proviso that the donee shall take the gift with the burthens; but it is an express
agreement to pay what seems to be a fresh apportionment of the ground-rent, and
which is made payable not to a superior landlord but to the executors. So that this
rent is clearly not something incident to the assignment of the house; for in that
case, instead of being payable to the executors; it would be payable to the landlord.
Then as to the repairs: these houses may very possibly be held under a lease contain-
ing covenants to repair, but we know nothing about it; for anything that appears,
the liability to repair is created by this instrument. The proviso certainly struck me
at first as Mr. Williams [one of counsel] put it, that the rent and repairs were merely
attached to the gift of the donors; and, had the instrument been executed by the
donors only; there might have been some ground for that construction; but the fact
is not so. Then it is suggested that this would be held to be a mere voluntary convey-
ance as against a subsequent purchaser for value: possibly that might be so: but
suppose it would: the plaintiff contracts to take it, and does take it, whatever it is, for
better for worse: perhaps a bona fide purchase for a valuable consideration might
override it, but that cannot be helped.
Rule discharged.

[The opinion of Coleridge J is omitted.]

NOTE S AN D Q U ESTIO N S

1. "Nominal consideration" means some practically valueless item or trivial amount of

money that bears no relation to the value of the promise for which it is exchanged-for
example, a valuable option to purchase property given for $1. Should promises for which nom-
inal consideration has been given be enforced? Why or why not7 See Waddams at paras 178-
81; McCamus at 226-30; Mac Dougall at 105 - 6; and Benson at 161.
2. Should it matter if Mr. Thomas had died owing large sums of money to creditors7
3. Has Eleanor T~omas expressly or impliedly promised to take possession or keep posses-
sion? Is there mutuality of obligation here7 If Eleanor had no right to possession, did she, by
remaining in possession, incur a detriment such that a court would find that she had provided
good consideration?
4. Is a contract to "sell" $100 in return for lC binding? See Schnell v Nell, 17 Ind 29 (US Sup
Ct 1861).

244
 I. BARGAINS

G. MUTUAL PROMISES

Thorp v Thorp. (1702), 12 Mod 455, 88 ER 1448, 1450 (KB). HOLT CJ: [W]here the doing
of a thing will be a good consideration, a promise to do that thing will be so too.

Harrison v Cage. (1698), 5 Mod 411, 87 ER 736 (KB). A case of mutual promises to
marry, breach by the woman. Action on the case. HOLT CJ: Why should not a woman
be bound by her promise as well as a man is bound by his? Either all is nudum pactum, ·
or else the one promise is as good as the. other. You agree a woman shall have an
action; now what is the consideration of a man's promise? Why, it is the woman's.
Then why should not his promise be a good consideration for her promise as much,
as her promise is a good consideration for his? There is the same parity of reason in
the one case as there is in the other, and the consideration is mutual. TURTON J: This
action is grounded on mutual promises.

Nichols v Raynbred. (1615), Hobart 88, 80 ER 88 (KB) . [T]he promises must be at one
instant, for else they will be both nuda pacta.

NOTES
1. The ease with which an 18th-century judge could hold the exchange of a promise as
good consideration for a promise has not been characteristic of later centuries, notably the
latter half of the 19th and the first half of the 20th. Pollock, for example, in his Contracts (13th
ed at 144), inclines to the view that an exchange of promises cannot be logically explained in
terms of benefit and detriment. This rule, "the most important for the business of life," has "no
conclusive reason other than the convenience of so holding." Unless the promise given in
exchange is binding, how has the promisee suffered a legal detriment, or changed his position
at the request of the promisor7 It seems rather unconvincing to argue that the promisee is
privileged to utter words or not, as he pleases, and that he gives up this privilege, because
there is no reason to think that the promisor requests such an utterance. He requests a binding
promise-that is, a legal thing-not a mere physical noise. On the other hand, if the promise is
considered binding because of the exchanged promise, and the exchanged promise is binding
because it, in turn, is given in consideration of the first promise, the circular argument is objec-
tionable. One simple escape from this dilemma is to accept the existence of a bargain as a
sufficient reason for enforcement and to include within the concept of bargain an executory
exchange.
2. For different answers to Pollock's conundrum and the conceptual difficulty posed by
Nichols, see Benson at 160-61, 173-74; B Coote, "The Essence of Contract (Part II)" (1988-89)
1JCL183 at 191-93.

GREAT NORTHERN RAILWAY COMPANY V WITHAM

(1873), LR 9 CP 16

In October, 1871, the plaintiffs advertised for tenders for the supply of goods (amongst
other things iron) to be delivered at their station at Doncaster, according to a certain
specification. The Defendant sent in a tender as follows:

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

I, the undersigned, hereby undertake to supply the Great Northern Railway Company,
for twelve months from the 1st of November, 1871, to 31st of October. 1872, with such
quantities of each or any of the several articles named in the attached specification as
the company's storekeeper may order from time to time. at the price set opposite each
article respectively, and agree to abide by the conditions stated on the other side .
. (Signed) Samuel Witham.

The tender was accepted and several orders for iron were given by the company,
which were from time to time duly executed by the defendant: but ultimately the
defendant refused to supply any more, whereupon this action was brought.
A verdict having been found for the plaintiffs, Digby Seymour, Q.C., moved to
enter a nonsuit, on the ground that the contract was void for want of mutuality. He
contended that, as the company did not bind themselves to take any iron whatever
from the defendant, his promise to supply them with fron was a _promise without
consideration ....
BRETT J: The company advertised for tenders for the supply of stores such as they
might think fit to order, for one year. The defendant made a tender offering to supply
them for that period at certain fixed prices; and the company accepted his tender.
If there were no other objection, the contract between the parties would be found
in the tender and the letter accepting it. This action is brought for the defendant's
refusal to deliver goods ordered by the company; and the objection to the plaintiff's
right to recover is, that the contract is unilateral. I do not, however, understand what
objection that is to a contract. Many contracts are obnoxious to the same complaint.
If I say to another, "If you will go to York, I will give you £100" that is in a certain sense
a unilateral contract. He has not promised to go to York; but if he goes it cannot be
doubted that he will be entitled to receive the £100. His going to York at my request
is a sufficient consideration for my promise. So, if one says to another, "If you will
give me an order for iron, or other goods, I will supply it at a given price": if the order
is given, there is a complete contract which the seller is bound to perform. There is
in such a case ample consideration for the promise. So, here, the company having
given the defendant an order at his request, his acceptance of the order would bind
them. If any authority could have been found to sustain Mr. Seymour's contention,
I should have considered that a rule ought to be granted. But none has been cited.
Burton v. Great Northern Railway Company, 9 Ex. 507, is not at all to the purpose. This
is matter of every day's practice; and I think it would be wrong to countenance the
notion that a man who tenders for the supply of goods in this way is not bound to
deliver them when an order is given. I agree that this judgment does not decide the
question whether the defendant might have absolved himself from the further per-
formance of the contract by giving notice.
Rule refused.

[The concurring opinions of Keating and Grove JJ are omitted.]

NOTES AND QUESTIONS

1. With his expression "unilateral contract" does Brett J refer to the same situation that
Digby Seymour, QC does with his expression "want of mutuality"? Did the court find a contract
in this case? Was it unilateral or bilateral? What do these expressions mean? How do you
"absolve yourself" from performance of a contract by giving notice if the contract itself does
not provide for notice or notice cannot reasonably be implied7 Under the contract found by

246
 I. BARGAINS

the court, does the railway have to buy any iron? Is it free to buy iron from anybody else if it
chooses? Unilateral contracts are discussed in Section IV, below.
2. Speaking of this case, Professor Corbin, in "The Effect of Options on Consideration"
(1925) 34 Yale LJ 571, said: "In cases like this it may be reasonably argued that there was no
contract because of lack of acceptance in accordance with the offer rather than for lack of
consideration; orders were asked of the offeree and not illusory promises. Often however, the
offeror does not so understand his own offer and makes no such contention; lack of consider-
ation is a good defense. If an order is given before the offer is withdrawn, a contract is made."
Do you agree? What are the terms of the "contract" that is so made?
3. By "illusory promise" Professor Corbin means a "promise that is not a promise . ... [T]he
chief feature of contract law is that by an expression of his will today the promisor limits his
freedom of voluntary choice in the future .... To fall within this field, therefore, a promise must
in its terms express a willingness to effect this limitation on freedom of choice . ... [An] illusory
promise is neither enforceable against the one making it, nor is it operative as a consideration
for a return promise."
4. Should a promise to sell the entire output of the promisor'.s plant be regarded as equally
illusory? What about a promise to buy all the promisor's needs in a certain line from the prom-
isee7 Will the analysis differ if there are promises not to sell the output to third persons, or to
buy needs from third persons7

Percival v London Etc Committee. (1918), 87 LJKB 677. ATKIN J : One knows that
these tenders are very often in a form under which the purchasing body is not bound
to give the tenderer any order at all; in other words, the contractor offers to supply
goods at a price, and if the purchasing body chooses to give him an order for goods
during the stipulated time, then he is under an obligation to supply the goods in
accordance with the order; but apart from that nobody is bound.

In Re The Gloucester Municipal Election Petition. [1901] 1 KB 693. A tender to

supply goods that the council might want in a certain period, when accepted was
held to result in a contract. DARLING J : There is a good obligation to order from the
respondent such of the goods included in his tender as the council might require ...
for I do not think that the council would have been justified in treating the respon -
dent's tender as a mere price list, and ordering the goods which they required from
any one whom they might choose .... There was a contract, because there was an
obligation on both sides.

Greenberg v Lake Simcoe Ice Supply Co. (1917), 39 OLR 32 (H Ct J). The Lake Simcoe
c;ompany, a dealer in coal, confirmed an arrangement with Greenberg, a retailer of
coal, in these words: "We beg to confirm our quotation on coal taken by you at our
Dupont or Florence street yards, namely, ... $6.75 per ton for all coal taken from
September 1st to April 30, 1917." No quantity of coal w as agreed to be supplied and
there was no uhdertaking to purchase any coal. In fact, about 40 tons were supplied
before the company sought to put aside the arrangement because of suspected
dishonest dealings. Greenberg sued for damages. Held, no contract. LATCHFORD J:
The plaintiff was not under the slightest obligation to purchase a single ton of coal
from the defendants. There was no consideratiori. from him to the defendants, and
no acceptance ... except in so far as the plaintiff from time to time prior to the revela-
tion of his fraud, applied for and was supplied with coal. Until each such transaction
was completed, there was no mutuality of obligation.

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TOBIAS V DICK AND T EATON CO

[1937] 4 DLR 546 (Man KB)

DYSART J: The plaintiff sues John Dick and the T. Eaton Co. Ltd.,-the one for a breach
of an alleged contract, and the other for interfering with his rights under that con-
tract. He also charges both defendants with conspiracy, and asks for an injunction
and damages.
The "contract" in question was originally drawn up by the plaintiff Tobias himself,
who, by trickery, induced the defendant to sign it in its present changed form; but
this defendant has by conduct since confirmed it, and cannot repudiate it. It reads thus-
Morden, Manitoba. April th .. 1935.

AGR EEMENT
This is to confirm that AM. Tobias of Morden, Manitoba has the exclusive selling agency,
to sell and organ ize territory and appoint his own agents for the John Dick Crushers.
from the above date, April th., 1935 to December 31st, 1937, for all Manitoba, Saskatch-
ewan and Alberta.
John Dick reserves the right to sell in the district and tributary of Emerson, Manitoba,
and for a radius of 30 miles East. West. North and South of the Town of Emerson,
Manitoba.
The cost of the grain grinders to AM. Tobias is $43.00 F.O.B. Emerson ....
At no time must there be more than five machines unpaid for, and all machines must
be paid for in cash, unless w ith the consent of John Dick.

Witness H. Dueck AM. Tobias

John E. Dick.

The parties to this litigation assumed to the very last day of the trial that this
document constituted a contract binding on both parties thereto. In my opinion, it
is not a contract at all . It has no mutuality-it is entirely a one-sided arrangement.
By it, Tobias gets the exclusive right "to sell" Dick's machines within a stated territory
for a stated time, but does not promise to sell any of the machines. The term "to sell"
by implication gives Tobias the right first to buy, in order that he may then sell. In
essence therefore, the document gives him the exclusive right to buy Dick's entire
output of machines. This construction finds confirmation in the later provisions of
the document fixing the price and terms upon which Tobias may buy the machines
from Dick.
These provisions taken together clearly indicate that there is no control left in
Dick over the machines, nor over Tobias' dealings in respect of the machines after
Tobias has bought them; nor over the appointment of agents or the organization of
a selling staff. Tobias' profits are not based on commission, but he is free to resell the
machines at his own price and terms, and through his own appointed agents. Clearly,
therefore, the agreement, notwithstanding an express declaration to that effect, does
not create an agency.
The indirect promise by Dick "to sell" to Tobias is not supported by any consider-
ation moving from Tobias, and so is not binding upon Dick. There is therefore no
contract. The document evidences nothing more than an offer from Dick open for
a given time. This offer of course remains open for acceptance until withdrawn, and
has never been formally withdrawn. It is of such a nature, having regard to Dick's
method of manufacturing, that it could be accepted in part, from time to time. And
so far as it was accepted, it was accepted by instalments.

248
 I. BARGAINS

Tobias ordered a number of machines on two separate occasions, took delivery

of them and paid for them. Some of these he is unable to sen, but he does not pretend
that he can return them to Dick and have the price refunded, as he might do if he
were an agent.
Apart from these two partial acceptances, Tobias has not requested any more
machines, and there has therefore been no refusal by Dick to live up to his offer. Dick
was only too anxious to sen more machines to Tobias, and repeatedly urged Tobias
to take those that were already completed. Only after Dick had lost an hope of dispos-
ing of his machines to Tobias did he decide to ignore his "agreement" altogether and
sell his machines elsewhere.
To sum up, there was no contract between these two parties, and therefore no
breach. The plaintiff's action against Dick must be dismissed with costs . ...
The plaintiff's action against the T. Eaton Co. will also be dismissed with costs ....
Action dismissed.

WOOD V LUCY, LADY DUFF-GORDON

118 NE 214(NYCA1917)

CARDOZO J: The defendant styles herself "a creator of fashions." Her favour helps a
sale. Manufacturers of dresses, millinery, and like articles are glad to pay for a cer-
tificate of her approval. The things which she designs, fabrics, parasols, and what
not, have a new value in the public mind when issued in her name. She employed
the plaintiff to help her to turn this vogue into money. He was to have the exclusive
right, subject always to her approval, to place her endorsements on the designs of
others. He was also to have the exclusive right to place her own designs on sale, or
to license others to market them. In return she was to have one-half of "a\\ profits
and revenues" derived from any contracts he might make. The exclusive right was
to last at least one year from April 1, 1915, and thereafter from year to year unless
terminated by notice of 90 days . The plaintiff says that he kept the contract on his
part, and that the defendant broke it. She placed her endorsement on fabrics, dresses,
and millinery without his knowledge, and withheld the profits. He sues her for the
damages and the case comes here on demurrer.
The agreement of employment is signed by both parties. It has a wealth of recitals.
The defendant insists, however, that it lacks the elements of a contract. She says that
the plaintiff does not bind himself to anything. It is true that he does not promise in
so many words that he will use reasonable efforts to place the defendant's designs.
We think, however, that such a promise is fairly to be implied. The law has outgrown
its primitive stage of formalism when the precise word was the sovereign talisman,
and every slip was fatal. It takes a broader view to day. A promise may be lacking and
· yet the whole writing may be "instinct with an obligation," imperfectly expressed ....
The implication is that the plaintiff's business organization will be used for the
purpose for which it is adapted. But the terms of the defendant's compensation are
even more significant. Her sole compensation for the grant of an exclusive agency
is to be one-half of a\\ the profit's resulting from the plaintiff's efforts. Unless he gave
his efforts, she could never get anything. Without an implied promise, the transaction
cannot have such business "efficacy, as both parties must have intended that at an
events it should have." Bowen, L.J. in the Moorcock, 14 P.D. 64, 68. But the contract
does not stop there. The plaintiff goes on to promise that he will account monthly

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

for all moneys received by him, and that he will take out all such patents and copy-
rights and trade-marks as may in his judgment be necessary to protect the rights
and articles affected by the agreement. It is true, of course, as the appellate Division
has said, that if he was under no duty to try to market designs or to place certificates
of endorsement, his promise to account for profits or take out copyrights would be
valueless. But in determining the intention of the parties the promise has a value. It
helps to enforce the conclusion that the plaintiff had some duties. His promise to
pay the defendant one-half of the profits and revenues resulting from the exclusive
agency and to render accounts monthly was a promise to use reasonable efforts to
bring profits and revenues into existence.

QUESTIONS AND PROBLEMS

1. Why do business people enter into the kinds of agreements found in cases such as
Witham, Tobias , and Wood?
2. What features of Wood persuaded the court that there was, at least, an implicit obliga-
tion on Wood?
3. If Lady Duff-Gordon were suing Wood because he failed to bring any profits and rev-
enues into existence, what standard of effort on Wood's part would she have to prove? How
would the damages be measured? If Wood were also under the same "contract" with another
equally prominent person, how would he have to divide his efforts? Is the business incentive
on Wood's part enough to justify holding Lady Duff-Gordon to her promise? Could we say that
Lady Duff-Gordon exchanged her promise for the chance, given her by Wood, that he would
likely bring into existence profits and revenues?
4. A signs a document that gives B "sole and exclusive right to act as my agent in the sale
of my home for 30 days from today's date." A promises to pay Ba commission of 5 percent of
the selling price upon B finding a purchaser. After 15 days, A is very dissatisfied with the service
given her by B. She purports to cancel the agreement. Can she do so? See also Waddams at
paras 124-25; McCamus at 224-26.

H. PRE-EXISTING DUTY

HARRIS V WATSON
(1791), Peake 102, 170 ER 94 (KB)

In this case the declaration stated that the plaintiff being a seaman on board the ship
"Alexander" of which the defendant was master and commander, and which was
bound on a voyage to Lisbon: whilst the ship was on her voyage, the defendant, in
consideration that the plaintiff would perform some extra work, in navigating the
ship, promised to pay him five guineas over and above his common wages. There
were other counts for work and labour, & c.
The plaintiff proved that the ship being in danger, the defendant, to induce the
seamen to exert themselves, made the promise stated in the first count.
LORD KENYON: If this action was to be supported, it would materially affect the navi-
gation of this kingdom. It has been long since determined that when the freight is
lost, the wages are also lost. This rule was founded on a principle of policy, for if
sailors were in all events to have their wages, and in times of danger entitled to insist
on an extra charge on such a promise as this, they would in many cases suffer a ship
to sink, unless the captain would pay any extravagant demand they might think
proper to make. The plaintiff was nonsuited.

250
 I. BARGAINS

STILK V MYRICK
(1809), 2 Camp 317, 170 ER 1168

This was an action for a seaman's wages, on a voyage from London to the Baltic and
back.
By the ship's articles, executed before the commencement of the voyage, the plain -
tiff was to be paid at the rate of £5 a month; and the principal question in the cause
was whether he was entitled to a higher rate of wages. In the course of the voyage two
of the seamen deserted; and the captain having in vain attempted to supply their
places at Cronstadt, there entered into an agreement with the rest of the crew, that
they should have the wages of the two who had deserted equally divided among them,
if he could not procure two other hands at Gottenburgh. This was found impossible;
and the ship was worked back to London by the plaintiff and eight more of the ori-
ginal crew, with whom the agreement had been made at Cronstadt.

LORD ELLENBOROUGH : I think Harris v. Watson [the preceding case] was rightly
decided; but I doubt whether the ground of public policy, upon which Lord Kenyon
is stated to have proceeded, be the true principle on which the decision is to be
supported. Here, I say the agreement is void for want of consideration. There was
no consideration for the ulterior pay promised to the mariners who remained with
the ship. Before they sailed from London they had undertaken to do all they could
under all the emergencies of the voyage. They had sold all their services till the voy-
age should be completed. If they had been at liberty to quit the vessel at Cronstadt,
the case would have been quite different; or if the captain had capriciously dis-
charged the two men who were wanting, the others might not have been compel-
lable to take the whole duty upon themselves, and their agreeing to do so might have
been a sufficient consideration for the promise of an advance of wages. But the
desertion of a part of the crew is to be considered an emergency of the voyage as
much as their death; and these who remain are bound by the terms of their original
contract to exert themselves to the utmost to bring the ship in safety to her destined
port. Therefore, without looking to the policy of this agreement, I think it is void for
want of consideration, and that the plaintiff can only recover at the rate of £5 a
month.
Verdict accordingly.

Hartley v Ponsonby. (1857), 7 El & Bl 872, 119 ER 1471. The crew of a ship was so
reduced in number that "for the ship to go to sea with so few hands was dangerous
to life. If so, it was not incumbent on the plaintiff to perform the work; and he was
in the condition of a free man." It was held there was consideration for the contract
to pay him an additional sum to work the ship home.

New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Euryme-

don). [1975] AC 154. LORD WILBERFORCE: An agreement to do an act which the
promisor is under an existing obligation to a third party to do, may quite well amount
to valid consideration ... the promisee obtains the benefit of a direct obligation ....
This proposition is illustrated and supported by Scotson v. Pegg (1861), 6 H. & N. 295
which their Lordships consider to be good law.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

NOTES AND QUESTIONS

1. Suppose the captain in Stilk v Myrick had requested the seamen to give him a pepper-
corn (if they had one with them). Suppose he had put his promise in writing and under seal.
Would the result have been different?
2. A substantially different report of Stilk v Myrick is found at (1809), 6 Esp 129, 170 ER 851.
In that report, Lord Ellenborough CJ was quoted as saying that "he recognised the principle of
the case of Harris v Watson as founded on just and proper policy." The word "consideration"
was not mentioned. The reporter of this second version was Espinasse, who was also counsel
for the plaintiff. Espinasse, however, was not held in high esteem by the judiciary as an accur-
ate reporter and hence the version excerpted above has traditionally been regarded as more
reliable.

HOLMES, The Common Law (1881)

The only universal consequence of a legally binding promise is that the law makes
the promisor pay damages if the promised event does not come to pass . In every
case it leaves him free from interference until the time for fulfilment has gone by,
and therefore free to break his contract if he chooses ....
If, when a man promised to labour for another, the law made him do it, his relation
to his promise might be called a servitude ad hoc with some truth. But that is what
the law never does. It never interferes until a promise has been broken, and therefore
cannot possibly be performed according to its tenor. It is true that in some instances
equity does what is called compelling specific performance. But, in the first place, I
am speaking of the common law, and in the next, this only means that equity com -
pels the performance of certain elements of the total promise which are still capable
of performance.

NOTES AND QUESTIONS

1. Holmes is suggesting that the duty of the promisor under a contract is either to perform
his contract or to pay damages. It is then arguable that because the promisor has his choice-
that is, this privilege of performing one duty or the other-by giving up this privilege and agree-
ing to perform the contract rather than pay damages he has given up a valuable legal right,
called in technical terms a privilege. And that, of course, is a valid exchange constituting a legal
detriment. On this basis Stilk v Myrick must be wrongly decided, but Harris v Watson may be
right.
2. Is Holmes's view of the law consistent with the modern remedy of specific performance
discussed in Chapter 2 or with the existence of the tort of inducing breach of contract? What
good is a theory of contract damages that cannot account for these doctrinal facts?
3. Does Holmes's reasoning not lead to an absurdity? For example, if every promise allows
the promisor a "perform or pay" privilege, why is the second promise to actually perform any
different?
4. What difficulties might we have with the rule that giving up your "right" to break a contract
is good consideration? Does one have a right to breach a contract? Consider the following.

Coulls v Bagot's Executor and Trustee Co Ltd (1967), 119 CLR 460. WINDEYER J: It
is ... a faulty analysis of legal obligations to say that the law treats a promisor as having
a right to elect either to perform his promise or to pay damages. Rather ... the prom-
isee has "a legal right to the performance of the contract."

252
 I. BARGAINS

SMITH V DAWSON
(1923), 53 OLR 615 (CA)

The plaintiffs agreed with the defendant to build her a house for $6,464. When the
house was nearly finished, a fire took place in it doing considerable damage.
The defendant effected insurance on the house as it was being built. The plaintiffs
effected no insurance. After the fire the defendant asked the plaintiffs to go ahead
and complete the house. The plaintiffs said they would if the defendant promised
to pay them the insurance monies.
RIDDELL J (Logie J concurring): ... The situation then seems quite clear-the plaintiffs,
learning that the defendant had received some insurance money on the house,
objected to go on without some kind of assurance that they were to get the insurance
money-the defendant demurred, as she had lost considerably by the destruction of
her furniture, but finally said, "All right, go ahead and do the work." If this constituted
a contract at all, it was that she Would give them the insurance money which she
had received, if they would go ahead and do the work they were already under a legal
obligation to do.
In some of the United States a doctrine has been laid down that (at least in building
contracts) the contractor has the,option either to complete his contract or to abandon
it and pay damages. These Courts have accordingly held that the abandonment by
the contractor of his option to abandon is sufficient consideration for a promise to
pay an extra amount.
The Courts of Illinois, Indiana, and Massachusetts seem to have adopted this
rule . .. . But such a course is to allqw a contractor to take advantage of his own wrong,
and other American Courts reprobate it: 9 Corpus Juris, 720; 13 Corpus Juris, 354, sec.
210, and cases cited in notes.
This is not and never was law in Ontario, as it is not and never was law in England.
It has long been text-book law that "not the promise or the actual performance of
something which the promisee is legally bound to perform" is a consideration for a
promise.
Halsbury's Laws of England, 385, para. 798: "the performance of an existing con-
tract by one of the parties is no consideration for a new promise by the other party":
Leake on Contracts, 7th ed., p. 455, and cases cited.
I am of the opinion that the promise (if there was one) to pay for the work to be
done was not binding for want of consideration, and would allow the appeal with
costs here and below. If there be any difficulty in moulding the judgment, one of us
may be spoken to.
[The judgments of Latchford and Middleton JJ are omitted.]

England v Davidson. (1840), 11 Ad & E 856, 113 ER 640. The defendant offered a
reward of £50 to anyone giving information leading to the conviction of persons
who broke into his house. The plaintiff, a police constable on duty in the area in
which the defendant's house was located, did give such information and claimed
the reward. The defendant paid him five guineas but failed to pay the balance. In an
action to recover the balance it was objected that the plaintiff had given no consider-
ation because as a police constable he :was bound to give such information anyway.
Judgment for the plaintiff. LORD DENMAN CJ: I think there may be services which
the constable is not bound to render and which he may therefore make the ground

253
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

of a contract. We should not hold a contract to be against the policy of the law, unless
the grounds for so deciding were very clear.

Reif v Page. 55 Wisc 496 (1882). A husband offered a reward t:J anyone who would
rescue his wife, dead or alive, from a burning building. A fireman who took out the
dead body was held entitled to recover. The court said that a fireman was not legally
bound to risk his life in effecting a rescue.

Pao On v Lau Yiu Long. [1980] AC 614 (PC). LORD SCARMAN: When one turns to
consider cases where a pre-existing duty imposed by law is alleged to be valid con-
. sideration for a promise, one finds cases in which public policy has been held to
invalidate the consideration. A promise to pay a sheriff in consideration of his
performing his legal duty, a promise to pay for discharge from illegal arrest, are to
be found in the books as promises which the law will not enforce .... Yet such cases
are also explicable upon .the ground that a person who promises to perform, or
performs, a duty imposed by law provides no consideration. In cases where the
discharge of a duty imposed by law has been treated as valid consideration, the
courts have usually (but not invariably) found an act over and above, but consistent
with, the duty imposed by law.

NOTES AND QUESTIONS

1. Counsel for the defendant in Davidson argued that the contract was against public pol-
icy. To what policy is it obnoxious? Do rewards operate to deflect a policeman's attention from
his regular duties7 Should this fact. if it is a fact. justify the promisor's failure to carry out his
promise? Should a court concern itself with such a question, or should it be left to the legisla-
tor or chief of police7 For a discussion, see MacDougall at 109-10.
2: Could a different conclusion in these cases have been reached on the basis of motive7
See the reward cases in Section IV, below.
3. If the pre-existing duty rule is based on policy, is the policy at play in the public service
cases the same as that involved when business people make adjustments to their contractual
relationships? What would motivate business people to agree to pay a higher price for work
already contracted for at a lower price? Consider the following cases.

RAGGOW V SCOUGALL AND CO

(1915), 31 TLR 564 (Div Ct)

This was an appeal by the defendants, Messrs. Scougall and Co., who were a ·firm of
mantle-makers, from a decision of Judge Rentoul in the City of London Col).rt, by
which plaintifi, a mantle designer, recovered judgment for £58.
In August, 1913, the plaintiff by an agreement in writing agreed to become the
defendants' designer for two years at a c;ertain salary. It was provided that if the
business should be discontinued during the period the agreement should cease to
be of any effect. When the war broke out many customers cancelled orders which
they had given to the firm, and the defendants had to consider whether they should
close the business altogether. They called their employees together, and most of
them agreed to a reduction of wages during the war if the defendants would continue

254
 I. BARGAIN S

the business. The plaintiff entered into a new agreement in writing, in which he, like
other employees of the firm, agreed to accept a smaller salary for the duration of the
war, provided that when the war was over the terms of the old agreement should be
revived. He went on with his work and accepted the new salary until February last,
when the defendants received a solicitor's letter claiming payment in full at the rate
fixed in the old agreement; and as they refused to pay the excess this action was
brought.
In the Court below judgment was given for the plaintiff on the ground that no con -
sideration had been shown for the new agreement to accept a reduced payment. ...
MR. JUSTICE DARLING said that the appeal must be allowed. It was clear from the
provision in the new agreement that the terms of the old one should be reviewed
when the war came to an end and that until the war ended the old agreement was
dead. The parties had in fact torn up the old agreement and made a new one by
mutual consent. They could have done it by recitals setting out the existence and
rescission of the old agreement, but they had adopted a shorter course. The new
agreement was an agreement contemplating employment on certain terms while
the war lasted, and on certain other terms, which could be ascertained by reference
to the older document, after the war had ended. The point, therefore, as to want of
consideration failed and the appeal succeeded. He was the more glad to be able to
arrive at this conclusion on the law, for it was evident that the plaintiff was trying to
do a very dishonest thing.
[Coleridge J agreed.I

QUESTION
Could the court have found consideration in this case? What might distinguish this case from
Smith v Dawson. in which the plaintiff argued he had given up his "right" to break the contract?

GILBERT STEEL LTD V UNIVERSITY CONSTRUCTION LTD

(1976), 67 DLR (3d) 606 (Ont CA)

WILSON JA: This is an appeal from the order of Mr. Justice Pennell dismissing the
plaintiff's action for damages for breach of an oral agreement for the supply of
fabricated steel bars to be incorporated into apartment buildings being constructed
by the defendant. The case raises some fundamental principles of contract law.
The circumstances giving rise to the action are as follows. On September 4, 1968,
the plaintiff entered into a written contract to deliver to the defendant fabricated
steel for apartment buildings to be erected at three separate sites referred to in the
contract as the "Flavin, Tectate and University projects." The price fixed by that
contract was $153 per ton for "Hard grade" and $159 per ton for "Grade 60,000."
Deliveries for the Flavin and Tectate projects were completed in August, 1969, and
October, 1969, respectively, and paid for at the agreed-upon prices.
Two apartment buildings calling for the supply of 3,000 tons of fabricated steel
were to be erected at the University site. However, prior to the defendant's notifying
the plaintiff of its intention to commence construction on the first of these two
buildings, the owners of the steel mill announced an increase in the price of unfab-
ricated steel. They also gave warning of a further increase to come. The plaintiff
approached the defendant about a new contract for the University project and a
written contract dated October 22, 1969, was entered into for the supply of fabricated

255
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

steel for the first building. The new price was $156 per ton for "Hard grade" and $165
per ton for "Grade 60,000." In fact this increase in price did not reflect the full amount
of the initial increase announced by the mill owners.
On March 1, 1970, while the building under construction was still far from comple-
tion, the mill owners announced the second increase in price and a further discus-
sion took place between John Gilbert and his brother Harry representing the plaintiff
and Mendel Tenenbaum and Hersz Tenenbaum representing the defendant with
respect to the price to be paid for the steel required to complete the first building. It
is this discussion which the plaintiff alleges resulted in a binding oral agreement
that the defendant would pay $166 per ton for "Hard grade" and $178 per ton for
"Grade 60,000 ." Although the plaintiff submitted to the defendant a written contract
embodying these revised prices following th eir meeting, the contract was not
executed. It contained, in addition to the increased prices, two new clauses which
the trial Judge found had not been the subject of any discussion with the defendant
but were unilaterally imported into the document by the plaintiff. The trial Judge
also found, however, that the defendant agreed at the meeting to pay the increased
price.
From March 12, 1970, until the completion of the first building the defendant
accepted deliveries of the steel against invoices which reflected the revised prices
but, in making payments on account, it remitted cheques in rounded amounts which
at the date of the issuance of the writ resulted in a balance owing to the plaintiff in
accordance with the invoices.
Having found on the evidence that the defendant had orally agreed to pay the
increased prices, the legal issue confronting Mr. Justice Pennell was whether that
agreement was legally binding upon the defendant or whether it failed for want of
consideration and that the plaintiff was already obliged before the alleged oral agree-
ment was entered into to deliver the steel at the original prices agreed to in the
written contract of October 22, 1969. Where then was the quid pro quo for the defen-
dant's promise to pay more?
Counsel for the plaintiff sought to supply this omission from the evidence of
Hersz Tenenbaum who, during the course of discussions which took place in Sep-
tember, 1970, with a view to a contract for the supply of steel for the second building
at the University site, asked whether the plaintiff would give him "a good price" on
steel for this building. Plaintiff's counsel argued that the promise of a good price on
the second building was the consideration the defendant received for agreeing to
pay the increased price on the first. The trial Judge rejected this submission and
found the oral agreement unenforceable for want of consideration. In the course of
his reasons for judgment the trial Judge adverted briefly to an alternate submission
made by the Plaintiff's counsel. He said:
I should, in conclusion, mention a further point which was argued with ingenuity by Mr.
Morphy. His contention was that the consideration for the oral agreement was the
mutual abandonment of right under the prior agreement in writing. I must say, with
respect. that this argument is not without its attraction for me .
On the appeal Mr. Morphy picked up and elaborated upon this submission which
had intrigued the trial Judge. In launching his main attack on the trial Judge's find-
ing that the oral agreement was unenforceable for want of consideration, he submit-
ted that the facts of this case evidenced not a purported oral variation of a written
contract which failed for want of consideration but an implied rescission of the
written contract and the creation of a whole new contract, albeit oral, which was
subsequently reneged on by the defendant. The consideration for this new oral

256
 I. BARGAINS

agreement, submitted Mr. Morphy, was the mutual agreement to abandon the pr<;vi-
ous written contract and to assume the obligations under the new oral one. Mr.
Morphy submitted to the Court for its consideration two lines of authority, the first
line illustrated by the leading case of Stilk v. Myrick (1809), 2 Camp. 317, 170 E.R. 1168,
in which the subsequent agreement was held to be merely a variation of the earlier
agreement and accordingly failed for want of consideration, and the other line illus-
trated by Morris v. Baron & Co., (1918] AC. 1, in which the subsequent agreement was
held to have rescinded the former one and was therefore supported by the mutual
agreement to abandon the old obligations and substitute the new. Mr. Morphy invited
us to find that the oral agreement to pay the increased price for steel fell into the
second category. There was, he acknowledged, no express rescission of the written
contract but price is such a fundamental term of a contract for the supply of goods
that the substitution of a new price must connote a new contract and impliedly
rescind the old.
It is impossible to accept Mr. Morphy's submission in face of the evidence
adduced at the trial. It is clear that the sole reason for the discussions between the
parties in March, 1970, concerning the supply of steel to complete the first building
at the University site was the increase in the price of steel by the mill owners. No
changes other than the change in price were discussed. The trial Judge found that
the other two changes sought to be introduced into the written document submitted
by the plaintiff to the defendant for signature following the discussions had not even
been mentioned at the meeting. Moreover, although repeated references were made
at trial by the Gilbert brothers to the fact that the parties had made a "new contract"
in March, 1970, it seems fairly clear from the evidence when read as a whole that the
"new contract" referred to was the agreement to pay the increased price for the steel,
i.e., the agreement which effected the variation of the written contract and not a new
contract in the sense of a contract replacing in toto the original contract of October
22, 1969.
I am not persuaded that either of the parties intended by their discussions in
March, 1970, to rescind their original contract and replace it with a new one. Indeed,
it.is significant that no such plea was made in the statement of claim which confined
itself to an allegation that "it was orally agreed in March 1970 that the prices as set
forth in the said contract [that is, of October 22, 1969] would be varied ...." Accord-
ingly, consideration for the oral agreement is not to be found in a mutual agreement
to abandon the earlier written contract and assume the obligations under the new
oral one.
Nor can I find consideration in the vague references in the evidence to the pos-
sibility that the plaintiff would give the defendant "a good price" on the steel for the
second building if it went along with the increased prices on the first. The plaintiff,
in my opinion, fell far short of making any commitment in this regard.
Counsel for the appellant put before us as an alternate source of consideration
for the agreement to pay the increased price, the increased credit afforded by the
plaintiff to the defendant as a result of the increased price. The argument went
something like this. Whereas previously the defendant had credit outstanding for
60 days in the amount owed on the original prices, after the oral agreement was
made he had credit outstanding for 60 days in the amount owed on the higher prices.
Therefore, there was consideration flowing from the promisee and the law does not
inquire into its sufficiency. Reliance was placed by counsel on the decision of Chief
Justice Meredith in Kilbuck Coal Co. v. Turner & Robinson (1915), 7 O.W.N. 673. This
case, however, is clearly distinguishable from the case at bar, as Mr. Justice Pennell
pointed out in his reasons, on the basis of the force majeure clause which had relieved

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the plaintiff of its obligations under the original contract. In undertaking to supply
coal despite the strike the plaintiff was unquestionably providing consideration of
real substance in that case. I cannot accept counsel's contention, ingenious as it is,
that the increased credit inherent in the increased price constituted consideration
flowing from the promisee for the prom'isor's agreement to pay the increased price.
The final submission put forward by counsel for the appellant was that the
defendant, by his conduct in not repudiating the invoices reflecting the increase in
price when and as they were received, had in effect acquiesced in such increase and
should not subsequently be permitted to repudiate it. There would appear tc:i be two
answers to this submission. The first is summed up in the maxim that estoppel can.
never be used as a sword but only as a shield. A plaintiff cannot found his claim in
estoppel. Secondarily, however, it should perhaps be pointed out that in order to
found an estoppel the plaintiff must show, not only that the conduct of the defendant
was clearly referable to the defendant's having given up its right to insist on the
original prices, but also that the plaintiff relied on the defendant's conduct to its
detriment. I do not think the plaintiff can discharge either of these burdens on the
facts of this case.
In summary, I concur in the findings of the trial Judge that the oral agreement
made by the parties in March, 1970, was an agreement to vary the written contract
of October 22, 1969, and that it must fail for want of consideration.

WILLIAMS V ROFFEY BROS LTD

[1991] 1 QB 1 (CA)

[The plaintiff was a carpenter employed by the defendant contractor to work on the
refurbishing of some flats . The defendant made interim payments on the total
contract price of £20,000. After six months, £16,200 had been paid. The plaintiff then
experienced financial difficulty due, first, to the fact that the contract price had been
too low and, second, to his failure to supervise his workers properly. The defendants
were particularly concerned to avoid·delays because the main contract contained a
penalty clause. They agreed to pay the plaintiff a further £10,300 to be paid as flats
were completed. The plaintiff continued working for approximately one and one
half months after the agreement, but received only one further payment of £1,500.
The plaintiff sued for the remaining contract price and the extra payments agreed
· to by the defendants. Among other arguments, the defendants argued that the varia -
tion of the contract had been made without consideration.]
GLIDEWELL LJ (after reviewing the facts and discussing another issue raised by the
defendants): Was there consideration for the defendants' promise made on 9 April
1986 to pay an additional price at the rate of £575 per completed flat?
The judge made the following findings of fact which are relevant on this issue.
(i) The subcontract price agreed was too low to enable the plaintiff to operate satis-
factorily and at a profit. Mr. Cottrell, the defendants' surveyor, agree that this was so.
(ii) Mr. Roffey (managing director of the defendants) was persuaded by Mr. Cottrell
that the defendants should pay a bonus to the plaintiff. The figure agreed at -the
meeting on 9 April 1986 was £10,300 .
The judge quoted and accepted the evidence of Mr. Cottrell to the effect that a
main contractor who agrees too low a price with a subcontractor is acting contrary
to his own interests. He will never get the job finished without paying more money.
The judge therefore concluded:

258
 I. BARGAINS

In my view where the original subcontract price is too low, and the parties subsequently
agree that additional moneys shall be paid to the subcontractor, this agreement is in
the interests of both parties. Th is is what happened in the present case, and in rriy
opinion the agreement of 9 April 1986 does not fail for tack of consideration .

In his address to us, Mr. Evans outlined the benefits to his clients, the defendants,
which arose from their agreement to pay the additional £10,300 as: (i) seeking to
ensure that the plaintiff continued work and did not stop in breach of the subcon-
tract; (ii) avoiding the penalty for delay; and (iii) avoiding the trouble and expense of
engaging other people to complete the carpentry work
However, Mr. Evans submits that, though his clients may have derived, or hoped
to derive, practical benefits from their agreement to pay the "bonus," they derived
no benefit in law since the plaintiff was promising to do no more than he was already
bound to do by his sub-contract, Le. continue with the carpentry work and complete
it on time. Thus there was no consideration for the agreement.
Counsel for the defendants relies on the principle of law which, traditionally, is
based on the decision in Stilk v. Myrick. That was a decision at first instance of Lord
Ellenborough CJ. On a voyage to the Baltic, two seamen deserted. The captain agreed
with the rest of the crew that if they worked the ship back to London without the two
seamen being replaced, he would divide between them the pay which would have
been due to the two deserters. On arrival at London this extra pay was refused and
the plaintiff's action to recover his extra pay was dismissed. Counsel for the defend-
ant argued that such an agreement was contrary to public policy, but Lord Ellenbor-
ough CJ's judgment (as reported in Campbell's Reports) was based on lack of
consideration . ...
It was suggested to us in argument that, since the development of the doctrine
of promissory estoppel, it may well be possible for a person to whom a promise has
been made, on which he has relied, to make an additional payment for services
which he is in any event bound to render under an existing contract or by operation
of law, to show that the promisor is estopped from claiming that there was no con -
sideration for his promise. However, the application of the doctrine of promissory
estoppel to facts such as those of the present case has not yet been fully developed :
see e.g. the judgment of Lloyd J . in Syros Shipping Co. SA v. Elaghill Trading Co., The
· Proodos C, [1981] 3 All E.R 189 at 191. Moreover, this point was not argued in the court
below, nor was it more than adumbrated before us. Interesting though it is, no reli-
ance can in my view be placed on this concept in the present case.
There is, however, another legal concept of relatively recent development which
is relevant, namely that of economic duress. Clearly, if a sub-contractor has agreed
to undertake work at a fixed price, and before he has completed the work declines
to continue with it unless the contractor agrees to pay an increased price, the sub-
contractor may be held guilty of securing the contractor's promise by taking unfair
advantage of the difficulties he will cause if he does not complete the work In such
a case an agreement to pay an increased price may well be voidable because it was
entered into under duress. Thus this concept may provide another answer in law to
the question of policy which has troubled the courts since before Sti/k v. Myrick and
no doubt led at the date of that decision to a rigid adherence to the doctrine of
consideration.
[After discussion of authorities, Glidewell LJ continued.]
Accordingly ... the present state of the law on this subject can be expressed in the
following proposition: (i) if A has entered into a contract with B to do work for, or to
supply goods or services to, B in return for payment by B and (ii) at some stage before

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

A has completely performed his obligations under the contract B has reason to doubt
whether A will, or will be able to, complete his side of the bargain and (iii) B thereupon
promises A an additional payment in return for A's promise to perform his contrac-
tual obligations on time and (iv) as a result of giving his promise B obtains in practice
a benefit, or obviates a disbenefit, and (v) B's promise is not given as a result of eco-
nomic duress or fraud on the part of A, then (vi) the benefit to B is capable of being
consideration for B's promise, so that the promise will be legally binding.
As I have said, counsel for the defendants accepts that in the present case by
promising to pay an extra £10,300 the defendants secured benefits. There is no find-
ing, and no suggestion, that in this case the promise was given as a result of fraud
or duress.
If it be objected that the propositions above contravene the principle in Stilk v.
Myrick I answer that in my view they do not: they refine and limit the application of
that principle, but they leave the principle unscathed, e .g. where B secures no benefit
by this promise. It is not in my view surprising that a principle enunciated in relation
to the rigours of seafaring life during the Napoleonic wars should be subjected dur-
ing the succeeding 180 years to a process of refinement and limitation in its applica -
tion in the present day.
It is therefore my opinion that on his findings of fact in the present case, the judge
was entitled to hold, as he did, that the defendants' promise to pay the extra £10,300
was supported by valuable consideration, and thus constituted an enforceable
agreement.
[The concurring judgments of Russell and Purchas LJJ have been omitted.]

M. Chen-Wishart, "The Enforceability of Additional Contractual Promises: A Ques-

tion of Consideration?" (1991) 14 NZULR 270 at 270 : Via the concept of 'practical
benefit' the court significantly widened the content of consideration with the effect
that it is easier to satisfy the requirement that consideration move from the party
seeking to enforce the additional promise . ... It is clear that any reluctance to enforce
additional promises given after a contract-has been agreed to, arises out of a concern
that the promisor may have been unfairly pressured into making the additional
promise. Since the problem in this context is inherently not about the existence of
valuable exchange, the doctrine of consideration is an inappropriate test of enforce-
ability. Tinkering with the definition of what constitutes valuable exchange, whether
by the concept of practical benefit or some other concept, does not alter this inherent
unsuitability for the task.

NAV CANADA V GREATER FREDERICTON

AIRPORT AUTHORITY INC
2008 NBCA 28, 290 DLR (4th) 405

ROBERTSON JA (for the court):

I. OVERVIEW

[1] Ultimately, this Court must rule on the enforceability of what amounts to a
variation to an existing contract or, as it is commonly described, a post-contractual
modification to an executory contract. It is a case of first impression that brings into

260
 I. BARGAINS

issue fundamental principles of contract law tied to the articulation and application
of the doctrines of consideration and economic duress.
[2] By federal prerogative, the appellant, Nav Canada, has the exclusive right and
responsibility to provide aviation services and equipment to the respondent, the
Greater Fredericton Airport Authority Inc. Their contractual relationship is governed
by the Aviation and Services Facilities Agreement ("ASF Agreement"). The litigation
stems from the Airport Authority's decision to extend one of its two runways, at a
cost of $6 million, and its request that Nav Canada relocate the instrument landing
system situated on the other runway to the one being extended. Part of that system
consisted of a navigational aid labeled a "NDB" (a non-directional beacon). Nav
Canada concluded that it made better economic sense to replace that navigational
aid with another labeled a "DME" (distance measuring equipment). However, a
disagreement soon arose as to which of the parties should pay the acquisition cost
of $223,000. In a letter to the Airport Authority, Nav Canada refused to make provi-
sion in its fiscal budget for the upcoming year for the purchase of the DME, unless
the Airport Authority agreed to pay the $223,000. From the outset, the Airport Author-
ity insisted that it was not contractually bound to pay, but capitulated in a letter
written "under protest" in order to ensure that the extended runway became opera-
tional. On the basis of that letter, Nav Canada installed the necessary equipment.
Subsequently, the Airport Authority refused to pay and the parties agreed to arbitrate
the matter in accordance with the Arbitration Act, S.N.B. 1992, c. A-10.1.
[3] The arbitrator held that Nav Canada possessed the exclusive right under the
ASF Agreement to decide whether to replace navigational aids but that there was
nothing in that agreement that entitled Nav Canada to claim reimbursement for the
cost of acquiring the DME. Hence, according to the arbitrator, the Airport Authority
was not contractually obligated to pay for the navigational aid. However, the arbi-
trator went on to hold that the subsequent exchange of correspondence between
the parties gave rise to a separate and binding contract, supported by consideration,
and therefore Nav Canada was entitled to recover the acquisition cost on that basis.
In reaching that conclusion, the arbitrator rejected the argument that the words
"under protest" were sufficient to negate contractual liability.

IV. THE "CONSIDERATION" ISSUE

[16] The question of whether the arbitrator erred in law in finding that the parties
had entered into an enforceable agreement by which the Airport Authority promised
to pay for the DME raises the immediate question of whether that promise was sup-
ported by consideration. The arbitrator so held but without offering reasons for his
conclusion. While I have characterized the Airport Authority's promise to pay for the
navigational aid as a variation to an existing contract, Nav Canada disagrees, main-
taining that it is an agreement which falls outside the ASF Agreement ... .

[18] Nav Canada's argument that it was the Airport Authority that elected to
replace the old NDB with a new DME is in conflict with the arbitrator's findings of
fact: Nav Canada .w as the party that insisted on installing the DME rather than relo-
cating the old NDB, and Nav Canada had the contractual authority to make that
election. Having done so, Nav Canada cannot turn around and argue that it was not
obligated to install the navigational aid in accordance with the underlying contract,
the ASF Agreement.
[19] I return to the question whether the Airport Authority's subsequent promise
to pay for the cost of the navigational aid was supported by "fresh" consideration.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORC ED

Accepting that the hallmark of every bilateral contract is a consensual bargain (a

promise in exchange for a promise), it must be asked whether the party seeking to
enforce the post-contractual modification (Nav Canada) had agreed to do more than
originally promised (in the ASF agreement) in return for the agreement to modify
the contract. It is a well-established feature of the traditional doctrine of considera-
tion that consideration must move from the promisee (Nav Canada) or; in other
words, the promisee must suffer a detriment in return for the promise of the prom-
isor (the Airport Authority). That something more provides the consideration neces-
sary to enforce what otherwise would be a gratuitous and unenforceable promise.
But as we know, under the rule in Stilk v. /Vlyrick (1809), 2 Camp. 317, 170 E.R. 1168, the
performance of a pre -existing obligation does not qualify as fresh or valid consider-
ation and, therefore, such an agreement to vary an existing contract remains unen -
forceable. In this case, Nav Canada's pre-existing contractual obligation was to pay ·
for the DME once it exercised its contractual right to insist on purchasing new
equipment rather than relocating the old. In short, Nav Canada promised nothing
in return for the Airport Authority's promise to pay for a navigational aid that it was
not contractually bound to pay for under the ASF Agreement.
[20] The parties quite properly point out that, in Canada, the lead decision on the
unenforceability of gratuitous promises in the context of a post-contractual modi-
fication is Gilbert Steel Ltd. v. University Construction Ltd. ... [After summarizing Gilbert
Steel, Robertson JA continued.]
[22] Nav Canada's argument, that the Airport Authority's promise to pay for the
navigational aid is enforceable, runs afoul of other tenets of the consideration doc-
trine. In the years following Stilk v. /Vlyrick, the law would impose other barriers to the
enforcement of post-contractual modifications. The first came in the form of a rule
declaring that the plaintiff's forbearance from breaching the existin~ contract does
not qualify as fresh consideration. Thus, the plaintiff (e.g., Nav Canada) cannot argue
that the consideration fqr the defendant's promise to pay more was the plaintiff's
forbearance from exercising its legal right to breach the contract by refusing to
deliver promised goods or by withholding promised services (e.g. refusing to acquire
and install the DME). Another rule that prevents the enforcement of a variation to
an executory contract was articulated in Combe v. Combe ... namely that a plea of
detrimental reliance is not a valid basis for enforcing an otherwise gratuitous prom-
ise. The plaintiff who argues detrimental reliance is in fact pleading that the defend-
ant should be estopped from asserting that the agreement is unenforceable because
of a lack of fresh consideration for the promise. Regrettably, the fact that the plaintiff
may have relied on the agreement to his or her detriment.is of no consequence as
promissory estoppel may be invoked only as a [shield] and not as a [sword]. Thus,
Nav Canada's estoppel-based argument-that it relied to its own detriment on the
Airport Authority's gratuitous promise-must be rejected also,
[23] To this point, I have merely outlined the classical contract law approach to
the enforcement of variations to an existing contract. The question which remains
is whether this case should be decided on the basis of a "failure of consideration." I
say this because in truth the courts have developed a number of ways to avoid the
application of the classical tenets of the consideration doctrine when the court is
convinced that the contractual variation was not procured under economic duress.
Indeed, courts have adopted a number of "legal fictions" to avoid the blind application
of the classical rules, thereby turning a gratuitous promise into an enforceable one.
The principal techniques courts use to avoid the rule in Stilk v. /Vlyrick were identified
by the Ontario Law Reform Commission in its Report on Amendment of the Law of
Contract (Toronto: Ministry of the Attorney General, 1987) at page 14: (1) finding that

262
 I. BARGAINS

on the facts of the case the plaintiff promised to do more than originally obliged to
do; (2) finding that the circumstances have changed after the original contract was
formed so that the plaintiff's promise to do exactly what was agreed to is consider-
ation for a promise of more from the defendant; (3) accepting the plea of detrimental
reliance on the basis of justice and equity, despite the application of the orthodox
rules; and (4) holding that the original contract was mutually rescinded and replaced
by a new agreement which incorporated the variation to the original contract ....
[24] Two relatively recent cases reveal the extent to which some courts are unwill-
ing to take a rigid or classical approach when it comes to applying the doctrine of
consideration and the rule in Stilk v. Myrick. The first is the decision of the Ontario
Court of Appeal in Techform Products Ltd. v. Wolda (2001), 56 O.R. (3d) 1 (C.A.), [2001]
O.J. No. 3822 (QL), leave to appeal refused, [2001] S.C.C.A. No. 603 (QL) . The defend-
ant was retained in 1989 as an independent contractor to undertake research on
behalf of the plaintiff. The parties were governed by a yearly contract that either side
could terminate by giving sixty days' notice. Eventually, the plaintiff became con-
cerned that, in future, the defendant might assert a right to any patentable invention
that resulted from research undertaken pursuant to their contract. To address this
concern, the plaintiff produced a written agreement that mandated that the defend-
ant assign a\\ of his inventions to the plaintiff in consideration of his continued
engagement. The defendant signed the agreement in 1993. In 1997, the defendant
invented a patentable device and sought compensation from the plaintiff, who
refused to pay. The contractual relationship was terminated and questions arose as
to whom had the legal right to the invention and whether the 1993 agr"eement was
enforceable. The trial judge held that the 1993 agreement failed for want of consider-
ation and was unenforceable on the ground of economic duress. The Court of Appeal
disagreed. It was able to find the necessary consideration by implying a term into
the contract, namely that the plaintiff implicitly promised to forbear from dismissing
the defendant for a reasonable period of time after the signing of the agreement.
Citing Maguire v. Northland Drug Co. Ltd., [1935] S.C.R. 412, [1935] S.C.J. No. 11 (QL),
the Court of Appeal held that continued employment and implied forbearance from
dismissal for a reasonable period of time is adequate consideration. The fact that the
original contract stated that the contractual relationship could be terminated by
either party on sixty days' notice did not impede the court's willingness to imply a
term broader in scope. The subsequent agreement being enforceable under the
doctrine of consideration, the court went on to hold that it was not procured under
economic duress ....
[25] While Canadian courts continue to struggle with the rule in Stilk v. Myrick
and the concept of "fresh" consideration, in recent years the English Court of Appeal
has effectively modified the consideration doctrine by asking whether the promisor
obtained a benefit or advantage from the agreement to vary, irrespective of whether
the promisee has agreed to do more. Under the classical concept of consideration,
it is expected that the promisee suffer a detriment even if it be a promise to pay a
"peppercorn," unless of course the gratuitous promise is reduced to writing under
seal. In Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All E.R. 512 (C.A.),
[1991] 1 O.B. 1, the defendant contractor voluntarily promised to pay the plaintiff
subcontractor more than was agreed to in their original contract. ...
[26] In The Law of Contracts (Toronto: Irwin Law Inc., 2005), Professor J .D. McCa-
mus, at p. 249, explains the ratio of the Court of Appeal's decision in Williams v. Roffey
Bros. & Nicholls (Contractors) Ltd. as follows: "For all three members of the court, then,
it appears that the fact that the contractor would obtain a benefit, albeit one arising
from the defendant's relationship with the owner of the flats, could serve as con-

26 3
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

sideration rendering the promise to pay more an enforceable one." In short, the
English Court of Appeal was prepared to "relax" the tenets of the consideration
doctrine in order to render enforceable a gratuitous promise to pay more. Under
English law, then, it is no longer necessary to look for an exchange of promises or
detriment on the part of the promisee to enforce a variation of a contract, so long as
the promisor obtains some benefit or advantage.
[271 In my opinion, this is a proper case to consider whether this Court should
build upon the English Court of Appeal's decision in Williams v. Roffey Bros. & Nicholls
(Contractors) Ltd. in order to avoid the rigid application of the rule in Stilk v. Myrick. I
am prepared to accept that there are valid policy reasons for refining the consider-
ation doctrine to the extent that the \aw will recognize that a variation to an existing
contract, unsupported by consideration, is enforceable if not procured under eco-
nomic duress ....
[28] I offer several reasons for this incremental change in the \aw. First, the rule
in Stilk v. Myrick is an unsatisfactory way of dealing with the enforceability of post-
contractua\ modifications. As Professor McCamus points out, the rule is both
overinc\usive and underinc\usive . It is overinc\usive because it captures renegotia-
tions induced by coercion so long as there is consideration for the modification. It
is underinc\usive in cases where there is no consideration because it excludes
voluntary agreements that do not offend the tenets of the economic duress doctrine
(see pp. 381-382 of his text) . The reality is that existing contracts are frequently varied
and modified by tacit agreement in order to respond to contingencies not anticipated
or identified at the time the initial contract was negotiated. As a matter of commercial
efficacy, it becomes necessary at times to adjust the parties' respective contractual
obligations and the \aw must then protect their legitimate expectations that the
modifications or variations will be adhered to and regarded as enforceable.
[291 Second, the consideration doctrine and the doctrine of promissory estoppe\
work in tandem to impose an injustice on those promisees who have acted in good
faith and to their detriment in relying on the enforceability of the contractual modi-
fication. The notion that detrimental reliance can only be invoked if the promisee is
the defendant to the action (i.e., as a shield and not a sword) is simply unfair and
leads to an unjust result if the promisor was not acting under economic duress. In
The Law of Contracts, 5th ed. (Toronto: Canada Law Book, 2005) at p. 83, Professor
S.M. Waddams points out that some gratuitous promises have been enforced because
of detrimental reliance on the part of the promisee. He notes that these cases should
not be met by a fictional attempt to find consideration in the sense of a bargained
exchange. Professor Waddams opines that courts should openly recognize that, while
these promises are not bargains, there may be other sound reasons for enforcement.
In my view, this reasoning is persuasive in the context of the enforcement of a post-
contractua\ modification. I agree with Professor Waddams' exhortation that courts
should avoid "fictional". attempts to find consideration. We should not be seduced
into adhering to a hunt and peck theory in an effort to find consideration where
none exists, nor should we manipulate the consideration doctrine in such a way that
it is no longer recognizable. Frankly, \aw professors spend far too much time trying
to explain to law students what qualifies as valid consideration and why the cases
seem to be irreconcilable, except in result, while judges spend more time avoiding
the rule in Stilk v. Myrick than they do in applying it. Parties to a contract and to litiga-
tion are entitled to expect that there is some certainty in the law and that it is not
dependent on the length of the chancellor's foot. For courts to find consideration by
holding, for example, that the parties implicitly agreed to a mutual rescission of the
original contract or that they implicitly agreed to a new term is to weaken the \aw of
contract, not strengthen it.

264
 I. BARGAINS

[30] My third reason for refining the tenets of the consideration doctrine is tied
to the reality that it developed centuries before the recognition of the modern and
evolving doctrine of economic duress. The doctrine of consideration and the con-
cept of bargain and exchange should not be frozen in time so as to reflect only the
commercial realities of another era. If the courts are wi\\ing to formulate and adopt
new contractual doctrines, they are equa\\y capable of modifying the old. To the
extent that the old doctrines interfere with the policy objectives underscoring the
new, change is warranted. In my view, this is precisely what the English Court of
Appeal did in Williams v. Roffey Bros. & Nicholls (Contractors) Ltd.
[31] For the above reasons, I am prepared to accept that a post-contractual modi-
fication, unsupported by consideration, may be enforceable so long as it is estab-
lished that the variation was not procured under economic duress. In reaching this
conclusion, I am mindful that the Supreme Court has cautioned that it is not the role
of the courts to undertake "major" reforms in the common \aw or those that may
have "complex ramifications." That is the prerogative of the legislature. "Incremental"
changes, however, are permissible ... .
[32) In my view, the modernization of the consideration doctrine as it is tied to
the rule in Stilk v. Myrick qualifies as an incremental change. It relieves the courts of
the embarrassing task of offering unconvincing reasons why a contractual variation
should be enforced. Again having regard to the Supreme Court's admonition, I wish
to emphasize that I am not advocating the abrogation of the rule in Stilk v. Myrick.
Simply, the rule should not be regarded as determinative as to whether a gratuitous
promise is enforceable. Nor am I suggesting that the doctrine of consideration is
irrelevant when it comes to deciding whether a contractual variation was procured
under economic duress. There wi\\ be cases where the post-contractual modification
is in fact and \aw supported by valid or fresh consideration. In my view, that type of
evidence is important when it comes to deciding whether the contractual variation
was procured with the "consent" of the promisor. After a\\, why would anyone agree
to pay or do more than is required under an existing contract in return for nothing?
But if the contractual variation was supported by fresh consideration, the argument
that the variation was procured under economic duress appears, on the face of it,
less convincing and the circumstances more in line with what one expects to see in
every commercial contract: a "consensual bargain.'' On the other hand, for example,
a person who agrees to pay more than the original contract price either in writing
under sea\ or in return for a "peppercorn" is entitled to argue that the agreement was
procured under economic duress.
[Robertson JA's discussion of economic duress is excerpted in Chapter 6, Section VI.)

River Wind Ventures Ltd v British Columbia. 2009 BCSC 589, rev'd (on other
grounds) 2011 BCCA 79. MEIKLEM J: I agree with the reasoning of the court in the
Greater Fredericton Airport Authority case in deciding to modernize the requirement
of consideration in the context of variations of existing contracts. With respect,
however, it is not clear to me that the first sentence in para. 31 ... fu\\y captures the
modernized principle intended to be enunciated by the court. That sentence seems
to state that the only prerequisite for the enforceability of a post-contractual modi-
fication is that the variation was not procured by duress, but I note that the second
reason (set out in the quoted para. 29) for making what is characterized as an incre-
mental change in the \aw was to avoid imposing an injustice:"... on those promisees
who have acted in good faith and to their detriment in relying on the enforceability
of the contractual modification ...." While I find that the facts of this case represent

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CHAP:rER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

a situation where it would be unjust to adhere to the entrenched principle that equit-
able estoppel can only be relied upon as a shield, and not as a sword, I would follow
the reasoning in the Greater Fredericton Airport Authority case only so far as enforcing
a post-contractual variation in the absence of consideration if the evidence estab-
lished either detrimental reliance by the plaintiff or the gaining of a benefit or
advantage by the defendant. I am not persuaded that equity calls for enforceability
where neither of those elements are present.

RICHCRAFT HOMES LTD V URBANDALE CORP

2016 ONCA 622

[In 2001, Urbandale Corporation and Richcraft Homes Ltd. entered into a limited
partnership agreement ("LPA"). Clause 3.4 of the LPA allowed Riverdale to purchase,
from the partnership, "residential house lots to meet Richcraft's needs." A dispute
arose between the parties as to the correct interpretation of the clause. In response,
the principals of Urbandale and Richcraft signed a document related to the LPA (the
"2005 document"), which provided the parties would divide the building lots equally.
When Richcraft sought to enforce the 2005 agreement, Urbandale contended that
the agreement was unenforceable for lack of consideration].
LAUWERS JA (for the court):
[43] While the developing case law outside Ontario suggests that the time might
be ripe for this court to re-consider the role that consideration plays in the enforce-
ability of contractual variations, in my view, Gilbert Steel was a fundamentally dif-
ferent case on the facts and its holding has no application to this case.
[44] The 2005 document lacks the formality of the LPA. As the application judge
found, it was intended by ... [the principals] to clarify the terms of the LPA. The
potential for a dispute between the parties was plain enough on the language of
Article 3.4 LPA to cause ... anxiety. On the facts, Richcraft was in no position to exert
any kind of pressure on its senior partner, and Urbandale was not in a vulnerable
position. The 2005 agreement was not, in my view, entirely one-sided in Richcraft's
favour.

[46] Certainty in a long-term, ongoing business relationship is of value to the

contracting parties because it avoids disputes and allows the parties to plan both
their own affairs and also the orderly and reasonable unfolding of their business
relationship. In Gilbert Steel, the respective obligations of each of the contracting
parties were already clear: Gilbert Steel was supplying fabricated steel; University
Construction was purchasing it at an agreed-upon price. Therefore, it was also clear
to see that when University Construction promised to pay a higher price than it had
previously agreed, it received nothing in return over and above the steel to which it
was already entitled under the contract.
[47] The appellant's assertion that the 2005 document represented a compromise
of its entitlement to a greater than equal share of the lots, or in other words, a promise
for which it received no consideration, assumes that it was in fact originally entitled
to a greater than equal share. However, in my view, under the original terms of the
LPA it was far from clear how many lots Urbandale Construction and Richcraft were
each entitled to under Article 3.4. That article entitled Richcraft to "such residential
house lots to meet Richcraft's needs," with no limitation. The 2005 document clarified

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 I. BARGAINS

the issue of quantum: Richcraft was entitled to share equally in the available lots with
Urbandale Construction. Clarifying an unclear term in a long-term contract, in order
to create certainty and to avoid future costly disputes, enures to the parties' mutual
benefit, and is something of value that flows from and to each contracting party. It
thus serves as a functional form of consideration.

NOTES AND QUESTIONS

1. Why was the court in Gilbert Steel unwilling to use the implied rescission analysis of
Raggow v Scougall?
2. In Roffey Bros it is suggested that the presence of economic duress would negative a
finding that a particular "practical benefit" could constitute good consideration. What do con-
cepts like economic duress (discussed in Chapter 6, Section VI) have to do with the question
of whether something amounts to consideration? Consider and contrast the pairing of prom-
issory estoppel and duress discussed by Lord Denning in D & C Builders, Ltd v Rees, below.
3. Is the reasoning in Roffey Bros consistent with the idea that the consideration must
move from the promisee at the promisor's request? For arguments that it is not, see South
Caribbean Trading Co v Trafigura Beheer BV, [2004] EWHC 2676 at para 108; J O'Sullivan,
"Unconsidered Modifications" (2017) 133 Law Q Rev 191. Could the promisor sue the promisee
if the practical benefits do not materialize? To the extent that this is not possible, does this cast
doubt on the concept of practical benefit as consideration? For an analysis, see M Roberts,
"The Practical Benefit Doctrine Marches On" (2017) 80 Mod L Rev 339 at 343-46.
4. Could the result in Roffey Bros or NAV Canada be explained using the principles of
promissory estoppel discussed in Section 111.C.2, below?
5. If the law on promissory estoppel is broken, unjust, and unfair (as is argued in NAV
Canada and River Wind Ventures) is the most efficient solution to change the law on consider-
ation or to fix the law on estoppel directly? For the evolution of the doctrine of promissory
estoppel in Australia and the United States that addresses the sword and shield issue, see Sec-
tion 111.C.2, below.
6. Given the fact that duress cannot explain the contours of the pre-existing duty doctrine
(a fact that Robertson JA notes at para 28), why does the court in NAV Canada assume that it
is the justification of that doctrine? Is it the only possible explanation of what the common law
is doing? Can the ideas of "transfer" or "rights to performance" shed any light on the doctrine?
For example, can one give the same gift to the same person more than once?
7. Do you agree that Robertson JA is not advocating the abrogation of the rule from Stilk v
Myrick? Do you agree that what he proposes is merely an incremental change? Is Robertson
JA really building on and applying Roffey Bros?
8. Is the decision of the Ontario Court of Appeal in Richcraft consistent with the practical
benefits analysis espoused in Roffey Bros7 Was the court's attempt to distinguish Gilbert Steel
convincing? Might the case be viewed as one of compromise (see Section I, below)?
9. Why should consideration be necessary to modify an existing contract-that is, one that
already states a valid consideration7 Is an attack on the pre-existing duty doctrine not an attack
on the doctrine of consideration itself? For judicial examination of this issue, see Antons Trawl-
ing Co Ltd v Smith, [2003] 2 NZLR 23 (CA) .
10. For more discussion of pre-existing duty, see Fridman at 96-106; MacDougall at 112-
16; Swan & Adamski at 72-100; V Aivazan, M Trebilcock & M Penny, "The Law and Economics
of Contract Modification: The Uncertain Quest for a Benchmark of Enforceability" (1984) 22
Osgoode Hall LJ 173; B Reiter, "Courts, Consideration and Common Sense" (1977) 27 UTLJ
439; M Chen-Wishart, "A Bird in the Hand: Consideration and Contract Modifications" in Bur-
rows & Peel 89.

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CHAPTER 3 THE Kl~IDS OF PROMISES LEGALLY ENFORCED

FOAKES V BEER
(1884), LR 9 App Cas 605 (HL)

[In 1875, Mrs. Beer recovered judgment against Dr. Foakes for £2,090 19s. including
costs. In an agreement dated December 21, 1876, Dr. Foakes promised to pay "the
whole sum," £500 down and the balance in fixed payments over some five years;
and Mrs. Beer promised not to take ·any proceedings on the judgment. This in effect
meant that Mrs. Beer would not claim any interest on the unpaid part of the judg-
ment. In 1882 Mrs. Beer commenced this action on the judgment for the interest,
the principal amount having been paid as agreed. Cave J held that Mrs. Beer was not
entitled to judgment because of the agreement. The Queen's Bench Division dis-
charged an order for a new trial on the ground of misdirection. The Court of Appeal
reversed that decision and entered judgment for the respondent for the interest due,
with costs. Dr. Foakes appealed to the House of Lords.]
HOLL oc (for the appellant): Apart from the doctrine of Cumber v. Wane (1721), 1 St.
425; 93 E.R. 613, there is no reason in sense or law why the agreement should not be
valid, and the creditor prevented from enforcing his judgment if the agreement be
performed. It may often be much more advantageous to the creditor to obtain
immediate payment of part of his debt than to wait to enforce payment, or perhaps
by pressing his debtor to force him into bankruptcy, with the result of only a small
dividend. Moreover if a composition is accepted friends, who would not otherwise
do so, may be willing to come forward to assist the debtor. And if the creditor thinks
that the acceptance of part is for his benefit who is to say it is not? The doctrine of
Cumber v. Wane has been continually assailed, as in Couldery v. Bartrum (1880), 19
Ch. D. 394, by Jessel M.R. In the note to Cumber v. Wane (1 Smith L.C. 4th ed. p . 253,
8th ed. p. 367) which was written by J.W. Smith and never disapproved by any of the
editors, including Willes and Keating JJ., it is said "that its doctrine is founded upon
vicious reasoning and false views of the office of a Court of law, which should rather
strive to give effect to the engagements which persons have thought proper to enter
into, than cast about for subtle reasons to defeat them upon the ground of being
unreasonable. Carried to its full extent the doctrine of Cumber v. Wane embraces the
exploded notion that in order to render valid a contract not under seal, the adequacy
as well as the existence of the consideration must be established. Accordingly in
modem times it has been, as appears by the preceding part of the note, subjected to
modification in several instances," Cumber v. Wane was decided on a ground now
admitted to be erroneous, viz. that the satisfaction must be found by the Court to be
reasonable. The Court cannot inquire into the adequacy of the consideration. Reyn-
olds v. Pinhowe (1595), Cro. Eliz. 429; 78 E.R. 669, which was not cited in Cumber v.
Wane ... decided that the saving of trouble was a sufficient consideration; "for it is a
benefit unto him to have his debt without suit or charge." ... Pinne/'s Case (1602), 5
Coke's Rep. 117a; 77 E.R. 237, was decided on a point of pleading; the dictum that
payment of a smaller sum was no satisfaction of a larger, was extra-judicial, and
overlooked all considerations of mercantile convenience, such as mentioned in
Reynolds v. Pinhowe; and it is also noticeable that it was a case of a bond debt sought
to be set aside by a parol agreement. It is every day practice for tradesmen to take
less in satisfaction of a larger sum, and give discount, where there is neither custom
nor right to take credit. ... The result of the cases is that if Cumber v. Wane be right,
payment of a less sum than the debt due, by a bill, promissory note or cheque is a
good discharge; but payment of such less sum by sovereigns or Bank of England
notes is not. Here the agreement is not to take less than the debt, but to give time for
payment of the whole without interest. Mankind have never acted on the doctrine

268
 I. BARGAINS

of Cumber v. Wane, but the contrary; nay few are aware of it. By overruling it the
House will only declare the universal practice to be good law as we\\ as good sense.
[EARL OF SELBORNE LC: Whatever may be the ultimate decision of this appeal the
House is much indebted to Mr. Ho\\ for his exceedingly able argument.]
EARL OF SELBORNE LC: ... The question, therefore, is nakedly raised by this appeal,
whether your Lordships are now prepared, not only to overrule, as contrary to law,
the doctrine stated by Sir Edward Coke to have been laid down by al\ the judges of
the Common Pleas in Pinne/'s Case in 1602, and repeated in his note to Littleton,
sect. 344, but to treat a prospective agreement, not under seal, for satisfaction of a
debt, by a series of payments on account to a total amount less than the whole debt,
as binding in law, provided those payments are regularly made; the case not being
one of a composition with a common debtor, agreed to, inter se, by several creditors.
I prefer so to state the .question instead of treating it (as it was put at the Bar) as
depending on the authority of the case of Cumber v. Wane, decided in 1718. It may
we\\ be that distinctions, which in later cases have been held sufficient to exclude
the application of that doctrine, existed and were improperly disregarded in Cumber
v. Wane, and not really contradicted by any later authorities. And this appears to me
to be the true state of the case. The doctrine itself, as laid down by Sir Edward Coke,
may have been criticised, as questionable in principle, by some persons whose
opinions are entitled to respect, but it h as never been judicially overruled; on the
contrary I think it has always since the sixteenth century, been accepted as law. If
so, I cannot think that your Lordships would do right, if you were now to reverse, as
erroneous, a judgment of the Court of Appeal, proceeding upon a doctrine which
has been accepted as part of the law of England for 280 years.
The distinction between the effect of a deed under seal, and that of an agreement
by parol, or by writing not under seal, may seem arbitrary but it is established in our
law; nor is it really unreasonable or practically inconvenient that the law should
require particular solemnities to give to a gratuitous contract the force of a binding
obligation. If the question be (as, in the actual state of the law, I think it is), whether
consideration is, or is not, given in a case of this kind, by the debtor who pays down
part of the debt presently due from him, for a promise by the creditor to relinquish,
after certain further payments on account, the residue of the debt, I cannot say that
I think cons~deration is given, in the sense in which I have always understood that
word as used in our law. It might be (and indeed I think it would be) an improvement
in our law, if a release or acquittance of the whole debt, or payment of any sum which
the creditor might be content to receive by way of accord and satisfaction (though
less than the whole), were held to be, generally, binding, though not under seal; nor
should I be unwilling to see equal force given to a prospective agreement, like the
present, in writing though not under seal; but I think it impossible, without refine-
ments which partially alter the sense of the word, to treat such a release or acquit-
tance as supported by any new consideration proceeding from the debtor . ...
My conclusion is, that the order appealed from should be affirmed, and the appeal
dismissed, with costs, and I so move your Lordships.
[The opinions of Lords Blackbum, Fitzgerald, and Watson are omitted.]

Couldery v Bartrum. (1880), 19 ChD 394. JESSEL MR: According to English Common
Law a creditor might accept anything in satisfaction of his debt except a less amount
of money. He might take a horse, or a canary, or a tomtit if he chose, and that was accord
and satisfaction; but, by a most extraordinary peculiarity of the English Common Law,

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

he could not take 19s. 6d. in the pound; that was nudum pactum. Therefore, although
the creditor might take a canary, yet, if the debtor did not give him a canary together
with his 19s. 6d., there was no accord and satisfaction; if he did, there was accord
and satisfaction. That was one o1 the mysteries of English Common Law.

NOTES AND QUESTIONS

1. Do the arguments of Holl QC, namely that Pinne/'s Case was decided on the basis of
deficiencies in the pleadings and that there existed lines of authority that challenged Cumber
v Wane, change your view as to the cogency of Foakes v Beer?
2. Payment of a debt, or part of a debt, by a third person has been held to operate as a
discharge of the origina l debtor. "The effect of such an agreement between a creditor and a
third party with regard to the debt is to render it impossible for the creditor afterwards to sue
the debtor for it. The way in which this is worked out in law may be that it would be an abuse
of the process of the court to allow the creditor under such circumstances to sue, or it may
be, and I prefer that view, that t here is an extinction of the debt; but whichever way it is put, it
comes to the same thing, namely that, after acceptance by a creditor of a sum offered by a
third party in settlement of the claim against the debtor, the creditor cannot maintain an action
for the balance." Fletcher Moulton LJ, in Hirachand v Temple, [1911] 2 KB 330 (CA).
3. Where several creditors agree with the debtor to accept a proportion of their claim in
satisfaction, such composition agreements are held good. See Good v Cheesman (1831), 2 B
& Ad 328, 109 ER 1165. It is usually stated that the promise of each creditor is consideration for
the promise of every other creditor. If the creditors promise not to sue the debtor, how can
this avail the debtor? That it does operate in his favour is undoubted.
4. Could agreeing to become a several debtor of a portion of a joint debt be consideration
for a promise by the creditor to accept this lesser amount7 For a judicial rejection of this pos-
sibility, see Collier v P & /V1 J Wright (Holdings) Ltd, [2008] 1 WLR 643 (CA) . For criticism of this
position, see Richard Austen-Baker, "A Strange Sort of Survival for Pinne/'s Case" (2008) 71 Mod -
L Rev 611, where the author argues that this agreed-on change in status is consideration
because it is a detriment to the debtor that moves to the creditor at the creditor's request.
5. Could application of the practical benefits test from Roffey Bros help deal with the
problem raised by Foakes v Beer7 For a judicial rejection of this possibility, see Re Selectmove
Ltd, [1995] 2 All ER 531 (CA). For a different view, see MWB Business Exchange Centres Ltd v
Rock Advertising Ltd, [2016] EWCA Civ 553, where the court held that practic;al benefits over
and above accommodating the debtor (such as ensuring that a licensee continued to occupy
property) could count as consideration.
6. Has promissory estoppel solved the problems raised by Foakes v Beer? See D & C Build-
ers, Ltd v Rees and Collier v P & /V1 J Wright (Holdings) Ltd, Section 111.C.2, below.
7. Should judges change the common law w hen its principles are inconsistent with mod-
ern business practice?

LAW REVISION COMMITTEE, SIXTH INTERIM REPORT

(1937) Cmnd 5449 (Engl

34. In Foakes v. Beer Lord Blackburn was evidently disposed to hold that it was
still open to the House of Lords to reconsider the rule based on the dictum [in Pinne/'s
Case], but in deference to his colleagues who were of a different opinion he did not
press his views. In a few words (at p. 622) he summed up what appears to us to be a
powerful argument for the abolition of the rule. He said:

270
 I. BARGAINS

What principally weighs with me in thinking that Lord Coke made a mistake of fact is
my conviction that all men of business, whether merchants or tradesmen, do every day
recognize and act on the ground that prompt payment of a part of their demand may
be more beneficial to them than it would be to insist on their rights and enforce payment
of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this
often is so. Where the credit of the debtor is doubtful it must be more so.

35. In our opinion this view is as valid as it was fifty years ago, and we have no
hesitation in recommending that legislation should be passed to give effect to it. This
legislation would have the additional value of removing the logical difficulty involved
in finding a consideration for the creditor's promises in a composition with creditors
when not under seal. It would be possible to enact only that actual payment of the
lesser sum should discharge the obligation to pay the greater, but we consider that it
is more logical and more convenient to recommend that the greater obligation can
be discharged either by a promise to pay a lesser sum or by actual payment of it, but
that if the new agreement is not performed then the original obligation shall revive.

MERCANTILE LAW AMENDMENT ACT

RSO 1990, c M .10

16. Part performance of an obligation, either before or after a breach thereof,

when expressly accepted by the creditor in satisfaction, or rendered in pursuance
of an agreement for that purpose, though without any new consideration, shall be
held to extinguish the obligation.

NOTES AND QUESTIONS

1. This section was originally enacted in 1885 as s 6 of the Administration of Justice Act.
Like any statute, it is better understood when applied to specific facts. Would it have produced
a different result in Foakes v ·aeer? Suppose Mrs. Beer had commenced her action before
Dr. Foakes had made the £500 down payment. Could the statute have been invoked? Suppose
after Dr. Foakes had completed all but the last payment Mrs. Beer had made her claim. What
wou ld the result be applying the Act?
2. Does s 16 of the Mercantile Law Amendment Act apply where the agreement is founded
on economic duress, undue influence, or unconscionability7 See Process Automation Inc v
Norstream lntertec Inc, 2010 ONSC 3987, noted (2011) 90 Can Bar Rev 199, where the court
reasoned that because the section is not an exhaustive code it was not meant to oust these
principles.
3. Many provinces and some US states have adopted similar legislation . For a discussion of
these enactments, see Waddams at paras 139-40; Fridman at 118-20.
4. Was s 16 of the Act necessary or could the application of the common law concept of
a collateral unilateral contract have reached a commercially reasonable result7 For just such
an argument, see MWB Business Exchange Centres Ltd v Rock Advertising Ltd, [2016] EWCA
Civ 553 at paras 89-90. For criticism of the idea, see M Roberts, "The Practical Benefit Doctrine
Marches On" (2017) 80 Mod L Rev 339 at 344-47.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

I. COMPROMISES

COOK V WRIGHT
(1861), 1 B & S 559, 121 ER 822 (OB)

BLACKBURN J : In this case ·it appeared on the trial that the defendant was agent for
a Mrs. Bennett, who was non-resident owner of houses in a district subject to a local
act. Work had been done in the adjoining street by the commissioners for executing
the act, the expenses of which, under the provisions of their act, they charged on
the owners of the adjoining houses. Notice had been given to the defendant, as if
he had himself been owner of them. He attended at a board meeting of the commis-
sioners, and objected both to the amount and nature of the charges, and also stated
that he was not the owner of the houses, and that Mrs. Bennett was. He was told that
if he did not pay he would be treated as one Goble had been. It appeared that Goble
had refused to pay a sum charged against him as owner of some houses, and the
commissioners had taken legal proceedings against him, and he had then submitted
and paid with costs. In the result it was agreed between the commissioners and the
defendant that the amount charged upon him should be reduced, and that time
should be given to pay it in three instalments; he gave three promissory notes for
the three instalments; the first was duly honoured, the others were not, and were the
subject of the present action. At the trial it appeared that the defendant was not in
fact owner of the houses. As agent for the owner he was not personally liable under
the act. In point of law, therefore, the commissioners were not entitled to claim the
money from him; but no case of deceit was alleged against them. It must be taken
that the commissioners honestly believed that the defendant was personally liable,
and really intended to take legal proceedings against him, as they had done against
Goble. The defendant, according to his own evidence, never believed that he was
liable in law, but signed the notes in order to avoid being sued as Goble was. Under
these circumstances the substantial question reserved (irrespective of the form of
the plea) was whether there was any consideration for the notes. We are of opinion
that there was.
There is no doubt that a bill or note given in consideration of what is supposed
to be a debt is without consideration if it appears that there was a mistake in fact as
to the existence of the debt, Bell v. Gardiner (1842), 4 M. & Gr. 11; 134 E.R. 5; and,
according to the cases of Southall v. Rigg and Forman v. Wright (1851), 11 C.B. 481; 138
E.R. 560, the law is the same if the bill or note is given in consequence of a mistake
of law as to the existence of the debt. But here there was no mistake on the part of
the defendant either of law or fact. What he did was not merely the making an
erroneous account stated, or promising to pay a debt for which he mistakenly
believed himself liable. It appeared on the evidence that he believed himself not to
be liable; but he knew that the plaintiffs thought him liable, and would sue him if he
did not pay, and in order to avoid the expense and trouble of legal proceedings
against himself he agreed to compromise; and the question is, whether a person
who has given a note as a compromise of a claim honestly made on him, and which
but for that compromise would have been at once brought to a legal decision, can
resist the payment of the note on the ground that the original claim thus comprom-
ised might have been successfully resisted.
If the suit had been actually commenced, the point would have.been concluded
by authority. In Long ridge v. Darville (1821), 5 B. & A 117; 106 E.R. 1136, it was held that
the compromise of a suit instituted to try a doubtful question of law was a sufficient

272
 I. BARGAINS

consideration for a promise. In Atlee v. B/ackhouse (1838), 3M. & W. 633; 150 E.R. 1298
where the plaintiff's goods had been seized by the excise, and he had afterwards
entered into an agreement with the commissioners of excise that all proceedings
should be terminated, the goods delivered up to the plaintiff, and a sum of money
paid by him to the commissioners, Parke B., rests his judgment, p . 650, on the ground
that this agreement of compromise honestly made was for consideration, and bind-
ing. In Cooper v. Parker (1885), 15 C.B. 822; 139 E.R. 650 the Court of Exchequer
Chamber held that the withdrawal of an untrue defence of infancy in a suit, with
payment of costs, was a sufficient consideration for a promise to accept a smaller
sum in satisfaction of a larger.
In these cases, however, litigation had been actually commenced; and it was
argued before us that this made a difference in point of law, and that though, where
a plaintiff has actually issued a writ against a defendant, a compromise honestly
made is binding, yet the same compromise, if made before the writ actually issues,
though the litigation is impending, is void. Edwards v. Baugh (1843), 11 M. & W. 641;
152 E.R. 962, was relied upon as an authority for this proposition. But in that case
Lord Abinger expressly bases his judgment (pp. 645, 646) on the assumption that the
declaration did not, either expressly or impliedly, show that a reasonable doubt
existed between the parties. It may be doubtful whether the declaration in that case
ought not to have been construed as disclosing a compromise of a real bona fide
claim, but it does not appear to have been so construed by the court. We agree that
unless there was a reasonable claim on the one side, which it was bona fide intended
to pursue, there would be no ground for a compromise; but we cannot agree that
(except as a test of the reality of the claim in fact) the issuing of a writ is essential to
the validity of the compromise. The position of the parties must necessarily be altered
in every case of compromise, so that, if the question is afterward opened up they
cannot be replaced as they were before the compromise. The plaintiff may be in a
less favorable position for renewing his litigation, he must be at an additional trouble
and expense in again getting up his case, and he may no longer be able to produce
the evidence which would have proved it originally. Besides, though he may not in
point of law be bound to refrain from enforcing his rights against third persons
during the continuance of the compromise to which they are not parties, yet prac-
tically the effect of the compromise must be to prevent his doing so. For instance,
in the present case, there can be no doubt that the practical effect of the compromise
must have been to induce the commissioners to refrain from taking proceedings
against Mrs. Bennett, the real owner of the houses, while the notes given by the
defendant, her agent, were running; though the compromise might have afforded
no ground of defence had such proceedings been resorted to. It is this detriment of
the party consenting to a compromise arising from the necessary alteration in his
position which, in our opinion forms the real consideration for the promise, and not
the technical and almost illusory consideration arising from the extra cost of litigation.
The real consideration therefore depends, not on the actual commencement of a
suit, but on the reality of the claim made and the bona tides of the compromise.
In the present case we think that there was sufficient consideration for the notes
in the compromise made as it was.
The rule to enter a verdict for the plaintiff must be made absolute.

Callisher v Bischoffsheim. (1870), LR 5 QB 449. COCKBURN CJ: If the defendant's

contention were adopted, it would result that in no case of a doubtful claim could a
compromise be enforced. Every day a compromise is effected on the ground that

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the party making it has a chance of succeeding in it; and if he bona fide believes he
has a fair chance of success, he has a reasonable ground for suing, and his forbear-
ance to sue wi\\ constitute a good consideration. When such a person forbears to
sue he gives up what he believes to be a right of action, and the other party gets an
advantage; and, instead of being annoyed with an action, he escapes from the vexa-
tion incident to it.

FAIRGRIEF V ELLIS
(1935), 49 BCR 413 (SC)

MACDONALD J; Defendant is a retired gentleman, 72 years of age, owning and resid-

ing upon a sma\\ parcel of \and on Lulu Island, worth approximately $2,500. For some
years his relations with his wife have been strained; she refused to live with him in
British Columbia and maintained her residence in California.
Plaintiffs are sisters, cultured maiden ladies about 50 years of age, who until the
year 1933 lived in Winnipeg where they had been employed in clerical work though
in recent times they were for considerable periods out of employment. They had
been close friends of the defendant over a period of some 25 years and their relations
may be judged from the fact that they ca\\ed him "Dad." In the spring of 1933 the
plaintiff Cornelia Fairgrief came to British Columbia on an excursion and visited
with the defendant for some three days. Fo\\owing that occasion some letters passed
between the defendant and the plaintiff Anne Fairgrief wherein the plaintiff Anne
Fairgrief was invited to visit the defendant. This invitation she declined. In August
of that year defendant's son, who had for some months been residing with him,
departed for the United States whereupon defendant wrote the plaintiff Anne Fair-
grief stating that he was alone and that he required a housekeeper and that he wished
the plaintiffs to come and keep house for him, final arrangements to be made after
their arrival. Plaintiffs thereupon came to the defendant's home and took up their
residence with him upon a verbal agreement that if they would become his house-
keepers and take charge of his home during his lifetime the home would become
theirs upon his death.
Pursuant to the above agreement plaintiffs entered upon their duties, took fu\\
charge of the home, performed a\\ the household duties and did a good deal of work
outside including painting, cleaning up the ground and other works of a more or
less permanent nature. In addition to being his housekeepers they were his conge-
nial companions and the three lived comfortably and happily until August, 1934,
when the defendant's wife (much to his surprise for he had expected nothing of the
sort) suddenly arrived in Vancouver. Defendant requested the plaintiffs to remain
and be kind to his wife while she should reside with them, he feeling quite assured
that her stay would not be a lengthy one. At the end of about a month defendant told
the plaintiffs that he was grieved to be obliged to tel\ them that his wife insisted that
they should depart the premises as she intended to remain and take charge. Defend-
ant, knowing of his obligation to the plaintiffs, promised them if they would give up
their rights under the agreement already entered into and would depart from his
home he would on or about the 1st of October, 1934, pay them $1, 000. That offer was
accepted and plaintiffs removed themselves from the premises. The plaintiffs now
bring action to recover that sum of $1,000. I have no doubt at a\\ that the defendant's
repudiation of his agreement resulted from the interference of his wife. Having
persistently refused to live with him and assist him in making a happy and comfort-
able home, she was determined that the plaintiffs .should not be a\\owed to render

274
 I. BARGAINS

that assistance which she herself declined to render. Incidentally it may be said that
her further actions justify to some extent this assumption for she again left her
husband on November 2nd, 1934, and has not returned to him. Although there is a
conflict of evidence I find the facts to be as above ·stated.
On the above facts, can the plaintiffs succeed? It is contended in the first instance
that the agreement first made cannot be enforced by reason of the 4th section of the
Statute of Frauds, the agreement being one relating to an interest in land. With that
contention I agree and I also agree that the plaintiffs cannot rely upon the fact that
they have partly performed their contract for the reason that the acts which they
performed are not necessarily referable to the contract alleged by them but might
equally be referable to the contract set out by the defendant, viz.:
That the agreement under which the plaintiffs came to reside with the defendant ... was
that in return for their board and lodging the plaintiffs were to keep house for the
defendant until the defendant's wife came up from California.
See Haddock v. Norgan (1923), 33 B.C. 237; (1924), 34 B.C. 74.
Notwithstanding the above, however, I cannot understand why the plaintiffs
cannot succeed in their claim for $1,000. When the agreement was made in Sep-
tember to pay the plaintiffs $1,000 the defendant thought that he was under an
obligation to the plaintiffs and in order to be released from that obligation and so
that the plaintiffs might agree to peacefully vacate his premises, he made the second
agreement. Even although he was not in law bound to perform the first agreement
nevertheless I think there was good consideration to support the promise to pay
$1,000 . ...
There will be judgment for the plaintiffs for $1,000.

NOTES AN D Q U ESTI O NS

1. For an example of a compromise agreement that was found to be unenforceable on the

basis that the party pursuing the action could have no bona fide belief in the merits of their
claim, see B(DC) v Arkin, [1996] 8 WWR 100 (Man OB), affd [1996] 10 WWR 689 (Man CA)
2. Might the result in Fairgrief be supported as a compromise of an unjust enrichment
claim? See Deg/man v Guaranty Trust Co, excerpted in Chapter 2, Section IX.
3. Why must the party pursuing the action have a bona fide belief in its merits? For
example, if the rules of civil procedure would allow someone to bring a claim without such a
bona fide belief, why should surrender of this claim not count as consideration? See Waddams
at paras 129-32; McCamus at 230-33; Fridman at 93-96; MacDougall at 106-7.
4. If the sailors in Stilk v Myrick, above, had had a bona fide belief that they did not have to
continue the voyage, would the captain's promise to pay more have been enforceable as a
compromise?
5. For the interplay between the law of mistake and contracts of compromise, see
Toronto-Dominion Bank v Fortin et al (No 2), noted in Chapter 9, Section V.

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CHAPTER 3 THE KIND S OF PROMISES LEGALLY ENFORCED

J. CHARITABLE SUBSCRIPTIONS

DALHOUSIE COLLEGE V BOUTILIER ESTATE

[1934] SCR 642

CROCKET J (for the court) : This appeal concerns a claim which was filed in the Pro-
bate Court for the County of Halifax, Nova Scotia, in the year 1931, by the appellant
College against the respondent Estate for $5,000, stated as having been "subscribed
to Dalhousie Campaign Fund (1920)," and attested by an affidavit of the College
Bursar, in which it was alleged that the stated amount was justly and truly owing to
the College Corporation.
The subscription, upon which the claim was founded, was obtained from the
deceased on June 4, 1920, in the course of a canvass which was being conducted
by a committee, known as the Dalhousie College Campaign Committee, for the
raising of a fund to increase the general resources and usefulness of the institution
and was in the following terms:
For the purpose of enabling Dalhousie College to -maintain and improve the efficiency
of its teaching, to construct new buildings and otherwise to keep pace with the growing
need of its constituency and in consideration of the subscription of others, I promise
to pay to the Treasurer of Dalhousie College the sum of Five Thousand Dollars, payment
as follows:
Terms of payment as per letter from Mr. Boutilier.
A.399. Name Arthur Boutilier.
Date June 4th, 1920.
Make all cheques payable to the Treasurer of Dalhousie College.
So far as the record disclosed, the subscription was not accompanied or followed
by any letter from the deceased as to the terms of payment. He died on October 29,
1928, without making any payment on account. It appears that some time after he
signed the subscription form he met with severe financial reverses which prevented
him from honouring his pledge. That he desired and hoped to be able to do so is
evidenced by a brief letter addressed by him to the President of the University on
April 12, 1926, in reply to a communication from the latter, calling his attention to
the subscription and the fact that no payments had been made upon it. The
deceased's letter, acknowledging receipt of the President's communication states:
In reply I desire to advise you that I have kept my promise to you in mind. As you are
probably aware, since making my promise I suffered some rather severe reverses, but I
expect before too long to be able to redeem my pledge .
... There is, of course, no doubt that the deceased's subscription can be sustained
as a binding promise only upon one basis, viz.: as a contract, supported by a good
and sufficient consideration. The whole controversy between the parties is as to
whether such a consideration is to be found, either in the subscription paper itself
or in the circumstances as disclosed by the evidence.
So far as the signe\J. subscription itself is concerned, it is contended in behalf of
the appellant that it shews upon its face a good and sufficient consideration for the
deceased's promise in its statement that it was given in consideration of the sub-
scription of others. As to this, it is first to be observed that the statement of such a
consideration in the subscription paper is insufficient to support the promise if, in
point of law, the subscriptions of others could not provide a valid consideration

276
 I. BARGAINS

therefor. I concur in the opinion of Chisholm C.J., that the fact that others had signed
separate subscription papers for the same common object or were expected so to
do does not of itself constitute a legal consideration ..
As to finding the consideration for the subscription outside the subscription itself,
the only evidence relied upon is that of Dr. MacKenzie that increased expenditures
were made by the College for the purposes stated between the years 1920 and 1931
on the strength of the subscriptions obtained in the canvass of 1920. It is contended
that this fact alone constituted a consideration for the subscription and made it
binding. The decisions in Sargent v. Nicholson; Y.M.C.A. v. Rankin; and the judgment
of Wright J., of the Supreme Court of Ontario, in Re Lob/aw, adopting the two former
decisions, are relied upon to sustain this proposition as well as some earlier Ontario
cases and several American decisions .
There seems to be no doubt that the first three cases mentioned unqualifiedly
· support the proposition relied upon, as regards at lea~t a subscription for a single
distinct and definite object, such as the erection of a designated building, whether
or not the expenditure would not have been made nor any liability incurred by the
promisee but for the promise or not. The earlier Ontario cases relied upon, however,
do not appear to me to go that far. They an shew that there was either a direct per-
sonal interest on the part of the subscriber in the particular project undertaken or
some personal participation in the action of the promisee as a result of which the
expenditure or liability was incurred.
Regarding the American decisions, upon which Sargent v. Nicholson appears to
have entirely proceeded-more particularly perhaps on the dictum of Gray C.J., in
Cottage Street M.E. Church v. Kendall than any other-it may be pointed out that there
are other American cases which shew that there must be something more than the
mere expenditure of money or the incurring of liability by the promisee on the faith
of the promise. Hull v. Pearson (1899), 56 NY. Sup. 518, a decision of the Appellate
Division of the Supreme Court of New York, in which many of the American cases
are reviewed, should perhaps be mentioned in this regard. One W. subscribed a
certain sum for the work of the German department of a theological seminary. There
was no consideration expressed in the memorandum, and there wa~ no evidence
of a request in the part of W. that the work should be continued, or of any expendi -
tures on the part of the the.o logical seminary in reliance on such request. Such
department had been continued, but there was no evidence that it would not have
been continued as it had been for a series of years but for the subscription. It was
held that the subscription was without consideration and could not be enforced.
Woodward J., in the course of his reasons, in which the full court concurred, said:

It is true that there is evidence that the German department has been continued, but this
does not meet the requirement. There is no evidence that it would not have been con-
tinued as it had been for a series of years if the subscription of Mr. Wild had not been made.
And further :

He undoubtedly made the subscription for the purpose of aiding in promoting the work
of the German department; but, in the absence .of some act or word which clearly
indicated that he accompanied his subscription· by a request to do something which
the corporation would not have done except for his subscription, there is no such
request as would justify a constructive consideration in support of this promise.

These latter dicta seem to accord more with the English decisions, which give no
countenance to the principle applied in Sargent v. Nicholson and Y.M.C.A. v. Rankin
and in the earlier American cases, as is so pointedly illustrated by the judgments of

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

Pearson J., in In Re Hudson, and Eve J., in In Re Cory (1912), 29 T.L.R. 18. The head
note in In Re Hudson states:
A. verbally promised to give £20,000 to the Jubilee Fund of the Congregational Union,
and also filled up and signed a blank form of promise not addressed to anyone, but
headed "Congregational Union of England and Wales Jubilee Fund," whereby he prom-
ised to give £20,000 in five equal annual instalments of £4,000 each, for the liquidation
of chapel debts. A. paid three instalments of £4,000 to the fund within three years from
the date of his promise, and then died, leaving the remaining two instalments unpaid
and unprovided for.
The Congregational Union claimed £8,000 from A.'s executors, on the ground that
they had been led by A.'s promise to contribute larger sums to churches than they would
otherwise have done; that money had been given and promised by other persons in
consequence of A.'s promise; that grants from the Jubilee Fund had been promised to
cases recommended by A. ; and that churches to which promises had been made by
the committee, and the committee themselves, had incurred liabilities in consequence
of A. 's promise.
His Lordship held there was no consideration for the promise. "There really was,"
he said, "in this matter, nothing whatever in the shape of a consideration which
could form a contract between the parties."
And he added:
I am bound to say that this is an attempt to turn a charity into something very different
from a charity. I think it ought to fail, and I think it does fail. I do not know to what extent
a contrary decision might open a new form of posthumous charity. Posthumous charity
is already bad enough, and it is quite sufficiently protected by law without establishing
a new principle which would extend the doctrine in its favour far more than it has been
extended or ought to be extended.
In the Cory case a gift of 1,000 guineas was promised to a Y.M.C.A. Association
for the purpose of building a memorial hall. The sum required was £150,000, of which
£85,000 had been promised or was available. The committee in charge decided not
to commit themselves until they saw that their efforts to raise the whole fund were
likely to prove successful. The testator, whose estate it was sought to charge, prom -
ised the 1,000 guineas and subsequently the committee felt justified in entering into
a building contract, which they alleged they were largely induced to enter into by
the testator's promise. Eve J., held there was no contractual obligation between the
parties and therefore no legal debt due from the estate.
Chisholm C.J., in the case at bar, said that without any want of deference to
eminent judges who have held otherwise he felt impelled to follow the decisions in
the English cases. I am of opinion that he was fully justified in so doing, rather than
apply the principle contended for by the appellant in reliance upon the decision in
Sargent v. Nicholson based, as the latter case is, upon the decisions of United States
courts, which are not only in conflict with the English cases, but with decisions of
the Court of Appeals of the State of New York, as I have, I think, shewn, and which
have been subjected to very strong criticism by American legal authors, notably by
Prof. Williston, as the learned Chief Justice of Nova Scotia has shewn in his exhaust-
ive and, to my mind, very convincing judgment.
To hold otherwise would be to hold that a naked, voluntary promise may be
converted into a binding legal contract by the subsequent action of the promisee
alone without the consent, express or implied, of the promisor. There is no evidence
here which in any way involves the deceased in the carrying out of the work for

278
 IL INTENTION

which the promised subscription was made other than the signing of the subscrip-
tion paper itse1f.
I may add that, had I come to the opposite conclusion upon the legal question
involved, I should have felt impelled, as Chisholm C.J . did, to seriously question the
accuracy of the statement relied upon by the appellant that "this work was done and
the increased expenditures were made on the strength of the subscriptions prom -
ised," if that statement was meant to refer to all the increased expenditures listed in
the comparative statements produced by Dr. MacKenzie. The statement relied on
does not profess to set out verbatim the language of the witness. The record of the
evidence is apparently but a brief summary taken down by the Registrar. That the
summary is inaccurate was shewn by the admission made on the argument before
us th at it was not $220,000 which was subscribed in all in 1920, but $2,200,000. The
statement produced of expenditures on buildings, grounds and equipment since
1920 shews a grand total for the more than ten years of but $1,491,687-over $700,000
less than the aggregate of the 1920 campaign subscriptions-and this grand total
includes over $400,000 for Shirriff Hall, which it is well known was the object of a
special donation contributed by a wealthy lady, now deceased, as a memorial to her
father. In the light of this correction it becomes quite as difficult to believe that the
College Corporation, in doing "this work" and making "the increased expenditures"
did so in reliance upon the deceased's subscription, as if the aggregate of the sub-
scriptions had been but $220,000, as the Registrar took the figures down, and the
Nova Scotia Supreme Court supposed, and the total expenditures $1,491,687. This
evidence would assuredly seem to shut out all possibility of establishing a claim
against the deceased's estate on any such ground as estoppel.
The appeal, I think, should be dismissed with costs.

NOTES AND QUESTIONS

1. Two Canad ian jurisdictions give statutory protection to subscriptions to public undertak-
ings: Public Subscriptions Act, RSNS 1989, c 378 and Statute of Frauds, RSPEI 1988, c S-6, s 4.
2. The decision of Ang lo-Canadian courts that promises to give to charity are not enforce -
able without consideration is a controversial one. What policies justify the rule formulated in
Dalhousie College? Cou ld concerns about protecting creditors or family members be driving
the result? See Waddams at para 126; Eastwood v Kenyon (1840), 11 Ad & E 438, 113 ER 482
(per Lord Denman). Compare the result of Dalhousie College with that reached in Hutchison
v The Royal Institution for the Advancement of Learning, [1932] SCR 57, whi ch applied the
Quebec civil law rules relating to promise enforcement.
3. What if the c haritable institution suffers a detriment as a result of the promise? Wou ld
that detriment constitute consideration or ground an estoppel? See McCamus at 233-36.

II. INTENTION
It is sometimes said that a contract is not formed between parties unless they had an "i nten-
tion " to contract. We should not, however, assume this intention has anything to do with a
subjective decision to make a contract. Instead, a finding of "intention " to contract reflects a
court's decision as to whether a reasonable person in the position of the promisee would
consider that the promisor "intended" to make a promise that would affect the promisor's lega l
status.
Sometimes o ne is convinced that the promisor was making a statement only as a joke or as
a socia l engagement and that no one would seriously consider a promise that might subject

279
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

the maker to legal obligations. Other situations will not be so obvious. Consider the following
instances of "family arrangements" in which the matter wound up before the courts. What
made the court think there was or was not an "intention" to create a contract?

BALFOUR V BALFOUR
[1919] 2 KB 571 (CA)

Appeal from a decision of SARGENT J., sitting as an additional judge of the King's
Bench Division.
The plaintiff sued the defendant (her husband) for money which she claimed to
be due in respect of an agreed allowance of £30 a month. The alleged agreement
was entered into under the following circumstances. The parties were married in
August, 1900. The husband, a civil engineer, had a post under the Government of
Ceylon as Director of Irrigation, and after the marriage he and his wife went to
Ceylon, and lived there together until the year 1915, except that in 1906 they paid a
short visit to this country, and in 1908 the wife came to England in order to undergo
an operation, after which she returned to Ceylon. In November, 1915, she came to
this country with her husband, who was on leave. They remained in England until
August, 1916, when the husband's leave was up and he had to return. The wife how-
ever on the doctor's advice remained in England. On August 8, 1916, the husband
being about to sail, the alleged parol agreement sued upon was made. The plaintiff,
as appeared from the judge's note, gave the following evidence of what took place:
"In August, 1916, defendant's leave was up. I was suffering from rheumatic arthritis.
The doctor advised my staying in England for some months, not to go out till Nov-
ember 4. On August 8 my husband sailed. He gave me a cheque from 8th to 31st for
£24, and promised to give me £30 per month till I returned." Later on she said: "My
husband and I wrote the figures together on August 8; £34 shown. Afterwards he
said £30." In cross-examination she said that they had not agreed to live apart until
subsequent differences arose between them, and that the agreement of August, 1916,
was one which might be made by a couple in amity. Her husband in consultation
with her assessed her needs, and said he would send £30 per month for her main -
tenance. She further said that she then understood that the defendant would be
returning to England in a few months, but that he afterwards wrote to her suggesting
that they had better remain apart. In March, 1918, she commenced proceedings for
restitution of conjugal rights, and on July 30 she obtained a decree nisi. On Decem-
ber 16, 1918, she obtained an order for alimony.
SARGENT J . held that the husband was under an obligation to support his wife, and
the parties had contracted that the extent of that obligation should be defined in
terms of so much a month. The consent of the wife to that agreement was a sufficient
consideration to constitute a contract which could be sued upon. He accordingly
gave judgment for the plaintiff. TJ:e husband appealed.
ATKIN LJ: The defence to this action on the alleged contract is that the defendant,
the husband, entered into no contract with his wife, and for the determination of
that it is necessary to remember that there are agreements between parties which
do not result in contracts within the meaning of that term in our law. The ordinary
example is where two parties agree to take a walk together, or where there is an offer
and an acceptance of hospitality. Nobody would suggest in ordinary circumstances
that those agreements result in what we know as a contract, and one of the most
usual forms of agreement which does not constitute a contract appears to me to be

280
 II. INTENTION

the arrangements which are made between husband and wife. It is quite common,
and it is the natural and inevitable result of the relationship of husband and wife,
that the two spouses should make arrangements between themselves-agreements
such as are in dispute in this action-agreements for allowances, by which the
husband agrees that he will pay to his wife a certain sum of money, per week, or per
month, or per year, to cover either her own expenses or the necessary expenses of
the household and of the children of the marriage, and in which the wife promises
either expressly or impliedly to apply the allowance for the purpose for which it is
given. To my mind those agreements, or many of them, do not result in contracts at
all, and they do not result in contracts even though there may be what as between
other parties would constitute consideration for the agreement. ... Nevertheless they
are not contracts, and they are not contracts because the parties did not intend that
· they should be attended by legal consequences. To my mind it would be of the worst
possible example to hold that agreements such as this resulted in legal obligations
and could be enforced in the Courts. It would mean this, that when the husband
makes his wife a promise to give her an allowance of 30s. or £2 a week, whatever he
can afford to give her, for the maintenance of the household and children, and she
promises to apply it, not only could she sue him for his failure in any week to supply
the allowance, but he could sue her for non-performance of the obligation, express
or implied, which she had undertaken on her part. All I can say is that the small
Courts of this country would have to be multiplied one-hundredfold if these arrange-
ments were held to result in legal obligations. They are not sued upon, not because
the parties are reluctant to enforce their legal rights when the agreement is broken,
but because the parties, in the inception of the arrangements, never intended that
they should be sued upon. Agreements such as these are outside the realm of con-
tracts altogether. The common law does not regulate the form of agreements
between spouses. Their promises are not sealed with seals and sealing wax. The
consideration that really obtains f9r them is that natural love and affection which
counts for so little in these cold Courts. The terms may be repudiated, varied or
renewed as performance proceeds or as disagreements develop, and the principles
of the common law as to exoneration and discharge and accord and satisfaction are
such as find no place in the domestic code. The parties themselves are advocates,
judges, Courts, sheriff's officer and reporter. In respect of these promises each house
is a domain into which the King's writ does not seek to run, and to which his officers
do not seek to be admitted. The only question in this case is whether or not this
promise was of such a class or not. For the reasons given by my brethren it appears
to me to be plainly established that the promise here was not intended by either party
to be attended by legal consequences. I think the onus was upon the plaintiff, and
the plaintiff has not established any contract. The parties were living together, the
wife intending to return. The suggestion is that the husband bound himself to pay
£30 a month under all circumstances, and she bound herself to be satisfied with that
sum under all circumstances, and, although she was in ill-health and alone in this
country, that out of that sum she undertook to defray the whole of her medical
expenses that might fall upon her, whatever might be the development of her illness,
and in whatever expenses it might involve her. To my mind neither party contem -
plated such a result. I think that the parol evidence upon which the case turns does
not establish a contract. I think that the letters do not evidence such a contract, or
amplify the oral evidence which was given by the wife, which is not in dispute. For
these reasons I think the judgment of the Court below was wrong and that this appeal
should be allowed.

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WARRINGTON LJ: :.. These two people never intended to make a bargain which could
be enforced in law. The husband expressed his intention to make this payment, and
he promised to make it, and was bound in honour to continue it so long as he was
in a position to do so. The wife on the other hand, so far as I can see, made no bargain
at all. That is in my opinion sufficient to dispose of the case ....
DUKE LJ: ... I am satisfied that there was no consideration moving from the wife to
the husband or promise by the husband to the wife which was sufficient to sustain
this action founded on the contract.

NOTES AND QUESTIONS

1. Is this case decided on the basis of "consideration" or "intent to contract'?
2. Does the rule propounded in Balfour work to the disadva.n tage of vulnerable family
members? For an affirmati ve answer, see MacDougall at 57; P Saprai, "Balfour v Balfour and the
separation of contract and promise" (2017) 37 LS 468 at 473-76 .
3. For a justification of Balfour on the basis that it respects the value inherent in family
relationships and the ability to be free from contract, see Smith at 214; D Kimel, From Promise
to Contract: Towards a Liberal Theory of Contract (Oxford: Hart, 2003) at 136-42.

Simpkins v Pays. [1955] 3 All ER 10 (HC) . The defendant, a lady of 83, had been living
with her granddaughter and the plaintiff, who had been a boarder since 1950, in
circumstances that had "some element of a family circle" about it, although the
plaintiff was not related to the defendant. The three ladies competed regularly in a
newspaper competition under a not very formal arrangement that if they won, they
would "go shares." The defendant and her granddaughter would put their guesses
on a slip of paper and the plaintiff would fill in the coupon, putting her own guess
first, then the granddaughter's and the defendant's last. Whoever happened to have
stamps handy seems to have supplied the trifling amount involved each week. When
the weekly entry finally won £750 on the granddaughter's entry, the defendant
claimed the whole amount. The plaintiff sued to recover £250. Held, for the plaintiff.
SELLERS J: It may well be there are many family associations where some sort of
rough and ready statement is made which would not, in a proper estimate of the
circumstances, establish a contract which was contemplated to have legal conse-
quences, but I do not so find here. I think that in the present case there was a mutual-
ity in the arrangement between the parties. ... This was in the nature of a very
informal syndicate so that they should all get the benefit of success.

MERRITT V MERRITT
[1970] 2 All ER 760 (CA)

The husband and wife were married in 1941 and had three children. In 1966, the
husband became attached to another woman, and left the matrimonial home to live
with her. At that time, the matrimonial home, a freehold house, was in the joint
names of the husband and wife, and was subject to an outstanding mortgage of
some £180. The wife pressed the husband to make arrangements for the future, and
on 25th May 1966, they met and talked the matter over in the husband's car. The
husband said that he would pay the wife £40 a month out of which she must make
the outstanding mortgage payments on the house and he gave her the building

282
 II. INTENTION

society mortgage book. Before leaving the car the wife insisted that the husband
should put down in writing a further agreement, and on a piece of paper he wrote:
"In consideration of the fact that you will pay all charges in connection with the
house ... until such time as the mortgage repayment has been completed, when the
mortgage has been completed I will agree to transfer the property in to your sole
ownership." The husband signed and dated that agreement, and the wife took the
piece of paper away with her. In the following months she paid off the mortgage,
partly out of the husband's monthly payment to her and partly out of her own earn-
ings. When the mortgage was paid off the husband refused to transfer the house to
the wife.
This was an appeal by the husband, John Bertram Merritt, against the judgment
of Stamp J ., given on 14th May 1969, whereby he held that the wife, Millicent Joan
Merritt, was entitled to a declaration that she was now the sole beneficial owner of
the matrimonial home, a freehold property known as 133 Clayton Road, Hook, Surrey,
and ordered the husband to join with the wife .in transferring the property to her.
Stamp J. also dismissed the husband's counterclaim that the property was owned
by the parties in equal shares.
LORD DENNING MR: ... The first point taken on his behalf by counsel for the husband
was that the agreement was not intended to create legal relations. It was, he says, a
family arrangement such as was considered by the court in Balfour v. Balfour and in
,Jones v. Padavatton. So the wife could not sue on it. I do not think that those cases
have any application here. The parties there were living together in amity. In such
cases their domestic arrangements are ordinarily not intended to create legal rela -
tions. It is altogether different when the parties are not living in amity but are sep-
arated, or about to separate. They then bargain keenly. They do not rely on
honourable understandings. They want everything cut and dried. It may safely be
presumed that they intend to create legal relations.
Counsel for the husband then relied on the recent case of Gould v. Gould, when
the parties had separated, and the husband agreed to pay the wife £12 a week "so
long as he could manage it." The majority of the court thought that those words
introduced such an element of uncertainty that the agreement was not intended to
create legal relations. But for that element of uncertainty, I am sure that the majority
would have held the agreement to be binding. They did not differ from the general
proposition which I stated: "When ... husband and wife, at arm's length, decide to
separate and the husband promises to pay a sum as maintenance to the wife during
the separation, the court does, as a rule, impute to them an intention to create legal
relations."
In all these cases the court does not try to discover the intention by looking into
the minds of the parties. It looks at the situation in which they were placed and asks
itself: would reasonable people regard the agreement as intended to be binding7
Counsel for the husband sought to say that this agreement was uncertain becau se
of the arrangement for £40 a month maintenance. That is obviously untenable. Next
he said that there was no consideration for the agreement. That point is no good. ·
The wife paid the outstanding amount to the building society. That was ample con -
sideration. It is true that the husband paid her £40 a month which she may have used
to pay the building society. But still her act in paying was good consideration. Counsel
for the husband took a small point about rates. There was nothing in it. The rates
were adjusted fairly between the parties afterwards. Finally, counsel for the husband
said that, under s. 17 of the Married Women's Property Act 1882, this house would be
owned by the husband and the wife jointly; and that, even if this house were trans-
ferred to the wife, she should hold it on trust for them both jointly. There is nothing

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in this point either. The paper which the husband signed dealt with the beneficial
ownership of the house. It was intended to belong entirely to the wife.
I find myself in entire agreement with the judgment of Stamp J. This appeal
should be dismissed.

FAMILY LAW ACT

RSO 1990, c F.3

55(1) A domestic contract [such as a marriage contract, separation agreement, or

cohabitation agreement] and an agreement to amend or rescind a domestic contract
are unenforceable unless made in writing, signed by the parties and witnessed.

NOTE
In Canadian law, support obligations between family members are generally regulated by
legislation, although, as the excerpt from the Family Law Act indicates, certain matters may still
be the subject of contract.

JONES V PADAVATTON
[1969] 2 All ER 616 (CA)

[A mother and daughter agreed that the mother would pay an allowance of $200 per
month if the daughter would leave her employment as an embassy secretary to read
for the Bar in England. On faith of the arrangement, the daughter gave up her job,
moved to the United Kingdom, and commenced legal studies. Due to difficulties in
finding suitable housing, their arrangement was subsequently altered, with the
mother providing a house in which the daughter could reside. A dispute arose
between them and the mother commenced an action to evict her daughter from the
house.]
DANCKWERTS LJ: This is an action between the mother and the daughter, and one
which is really deplorable. The points of difference between the two parties appear
to be comparatively small, and it is distressing that they could not settle their differ-
ences amicably and avoid the bitterness and expense which is involved in this
dispute carried as far as this court. ...
There is no doubt that this case is a most difficult one, but I have reached a con -
clusion that the present case is one of those family arrangements which depend on
the good faith of the promises which are made and are not intended to be rigid,
binding agreements. Balfour v. Balfour was a case of husband and wife, but there is
no doubt that the same principles apply to dealings between other relations, such
as father and son and daughter and mother. This, indeed, seems to me a compelling
case. The mother and the daughter seem to have been on very good terms before
1967. The mother was arranging for a career for the daughter which she hoped would
lead to success. This involved a visit to England in conditions which could not be
wholly foreseen. What was required was an arrangement which was to be financed
by the mother and was such as would be adaptable to circumstances, as it in fact
was. The operation about the house was, in my view, not a completely fresh arrange-
ment, but an adaptation of the mother's financial assistance to the daughter due to

284
 IL INTENTION

the situation which was found to exist in England. It was not a stiff contractual
operation any more than the original arrangement.
In the result, of course, on this view, the daughter cannot resist the mother's rights
as the owner of the house to the possession of which the mother is entitled .... In my
opinion, therefore, the appeal should be allowed.
SALMON LJ: I agree with the conclusion at which Danckwerts, L.J., has arrived, but
I have reached it by a different route. The first point to be decided is whether or not
there was ever a legally binding agreement between the mother and the daughter
in relation to the daughter's reading for the Bar in England. The daughter alleges that
there was such an agreement, and the mother denies it. She says that there was
nothing but a loose family arrangement which had no legal effect. The onus is clearly
on the daughter. There is no dispute that the parties entered into some sort of
arrangement. It really depends on: (a) whether the parties intended it to be legally
binding; and (b) if so, whether it was sufficiently certain to be enforceable.
Did the parties intend the arrangement to be legally binding? This question has
to be solved by applying what is sometimes (although perhaps unfortunately) called
an objective test. The court has to consider what the parties said and wrote in the
light of all the surrounding circumstances, and then decide whether the true infer-
ence is that the ordinary man and woman, speaking or writing thus in such circum -
stances, would have intended to create a legally binding agreement.
Counsel for the mother has said, quite rightly that as a rule when arrangements
are made between close relations, for example, between husband and wife, parent
and child or uncle and nephew in relation to an allowance, there is a presumption
against an intention of creating any legal relationship. This is not a presumption of
law, but of fact. It derives from experience of life and human nature which shows
that in such circumstances men and women usually do not intend to create legal
rights and obligations, but intend to rely solely on family ties of mutual trust and
affection. This has all been explained by Atkin L.J., in his celebrated judgment in
Balfour v. Balfour. There may, however, be circumstances in which this presumption,
like all other presumptions of fact, can be rebutted ....
In the present case the learned county court judge, having had the advantage of
seeing the mother and the daughter in the witness box, entirely accepted the daugh-
ter's version of the facts. He came to the conclusion that on these very special facts
the true inference must be that the arrangement between the parties prior to the
daughter's leaving Washington were intended by both to have contractual force. On
the facts as found by the learned county court judge this was entirely different from
the ordinary case of a mother promising her daughter an allowance whilst the
daughter read for the Bar, or a father promising his son an allowance at university
if the son passed the necessary examinations to gain admission. The daughter here
was 34 years of age in 1962. She had left Trinidad and settled in Washington as long
ago as 1949. In Washington she had a comfortable flat and was employed as an
assistant accountant in the Indian embassy at a salary of $500 a month (over £2,000
a year). This employment carried a pension. She had a son of seven years of age who
was an American citizen, and had, of course, already begun his education. There
were obviously solid reasons for her staying where she was. For some years prior to
1962, however, the mother, who lived in Trinidad, had been trying hard to persuade
her to throw up all that she had achieved in Washington and go to London to read
for the Bar. The mother would have been very proud to have a barrister for a daugh-
ter. She also thought that her plan was in the interest of her grandson, to whom she
was much attached. She envisaged that, .a fter the daughter had been called to the
Bar, she would practise in Trinidad and thereafter presumably she (the mother) would

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CHAPTER 3 THE KINDS OF PROM ISES LEGALLY ENFORCED

be able to see much more of the daughter than formerly. The daughter was naturally
loath to leave Washington, and did not regard the mother's suggestion as feasible .
The mother, however, eventually persuaded the daughter to do as she wished by
promising her that, if she threw up her excellent position in Washington and came
to study for the Bar in England, she would pay her daughter an allowance of $200 a
month until she had completed her studies. The mother's attorney in Trinidad wrote
to the daughter to confirm this . I cannot think that either intended that if, after the
daughter had been in London, say, for six months, the mother dishonoured her
promise and left her daughter destitute, the daughter would have no legal redress.
In the very special circumstances of this case, I consider that the true inference
must be that neither the mother nor the daughter could have intended that the
daughter should have no legal right to receive, and the mother no legal obligation
to pay, the allowance of $200 a month . ...
[Salmon LJ went on to hold that the agreement was enforceable despite its uncer-
tainties; the court could imply reasonable terms where the parties had left the details
unsettled. However, he agreed in the result reached by Danckwerts LJ on the ground
that in the circumstances a reasonable time for the duration of the daughter's legal
studies had elapsed, and hence her right to stay in the house had expired. Fenton
Atkinson LJ, the other member of the court, agreed with Danckwerts LJ that there
was no intent to enter into a legally binding contract.]

ROSE AND FRANK COMPANY V JR CROMPTON

& BROTHERS, LIMITED
[1923] 2 KB 261 (Eng CA)

J.R. Crompton and Brothers, Ltd., were English manufacturers of carbonizing tissue
papers. Rose and Frank Co. were merchants in the United States handling the product
of the former firm. A series of contracts had been entered into by both parties dating
from 1905 which contracts having been performed, the two companies in 1913
entered into negotiations for an arrangement which was to govern future dealings.
A lengthy document was drawn up and signed by both parties in July and August,
1913. This document provided inter a/ia for the duration of the arrangement, the
method of determining it, the territory covered, the fixation of prices. In the body of
the document there was inscribed the following paragraph:
This arrangement is not entered into. nor is this memorandum written, as a formal or
legal agreement, and shall not be subjected to legal jurisdiction in the Law Courts either
of the United States or England, but it is only a definite expression and record of the
purpose and intention of the three parties concerned to which they each honourably
pledge themselves ·with the fullest confidence, based on past business with each other,
that it will be carried through by each of the ... parties with mutual loyalty and friendly
co-operation.
J .R. Crompton and Bros. Ltd., becoming dissatisfied with the manner in which
the plaintiffs were conducting the business in America, refused to continue the
arrangement. The plaintiffs then brought this action. At the trial Bailhache J. found
for the plaintiffs, adjudging the agreement of 1913 to be a legally binding contract.
. The defendants appealed.
SCRUTTON LJ: ... Now it is quite possible for parties to come to an agreement by accept-
ing a proposal with the res~lt that the agreement concluded does not give rise to legal

286
 II. INTENTION

relations. The reason of this is that the parties do not intend that their agreement shall
give rise to legal relations. This intention maybe implied from the subject-matter of
the agreement, but it may also be expressed by the parties. In social and family relations
such an intention is readily implied, while in business matters the opposite result
would ordinarily follow. But I can see no reason why, even in business matters, the
parties should not intend to rely on each other's good faith and honour and to exclude
all idea of settling disputes by any outside intervention, with the accompanying
necessity of expressing themselves so precisely that outsiders may have no difficulty
in understanding what they mean. If they clearly express such an intention I can
see no reason in public policy why effect should not be given to their intention.
Both legal decisions and the opinions of standard text writers support this view....
In the early years of the war, when a member of a club brought an action against the
committee to enforce his supposed rights in a golf club competition, I nonsuited him .
for the same reason, that from the nature of the domestic and social relations I drew
the inference that the parties did not intend legal consequences to follow from them:
Lens v. Devonshire Club (Unreported. See The Times, Dec. 4, 1914.) ... Judged by this
test, I come to the same conclusion as the learneQ. judge, that the particular clause
in question shows a clear intention by the parties that the rest of their arrangement
or agreement shall not affect their legal relations, or be enforceable in a Court of Law,
but in the words of the clause, shall be "only a definite expression and record of the
purpose and intention of the three parties concerned to which they each honourably
pledge themselves," "and shall not be subject to legal jurisdiction." If the clause stood
first in the document, the intention of the parties would be exceedingly plain.
The cases cited to us to the contrary were cases in which the form of the other
part of the document, as a covenant in a deed, or a grant of a right in property in
legal terms, clearly showed an.intention to create a legal right, and where subsequent
words, purporting not to define but to negative the creation of such a right, were
rejected as repugnant. In Ellison v. Bignold (1821), 2 Jae. & W. 503; 37 E.R. 720, where
the parties under seal "resolved and agreed and did by way of declaration and not of
covenant spontaneously and fully consent and agree," Lord Eldon laid aside "the
nonsense about agreeing and declaring without covenanting." An agreement under
seal is quite inconsistent with no legal relations arising therefrom. And in the present
case I think the parties, in expressing their vague and loosely worded agreement or
arrangement, having expressly stated their intention that it shall not give rise to legal
relations but shall depend only on mutual honourable trust. This destroys the deci-
sion of Bailhache J. so far as it is based on the view that the document of 1913 gives
rise to legal rights which can be enforced.
[The opinions of Bankes and Atkin LJJ are omitted, and only the facts and the opin -
ion as they relate to the validity qf the written agreement as a contract are given.
Insofar as the Court of Appeal declared the written agreement invalid as a contract .
their judgment was affirmed by the House of Lords in [1925] AC 445.J

Jones v Vernon's Pools, Ltd. [1938] 2 All ER 626 (KB). The plaintiff claimed that he
had accurately completed a coupon which he entered in the defendant's weekly pool
on football matches, a lottery which paid large sums to the successful applicants.
The defendant denied that it had received the plaintiff's coupon, and relied on a
statement printed on the back of all its coupons that "the sending in and acceptance
of the coupon" should not "give rise to any legal relationship ... but [be] binding in
honour only." Held, for the defendant. ATKINSON J: I am told that there are a million
coupons received every weekend. Just imagine what it would mean if half the people

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

in the country could come forward and suddenly claim that they had posted and
sent in a coupon which they never had, bring actions against the pool alleging that,
and calling evidence to prove that they had sent in a coupon containing the list of
winning teams, and if Vernon's had to fight case after case to decide whether or not
those coupons had been sent in and received. The business could not be carried on
for a day on terms of that kind . ... There is to be no legal liability to pay. He has got to
trust to them, and, if something goes wrong, as I say, it is his funeral, and not theirs.

Canadian Taxpayers Federation v Ontario (Minister of Finance). (2004), 73 OR (3d)

621 (Sup Ct J). ROULEAU J: In the course of election campaigns, politicians and their
parties present their election platform to the electorate. In so doing they commonly
· make promises and pledge that they will or will not do various things if and when
they are elected. It is hoped that, if elected, the politicians and their parties will keep
their promises and will follow through with the pledges given. This said, however,
few people would consider that all of the promises made and pledges given consti-
tute legally-binding agreements between the candidate and the elector or electors
to whom these promises or pledges were made .... It is a well-settled principle that,
when elected into government, commitments previously made by a Minister regard-
ing future conduct cannot fetter that Minister's freedom to "propose, consider and,
if they think fit, vote for laws, even laws which are inconsistent with the contractual
obligations." ... [U]ndertakings given as to what the government will or will not legislate
in the future are without value, do not amount to consideration and cannot form
the basis of a contract. ... While it is no doubt desirable and important to the proper
functioning of a democracy that candidates and parties do their best to follow through
with the promises and pledges made, it is not the role of the courts ... to intervene to
enforce such promises and pledges. Rather, the remedy is for the electorate to con -
sider and weigh the record of each candidate and party at the time of voting.

QUESTIONS
1. Powell lived in the Pershore fire district and the Upton police district. When his barn
caught fire, he telephoned the Upton police office to ask for "the fire brigade" and the police
telephoned the Upton fire brigade, which responded to the ca ll. The Upton brigade apparently
believed the fire was in its district. Unknown to Powell, although the Upton brigade was
allowed to attend fires outside its district, it charged for such service. Had the Pershore brigade
come, it would have done so for free. Powell was held liable to pay the Upton brigade (Upton-
on-Severn Rural District Council v Powell, [1942] 1 All ER 220 (CA), noted (1942) 20 Can Bar
Rev 557). What "intention" did Powell have in this case? See Waddams at para 148; Fridman at
42-43. Was this really an unjust enrichment case? See J Ed elman, "Liability in Unjust Enrich-
ment Where a Contract Fails to Materialize" in Burrows & Peel 166.
2. Is there a presumption against an intention to form a legal relationship between (i) a holder
of an ecclesiastical office and his church (see Brewer v Incorporated Synod of the Diocese of
Ottawa of the Anglican Church of Canada, [1996] OJ No 634 (OL) (Gen Div); Preston v Pres-
ident of the /Vlethodist Conference, [2013] UKSC 29) and (i i) two consumers engaging in the
exchange of rapid-fire ema ils (see Girouard v Druet, 2012 NBCA 40, noted (2014) 65 UNBLJ
403)? Should there be'
3. Is the intention requirement one that is based in public policy or one that is discernible
from principle (or perhaps some combination of the two)? For a discussion, see MacDougall
at 53-54; Waddams at para 159-60; MG Pratt, "Disclaimers of Contractua l Liability and Volun-
tary Obligations" (2014) 51 Osgoode Hall LJ 767; and the excerpts below.

288
 Ill. NON-BARGAIN PROMISES

4. Can the results of the cases excerpted above be accounted for on alternative grounds-
for example, lack of consideration, lack of certainty, or presence of exclusion clauses? For
such an argument, see J Swan, "Consideration and the Reasons for Enforcing Contracts"
(1976) 1!? UWO L Rev 83. If they were so accountable, would this bolster Williston's argument
(set out below)?

Pollock on Contracts. 13th ed at 3, n 5: An appointment between two friends to go

out for a walk or to read a book together is not an agreement in the legal sense: for
it is not meant to produce, nor does it produce, any new legal duty or right or any
change in existing ones. Nothing but the absence of intention seems to prevent a
contract from arising in many cases of this kind. A asks B for dinner. Here is a pro-
posal of something to be done by B at A's request, namely, coming to A's house at
the appointed time. If B accepts, there is in form a contract by mutual promises ....
Why is A not legally bound to have meat and drink ready for B, so that if A had forgot-
ten his invitation and gone elsewhere B should have a right for action? Only because
no legal bond was intended by the parties.

Williston on Contracts. Students' ed rev, s 21: The further statement of Savigny,

which has been popularized for English and American lawyers by Sir Frederick Pol-
lock and others, that not only mental assent to a promise in fact, but an intent to
form a legal relation is a requisite for the formation of contracts .. . cannot be
accepted .... In a system of law ... which does not enforce promises unless some
benefit to the promisor or detriment to the promisee has b.een asked and given, there
is no propriety in such a \imitation. The only proof of its existence will be the produc-
tion of cases holding that, although consideration was asked and given for a promise,
it is, nevertheless, not enforceable because a legal relation was not contemplated.

Ill. NON-BARGAIN PROMISES

A. THE SEAL
An early form of action, called covenant, permitted enforcement of promises, even without any
element of exchange, if under seal. The seal, originally molten wax dropped onto the document
and impressed with a die, later took the form of a gummed paper wafer. A sealed document (also
known as a deed, a covenant, a formal contract, or a specialty) usually contains formal language
and ends with the words "signed, sealed, and delivered." Through the passage of time, the
requirements of signing, sealing, and delivering have become much attenuated.

Friedmann Equity Developments Inc v Final Note Ltd. 2000 SCC 34, [2001] 1 SCR
842. BASTARACHE J: Because a contract under seal derives its validity from its form
alone, there are several incidents of such a contract which differ from those of a
simple contract. The fundamental difference between contracts under seal and
simple contracts is in relation to the doctrine of consideration. The law will enforce
a contract under seal even without consideration. Therefore, a gratuitous promise
which is expressed in an instrument under seal is enforceable. There are other inci-
dents of a contract under seal, which may be summarized as follows:

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CHAPTER 3 THE KINDS OF PROM ISES LEG ALLY ENFORCED

1. Where a debtor covenants in a deed to pay a debt antecedently based in simple

contract, the right to sue in debt merges in the right to sue on the covenant
and is extinguished in law.
2. In an action on a deed, a statement in the deed may operate by way of estoppel ·
against the maker of the statement.
3. At common law, only a person named in an instrument under seal as a party
to it could sue on a covenant in the instrument expressed to be for his
benefit.
4. The limitation period for an action for a breach of a contract under seal may
be longer than for a simple contract in some provinces.

Linton v Royal Bank of Canada. [1967] 1 OR 315 (H Ct J). HARTT J: Here we have a
document which ends with the words "signed, sealed and delivered" and which has
the word "seal" in parentheses beside the space provided for a signature or signatures.
The guarantor signed the document witho\lt altering either of those printed items,
and had it delivered to the creditor. Is it reasonable to say that the addition of a paper
seal beside the signature in these circumstances was a material alteration of the
agreement between the parties? Would it not be more accurate to say that it was an
alteration "which carried out the intention of the parties already apparent on the face
of the document." When a party signs a document, which by its language purports
to be a deed, he cannot afterwards deny that it is so .... When the guarantee in ques-
tion was signed by Mr. Linton with the intention of constituting the document a
deed, it became such. The important evidence in this regard was the markings on
the document itself, namely "signed, sealed and delivered" and the word "seal" beside
the space provided for signature. The document being a deed from the outset, the
addition of a paper wafer by the bank cannot be considered a material alteration
affecting the "legal incidence" of the document.

Vincent v Premo Enterprises Ltd. [1969] 2 WLR 1256 (CA). LORD DENNING MR: The
law as to "delivery" of a deed is of ancient date. But it is reasonably clear. A deed is
very different from a contract. On a contract for the sale of land, the contract is not
binding on the parties until they have exchanged their parts. But with a deed it is
different. A deed is binding on the maker of it, even though the parts have not been
exchanged, as long as it has been signed, sealed and delivered. "Delivery" in this
connection does not mean "handed over" to the other side. It means delivered in the
old legal sense, namely, an act done so as to evince an intention to be bound. Even
though the deed remains in the possession of the maker, or of his solicitor, he is
bound by it if he has done some act evincing an intention to be bound, as by saying:
"I deliver this my act and deed." He may, however, make the "delivery" conditional:
in which case the deed is called an "escrow" which becomes binding when the
condition is fulfilled . WINN LJ: [I]t might be very helpful in modern life if there were
some modification of the law, departing somewhat from the strictness of the old rule
the effect of which my Lord has indicated, viz., that a man becomes bound when he
executes a deed in the form usually adopted .... I think it might be more realistic to
depend upon physical movement or legal control of the document after the time
when it is sealed.

290
 Ill. NON - BARGAIN PROMISES

NOTES AND QUESTIONS

1. Although Lord Denning correctly states the modern rule, his summary is not historically
accurate because this understanding of "delivery" is of fairly recent origin . See Xenos v Wick-
ham (1866), LR 2 HL 296. Ironically, the reform suggested by Winn LJ would not be novel
because the traditional common law position was that there had to be an actual delivery or a
change in legal control of the document; see DEC Yale, "The Delivery of a Deed " (1970) 28 :1
Cambridge LJ 52.
2. For a view of sealing that is somewhat different to that taken in Linton, see Royal Bank
of Canada v Kiska (1967). 2 OR 379 (CA) per Laskin JA (dissenting) and 872899 Ontario Inc v
/acovoni (1998), 163 DLR (4th) 263 (Ont CA) .
3. For general discussions of sealed contracts and their idiosyn cratic application vis-a-vis
other areas of the law, see Waddams at paras 171-77; McCamus at 263-76 ; MacDouga ll at
99-100; Swan & Adamski at 148-62; TG Youdan. "The Formal Requirements of a Deed " (1979)
5 Bus L Rev 71; GHL Fridman, "Some Words About Deed" (2002) 81 Can Bar Rev 69.
4. The requirements of signing, sealing, and delivering look to be further affected by legis -
lation dealing w ith e-commerce. For example. the Electronic Commerce Act, 2000, SO 2000,
c 17 (ECA) has "functional equ ivalency rules" that provide for electronic signatures and the
electronic provision of written documents (see ss 4-11) . Section 11(6) of the ECA also contem-
plates that rules for sea l equivalency wi ll be prescribed in the regulations. These regulations
have yet to be promu lgated. For more on the ECA. see the Notes and Questions section fol-
lowing its excerption in section I.E. above . For a general exam ination of the issues surrounding
electronic documents and evidentiary issues, see GS Takach, Computer Law, 2nd ed (Toronto:
Irwin Law, 2003) c h 6.
5. Why shou ld a modern court enforce a promise simply because the promisor affixed a
red sticker to his or her written promise? Consider the following excerpts.

FULLER, "CONSIDERATION AND FORM"

(1941) 41 Colum L Rev 799 at 800 -1

The Evidentiary Fun ction . The most obvious function of a l egal formality is, to use
Austin's words, that of providing "evidence of the existence and purport of the
contract, in case of controversy." The need for evidentiary security may be satisfied
in a variety of ways: by requiring a writing, or attestation, or the certification of a
notary. It may even be sati sfied, to some extent, by such a device as the Roman stipu-
latio, which compelled an oral spelling out of the promise in a manner sufficiently
ceremonious to impress its terms on participants and possible bystanders.
Th e Cautionary Fun ction. A formality may also perform a cautionary or deterrent
function by acting as a check against inconsiderate action. The seal in its original
form fulfilled this purpose remarkably well. The affixing and impressing of a wax
wafer-symbol in the popular mind of legalism and weightiness - was an excellent
device for inducing the circumspective frame of mind appropriate in one pledging
his future. To a less extent any requirement of a writing, of course, serves the same
purpose, as do requirements of attestation, notarization, etc .
Th e Channeling Function . Though most discussions of the purposes served by
formalities go no further than the analysis just presented, this analysis stops short
of recognizing one of the most important functions of form. That a legal formality
may·perform a function not yet described can be shown by the seal. The seal not
only insures a satisfactory memorial of the promise and induces deliberation in the
making of it. It serves also to mark or signalize the enforceable promise; it furnish es

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

a simple and external test of enforceability. This function of form Ihering described
as "the facilitation of judicial diagnosis" and he employed the analogy of coinage in
explaining it.
Form is for a legal transaction what the stamp is for a coin. Just as the stamp of the coin
relieves us from the necessity of testing the metallic content and weight-in short, the
value of the coin (a test which we could not avoid if uncoined metal were offered to us
in payment). in the same way legal formalities relieve the judge of an inquiry whether a
legal transaction was intended, and-in case different forms are fixed for different legal
transactions-which was intended.
In this passage it is apparent that Ihering has placed an undue emphasis on the
utility of form for the judge, to the neglect of its significance for those transacting
business out of court. If we look at the matter purely from the standpoint of the
convenience of the judge, there is nothing to establish the forms used in legal trans-
actions from the "formal" element which to some degree permeates all thinking.
Even in .t he field of criminal law "judicial diagnosis" is "facilitated" by formal defin -
itions, presumptions, and artificial construction of fact. The thing which character-
izes the law of contracts and conveyances is that in this field forms are deliberately
used, and are intended to be so used, by the parties whose acts are to be judged by
the law. To the business man who wishes to make his own or another's promise
binding, the seal was at common law available as a device for the accomplishment
of his objective. In this aspect form offers a legal framework into which the party
may fit his actions, or, to change the figure, it offers channels for the legally effective
expression of intention. It is with this aspect of form in mind that I have described
the third function of legal formalities as "the channeling function."

ALAN BRUDNER, "RECONSTRUCTING CONTRACTS"

(1993) 43 UTLJ 1 at 34-35 (footnotes omitted)

The fact that promises under seal are binding without consideration has led many
to surmise that consideration must be a functional substitute for a seal. If the purpose
of the seal is to give evidence of an intention to beget legal consequences or to
encourage careful deliberation, then the doctrine of consideration must have this
purpose as well. And then it is a short step to the conclusion that many things (such
as a signed writing) besides consideration may perform the evidentiary or cautionary
function, so that the bargain requirement begins to look like a fetish if insisted upon
without regard to the contextual features that might make it superfluous. Taken to its
extreme, this reasoning issues in a proposal to redefine consideration to mean any
good reason for enforcing a promise, of which the existence of a bargain is only one.
The flaw in this reasoning is the assumption that consideration and the seal are
interchangeable means by which to test the legal seriousness of a promise. Those who
start from this premise forget that the enforcement of promises in an action for debt
long predates the writ of assumpsit from which the modern action for breach of con -
tract derives; and they forget too that promises under seal are enforceable only upon
delivery to the donee. These phenomena suggest that the enforcement of promises
under seal rests on the theoretical foundations different from that of enforcement of
promises per se. In fact, promises under seal are enforced not as executory promises
but as executed gifts. A gift does not pass title to the donee until delivered, but the
delivery of a sealed deed of gift counts as a symbolic delivery of the object. In the same
way, a promise signed, sealed, and delivered passes possessory title to the donee, and

292
 Ill. NON-BARGAIN PROMISES

the court enforces the title. Thus, the seal is not an alternative to consideration in
triggering the enforcement of a promise; rather it is something that (along with deliv-
ery) transforms a promise into an executed transfer. By contrast, the element required
for the enforceability of a promise as promise is consideration. This distinction will
.perhaps seem artificial to those who see only the identical act of promising in both
cases. However, what matters for our understanding of deeds and contracts fs not that
the same raw acts of promising underlie both; what matters is the theory behind the
legal enforcement of these acts. Before the law attained the sophistication of enforcing
executory contracts, it enforced promises by interpreting them as symbolic transfers
when accompanied by formalities signifying the crossing of a boundary between
promise and "deed." But if the legal theory behind enforcement differs as between deeds
and contracts, then the formalities attached to these instruments must also differ in
significance, since the only meaning these formalities can have is the one that theory
gives them. If promises under seal are enforced only as executed transfers of pos-
sessory title, while unsealed promises .for consideration are enforced as promises,
then the seal provides no hint to the meaning of consideration.

QUESTIONS

1. Which view of the law, that of Fuller or Brudner, is more compelling?

2. Which of the three functions indicated by Fuller (evidentiary, cautionary, or channelling)
does the seal continue to further?

LAW REVISION COMMITTEE, SIXTH INTERIM REPORT

(1937) Cmnd 5449 (Eng), 15 Can Bar Rev 585

[29] Basing themselves on the views of Lord Mansfield stated in Pillans v. Van
Mierop [(1765), 3Burr1663] ... many judges and writers of textbooks (see, in particular,
Professor Holdsworth, History of English Law, Vol. VII, p. 48) have advocated that a
promise in writing, though not under seal and not supported by consideration,
should be enforceable. The only justification for the doctrine of consideration at the
present day, it is said, is that it furnishes persuasive evi.dence of the intention of the
parties concerned to create a binding obligation, but it does not follow from this that
consideration should be accepted as the sole test of such intention. This intention
ought to be provable by other and equally persuasive evidence such as, e.g., the fact
that the promisor has put his promise in writing. We agree with this view, and we
therefore recommend that consideration should not be required in those cases in
which the promise is in writing.
We must make it clear when we speak of the promise being in writing we mean
the promise which is being sued upon, and we do not mean that, in the case of a
contract consisting of mutual promises both the promises must be in writing.
[30] On the other hand we are of the opinion that the entire promise should be
in writing to bring it within the rule and that no other evidence of the promise,
whether in writing or partly in writing and partly oral, should be considered suffi-
cient. Nor do we recommend that the written promise must be signed: all that is
necessary is that the Court should be satisfied that the writing (which includes
typescript and print) is that of the promisor or his agent. This can be proved in the
same way as any other question of fact is proved. Thus the requirement of writing
which we are now recommending has nothing to do with the old "memorandum
or note" of the Statute of Frauds. It differs both in purpose and in content.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

This recommendation does not mean that a promise in writing will be binding
in every case. It will still be necessary for the Court to find that the parties intended
to create a binding obligation. Just as the presence of consideration today does not
convert a social engagement into a legal contract, so the presence of writing will
not convert a gratuitous promise into a legally binding one unless the Court deter-
mines that the parties intended it to be legally binding.

LAW REFORM COMMISSION OF BRITISH COLUMBIA,

Report on Deeds and Seals, 1988
(Vancouver: Commission, 1988)

[The Law Reform Commission recommended in this report that specialty obligations
be retained, but that they operate in the same manner as simple contracts. The com -
mission commented:]
This approach to reform raises the question: what advantage is there to retaining
the concept of specialty obligations if they are to be indistinguishable from simple
obligations? There is a very significant advantage.
For the most part, paralleling simple and specialty obligations should dramatically
simplify the law. The parties may use either a contract or a deed to record their
arrangements and be assured that the legal consequences are the same. There is,
consequently, little advantage to using a deed, except in one respect.
As a general rule the law will not enforce a gratuitous obligation unless it is
recorded by deed. The law of contract depends upon the concept of consideration.
There are, however, circumstances where the parties will wish to enter into gratu -
itous obligations confident that they will be binding. That has been the chief utility
of the deed in modern times and, in our view, it should be retained ...
The point may be raised that a similar result could be achieved simply by enacting
legislation that provides that obligations intended by the parties to be binding shall
be binding. Reform along these lines would remove the need to retain the concept
of specialty obligations.
We fear, however, that it would also do grave injury to the modern law of contract.
Would these obligations be contractual? If not, what kind of obligations would they
be? In our view it is simpler by far to retain the concept of specialty obligations,
altered as we have proposed, than to define a new kind of statutory obligation or to
provide that there are contractual obligations enforceable by some theory totally
inconsistent with that which underlies the enforcement of contractual obligations
generally. (pp. 42-43)

NOTES AND QUESTIONS

1. Canadian legislatures have not hastened to "abolish the seal," whatever that expression
may mean, but legislatures in the United States have been quite active. For example, several
American jurisdictions have language like California's Civil Code, s 1629: "All distinctions between
sealed and unsealed instruments are abolished." As a result of this section, are unsealed promises
as enforceable as sealed ones used to be? Or are sealed instruments no longer enforceable
unless consideration is proved7 The California Code also provided, ins 1614: "A written instru-
ment is presumptive evidence of consideration."
2. Compare California's Civil Code with the Uniform Written Obligations Act approved by
the Commissioners on Uniform State Laws in 1925. It is in force only in Pennsylvania:

294
 Ill. NON-BARGAIN PROMISES

A written release or promise hereafter made and signed by the person releasing or promis-
ing shall not be inva lid or unenforceable for lack of consideration, if the writing also contains
an additional express statement, in any form of language, that the signer intends to be legally
bound .
3. Williston, who advocated the model Act, says (Williston on Contracts, 3rd ed. s 219 at
794) : "[E] fforts to fill the gap created by statutory abolition of the sea l have proved larg ely
unsuccessful." See Corbin on Contracts, ~ 257, for a short criticism. Critics have also suggested
that the form of words can become as sterile as the sea l through mass re production in fine
print on ready-made forms of contracts, and the further suggestion has been made that the
model Act be modified to requ ire that the words be in the handwriting of the promisor after
the principle of holograph wills. See also Steele, "The Uniform Written Obli gations Act: A Criti-
cism" (1920) 21 Ill L Rev 185.

B. PAST CONSIDERATION

LAMPLEIGH V BRATHWAIT
(1615), Hoba rt 105, 80 ER 255

Anthony Lampleigh brought an assumpsit against Thomas Brathwait, and declared

that, whereas the defendant had feloniously slain one Patrick Mahume, the defend-
ant, after said felony done, instantly required the plaintiff to labor and do his
endeavor to obtain his pardon from the king; whereupon the plaintiff upon the same
request did, by all the means he could and many days' labor, do his endeavor to
obtain the king's pardon for the said felony; viz., in riding and journeying at his own
ch arges from London to Reiston, when the king was there, and to London back, and
so to and from Newmarket, to obtain pardon for the defendant for the said felony.
Afterwards in consideration of the premises, the said defendant did promise the said
plaintiff to give him £100 and that he had not, to his damage £120.
To this, the defendant pleaded non assumpsit, and found for the plaintiff,.damage
£100 . It was said in arrest of judgment that the consideration was past.
It was agreed that a mere voluntary courtesy will not have a consideration to
uphold an assumpsit. But if that courtesy were moved by a suit or request of the party
that gives the assumpsit, it will bind; for the promise, though it follows, yet it is not
naked, but couples itself with the suit before, and the merits of the party procured
by that suit, which is the difference.

Kennedy v Broun. (1863), 13 CB (NS) 677, 143 ER 268, 292. ERLE CJ: In Lampleigh v.
Brathwait, it was assumed that the journeys ·w hich the plaintiff performed at the
request bf the defendant, and the other services he rendered, would have been suf-
ficient to make any promise binding if it had been connected therewith in one
contract; the peculiarity of the decision lies in connecting a subsequent promise
with a prior consideration after it had been executed. Probably at the present day,
such service or such request would have raised a promise by implication to pay what
it was worth; and the subsequent promise of a sum certain would have been evi-
dence for the jury to fix the amount.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

Pao On v Lau Yiu Long. [1980] AC 614 (PC). LORD SCARMAN: An act done before the
giving of a promise to make a payment or to confer some other benefit can sometimes
be consideration for the promise. The act must have been done at the promisors'
request: the parties must have understood that the act was to be remunerated either
by a payment or the conferment of some other benefit: and payment, or the confer-
ment of a benefit, must have been legally enforceable had it been promised in
advance .... It matters not whether the [promise] thus given be regarded as the best
evidence of the benefit intended to be conferred ... or as the positive bargain which
fixes the benefit on the faith of which the promise was given -though where, as here,
the subject is a written contract, the better analysis is probably that of the "positive
bargain."

QUESTIONS
1. What if the later promise is unreasonably low in comparison to the market value of the
requested act? Could the promisee sue for this higher amount? What if the later promise is
unreasonably high? Could the promisor refuse to perform her promise in full?
2. Xis taken ill at his club. Y, a doctor, attends him. On recovering, X orally promises to give
Y Blackacre, worth $100,000, for his services. Can A claim Blackacre? Would the third require-
ment of enforceability from Pao On come into play?
3. Are these cases really bargains in disguise? Are past consideration cases better seen as
instances of unjust enrichment? See McCamus at 237-43.
4. Should the court be prepared to imply a request when, for whatever reason, the promisor
is unable to do so herself? For an example of where a request was implied, see Webb v McGowin,
3 Div 768 (Alabama CA 1935) The facts of the case are as follows : Wand M both worked at the
local mill. W was responsible for keeping the upper floor of the mill free of pine block remnants.
The usual and ordinary way of clearing the floor was to drop the blocks from the upper level
to the level below. As W started to turn one of the blocks loose, which in this case weighed
75 pounds, he noticed that M was standing directly where the block was to fall. Had W let go
of the block it would have struck M with enough force to have seriously injured or killed him.
In order to save M, W diverted the block by falling with it. Although M was saved, W was so
severely injured that he was unable to work for the rest of his life. In consideration of this act of
bravery, M promised that he would pay $15 every two weeks to W during the remainder of W's
life. M made the payments for almost nine years but after M's death, his estate refused to make
further payments. W then brought suit to recover the unpaid installments. The court found that
M's promise was enforceable on the basis that M's material benefit of being saved meant that his
"express promise to pay appellant for the services rendered was an affirmance or ratification
of what appellant had done raising the presumption that the services had been rendered at
[M's] request." Would the judges in the cases that follow be willing to imply requests?

ROSCORLA V THOMAS
(1842), 3 OB 234, 114 ER 496

The plaintiff bought a horse from the defendant for £30. There was apparently no
promise made at the time about the horse's qualities. Later the defendant did promise
the plaintiff that the horse was not over five years old and was sound and free from
vice. It then appeared that the horse was "very vicious, restive, ungovernable, and
ferocious." In an action based on the later promise (assumpsit) there was a verdict
for the plaintiff but the defendant obtained a rule nisi to arrest the judgment on the
ground that there was no consideration.

296
 Ill. NON-BARGAIN PROMISES

LORD DENMAN CJ (for the court): ... It may be taken as a general rule, subject to excep-
tion not applicable to this case, that the promise must be co-extensive with the
consideration. In the present case, the only promise that would result from the con -
sideration as stated, and be co-extensive with it, would be to deliver the horse upon
request. The precedent sale without a warranty, though at the request of the defendant,
imposes no other duty or obligation upon him. It is clear therefore that the consider-
ation stated would not raise an implied promise by the defendant that the horse was
sound or free from vice.
But the promise in the present case must be taken to be, as in fact it was, express
and the question is, whether that fact will warrant the extension of the promise
beyond that which would be implied by law; and whether the consideration, though
insufficient to raise an implied promise, will nevertheless support an express one.
And we think that it will not.
The cases in which it has been held that, under certain circumstances, a con-
sideration insufficient to raise an implied promise, will nevertheless support an
express one, will be found collected and reviewed in the note (a) to Wennall v. Adney
(1802), 3 B. & P. 247; 127 E.R. 137 and in the case of Eastwood v. Kenyon. They are cases
of voidable contracts subsequently ratified, of debts barred by operation of law
subsequently revived, and of equitable and moral obligations which, but for some
rule of law, would of themselves have been sufficient to raise an implied promise.
All these cases are distinguishable from, and indeed inapplicable to the present,
which appears to us to fall within the general rule, that a consideration past and
executed will support no other promise than such as would be implied by law.
The rule for arresting the judgment upon the first count must therefore be made
absolute .

Mills v Wyman. 3 Pick (20 Mass] 207 (SJC 1825). PARKER CJ: If moral obligation, in
its fullest sense, is a good substratum for an express promise, it is not easy to perceive
why it is not equally good to support an implied promise. What a man ought to do,
generally he ought to be made to do, whether he promise or refuse. But the \aw of
society has left most of such obligations to the interior forum, as the tribunal of
conscience has been aptly called. Is there not a moral obligation upon every son
who has become affluent by means of the education and advantages bestowed upon
him by his father, to relieve that father from pecuniary embarrassment, to promote
his comfort and happiness, and even to share with him his riches, if thereby he will
be made happy? And yet such a son may, with impunity, leave such a father in any
degree of penury above that which will expose the community in which he dwells
to the danger of being obliged to preserve him from absolute want. ... Without doubt
there are great interests of society which justify withholding the coercive arm of the
\aw from these duties of imperfect obligation as they are called; imperfect, not because
they are less binding upon the conscience than those which are called perfect, but
because the wisdom of the social \aw does not impose sanctions upon them.

NOTES AND QUESTIONS

1. As indicated in the above cases, there was a school of thought in the 18th and early 19th
centuries that maintained that the existence of a moral obligation should in itself be sufficient
reason for enforcing a promise to fulfill that obligation. In Lee v /'v1uggeridge (1813), 5 Taunt 36,
Lord Mansfield said: "It has long been established that where a person is bound morally and
conscientiously to pay a debt, though not legally bound, a subsequent promise to pay will give

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

a right of action ." Since Eastwood v Kenyon (1840), 11 Ad & E 438, this view has been regarded
as overruled, but there are several situations where relics of the earlier view may still be found.
One principle is that promises to pay prior debts may sometimes be enforceable, even though
the debt itself is for some reason unenforceable. For a discussion, see Waddams at paras
182-91.
2. Section 53 of the Bills of Exchange Act provides that antecedent debt or liability consti-
tutes sufficient consideration for a bill of exchange. Why is this thought necessary? Consider:
A borrows money from B ag ree ing to repay the sum with interest in one month. At the end of
the month, A gives B a cheque. Without s 53, wou ld there be good consideration for the giving
of the cheque? What arguments could be made? See Currie v /vlisa (1875), LR 10 Exch 153.
3. A, seeing B's house on fire, hires men to assist him in putting out the fire at an expense
of $2,000. B, who was abse nt at the tim e, hears of A's actions and prom ises to pay him $1,000.
The house burns to the ground and is now practica lly worth less (that is, wort h $200). Can A
recover as a matter of common law7 In which amou nt? Wo uld A fare any better using the legal
doctri nes excerpted below7

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND)

American Law Institute, 1981

86(1) A promise made in recognition of a benefit previously received by the prom-

isor from the promisee is binding to the extent necessary to prevent injustice.
(2) A promise is n ot binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the
promisor has n ot been unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.

CIVIL CODE OF QUEBEC

LRO , c C-1991

1482. Management of the business of another exists where a person, the manager,
spontaneously and under no obligation to act, voluntarily and opportunely under-
takes to manage the business of another, the principal, ·W ithout his knowledge ....
1484. The manager is bound to continue the management undertaken until he
can withdraw without risk of loss or until the principal ... is able to provide for it. ...
1486. When the conditions of management of the business of another are ful-
filled, even if the desired result has not been attained, the principal shall reimburse
the manager for an the necessary or useful expenses he has incurred and indemnify
him for any injury he has suffered by reason of his management and not through
his own fault. ...
1487. Expenses or obligations are assessed as to their necessity or usefulness at
the time they were incurred or contracted by the manager. ...
1490. Management inopportunely undertaken by a manager is binding on the
principal only to the extent of his enrichment.

298
 Ill. NON-BARGAIN PROMISES

C. SUBSEQUENT RELIANCE

KN LLEWELLYN, "WHAT PRICE CONTRACT?

AN ESSAY IN PERSPECTIVE"
(1931) 40 Yale LJ 704 at 741-44 ·

[Reprinted by permission of the Yale Law Journal Company and Fred B. Rothman &
Company from the Ya le La w Journal.]
Neither causes nor processes of the development of the consideration concept are
at all clear in detail. We do not know h ow the Germanic system of awarding wh at
one may speak of as the advantage of proof to the apparently sounder side came to
degenerate into the debt-defendant's power as of right to swear himself out of judg- .
ment. We do not know whether the fear of stout swearers or the growth of com-
mercial transactions was the more vital factor in developing assumpsit; we know
little if anything of the details of the latter pressure on the courts from, say, 1570 to
1620. We do not know in any clarity the process by which the case-misfeasance-tort
root and the quid-pro-quo root out of debt were built together. What is clear, is the
emergence of a current definition in terms of benefit to the promisor or detriment
to the promisee as the agreed equivalent and inducing cause of the promise; a def-
inition which purports both to show what is adequate and what is necessary to a
successful action in assumpsit or its heirs. The current formulation has the merit of
covering most cases, even if it does not cover all. Indeed, it is obvious that as soon
as the arbitrary but utterly necessary logical jump is made, of making mutual prom -
ises serve to support each other, the great bulk of business promises are comfortably
cared for.
Four troublesome classes of cases remain. There are business promises such as
"firm offers," understood to be good for a fixed time, but revoked before. They are
frequent; they are and should be relied on. As to them our consideration doctrine is
badly out of joint. Closely related in orthodox doctrine, less so in practice, is the
second class; promises which call for acceptance by extended action (such as laying
twenty miles of track), revoked while the work is in process. A third and hugely
important class is that of either additional or modifying business promises made
after an original deal has been agreed upon. Law and logic go astray whenever such
dealings are regarded as truly comparable to new agreements. They are not. No
business man regards them so. They are going-transaction adjustments, as different
from agreement-formation as are corporate organization and corporate manage-
ment; and the line of legal dealing with them which runs over waiver and estoppel
is based on sound intuition. The fourth main trouble-making class has only a doc-
trinal connection with business; it lies chiefly in the field of family affairs; it includes
the promise made and relied on, but which did not bargain for reliance, and in the
case of promises to provide it laps over into the third party beneficiary problem. As
to all of these classes but the first, a distinct but very uneven tendency is observable
in the courts to strain by one dodge or another toward enforcement. That tendency
is healthy. It may be expected to increase. It has already had some effects on orthodox
doctrine, and may be expected to have more . Meanwhile the first class mentioned
goes largely untouched.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

1. Gratuitous Undertakings

Ames, "The History of Assumpsit." (1888) 2 Harv L Rev 1: The action against a bailee
for negligent custody was looked upon ... as a tort, and not as a contract. The immedi-
ate cause of the injury in the case of the bailee was, it is true, a nonfeasance, and not,
as in the case of the surgeon or carpenter, a misfeasance .... The action against the
bailee sounding in tort, consideration was no more an essential part of the count
than it was in action against a surgeon ... . Oddly enough, the earliest attempts to
charge bailees in assumpsit were made when the bailment was gratuitous. These
attempts, just before and after 1600, were unsuccessful, because the plaintiff could
not make out any consideration. The gratuitous bailment was of course not a benefit,
but a burden to the defendant; and, on the other hand, it was not regarded as a detri-
ment, but an advantage to the plaintiff. But in 1623 it was finally decided, not without
a great straining, it must be conceded, of the doctrine of consideration, that a bailee
might be charged in assumpsit on a gratuitous bailment.

Baxter v Jones. (1903), 6 OLR 360 (CA) . The plaintiff asked the defendant, his fire
insurance agent, through whom he was placing extra insurance on his mills and
machinery, to notify the other companies who held his ipsurance. The defendant
gratuitously agreed to do this but failed to carry out his promise. On a fire damage
claim the other companies, not having been notified of the extra insurance, denied
liability, but settled for $1,000 less than they would have had to pay under the
increased policies. This action was to recover the $1,000. Held, for the plaintiff.
MacLENNAN JA: Mr. Baxter says he went to [Mr. Jones] for this additional insurance
just because his other risks were in his office, and, it is not contended that there was
any consideration between the plaintiffs and the defendant in connection with the
business. The only consideration in the matter was the premium which was paid to
the company. As between the plaintiffs and defendant, therefore, the whole business
was voluntary. It was contended that the procurement of the policy and the promise
to notify the companies were one single transaction, and that having undertaken
the business and performed it negligently, the defendant was responsible although
there was no consideration for the contract: Coggs v. Bernard and E/see v. Gatward.

De La Bere v Pearson, Limited. [1908] 1 KB 280 (Eng CA). The defendants published
a newspaper in which "readers ... desiring financial advice in these columns" were
invited to address their queries to the city editor. The plaintiff, a regular reader (it is
not reported that he was a purchaser or subscriber), wrote asking how best he co~ld
invest £800, and specifically requesting the name of a "good stock broker." The city
editor turned the letter over to an "outside stock broker" who persuaded the plaintiff
to invest £1400 with him. No shares were bought, the money instead was appropri-
ated to the stock broker's private affairs. He was an undischarged bankrupt. The city
editor knew that the broker was not on the stock exchange, but did not know of his
bankruptcy, although he could have found out. The publishers had done what they
could to help several of their readers who had lost money to the broker. The plaintiff
sued the defendant publishers for damages for breach of contract to exercise due
care in giving financial advice to the plaintiff. The lord chief justice held that the
plaintiff was entitled to recover the £1,400 sent by him to the broker for investment.
The defendant appealed, but the appeal was dismissed. On the question of consider-
ation, nothing appears in the report of the argument. VAUGHAN WILLIAMS LJ: In the

300
 Ill. NON - BARGAIN PROMISES

first place, I think there was a contract as between the plaintiff and the defendants.
The defendants advertised, offering to give advice with reference to investments.
The plaintiff, accepting that offer, asked for advice, and asked for the name of a good
stock broker. The questions and answers were, if the defendants chose, to be inserted
in their paper as published; such publication might obviously have a tendency to
increase the sale of the defendants' paper. I think that this offer, when accepted,
resulted in a contract for good consideration.

Hedley Byrne & Co Ltd v Heller & Partners Ltd. [1964] AC 465 (HL). LORD DEVLIN:
Many cases could be cited in which the same result has been achieved by setting up
some nominal consideration and suing in contract instead of in tort. In Coggs v.
Bernard, Holt C.J. put the obligation on both grounds. He said: "... [S]econdly, it is
objected, and there is no consideration to ground this promise upon, and therefore
the undertaking is but nudum pactum. But to this I answer, that the owners trusting
him with the goods is a sufficient consideration to oblige him to a careful manage-
ment. Indeed, if the agreement had been executory, to carry these brandies from the
one place to the other on such a day, the defendant had not been bound to carry
them. But this is a different case, for assumpsit does not only signify a future agree-
ment, but in such a case as this, it signifies an actual entry upon the thing, and taking
the trust upon himself. And if a man will do that, and miscarries in the performance
of his trust, an a,ction will lie against him for that, though nobody could have com-
pelled him to do the thing."
De La Bere v. Pearson Ltd. is an example of a case of this sort decided on the ground
that there was a sufficiency of consideration .... The case being brought in contract,
Vaughan Williams L.J. thought that there was sufficient consideration in the fact that
the plaintiff consented to the publication of his question in the defendants' paper if
the defendants so chose. For Barnes P. the consideration appears to have lain in the
plaintiff addressing an inquiry as invited. In the same way when in Everett v. Griffiths
the Court of Appeal was considering the liability of a doctor towards the person he
was certifying, Scrutton L.J. said that the submission to treatment would be a good
consideration.
My Lords, I have cited these instances so as to show that in one way or another the
law has ensured that in this type of case a just result has been reached. But I think that
today the result can and should be achieved by the application of the law of negligence
and that it is unne.c essary and undesirable·to construct an artificial consideration.

NOTES AND QUESTIONS

1. Negligent misrepresentation in tort is dealt with in more detail in Chapter 9.
2. Why should an action on the supposedly gratuitous promise of the defendant in Jones
be justified by the ancient law7 For a discussion of the rationale behind the gratuitous under-
takings cases, see WA Seavey, "Reliance on Gratuitous Promises" (1951) 64 Harv L Rev 913; CO
Gregory, "Gratuitous Undertakings and the Duty of Care" (1951-52) 1 DePaul L Rev 30; MP
Gergen, "Negligent Misrepresentation as Contract" (2013) 101 Cal L Rev 953.
3. Could Jones be explained on the basis that the plaintiff agreed to buy insurance through
the defendant agent at his request so that he would earn a commission on the prem ium? Then
could not the one act be consideration for two promises, to procure and to notify?

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2. Estoppel

Skidmore v Bradford. (1869), LR 8 Eq 134. An uncle promised his nephew, Edward

Bradford, that he would buy him a warehouse for £5,000. The uncle paid £1,000 and
Edward Bradford entered into a contract to buy the warehouse. The uncle paid a
further £500, but died before making_any further payment. The estate was held liable
to pay the balance. STUART VC: If Edward Bradford were a mere volunteer there is no
principle on which he would be entitled to come to this Court to have the testator's
intended act of bounty completed .... But if on the faith of the testator's representation
he has involved himself in any liability, or had incurred any obligation, he cannot
be regarded as a volunteer, and if so, the testator's assets are liable to make good the
representation on the faith of which the nephew had entered into this contract.

Re Hudson. (1885), 54 LJ Ch 811. COOKSON QC (in the argument): [T]he testator

signed a document by which he represented that the committee of the Jubilee Fund
had £20,000 coming from him at their disposal, and relying on that document they
have collected and expended money and incurred liabilities, and have in fact come
under an obligation to provide £3,500 more than has come to their hands. The con-
sideration for a contract need not consist of money; if a person suffers any detriment
or inconvenience, that is sufficient consideration moving from him to support a
contract by which another person comes under an obligation to him.
DAVEY QC: The argument is that that which is a mere nudum pactum can be con-
verted into a contract by something subsequently done by one of the parties. But
that is not so. Hammersly v. De Beil, 12 Cl. & F. 45, [one of a group of cases relied on
in Skidmore v Bradford, above] was for a time supposed to have established the rule
that a man who changes his position in reliance on an expression of intention can
insist upon effect being given to that expression of intention. But that idea is now
exploded. If A represents to B that something is an existing fact, and B acts on the
faith of that representation, A is bound, but that is not so where the representation
is of an intention and not of a fact.

Maddison v Alderson. (1883), 8 App Cas 467, 473. LORD SELBORNE: I have always
understood it to have been decided ... that the doctrine of estoppel by representation
is applicable only to representation as to some state of facts alleged to be at the time
actually in existence, and not to promises de futuro, which, if binding at all, must be
binding as contracts.

HUGHES V METROPOLITAN RAILWAY CO

(1877), 2 App Cas 439

!By the terms of a lease, the landlord had the right to demand repairs on six months'
notice to the tenant. In October the landlord gave the notice. In November and
December the parties negotiated about the possibility of the landlord's buying the
tenant's interest in the property. On December 31 the negotiations broke off, and in
April the landlord asserted a right to forfeit the lease on the expiry of the six-month
period from October. The House of Lords held that the landlord was not entitled to
assert such a right.]

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 Ill. NON - BARGAIN PROMISES

LORD CAIRNS LC: It is the first principle upon which an courts of equity proceed, that
if parties who have entered into definite and distinct terms involving certain legal
· results-certain penalties or legal forfeiture-afterwards by their own act or with their
own consent enter upon a course of negotiation which has the effect of leading one
of the parties to suppose that the strict rights arising under the contract will not be
enforced, or will be kept in suspense, or held in abeyance, the person who otherwise
might have enforced those rights will not be allowed to enforce them where it would
be inequitable having regard to the dealings which have then taken place between
the parties.

CENTRAL LONDON PROPERTY TRUST LTD

V HIGH TREES HOUSE LTD
[1947) KB 130

[The plaintiffs leased a block of flats to the defendants, a wholly owned subsidiary,
for 99 years from September 29, 1937, at a rent of £2,500 a year. Only about one-third
of the flats had been let by the outbreak of war in 1939 and, on January 3, 1940, the
plaintiffs agreed with the defendants to accept a reduced rent of £1,250 a year "as
from the commencement of the lease." In March of 1941 the affairs of the plaintiffs
were handed over to a receiver, who after that managed the company. Only the
reduced rent was paid until the receiver looked at the lease in September of 1945,
when he claimed the whole amount for the quarter ending September 29, 1945, and
arrears of £7,916. The defendants did not pay and these "friendly proceedings" were
commenced to recover £625 rent for each of the quarters ending September 29, 1945,
and December 25, 1945. By early 1945 the flats were fully let.)
DENNING J: ... If I were to consider this matter without regard to recent developments
in the law, there is no doubt that had the plaintiffs claimed it, they would have been
entitled to recover ground rent at the rate of £2,500 a year from the beginning of the
term, since the lease under which it was payable was a lease under seal which,
according to the old common law, could not be varied by an agreement by parol
(whether in writing or not), but only by deed. Equity, however stepped in, and said
that if there has been a variation of a deed by a simple contract (which in the case
of a lease required to be in writing would have to be evidenced by writing), the courts
may give effect to it as is shown in Berry v. Berry, [1929] 2 K.B. 316. That equitable
doctrine, however, could hardly apply in the present case because the variation here
might be said to have been made without consideration. With regard to estoppel,
the representation made in relation to reducing the rent, was not a representation
of an existing fact. It was a representation, in effect, as to the future, namely, that
payment of the rent would not be enforced at the full rate but only at the reduced
rate. Such a representation would not give rise to an estoppel, because, as was said
in Jorden v. Money (18.54), 5 H.L.C. 185; 10 E.R. 868, a representation as to the future
must be embodied as a contract or be nothing.
But what is the position in view of developments in the law in recent years? The
law has not been standing still since Jorden v. Money. There has been a series of
decisions over the last fifty years which, although they are said to be cases of estoppel
are not really such. They are cases in which a promise was made which was intended
to create legal relations and which, to the knowledge of the person making the
promise, was going to be acted on by the person to whom it was made, and which
was in fact so acted on. In such cases the courts have said that the promise must be

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honoured. The cases to which I particularly desire to refer are : Fenner v. Blake, (1900]
1 O.B. 426, In re Wickham (1917), 34 T.L.R. 158, Re William Porter & Co., Ltd., (1937] 2 All
E.R. 361 and Buttery v. Pickard, (1946] W.N. 25. As I have said they are not cases of ·
estoppel in the strict sense. They are really promises-promises intended to be bind-
ing, intended to be acted on, and in fact acted in. Jorden v. Money can be distin-
guished, because there the promisor made it clear that she did not intend to be legally
bound, whereas in the cases to which I refer the proper inference was that the
promisor did intend to be bound. In each case the court held the promise to be
binding on the party making it, even though under the old common law it might be
difficult to find any consideration for it. The courts have not gone so far as to give a
cause of action in damages for the breach of such a promise, but they have refused
to allow the party making it to act inconsistently with it. It is in that sense, and that
sense only, that such a promise gives rise to an estoppel. The decisions are a natural
result of the fusion of law and equity: for the cases of Hughes v. Metropolitan Ry. Co.
(1877), 2 App . Cas. 439, Birmingham and District Land Co. v. London & North Western
Ry. Co. (1888), 40 Ch. D. 268 and Salisbury (Marquess) v. Gilmore, (1942] 2 KB. 38, afford
a sufficient basis for saying that a party would not be allowed in equity to go back
on such a promise. In my opinion, the time has now come for the validity of such a
promise to be recognized. The logical consequence, no doubt is that a promise to
accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwith-
standing the absence of consideration: and if the fusion of law and equity leads to
this result, so much the better. That aspect was not considered in Foakes v. Beer
(1884), 9 App. Cas. 605. At this time of day however, when law and equity have been
joined together for over seventy years, principles must be reconsidered in the light
of their combined effect. It is to be noticed that in the Sixth Interim Report of the
Law Revision Committee, paras. 35, 40, it is recommended that such a promise as
that to which I have referred, should be enforceable in law even tnough no consider-
ation for it has been given by the promisee. It seems to me that, to the extent I have
mentioned, that result has now been achieved by the decisions of the courts.
I am satisfied that a promise such as that to which I have referred is binding and
the only question remaining for my consideration is the scope of the promise in the
present case. I am satisfied on all the evidence that the promise here was that the
ground rent should be reduced to £1,250 a year as a temporary expedient while the
block of flats was not fully, or substantially fully let, owing to the conditions prevail-
ing. That means that the reduction in the rent applied throughout the years down
to the end of 1944, but early in 1945 it is plain that the flats were fully let, and, indeed
the rents received from them (many of them not being affected by the Rent Restric-
tions Acts), were increased beyond the figure at which it was originally contemplated
that they would be let. At all events the rent from them must have been very con -
siderable. I find that the conditions prevailing at the time when the reduction in rent
was made, had completely passed away by the early months of 1945. I am satisfied
that the promise was understood by all parties only to apply under the conditions
prevailing at the time when it was made, namely, when the flats were only partially
let, and that it did not extend any further than that. When the flats became fully let,
early in 1945, the reduction ceased to apply.
In those circumstances, under the law as I hold it, it seems to me that rent is pay-
able at the full rate for the quarters ending September 29 and December 25, 1945.
If the case had been one of estoppel, it might be said that in any event the estoppel
would cease when the conditions to which the representation applied came to an
end, or it also might be said that it would only come to an end on notice. In either
case it is only a way of ascertaining what is the scope of the representation. I prefer

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to apply the principle that a promise intended to be binding, intended to be acted

on and in fact acted on, is binding so far as its terms properly apply. Here it was
binding as covering the period down to the early part of 1945, and as from that time
full rent is payable.
I therefore give judgment for the plaintiff company for the amount claimed.

COMBE V COMBE
[1951] 1 All ER 767 (CA)

ASQUITH LJ : I will ask Denning, L.J., to deliver the first judgment.

DENNING LJ: In this case a wife who has divorced her husband claims maintenance
from him -not in the Divorce Court, but in the King's Bench on an agreement which
is said to be embodied in letters. The parties were married in 1915. They separated
in 1939. On Feb. 1, 1943, on the wife's petition, a decree nisi of divorce was pro-
nounced. Shortly afterwards letters passed between the solicitors with regard to
maintenance. On Feb. 9, 1943 (eight days after the decree nisi), the solicitor for the
wife wrote to the solicitor for the husband:
With regard to permanent maintenance, we understood that your client is prepared to
make [the wife] an allowance of £100 per year free of income ta x.

In answer, on Feb. 19, 1943, the husband's solicitors wrote:

The respondent has agreed to allow yo ur client £100 per annum free of tax.

On Aug. 11, 1943, the decree was made absolute. On Aug. 26, 1943, the wife's
solicitors wrote to the husband's solicitors, saying:
Referring to your letter of Feb. 19 last, our client would like the £100 per annum agreed
to be paid to her by your client to be remitted to us on her behalf quarterly. We shall be
glad if you will kindly let us have a cheque for £25 for the first quarterly instalment and
make arrangements for a similar remittance to us on Nov. 11. Feb. 11, May 11, and Aug.
11 in the future.

A reply did not come for nearly two months because the husband was away, and
then he himself, on Oct. 18, 1943, wrote a letter which was passed on to the wife's
solicitors:
... [R]egarding the sum of £25 claimed on behalf of Mrs. Coombe ... I would point out
that whilst this is paid quarterly as from Aug. 11, 1943, the sum is not due till Nov. 11,
1943, as I can hardly be expected to pay this allowance in advance.

He never paid anything. The wife pressed him for payment, but she did not follow
it up by an application to the divorce court. It is to be observed that she herself has
an income of her own of between £700 and £800 a year, whereas her husband has
only £650 a year. Eventually, after nearly seven years had passed since the decree
absolute, she brought this action in the King's Bench Division on July 28, 1950,
claiming £675 being arrears for six years and three quarters at £100 a year. Byrne, J.,
held that the first three quarterly instalments of £25 were barred by the Limitation
Act, 1939, but he gave judgment for £600 in respect of the instalments which accrued
within the six years before the action was brought. He held, on the authority of
Gaisberg v. Storr, [1949] 2 AU E.R. 411, that there was no consideration for the husband's

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promise to pay his wife £100 but, nevertheless, he held that the promise was enforce-
able on the principle stated in Central London Property Trust Ltd. v. Hightrees House,
Ltd. and Robertson v. Minister of Pensions, (1949] 2 All E.R. 767, because it was an
unequivocal acceptance of liability, intended to be binding, intended to be acted on,
and, in fact, acted on.
Much as I am inclined to favour the principle of the Hightrees case, it is important
that it should not be stretched too far lest it should be endangered. It does not create
new causes of action where none existed before. It only prevents a party from insist-
ing on his strict legal rights when it would be unjust to allow him to do so, having
regard to the dealings which have taken place between the parties. That is the way
it was put in the case in the House of Lords which first stated the principle .... It is
also implicit in all the modern cases in which the principle has been developed.
Sometimes it is a plaintiff who is not allowed to insist on his strict legal rights. Thus,
a creditor is not allowed to enforce a debt which he has deliberately agreed to waive
if the debtor has carried on business or in some other way changed his position in
reliance on the waiver. A landlord who has told his tenant that he can live in his
cottage rent free for the rest of his life is not allowed to go back on it if the tenant
stays in the house on that footing. Sometimes it is a defendant who is not allowed
to insist on his strict legal rights. His conduct may be such as to debar him from
relying on some condition, de·n ying some allegation, or taking some other point in
answer to the .claim. Thus, a government department, who had accepted a disease
as due to war service, were not allowed afterwards to say it was not, when the soldier
in reliance on the assurance, had abstained from getting further evidence about it:
Robertson v. Minister of Pensions. A buyer who had waived the contract date for
delivery was not allowed afterwards to set up the stipulated time as an answer to the
seller. A tenant who had encroached on an adjoining building, asserting that it was
comprised in the lease, was not allowed afterwards to say that it was not included in
the lease. A tenant who had lived in a house rent free by permission of his landlord,
thereby asserting that his original tenancy had ended, was not afterwards allowed
to say that his original tenancy continued. In none of these cases was the defendant
sued on the promise, assurance, or assertion as a cause of action in itself. He was
sued for some other cause, for example, a pension or a breach of contract, or pos-
session, and the promise, assurance, or assertion only played a supplementary role,
though, no doubt, an important one. That is, I think, its true function. It may be part
of a cause of action, but not a cause of action i.n itself. The principle, as I understand
· it, is that where one party intended to affect the legal relations between them and to
be acted on accordingly, then, once the other party has taken him at his word and
acted on it, the one who gave the promise or assurance cannot afterwards be allowed
to revert to the previous legal relations as if no such promise or assurance had been
made by him, but he must accept their legal relations subject to the qualification
which he himself has so introduced, even though it is not supported in point of law
by any consideration, but only by his word.
Seeing that the principle never stands alone as giving a cause of action in itself,
it can never do away with the necessity of consideration when that is an essential
part of the cause of action. The doctrine of consideration is too firmly fixed to be
overthrown by a side-wind. Its ill effects have been largely mitigated of late, but it
still remains a cardinal necessity of the formation of a contract, although not of its
modification or discharge. I fear that it was my failure to make this clear in Central
London Property Trust Ltd. v. Hightrees House, Ltd., which misled Byrne, J., in the
present case. He held that his wife could sue on the husband's promise as a separate
and independent cause of action by itself, although, as he held, there was no consider-
ation for it. That is not correct. The wife can only enforce the promise if there was

306
 Ill. NO N-BARGAIN PRO MI SES

consideration for it. That is, therefore, the rea1 question in the case: Was there suffi-
cient consideration to support the promise?
If it were suggested that, in return for the husband's promise, the wife expressly
or impliedly promise'd to forbear from applying to the court for maintenance-that
is, a promise, in return for a promise-there would clearly be no consideration
because the wife's promise wou1d not be binding on her and, therefore, would be
worth nothing. Notwithstanding her promise, she could always apply to the divorce
court for maintenance-perhaps, only with leave-but nevertheless she could apply.
No agreement by her could take away that right. There was, however, clear1y no
promise by the wife, express or implied, to forbear from applying to the court. All
that happened was that she did, in fact, forbear-that is, she did an act in return for
a promise. Is that sufficient consideration? Unilateral promises of this kind have long
been enforced so long as the act of forbearance is done on the faith of the promise
and at the request of the promisor, express or implied. The act done is then in itseU
sufficient consideration for the promise, even though it arises, ex post facto, as Parker
J ., pointed out in Wigan v. English and Scottish Law Life Assurance Assocn., [1909] 1
Ch. 291 at p. 298. If the findings of Byrne, J., are accepted, they are sufficient to bring
this princip1e into play. His finding that the husband's promise was intended to be
binding, intended to be acted upon, and was, in fact, acted on-a1though expressed
to be a finding on the principle of the Hightrees House case-is equivalent to a finding
that there was consideration within this long-settled rule, because it comes to the
same thing expressed in different words : see Oliver v. Davis. My difficulty, however,
is to accept the findings of Byrne, J ., that the promise was "intended to be acted on."
I cannot find any evidence of any intention by the husband that the wife should
forbear from applying to the court for maintenance, or, in other words, any request
by the husband, express or implied, that the wife shou1d so forbear . He 1eft her to
apply, if she wished to do so. She did not do so, and I am not surprised, because it is
very unlikely that the divorce court would have made any order in her favour, since
she had a bigger income than her husband. Her forbearance was not intended by
him, nor was it done at his request. It was, therefore, no consideration.
It may be that the wife has suffered some detriment because, after forbearing to
apply to the court for seven years, she might not now get 1eave to apply. The court,
however, is nowadays much more ready to give leave than it used to be; and I should
have thought that, if the wife fell on hard times, she would stiU get leave. Assuming,
however, that she has suffered some detriment by her forbearance, neverthe1ess, as
the forbearance was not at the husband's request, it is no consideration.
The doctrine of consideration is sometimes said to work an injustice, but I see
none in this case, nor was there any in ... Gaisberg v. Storr. I do not think it would be
right for this wife, who is better off than her husband, to take no action for six or
seven years and then demand from him the whole £600. The truth is that in these
maintenance cases the real remedy of the wife is, not by action in the King's Bench
Division, but by application in the Divorce Court. ... For these reasons I think the
appea1 should be aUowed.
[The opinions of Asquith and Birkett LJJ are omitted.]

Waltons Stores (Interstate) Ltd v Maher. (1988), 164 CLR 387 (Aus HC) . BRENNAN J :
The object of the equity is not to compe1 the party bound to fulfil the assumption or
expectation; it is to avoid the detriment which, if the assumption or expectation goes
unfulfilled, wiU be suffered by the party who has been induced to act or to abstain
from acting thereon. If this object is kept steadily in mind, the concern that a genera1

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application of the principle of equitable estoppel would make non-contractual

promises enforceable as contractual promises can be allayed .... [T]here are differ-
ences between a contract and an equity created by estoppe\. A contractual obligation
is created by the agreement of the parties; an equity created by estoppel may be
imposed irrespective of any agreement by the party bound. A contractual obligation
must be supported by consideration; an equity created by estoppel need not be
supported by what is, strictly speaking, consideration. The measure of a contractual
obligation depends on the terms of the contract and the circumstances to which it
applies; the measure of an equity created by estoppel varies according to what is
necessary to prevent detriment resulting from unconscionable conduct.

NOTES AND QUESTIONS

1. Combe v Combe is often cited for the proposition that promissory estoppel can be used
only as a "shield" and not a "sword": see Gilbert Steel, above. Does that mean that a plaintiff
cannot raise promissory estoppel7 Consider the following comment:

The rule that promissory estoppel creates no new cause of action is often confused with a
rule that only defendants can invoke the doctrine. Perhaps the aphorism that states that
promissory estoppel is a shield and not a sword is responsible for this confusion . Clearly the
second rule does not follow from the first and accepted rule. A plaintiff can indeed invoke
promissory estoppel if her action is founded on an independently existing right, contractual
or otherwise . The case of Charles Rickards Ltd. v. Oppenhaim ((1950] 1 All E.R. 420 (C.A.))
provides an example. The plaintiff agreed to build a body on a Rolls-Royce chassis owned
by the defendant. The completed car was to be delivered by a stipulated date. It became
clear that delivery in conformity with the contract would be impossible. The defendant
agreed to a number of extensions until, in frustration, he refused any further extensions.
When the car was finally ready, he refused to accept delivery. While recovery was denied
because the defendant had brought the estoppel to an end, the plaintiff clearly could have
invoked promissory estoppel if the defendant had not revoked the promise . The plaintiff
would sue on the basis of the contract. The defendant would then argue that delivery was
late under the original contract. The plaintiff could use promissory estoppel to prevent the
defendant from invoking his right to delivery on the date stipulated in the contract. Promis-
sory estoppel can only be used as a defense. but both plaintiffs and defendants have need
of defenses.

(JA Manwaring, "Promissory Estoppel in the Supreme Court of Canada" (1986-87) 10:3 Dal LJ
43 at 57)
2. Manwaring suggests at 51-52 in the above article that courts have two choices in
attempting to provide remedies in cases in which a party has relied on a representation and
incurred loss. They may either "continually redefine the concept of consideration .. . [or] use
the tools that Equity places at the disposition of the court in order to mitigate the harshness of
the requirement of consideration." Does Williams v Roffey Bros, above, illustrate this point7
3. If Brennan J is correct. would using estoppel as a cause of action eviscerate the doctrine
of consideration7
4. Did the court correctly analyze the estoppel claim in Gilbert Steel, above7
5. Is Combe v Combe consistent with Owen Sound, excerpted below?
6. For an alternative justification of the result in Combe v Combe, one that is based on the
policy of protecting the jurisdiction of the Divorce Court. see J Swan, "Consideration and the
Reasons for Enforcing Contracts" (1976) 15 UWO L Rev 83.

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 Ill. NON-BARGAIN PROMISES

JOHN BURROWS LIMITED V SUBSURFACE SURVEYS LIMITED

(1968] SCR 607, 68 DLR (2d) 354

[As per a negotiated purchase agreement, the plaintiff (John Burrows Ltd.) sold
substantially all of its assets to the defendant (Subsurface Surveys Ltd.) for $150,000.
The majority of the purchase price was paid in cash with the balance payable by way
of a promissory note. As security for this arrangement, the defendant deposited a
number of shares with the plaintiff. The terms of the promissory note dictated that
interest accrued at 6 percent per annum and was payable monthly. A further provi-
sion stated that, upon any default by the defendant, the entire outstanding amount
became immediately payable. Although the defendant always made the requisite
interest payments, they were frequently late. Nonetheless, the principals of the two
companies were friends and 11 payments were accepted more than 10 days after
they were due without consequence. After a falling out between the principals, the
plaintiff advised the defendant that because the current interest installment was over
36 days overdue it was triggering the accelerated payment clause in the promissory
note. In response, the defendant tendered a sum amounting to the overdue interest.
Such payment was rejected and the plaintiff subsequently commenced an action
seeking full payment of the amount outstanding on the promissory note . The plain-
tiff won at trial but the defendant succeeded on appeal. The plaintiff then appealed ·
to the Supreme Court of Canada.]
RITCHIE J : ... The two defences raised by the respondents which form the subject of
the appeal are:
(a) That the document referred to in paragraph 2 of the Statement of Claim is not
a promissory note because it is not due at a fixed or determinable future time
and is not for a sum certain as required by Section 176(1) of the Bills of
Exchange Act. ... (and)
(c) ...
(i) the Plaintiff is estopped from saying that the Defendants defaulted in the
payment of such interest because by its conduct ... it represented to the
Defendants that late payment would be accepted without penalty of
default which said representation was intended to affect the legal relations
between the Plaintiff and the Defendants and which said representation ·
was relied on and acted on by the Defendants . ...
I am ... of opinion that the instrument in.question was a promissory note, and
there can be no doubt that the respondents were in default in their interest payments
for more than 10 days after the same became due.
It remains to be considered whether the circumstances disclosed by the evidence
were such as to justify the majority of the Court of Appeal in concluding that this
was a case to which the defence of equitable estoppel or estoppel by representation
applied.
Since the decision of the present Lord Denning in the case of Central London
Property Trust Ltd. v. High Trees House Ltd., [19471 K.B . 130 there has been a great deal
of discussion, both academic and judicial, on the question of whether that decision
extended the doctrine of estoppel beyond the limits which had been therefore fixed,
but in this Court in the case of Conwest Exploration Co. Ltd. et al. v. Letain, 41 D.L.R.
(2d) 198 at pp. 206-7, [1964] S.C.R. 20, Judson J., speaking for the majority of the
Court, expressed the view that Lord Denning's statement had not done anything
more than restate the principle expressed by Lord Cairns in Hughes· v. Metropolitan
R. Co. (1877), 2 App. Cas. 439 at p. 448 ....

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[After discussing the Hughes case and Combe v Combe, RITCHIE J continued:]

It seems clear to me that this type of equitable defence cannot be invoked unless
there is some evidence that one of the parties entered into a course of negotiation
which had the effect of leading the other to suppose that the strict rights under the
contract would not be enforced, and I think that this implies that there must be evi-
dence from which it can be inferred that the first party intended that the legal relations
created by the contract would be altered as a result of the negotiations. ·
It is not enough to show that one party has taken advantage of indulgences
granted to him by the other for if this were so in relation to commercial transactions,
such as promissory notes, it would mean that the holders of such notes would be
required to insist on the very letter being enforced in all cases for fear that any
indulgences granted and acted upon could be translated into a waiver of their rights
to enforce the contract according to its terms.
As Viscount Simonds said in Tool Metal Mfg. Co. v. Tungsten Electric Co., Ltd. [1955]
2 All E.R. 657 at p . 660: "... [T]he gist of the equity lies in the fact that one party has by
his conduct led the other to alter his position. I lay stress on this, because I would
not have it supposed, particularly in commercial transactions, that mere acts of
indulgence are apt to create rights .... "
The learned trial judge dealt with the rule of estoppel by representation as applied
to the circumstances of the present case in the following brief paragraphs:

It is my opinion, however, that for such a rule to apply, the plaintiff must have known
or should have known that his action or inaction was being acted upon by the defendant
and that the defendant thereby changed his legal position. I do not believe that John
Burrows ever gave any consideration to the fact that in accepting late payments of
interest on the note, he was thereby leading Mr. Whitcomb-as an officer of the defend-
ant corporation--into thinking that strict compliance would not be required at any time.
It is a matter of regret that Mr. Burrows did not see fit to advise Mr. Whitcomb by
lette·r or verbally of his intention to require strict adherence to the terms of the note;
but be that as it may, it is my opinion that both defendants were always aware of the
terms of P. 1 and knew that default in payment of interest exceeding 10 days could result
in the plaintiff demanding full payment, as the plaintiff has now done.

Ritchie J.A., who did not agree with the learned trial judge's interpretation of the
evidence, made the following observations in the course of his reasons for judgment
[62 DLR (2d) at 720]:

By its conduct in accepting payments of interest after they were more than 10 days in
default and, over a period of 16 months, not proceeding to enforce payment of the
principal amount owing under P-1, the plaintiff gave the defendants a promise, or
assurance, which it intended would affect the legal relations between them. Thereby,
the plaintiff lulled the defendants into a false sense of security and misled them into the
belief its strict rights to enforce immediate payment of the principal amount of $42,000
would be held in obeyance or be suspended L)ntil they were informed otherwise. It was
reasonable for the defendants so to interpret the plaintiff's conduct. As a result, the
position of each defendant was prejudiced. In my respectful opinion, the evidence
supports that conclusion.

With the greatest respect for the reasoning of the majority of the Court of Appeal,
I prefer the interpretation placed on the evidence by the learned trial judge and by
Bridges C.J.N:B., in his dissenting reasons for judgment where he said [at 705]:

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 Ill. NON-BARGAIN PROMISES

For estoppel to apply, I think we must be satisfied that the conduct of Burrows amounted
to a promise or assurance, intended to affect the legal relations of the parties to the
extent that if an interest instalment became in default for 10 days the plaintiff would not
claim the principal as due unless it had previously notified the defendants of its intention
to do so or. if it had not so notified them. that notice would be given them the principal
wou ld be claimed if such instalment so in default were not paid . This is. I think, a great
deal to infer.
I do not think that the evidence warrants the inference that the appellant entered
into any negotiations with the respondents which had the effect of leading them to
suppose that the appellant had agreed to disregard or hold in suspense or abeyance
that part of the contract which provided that: "... on default being made by both
Subsurface Surveys Ltd. and the Debtor in paying any principal or interest due at
any time according to the terms of the said note the Company may forthwith cause
the pledged shares to be transferred to the name of the Company on the share regis -
ter of Subsurface Surveys Ltd. and the pledged shares shall thereupon become the
absolute property of the Company." I am on the other hand of opinion that the
behaviour of Mr. Burrows is much more consistent with his having granted friendly
indulgences to an old associate while retaining his right to insist on the letter of the
obligation, which he did when he and Whitcomb became estranged and when the
respondents were in default in payment of an interest payment for a period of 36
days.
For all these reasons I would allow the appeal and restore the judgment of the
learned trial Judge. The appellant is entitled to its costs both here and in the Appeal
Division.
Appeal allowed; trial judgment restored.

OWEN SOUND PUBLIC LIBRARY BOARD

V MIAL DEVELOPMENTS LTD
(1979), 102 DLR (3d) 685 (Ont CA)

[The Owen Sound Public Library Board ("the appellant") and Mial Developments Ltd.
entered into a construction contract for substantial renovations to the local public
library building. The contract provided that the Library Board should make payment
of any amounts due within five days of being presented with an architect's certificate.
The contract further provided that if the Library Board should fail to pay within seven
days, Mial might upon five days' written notice terminate the contract. On November
4, the architect certified that a sum was due on December 12. On November 16, the
Library Board requested that Mial secure the corporate seal of the subcontractor on
one of the documents supporting the certificate. This was done in order to ensure
that the subcontractor had been paid by Mial. Mial undertook to secure the subcon -
tractor's seal although such an action was unnecessary under the contract. The
Library Board did not pay on December 12 because Mial had not secured the sub-
contractor's corporate seal. On December 20, Mial wrote giving five days' notice of
termination . That letter was received by the Library Board on Friday, December 22.
Due to the holidays, a cheque was not mailed until December 28. The cheque was
received by Mial on January 2. On December 28, Miat purported to terminate the
contract because it was in its financial interest to do so. The Library Board then sued
for breach of contract. ]

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

LACOURCIERE JA: This appeal, which turns on the applicability of the doctrine of
promissory estoppel, is brought by the Owen Sound Public Library Board (the
"Library Board") from the judgment of the Honourable Mr. Justice Henry dismissing
with costs the Library Board's claim for damages for breach of contract and allow-
ing with costs the counterclaim of the defendant, Mial Developments Limited ("Mial"),
for payment for all work executed ....
The fundamental issue at trial, i.e. the contractor's right to terminate the contract,
was resolved in the contractor's favour. The circumstances disclosed by the evidence
must be examined in the light of the appellant's main submission that the learned
trial Judge erred in his understanding and application of the principles of promissory
estoppel. The promissory estoppel doctrine was invoked on the basis of the allegation
that the contractor had failed to honour its promise to obtain the affixing of a seal
to a certain document, which promise was relied on by the appellant in delaying
payment of the account. ...
[After outlining the facts, LACOURCIERE JA continued:]
The learned trial Judge found, on these facts, that the clear and unambiguous
language cifthe articles quoted above entitled Mia\ legally to terminate the contract.
He did not consider that the doctrine of promissory estoppel precluded Mial from
relying on the strict terms of the contract. In his view, Brown's promise, on behalf ·
of Mia\, to obtain a document bearing the corporate seal of the subcontractor
(although admittedly such action was meaningless and unnecessary) caused Mr.
McReavy to "put the matter aside without processing the architect's certificate for
payment in reliance on his understanding that he need not act until the document
was received."
Notwithstanding that important inference, the learned trial Judge refused to
exercise the Court's equitable jurisdiction on the basis that there was no intention
on the part of Brown or Mial, in spite of the promise, to alter the Library Board's strict
legal obligation under the contract. ...
It was submitted on behalf of the appellant that the learned trial Judge erred in
law in requiring intention or knowledge on the part of the promisor as a prerequisite
to the operation of the equitable doctrine of estoppel. Counsel for the appellant relied
on Hughes v. Metropolitan R. Co. et al. (1877), 2 App. Cas. 439, for the proposition that
it is sufficient if a party to a contract, by his words or conduct, induces the other party
to believe that strict performance of the terms of the contract will not be insisted
upon ....
The appellant further submitted that, in the present case, the request for the cor-
porate seal of the subcontractor was made by the Library Board and its architect for
the purpose of advising Mia\ that its application for payment of the holdback could
not otherwise be processed. In that Mial could have refused this request and insisted
upon payment pursuant to the certificate, its promise to obtain the seal could only
be interpreted as a withdrawal of the certificate until the requested documentation
was secured. Thus, counsel asked this Court to conclude that the words and conduct
of Brown, as Mia\'s representative, could only induce the Library Board's agent into
the belief that the operation of the time-limit under art. 38 was suspended, and that
the time would begin to run upon Mia\'s production of the requested seal.
The appellant stressed in argument that the promisor's words and conduct, not
his intent, are material to the proper invocation of the promissory estoppel doctrine.
After referring to Hughes v. Metropolitan R. Co., supra, Bowen, L.J., in Birmingham &
District Land Co. v. London North Western R. Co. (1888), 40 Ch.D. 268, put the principle
to be applied as follows at p . 286:

312
 Ill. NON-BARGAIN PROMISES

It seems to me to amount to this, that if persons who have contracted rights against
others induce by their condu.ct those against whom they have such rights to believe
that such rights will either not be enforced or will be kept in suspense or abeyance for
some particular time, those persons will not be allowed by a Court of Equity to enforce
the rights until such time has elapsed, without at all events placing the parties in the
same position as they were before.
The principle as stated by Lord Cairns in Hughes v. Metropolitan R. Co., which I
have already quoted above, was approved by the Supreme Court of Canada in Con-
west Exploration Co. Ltd. et al. v. Letain, [1964] S.C.R. 20 ....
The learned trial Judge, in refusing to apply the doctrine of promissory estoppel
in favour of the Library Board, on the basis that the Board failed to satisfy him that
Mial, as promisor, had the requisite intention or knowledge, did not refer specifically
to the authorities which appear to support this prerequisite.
In Snell's Principles of Equity, 27th ed. (1973), at p . 563, the learned co-authors, the
Honourable Sir Robert Megarry and P.V. Baker, state the rule in the following words :
Where by his words or conduct one party to a transaction makes to the other an
unambiguous promise or assurance which is intended to affect the legal relations
between them (whether contractual or otherwise), and the other party acts upon it,
altering his position to his detriment, the party making the promise or assurance will
not be permitted to act -inconsistently with it. ...

I interpret these cases as authority for the proposition that a promise, whether .
express or inferred from a course of conduct, is intended to be legally binding if it
reasonably leads the promisee to believe that a legal stipulation, such as strict time
of performance, will not be insisted upon. In Charles Rickards Ltd. v. Oppenheim,
supra, Lord Justice Denning, with whom Singleton and Bucknill, L.JJ., concurred,
said at p. 623:
If the defendant, as he did, led the plaintiffs to believe that he would not insist on the
stipulation as to time, and that, if they carried out the work, he would accept it, and they
did it, he could not afterwards set up the stipulation as to the time against them . Whether
it be called waiver or forbearance on his part, or an agreed variation or substituted
performance, does not matter. It is a kind of estoppel. By his conduct he evinced an
intention to affect their legal relations. He made, in effect, a promise not to insist on
his strict legal rights. That promise was intended to be acted on, and was in fact acted
on. He cannot afterwards go back on it.
(Emphasis added.) Reference also may be made to Spencer Bower and Turner, The
Law Relating to Estoppel by Representation, 3rd ed. (1977), at p . 377.
The prerequisite of intention to alter legal relations was not mentioned or dis-
cussed in Hughes v. Metropolitan R. Co., supra, or in the Birmingham case, supra.
·However, it was stressed by Ritchie, J., delivering the judgment of the Supreme Court
of Canada in John Burrows Ltd. v. Subsurface Surveys et al., [1968] S.C .R. 607, 68 D.L.R.
(2d) 354, in discussing a defence of promissory estoppel raised by a debtor against
a creditor who had accepted without complaint habitually late repayments but later
had invoked an acceleration clause without notice ....
[After quoting from John Burrows, LACOURCIERE JA continued:]
The respondent argued that Brown's assertion that he would get the corporate
seal affixed to the statutory declaration was not made with any reference to payment
of the valid certificate. Counsel stated that there is no evidence that the assertion

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

was related to payment, and the learned trial Judge found expressly that "there was
no discussion of the effect of this undertaking [to obtain the document] on payment
of the holdback ...." He said: "The terms of payment were not raised or discussed."
The evidence appears to support the conclusion that no one on behalf of Mial
expressly agreed to the suspension of the time requirement for payment pending
delivery of the seal, and no one on behalf of the Library Board made any request to
that effect.
Nevertheless, the more difficult and relevant question is whether Brown's state-
ment and conduct could logically or reasonably be interpreted by the Library Board
as an agreement by Mial that it would postpone the Board's strict obligation to pay
the certificate. If that were so, Mial would be seeking to take advantage of a default
induced by its own conduct. There is no direct evidence to the effect that the Board
delayed payment because of the promise, although two members of the Library
Board testified at trial. However, the learned trial Judge made an inference to the
effect that McReavy "put the matter aside without processing the architect's certifi-
cate for payment in reliance on his understanding that he need not act until the
document was received." With all due respect, and notwithstanding the respondent's
submissions to the contrary, this inference is fully supported by the evidence. Coun-
sel for the respondent submitted that it was incumbent on the Board to lead evidence
on this specific point, and that there is no sworn testimony to support it. He con-
tended that the letter of December 22, 1972, referring to the request to obtain the seal,
was an attempt following cancellation of the contract to provide ex post facto a
reason for non-payment of the certificate, which reason the Board's witnesses did
not support in the witness-box.
On the basis of the authorities mentioned, I agree with the learned trial Judge
that intent and knowledge on the part of the promisor are necessary ingredients of
promissory estoppel. However, the authorities make it clear that intent to create legal
relations does not require a direct statement to that effect. Rather, such an intent can
be based on an inference drawn from the evidence. Knowledge by the promisor that
the promisee is likely to regard the promise as affecting their legal relations consti -
tutes an appropriate basis from which the inference of the existence of a sufficient
intent can be drawn.
In this case, as found by the learned trial Judge, the Library Board's agent did in
fact understand Mial's position to be that the Board need not make payment under
the certificate until the sealed document was received. He relied on that understand-
ing, which arose out of a discussion between representatives of the parties. I am of
the opinion that both the agent's understanding and his reliance were reasonable.
It was not necessary for the Court below to find specific words spoken by the parties
to the effect that Mial's agreement to provide further documentation suspended the
Library Board's obligation. As a matter of common business sense, the respondent,
an experienced contractor, would interpret a request for further documentation as
a suspension of the effect of the architect's certificate, particularly when the request
was made in the presence of the architect's representative and repeated on behalf
of the architect. As stated by Riddell, J., in Grimsby Steel Furniture Co. Ltd. v. Columbia
Gramophone Co. (1922), 23 O.W.N. 188 at p. 189, "Silence is sometimes as cogent as
speech ...."The predictable and reasonable interpretation placed on Brown's promise
to obtain the seal, in the circumstances, is sufficient to support a finding that the
requisite intent and knowledge existed. This Court is free to draw such an inference
from the proven facts. It would be neither equitable nor just to view Mial's statement
and conduct as having any other effect than that of leading the Library Board's rep-
resentative to suppose that the strict payment obligations within the time-limits

314
 Ill. NON-BARGAIN PROMISES

would not be enforced. In my view, the only proper inference on the facts found by
the learned trial Judge is that the Library Board failed to pay the Friesen holdback
because of the promise made by Mia\, which promise remained unfulfilled at the
time of the cancellation. In this respect the case is quite different from the factual
situation in John Burrows Ltd., supra. I find, therefore, that the contractor Mia\ was
not entitled to cancel the contract and that the purported cancellation was unjustified
and ineffective. The Board was ·consequently entitled to judgment for damages
assessed on established principles. In view of this conclusion, it becomes unneces-
sary to discuss the other grounds of appeal raised.
I would accordingly, allow the appeal with costs and set aside the judgment below.
In place thereof I would enter judgment for the plaintiff and direct a reference to the
Master to ascertain the amount of damages suffered by the plaintiff. I would also
dismiss with costs the counterclaim of Mia\.
Appeal allowed.

Amalgamated Investment & Property Ltd v Texas Commerce International Bank

Ltd. [1982] QB 84 (CA) . BRANDON LJ: I turn to the second argument advanced on
behalf of the plaintiffs, that the bank is here seeking to use estoppel as a sword rather
than a shield, and that that is something which the law of estoppel does not permit.
Another way in which the argument is put is that a party cannot found a cause of
action on an estoppel . ... This ·m ustrates what I would regard as the true proposition
of law, that, while a party cannot in terms found a cause of action on an estoppel, he
may, as a result of being able to rely on an estoppel, succeed on a cause of action on
which, without being able to rely on that estoppel, he would necessarily have failed.

NOTES AND QUESTIONS

1. Consider the meaning of the terms "estoppel," "waiver," and "promissory estoppel." How do
courts differentiate among them7 See Waddams at paras 206-7; McCamus, ch 8; Mac Dougall,
ch 9; Fridman at 548-55. See also B MacDougall, Estoppel (Toronto: LexisNexis, 2012), ch V.
2. It is sometimes suggested that the "shield" in the Owen Sound case had become very
pointed . How? What did the court do here that was different from what it did in the earlier
cases in this section?
3. Does it matter to the court that it will have to add or rewrite a term?
4. Is Owen Sound an application of John Burrows or a complete reinterpretation of it? Has
Owen Sound moved the focus from intention to the issue of whether the reliance was
reasonable?
5. Suppose X and Y have a contract that X will build a website for Y in return for $10,000.
After the contract is totally complete, Y promises X an additional $3,000 because Y is very
pleased with X's work. X detrimentally relies on Y's promise to the value of $3,000. Relying on
the Amalgamated Investment case, can X sue Y for breach of contract and then attempt to
estop Y from denying that the contract price was $13,000? For judicial doubting of this pos-
sibility, see Canadian Superior Oil Ltd v Hambly, [19701 SCR 932 .
6. What makes reliance reasonable? When would it be unreasonable to rely.on a promise?
See A Robertson. "Reasonable Reliance in Estoppel by Conduct" (2000) 23 UNSWLJ 87; A-G
for Hong Kong v Humphries Estate, [1987] AC 114 (PC) ; Cobbe v Yeoman 's Row Management
Ltd, [2008) UKHL 55; Waddams at para 164; E Bant & M Bryant, "Fact, Future and Fiction: Risk
and Reasonable Reliance in Estoppel" (2015) 35 OJLS 427; Cowper-Smith v Morgan, 2017 SCC
61 (excerpted below).

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

D & C BUILDERS, LTD V REES

[1965] 3 All ER 837 (CA)

LORD DENNING MR: D. & C. Builders, Ltd. ("the plaintiffs") are a little company. "D"
stands for Mr. Donaldson, a decorator; "C" for Mr. Casey, a plumber. Tney are jobbing
builders. The defendant, Mr. Rees, has a shop where he sens builders' materials.
In the spring of 1964 the defendant employed the plaintiffs to do work at his
premises, 218, Brick Lane. The plaintiffs did the work and rendered accounts in May
and June, which came to £746 13s. ld . altogether. The defendant paid £250 on
account. In addition the plaintiffs made an allowance of £14 off the bi\\. So in July,
1964, there was owing to the plaintiffs the sum of £482 13s. ld. At this stage there
was no dispute as to the work done . But the defendant did not pay.
On Aug. 31, 1964, the plaintiffs wrote asking the defendant to pay the remainder
of the bi\\. He did not reply. On Oct. 19, 1964, they wrote again, pointing out that the
"outstanding account of £480 is well overdue." Still the defendant did not reply. He
did not write or telephone for more than three weeks. Then on Friday, Nov. 13, 1964,
the defendant was ill with influenza. His wife telephoned the plaintiffs. She spoke to
Mr. Casey. She began to make complaints about the work; and then said: "My hus-
band will offer you £300 in settlement. That is an you'll get. It is to be in satisfaction."
Mr. Casey said he would have to discuss it with Mr. Donaldson. The two of them
talked it over. Their company was in desperate financial straits. If they did not have
the £300, they would be in a state of bankruptcy. So they decided to accept the £300
and see what they could do about the rest afterwards. Thereupon Mr. Donaldson
telephoned to the defendant's wife. He said to her: "£300 will not even clear our
commitments on the job. We will accept £300 and give you a year to find the balance."
She said: ·"No, we will never have enough money to pay the balance. £300 is better
than nothing." He said: "We have no choice but to accept." She said: "Would you like
the money by cash or by cheque. If it is cash, you can have it on Monday. If by
cheque, you can have it tomorrow (Saturday)." On Saturday, Nov.14, 1964, Mr. Casey
went to collect the money. He took with him a receipt prepared on the company's
paper with the simple words: "Received the sum of £300 from Mr. Rees." She gave
him a cheque for £300 and asked for a receipt. She insisted that the words "in
completion of the iJ.Ccount" be added. Mr. Casey did as she asked. He added the words
to the receipt. So she had the dean receipt: "Received the sum of £300 from Mr. Rees
in completion of the account. Paid, M. Casey." Mr. Casey gave in evidence his reason
for giving it: "If I did not have the £300 the company would have gone bankrupt. The
only reason we took it was to save the company. She knew the position we were in."
The plaintiffs were so worried about their position that they went to their solici-
tors. Within a few days, on Nov. 23, 1964, the solicitors wrote complaining that the
defendant had "extracted a receipt of some sort or other" from them. They.said that
they were treating the £300 as a payment on account. On Nov. 28, 1964, the defend-
ant replied alleging bad workmanship. He also set up the receipt which Mr. Casey
gave to his wife, adding: "I assure you she had no gun on her." The plaintiffs brought
this action for the balance. The defendant set up a defence of bad workmanship and
also that there was a binding settlement. The question of settlement was tried as a
preliminary issue. The judge made these findings:
I concluded that by the middle of August the sum due to the plaintiffs was ascerta ined
and not then in dispute. I also concluded that there was no consideration to support
the agreement of Nov. 13 and 14. It was a case of agreeing to take a lesser sum, when
a larger sum was already due to the plaintiffs. It w as not a case of agreeing to take a

316
 Ill. NON-BARGAIN PROMISES

cheque for a smaller account instead of receiving cash for a larger account. The pay-
ment by cheque was an incidental arrangement.

The judge decided, therefore, the preliminary issue in favour of the plaintiffs. The
defendant appeals to this court. He says that there was here an accord and satisfac-
tion -an accord when the plaintiffs agreed, however reluctantly, to accept £300 in
settlement of the account- and satisfaction when they accepted the cheque for £300
and it was duly honoured.
This case is of some consequence for it is a daily occurrence that a merchant or
tradesman, who is owed a sum of money, is asked to take less. The debtor says he is
in difficulties. He offers a lesser sum in settlement, cash down. He says he cannot
pay more. The creditor is considerate. He accepts the proffered sum and forgives
him the rest of the debt. The question arises: is the settlement binding on the
creditor? The answer is that, in point of law, the creditor is not bound by the settle-
ment. He can the next day sue the debtor for the balance, and get judgment. The law
was so stated in 1602 by Lord Coke in Pinnel's Case-and accepted in 1884 by the
House of Lords in Foakes v. Beer.
Now, suppose that the debtor, instead of paying the lesser sum in cash, pays it by
cheque. He makes out a cheque for the amount. The creditor accepts the cheque
and cashes it. Is the position any different? I think not. No sensible distinction can
be taken between payment of a lesser sum by cash and payment of it by cheque. The
cheque, when given, is conditional payment. When honoured, it is actual payment.
It is then just the same as cash. If a creditor is not bound when he receives payment
by cash, he should not be bound when he receives payment by cheque . ... In point
of law payment of a lesser sum, whether by cash or by cheque, is no discharge of a
greater sum.
This doctrine of the common law has come under heavy fire . It was ridiculed by
Sir George Jessel M.R., in Couldery v. Bartrum. It was held to be mistaken by Lord
Blackburn in Foakes v. Beer. It was condemned by the Law Revision Committee in
their Sixth Interim Report (Cmnd. 5449), para. 20 and para. 22. But a remedy has been
found. The harshness of the common law has been relieved. Equity has stretched
out a merciful hand to help the debtor. The courts have invoked the broad principle
stated by Lord Cairns L.C., in Hughes v. Metropolitan Ry. Co. (1877) 2 App. Cas. 439 . ...
This principle has been applied to cases where a creditor agrees to accept a lesser
sum in discharge of a greater. So much so that we can now say that, when a creditor
and a debtor enter on a course of negotiation, which leads the debtor to suppose
that, on payment of the lesser sum, the creditor will not enforce payment of the
balance, ancl. on the faith thereof the debtor pays the lesser sum and the creditor
accepts it as satisfaction: then the creditor will not be allowed to enforce payment
of the balance when it would be inequitable to do so. This was well illustrated during
the last war. Tenants went away to escape the bombs and left their houses unoc-
cupied. The landlords accepted a reduced rent for the time they were empty. It was
held that the landlords could not afterwards turn round and sue for the balance: see
Central London Property Trust, Ltd. v. High Trees House, Ltd. This caused at the time
some eyebrows to be raised in high places. But they have been lowered since. The
solution was so obviously just that no one could well gainsay it.
In applying this principle, however, we must note the qualification. The creditor
is barred from his legal rights only when it would be inequitable for him to insist on
them. Where there has been a true accord under which the creditor voluntarily agrees
to accept a.lesser sum in satisfaction, and the debtor acts on that accord by paying
the lesser sum and the creditor accepts it, then it is inequitable for the creditor

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afterwards to insist on the balance. But he is not bound unless there has been truly
an accord between them.
In the present case, on the facts as found by the judge, it seems to me that there
was no true accord. The debtor's wife held the creditor to ransom. The creditor was
in need of money to meet his own commitments, and she knew it. When the creditor
asked for payment of the £480 due to him, she said to him in effect: "We cannot pay
you the £480. But we will pay you £300 if you will accept it in settlement. If you do
not accept it on those terms, you will get nothing. £300 is better than nothing." She
had no right to say any such thing. She could properly have said: "We cannot pay
you more than £300. Please accept it on account." But she had no right to insist on
his taking it in settlement. When she said: "We will pay you nothing unless you accept
£300 in settlement," she was putting undue pressure on the creditor. She was making
a threat to break the contract (by paying nothing) and she was doing it so as to
compel the creditor to do what he was unwilling to do (to accept £300 in settlement):
and she succeeded. He complied with her demand. That was on recent authority a
case of intimidation .... In these circumstances there was no true accord so as to
found a defence of accord and satisfaction .... There is also no equity in the defendant
to warranty any departure from the due course of law. No person can insist on a
settlement procured by intimidation.
In my opinion there is no reason in law or equity why the creditor should not
enforce the full amount of the debt due to him. I would, therefore, dismiss this appeal.

Collier v P & M J Wright (Holdings) Ltd. [2008] 1 WLR 643 (CA) . ARDEN LJ: [I]f (1) a
debtor offers to pay part only of the amount he owes, (2) the creditor voluntarily
accepts that offer, and (3) in reliance on the creditor's acceptance the debtor pays
that part of the amount he owes in full, the creditor will, by virtue of the doctrine of
promissory estoppel, be bound to accep\ that sum in full and final satisfaction of the
whole debt. For him to resile will of itself be inequitable. In addition, in these cir-
cumstances, the promissory estoppel has the effect of extinguishing the creditor's
right to the balance of the debt. This part of our law originated in the brilliant obiter
dictum of Denning J. in the High Trees case .... To a significant degree it achieves in
practical terms the recommendation of the Law Revision Committee chaired by Lord
Wright MR in 1937.

MWB Business Exchange Centres Ltd v Rock Advertising Ltd. [2016] EWCA Civ
553. KITCHIN LJ: It may be the case that it would be inequitable to allow the promisor
to go back upon his promise without giving reasonable notice ... or it may be that it
would be inequitable to allow the promisor to go back on his promise at all with the
result that the right is extinguished. All will depend upon the circumstances. It fol-
lows that I do not for my part think that it can be said, consistently with the author-
ities ... that in every case where a creditor agrees to accept payment of a debt by
instalments, and the debtor acts upon that agreement by paying one of the instal-
ments, and the creditor accepts that instalment, then it will necessarily be inequitable
for the creditor later to go back upon the agreement and insist on payment of the
balance. Again, all will depend upon the circumstances.

318
 Ill. NON - BARGAIN PROMISES

NOTES AND QUESTIONS

1. Would the pressure applied by Mrs. Rees have constituted duress? See Chapter 6, Sec-
tion VI.
2. For criticism of Arden LJ 's approach in Collier, see M Chen-Wishart. "A Bird in the Hand:
Consideration and Contract Modifications" in Burrows & Peel at 102-5; MH Ogilvie, "Part Pay-
ment, Promissory Estoppel and Lord Denning's 'Brilliant Balance'" (2010) 49 Can Bus LJ 287;
M Roberts, 'The Practical Benefit Doctrine Marches On" (2017) 80 Mod L Rev 339 at 348-50.
3. Is promissory estoppel a unitary doctrine? For an argument against. see B McFarlane,
"Promissory Estoppel and Debts" in Burrows & Peel at 115, where it is conte nded that cases
commonly thought of as "promissory estoppel" are best explained as applications of three
more specific doctrines, each with their own legal incidents, which concern the relinquish-
ment. acquisition, and creation of rights.
4. What detriment was suffered by the defendant in D & C Builders? Is detrimental reliance
a necessary element to ground a promissory estoppel? Consider the following excerpts.

Ajayi v RT Briscoe (Nigeria) Ltd. [1964] 1WLR1326 (PC). LORD HODSON: The prin-
ciple which has been described as quasi estoppel and perhaps more aptly as promis-
sory estoppel is that when one party to a contract in the absence of fresh
consideration agrees not to enforce his rights an equity will be raised in favour of
the other party. This equity is, however, subject to the qualification (a) that the other
party has altered his position, (b) that the promisor can resile from his promise on
giving reasonable notice, which need not be a formal notice, giving the promisee a
reasonable opportunity of resuming his position, (c) the promise only becomes final
and irrevocable if the promisee cannot resume his position.

The Post Chaser. [1981] 1 AU ER 19 (OB). ROBERT GOFF J: The fundamental principle
is ... that the representor will not be allowed to enforce his rights "where it would be
inequitable ...." To establish such inequity, it is not necessary to show detriment;
indeed, the representee may have benefited from the representation, and yet it may
be inequitable, at least without reasonable notice, for the representor to enforce his
legal rights. Take the facts of ... [High Trees]. The representation was by a lessor to the
effect that he would be content to accept a reduced rent. In such a case, although
the lessee has benefited from the reduction in rent, it may well be inequitable for the
lessor to insist upon his legal right to the unpaid rent, because the lessee has con-
ducted his affairs on the basis that he would only have to pay rent at the lower rate;
and a Court might well think it right to conclude that only after reasonable notice
could the lessor return to charging rent at the higher rate specified in the lease.
Furthermore it would be open to the Court, in any particular case, to infer from the
circumstances of the case that the representee must have conducted his affairs in
such a way that it would be inequitable for the representor to enforce his rights, or
to do so without reasonable notice.

Bertkey Development Ltd v Incorporated Owners of Fine Mansion. [1999] 2 HKLRD

662 (CA). LIU JA: Lord Denning has tried, time and again, to dispense with the require-
ment of detriment altogether .... His Herculean efforts were not well received. It is
generally accepted today that some detriment in the sense expounded by the dis-
tinguished Australian jurist Dixon J. would be required to feed an estoppel.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

Grundt v Great Boulder Proprietary Gold Mines Ltd. (1937), 59 CLR 641 (Aus HC) .
DIXON J: [T]he real detriment or harm from which the law seeks to give protection
is that which would flow from the change of position if the assumption were deserted
that led to it. So long as the assumption is adhered to, the party who altered his situ-
ation upon the faith of it cannot complain. His complaint is that when afterwards
the other party makes a different state of affairs the basis of an assertion of right
against him then, if it is allowed, his own original change of position will operate as
a detriment.

Ryan v Moore. 2005 SCC 38, [2005] 2 SCR 53. BASTARACHE J: The jurisprudence and
academic comments support the requirement of detrimental reliance as lying at the
heart of true estoppel .... Detrimental reliance encompasses two distinct, but inter-
related, concepts: reliance and detriment. The former requires a finding that the party
seeking to establish the estoppel changed his or her course of conduct by acting or
abstaining from acting in reliance upon the assumption, thereby altering his or her
legal position. If the first step is met, the second requires a finding that, should the
other party be allowed to abandon the assumption, detriment will be suffered by
the estoppel raiser because of the change from his or her assumed position.

The Commonwealth of Australia v Verwayen. (1990), 170 CLR 394 (Aus HC) .
McHUGH J: Once the detriment has ceased or been paid for, there is nothing uncon-
scionable in a party insisting on reverting to his or her former relationship with the
other party and enforcing his or her strict legal rights.

Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd. [1972]

AC 741 (HL). LORD HAILSHAM OF MARYLEBONE LC: [T]he time may soon come when
the whole sequence of cases based on promissory estoppel since the war, beginning
with ... High Trees ..., may need to be reviewed and reduced to a coherent body of
doctrine by the courts. I do not mean to say that they are to be regarded with suspi-
cion. But as is common with an expanding doctrine they do raise problems of
coherent exposition which have never been systematically explored.

NOTES AND QUESTIONS

1. Does The Post Chaser, properly understood, stand for the proposition that no detriment
is needed for promissory estoppel7 If it does stand for that proposition is it consistent with the
Privy Council's advice in Ajayi7
2. Is it in good conscience for a wealthy person not to give money to the needy7 Should
such a promise be enforced because it would be inequitable not to do so7 Is this the type of
unconscionability that the courts do, or should, have in mind?
3. What is the theoretical basis of promissory estoppel-is it unconscionability, promise
enforcement, or the elimination of detrimental reliance? Which view is best supported by the
criteria of liability? Which view is best supported by the choice of the court's remedy? Which
view is more consistent with justice7 For various arguments, see Smith at 233-44; M Spence,
Protecting Reliance (Oxford: Hart, 1999); Elizabeth Cooke, The /Vlodern Law of Estoppel
(Oxford: Oxford University Press, 2000) ; P Heffey, J Paterson & A Robertson, Principles of
Contract Law, 2nd ed (Sydney: Lawbook Co, 2005) at 193-95; Benson at 174-79; A Robertson,
"Situating Equitable Estoppel Within the Law of Obligations" (1997) 19 Sydney L Rev 32.

320
 Ill. NON-BARGAIN PROMISES

4. What are the current doctrinal rules in regard to promissory estoppel that can be distilled
from the case? Fridman at 127-35 describes them as follo ws: (1) there must have been an
existing legal relationship between the parties at the time the statement on which the estoppel
is .founded was made; (2) there must be a clear promise or representation made by the party
against whom the estoppel is raised, establishing his intent to be bound by what she has said;
(3) there must have been reliance, by the party raising the estoppel, on the statement or con-
duct of the party against whom the estoppel is raised; (4) the party to whom the representation
was made must have acted on it to her detriment; (5) the promisee must have acted equitably.
Which cases stand for which propositions?
5. What issues of coherence might Lord Hailsham LC have had in mind in Woodhouse?
Consider this question as you examine the following cases dealing with proprietary estoppel.

Dillwyn v Llewelyn. (1862), 6 LT 878, 4 De G F & J 517, 31 LJ Ch 658. The owner of a

piece of land, then worth £1,500, promised (in a signed writing) to give it to his son
"for the purpose of furnishing himself with a dwelling-house." The son made exten-
sive improvements to the land at a cost of £20,000. The owner died leaving the land
py will to other persons. The Chancery court held that the son was entitled to be
declared the owner of the land in equity. LORD WESTBURY Lc: ·Now, about the rules
of the court there can be no controversy. A voluntary agreement will not be com-
pleted or assisted by a court of equity; in cases of mere gift, if anything be wanting
to complete the title of the donee, a court of equity will not assist him in obtaining
it, for a mere donee can have no right to claim more than he has received. But the
subsequent acts of the donor may give the donee that right or ground of .claim which
he did not acquire from the original gift .... So if A puts B in possession of a piece of
land, and tells him, I give it to you, that you may build a house on it; and B, on the
strength of that promise, with the knowledge of A, expends a large sum of money
in building a house accordingly, I cannot doubt that the donee acquires a right from
the subsequent transaction to call on the donor to perform that contract which arises
from the contract, and to complete the imperfect donation which was made. [Note:
Money figures are from the LT report; De G F & J's report omits "which arises from
the contract" in the second-last line; LJ has "which arises therefrom."]

CRABB V ARUN DISTRICT COUNCIL

[1976] Ch 179 (CA)

LORD DENNING MR (Lawton and Scarman LJJ concurring): This case cannot be
properly understood without a map: but I will try to explain it as best I can. Near
Bognor Regis there is a village called Pagham. There is a road there called Hook Lane
running east and west. On the south side of that road there is an area of land called
Windmill Park. In 1946 a Mr. Alford bought 5V2 acres of it. It formed a big square field
with its north side next to the road. Now you must imagine that big field divided into
two parts by a line running from north to south, with two acres on the eastern side
of the line and 31/z acres on the western side, and the two acres divided by a line
horizontally into two halves, the front portion (1 acre) being next to the road and the
back portion (1 acre) with no access to the road: Mr. Alford developed the two acres
and left the other 3V2 acres undeveloped. On these two acres Mr. Alford put two
industrial buildings. On the front portion he erected offices and showrooms. On the
back portion he erected a building for the manufacture of caravans. And he made a
road on these two acres connecting the back portion to the front.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

In 1962 Mr. Alford died. His executors decided to develop the remaining 3112 acres
on the western side of the field . They obtained planning permission to erect dwelling
houses on it. Under this proposal there was to be a new estate road made to give
access from Hook Lane to the new housing estate. It was to be made on the 3112 acres
but was to run alongside the boundary line between the 3 112 acres and the two acres.
It was to be called Mill Park Road. This road was to be to the advantage also of the
buildings on the two -acre portion, because they could have access on to the near
road. The proposal at that time was, however, that there should be only one access
from the two acres on to th e new road. This was to be at a point marked "A" in the
front portion, about halfway up from Hook Lane. It was thought at that time that one
access would be sufficient because the whole of the two acres were in one occupa -
tion. The vehicles from the back portion (where caravans were made) could go along
their own existing road to the front portion (where the offices and showrooms were),
and then out at point A This was to be the only access to the two acres. The previous
access (from a side lane) was to be closed.
Planning permission was given for this development. But the executors of Mr.
Alford did not carry it out themselves. They sold the two acres to the plaintiff; and
they sold the 3112 acres to the defendants, the Chichester Rural District Council. The
conveyances are of importance. By a conveyance dated September 1, 1965, th e
executors of Mr. Alford sold the whole of the two acres with the two industrial build -
ings to the plaintiff, and in the conveyance they agreed to erect a fence 5 ft. 6 in.
high along the boundary line (save for the access gap at point A). They also granted
him a right of access at point A to the proposed new road and a right of way along
it to Hook Lane. By a conveyance dated December 8, 1966, the executors of Mr. Alford
sold the 31/2 acres of the defendants, but they expressly reserved the right (which they
had already granted to the plaintiff) for the owner of the two acres to have access at
point A to the proposed new road and a right of way along it to Hook Lane. In the
same deed the defendants agreed to erect the fence 5 ft. 6 in. high along the bound-
ary line (save for the access gap at point A).
So, on the conveyances the owners and occupiers of the two acres had a right of
access at one point, namely, point A (halfway up the front portion). It was shown on
the map as a gap about 20 feet wide; and from that point they had a right of way
along the proposed new estate road, to get to Hook Lane. The defendants were to
erect a close-boarded fence 5 ft. 6 in. high along the whole boundary between the
two acres and the 31/2 acres, except for the 20 feet gap at point A
In 1967 the plaintiff had a new idea about his two acres. He thought it would be
desirable to split up the two portions and sell them separately for separate use. The
front portion (with the offices and showrooms) was clearly separated from the back
portion (with the manufacturing). But, if they were split up, he would need another
access. The access at point A would serve the front portion. But he would need
another access at another point (to be called point B) so as to serve the back portion,
together with a right of way along the new estate road from point B to Hook Lane.
Now, by this time the plaintiff had engaged as his architect, Mr. Alford, who was
the son of the original owner of the land. On June 22, 1967, Mr. Alford, as architect
for the plaintiff, wrote this letter to the engineer of the defendant council:
For the attenti on .of Mr. Stonier:
Dear Sir ... It would appear that Mr. Crabb may require two entrances off the new
road. one to each of his two bu ildings. If you could let me know when you hope to get
this fence line out I would be glad of the opportunity of meeting a representative of
your department on the site so that these matters can be finally settled and the line of
the fence agreed .

322
 Ill. NON-BARGAIN PROMISES

In pursuance of that letter there was a meeting on July 26, 1967, which was
attended by the plaintiff and his architect, Mr. Alford, and by a representative of the
defendants. There is no written note of what took place. Both the plaintiff and his
architect, Mr. Alford, gave evidence about the meeting. But unfortunately the defend-
ants gave no evidence about it. They undoubtedly had a representative there, but we
do not know who it was. The engineer, Mr. Stonier, said that he himself was not
present. The only other person who might have represented the defendants was a
Mr. Queen. He was in Canada and not available to give evidence. But there is no
doubt that they agreed the line of the fence which was to separate the plaintiff's land
from the defendant's land. There is also no doubt that there was an agreement in
principle that the plaintiff should have, not only the access at point A, but also an
additional access at point B, so as to give access from the back portion of his land
on to the new estate road. The plaintiff said that the defendant's representative made
a firm commitment for a second access at B, but the judge said that the plaintiff was
rather over sanguine. The judge preferred the evidence of Mr. Alford who was rather
more cautious. Mr. Alford said: "I thought we had got final agreement in that there
was to be access at point B, but I saw further processes beyond the meeting." He
foresaw, no· doubt, that there might have to be a document drawn up between the
solicitors. Later on, in his evidence, Mr. Alford was asked whether there was to be any
payment for this additional access. He said: "The normal anticipation at that time
would be that some consideration would be demanded." But the defendaNts' repre-
sentatives did not ask for any payment. Mr. Alford said: "My strong feeling is we
would not be asked to pay that consideration when talking to the defendants in 1967."
Summing up the evidence, as accepted by the judge, the result of the meeting on
July 22, 1967 was that there was an agreement in principle that the plaintiff should
have an additional access at point B to the land, because it was envisaged that he
would sell his two acres of land in two portions: the front portion with access at point
A to the new road, and the back portion with access at point B to the new road. But
the judge found there was no definite assurance to that effect, and, even if there had
been, it would not have been binding in the absence of either writing or consider-
ation. In order to be binding, there would have to be the legal processes foreseen by
Mr. Alford.
As it happened, no legal processes were gone through. The defendants made no
formal grant to the plaintiff of any access at point B or any easement over the new
road. But, nevertheless, the parties acted in the belief that he had or would be granted
such a right. During the winter of 1967 the defendants erected a fence along the line
of the agreed boundary, but they left gaps at point A with acce·ss to the front portion
of the plaintiff's land and at point B with access to the back portion. These two gaps
were used by lorries which went in and out at points A and B as if they were exits
and entrances. It was creating such a mess and disturbance of the plaintiff's land
that there was a meeting on the site on January 31, 1968, at which the defendants
agreed that they would undertake a tidying-up operation; and they did so.
On February 6, 1968, therewas an important development. The defendants gave
orders for gates to be constructed at points A and B, and they were in fact con-
structed. We have before us the contractors' account dated March 30, 1968. The
contractors erected a fence 5 ft. 6 in. high an the way along the boundary, but they
put gates in the fence at points A and B. At point A they erected a pair of oak close·-
boarded gates 18 ft. 0 ins. wide, 5 ft. 6 ins. high, complete with posts and fittings, at
a cost of £117 Ss. 6d. At point B they erected a similar pair 12 ft. 3 ins. wide and 5 ft. 6
ins. high, at a cost of £76 6s. Od. The gateposts were set firmly in concrete at points
A and B, and were clearly·intended to be permanent.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

Some months later, in the autumn of 1968, the plaintiff agreed to sell the front
portion of his land to a purchaser and assigned to the purchaser the right of access
at point A But, here is the important matter. In the conveyance of the front portion
of October 4, 1968, the plaintiff did not reserve any right for himself (as the owner of
the back portion) to go over the front portion so as to get out at point A The plaintiff
thought that he already had a right of access at point B (where gates had already been
erected) and so he did not need to reserve any right to get to point A The judge found
that "... Mr. Crabb believed that he had an assurance by the council that he would
have access at point B from the council's land and was content to rely on that assur-
ance. He did not reserve any right of access over [the front portion] ... . Mr. Crabb
would not have been prepared to proceed with the sale of [the front portion] to [the
purchaser] without reserving access over it ... if he had not believed ... that he would
have access over the council's land."
But then, in January 1969, there was a new development. The plaintiff put a
padlock on the inside of the gate at point B. The defendants were incensed by this.
But they did not say a word to the plaintiff. They went on to his land. They took down
the gates at point B. They pulled them out of the concrete. They took them away and
filled the gap with extra posts and a close-boarded fence to match the existing fence.
In short, they shut up the access at point B. The judge said: "The council gave no
notice to Mr. Crabb of its intention to take this step; it seems to me that it was a
discourteous and high-handed act. ..."
It is that action, depriving the plaintiff of his access, which has led to all the
trouble. The plaintiff sought to settle the matter by agreement. The defendants did
not object to his having access at point B and an easement to serve the back portion
of the land, but they wanted £3,000 for it. This was more than the plaintiff was willing
to pay. So no agreement was reached. In consequence this back portion of land has
been rendered sterile. The plaintiff has been unable to sell it or make use of it because
it has no outlet anywhere.
In June 1971 the plaintiff brought this action claiming a right of access at point B
and aright of way along the estate road. He had no such right by any deed or con -
veyance or written agreement. So, in strict law, on the conveyance, the defendants
were entitled to their land, subject only to an easement at point A, but none at point
B. To overcome this strict law, the plaintiff claimed a right of access at B on the
ground of equitable estoppel, promissory or proprietary. The judge held that he could
not avail himself of any estoppel. He said: "In the absence of a definite assurance by
the representative of the council, no question of estoppel can arise, and that really
concludes the action: The plaintiff appeals to this court.
When Mr. Millett, for the plaintiff, said that he put his case on an estoppel, it shook
me a little; because it is commonly supposed that estoppel is not itself a cause of
action. But that is because there are estoppels and estoppels. Some do give rise to a
cause of action. Some do not. In the species of estoppel called proprietary estoppel,
it does give rise to a cause of action. We had occasion to consider it a month ago in
Moorgate Mercantile Co. Ltd. v. Twitchings [1975] 3 W.L.R. 286 where I said, at p. 297,
that the effect of estoppel on the true owner may be that "... his own title to the prop-
erty, be it land or goods, has been held to be limited or extinguished, and new rights
and interests have been created therein. And this operates by reason of his con -
duct-what he has led the other to believe-even though he never intended it." The
n ew rigl;lts and interests, so created by estoppel, in or over land, will be protected by
the courts and in this way give rise to a cause of action. This was pointed out in
Spencer Bower and Turner, Estoppe/ by Representation, 2nd ed. (1966), pp. 279-282.

324
 Ill. NON-BARGAIN PROMISES

The basis of this proprietary estoppel-as indeed of promissory estoppel-is the

interposition of equity. Equity comes in, true to form, to mitigate the rigours of strict
law. The early cases did not speak of it as "estoppel." They spoke of it as "raising an
equity." If I may expand what Lord Cairns L.C. said in Hughes v. Metropolitan Railway
Co. (1877) 2 App. Cas. 439, 448: "[I]t is the first principle upon which all courts of
equity proceed" that it will prevent a person from insisting on his strict legal rights-
whether arising under a contract, or on his title deeds, or by statute-when it would
be inequitable for him to do so having regard to the dealings which have taken place
between the parties.
What then are the dealings which will preclude him from insisting on his strict
legal rights? If he makes a binding contract that he will not insist on the strict legal
position, a court of equity will hold him to his contract. Short of a binding contract,
if he makes a promise that he will not insist upon his strict legal rights-then, even
though that promise may be unenforceable in point of law for want of consideration
or want of writing-then, if he makes the promise knowing or intending that the
other will act upon it, and he does act upon it, then again a court of equity will not
allow him to go back on that promise: see Central London Property Trust Ltd. v. High
Trees House Ltd. [1947] KB . 130 and Charles Rickards Ltd. v. Oppenhaim [1950] 1 KB .
616, 623. Short of an actual promise, if he, 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, that again will
raise an equity in favour of the other; and it is for a court of equity to say in what way
the equity may be satisfied. The cases show that this equity does not depend on
agreement but on words or conduct. In Ramsden v. Dyson (1866) L.R. 1 H.L. 129, 170
Lord Kingsdown spoke of a verbal agreement "or what amounts to the same thing,
an expectation, created or encouraged." In Birmingham and District Land Co. v. London
and North Western Railway Co. (1888) 40 Ch. D. 268, 277, Cotton L.J. said that"... what
passed did not make a new agreement, but ... what took place ... raised an equity
against him." And it was the Privy council in Plimmer v. Wellington Corporation (1884)
9 App. Cas. 699, 713-714 who said that"... the court must look at the circumstances
in each case to decide in what way the equity can be satisfied" giving instances.
Recent cases afford illustrations of the principle. In Inwards v. Baker [1965] 2 O.B.
29 it was held that, despite the legal title being in the plaintiffs, the son had an equity
to remain in the bungalow "as long as he desired to use it as his home." Danckwerts
L.J. said, at p. 38: "[E]quity protects him so that an injustice may not be perpetrated."
In E.R. Ives Investment Ltd. v. High [1967] 2 O.B. 379, it was held that Mr. High and his
successors had an equity which could only be satisfied by allowing him to have a
right of access over the yard, "so long as the block of flats has its foundations on his
land." In Siew Soon Wah v. Yong Tong Hong [1973] 2 M.L.J. 3 the Privy Council held
that, despite the fact that the defendant had no protection under the Rent Acts, he
had an equity to remain "so long as he continued to practise his profession."
The question then is: were the circumstances here such as to raise an equity in
favour of the plaintiff? True the defendants on the deeds had the title to their land,
free of any access at point B. But they led the plaintiff to believe that he had or would
be granted a right of access at point B. At the meeting of July 26, 1967, Mr. Alford and
the plaintiff told the defendants' representative that the plaintiff intended to split the
two acres into two portions and wanted to have an access at point B for the back
portion; and the defendants' representative agreed that he should have this access.
I do not think the defendants can avoid responsibility by saying that their represent-
ative had no authority to agree this. They entrusted him with the task of setting out

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the line of the fence and the gates, and they must be answerable for his conduct in
the course of it: see Attorney-General to the Prince of Wales v. Collom [1916] 2 KB. 193,
207; and /vloorgate Mercantile Co. Ltd. v. Twitchings [1975] 3 W.L.R. 286, 298.
The judge found that there was "no definite assurance" by the defendants' repre-
sentative, and "no firm commitment," but only an "agreement in principle," meaning
I suppose that, as Mr. Alford said, there were "some further processes" to be gone
through before it would become binding. But if there were any such processes in
the mind of the parties, the subsequent conduct of the defendants was such as to
dispense with them. The defendants actually put up the gates at point Bat consider-
able expense. That certainly led the plaintiff to believe that they agreed that he should
have the right of access through point B without more ado.
The judge also said that, to establish this equity or estoppel, the defendants must
have known that the plaintiff was selling the front portion without reserving a right
of access for the back pqrtion. I do not think this was necessary. The defendants
knew that the plaintiff intended to sell the two portions separately and that he would
need an access at point B as well as point A Seeing that they knew of his inten-
tion-and they did nothing to disabuse him but rather confirmed it by erecting gates
at point B- it was their conduct which led him to act as he did : and this raises an
equity in his favour against them.
In the circumstances it seems to me inequitable that the council should insist on
their strict title as they did, and to take the highhanded action of pulling down the
gates without a word of warning, and to demand of the plaintiff £3,000 as the price
for the easement. If he had moved at once for an injunction in aid of his equity-to
prevent them removing the gates-I think he should have been granted it. But he
did not do so. He tried to negotiate terms, but these failing, the action has come for
trial. And we have the question: in what way now should the equity be satisfied?
Here equity is displayed at its most flexible, see Snell's Principles of Equity, 27th ed.
(1973), p. 568, and the illustrations there given. If the matter had been finally settled
in 1967, I should have thought that, although nothing was said at the meeting in July
1967, nevertheless it would be quite reasonable for the defendants to ask the plaintiff
to pay something for the access at point B, perhaps-and I am guessing-some
hundreds of pounds. But, as Mr. Millett pointed out in the course of the argument,
because of the defendants' conduct, the pack land has been.landlocked. It has been
sterile and rendered useless for five or six years, and the plaintiff has been unable to
deal with it during that time. This loss to him can be taken into account. And at the
present time, it seems to me that in order to satisfy the equity, the plaintiff should
have the right of access at point B without paying anything for it.
I would, therefore, hold that the plaintiff, as the owner of the back portion, has a
right of access at point B over the verge on to Mill Park and a right of way along that
road to Hook Lane without paying compensation. I would allow the appeal and
declare that he has an easement, accordingly.

Loranger v Haines. (1921), 50 OLR 268 (CA). Action by the purchaser for specific
performance. The facts of the case were as follows : L was associated with Hin pro-
moting a patent. H purchased a large parcel of land intending to build a house on
part and sell the rest. H suggested that he would give L a building site on which a
house might be built next to his own. L accepted and drafted an agreement in which,
for "consideration hereinafter mentioned," H promised to convey a parcel of land to
him. The agreement called for L to build a residence on this parcel and to share in the
cost of sewers, watermains, and a common roadway. L built, without any conveyance,

326
 Ill. NON - BARGAIN PROMISES

a house costing $12,500, and spent $1,500 improving the land. After a falling out,
H refused to convey the agreed-on parcel to L. Held, for the plaintiff. On appeal,
affirmed. The things that Loranger undertook to do were a sufficient consideration.
MEREDITH CJCP: And quite apart from any question of contract, the defendant should
assuredly be estopped from claiming title to and taking possession of the land upon
which, not only with his knowledge, but at his request, the plaintiff has expended so
much money-with the defendant's .knowledge and before his eyes-on the faith of
his promise to convey it to the plaintiff.

COWPER-SMITH V MORGAN
2011 sec 61

MCLACHLIN CJ (Abella, Moldaver, Karakatsanis, Wagner, Gascon and Rowe JJ

concurring) :
[1} Equity enforces promises that the law does not. This appeal concerns such a
promise, part of an arrangement between siblings to provide care for their aging
m·o ther. The sister assured the brother that, if he moved back into the family home
to do so, he would be able to acquire her share of that property after their mother's
death. The question before us is whether equity-and specifically the doctrine of
proprietary estoppel-now binds her to her word.
[2} The trial judge concluded that all the elements of proprietary estoppel were
established: the sister promised the brother that he would be able to purchase her
eventual interest in their mother's property; the brother reasonably relied on the expect-
ation that he would be able to do so; and, because of the detriment the brother sufferei:i
as a result of his reliance, it would be unfair and unjust in the circumstances to permit
the sister to resile from her promise. The evidence supports that conclusion.
[3} That the sister did not have an interest in the property at the time her brother
relied on her promise does not negate her obligation to keep her promise; proprietary
estoppel will attach to the sister's interest in the property as soon as she receives it
from their mother's estate. I would allow the appeal.

Ill. ANALYSIS

[15} An equity arises when (1) a representation or assurance is made to the claim -
ant, on the basis of which the claimant expects that he will enjoy some right or
benefit over property; (2) the claimant relies on that expectation by doing or refrain -
ing from doing something, and his reliance is reasonable in all the circumstances;
and (3) the claimant suffers a detriment as a result of his reasonable reliance, such
that it would be unfair or unjust for the party responsible for the representation or
assurance to go back on her word: see Thorner v. Major, [2009} UKHL 18 .... The
representation or assurance may be express or implied ... . An inchoate equity arises
at the time of detrimental reliance on a representation or assurance. It is not neces-
sary to determine, in this case, whether this equity is personal or proprietary in
nature. When the party responsible for the representation or assurance possesses
an interest in the property sufficient to fulfill the claimant's expectation, proprietary
estoppel may give effect to the equity by making the representation or assurance
binding.
[16} Proprietary estoppel protects the equity, which in turn protects the claim-
ant's reasonable reliance .... Like other estoppels, proprietary estoppel avoids the

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CHAPTER 3 THE KINDS OF PROMI SES LEGALLY EN FORCED

unfairness or injustice that would result to one party if the other were permitted to
break her word and insist on her strict legal rights ....
[17] Where protecting the equity of the case may demand the recognition of
"new rights and interests ... in or overland" (Crabb v. Arun District Council ... ), propri-
etary estoppe\ can do what other estoppe\s cannot-it can found a cause of action:
see MacDougall [Estoppel (Toronto : LexisNexis, 2012)], at p. 424 .. . . Where the ingre-
dients for a proprietary estoppel are present, the court must determine whether it is
appropriate to satisfy the equity by recognizing the modification or creation of
property rights "in situations where there is want of consideration or of writing" ... .
[18] Consensus as to the elements of proprietary estoppel has proved elusive ... .

(20] Unfairness or injustice-sometimes referred to as "unconscionability," albeit

not in the sense in which that term is used in contract law (see Ryan, (2005 SCC 38]
at para. 74)-are not stand-alone criteria; they are what proprietary estoppel aims to
avoid by keeping the owner to her word.
(211 It has commonly been understood in Canada that proprietary estoppel is
concerned with interests in land ... .
[221 We need not decide, in this case, whether proprietary estoppel may attach
to an interest in property other than land; Max's expectation was that he would enjoy
a right over the family home, namely, the right to acquire Gloria's eventual interest
in it. Nor need we determine whether equity more broadly enforces non-contractual
promises on which claimants have detrimentally relied: see, e.g., Waltons Stores
(Interstate) Ltd. v. Maher (1988), 76 A.L.R. 513 (H.C.) ....

A. WAS MAX'S RELIANCE REASONABLE?

[23] As we have seen, to establish proprietary estoppel one must first establish
an equity of the kind that proprietary estoppel protects. This requires three things :
a representation or assurance on the basis of which the claimant expects to enjoy a
right or benefit over property, reasonable reliance on that expectation, and detriment
as a result of the reliance. When the owner of an interest in the property over which
the claimant expects to enjoy a right or benefit is responsible for the representation
or assurance, then the equity established by the claimant's reasonable reliance may
be given effect by proprietary estoppel.
[241 There is no question that Gloria assured Max that, if he moved back to
Victoria to care for their mother, he would be able to acquire her eventual interest
in the house. Nor is it disputed that, as a result of his reliance on that assurance, Max
has suffered a detriment. The trial judge determined, and all now agree, that "Max
acted to his detriment in moving from England to Victoria, giving up employment
income, the long-term lease of a cottage, his contacts with his children, and his
social life to look after his aged dementing mother" and that "[hie did so relying on ·
Gloria's agreement to his conditions for the move": para. 118.
[251 The question is whether Max's reliance was reasonable. If not, then no equity
arose in his favour. Gloria argues-and the Court of Appeal majority accepted-that
Max's reliance could not have been reasonable because Gloria did not own an interest
in the property. As Willcock J.A. wondered, at para. 111 of his reasons, "[h]ow can
there be reasonable reliance upon a promise to convey an interest in property made
by one who does not have such an interest or whose interest is uncertain?"
(26] Reasonableness is circumstantial. As Lord Walker put it in Thorner, "to estab-
lish a proprietary estoppel the relevant assurance must be clear enough,'' that is, "(t]he
promise must be unambiguous and must appear to have been intended to be taken

328
 Ill. NON-BARGAIN PROMISES

seriously. Taken in its context, it must have been a promise which one might reason -
ably expect to be relied upon by the person to whom it was made" .... What matters
is what one party induced the other to expect; as Lord Hoffmann stated in Thorner,
the question is whether "the meaning ... conveyed would reasonably have been
understood as intended to be taken seriously as an assurance which could be relied
upon" .. . .
[27] In Thorner, one party had induced the other to expect that he would inherit
farm property. Since the parties knew "that the extent of the farm was liable to fluctu -
ate (as development opportunities arose, and tenancies came and went)," "[t]here is
no reason to doubt that their common understanding was that [the] assurance
related to whatever the farm consisted of at [the owner's] death": para. 62. This was
. not the sort of uncertainty which would make reliance on the.assurance unreason -
able because "it is unprofitable, in view of the retrospective nature of the assessment
which the doctrine of proprietary estoppel requires, to speculate on what might have
been": para. 65.
[28] This approach to assessing certainty-and thus the reasonableness of reli-
ance-permits equity "to mitigate the rigours of strict law": Crabb, at p. 871; see also
Thorner, at para. 9"8, per Lord Neuberger. Unlike a contract, which, "subject to the
narrow doctrine of frustration, must be performed come what may," equity "looks
backwards from the moment when the promise falls due to be performed and asks
whether, in the circumstances which have actually happened, it would be uncon-
scionable for the promise not to be kept": Walton, [EWCA, April 14, 1994 (unreported)]
at paras. 20-21, quoted in Thorner, at para. 57.
[29] In a proprietary estoppel claim, where the equity is said to have arisen when
the claimant relied on an expectation that he would enjoy some right or benefit over
property, it may be that the party responsible for the expectation had such a specula-
tive interest in the property that the claimant's reliance could not have been reason-
able: see Cobbe v. Yeoman's Row Management Ltd., [2008] UKHL 55 .... But whether
this is so will depend on context, not on ex ante doctrinal restrictions. The Court of
Appeal majority's proposed bright line rule-namely, that reliance on a promise by
a party with no present interest in property can never be reasonable-is out of step
with equity's purpose, which is to temper the harsh effects of strict legal rules.
[30] Whether, in a particular case, a claimant's reliance was reasonable in the
circumstances is a question of mixed fact and law. A trial judge's determination of
this point is, absent palpable and overriding error, entitled to deference ....
[31] Here, on the trial judge's findings, both Max and Gloria had clearly under-
stood for well over a decade that their mother's estate, including the house in which
she lived, would be divided equally among her three children upon her death.
Nathan, Max, and Max's ex-wife each testified to a conversation with Elizabeth and
Arthur, just prior to Arthur's death in 1992, in which both parents made clear that
everything they owned would be divided equally among their three children once
Elizabeth pa~sed away. Max's evidence was that Elizabeth confirmed as much to him
in 2002. Gloria conceded at trial that, in the years before her mother's death, she
made statements evincing the same expectation. She departed from that position-
and asserted that she was entitled to all of her mother's assets, the house included-
only in April 2011.
[32] It was thus sufficiently certain that Gloria would inherit a one-third interest
in the property for her assurance to be taken seriously as one on which Max could
rely. Max ·and Gloria negotiated for an extended.period before Max uprooted his life
in England and returned to Victoria. Gloria promised unequivoc";llY that he would
be able to acquire her share of the property if he did so. She made that commitment,

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

among others, with the purpose of enticing him back to the family home. In this,
she succeeded. I see no basis on which to overturn the trial judge's conclusion that,
in these circumstances, Max's reliance was reasonable.
[33] Max reasonably relied on the expectation that he would be able to acquire
Gloria's interest in the property once their mother's estate had been administrated
in the usual course. Gloria was responsible for that expectation; she promised Max
as much before he returned to Victoria from England. Max suffered a detriment as
a result, such that it would be unfair or unjust to permit Gloria to break her word. An
equity thus arose in Max's favour. It is this equity that proprietary estoppel will pro-
tect, if its elements are established.

B. DOES PROPRIETARY ESTOPPEL PROTECT THE EQUITY?

[34] The dispute as to whether the elements of proprietary estoppel are made
out in this case turns on whether, at the time of the claimant's reliance, the party
responsible for the claimant's expectation that he will enjoy a right or benefit over
property must own an interest in the property sufficient to meet the claimant's
expectation. The Court of Appeal majority concluded that, since Gloria did not own
such an interest at the ti):ne of Max's reliance, his proprietary estoppel claim could
not succeed . ...
[35] I cannot agree. With respect, the conclusion reached by the Court of Appeal
majority conflates proprietary estoppel with the equity to which it gives effect. . ·
[36] An equity arose in Max's favour when he reasonably relied to his detriment
on the expectation that he would be able to acquire Gloria's one-third interest in
their mother's house. That equity could not have been protected by proprietary
estoppel at the time it arose, because Gloria did not then own an interest in the
property. But that does not mean that proprietary estoppel cannot attach to Gloria's
share of the house once she receives it. I conclude that it can.

C. WHAT IS THE APPROPRIATE REMEDY?

· [46] Where a claimant has established proprietary estoppel, the court has con-
siderable discretion in crafting a remedy that suits the circumstances .... As with any
exercise of discretion, an appellate court should not interfere unless the trial judge's
decision evinces an error in principle or is plainly wrong ...
[47] Still, "the court must take a principled approach, and cannot exercise a com-
pletely unfettered discretion according to the individual judge's notion of what is
fair in any particular case": Jennings v. Rice, [2002] EWCA Civ. 159 .... A claimant who
establishes the need for proprietary estoppel is entitled only to the minimum relief
necessary to satisfy the equity in his favour .... Since the equity aims to address the
unfair or unjust detriment the claimant would suffer if the owner were permitted to
resile from her inducement, encouragement, or acquiescence, "there must be a pro-
portionality between the remedy and the detriment which is its purpose to avoid" ....
[48] This approach recognizes that, while proprietary estoppel arises where the
claimant's expectations are frustrated, the reasonableness of the claimant's expecta-
tions must be assessed in light of, among other things, the detriment the claimant
has actually suffered .... Courts of equity must therefore strike a balance between
vindicating the claimant's subjective expectations - which, in their full context, may
or may not reflect a reasonable valuation of the claimant's detriment-and correcting
that detriment, which may be difficult or even impossible to measure .... In no case,
however, may the claimant ·o btain more than he expected .

330
 Ill. NON - BARGAIN PROMISES

[49] Here, Max's detriment lay in his returning to Victoria to live with and care
for his aging mother. He expected, among other things, that he would be able to
acquire Gloria's share of their mother's house after their mother's death and once
her estate had been administered. Having kept up his end of the bargain, he sought
an order requiring Gloria to keep up hers by selling him her one-third interest in the
property. The trial judge concluded that this was the minimum required to satisfy
the equity.
[50] Requiring Gloria to sell her interest in the house to Max is the minimum
necessary to satisfy the equity in Max's favour. The question is, at what price 7
[511 Max submits that he should be entitled to purchase Gloria's share for
$223,333.33, which reflects the property's 2011 appraised value of $670,000.00. Gloria
argues that, if she is ordered to sell her interest to Max, it should be at its current fair
market value, which the parties agree is higher than it was in 2011.
[52] I agree with Max. As soon as Gloria receives an interest in the property from
their mother's estate, all of the elements of proprietary estoppel will be satisfied. But
the relevant equity will have arisen long before-namely, at the time of Max's reliance.
The equity in Max's favour exists to avoid the unfairness and injustice that would
result if Gloria were permitted to break her word and not sell her interest to Max,
notwithstanding the detriment Max suffered in re~urning to Victoria from England.
Max valued that detriment as being worth the concessions he obtained from Gloria.
One of those concessions was that Max would be able to acquire Gloria's interest in
the property in exchange for an amount equal to one third of its total fair market
value once the estate had been administered.

[56] To hold otherwise would disregard the difference between the equity and
the estoppel. That no estoppel was available at the time the equity arose is of no
moment. Max's expectations must be considered broadly ....
[57] Still, as the trial judge recognized, satisfying the equity does not require Gloria
to sustain a loss. Had events unfolded as Max reasonably expected them to, Gloria would
have given up her interest in the property in early 2011 in exchange for its fair market
value. She would have had the benefit of those funds during the intervening years.
And her mother's estate would have been relieved of the cost of maintaining the
property, increasing the residue in which Gloria and her siblings are to share equally.
[58] Max will therefore be entitled to purchase Gloria's interest in the property
for $223,333.33, plus an amount equal to the post-judgment interest that would be
payable on a judgment in that amount issued on February 2, 2011, once Gloria has
received that interest from Elizabeth's estate. Upon his acquisition of Gloria's interest
in the property, Max is to account to the estate for the amount of any expenses
incurred by the estate in maintaining the property since February 2, 2011.

[60] I would allow the appeal ....

[The partially concurring judgments of BROWN J and COTE J are omitted.]

NOTES AND QUESTIONS

1. Are cases like Dillwyn, Crabb, Cowper-Smith, and Loranger really contract cases? If not,
how should the rule applied in these cases be classified? In SM Waddams, Dimensions of Pri-
vate Law: Categories and Concepts in Anglo-American Legal Reasoning (Cambridge : Cam-
bridge University Press, 2003), the author suggests that this issue (reliance on gratuitous
promises) has, li ke many other issues in private law, not been allocated to a single category,

331
CHAPTER 3 THE KINDS O F PROMISES LEGALLY ENFORCED

but has been influenced concurrently by several concepts, including contract, wrongdoing,
unjust enrichment, property, and public policy. Do you agree with this analysis?
2. A promises to give to B a vacant lot next to the family cottage in Muskoka. The lot is
worth $1 million, and B builds a cabin there at a cost of $50,000. A dies leaving all her property
by will to C. How wou ld you advise B?
3. A is the owner of land and enters into negotiations with B for the sale of that land to B.
They reach an oral "agreement in principle" on the core terms of the sale but no written con-
tract is produced. There remain some non-trivial terms still to be agreed on . The structure of
the agreement in principle is that B, at his own expense, will apply for planning permission and,
if that permission is obtained, A will sell the land to B at a stipulated price. Both A and B know
that the agreement in principle is not legally binding but both lead the other person to believe
that they feel themselves honour bound to enter into the formal contract once planning per-
mission is obtained. The application for planning permission is successful and A then seeks to
renegotiate the core financial terms of the sale. B is unwilling to agree to the new financial
terms. Can B sue A in proprietary estoppel to enforce their agreement in principle? Has B's
reliance on the agreement in principle been reasonable? For a negative answer to both these
questions, see Cobbe v Yeoman's Row Management Ltd, [2008] UKHL 55.
4. Why might a court allow estoppel to be used as a cause of action in relation to promises
to convey interests in land? For a multifaceted historical explanation based on the prevalence
of formalities requi1·ed to transfer interests in land, the sympathetic nature of the persons rely-
ing, and the lack of respect for consideration in the equity tradition, see E Cooke, The Modern
Law of Estoppel (Oxford: Oxford University Press, 2000) at 127-28. See also, the discussi~:ms in
B MacDougall, Estoppel (Toronto: LexisNexis, 2012); B McFarlane, The Law of Proprietary
Estoppel (Oxford: Oxford University Press, 2014); and J McGhee, Snell's Equity, 33rd ed (Lon-
don: Sweet & Maxwell, 2015); all of which were relied on by the Supreme Court in
Cowper-Smith.
5. As the Supreme Court noted in Cowper-Smith, courts deciding cases of proprietary
estoppel have shown a willingness, in certain circumstances, to limit a claimant's remedy to
one that undoes detrimental reliance rather than one that meets the claimant's expectation.
Courts deciding cases of promissory estoppel have not shown this same willingness. Is there
any compelling reason for this difference?
6. Is the current law of estoppel coherent when both the rules of proprietary and promis-
sory estoppel are viewed together? For arguments that it is not, see JW Neyers, "A Coherent
Law of Estoppel?" (2003) J of Obligations & Remedies 25; B McFarlane & P Sales, "Promises,
Detriment, and Liability" (2015) 131 Law Q Rev 610. Sensing these incoherences, Australian
courts have moved to merge the rules of promissory and proprietary estoppel. The excerpts
that follow describe this process and its effect on Canadian courts.

PETER HEFFEY, JEANNIE PATERSON & ANDREW ROBERTSON,

Principles of Contract Law, 2ND ED
(Sydney: Lawbook Co, 2005) at 162-63 (footnotes omitted)

Both the principles of proprietary estoppel and promissory estoppel came to be

applied in the Australian courts. In Waltons Stores (Interstate) Ltd v. Maher [(1988), 164
CLR 387], the High Court recognised a unity of principle between promissory and
proprietary estoppel, and recognised that they are manifestations of a broader prin-
ciple of equitable estoppel, which is of general application. It was said that the com-
mon thread that links promissory and proprietary estoppel together is the principle
that equity will come to the relief of a plaintiff who has acted to his or her detriment
on the basis of an assumption induced by the defendant's conduct.

332
 Ill. NON-BARGAIN PROMISES

Waltons Stores negotiated to lease land from Mr. and Mrs. Maher, on terms that
required the Mahers to demolish a building on their land and construct a new build-
ing to Waltons' specifications. Time was short, and the terms of the lease needed to
be finalised quickly so that the Mahers could complete the construction work by the
date stipulated by Waltons. The Mahers were concerned to ensure that there were
no problems with the lease before they demolished a new brick part of the old build-
ing. When negotiations were essentially complete, Waltons' solicitors sent to the
Mahers' solicitors a copy of the lease which incorporated some final amendments
requested by the Mahers. Waltons' solicitors told the Mahers' solicitors that they
would let them know the next day if Wal tons disagreed with any of the amendments.
The Mahers heard no more from Waltons' solicitors on this issue. The lease was
signed by the Mahers and returned to Waltons on November 11 "by way of exchange.''
Waltons then instructed its solicitors to "go slow" on the transaction, pending a
review of its retailing strategy. Waltons became aware in December that the Mahers
had begun to demolish the existing building, but still delayed signing. On 19 January,
when the construction of the new building was 40 per cent complete, Waltons'
solicitors informed the Mahers' solicitors that Waltons did not intend to proceed with
the lease.
No contract existed between the parties because Waltons had not executed the
lease. Deane and Gaudron JJ. found that the Mahers had acted on the assumption
that exchange had taken place and a binding agreement for lease had been made.
This was an assumption of existing fact which, when relied upon, established an
estoppel in pais or common law estoppel. The effect of that estoppel was to prevent
Waltons from denying that they had signed the lease. The rights of the parties were
therefore determined on the basis that Waltons had signed the lease. Mason C.J.,
Wilson and Brennan JJ. preferred the conclusion that the Mahers had acted on the
assumption that Waltons would complete the transaction. This was an assumption
as to Waltons' future conduct, which could only give rise to a promissory or equitable
estoppel.
Mason C.J. and Wilson J. accepted that a promissory estoppel could arise between
parties involved in pre-contractual negotiations, and could be used to support a
cause of action in contract. Here, they said, Waltons' inaction encouraged the Mahers
to continue to act on the assumption that the completion of the transaction was
merely a formality. It was unconscionable for Waltons to act as it did, and Waltons
was estopped from retreating from its implied promise to complete the contract.
Brenna.n J. recognised that promissory estoppel could operate as an independent
source of rights. If the proper inference from the facts was that the Mahers had been
led to believe that a contract would come into existence, then Waltons' unconscion-
able conduct raised an equity in favour of the Mahers, which the Court had to satisfy
by granting appropriate relief. The appropriate relief was to treat Waltons as though
it had signed and exchanged the lease.
The decision in Waltons Stores v. /Via her was a significant development in Austral-
ian contract law because it involved a departure from the classical idea that a promise
creates a legal obligation only when consideration has been given in return for the
promise and a contract has been formed . The decision greatly expanded the range of
situations in which liability could result from reliance on non-contractual promises.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

NMVATA
2003 BCCA 297, 13 BCLR (4th) 73

HUDDART JA (for the court):

[1] This appeal arises out of a failed relationship. It is from an order dismissing
Ms. A's claim to enforce a promise by Mr. M. to pay the balance outstanding on the
mortgage on her home in England {GBP 73,048.53) if she would come to live with
him in Canada with a view to marriage.
[2] In reliance on that promise, Ms. A resigned her permanent job with the Bank
of America and moved to Vancouver in July 1993. The relationship was stormy, in
part, because Mr. M. did not pay off her mortgage. He did, however, loan her $100,000
on a promissory note dated 6 April 1994. Ms. A applied those funds to her mortgage.
About a week later, Mr. M. evicted Ms. A from his home. She has not been able to
find permanent employment since, in England or Vancouver.
[3] The only issue on this appeal is whether the trial judge erred in r~fusing to
enforce the promise on which Ms. A relied to her detriment. ...
[4] The essence of the appeal is that the trial judge took too narrow a view of the
equitable doctrine of promissory estoppel .... Ms. A's counsel frankly acknowledged
he was asking this Court ... to extend the application of promissory estoppel to right
a wrong that is otherwise being done to Ms. A, she having suffered from her reliance
on Mr. M.'s promise, albeit in a romantic relationship. He asks us to follow the path
already well trod by the courts of New Zealand, Australia, and the United States, and
being opened in England to an equitable remedy for injurious reliance on a promise
intended to bind its maker and to be acted upon by the promisee, and acted upon
by the promisee to the knowledge of the promisor.
[5] This is the approach to promissory estoppel about which Professor Waddams
wrote in The Law of Contracts {4th ed.) Canada Law Book, 1999, at p. 141 ...
... It may therefore be suggested that Commonwealth law is moving, though rather
slowly, in the direction of the Second Restatement, section 90, that is, towards the
protection of promises by reason of and to the extent of subsequent reliance.
[6] The relevant part of Restatement of the Law Second, Contracts 2d, The Amer-
ican Law Institute, American Law Institute Publishers (1981) states:

90. Promise Reasonably Inducing Action or Forbearance

(1) A promise which the promiser should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of the
promise. The remedy granted for breach may be limited as justice requires.
[7] The appellant finds further support for this extension of promissory estoppel
beyond its reach as accepted currently in Canadian authorities in Waltons Stores
(Interstate) Limited v. fv1aher and Another (1988), 164 C.L.R. 387 {H.C.A). At para. 26,
Brennan J. summarized the Australian position:
A non-contractual promise can give rise to an equitable estoppel only when the prom-
isor induces the promisee to assume or expect that the promise is intended to affect
their legal relations and he knows or intends that the promisee will act or abstain from
acting in reliance on the promise, and when the promisee does so act or abstain ... and
the promisee would suffer detriment by his action or inaction if the promisor were not
to fu lfi ll the promise.

334
 Ill. NON-BARGAIN PROMISES

[9] [O]n the basis of this view of promissory estoppel, Ms. A. considers the min-
imum equity to do her justice is that she not be required to pay back the loan of
$100,000.00 ....
[10] The respondent says this Court should not make such a revolutionary change
to the law in circumstances where the unfulfilled promise was made at the outset of
a romantic relationship that by its nature involves risk-taking, and, he might have
said, many promises. This is particularly so, he submits, because Parliament and the
Legislature have provided statutory remedies for losses suffered on the breakdown
of romantic or marriage-like relationships, among which they have not chosen to
include the enforcement of an unfulfilled promise. Finally, he asks, what better test
is there for the enforcement of a promise than that the common law (as understood
in British Columbia) provides: did the parties intend to affect their legal relations?
Here, he points out, there is no evidence either party thought a legal relationship
had been created by the promise, that their legal relations had been affected, or that
the promise was legally binding.
[11] The appellant replies that, if this is the correct test for the enforcement of a
promise, Mr. Justice Cohen's order dismissing her claim must be set aside and the
matter remitted to the trial court for consideration as to whether the parties thought
the promise of Mr. M. to be legally binding.
·[12] I find merit in the respondent's submission given the current status of the
law of promissory estoppel in Canada, but need consider only the appellant's submis-
sion to resolve this appeal. If equitable estoppel is seen as a flexible doctrine requiring
a broad approach to preclude unconscionable conduct or injustice, I am not per-
suaded by the findings of the trial judge or the evidence in this case that Mr. M.'s
failure to keep his promise to Ms. A. is unconscionable as the law understands that
concept, and, thus, unjust. This is because, even on the analyses in Waltons, supra, a
necessary element of promissory estoppel is the promisee's assumption or expect-
ation of a legal relationship.

[17] None of the Australian High Court justices would have extended the reach
of the doctrine of promissory estoppel to provide the equivalent of the American
injurious reliance remedy. By no reading of any of their opinions, would the doctrine
reach to the facts of this case ....
. [18] While it may be, as Professor Waddams suggests, that the law is moving
slowly toward a more generous approach to promissory estoppel than that said ... to
be well settled, I can see little evidence of that movement in Canadian authorities,
or for that matter, in English authorities.

[20] The absence of any evidence as to what interest, if any, Mr. M. might acquire
in her home, significant references in their correspondence to a future equal partner-
ship and to joint plans for the English house to produce income for them jointly, and
the lack of any reference to when the promise was to or could be fulfilled, suggest
the promise was made in the context of a relationship both of them thought would
be permanent, and result in marriage, at which point they would be life partners, not
that it would be fulfilled to compensate Ms. A. for the detriment she would suffer
from leaving her job and home. There was also a lack of mutuality, in that Ms. A.
could be under no enforceable obligation to stay with Mr. M. if he fulfilled the
promise.
[21] In these circumstances, I can see no reason to remit the matter to the trial
court for further consideration, even if the trial judge can be said to have erred in

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

requiring proof of an existing legal relationship as a necessary element of promissory

estoppel. Whether he did err in that regard I prefer to leave for another case w here
the question requires to be answered.
[221 It follows I would dismiss the appeal.

NOTES AND QUESTIONS

1. Although not made clear in the excerpt above, Ms. A's claim in promissory estoppel was
a counterclaim to Mr. M's attempt to recover $100,000 under a promissory note signed by her.
While his claim succeeded in full (see McLeod v Amiras, (2001), 94 BCLR (3d) 359 (SC)), her
counterclaim was unsuccessful. Does it seem just that she has to repay the loan, but that he
has no obligation to pay for her substantial detriment? Is it not realistic to assume that, before
the breakup, the parties would have understood the repayment of the loan to be conditional
on Mr. M fulfilling his side of the bargain?
2. Is the court's discussion of intention consistent with that given in Owen Sound, above?
Is its discussion of certainty consistent with that given in Crabb, above?
3. American law has been much more willing to enforce non-proprietary gratuitous prom-
ises that have been relied on (in contrast to Canadian cases such as NM v ATA and Calgary Fire
Fighters Association (International Association of Fire Fighters, Local 255) v Calgary (City),
2011ABCA121) . What is the conceptual basis underpinning s 90 of the Restatement of Con- .
tracts, 2d7 Consider the following excerpt.

WARREN A SEAVEY, "RELIANCE UPON GRATUITOUS

PROMISES OR OTHER CONDUCT"
(1950-51) 64 Harv L Rev 913 at 925-27 (footnotes omitted)

This brings us ... to the ... situation, where there has been a failure to perform a gra -
tuitous promise which, it is assumed, was made in good faith .... The ... way of dealing
with the situation is to use tort principles. This will avoid the indefiniteness of the
application of Section 90 and will also clarify the matter of damages. The colloquial
explanation for the rule of the section is that it creates "promissory estoppel." Estoppel
is basically a tort doctrine and the rationale of the section is that justice requires the
defendant to pay for harm caused by foreseeable reliance upon performance of his
promise. The wrong is not primarily in depriving the plaintiff of the promised reward
but in causing the plaintiff to change position to his detriment. It would follow that
the damages should not exceed the loss caused by the change of position, which
would never be more in amount, but might be less, than the promised reward ....
The limitations [of the tort analysis] .. ., which do not appear in Section 90 of the
Restatement of Contracts, are that the defendant is not liable if the plaintiff had no
other means of securing the result or if the defendant had notified the plaintiff of an
intent not to perform while the other still had available means to secure performance.
Both limitations seem necessary for tort liability and it may be that this is merely
spelling out what is implicit ... in Section 90. Thus, ... if a person gives the promise
to insure a vessel at a time when the plaintiff could not have secured any other per-
son to do the work for him, there would be no liability. Likewise, if the defendant,
having decided not to perform his promise, notified the plaintiff in time for other
insurance to be secured, no harm would have resulted from his failure to perform
the undertaking. If there is reliance, it would seem unjust not to allow recovery where
the defendant has reason to know of the reliance and where, without excuse, the

336
 IV. UNILATERAL CONTRACTS

defendant fails to perform. If the promisor attempted good faith performance and,
in the exercise of due care, failed to carry our his promise, there should be no liability
since it was not a bargaining transaction.

NOTES AND QUESTIONS

1. For a view of s 90 that is very different than that offered by Seavey, see T Yorio & S Thel,
'The Promissory Basis of Section 90" (1991) 101 Yale LJ 111. In that article the authors argue
that the purpose of s 90 is to enforce serious promises. Thus, detrimental reliance is important
only insofar as it helps to identify serious promises and distinguish them from promises not
warranting enforcement. Which view of s 90 would Fuller or Brudner support (recall their
exc erpts in Section Ill.A, above)? For a discussion of s 90, see Waddams at paras 192-94;
McCamus at 298-301.
2. Surveys of American case law have found that judges routinely award expectation dam-
ages and specific performance for breach of s 90 (see e.g . the discussion of Yorio & Th el,
above; DA Farber & JH Matheson, "Beyond Promissory Estoppel: Contract Law and the Invis-
ible Handshake" (1985) 52 U Ch icago L Rev 903; Smith at 239-40). Does this undermine
Seavey's justification7 Why might a court award expectation damages when it was concerned
about detrimental reliance7 For various explanations. see A Robertson, "Satisfying the Min-
imum Equity: Equitable Estoppel Remedies after Verwayen" (1996) 20 Melbourne UL Rev 805;
A Robertson, 'The Reliance Basis of Proprietary Estoppel Remedie s" [2008] The Con veyancer
295; B McFarlane & P Sales, "Promises, Detriment. and Liabili ty" (2015) 131 Law Q Rev 610; and
Fuller & Perdue, 'The Reliance Interest in Contract Damages." w hich is excerpted in Chapter 2,
Section I.
3. A promises B $50,000 as a gift. B buys a car for $25,000. A revokes his promise. B's car
is worth $20,000. What shou ld be B's measure of recovery? Would it make any difference if A,
in stead of revoking the promise, had died leaving unpaid creditors and needy dependants7

IV. UNILATERAL CONTRACTS

A "unilateral contract" is ·made by accepting an offer; not by making a counterpromise (which
would create a "bilateral contract" of mutual promises) but by performing a requested overt
act. The contract is sa id to be unilateral because there is only o ne re lationship of right and duty
created between the parties-the promiser is under a duty to perform her pro mise and the
promisee has a right to the promised performance (provided in each case that the requested
act is performed) .
Unilateral contract situations present a number of problems, many arising in what are
sometimes called the "reward case s." To whom is a reward offered? Mu st the offeree, whoever
she may be, notify the offerer? If so, when7 Another interesting problem arises when the
offerer wants to revoke her offer after the offeree has substantially performed the requested
act. When should the courts protect the interests of the parties? What interests ought to be
protected7
Looking back through the materials presented thus far, w here before have you see n unilat-
era l C:ontracts7 How w as the concept used by the courts?

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

WILLIAMS V CARWARDINE
(1833), 4 B & Ad 621, 110 ER 590

At the trial before Park J ., at the last Spring Assizes for the county of Hereford, the
following appeared to be the facts of the case: One Walter Carwardine, the brother
of the defendant, was seen on the evening of the 24th of March, 1831, at a public
house at Hereford, and was not heard of again till his body was found on the 12th of
April in the river Wye, about two miles from the city. An inquest was held on the
body on the 13th of April and the following days till the 19th; and it appearing that
the plaintiff was at a house with the deceased on the night he was supposed to have
been murdered, she was examined before the magistrates but did not give them any
information which led to the apprehension of the real offender. On the 25th of April
the defendant caused a handbill to be published, stating that whoever would give
such information as would lead to a discovery of the murderer of Walter Carwardine,
should, on conviction receive a reward of £20; and any person concerned therein,
or privy thereto (except the party who actually committed the offence), should be
entitled to such reward, and every exertion used to procu,re a pardon; and it then
added, that information was to be given, and application for the above reward was
to be made, to William Carwardine, Holmer, near Hereford. Two persons were tried
for the murder at the Summer Assizes, 1831, but acquitted. Soon after this the plaintiff
was severely beaten and bruised by one William Williams; and on the 23rd of August,
1831, believing she had not long to live, and to ease her conscience, she made a
voluntary statement, containing information which led to the subsequent conviction
of Williams. Upon this evidence it was contended, that as the plaintiff was not
induced by the reward promised by the defendant to give evidence, the law would
not imply a contract by the defendant to pay her the £20. The learned Judge was of
opinion that the plaintiff, having given the information which led to the conviction
of the murderer, had performed the condition on which the £20 was to become
payable, and was therefore entitled to recover it; and he directed the jury to find a
verdict for the plaintiff, but desired them to find specially whether she was induced
to give the information by the offer of the promised reward. The jury found that she
was not induced by the offer of the reward, but by other motives.
Curwood [counsel for the defendant] now moved for a new trial. There was no
promise to pay the plaintiff the sum of £20. That promise could only be enforced in
favor of persons who should have been induced to make disclosures by the promise
of the reward. Here the jury found that the plaintiff was induced by other motives to
give the information. They have, therefore, negatived any contract on the part of the .
defendant with the plaintiff.
DENMAN CJ: The plaintiff, by having given information which led to the conviction
of the murderer of Walter Carwardiri.e, has brought herself within the terms of the
advertisement, and therefore is entitled to recover.
LITTLEDALE J: The advertisement amounts to a general promise to give a sum of
money to any person who shall give information which might lead to the discovery
of the offender. The plaintiff gave that information.
PARKE J: There was a contract with any person who performed the condition men-
tioned in the advertisement.
PATTESON J : I am of the same opinion. We cannot go into the plaintiff's motives.

338
 IV. UNILATERAL CONTRACTS

[Rule refused. From the report of the trial in 5 C & P 566 at 574, it might appear from
an admission of the defendant's counsel that the plaintiff knew of the offer at the
time she gave the information. If she did not, could she be treated as a party to a
contract? Could she have given the information in fulfillment of its condition?]

THE CROWN V CLARKE

(1927), 40 CLR 227 (Aus HC)

ISAACS ACJ : This is an appeal from the judgment of the Fu\\ Court of Western Aus-
tralia. Evan Clarke proceeded, by petition of right under the Crown Suits Act 1898, to
sue the Crown for £1,000 promised by proclamation for such information as should
lead to the arrest.and conviction of the person or persons who committed the mur-
ders of two police officers, Walsh and Pitman . ... At the trial the Chief Justice gave
judgment for the Crown. In the Fu\\ Court, by a majority, the judgment of McMillan
C.J., the trial Judge, was reversed. In the result, two learned Judges thought the
Crown should succeed while two others thought Clarke should succeed ....
The facts of this case, including inferences, are not, as I understand, in dispute.
They amount to this: The information for which Clarke claims the reward was given
by him when he was under arrest with Treftene on a charge of murder, and was
given by him in circumstances which show that in giving the information he was
not acting on or in pursuance of or in reliance upon or in return for the consideration
contained in the proclamation, but exclusively in order to clear himself from a false
charge of murder. In other words, he was acting with reference to a specific criminal
charge against himself, and not with reference to a general request by the commun-
ity for information against other persons. It is true that without his information and
evidence no conviction was probable, but it is also abundantly clear that he was not
acting for the sake of justice or from any impulse of conscience or because he was
asked to do so, but simply and solely on his own initiative, to secure his own safety
from the hand of the \aw and altogether irrespective of the proclamation. He has, in
my opinion, neither a legal nor a moral claim to the reward. The learned Chief Justice
held that Clarke never accepted or intended to accept the offer in the proclamation,
and unless the mere giving of the information without such intention amounted in
law to an acceptance of the offer or to performance of the condition, there was
neither "acceptance" nor "performance," and therefore there was no contract. I do
not understand either of the learned Judges who formed the majority to controvert
this. But they held that Williams v. Carwardine (1833), 110 E.R. 590, has stood so long
that it should be regarded as accurate, and that, so regarded, it entitled the respondent
to judgment. ...
The controlling principle, then, is that to establish the consensus without which
no true contract can exist, acceptance is as essential as offer, even in a case of the
present class where the same act is at once sufficient for both acceptance and per-
formance. But acceptance and performance of condition, as shown by the judicial
reasoning quoted, involve that the person accepting and performing must act on
the offer ....
Instances easily suggest themselves where precisely the same act done with refer-
ence to an offer would be performance of the condition, but done with reference to
a totally distinct object would not be such a performance. An offer of £100 to any
person who should swim a hundred yards in the harbour on the first day of the year,
would be met by voluntarily performing the feat with reference to the offer, but would
not in my opinion be satisfied by a person who was accidentally or maliciously

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

thrown overboard on that date and swam the distance simply to save his life, without
any thought of the offer. The offeror might or might not feel morally impelled to give
the sum in such a case, but would be under no contractual obligation to do so ....
The appeal ... should, in my opinion, for the reasons stated, be allowed, and the
judgment of McMillan C.J. restored.

[The opinion is considerably abbreviated. The opinions of Higgins and Starke JJ are
omitted.]

CIVIL CODE OF QUEBEC

LRO, c C-1991

Article 1395. The offer of a reward made to anyone who performs a particular act
is deemed to be accepted and is binding on the offeror when the act is performed,
even if the person who performs the act does not know of the offer, unless, in cases
which admit of it, the offer was previously revoked expressly and adequately by the
offeror.

NOTES AND QUESTIONS

1. For a discussion of the reward cases and issues of motive and reliance, see P Mitchell &
J Phillips, "The Contractual Nexus: Is Reliance Essential? " (2002) 22 Oxford J Leg Stud 115.
2. Should the common law adopt the rule espoused in the Civil Code of Quebec?
3. Does the issue of motive help explain why two simultaneous and identical offers are not
treated as offer and acceptance but rather as cross - offers? Recall Tinn v Hoffmann, above.
4. Would a promise by X to give Y "a million dollars for being female " be contractually binding
(assuming Y is and has alw ays been female)? Do the reward cases help formulate an answer?

CARLILL V CARBOLIC SMOKE BALL COMPANY

(1893] 1 08 256 (CA)

The defendants, who were the proprietors and vendors of a medical preparation
called "The Carbolic Smoke Ba\\," inserted in the Pall Mall Gazette of November 13th,
1891, and in other newspapers, the following advertisement:

£100 reward will be paid by the Carbolic Smoke Ball Company to any person who
contracts the increasing epidem ic of influenza, colds, or any disease caused by taking
cold. after having used the ball three times daily for two weeks according to the printed
directions supplied with each ball. £1000 is deposited with the Alliance Bank. Regent
Street, shewing our sincerity in the matter.
During the last epidemic of influenza many thousand carbolic smoke balls were sold
as preventives aga inst th is disease, and in no ascertained case was the disease con-
tracted by those using carbolic smoke ball.
One carbolic smoke ball will last a family several months, making it the cheapest
remedy in the world at the price, 10s., post free. The ball can be refilled at a cost of 5s.
Address, Carbolic Smoke Ball Company, 27 Princes Street, Hanover Square London .

The plaintiff, a lady, on the faith of this advertisement, bought one of the balls at
a chemist's, and used it as directed three times a day, from November 20, 1891, to

340
 IV. UNILATERAL CONTRACTS

January 17, 1892, when she was attacked by influenza. Hawkins J. held that she was
entitled to recover the £100. The defendants appealed.
LINDLEY LJ: I will begin by referring to two points which were raised in the court
below. I refer to them simply for the purpose of dismissing them. First, it is said no
action will lie upon this contract because it is a policy. You have only to look at the
advertisement to dismiss that suggestion. Then it is said that it is a bet. Hawkins J.
came to the conclusion that nobody ever dreamt of a bet, and that the transaction
had nothing whatever in common with a bet. I so entirely agree with him that I pass
over this contention also as not worth serious attention.
Then, what is left? The first observation I will make is that we are not dealing with
any inference of fact. We are dealing with an express promise to pay £100 in certain .
events. Read the advertisement how you will, and twist it about as you will, here is
a distinct promise expressed in language which is perfectly unmistakable-"£100
reward will be paid by the' Carbolic Smoke Ball Company to any person who contracts
the influenza after having used the ball thre.e times daily for two weeks according to
the printed directions supplied with each ball."
We must first consider whether this was intended to be a promise at all, or whether
it was a mere puff which meant nothing. Was it a mere puff? My answer to that
question is No, and I base my answer upon this passage: "£1000 is deposited with
the Alliance Bank, shewing our sincerity in the matter." Now, for what was that
money deposited or that statement made except to negative the suggestion that this
was a mere puff and meant nothing at all? The deposit is called in aid by the adver-
tiser as proof of his sincerity in the matter-that is, the sincerity of his promise to
pay this £100 in the event which he has specified. I say this for the purpose of giving
point to the observation that we are not inferring a promise; there is the promise, as
plain as words can make it.
Then it is contended that it is not binding. In the first place, it is said that it is not
made with anybody in particular. Now that point is common to the words of this
advertisement and to the words of all other advertisements offering rewards. They
are offers to anybody who performs the conditions named in the advertisement, and
anybody who does perform the conditions accepts the offer. In point of law this
advertisement is an offer to pay £100 to anybody who will perform these conditions,
and the performance of the conditions is the acceptance of the offer. That rests upon
a string of authorities, the earliest of which is Williams v. Carwardine (1833), 110 E.R
590, which has been followed by many other decisions upon advertisements offering
rewards.
But then it is said, "Supposing that the performance of the condition is an accept-
ance of the offer, that acceptance ought to have been notified." Unquestionably, as
a general proposition, when an offer is made, it is necessary in order to make a
binding contract, not only that it should be accepted, but that the acceptance should
be notified. But is that so in cases of this kind? I apprehend that they are an exception
to that rule, or, if not an exception, they are open to the observation that the notifi-
cation of the acceptance need not precede the performance. This offer is a continu-
ing offer. It was never revoked, and if notice of acceptance is required-which I doubt
very much, for I rather think the true view is that which was expressed and explained
by Lord Blackburn in the case of Brogden v. Metropolitan Ry. Co. (1877), 2 App. Cas.
666, 691-if notice of acceptance is required, the person who makes the offer gets
the notice of acceptance contemporaneously with his notice of the performance of
the condition. If he gets notice of the acceptance before his offer is revoked, that in
principle is all you want. I, however, think that the true view, in a case of this kind,
is that the person who makes the offer shews by his language and from the nature

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

of the transaction that he does not expect and does not require notice of the accept-
ance apart from notice of the performance ....
It appears to me, therefore, that the defendants must perform their promise, and,
if they have been so unwary as to expose themselves to a great many actions, so
much the worse for them.
BOWEN LJ: I am of the same opinion . ...
It was said that there was no notification of the acceptance of the contract. One
cannot doubt that, as an ordinary rule of law, an acceptance of an offer made ought
to be notified to the person who makes the offer, in order that the two minds may
come together. Unless this is done the two minds may be apart, and there is not that
consensus which is necessary according to the English law-I say nothing about the
laws of other countries-to make a contract. But there is this clear gloss to be made
upon that doctrine, that as notification of acceptance is required for the benefit of
the person who makes the offer, the person who makes the offer may dispense with
notice to himself if he thinks it desirable to do so, and I suppose there can be no
doubt that where a person in an ·offer made by him to another person, expressly or
impliedly intimates a particular mode of acceptance as sufficient to make the bargain
binding, it is only necessary for the other person to whom such offer is made to
follow the indicated method of acceptance; and if the .person making the offer,
expressly or impliedly intimates in his offer that it will be sufficient to act on the
proposal without communicating acceptance of it to himself, performance of the
condition is a sufficient acceptance without notification.
That seems to me to be the principle which lies at the bottom of the acceptance
cases, of which two instances are the well-known judgment of Mellish L.J. in Harris'
Case (1872), 7 Ch. App. 587, and the very instructive judgment of Lord Blackburn in
Brogden v. Metropolitan Ry. Co., in which he appears to me to take exactly the line I
have indicated.
Now, if that is the law how are we to find out whether the person who makes the
offer does intimate that notification of acceptance will not be necessary in order to
constitute a binding bargain? In many cases you look to the offer itself. In many
cases you extract from the character of the transaction that notification is not
required, and in the advertisement cases it seems to me to follow as an inference to
be drawn from the transaction itself that a person is not to notify his acceptance of
the offer before he performs the condition, but that if he performs the condition noti-
. fication is dispensed with. It seems to me that from the point of view of common sense
no other idea could be entertained. If I advertise to the world that my dog is lost, and
that anybody who brings the dog to a particular place will be paid some money, are
all the police or other persons whose business it is to find lost dogs to be expected
to sit down and write me a note saying they have accepted my proposal? Why, of
course, they at once look after the dog, and as soon as they have found the dog they
have performed the condition. The essence of the transaction is that the dog should
be found, and it is not necessary under such circumstances, as it seems to me, that
in order to make the contract binding there shduld be any notification of acceptance.
It follows from the nature of the thing that the performance of the condition is suf-
ficient acceptance without notification of it, and a person who makes an offer in an
advertisement of that kind makes an offer which must be read by the light of that
common sense reflection. He does, therefore, in his offer impliedly indicate that he
does not require notification of the acceptance of the offer.
[Appeal dismissed. Only part of the opinions is given and the concurring opinion of
AL Smith LJ is omitted.] ·

342
 IV. UNILATERAL CONTRACTS

NOTES

1. In 1893, an advertisement appeared in The Illustrated London News. The Carbolic

Smoke Ball Company stated in this new ad that thousands of smoke balls had been sold due
to the first ad and that only three people had claimed the reward. The company went on to
offer a larger reward of £200. It neglected to mention that Mrs. Carlill, at least, had only recov-
ered after legal action .
2. In Kolodziej v Mason, 774 F 3d 736, 741 (11th Cir 2014), the plaintiff, a law student, filed
a breach of contract claim against a criminal defence lawyer who had stated on national tele-
vision that he would "pay a million dollars" to anyone who could prove that his client could get
from the Atlanta airport to a specific hotel in only 28 minutes as the prosecution had alleged.
Without contacting the defendant lawyer, the plaintiff made the journey in under 28 minutes
and demanded payment. After citing Carlill and other similar American authorities, the court
affirmed the judgment below dismissing the plaintiff's action. The court stated that "We do not
find that [the defendant's] .. . statements were such that a reasonable, objective person would
have understood them to be an invitation to contract." The court added: "We simply are driven
to ask ... : 'Why did you not just call?' Perhaps a jurist's interpretation of an old aphorism pro-
vides the answer: If, as Alexander Pope wrote, 'a little learning is a dangerous thing' then a little
learning in law is particularly perilous."

Goldthorpe v Logan. [1943] 2 DLR 519 (Ont CA). LAIDLAW JA: The female appellant
had some hairs on her face and wanted to have them removed. She saw advertise-
ments published in a newspaper by the defendant Anne Graham Logan. She Went to
the place of business stated in the advertisement and consulted the defendant Kathleen
Fitzpatrick, a registered nurse, who was an employee of the defendant Logan. She
was told that her face could be definitely "cleared," that the hair could be removed
permanently, and the result was guaranteed. She then submitted to a number of
"treatments" by electrolysis for the purpose of removing the hairs but the result was
not satisfactory. Hairs continued to grow on her face in the same way as before, and
in spite of the efforts of the defendants to remedy the condition. :.. [T]he alternative
allegation to the effect that the defendant Logan is responsible in law by reason of a
breach of contract made by or on her behalf with the female plaintiff requires careful
consideration. The elements of a valid contract are well known, and it is only neces-
sary to analyze the evidence to determine whether or not they exist in this case. I at
once examined the advertisement ... : "Hairs .. . removed safely and permanently by
Electrolysis . ... No marks, No Scars, Results Guaranteed ...." What is the true nature
and construction of this advertisement? ... [T]he sensible interpretation of her words
is this: "If you will submit yourself to my tr.eatment and pay me (certain charges) I
undertake to remove hairs safely and permanently by electrolysis and I promise to
obtain a satisfactory result." The effect in law of such a statement is to create q.n offer
from the person by whom it is made to every person who is willing to accept the
terms and conditions of it. ... If the vendor's self-confidence had persuaded her into
an excessive, extravagant promise, she cannot now escape a complaint from a
credulous and distressed person to whom she gave assurance of future excellence
and relief from her burden.

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NOTES AND QUESTIONS

1. The use of contractua l analysis to impose strict liability in the interests of consumer
protection is not uncommon but has become less necessary in light of the rise of universal
health care, expansions in the law of negligence, and the passage of consumer protection
legislation in various provinces.
2. Was it necessary for the court to find that the advertisement created a unilateral contract
given that the plaintiff was given further assurances by the defendant?
3. If a person with an incurable facial hair condition had presented herself at the defen-
dant's office and been told that there was nothing that the defendant could do, would that
person have been able to sue for breach of contract on the court's reasoning?

DALE V MANITOBA
(1997), 147 DLR (4th) 605 (Man CA)

SCOTT CJM (for the court):

The principal issue on this appeal is whether, as found by the trial judge, a legally
enforceable contract was entered into between the plaintiffs and the defendant.
In 1992, each of the plaintiffs (and others) were accepted into the affirmative
action program known as the ACCESS program (the program) created by the defend-
ant [the government of Manitoba]. ACCESS was the generic name adopted to
describe a number of programs funded by the provincial Department of Education,
and administered by various education institutions and organizations, in this
instance the University of Manitoba (the University), to provide post-secondary
educational opportunities to disadvantaged persons ....
At the outset, it is essential to address the findings of fact made by the trial judge,
which were vigorously assailed by appellant's counsel. In my opinion, Schulman J .
was undoubtedly correct when he concluded not only that the plaintiffs believed
that they had a contractual arrangement with the government not to alter the terms
and conditions of the funding arrangements that existed at the time of their entry
into the program in 1992, but that in fact such an understanding had been com-
municated to them by the designated ACCESS staff at the University. There was ample
evidence to support these findings.
This being so, the central question becomes whether the communication of this
information to the students committed the government or the University of Mani-
toba, or both.
Before moving on to this question, the answer to which depends on whether the
University ACCESS staff had the ostensible or apparent authority to commit the gov-
ernment, I tum briefly to consideration of one of the most venerable authorities
concerning the law of contract, namely Carlill v. Carbolic Smoke Ball Company, [1893]
1 O.B. 256 (C.A), where the principle was established that an enforceable offer could
be made to a "stranger" or an unknown member of the general public. Of particular
relevance for this case is the statement of principle found in Carlill that, where an
offer-such as that found to be made here-is continuing in nature, then notification
need not precede performance. In other words, notification of acceptance need not
be made so long as the offer continues to remain unrevoked. For an interesting
review of the modem application of what has now come to be called unilateral
contracts, see Professor G.H.L. Fridman, O.C., The Law of Contract in Canada 3rd ed.
(Toronto: Carswell, 1994). In C. 2(3)(h) at p. 75, Professor Fridman points out that the
applicability of this principle in any given situation depends on whether the "offer"

344
 IV. UNILATERAL CONTRACTS

was intended to be taken seriously, or was merely promotion or "puffing." His conclu-
sion is that "practical considerations have ousted logical analysis." Applying a "robust
and pragmatic view" to the facts of this case, it is plain to me that by virtue of the
role assigned by government to the University that a binding offer was made to the
student applicants, open for acceptance without specific and direct communication
to government.
As noted earlier, the determining question is on whose behalf was the offer com -
municated. For the purposes of this decision, I accept (without necessarily so finding)
that the University ACCESS personnel did not have the actual or real authority to
commit the Government of Manitoba with respect to the level and continuation of
funding .... It is clear, however, that the staff who dealt with the ACCESS students,
and were their sole source of information concerning all particulars and require-
ments of the program, sincerely and honestly believed-and communicated to the
students-the contrary: that is that the commitment made to the students at the time
of their entry into the program in 1992 would continue up to the time they obtained
their undergraduate degree . ...
[After discussing the leading cases on ostensible authority, the justice continued:]
I have no difficulty in concluding that the program administrators had the appar-
ent or ostensible authority to speak on behalf of the "owner" of the program, namely,
the government of Manitoba. Here the government, after defining all of the terms
and parameters of the program, left it entirely to the University program staff to deal
with the student applicants throughout the course of the four -year program. To the
"outside world" they were the only ones, up until the changes that are the subject-
matter of this action, with whom the students made their arrangements, a fact well
known to the government. How can it be said in these circumstances that the
University staff did not have the apparent authority to make a commitment on behalf
of the government which had delegated all the administrative responsibilities to
them while nonetheless maintaining, as the trial judge found, a "hands-on involve-
ment" in the operation of the program? Given this role, it was incumbent on gov-
ernment, if it was concerned that this authority might be abused, to give clear
instructions about the full implications of changes to the program regime. This was
not done.
The trial judge concluded that the offers of funding by University ACCESS staff
were made on behalf of the joint operators of the program, or alternatively as the
agent of the government. He was entirely correct in the latter part of his conclusion.
Indeed, given the evidence accepted by him concerning the role that the govern -
ment expected the ACCESS staff to play, and that they did pi.ay throughout the
program (and specifically with respect to the four applicants before the court), it is
difficult to see how he could have come to any other conclusion.
In my opinion, this is sufficient to decide this appeal. There was a legally enforce-
able offer made to the students on behalf of the government, which these applicants
accepted. The terms of the contract were as found by the trial judge. While Schulman J.
felt obliged to deal with a multitude of other legal issues put before him by counsel
(about which I intentionally make no comment), the legal effect of his judgment,
now affirmed by this decision, is correctly set forth in the precise terms of the formal
judgment roll taken out after trial:
THIS COURT DECLARES that the Defendant Government of Manitoba is a party to a
contract with the Plaintiffs, whereby the said Defendant is required to continue to
provide, subject to assessed needs, the same base level of grants and other supports
for living allowances, rental subsidies, transportation, day care, medical and dental and

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

optical care, special support costs, and tuition and books, as was provided to the said
Plaintiffs during their year of initial registration .

The appeal is accordingly dismissed with costs.

Appeal dismissed.

GRANT V PROVINCE OF NEW BRUNSWICK

(1973), 35 DLR (3d) 141 (NB App Div)

HUGHES CJNB: This is an appeal by the Province of New Brunswick (herein referred
to as "the Province") from a judgment in the Queen's Bench Division directed against
it in favour of the plaintiff for $4,800, being the value of 4,000 barrels of potatoes
which the plaintiff alleged he sold to the Province in 1967 under a potato price sta-
bilization programme, with costs to be taxed.
On this appeal as well as at trial, the Province contended that the evidence does not
establish a contract between the parties and that consequently, the action should be ·
dismissed. In the spring of 1967, there was in Canada a considerable surplus of potatoes
produced in 1966 which could not be marketed. To stabilize the price of potatoes the
Governor-General in Council passed Order in Council P.C. 1967-892 dated May 4, 1967,
pursuant to the Agricultural Stabilization Act, 1957-58 (Can.), c. 22 [now RSC 1970, c A-9],
designating potatoes as an agricultural commodity for the purpose of the Act and
authorizing the Agricultural Stabilization Board to make payments to producers for
potatoes grown in 1966, limited to deliveries of 1,000 barrels per producer, for use
for starch manufacture and for other non-food uses approved by the Board. Pro-
grammes carried out under this Order in Council are referred to Program respectively.
By a subsequent Order in Council the limitation of 1,000 barrels per producer was
raised to 5,000 barrels.
These programmes were found inadequate to absorb the surplus potatoes in New
Brunswick and an arrangement was entered into by the Minister of Agriculture for
the Province with the Government of Canada to implement a potato price stabiliz-
ation programme under which the Province undertook to purchase potatoes direct
from growers resident in New Brunswick at the support price of $1.20 per barrel and
to make payment for such potatoes direct to the producers. Under the programme
purchases were limited to 5,000 barrels per producer including all potatoes sold
under the Potato Starch Diversion Program and the Livestock Feed Diversion Pro-
gram. The Agricultural Stabilization Board undertook as a term of the arrangement
to pay the Province 1/zC per lb. for all potatoes purchased by the Province under the
programme.
In entering into the agreement with the Government of Canada neither the
Minister of Agriculture nor the Government of the Province had statutory authority
to do so and the cost of the programme was financed by special warrants. To imple-
ment the programme the Province appointed an administrator and established a
committee consisting of potato farmers, officials of the Department of Agriculture
and one representing the Agricultural Stabilization Board.
The committee's function was to process applications made by potato growers
to ensure that the applicants were eligible and the potatoes offered for purchase
qualified under the programme. In all, the Province received about 735 applications
of which an estimated 700 were approved without question. Of the remaining 35,
25 were approved after the applicants satisfied the committee as to their eligibility.

346
 IV. UNILATERAL CONTRACTS

The remaining 10, of which the plaintiff was one, were refused the benefits of the
programme.
The Province publicized the programme and prepared a form of application
which was made available to growers who wished to dispose of their surplus potatoes
by selling them to the Province. In the form, the grower was re.q uired to state his
potato acreage, his 1966 production, the capacity of storage used by him, the number
of acres which he rented in 1966, and the estimated quantity of potatoes which he
offered for purchase, and the applicant was required to make a statutory declaration
as to the truth of his statements. On the reverse side of the application there was
printed certain general information relating to the programme ....
At the foot of the application there is a form to be completed by a federal Govern -
ment inspector certifying the grade of potatoes offered for purchase and a certificate
to be completed by a provincial inspector as to the grade and volume of the potatoes
referred to in the application and stating there was evidence of excessive breakdown
of the potatoes and that they had been disposed of in a manner satisfactory to the
inspector. The certificate on the plaintiff's application was duly completed and signed
by a federal Government inspector and by a provincial inspector.
After these certificates were completed and the potatoes disposed of, the plaintiff's
application was placed by the administrator before the committee for its approval.
Owing to certain information which came to its attention, the committee refused
the plaintiff's application and t~e administrator wrote the plaintiff under date of
October 5, 1967, stating, inter alia:

The administration of this program is the responsibility of the Board appointed by the
Minister of Agriculture and is subject to the guide lines and regulations established at
the outset, through negotiation between the Federal Stabilization Board and the Prov-
ince. One such regulation states that the potatoes offered must be the property of the
applicant. Information received by the Board indicates that you do not qualify under
this regulation.
I have been instructed by the Board to inform you that for this reason your applica-
tion has not been approved . We cannot, therefore, pay any assistance on the potatoes
offered in your application .

The plaintiff replied protesting he was in fact the owner of the potatoes offered.
Later he appeared before the committee but was unable to satisfy its members that
he owned the potatoes which he had offered. Later, he brought the present action
claiming the price of 4,000 barrels of potatoes at $1.20 per barrel. At the trial he testi-
fied he owned the potatoes and his evidence was accepted by the learned trial Judge
who directed that judgment be entered against the Province for the price claimed.
On this appeal the Province did not challenge the trial Judge's finding that the plain-
tiff was the owner of the potatoes which he offered for purchase, but contended that
payments made to applicants under the potato price stabilization programme
constituted subsidies, the payment of which the applicant had no legal right to
enforce.
Counsel for the plaintiff admitted that to succeed in the action the plaintiff must
prove there was an offer to purchase or to sell made by one of the parties to the other
and that the party to whom it was made accepted it. It is elementary that until an
offer open for acceptance by a person to whom it is made has been accepted by him,
no contract results.
If the plaintiff's application is to be construed as an offer by him to the Province
of potatoes for purchase, I am unable to find anything in the evidence to establish
that the Province accepted his offer since the administrator who must be taken to

347
CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

be the agent of the Province refused \o approve the application by letter dated Octo-
ber 5, 1967, and nothing which occurred thereafter can be regarded as constituting
an acceptance.
In his opening remarks at trial, counsel for the plaintiff stated that the plaintiff based
his case on the acceptance by him of terms offered by the Province. I interpret this
submission to mean that the plaintiff claims the Province made a general offer to all
eligible potato producers resident in New Brunswick to purchase any potatoes grown
by them in 1966, subject to the limitations and conditions specified in the general
information on the reverse side of the application form which it had prepared and that
the plaintiff, by offering his potatoes, having them measured and inspected, and by
disposing of them in a manner satisfactory to the inspector appointed by the. Prov-
ince, had accepted the Province's offer. This is essentially the view taken by the trial
Judge who interpreted the general information as an offer and not merely as a state-
ment by the Province of its intention to purchase potatoes.
It may well be that the Province in publicizing the general information concern -
ihg its potato price stabilization intended merely to inform eligible potato growers
resident in New Brunswick of a policy without any intention of making a binding
offer which would obligate it to purchase all eligible potatoes offered by all eligible
growers. In interpreting an offer the objective test should, I think, be applied. Williston
on Contracts, 3rd ed., (1957), vol. 1, s. 94, contaiµs the following statement a:t p. 339:

It follows that the test of the true interpretation of an offer or acceptance is not what
the party making it thought it meant or intended it to mean, but what a reasonable
person in the position of the parties w ould have thought it meant.

It is to be observed that para. 3 of the general information does not expressly state
that the Province will purchase all potatoes offered nor does para. 7 promise to
approve applications and authorize payment when an inspector appointed by the
Minister has certified the quantity of the potatoes is correctly stated and that the
potatoes have broken down and been disposed of in a manner satisfactory to the
inspector. It only states that the application will not be approved nor will payment
be authorized until these things are done . There is, nevertheless, an implication in
the general information that if and when these things have been done, payment will
be authorized. Had the Province intended to reserve the right to select from whom
it chose to purchase potatoes,' it could have indicated there was a limit to the quantity
or the value of the potatoes which it was prepared to purchase or it could have stated
that the decision of the committee appointed to administer .t he programme was final
or made it clear that the committee's approval was a condition to the right to
payment.
I am not satisfied that the trial Judge erred in finding that the Province offered to
purchase potatoes at the support price from all eligible growers resident in New
Brunswick who offered their potatoes for purchase within the guide-lines set out in
the information. Indeed, I accept the view that a reasonable person in the position
of the plaintiff would be entitled to assume that if he complied with the conditions
set out in the general information and disposed of his potatoes to the satisfaction of
the inspector appointed by the Province, he was entitled to sell his potatoes to the
Province and that the Province was legally bound to purchase and pay for them. I
would accordingly affirm the decision of the trial Judge and dismiss the appeal with
costs.
Appeal dismissed.

348
 IV. UNILATERAL CONTRACTS

NOTES AND QUESTIONS

1. In Dale, what was the act that was requested by the government to make its promise of
funding binding?
2. Compare the result in Grant with that in Australian Woollen Mills Ltd v Commonwealth
of Australia, [1956] 1WLR11 (PC), where their Lordships held that information about a govern-
ment subsidy program was merely a statement of policy rather than a contractual offer that
could have been accepted by the plaintiff. See also Canada v South Yukon Forest Corp, 2012
FCA 165, where the court refused to find a unilateral contract (a guaranteed supply of timber in
exchange for building of a timber mill) because a statutory process for allocating timber (which
required a grant by order in council) meant that departmental officials could not bind the Crown.

ERRINGTON V ERRINGTON
[195211 All ER 149 (CA)

DENNING LJ: The facts are reasonably clear. In 1936 the father bought the house for
his son and daughter-in-law to live in. The father put down £250 in cash and bor-
rowed £500 from a building society on the security of the house, repayable with
interest by instalments of 15s. a week. He took the house in his own name and made
!limself responsible for the instalments. The father told the daughter-in-law that the
£250 was a present for them, but he left them to pay the building society instalments
of 15s. a week themselves. He handed the building society book to the daughter-in -
law and said to her: "Don't part with this book. The house will be your property when
the mortgage is paid." He said that when he retired he would transfer it into their
names. She has, in fact, paid the building society instalments regularly from that day
to this with the result that much of the mortgage has been repaid, but there is a good
deal yet to be paid. The rates on the house came to 10s. a week. The couple found
that they could not pay those as well as the building society instalments so the father
said he would pay them and he did so.
It is to be noted that the couple never bound themselves to pay the instalments
to the building society, and I can see no reason why any such obligation should be
implied. It is clear law that the court is not to imply a term unless it is necessary, and
I do not see that it is necessary here. Ample content is given to the whole agreement
by holding that the father promised that the house should belong to the couple as
soon as they had paid off the mortgage. The parties did not discuss what was to
happen if the couple failed to pay the instalments to the building society, but I should
have thought it clear that, if they did fail to pay the instalments, the father would not
be bound to transfer the house to them. The father's promise was a unilateral con-
trad-a promise of the house in return for their act of paying the instalments. It could
not be revoked by him once the couple entered on performance of the act, but it
would cease to bind him if they left it incomplete and unperformed, which they have
not done. If that was the position during the father's lifetime, so it must be after his
death. If the daughter-in-law continues to pay all the building society instalments,
the couple will be entitled to have the property transferred to them as soon as the
mortgage is paid off, but if she does not do so, then the building society will claim
the instalments from the father's estate and the estate will have to pay them. I cannot
think that in those circumstances the estate would be bound to transfer the house
to them, any more than the father himself would have been ....
In the present case it is clear that the father expressly promised the couple that
the property should belong to them as soon as the mortgage was paid, and .impliedly

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

promised that, so long as they paid the instalments to the building society, they
should be allowed to remain in possession. They were not purchasers because they
never bound themselves to pay the instalments but nevertheless they were in a
position analogous to purchasers. They have acted on the promise and neither the
father nor his widow, his successor in title, can eject them in disregard of it. The
result is that, in my opinion, the appeal should be dismissed and no order for pos-
session should be made. I come to this conclusion on a different ground from that
reached by the learned judge, but it is always open to a respondent to support the
judgment on any ground. If there is a dispute between the son and the daughter-
in-law as to their respective rights in the house, that must be decided under s . 17 of
the Married Women's Property Act, 1882. If the father's widow should cease to pay
the rates, the actual occupier must pay them, because the father did not bind himself
to pay them. He only did so out of paternal affection.
[The concurring opinions of Somervell and Hodson LJJ are omitted.)

DAWSON V HELICOPTER EXPLORATION

[1955] SCR 868, 5 DLR 404

[Dawson, a US citizen, had been negotiating by mail with Kidd and Springer, ir:1
Vancouver, an arrangement to get at some mineral deposits at the head of the Leduc
River in British Columbia, in very rough country, which Dawson had discovered 20
years earlier. On January 13, 1951, Dawson wrote : "A large mining company in Salt
Lake is showing a definite interest. To protect my interest, it will be necessary for me
to arrive at some definite arrangement soon." Springer replied on January 17: "I would
be interested in making some arrangement next summer to finance you in staking
claims for which we would give you an interest. I would suggest that we should pay
for your time and expenses and carry you for a ten per cent non-assessable interest
in the claims." Dawson replied on January 22: "Your proposition ... appeals to me as
being a fair one."
Thereafter Dawson was recalled to active duty in the United States Naval Reserve
Engineering Corps, and sent to the Marshall Islands. Correspondence continued
under rather difficult conditions, and on February 28 Dawson wrote: "As I informed
you in a previous letter, your offer of a 10% non-assessable interest for relocating
and finding these properties is acceptable to me, provided there is a definite arrange-
ment to this effect in the near future." On March 5, Springer wrote, "I hereby agree
that, if you take us in to the showings and we think they warrant staking, that we
will stake the claims and give you a 10% non -assessable interest. The claims would
be recorded in our name and we will have full discretion in dealing with them-you
to get 10% of the vendor inter.est." Dawson replied on April 12: "If you will inform me,
if and when you obtain a pilot for your copter, I will immediately take steps for a
temporary release in order to be on hand." Dawson wrote again, on May 27: "Would
like to know if your plans for further exploration work in the Unuk River area have
become definite .... For me to get away from my present duties on a furlough it may
be necessary for me to have several weeks notice."
On June 7, Springer wrote:
Up to a little over a week ago it did not look as though we would be able to secure a pilot
for our helicopter. However, we have a man now who we hope will be satisfactory.
I was talk ing to Tom McOuillan, who is prospecting for us this year; he said he had
been over your showings at the head of the Leduc River, and in his opinion it would be

350
 IV UNILATERAL CONTRACTS

practically impossible to operate there, as the showings were in behind ice fields, which
along with the extreme snow falls made it very doubtful if an economic operation could
be carried on.
We have also been delayed in getting away this year, due to pilot trouble, and have
so much work lined up that I am doubtful whether we will have time to visit your show-
ings, also I do not think we would be warranted in making the effort to get in there due
to the unfavorable conditions. I must advise you therefore, not to depend on our making
this trip, and suggest if you are still determined" to go in, to make other arrangements.

Dawson did not reply. In 1952 he discovered that the helicopter company had
made investigations and in 1953 arrangements were made for development by the
company to which Springer had sold the claims in exchange for paid-up stock.
Dawson commenced this action in November 1953, and his claim was dismissed by
the trial judge, who was affirmed by the BC Court of Appeal.]
RAND J (Fauteux J concurring): ... The substantial contention of the respondent is
that any offer contained in the correspondence and in particular the letter·of March
5th called for an acceptance not by promise but by performance of an act, the loca -
tion of the claims by Dawson for the respondent. It is based upon the well-known
conception which in its simplest form is illustrated by the case of a reward offered
for some act to be done. To put it in other words, no intention was conveyed by
Springer when he said "I hereby agree" that Dawson, if agreeable, should have replied,
"I hereby accept" or words to that effect: the offer called for and awaited only the act
to be done and would remain revocable at any time until every element of that act
had been completed.
The error in this reasoning is that such an offer contemplates acts to be performed
by the person only to whom it is made and in respect of which the offeror remains
passive, and that is not so here. What Dawson was to do was to proceed to the area
with Springer or persons acting for him by means of the respondent's helicopter and
to locate the showings. It was necessarily implied by Springer that he would partici-
pate in his own proposal. This involved his promise that he would do so, and that the
answer to the proposal would b.e either a refusal or a promise on the part of Dawson
to a like participation. The offer was unconditional but contemplated a performance
·subject to the condition that a pilot could be obtained by the respondent.
Dawson's answer of April 12th was, as I construe it, similarly an unqualified
promissory acceptance, subject as to performance to his being able to obtain the
necessary leave. It was the clear implication that Springer, controlling the means of
making the trip, should fix the time and should notify Dawson accordingly. As the
earlier letters show, Dawson was anxious to conclude some arrangement and if he
could not make it with Springer he would seek it in other quarters.
Although in the circumstances, because the terms proposed involve such com-
plementary action on the part of both parties as to put the implication beyond doubt,
the precept is not required, this interpretation of the correspondence follows the
tendency of Courts to treat offers as calling for bilateral rather than unilateral action
when the language can be fairly so construed, in order that the transaction shall have
such "business efficacy as both parties must have intended that at all events it should
have": Bowen L.J. in The "Moorcock " (1889), 14 P.D. 64 at p . 68. In theory and as
conceded by Mr. Guild, an offer in the unilateral sense can be revoked up to the last
moment before complete performance. At such a consequence many Courts have
balked; and it is in part that fact that has led to a promissory construction where that
can be reasonably given. What is effectual is the real intention of both parties to close
a business bargain on the strength of which they may, thereafter, plan their courses . ...

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

ESTEY J (Cartwright J concurring): ... It is contended that the appellant's silence, after
his receipt of the letter of June 7, 1951, until his interview in December, 1952, con-
stitutes an abandonment of the contract. ...
The letter of repudiation is dated June 7, 1951, and during the next month Kvale
and McQuillan were taken into the area by helicopter. They were again taken into
the area where, on August 2nd of that year, they staked a number of claims which
were duly recorded. The record does not indicate when respondent changed its mind
as indicated by Springer's remark to appellant at its office in December, 1952, but it
is apparent that many of the difficulties emphasized in the letter of June 7th had
either disappeared or been overcome by the following month. Upon this record it
rather appears that the respondent concluded it could continue without assistance
from the appellant and, therefore, wrote the letter of repudiation.
The respondent, in this letter of repudiation, set forth its reasons therefore which
it would be difficult for the appellant, stationed as he was in the Marshall Islands, to
effectively appraise. I do not think that under such circumstances a conclusion
adverse to the appellant can be drawn from his failure to further press the respondent
at that time. Immediately upon his return in December, 1950, he "wrote to the Mining
Recorder at Prince Rupert" and apparently continued his examination to ascertain
what had, in fact, taken place. He visited the premises in June and July, 1950, and
relocated the three claims which he had found in 1931. When he had ascertained, at
least in part, what had taken place, he made his position known to the respondent
in December of 1952. Moreover, while silence may be evidence of repudiation, its
weight must depend upon the circumstances and here I do not think his silence,
coupled with the steps he took immediate!):" upon his return from the Marshall
Islands, sufficiently supports a conclusion that he, at any time, intended to abandon
his rights under the contract.
Upon receipt of the letter of repudiation dated June 7, 1951, the appellant might
have accepted it and forthwith claimed damages. Since, however, he did not accept
it, the contract remained in force and binding upon both parties. It, therefore,
remained the duty of the respondent, having obtained a pilot, to take the appellant
into the area in August or September. Not only did the respondent not do so, but,
notwithstanding the terms of its letter of repudiation, it, in fact, took Kvale and
McQuillan into the area where they staked claims on behalf of the respondent. This
conduct constituted a breach of its contract.
The appeal should be allowed with costs throughout and the matter referred back
to the Supreme Court of British Columbia to determine the damages.
[Kerwin CJ dissented.]

QUESTIONS

1. Is the result in Errington v Errington consistent with the rules of contract formation?
Would a double unilateral contract explanation be one that would be plausible on the facts7
For a discussion, see McCamus at 86-90; MacDougall at 32-33.
2. Would some sort of reliance-based liability, such as that based on s 90 of the Restate-
ment or equitable estoppel, be a simpler solution to the problem of the revocation of unilateral
offers after substantial performance7 See Mobil Oil Australia Ltd v Wei/come International Pty
Ltd (1998), 81 FCR 475. Might it even be possible to explain all of "unilateral contract" on the
basis of the promise-detriment principle7 For just such an argument. see B McFarlane & P
Sa les, "Prom ises, Detriment. and Liability" (2015) 131 Law Q Rev 610 at 620, 626-27.
3. Do you think that the Supreme Court would have found a bilateral contract if the com-
pany had sued Dawson for non-performance7

352
 IV. UNILATERAL CONT RACTS

4. What was the wrong that the defendant in Dawson committed: failing to take the plain-
tiff to the site or developing the site without the participation of the pla inti ff? Wou ld an action
for breach of confidence, similar to that pursued in Lac Minerals Ltd v International Corona
Resources Ltd, [1989) 2 SCR 574, have been a better solution to the problem posed by the
facts of Dawson?

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND)

American Law In stitute, 1981

25. Option Contracts.

An option contract is a promise which meets the requirements for the formation
of a contract and limits the promisor's power to revoke an offer ....
32. Invitation of Promise or Performance.
In case of doubt an offer is interpreted as inviting the offeree to accept either by
promising to perform what the offer requests or by rendering the performance, as
the offeree chooses.

45. Option Contract created by Part Performance or Tender.

(1) Where an offer invites an offeree to accept by rendering a performance and
does n ot invite a promissory acceptance, an option contract is created when th e
offeree tenders or begins the invited performance or tenders a beginning of it.
(2) The offeror's duty of performance under any option contract so created is
conditional on completion or tender of the invited performance in accordance
with the terms of the offer.

62. Effect of Performance by Offeree where Offer invites either Performance or

Promise.
(1) Where an offer invites an offeree to choose between acceptance by promise
and acceptance by performance, the beginning of the invited performance or a
tender of a beginning of it is an. acceptance by performance.
(2) Such an acceptance operates as a promise to render complete performance.

UNIFORM COMMERCIAL CODE

American Law Institute, 1978

Section 2-206. Offer and Acceptance in Formation of Contract

(1) Unless otherwise unambiguously indicated. by the language or
circumstances
.(a) an offer to make a contract shall be construed as inviting acceptance in
any manner and by any medium reasonable in the circumstances;
(b) an order or other offer to buy goods for prompt or current shipment
shall be construed as inviting acceptance either by a prompt promise to ship
or by the prompt or current shipment of conforming or non-conforming
goods, but such a shipment of non-conforming goods does not constitute an
acceptance if the seller seasonably notifies the buyer that the shipment is
offered only as an accommodation to the buyer.

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CHAPTER 3 THE KINDS OF PROMISES LEGALLY ENFORCED

(2) Where the beginning of a requested performance is a reasonable mode of

acceptance an offeror who is not notified of acceptance within a reasonable time
may treat the offer as having lapsed before acceptance.

NOTES
1. There are problems in fitting together these sections of the Restatement and the Uni-
form Commercial Code. See JE Murray, "Contracts: A New Design for the Agreement Process"
(1968) 53 Cornell L Rev 785.
2. Unilateral contracts should also be considered in the light of R (Ont) v Ron Engineering,
considered in Chapter 9, Section V. See also Waddams, ch 4; MacDougall at 32 - 33, 46-48;
Fridman at 70-77; Swan at 246-48 .

354
 " CHAPTER FOUR

CONTRACTS AND THIRD PARTIES

I. Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355

II. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
Ill. Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398
IV. Mercantile Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405
V. Buyers and Sellers in Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406
VI. Mistake of Identity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
VII. Documents Mistakenly Signed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422

I. THIRD-PARTY BENEFICIARIES

TWEDDLE V ATKINSON
(1861), 1 B & S 393, 121 ER 762

The declaration stated that the plaintiff was the son of John Tw eddle, deceased and
before the making of the agreement hereafter mentioned, married the daughter of
William Guy, deceased; and before the marriage the parents of the parties to the
marriage orally promised to give the plaintiff a marriage portion; and after the mar-
riage in order to give effect to their promises the parents entered into the follow ing
written agreement for the plaintiff's benefit:

High Coniscliffe, July 11, 1855.

Memorandum of agreement made this day between William Guy, of, & c., of the one
part, and John Tweddle, of, & C., of the other part. Whereas it is mutually agreed that
the said William Guy shall and will pay th e sum of £200 to William Tweddle, his son-in-
law; and the said John Tweddle, father to the aforesaid Wi lliam Tweddle, shall and w ill
pay the sum of £100 to the said William Tweddle, each and severally the said sums on
or before the 21st day of August, 1855. And it is hereby further agreed by the aforesaid
William Guy and the said John Tweddle that th e said Willi am Tweddle has full power to
sue the said parties in any court of law or equity for th e aforesaid sum, hereby promised
and specified.

The declaration further alleged that afterwards and before this suit, the plaintiff
and his said wife, who is still living, ratified and assented to the said agreement, yet
neither the said William Guy nor his executor has paid the promised sum of £200.
Demurrer and joinder therein.

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CROMPTON J: It is admitted that the plaintiff cannot succeed unless this case is an
exception to the modern and well-established doctrine of the action of assumpsit.
At the time when the cases which have been cited were decided the action of
assumpsit was treated as an action of trespass upon the case, and therefore in the
nature of a tort; and the law was not settled, as it now is, that natural love and affec-
tion is not a sufficient consideration for a promise upon which an action may be
maintained; nor was it settled that the promisee cannot bring an action unless the
consideration for the promise moved from him. The modern cases have, in effect,
overruled the old decisions; they sh ow that the consideration must move from the
party entitled to sue upon the contract. It would be a monstrous proposition to say
that a person was a party to the contract for the purpose of suing upon it for his own
advantage and not a party to it for the purpose of being sued. It is said that the father
in the present case was agent for the son in making the contract, but that argument
ought also to make the son liable upon it. I am prepared to overrule the old decisions,
and to hold that, by reason of the principles which now govern the action of assump-
sit, the present action is not maintainable.
[Judgment was given for the defendant. The concurring opinions of Wightman and
Blackburn JJ are omitted.]

DRIVE YOURSELF HIRE CO LTD V STRUTT

[19541 1 OB 250 at 273-74

DENNING L: In 1861 .. . came the unfortunate case of Tweddle v. Atkinson in which the
Court of Queen's Bench departed from the law as it had been understood for the previ-
ous 200 years and held, quite generally, that no stranger could take advantage of a
contract though made for his benefit: and that was assumed, without argument, to
be the law by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd.
I do not pause to consider whether this new rule was legitimately introduced into
the law. Incidentally, the courts of the United States have not adopted this new rule .
They have followed the original common law, which is much more in accord with
the needs of a civilised society. So is the Scots law.

BESWICK V BESWICK
[1966] 1 Ch 549 (CA), [1968] AC 70 (HL)

LORD DENNING MR: Old Peter Beswick was a coal merchant in Eccles, Lancashire.
He had no business premises. Al\ he had was a lorry, scales and weights. He used to
take the lorry to the yard of the National Coal Board, where he bagged coal and took
it round to his customers in the neighbourhood. His nephew, John Joseph Beswick,
helped him in the business.
In March, 1962, old Peter Beswick and his wife were both over 70. He had had his
leg amputated and was not in good health. The nephew was anxious to get hold of
the business before the old man died. So they went to a solicitor, Mr. Ashcroft, who
drew up an agreement for them. The business was to be transferred to the nephew:
old Peter Beswick vyas to be employed in it as a consultant for the rest of his life at
£6 10s. a week. After his death the nephew was to pay to his widow an annuity of £5
per week, which was .to come out of the business. The agreement was quite short
and I will read it in full:

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 I. THIRD-PARTY BENEFICIARIES

1. Peter Beswick to assign to John Joseph Beswick the goodwill, motor lorry, scales, weights
and other trade utensils of the business of a coal merchant hitherto carried on by him in
consideration of the transferee employing the transferor as consultant to the said business
for the remainder of the transferor's life at a weekly salary of £6 10s.
2. For the like consideration the transferee, in the event of the death of the transferor, to pay
to the transferor's widow an annuity to be charged on the said business at the rate of £5
per week.
3. The transferee not to sell the said business in any way freed from his liability to the trans-
feror, which liability shall cease only on the death of the survivor of them the transferor and
his said widow.
4. The agreement betw een the parties to be deemed for all purposes to have commenced
to operate as from March 1, 1962.
5. The transferor to be free to devote only such time to the conduct of the said business as
he shall find convenient or shall at his own absolute discretion decide.
6. For the consideration aforesaid the transferee to take over the transferor's liability to the
following creditors of the tran sferor : Geo rge and Lydia Turner in the sum of £187, Joseph
Beswick in the sum of £250 or such lesser sums as shall be agreed with the said creditors
whether by compounding or otherwise.

After the agreement was signed, the nephew took over the business an.ct ran it.
The old man seems to have found it difficult at first to adjust to the new situation,
but he settled down. The nephew paid him £6 10s. a week. But, as expected, he did
not live long. He died on November 3, 1963, leaving his widow, who was 74 years of
age and in failing health. The nephew paid her the first £5. But he then stopped
paying her and has refused to pay her any more.
On June 30, 1964, the widow took out letters of administration to her husband's
estate. On July 15, 1964, she brought an action against the nephew for the promised
£5 a week. She sued in the capacity of administratrix of the estate of Peter Beswick,
deceased, and in her personal capacity she claimed £175 in arrears and a declaration.
By amendment she claimed specific performance and the appointment of a receiver.
The action came for hearing before the Vice -Chancellor of the County Palatine of
Lancaster, who held that she had no right to enforce the agreement. He dismissed
the action.
If the decision of the Vice-Chancellor truly represents the law of England, it would
be deplorable. It would mean that the nephew could keep the business to himself,
and at the same time repudiate his promise to pay the widow. Nothing could be more
unjust. I am sure the Vice -Chancellor would have decided in favour of the widow if
he had not felt himself bound by the decision of Wynn-Parry J. in In re /V/iller's Agree-
ment, [1947] Ch. 615. That case is cited in the textbooks as if it were the last word on
the subject: see Anson on Contracts, 22nd. ed. (1964) p. 381; Cheshire and Fifoot on
Contracts, 5th ed. (1960), p. 377. It is very like this case. So we must examine it with
some care. In In re /V/iller's Agreement there were three partners. One of them had
retired and transferred his interest to the other two. By a deed of covenant made by
the three partners, the two continuing partners agreed to pay the retiring partner
£5,000 a year during his life, and after his death to pay £1,000 a year to his three
daughters during their lives. The two continuing partners also charged their interest
in the firm with payment of those sums. The Revenue authorities claimed that estate
duty was payable on the annuities payable to the daughters. That depended on
whether the daughters had such an interest in property as would be protected in a
court of law of equity. Wynn-Parry J . held that they had no such interest. "At common
law," he said, "so far as the plaintiffs" (the daughters) "are concerned, the deed is res
inter alios acta, and they have no right thereunder." As to section 56 of the Law. of
Property Act, 1925, "the section," he said, "h as not the effect of creating rights, but

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only of assisting the protection of rights shown to exist." As to the charge: "ThE;!
central function of a charge is to secure the performance of an obligation, and the
charge is essentially ancillary.'' He concluded: "I cannot find ... that the deed confers
upon any of the daughters any right to sue .... [T]he payments, if and when made,
will be no more than voluntary payments .... "He held, accordingly, that estate duty
was not payable on the daughters' annuities.
I can understand the desire of the judge in that case to save the daughters from
death duties, but I cannot subscribe to the way he did it. He was wrong in saying
that the daughters had no enforceable interest. We have here the standard pattern
of a contract for the benefit of a third person. A man has a business or other assets.
He transfers them to another and, instead of taking cash, takes a promise by that
other that he will pay an annuity or other sum to his widow or children. Can the
transferee take the assets and reject the promise? I think not. In my opinion a contract
such as this, for the benefit of widow and children, is binding. The party who makes
the promise must honour it, unless he has some good reason why he should not do
so. He may, for instance, be able to say that the contract should be rescinded as being
induced by fraud or misrepresentation, or that it was _varied or rescinded by agree-
ment between the parties, before the widow or children knew about it and adopted it.
But unless he has some good reason, he is bound. The executor of the dead man can
sue to enforce it on behalf of the widow and children. The widow and children can join
with the executor as plai ntiffs in the action. If he refuses to sue they may sue in their
own names joining him as a defendant. In this way they have a right which can be
enforced. I will prove this by referen.ce to the common law, reinforced by equity, and
now by statute.

1. THE COMMON LAW

The common law on this subject was much considered in Dutton v. Poole, (1678) T.
Raym. 302, in 1678. It was regarded at the time as a case of great consequence and
is reported by no less than five of the old reporters. It was similar in principle to our
present case. The facts were these: Sir Edward Poole owned timber trees in a wood
in Oaksey Park, Wiltshire. He had several children, including his son and heir, Nevil,
and a daughter Grizel. Sir Edward proposed to cut down the trees and sell them so
as to raise portions for the younger children. The eldest son did not want him to do
this, because he was the heir and would inherit the trees if they were left standing.
There was a meeting between the father and mother and the eldest son. The son
asked the father not to cut down the trees, and promised him that, if he did not cut
them down, he would pay £1,000 to the daughter Grizel. In reliance on the promise,
the father did not cut down any of the trees, and died. The eldest son inherited and
had the benefit of them. The daughter Grizel (who had married Sir Ralph Dutton)
claimed £1,000 from the eldest son. He refused to pay it to her.
The mother was the executrix of the father's estate. She could as executrix have
sued to enforce the agreement. But she was th_e only person present when it was
made, and if she brought the action, she would not be a competent witness. So the
daughter and her husband themselves sued the eldest son for the £1,000. In that
action the mother was a competent witness. She proved the agreement, and the
plaintiffs obtained judgment for £1,000. The eldest son appealed to the Court of King's
Bench sitting in bane. The case was argued twice. John Holt appeared for the eldest
son. He said that the action ought to be brought by the father's executor for the benefit
of the daughter; and not by the daughter herself, as she was ."not privy to the promise
nor consideration." Pollexsen appeared for the daughter. He said that the action was

358
 I. THIRD-PARTY BENEFICIARIES

maintainable either by the party to whom the promise was made, or by the daughter.
When the case was first argued, two of the four judges were disposed to accept Holt's
argument and hold that the daughter could not sue. But at the second argument
Scroggs C.J. with his three brethren all held that the daughter could sue, "for the son
hath the benefit by having of the wood, and the daughter hath lost her portion by
this means." The eldest son appealed to the Court of Exchequer Chamber, but the
appeal was dismissed.
Two things appear from that case: First, it was accepted on all hands that the father's
executrix could have sued for the benefit of the daughter. Second, that in the special
circumstances of that case (when a party could not give evidence), the daughter
herself could sue on the contract although she was not a party to it. It was a decision
of the Court of Exchequer Chamber and has never been overruled. It was approved
by Lord Mansfield himself in 1776 who thought it so plain that "it is matter of surprise
how a doubt could have arisen in that case." I know that in the 19th century some
judges said that it was wrongly decided, but the criticism is not merited. It would
have been shocking if the daughter had been refused a remedy.
The case of Tweddle v. Atkinson is readily distinguishable. John Tweddle married
Miss Guy. After the marriage the two fathers of the young couple made an agreement
between themselves, the two fathers, to pay these sums: The husband's father prom-
ised to pay his son £100: the wife's father promised to pay his son-in-law £200: such
payments to be made on or before August 21, 1855. Clearly the payments were to be
mutual for the benefit of the young couple. Neither of the fathers made the promised
payments: and afterwards both fathers died. Then the young husband sued the
executor of his wife's father for the £200. The action failed for the very good reason
that the husband's father had not done his part. He had not paid his promised £100.
The son could not himself be sued for his father's failure to pay the £100: for he was
no party to the contract. So he could not be allowed to sue his wife's father for the
£200. Crompton J. said: "It would be a monstrous proposition to say that a person
was a party to the contract for the purpose of suing upon it for his own advantage,
and not a party to it for the purpose of being sued." But if the husband's father had
paid his £100 and thus wholly performed his part, then the husband's father in his
lifetime, or his executor after his death, could have sued the wife's father or his execu-
tor for the £200. As Wightman J. observed: "If the father of the plaintiff had paid the
£100 which he promised, might not he have sued the father of the plaintiff's wife on
his express promise7" To which the answer would undoubtedly be: "Yes, he could
sue and recover the £200," but he would recover it not for his own benefit, or for the
benefit of the estate, but for the benefit of the son.
Those two cases give the key at common law to the whole problem of contracts
for the benefit of a third person. Although the third person cannot as a rule sue alone
in his own name, nevertheless there·is no difficulty whatever in the one contracting
party suing the other party for breach of the promise. The third person should,
therefore, bring the action in the name of the contracting party, just as an assignee
used to do. Face to face with the contracting party, the defaulter has no defence. He
is sued by one who has provided consideration and to whom he has given his
promise to pay the third person. He has broken his promise and must pay damages.
The defaulter sometimes seeks to say that the contracting party can only recover
nominal damages because it is not he bu_t the third person who has suffered the
damage. The common law has never allowed the defaulter to escape by such a shifty
means. It holds that the contracting party can recover the money which should have
been paid to the third person. He can get judgment for the sum and issue a writ of
ti. fa. or other machinery to enforce payment: but when he recovers it, he holds the

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proceeds for the benefit of the third person. He cannot retain the money himself
because it belongs to the third person and not to him: see In re Schebsman, Ex pa rte
the Official Solicitor, the Trustee, Cargo Superintendents (London) Ltd. v. Schebsman
(1944] Ch. 83. It is money had and received to the use of the third person. In Robert-
son v. Wait, (1853) 8 Exch. 299, Martin B. said: "If a person ma.kes a contract whereby
another obtains a benefit, why may not the former sue for it?" And in Lloyd's v. Harper
(1880), 16 Ch. D. 290, Lush L.J. said: "I consider it to be an established rule of law that
where a contract is made with A for the benefit of B, A can sue on the contract for
the benefit of B and recover all that B could have recovered if the contract had been
made with B himself."
Such was the position at common law if the action was brought in the name of
the contracting party by himself alone. But nowadays when joinder of parties is freely
permissible, it is far better for the contracting party and the third person to join as
co-plaintiffs. Judgment will be given for the plaintiffs for the amount: and on pay-
ment, it will go at once to the third person who is entitled to it.

2. EQUITY

Sometimes one of the contracting parties makes the contract on trust for the third
person, in this sense, that from the very beginning the right to sue is vested in him
as trustee for the third person as beneficiary. Such a contrac.t is different from those
we are considering. It cannot be rescinded or varied except with the consent of the
third person beneficiary: see In re Empress Engineering Co. (1880), 16 Ch. D. 125. In
such a case it is clearly established that the third person himself can sue in equity to
enforce the contract: ... but even so, he ought as a rule to join the trustee as a party.
Here we have a case where there is admittedly no trust of the contractual right. Peter
Beswick and his nephew might by agreement before his death have rescinded or
varied the agreement, if they so wished. Nevertheless, although there is no trust, I
do not think equity is powerless. It has in its hands the potent remedy of ordering a
party specifically to perform his contract. If a party makes a promise to pay money
to a third person, I see no reason why a court of equity should not order him to
perform his promise. The action must be brought, of course, in the name of the other
contracting party; but, that being done, there is no bar to a decree for specific per-
formance being made. True it is for the payment of money, but a court of equity
often decrees specific performance of a promise to pay money. It can enforce it by
the appointment of a receiver, or other appropriate machinery. We have been
referred to three cases where this has been done, although there was no trust. The
first is Keenan v. Handley (1864), 13 W.R. 930. Ellen Keenan was the mistress of Captain
Handley. They lived as Mr. and Mrs. Coverdale and had a baby daughter called Lucy
Coverdale. Captain Handley wrote this letter to Miss Keenan: "I will allow you £150
a year, to be continued to you while you live and to your child after your death,
should she survive you." She and her daughter sued for specific performance.
Kindersley V.-C. granted it. He ordered deeds to be executed for payment of the
annuities, including the am ounts to the daughter, although she was not a party to
the agreement. The next case is Peel v. Peel, (1869) 17 W.R. 586. William Peel was in
financial difficulty. His brother Edmund Peel agreed with his cousin, Sir Robert Peel,
that Edmund would pay off William's debts and that Sir Robert would during his life
pay William an annuity of £164 a year. Edmund paid off the debts but Sir Robert Peel
did not pay the amounts. Edmund Peel and William Peel sued for specific perform -
ance. James V.-C. granted it. He ordered Sir Robert to pay William Peel £164 a year,
although William was not a party to the agreement. The third case is Hohler v. Aston,
(1920] 2 Ch. 420, where Mrs . Aston agreed with her nephew, Mr. Hohler, to make

360
 I. THIRD - PARTY BENEFICIARIES

provision for her niece and her husband, Mr. and Mrs. Rollo. Mrs. Aston died before
doing so. Mr. Hohler and Mr. and Mrs. Rollo sued the executors for specific perform-
ance . Sargant J . granted it. He said: !'Mr. E.T. Hohler was entitled, and is now entitled,
to enforce for the benefit of the third parties, Mr. and Mrs. Rollo, a contract made
with Mrs. Aston for those third parties. The third parties, of course, cannot themselves
enforce a contract made for their benefit, but the person with whom the contract is
made is entitled to enforce the contract."
These cases in equity fit in exactly with the common law. The contracting party is
entitled by himself alone, or jointly with the third person, to have the contract per-
formed according to its terms, and the court will decree specific performance of it. ...
[Lord Denning then examined s 56(1) of the Law of Property Act, 1925 (UK).]

4. CONCLUSION

The general rule undoubtedly is that "no third person can sue, or be sued, on a con -
tract to which he is not a party": but at bottom that is only a rule of procedure. It goes
to the form of remedy, not to the underlying right. Where a contract is made for the
benefit of a third person who has a legitimate interest to enforce it, it can be enforced
by the third person in the name of the contracting party or jointly with him or, if he
refuses to join, by adding him as a defendant. In that sense, and it is a very ~ea\ sense,
the third person has a right arising by way of contract. He has an interest which will
be protected by \aw., The observations to the contrary in In re /v1iller's Agreement and
Green v. Russell, [1959] 2 O.B. 226 are in my opinion erroneous. It is different when
a third person has no legitimate interest, as when he is seeking to enforce the main -
tenance of prices to the public disadvantage, as in Dunlop Pneumatic Tyre Co. Ltd. v.
Selfridge & Co. Ltd., [1915] AC. 847: or when he is seeking to rely, not on any right
given to him by the contract, but on an exemption clause seeking to exempt himself
from his just liability. He cannot set up an exemption clause in a contract to which
he was not a party: see Midland Silicones Ltd. v. Scruttons Ltd., [1962] AC. 446.
The widow here sues in her capacity as executrix of her husband's estate (and
therefore as contracting party), and also in her personal capacity (and therefore as a
third person). This joint claim is clearly good. She is entitled to an order for specific
performance of the agreement, by ordering the defendant to pay the arrears of £175,
and the instalments of £5 a week as they fall due . The order for paying the arrears of
£175 is equivalent to a judgment for that sum and can be enforced by ti. fa. or other
appropriate machinery: see R.S.C. Ord. 42, r. 3. When the money is recovered, it will
go to the widow for her own benefit, and not to her husband's estate. I would allow
the appeal accordingly.
[The nephew appealed to the House of Lords.]
LORD REID : My Lords, before 1962 the respondent's deceased husband carried on
business as a coal merchant. By agreement of March 14, 1962, he assigned to his
nephew, the appellant, the assets of the business and the appellant undertook first
to pay him £6 10s. per week for the remainder of his life and then to pay the respond-
ent an annuity of £5 per week in the event of her husband's death. The husband died
in November, 1963. Thereupon, the appellant made one payment of £5 to the
respondent but he refused to make any further payment to her. The respondent now
sues for £175 arrears of the annuity and for an order for specific performance of the
continuing obligation to pay the annuity. The Vice-Chancellor of the County Palatine
of Lancaster decided against the respondent but the Court of Appeal reversed this

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decision and, besides ordering payment of the arrears, ordered the appellant to pay
to the respondent for the remainder of her life an annuity of £5 per week in accord-
ance with the agreement.
It so happens that the respondent is administratrix of the estate of her deceased
husband and she sues both in that capacity and in her personal capacity. So it is
necessary to consider her rights in each capacity.
For clarity I think it best to begin by considering a simple case where, in consider-
ation of a sale by A to B, B agrees to pay the price of £1,000 to a third party X. Then
the first question appears to me to be whether the parties intended that X should
receive the money simply as A's nominee so that he would hold the money for
behoof of A and be accountable to him for it, or whether the parties intended that X
should receive the money for his own behoof and be entitled to keep it. That appears
to me to be a question of construction of the agreement read in light of all the cir-
cumstances which were known to the parties. There have been several decisions
involving this question. I am not sure that any conflicts with the view which I have
expressed: but if any does, ... I would not agree w ith it. I think that In re Schebsman
was rightly decided and that the reasoning of Uthwatt J. and the Court of Appeal
supports what I have just said. In the present case I think it clear that the parties to
the agreement intended that the respondent should receive the weekly sums of £5
in her own behoof and should not be accountable to her deceased husband's estate
for them. Indeed the contrary was not argued.
Reverting to my simple example the next question appears to me to be: Where
the intention was that X should keep the £1,000 as his own, what is the nature of B's
obligation and who is entifled to enforce it? It was not argued that the law of England
regards B's obligation as a nullity, and I have not observed in any of the authorities
any suggestion that it would be a nullity. There may have been a time when the
existence of a right depended on whether there was any means of enforcing it, but
today the law would be sadly deficient if one found that, although there is a right,
the law provides no means for enforcing it. So this obligation of B must be enforce-
able either by X or by A I shall leave aside for the moment the question whether
section 56(1) of the Law of Property Act, 1925, has any application to such a case, and
consider the position at common law.
Lord Denning's view, expressed in this case not for the first time, is that X could
enforce this obligation. But the view more commonly held in recent times has been
that such a contract confers no right on X and that X could not sue for the £1,000.
Leading counsel for the respondent based his case on other grounds, and as I agree
that the respondent succeeds on other grounds, this would not be an appropriate
case in which to solve this question. It is true that a strong Law Revision Committee
recommended so long ago as 1937 (Cmd. 5449) : "That where a contract by its express
terms purports to confer a benefit directly on a third party it should be enforceable
by the third party in his own name .... " (p. 31). And, if one had to contemplate a further
long period of Parliamentary procrastination, this House might find it necessary to
deal with this matter. But if legislation is probable at any early date I would not deal
with it in a case where that is not essential. So for the purposes of this case I shall
proceed on the footfog that the commonly accepted view is right.
What then is A's position? I assume that A has not made himself a trustee for X,
because it was not argued in this appeal that any trust has been created. So, if X has
no right, A can at any time grant a discharge to B or make some new contract with
B. If there were a trust the position would be different. X would have an equitable
right and A would be entitled and, indeed, bound to recover the money and account
for it to X. And A would have no right to grant a discharge to B. If there is no trust
and A wishes to enforce the obligation, how does he set about it? He cannot sue B

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 I. THIRD-PARTY BENEFICIARIES

for the £1,000 because under the contract the money is not payable to him, and, if
the contract were performed according to its terms, he would never have any right
to get the money. So he m.u st seek to make B pay X.
The argument for the appellant is that A's only remedy is to sue B for damages for
B's breach of contract in failing to pay the £1,000 to X. Then the appellant says that
A can only recover nominal damages of 40s. because the fact that X has not received
the money will generally cause no loss to A: he admits that there may be cases where
A would suffer damage if X did not receive the money but says that the present is
not such a case.
Applying what I have said to the circumstances of the present case, the respond-
ent in her personal capacity has no right to sue, but she has a right as administratrix
of her husband's estate to require the appellant to perform his obligation under the
agreement. He has refused to do so and he maintains that the respondent's only
right is to sue him for damages for breach of his contract. If that were so, I shall
assume that he is right in maintaining that the administratrix could then only recover
nominal damages because his breach of contract has caused no loss to the estate of
her deceased husband.
If that were the only remedy available the result would be grossly unjust. It would
mean that the appellant keeps the business which he bought and for which he has
only paid a small part of the price which he agreed to pay. He would avoid paying
the rest of the price, the annuity to the respondent, by paying a mere 40s.
damages.
The respondent's first answer is that the common law has been radically altered
by section 56(1) of the Law of Property Act, 1925, and that that section entitles her to
sue in her personal capacity and recover the benefit provided for her in the agree-
ment although she was not a party to it.
[After an examination of the history of the section, Lord Reid held that it did not have
the wide meaning contended fo~ by the widow and accepted by Lord Denning and
the majority of the Court of Appeal.]
The respondent's second argument is that she is entitled in her capacity of
administratri~ of her deceased husband's estate to enforce the provision of the
agreement for the benefit of herself in her personal capacity, and that a proper way
of enforcing that provision is to order specific performance. That would produce.a
just result, and, unless there is some technical objection, I am of opinion that specific
performance ought to be ordered. For the reasons given by your Lordships I would
reject the arguments submitted for the appellant that specific performance is not a
possible remedy in this case. I am therefore of opinion that the Court of Appeal
reached a correct decision and that this appeal should be dismissed.
[The other Lords agreed, in substance, with Lord Reid.]

QUESTION
Was Lord Reid (with whom the majority agreed on this point) correct in assuming that no loss
was suffered by the promisee? If so, in what sense would nominal damages be "inadequate"?
If damages were awarded to the promisee would they belong entirely to the promisee? (In
Beswick, would they form part of the estate?) When can a claim by a third-party beneficiary be
framed in non-contractual terms (consider property, wrongdoing, unjust enrichment, and
estoppel)? See Glanzer v Shepherd, 223 NY 236 (1922); White v Jones. [1995) 2 AC 207 (HL);
Trident General Ins Co v McNiece Bros Pty Ltd (1988), 165 CLR 107 (Aus HC) .

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DUNLOP PNEUMATIC TYRE CO LTD V SELFRIDGE & CO LTD

[1915] AC 847 (H L)

The facts of this case are shortly stated by Lord Sumner. There are two instances of
sale and delivery complained of by Dunlop in this case. The steps in the Jameson
transaction are as follows. Those in the other, the Strauss transaction, are similar,
and need not be analysed. On October 12, 1911, Messrs. Dew & Co., motor accessory
factors, contracted with the appellants, the Dunlop Company, in terms of the latter's
price maintenance agreement then current. By this contract Dew became bound,
inter alia, to buy from the Dunlop Company motor tyres, covers, tubes, and sundries
to the net value of £2000 before the expiration of September, 1912, and the appellants
became bound, if the contract continued to subsist, as it did, to sen and deliver such
_goods up to that value, whenever reasonably required to do so.
On December 21, 1911, a Captain Jameson thought fit to ask the respondents,
Selfridge's, who are described as wholesale and retail merchants, for their lowest
price for a Dunlop motor tyre, grooved and non-skid, 815 by 105"Their answer was
that, on receipt of his order, such a tyre would be procured and the price would be
£5 18s. 2d., which was the appellants' list price, less 71a per cent.
On January 1, 1912, Captain Jameson sent to the respondents an order for the
tyre, and also the money for it, and on the same day the order was accepted, and
delivery of the tyre was promised for the following day. In. fact, on January 2 the
respondents ordered this tyre from Dew by telephone. Dew, in turn, ordered it by
telephone from the appellants; it was delivered by them to Dew, and they sent it to
the respondents. These were the events of January 2. On the next day the respond-
ents delivered it to Captain Jameson. Of course, the respondents did not mention
Captain Jameson to Dew, nor did Dew mention the respondents to the appellants.
So far the respondents had signed no price maintenance agreement. They had
been pressed to do so, and no doubt knew that the reason why they were being
pressed by Dew was because the appellants, in turn, strictly required them to obtain
these agreements from those of their customers to whom they sold. Within two or
three days of January 3 they did sign such an agreement, dating it January 2, and
delivering it to Dew, to whom it was addressed, a week or so afterwards. It is for
breach of this agreement that the appellants sued.
The parties have been desirous of knowing their reciprocal rights and duties, if
any, arising out of this agreement, and have accordingly raised two broad questions:
(1) Is there any agreement between these parties at am (2) If so, is there any consider-
ation moving from the appellants to support it and make it bind the respondents to
them? But for this there would have been a good deal to be said for the proposition
that a bargain and sale, clearly complete before this agreement was signed or dated,
could be no breach of it, and that the performance of that bargain by delivery of the
goods after the price maintenance agreement was made could hardly be a ground
for the grant of an injunction.
Phillimore J. gave judgment for the appellants for £10, the liquidated damages in
respect of the two breaches, and granted an injunction restraining the respondents
from selling Dunlop motor tyres, etc., below the appellants' current list prices.
The Court of Appeal reversed this decision and gave judgment for the respondents.
They held that the contract of January 2 was not a contract between the appellants
and the respondents at all, but was a contract between Dew and the respondents
only, and that Dew were not legally competent at one and the same time to make a
contract with the respondents by themselves as principals and as agents of the
appellants. They therefore held that the action was not sustainable.

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 I. THIRD-PARTY BENEFICIARIES

VISCOUNT HALDANE LC: My Lords, in :r_ny opinion this appeal ought to fail ....
My Lords, in the law of England certain principles are fundamental. One is that
only a person who is a party to a contract can sue on it. Our law knows nothing of
a }us quaesitum tertio arising by way of contract. Such a right may be conferred by
way of property, as, for example, under a trust, but it cannot be conferred on a
stranger to a contract as a right to enforce the contract in personam. A second
principle is that if a person with whom a contract not under seal has been made is
to be able to enforce it consideration must have been given by him to the promisor
or to some other person at the promisor's request. These two principles are not
recognized in the same fashion by the jurisprudence of certain continental countries
or of Scotland, but here they are well established. A third proposition is that a prin-
cipal not named in the contract may sue upon it if the promisee really contracted as
his agent. But again, in order to entitle him so to sue, he must have given consider-
ation either personally or through the promisee, acting as his agent in giving it.
My Lords, in the case before us, I am of opinion that the consideration, the allow-
ance of what was in reality part of the discount of which Messrs. Dew, the promisees,
were entitled as between themselves and the appellants, was to be given by Messrs.
Dew on their own account, and was not in substance, any more than in form, an
allowance made by the appellants. The case for the appellants is that they permitted
and enabled Messrs. Dew, with the knowledge and by the desire of the respondents,
to sell to the latter on the terms of the contract of January 2, 1912, but it appears to
me that even if this is so the answer is conclusive. Messrs. Dew sold to the respond-
ents goods which they had a title to obtain from the appellants independently of this
contract. The consideration by way of discount under the contract of January 2 was
to come wholly out of Messrs. Dew's pocket, and neither directly nor indirectly out of
that of the appellants. If the appellants enabled them to sell to the respondents on the
terms they did, this was not done as any part of the terms of the contract sued on .
. No doubt it was provided as part of these terms that the appellants should acquire
certain rights, but these rights appear on the face of the contract as Jura quaesita tertio
which the appellants could not enforce. Moreover, even if this difficulty can be got
over by regarding the appellants as the principals of Messrs. Dew in stipulating for
the rights in question, the only consideration disclosed by the contract is one given
by Messrs. Dew, not as their agents, but as principals acting on their own account.
The conclusion to which I have come on the point as to consideration renders it
unnecessary to decide the further question as to whether the appellants can claim
that a bargain was made in this contract by Messrs. Dew as their agents; a bargain
which, apart from the point as to consideration, they could therefore enforce. If it
were necessary to express an opinion on this further question, a difficulty as to the
position of Messrs. Dew would have to be considered. Two contracts-one by a man
on his own account as principal, and another by the same man as agent-may be
validly comprised in the same piece of paper. But they must be two contracts, and
not one as here. I do not think that a man can treat one and the same contract as
made by him in two capacities. He cannot be regarded as contracting for himself
and for another uno flatu.
My Lords, the form of the contract which we have to interpret leaves the appellants
in this dilemma, that, if they say that Messrs. Dew contracted on their behalf, they
gave no consideration, and if they say they gave consideration in the shape of a
permission to the respondents to buy, they must set up further stipulations, which
are neither to be found in the contract sued upon nor are germane to it, but are really
inconsistent with its structure. That contract has been reduced to writing, and it is
in the writing that we must look for the whole of the terms made between the parties.

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These terms cannot, in my opinion, consistently with the settled principles of English
law, be construed as giving to the appellants any enforceable rights as against the
respondents.
I think that the judgment of the. Court of Appeal was right, and I move that the
appeal be dismissed with costs.
LORD DUNEDIN: My Lords, I confess that this case is to my mind apt to nip any bud-
ding affection which one might have had for the doctrine of consideration. For the
effect of that doctrine in the present case is to make it possible for a person to snap
his fingers at a bargain deliberately made, a bargain not in itself unfair, and which
the person seeking to enforce it has a legitimate interest to enforce. Notwithstanding
these considerations I cannot say that I have ever had any doubt that the judgment
of the Court of Appeal was right. ...
That there are methods of framing a contract which will cause persons in the
position of Selfridge to become bound, I do not doubt. But that has not been done
in this instance; and as Dunlop's advisers must have known of the law of consider-
ation, it is their affair that they have not so drawn the contract.
[Opinions to the like effect were given by Lords Atkinson, Parker of Waddington,
Sumner, and Parmoor.J

THE SATANITA
[1895] P 248 (CA)

On July 5, 1894, the Valkyrie and the Satanita were manoeuvring to get into position
for starting for the fifty mile race at the Mudhook Yacht Club Regatta, when the
Satanita ran into and sank the Valkyrie.
The entry for the Satanita for the regatta was signed by the defendant, .a nd con -
tained the following clause: "I undertake that, while sailing under this entry, I will
obey and be bound by the sailing rules of the Yacht Racing Association and the
by-laws of the club."
The rules of the Yacht Racing Association, adopted by the club, provided among
other things as follows:
Rule 24: "... If a yacht, in consequence of her neglect of any of these rules, shall foul
another yacht ... she shall forfeit all claim to the prize, and shall pay all damages."

The plaintiffs, in an action in personam in the Admiralty Division ... alleged that by
the terms of the entry and in consideration that the owner of the Valkyrie would race
with the defendant under these rules, the defendant agreed that if the Satanita fouled
the Valkyrie in consequence of her neglect of any of the rules, the Satanita would
pay all damages .... The defendant denied that he had entered into such agreement
as alleged ....
LORD ESHER MR: This is an action by the owner of a yacht against the owner of
another yacht, and although brought in the Admiralty Division, the contention really
is that the yacht which is sued has broken the rules which by her consent governed
her sailing in a regatta in which she was contesting for a price.
The first question raised is whether, supposing her to have broken a rule, she can
be sued for that breach of the rules by the owner of the competing yacht which has
been damaged; in other words, was there any contract between the owners of those
two yachts? Or it may be put thus: Did the owner of the yacht which is sued enter

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 I. THIRD-PARTY BENEFICI ARIES

into obligation to the owner of the other yacht, that if his yacht broke the rules, and
thereby injured the other yacht, he would pay damages? It seems to me clear that
he did; and the way that he has undertaken that obligation is this. A certain number
of gentlemen formed themselves into a committee and proposed to give prizes for
matches sailed between yachts at a certain place on a certain day, and they promul-
gated certain rules, and said: "If you want to sail in any of our matches for our prizes,
you cannot do so unless you submit yourselves to the conditions which we have
thus laid down. And one of the conditions is, that if you do sail for one of such prizes
you must enter into an obligation with the owners of the yachts who are competing,
which they at the same time enter into similarly with you, that if by a breach of any
of our rules you do damage or injury to the owner of a competing yacht, you shall
be liable to make good the damage which you have so done." If that is so, then when
they do sail, and not till then, that relation is immediately formed between the yacht
owners. There are other conditions with regard to these matches which constitute
a relation between each of the yacht owners who enters his yacht and sails it and
the committee; but that does not in the least do away with what the yacht owner has
undertaken, namely, to enter into a relation with the other yacht owners, that relation
containing an obligation.
Here the defendant, the owner of the Satanita, entered into a relation with the
plaintiff Lord Dunraven, when he sailed his yacht against Lord Dunraven's yacht,
and that relation contained an obligation that if, by any breach of any of these rules,
he did damage to the yacht of Lord Dunraven, he would have to pay the damages:
[Only that part of the opinion is given that deals with the formation of the contract.
Rigby and Lopes LJJ gave judgments to the same effect. Rigby LJ said: "To whom is
the owner of that yacht to pay those damages? He cannot pay them to the club, nor
do I think the club could recover them. The true and sensible construction is that he
must pay the owner of the yacht fouled ." The judgments were affirmed in the House
of Lords sub nom Clarke v Dunraven, [1897] AC 59.J

MULHOLLAND V MERRIAM
(1872), 19 Grant 288 (Ont Ch)

STRONG VC: About the 6th of November, 1868, John Mulholland being possessed of
a considerable amount in money and securities, the proceeds of the sale of his farm
and also of some other property, executed an instrument in a very peculiar form.
This document, which was prepared by Philip Green, a schoolmaster, residing in the
neighbourhood of the defendant, may be thus described. The first part of it purports
to be a bond by the defendant to John Mulholland in the penal sum of $400. What is
declared to be the condition is as follows : John Mulholland purports thereby to assign
to the defendant "all his estate real and personal, with notes and accounts, to the said
William Merriam on condition that he pay his heirs in the manner following, namely,"
and then follows a direction to pay to each of the living children of John Mulholland
except the defendant's wife $400, and the like sum to the children of two deceased
daughters. It then contains the following clause: "The said William Merriam hereby
becomes bound to pay the above mentioned sums to the parties herein named at
the time of the decease of the said John Mulholland or as soon after as can conven-
iently be done ." A covenant on the part of·Merriam tG provide a maintenance for
John Mulholland during the remainder of his life, completes the document.
This bond or agreement was executed by sealing by both John Mulholland and
his son-in-law, the defendant, William Merriam.

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The bill is filed by George B. Mulholland one of the sons of John Mulholland, to
enforce payment of the $400, which by the instrument set forth was to be paid to
him on his father's death, which took place in April, 1870. The defendant by his
answer to the original bill alleges in paragraph 7 that he h as "in all things fully per-
formed the trusts and covenants in the said bond and agreement on his part to be
performed."
At the hearing it was contended for the defendant, in the first place, that there
was no jurisdiction; that no trust was created by the agreement, and that there was
an absence of any privity, either at law or in equity, between the plaintiff and the
defendant, the proper remedy of the instrument being an action at law, to be brought
by th e personal representative of John Mulholland ..
As to the first point raised by the defendant. I have had much doubt and difficulty,
for it seemed to me at first that the bond could be considered in legal effect as noth-
ing more than a personal covenant by Merriam the defendant with John Mulholland,
and that consequently the only remedy on it could have been action at law by the
personal representative of the latter. More mature consideration has led me to think
I was wrong in my first impression both as to the proper construction of the instru -
ment, and also as to the consequence which I thought would have attached, if that
construction had been correct. ...
[Strong VC then concluded that on the true construction of the document, Merriam
was a trustee of the property conveyed to him, and so was bound to account to
George, the beneficiary of that trust. The learned judge then went on to consider
whether Merriam's promise could be enforced even if there were no trust of the
property.]
I think there could be no doubt but that a personal representative of the testator
recovering this money in an action at law would be considered as a trustee for the
plaintiff, and, if so, it would, I think, follow that the plaintiff can maintain this suit. I
quite agree that, in the naked case, where there is a covenant by one person with
another to pay a sum of money to a stranger, or do any act for the benefit of a
stranger who is not a party to the instrument or agreement, the person to whom the
money is to be paid, or who is to be benefited, cannot sue either at law or in equity,
inasmuch as there is no privity of contract. ... There appears, it is true, to be an excep-
tion to this general rule recognized in some of the older cases where it is laid down
that the person to receive the benefit of the contract, though a stranger to it, may
maintain an action upon it if he stand in such a relationship to the contracting party
that it may be considered that the contract was made for his benefit, and in the very
case of a contract made with a father to pay money to his son or daughter, it has
been held upon this principle that the son or daughter might sue on the contract. ...
Dutton v. Poole (1678), 83 E.R. 523 . .
This doctrine is not, however, now approved as regards courts of law, as appears
from the late case of Tweddle v. Atkinson (1861), 121 E.R. 762. This, however, in my
opinion, only goes to shew the applicability to a case like the present of a remedy in
this Court proceeding on a doctrine which I will endeavour to point out. There can
be no doubt, as I have already said, that this $400, if recovered in an action at law by
a personal representative of John Mulholland, would not be assets in his hands to
be distributed by him according to the Statute of Distributions, but would be
impressed with a trust in equity in favor of the plaintiff. This must be so, for th e only
other alternative is, that it was in the power of the defendant entirely to defeat any
or an of the gifts which the settlor made to his children, by compelling the personal
representative to bring an action, the fruits of which would be free from any trust

368
 I. THIRD-PARTY BENEFICIARIES

and liable to be distributed amongst the next of kin; which would of course, be
absurd.
Then if the money, when recovered by the administrator, would be affected by a
trust, it must also be, that the right of action which the personal representative has
is also bound by a like trust; and, if this is so, there is the highest authority for saying
that, even though the obligation of Merriam rests (as I have already determined it
does not) merely on contract, and he should not be bound by any trust, yet, as the
personal representative would be a trustee for the plaintiff, he and the plaintiff con-
jointly might maintain this bill. The authority which I refer to is the case of Gregory
v. Williams (1817), 36 E.R. 224, decided by a very great Judge (Sir William Grant, M.R.),
and it is approved by Mr. Spence, who, in his treatise, 2 Equitable Jurisdiction, 286,
thus states both the case and the principle which it establishes: he says:
There are instances where a third person has been expressly allowed to treat the party
exacting the stipulation as his trustee, though such third person was a mere stranger to
the parties. In the case of Gregory v. Williams, one Parker, who was in the possession of
a farm belonging to the defendant Williams, was considerably indebted to Williams; he
also owed a large debt to one Gregory. Parker, as Williams knew, was under apprehension
that Gregory would arrest him; Williams, the landlord, and Parker, the tenant, entered
into an agreement in writing, to which Gregory, the creditor, was neither party nor privy,
to the following effect, namely: that, if Parker would make over to Williams all his stock
and effects of every kind, he would pay the debt due to Gregory, Gregory subsequently
was informed of this arrangement, and he and Parker filed their bill against Williams to
enforce it. The stock and effects assigned to Williams by Parker had been sold at a loss; it
was insisted by Williams that, if Gregory had any remedy, it was at law. Sir W. Grant con-
sidered it was at least doubtful whether Gregory could recover at law, for the engagement
of Williams was not made directly to Gregory, but to Parker only, and the consideration
was furni_ shed by Parker only, for he alone did the act which constituted the consider-
ation; Gregory was not a party to the contract; however, that learned Judge supported
Gregory's right to sue in equity, saying "Parker acts as his trustee, and Gregory may derive
an equitable right through the medium of Parker's agreement, though it was at least
questionable whether he could have maintained an action at law; it was like the case
where a man promised the widow that, if she would allow his name to be joined with
hers in the administration, he would make up the deficiency of the assets for the payment
of the testator's debts; which promise was held to be binding in favour of the creditors,
though they could not sue at law, as the promise was not made to them; so here,
Gregory had a right to insist upon the benefit of the promise made to Parker to the
extent of £900, which Parker represented to be the amount of the debt."

This cas·e which never appears.to have been overruled or even doubted, lays down
a reasonable and convenient doctrine applying directly to the present case, and
shewing that the plaintiff has an equitable right to enforce the contract (if it is nothing
more than a contract) which the defendant entered into with John Mulholland. It is
true that in the case of Gregory v. Williams the quasi trustee, Parker, was a co-plaintiff,
and it may be said that a personal representative of the settlor John Mulholland ought
to be a party here. But there is no such representative in existence, and if one was
constituted it would only be for the express purpose of this suit since all the property
of the intestate was made over by this assignment to the defendant, and there are
now no assets to administer or debts to pay; and such an administrator would be a
mere formal party as a trustee having not the slightest interest. I am therefore per-
fectly justified in directing as I do under the Consolidated Order 56, that the suit may
proceed in the absence of any person representing the estate of John Mulholland.

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

Therefore in my judgment the suit is maintainable; first because the defendant is

a trustee under the instrument of the 6th November, 1868, and the plaintiff is one of
the cestuis que trust; second, even though the defendant be not a trustee, and is liable
on contract only, the plaintiff has nevertheless an equitable right of suit on the
authority of the case referred to.

Les Affreteurs Reunis Societe Anonyme v Leopold Walford (London) Limited.

[1919] AC 801 (Eng HL) . LORD WRENBURY: We have here to do with a contract between
two parties reserving a benefit to a third. The two parties are the shipowners and the
charterers, the third party is the broker of one of them, who is to be remunerated in
respect of a contract which is being made for the hire of a ship. The particular form
of contract in question is of course prepared by, or is under the eyes of the broker
who is negotiating the matter. It is sent to the principals for signature, and they sign
it, and there is contained in it a clause which reserves a benefit to the broker. Under
those circumstances an action is brought by the broker against the shipowner for the
commission which is expressed to be payable to him under the contract between
the shipowner and the charterer-a contract to which he himself, I agree, was not a
party. By agreement between the parties the record is to be treated as if the charterer
were joined as a plaintiff in the action. The case is one in which an action can be
brought on behalf of a person to whom a benefit is reserved although he is not a
party to it. That is the subject of the decision in Robertson v. Wait. Under those cir-
cumstances the shipowners, the defendants in the action, defend the action and in
effect are here saying: "It is perfectly true that we attached our signature to this
document; it is perfectly true that it contains in Article 29 this stipulation in favour
of a third party; but that means nothing at all-that is not the bargain at all to which
we were parties. The matter is governed by a certain custom." ·
My Lords, I feel myself in great difficulty in understanding a contention of that
sort. It is said that in this particular business there exists a custom (and I will take it
for the moment that the custom is proved) that in time charterparties broker's com-
mission is payable out of hire earned and is not payable unless hire is earned. In this
contract, however, there is a stipulation that the commission shall be on the esti-
mated gross amount of hire on signing the charter ship lost or not lost. I find myself
quite unable to understand how it can be set up that into a contract expressed in
those terms there can be introduced a custom to an exactly contrary effect. Directly
it is conceded that the broker, although not a party to the contract, can sue on the
contract, inasmuch as he can sue by the charterer as trustee for him, it appears to
me that the case really is over. I have only to read Article 29 and I find there an express
stipulation-a stipulation which is accepted by the signature of the defendants, that
this payment shall be made, and for that payment it appears to me that the defend-
ants are liable.

NOTE ON THE TRUST CONCEPT

The concept of trust involves a separation between lega l and benefic ia l ownership: legal title
to property is vested in one person (the trustee) and the beneficial interest in another (the
cestui que trust, or beneficiary). The interest of the benefic iary is enforceable against the
trustee and anyone else except a good-faith purchaser of the legal estate for value without
notice . The subject of a trust may be intangible as well as tangible property and may include a
promise. Trusts were developed by the courts of equity.

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 I. THIRD-PARTY BENEFICIARIES

The notion of a trust of a promise, which found favour in Mulholland v Merriam and in
Walford, is clearly capable of making great inroads on the rule denying an action to a third-
party beneficiary. For if the making of the promise in favour of the third party is in itself suffi-
cient to create a trust, it is always open to a court to hold that the promise is enforceable at
the suit of the third party. Even without the promisee's cooperation, the third party could
succeed, for once a trust is found a court will never allow the rights of a beneficiary to be
defeated because of the recalcitrance of the trustee . Indeed, it was argued by Corbin in "Con-
tracts for the Benefit of Third Persons" (1930) 46 Law Q Rev 12 that the way was open, by
means of the concept of trust of a promise, effectively to abolish the rule against third-party
beneficiaries. This suggestion was, however, rejected in Re Schebsman, [1944] Ch 83 (CA) and
in Green v Russell, [1959] 2 OB 226 (CA), where proof of a "real" intention to create a trust was
required.

JACKSON V HORIZON HOLIDAYS LTD

[1975] 3 All ER 92 (CA)

LORD DENNING MR: Mr. Jackson is a young man, in his mid-twenties . He has been
very successful in his business. He is married with three sma\\ children. In November
1970 there were twin boys of three years of age; and his wife had just had her third
child. He had been working very hard. They determined to have a holiday in the sun.
He decided on Ceylon. He enquired of Horizon Holidays Ltd. He made arrangements
with their agent, a Mrs. Bremner, for a holiday at a hotel, the Pegasus Reef Hotel,
Hendala Point, Ceylon. He wrote them a letter which shows that he wanted every-
thing of the highest standard ....

He spoke on the telephone to Mrs. Bremner. She led him to believe that the hotel
would come up to his expectations. She wrote on the booking form: "Remarks Twins
Room with connecting door essential. Total charge, £1,432." He sent it in and booked
the holiday.
In the middle of January it was discovered that the Pegasus Reef Hotel would not
be ready in time. So Horizon Holidays recommended a substitute. This was Brown's
Beach Hotel. It was described in the advertisement as being, "superbly situated right
on the beach, with a\\ facilities for an enjoyable holiday including mini-golf, exce\\ent
restaurant, cocktail lounge, swimming pool, beauty salon, hairdressers and gift
shop .... The bedrooms are we\\ furnished and equipped in modem style. A\\ rooms
have private bath, shower, w.c., sea view and air-conditioning."
Mr. Jackson had some hesitation about this other hotel. But Horizon Holidays
assured him that it would be up to his expectation. So Mr. Jackson accepted it. But
Horizon Holidays reduced the charge. Instead of the price being the total sum of
£1,432, now, because of the change of hotel, it would be £1,200. That included air
travel to Ceylon and back and a holiday for four weeks. So they went there. The
courier, Miss Redgrave, met them and took them to Brown's Beach Hotel. But they
were greatly disappointed. Their room had not got a connecting door with the room
for the children at a\\. The room for the children was mildewed-black with mildew,
at the bottom. There was fungus growing on the wa\\s. The toilet was stained. The
shower was dirty. There was no bath. They could not let the children sleep in it. So
for the first three days they had a\\ the family in one room. The two children were
put into one of the single beds and the two adults in the other single bed. After the
first three days they were moved into what was said to be one of the best suites in
the hotel. Even then, they had to put the children in to sleep in the sittingroom and

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the parents in the bedroom. There was dirty linen on the bed. There was no private
bath but only a shower; no mini-golf course; no swimming pool, no beauty salon,
no hairdressers' salon. Worst of all was the cooking. There was no choice of dishes.
On some occasions, however, curry was served as an alternative to the main dish.
They found the food very distasteful. It appeared to be cooked in coconut oil. There
was a pervasive taste because of its manner of cooking. They were so uncomfortable
at Brown's Hotel, that after a fortnight they moved to the Pegasus Reef Hotel. It
appears that by that time it was nearing completion. But a lot of building work was
still going on. At any rate, for the fortnight they were in the Pegasus Reef Hotel, where
things were somewhat better than at Brown's Beach. They stayed out the four weeks
and came home.
Soon after their return, Mr. Jackson wrote a letter setting out all his complaints from
the beginning to the end. Then Mr. Jackson brought an action for damages in respect
of the loss of his holiday for himself, his wife and the two small children. Horizon
Holidays admitted liability. The contest was only on the amount of damages.
In Jarvis v. Swans Tours Ltd. [1973] Q.B. 233 it was held by this court that damages
for the loss of a holiday may include not only the difference in value between what
was promised and what was obtained, but also damages for mental distress,
inconvenience, upset, disappointment and frustration caused by the loss of the
holiday. The judge directed himself in accord·?-nce with the judgments in that case.
He eventually awarded a sum of £1,100. Horizon Holidays Ltd. appeal. They say it
was far too much. The judge did not divide up the £1,100. Counsel has made sug-
gestions about it. Counsel for Horizon Holidays suggests that the judge gave £100
for diminution in value and £1,000 for the mental distress. But counsel for Mr.
Jackson suggested that the judge gave £600 for the diminution in value and £500
for the mental distress. If I were inclined myself to speculate, I think the suggestion
of counsel for Mr. Jackson may well be right. The judge took the cost of the holidays
at £1,200. The family only had about half the value of it. Divide it by two and you get
£600. Then add £500 for the mental distress.
On this question a point of law arises. The judge said that he could only consider·
the mental distress to Mr. Jackson himself, and that he could not consider the distress
to his wife and children. He said: "... the damages are the Plaintiff's; that I can consider
the effect upon his mind of his wife's discomfort, vexation and the like, although I
cannot award a sum which represents her vexation."
Counsel for Mr. Jackson disputes that proposition. He submits that damages can
be given not only for the leader of the party, in this case, Mr. Jackson's own distress,
discomfort and vexation, but also for that of the rest of the party.
We have had an interesting discussion as to the legal position when one person
makes a contract for the benefit of a party. In this case it was a husband making a
contract for the benefit of himself, his wife and children. Other cases readily come
to mind: A host makes a contract with a restaurant for a dinner for himself and his
friends. The vicar makes a contract for a coach trip for the choir. In all these cases
there is only one person who makes the contract. It is the husband, the host or the
vicar, as the case may be. Sometimes he pays the whole price himself. Occasionally
he may get a contribution from the others. But in any case it is he who makes the
contract. It would be a fiction to say that the contract was made by all the family, or
all the guests, or all the choir, and that he was only an agent for them. Take this very
case. It would be absurd to say that the twins of three years old were parties to the
contract or that the father was making the contract on their behalf as if they were
principals. It would equally be a mistake to say that in any of these instances there
was a trust. The transaction bears no resemblance to a trust. There was no trust fund

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 I. THIRD-PARTY BENEFICIARIES

and no trust property. No, the real truth is that in each instance, the father, the host
or the vicar, was making a contract himself for the benefit of the whole party. In
short, a contract by one for the benefit of third persons.
What is the position when such a contract is broken? At present the law says that
the only one who can sue is the one who made the contract. None of the rest of the
party can sue, even though the contract was made for their benefit. But when that
one does sue, what damages can he recover? Is he limited to his own loss? Or can
he recover for the others? Suppose the holiday firm puts the family into a hotel which
is only half built and the visitors have to sleep on the floor? Or suppose the restaurant
is fully booked and the guests have to go away, hungry and angry, having spent so
much on fares to get there? Or suppose the coach leaves the choir stranded half-way
and they have to hire cars to get home? None of them individually can sue. Only the
father, the host or the vicar can sue. He can, of course, recover his own damages.
But can he not recover for the others? I think he can. The case comes within the
principle stated by Lush L.J. in Lloyd's v. Harper (1880) 16 Ch.D. 290, at 291: "... I con-
sider it to be an established rule of law that where a contract is made with A for the
benefit of B, A can sue on the contract for the benefit of B, and recover all that B could
have recovered if the contract had been made with B himself."
It has been suggested that Lush L.J. was thinking of a contract in which A was
trustee for B. But I do not think so . He was a common lawyer speaking of the com -
mon law. His words were quoted with considerable approval by Lord Pearce in
Beswick v. Beswick. I have myself often quoted them. I think they should be accepted
as correct, at any rate so long as the law forbids t)1e third persons themselves to sue
for damages. It is the only way in which a just result can be achieved. Take the
instance I have put. The guests ought to recover from the restaurant their wasted
fares. The choir ought to recover the cost of hiring the taxis home. There is no one
to recover for them except the one who made the contract for their benefit. He should
be able to recover the expense to which they have been put, and pay it over to them.
Once recovered, it will be money had and received to their use. (They might even,
if desired, be joined as plaintiffs.) If he can recover for the expense, he should also
be able to recover for the discomfort, vexation and upset which the whole party have ·
suffered by reason of the breach of _c ontract, recompensing them accordingly out
of what he recovers.
Applying the principles to this case, I think that the figure of £1,100 was about
right. It would, I think, have been excessive if it had been awarded only for the dam-
age suffered by Mr. Jackson himself. But when extended to his wife and children, I
do not think it is excessive. People look forward to a holiday. They expect the prom-
ises to be fulfilled . When it fails, they are greatly disappointed and upset. It is difficult
to assess in terms of money; but it is the task of the judges to do the best they can. I
see no reason to interfere with the total award of £1,100 .
I would therefore dismiss this appeal.
ORR LJ: I agree.
JAMES LJ: In this case, Mr. Jackson, as found by the judge on the evidence, was in
need of a holiday at the end of 1970. He was able to afford a holiday for himself and
his family. According to the form which he completed, which was the form of Hor-
izon Holidays Ltd., he booked what was a family holiday. The wording of that form
might in certain circumstances give rise to a contract in which the person signing
the form is acting as his own principal and as agent for others. In the circumstances
of this case, as indicated by Lord Denning M.R. it would be wholly unrealistic to
regard this contract as other than one made by Mr. Jackson for a family holiday. The

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judge found that he did not get a family holiday. The costs were some £1,200. When
he came back he felt no benefit. His evidence was to the effect that, without any
exaggeration, he felt terrible. He said: "The only thing, I was pleased to be back, very
pleased, but I had nothing at al\ from that holiday." For my part, on the issue of dam-
ages in this matter, I am quite content to say that £1,100 awarded was the right and
proper figure in those circumstances. I would dismiss the appeal.
Appeal dismissed. Leave to appeal to the House of Lords refused.

NOTE
Jackson was disapproved by Lord Wilberforce in Woodar Investment Development Ltd v
Wimpey Construction UK Ltd, [1980] 1 WLR 277 (HL), but, in the same case, Lord Keith (at 297)
explained Jackson as a case where the promisee's own loss was augmented by the losses of
his family, and Lord Scarman (at 300) said, "If the opportunity arises I hope the House will
reconsider Tweddle v. Atkinson ... and the other cases which stand guard over this unjust rule."

Midland Silicones Ltd v Scruttons Ltd. [1962] AC 446 (HL). Scruttons Ltd. were
stevedores hired to handle a drum of silicone diffusion pump fluid from the ship to
a lorry provided by the consignee, Midland Silicones Ltd. The stevedores were just
lowering the drum on to the lorry when by their negligence it was dropped and some
of the contents were lost. The loss was assessed at £593 12s. By virtue of the bi\\ of
lading between the shipper and the carrier, the carrier who moved the drum from
New York to London was not to be liable for more than $500 (£179 ls.) in the event
of damage. By virtue of the stevedoring contract between the carrier and Scruttons
Ltd., Scruttons Ltd. agreed to be liable for damage while they were handling the drum,
but they were entitled to "such protection as is afforded by the terms, conditions and
exceptions of the bills of lading." By virtue of the sale of goods contract between the
shipper and Midland, the title in the drum passed from the shipper, or seller, to
Midland while it was on board the ship, and thereafter Midland became subject to
the same rights ~n respect of the drum as if the contract in the bi\\ of lading had been
made directly with Midland. There was no express contract between Midland and
Scruttons Ltd. Diplock J. directed judgment for Midland for £593 12s. 2d. plus interest.
The Court of Appeal dismissed an appeal. The House of Lords affirmed the Court of
Appeal. On the question whether Scruttons Ltd., who had no contract with Midland,
could take advantage of the clause in the bi\\ of lading limiting the carrier's liability
to $500, the House, with the exception of Lord Denning, who dissented, denied the
protection on the ground that a third party cannot take advantage of a clause in a
contract to which he is not a party. VISCOUNT SIMONDS: But, my Lords, al\ these
contentions were but a prelude to one which, had your Lordships accepted it, would
have been the foundation of a dramatic decision of this House. It was argued, if I
understood the argument, that if A contracts with B to do something for the benefit
of C, then C, though not a party to the contract, can sue A to enforce it. This is
independent of whether C is A's undisclosed principal or a beneficiary under a trust
of which A is trustee. It is sufficient that C is an "interested person." My Lords, if this
is the \aw of England, then, subject always to the question of consideration, no doubt,
if the carrier purports to contract for the benefit of the stevedore, the latter can
enforce the contract. Whether that premiss is satisfied in this case is another matter,
but, since the argument is advanced, it is right that I should deal with it. Learned
counsel for the respondents met it, as they had successfully done in the courts below,

374
 I. THIRD-PARTY BENEFICIARIES

by asserting a principle which is, I suppose, as well established as any in our law, a
"fundamental" principle, as Lord Haldane called it in Dunlop Pneumatic Tyre Co. Ltd.
~- Selfridge & Co. Ltd., [1915) AC. 847, an "elementary" principle, as it has been called
times without number, that only a person who is a party to a contract can sue upon
it. "Our law," said Lord Haldane, "knows nothing of ajus quaesitum tertio arising by
way of contract." Learned counsel for the respondents claimed that this was the
orthodox view and asked your Lordships to reject any proposition that impinged
upon it. To that invitation I readily respond. For to me heterodoxy, or, as some might
say, heresy, is not the more attractive because it is dignified by the name of reform.
Nor will I easily be led by an undiscerning zeal for some abstract kind of justice to
ignore our first duty, which is to administer justice according to law, the law which
is established for us by Act of Parliament or the binding authority of precedent. The
law is developed by the application of old principles to new circumstances. Therein
lies its genius. Its reform by the abrogation of those principles is the task not of the
courts of law but of Parliament. Therefore I reject the argument for the appellants
under this head and invite your Lordships to say that certain statements which
appear to support it in recent cases such as Smith & Snipes Hall Farm v. River Douglas
Catchment Board, [1949) 2 K.B. 500, and White v. John Warwick & Co. Ltd., [1953) 1
W.L.R. 1285, must be rejected. If the principle of }us quaesitum tertio is to be intro-
duced into our law, it must be done by Parliament after a due consideration of its
merits and demerits. I should not be prepared to give it my support without a greater
knowledge than I at present possess of its operation in other systems of law.
LORD DENNING (dissenting): [T]he question is: Did the owners of the goods impliedly
authorize the carrier to employ stevedores on the terms that their liability should be
limited to $5007 I think they did . ... The carrier simply passed on the self-same lim-
itation as he himself had, and this must have been within his implied authority. It
seems to me that when the owner of goods allows the person in possession of them
to make a contract in regard to them, then he cannot go back on the terms of the
contract, if they are such as he expressly or impliedly authorized to be made, even
though he was no party to the contract and could not sue or be sued upon it. It is
just the same as if he stood by and watched it being made. And his successor in title
is in no better position.
[Lord Reid pointed out that the House had been informed that questions of this kind
frequently arise and that this action had been brought as a test case. How will the
result affect the revision of the standard forms of the three contracts involved here7]

NEW ZEALAND SHIPPING CO LTD V AM SATTERTHWAITE

& CO LTD (THE EURYMEDON)
[1975] AC 154 (PC)

LORD WILBERFORCE: The facts of this case are not in dispute . An expensive drilling
machine was received on board the ship Eurymedon at Liverpool for transhipment
to Wellington pursuant to the terms of a bill of lading no. 1262 dated June 5, 1964.
The shipper was the maker of the drill, Ajax Machine Tool Co. Ltd. ("the consignor").
The bill of lading was issued by agents for the Federal Steam Navigation Co. Ltd. ("the
carrier"). The consignee was AM. Satterthwaite & Co. Ltd. of Christchurch, New
Zealand ("the consignee"). For several years before 1964 the New Zealand Shipping
Co. Ltd. ("the stevedore") had carried out all stevedoring work in Wellington in respect
of the ships owned by the carrier, which was a wholly owned subsidiary of the steve -

375
CHAPTER 4 CONTRACTS AND THIRD PARTIES

dore. In addition to this stevedoring work the stevedore generally acted as agent for
the carrier in New Zealand; and in such capacity as general agent (not in the course
of their stevedoring functions) the stevedore received the bill of lading at Wellington
on July 31, 1964. Clause 1 of the bill of lading, on the construction of which this case
turns, was in the same terms as bills of lading usually issued by the stevedore and
its associated companies in respect of ordinary cargo carried by their ships from the
United Kingdom to New Zealand. The consignee became the holder of the bill of
lading and owner of the drill prior to August 14, 1964. On that date the drill was dam-
aged as a result of the stevedore's negligence during unloading.
At the foot of the first page of the bill of lading the following words were printed
in small capitals: "In accepting this bill of lading the shipper, consignee and the
owners of the goods, and the holders of this bill of lading agree to be bound by all of
its conditions, exceptions and provisions whether written, printed or stamped on
the front or back hereof." On the back of the bill of lading a number of clauses were
printed in small type. It is only necessary to set out the following. The first and third
paragraph of clause 1 provided:

This bill of lading shall have effect (a) subject to the provisions of any legislation giving
effect to the International Convention for the unification of certain rules relating to bills
of lading dated Brussels, August 25. 1924, or to similar effect which is compulsorily
applicable to the contract of carriage evidenced hereby and (b) where no such legisla-
tion is applicable as if the Carriage of Goods by Sea Act 1924. of Great Britain and the
ru les scheduled thereto applied hereto and were incorporated herein . Nothing herein
contained shall be deemed to be a surrender by the carrier of any of his rights or
immunities or an increase of any of his responsibilities or liabilities under the provisions
of the said legislation or Act and rules (as the case may be) and the said provisions shall
not (unless and to the extent that they are by law compulsorily applicablel .apply to that
portion of the contract evidenced by this bill of lading which relates to forwarding under
clause 4 hereof. If anything herein contained be inconsistent with or repugnant to the
said provisions, it shall to the extent of such inconsistency or repugnance and no further
be null and void ....
It is hereby expressly agreed that no servant or agent of the carrier (including every
if'.ldependent contractor from time to time employed by the carrier) shall in any circum -
stances whatsoever be under any liability whatsoever to the shipper. consignee or owner
of the goods or to any holder of this bill of lading for any loss or damage or delay of
whatsoever kind arising or resulting directly or indirectly from any act neglect or default
on his part while acting in the course of or in connection with his employment and,
without prejudice to the generality of the foregoing provisions in this clause. every
exemption. limitation, condition and liberty herein contained and every right, exemption
from liability, defence and immunity of whatsoever nature applicable to the carrier or
to which the carrier is entitled hereunder shall also be available and shall extend to
protect every such servant or agent of the carrier acting as aforesaid and for the purpose
of all the foregoing provisions of this clause the carrier is or shall be deemed to be acting
as agent or trustee on behalf of and for the benefit of all persons who.are or might be
his servants or agents from time to time (includ ing independent contractors as aforesaid)
and all such persons shall to this extent be or be deemed to be parties to the contract
in or evidenced by this bill of lading.

Clause 11 provided:

The carrier will not be accountable for goods of any description beyond £100 in respect
of any one package or unit unless the value thereof shall have been stated in writing
both on the broker's order which must be obtained before shipment and on the shipping

376
 I. THIRD-PARTY BENEFICIARIES

note presented on shipment and extra freight agreed upon and paid and bills of lading
signed with a declaration of the nature and value of the goods appearing thereon. When
the value is declared and extra freight agreed as 'aforesaid the carrier's liability shall not
exceed such value or pro rata on that basis in the event of partial loss or damage.
No declaration as to the nature and value of the goods having appeared in the bill
of lading, and no extra freight having been agreed upon or paid, it was acknowledged
by the consignee that the liability of the carrier was accordingly limited to £100 by
the application of clause 11 of the bill of lading. Moreover, the incorporation in the
bill of lading of the rules scheduled to the Carriage of Goods by Sea Act 1924 meant
that the carrier and the ship were.discharged from all liability in respect of damage
to the drill unless suit was brought against them within one year after delivery. No
action was commenced until April 1967, when the consignee sued the stevedore in
negligence, claiming £880 the cost of repairing the damaged drill.
The question in the appeal is whether the stevedore can take the benefit of the
time limitation provision. The starting point, in discussion of this question, is pro-
vided by the House of Lords decision in Midland Silicones Ltd. v. Scruttons Ltd. [1962]
AC. 446. There is no need to question or even to qualify that case in so far as it affirms
the general proposition that a contract between two parties cannot be sued on by a
third person even though the contract is expressed to be for his benefit. Nor is it
necessary to disagree with anything which was said to the same effect in the Aus-
tralian case of Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd. (1956) 95
C.L.R. 43. Each of these cases was dealing with a simple case of a contract the benefit
of which was sought to be taken by a third person not a party to it, and the emphatic
pronouncements in the speeches and judgments were directed to this situation. But
Midland Silicones left open the case where one of the parties contracts as agent for
the third person: in particular Lord Reid's speech spelt out, in four propositions, the
prerequisites for the validity of such an agency contract. There is of course nothing
unique to this case in the conception of agency contracts: well known and common
instances exist in the field of hire purchase, of bankers' commercial credits and other
transactions. Lord Reid said, at p: 474:
I can see a possibility of success of the agency argument if (first) the bill of lading makes
it clear that the stevedore is intended to be protected by the provisions in it which limit
liability, (secondly) the bill of lading makes it clear that the carrier, in addition to contract-
ing for these provisions on his own behalf, is also contracting as agent for the stevedore
that these provisions should apply to the stevedore, (thirdly) the carrier has authority
from the stevedore to do that, or perhaps later ratification by the stevedore would suffice,
and (fourthly) that any difficulties about consideration moving from the stevedore were
overcome. And then to affect the consignee it would be necessary to show that the
provisions of the Bills of Lading Act 1855 apply.
The question in this appeal is whether the contract satisfies these propositions.
Clause 1 of the bill of lading, whatever the defects in its drafting, is clear in its
relevant terms. The carrier, on his own account, stipulates for certain exemptions
and immunities: among these is that conferred by article III, rule 6, of the Hague
Rules which discharges the carrier from all liability for loss or damage unless suit is
brought within one year after delivery. In addition to these stipulations on his own
account, the carrier as agent for, inter alios, independent contractors stipulates for
the same exemptions.
Much was made of the fact that the carrier also contracts as agent for numerous
other persons; the relevance of this argument is not apparent. It cannot be disputed
that among such independent contractors, for whom, as agent, the carrier contracted,

377
CHAPTER 4 CONTRACTS AND THIRD PARTIES

is the appellant company which habitually acts as stevedore in New Zealand by

arrangement with the carrier and which is, moreover, the parent company of the
carrier. The carrier was, indisputably, authorised by the appellant to contract as its
agent for the purposes of clause 1. All of this is quite straightforward and was
accepted by all the judges in New Zealand. The only question was, and is, the fourth
question presented by Lord Reid, namely that of consideration.
It was on this point that the Court of Appeal differed from Beattie J ., holding that
it had not been shown that any consideration for the shipper's promise as to exemp-
tion moved from the promisee, i.e., the appellant company.
If the choice, and the antithesis, is between a gratuitous promise, and a promise
for consideration, as it must be in the absence of a tertium quid, there can be little
doubt which, in commereial reality, this is. The whole contract is of a commercial
character, involving service on one side, rates of payment on the other, and qualify-
ing stipulations as to both. The relations of all parties to each other are commercial
relations entered into for business reasons of ultimate profit. To describe one set of
promises, in this co'ntext, as gratuitous, or nudum pactum, seems paradoxical and
is prima facie implausible. It is only the precise analysis of this complex of relations
into the classical offer and acceptance, with identifiable consideration, that seems
to present difficulty, but this same difficulty exists in many situations of daily life,
e.g., sales at auction; supermarket purchases; boarding an omnibus; purchasing a
train ticket; tenders for the supply of goods; offers of rewards; acceptance by post;
warranties of authority by agents; manufacturers' guarantees; gratuitous bailments;
bankers' commercial credits. These are all examples which show that English law,
having committed itself to a rather technical and schematic doctrine of contract, in
application takes a practical approach, often at the cost of forcing the facts to fit
uneasily into the marked slots of offer, acceptance and consideration.
In their Lordship's opinion the present contract presents much less difficulty than
many of those above referred to. It is one of carriage from Liverpool to Wellington. ·
The carrier assumes an obligation to transport the goods and to discharge at the port
of arrival. The goods are to be carried and discharged, so the transaction is inherently
contractual. It is contemplated that a part of this contract, viz. discharge, may be
performed by independent contractors-viz. the appellant. By clause 1 of the bill of
lading the shipper agrees to exempt from liability the carrier, his servants and
independent contractors in respect of the performance of this contract of carriage.
Thus, if the carriage, including the discharge, is wholly carried out by the carrier, he
is exempt. If part is carried out by him, and part by his servants, he and they are
exempt. If part is carried out by him and part by an independent contractor, he and
the independent contractor are exempt. The exemption is designed to cover the
whole carriage from loading to discharge, by whomsoever it is performed: the per-
formance attracts the exemption or immunity in favour of whoever the performer
turns out to be. There is possibly more than one way of analysing this business
transaction into the necessary components; that which their Lordships would accept
is to say that the bill of lading brought into existence a bargain initially unilateral but
capable of becoming mutual; between the shipper and the appellant, made through
the carrier as agent. This became a full contract when the appellant performed ser-
vices by discharging the goods. The performance of these services for the benefit of
the shipper was the consideration for the agreement by the shipper that the appellant
should have the benefit of the exemptions and limitations contained in the bill of
lading. The conception of a "unilateral" contract of this kind was recognised in Great
Northern Railway Co. v. Witham (1873) L.R. 9 C.P. 16 and is well established. This way
of regarding the matter is very close to if not identical to that accepted by Beattie J.

378
 I. THIRD - PARTY BENEFICIARIES

in the Supreme Court: he analysed the transaction as one of an offer open to accept-
ance by action such as was found in Carlill v. Carbolic Smoke Ball Co. [1893] 1 O.B.
256. But whether one describes the shipper's promise to exempt as an offer to be
accepted by performance or as a promise in exchange for an act seems in the present
context to be a matter of semantics. The words of Bowen L.J. in Carlill v. Carbolic
Smoke Ball Co. [1893] 1 O.B. 256, 268: "why should not an offer be made to all the
world which is to ripen into a contract with anybody who comes forward and per-
forms the condition?" seem to bridge both conceptions: he certainly seems to draw
no distinction between an offer which matures into a contract when accepted and
a promise which matures into a contract after performance, and, though in some
special contexts (such as in connection with the right to withdraw) some further
refinement may be needed, either analysis may be equally valid. On the main point
in the appeal, their Lordships are in substantial agreement with Beattie J.
The following points require mention:

1. In their Lordships' opinion, consideration may quite well be provided by the

appellant, as suggested, even though (or if) it was already under an obligation
to discharge to the carrier. (There is no direct evidence of the existence or
nature of this obligation, but their Lordships are prepared to assume it.) An
agreement to do an act which the promisor is under an existing obligation to
a third party to do, may quite well amount to valid consideration and does so
in the present case: the promisee obtains the benefit of a direct obligation
which he can enforce . This proposition is illustrated and supported by Scotson
v. Pegg (1861) 6 H. & N. 295 which their Lordships consider to be good law.
2. The consignee is entitled to the benefit of, and is bound by, the stipulations in
the bill of lad ing by his acceptance of it and request for delivery of the goods
thereunder. This is shown by Brandt v. Liverpool, Brazil and River Plate Steam
Navigation Co. Ltd. [1924] 1 K.B. 575 and a line of earlier cases. The Bills of
Lading Act 1855, section 1 (in New Zealand the Mercantile Law Act 1908, sec-
tion 13) gives partial statutory recognition to this rule, but, where the statute
does not apply, as it may well .n ot do in this case, the previously established
law remains effective.
3. The appellant submitted, in the alternative, an argument that. quite apart from
contract, exemptions from, or limitation of, liability in tort may be conferred by
mere consent on the part of the party who may be injured. As their Lordships
consider that the appellant ought to succeed in contract, they prefer to express
no opinion upon this argument: to evaluate it requires elaborate discussion.
4 . A clause very similar to the present was given effect by a United States District
Court in Carle & /Vlontanari Inc. v. American Export lsbrandtsen Lines Inc.
[1968] 1 Lloyd 's Rep. 260. The carrier in that case contracted, in an exemption
clause, as agent, for, inter alios, all stevedores and other independent con-
tractors, and although it is no doubt true that the law in the United States is
more liberal than ours as regards third party contracts, their Lordships see no
reason why the law of the Commonwealth should be more restrictive and
technical as regards agency contracts . Commercial considerations should
have the same force on both sides of the Pacific .

In the opinion of their Lordships, to gtve the appellant the benefit of the exemp-
tions and limitations contained in the bill of lading is to give effect to the clear
intentions of a commercial document, and can be given within existing principles.
They see no reason to strain the law or the facts in order to defeat these intentions.
It should not be overlooked that the effect of denying validity to the clause would be

379
CHAPTER 4 CONTRACTS AND THIRD PARTIES

to encourage actions against servants, agents and independent contractors in order

to get round exemptions {which are almost invariable and often compulsory)
accepted by shippers against carriers, the existence, and presumed efficacy, of which
is reflected in the rates of freight. They see no attraction in this consequence.
Their Lordships will humbly advise Her Majesty that the appeal be allowed and
the judgment of Beattie J. restored. The respondent must pay the costs of the appeal
and in the Court of Appeal.
[Viscount Dilhorne.dissented.J

NOTES
1. In /TO v Miida Electronics Ltd, [1986] 1 SCR 752, the Supreme Court of Canada followed
the New Zealand Shipping case.
2. In Greenwood Shopping Plaza Ltd v Beattie, [1980] 2 SCR 228 , the lessor of business
premises covenanted with its tenant to insure against fire . A loss by fire occurred, allegedly
caused by the negligence of two of the lessee's employees. The Supreme Court of Canada
held that the employees were not entitled to rely on the lease to limit their liability.

LONDON DRUGS LTD V KUEHNE & NAGEL INTERNATIONAL LTD

[1992] 3 SCR 299

IACOBUCCI J {L'Heureux-Dube, Sopinka, and Cory JJ concurring): This appeal and

cross-appeal raise two principal issues: (1) the duty of care owed by employees to
their employer's customers, and (2) the extent to which employees can claim the
benefit of their employer's contractual limitation of liability clause.

I. FACTS
The facts are not complicated. On August 31, 1981, London Drugs Limited {hereinafter
"appellant"), delivered a transformer weighing some 7,500 pounds to Kuehne and
Nagel International Ltd. {hereinafter "Kuehne & Nagel") for storage pursuant to the
terms and conditions of a standard form contract of storage. The transformer had
been purchased from its manufacturer, Federal Pioneer Limited, and was to be
installed in the new warehouse facility being built by the appellant. '.fhe contract of
storage included the following limitation of liability clause:
LIABILITY-Sec. 11(a) The responsibility of a warehouseman in the absence of written
provisions is the reasonable care and diligence required by the law.
(b) The warehouseman's liability on any one package is limited to $40 unless the
holder has declared in writing a valuation in excess of $40 and paid the additional charge
I
specified to cover warehouse liability.
With full knowledge and understanding of this clause, the appellant chose not to
obtain additional insurance from Kuehne & Nagel and instead arranged for its own
all-risk coverage. At the time of entering into the contract, the appellant knew, or
can be assumed to have known, that Kuehne & Nage\'s employees would be respon-
sible for moving and upkeeping the transformer.
On September 22, 1981, Dennis Gerrard Brassart and Hank Vanwinkel (hereinafter
"respondents"), both employees of Kuehne & Nagel, received orders to load the
transformer onto a truck which would deliver it to the appellant's new warehouse.
The respondents attempted to move the transformer by lifting it with two forklift

380
 I. THIRD-PARTY BENEFICIARIES

vehicles when safe practice required it to be lifted from above using brackets which
were attached to the transformer and which were clearly marked for that purpose.
While being lifted, the transformer toppled over and fell causing damages in the
amount of $33,955.41.
Alleging breach of contract and negligence, the appellant brought an action for
damages against Kuehne & Nagel, Federal Pioneer Limited, and the respondents. In
a judgment rendered on April 14, 1986, Trainor J. of the Supreme Court of British
Columbia held that the respondents were personally liable for the full amount of
damages, limiting Kuehne & Nagel's liability to $40 and dismissing the claim against
Federal Pioneer Limited. On March 30, 1990, the majority of the Court of Appeal
allowed the respondents' appeal and reduced their liability to $40. The appellant was
granted leave to appeal to this Court on December 7, 1990. The respondents have cross
appealed in order to argue that they should be completely free of liability. A written
intervention was made by the General Truck Drivers & Helpers Local Union No. 31,
the union authorized to negotiate the collective agreement with Kuehne & Nagel
which, at an material times, governed the respondents' employment relationship.

Ill. ISSUES

The cross-appeal raises the following question:

(1) Did the respondents, acting in the course of their employment and performing
the very essence of their employer's contractual obligations with the appellant,
owe a duty of care to the appellant?
If so, it is not disputed before this Court that the respondents were negligent
in their handling of the appellant's transformer. In other words, the finding of
the trial judge that the respondents breached their duty of care is not con-
tested. Moreover, it is not disputed that it is the respondents' negligence which
was the cause of the damages to the transformer and that these damages
amount to $33,955.41. The next question which is raised by the appeal would
thus become one of the appropriate liability for this breach, namely:
(2) Can the respondents obtain the benefit of the limitation of liability clause
contained in the contract of storage between their employer and the appellant
so as to limit their liability to $40?
For reasons that follow, I am of the opinion that both questions should be answered
in the affirmative. By so concluding, both the cross-appeal and the appeal should
therefore be dismissed ..

(A) SHOULD THE DOCTRINE OF PRIVITY BE RELAXED?

Without doubt, major reforms to the rule denying third parties the right to enforce ·
contractual provisions made for their benefit must come from the legislature.
Although I have strong reservations about the rigid retention of a doctrine that has
undergone systematic and substantial attack, privity of contract is an established
principle in the law of contracts and should not be discarded lightly. Simply to abolish
the doctrine of privity or to ignore it, without more, would represent a major change
to the common law involving complex and uncertain ramifications. This Court has
in the past indicated an unwillingness to sanction judge-made changes of this
magnitude ....
This Court has also recognized, however, that in appropriate circumstances courts
have not only the power but the duty to make incremental changes to the common

381
CHAPTER 4 CONTRACTS AND THIRD PARTIES

\aw to see that it reflects the emerging needs and values of our society.... It is my
view that the present appeal is an appropriate situation for making such an incre-
mental change to the doctrine of privity of contract in order to allow the respondents
to benefit from the \imitation of liability clause.
As we have seen earlier, the doctrine of privity has come under serious attack for
its refusal to recognize the right of a third party beneficiary to enforce contractual
provisions made for his or her benefit. Law reformers, commentators and judges have
pointed out the gaps that sometimes exist between contract theory on the one hand,
and commercial reality and justice on the other. We have also seen that many juris-
dictions around the world, including Quebec and the United States, have chosen from
an early point (as early as the doctrine became "settled" in the English common \aw)
to recognize third party beneficiary rights in certain circumstances. As noted by the
appellant, the common \aw recognizes certain exceptions to the doctrine, such as
agency and trust, which enable courts, in appropriate circumstances, to arrive at
results which conform with the true intentions of the contracting parties and com -
mercia\ reality. However, as many have observed, the availability of these exceptions
does not always correspond with their need. Accordingly, this Court should not be
precluded from developing the c9mmon \aw so as to recognize a further exception
to privity of contract merely on the ground that some exceptions already exist.
While these comments may not, in themselves, justify doing away with the
doctrine of privity, they nonetheless give a certain context to the principles that this
Court is now dealing with. This context clearly supports in my view some type of
reform or relaxation to the law relating to third party beneficiaries. Again, I reiterate
that any substantial amendment to the doctrine of privity is a matter properly left
with the legislature. But this does not mean that courts should shut their eyes to
criticisms when faced with an opportunity, as in the case at bar, to make a very spe-
cific incremental change to the common law.
At this point, it is useful to recall briefly the salient facts with which this Court is
seized. The appellant entered into a contract with Kuehne & Nagel for certain ser-
vices, namely, the storing of its transformer. When the contract was signed, the
appellant knew that it contained a clause limiting the liability of the "warehouseman"
to $40. It also knew, or can be assumed to have known, that Kuehne & Nagel
employed many individuals and that these employees would be directly involved in
the storing of the transformer. The appellant chose not to obtain additional insurance
from Kuehne & Nagel and instead arranged for its own all-risk coverage. When the
damages to the transformer occurred, the respondents, two of Kuehne & Nage\'s
employees, were acting in the course of their employment and were performing
services directly related to the contract of storage. The appellant is now seeking to
recover the full amount of damages from these employees since it can only obtain
$40 from the employer. As a defence to such a claim, the respondents are attempting
to obtain the benefit of the \imitation of liability clause.
There are few principled reasons for upholding the doctrine of privity in the cir-
cumstances of this case. Maintaining the alleged status quo by itself is an unhelpful
consideration since I am considering whether or not a relaxation, or change, to the
law should be made. Similarly, most of the traditional reasons or justifications behind
the doctrine are of little application in cases such as this one, when a third party
beneficiary is relying on a contractual provision as a defence in an action brought
by one of the contracting parties. There are no concerns about double recovery or
floodgates of litigation brought by third party beneficiaries. The fact that a contract
is a very persona\ affair, affecting only the parties to it, is simply a restatement of the
doctrine of privity rather than a reason for its maintenance. Nor is there any concern

382
 I. THIRD - PARTY BENEFICIARIES

about "reciprocity," that is, there is no concern that it would be unjust to allow a party
to sue on a contract when he or she cannot be sued on it.
Moreover, recognizing a right for a third party beneficiary to rely on a limitation
of liability clause should have relatively little impact on the rights of contracting
parties to rescind or vary their contracts, in comparison with the recognition of a
third party right to sue on a contract. In the end, the most that can be said against
the extension of exceptions to the doctrine of privity in this case is that the respond-
ent employees are mere donees and have provided no consideration for the con-
tractual limitation of liability.
The doctrine of privity fails to appreciate the special considerations which arise
from the relationships of employer-employee and employer-customer. There is
clearly an identity of interest between the employer and his or her employees as far
as the performance of the employer's contractual obligations is concerned. When a
person contracts with an employer for certain services, there can be little doubt in
most cases that employees will have the prime responsibilities related to the per-
formance of the obligations which arise under the contract. This was the case in the
present appeal, clearly to the knowledge of the appellant. While such a similarity or
closeness might not be present when an employer performs his or her obligations
through someone who is not an employee, it is virtually always present when
employees are involved. Of course, I am in no way suggesting that employees are a
party to their employer's contracts in the traditional sense so that they can bring an
action on the contract or be sued for breach of contract. However, when an employer
and a customer enter into a contract for services and include a clause limiting the
liability of the employer for damages arising from what will normally be conduct
contemplated by the contracting parties to be performed by the employer's employ-
ees, and in fact so performed, there is simply no valid reason for denying the benefit
of the clause to employees who perform the contractual obligations. The nature and
scope of the \imitation of liability clause in such a case coincides essentially with the
nature and scope of the contractual obligations performed by the third party bene-
ficiaries (employees).
Upholding a strict application of the doctrine of privity in the circumstances of
this case would also have the effect of allowing the appellant to circumvent or escape
the \imitation of liability clause to which it had expressly consented . ...
In a similar fashion, it would be absurd in the circumstances of this case to let the
appellant go around the \imitation of liability clause by suing the respondent employ-
ees in tort. The appellant consented to limit the "warehouseman's" liability to $40 for
anything that would happen during the performance of the contract. When the loss
occurred, the respondents were acting in the course of their employment and per-
forming the very services, albeit negligently, for which the appellant had contracted
with Kuehne & Nagel. The appellant cannot obtain more than $40 from Kuehne &
Nagel, whether the action is based in contract or in tort, because of the \imitation of
liability clause. However, resorting to exactly the same actions, it is trying to obtain
the full amount from the individuals ("warehousemen") who were directly respon-
sible for the storing of its goods in accordarn; e with the contract. As stated earlier,
there is an identity of interest between the respondents and Kuehne & Nagel as far
as performance of the latter's contractual obligations is concerned. When these facts
are taken into account, and it is recalled that the appellant knew the role to be played
by employees pursuant to the contract, it is clear to me that this Court is witnessing
an attempt in effect to "circumvent or escape a contractual exclusion or \imitation
of liability for the act or omission that would constitute the tort." In my view, we
should not sanction such an endeavour in the name of privity of contract.

383
CHAPTER 4 CO NTRACTS AND THIRD PARTIES

Finally, there are sound policy reasons why the doctrine of privity should be
relaxed in the circumstances of this case. A clause such as one in a contract of stor-
age limiting the liability of a "warehouseman" to $40 in the absence of a declaration
by the owner of the goods of their value and the payment of an additional insurance
fee makes perfect commercial sense. It enables the contracting parties to allocate
the risk of damage to the goods and to procure insurance accordingly. If the owner
declares the value of the goods, which he or she alone knows, and pays the additional
premium, the bargain will have placed the entire risk on the shoulders of the "ware-
houseman." On the other hand, if the owner refuses the offer of additional coverage,
the bargain will have placed only a limited risk on the "warehouseman" and the
owner will be left with the burden of procuring private insurance if he or she decides
to diminish its own risk. In either scenario, the parties to the contract agree to a
certain allocation and then proceed, based on this agreement, to make additional
insurance arrangements if required. It stretches commercial credulity to suggest
that a customer, acting prudently, will not obtain insurance because he or she is
looking to the employees for recovery when generally little or nothing is known
about the financial capacity and professional skills of the employees involved. That
does not make sense in the modern world.
In addition, employees such as the respondents do not reasonably expect to be
subject to unlimited liability for damages that occur in the performance of the con-
tract when said contract specifically limits the liability of the "warehouseman" to a
fixed amount. According to modern commercial · practice, an employer such as
Kuehne & Nagel performs its contractual obligations with a party such as the appel-
lant through its employees. As far as the contractual obligations are concerned, there
is an identity of interest between the employer and the employees. It simply does
not make commercial sense to hold that the term "warehouseman" was not intended
to cover the respondent employees and as a result to deny them the benefit of the
limitation of liability clause for a loss which occurred during the performance of
the very services contracted for. Holding the employees liable in these circum-
stances could lead to serious injustice especially when one considers that the
financial position of the affected employees could vary considerably such that, for
example, more well off employees would be sued and left to look for contribution
from their less well off colleagues. Such a result also creates uncertainty and requires
excessive expenditures on insurance in that it defeats the allocations of risk specif-
ically made by the contracting parties and the reasonable expectations of everyone
involved, including the employees. When parties enter into commercial agreements
and decide that one of them and its employees will benefit from limited liability, or
when these parties choose language such as "warehouseman" which implies that
employees will also benefit from a protection, the doctrine of privity should not stand
in the way of commercial reality and justice.
For all the above reasons, I conclude that it is entirely appropriate in the circum -
stances of this case to call for a relaxation of the doctrine of privity.

(B) HOW SHOULD THE DOCTRINE OF PRIVITY BE RELAXED?

Regardless of the desirability of making a particular change to the law, I have already
noted that complex changes with uncertain ramifications should be left to the legis-
lature. Our power and duty as a court to adapt and develop the common law must only
be exercised generally in an incremental fashion. This is particularly important when,
as here, changes to substantive law are concerned, as opposed to changes to proced-
ural law. The respondents submit that this Court should relax the doctrine of privity

384
 I. THIRD-PARTY BENEFICIARIES

so as to permit non-contracting employees to take the benefit of any immunities or

limitations of liability granted to their employer. They offer three requirements for the
application of this new exception, namely: (1) there is a contractual limitation of liability
between an employer and another party; (2) the loss occurs during the employer's
performance of its contractual obligations to that party; and (3) the employees are
acting in the course of their employment when the loss occurs.
In my opinion, not only does the respondents' submission go beyond what is
required to dispose of the present appeal, but it also does not represent an incre -
mental change to the law. The main problem I have is with their first requirement.
As we have seen earlier, the criticisms and statutory inroads into the doctrine of
privity of contract have mostly, if not exclusively, occurred with respect to third party
beneficiaries. That is, with respect to third parties to whom contracting parties have
extended, either expressly or impliedly, some form of benefit arising under the
contract. However, this is not the thrust of the respondents' submission. In essence,
what they are requesting is the recognition of a third party right, or ius tertii, for
complete strangers to their employer's contracts, without any regard whatsoever to ·
the intention of the contracting parties. While this may be an appropriate step for the
legislature, it is not the type of incremental change that this Court should endorse.
In my opinion, a threshold requirement for employees to obtain the benefit of their
employer's contractual limitation of liability clause is the express or implied stipula-
tion by the contracting parties that the benefit of the clause will also be shared by said
employees. Without such a stipulation, it is my view that the employees are in a no
better situation than this Court held those employees involved in Greenwood Shop-
ping Plaza, supra, to be in, and should not therefore be able to rely on the clause as a
means of defence. This Court found that the employees were strangers to the con-
tract, as I discussed above. As for the other requirements proposed by the respondents,
I agree with their substance although I would express them in a different manner.
In the end, the narrow question before this Court is: in what circumstances should
employees be entitled to benefit from a limitation of liability clause found in a con-
tract between their employer and the plaintiff (customer)? Keeping in mind the
comments made earlier and the circumstances of this appeal, I am of the view that
employees may obtain such a benefit if the following requirements are satisfied:
(1) The limitation of liability clause· must, either expressly or impliedly, extend its
benefit to the employees (or employee) seeking to rely on it; and
(2) the employees (or employee) seeking the benefit of the limitation of liability
clause must have been acting in the course of their employment and must
have been performing the very services provided for in the contract between
their employer and the plaintiff (customer) when the loss occurred.
Although these requirements, if satisfied, permit a departure from the strict applica-
tion of the doctrine of privity of contract, they represent an incremental change to
the common law. I say "incremental change" for a number of reasons.
First and foremost, this new exception to privity is dependent on the intention of
the contracting parties. An employer and his or her customer may choose the
appropriate language when drafting their contacts so as to extend, expressly or
impliedly, the benefit of any limitation of liability to employees. It is their intention
as stipulated in the contract which will determine whether the first requirement is
met. In this connection, I agree with the view that the intention to extend the benefit
of a limitation of liability clause to employees may be express or implied in all the
circumstances: see e.g. Mayfair Fabrics v. Henley, 244 A.2d 344 (N.J. 1968); Employers
Casualty Co. v. Wainwright, 473 P. 2d 181 (Colo. Ct. App. 1970) (cert. denied).

385
CHAPTER 4 CONTRACTS AND TH IRD PARTIES

Second, taken as a whole, this new exception involves very similar benchmarks
to the recognized agency exception, applied in The Eurymedon and by this Court in
!TO-International Terminal Operators [[1986] 1 SCR 752]. As discussed in the latter
decision, the four requirements for the agency exception were inspired from the
following passage of Lord Reid's judgment in Midland Silicones, supra (at p. 474):
I can see a possibility of success of the agency argument if (first) the bill of lading makes
it dear that the stevedore is intended to be protected by the provisions in it which limit
liability, (secondly) the bill of lading makes it clear that the carrier, in addition to contract-
ing for these provisions on his own behalf, is also contracting as agent for the stevedore
that these provisions should apply to the stevedore, (thirdly) the carrier has authority
from the stevedore to do that or perhaps later ratification by the stevedore would suf-
fice, and (fou rthly) that any difficulties about consideration moving from the stevedore
were overcome.

The first requirement of both exceptions is virtually identical. The second and third
requirements of the agency exception are supplied by the identity'of interest between
an employer and his or her employees as far as the performance of contractual
obligations are concerned; this is implicit in the recognition of this new exception.
As for the fourth requirement of agency, while this new exception makes no specific
mention of consideration moving from the employees to the customer, the second
requirement of the new exception embraces the same elements which were adopted
by courts to recognize consideration moving from stevedores in cases involving
"Himalaya clauses."
Third, it must be remembered that I am proposing a very specific and limited
exception to privity in the case at bar; viz. permitting employees who qualify.as third
party beneficiaries to use their employer's \imitation of liability clauses as "shields"
in actions brought against them, when the damage they have caused was done in
the course of their employment and while they were carrying out the very services
for which the plaintiff (customer) had contracted with their employer. In sum, Lam
recognizing a limited jus tertii.
In closing on this point, I wish to add the obvious comment that nothing in the
above reasons should be taken as affecting in any way recognized exceptions to
privity of contract such as trust and agency. In other words, even if the above require-
ments are riot satisfied, an employee may still establish the existence of a trust or
agency so as to obtain a benefit which the contracting parties intended him or her
to have, notwithstanding lack of privity.

(C) APPLICATION OF THE NEW EXCEPTION

The only question in the case at bar is whether the respondents are third party bene-
ficiaries with respect to the \imitation of liability clause so as to come within the first
requirement of the test I set forth above. Based on uncontested findings of fact, the
respondents were acting in the course of their employment when they caused the
transformer to topple over. Moreover, at that time they were performing the very
services provided for in the contract between Kuehne & Nagel and the appellant,
namely, the storage and upkeep of the transformer.
For convenience, I reproduce again the \imitation of liability clause .... Does the
language chosen indicate that the benefit of the clause is specifically restricted to
Kuehne & Nagel? I think not. On the contrary, when al\ of the relevant circumstances
are considered, it is my view that the parties must be taken as having intended that
the benefit of this clause would also extend to Kuehne & Nagel's employees.

386
 I. THIRD-PARTY BENEFICIARIES

It is clear that the parties did not choose express language in order to extend the
benefit of the clause to employees. For example, there is no mention of words such
as "servants" or "employees" ins. ll(b) of the contract. As such, it cannot be said that
the respondents are express third party beneficiaries with respect to the limitation
of liability clause. However, this does not preclude a finding that they are implied
third party beneficiaries. In view of the identity of interest between an employer and
. his or her employees with respect to the performance of the former's contractual
obligations and the policy considerations discussed above, it is surely open to a court,
in appropriate circumstances, to conclude that a limitation of liability clause in a
commercial contract between an employer and his or her customer impliedly
extends its benefit to employees.
In the case at bar, the parties have not chosen language which inevitably leads
to the conclusion that the respondents were not to benefit from s. ll(b) of the con-
tract of storage. The term "warehouseman" as used in s. 11(b) is not defined in the
contract and the definition provided in the Warehouse Receipt Act, s. 1, is of no use
in determining whether it includes employees for the purpose of the contractual
limitation of liability. While it is true thats. 10(e) of the contract uses the term "ware-
house employee," this by itself does not preclude an interpretation of "warehouseman"
ins. ll(b) of the same contract as implicitly including E;mployees for the purposes of
the limitation of liability clause. Such a conclusion does not offend the words chosen
by the parties.
When an the circumstances of this case are taken into account, including the
nature of the relationship between employees and their employer, the identity of
interest with respect to contractual obligations, the fact that the appellant knew that
employees would be involved in performing the contractual obligations, and the
absence of a clear indication in the contract to the contrary, the term "warehouse-
man" ins. ll(b) of the contract must be interpreted as meaning "warehousemen." As
such, the respondents are not complete strangers to the limitation of liability clause.
Rather, they are unexpressed or implicit third party beneficiaries with respect to this
clause. Accordingly, the first requirement of this new exception to the doctrine of
privity is also met.

IV. CONCLUSION
The respondents owed a duty of care to the appellant in their handling of its trans-
former. According to the uncontested findings of the trial judge, they breached this
duty causing damages in the amount of $33,955.41. While neither trust nor agency
is applicable, the respondents are entitled to benefit directly from the limitation of
liability clause in the contract between their employer and the appellant. This is so
because they are third party beneficiaries with respect to that clause and because
they were acting in the course of their employment and performing the very services
contracted for by the appellant when the damages occurred. I acknowledge that this,
in effect, relaxes the doctrine of privity and creates a limited jus tertii. However, when
viewed in its proper context, it merely represents an incremental change to the law,
necessary to see that the common law develops in a manner that is consistent with
modern notions of commercial reality and justice.

V. DISPOSITION

For the foregoing reasons, I would dismiss the appeal and cross-appeal, both with costs.

387
CHAPTER 4 CONTRACTS AND THIRD PARTIES

NOTE

The two judges who did not join in the judgment of the majority agreed that the employees
were not liable. Mclachlin J held that the limitation clause could not be interpreted to include
the employees, but she held that the plaintiff had voluntarily assumed the risk of damage
exceeding the sum of $40. La Forest J held that the employees owed no duty of care to the
plaintiff at all, and he would have allowed the cross-appeal by the employees to remove their
liability entirely. Stevenson J took no part in the judgment.

FRASER RIVER PILE & DREDGE LTD V CAN-DIVE SERVICES LTD

[1999] 3 SCR 108

[A marine insurer waived its subrogation rights against, among others, "any char-
terer." The insured vessel was sunk by a charterer's negligence, and the insurer then
sought to bring a subrogated action in the owner's name. The court held that the
insurer was bound by the waiver and could not, even by express agreement with the
owner, exercise any subrogation rights after the occurrence of the loss.]
IACOBUCCI J: ...
[30] As a preliminary matter, I note that it was not .o ur intention in London Drugs .. .
to limit application of the principled approach to situations involving only an
employer-empl_o yee relationship. That the discussion focused on the nature of this
relationship simply reflects the prudent jurisprudential principle that a case should
not be decided beyond the scope of its immediate facts.
[31] In terms of extending the principled approach to establishing a new excep-
tion to the doctrine of privity of contract relevant to the circumstances of the appeal,
regard must be had to the emphasis in London Drugs that a new exception first and
foremost must be dependent upon the intention of the contracting parties. Accord-
ingly; extrapolating from the specific requirements as set out in London Drugs, the
determination in general terms is made on the basis of two critical and cumulative
factors: (a) did the parties to the contract intend to extend the benefit in question to
the third party seeking to rely on the contractual provision; and (b) are the activities
performed by the third party seeking to rely on the contractual provision the very
activities contemplated as coming within the scope of the contract in general, or the
provision in particular, again as determined by reference to the intentions of the
parties?

(A) INTENTIONS OF THE PARTIES

[32] As to the first inquiry, Can-Dive has a very compelling case in favour of
relaxing the doctrine of privity in these circumstances, given the express reference
in the waiver of subrogation clause to "charterer(s)," a class of intended third-party
beneficiaries that, on a plain reading of the contract, includes Can-Dive within the
scope of the term. Indeed, there is no dispute between the parties as to the meaning
of the term within the waiver of subrogation clause; disagreement exists only as to
whether the clause has legal effect. Accordingly, there can be no question that the
parties intended to extend the benefit in question to a class of third-party benefici-
aries whose membership includes ca·n-Dive. Given the lack of ambiguity on the face
of the provision, there is no need to resort to extrinsic evidence for the purposes of
determining otherwise. If the parties did not intend the waiver of subrogation clause

388
 I. THIRD-PARTY BENEFICIARIES

to be extended to third-party beneficiarie ~ , they need not have included such lan-
guage in their agreement.
[33] In essence, Fraser River's argument in terms of the intention of the parties
is not that the scope of the waiver of subrogation clause does not extend to third
parties such as Can -Dive, but that the provision can only be enforced by Fraser River
on Can-Dive's behalf, and not by Can-Dive acting independently. A plain reading
of the provision, however, does not support this conclusion. There is no language
in the clause indicating that the waiver of subrogation is intended to be conditional
upon Fraser River's initiative in favour of any particular third-party beneficiary. It
appears to me that Fraser River has conflated arguments concerning the intentions
of the parties ih drafting the provision and the legal effect to be given to the provi-
sion. In no uncertain terms, the waiver of subrogation clause indicates that the
insurers are precluded from proceeding with an action against third-party benefici-
aries coming within the class of "charterer(s)," and the relevant inquiry is whether to
give effect to these intentions by enforcing the contractual term, notwithstanding
the doctrine of privity of contract.
[34] In my opinion, the case in favour of relaxing the doctrine of privity is even
stronger in the circumstances of this appeal than was the case in London Drugs,
supra, wherein the parties did not expressly extend the benefit of a limitation of lia-
bility clause covering a "warehouseman" to employees. Instead, it was necessary to
support an implicit extension of the benefit on the basis of the relationship between
the employers and its employees, that is to say, the identity of interest between the
employer and its e_rnployees in terms of performing the contractual obligations. In
contrast, given the express reference to "charterer(s)" in the waiver of subrogation
clause in the policy, there is no need to look for any additional factors to justify
characterizing Can-Dive as a third party beneficiary rather than a mere stranger to
the contract.
[35] Having concluded that the parties intended to extend the benefit of the waiver
of subrogation clause to third parties such as Can-Dive, it is necessary to address
Fraser River's argument that its agreement with the insurers to pursue legal action
against Can-Dive nonetheless effectively deleted the third-party benefit from the
contract. A significant concern with relaxing the doctrine of privity is the potential
restrictions on freedom of c.o ntract which could result if the interests of a third-party
beneficiary must be taken into account by the parties to the initial agreement before
any adjustment to the contract could occur. It is important to note, however, that the
agreement in question was concluded subsequent to the point at which what might
be termed Can-Dive's inchoate right under the contract crystallized into an actual
benefit in the form of a defence against an action in negligence by Fraser River's
insurers. Having contracted in favour of Can -Dive as within the class of potential
third-party beneficiaries, Fraser River and the insurers cannot revoke unilaterally
Can-Dive's rights once they have developed into an actual benefit. At the point at
which Can-Dive's rights crystallized, it became for all intents and purposes a party
to the initial contract for the limited purposes of relying on the waiver of subrogation
clause. Any subsequent alteration of the waiver provision is subject to further nego-
tiation and agreement among all of the parties involved, including Can-Dive.
[36] I am mindful, however, that the principle of freedom of contract must not
be dismissed lightly. Accordingly, nothing in these reasons concerning the ability
of the initial parties to amend contractual provisions subsequently should be taken
as applying other than to the limited situation of a third party's seeking to rely on a
benefit conferred by the contract to defend against an action initiated by one of the
parties, and only then in circumstances where the inchoate contractual right has

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

crystallized prior to any purported amendment. Within this narrow exception, how-
ever, the doctrine of privity presents no .o bstacle to contractual rights conferred on
third-party beneficiaries.

(B) THIRD-PARTY BENEFICIARY IS PERFORMING THE ACTIVITIES CONTEMPLATED

IN THE CONTRACT

[37] As to the second requirement that the intended third-party beneficiary must
rely on a contractual provision in connection with the very activities contemplated
by the contract in general, or by the relevant clause in particular, Fraser River has
argued that a significant distinction exists between the situation in London Drugs, ...
and the circumstances of the present appeal. In London Drugs, the relationship
between the contracting parties and the third-party beneficiary involved a single
contract for the provision of services, whereas in the present circumstances, such a
"contractual nexus," to use Fraser River's phrase, does not exist. In other words, the
waiver of subrogation clause upon which Can-Dive seeks to rely is contained in an
unrelated contract that does not pertain to the charter contract in effect between
Fraser River and Can -Dive.
[38] With respect, I do not find this argument compelling, given that .a similar
contractual relationship could be said to exist in London Drugs, in terms of the service
contract between the parties and a contract of employment which presumably
existed between the employer and employees. At issue is whether the purported
third-party beneficiary is involved in the very activity contemplated by the contract
containing the provision upon which he or she seeks to rely. In this case, the relevant
activities arose in the context of the relationship of Can-Dive to Fraser River as a
charterer, the very activity anticipated in the policy pursuant to the waiver of sub-
rogation clause. Accordingly, I conclude that the second requirement for relaxing
the doctrine of privity has been met.

(C) POLICY REASONS IN FAVOUR OF AN EXCEPTION IN THESE CIRCUMSTANCES

[39] Having found that Can-Dive has satisfied both of the cumulative threshold
requirements for the purposes of introducing a new, principled exception to the
doctrine of privity of contract as it applies to third party beneficiaries, I nonetheless
wish to add that there are also sound policy reasons for relaxing the doctrine in these
circumstances. In this respect, it is time to put to rest the unreasonable application
of the doctrine of privity to contracts of insurance established by the Privy Council
in Vandepitte [v Preferred Accident Insurance Corp of New York, [1933] AC 70 (PC)], a
decision characterized since its inception by both legislatures and the judiciary as
out of touch with commercial reality. As Esson J.A. noted, the decision in Vandepitte
received little attention outside the fiel<:I of automobile insurance, where it had been
promptly overruled by legislative amendment in British Columbia and other prov-
inces. In addition, Esson J.A. was correct in holding that Vandepitte has been
impliedly overruled in the course of decisions by the Court, given that in cases where
the rule of privity might have been applied, the decision was ignored ... . Of particular
interest is the Court's decision in Commonwealth Construction Co. [v Imperial Oil Ltd,
[1978] 1 SCR 317] .... The case concerned a general contractor's "builder's risk" policy
that purported to extend coverage to subcontractors who were not parties to the
original contract. In holding that subrogation was not available against the sub-
contractors, de Grandpre J., writing for the Court, made the following comments
regarding the "Additional Insureds" and "Trustee" clauses, at p. 324:

390
 I. THIRD-PARTY BENEFICIARIES

While these conditions may have been inserted to avoid the pitfalls that were the lot of
the unnamed insured in Vandepitte v. Preferred Accident Ins. Co. [citations omitted], a
precaution that in my view was not needed, they without doubt cover additional ground.

[40] When considered in light of the Court's discussion of the necessary inter-
dependence of various contractors involved in a common construction enterprise,
the comment reflects the Court's acknowledgment that the rule of privity set out in
Vandepitte, supra, was inconsistent with commercial reality. In a similar fashion, Fraser
River in the course of this appeal has been unable to provide any commercial reason
for failing to enforce a bargain entered into by sophisticated commercial actors. In
the absence of any indication to the contrary, I must conclude that relaxing the
doctrine of privity in these circumstances establishes a default rule that most closely
corresponds to commercial reality as is evidenced by the inclusion of the waiver of
subrogation clause within the contract itself.
[41] A plain reading of the waiver of subrogation clause indicates that the benefit
accruing in favour of third parves is not subject to any qup.lifying language or limit-
ing conditions. When sophisticated commercial parties enter into a contract of
insurance which expressly extends the benefit of a waiver of subrogation clause to
an ascertainable class of third party beneficiary, any conditions purporting to limit
the extent of the benefit or the terms under which the benefit is to be available must
be clearly expressed. The rationale for this requirement is that the obligation to
contract for exceptional terms most logically rests with those parties whose inten -
tions do not accord with what I assume to be standard commercial practice. Other-
wise, notwithstanding the doctrine of privity of contract, courts will enforce the
bargain: agreed to by the parties and will not undertake to rewrite the terms of the
agreement.
[42] Fraser River has also argued that to relax the doctrine of privity of contract
in the circumstances of this appeal would be to introduce a significant change to
the law that is better left to the legislature. As was noted in London Drugs, supra,
privity of contract is an established doctrine of contract law, and should not be lightly
discarded through the process of judicial decree. Wholesale abolition of the doctrine
would result in complex repercussions that exceed the ability of the courts to antici-
pate and address. It is by now a well-established principle that courts will not under-
take judicial reform of this magnitude, recognizing instead that the legislature is
better placed to appreciate and accommodate the economic and policy issues
involved in introducing sweeping legal reforms.
[43] That being said, the corollary principle is equally compelling, which is that
in appropriate circumstances, courts must not abdicate their judicial duty to decide
on incremental changes to the common law necessary to address emerging needs
and values in society .... In this case, I do not accept Fraser River's submission that
permitting third party beneficiaries to rely on a waiver of subrogation clause repre-
sents other than an incremental development. To the contrary, the factors present
in London Drugs, supra, in support of the incremental nature of the exception are
present as well in the circumstances of this appeal. As in London Drugs, a third-party
beneficiary is seeking to rely on a contractual provision in order to defend against
an action initiated by one of the contracting parties. Fraser River's concerns regard-
ing the potential for double recovery are unfounded, as relaxing the doctrine to the
extent contemplated by these reasons does not permit Can-Dive to rely on any
provision in the policy to establish a separate claim. In addition, the exception is
dependent upon the express intentions of the parties, evident in the language of the
waiver of subrogation clause, to extend the benefit of the provision to certain named
classes of third -party beneficiaries.

391
CHAPTER 4 CONTRACTS AND THIRD PARTIES

V. CONCLUSION AND DISPOSITION

[44] I conclude that the circumstances of this appeal nonetheless meet the require-
ments established in London Drugs, supra, for a third-party beneficiary to rely on the
terms of a contract to defend against a claim initiated by one of the parties to the con -
tract. As a third.-partybeneficiaryto the policy, Can-Dive is entitled to rely on the waiver
of subrogation clause whereby the insurers expressly waived any right of subrogation
against Can-Dive as a "charterer" of a vessel included within the policy's coverage . .

[See McCamus at 303-30; Waddams at paras 280-95; JW Neyers, "Explaining the

Principled Exception to Privity of Contract" (2007) 52 McGill LJ 757.]

NOTES

1. In District of Kitimat v A/can Inc (2006), 265 DLR (4th) 462 (BCCA), the District of Kitimat
brought a petition seeking declaratory relief against a company for its sale of hydroelectric
power to the United States, alleging that this was in contravention of various agreements
between the provincial government and the company. The petition was dismissed. The BC
Court of Appeal said (at paras 69-71): "In both London Drugs and Fraser River, the third party
sought the benefit of the contract to protect itself from a claim advanced against them. The
learned chambers judge distinguished these cases from this one, correctly in my view, on the
basis that here Kitimat seeks to avail itself of the statutory and contractual relationship between
Alcan and the Province so that it can advance a claim against Alcan . If, however, Kitimat had
standing to advance its claim against Alcan for the latter's breach of its public obligations, it
would have no need to resort to a third party beneficiary claim under the contract. In attempt-
ing to extend the third party beneficiary principle to permit it to advance, rather than to defend
a claim, Kitimat is simply trying to circumvent the well settled principles governing private
interest standing. In my respectful view, such a claim is well beyond anything contemplated by
the decisions in London Drugs or Fraser River."
2. In Brown v Belleville (City), 2013 ONCA 148, a covenant by a municipality to maintain
and repair a drainage system on certain land was held to be enforceable by a successor in title
to the land. The court said at para 110: "I recognize that London Drugs and Fraser River were
cases where the third-party beneficiaries sought to rely, by way of defence, on the benefit of
the contractual provisions at issue to resist claims brought against them-they were not seek-
ing to enforce the affirmative benefit of the relevant contractual provisions. Nevertheless, it is
my view that the Browns' status as successors of the original covenantee under the Agreement
affords them the right to seek to enforce the original covenantor's contractual obligations as
against the original covenantor."

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND}

" American Law Institute, 1981_

302. Intended and Incidental Beneficiaries.

(1) Unless otherwise agreed between promisor and promisee, a beneficiary of
a promise is an intended beneficiary if recognition of a right to performance in
the benefici ary is appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee
to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the bene-
ficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not ah intended beneficiary. ...

392
 I. THIRD-PARTY BENEFICIARIES

304. Creation of Duty to Beneficiary.

A promise in a contract creates a duty in the promisor to any intended beneficiary
to perform the promise, and the intended beneficiary may enforce the duty.
305. Overlapping Duties to Beneficiary and Promisee.
(1) A promise in a contract creates a duty in the promisor to the promisee to
perform the promise even though he also has a similar duty to an intended
beneficiary.
(2) Whole or partial satisfaction of the promisor's duty to the beneficiary satis-
fies to that extent the promisor's duty to the promisee.
306. Disclaimer by a Beneficiary.
A beneficiary who has not previously assented to the promise for his benefit may
in a reasonable time after learning of its existence and terms render any duty to
himself inoperative from the beginning by disclaimer.
307. Remedy of Specific Performance.
Where specific performance is otherwise an appropriate remedy, either the
promisee or the beneficiary may maintain a suit for specific enforcement of a duty
owed to an intended beneficiary. ...
309. Defences against the Beneficiary.
(1) A promise creates no duty to a beneficiary unless a contract is formed
between the promisor and the promisee; and if a contract is voidable or unen-
forceable at the time of its formation the right of any beneficiary is subject to the
infirmity.
(2) If a contract ceases to be binding in whole or in part because of impracti-
cability, public policy, non-occurrence of a condition, or present or prospective
failure of performance, the right of any beneficiary is to that extent discharged
or modified.
(3) Except as stated in Subsections (1) and (2) and in fi311 or as provided by the
contract, the right of any beneficiary against the promisor is not subject to the
promisor's claims or defences against the promisee or to the promisee's claims
or defences against the beneficiary.
(4) A beneficiary's right against the promisor is subject to any claim or defence
arising from his own conduct or agreement.
310. Remedies of the Beneficiary of a Promise to pay the Promisee's Debt; Reim-
bursement of Promisee.
(1) Where an intended beneficiary has an enforceable claim against the prom-
isee, he can obtain a judgment or judgments against either the promisee or the
promisor or both based on their respective duties to him. Satisfaction in whole
or in part of either of these duties, or of a judgment thereon, satisfies to that extent
the other duty or judgment, subject to the promisee's right of subrogation.
(2) To the extent that the claim of an intended beneficiary is satisfied from
assets of the promisee, the promisee has a right of reimbursement from the
promisor, which may be enforced directly and also, if the beneficiary's claim is
fully satisfied, by subrogation to the claim of the beneficiary against the promisor,
and to any judgment thereon and to any security therefor.
311. Variation of a Duty to Beneficiary.
(1) Discharge or modification of a duty to an intended beneficiary by conduct
of the promisee or by a subsequent agreement between promisor and promisee
is ineffective if a term of the promise creating the duty so provides.

393
CHAPTER 4 CONTRACTS AND THIRD PARTIES

(2) In the absence of such a term, the promisor and promisee retain power to
discharge or modify the duty by subsequent agreement.
(3) Such a power terminates when the beneficiary, before he receives notifi-
cation of the discharge or modification, materially changes his position in justifi-
able reliance on the promise or brings suit on it or manifests assent to it at the
request of the promisor or promisee.
(4) If the promisee receives consideration for an attempted discharge or
modification of the promisor's duty which is ineffective against the beneficiary,
the beneficiary can assert a right to the consideration so received. The promisor's
duty is discharged to the extent of the amount received by the beneficiary.
312. Mistake as to Duty to Beneficiary.
The effect of an erroneous belief of the promisor or promisee as to the existence
or extent of a duty owed to an intended beneficiary is determined by the rules mak-
ing contracts voidable for mistake.
315. Effect of a Promise of Incidental Benefit.
An incidental beneficiary acquires by virtue of the promise no right against the
promisor or the promisee.

CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

(UK), c 31

1(1) Subject to the provisions of this Act, a person who is not a party to a contract
(a "third party") may in his own right enforce a term of the contract if-
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (l)(b) does not apply if on a proper construction of the contract it
appears that the parties did not intend the term to be enforceable by the third party.
(3) The third party must be expressly identified in the contract by name, as a
member of a class or as answering a particular description but need not be in exist-
ence when the contract is entered into.
(4) This section does not confer a right on a third party to enforce a term of a
contract otherwise than subject to and in accordance with any other relevant terms
of the contract.
(5) For the purpose of exercising his right to enforce a term of the contract, there
shall be available to the third party any remedy that would have been available to
him in an action for breach of contract if he had been a party to the contract (and
the rules relating to damages, injunctions, specific performance and other relief shall
apply accordingly).
(6) Where a term of a contract excludes or limits liability in relation to any matter,
references in this Act to the third party enforcing the term shall be construed as refer-
ences to his availing himself of the exclusion or limitation.
(7) In this Act, in relation to a term of a contract which is enforceable by a third party-
"the promisor" means the party to the contract against whom the term is enforce-
able by the third party, and
"the promisee" means the party to the contract by whom the term is enforceable
against the promisor.

394
 I. THIRD-PARTY BENEFIC IARIES

2(1) Subject to the provisions of this section, where a third party has a right under
section 1 to enforce a term of the contract, the parties to the contract may not, by
agreement, rescind the contract, or vary it in such a way as to extinguish or alter his
entitlement under that right, without his consent if-
(a) the third party has communicated his assent to the term to the promisor,
(b) the promisor is aware that the third party has relied on the term, or
(c) the promisor can reasonably be expected to have foreseen that the third
party would rely on the term and the third party has in fact relied on it.
(2) The assent referred to in subsection (l)(a)-
(a) may be by words or conduct, and
(b) if sent to the promisor by post or other means, shall not be regarded as
communicated to the promisor until received by him.
(3) Subsection (1) is subject to any express term of the contract under which-
(a) the parties to the contract may by agreement rescind or vary the contract
without the consent of the third party, or
(b) the consent of the third party is required in circumstances specified in the
contract instead of those set out in subsections (l)(a) to (c).
(4) Where the consent of a third party is required under subsection (1) or (3), the
court or arbitral tribunal may, on the application of the parties to the contract, dis-
pense with his consent if satisfied-
(a) that his consent cannot be obtained because his whereabouts cannot
reasonably be ascertained, or
(b) that he is mentally incapable of giving his consent.
(5) The court or arbitral tribunal may, on the application of the parties to a con-
tract, dispense with any consent that may be required under subsection (l)(c) if satis-
fied that it cannot reasonably be ascertained whether or not the third party has in
fact relied on the term.
(6) If the court or arbitral tribunal dispenses with a third party's consent, it may
impose such conditions as it thinks fit, including a condition requiring the payment
of compensation to the third party.
(7) The jurisdiction conferred on the court by subsections (4) to (6) is exercisable
by both the High Court and a county court.
3(1) Subsections (2) to (5) apply where, in reliance on section 1, proceedings for
the enforcement of a term of a contract are brought by a third party.
(2) The promisor shall have available to him by way of defence or set-off any
matter that-
(a) arises from or in connection with the contract and is relevant to the term, and
(b) would have been available to him by way of defence or set-off if the pro-
ceedings had been brought by the promisee.
(3) The promisor shall also have available to him by way of defence or set-off any
matter if-
(a) an express term of the contract provides for it to be available to him in
proceedings brought by the third party, and
(b) it would have beer:t available to him by way of defence or set-off if the
proceedings had been brought by the promisee.
(4) The promisor shall also have available to him-
(a) by way of defence or set-off any matter, and
(b) by way of counterclaim any matter not arising from the contract,
that would have been available to him by way of defence or set-off or, as the case
may be, by way of counterclaim against the third party if the third party had been a
party to the contract.

395
CHAPTER 4 CONTRACTS AND THIRD PARTIES

(5) Subsections (2) and (4) are subject to any express term of the contract as to the
matters that are not to be available to the promisor by way of defence, set-off or
counterclaim.
(6) Where in any proceedings brought against him a third party seeks in reliance
on section 1 to enforce a term of a contract (including, in particular, a term purport-
ing to e~clude or limit liability), he may not do so if he could not have done so '
(whether by reason of any particular circumstances relating to him or otherwise)
had he been a party to the contract.
4. Section 1 does not affect any right of the promisee to enforce any term of the
contract.
5. Where under section 1 a term of a contract is enforceable by a third party, and
the promisee has recovered from the promisor a sum in respect of-
(a) the third party's loss in respect of the term, or
(b) the expense to the promisee of making good to the third party the default
of the promisor,
then, in any proceedings brought in reliance on that section by the third party, the
court or arbitral tribunal shall reduce any award to the third party to such extent as
it thinks appropriate to take account of the sum recovered by the promisee . ...
[Section 6 contains a series of exceptions where the Act does not apply.]
7(1) Section 1 does not affect any right or remedy of a third party that exists or is
available apart from this Act.
[For a critical analysis of this statute, see R Stevens, "Contracts (Rights of Third Parties)
Act 1999" (2004) 120 Law Q Rev 292.J

QUEBEC CIVIL CODE

LRO, c C-1991

1444. A person may make a stipulation in a contract for the benefit of a third
person. The stipulation gives the third person beneficiary the right to exact perform -
ance of the promised obligation directly from the promisor ....
1446. The stipulation may be revoked as long as the third person beneficiary has
not advised the stipulator or the promisor of his will to accept it.
1447. Only the stipulator may revoke a stipulation; neither his heirs nor his credit-
ors may do so. If the promisor has an interest in maintaining the stipulation, how-
ever, the stipulator may not revoke it without his consent.

PROBLEM

Able takes tickets for a voyage by himself and his wife on a ship owned by Baker. Mr. and Mrs.
Able are both injured when the gangway is carelessly removed by Charlie, one of the crew. On
the face of the tickets is a clause that reads : "Neither Baker nor his servants sha ll be made liable
for any injury whatsoever to the person of any passenger arising from the activities of Baker's
servants, whether occasioned or caused by negligence or otherwise, and in this regard it is
agreed that Baker contracts as agent for his servants." Advise Mr. and Mrs . Able. See Adler v
Dickson, [195511QB158; Gore v Van Der Lann, [19671 2 QB 31; Cockerton v Naviera Aznar SA,
[1960] 2 LI LR 450 (SC); Odgers, "The Strange Case of Mrs. Gore" (1970) 86 Law Q Rev 69. See
also MacDougall at Chapter 7; Waddams at paras 281-98.

396
 II. ASSIGNMENT

II. ASSIGNMENT
Contractual rights have long been treated as a species of property, and like other kinds of
property, they have been bought and sold. The common law courts before the Judicature Act
refused to recognize assignments, but the Courts of Equity did recognize and enforce them.
In the case of contractual rights enforceable at law (choses in action), the Court of Equity,
because it could not directly affect the decisions of the courts of law, achieved its end
indirectly by permitting the assignee to bring his action in the name of the assignor, if neces-
sary, enjoining the assignor from objecting. In the case of rights enforceable in equity (choses
in equity), the assignee's right was directly enforceable by the Court of Equity.
The Judicature Act included a provision, nows 53(1) of the Ontario Conveyancing and Law
of Property Act, RSO 1990, c C.34, and in force in all the common law provinces, but with
variations in Saskatchewan and Manitoba, permitting assignments subject to certain restrictions.
It was held in Brandt's Sons & Co v Dunlop Rubber Co Ltd, [1905] AC 454 (HL) that the effect
of the statute was not to impair the validity of the old equitable procedure. An assignment that
fails to comply with the statute, therefore, may still be valid as an equitable assignment.
It is ironic that the establishment of free assignability coincided with the strengthening of
the rule against third-party beneficiaries (Tweddle v Atkinson, above). If A makes a promise .to
B, B can, in the next instant of time, assign the benefit of it to Casa gift. if he wishes. It seems
odd to prevent A and B from agreeing to do the same thing directly-that is, to confer a direct
benefit on C.
It will be noted that assignment under the statute is "subject to equities" -that is, to
defences that the debtor could have asserted against the assignor. The assignee of a debt,
therefore, is generally in no better position than the assignor, even if he gives value for the debt
in good faith without notice of the defences, and the debtor is generally no worse off by the
assignment. This rule obviously limits the negotiability of debts; it is the assignee, and not the
debtor, who takes the risk of the assignor's fraud or insolvency.
The commercial need for negotiability is met by the concept of the negotiable instrument
defined by the Bills of Exchange Act, RSC 1985, c B-4 to mean a promissory note or a bill of
exchange (including a cheque). The chief significance of a negotiable instrument is that the
holder of one for value in good faith does not take "subject to equities," and so if a debt is
embodied in a negotiable instrument and negotiated to a third party, it is generally the debtor,
not the holder of the instrument, who takes the risk of the creditor's fraud or insolvency. This
rule is subject to an important qualification in the case of consumer transactions.

CONVEYANCING AND LAW OF PROPERTY ACT

RSO 1990, c C.34

53(1) Any absolute assignment, made on or after the 31st day of December, 1897,
by writing under the hand of the assignor, not purporting to be by way of charge
only, of any debt or other legal chose in action of which express notice in writing
has been given to the debtor, trustee or other person from whom the assignor would
have been entitled to receive or claim such debt or chose in action is effectual in law,
subject to all equities that would have been entitled to priority over the right of the
assignee if this section had not been enacted, to pass and transfer the legal right to
such debt or chose in action from the date of such notice, and all other remedies for
the same and the power to give a good discharge for the same without the concur-
rence of the assignor.

[This provision is substantially the same as s 25(6) of the English Judicature Act of
1873, later s 136 of the Law of Property Act. See also Waddams at paras 269-80.J

397
CHAPTER 4 CONTRACTS AND T HIRD PARTIES

Ill. AGENCY
If A authorizes B to act on her behalf, and B contracts on A's behalf with C. B is A's agent. and
there is a contract between A and C. Such an arrangement creates three sets of relationships-
those between A and B, B and C. and A and C.
The relation ship between the principal and his agent is a contractual one, but no detailed
attention is given to it here, though some of the cases elsewhere in the book arise out of
agency relationships. The agent is generally held to owe his principal a special duty of trust that
prevents him from profiting at his principal's expense.
The relationship between the agent and the third party is on the borderline of contract, tort,
and restitutio n. If a contract is formed betwee n A and C, the agent, B, is ordinarily not person -
ally liable, but there are a number of important exceptions to this rule, as whe re the agent
undertakes to gua rantee payment by the principal or where justice for some other reason
requires the imposition of personal liability on the agent. If an agent claims to have authority
that he does not in fact have and the principal in consequence is not liable to the third party,
the age nt can be held liable for what is called "breach of wa rranty of authority. " Whether the
basis of the warranty is contractual or tortious, the effect is to hold the agent to a guarantee
that she has the au thority she claims to have.
The relationship between principal and third party is the most interesting and significant
aspect of agency, and the extract below from Seavey's article on the subject is a useful account.

SEAVEY, "THE RATIONALE OF AGENCY"

(1920) 29 Yale LJ 859

[Reprinted by permission of the Yale Law Book Company and Fred B. Rothman &
Company from the Yale Law Journal, vol. 29, pp. 860, 872-89, 880-86.J
Authority. This word is combined usually with the idea of representation and with
delegation. It cannot be discarded since its long continued use has made it an essen -
tial part of our legal vocabulary. Unfortunately, however, it is used indiscriminately
in two very different senses, e.g.: the power held by the agent, and the power coupled
with the privilege of exercising it. Thus we have the qualifying and confusing words
"real" and "apparent" added to it to explain that the principal may be bound by an act
in excess of the agent's real authority if the act was within the scope of his apparent
authority. This double use leads to inaccuracy and is unnecessary. Authority is from
auctoritas meaning legal power, or power exercised in conformity to law. The confu -
sion is due to using a word conveying a combination of elementary ideas, where
one idea is to be expressed and where both are.
Using the single-idea word "power" to describe that which the agent holds, we
escape confusion, and reserve "authority" for its proper and more limited use. "Power"
has a definite meaning in law and its use is not limited to agency. It may be classified
and analyzed. It is therefore both more exact and more helpful in connecting what
are said to be the special rules of agen cy with the general body of the law. For present
purposes, it may be said that a power is a legal ability by which a person may create,
change, or extinguish legal relations.
"Authority" should b e limited to its primitive meaning of a power which can be
rightfully exercised, or a power which can be exercised without going beyond the
privilege given to A by P. Thus the phrase given above would be paraphrased: a
principal is bound where the agent acts in the exercise of h is power, although with-
out authority, i.e., although not privileged by his principal to exercise it. The existence
and extent of the power is determined by public policy; authority is limited by the

398
 Ill. AGENCY

expression of the principal's will in accordance with the agreement with or direction
to the agent. The agent always has both the power and an authority, the latter being
sometimes identical with, sometimes smaller, but never larger, than the former ....

The Power. In the following discussion will be included cases of agency and also
cases which resemble it only in externals, i.e., those situations where the law, oper-
ating upon the voluntary act of P, creates in A a power to affect the legal relations of
P, this being created in order to prevent injustice. It will not include tort cases, being
limited to those powers the exercise of which results in some form of contractual
liability. These may be divided into two classes:
(a) Powers, the exercise of which results in true contracts. In this class is included
all cases where the parties to be held, i.e ., both principal and third party,
expressed an intention to create the specific agreement or an agreement of
the sort made. Cases where the existence of the principal was unknown to the
third party are excluded since the parties are as much a part of an agreement
as the terms . Also excluded are certain cases where the agent exceeded his
orders. For convenience, a further subdivision may be made:
(1) The powers originated by direct grant to the agent create what is usually
called "real authority," so called, I presume, because the agent is privileged
to exercise them in the performance of his fiduciary obligations. They are
again subclassified into those created by "express authority" and those
created by "implied authority," the latter referring to powers created by
the conduct of the principal in connection with the usages and customs
of the business of the locality.

That the existence of these powers is no departure from the operation of the
ordinary principles relating to contracts is clear in most cases. If the principal has
agreed to become a party to a particular contract and the agent obeys orders, there
is an expressed consent, conveyed as intended to the other party. Where the agent
is given discretion as to the creation or terms of such contracts, there is a variation
from the usual offer and acceptance situation where there is not the intervention of
an agent. It is not true that the contract is completed by the will of the principal alone,
or that the agent is "a referee who settles the price," a mere "tetotum." The contract
comes into existence through the independent will of the agent, for the latter is
responsible for his acts· and words so far as his status as an individual permits. But
the contract does come into existence in accordance with the expressed will of the
principal and there is no departure from the theory of contracts. Nor is there any-
thing peculiar in "implied authority," which corresponds to contracts implied in fact.
Actions have the same weight in expressing intentions as do words, and in neither
agency nor contracts do we inquire what a party thinks; we interpret his words and
acts. The power, therefore, includes all that the agent reasonably believes it contains
and this is determined by custom, if there are no instructions to the contrary.
Where the existence, but not the name, of the principal is known, it might be
thought that a true contract is not created. But in this case, T, the third person, by
his agreement with A, the agent, shows his intention to contract with a person
indicated by description and of course it is not necessary to know personally the
other party to a contract. It is sufficient if he falls within the class intended to be dealt
with. It may be objected that the agent is a party to the contract and that there is but
one contract. It is true that in many cases the agent has been a successful plaintiff
and an unsuccessful defendant. But those cases may be placed upon a number of
different grounds-the form of the written agreement, a custom to hold the agent

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

as guarantor, a right in the agent to sue created by his personal interest in the goods.
In all of these cases there may be alternative or secondary agreements with the agent
but these do not affect the existence of the intent to deal with the principal nor the
reality of a consensual relationship with him. Of course if the third party chooses to
deal exclusively with the agent, we have no question of agency, at least within the
principles now discussed.
(2) The power created where the principal has led T to believe that a power
existed in A. This refers, of course. to "ostensible authority" o r the so-
called "agency by estoppel." In th is class of cases also. there is created a
true contract. As has been pointed out we may discard the use of the word
estoppel as unnecessary, although doubtless the basis for liability is much
the same as i\1 estoppel. If P represents to T that A has authority to con -
tract, the legal result is exactly the same as if A had authority to contract.
Here A has a power to create contractual relations between P and T identi-
cal to those which would have been created by the same words spoken
to A. It is objected that .if A is not an agent, a misrepresentation that he is
one will not make him one and, since, by hypothesis, there is no true
agent, the obligation must rest upon estoppel. This is not, however, an
accurate statement of the representation. In the statement by P that A is
his agent, the on ly part material to Tis that A has a power to create certain
ascerta inable contractual relations between P and T. Thi s representation
may be made, of course, by any action which indicates to a normal person
that A has the particular power in question. This is ind icated by conduct
leading T to believe that A is a certain kind of an agent and that he has
power to deal with ttie class of persons to which T belongs.
The situation is not different from that where P makes an offer personally to T.
P's actual consent is unnecessary. The offer is made by the speaking of the words or
the doing of an act with communication through authorized channels. With P's
mental pr.o cesses we are not concerned. In the case of agency the courts have used
the language of estoppel, very largely because of the double use of the word "author-
ity,'' a use which has led to phrasing indicating that the power is real only where it
can be rightly exercised. That the contract is real, however, has never been ques-
tioned and therefore the power to make it must be real. If in these cases, A purports
to exercise the power, he has, as against P, the rights and duties of an agent only
where P's representations are such that A reasonably believed that P intended him
to act as agent in the matter. But the existence of agency is not essential to the reality .
of ·the powers or of the contracts made by their exercise.
Entirely irrespective of this excursus upon estoppel, however, there are in these
cases all the essentials of contracts and there is no divergence from general prin -
ciples. But two points call for further notice .
The representation that another is an agent of a particular kind or has authority
to do certain classes of acts, sweeps into the power conferred all acts that the customs
and usages of the trade or locality have made usual. But as Ewart points out, there
would be no real contract created by such acts if T were not aware of the custom,
since there would be no communication of P's holding out or offer, it being assumed
that A is not authorized to make the representations as to the extent of his powers.
Thus where there is a holding out to T that A is a particular kind of an agent and by
the custom of the place such agents have authority to warrant, there is no holding
out to T that A has this authority unless T knows the custom. In this, the situation
differs from that where there is a direct grant of authority to A to warrant, for in this
case A is authorized to state that he has such power.

400
 Ill. AGENCY

The representation may be made in a great variety of ways, and so also the com-
munication. T may receive his information individually or as one of a class. The
communication may be by advertisements, by an office being kept open with signs
indicating its character, or it may be through A himself. That "the authority of the
agent cannot be proved by the agent's statement of it," is true; but there may be a
power based upon statements which the principal has authorized the agent to make.
If he so authorizes a statement, the fact that at the same time he instructs the agent
. not to exercise the power does not affect the rights of third persons who do not know
of the instructions. This is the basis of the cases where an agent disobeys instructions
and there are no elements of misrepresentation except in the agent's statements.
Thus if P tells A to represent to buyers that he is P's horse selling agent and instructs
him not to warrant, as is the custom, but also not to disclose this want of authority,
A creates in himself a power to warrant by following the instructions. This is true
whether A is a "general" or a "special" agent, since the power is created not by the
agreement between P and A as to .A's authority, but by the authorized statement of
A that he is a horse selling agent. These "secret instructions" must be distinguished
from the instructions considered later.
In much the same way where a principal intrusts goods to a selling agent, it is
inferable as a fact that he causes the agent to represent that he has authority to sell the
goods in the normal manner with the usual incidents of sale in the locality to which
they are sent. Merely giving possession of goods to another is not a representation
of ownership, even, perhaps, when they are sent to a place where such goods are
commonly sold; but to intrust goods or the indicia of title to one for the purpose of
sale or as security for a loan may be said to be equivalent to a representation that the
agent has the usual power of sale. If this is such a representation, as most courts have
considered it, the result is the same whether the goods were given to a "special" or
to a "general" agent.
In all of these cases classified as containing powers resulting in true contracts,
we find that either the act of the agent was rightful, i.e., he had authority, or there
was a manifestation of assent given by the principal through some authorized chan-
nel to the third party. There can be no contract made by "holding out to the world"
an agent as having a particular character or particular powers. In the absence of
authority or representation, there is nothing to which the principal has expressed
assent to the third person, and hence nothing to which the general rules of contract
can be applied. This does not prevent, however, obligations arising the remedy for
which lies in an action of assumpsit.
(b) In the second class of cases I have placed powers, the exercise of which does
not result in a contract, but which does create obligations enforceable in an
action of assumpsit. For further consideration, they may be divided into two
groups: (1) where the existence of the principal is unknown and the agent acts
in conformity to orders, and (2) where the agent acts contrary to orders and
there is no element of representation of his authority by the principal to the
third person. These are distinctive agency powers, existing only where all the
elements of agency exist and seemingly created by the relationship. That they
do exist cannot be denied in view of the cases, and their existence prevents,
if nothing else does, the conception that the agent is a sort of human machine
conveying the assent of the principal to the third party. For in the case where
the existence of the principal is undisclosed, the third person did not assent
to the principal as a party to the contract, and in the second group of cases
the principal never assented nor expressed assent to the contract as made. It
is for this reason that it cannot be said that the resulting obligation is a true

401
CHAPTER 4 CONTRACTS AND THIRD PARTIES

contract, there being no mutual assent, even by the use of the most violent
presumptions.

In group (1) where the existence of the principal is unknown, the resulting obliga -
tions are accepted by the commentators as something like an excrescence. It may
be that historically it can be explained only through the fiction of the identity of
master and servant, or as the outcome of "a kind of common law equity, powerfully
aided and extended by the fiction of the identity of principal and agent and the
doctrine of reciprocity or mutuality of contractual obligations." Pollock says frankly
that "the position of an undisclosed principal is an anomaly." Ames goes further. He
charges the doctrine with the two sins of ignoring fundamental principles and of
producing injustice. Of course if it ignores fundamental principles, we must expect
that it will produce injustice, if we have faith in our principles. But I think that the
doctrine is not as black or as peculiar as it is painted and that the case against it is
somewhat overstated.
Of course it is a fiction, though not because of that an anomaly at common law,
to designate as a contract that which is obviously not consensual. There is nothing
necessarily inconsistent, however, in allowing an action of assumpsit either by or
against the principal, based upon the agreement made by the agent. Accepting Lewis'
theory as sound, that assumpsit lies against one who has caused the plaintiff to
change his position for a stipulated reward, the technical objection against allowing
suit by the third person fails. And the common law was accustomed to enforce
promises made to another than the plaintiff. It created an obligation to pay when
land was left upon a condition, and later created out of whole cloth, by the fiction of
an implied promise, all those obligations now known as quasi-contractual. In the
case of the undisclosed principal, the only fiction alleged is that of treating the
principal as a party to the contract, and this fiction is not needed either to create
rights in favor of or obligations against the principal. ... A principal receives profits
and controls the manner of making them. It is for this reason that his duty to exoner-
ate is both personal and unlimited. Liability follows control and it is not unjust,
therefore, to allow the third person to recover against one who is both the receiver
of the profits and the dominus of the one making the contract. ...
In group (2) where the agent acts contrary to instructions and there is no element
of representation by the principal to the third person, the courts have created a power
in the agent in certain cases:
1. Where the agent is intrusted with the management of a business or with a
series of transactions, he has the powers usual to an agent of his class, and
limitations sought to be· placed upon it are ineffective unless brought to the
attention of the third person dealing with the agent.
(a) Where the existence of the principal is unknowri. This result has been
severely criticized, but has been accepted without hesitation by a great
majority of the courts.
(b) Where the existence of the principal is disclosed, the existence of this
agency power has been denied, explicitly by many and implicitly by all
who, admitting the soundness of the general rules of undisclosed princi-
pal, disagree with Watteau v. Fenwick. For if this case is correct, it must
be because of a principal that an agent has a power, in certain cases,
greater than his authority, although there has been no element of repre-
sentation to the third person. That such a power does exist where the
existence of the principal is disclosed as well as where it is not, is seen by
an examination of the cases. As seen before, "a holding out to the world"

402
 Ill. AGENCY

is not a representation to the particular third person. Nor can there be a

holding out to him that an agent has a power to contract in conformity
to the customs of the trade or locality unless such third person knows of
such customs. If. therefore, liability were placed upon grounds of repre-
sentation, it should be a part of the case of a third person seeking to hold
a principal where the agent had acted in accordance with the powers
usually conferred upon such agents, but contrary to his individual orders,
to show that he, the third person, knew of such holding out or knew of
the customs. In fact the cases do not require this. It follows, therefore,
that the power must be created by the relationship of principal and agent,·
and that the principal is not bound upon a theory that he assented or
manifested any assent; he is bound because he is a principal.
This method of approach assists in solving the difficult question of what is meant
by instructions. Where the power is based solely upon representation, the only
instructions which do not affect third persons are those intended to be kept secret
and those which are purely by way of advice. But, as pointed out by Mechem, there
are many instructions not intended to be kept secret which affect the third person
only if he is informed of them. For example, there is no reason to suppose that ordin-
arily a principal intends that an agent not authorized to warrant should keep this
limitation secret. Yet in the case cif a general agent, the principal would be held liable
were a warranty such as is customary in the business to be given. In dealing with
the situations coming within the class considered here, the principal's intent as to
this concealment by the agent becomes immaterial; the third person is unaffected
by any instructions not in conformity with the customs of the locality or business,
unless he knew or should have known of the instructions.
2. Where the agent is intrusted with the management of a particular transaction,
and is given neither the possession of goods, nor documents indicating a more
extended authority, I have discovered no cases where the principal has been
held liable for unauthorized acts. In making this distinction, I am aware that
modern text writers and some courts are inclined either to cast aside or mini-
mize the effect of the classification into general and special agents . But
although the necessity for its application may be infrequent, the classification
was made by the older judges and commentators, and it plays an important
part in the development of the law. It cannot be said that it is difficult to con-
trast a general agent with a special agent. Justice Strong, in B_u tler v. Mapes,
has summed up the judicial attitude: "The purpose of [a special agency] is a
single transaction, or a transaction with designated persons .... Authority to
buy for a principal a single article of merchandise by one contract, or to buy
several articles from a person named, is a special agency, but authority to make
purchase from any persons with whom the agent may choose to deal, or to
make an in<;lefinite number of purchases, is a general agency."

There is considerable business sense in the classifications, which in effect creates

powers in proportion to the authority created in another and adopts a convenient
rule of thumb for easy measurement. It must be borne in mind, of course, that a
special agent may be given the most complete authority in dealing with the particular
matter intrusted to him. If it is said in some cases that a special agent has· "general
powers," the meaning is that the agent has been given such authority in dealing in
the particular transaction as a general agent normally has. It must be remembered
also that there may be a representation by the principal that the agent has greater

403
CHAPTER 4 CONTRACTS AND THIRD PARTIES

authority than that given him and that the power will be commensurate with the
representation. Furthermore the instructions given a special agent maybe intended
to be kept secret, or may be merely advice, intended riot to limit the agent's powers
but to guide his discretion. In these cases the instructions do not limit his powers.
Furthermore, the fact that the agent acted in bad faith and in fraud of the principal
is immaterial, unless known to the third person, since the motive with which the act
is done does not affect the exercise of the power.
Reasons for the creation of agency powers. Unless it is true that an agent's power
may be greater than his authority in cases where there has been no representation
of authority, there would be no necessity to discuss the reasons for the liability of
the principal. Assuming that such powers have been created by law, there must be
some reasons of public policy which require their existence. It must be in the protec-
tion of some conceived interest of business that, except in the case of a special agent,
one is prevented from creating powers limited to the express authority given. The
employer's interests are fully protected only if he is allowed to create powers of any
kind and limited in any manner so long as he does not affirmatively mislead others.
In the first place it is to be noted that the conception that interests can be protected
only in certain defined ways is not limited to the law of agency or to powers. Only
certain interests in land will be protected by the creation of easements; the desire of
the parties to create an easement is not enough. So a statement of an intention to
make an instrument negotiable will not make it such. A mortgagor cannot in advance
cut off his equity of redemption. "The law will not permit the owner of an estate to
grant it alternately to his heirs male and female ." For one reason or another the law
prevents the creation of extraordinary types of dealing, because conceived to be
injurious to the individual or to the public. It is, therefore, not inconsistent with the
custom of judicial decision to create powers in accordance with general customs, if
there are affirmative reasons for so doing.
In all the cases where an agent exceeds his authority, one of two persons, both
innocent, must suffer. Between these two classes of persons, we must select the class
which, in the long run, should suffer. The reasons which have actuated the courts
in placing the burden upon the employer may be grouped under three heads.
Trust reposed in the agent. It is said that there is no reason for preferring the third
person for he has trusted the agent. True, he does trust, but not equally with, nor in
the same way as does the principal. In the case where the principal is undisclosed,
T trusts the solvency of the agent; where the principal is known, he trusts his truth-
fulness. In both cases A and Tare adversary parties. On the other hand the principal
trusts the truthfulness, the honesty, the loyalty and the discretion of the agent, for
that is what A has agreed to give him. When the agency relationship has been estab-
lished A and P are not adversary parties; the agent is a fiduciary and subject to the
stringent rules created upon the hypothesis that the fiduciary exists only to benefit
the cestui. There is a trusting with a power, as in the case of a trustee there is a trust-
ing with a title. It is true that there is no general principal that a known trustee may
bind the trust estate where he acts in excess of the authority given him but, in the
absence of notice of the existence of a written authorization, he may create rights
in favor of third persons by such act.
Control. Liability follows control and the principal has a power of control at all
times. It is true that normally liability for unintended results comes only where there
has been negligent conduct on the part of the one who is held. There are, however,
extrahazardous uses where liability for injurious results is absolute. And one of the
elements of such liability is that the use shall be both dangerous and novel. It is not

404
 IV. MERCANTILE AGENTS

introducing an incongruity to subject the principal to liability where he has

attempted to create an unusual power which may be expected to cause injury to
third persons dealing with reference to the usual business methods.
Business convenience. Agency is essentia\\y commercial; genera\\y there is neither
time nor opportunity to examine the extent of the powers of the individual agent by
tracing them to their source. They have to be classified and taken at a face value. The
general agent must circulate more or less as does a negotiable instrument without
hindering conditions. Because of this, an agent sent out habitua\\y with powers
limited in certain abnormal ways would be in a position to cause injury to third
persons. In sending out an agent, the principal knows, or should know, that his
vouchers wi\\ not be carefu\\y looked to. And he knows that the agent wi\\ not be apt
to mention a lack of authority, for this might often interfere with sales. He knows of
the human qualities which, at times, wi\\ lead even a faithful agent to overstep his
authority in the desire to make sales. It is said that the third party need not deal with
the agent. But if business is to continue, agents must be dealt with and protection
given as experience rather than logic dictates.
In reaching this result, the courts have had before them the more or less imperfect
analogy of the liability of a master for the torts of his servant. In both cases, the courts ·
cannot avoid the conclusion that it is good business sense to hold that where one
employs and controls another in the performance of acts for the benefit of a business,
that business ought to pay for the mistakes, negligence and errors of judgment of the
one so employed. For this purpose, the general agent may be said to bear the same
relation to the special agent that a servant bears to an independent contractor.
[See also Waddams at paras 255-68.]

IV. MERCANTILE AGENTS

An agent in possession of her principal's goods was thought to present something of a trap to
third parties, who might be induced by the agent's possession to believe that she had the right
to dispose of the goods. In this situation. the Factors Act provides that the third ·party is pro-
tected, even though the agent acts in defiance of the true owner's express instructions. To this
extent the common law moves some way toward the maxim of French law, "possession vaut
titre"-that is, toward protection of the third party, in contradistinction to the general common
law maxim, "nemo dat quod non habet" (no one can give what he does not own), which tends
to protect the true owner in such situations.

FACTORS ACT
RSO 1990, c F.1

1. (1) In this Act,

(a) "document of title" includes any bi\\ of lading and warehouse receipt, as
defined by The Mercantile Law Amendment Act, any warrant or order for the
delivery of goods, and any other document used in the ordinary course of busi-
ness as proof of the possession or control of goods, or authorizing or purporting
to authorize, either by endorsement or delivery, the possessor of the document
to transfer or receive goods thereby represented;
(b) "goods" includes wares and merchandise;

405
CHAPTER 4 CONTRACTS AND THIRD PARTIES

(c) "mercantile agent" means a mercantile agent having, in the customary

course of his business as such agent, authority either to sell goods or to consign
goods tor the purpose of sale, or to buy goods, or to raise money on the security
of goods;
(d) "pledge" includes any contract pledging or giving a lien or security on
goods, whether in consideration of an original advance or of any further or
continuing advance or of any pecuniary liability.
(2) A person shall be deemed to be in possession bf goods or of the documents
of title to goods wh ere th e goods or documents are in the person's actual custody or
are held by another person subject to the person's control or for the person or on the
person's behalf.
2. (1) Where a mercantile agent is, with the consent of the owner, in possession
of goods or of the documents of title to goods, a sale, pledge or other disposition of
the goods made by the agent, when acting in the ordinary course of business of a
mercantile agent, is, subject to this Act, as valid as if the agent were expressly author-
ized by the owner of the goods to make the disposition, if the person taking under
it acts in good faith and has not at the time thereof notice that the person making it
has not authority to make it.
(2) Where a mercantile agent has, with the consent of the owner, been in pos-
session of goods or of documents of title to goods, a sale, pledge or other disposition
that would have been valid if the consent had continued, is valid despite the deter-
mination of the consent; if the person taking under the disposition acts in good faith
and has not at the time thereof notice that the consent has been terminated. ·
(3) Where a mercantile agent has obtained possession of any documents of title
to goods by reason of being or having been, with the consent of the owner, in pos-
session of the goods represented thereby, or of any other documents of title of the
goods, the agent's possession of the first mentioned documents shall, for the pur-
poses of this Act, be deemed to be with the consent of the owner.
(4) For the purposes of this Act the consent of the owner shall be presumed in
the absence of evidence to the contrary. ·
3. A pledge by a mercantile agent of the documents of title to goods shall be
deemed to be a pledge of the goods.

10. The provisions of this Act shall be construed in amplification and not in dero-
gation of the powers exercisable by an agent independently of this Act.

V. BUYERS AND SELLERS IN POSSESSION

Another instance of protecting one who relies on the apparent ownership of goods signified
by possession is the case of the buyer or seller of goods left in possession of them with the
true owner's consent.

SALE OF GOODS ACT

RSO 1990, c S.1

25(1) Where a person having sold goods continues or is in possession of the goods
or of the documents of title to the goods, the delivery or transfer by that person, or
by a mercantile agent acting for that person, of the goods or documents of title under

406
 V. BUYERS AND SELLERS IN POSSESSION

·a sale, pledge, or other disposition thereof, to any person receiving the same in good
faith and without notice of the previous sale, has the same effect as if the person
making the delivery or transfer were expressly authorized by the owner of the goods
to make the delivery or transfer.
(2) Where a person having bought or agreed to buy goods obtains, with the
consent of the seller, possession of the goods or the documents of title to the goods,
the delivery or transfer by that person, or by a mercantile agent acting for that person,
of the goods or documents of title, under a sale, pledge or other disposition thereof
to any person receiving the same in good faith and without notice of any lien or
other right of the original seller in respect of the goods, shall have the same effect as
if the person making the delivery or transfer were a mercantile agent in possession
of the goods or documents of title with the consent of the owner.

(4) In this section "mercantile agent" means a mercantile agent having, in the
customary course of business as such agent, authority either to sell goods or to
consign goods for the purpose of sale, or to buy goods, or to raise money on the
security of goods.

[This section was originally in the English Factors Act of 1889 as ss 8-9.]

NOTES AND QUESTIONS

1. Where a transaction creates what is, in substance, a security interest in goods-for

example, a conditional sale agreement or a chattel mortgage, where interest in goods is
retained in order to secure payment of a debt-the Personal Property Security Act, RSO 1990,
c P.10 applies. In general, this Act requires registration by the secured party of his interest and
gives in return priority over subsequent purchasers from and creditors of the debtor.
2. A problem that the courts frequently confront in a variety of situations is which of two
more-or-less innocent parties to favour when one or both of them must suffer for the fraud
of a third party. The problem arises in the assignment cases: a creditor assigns a debt to a bona
fide purchaser, who pays full value for it; it then turns out that the debtor has a defence against
the creditor. Should the debtor be able to assert that defence against the assignee? Consider
the problem of the mercantile agent who, contrary to the principal's instructions, disposes of
goods to an innocent third party. Should the principal be able to assert against the third party
the agent's lack of authority?
We now consider two further situations in which a similar problem arises . The first is the
case of mistaken identity. The owner of goods sells them to a rogue, mistakenly believing that
the rogue is a wealthy and respectable citizen; the rogue promises to pay to the owner the
price of the goods, takes the goods, sells them to an innocent third party, and disappears.
Should the original owner be able to recover the goods without compensation from the third
party7 The other case is that of documents mistakenly signed. Here the rogue obtains a signa-
ture to a document by misrepresenting its nature; an innocent third party, relying on the sig-
nature, then pays value to the rogue who, as usual, disappears or is insolvent. Should the signer
be able to allege against the third party that the signature is void? These problems have not
always been considered together, and it is hoped that the analogy drawn here will be useful in
analyzing them.

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CHAPTER 4 CO NT RACTS AND TH IRD PARTIES

VI. MISTAKE OF IDENTITY

BOULTON V JONES
(1857), 2 H & N 564, 157 ER 232, 27 LJ Ex 117

At the trial before the Assessor of the Court of Passage at Liverpool, it appeared that
the plaintiff had been foreman and manager of one Brocklehurst, a pipe hose manu -
facturer, with whom the defendants had been in the habit of dealing, and with whom
they had a running account. On the morning of the 13th of January, 1857, the plaintiff
bought Brocklehurst's stock, fixtures and business, and paid for them. In the after-
noon of the same day, the defendant's servant brought a written order, addressed to
Brocklehurst, for some leather hose. The goods were supplied by the plaintiff. The
plaintiff's bookkeeper struck out the name of Brocklehurst and inserted the name of
the plaintiff in the order. An invoice was afterwards sent in by the plaintiff to the
defendants, who said they knew nothing of him. Upon these facts, the jury, under
direction of the Assessor, found a verdict for the plaintiff, and leave was reserved to
the defendants to move to enter a verdict for them.
POLLOCK CB: The point raised is, whether the facts proved did not show an intention
on the part of the defendants to deal with Brocklehurst. The plaintiff, who succeeded
Brocklehurst in business, executed the order without any intimation of the change
that had taken place, and brought this action to recover the price of the goods sup-
plied. It is a rule of law, that if a person intends to contract with A, B cannot give
himself any right under it. Here the order in writing was given to Brocklehurst.
Possibly Brocklehurst might have adopted the act of the plaintiff in supplying the
goods, and maintained an action for their price. But, since the plaintiff has chosen
to sue, the only course the defendants could take was to plead that there was no
contract with him.
MARTIN B: I am of the same opinion. This is not a case of principal and agent. If there
was any contract at all, it was not with the plaintiff. If a man goes to a shop and makes
a contract, intending it to be with one particular person, no other person can convert
that into a contract with him.
BRAMWELL B: The admitted facts are, that the defendants sent to a shop an order for
goods, supposing they were dealing with Brocklehurst. The plaintiff, who supplied
the goods, did not undeceive them. If the plaintiff were now at liberty to sue the
defendants, they would be deprived of their right of set-off as against Brocklehurst.
When a contract is made in which the personality of the contracting party is or may
be of importance, as a contract with a man to write a book, or the like, or where there
might be a set-off, no other person can interpose and adopt the contract. As to the
difficulty that the defendants need not pay anybody, I do not see why they should,
unless they made a contract either express or implied. I decide the case on the
ground that the defendants did not know that the plaintiff was the person who sup-
plied the goods, and that allowing the plaintiff to treat the contract as made with him
would be a prejudice to the defendants . ... The defendant has, it is true, had the goods;
but it is also true that he has consumed them and cannot return them.
CHANNELL B: In order to entitle the plaintiff to recover he must show that there was
a contract with himself. The order was given to the plaintiff's predecessor in business.
The plaintiff executes it without notifying to the defendants who it was who executed
the order. When the invoice was delivered in the name of the plaintiff, it may be that

408
 VI. MISTAKE OF IDENTITY

the defendants were not in a situation to return the goods .... Here the defendant had
no notice of the plaintiff's claim, until the invoice was sent to him, which was not
until after he had consumed the g·oods, and when he could not, of course, have
returned them. Without saying what might have been the effect of the receipt of the
invoice before the consumption of the goods, it is sufficient to say that in this case
the plaintiff clearly is not entitled to sue and deprive the defendant of his set-off.
Rule absolute.

[From the Law Journal report (27 LJ Ex 117), it appears that the defendant had a set-off
against Brocklehurst, and that the case was argued on that basis.]

CUNDY V LINDSAY
(1878), 3 App Cas 459 (H L)

In 1873, one Alfred Blenkarn hired a room at a corner house in Wood Street, Cheap-
side; it had two side windows opening into Wood Street, but though the entrance
was from Little Love Lane it was by him constantly described as 37, Wood Street,
Cheapside. His agreement for this room was signed "Alfred Blenkarn." The now
respondents, Messrs. Lindsay & Co., were linen manufacturers carrying on their
business in Belfast. In the latter part of 1873, B\enkarn wrote to the plaintiffs on the
subject of a purchase from them of goods of their manufacture-chiefly, cambric
handkerchiefs . His letters were written as from "37, Wood Street, Cheapside," where
he pretended to have a warehouse, but in fact occupied only a room on the top floor,
and that room, though looking into Wood Street on one side, could only be reached
from th:e entrance in 5, Little Love Lane. The name signed to these letters was always
signed without any initial as representing a Christian name, and was, besides, so
written as to appear "Blenkiron & Co." There was a highly respectable firm of W.
Blenkiron & Son, carrying on business in Wood Street-but at number 123, Wood ·
Street, and not at 37. Messrs. Lindsay, who knew the respectability of Blenkiron &
Son, though not the number of the house where they carried on business, answered
the letters, and sent the goods addressed to "Messrs. Blenkiron & Co., 37, Wood Street,
Cheapside," where they were taken in at once. The invoices sent with the goods were
always addressed in the same way. Blenkarn sold the goods, thus fraudulently
obtained from Messrs. Lindsay, to different persons, and among the rest he sold 250
dozen of cambric handkerchiefs to the Messrs. Cundy, who were bona fide purchas-
ers and who resold them in the ordinary way of their trade. Payment not being made,
an action was commenced in the Mayor's Court of London by Messrs . Lindsay, the
junior partner of which firm, Mr. Thompson, made the ordinary affidavit of debt, as
against Alfred Blenkarn, and therein named Alfred B\enkarn as the debtor. Blenkarn's
fraud was soon discovered, and he was prosecuted at the Central Criminal Court,
and convicted and sentenced. Messrs. Lindsay then brought an action against
Messrs. Cundy for unlawful conversion of the handkerchiefs. The cause was tried
before Mr. Justice Blackburn, who left it to the jury to consider whether Alfred B\en -
karn with a fraudulent intent to induce the plaintiffs to give him the credit belonging
to the good character of Blenkiron & Son, wrote the letters and by fraud induced the
plaintiffs to send the goods to 37, Wood Street-were they the same goods as those
bought by the defendants, and did the plaintiffs by the affidavit of debt intend, as a
matter of fact, to adopt Alfred Blenkarn as their debtor. The first and second questions
were answered in the affirmative, and the third in the negative. A verdict was taken

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

for the defendants, with leave reserved to move to enter the verdict for the plaintiffs.
On motion accordingly, the court, after argument, ordered the rule for entering
judgment for the plaintiffs to be discharged, and directed judgment to be entered
for the defendants. On appeal, this decision was reversed and judgment ordered to
be entered for the plaintiffs, Messrs. Lindsay. This appeal was then brought.
LORD CAIRNS LC: My Lords, you have in this case to discharge a duty which is always
a disagreeable one for any court, namely to determine as between two parties, both
of whom are perfectly innocent, upon which of the two consequences of a fraud
practised upon both of them must fa\\. My Lords, in discharging that duty your Lord-
ships can do no more than apply, rigorously, the settled and we\1-known rules of
law. Now, with regard to the title to persona\ property, the settled and we\1-known
rules of law may, I take it, be thus expressed: by the law .of our country the purchaser
of a chattel takes the chattel, as a general rule, subject to what may turn out to be
certain infirmities in the title. If he purchases the chattel in market overt, he obtains
a title which is good against an the world; but if he does not purchase the chattel in
market overt, and if it turns out that the chattel has been found by the person who
professed to sen it, the purchaser will not obtain a title good as against the real owner.
If it turns out that the chattel has beeri stolen by the person who has professed to sen
it, the purchaser will not obtain a title. If it turns out that the chattel has come into
the hands of the person who professed to sen it, by a de facto contract, that is to say,
a contract which has purported to pass the property to him from the owner of the
property, there the purchaser will obtain a good title, even although afterwards it
should appear that there were circumstances connected with that contract, which
would enable the original owner.of the goods to reduce it, and to set it aside because
these circumstances so enabling the original owner of the goods, or of the chattel,
to reduce the contract and to set it aside, will not be aUowed to interfere with a title
for valuable consideration obtained· by some third party during the interval while
the contract remained unreduced.
My Lords, the question, therefore, in the present case, as your Lordships will
observe, reaUy becomes the very short and simple one which I am about to state.
Was there any contract which, with regards to the goods in question in this case,
had passed the property in the goods from Messrs. Lindsay to Alfred Blenkarn? If
there was any contract passing that property, even although, as I have said, that
contract might afterwards be open to a process of reduction upon .the ground of
fraud, stiU, in the meantime, B\enkarn might have conveyed a good title for valuable
consideration to the present appeUants.
Now, my Lords, there are two observations bearing upon the solution of that ques-
tion which I desire to make. In the first place, if the property in the goods in question
passed, it could only pass by way of contract; there is nothing else which could
have passed the property. The second observation is this, your Lordships are not
here embarrassed by any conflict of evidence, or any evidence whatever as to con -
versations or as to acts done; the whole history of the whole transaction lies upon
paper. The principal parties concerned, the respondents and B\enkarn, never came
in contact persona\\y-everything that was done was done by writing. What has to be
judged of, and what the jury in the present case had to judge of, was merely the con -
c\usion to be derived from that writing, as applied to the admitted facts of the case.
Now, my Lords, discharging that duty and answering that inquiry, what the jurors
have found is in substance this: it is not necessary to speU out the words, because
the substance of it is beyond a\\ doubt. They have found that by the form of the
signatures to the letters which were written by Blenkarn, by the mode in which his
letters and his applications to the respondents were made out, and by the way in

410
 VI. MISTAKE OF IDENTITY

which he left uncorrected the mode and form in which, in turn, he was addressed by
the respondent; that by all those means he led, and intended to lead, the respondents
to believe, and they did believe that the person with whom they were communicating
was not Blenkarn, the dishonest and irresponsible man, but was the well known and
solvent house of Blenkiron & Co., doing business in the same street. My Lords, those
things are found as matters of fact, and they are placed beyond the range of dispute
and controversy in the case.
If that is so, what is the consequence? It is that Blenkarn-the dishonest man, as
I call him-was acting here just in the same way as if he had forged the signature of
Blenkiron & Co., the respectable firm, to the application for goods, and as if, when in
return, the goods were forwarded and letters were sent, accompanying them, he had
intercepted the goods and intercepted the letters and had taken possession of the
goods, and of the letters which were addressed to, and intended for, not himself, but
the firm of Blenkiron & Co. Now, my Lords, stating that matter shortly in that way, I
ask the question, how is it possible to imagine that in the state of things any contract
could have arisen between the respondents and Blenkarn, the dishonest man? Of him
they knew nothing, and of him they never thought. With him they never intended to
deal. Their minds never, even for an instant of time, rested upon him, and as between
him and them there was no consensus of mind which could lead to any agreement
or any contract whatever. As between him and them there was merely the one side
to a contract, where, in order to produce a contract, two sides would be required. With
the firm of Blenkiron & Co., of course there was no contract, for as to them the matter
was entirely unknown, and therefore the pretence of a contract was a failure.
The result, therefore, my Lords, is this, that your Lordships have not here to deal
with one of those cases in which there is de facto a contract made which may after-
wards be impeached and set aside, on the ground of fraud; but you have to deal with
a case which ranges itself under a completely different chapter of law, the case
namely in which the contract n ever comes into existence. My Lords, that being so,
it is idle to talk of the property passing. The property remained, as it originally had
been, the property of the respondents, and the title which was intended to be given
to the appellants was a title which could not be given to them.
My Lords, I therefore move your Lordships, that this appeal be dismissed with
costs, an:d the judgment of the Court of Appeal affirmed.
[Lords Hatherly and Penzance also gave reasons for dismissing the appeal. Lord
Gordon concurred.]

NOTE

In Shogun Finan ce Ltd v Hudson. [2004] 1 AC 919 (HU. the reason ing in Cundy v Lindsay was
approved by a majority, over vigorous dissents by two of the law lord s, and applied to a provi-
sion of the Hire Purchase Act, 1964 (UK).

KING'S NORTON METAL CO LTD

V EDRIDGE, MERRETT & CO LTD
(1897), 14 TLR 98 (CA)

The action was brought to recover damages for the conversion of one ton of brass
rivet wire. The plaintiffs were metal manufacturers at King's Norton, Worcestershire,
and the defendants were metal merchants at Birmingham. It appeared that in 1896

411
CHAPTER 4 CONTRACTS AND THIRD PARTIES

the plaintiffs received a letter purporting to come from Hallam & Co., Soho Hackle
Pin and Wire Works, Sheffield, at the head of which was a representation of a large
factory with a number of chimneys, and in one corner was a printed statement that
Hallam & Co. had depots and agencies at Belfast, Lille, and Ghent. The letter con-
tained a request by Hallam & Co. for a quotation of prices for brass rivet wire. In reply,
the plaintiffs quoted prices, and Hallam & Co. then by letter ordered some goods,
which were sent off to them. These goods were never paid for. It turned out that a
man named Wallis had adopted the name of Hallam & Co., and fraudulently obtained
goods by the above means, and that Wallis sold the goods to the defendants, who
bought them bona fide, and with no notice of any defect of title in Wallis. It appeared
that the plaintiffs had been paid for some goods previously ordered by Hallam & Co.,
by a cheque drawn by "Hallam and Co." The plaintiffs brought this action to recover
damages for the conversion of these goods. At the trial, the learned judge non-suited
the plaintiffs upon the ground that the property in the goods had passed to Wallis,
who sold them to the defendants before the.plaintiffs had disaffirmed the contract.

AL. SMITH LJ said the case was a plain one. The question was whether the plaintiffs,
who had been cheated out of their goods by a rogue called Wallis, or the defendants
were to bear the loss. The law seemed to him to be we\\ settled. If a person induced
by false pretences contracted with a rogue to sell goods to him and the goods were
delivered the rogue could until the contract was disaffirmed give a good title to the
goods to a bona fide purchaser for value. The facts here were that Wallis, for the
purpose of cheating, set up in business as Hallam and Co., and got note-paper
prepared for the purpose, and wrote to the plaintiffs representing that he was carry-
ing on business as Hallam and Co. He got the goods in question and sold them to
the defendants, who bought them bona fide for value. The question was, With wh?m,
upon this evidence, which was all one way, did the plaintiffs contract to sell goods?
Clearly with the writer of the letters. If it could have been shown that there was a
separate entity called Hallam and Co. and another entity called Wallis then the case
might have come within the decision in Cundy v. Lindsay (1878), 3 App. Cas. 459. In
his opinion there was a contract by the plaintiffs with the person who wrote the
letters, by which the property passed to him. There was only one entity, trading it
might be under an alias, and there was a contract by which the property passed to
him. Mr. Justice CAVE said that this was nothing more than a long firm fraud. Did
any one ever hear of an attempt being made by a person who had delivered his goods
to a long firm to get his goods back on the ground that he had made no contract
with the long firm? Tne indictment against a long firm was always for obtaining the
goods by false pretences, which presupposed the passing of the property. For these
reasons there was no question to go to the jury, and the non-suit was right.

[Rigby and Collins LJJ delivered judgments to the same effect.]

Phillips v Brooks. (1910] 2 KB 243 (Eng HC) . On April 15, 1918, a man entered the
plaintiff's shop and asked to see some pearls and some rings. He selected pearls at
the price of £2,550 and a ring at the price of £450. He produced a cheque book and
wrote out a cheque for £3,000. In signing it, he said: "You see who I am, I am Sir
George Bullough," and he gave an address in St. James's Square. The plaintiff knew
there was such a person as Sir George Bullough, and finding on reference to a direc-
tory that Sir George lived at the address mentioned, he said, "Would you like to take
the articles with you?" to which the man replied: "You had better have the cheque

412
 VI. MISTAKE OF IDENTITY

cleared first, but I should like to take the ring, as it is my wife's birthday tomorrow,"
whereupon the plaintiff let him have the ring. The cheque was dishonoured, the
person who gave it being in fact a fraudulent person named North, who was subse-
quently convicted of obtaining the ring by false pretences. In the meantime-namely,
on April 16, 1918-North, in the name of Firth, had pledged the ring with the defend-
ants, pawnbrokers, who, bona fide and without notice advanced £350 on it. Held, for
the defendants. HORRIDGE J: I think the seller intended to contract with the person
present, and there was no error as to the person with whom he contracted, although
the plaintiff would not have made the contract if there had not been a fraudulent
misrepresentation.

INGRAM V LITTLE
[1961] 1 OB 31 {CA)

The Misses Ingram advertised their car for sale for £725. A stranger calling himself
Hutchinson came to the house on August 3, 1957, and after an examination of the
car offered Miss Elsie Ingram £700 for it. The offer was refused. After some discussion
he offered £717, which was accepted. Hutchinson then took out his cheque book,
but at this time Miss Elsie immediately told him that she was only willing to sell for
cash, that she was not prepared to accept a cheque, and started to leave the room.
Hutchinson then described himself as Mr. P.G.M. Hutchinson, with business interests
at Guildford and as living at.Stanstead House, Stanstead Road, Caterham. Miss Hilda
Ingram, who was present, slipped out and checked in the area telephone directory
at the local post office. Finding an entry for "Hutchinson, P.G.M., Stanstead House,
Stanstead Road, Caterham 4665" Miss Hilda returned, reported this fact, and the
Misses Ingram decided to take Hutchinson's cheque and the deal was concluded.
Hutchinson disappeared with the car and has not been heard of since under that
name. On August 6, 1957, a man calling himself Hardy sold the Ingram car to Regi-
nald Little in Blackpool. Hardy, or Hutchinson, disappeared and has not been heard
of since under either name. In December 1957, Little sold the car to another dealer.
The plaintiffs sued Little for the return of the car or damages for its conversion. Slade J.
held that Hutchinson and Hardy were the same person, and that Little had bought
in good faith, but he held that the plaintiffs' mistake as to the identity of the person
with whom they were dealing prevented the formation of a contract. He gave judg-
ment for the plaintiffs for £720, the agreed value of the car. The defenda·n t appealed.
SELLERS LJ: ... The decision in the present case turns solely on whether "Hutchinson"
entered into a contract which gave him a title to the car which would subsist until
it was avoided on the undoubted fraud being discovered ....
It does not seem to me to matter whether the right view of the facts is, as the judge
has held and as I would agree, that there was no concluded contract before the
cheque was produced and before the vital fraudulent statements were made or that
there was a concluded contract which "Hutchinson" at once repudiated by refusing
to pay cash and that this repudiation was accepted by the plaintiffs and the trans-
action was then and there at an end. The property would not have passed until cash
had been paid and it never was paid or intended to be paid.
Was there a cont:ract of sale subsequently made which led to the plaintiffs taking
"Hutchinson's" cheque and in exchange for it handing over the car and its log book?
The judgment held that there never .was a concluded contract, applying, as I
understand it, the elementary factors required by law to establish a contract.

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

The judge, treating the plaintiffs as the offerors and the rogue "Hutchinson" as
the offeree, found that the plaintiffs in making their offer to sell the car not for cash
but for a cheque (which in the circumstances of the Bank Holiday week-end could
not be banked before the following Tuesday, August 6, 1957) were under the belief
that they were dealing with, and therefore making their offer to, the honest P.G.M.
Hutchinson of Caterham, whom they had reason to believe was a man of substance
and standing.
"Hutchinson" the offeree, knew precisely what was in the minds of the two ladies
for he had put it there and he knew that their offer was intended for P.G.M. Hutchin-
son of Caterham and that they were making no offer to and had no intention to
contract with him, as he was. There was no offer which he "Hutchinson" could accept
and, therefore, there was no contract.
The judge pointed out that the offer which the plaintiffs made was one which was
capable of being accepted only by the honest P.G.M. Hutchinson of Caterham and
was incapable of acceptance by "Hutchinson."
In all the circumstances of the present case I would accept the judge's findings.
Indeed the conclusion so reached seems self-evident.
Is the conclusion to be held wrong in law? If it is, then, as I see it, it must on the
sole ground that as "Hutchinson" was present, albeit making fraudulent statements
to induce the plaintiffs to part with their car to him in exchange for his worthless
cheque and was successful in so doing, then a bargain must have been struck with
him personally, however much he deceived the plaintiffs into thinking they were
dealing with someone else.
Where two parties are negotiating together and there is·no question of one or the
other purporting to act as agent for another, and an agreement is reached, the normal
and obvious conclusion would no doubt be that they are the contracting parties. A
contrary finding would not be justified unless very clear evidence demanded it. The
unfortunate position of the defendant in this case illustrates how third parties who
deal in good faith with the fraudulent person may be prejudiced.
The mere presence of an individual cannot, however, be conclusive that an
apparent bargain he may make is made with him. If he were disguised in appearance
and in dress to represent someone else and the other party, deceived by the disguise,
dealt with him on the basis that he was that person and would not have contracted
had he known the truth then, it seem!> clear, there would be no contract established.
If words are substituted for outward disguise so as to depict a different person from
the one physically present, in what circumstances would the result be different?
Whether the person portrayed, by disguise or words, is known to the other party
or not is important in considering whether the identity of the person is of any
moment or whether it is a matter of indifference. If a man said his name was Brown
when it was in fact Smith, and both were unknown to the other party, it would be
difficult to say that there was any evidence that the contract was not made and
intended to be made with the person present. In King 's Norton Metal Co. Ltd. v.
Edridge, Merrett & Co. Ltd. (1897), 14 T.L.R. 98, one Wallis fraudulently described
himself as Hallam & Co., making it appear a substantial firm with a large factory. The
court held that the use of an assumed name by the buyer did not prevent a finding
that the plaintiffs, the sellers of some brass rivet wire, had contracted with him.
But personal knowledge of the person fraudulently represented cannot, I think,
be an essential feature . It might be a very strong factor but the qualities of a person
not personally known might be no less strong. If a man misrepresented himself to
be a Minister of the Crown or a stockbroker, confidence in the person so identified

414
 VI. MISTAK E O F IDE NTITY

might arise although the iJ.'.1.dividual so described was wholly unknown personally
or by sight to the other party.
It would seem that there is an area of fact in cases of the type under consideration
where a fraudulent person is present purporting to make a bargain with another and
that the circumstances may justify a finding that, notwithstanding some fraud and
deceit, the correct view may be that a bargain was struck with the person present,
or on the other hand they may equally justify, as here, a finding the other way.
Some of the difficulties and perhaps confusion which have arisen in some of the
cases do not, in my view, arise here.
If less had been said by the rogue, and if nothing had been done to confirm his
statements by Miss Hilda Ingram, who communicated what she had learnt to Miss
Elsie who was doing the main negotiation, the result might have been different, for
the sellers' concern about the stability and standing of the buyer might not have
been revealed and it might have been held that an offer in such circumstances was
to the party present, whatever his true identity would be.
In Phillips v. Brooks Ltd., [1919] 2 K.B . 243, the rogue had apparently been in the
shop some time inspecting the goods which were brought and displayed for sale to
him without any regard to his identity-he was a "customer" only. The judgment of
Horridge J. is, as I read it, based on a finding of fact that Phillips intended to deal
with North as a customer. Viscount Haldane, in Lake v. Simmons, [1927] A.C . 487, has
taken the view that the case could be explained on the ground that the fraudulent
misrepresentation was not made until after the parties had agreed upon a sale.
That opinion has been criticised, mainly, I think, by academic writers, but if, as
must be conceded, it is a possible view, and as Phillips v. Brooks Ltd. has stood for so
long and is, as I think, a decision within an area of fact, I would not feel justified in
saying it was wrong.
It is not an authority to establish that where an offer or acceptance is addressed
to a person (although under a mistake as to his identity) who is present in person,
then it must in all circumstances be treated as if actually addressed to him. I would
regard the issue as a question of fact in each case depending on what was said and
done and applying the elementary principles of offer and acceptance in the manner
in which Slade J. directed himself.
The judgment quotes extensively from the article by Dr. Goodhart, the editor of
the Law Quarterly Review, called "Mistake as to Identity in the Law of Contract" (1941),
57 L.O.R. 228, and I would join the judge in his expression of indebtedness to the
author. Referring to Phillips v. Brooks Ltd., Dr. Goodhart asked, "Did the shopkeeper
believe that he was entering into a contract with Sir George Bullough and did North
know this? If both answers are in the affirmative, then it is submitted that there was
no contract."
I think there may be a doubt in that case whether both the answers should have
been in the affirmative, but on the facts of the present case I feel no doubt and I
would uphold the judge's views of no contract.
Dr. Goodhart might well be right when he said that "There is no branch of the law
of contract which is more uncertain and difficult" than that involved in the present
case, and I am conscious that our decision here will not have served to dispel the
uncertainty. ...
I am in agreement with the judge when he quotes, accepts and applies the fol-
lowing passage from Dr. Goodhart's article-"It is the interpretation of the promise
which .is the essential thing. This is usually based on the interpretation which a
reasonable man, in the promisee's position, would place on it, but in those cases

415
CHAPTER 4 CONTRACTS AND THIRD PARTIES

where the promisor knows that the promisee has placed a peculiar interpretation
on his words, then this is the binding one. The English law is not concerned with
the motives of the parties nor with the reasons which influenced their actions. For
practical reasons it has limited itself to the simple questions: what did the promisor
promise, and how should this be interpreted?"
Phillips v. Brooks Ltd. is the closest authority on which the defendant relies. Once
that is distinguished on its facts, without going so far as to say it is wrong, authority
leans strongly in favour of the judgment appealed from ....
DEVLIN LJ (dissenting): ... Before, therefore, I consider mistake, I shall inquire whether
there is offer and acceptance in form. There is no doubt that H's offer was addressed
to Miss Ingram and her acceptance apparently, addressed to him. But, it is argued,
the acceptance was in reality addressed to P.G.M. Hutchinson, who was not the
offeror, and, therefore, no contract was made. There can be no doubt upon the author-
ities that this argument must be settled by inquiring with whom 0iss Ingram intended
to contract: was it with the person to whom she was speaking or was it with the person
whom he represented himself to be? ... All that Miss Ingram or any other witness in
her position can say is that she did in fact accept the offer made to her; and that, if
she had not been tricked or deceived, she would not have accepted it.
Courts of law are not inexperienced in dealing with this sort of situation. They
do so by means of presumptions .... Whether the court, when it acts in this way, is
really ascertaining the intentions of the parties or whether it is simply providing a
just solution of their difficulties is a theoretical question which I need not explore . ...
In my judgment, the court cannot arrive at a satisfactory solution in the present
case except by formulating a presumption and taking it at least as a starting point.
The presumption that a person is intending to contract with the person to whom he
is actually addressing the words of contract seems to me to be a simple and sensible
one and supported by some good authority....
I do not think it can be said that the presumption is conclusive, since there is at
least one class of case in which it can be rebutted. If the person addressed is posing
only as an agent it is plain that the party deceived has no thought of contracting with
him but only with his supposed principal; if then there is no actual or ostensible
authority, there can be no contract. Hardman v. Booth (1863), 1 H. & C. 803, is, I think,
an example of this. Are there any other circumstances in which the presumption
can be rebutted? It is not necessary to strain to find them, for we are here dealing
only with offer and acceptance; contracts in which identity really matters may still
be avoided on the ground of mistake. I am content to leave the question open, and
do not propose to speculate on what other exceptions there may be to the general
rule. What seems plain to me is that the presumption cannot in the present case be
rebutted by piling up the evidence to show that Miss Ingram would never have
contracted with H. unless she had thought him to be P.G.M. Hutchinson. That fact
is conceded and, whether it is proved simpliciter or proved to the hilt, it does not go
any further than to show that she was the victim of fraud. With great respect to the
judge, the question that he propounded as the test is not calculated to show any more
than that. He said: "Is it to be seriously suggested that they were willing to accept the
cheque of the rogue other than in the belief; created by the rogue himself, that he, the
rogue, was in fact the honest P.G.M. Hutchinson of the address in Caterham with
the telephone number which they had verified?" In my judgment, there is everything
to show that Miss Ingram would never had accepted H.'s offer if she had known the
truth, but nothing to rebut the ordinary presumption that she was addressing her
acceptance, in law as well as in fact, to the person to whom she was speaking. I think,
therefore, that there was offer and acceptance in form.

416
 VI. MISTAKE OF IDENTITY

On my view of the law, it, therefore, becomes necessary to consider next whether
there has been a mistake that vitiates the contract. As both my brethren are of opinion
that there has been no offer and acceptance, the result of this further inquiry cannot
affect the decision in the present case or its ratio, and I shall, therefore, state my
conclusion and my reasons for it as briefly as may be.
In my judgment there has been no such mistake. I shall assume without argu-
ments what I take to be the widest view of mistake that is to be found in the author-
ities, and that is that a mistake avoids the contract if at the time it is made there exists
some state of fact which, as assumed, is the basis of the contract and as it is in truth,
frustrates its object. .. .
The fact that Miss Ingram refused to contract with H. until his supposed name and
. address had been "verified" goes to show that she regarded his identity as fundamental.
In this she was misguided. She should have concerned herself with creditworthiness
rather than with identity. The fact that H . gave P.G.M. Hutchinson's address in the
directory was no proof that he was P.G.M. Hutchinson; and if he had been, that fact
alone was no proof that his cheque would be met. Identity, therefore, did not really
matter. Nevertheless, it may truly be said that to Miss Ingram, as she looked at it, it did.
In my judgment, Miss Ingram's state of mind is immaterial to this question. When
the law avoids a contract ab initio, it does so irrespective of the intentions or opinions
or wishes of the parties themselves .... This rule applies in the case of mistake because
the reason for the avoidance is the same, namely, that the consent is vitiated by non-
agreement about essentials. It is for the court to determine what in the light of all
the circumstances is to be deemed essential. In my judgment, in the present case
H.'s identity was immaterial. His creditworthiness was not, but creditworthiness in
relation to contract is not a basic fact; it is only a way of expressing the belief that
each party normally holds that the other will honour his promise ....
There can be no doubt, as all this difference of opinion shows, that the dividing
line between voidness and voidability, between fundamental mistake and incidental
deceit, is a very fine one. That a fine and difficult distinction has to be drawn is not
necessarily any reproach to the law. But need the rights of the parties in a case like
this depend on such a distinction7 The great virtue of the common law is that it sets
out to solve legal problems by the application to them of principles which the ordin-
ary man is expected to recoQ"nise as sensible and just; their application in any par-
ticular case may produce what seems to him a hard result, but as principles they
should be within his understanding and merit his approval. But here, contrary to its
habit, the common law, instead of looking for a principle that is simple and just, rests
on theoretical distinctions. Why should the question whether the defendant should
or should not pay the plaintiff damages for conversion depend upon voidness or
voidability, and upon inferences to be drawn from a conversation in which the
defendant took no part! The true spirit of the common law is to override theoretical
distinctions when they stand in the way of doing practical justice. For the doing of
justice, the relevant question in this sort of case is not whether the contract was void
or voidable, but which of two innocent parties shall suffer for the fraud of a third.
The plain answer is that the loss should be divided between them in such proportion
as is just in all the circumstances. If it be pure misfortune, the loss should be borne
equally; if the fault or imprudence of either party has caused or contributed to the
loss, it should be borne by that party in the whole or in the greater part. In saying
this, I am suggesting nothing novel, for this sort of observation has often been made.
But it is only in comparatively recent times that the idea of giving to a court power
to apportion loss has found a place in our law. I have in mind particularly the Law
Reform Acts of 1935, 1943 and 1945, that dealt respectively with joint tortfeasors,
frustrated contracts and contributory negligence . These statutes, which I believe to

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

have worked satisfactorily, show a modern inclination towards a decision based on

a just apportionment rather than one given in black or white according to the logic
of the law. I believe it would be useful if Parliament were now to consider whether
or not it is practicable by means of a similar act of law reform to provide for the
victims of a fraud a better way of adjusting their mutual loss than that which has
grown out of the common law.
[The judgment of Pearce LJ is omitted. The appeal was dismissed but leave was
granted to appeal to the House of Lords .]

LEWIS V AVERAY
(1972] 1 OB 198 (CA)

LORD DENNING MR: This is another case where one of two innocent persons has to
suffer for the fraud of a third. It will no doubt interest students and find its place in
the textbooks.
Mr. Lewis is a young man who is a post-graduate student of chemistry. He lives
at Clifton near Bristol. He had an Austin Cooper "S" motor car. He decided to sell it.
He put an advertisement in the newspaper offering it for £450. On May 8, 1969, in
reply to the advertisement a man-I will simply call him the "rogue," for so he was-
telephoned and asked if he could come and see the car. He did not give his name.
He said he was speaking from Wales, in Glamorganshire. Mr. Lewis said he could
come and see it. He came in the evening to Mr. Lewis's flat. Mr. Lewis showed him
the car, which was parked outside. The rogue drove it and tested it. He said he liked
it. They then went along to the flat of Mr. Lewis's fiancee, Miss Kershaw (they have
since married). He told them he was Richard Green and talked much about the film
world. He led both of them to believe that he was the well-known film actor, Richard
Greene, who played Robin Hood in the "Robin Hood" series. They talked about the
car. He askeo to see the logbook. He was shown it and seemed satisfied. He said he
would like to buy the car. They agreed a price of £450. The rogue wrote out a cheque
for £450 on the Beckenham Branch of the Midland Bank. He signed it "RA. Green."
He wanted to take the car at once. But Mr. Lewis was not willing for him to have it
until the cheque was cleared. To hold him off, Mr. Lewis said there were one or two
small jobs he would like to do on the car before letting him have it, and that would
give time for the cheque to be cleared. The rogue said, "Don't worry about those small
jobs. I would like to take the car now." Mr. Lewis said: "Have you anything to prove
that you are Mr. Richard Green?" The rogue thereupon brought out a special pass of
admission to Pinewood Studios which had an official stamp on it. It bore the name
of Richard A. Green and the address, and also a photograph which was plainly the
photograph of this man, who was the rogue.
On seeing this pass, Mr. Lewis was satisfied. He thought this man was really Mr.
Richard Greene, the film actor. By that time it was 11 o'clock at night. Mr. Lewis took
the cheque and let the rogue have the car and the logbook and the Ministry of
Transport test certificate. Each wrote and signed a receipt evidencing the transaction.
Mr. Lewis wrote:
Received from
Richard A. Green, 59 Marsh Rd., Beckenham, Kent
the sum of £450 in return for Austin Cooper S Reg.
No. AHT 484B chassis No. CA257-549597
Keith Lewis.

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 VI. MISTAKE OF IDENTITY

The rogue wrote:

Received logbook No. 771835 and M.O.T. for Mini-Cooper S No. AHT 4848
R.A. Green. \
Next day, May 9, 1969, Mr. Lewis put the cheque into the bank. A few days later
the bank told him it was worthless. The rogue had stolen a cheque book and written
this £450 on a stolen cheque.
Meanwhile, while the cheque was going through, the rogue sold the car to an
innocent purchaser. He sold it to a young man called Mr. Averay. He was at the time
under 21. He was a music student in London at the Royal College of Music. His
parents live at Bromley. He was keen to buy a car. He put an advertisement in the
"Exchange and Mart," seeking a car for £200. In answer he had a telephone cal\ from
the rogue. He said he was speaking from South Wales. He said that he was coming
to London to sell a car. Mr. Averay arranged to meet him on May 11, 1969. The rogue
came with the car. Young Mr. Averay liked it, but wanted to get approval of his par-
ents. They drove it to Bromley. The parents did approve. Young Mr. Averay agreed
to buy it for £200. The rogue gave his name as Mr. Lewis. He handed over the car
and logbook to young Mr. Averay. The logbook showed the owner as Mr. Lewis. In
return Mr. Averay, in entire good faith, gave the rogue a cheque for £200. The rogue
signed this receipt:
Sale of Cooper S to A.J. Averay.
Received £200 for the Cooper S Registration No.
AHT 4848, the said car being my property absolutely,
there being no hire purchase charges outstanding or
other impediment to selling the car:
Keith Lewis
May 13, 1969.
A fortnight later, on May 29, 1969, Mr. Averay wanted the workshop manual for
the car. So his father on his behalf wrote to the name and address of the seller as
given in the logbook-that is, Mr. Lewis. Then, of course, the whole story came to
light. The rogue had cashed the cheque and disappeared. The police have tried to
trace him, but without success.
Now Mr. Lewis, the original owner of the car, sues young Mr. Averay. Mr. Lewis
claims that the car is still his. He claims damages for conversion. The judge found
in favour of Mr. Lewis and awarded damages of £330 for conversion.
The real question in the case is whether on May 8, 1969, there was a contract of
sale under which the property in the car passed from Mr. Lewis to the rogue. If there
was such a contract, then, even though it was voidable for fraud, nevertheless Mr.
Averay would get a good title to the car. But if there was no contract of sale by Mr.
Lewis to the rogue-either becau~e there was, on the face of it, no agreement
between the parties, or because any apparent agreement was a nullity and void ab
initio for mistake, then no property would pass from Mr. Lewis to the rogue. Mr.
Averay would not get a good title because the rogue had no property to pass to him.
There is no doubt that Mr. Lewis was mistaken as to the identity of the person
who handed him the cheque. He thought that he was Richard Greene, a film actor
of standing and worth: whereas in fact he was a rogue whose identity is quite
unknown. It was under the influence of that mistake that Mr. Lewis let the rogue
have the car. He would not have dreamed of letting him have it otherwise.
What is the effect of this mistake? There are two cases in our books which cannot,
to my mind, be reconciled the one with the other. One of them is Phillips v. Brooks ·

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

Ltd. [1919 ] 2 K.B. 23, where a jeweUer had a ring for sale. The other is Ingram v. Little
[1961] 1 O.B. 31, where two ladies had a car for sale. In each case the story is very
similar to the present. A plausible rogue comes along. The rogue says he likes the
ring, or the car, as the case may be. He asks the price. The seUer names it. The rogue
says he is prepared to buy it at that price. He pulls out a cheque book. He writes, or
prepares to write, a cheque for the price. The seUer hesitates. He has never met this
man before. He does not want to hand over the ring or the car not knowing whether
the cheque will be met. The rogue notices the seUer's hesitation. He is quick with his
next move . He says to the jewener, in Phillips v. Brooks: "I am Sir George BuUough of
11 St. James's Square"; or to the ladies in Ingram v. Little "I am P.G.M. Hutchinson of
Stanstead House, Stanstead Road, Caterham"; or to the post-graduate student in the
present case: "I am Richard Greene, the film actor of the Robin Hood series." Each
sener checks up the information. The jeweUer looks up the directory and finds there
is a Sir George Bunough at 11 St. James's Square. The ladies check up too. They look
at the telephone directory and find there is a "P.G.M. Hutchinson of Stanstead House,
Stanstead Road, Caterham." The post-graduate student checks up too. He examines
the official pass of the Pinewood Studios and finds that it is a pass for "Richard A
Green" to the Pinewood Studios with this man's photograph on it. In each case the
seUer feels that this is sufficient confirmation of the man's identity. So he accepts the
cheque signed by the rogue and lets him have the ring, in the one case, and the car
and logbook in the other two cases. The rogue goes off and sens the goods to a third
person who buys them in entire good faith, and pays the price to the rogue . The
rogue disappears. The original seUer presents the cheque. It is dishonoured. Who is
entitled to the goods7 The original seUer? Or the ultimate buyer7 The courts have
given different answers. In Phillips v. Brooks, the ultimate buyer was held to.be entitled
to the ring. In Ingram v. Little the origin_al sener was held to be entitled to the car. In
the present case the deputy county court judge has held the original seller entitled.
It seems to me that the material facts in each case are quite indistinguishable the
one from the other. In each case there was, to all outward appearance, a contract;
but there was a mistake by the sener as to the identity of the buyer. This mistake was
fundamental. In _each case it led to the handing over of the goods. Without it the
seller would not have parted with them.
This case therefore raises the question: What is the effect of a mistake by one party
as to the identity of the other? It has sometimes been said that if a party makes a
mistake as to the identity of the person with whom he is contracting there is no
contract, or, if there is a contract, it is a nullity and void, so that no property can pass
under it. This has been supported by a reference to the French jurist Pothier; but I
have said before, and I repeat now, his statement is no part of English law. I know
that it was quoted by Lord Haldane in Lake v. Simmons [19271 AC. 487, 501, and, as
such, misled Tucker J . in Sow/er v. Potter [194011 K.B. 271, into holding that a \ease
was void whereas it was reaUy voidable. But Pothier's statement [to the effect that
the mistake destroys consent and annuls the agreement] has given rise to suc;:h
refinements that it is time it was dead and buried altogether.
For instance, in Ingram v. Little [1961] 1 O.B. 31 the majority of the court suggested
that the difference between Phillips v. Brooks [1919] 2 K.B. 243 and Ingram v. Little was
that in Phillips v. Brooks the contract of sale was concluded (so as to pass the property
to the rogue) before the rogue made the fraudulent misrepresentation: see [1961] 1
O.B. 31, 51, 60: whereas in Ingram v. Little the rogue made the fraudulent misrepre-
sentation before the contract was concluded. My own view is that in each case the
property in the goods did not pass until the seller let the rogue have the goods.
Again it has been suggested that a mistake as to the identity of a person is one
thing: and a mistake as to his attributes is another. A mistake as to identity, it is said,

420
 VI. MISTAKE OF IDENTITY

avoids a contract: whereas a mistake as to attributes does not. But this is a distinction
without a difference. A man's very name is one of his attributes. It is also a key to his
identity. If then, he gives a false name, is it a mistake as to his identity? or a mistake
as to his attributes? These fine distinctions do no good to the law.
As I listened to the argument in this case, I felt it wrong that an innocent pur-
chaser (who knew nothing of what passed between the seller and the rogue) should
have his title depend on such refinements . After all, he has acted with complete
circumspection and in entire good faith: whereas it was the seller who let the rogue
have the goods and thus enabled him to commit the fraud. I do not, therefore, accept
the theory that a mistake as to identity renders a contract void. I think the true prin -
ciple is that which underlies the decision of this court in King 's Norton f'vletal Co. Ltd.
v. Edridge Merrett & Co. Ltd. (1897) 14 T.L.R. 98 and of Horridge J. in Phillips v. Brooks
[1919] 2 K.B . 243, which has stood for these last 50 years. It is this: When two parties
have come to a contract-or rather what appears, on the face of it, to be a contract-
the fact that one party is mistaken as to the identity of the other does not mean that
there is no contract, or that the contract is a nullity and void from the beginning. It
only means that the contract is voidable, that is, liable to be set aside at the instance
of the mistaken person, so long as he does so before third parties have in good faith
acquired rights under it.
Applied to the cases such as the present, this principle is in full accord with the
presumption stated by Pearce L.J. and also Devlin L.J. in Ingram v. Little [1961] 1 Q.B.
31, 61, 66. When a dealing is had between a seller like Mr. Lewis and a person who is
actually there present before him, then the presumption in law is that there is a
contract, even though there is a fraudulent impersonation by the buyer representing
himself as a different man than he is. There is a contract made with the very person
there, who is present in person. It is liable no doubt to be avoided for fraud, but it is
still a good contract under which title will pass unless and until it is avoided. In sup-
port of that presumption, Devlin L.J. quoted, at p. 66, not only the English case of
Phillips v. Brooks, but other cases in the United States where "the courts hold that if
A appeared in person before B, impersonating C, an innocent purchaser from A gets
the property in the goods against B." That seems to me to be right in principle in this
country also.
In this case Mr. Lewis made a contract of sale with the very man, the rogue, who
came to the flat. I say that he "made a contract" because in this regard we do not look
into his intentions, or into his mind to know what he was thinking or into the mind
of the rogue. We look to the outward appearances. On the face of the dealing. Mr.
Lewis made a contract under which he sold the car to the rogue, delivered the car
and the logbook to him, and took a cheque in return. The contract is evidenced by
the receipts which were signed. It was, of course, induced by fraud. The rogue made
false representations as to his identity. But it was still a contract, though voidable for
fraud. It was a contract under which this property passed to the rogue, and in due
course passed from the rogue to Mr. Averay, before the contract was avoided.
Though I very much regret that either of these good and reliable gentlemen
should suffer, in my judgment it is Mr. Lewis who should do so. I think the appeal
should be allowed and judgment entered for the defendant.
[Phillimore and Megaw LJJ agreed. See also McCamus at 539-48; MacDougall at
238-40; Waddams at paras 299-306.J

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

VII. DOCUMENTS MISTAKENLY SIGNED

FOSTER V MACKINNON
(1869), LR 4 CP 704

This was an action by an indorsee against an indorser on a bill of exchange for.£3000.

One Callow, who was called as a witness for the plaintiff testified that the defendant,
an elderly man, signed the note in his presence, he having taken the bill, as drawn
and endorsed by one Cooper, to the defendant and asked him to sign it telling him
it was a guarantee. The defendant had previously signed a guarantee for £3000 for
Callow but no liability had resulted to him. Callow only showed the defendant the
back of the paper; it was, however, in the ordinary shape of a bill of exchange, and
bore a stamp, the impress of which was visible through the paper. The defendant
wrote his signature right after Cooper's. Bovill C.J. at the trial told the jury that, if the
endorsement was not the signature of the defendant, or if, being his signature, it
was obtained upon a fraudulent representation that it was a guarantee, and the
defendant signed it without knowing that it was a bill, and under .the belief that it
was a guarantee, and if the defendant was not guilty of any negligence in so signing
the paper, he was entitled to the verdict. The jury found for the defendant. On a rule
nisi for a new trial on grounds of misdirection and that the verdict was against the
weight of evidence.
BYLES J (for the court): ... The case presented by the defendant is, that he never made
the contract declared on; that he never saw the face of the bill; that the purport of the
contract was fraudulently mis-described to him; that, when he signed one thing, he
was told and believed that he was signing another and an entirely different thing;
and that his mind never went with his act.
It seems plain, on prindple and on authority, that, if a blind man, or man who
cannot read, or who for some reason (not implying negligence) forgot to read, has
a written contract falsely read over to him, the reader misreading to such a degree
that the written contract is of a nature altogether different from the contract pre-
tended to be read from the paper which the blind or illiterate man afterwards signs;
then, at least if there is no negligence, the signature so obtained is of no force. And
it is invalid not merely on the ground of fraud, where fraud exists, but on the ground
that the mind of the signer did not accompany the signature; in other words that he
never intended to sign, and therefore in contemplation of law never did sign, the
contract to which his name is appended.
The authorities appear to us to support this view of the law. In Thoroughgood's
Case (1582), 2 Co. Rep. 9a; 76 E.R. 408, it was held that, if an illiterate man have a deed
falsely read over to him, and he then seals and delivers the parchment; that parchment
is nevertheless not his deed. In a note to Thoroughgood's Case, in Fraser's edition of
Coke's Reports, it is suggested that the doctrine is not confined to the condition of an
illiterate granter; and a case in Keilway's Reports, 70, pl. 6, is cited in support of this
observation. On reference to that case it appears that one of the judges did there
observe that it made no difference whether the granter were lettered or unlettered.
That, however, was a case where the grantee himself was the defrauding party. But
the position that, if a granter or covenantor be deceived or misled as to the actual
contents of the deed, the deed does not bind him, is supported by many authorities ....
Accordingly, it has recently been decided in the Exchequer Chamber, that, if a deed
be delivered, and a blank left therein be afterwards improperly filled up (at least if

422
 VII. DOCUMENTS MISTAKENLY SIGNED

that be done without the grantor's negligence), it is not the deed of the grantor: Swan
v. North British Australasian Land Company (1863), 2 H. & C. 175; 159 E.R. 73.
These cases apply to deeds; but the principle is equally applicable to other written
contracts. Nevertheless, this principle, when applied to negotiable instruments, must
be and is limited in its application. These instruments are not only assignable, but
they form part of the currency of the country. A qualification of the general rule is
necessary to protect innocent transferees for value. If, therefore, a man write his
name across the back of a blank bill-stamp, and part with it, and the paper is after-
wards improperly filled up, he is liable as indorser. If he write it across the face of the
bill, he is liable as acceptor, when the·instrument has once passed into the hands of .
an innocent indorsee for value before maturity, and liable to the extent of any sum
which the stamp will cover.
In these cases, however, the party signing knows what he is doing; the indorser
intended to indorse, and the acceptor intended to accept, a bill of exchange to be
thereafter filled up, leaving the amount, the date, the maturity, and the other parties
to the bill undetermined.
But, in the case now under consideration, the defendant, according to the evi-
dence, if believed, and the finding of the jury, never intended to indorse a bill of
exchange at all, but intended to sign a contract of an entirely different nature. It was
not his design, and, if he were guilty of no negligence, it was not even his fault that
the instrument he signed turned out to be a bill of exchange. It was as if he had
written his name on a sheet of paper for the purpose of franking a letter, or in a lady's
album, or on an order for admission to the Temple Church, or on the fly-leaf of a
book, and there had already been, without his knowledge, a bill of exchange or a
promissory note payable to order inscribed on the other side of the paper. To make
the case clearer, suppose the bill or note on the other side of the paper in each of
these cases to be written at a time subsequent to the signature, then the fraudulent
misapplication of that genuine signature to a different purpose would have been a
counterfeit alte:ration of a writing with intent to defraud, and would therefore have
amounted to a forgery. In that case, the signer would not have been bound by his
signature, for two reasons, first, that he never in fact signed the writing declared on,
and, secondly, that he never intended to sign any such contract.
In the present case, the first reason does not apply, but the second reason does
apply. The defendant never intended to sign that contract, or any such contract. He
never intended to put his name to any instrument that then was or thereafter might
become negotiable. He was deceived, not merely as to the legal effect, but as to the
actual contents of the instrument.
We are not aware of any case in which the precise question now .before us has
arisen on bills of exchange or promissory notes, or been judicially discussed .... But,
in Putnam v. Sullivan, an American case, reported in 4 Mass. 45, and cited in Parsons
on Bills, vol. i, p . 111 n., a distinction is taken by Chief Justice Parsons between a case
where an endorser inte11ded to indorse such a note as he actually indorsed, being
induced by fraud to indorse it, and a case where he intended to indorse a different
note and for a different purpose. And the Court intimated an opinion that, even in
such a case as that, a distinction might prevail and protect the indorsee.
The distinction in the case now under consideration is a much plainer one; for,
on this branch of the rule, we are to assume that the indorser never intended to
indorse at all, but to sign a contract of an entirely different nature.
For these reasons, we think the direction of the Lord Chief Justice was right.
[A new trial was granted because "the case should undergo further investigation."]

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CHAPTER 4 CONTRACTS AND TH IRD PARTIES

HOWATSON V WEBB
(1907] 1 Ch 537

Webb was the managing clerk of one Hooper, a solicitor, who was engaged in build-
ing speculations near Edmonton, north of London, for the purposes of which Hooper
had had various leases put in Webb's name as nominee for him. Some time after
Webb had left Hooper's service, Hooper called him on the phone and asked him to
come over and sign some deeds "transferring the Edmonton property." Webb went
the same day and arrived about lunch time. Hooper seemed to be in a great hurry
and asked Webb to sign and "Hurry up and come and join me at lunch." Webb asked
"What are the deeds7" to which Hooper replied, "They are just deeds transferring that
property," presumably meaning the Edmonton property. Hooper then went out and
Webb signed a number of deeds left open for signature on a table. One was a mort-
gage dated that day, June 2, 1899, between Webb and one Whitaker as mortgagee
and contained Webb's covenant to pay the mortgagee £1000. During the next seven
years Hooper paid the interest and £200 on principal. Webb was not called upon to
pay any interest, but on February 2, 1906, the plaintiff, Miss Howatson, ·asked for
payment of the principal. Miss Howatson took a transfer of the mortgage from
Whitaker in October 1902, and paid Whitaker, or possibly Hooper, as s.olicitor in the
transaction, £800. Webb raised the defence of non est factum.
WARRINGTON J : The question in this case is which of two innocent parties is to suffer
for the roguery of a third party....
[After a careful review of Foster v Mackinnon and some other cases, Warrington J
continued:]
What does the evidence in the present case shew? I may go so far in the defen-
dant's favour as to say that Webb, having regard to his knowledge of Hooper, when
Hooper said that the deeds were "deeds for transferring the Edmonton property" was
justified in believing that they were deeds such as a nominee could be called upon
to execute either in favour of a new nominee or for the purpose of putting an end
to his own position of nominee, and certainly not a deed creating a mortgage to
another person. But in my opinion that is not enough. He was told that they were
deeds relating to the property to which they did in fact relate. His mind was therefore
applied to the question of dealing with that property. The deeds did deal with that
property. The misrepresentation was as to the contents.of the deed, and not as to
the character and class of the deed. He kn~w he was dealing with the class of deed
with which in fact he was dealing, but did not ascertain its contents. The deed con-
tained a covenant to pay. Under those circumstances I cannot say that the deed is
absolutely void. It purported to be a transfer of the property, and it was a transfer of
the property. If the plea of non est factum is to succeed the deed must be wholly, and
not partly, void. If that plea is an answer in this case, I must hold it to be an answer
in every case of misrepresentation. In my opinion the law does not go as far as that.
The defence therefore fails. There must therefore be judgment for the plaintiff on .
the claim with costs.
[The judgment of Warrington J, which has been drastically cut, was unanimously
affirmed on appeal-[1908] 1Ch1.]

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 VII. DOCUMENTS MISTAKENLY SIGNED

SAUNDERS V ANGLIA BUILDING SOCIETY (GALLIE V LEE)

[1971] AC 1004 (HL)

LORD PEARSON: My Lords, this appeal raises questions of \aw as to the limits of the
plea of non est factum, in a case where the person who signed the deed of assignment
of a long lease of a house alleges that she was deceived by the assignee as to the nature
and character of the deed, so that it was not her deed; and she relies on the plea not
only against the assignee who is alleged to have deceived her but also against an
innocent third party, the defendant building society who afterwards in good faith
and with no knowledge of any defect affecting her signature lent money to the
assignee on the security of the house. There are also questions of fact on which two
members at least of the Court of Appeal took different views from that of the \earned
trial judge.
In 1962 the plaintiff, Mrs. Ga\lie, was 78 years of age. She owned a long lease of a
house, where she resided and earned her living by taking in lodgers. The ground
rent was small, so that in broad effect she was the owner of the house . The only one
of her relatives who frequently visited her was her nephew, Walter Parkin, aged about
40 . He had a small garage at which he did motor repairing work. He had a friend and
business associate, named William Robert Lee, whom he trusted, although in the
event Lee proved to be untrustworthy.
The plaintiff told Parkin that she had made a will leaving her house to him. Later
she handed over to him the deeds of her house thinking apparently that she was
thereby transferring to him the ownership of the house or at any rate enabling him
to raise money on the security of the house. She made it a condition that she would
have the u se of the house for the rest of her life. Parkin needed money for his busi-
ness, and she w~shed to help him in this way. If a further step, such as the making
of a deed of gift, was required, she would be willing to do this.
Parkin consulted with Lee. Parkin was in a difficulty. He had left his wife and three
children, and for years had been living with another woman who had become kri.own
as "Mrs. Parkin." He was in arrear with maintenance payments to his wife, and he
was afraid that if he became the owner of the house his wife might be able to force
him to pay the maintenance. Lee needed money in order to purchase a house for
himself and his family, as they were still living in his father's house. He saw the
opportunity of raising money on the security of the plaintiff's house if he could
become the owner of it. It was arranged, or at any rate proposed, between Parkin
and Lee that the plaintiff should transfer the house to Parkin by deed of gift, and
when she had done so Parkin should sell the house to Lee at a price of £2,000 or
£2,500 (the evidence is not clear as to the amount of the proposed price) and Lee
should raise money from a building society on the security of the house and should
pay the price of £2,000 or £2,500 by making monthly payments to the woman known
as "Mrs. Parkin." Lee consulted a firm of solicitors about the proposed transaction
and was advised that a recent deed of gift on the title would be likely to deter a build-
ing society from lending money on the security of the house and that a direct sale
by the plaintiff to Lee would be preferable. Accordingly, the solicitors drafted a deed
of assignment of the house from the plaintiff to Lee at a stated price of £3,000. It may
be that the conduct of the solicitors or their managing clerk fell below professional
standards, but it is not necessary to investigate that aspect of the matter.
Lee and Parkin went to see the plaintiff. Lee had the deed, and he put it before the
plaintiff for her to sign. The plaintiff had broken her spectacles and could not read .
effectively without them. She asked what the deed was, and Lee said, in the presence
of Parkin and without any dissent from him, that the deed was "to do with the gift

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

by deed to Wally for the house ." The plaintiff, not having asked Parkin to read the
deed to her or give his explanation of it, but assuming that Parkin and Lee knew what
they were doing, and desiring to help Parkin in the way that he wished, signed the
deed. Parkin witnessed the plaintiff's signature to the deed. The price of £3,000 was
not paid or intended to be paid, so that in practical reality the assignment from the
plaintiff to Lee was for no consideration. As between Lee and Parkin the intention
was that £2,000 or £2,500 was to be made available in some way by Lee to Parkin:
he might pay monthly instalments to the woman known as "Mrs. Parkin" or he might
from time to time put money into the business of Parkin, in which Lee had some
interest. It is not easy to gather from the evidence exactly what the arrangement was,
and it probably was somewhat indefinite in its details, but I think that was the broad
effect of it. If this arrangement or something on these lines, had been duly carried
out, the plaintiff's signature to the deed would have enabled Parkin through Lee to
raise money on the security of the house in the way that Parkin considered most
beneficial to himself.
Lee made to the defendant building society an application containing some false
statements and supported it with a testimonial, drafted by him and signed by Parkin,
also containing some false statements. The defendant building society, in response
to the application, and in reliance on the title deeds including the plaintiff's assign-
ment to Lee, and having· no notice of any defect in the assignment or of anything
unusual affecting it and acting in complete good faith, lent £2,000 to Lee on the
security of the house.
Then things went wrong. Lee failed to carry out his arrangement with Parkin. Lee
was heavily indebted, and the sum which he had borrowed from the defendant
building society was used up in paying his debts, and probably his other resources
were insufficient to enable him to make any money available to Parkin: At any rate,
he did not make the sum of £2,500 or £2,000 or any sum available to Parkin in any
way. Thus, in the event, the plaintiff's execution of the deed of assignment did not
bring any benefit to Parkin, although it would have done if his arrangement with
Lee had been duly carried out by Lee.
The plaintiff commenced her action in July, 1964. By her amended statement of
claim she claimed (1) against Lee a declaration that the assignment of the house to
him was void, return of the title deeds or their value and damages for their detention,
and damages for fraudulent misrepresentation, and (2) against the defendant build-
ing society a declaration that the assignment of the house to Lee was void, and the
delivery up of the title deeds or their value and damages for their detention.
The plaintiff's evidence was, owing to her age and infirmity, taken on commis-
sion, so that the learned judge did not have the advantage of seeing and hearing her
as she was giving her evidence. Evidence was given at the trial by Parkin, Lee ·a nd a
witness named Hall who had been managing clerk of the solicitors concerned. The
learned judge found that Lee and Hall had told lies in the witness box and he could
not rely on their evidence. As to Parkin, he found that he had told some lies in the
witness box and that his evidence showed a high degree of confusion and inaccu -
racy, but nevertheless there were times in his evidence when he was saying simple
things when the learned judge had the conviction that he was telling the truth. With
regard to the plaintiff's evidence the learned judge said: "It is apparent from the
transcript of that evidence first that she must have been a difficult witness, that her
evidence is not very clear in a number of respects and in some respects it is
contradictory."
He did, however, find as a fact that the plaintiff did not read the document, that
Lee represented it to be a deed of gift to Parkin and that the plaintiff executed it in

426
 VII. DOCUMENTS MISTAKENLY SIGNED

the belief that that was what it was. He also found as a fact that the plaintiff had no
idea that the document took the form of an assignment on sale from her to Lee and
that a sale or gift to him was something which she did not and would not for on_e
moment have contemplated.
As at least two members of the Court of Appeal did not accept these findings of
the learned judge, and I prefer their views to his (though undoubtedly these ques-
tions of fact are difficult), I will set out a few extracts from the plaintiff's evidence
taken on commission, in order to show in outline what was the basis of their views:

0. Do you know that Mr. Parkin-that is Wally-gave the building society a testimo-
nial about Mr. Lee so that he could get a mortgage on this house? Do you know that?
A I did not know what they were doing when they came to see me. I only said to my
nephew-I didn't refer to Mr. Lee; I referred to my nephew, and I said to my nephew-"! ·
don't mind, helping you at all. I have helped you in the past and I will still help you as
long as I can; but mind you are doing the right thing." I have always trusted my nephew.
0. And if he told you a document was all right you believed him? A. I believe my
nephew. I don't believe Mr. Lee.
0. And, of course, whe n your nephew and Mr. Lee came along with the document
you thought it must be all right? A. I did.
0. And it was because your nephew was there that you were willing to sign it?
A. Yes ....
0. Did you know that Mr. Lee stated that he would buy the house from Mr. Parkin?
A. No. I did not know he was buying the house. I just thought he was having a loan on
my house.
0. Mr. Lee was? A. Yes. But if my nephew had have come to me and said, "Auntie,
I am in difficulties," I would have got him the money instead of bothering Mr. Lee.
0. But the money was to be borrowed on your deeds through Mr. Lee. Is that right?
A. Yes.
0. And you were quite satisfied about that? A. Yes. I done it to help my nephew with
his business ....
0. Have you brought this action to help your nephew? A. I have, sir....
0. Did it occur to you to ask Wally to read the document to you? A. I never thought
of that. sir.
, 0. You thought it was all right. If Wally was there. it must be all right? A. I did.

The learned judge (1) made a declaration as against Lee that the alleged assign -
ment of June 15, 1962 was void and of no effect, and directed an inquiry as to dam-
ages; (2) made a declaration in the same terms as against the defendant building
society, and ordered them to deliver up the title deeds. There was no appeal by Lee.
Ther~ was an appeal by the defendant building society, and it was allowed by the
Court of Appeal.
The Master of the Rolls decided the case on a broad principle to which I will refer
later.
Russell L.J. carefully examined the facts of the case and made two comments on
the plaintiff's evidence, and these were in effect his grounds of decision. He said,
[1969] 2 Ch. 17, 40-41:
The first is ... it is inadequate to establish the minimum facts necessary to establish the
plea of non est factum, assuming that it wou ld be sufficient for that plea to show that
the plaintiff was induced wholly by Lee's falsehood to think that she was signing a deed
of gift to Parkin· whereas she executed an assignment in terms for value to Lee. I think
that the plaintiff's evidence in this regard was unsatisfactory, and was inadequate to

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discharge the burden of proof that is laid by law on this plea, which requires strong and
clear evidence for its discharge . ... At first sight, of course, it is easy to see the difference
between a voluntary assignment of the leasehold property to A and an assignment for
value of that property to 8. But what upon the plaintiff's own evidence was the essential
character of the document she was intending to execute? It was a document intended
by her to divest herself of her leasehold property by transferring it to another, not as
mere trustee for her, but so that transferee should be in a position to deal with the
property and in particular by borrowing money on the security of the property. Her
evidence in my view makes it plain that she understood that Lee and Parkin were jointly
concerned in a project of raising money on security of the property and this was her
intention. In those circumstances I do not consider that it is correct to say that, for the
purposes of the plea of non est factum, a transfer by her to Lee is to be regarded as of
a totally different character or nature from a .transfer to Parkin. The judge relied on the
identity of the transferee as constituting the essential nature or character of the instru-
ment. In so doing I think that he paid insufficient regard to what I may call the object
of the exercise. Suppose that Lee had carried through the arrangement that Parkin had
understood was made-had in fact paid Parkin . This would have fulfilled the plaintiff's
purpose in executing the document put before her.
I respectfully agree with the reasoning of Russell L.J. and in particular with the
principle that importance should be attached to the "object of the exercise," when
dissimilar legal documents may have similar practical effects. Another example of
this will be found in Mercantile Credit Co. Ltd. v. Hamblin, [1965] 2 O.B. 242, 267. In
that case the defendant had signed hire-purchase documents, and there was some
evidence that she intended to raise money by means of a mortgage of her car, and
she had pleaded non est factum. It became plain, however, that the object of the
proposed hire-purchase transaction was to produce the same practical effect as a
mortgage of the car would have produced (if it had been lawful) . She would sell the
car through a dealer to a finance company, and take it back from the finance com-
pany on hire purchase, with the result that she would receive a lump sum down and
would repay it with additions by instalments over a period, so that she would for
practical purposes be in much the same position as if she had mortgaged the car.
The plea of non est factum failed.
I think Salmon L.J.'s view of the facts in the present case was consistent with that
of Russell L.J., but his main conclusion on the facts was this, [1969] 2 Ch. 17, 45:
In the present case it seems plain from Mrs. Gallie's evidence, which was given before
an examiner and which we are, therefore, in just as good a position to evaluate as was
the judge, that Mrs. Gallie would have executed the conveyance even if its true .character
and class and the nature of the transaction had been properly explained to her and she
had understood the explanation. Certainly she was not induced to sign by any false
representation made to her by Lee.

In the later passage Salmon L.J. said, at p. 47: [I]f Parkin had taken the trouble
to explain the true nature of the document to her and told her that the solicitors had
advised that it should be in that form and asked her to sign it, there can in my view
be no real doubt but that she would have done so."
I think that conclusion 'of Salmon L.J. is probably right but there may be an ele-
ment of doubt as to what the plaintiff would have done if she had been given a full
explanation of the document. I would dismiss the appeal for the reasons given by
Russell L.J. because they seem to me free from doubt.
In the judgments of the Court of Appeal in this case there was an elaborate and,
if I may respectfully say so, illuminating and valuable discussion of the law relating

428
 VII. DOCUMENTS MISTAKENLY SIGNED

to the plea of non est factum. It is not practicable in this opinion to examine what
they have said at length and in detail, dealing with every point. It seems to me that
the right course here is to examine the law on this subject with the aid of the judg-
ments in the Court of Appeal and to endeavour to arrive at clear general propositions
for the future on the basis of the earlier law which I think has become distorted in
some respects.
I must, however, deal specifically with the broad principle stated by the Master of
the Rolls as his conclusion from his investigation of the law, at pp. 36-37:
... [W)henever a man of full age and understanding, who can read and write, signs a legal
document which is put before him for signature-by which I mean a document which,
it is apparent on the face of it is intended to have legal consequences-then, if he does
not take the trouble to read it, but signs it as it is, relying on the word of another as to
its character or contents cir effect, he cannot be heard to say that it is not his document.
By his conduct in signing it he has represented, to all those into whose hands it may
come, that it is his document; and once they act upon it as being his document, he
cannot go back on it and say it was nullity from the beginning . ,
In applying the principle to the present case, the Master of the Rolls said, at p. 37:
... Mrs. Gallie cannot in this case say that the deed of assignment was not her deed. She
signed it without reading it, relying on the assurance of Lee that it was a deed of gift to
Wally. It turned out to be a deed of assignment to Lee. But it was obviously a legal
document. She signed it: and the building society advanced money on the faith of it
being her document. She cannot now be allowed to disavow her signature.
There can be no doubt that this statement of principle by the Master of the Rolls
is not only a clear and concise formulation but also a valuable guide to the right
decision to be given by a court in any ordi;nary case. The danger of giving an undue
extension to the plea of non est factum has been pointed out in a number of cases.
For instance in Muskham Finance Ltd. v. Howard, [1963] 1 O.B. 904, 912 Donovan L.J.
delivering the judgment of the court said:
The plea of non est factum is a plea which must necessarily be kept within narrow limits.
Much confusion and uncertainty would result in the field of contract and elsewhere if
a man were permitted to try to disown his signature simply by asserting that he did not
understand that which he had signed.
In Hunter v. Walters (1871), L.R. 7 Ch. App. 75, 87, Mellish LJ. said: "Now, in my
opinion, it is still a doubtful question at law, on which I do not wish to give any
decisive opinion, whether, if there be a false representation respecting the contents
of a deed, a person who is an educated person, and who might, by very simple
means, have satisfied himself as to what the contents of the deed really were, may
not, by executing it negligently be estopped as between himself and a person who
innocently acts upon the faith of the deed being valid, and who accepts an estate
under it."
This passage was referred to by Farwell L.J. in Howatson v. Webb, [1908] 1 Ch. 1,
being 3-4, where he said:
I think myself that the question suggested. but not decided, by Mellish L.J. in that case
will some day have to be determined. viz., whether the old cases on misrepresentation
as to the contents of a deed were not based upon the illiterate character of the person
to whom the deed was read over, and on the fact that an illiterate man was treated as
being in the same position as a blind man: see Thoroughgood 's Case and Sheppard's
Touchstone p. 56; and whether at the present time an educated person, who is not

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blind, is not estopped from availing himself of the plea of non est factum against a
person who innocently acts upon the faith of the deed being valid.

The principle stated by the Master of the Rolls can and should be applied so as to
confine the scope of the plea of non est factum within narrow limits. It rightly pre-
vents the plea from being successful in the normal case of a man who, however
much he may have been misinformed about the nature of a deed or document, could
easily have ascertained its true nature by reading it and has taken upon himself the
risk of not reading it.
I think, however, that, unless the doctrine of non est factum, as it has been under-
stood for at least a hundred years, is to be radically transformed, the statement of
principle by the Master of the Rolls, taken just as it stands, is too absolute and rigid
and needs some amplification and qualification. Doubts can be raised as to the
meaning of the phrase "a man of full age and understanding, who can read and
write." There are degrees of understanding and a person who is a great expert in
some subjects may be like a child in relation to other subjects. Does the phrase refer
to understanding of things in general, or does it refer to capacity for understanding
(not necessarily in more than a general and elementary way) legal documents and
property transactions and business transactions?
In my opinion, the plea of non est factum ought to be available in a proper case
for the relief of a person who for permanent or temporary reasons (not limited to
blindness or illiteracy) is not capable of both reading and sufficiently understanding
the deed or other document to be signed. By "sufficiently understanding" I mean
understanding at least to the point of detecting a fundamental difference between
the actual document and the document. as the signer had believed it to be. There
must be a proper case for such relief. There would not be a proper case if (a) the
signature of the document was brought about by negligence of the signer in failing
to take precautions which he ought to have taken, or (b) the actual document was
not fundamentally different from the document as the signer believed it to be. I will
say something later about negligence and about fundamental difference .
In the present case the plaintiff was not at the material time a person who could
read, because on the facts found she had broken her spectacles and could not effect-
ively read without them. In any case her evidence (unless it was deliberately false,
which has not been argued) shows that she had very little capacity for understanding
legal documents and property transactions, and I do not think a reasonable jury
would have fqund that she was negligent. In my opinion, it would not be right to
dismiss the plaintiff's appeal on the ground that the principle stated by the Master
of the Rolls is applicable to her case. I do not think it is.
The principle as stated is limited to a case in which it is apparent on the face of
the document that it is intended to have legal consequences. That allows for possible
success of the plea in a case such as Lewis v. Clay (1897), 67 L.J. Q.B. 224, where Clay
had been induced to sign promissory notes by the cunning deception of a false
friend, who caused him to believe that he was merely witnessing the friend's signa -
ture on several private and highly confidential documents, the m aterial parts of
which had been covered up.
I wish to reserve the question whether the plea of non est factum would ever be
rightly successful in a case where (1) it is apparent on the face of the document that
it is intended to have legal consequences; (2) the signer of the document is able to
read and sufficiently understand the document; (3) the document is fundamentally
different from what he supposes it to be; (4) he is induced to sign it without reading
it. It seems unlikely that the plea ought ever to succeed in such a case, but it is inad-
visable to rule out the wholly exceptional and unpredictable case.

430
 VII. DOCUMENTS MISTAKENLY SIGNED

I have said above that the statement of principle by the Master of Rolls needs to
be amplified and qualified unless the doctrine of non est factum, as it has been under-
stood for at least a hundred years, is to be radically transformed. What is the doctrine,
and should it be radically transformed?
As to the early history, the authorities referred to in the judgment of Byles J . in
Foster v. Mackinnon (1869), L.R. 4 C.P. 704, 711-12 (and also referred to in Holdsworth's
History of England Law, Vol. 8, pp. 50-51) were cited in the argument of this appeal.
Having considered them I think they show that the law relating to the plea of non
est factum remained in an undeveloped state until the judgment in Foster v. /vlackin-
non, and the modern development began with that judgment. It was the judgment
of the court (Bovill C.J., Byles, Keating and Montague Smith JJ.} delivered by Byles J.
He said, at p. 711:

It seems plain, on principle and on authority, that, if a blind man, or a man who cannot
read, or who for some reason (not implying negligence) forbears to read, has a written
contract falsely read over to him, the reader misreading to such a degree that the
written contract is of a nature altogether different from the contract pretended to be
read from the paper which the blind or illiterate man afterwards signs; then, at least if
there be no negligence, the signature so obtained is of no force. And it is invalid not
merely on the ground of fraud, where fraud exists, but on the ground that the mind of
the signer did not accompany the signature; in other words, that he never intended to
sign, and therefore in contemplation of law never did sign, the contract to which his
name is appended.

In my opinion, the essential features of the doctrine are contained in that passage
and the doctrine does not need any radical transformation. A minor comment is that
the phrase "who for some reason (not implying negligence} forbears to read" is (to
use a currently fashionable word} too "permissive" in its tone. If a person forbears
to read the document, he nearly always should be reckoned as negligent or otherwise
debarred from succeeding on the plea of non est factum. ·
The passage which I have set out from Byles J.'s judgment, though I think it
contains the essential features, was only a brief summary in a leading judgment, and
there are further developments which need to be considered.

Ascertainment of the intention. I think the doctrine of non est factum inevitably
involves applying the subjective rather than the objective test to ascertain the inten -
tion. It takes the intention which a man has in his own mind rather than the intention
which he manifests to others (the intention which as reasonable men they would
infer from his words and conduct}.
There are, however, some cases in which the subjective test of intention can be
applied so as to produce the same result as would be produced by the objective test.
Suppose a man signs a deed without knowing or inquiring or having any positive
belief or formed opinion, as to its nature or effect: he signs it because his solicitor or
other trusted adviser advises him to do so. Then his intention is to sign the deed that
is placed before him, whatever it may be or do. That is the intention in his own mind
as well as the intention which by signing he manifests to others. Examples of this
will be found in Hunter v. Walters (1871), 7 Ch. App. 75; National Provincial Bank of
England v. Jackson (1886), 33 Ch. D. 1; King v. Smith, [1900] 2 Ch. 425. In King v. Smith,
Farwell J., at p. 430, cited and relied upon a passage in the judgment of Mellish L.J.
in Hunter v. Walters (1817), L.R. 7 Ch. App. 75, 88, where he said:
[W]hen a man knows that he is conveying or doing something with his estate, but does
not ask what is the precise effect of the deed, because he is told it is a mere form, and

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has such confidence in his solicitor as to execute the deed in ignorance, then, in my
opinion, a deed so executed, although it may be voi dable upon the ground of fraud, is
not a void deed .

Farwell J. said, [1900] 2 Ch. 425, 430 that Mr. King "had absolute confidence in his
solicitor, and executed any deed relating to his property that Eldred put before him."
I think this principle affords a solution to a problem that was raised in the course
of the argument. Suppose that the very busy managing director of a large company
has a pile of documents to be signed in a few minutes before his next meeting, and
his secretary has arranged them for maximum speed with only the spaces for sig-
nature exposed, and he "signs them blind," as the saying is, not reading them or even
looking at them. He may be exercising a wise economy of his time and energy. There
is the possibility of some extraneous document, involving him in unexpected per-
sonal liability, having been fraudulently inserted in the pile, but this possibility is so
improbable that a reasonable man would disregard it: Bolton v. Stone, [1951] A.C. 850,
858._Such conduct is not negligence in any ordinary sense of the word. But the per-
son who ·signs documents in this way ought to be held bound by them, and ought
not to be entitled to avoid liability so as to shift the burden of loss on to an innocent
third party. The whole object of having documents signed by him is that he makes
them his documents and takes responsibility for them. He takes the chance of a
fraudulent substitution. I think the right view of such a case is that the person who
signs intends to sign the documents placed before him, whatever they may be, and
so there is no basis on which he could successfully plead non est factum.

Negligence. It is clear that by the law as it was laid down in Foster v. /Vlackinnon
(1869), L.R. 4 C.P. 704 a person who had signed a document differing fundamentally
from what he believed it to be would be disentitled from successfully pleading non
est factum if his signing of the document was due to his own negligence. The word
"negligence" in this connection had no special, technical meaning. It meant careless-
ness, and in each case it was a question of fact for the jury to decide whether the
person relying on the plea had been negligent or not. In Foster v. /Vlackinnon the Lord
Chief Justice had told the jury that, if the indorsement was not the defendant's
signature, or if, being his signature, it was obtained upon a fraudulent representation
that it was a guarantee, and the defendant signed it without knowing that it was a
bill, and under the belief that it was a guarantee and if the defendant was not guilty
of any negligence in so signing the paper, the defendant was entitled to the verdict.
On appeal this direction was held to be correct. In Varley v. Cooke (1857), 1 Giffard 230,
236-237, Stuart V.-C. said: "It cannot be said that Cooke's conduct was careless or rash.
He was deceived, as anyone with the ordinary amount of intelligence and caution
would have been deceived, and he is therefore entitled to be relieved." Whatever may
be thought of the merits of the decision in that case, this passage illustrates the simple
approach to the question whether the signer of the deed had been negligent or not.
Similarly, in Lewis v. Clay (1898), 67 L.J.O.B. 224, 225, Lord Russell of Killowen C.J. left
to the jury the question: "Was the defendant, in signing his name as he did, recklessly
careless, and did he thereby enable Lord William Nevill to perpetrate the fraud?"
Unfortunately this·simple and satisfactory view as to the meaning and effect of
negligence in relation to the plea of non est factum became distorted in the case of
Carlisle and Cumberland Banking Co. v. Bragg, [1911] 1 KB. 489 . The defendant was
induced to sign the document by fraud, and did not know that it was a guarantee,
but thought that it was a mere proposal for insurance. The jury found that he had
been negligent. Pickford J . considered that the finding of negligence was immaterial,
and on appeal his view was upheld. Vaughan Williams L.J. said on p. 494:

4 32
 VII. DOCUMENTS MISTAKENLY SIGNED

I do not know whether the jury understood that there could be no material negligence
unless there was a duty on the defendant towards the plaintiff. Even if they did under-
stand that, in my opinion, in the case of this instrument, the signature to which was
obtained by fraud, and which was not a negotiable instrument, Pickford J. was right in
saying that the finding of negligence was immaterial. I wish to add for myself that in my
judgment there is no evidence whatsoever to show that the proximate cause of the
plaintiff's advancing money on this document was the mere signature of it by the
defendant. In my opinion, the proximate cause of the plaintiffs' making the advance was
that Rigg fraudulently took the document to the bank, having fraudulently altered it by
add ing the forged signature of an attesting witness, and but for Rigg having done these
things the plaintiffs would never have advanced the money at all.

The reasoning of the Court of Appeal in Carlisle and Cumberland Banking Co. v.
Bragg has been criticised, for example, by Sir William Anson in the year 1912 in 28
Law Quarterly Review, at p. 190, and by Professor Guest in the year 1963 in 79 Law
Quarterly Review, at p. 346. Also doubts as to the correctness of the reasoning were
expressed by Donovan L.J. delivering the judgment of the Court of Appeal in
/v1uskham Finance Ltd. v. Howard, [1963] 1 O.B. 9-4, 913 and by Gavan Duffy J. in Carlton
and United Breweries Ltd. v. Elliott, [1960] V.R. 320. In my opinion Carlisle and Cum-
berland Banking Co. v. Bragg, [1911] 1 KB. 489 was wrong in the reasoning and the
decision.
I think it i s not right to say that in relation to the plea of non est factum, negligence
operates by way of estoppel. The phrase "estoppel by negligence" tends, in this con-
nection at any rate, to be misleading in several ways:

(1) The phrase is inaccurate in itself, as has been pointed out in Spencer Bower
and Turner on Estoppel by Representation, 2nd ed. (1966), p. 69 and in the
judgments of the Court of Appeal in this case. Estoppel in the normal sense
of the word . does not arise from negligence: it arises from a repre se ntation
made by words or conduct.
(2) The phrase tends to bring in the technicalities of estoppel, and the requirement
that the representation must be intended to be acted upon may cause
difficulties.
(3) The phrase tends to bring in the technicalities of negligence as they have been
developed in the tort of negligence. This is what happened in Carlisle and
Cumberland Banking Co. v. Bragg, as shown by the passage cited above. The
innocent third party who has paid or lent money on the faith of a negligently
signed document should not have to prove the signer owed a duty to him, nor
that the signer's negligence was the proximate cause of the money paid or lent.
(4) An estoppel must be pleaded and proved by the party relyi ng on it. In re latio n
to the plea of non est factum, this could put the burden of proof on the wrong
party. The person who has signed the document knows with what knowledge
or lack of k.nowledge and with what intention he signed the document, and
how he was induced or came to sign it. He should have the burden of proving
that his signature was not brought about by negligence on his part.

Salmon L.J. has said in his judgment in this case [1969] 2 ch. 17, 48: "If, ... a person
signs a document because he negligently failed to read it, I think he is precluded
from relying on his own negligent act for the purpose of escaping from the ordinary
consequences of his signature. In such circumstances he cannot succeed on a plea
of non est factum. This is not in my view a true estoppel, but an illustration of the
principle that no man may take advantage of his own wrong."
I agree.

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The degree of difference required. The judgments in the older cases used a variety
of expressions to signify the degree or kind of difference that, for the purpose of the
plea of non est factum, must be shown to exist between the document as it was and
the document as it was believed to be. More recently there has been a tendency to
draw a firm distinction between (a) a difference in character or class, whkh is suf-
ficient for the purposes of the plea, and (b) a difference only in contents, which is
not sufficient. This distinction has been helpful in some cases, but, as the judgments
of the Court of Appeal have shown, it would produce wrong results if it were applied
as a rigid rule for all cases. In my opinion, one has to use a more general phrase, such
as "fundamentally different" or "radically different" or "totally different."
I would dismiss the appeal.
LORD REID: My Lords, I am in general agreement with the speech of my noble and
learned friend, Lord Pearson. In my opinion this appeal must fail however one states
the law. The existing law seems to me to be in a state of some confusion. I do not
think that it is possible to reconcile all the decisions, let alone all the reasons given
for them. In view of some general observations made in the Court of Appeal I think
that it is desirable to try to extract from the authorities the principles on which most
of them are based. When we are trying to do that my experience has been that there
are dangers in there being only one speech in this House. Then statements i.n it have
often tended to be treated as definitions and it is not the function of a court or of this
House to frame definitions; some latitude should be left for future developments .
The true ratio of a decision generally appears more clearly from a comparison of two
or more statements in different words which are intended to supplement each other.
The plea of non est factum obviously applies when the person sought to be held
liable did not in fact sign the document. But at least since the sixteenth century it
has also been held to apply in certain cases so as to enable a person who in fact
signed a document to say that it is not his deed. Obviously any such extension must
be kept within narrow limits if it is not to shake the confidence of those who habitu -
ally and rightly rely on signatures when there is no obvious reason to doubt their
validity. Originally this extension appears to have been made in favour of those who
were unable to read owing to blindness or illiteracy and who therefore had to trust
someone to tell them what they were signing. I think that it must also apply in favour
of those who are permanently or temporarily unable through no fault of their own
to have without explanation any real understanding of the purport of a particular
document, whether that be from defective education, illness or innate incapacity.
But that does not excuse them from taking such precautions as they reasonably
can. The matter generally arises where an innocent third party has relied on a signed
document in ignorance of the circumstances in which it was signed, and where he
will suffer loss if the maker of the document is allowed to have it declared a nullity.
So there must be a heavy burden of proof on the person who seeks to invoke this
remedy. He must prove all the circumstances necessary to justify its being granted
to him, and that necessarily involves his proving that he took all reasonable precau -
tions in the circumstances. I do not say that the remedy can never be available to a
man of full capacity. But that could only be in very exceptional circumstances;
certainly not where his reason for not scrutinising the document before signing it
was that he was too busy or too lazy. In general I do not think that he can be heard
to say that he signed in reliance on someone he trusted. But, particularly when he
was led to believe that the document which he signed was not one which affected
his legal rights, there may be cases where this plea can properly be applied in favour
of a man of full capacity.

434
 VII. DOCUMENTS MISTAKENLY SIGNED

The plea cannot be available to anyone who was content to sign without taking
the trouble to try to find out at least the general effect of the document. Many people
do frequently sign documents put before them for signature by their solicitor or
other trusted advisers without making any enquiry as to their purpose or effect. But
the essence of the plea non est factum is that the person signing believed that the
document he signed had one character or one effect whereas in fact its character or
effect was quite different. He could not have such a belief unless he had taken steps
or been given information which gave him some grounds for his belief. The amount
of information he must have and the sufficiency of the particularity of his belief must
depend on the circumstances of each case. Further the plea cannot be available to
a person whose mistake was really a mistake as to the legal effect of the document,
whether that was his own mistake or that of his adviser. That has always been the
law and in this branch of the law at least I see no reason for any change.
We find in many of the authorities statements that a man's deed is not his deed
if his mind does not go with his pen. But that is far too wide. It would cover cases
where the man had taken no precautions at all, and there was no ground for his belief
that he was signing something different from that which in fact he signed. I think
that it is the wrong approach to start from that wide statement and then whittle it
down by excluding cases where the remedy will not be granted. It is for the person
who seeks the remedy to show that he should have it.
Finally, there is the question to what extent or in what way must there be a dif-
ference between that which in fact he signed and that which he believed he was
signing. In an endeavour to keep the plea within bounds there have been many
attempts to lay down a dividing line. But any dividing line suggested has been dif-
ficult to apply in practice and has sometimes led to unreasonable results. In particular
I do not think that the modern division between the character and the contents of
a document is at all satisfactory. Some of the older authorities suggest a more flexible
test so that one can take all factors into consideration. There was a period when here
as elsewhere in the law hard and fast dividing lines were sought, but I think that
experience has shown that often they do not produce certainty but do produce
unreasonable results.
I think that in the older authorities difference in practical result was more import-
ant than difference in legal character. If a man thinks that he is signing a document
which will cost him £10 and the actual document would cost him £1,000 it could not
be right to deny him this remedy simply because the legal character of the two was
the same. It is true that we must then deal with questions of degree but that is a
familiar task for the courts and I would not expect it to give rise to a flood of
litigation.
There must I think be a radical difference between what he signed and what he
thought he was signing-or one could use the words "fundamental" or "serious" or
"very substantial." But what amounts to a radical difference will depend on all .the
. circumstances. If he thinks he is giving property to A whereas the document gives
it to B the difference may often be of vital importance, but in the circumstances of
the present case I do not think that it is. I think that it must be left to the courts to
determine in each case in light of all the facts whether there was or was not a suf-
ficiently great difference. The plea non est factum is in a sense illogical when applied
to a case where the man in fact signed the deed. But it is none the worse for that if
applied in a reasonable way.
I would dismiss this appeal.
[Lord Hodson, Lord Wilberforce, and Viscount Dilhorne delivered concurring speeches.]

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MARVCO COLOUR RESEARCH LTD V HARRIS

[1982] 2 SCR 774, 141 DLR (3d) 577

ESTEY J: This is an action for foreclosure on a mortgage (or more accurately, a charge
under the Land Titles Act, R.S .O. 1970, c. 234) securing the sum of $55,650.43 granted
by the respondents to the appellant. The only defence raised in the action was that
of non est factum. The respondents unquestionably executed the charge in favour
of the appellant and it is clear that the appellant has not been guilty of fraud or
improper conduct of any kind and in concurrent findings below has been found to
be, but for non est factum, .fully entitled to the relief requested. The respondents
executed the charge at the r~quest of a third party, Johnston, in connection with the
acquisition by Johnston,of an interest of an associate in a firm owned by Johnston
and the associate. In connection with this acquisition the respondents had advanced
$15,000 in cash raised by them through an earlier mortgage on the same property,
granted by them to the Bank of Montreal. The husband, Dennis Harris, one of the
respondents, had also executed a contract of guarantee in favour of the appellant of
the same principal sum as secured by the mortgage which is the subject of this
action. In this guarantee the appellant, in consideration of the covenants by the
respondent husband and Johnston, released its claims against Suwald, the person
whose interest in the firm was being purchased by Johnston. Prior to the release,
Suwald had been liable to the appellant on a covenant in a chattel mortgage which
had been given by Johnston and Suwald at the time of the purchase of the firm from
the appellant. Apparently on the same day, but after this contract of guarantee was
executed, the respondents signed the mortgage or charge in question, the last para-
graph of which included the following passage typed in a blank space in the form
of charge used by the parties:

This mortgage is given as collateral security for the liability of Dennis Albert Harris under
the terms of a Deed of Covenants bearing even data wherein the said Dennis Albert
Harris and the Mortgagee are (inter alia) parties as co - covenantor and covenantee
respectively. No financial liability on the part of the Mortgagors shall arise hereunder
unless and until there shall be default on the part of the covenantors of the terms of
the said Deed of Covenants and no rights shall accrue to the Mortgagee prior to any
such default. The Mortgagee agrees with the Mortgagors that it will pursue all other
remedies under the Deed of Covenants and Chattel Mortgage referred to therein before
enforcing the security hereby constituted . Discharge of the liabilities arising under the
Deed of Covenants and the said Chattel Mortgage shall rank pro tanto as a discharge
(or partial discharge, as the case may be) of the principal secured hereby. All other terms
and conditions of this Mortgage shall be read and construed accordingly.

The mortgage was in fact, therefore a collateral security grant by the respondents in
favour of the appellant securing the performance by the covenantors, including the
respondent husband, and it was relied upon by the appellant in releasing Suwald
from his obligations under the chattel mortgage.
Johnston was at all material times living with the daughter of the respondents.
The daughter also executed the aforementioned contract of guarantee as trustee
because she had been the trustee under a bill of sale executed by the appellant in
favour of a company owned or controlled by Suwald and Johnston at the time the
appellant sold its business to those individuals or their corporate nominee. The
daughter did not personally guarantee the indebtedness to the appellant. Other than
the association of their daughter with Johnston, the.purchaser of the Suwald interest

436
 VII. DOCUMENTS MISTAKENLY SIGNED

in the firm in question, there appears to be no reason for the participation by the
respondents in the financing of Johnston's purchase of Suwald's interest in the firm.
The mortgage in question was executed by the respondents individually at dif-
ferent times and places on the same date, apparently January 27, 1976. When the
respondent wife signed the document her daughter was present, but the finding is
that in executing the mortgage the respondent wife relied upon the representations
made by Johnston, who was also present, as to the nature and content of the docu-
ment, and did not do so in reliance upon anything said by the daughter. The
respondent husband executed the mortgage later on the same day in the presence
of Johnston upon whose representations he likewise apparently relied. The learned
trial judge stated this about the execution of the mortgage by the respondents [107
DLR (3d) 632 at 634, 27 OR (2d) 686, aff'd 115 DLR (3d) 512nl, 30 OR (2d) 162n (CA)]:
When she [the respondent wife] arrived Johnston said they were to wait for Clay [an
employee in the lawyer's office] who was bringing a paper for her to sign . Clay arrived,
said there was an error in the document, left and returned and presented the document
to the wife. At some point Johnston, perhaps in the presence of Clay, said it was "just
to correct the date" in the Bank of Montreal mortgage. In any event the defendant wife
signed it without reading it. Later that day Johnston and Clay attended upon her hus-
band at home.and got him to sign as well. The husband testified they told him it related
to discrepancies in the date of the Bank of Montreal mortgage. He signed without
question and without reading . ...
There is also no doubt that the defendants were careless in not reading the document
before signing . The wife is well educated, the husband less so, but both are literate and
English-speaking and both have a basic understanding of mortgages, having executed
at least three others since the purchase of their home. It is the undisputed evidence,
however, that they were told it was an unimportant amendment to the Bank of Montreal
mortgage when in reality it was a second substantial mortgage to the plaintiff.
The mortgage in favour of the Bank of Montreal has been paid off and the only
issue arising on this appeal, concerns the mortgage which is the subject of the action,
and in that connection this issue was put by the appellant:
Is the d1"fence of non est factum available to a party who, knowing that a document
has legal effect, carelessly fails to read the document thereby permitting a third party
to perpetrate a fraud on another innocent party?
This issue turns on the decision of this Court in Prudential Trust Co. Ltd. v. Cugnet et
al. (1956), 5 D.L.R. (2d) 1, [1956] S.C.R. 914, a four-to-one decision. The majority,
applying the decision of the English Court of Appeal in Carlisle & Cumberland Banking
Co. v. Bragg, [1911] 1 KB. 489 found that where a document was executed as a result
of a misrepresentation as to its nature and character and not merely its contents the
defendant was entitled to raise the plea of non est factum on the basis that his mind
at the time of the execution of the document did not follow his hand. In such a cir-
cumstance, the document was void ab initio. So went the judgment of Nolan J. with
whom Justices Taschereau and Fauteux, as they then were, concurred. Locke J.
reached the same result, but added the following comment on the effect of careless
conduct on the ability of the defendant to raise the plea of non est factum (at p. 4
D.L.R., p. 9_?9 S.C.R.):
It is my opinion that the result of the authorities was correctly stated in the Bragg's case.
To say that a person may be estopped by careless conduct such as that in the present
case, when the instrument is not negotiable, is to assert the existence of some duty on

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the part of the person owing to the public at large, or to other persons unknown to him
who might suffer damage by acting upon the instrument on the footing that it is valid
in the hands of the holder. I do not consider that the authorities support the view that
there is any such general duty, the breach of which imposes a liability in negligence.
Cartwright J., as he then was, dissented. His Lordship commenced with a recitation
of the general proprieties (at p. 7 D.L.R., p. 932 S.C.R.):
... [G]enerally speaking, a person who executes a document without taking the trouble
to read it is liable on it and cannot plead that he mistook its contents, at all events, as
against a person who acting in good faith in the ordinary course of business has changed
his position in reliance on such document
and then moved to the exception arising under the principle of non est factum. After
making reference to Carlisle v. Bragg, supra. His Lordship said (at p. 9 D.L.R., p . 934
S.C.R.):
An anxious consideration of all the authorities referred to by counsel and the Courts
below has brought me to the conclusion that, insofar as Carlisle v. Bragg decides that
the rule that negligence excludes a plea of non est factum is limited to the case of
negotiable instruments and does not extend to a deed such as the one before us, we
should refuse to follow it.
He concluded, therefore, that any person who fails to exercise reasonable care in
signing a document is precluded from relying on the plea of non est factum as
against a person who relies upon that document in good faith and for value.
As the basis for the judgments of Justice Nolan, concurred in by two other mem-
bers of the court, and of Justice Locke was the judgment of the Court of Appeal of
England in Carlisle v. Bragg, supra, it should be pointed out at once that that case has
been overruled by the House of Lords in Saunders v. Anglia Building Society (reported
in the Court of Appeal as Ga/lie v. Lee, [1969] 2 Ch. 17, [1969] 1 All E.R. 1062, [1969] 2
W.L.R. 901, sub nom. Gal/ie v. Lee), [1971] AC. 1004, per Lord Pearson at p. 1038, per
Lord Wilberforce at p. 1027, per Viscount Dilhome at p. 1023, and per Lord Hodson
at p. 1019. Lord Reid stated (at p . 1015) : "I am in general agreement witQ the speech
of my noble and learned friend, Lord Pearson."
The doctrine of non est factum sprang into prominence with the judgment in
Foster v. /vlackinnon (1869), L.R. 4 C.P. 704. At trial in that case the jury was directed
that if the defendant's signature on the document in question "was obtained upon
a fraudulent representation that it was a guarantee and that the defendant signed it
without knowing that it was a bill, and under the belief that it was a guarantee, and
if the defendant was not guilty of any negligence in so signing the paper, he was
entitled to the verdict." On appeal, the Court of Common Pleas endorsed the direction
of the trial judge, and held that (at p . 712):
.. . [l]n the case now under consideration, the defendant, according to the evidence, if
believed, and the finding of the jury, never intended to indorse a bill of exchange at all,
but intended to sign a contract of an entirely different nature. It was not his design, and,
if he were guilty of no negligence, it was not even his fault that the instrument he signed
turned out to be a bill of exchange.
In Foster v. /vlackinnon a distinction is drawn between negotiable instruments and
other documents. A qualification of the general rule was felt to be necessary when
applied to negotiable instruments in order to protect innocent transferees for value.
As a result, the court concluded that where "the party signing knows what he is
doing: the indorser intended to indorse, and the acceptor intended to accept, a bill

438
 VII. DOCUMENTS MISTAKENLY SIGNED

of exchange," the party signing the document cannot deny its validity against a
holder in due course whether or not he was negligent in affixing his signature. This
rule was said to be a limitation on the general principle of non est factum established
in earlier cases under which the signor, in order to deny successfully his signature,
had to show that he had not been careless in executing the document. This general
rule was applicable to deeds, and "equally applicable to other written contracts" (at
p. 712).
Following the decision in Foster v. Mackinnon, and prior to the decision of the
Court of Appeal in Carlisle v. Bragg, it is clear that the presence or absence of negli-
gence on the part of the defendant was a critical factor in determining his ability to
raise successfully the plea of non est factum. The rule as stated in two of the leading
textbooks of the day was as follows:
So a man may avoid a deed or other instrument, which he was induced to execute by
a fraudulent misrepresentation of its contents, as was held in Foster v. Mackinnon .
And if the party who executes an instrument in such circumstances has not been
guilty of negligence in so doing, he may avoid it, not only against him who made the
fraudulent misrepresentation, but as against a third party who has acted innocently, on
the faith of the instrument being genuine.
(Chitty on Contracts, 15th ed. (1909), at pp. 673-74)

Mistake as to the nature of the transaction entered into ... must arise from some deceit
which ordinary diligence could not penetrate, or some mischance which ordinary dili-
gence could nc;it avert.
(Anson, Law of Contracts, 12th ed. (1910), at pp. 151-52)
Only one exception to this rule was recognized: if the document signed was a bill
of exchange and the signor intended to sign a bill of exchange, he could not suc-
cessfully plead non est factum, even though he had not been negligent.
Almost a half a century after the decision in Foster v. Mackinnon, supra, the Court
of Appeal in Carlisle v. Bragg, supra, substantially modified the law in the United
Kingdom with reference to the plea of non est factum. In that case the court allowed
the plea to be entered by a defendant who had executed a guarantee believing it to
be a document of a different character, and went on to hold that the defendant was
not estopped from raising the plea even though it was the negligence of the defend-
ant which led to the loss in question. The jury indeed had found the defendant to be
negligent in signing the document. The Court of Appeal concluded that any doctrine
which limited the application of the plea where the defendant was negligent was
confined to negotiable instruments.
The decision of the Court of Appeal in Carlisle v. Bragg may be summarized as
follows:
(1) Foster v. Mackinnon applies only to bills of exchange.
(2) Negligence on the part of the signor is therefore relevant only to bills of
exchange.
(3) Negligence is used in the tortious sense. and therefore, only when a duty of
care exists in the signor and his act is the proximate cause of the loss by the
third party, can it be a bar to a successful plea of non est factum.
(4) n all other cases negligence is irrelevant, and non est factum may be pleaded
where the document signed is of a different nature from that which the signor
intended to execute: vide Chitty on Contracts, 18th ed. (1930), at p. 803, and
Anson, Law of Contracts, 14th ed. (1917), at p. 164.

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Carlisle v. Bragg has attracted unfavourable comment in legal writings and the
following is an example of the criticisms of the judgment written shortly after its
issuance:

A man who signs a document which he has not taken the trouble to read, who makes
therein a promise on which other persons may act to their detriment, and who is found
by a jury to have acted without reasonable ca re, is not liable for the consequences of
his act to the party who has suffered by reliance on his promise, unless the document,
the nature and contents of which he has neglected to ascertain, should chance to be
a negotia.ble instrument; or unless the promisee, whose identity he has also neglected
to ascertain, should chance to be a person to whom he owes a duty to take care. Such
is the decision of the Court of Appeal in Carlisle and Cumberland Banking Co. v. Bragg,
[19i1] 1 K.B. 489, 80 L.JKB . 472 .
Shortly stated, the Court was asked to say which of two innocent parties should
suffer for the fraud of a third, and the Lords Justices decided in favour of the man whose
admitted negligence was the cause of the trouble.

(Anson, Carlisle and Cumberland Banking Co. v. Bragg, 28 L.O.R. 190 (1912) at p. 190.)
Although the decision in Carlisle v. Bragg was the subject of much criticism, it was
adopted by the majority of this court in Prudential Trust Co. Ltd. v. Cugnet, supra . ...
It was not u n til Saunders v. Anglia Building Society, supra, that the law was put back
to the position which it was in after Foster v. Mackinnon. It is interesting to note that
in doing so all the judges dealt with the meaning of the word negligence as employed
by the court in Foster v. Mackinnon as meaning "carelessness" in the same way that
Cartwright J. did in Prudential, supra. Thus the rule with reference to non est factum
in the United Kingdom requires that the defenda-Dt be not guilty of carelessness in
order to be entitled to raise the defence of non est factum.
It is not necessary for us to concern ourselves with the second leg of Saunders v.
Anglia, namely, those circumstances in which a defendant who has not been guilty
of negligence may raise the defence of non est factum. Here the respondents, by
concurrent findings below, were found to be negligent or careless. I do note in pass-
ing, however, that it was the consensus of the several members of the House of Lords
participating in the Saunders case that for the principle to operate, the document
must be fundamentally different, either as to content, character or otherwise from
the document that the signor intended to execute. Prior to this decision the plea of
non est factum was available only if the mistake was as to the very nature or character
of the transaction. It was not sufficient that there be a mistake as to the contents of
the document: Howatson v. Webb, [1907} 1 Ch. 537, affirmed [1908} 1Ch.1; /V1uskham
Finance Ltd. v. Howard, [1963} 1 O.B. 904. This distinction was rejected by the House
of Lords in favour of a more flexible test. In the words of Lord Pearson (at p. 1039):
"In my opinion, one. has to use a m bre general phrase, such as 'fundamentally dif-
ferent' or 'radically different' or 'totally different.'" Lord Wilberforce at pp. 1026-7
concluded that the principle would come into play on "rare occasions.'' ...
In my view, with all due respect to those who have expressed views to the contrary,
the dissenting view of Cartwright J. (as he then was) in Prudential, supra, correctly
enunciated the principles of the law of non est factum . In the result the defendants-
respondents are barred by reasons of their carelessness from pleading that their minds
did not follow their hands when executing the mortgage so as to be able to plead that
the mortgage is not binding upon them . The rationale of the rule is simple and clear.
As between an innocent party (the appellant) and the respondents, the law must take
into account the fact that the appellant was completely innocent of any negligence,
carelessness or wrongdoing, whereas the respondents by their careless conduc~ have

440
 VII. DOCUMENTS MISTA KENLY SIGNED

made it possible for the wrongdoers to infJict a loss. As between the appellant and
the respondents, simple justice requires that the party, who by the application of
reasonable care was in a position to avoid a loss to any of the parties, should bear
any loss that results when the only alternative available to the courts would be to
place the loss upon the innocent appellant. In the final analysis, therefore, the ques-
tion raised cannot be put more aptly than in the words of Cartwright J. in Prudential,
supra, at p. 5 D.L.R., p. 929 S.C.R.: "... [W]hich of two innocent parties is to suffer for
the fraud of a third." The two parties are innocent in the sense that they were not
guilty of wrongdoing as agai.nst any other person, but as between the two innocent
parties there remains a distinction significant in the law, namely that the respond-
ents, by their carelessness, have exposed the innocent appellant to risk of loss, and
even though no duty in law was owed by the respondents to the appellant to safe-
guard the appellant from such loss, nonetheless the law must take this discarded
opportunity info account.
In my view, this is so for the compelling reason that in this case, and no doubt
generally in similar cases, the respondents' carelessness is but another description
of a state of mind into which the respondents have fallen because of their determin -
ation to assist themselves and/or a third party for whom the transaction has been
entered into in the first place. Here the respondents apparently sought to attain some
advantage indirectly for their daughter by assisting Johnston in his commercial ven-
ture. In the Saunders case, supra, the aunt set out to apply her property for the benefit
of her nephew. In both cases the carelessness took the form of a failure to determine
the nature of the document the respective defendants were executing. Whether the
carelessness stemmed from an enthusiasm for their immediate purpose or from a
confidence in the intended beneficiary to save them harmless matters not. This may
explain the origin of the careless state of mind but is not a factor limiting the operation
of the principle of non est factum and its application. The defendants, in executing
the security without the simple precaution of ascertaining its nature in fact and in
law, have nonetheless taken an intended and deliberate step in signing the document
and have caused it to be legally binding upon themselves. In the words of Foster v.
Mackinnon this negligence, even though it may have sprung from good intentions,
precludes the defendants in this circumstance from disowning the document, that
is to say, from pleading that their minds did not follow their respective hands when
signing the document and hence that no document in law was executed by them.
This principle of law is based not only upon the principle of placing the loss on
the person guilty of carelessness but also upon a recognition of the need for certainty
and security in commerce . ... The appellant, as it was entitled to do, accepted the
mortgage as valid, and adjusted its affairs accordingly. For example, the appellant
released Suwald from the chattel mortgage held by the appellant.
I wish only to add that the application of the principle that carelessness will dis-
entitle a party to the document of the right to disown the document in law must
depend upon the circumstances of each case. This has been said throughout the
judgments written on the principle of non est factum from the earliest times. The
magnitude, and extent of the carelessness, the circumstances which may have
contributed to such carelessness, and all other circumstances must be taken into
account in each case before a court may determine whether estoppel shall arise in
the defendant so as to prevent the raising of this defence. The policy considerations
inherent in the plea of non est factum were well stated by Lord Wilberforce in his
judgment in Saunders, supra, at pp. 1023 -4:
... [T)he law ... has two conflicting objectives: relief to a signer whose consent is genu-
inely lacking ... [and) protection to innocent third parties who have acted upon an

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CHAPTER 4 CONTRACTS AND THIRD PARTIES

apparently regular and properly executed document. Because each of these factors
may involve questions of degree or shading any rule of law must represent a comprom -
ise and must allow to the court some flexibility in application.
The result in this case has depended upon the intervention by this court in the
development of the principle of non est factum and its invocation in a way inconsis-
tent with that applied many years ago in the Prudential case, supra. The respondents
have pleaded their case in the courts below and in this court consistent with the
result in the Prudential judgment. In these circumstances consideration can and
should be given to the application of the general principle that costs follow the event.
The appellant, of course, was required to persevere to the level of this court in order
to bring about a review of the reasoning which led to the determination in the
Prudential case. The respondents, on the other hand, acted reasonably in founding
their position upon that decision notwithstanding the revision of the law of England
consequent upon the judgments in Saunders. In all these circumstances, therefore,
I would award to the appellant costs only before the court of first instance with no
costs being awarded either party in the Court of Appeal or in this court.
Appeal allowed.

[See also McCamus at 548-56; MacDougall at 240-42; Waddams at paras 307-14.]

442
 CHAPTER FIVE

WRITTEN DOCUMENTS

I. Unsigned Documents {The Ticket Cases) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443

II. Parol Evidence Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
Ill. Rectification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491

I. UNSIGNED DOCUMENTS (THE TICKET CASES)

PARKER V THE SOUTH EASTERN RAILWAY COMPANY

(1877), 2 CPD 416 (CA)

The plaintiff deposited a bag in a cloak-room at the defendants' railway station, paid
the clerk 2d., and received a paper ticket, on one side of which were written a number
and a date, and were printed notices as to when the office would be opened and
closed, and the words "See Back." 9n the other side were printed several clauses
relating to articles left by passengers, the last of which was, "The company will not
be responsible for any package exceeding the value of £10 ." The plaintiff on the same
day presented his ticket and demanded his bag, and the bag could not be found, and
has not been since found. Parker claimed £24 10s. as the value of his bag. The com -
pany pleaded that they had accepted the goods on the condition that they would
not be responsible for the value if it exceeded £10; and at the trial they relied on the
words printed on the back of the ticket, and also on the fact that a notice to the same
effect was printed and hung up in the cloak-room. The plaintiff gave evidence and
denied that he had seen the notice, or read what was printed on the ticket. He admit-
ted that he had often received such tickets and knew there was printed matter on
them, but said that he did not know what it was. He said that he imagined the ticket
to be a receipt for the money paid by him. Another case with very similar facts was
tried at the same time.
Parker's case was tried at Westminster on the 27th of February, 1876, before Pollock
B. The questions left by the judge to the jury were: 1. Did the plaintiff read or was he
aware of the special condition upon which the articles were deposited' 2. Was the
plaintiff, under the circumstances, under any obligation, in the exercise of reasonable
and proper caution, to read or make himself aware of the condition?
The jury answered both questions in the negative, and the judge thereupon dir-
ected judgment to be entered for the plaintiff for the amount claimed, reserving leave
to the defendants to move to enter judgment for them.

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CHAPTER 5 WRITTEN DOCUMENTS

The defendants moved to enter judgment, and also obtained from the Common
Pleas Division an order nisi for a new trial, on the ground of misdirection. The order
was discharged, and the motion was refused by the Common Pleas Division. The
Defendants appealed.
MELLISH LJ: In this case we have to consider whether a person who deposits in the
cloak7room of a railway company articles which are lost through the carelessness
of the company's servants is prevented from recovering, by a condition on the back
of the ticket, that the company would not be liable for the loss of goods exceeding
the value of £10 . It was argued on behalf of the railway company that the company's
servants were only authorized to receive goods on behalf of tt:ie company upon the
terms contained in the ticket. ... I am of opinion that this objection cannot prevail. It
is clear that the company's servants did not exceed the authority given them by the
company. They did the exact thing they were authorized to do. They were authorized
to receive articles on deposit as bailees on behalf of the company, charging 2d. for
each article, and delivering a ticket properly filled up to the person leaving the article.
This is exactly what they did in the present cases, and whatever may be the legal
effect of what was done, the company must, in my opinion, be bound by it. The
directors may have thought, and no doubt did think, that delivering the ticket to the
person depositing the article would be sufficient to make him bound by the condi-
tions contained in the ticket, and if they were mistaken in that, the company must
bear the consequences.
The question then is, whether the plaintiff was bound by the conditions contained
in the ticket. In an ordinary case, where an action is brought on a written agreement
which is signed by the defendant, the agreement is proved by proving his signature,
and, in the absence of fraud, it is wholly immaterial that he has not read the agreement
and does not know its contents. The parties may, however, reduce their agreement into
writing, so that the writing constitutes the sole evidence of the agreement, without
signing it; but in that case there must be evidence independently of the agreement
itself to prove that the defendant has assented to it. In that case, also, if it is proved
that the defendant has assented to the writing constituting the agreement between
the parties, it is, in the absence of fraud, immaterial that the defendant had not read
the agreement and did not know its contents. Now if in the course of making a
contract one party delivers to another a paper containing writing, and the party
receiving the paper knows that the paper contains conditions which the party
delivering it intends to constitute the contract, I have no doubt that the party receiv-
ing the paper does, by receiving and keeping it, assent to the conditions contained
in it, although he does not read them, and does not know what they are. I hold
therefore that the case of Harris v. Great Western Ry. Co. (1876), 1 Q.B.D. 515, was rightly
decided, because in that case the plaintiff admitted, on cross-examination, that he
believed there were some conditions on the ticket. On the other hand, the case of
Henderson v. Stevenson (1875), L.R. 2 Sc. & Div. 470, is a conclusive authority that if
the person receiving the ticket does not know that there is any writing upon the back
of the ticket, he is not bound by a condition printed on the back. The facts in the
cases before us differ from those in both Henderson v. Stevenson, and Harris v. Great
Western Ry. Co. because in both the cases which have been argued before us, though
the plaintiffs admitted that they knew there was writing on the back of the ticket,
they swore not only that they did not read it, but that they did not know or believe
that the w riting contained conditions, and we are to consider whether, under those
circumstances, we can lay down as a matter of law either that the plaintiff is bound
or that he is not bound by the conditions contained in the ticket, or whether his

444
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

being bound depends on some question of fact to be determined by the jury, and if
so, whether, in the present case, the right question was left to the jury.
Now, I am of opinion that we cannot lay down, as a matter of law, either that the
plaintiff was bound or that he was no.t bound by the conditions printed on the ticket,
from the mere fact that he knew there was writing on the ticket, but did not know
that the writing contained conditions. I think there may be cases in which a paper
containing writing is delivered by one party to another in the course of a business
transaction, where it would be quite reasonable that the party'receiving it should
assume that the writing contained in it no condition, and should put it in his pocket
unread. For instance, if a person driving through a turnpike gate received a ticket
upon paying the toll, he might reas.onably assume that the object of the ticket was
that by producing it he might be free from paying toll at some other turnpike gate,
and might put it in his pocket unread. On the other hand, if a person who ships goods
to be carried on a voyage by sea receives a bill of lading signed by the master, he
would plainly be bound by it, although afterwards in an action against the shipowner
for the loss of the goods, he might swear that he had never read the bill of lading,
and that he did not know that it contained the terms of the contract of carriage, and
that the shipowner was protected by the exceptions contained in it. Now the reason
why the person receiving the bill of lading would be bound seems to me to be that
in the great majority of cases persons shipping goods do know that the bill of lading
contains the terms of the contract of carriage; and the shipowner, or the master
delivering the bill of lading, is entitled to assume that the person shipping goods has
that knowledge. It is, however, quite possible to suppose.that a person who is neither
a man of business nor a lawyer might on some particular occasion ship goods
without the least knowledge of what a bill of lading was, but in my opinion such
person must bear the consequences of his own exceptional ignorance, it being
plainly impossible that business could be carried on if every person who delivers a
bill of lading had to stop to explain what a bill of lading was.
Now the question we have to consider is whether the railway company were
entitled to assume that a person depositing luggage, and receiving a ticket in such
a way that he could see that some writing was printed on it, would understand that
the writing contained the conditions of contract, and this seems to me to depend
upon whether people in general would in fact and naturally, draw that inference.
The railway company, as it seems to me, must be entitled to make some assumptions
respecting the person who deposits luggage with them: I think they are entitled to
assume that he can read, and that he understands the English language, and that he
pays such attention to what he is about as may be reasonably expected from a person
in such a transaction as that of depositing luggage in a cloak-room. The railway
company must, however, take mankind as they find them, and if what they do is
sufficient to inform people in general that the ticket contains conditions, I think that
a particular plaintiff ought not to be in a better position than other persons on account
of his exceptional ignorance or stupidity or carelessness. But if what the railway com -
pany do is not sufficient to convey to the minds of people in general that the ticket
contains conditions, then they have received goods on deposit without obtaining
the consent of the persons depositing them to the conditions limiting their liability.
I am of opinion, therefore, that the proper direction to leave to the jury in these cases
is, that if the person receiving the ticket did not see or know that there was any writing
on the ticket he is not bound by the conditions; that if he knew there was writing, and
knew or believed that the writing contained conditions, then he is bound by the
conditions; that if he knew there was writing on the ticket, but did not know or
believe that the writing contained conditions, nevertheless he would be bound, if

445
CHAPTER 5 WRITTEN DOCUMENTS

the delivering of the ticket to him in such a manner that he could see there was
writing upon it, was, in the opinion of the jury, reasonable notice that the writing
contained conditions.
I have lastly to consider whether the direction of the learned judge was correct,
. namely, "Was the plaintiff under the circumstances, under any obligation, in the exer-
cise of reasonable and proper caution, to read and to make himself aware of the
condition?" I think that this direction was not strictly accurate, and was calculated to
mislead the jury. The plaintiff was certainly under no obligation to read the ticket, but
was entitled to ~eave it unread if he pleased, and the question does not appear to me to
direct the attention of the jury to the real question, namely, whether the railway com-
pany did what was reasonably sufficient to give the plaintiff notice of the condition.
On the whole, I am of opinion that there ought to be a new trial.
BRAMWELL LJ: ... Has not the giver of the paper a right to suppose that the receiver
is content to deal on the terms in the paper? What more can be done? Must he say,
"Read that?" As I have said, he does so in effect when he puts it into the other's hands.
The truth is, people are content to take these things on trust. They know that there
is a form which is always used-they are satisfied it is not unreasonable, because
people do not usually put unreasonable terms into their contracts. If they did, then
dealing would soon be stopped. Besides, unreasonable practices would be known.
The very fact of not looking at the paper shews that this confidence exists. It is asked :
What if there was some unreasonable condition, as for instance to forfeit £1000 if
the goods were not removed in forty-eight hours? Would the depositors be bound?
I might continue myself by asking: Would he be, if he were told, "our conditions are
on this ticket," and he did not read them. In my judgment, he would not be bound
in either case. I think there is an implied understanding that there is no condition
unreasonable to the knowledge of the party tendering the document and not insist-
ing on its being read-no condition not relevant to the matter in hand. I am of
opinion, therefore, that the plaintiffs, having notice of the printing, were in the same
situation as though the porter had said, "Read that, it concerns the matter in hand":
that if the plaintiffs did not read it, they were as much bound as if they had read it
and had not objected.
The difficulty I feel as to what I have written is that it is too demonstrative . But,
put in practical language, it is th.is: The defendants put into the hands of the plaintiff
a paper with printed matter on it, which in an good sense and reason must be sup-
posed to relate to the matter in hand. This printed matter the plaintiff sees, and must
either read it, and object if he does not agree to it, or if he does read it and not object,
or does not read it, he must be held to consent to its terms; therefore, on the facts,
the judges should have directed verdicts for the defendants.
[The opinion of Bramwell LJ has been severely cut and the opinion of Baggallay LJ
omitted altogether. The court ordered a new trial.)

Lamont v Canadian Transfer Co Ltd. (1909), 19 OLR 291 (CA) . The plaintiff, having
arrived in Toronto by steamer, handed his baggage checks to his father-in-law in
order that his trunks might be sent to his residence. The father -in-law gave the
checks to a friend of his, one Horn, a customs officer, and asked him to have the
trunks delivered. Horn took the checks and handed them, together with 25¢, to Dunn,
an agent of the Canadian Transfer Co., with .instructions to send along the trunks.
Dunn offered to do it without charge, but Horn refused, saying that he had been
given the 25¢. The agent then removed the steamer checks and replaced them by

446
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

checks of the Can. Transfer Co. Fifteen minutes later Horn came back to Dunn and
asked him for a receipt, which, without being read, was later passed on to the plaintiff,
and not read by the latter until some ten days afterwards. On the face of the receipt,
there was legibly printed a notice that the company should "not be liable for any loss
or damage of any trunk for over $50." The trunk was either lost or stolen and the
plaintiff sued the company for the value of his trunk, refusing to accept the $50
tendered by the defendants. Held, for the plaintiff. GARROW JA: [T]he real question
is, ought knowledge to be imputed to him under the circumstances? This is a pure
question of fact, and, in my opinion, the reasonable inference is the other way. He
had already made an unconditional contract after having been offered free cartage.
He came back, not to get a new or different contract, but a mere receipt. That was
what he asked for, and he might under the circumstances fairly and without negli -
gence assume without reading it that he was merely getting what he had asked for
and nothing more. If he had not come back no question could have been raised as
to the defendants' liability, and the burden is of course upon them to shew that the
new contract was substituted, with the plaintiff's consent, for the old, and in this
they, in my opinion, fail.

Chapelton v Barry Urban District Council. [1940] 1 KB 532 (CA). The plaintiff was
injured when using a deck chair supplied for public use by the defendant Council.
When he took the chair from the attendant he was handed a ticket. He glanced at it
and slipped it into his pocket. He claimed to have no idea that there were conditions
on it. In fact, the ticket contained these words: "Available for 3 hours. Time expires
where indicated by cut-off and should be retained and shown on request. The
Council will not be made liable for any accident or damage arising from hire of chair."
Near the pile of chairs was a notice: "Barry Urban District Council. Cold Knap. hire
of chairs 2d. per session of 3 hours. The public are respectfully requested to obtain
tickets properly issued from the automatic punch in their presence from the Chair
Attendants." The county court judge found the damages to be £50 in addition to
special damages, but held the plaintiff bound by the notice on the ticket. The Court
of Appeal reversed him. SLESSER LJ : The very language of that "respectful request"
shows clearly, to my mind, that for the convenience of the local authority the public
were asked to obtain from the chair attendants tickets, which were mere vouchers
or receipts showing how long a person hiring a chair is entitled to use that chair. It
is wrong, I think, to look at the circumstance that the plaintiff obtained his receipt
at the same time as he took his chair as being in any way a modification of the
contract which I have indicated. This was a general offer to the general public, and
I think that it is right to say that one must take into account here that there was no
reason why anybody taking one of these chairs should necessarily obtain a receipt
at the moment he took his chair-and, indeed, the notice is inconsistent with that,
because it "respectfully requests" the public to obtain receipts for their money. It may
be that somebody might sit in one of these chairs for one hour, or two hours, or, if
the holiday resort was a very popular one, for a longer time, before the attendant
came round for his money, or it may be that the attendant would not come to him
at all for payment for the chair, in which case I take it that there would be an obliga -
tion upon the person who u sed the chair to search out the attendant, like a debtor
searching for his creditor, in order to pay him the sum of 2d. for the use of the chair
and to obtain a receipt for the 2d. paid.
I think the learned county court judge has misunderstood the nature of this
agreement. I do not think that the notice excluding liability was a term of the contract

447
CHAPTER 5 WRITTEN DOCUMENTS

at all .... I think the object of the giving and the taking of this ticket was that the person
taking it might have evidence at hand by which he could show that the obligation
he was under to pay 2d. for the use of the chair for three hours had been duly dis-
charged, and I think it is altogether inconsistent, in the absence of any qualification
of liability in the notice put up near the pile of chairs, to attempt to read into it the
qualification contended for. In my opinion, this ticket is no more than a receipt, and
is quite different from a railway ticket which contains upon it the terms upon which
a railway company agrees to carry the passenger.

Olley v Marlborough Court Ltd. [1949] 1 KB 532 (CA). A man and his wife checked
into a hotel, and paid a week's board and lodging in advance . They then went up to
their room, where a notice was displayed as follows: "The proprietors will not hold
themselves responsible for articles lost or stolen, unless handed to the manageress
for safe custody in a sealed package and a receipt obtained." The wife's furs were
stolen from her room because of the negligence of the hotel's servants, who gave the
key to an unauthorized person. It was held by the majority of the court that the notice
was seen by the plaintiffs too late for it to be a part of their contract with the hotel.
DENNING LJ: The first question is whether that notice formed part of the contract.
Now people who rely on a contract to exempt themselves from their common law
liability must prove that contract strictly. Not only must the terms of the contract be
clearly proved, but also the intention to create legal relations-the intention to be
legally bound-must also be clearly proved. The best way of proving it is by a written
document signed by the party to be bound. Another way is by handing him before
or at the time of the contract a written notice specifying its terms and making it clear
to him that the contract is on those terms. A prominent public notice which is plain
for him to see when he makes the contract or an .express oral stipulation would, no .
doubt, have the same effect. But nothing short of one of these three ways will suffice.
It has been held that mere notices put on receipts for money do not make a contract
(see Chapelton v. Barry Urban District Council). So, also, in my opinion, notices put up
in bedrooms do not of themselves make a contract. As a rule, the guest does not see
them until after he has been accepted as a guest. The hotel company no doubt hope
that the guest will be held bound by them, but the hope is vain unless they clearly
show that he agreed to be bound by them, which is rarely the case. ·

J Spurling Ltd v Bradshaw. [1956] 2 AU ER 121. The plaintiffs were warehousemen,

and the defendant, who had had previous dealings with the plaintiffs, delivered to
them for storage eight barrels of.orange juice. A few days later the plaintiffs sent to
the defendant a document, called a landing account, acknowledging receipt of the
goods, and referring to conditions on the back of the document. On the back, in small
print, was included the following clause: "We will not in any circumstances ... be liable
for any loss, damage or detention howsoever, whensoever or wheresoever occasioned
in respect of any goods entrusted to ... us in the course of our business, even when
such loss, damage or detention may have been occasioned by the negligence, wrong-
ful act or default of ourselves or our servants or agents." When the defendant came
to collect the barrels, they were found to be empty, and the defendant refused to pay
the storage charges on the ground that the plaintiff had been negligent in storing the
goods. The plaintiff brought an action, relying on the printed exemption clause. The
court held that the plaintiff could rely on the clause. DENNING LJ: This brings me to
the question whether this clause was part of the contract. Counsel for the defendant

448
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

urged us to hold that the plaintiffs did not do what was reasonably sufficient to give
notice of the conditions within Parker v. South Eastern Ry. Co. I agree that the more
unreasonable a clause is, the greater the notice which must be given of it. Some
clauses which I have seen would need to be printed in red ink on the face of the
document with a red hand pointing to it before the notice could be held to be suffi -
cient. The clause in this case, however, in my judgment, does not call for such
exceptional treatment, especially when it is construed, as it should be, subject to the
proviso that it only applies when the warehouseman is carrying out his contract and
not when he is deviating from it or breaking it in a radical respect. So construed, the
judge was, I think, entitled to find that sufficient notice was given. It is to be noticed
that the landing account on its face told the defendant that the goods would be
insured if he gave instructions; otherwise they were not insured. The invoice, on its
face, told him they were warehoused "at owner's risk." The printed conditions, when
read subject to the proviso which I have mentioned, added little or nothing to those
explicit statements taken together. Next it was said that the landing account and
invoice were issued after the goods had been received and could not therefore be
part of the contract of bailment: but the defendant admitted that he had received
many landing accounts before. True heh.a d not troubled to read them. On receiving
this account, he took no objection to it, left the goods there, and went on paying the
warehouse rent for months afterwards. It seems to me that by the course of business
and conduct of the parties, these conditions were part of the contract.

QUESTION
Is it relevant to ask who, as between plaintiff and defendant, could more efficiently insure
against the loss of the goods?

MCCUTCHEON V DAVID MACBRAYNE LTD

[1964] 1 All .ER 430 (HL)

LORD DEVLIN: My Lords, when a person in the Isle of Islay wishes to send goods to the
mainland he goes into the office of MacBrayne (the respondents) in Port Askaig which
is conveniently combined with the local Post Office. There he is presented with a
document headed "Conditions" containing three or four thousand words of small
print divided into twenty-seven paragraphs. Beneath them there is a space for the
sender's signature which h~ puts below his statement in quite legible print that he
thereby agrees to ship on the conditions stated above. The appellant, Mr. Mccutcheon,
described the negotiations which preceded the making of this formidable contract
in the following terms:
0.-Tell us about that document; how did you come to sign it? A.-You just walk in the
office and the document is filled up ready and all you have to do is to sign your name
and go out. 0 .-Did you ever read the conditions? A.-No. 0 .-Did you know what
was in them? A.-No.
There are many other passages in which the appellant and his brother-in-law,
Mr. McSporran, endeavour more or less successfully to appease the forensic aston-
ishment aroused by this statement. People shipping calves, the appellant said (he
was dealing with an occasion when he had shipped thirty-six calves), had not much
time to give to the reading. Asked to deal with another occasion when he was

449
CHAPTER 5 WRITTEN DOCUMENTS

unhampered by livestock, he said that people generally just tried to be in time for
the boat's sailing; it would, he thought, take half a day to read and understand the
conditions and then he would miss the boat. In another part of his evidence he went
so far as to say that if everybody took time to read the document, "MacBrayne's office
would be packed out the door." Mr. McSporran evidently thought the whole matter
rather academic because, as he pointed out, there was no other way to send a car.
There came a day, Oct. 8, 1960, when one of the respondents'. vessels was negli-
gently sailed into a rock and sank. She had on board a car belonging to the appellant,
which he had got Mr. McSporran to ship for him, and the car was a total loss . It would
be a strangely generous set of conditions in which the persistent reader, after wading
through the verbiage, could not find something to protect the carrier against "any
loss ... wheresoever or whensoever occurring"; and condition 19 by itself is enough to
absolve the respondents several times over for all their negligence. It is conceded that
if the form had been signed as usual, the appellant would have had no case. But by a
stroke of ill luck for the respondents it was on this day of all days that they omitted to
get Mr. McSporran to sign the conditions. What difference does that make? If it were
possible for your lordships to escape from the world of make-believe, which the law
has created, into the real world in which transactions of this sort are actually done, the
answer would be short and simple. It should make no difference whatever. This sort
of document is not meant to be read, still less to be understood. Its signature is in truth
about as significant as a handshake that marks the fc:rmal conclusion of a bargain.
Your Lordships were referred to the dictum of Blackburn J., in Harris v. Great
Western Ry. Co. (1876) 1 O.B.D. 515. The passage is as follows: "And it is clear law that
where there is a writing, into which the terms of any agreement are reduced, the
terms are to be regulated by that writing. And though one of the parties may not
have read the writing, yet, in general, he is bound to the other by those terms; and
that, I apprehend, is on the ground that, by assenting to the contract thus reduced
to writing, he represents to the other side that he has made himself acquainted with
·the contents of that writing and assents to them, and so induces the other side to
act upon that representation by entering into the contract with him, and is con-
sequently precluded from denying that he did make himself acquainted with those
terms. But then the preclusion only exists when the case is brought within the rule
so carefully and accurately laid down by Parke B., in delivering the judgment of the
Exchequer in Freeman v. Cooke (1848) 2 Exch. 654, that is, if he 'means his representa-
tion to be acted upon, and it is acted upon accordingly: or if, whatever a man's real
intentions may be, he so conduct himself that a· reasonable man would take the
representation to be true, and believe that it was meant that he should act upon it,
and did act upon it as true."' If the ordinary law of estoppel was applicable to this
case, it might well be argued that the circumstances le·a ve no room for any repre-
sentation by the sender on which the carrier acted. I believe that any other member
of the public in the appellant's place-and this goes for lawyers as well as for lay-
men-would have found himself compelled to give the same sort of answers as the
appellant gave; and I doubt if any carrier who serves out documents of this type
could honestly say that he acted in the belief that the recipient had "made himself
acquainted with the contents." But Blackburn J. was dealing with an unsigned docu -
ment, a cloakroom ticket. Unless your Lordships are to disapprove the decision of
the Court of Appeal in L'Estrange v. F. Graucob, Ltd. [1934] 2 K.B. 394-and there has
been no suggestion in this case that you should-the law is clear, without any
recourse to the doctrine of estoppel, that a signature to a contract is conclusive.
This is a matter that is relevant to the way in which the respondents put their case.
They say that the previous dealings between themselves and the appellant, being

450
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

always on the terms of their "risk note," as they can their written conditions, the
contract between themselves and the appellant must be deemed to import the same
conditions. In my opinion, the bare fact that there have been previous dealings
between the parties does not assist the respondents at an. The fact that a man has
made a contract in the same form ninety-nine times (let alone three or four times
which are here alleged) will not of itself affect the hundredth contract, in which the
form is not used. Previous dealings are relevant only if they prove knowledge of the
terms, actual an d not constructive, and assent to them. If a term is not expressed in
a contract, there is only one other way in which it can come into it and that is by
implication. No implication can be made against a party of a term which was
unknown to him. If previous dealings show that a man knew of and agreed to a term
on ninety-nine occasions, there is a basis for saying that it can be imported into the
hundredth contract without an express statement. It may or may not be sufficient
to justify the importation-that depends on the circumstances; but at least by proving
knowledge the essential beginning is made. Without knowledge there is nothing.
It is for the purpose of proving knowledge that the respondents rely on the dictum
of Blackbum J. which I have cited. My lords, in spite of the great authority of Black-
bum J., I think that this is a dictum which some day your lordships may have to
examine more closely. It seems to me that when a party assents to a document
forming the whole or a part of his contract, he is bound by the terms of the docu -
ment, read or unread, signed or unsigned, simply because they are in the contract;
and it is unnecessary, and possibly misleading, to say that he is bound by them
because he represents to the other party that he has made himself acquainted with
them. But if there be an estoppel of this sort, its effect is in my opinion limited to the
contract in relation to which the representation is made; and it cannot (unless of
course there be something else on which the estoppel is founded besides the .mere
receipt of the document) assist the other party in relation to other transactions. The
respondents in the present case have quite failed to prove that the appellant made
himself acquainted with the conditions that they had introduced into previous deal-
ings. He is not estopped from saying that for good reasons or bad he signed the
previous contracts without the slightest idea of what was in them. If that is so, previ-
ous dealings are no evidence of knowledge and so are of little or no use to the
respondents in this case. I say "of little or no use" because the appellant did admit
that he knew that there were some conditions, though he did not know what they
were. He certainly did not know that they were conditions which exempted the
respondents from liability for their own negligence, though, I suppose, if he had
thought about them at an, he would have known that they probably exempted the
respondents from the strict liability of a carrier. Most people know that carriers exact
some conditions and it does not matter in this case whether the appellant's know-
ledge was general knowledge of this sort or was derived from previous dealings. Your
lordships can therefore leave previous dealings out of it and ask yourselves simply
what is the position of a man who, with that amount of general knowledge, appar-
~ntly makes a contract into which no conditions are expressly inserted? The answer
must surely be that either he does not make a contract at an because the parties are
not ad idem or he makes the contract without the conditions. You cannot have a
contract subject to uncommunicated conditions the terms of which are known only
to one side.
It is at this point, I think, that their lordships in the Second Division feU into error.
The Lord Justice-Clerk said: "It is, I think, wen settled that, if A contracts with B for
the carriage by B of A's goods, in the knowledge, gained through previous experience
of similar transactions, that B carries goods subject to conditions, A is bound by these

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conditions under this later contract, if it is of a similar nature to those which have
gone before, in the absence of agreement or information to the co.n trary. This applies
even if A, knowing that there are conditions, does not take the trouble tci ascertain
precisely what these conditions are." .
Similarly LORD MACKINTOSH said: "In these circumstances, I am of the opinion,
following what I understand to be the law as laid down in Parker v. South Eastern Ry.
Co. and particularly by Baggallay, L.J., that the [appellant], being aware by reason of
his qwn previous experience, and of that of the agent who happened to be acting
for him in the present transaction, that goods were carried on the [respondents']
vessels subject to certain conditions, and having been given no reason to think that
these conditions were not still operative on Oct. 8, 1960, was bound by the condi-
tions, although, as was proved to have been the case, he had never at any time
acquainted himself with their purport.''
My lords, I think, with great respect, that this is to introduce a new and funda-
mentally erroneous principle into the law of contract. There can be no conditions
in any contract unless they are brought into it by expression, incorporation or
implication. They are not brought into it simply because one party has inserted them
into similar transactions in the past and has not given the other party any reason to
think that he will not want to insert them again. The error is based, I think, on a
misunderstanding of what are commonly called the ticket cases; I say this because
the single authority cited for the proposition is one of the leading ticket cases, Parker
v. South Eastern Ry. Co. The question in these cases is whether or not the passenger
has accepted the ticket as a contractual document. If he knows that it contains
conditions of some sort, he must know that it is meant to be contractual. If he accepts
it as a contractual document, then prima facie (I am not dealing with questions of
reasonable notice) he is bound by the conditions that are printed on it or incorpor-
ated in it by .sufficient reference to some other document, whether he has inquired
about them or not. That is all that Baggallay, L.J., is saying in Parker v. South Eastern
Ry. Co. In the present case there is no contractual document at all. There is not so
much as a peg on which to hang ·any terms that are not expressed in the contract
nor a phrase which is capable of expansion. It is as if the appellant had been accepted
as a passenger without being given a ticket at all. There is then no special contract
and the contract is the ordinary one which the law imposes on carriers. As Baggallay,
L.J., said, "This clearly would be the nature of the contract if no ticket were delivered,
as occasionally happens.''
If a man is given a blank ticket without conditions or any reference to them, even
if he knows in detail what the conditions usually exacted are, he is not, in the absence
of any allegation of fraud or of that sort of mistake for which the law gives relief,
bound by such conditions. It may seem a narrow and artificial line that divides a
ticket that is blank on the back from one that says "For conditions see time-tables,"
or something of that sort, that has been held to be enough notice. I agree that it is
an artificial line and one that has little relevance to every day conditions. It may be
beyond your lordships' power to make the artificial line more natural: but at lea ~t
you can see that it is drawn fairly for both sides, and that there is not one law for
individuals and another for organizations that can issue printed documents . If the
respondents had remembered to issue a risk note in this case, they would have
invited your lordships to give a curt answer to any complaint by the appellant. He
might say that the terms were unfair and unreasonable, that he had never voluntarily
agreed to them, that it was impossible to read or understand them and that anyway,
if he had tried to negotiate any change, the respondents would not have listened to
him. The respondents would expect him to be told that he had made his contract

452
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

and must abide by it. Now the boot is on the other foot. It is just as legitimate, but
also just as vain, for the respondents to say that it was only a slip on their part, that
it is unfair and unreasonable of the appellant to take advantage of it and that he knew
perfectly well that they never carried goods except on conditions. The law must give
the same answer: they must abide by the contract which they made. What is sauce
for the goose is sauce for the gander. It will remain unpalatable sauce for both ani-
mals until the legislature, if the courts cannot do it, intervenes to secure that when
contracts are made in circumstances in which there is no scope for free negotiation
of the terms, they are made on terms that are clear, fair and reasonable and settled
independently as such. That is what Parliament has done in the case of carriage of
goods by rail and on the high seas.
I have now given my opinion on the main point in the case and the one on which
the respondents succeeded below. On the other points on which the respondents
failed below and which they put forward again as grounds for dismissing the claim,
I have nothing to add to what your lordships have already said. In my opinion the
appeal should be allowed.

THORNTON V SHOE LANE PARKING LTD

(1971] 2 OB 163 (CA)

LORD DENNING MR: In 1964 Mr. Thornton, the plaintiff, who was a free-lance trumpeter
of the highest quality, had an engagement with the BBC at Farringdon Hall. He drove
to the City in his motor car and went to park it at a multi-storey automatic car park.
It had only been open a few months. He had never gone there before. There was a
notice on the outside headed "Shoe Lane Parking." It gave the parking charges, Ss
for two hours, 7s 6d for three hours, and so forth; and at the bottom: "All Cars Parked
At Owners Risk." The plaintiff drove up to the entrance. There was not a man in
attendance. There was a traffic light which showed red. As he drove in and got to the
appropriate place, the traffic light turned green and a ticket was pushed out from
the machine. The plaintiff took it. He drove on into the garage. The motor car was
taken up by mechanical means to a floor above. The plaintiff left it there and went off
to keep his appointment with the BBC. Three hours later he came back. He went to
the office and paid the charge for the time that the car was there. His car was brought
down from the upper floor . He went to put his belongings into the boot of the car;
but unfortunately there was an accident. The plaintiff was severely injured. The judge
has found it was half'his own fault, but half the fault of Shoe Lane Parking Ltd., the
defendants. The judge awarded him £3,637 6s 11d.
On this appeal the defendants do not contest the judge's findings about the acci-
dent. They acknowledge that they were at fault, but they claim that they are protected
by some exempting conditions. They rely on the ticket which was issued to the
plaintiff by the machine. They say that it was a contractual document and that it
incorporated a condition which exempts them from liability to him. The ticket was
headed "Shoe Lane Parking." Just below there was a "box" in which was automatically
recorded the time when the car went into the garage. There was a notice alongside:
"Please present this ticket to cashier to claim your car." Just below the time, there
was some small print in the left hand corner which said: "This ticket is issued subject
to the conditions of issue as displayed on the premises." That is all.
The plaintiff says that he looked at the ticket to see the time on it, and put it in his
pocket. He could see there was printing on the ticket, but he did not read it. He only
read the time. He did not read the words which said that the ticket waq issued subject

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to the conditions as displayed on the premises. If the plaintiff had read those words
on the ticket and had looked round the premises to see where the conditions were
displayed, he would have had to have driven his car on into the garage and walked
round. Then he would have found, on a pillar opposite the ticket machine, a set of
printed conditions in a panel. He would also have found, in the paying office (to be
visited when coming back for the car) two more panels containing the printed
conditions. If he had the time to read the conditions-it would take him a very con-
siderable time-he would read this:

CONDITIONS
The following are the conditions upon which alone motor vehicles are accepted for
parking:

1. The Customer agrees to pay the charges of [the defendants].

2. The Customer is deemed to be fully insured at all times against all risks (including, without
prejudice to the generality of the foregoing, fire, damage and theft, whether due to the
negligence of others or not) and [the defendants] shall not be responsible or liable for any
loss or misdelivery of or damage of whatever kind to the Customer's motor vehicle, or any
articles carried therein or thereon or of or to any accessories carried thereon or therein or
injury to the Customer or any other person occurring when the Customer's motor vehicle
is in the Parking Building hows.oever that loss, misdelivery, damage or injury shall be
caused; and it is agreed and understood that the Customer's motor vehicle is parked and
permitted by [the defendants] to be parked in the Parking Building in accordance with this
Licence entirely at the Customer's risk.

There is a lot more. I have only read about one-tenth of the conditions. The
important thing to notice is that the defendants seek by this condition to exempt
themselves from liability, not only for damage to the car, but also for injury to the
customer howsoever caused. The condition talks about insurance. It is well known
that the customer is usually insured against damage to the car; but he is not insured
against damage to himself. If the condition is incorporated into the contract of
parking, it means that the plaintiff will be unable to recover any damages for his
personal injuries which were caused by the negligence of the company.
We have been referred to the ticket cases of former times from Parker v. South
Eastern Ry. Co. to /vlcCutcheon v. David /vlacBrayne Ltd. They were concerned with
railways, steamships and cloakrooms where booking clerks issued tickets to custom -
ers who took them away without reading them. In those cases the issue of the ticket
was regarded as an offer by the company. If the customer took it and retained it
without objection, his act was regarded as an acceptance of the offer: see Watkins v.
Ry.mill and Thompson v. London, Midland and Scottish Ry. Co. These cases were based
on the theory that the customer,' on being handed the ticket, could refuse it and
decline to enter into a contract on those terms. He could ask for his money back.
That theory was, of course, a fiction. No customer in a thousand ever read the condi-
tions. If he had stopped to do so, he would have missed the train or the boat.
None of those cases has any application to a ticket which is issued by an auto-
matic machine. The customer pays his money and gets a ticket. He cannot refuse
it. He cannot get his money back. He may protest to the machine, even swear at it;
but it will remain unmoved. He is committed beyond recall. He was co.m mitted at
the very moment when he put his money into the machine . The contract was con-
cluded at that time. It can be translated into offer and acceptance in this way. The
offer is made when the proprietor of the machine holds it out as being ready to
receive the money. The acceptance takes place when the customer puts his money
into the slot. T~e terms of the offer are contained in the notice placed on or near the

454
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

machine stating what is offered for the money. The customer is bound by those
terms as long as they are sufficiently brought to his notice beforehand, but not
otherwise. He is not bound by the terms printed on the ticket if they differ from the
notice, because the ticket comes too late. The contract has already been made: see
01/ey v. /Viar/borough Court Ltd. The ticket is no more than a voucher or receipt for
the money that has been paid (as in the deckchair case, Chapelton v. Barry Urban
District Council) on terms which have been offered and accepted before the ticket is
issued. In the present case the offer was contained in the notice at the entrance
giving the charges for garaging and saying "at owners risk," i.e. at the risk of the
owner so far as damage to the car was concerned. The offer was accepted when the
plaintiff drove up to the entrance and, by the movement of his car, turned the light
from red to green, and the ticket was thrust at him. The contract was then concluded,
and it could not be altered by any words printed on the ticket itself. In particular, it
could not be altered so as to exempt the company from liability for personal injury
due to their negligence.
Assuming, however, that an automatic machine is a booking clerk in disguise,
so that the old fashioned ticket ca:?es still apply to it, we then have to go back to the
three questions put by Mellish L.J. in Parker v. South Eastern Ry. Co., subject to this
qualification: Mellish L.J. used the word "conditions" in the plural, whereas it would
be more apt to use the word "condition" in the singular, as indeed Mellish L.J. himself
did at the end of his judgment. After all, the only condition that matters for this pur-
pose is the exempting condition. It is no use telling the customer that the ticket is
issued subject to some "conditions" or other, without more; for he may reasonably
regard "conditions" in general as merely regulatory, and not as taking away his rights,
unless the exempting condition is drawn specifically to his attention. (Alternatively,
if the plural "conditions" is used, it would be better prefaced with the word "exempt-
ing," because the exempting conditions are the only conditions that matter for this
purpose.) Telescoping the three questions, they come to this: the customer is bound
by the exempting condition if he knows that the ticket is issued subject to it: or, if
the company did what was reasonably sufficient to give him notice of it. Counsel
for the defendants admitted here that the defendants did not do what was reasonably
sufficient to give the plaintiff notice of the exempting condition. That admission
was properly made. I do not pause to enquire whether the exempting condition is
void for unreasonableness. All I say is that it is so wide and so destructive of rights
that the court should not hold any man bound by it unless it is drawn to his attention
in the most explicit way. It is an instance of what I had in mind in J. Spurling Ltd. v.
Bradshaw. In order to give sufficient notice, it would need to be printed in red ink
with a red hand pointing to it, or something equally startling.
However, although reasonable notice of it was not given, counsel for the d,efend-
ants said that this case came within the second question propounded by Mellish L.J.,
namely that the plaintiff "knew or believed that the writing contained conditions."
There was no finding to that effect. The burden was oh the defendants to prove it,
and they did not do so. Certainly there was no evidence that the plaintiff knew of
this exempting condition. He is not, therefore, bound by it. Counsel for the defend-
ants relied on a case in this court last year, /Vlendelssohn v. Normand Ltd. Mr. Mendels-
sohn parked his car in the Cumberland Garage at Marble Arch and was given a ticket
which contained an exempting condition. There was no discussion as to whether
the condition formed part of the contract. It was conceded that it did. That is shown
by the report. Yet the garage company were not entitled to rely on the exempting
condition for the reasons there given. That case does not touch the present, where
the whole question is whether the exempting condition formed part of the contract.

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I do not think it did. The plaintiff did not know of the condition, and the defendants
did not do what was reasonably sufficient to give him notice of it.
I do not think the defendants can escape liability by reason of the exempting
condition. I would, therefore, dismiss the appeal.
[Megaw LJ and Sir Gordon Wilmer delivered concurring judgments.]

QUESTIONS
1. A runs a photographic transparency lending library. B ordered 50 transparencies by
telephone, which were delivered with a printed "delivery note" stipulating that unless transpar-
encies were returned within 14 days of delivery a "holding fee" of $20 per transparency per day
would be payable. B had not previously used the library and did not read the note. She
returned the transparencies 24 days after delivery. Is she liable to pay $10,000? See lnterfoto
Picture Library Ltd v Stiletto Visual Programmes Ltd, [1989] QB 433 (CA).
2. When are terms incorporated in a contract made by computer? Is it necessary for the
recipient to click on an "agree" box7 See Century 21 Canada Limited Partnership v Rogers
Communications Inc, 2011 BCSC 1196, 338 DLR (4th) 32.

BRITISH CRANE HIRE CORP LTD V IPSWICH PLANT HIRE LTD

[1975] OB 303 (CA)

LORD DENNING MR: In June, 1970, a big earth-moving machine got stuck in the mud.
It sank so far as to be out of sight. It cost much money to get it out. Who is to pay the
cost?
The defendants, Ipswich Plant Hire Ltd., were doing drainage and other engin-
eering works in the marshy land next the River Stour, near Cattawade Bridge in Essex.
They are themselves in the hiring business, letting out cranes and so forth. But on
this occasion they were doing the work themselves . They needed a dragline crane
urgently. They got in touch with the plaintiffs, the British Crane Hire Corporation
Ltd., and asked if they could hire a dragline crane. The plaintiffs responded quickly.
They delivered it on Sunday, June 28, 1970. They let it on hire to the defendants,
together with the driver, Mr. Humphrey. No doubt the driver remained the servant
of the plaintiffs when he was driving the crane. The plaintiffs took it as far as they
could by road. Then it was unloaded.
On the next day, Monday, June 29, 1970, the defendants' site agent, a Mr. Mead-
ows, directed the driver the way to go across the marsh. When they got to a particu -
larly Dqd patch, Mr. Meadows warned the driver that he ought to have "nav:imats,"
that is, sets of timber baulks which could be laid on the marsh and form a kind of
roadway for the machine. The defendants ought to have supplied the "navimats,"
but they had not yet arrived. Mr. Meadows told the driver to wait for the "navimats."
But the driver did not wait. He took his chance. He went on without "navimats." He
got over that patch safely. Further on, _there was another bad patch of marsh. The
driver took his chance again. This time he fared worse. The dragline crane sank
into the marsh. That was the "first mishap." They got it out after a good deal of work.
There was no doubt that it was the fault of the driver, Mr. Humphrey, in not waiting
for the "navimats." His negligence was the cause of that first mishap. His employers,
the plaintiffs, must bear the cost of it.
On the next day, Tuesday, June 30, 1970, the "navimats" arrived. But there was a
second mishap. On that day the dragline crane had to cross another bad patch. The

456
 I. UNSIGNED DOCUMENTS (THE TICKET CASES)

driver, Mr. Humphrey, was this time using the "navimats." He had to make a turning
movement or "spragging." He had just completed it when, in spite of the "navimats,"
this machine sank into the marsh. It went out of sight. Great efforts were needed to
get it out. Heavy equipment was brought in. Eventually, at great expense, the
machine was got out.
The question arises on the second mishap. Who is to bear the expense of recover-
ing the machine from the marsh? The judge found that the sinking into the marsh
was not the fault of the driver, Mr. Humphrey, but the fault of Mr. Meadows, the site
agent of the defendants. The judge thought that Mr. Meadows ought to have directed
the crane by a safer route across the marshy ground. On that account he held the
defendants liable for the expense. That finding was challenged before us by Mr.
Mccowan for the defendants. He pointed out that the driver and the site agent had
gone together over the ground and decided on this route. I was impressed by Mr.
McCowan's submissions on this point. I doubt whether it would be right to hold the
site agent guilty of negligence. It seems to me that this second mishap may have
been a piece of bad luck which occurred without the fault of anyone. It was a hazard
due to the nature of the marsh itself at that point.
But it does not follow that the plaintiffs fail on their claim Even though the
defendants were not negligent, nevertheless the plaintiffs say that the defendants
are liable in contract for the costs of recovering the machine from the marsh. The
plaintiffs say that the contract incorporated the conditions on a printed form under
which the defendants are liable for the costs.
The judge found that the printed conditions were not incorporated into the
contract. The plaintiffs appeal from that finding . The facts are these: the arrange-
ments for the hire of the crane were all on the telephone. The plaintiffs agreed to let
the defendants this crane. It was to be delivered on the Sunday. The hiring charges
and transport charges were agreed. Nothing was said about conditions. There was
nothing in writing. But soon after the crane was delivered, the plaintiffs, in accord-
ance with their practice, sent forward a printed form to be signed by the hirer. It set
out the order, the work to be done, and the hiring fee, and that it was subject to the
conditions set out on the back on the form. The defendants would ordinarily have
sent the form back signed: but this time they did not do so. The accident happened
before they signed it. So they never did so. But the plaintiffs say that nevertheless,
from the previous course of dealing, the conditions on the form goyern the relation-
ship between the parties. They rely on no. 6:
Site conditions: The hirer shall take all reasonable precautions to ensure that the crane
can safely be taken onto and kept upon or at the site and in particular to ensure that the
ground is in a satisfactory condition to take the weight of the crane and/or its load. The
hirer shall where necessary supply and lay timber or other suitable material for the crane
to travel over and work upon and shall be responsible for the recovery of the crane from
soft ground.
Also on no. 8: "The hirer shall be responsible for and indemnify the owner against ...
all expenses in connection with or arising out of the use of the plant." In support of
the course of dealing, the plaintiffs relied on two previous transactions in which the
defendants had hired cranes from the plaintiffs. One was February 20, 1969; and the
other October 6, 1969. Each was on a printed form which set out the hiring of a crane,
the price, the site, and so forth; and also setting out the conditions the same as those
here. There were thus only two transactions many months before and they were not
known to the defendants' manager who ordered this crane. In the circumstances I
doubt whether those two would be sufficient to show a course of dealing.

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In Hollier v. Rambler Motors (A.MC.) Ltd. [1972] 2 O.B. 71, 76, Salmon L.J. said he
knew of no case "in which it has been decided or even argued that a term could be
implied into an oral contract on the strength of a course of dealing (if it can be so
called) which consisted at the most of three or four transactions over a period of five
years." That was a case of a private individual who had had his car repaired by the
defendants and had signed forms with conditions on three or four occasions. The
plaintiff there was not of equal bargaining power with the garage company which
repaired the car. The conditions were not incorporated.
But here the parties were both in the trade and were of equal bargaining power.
Each was a firm of plant hirers who hired out plant. The defendants themselves knew
that firms in the plant-hiring trade always imposed conditions in regard to the hiring
of plant; and that their conditions were on much the same lines. The defendants'
manager, Mr. Turner (who knew the crane), was asked about it. He agreed that he
had seen these conditions or similar ones in regard to the hiring of plant. He said
that most of them were, to one extent or another, variations of a form which he called
"the Contractors' Plant Association form." The defendants themselves (when they let
out cranes) used the conditions of that form. The conditions on the plaintiffs' form
were in rather different words, but nevertheless to much the same effect. He was
asked one or two further questions which I would like to read:
(0) If it was a matter of urgency, you would hire that machine out. and the conditions
of hire would no doubt follow7 (A) They would . (0) Is it right that, by the very nature
of your business. this is not something that happens just once a year. nor does it happen
every day either. but it happens fairly regularly? (A) It does. (0) You are well aware of
the condition that it is the hirer's responsibility to make sure that soft ground is suitable
for a vehicle or machine7 (A) It is: it is also the owner's responsibility to see that the
machine is operated competently.

Then the judge asked : "But it is the hirer's job to see what in relation to the ground7
(A) That suitable timber was supplied for the machine to operate on in relation to
soft ground." Then counsel asked: "And in fact it is the hirer's job to recover the crane
from the soft ground, if it should go into it7 (A) If the crane sank overnight of its own
accord, I dare say it would be."
From that evidence it is clear that both parties knew quite well that conditions
were habitually imposed by the supplier of these machines: and both parties knew
the substance of those conditions. In particular that if the crane sank in soft ground
it was the hirer's job to recover it: and that there was an indemnity clause. In these
circumstances, I think the conditions on the form should be regarded as incorpor-
ated into the contract. I would not put it so much on the course of dealing, but rather
on the common understanding which is to be derived from the conduct of the
parties, namely, that the hiring was . to be on the terms of the plaintiffs' usual
conditions.
As Lord Reid said in McCutcheon v. David MacBrayne Ltd. [1964] 1 W.L.R. 125, 128
quoting from the Scottish textbook, Gloag on Contract, 2nd ed. (1929), p. 7: "The
judicial task is not to discover the actual intentions of each party; it is to decide what
each was reasonably entitled to conclude from the attitude of the other." It seems to
me that, in view of the relationship of the parties, when the defendants requested
his crane urgently and it was supplied at once-before the usual form was received-
the plaintiffs were entitled to conclude that the defendants were accepting it on the
terms of the plaintiffs' own printed conditions-which would follow in a day or two.
It is just as if the plaintiffs had said: "We will supply it on our usual conditions," and
the defendants said "Of course, that is quite understood."

458
 II. PAROL EVIDENCE RULE

Applying the conditions, it is quite clear that nos. 6 and 8 cover the second mis-
hap. The defendants are liable for the cost of recovering the crane from the soft
ground.
But, so far as the first mishap is concerned, neither condition 6 nor condition 8
(the indemnity clause) is wide enough to cover it: because that mishap was due to
the negligence of their own driver. It requires very clear words to exempt a person
from responsibility for his own negligence: see Gillespie Bros. & Co. Ltd. v. Roy Bowles
Transport Ltd. [19731 O.B. 400, 415. There are no such words here.
Even though the judge did not find that the conditions were incorporated, he held
that there was an implied term that the hirer should return the chattel to the owner
at the end of the hiring. Mr. Mccowan pointed out that that implied term was not
d.i stinct\y pleaded or relied upon. But, nevertheless, there is much to be said for it.
When a machine is \et out on hire for us on marshy \and, and both parties know that
it may sink into a marsh, then it seems to me that, if it sinks into the marsh, it is the
hirer's job to recover it, so as to restore it to the owner at the end of the hiring. Take
a motor car which is let out on hire, and by reason of a gale, or an icy road, it goes off
the road into a ditch. It is the hirer's job to get it back on the road and restore it at the
end of the hiring. Just as when he takes it on a long journey and falls ill a long distance
away. It still is his duty to get it back and restore it to the owner at the end of the hiring.
Of course, if it is lost or damaged and he can prove that it was not due to an)_' fault
on his part, he would not be liable. A bailee is not liable for loss or damage which he
can prove occurred without any default on his part: but the return of the vehicle is
different. It is the duty of the hirer to return the vehicle at the end of the hiring to the
owner, and to pay the cost of doing so. Although he is not liable for loss or damage
occurring without his fault, nevertheless he is liable to do what is reasonable to
restore the property to the owner.
So, apart from the express conditions, it may well be, if it had been pleaded, that
the plaintiffs could have recovered for the second mishap on an implied term. But,
as it was not distinctly pleaded, I prefer to decide the case on the ground that condi-
tions 6 and 8 formed part of the contract of hiring: and under them the plaintiffs are
entitled to succeed in regard to mishap no. 2. I would affirm the decision of the judge,
but on a different ground.

[Megaw LJ agreed and Sir Eric Sachs delivered separate concurring reasons.]

Appeal and cross-appeal dismissed.

[See also McCamus at 184-97; Waddams at paras 61-67; MacDougall at 159-65.J

II. PAROL EVIDENCE RULE

It is often said that the general rule is that a party who signs a contractual document is bound
by its contents, even though he or she has not read the document, and even though the
contents of the document may differ from the signer's understanding of the agreement. A
statement often quoted is that of Scrutton LJ in L'Estrange v Graucob, (1934] 2 KB 394 at 403 :
"In cases in wh ich the contract is contained in a railway ticket o r other unsigned document, it
is necessary to prove that an alleged party was aware. or ought to have been aware of its terms
and conditions. These cases have no application when the document has been signed. When
a document containing contractual terms is signed, then, in the abse nce of fraud, or, I will add,
misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read

459
CHAPTER 5 WRITTEN DOCUMENTS

the document or not." The following cases include a variety of techniques by which courts
have managed to give relief to a party in spite of his signature to a contractual document.
Running through the cases are frequent references to the so-called parol evidence rule, of
which it has been said that it is not concerned especially with parol statements, that it is not a
rule of evidence, and that it is not even a rule at all. Nevertheless, references to it are so frequent
that it cannot be ignored. A typical statement of the rule, per Denman CJ in Goss v Lord Nugent
(1833). 5 B & Ad 58, follows: "By the general rules of the common law, if there be a contract
which has been reduced into writing, verbal evidence is not allowed to be given of what passed
between the parties, either before the written instrument was made, or during the time that it
was in a state of preparation, so as to add to, or subtract from, or in any manner to vary or
qualify the written contract."
The parties to a contract can seek to ensure the parol evidence rule applies by agreeing on
it in their contract. Such a term in a contract is called an "entire agreement" or "entire contract"
or "entire obligations" clause.

FEDERAL COMMERCE & NAVIGATION CO LTD V

TRADAX EXPORT SA
[1978] AC 1 (HL)

[Under a charterpatty the owners of a ship chartered her to carry grain to the port of
Brake. No berths were available at Brake, and the ship anchored at a lightship some
miles away. The charterer was bound to pay a fee for delay (demurrage) after the ship
had "arrived." The shipowners claimed demurrage based on the ship having become
an arriyed ship when she reached the lightship. The House of Lords, reversing the
Court of Appeal, held that the ship had not "arrived" until it had reached a port where
it could effectively be unloaded.]
LORD DIPLOCK: My Lords, the freight market for chartered vessels still remains a
classic example of a free market. It is world-wide in coverage, highly competitive
and sensitive to fluctuations in supply and demand. It is a market in which the indi-
vidual charterers and shipowners are matched in bargaining power and are at liberty
to enter into charterparties in whatever contractual terms they please.
In practice the contracts negotiated in this market by the parties or their brokers
are based upon one or other of a number of printed forms of charterparties appropri-
ate to the various kinds of use to which vessels are put. These forms incorporate
numerous standard clauses to which additions, often in the form of other well-
known standard clauses, and deletions are agreed in the course of the bargaining
process in which agreement is also reached upon such basic terms as rates of freight,
demurrage and dispatch money.
No market such as a freight, insurance or commodity market, in which dealings
involve the parties entering into legal relations of some complexity with one another,
can operate efficiently without the use of standard forms of contract and standard
clauses to be used in them. Apart from enabling negotiations to be conducted
quickly, standard clauses serve two purposes. First, they enable those making use of
the market to compare one offer with another to see which is the better; and this, as
I have pointed out, involves considering not only the figures for freight, demurrage
and dispatch money, but those clauses of the charterparty that deal with the alloca -
tion of misfortune risks between charterer and shipowner, particularly those risks
which may result in delay. The second purpose served by standard clauses is that
they become the subject of exegesis by the courts so that the way in which they will

460
 II. PAROL EVIDENCE RULE

apply to the adventure contemplated by the charterparty will be understood in the

same sense by both the parties when they are negotiating its terms and carrying
them out.
It is no part of the function of a court of justice to dictate to charterers and ship-
owners the terms of the contracts into which they ought to enter on the freight
market; but it is an important function of a court, and particularly of your Lordships'
House, to provide them with legal certainty at the negotiation stage as to what it is
that they are agreeing to. And if there is that certainty, then when occasion arises
for a court to enforce the contract or to award damages for its breach, the fact that
the members of the court themselves may think that one of the parties was unwise
in agreeing to assume a particular misfortune risk or unlucky in its proving more
expensive to him than he expected, has nothing to do with the merits of the case or
with enabling justice to be done. The only merits of the case are that parties who
have bargained on equal terms in a free market should stick to their agreements .
Justice is done by seeing that they do so or compensating the party who has kept
his promise for any loss he has sustained by the failure of the other party to keep his.

PRENN V SIMMONDS
(1971] 3 All ER 237 (HL)

LORD WILBERFORCE: My Lords, Dr. Simmonds's claim in this action is that under the
terms of an agreement under seal dated 6th July 1960, he is' entitled to acquire from
Mr. Prenn, for a consideration of £6,000, a 4 per cent interest in the ordinary capital
of a company controlled by Mr. Prenn called now Controls & Communications Ltd.,
but at the relevant date Radio & Television Trust Ltd. ("RTT"). This interest was worth
at the date of the trial about £200,000. Mr. Prenn disputes the claim on the ground
that a necessary condition set by the agreement has not been satisfied because less
than £300,000 profits available for dividend on the ordinary stock of RTT over the
relevant period has been earned. Dr. Simmonds maintains that the condition has
been fulfilled. The dispute relates not to the figures, which are agreed, but to the
definition of profits of RTT available for dividend on its ordinary stock. If this means
the separate profits of RTT alone, the amount over the period fell just short of the
target, by less than £10,000. If it means the consolidated profits of the group consist-
ing of RTF and subsidiaries, the amount was largely exceeded. The small margin of
deficiency, although capable of arousing sympathy for Dr. Simmonds, is not an
argument for one or other side. A similar situation might arise on either interpreta-
tion and is inherent in the nature of "target" agreements.
The question is thus simply one of construction of the agreement and it should
be capable of resolution shortly and cheaply. But Dr. Simmonds has claimed in the
alternative that, if the agreement did not bear the meaning he contended for, it
should be rectified so as to do so. This let in a mass of evidence, oral and documen-
tary, as to the parties' intentions, which would not be admissible on construction,
although (as I shall explain) counsel for Dr. Simmonds tried to bring some of it in on
that issue. It also involved some issues of law. This part of the case overshadowed
the rest, so that by far the greater part of the time spent both at first instance and in
the Court of Appeal was concerned with it. In this House argument was heard first
exclusively on the question of construction and, as your Lordships reached on it a
conclusion in favour of Dr. Simmonds, no argument on rectification was heard. I
now deal with this construction issue.

4 61
CHAPTER 5 WRITTEN DOCUMENTS

In order for the agreement of 6th July 1960 to be understood, it must be placed
in its context. The time has long passed when arguments, even those under seal,
were isolated from the matrix of facts in which they were set and interpreted purely
on internal linguistic considerations. There is no need to appeal here to any modern,
anti-literal, tendencies, for Lord Blackburn's well-known judgment in River Wear
Comrs . v. Adamson (1877) 2 App. Cas. 743 at 763 provides ample warrant for a liberal
approach. We must, as he said, enquire beyond the language and see what the cir-
cumstances were with reference to which the words were used, and the object,
appearing from those circumstances, which the person using them had in view.
Moreover, at any rate since 1859 (Macdonald v. Longbottom (1860) 1 E. & E. 977) it has
been clear enough that evidence of mutually known facts may be admitted to iden -
tify the meaning of a descriptive term.
Counsel for Dr. Simmonds, however, contended for even greater extension of the
court's interpretative power. They argued that later authorities have gone further
and allow prior negotiations to be looked at in aid of the construction of a written
document. In my opinion, they did not make good their contention. A modern
authority in this House, which counsel for Dr. Simmonds invoked, is Hvalfangersels-
kapet Polaris Aktiese/skap v. Unilever Ltd. (1933) 39 Com. Cas. 1 where it was necessary
to interpret the words "entire production." There, as here, there was a claim for
rectification in the alternative so that a great deal of evidence of matters prior to the
contract was called. But the speeches give no support for a contention that negotia-
tions leading up to the contract can be taken into account; at most they support the
admission of evidence to establish a trade or technical meeting (not in question here)
and, of course, they recognise the admissibility of evidence of surrounding circum -
stances. But they contain little to encourage, and much to discourage, evidence of
negotiation or of the parties' subjective intentions.
I may refer to one other case to dispel the idea that English law is left behind· in
some island of literal interpretation. In Utica City National Bank v. Gunn (1918) 118 N.E.
607 the New York Court of Appeals followed precisely the English line. Cardozo J . in
his judgment refers to "the genesis and aim of the transaction" citing Stephen's Digest
of the Law of Evidence, and Wigmore on Evidence. Surrounding circumstances may,
he says, "stamp upon a contract a popular or looser meaning" than the strict legal
meaning, certainly when to follow the latter would make the transaction futile . "It is
easier to give a new shade of meaning to a word than to give no meaning to a whole
transaction." The whole judgment, as orie may expect, combines classicism with
intelligent realism.
So I think that Dr. Simmonds gains little support from authority. On principle, the
matter is worth pursuing a little, because the present case illustrates very well the
disadvantages and danger of departing froi;n established doctrine and the virtue of
the latter. There wer~ prolonged negotiations between solicitors, with exchanges of
draft clauses, ultimately emerging in cl. 2 of the agreement. The reason for not
admitting evidence of these exchanges is not a technical one or even mainly one of
convenience (although the attempt to admit it did greatly prolong the case and add
to its expense). It is simply that such evidence is unhelpful. By the nature of things,
where negotiations are difficult, the parties' positions, with each passing letter, are
changing and until the final agreement, although converging, still divergent. It is
only the final document which records a consensus. If the previous documents use
different expressions, how does construction of those expressions, itself a doubtful
process, help on the construction of the contractual words? If the same expressions
are used, nothing is gained by looking back; indeed, something may be lost since
the relevant surrounding circumstances may be different. And at this stage there is

462
 II. PAROL EVIDENCE RULE

no consensus of the parties to appeal to. It may be said that previous documents
may be looked at to explain the aims of the parties. In a limited sense this is true; the
commercial, or business object, of the transaction, objectively ascertained, may be
a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be
shown that one interpretation completely frustrates that object, to the extent of
rendering the contract futile, that may be a strong argument for an alternative inter-
pretation, if that can reasonably be found. But beyond that it may be difficult to go;
it may be a matter of degree, or of judgment, how far one interpretation, or another,
gives effect to a common intention; the parties, indeed, may be pursuing that inten-
tion with differing emphasis, and hoping to achieve it to an extent which may differ,
and in different ways. The words used may, and often do, represent a formula which
means different things to each side, yet may be accepted because that is the only
way to get "agreement" and in the hope that disputes will not arise. The only course
then can be to try to ascertain the "natural" meaning. Far more, and indeed totally,
dangerous is it to admit evidence of one party's objective-even if this is known to
the other party. However strongly pursued this may be, the other party may only be
willing to give it partial recognition, and in a world of give and take, men often have
to be satisfied with less than they want. So, again, it would be a matter of speculation
how far the common intention was that the particular objective should be realised.
In the present case, Lord Denning M.R. seems to have taken into account Dr. Sim-
monds's anxiety (as testified by awitness) to protect himself against unilateral deci-
sions by Mr. Prenn; and an argument pressed on us was that, if Mr. Prenn's
interpretation (i.e. that only the holding company's profits were relevant) was correct,
Dr. Simmonds would, in this matter on which he felt so anxious, in some respect at
least, be completely in Mr. Prenn's hands, for Mr. Prenn could decide just how much,
or how little, of the subsidiaries' profits were to be passed to the holding company.
I cannot see how any of this can be admissible because, I repeat, I cannot see how
it is helpful. Given the fact of Dr. Simmonds's anxiety, the whole question is how far
. does the agreement meet it; how can we know, except by interpreting the agreement,
how far Mr. Prenn was willing to meet him or how far Dr. Simmonds decided to take
what he could get? Even the argument that Mr. Prenn's interpretation would put Dr.
Simmonds's position-a professional man-entering into relations with the source
of finance and benefits to come, might decide, in his own interest, that if he could
not get all the protection he wanted, the risk of partial protection was one to accept;
that Mr. Prenn had to be trusted to act fairly. To say that the clause had this result is
not to say that it was futile or frustratory: it is to say that a better clause could, with
hindsight, in Dr. Simmonds's interest have been drawn. But the court cannot con-
struct such a clause out of the material given.
In my opinion, then, evidence of negotiations, or of the parties' intentions, and
a fortiori of Dr. Simmonds's intention, ought not to be received, and evidence should
be restricted to evidence of the factual background known to the parties at or before
the date of the contract, including evidence of the "genesis" and objectively the "aim"
of the transaction.
As to the circumstances, and the object of the parties, there is no controversy in
the present case. The agreement itself, on its face, almost supplies enough, without
the necessity to supplement it by outside evidence. But some expansion, from
undisputed facts, makes for clearer understanding and I include a reference to these
in what follows .
In the year (1959) before the making of the contract, RTT was controlled by
Crompton Parkinson Ltd., a large public electrical engineering company. RTT itself did
not trade, but had a wholly-owned trading subsidiary, Airmec Ltd., which employed

463
CHAPTER 5 WRITIEN DOCUMENTS

Dr. Simmonds as managing director and as its leading technician. The structure of
RTT was such that Crompton Parkinson held 94 per cent of its ordinary capital, and
the whole of an issue of redeemable preference stock; the amount required to
redeem it being £294,716 (there were also some capital certificates but I need not
refer to this complication). Mr. Prenn desired to secure the services of Dr. Simmonds
in his group of companies and decided to do so by purchasing, from Crompton
Parkinson, RTT together, of course, with its subsidiary, Airmec, which in turn would
bring with it Dr. Simmonds's services. So in July-August, 1959, an agreement was
reached by which Mr. Prenn agreed to buy the 94 per cent of the ordinary capital
and the preference stock. For this he paid £160,000 in cash. The balance, £294,716,
was to be paid by four equal instalments on 19th August 1960, 1961, 1962 and 1963.
The agreement provided that any money applied by RTT in redeeming preference
stock was to go in reduction of the balance of the purchase price; and it was no doubt
in Mr. Prenn's prima facie interest that the preference stock should be redeemed out
of profits of RTT so as to avoid his having to find cash from his own resources.
The critical sale agreement between Mr. Prenn and Dr. Simmonds was dated 6th
July 1960, after a period of negotiation. Its connection with the Crompton Parkinson
agreement is manifest, both from ·the recital of the latter in it, and from the coinci-
dence of the critical date in cl. 2 with the date-19th August 1963-stated in the
Crompton Parkinson agreement as the terminal date for payment. A reading of the
agreement shows that it was intended to secure for Dr. Simmonds the provision of
an interest in the equity of RTT and that this was to be conditional on Dr. Simmonds
remaining with RTT long enough to ensure that the Crompton Parkinson debt was
. paid off out of profits of RTT and on RTT in fact earning enough to enable the debts
to be paid. Thus cl. 3 of the agreement provided for the sale to go off if Dr. Simmonds
left RTT before the terminal date either voluntarily or through dismissal for gross
misconduct. In order to make good this description of the agreement, I must set out
a number of its provisions . After stating the parties there are recitals and
definitions:
WHEREAS
A. In this agreement the following words and expressions shall have the meanings
set opposite them:
R.T.T.: Radio and Television Trust Limited .
Ord inary Stock Units : The Ordinary stock units of 6d. each in the capital of R.T.T. ..
The Contract: The contract created by excha nge of letters dated 21st Ju ly 1959
from Mr. Prenn to K.R. Cork as agent for C.P. and 29th July 1959 from C. P. to Mr.
Prenn as varied by a Memorandum in writing dated 19th August 1959 being a con-
tract for the purchase by Mr. Prenn of the interest of C.P. in R.T.T. and which includes
356,944 Preference Stock Units remaining in the hands of C.P. Under the terms of
this contract as varied there is an obligation on the part of Mr. Prenn to pay the sum
of £294,716, being the balance of the purchase money by your equal instalments
on 19th August in 1960, 1961, 1962 and 1963 respectively.
B. Under the Contract any money received by C.P. from R.T.T. for any of the said
356,944 Preference Stock Units redeemed after 19th August 1959 is to be applied by
C.P. in or towards payment of the balance of the said purchase money ..
Then the operative pa_rt:
l(a) [Provided for a payment by Mr. Prenn to Dr. Simmonds of £6,600.)
(b) [Provided for the sale to Dr. Simmonds of shares in RTT.]
(c) [Provided for sale of further shares to Dr. Simmonds.)

464
 II. PAROL EVIDENCE RULE

2. The provisions of Clause 1 hereof shall not take effect unless and until any one
of the following conditions has been satisfied:
(a) The sa id sum of £294,716 has been paid or satisfied in full on or before the
due dates for payment thereof under the Contract out of monies provided by R.T.T.
redeeming its Preference Stock Units out of its profits which wou ld ot.herwise be
available for dividend or
(b) The aggregate profits of R.T.T. earned during the four years ending 19th Aug-
ust 1963 and available for dividend on the Ord inary Stock. Units for the time being
issued whether declared or not shall have amounted to £300,000 after payment or
provision for income tax and profits tax provided always that the conditions of .this
sub -paragraph (b) shall only apply if the Preference Stock Units or any of them are
redeemed otherwise than out of the profits of R.T.T. which would otherwise be
available for dividend or the terms of payment of the said balance of the purchase
price under the Contract or any part thereof shall be re-arranged or all or any part
of the said sum of £294,716 shall be satisfied from any other source.
3. The provisions of clause 1 shall not take effect if at any time before 20th August
1963 Dr. Simmonds ceases to be employed by R.T.T. either directly or through any of
its subsidiaries by reason of his own act or is dismissed for gross misconduct and at the
time of such termination neither of the conditions in clause 2 shall have been fulfilled.

Clauses 4 and 5 contained other consequential provisions.

What, then with this background, is the meaning of cl. 27 Its purpose is plain.
Paragraph (a) provides that Dr. Simmonds is not to get his shares unless the outstand-
ing debt to Crompton Parkinson has been repaid by means of redemption of prefer-
ence stock out of profits of RTT. But this might not be fair to Dr. Simmonds, for Mr.
Prenn, under his agreement with Crompton Parkinson, was not obliged to redeem
the preference stock, or, if he did, might not use RTT's profits to do so. So para (b) is
evidently designed to protect Dr. Simmonds against these possibilities. There are
three alternative events which might bring it into operation, stated under the proviso.
If any of these happened, Dr. Simmonds was to get his shares if the aggregate profits
of RTT earned over the four years ending 19th August 1963 and available for dividend
on the ordinary stock units whether declared or not should have amounted to
£300,000 after payment or provision for income tax and profits tax. All of this was
in the nature of an inducement to Dr. Simmonds, to procure whose expert services
was a main object of the Crompton Parkinson purchase, and who was the main-
spring of the profit earning activities of RTT through Airmec, to ensure that enough
profits were earned to match the £294,716 which, on this hypothesis, was to be paid
by Mr. Prenn, otherwise than out of RTT's profits, to Crompton Parkinson.
What profits, then, are contemplated by this clause? The profits of the RTT group,
including Airmec, or only such separate profits as reach RTT as holding company?
This is the whole question in the case.
As a final preliminary matter, before answering this question, it is necessary to
state a few more matters of fact which must have been present to the minds of both
parties. First, it must have been known to those businessmen, .a t least in general
terms, that under the Companies Act 1948 there had to be placed before the share-
holders of RTT in general meeting a consolidated profit and loss account giving a
true and fair view of the profits of RTT and its subsidiaries combined just as if it was
an account of a single company. No doubt there would also be separate profit and
loss accounts of each individual company, including RTT itself, but I have no hesita-
tion in asserting that both under the scheme· of the Act and in accepted business
practice, the significant document is the consolidated account which alone would
show whether the enterprise represented by the group was making profit or not.

465
CHAPTER 5 WR ITTEN DOCUMENTS

Secondly, as one would expect, accounts in this form had been prepared by RTT.
There are among the documents consolidated profit and loss accounts of RTT and
subsidiaries for the year ended 31st March 1958, the fifteen months ended 30th June
1959, the nine months ended 31st March 1960, the three relevant periods immediately
before the agreement. Each of these shows the consolidated profit on trading (i.e. of
the group), the dividend paid (i.e. on the preference and ordinary capital of RTT) and
the balance on profit and loss account (of RTT and the subsidiaries). Thirdly, there
are minutes showing how the decisions as to dividends (on RTT capital) out of the
profits (of the group) were made. Minutes of 11th August 1959 and 10th June 1960
show, as one would expect, that these were made by the board of the holding com-
pany, which then instructed the subsidiaries to declare the appropriate amount by
way of dividend, in .f avour of the holding company.
In the light of this, the meaning of cl. 2 of the agreement seems to me clear. The
references to "profits" in para (a) and in para (b) can only, in my opinion, be to the
consolidated profits of the group consisting of RTT and its subsidiaries. It is only
these profits which could provide an incentive to Dr. Simmonds to remain and work
with the group and which could be a measure of his success. On the other hand, no
purpose can be discerned why the reference should be to the separate profits of RTT,
which in fact means such part of the group profits as the board of that company,
effectively Mr. Prenn, decided to pass up to the parent company.
Linguistically, the arguments point decidedly the same way. The reference to profits
"earned,'' and that to income and profits tax, point strongly to consolidated profits.
The use of the words "R.T.T." even coupled with the definition appears to me perfectly
neutral, since other usages of "R.T.T." in the agreement (definition of "the Contract"
and cl. 3) dispel any idea that the draftsman had in mind any segregation of RTT (qua
parent) from the rest of its group. The reference (in para (b)) to profits "available for
dividend on the Ordinary Stock Units," so far from pointing towards the limited
construction, points, for me, the other way. For both commercially and on the estab-
lished accounting practice, all profits of the group are available for these dividends.
It is true that a large part of the profits was ploughed back into the business of the
subsidiaries, and that both parties must have contemplated that this would be done,
but this is not to the point. To say so is to confuse the earning of profits with their
appropriation; all profits earned are available for dividend; what is done with them
is a matter of choice which rests with those who control the company. Even if they
decided to "plough them back" they still remain "available for dividend,'' so long as
they remain in the balance sheet as "balance on profit and loss account."
One other argument I must mention. It is based on para (a). The reference there
to profits otherwise available for dividend must, it is said, be to profits of the holding
company, because it is only out of them that preference stock can be redeemed. This
is said to be borne out by s. 58 of the Companies Act 1948, which requires that
redeemable preference shares can only be redeemed out of "profits available for
dividend" (or by a new issue). The u se of these same words in para (a) is argued to
show that only separate profits of RTT can be meant. In my opinion, this argument
is fallacious. Paragraph (a) can just as well be referring to group profits; in a real sense
(since RTT does not trade) its preference stock can only be redeemed by profits
earned by the group. Admittedly, before redemption can occur, they have to be
passed up to RTT (holding) by way of dividend on the subsidiaries; but they are still
group profits. The only difference between para (a) and para (b) is that i.n the one
case a "passing up" operation is presupposed, in the other not. But the "profits" are
the same-group profits. The use of the words "available for dividend" ins. 58 proves
nothing, since that section is not concerned with any particular type of company or

466
 II. PAROL EVIDENtE RULE

with any distinction between parent and subsidiary. It is simply, in effect, saying that
redeemable preference shares must be redeemed out of profits, not out of capital.
What those profits are, in the case of a group, must be decided on arguments outside
the section.
To sum up, Mr. Prenn's construction does not fit in any way the aim of the agree-
ment, or correspond with commercial good sense, nor is it, even linguistically,
acceptable. The converse of each of these propositions applies to Dr. Simmonds's
interpretation. I would accept it. It follows, in consequence, that the alternative claim
for rectification does not arise.

NOTES

1. In Investors Compensation Scheme, Ltd v West Bromwich Building Society, [1998] 1

WLR 896 (HU, Lord Hoffmann said, referring to Prenn v Simmonds:

The background was famously referred to by Lord Wi lberforce as the "matrix of fact." but this
phrase is, if anything, an understated description of what the background may include.
Subject to the requirement that it should have been reasonably available to the parties and
to the [exclusion of the parties' previous negotiations and their declarations of subjective
intent], it includes absolutely anything w hich would have affected the way in wh ich the
language of the document would have been understood by a reasonable man.

2. In Eli Lilly & Co v Novopharm Ltd, [1998] 2 SCR 129, evidence of the subjective intentions
of the parties to an agreement for the supply of pharmaceuticals was excluded. Iacobucci J
said at para 54: "The contractual intent of the parties is to be determined by reference to the
words they used in drafting the document, possibly read in the light of the surrounding cir-
cumstances which were prevalent at the time."
3. In Sattva Capital Corp v Creston Maly Corp, 2014 SCC 53, Rothstein J acknowledged
that the parol evidence rule is justified on the basis of certainty but has been subject to num-
erous critiques. He left for another day the issue of the role of the rule in general, but did say
at para 60 that:

The parol evidence rule does not apply to preclude evidence of the surrounding circum-
stances. Such evidence is consistent w ith the objectives of finality and certainty because it
is used as an interpretive aid for determining the meaning of the written words chosen by
the parties, not to change or overrule the meaning of those words. The surrounding circum-
stances are facts known or facts that reasonably ought to have been known to both parties
at or before the date of contracting; therefore, the concern of unreliability does not arise.

FARAH V BARKI
(1955] SCR 107, 2 DLR 657

[On March 8, 1951, Barki wrote out and signed a document stating: "I hereby declare
having sold today to Mr. Bryan Farah 650 shares of Joy Heat and Equipment Com-
pany for the Wice of $6500 payable by Mr. Farah on the 15th of December 1951." Farah
read over and signed the document, but, in an action by Barki on the alleged contract,
Farah testified that although he had read the document he did not appreciate that
he was personally becoming the purchaser of the shares. He thought, as Barki had
previously proposed to him, that the shares were to be transferred to him and that
he should act for Barki in controlling the company and carry out a sale of the shares

467
CHAPTER 5 WRITTEN DOCUMENTS

to one Joy, if that should prove possible. Farah had introduced Barki to Joy, who
carried on the furnace business and he and Barki incorporated the company. Joy
was given 350 shares at a par value of $10 and continued to manage the business.
Barki invested $6,500, for which he got 650 shares. The company did very poorly.
Arrangements were proposed, but which fell through, for the sale of Barki's shares
to Joy. It was at this stage that Barki made the proposal to Farah on which he relied.
The trial judge accepted Farah's evidence and dismissed the action and remarked
that the contract looked to him very much like a "smart trick" by which Barki endeav-
oured to recompense himself for a bad investment. The Ontario Court of Appeal
allowed an appeal and concluded that the trial judge had made no finding of fraud.
Farah appealed to the Supreme Court.]
KELLOCK J [after discussing the facts and evidence]: ... In these circumstances, I think
the finding of the \earned trial Judge is to be interpreted as a finding of fraudulent
misrepresentation on the part of the respondent as to the nature of the document
which he asked the appellant to sign, and which he trusted he would sign, as he did,
under the influence of the previous discussion without appreciating the real nature
of the document, understanding that it was to be followed by a more formal docu-
ment. The question therefore arises as to whether or not in such circumstances the
appellant can successfully resist an action upon the document.
Winfield in his 13th edition of Pollock on Contracts at p. 384, quotes the language
of Lord Chelmsford in Wythes v. Labouchere (1858), 3 De G. & J. 593 at p. 601, 44 E.R.
1397, namely: "It may be said generally that a man of business who executes 'an
instrument of a short and intelligible description cannot be permitted to allege that
he executed it in blind ignorance of its real character."'
Winfield goes on to state that: "Strictly this may be an inference of fact rather than
a rule of \aw; but under such conditions the inference is irresistible."
This puts the point too rigidly. As stated by Farwell J. in May v. Platt, [1900] 1 Ch.
616 at p. 623, fraud "unravels everything." The cases, however, such as that presently
before the Court, in which a man may escape from a short and clear document,
which he admits reading before signing, must be few. But that is no_t impossible ....
In Blay v. Pollard, [1930] 1 KB. 628, where fraud was not pleaded, Scrutton L.J., in
the course of his judgment, said at p. 633 : "As a: general rule mistake as to the legal
effect of what you are signing, when you have read the document, does not avail ... .
It would be very dangerous to allow a man over the age of legal infancy to escape
from the legal effect of a document he has, after reading it, signed, in the absence
of an express misrepresentation by the other party of that legal effect."
The learned Lord Justice continued, however, quoting from Fry on Specific Per-
formance as follows: "'It equally follows that the mistake of one party to a contract can
never be a ground for compulsory rectification, so as to impose on the second party
the erroneous conception of the first. The error of the plaintiff alone may, however,
where (but, it is conceived, only where) there has been fraud or conduct equivale.nt
to fraud on the part of the defendant, be a ground for putting the defendant to elect
between having the transaction annulled altogether or submitting to the rectification
of the deed in accordance with the plaintiff's intention.' ... This rests on unilateral
mistake in one party, fraud or conduct equivalent to fraud in the other party.''
[The opinions of Kerwin CJC and Rand J also allowing the appeal are omitted.
Cartwright and Fauteux JJ concurred with Kellock J.]

468
 II. PAROL EVIDE NCE RULE

Curtis v Chemical Cleaning and Dyeing Co, Ltd. [1951] 1 All ER 631 (CA). The
defendants are cleaners and dyers. The plaintiff took a white satin wedding dress to
them for cleaning. When the dress was returned it had a stain on it which had not
been there when it was left for cleaning. The trial judge found that the stain was caused
by the defendant's negligence. The defendants relied on a receipt that the plaintiff
signed. The receipt set out her name and address and a description of the dress and
in the bottom right hand corner under the amount to be charged, was printed: "This
or these articles is accepted on condition that the company is not liable for any
damage howsoever arising, or delay." The plaintiff was told she had to sign the docu-
ment because she had to accept responsibility for damage to the beads and sequins
on the dress. The trial judge awarded damages at £32 10s. The defendants appealed.
The Court of Appeal dismissed the appeal. DENNING LJ: If the party affected signs a
written document, knowing it to be a contract which governs the relations between
him and the other party, his signature is irrefragable evidence of his assent to the
whole contract, including the exempting clauses, unless the signature is shown to
be obtained by fraud or misrepresentation . ... What is a sufficient misrepresentation
for this purpose7 ... In my opinion, any behaviour by words or conduct is sufficient
to'be a misrepresentation if it is such as to mislead the other party about the existence
or extent of the exemption. If it conveys a false impression, that is enough. If the
false impression is created knowingly, it is a fraudulent misrepresentation; if it is
created unwittingly, it is an innocent misrepresentation. But either is sufficient to
disentitle the creator of it to the benefit of the exemption .... In those circumstances,
by failing to draw attention to the width of the exemption clause, the assistant created
the -false impression that the exemption related to the beads and sequins only, and
that it did not extend to the material of which the dress was made. it was done per-
fectly innocently, but, nevertheless, a false impression was created. It was probably
not sufficiently precise and unambiguous to create an estoppel ... but, nevertheless,
it was a sufficient misrepresentation to disentitle the cleaners from relying on the
exemption, except in regard to the beads and sequins ....
The second point made by counsel for the defendant was that, even if there was
an innocent misrepresentation, the plaintiff cannot, in point of law, avoid the terms
of the contract. He said that an innocent misrepresentation gives no right to damages
but only to rescission, that rescission was not possible because the contract was
executed, and that in any case rescission was of no use to the plaintiff, because, once
rescission has taken place, there would be no contract to sue upon. That is an attract-
ive argument, but I do not think it is right. One answer to it is that an executed
contract can in a proper case be rescinded for innocent misrepresentation; and if
the present contract was rescinded, the plaintiff could sue in tort for negligence,
because any task undertaken must be done carefully.

QUESTION
If the "receipt" signed in the Curtis case had carried the words, "None of our agents or employ-
ees has any authority to alter. vary, or qualify in any way these terms and conditions," wo uld
the case have been decided differently7

469
CHAPTER 5 WRITTEN DOCUMENTS

Canadian Indemnity Co v Okanagan Mainline Real Estate Bo ard. [1971} SCR 493.
JUDSON JA: A party who misrepresents, albeit innocently, the contents or effect of a
clause inserted by him into a contract cannot rely on the clause in the face of his
misrepresentation: Mendelssohn v Normand Ltd, [1969} 3 WLR 139; Curtis v Chemical
Cleaning & Dying Co, [1951} 1 KB 805; Jaques v Lloyd D George & Partners Ltd, [1968}
2 All ER 187.

HAWRISH V BANK OF MONTREAL

[1969} SCR 515

JUDSON JA (for the court) : This action was brought by the Bank of Montreal against
Andrew Hawrish, a solicitor in Saskatoon, on a guarantee which the solicitor had
signed for the indebtedness and liability of a newly formed company, Crescent
Dairies Limited. This company had been formed for the purpose of buying the assets
of Waldheim Dairies Limited, a cheese factory in which Hawrish had an interest.
By January 1959, the line of credit granted by the bank to the new company was
almost exhausted. The bank then asked Hawrish for a guarantee, which he signed
on January 30, 1959. The guarantee was on the bank's usual form and stated that it
was to be a continuing guarantee and to cover existing as well as future indebtedness
of the company up to the amount of $6,000.
The defence was that when he signed the guarantee, Hawrish had an oral assurance
from the assistant manager of the branch that the guarantee was to cover only exist-
ing indebtedness and that he would be released from his guarantee when the bank
obtained a joint guarantee from the directors of the company. The bank d!d obtain
a joint guarantee from the directors on July 22, 1959, for the sum of $10,000. Another
joint guarantee for the same amount was signed by the directors on March 22, 1960.
Between the dates of these two last-mentioned guarantees there had been some
changes in the directorate.
Hawrish was never a director or officer of the new company but at the time when
the action was commenced, he was a shareholder and he was interested in the
vendor company. At all times the new company was indebted to the vendor company
in an amount between $10,000 and $15,000. Hawrish says that he did not read the
guarantee before signing. On February 20, 1961, Crescent Dairies Ltd., whose over-
draft was at that time $8,000, became insolvent. The bank then brought its action
against Hawrish for the full amount of his guarantee-$6,000.
The trial Judge dismissed the bank's action. He accepted the guarantor's evidence
of what was said before the guarantee was signed and held that parol evidence was
admissible on the ground that it was a condition of signing the guarantee that the
appellant would be released as soon as a joint guarantee was obtained from the dir-
ectors. He relied upon Standard Bank v. McCrossan, 55 D.L.R. 238 .... The Court of
Appeal ... reversed this decision and gave judgment for the bank. In their view the
parol evidence was not admissible and the problem was not the same as that in
Standard Bank v. McCrossan. Hall J.A. correctly stated the ratio of the Standard Bank
case in the following paragraph of his reasons [at 373}: "In my opinion the learned
trial judge erred in holding that the respondent was able to establish such condition
by parol evidence. The condition found, if indeed it is one, was not similar to that
which existed in Standard Bank v. McCrossan, supra, in that it did not operate merely
as a suspension or delay of the written agreement. It may be permissible to prove by
extraneous evidence an oral agreement which operates as a suspension only."

470
 II. PAROL EVIDENCE RULE

The relevant provisions of this guarantee may be summarized as follows:

(a) It guarantees the present and future debts and liabilities of the customer.
(Crescent Dairies Ltd .) up to the sum of $6,000.
(b) It is a continuing guarantee and secures the ultimate balance owing by the
customer.
(c) The guarantor may determine at any tim e his further liability under the guar-
antee by notice in writing to the bank. The liability of the guarantor continues
until determined by such notice.
(d) The guarantor acknowledges that no representations have been made to him
on behalf of the bank; that the liability of the guarantor is embraced in the
guarantee; that the guarantee has nothing to do with any other guarantee; and
that the guarantor intends the guarantee to be binding whether any other
guarantee or security is given to the bank or not.
The argument before us was confined to two submissions of error contained in
the reasons of the Court of Appeal:
(a) that the contemporaneous oral agreement found by the tria l Judge neither
varied nor contradicted the terms of the written guarantee but simply provided
by an independent agreement a manner in which the liability of the appellant
would be terminated; and
(b) that oral evidence proving the making of such agreement, the consideration
for which was the signing of the guarantee, was admissible.
I cannot accept these submissions. In my opinion, there was no error in the
reasons of the Court of Appeal. This guarantee was to be immediately effective.
According to the oral evidence it was to terminate as to an liability, present or future,
when the new guarantees were obtained from the directors. But the document itself
states that it was to be a continuing guarantee for an present and future liabilities
and could only be terminated by notice in writing, and then only as to future liabil-
ities incurred by the customer after the giving of the notice. The oral evidence is also
in plain contradiction of the terms of para. (d) of my summary above made. There
is nothing in this case to permit the introduction of the principle in Pym v. Campbell
(1856), 6 El. & BL 370, 119 E.R. 903, which holds that the parol evidence rule does not
prevent a defendant from showing that a document formally complete and signed
as a contract, was in fact"only an escrow.
The appellant further submitted that the parol evidence was admissible on the
ground that it established an oral agreement which was independent of and collateral
to the main contract.
In the last half of the 19th century a group of English decisions, of which Lindley
v. Lacey (1864), 17 C.B. (N.S.) 578, 144 E.R. 232; Morgan v. Griffith (1871), LR. 6 Ex. 70;
and Erksine v. Adeane (1873), L.R. 8 Ch. 764, are representative, established that where
there was parol evidence of a distinct collateral agreement which did not contradict
nor was inconsistent with the written instrument, it was admissible. These were
cases between landlord and tenant in which parol evidence of stipulations as to
repairs and other incidental matters and as to keeping down game and dealing with
game was held to be admissible although the written leases were silent ~n these
points. These were held to be independent agreements which were not required to
be in writing and which were not in any way inconsistent with or contradictory of
the written agreement.
The principle formulated in these cases was applied in Byers v. fv1cfv1illan (1887), 15
S.C.R. 194. In this case Byers, a woodcutter, agreed in writing with one Andrew to

471
CHAPTER 5 WRITTEN DOCUMENTS

cut and deliver 500 cords of wood from certain lands. The agreement contained no
provision for security in the event that Byers was not paid upon making delivery.
However, before he signed, it was orally agreed that Byers was to have a lien on the
wood for the amount to which he would be entitled for his work and labour. Byers
was not paid and eventually sold the wood. The respondents, the McMiUans, in whom
the contract was vested as a result of various assignments, brought an action of
replevin. It was hel d by a majority of this Court that they could not succeed on the
ground that the parol evidence of the oral agreement in respect of the lien was
admissible. Strong J., with whom the other members of the majority agreed, said at
pp. 202-3:

Erksine v. Adeane, 8 Ch. App. 764; Morgan v. Griffith, L.R. 6 Ex. 70; Lindley v. Lacey, 17 .
C.B. (N.S.) 578, afford illustrations of the rule in question by the terms of which any .
agreement collateral or supplementary to the written agreement may be established
by parol evidence, provided it is one which as an independent agreement could be
made without writing, and that it is not in any way inconsistent with or contradictory of
the written agreement. ...
These cases (particularly Erskine v. Adeane which was a judgment of the Court of
Appeal) appear to be all stronger decisions than that which the appellant calls upon us
to make in the present case, for it is difficult to see how an agreement, that one who in
writing had undertaken by his labor to produce a chattel which is to become the property
of another shall have a lien on such product for the money to be paid as the reward of
his labor; in any way derogates from the contemporaneous or prior writing. By such a
stipulation no term or provision of the writing is varied or in the slightest degree infringed
upon; both agreements can well stand together; the writing provides for the perform-
ance of the contract, and the consideration to be paid for it, and the parol agreement
·merely adds something respecting security for the payment of the price to these terms.

In Hei/but, Symons & Co. v. Buckleton, [1913] A.C. 30 at p. 47, a case having to do
with the existence of a warranty in a contract for the sale of shares, there is comment
on the existence of the doctrine and a note of caution as to its application: .

It is evident, both on principle and on authority, that there may be a contract the con-
sideration for which is the making of some other contract. "If you will make such and
such a contract, I will give you one hundred pounds," is in every sense of the word a
complete legal contract. It is collateral to the main contract, but each has an independ-
ent existence, and they do not differ in respect of their possessing to the full the
character and status of a contract. But such collateral contracts must from their very
nature be rare. The effect of a collateral contract such as that which I have instanced
would be to increase the consideration of the main contract by 100[., and the more
natural and usual way of carrying this out would be by so modifying the main contract
and not by executing a concurrent and collateral contract. Such collateral contracts,
the sole effect of which is to vary or add to the terms of the principal contract, are
therefore viewed with suspicion, by the law. They must be proved strictly. Not only the
terms of such contracts but the existence of an animus contrahendi on the part of all
the parties to them must be clearly shewn. Any laxity on these points would enable
parties to escape from the full performance of the obligations of contracts unquestion-
ably entered into by them and more especially would have the effect of lessening the
authority of written contracts by making it possible to vary them by suggesting the
existence of verbal collateral agreements relating to the same subject - matter.

Bearing in mind these remarks to the effect that there must be a clear intention
to create a binding agreement, I am not convinced that the evidence in this case

472
 II. PAROL EVIDENCE RULE

indicates clearly the existence of such intention. Indeed, I am disposed to agree with
what the Court of Appeal said on this point. However, this is not in issue in this
appeal. My opinion is that the appellant's argument fails on the ground that the col-
lateral agreement allowing for the discharge of the appellant cannot stand as it clearly
contradicts the terms of the guarantee bond which state that it is a continuing
guarantee.
The appellant has relied upon Byers v. McMillan. But upon my interpretation that
the terms of the two contracts conflict, this case is really against him as it is there
stated by Strong J., that a collateral agreement cannot be established where it is
inconsistent with or contradicts the written agreement. To the same effect is the
unanimous. judgment of the High Court of Australia in Hoyt 's Proprietary Ltd. v.
Spencer (1919), 27 C.L.R. 133, which rejected the argument that a collateral contract
which contradicted the written agreement could stand with it. Knox C.J., said at p.
139: "A distinct collateral agreement, whether oral or in writing, and whether prior
to or contemporaneous with the main agreement, is valid and enforceable even
though the main agreement be in writing, provided the two may consistently stand
together so that the provisions of the main agreement remain in full force and effect
notwithstanding the collateral agreement. This proposition is illustrated by the deci-
sions in Lindley v. Lacey (17 C.B. (N.S.), 578), Erskine v. Adeane (L.R. 8 Ch. 756), De
Lassalle v. Guildford ([1901] 2 K.B . 215) and other cases.''
I would dismiss the appeal with costs.
Appeal dismissed.

NOTE
· Hawrish was approved in Bauer v The Bank of Montreal, [1980] 2 SCR 102 and Carman Con-
struction Ltd v Canadian Pacific Railway Co, [1982] 1 SCR 958 . The misrepresentation cases,
however, have been held to survive: Bank of Nova Scotia v Zackheim (1983), 3 DLR (4th) 760
(Ont CA). How the parol evidence rule operates on misrepresentations depends on whether
the written evidence of the contract excludes both oral terms and representations that are not
specifically set out within the writing : Tender Choice Foods Inc v Planet Energy (Ontario)
Corp, 2016 ONCA 192.

MORGAN V GRIFFITH
(1871), LR 6 Ex 70

The plaintiff became tenant of the defendant on Michaelmas Day, 1867, on oral
terms that included the signing of a lease. The plaintiff found the land was overrun
with rabbits and when the lease was presented for signature he refused to sign
unless the rabbits were destroyed. The defendant later promised to destroy them
when the plaintiff threatened to quit. At Michaelmas, 1868, the lease was again ten-
dered. The plaintiff refused to sign it, but the defendant repeated his promise. The
plaintiff then asked to have the promise incorporated in the lease, which the defendant
refused, although he repeated his promise. The plaintiff signed. The lease contained
the plaintiff's promise that he would not hunt or destroy game, but preserve it and
allow the defendant and his friends to hunt. The rabbits were not destroyed and the
plaintiff quit at Michaelmas, 1870. He then brought this action. The defendant pleaded
the parol evidence rule, but the trial judge admitted the oral evidence of his promise,
and the plaintiff got a verdict. The defendant appealed this ruling of the judge.

473
CHAPTER 5 WRITTEN DOCUMENTS

KELLY CB: All that is possible has been said on behalf of the defendant, but it has failed
to convince me. I think the verbal agreement was entirely collateral to the lease, and
was founded on a good consideration. The plaintiff, unless the promise to destroy
the rabbits had been given, would not have signed the lease, and a court of equity
would not have compelled him to do so, or only on the terms of the defendant
performing his undertaking. The decision of the county court judge must therefore
be affirmed.
[Pigott B, who was of the same opinion, observed that the "verbal agreement" did
not appear to contain any terms that conflicted with the written document.]

PYM V CAMPBELL
(1856), 6 E & B 370, 119 ER 903

[Campbell proposed to purchase Pym's invention and arranged a meeting at which

Pym, Campbell, and two engineers, Fergusson and Abernethie, were to attend and
the engineers were to inspect and approve the invention. Pym arrived late, after the
engineers had left. It was agreed that, because the parties were together, if the engin -
eers could be found the sale might be arranged. Fergusson was found and approved,
but Abernethie could not be found; however, Campbell drew up a paper that both
he and Pym signed and it was agreed that if later Abernethie approved the invention
the paper should be an agreement and if he did not it should not be one. Abernethie
did not approve.
The Lord Chief Justice told the jury that if they were satisfied that, before the paper
was signed, it was agreed among them all that it should not operate as an agreement
until Abernethie approved of the invention, they should find for the defendant on
the pleas denying the agreement. Verdict for the defendant.
Thomas Serjt., in the ensuing term, obtained a rule nisi for a new trial on the
ground of misdirection.]
ERLE J: I think that this rule ought to be discharged. The point made is that this is a
written agreement, absolute on the face of it, and that evidence was admitted to
shew it was conditional: and if that had been so it would have been wrong. But I am
of opinion that the evidence shewed that in fact there was never any agreement at
all. The production of a paper purporting to be an agreement by a party, with his
signature attached, affords a strong presumption that it is his written agreement;
and, if in fact he did sign the paper animo contrahendi, the terms contained in it are
conclusive, and cannot be varied by parol evidence: but in the present case the
defence begins one step earlier: the parties met and expressly stated to each other
that, though for convenience they would then sign the memorandum of the terms,
yet they were not to sign it as an agreement until Abernethie was consulted. I grant
the risk that such a defence i:nay be set up without ground; and I agree that a jury
should therefore always look on such a defence with suspicion: but, if it be proved
that in fact the paper was signed with the express intention that it should not be an
agreement, the other party cannot fix it as an agreement upon those so signing. The
distinction in point of law is that evidence to vary the terms of an agreement in
writing is not admissible, but evidence to shew that there is not an agreement at all
is admissible.
[The opinions of Lord Campbell CJ and Crompton J to the like effect are omitted.]

474
 IL PAROL EVIDE NCE RULE

Long v Smith. (1911), 23 OLR 121. Smith bought a piano from Long for a price
expressed in their written agreement to be $575. The printed form provided it was the
whole agreement. The parties had, however, what Smith called a "wordable under-
standing" that, if he afterward found that he had been overcharged or that the piano
was unsatisfactory, Smith could return it and get back his $10 deposit or exchange
the piano for another. When Smith wanted his oral agreement added to the printed
form of the contract of sale, Long said he could not alter it but that his word could
be relied on. After Smith paid a $10 deposit and had the piano for 2-3 weeks, an expert
valued it at $400. Smith wanted to return it and be relieved from any obligation
beyond the $10 deposit. BOYD J, for the court, said: ... it is argued that it is contrary
to the rule of evidence and the decisions of the Courts to allow oral testimony to be
given which is inconsistent with or repugnant to the terms of the written instrument.
No little difficulty and confusion has arisen in the application of this rule to the
varying transactions of business life, which is not lessened by the discordant op in -
ions of the Judges. But, without trying to reconcile differences, there is a well-marked
line of cases establishing this doctrine, that evidence may be given of a prior or a
contemporaneous oral agreement which constitutes a condition upon which the
performance of the written agreement is to depend. The oral evidence may be such
as to affect the performance of the written agreement by shewing that it is not to be
operative ti\\ the condition is complied with. The enforcement of the contract may
be suspended or arrested till the stipulation orally agreed on has been satisfied. Here
there was to be in substance and in essence no bargain if the piano was not worth
the price stated in the writing. At the outset, and before the signing of the contract, the
defendant was practically prevented from getting correct information as to the value
from a competent person, but it was left for him to satisfy himself on that point
forthwith thereafter. Ten dollars he had paid, but there was no intention of paying
any more ti\\ he was satisfied as to the truth of the representation as to value.

City and Westminster Properties (1934) Ltd v Mudd. (1959] 1Ch129. To the know-
ledge of his landlord, a tenant had for years used the back part of his shop for living
and sleeping, despite a prohibition of such use in his \ease. A new lease was drawn
up containing a covenant by the tenant to use the premises for "showrooms, work-
rooms and offices only," but the landlord orally assured the tenant that he could
continue to live on the premises, and on the strength of that assurance the tenant
signed the \ease. Now the landlord brings ·a n action for forfeiture of the lease on the
ground that the tenant is living on the premises in breach of his covenant. HARMAN J,
holding that the oral promise prevailed over the writing, said: If the defendant's
evidence is to be accepted, as I hold it is, it is a case of a promise made to him before
the execution of the lease that, if he would execute it in the form put before him, the
landlord would not seek to enforce against him personally the covenant about using
the property as a shop only. The defendant says that it was in reliance on this promise
that he executed the lea;>e and entered on the onerous obligations contained in it.
He says, moreover, that but for the promise made he would not have executed the
lease, but would have moved to other premises available to him at the time. If these
be the facts, there was a clear contract acted upon by the defendant to his detriment
and from which the plaintiffs cannot be allowed to resile . ...
The plea that this was a mere licence retractable at the plaintiffs' will does not bear
examination. The promise was that so long as the defendant personally was tenant,
so long would the landlords forbear to exercise the rights which they would have if
he signed the lease. He did sign the lease on this promise and is therefore entitled
to rely on it so long as he is personally in occupation of the shop.

475
CHAPTER 5 WRITTEN DOCUME NTS

NOTE
It is interesting to consider this case in connection with Central London Property Trust Ltd v
High Trees House Ltd in Chapter 3. What would have been the tenant's remedy in the Mudd
case if the landlord 's assurance had been given after the lease had been executed?

TILDEN RENT-A-CAR CO V GLENDENNING

(1978), 83 DLR (3d) 400 (Ont CA)

DUBIN JA: Upon his arrival at Vancouver airport, Mr. Clendenning, a resident of
Woodstock, Ontario, attended upon the office of Tilden Rent-A-Car Company for
the purpose of renting a car while he was in Vancouver. He was an experienced
trave\\er and had used Tilden Rent-A-Car Company on many prior occasions. He
provided the clerk employed at the airport office of Tilden Rent-A-Car Company
with the minimum information which was asked of him, and produced his American
Express credit card. He was asked by the clerk whether he desired additional cover-
age, and, as was his practice, he said "yes." A contract was submitted to him for his
signature, which he signed in the presence of the clerk, and he returned the contract
to her. She placed his copy of it in an envelope and gave him the keys to the car. He
then placed the contract in the glove compartment of the vehicle. He did not read
the terms of the contract before signing it, as was readily apparent to the clerk, and
in fact he did not read the contract until this litigation was commenced, nor had he
read a copy of a similar contract on any prior occasion.
The issue on the appeal is whether the defendant is liable for the damage caused
to the automobile while being driven by him by reason of the exclusionary provisions
which appear in the contract.
On the front of the contract are two relevant clauses set forth in box form. They
are as fo\\ows :

15. Collision Damage Waiver By Customers Initials "J.C."

In consideration of the payment of $2.00 per day customers liability for damage
to rented vehicle including windshield is limited to nil. But notwithstanding payment
of said fee, customer shall be fully liable for all collision damage if vehicle is used, oper-
ated or driven in violation of any of the provisions of this rental agreement or off
highways serviced by federal, provincial, or mun icipal governments, and for all damages
to vehicle by striking overhead objects.
16. I, the undersigned have read and received a copy of above and reverse side of
this contract.
Signature of customer or employee of customer "John T. Clendenning"

(Emphasis added.)
On the back of the contract in particularly sma\\ type and so faint in the customer's
copy as to be hardly legible, there are a series of conditions, the relevant ones being
as fo\\ows:

6. The customer agrees not to use the ve hicle in violation of any law, ordinance,
rule or regulation of any public au tho rity.
7. The customer agrees that the ve hicle will not be operated:
(a) By any person who has drunk or consumed any intoxicating liquor, whatever
be the quantity, or who is under the influence of drugs or narcotics.

476
 II. PAROL EVIDENCE RULE

The rented vehicle was damaged while being driven by Mr. Clendenning in
Vancouver. His evidence at trial, which was accepted by the trial Judge, was to the
effect that in endeavouring to avoid a collision with another vehicle and acting out
of a sudden emergency, he drove the car into a pole. He stated that although he had
pleaded guilty to a charge of driving while impaired in Vancouver, he did so on the
advice of counsel, and at the time of the impact he was capable of the proper control
of the motor vehicle. This evidence was also accepted by the trial Judge.
Mr. Clendenning testified that on earlier occasions when he had inquired as to
what added coverage he would receive for the payment of $2 per day, he had been
advised that "such payment provided full non-deductible coverage." It is to be
observed that the portion of the contract reproduced above does provide that "In
consideration of the payment of $2.00 per day customers liability for damage to
rented vehicle including windshield is limited to nil."
A witness called on behalf of the plaintiff gave evidence as to the instructions
given to its employees as to what was to be said by them to their customers about
the conditions in the contract. He stated that unless inquiries were made, nothing
was to be said by its clerks to the customer with respect to the exclusionary condi-
tions. He went on to state that if inquiries were made, the clerks were instructed to
advise the customer that by the payment of the $2 additional fee the customer had
complete coverage "unless he were intoxicated, or unless he committed an offence
under the Criminal Code such as intoxication."
Mr. Clendenning acknowledged that he had assumed, either by what had been
told to him in the past or otherwise, that he would not be responsible for any damage
to the vehicle on payment of the extra premium unless such damage was caused by
reason of his being so intoxicated as to be incapable of the proper control of the
vehicle, a provision with which he was familiar as being a statutory provision in his
own insurance contract.
The provisions fastening liability for damage to the vehicle on the hirer, as con-
tained in the clauses hereinbefore referred to, are completely inconsistent with the
express terms which purport to provide complete coverage for damage to the vehicle
in exchange for the additional premium. It is to be noted, for example, that if the
driver of the vehicle exceeded the speed-limit even by one mile per hour, or parked
the vehicle in a no-parking area, or even had one glass of wine or one bottle of beer,
the contract purports to make the hirer completely responsible for all damage to the
vehicle. Indeed, if the vehicle at the time of any damage to it was being driven off a
federal, provincial or municipal highway, such as a shopping plaza for instance, the
hirer purportedly would be responsible for all damage to the vehicle.
Mr. Clendenning stated that if he had known of the full terms of the written
instrument, he would not have entered into such a contract. Having regard to the
findings made by the trial Judge, it is apparent that Mr. Clendenning had not in fact
acquiesced to such terms.
It was urged that the rights of the parties were governed by what has come to be
known as "the rule in L'Estrange v. F Graucob, Ltd.," [1934] 2 K.B . 394, and in particular
the following portion from the judgment of Scrutton, L.J., at p. 403:
In cases in which the contract is contained in a railway ticket or other unsigned docu-
ment. it is necessary to prove that an alleged party was aware, or ought to have been
aware, of its terms and conditions. These cases have no application when the document
has been signed . When a document containing contractual terms is signed, then, in
the absence of fraud, or, I will add, misrepresentation, the party signing it is bound,
and it is wholly immaterial whether he has read the document or not.

(Emphasis added.)

477
CHAPTER 5 WRITTEN DOCUMENTS

In the same case Maugham, L.J., added at p. 406:

There can be no dispute as to the soundness in law of the statement of Mellish L.J . in
Parker v. South Eastern Ry. Co., 2 C.P.D. 416, 421, which has been read by my learned
brother, to the effect that where a party has signed a written agreement it is immaterial
to the question of his liability under it that he has not read it and does not know its
contents. That is true in any case in which the agreement is held to be an agreement
in writing.
There are, however, two possibilities to be kept in view. The first is that it might be
proved that the document, though signed by the plaintiff, was signed in circumstances
which made it not her act. That is known as the case of Non est factum .
And at p. 407:
Another possibility is that the plaintiff might have been induced to sign the document
by misrepresentation.
Consensus ad idem is as much a part of the law of written contracts as it is of oral
contracts. The signature to a contract is only one way of manifesting assent to
contractual terms. However, in the case of L'Estrange v. F. Graucob, Ltd., there was in
fact no consensus ad idem. Miss L'Estrange was a proprietor of a cafe. Two salesm~n
of the defendant company persuaded her to order a cigarette machine to be sold to
her by their employer. They produced an order form w hich Miss L'Estrange signed
without reading an of its terms. Amongst the many clauses in the document signed
by her, there was included a paragraph, with respect to which she was completely
unaware, which stated "any express or implied condition, statement, or warranty,
statutory or otherwise not stated herein is hereby excluded." In her action against
the company she alleged that the article sold to her was unfit for the purposes for
which it was sold and contrary to the Sale of Goods Act. The company successfully
defended on the basis of that exemption clause.
Although the subject of critical analysis by learned authors (see, for example, J .R.
Spencer, "Signature, Consent, and the Rule in L'Estrange v. Graucob," [19731C.L.J.104),
the case has survived, and it is now said that it applies to an contracts irrespective of
the circumstances under which they are entered into, if they are signed by the party
who seeks to escape their provisions.
Thus, it was submitted that the ticket cases, which in the circumstances of this
case would afford a ready defence for the hirer of the automobile, are not
applicable.
As is pointed out in Waddams, The Law of Contracts, at p. 191:
From the 19th century until recent times an extraordinary status has been accorded to
the signed document that will be seen in retrospect, it is suggested, to have been
excessive.
The justification for the rule in L'Estrange v. F. Graucob Ltd., appears to have been
founded upon the objective theory of contracts, by which means parties are bound
to a contract in writing by measuring their conduct by outward appearance rather
than what the parties inwardly meant to decide . This, in turn, stems from the classic
statement of Blackburn J., in Smith v. Hughes (1871), L.R. 6 O.B. 597 at p. 607:
I apprehend that if one of the parties intends to make a contract on one set of terms,
and the other intends to make a contract on another set of terms, or, as it is sometimes
expressed, if the parties are not ad idem, there is no contract, unless the circumstances
are such as to preclude one of the parties from denying that he has agreed to the terms
of the other. The rule of law is that stated in Freeman v. Cooke (1848), 2 Ex. 654, 154

478
 II. PAROL EVIDENCE RULE

E.R. 652. If, whatever a man's real intention may be, he so conducts himself that a
reasonable man would believe that he was assenting to the terms proposed by the
other party, and that other party upon that belief enters into the contract with him,
the man thus conducting himself would be equally bound as if he had intended to
agree to the other party's terms.

(Emphasis added.)
Even accepting the objective theory to determine whether Mr. Clendenning had
entered into a contract which included all the terms of the written instrument, it is
to be observed that an essential part of that test is whether the other party entered
into the contract in the belief that Mr. Clendenning was assenting to all such terms.
In the instant case, it was apparent to the employee of Tilden Rent-A-Car that Mr.
Clendenning had not in fact read the document in its entirety before he signed it. It
follows under such circumstances that Tilden Rent-A-Car cannot rely on provisions
of the contract which it had no reason to believe were being assented to by the other
contracting party.
As stated in Waddams, The Law of Contracts, p. 191:
One who signs a written document cannot complain if the other party reasonably relies
on the signature as a manifestation of assent to the contents, or ascribes to words he
uses their reasonable meaning. But the other side of the same coin is that only a rea-
sonable expectation will be protected. If the party seeking. to enforce the document
knew or had reason to know of the other's mistake the document should not be
enforced.
In ordinary commercial practice where there is frequently a sense of formality in
the transaction, and where there is a full opportunity for'the parties to consider the
terms of the proposed contract submitted for signature, it might well be safe to
assume that the party who attaches his signature to the contract intends by so doing
to acknowledge his acquiescence to its terms, and that the other party entered into
the contract upon that belief. This can hardly be said, however, where the contract
is entered into in circumstances such as were present in this case.
A transaction, such as this one, is invariably carried out in a hurried, informal
manner. The speed with which the transaction is completed is said to be one of the
attractive features of the services provided.
The clauses relied on in this case, as I have already stated, are inconsistent with
the over-all purpose for which the contract is entered into by the hirer. Under such
circumstances, something more should be done by the party submitting the contract
for signature than merely handing it over to be signed.
In an analogous situation Lord Devlin in the case of Mccutcheon v. David fvlac-
Brayne Ltd., [1964] 1W.L.R.125, commented as follows, at pp. 132-4:

It would be a strangely generous. set of conditions in which the persistent reader, after
wading through the verbiage, could not find something to protect the carrier against
"any loss ... wheresoever or whensoever occurring"; and condition 19 by itself is enough
to absolve the respondents several times over for all their negligence. It is conceded
that if the form had been signed as usual, the appellant would have had no case. But,
by a stroke of ill luck for the respondents, it was upon this day of all days that they
omitted to get Mr. McSporran to sign the conditions. What difference does that make?
If it were possible for your Lordships to escape from the world of make-believe
which the law has created into the real world in which transactions of this sort are
actually done, the answer would be short and simple. It should make no difference
whatever. This sort" of document is not meant to be read, still less to be understood.

479
CHAPTER 5 WRITTEN DOCUMENTS

Its signature is in truth about as significant as a handshake that marks the forma l
conclusion of a bargain.
Your Lordships were referred to the dictum of Blackburn J. in Harris v. Great Western
Railway Co. (1876) 1 O.B.D. 515, 530. The passage is as follows:

And it is clear law that where there is a writing, into which the terms of any agree-
ment are reduced, the terms are to be regulated by that writing. And though one
of the parties may not have read the writing, yet, in general, he is bound to the
other by those terms; and that. I apprehend, is on the ground that, by assenting
to the contract thus reduced to writing, he represents to the other side that he
has made himself acquainted w ith the contents of that writing and assents to
them, and so induces the other side to act upon that representation by entering
into the contract with him, and is consequently precluded from denying that he
did make himself acquainted w ith those terms. But then the preclusion only exists
when the case is brought w ithin the rule so carefully and accurately laid down by
Parke B.. in delivering the judgment of the Exchequer in Freeman v. Cooke (1848).
2 Ex. 654, that is, if he "means his representation to be acted upon, and it is acted
upon accordingly: or if, whatever a man's real intentions may be, he so conduct
himself that a reasonable man would take the representation to be true, and
believe that it was meant that he should act upon it, and did act upon it as true."

If the ord inary law of estoppel was applicable to this case, it might well be argued
that the circumstances leave no room for any representation by the sender on which
the carrier acted. I believe that any other member of the public in Mr. McCutcheon's
place-and this goes for lawyers as well as for laymen-would have found himself
compelled to give the same sort of answers as Mr. McCutcheon gave; and I doubt if any
carrier who serves out documents of th is type cou ld honestly say that he acted in the
belief that the recipient had "made himself acquainted w ith the contents." But Blackburn
J. was dealing w ith an unsigned document, a cloakroom ticket. Unless your Lordships
are to disapprove the decision of the Court of Appeal in L'Estrange v. F. Graucob Ltd..
[1934] 2 K.B. 394, C.A.-and there has been no suggestion in this case that you should-
the law is clear, w ithout any recourse to the doctrine of estoppel. that a signature to a
contract is conclusive.

(Emphasis added.)
An analysis of the Canadian cases, however, indicates that the approach in this
country has not been so rigid. In the case of Colonial Investment Co. of Winnipeg, fv1an.
v. Borland, [1911] 1 W.W.R. 171 at p. 189, 19 W.L.R. 588, 5 Alta. L.R. at p. 72 [aff'd 6 DLR 21,
2 WWR 960, 22 WLR 145, 5 Alta LR 71], Beck, J., set forth the following propositions:

Consensus ad idem is essential to the creation of a contract. whether oral. in writing or

under seal, subject to this, that as between the immediate parties (and merely voluntary
assigns) apparent-as distinguished from real-consent will on the ground of estoppel
effect a binding obligation unless the party denying the obligation proves:

(1) That the other party knew at the time of the making of the alleged contract that the mind
of the denying party did not accompany the expression of his consent; or
(2) Such facts and circumstances as show that it was not reasonable and natural for the other
party to suppose that the denying party was giving his real consent and he did not in fact
give it;
In commenting on the Colonial Investment Co. of Winnipeg v. Borland case, Spen-
cer, in the article above cited, observes at p. 121:
It is instructive to compare a Canad ian approach to the problem of confusing docu-
ments which are signed but not fully understood.

480
 II. PAROL EVIDENCE RULE

And at p. 122 the author concludes his article with the following analysis:

Policy considerations, but of different kinds, no doubt lay behind both the Canadian
and the English approaches to this problem . The Canadian court was impressed by the
abuses which would result-and , in England, have resulted-from enabling companies
to hold ignorant signatories to the letter of sweeping exemption clauses contained in
contracts in standard form . The English courts, however, were much more impressed
with the danger of furnishing an easy line of defence by which liars could evade con-
tractual liabilities freely assumed . It would be very dangerous to allow a man over the
age of legal infancy to escape from the legal effect of a document he has. after reading
it, signed, in the absence of any express misrepresentation by the other party of that
legal effect. Forty years later. most lawye rs would admit that the English courts made a
bad choice between two evils.

The significance of the circumstances under which a contract i s entered into is·
noted by Taschereau, J ., in Provident Savings Life Ass'ce Society of New York v. Mowat
et al. (1902), 32 S.C.R. 147, as follows at p. 162:

As remarked by Mr. Justice Maclennan [27 O.A.R. 675):

The case of a formal instrument like the present. prepared and executed, after a long
negotiation, and correspondence delivered and accepted, and acted upon for years,
is wholly different from the cases relating to railways and steamship and cloak-room
tickets. in which it has been held that conditions qualifying the principal co ntract of
carriage or bailment. not sufficiently brought to the attention of the passenger or
bailor are not binding upon him . Such contracts are usually made in moments of
more or less haste and confusion and stand by themselves.

I see no real distinction in contracts such as these, where the signature by itself
does not truly represent an acquiescence of unusual and onerous terms which are
inconsistent with the true object of the contract, and the ticket cases. This point was
made by Beck, J.A., in Can. Bk. Commerce v. Foreman, [1927] 2 D.L.R. 530 at p. 537,
[1927] 1 W.W.R. 783, 22 Alta. L.R. 443, where he stated:

Personally I have a very strong opinion. which is not to the full extent shared by other
members of the Court and expressed in Gray-Campbell Ltd. v. Flynn , [1923) 1 D.L.R. 51,
18 Alta. L.R. 547, and for which I see some support in some circumstances in Ball v.
Gutschenritter, [1925) 1 D.L.R. 901, at p. 908 (and see also Jadis v. Porte (1915), 23 D.L. R.
713, 8 Alta. L.R. 489)-the opinion that when a contract of a common type contains
special onerous and unusual provisions it is the duty of the party in w hose interests
such provisions are inserted to see that they are effectively called to the attention of
the other party under the penalty of their being held not binding upon the latter party
but I think that would not ordinarily affect the residue of the contract and co nsequently
the question does not arise in the present case. The only special provision which the
bank needs to invoke, and which is of that special character that it alters the rights of
the parties, is that permitting the giving of time to the debtor etc.; but this I would not
place under the category of special provisions of an onerous or special character but
would consider to be such a provision as the ordinary layman wou ld suppose to express
the law independently of special provision .

{Emphasis added.)
The same point of view was expressed by Lord Denning in the case of Jaques v.
Lloyd 0. George & Partners Ltd., [1968] 1 W.L.R. 625 at p . 630:

The principles which in my opinion are applicable are the se: When an estate agent is
employed to find a purchaser for a business or a house, the ordinary understanding of

481
CHAPTER 5 WRITTE N DOCUMENTS

mankind is that the commission is payable out of the purchase price when the matter
is concluded. If the agent seeks to depart from that ordinary and well-understood term,
then he must make it perfectly plain to his client. He must bring it home to him such as
to make sure he agrees to it. When his representative produces a printed form and puts
it before the client to sign, he should explain its effect to him, making it clear that it go~s
beyond the usual understanding in these matters. In the absence of such explanation,
a client is entitled to assume that the form contains nothing unreasonable or oppressive.
If he does not read it and the form is found afterwards to contain a term which is wholly
unreasonable and totally uncertain, as this is, then the estate agent cannot enforce it
against the innocent vendor.
In commenting on Jaques v. Lloyd D. George & Partners Ltd., and on the case of
O 'Connor Real Estate Ltd. v. Flynn (1969), 3 D.L.R. (3d) 345; affirmed 11 D.L.R. (3d) 559,
1 N.S.R. (2d) 949, in 49 Can. Bar Rev., Professor Waddams makes the following obser-
vations, at pp. 590-1:
These cases suggest that there is a special onus on the supplier to point out any terms
in a printed form which differ from what the consumer might reasonably expect. If he
fails to do so, he will be guilty of a "misrepresentation by omission," and the court will
strike down clauses which "differ from the ordinary understanding of mankind" or (and
sometimes this is the same thing) clauses which are "unreasonable or oppressive." If
this principle is accepted, the rule about written documents might be restated as follows:
the signer is bound by the terms of the document if, and only if, the other party believes
on reasonable grouQds that those terms truly express the signer's intention. This prin-
ciple retains the role of signed documents as a means of protecting reasonable expecta-
tions; what it does not allow is that a party should rely on a printed document to
contradict what he knows, or ought to know, is the understanding of the other party.
Again this principle seems to be particularly applicable in situations involving the distri-
bution of goods and services to consumers, though it is by no means confined to such
situations.
In modern commercial practice, many standard form printed documents are
signed without being read or understood. In many cases the parties seeking to rely
on the terms of the contract know or ought to know that the signature of a party to
the contract does not represent the true intention of the signer, and that the party
signing is unaware of the stringent and onerous provisions which the standard form
contains. Under such circumstances, I am of the opinion that the party seeking to
rely on such terms should not be able to do so in the absence of first having taken
reasonable measures to draw such terms to the attention of the other party, and, in
the absence of such reasonable measures, it is not necessary for the party denying
knowledge of such terms to prove either fraud, misrepresentation or non est'factum.
In the case at bar, Tilden Rent-A-Car took no steps to alert Mr. Clendenning to
the onerous provisions in the standard form of contract presented by it. The clerk
could not help but have known that Mr. Clendenning had not in fact read the contract
before signing it. Indeed the form of the contract itself with the important provisions
on the reverse side and in very small type would discourage even the most cautious
customer from endeavouring to read and understand it. Mr. Clendenning was in fact
unaware of the exempting provisions-. Under such circumstances, it was not open to
Tilden Rent-A-Car to rely on those clauses, and it was not incumbent on Mr. Clenden-
ning to establish fraud, misrepresentation or non est factum. Having paid the premium,
he was not liable for any damage to the vehicle while being driven by him.
As Lo rd Denning stated in Neuchatel Asphalte Co. Ltd. v. Barnett, [1957] 1 W.L.R.
356 at p . 360 : "We do not allow printed forms to be made a trap for the unwary."

482
 II. PAROL EVIDENCE RULE

In this case the trial Judge held that "the rule in L'Estrange v. Graucob" governed.
He dismissed the action, however, on the ground that Tilden Rent-A-Car had by their
prior oral representations misrepresented the terms of the contract. He imputed into
the contract the assumption of Mr. Clendenning that by the payment of the premium
he was "provided full non-deductible coverage unless at the time of the damage he
was operating the automobile while under the influence of intoxicating liquor to
such an extent as to be for the time incapable of the proper control of the auto-
mobile." Having found that Mr. Clendenning had not breached such a provision, the
action was dismissed.
For the reasons already expressed, I do not think that in the circumstances of this
case "the rule in L'Estrange v. Graucob" governed, and it was not incumbent upon
Mr. Clendenning to prove misrepresentation.
In any event, if "the rule in L'Estrange v. Gravcob" were applicable, it was in error,
in my respectful opinion, to impute into the contract a provision which Tilden Rent-
A-Car had not in fact represented as being a term of the contract.
As was stated in Canadian Indemnity Co. v. Okanagan Mainline Real Estate Board et
al. , [1971] S.C.R. 493 at p . 500, 16 D.L.R. (3d) 715 at p . 720, [1971] 1 W.W.R. 289:

A party who misrepresents, albeit innocently, the contents or effect of a clause inserted
by him into a contract cannot rely on the clause in the face of his misrepresentation.
Under such circumstances, absent the exclusionary provisions of the contract,
the defendant was entitled to the benefit of the contract in the manner provided
without the exclusionary provisions, and the action, therefore, had to fail.
In the result, therefore, I would dismiss the appeal with costs.
[Zuber JA concurred. Lacourciere JA dissented.]

GALLEN V ALLSTATE GRAIN CO LTD

(1984), 9 DLR (4th) 496 (BCCA)

LAMBERTJA:

I. THE ISSUES

[25] An oral representation was made by Mr. Nunweiler, the president of Allstate
Grain Company Ltd., to the plaintiffs. Later, the plaintiffs reached an agreement with
Allstate, and signed Allstate's standard form contract. The representation turned out
to be wrong, and the plaintiffs suffered a loss. The plaintiffs sued and won. This
appeal by Allstate is now limited to questions about the parol evidence rule . These
are the questions:
(a) Is evidence of the oral representation admissible7
(b) Is the oral representation a warranty?
(c) Can the oral representation add to, subtract from, vary or contradict the signed
document?
(d) Is there a contradiction between the oral representation and the signed
document7
The answer to each of these questions depends, to some extent, on the answers to
the others. So I suppose to discuss them separately, but to answer them all at the end.

483
CHAPTER 5 WRITTEN DOCUMENTS

II. THE FACTS

[26] A\\state Grain Company Ltd. is a Saskatchewan company. It is in the business

of selling seed to farmers and buying farm crops. It had sold buckwheat seed to
farmers in Saskatchewan and bought their buckwheat crops. It had developed a
standard form contract covering that type of transaction.
[27] A\\state discovered that there was a very good market for early buckwheat in
Japan. But buckwheat for that market had to be planted at the beginning of May anti
harvested before the end of July. That could not be done in Saskatchewan. So A\\state
decided to embark on a new venture in contracting with farmers in the Lower Fraser
Va\\ey to grow first crop buckwheat for the Japanese market. A\\state started off by
advertising for farmers who might be interested in such a project.
[28] The plaintiffs were experienced farmers in Ladner. But first crop buckwheat
was not a crop which had ever been grown in the Fraser Va\\ey, though buckwheat had
been grown as a second crop.
[29] The plaintiffs answered A\\state's advertisement and a meeting took place
between the plaintiffs and Mr. Nunweiler in March, 1980. They discussed planting
procedures, yield, returns, and details of growth. The plaintiffs asked about weeds.
They were assured by Mr. Nunweiler that there would be no problem with weeds; the
buckwheat would grn';N up and cover the field like an umbre\\a, and the weeds would
a\\ be smothered. On May 1, 1980, the plaintiffs signed A\\state's standard Buckwheat
Marketing Agreement, 1980, by which they agreed to buy buckwheat seed from
A\\state and to se\\ back the buckwheat crop. The contract contained this clause:
23. Allstate gives no warranty as to the productiveness or any other matter pertaining
to the seed sold to the producer and will not in any way be responsible for the crop.

The plaintiffs had prepared a substantial acreage for this project. They took delivery
of A\\state's buckwheat seed and planted it. The buckwheat grew, but the weeds grew
faster; they could not be contro\\ed, and they destroyed the growing buckwheat.
[30] The plaintiffs brought this action for breach of warranty, breach of co\\ateral
contract and negligent misrepresentation. Paris J . found that the plaintiffs relied on
Mr. Nunweiler's statement when, two months or so after the statement was made,
they entered the buckwheat contract; and he found that Mr. Nunweiler was perfectly
aware of the plaintiffs' concerns about weeds when he gave the assurances that he
did. On that basis, Paris J. decided that the assurances constituted a warranty, and
that the defendant c_o mpany was liable to the plaintiffs for breach of warranty. Paris J .
said it was clear on the law that an exclusionary clause in the standard form contract
would not avail the defendants if a co\\ateral warranty was made out. Seaton J.A. has
set out the relevant passages from the reasons of Paris J. and I will not repeat them.
[31] Paris J. also considered the claim for negligent misrepresentation. He did not
decide whether a duty of care existed, because, assuming that it did exist, Mr. Nun-
weiler had complied with a reasonable standard of care. Mr. Nunweiler had relied
on his experience in Saskatchewan, and he had relied on an expert in buckwheat,
and he had relied on government publications. They a\\ turned out to be wrong. But
Mr. Nunweiler was not negligent when he relied on them and assured the plaintiffs
that the buckwheat would smother the weeds.
[32] Paris J. decided that the other personal defendant, Ronald Butterley, was not
involved in the misrepresentation. So he dismissed the claims against the two indi-
vidual defendants. He awarded $18,000 damages, calculated from the profit lost in
not growing barley, plus prejudgment interest and costs, against A\\state. This appeal
is brought by A\\state from that judgment. There is no crosscappeal.

484
 II. PAROL EVIDENCE RULE

Ill. IS EVIDENCE OF THE ORAL REPRESENTATION ADMISSIBLE?

[33] The parol evidence rule is not only a rule about the admissibility of evidence.
It reaches into questions of substantive law. But it is a rule of evidence, as well as a
body of principles of substantive law, and if the evidence of the oral representation
in this case was improperly admitted, the appeal should be allowed.
[341 The rule of evidence may be stated in this way: Subject to certain exceptions,
when the parties to an agreement have apparently set down all its terms in a docu-
ment, extrinsic evidence is not admissible to add to, subtract from, vary or contradict
those terms.
[35] So the rule does not extend to cases where the document may not embody all
the terms of the agreement. And even in cases where the document seems to embody
all the terms of the agreement, there is a myriad of exceptions to the rule. I will set out
some of them. Evidence of an oral statement is relevant and may be admitted, even
where its effect may be to add to, subtract from, vary or contraqict the document:
(a) to show that the contract was invalid because of fraud, misrepresentation ,
mistake, incapacity, lack of consideration, or lack of contracting intention;
(b) to dispel ambiguities, to establish a term implied by custom, or to demonstrate
the factual matrix of the agreement;
(c) in support of a claim for rectification;
(d) to establish a condition precedent to the agreement;
(e) to establish a collateral agreement;
(f) in support of an allegation that the document itself was not intended by the
parties to constitute the whole agreement;
(g) in support of a claim fo r an equitable remedy, such as specific performance
or rescission, on any ground that supports such a claim in equity, including
misrepresentation of any kind, innocent, negligent or fraudulent; and
(h) in support of a claim in tort that the oral statement was in breach of a duty of
care.
I do not consider that I am setting out an exhaustive list. I am only showing that
appropriate allegations in the pleadings will require that the evidence be admitted.
[36] So, if it is said that an oral representation, that was made before the contract
document was signed, contains a warranty giving rise to a claim for damages, evi-
dence can be given of the representation, even if the representation adds to, subtracts
from, varies or contradicts the document, if the pleadings are appropriate, and if the
party on whos~ behalf the evidence is tendered asserts that from the factual matrix
it can be shown that the document does not contain the whole agreement. The oral
representation may be part of a single agreement, other parts of which appear in the
document (the one-contract theory). Alternatively, the document may record a
complete agreement, but there may be a separate collateral agreement with different
terms, one of which is the oral representation (the two-contract theory).
[371 On the basis of the pleadings in this case, I do not doubt that the evidence
was properly admitted on the question of whether the document constituted a record
of the whole agreement.
[38] I should add that I can see very little residual practicality in the parol evidence
rule, as a rule of evidence, in cases tried by a judge alone.

IV. IS THE ORAL REPRESENTATION A WARRANTY?

[39] A warranty is one of the terms that may form a part of a contractual relation-
ship and affect the scope of the relationship. It may be either a representation as to

485
CHAPTER 5 WRITTEN DOCUMENTS

the existence of a present fact ("This car has traveUed only 10,000 kms.''); or it may
be a promise to bear the risk of the loss that will flow from a failure of a fact to occur
in the future ("This car is guaranteed rust-proof.").
[40] It is not necessary to distinguish, in this case, between conditions, warran-
ties, and other contractual terms that may give rise to claims in damages. But what
must be done in this case is to distinguish between a warranty, where the breach
gives rise to a claim for damages, and a bare and innocent misrepresentation, which
may give rise to a claim in equity for rescission, but does not give rise to a claim for
damages.
[41] The distinction does not turn on whether the recipient of the representation
acted on it. The distinction turns on whether the representation became a part of
the contractual relationship between the maker and the recipient. That, in turn,
depends on the .Intention of the parties, as derived from objective evidence, includ-
ing but not limited to, evidence that tends to show whether the representation was
intended to be acted upon and was in fact acted upon.
[42] Seaton J.A., whose reasons I have seen in draft form, has set out six factors
listed in Halsbury as aids in determining whether a statement is a warranty or a bare
representation. The six factors are only straws in the wind, but, to the extent that
they are helpful, I think that the second factor, namely, that the recipient makes it
clear that he regards the matter as so important that he would not contract without
the assurance, and the third factor, namely, that the maker is stating a matter that
should be within his knowledge and of which the recipient is known to be ignorant, ·
both·apply on the facts of this case, and both tend to show a warranty rather than a
bare representation.
[43] More helpful than Halsbury, in my opinion, are the reasons of Robertson J.A.
in Yorke v. Duval, [1953] 3 D.L.R. 820, 9 W.W.R. (N.S.) 523, a decision of this court. They
contain two guides for determining whether a pre-contractual representation is a
warranty. First, at p. 821 D.L.R., p. 545-5 W.W.R., Robertson J.A. said that the way to
decide is to look at the contract in the light of all the surrounding circumstances,
and that one of the first things to look.to is to what extent the accuracy of the state-
ment-the truth of what is promised-would be likely to affect the substance and
foundation of the adventure which the contract is intended to carry out. Then,
second, at p. 822 D.L.R., p. 525.W.W.R., Robertson J.A. said that the essence of a war-
ranty is that it becomes plain by the words and actions of the parties that it is
intended that, in the purchase, the responsibility of the soundness will rest upon the
vendor.
[44] That seems to me to put the question squarely. What the trier of fact is trying
to find out is this: who was to bear the risk that the statement might be wrong, the
person who made it, or the person who acted on it? If it must be taken to have been
intended, and understood, when said, to form a part of the contractual relations
between the parties, then it is a warranty.
[451 As was said by Robertson J.A. in Yorke v. Duval, in the end it is a question of
fact as to whether what was said was a warranty or just a statement. I will return to
that question of fact in this case in Part VII of these reasons.

V. CAN THE ORAL REPRESENTATION ADD TO, SUBTRACT FROM,

VARY, OR CONTRADICT THE SIGNED DOCUMENT?

[46] Once the oral evidence has been properly admitted under the application of
the parol evidence rule, the body of principles of substantive law that are also cus-
tomarily treated as being encompa_s sed by the rule must be considered.

486
 II. PAROL EVIDENCE RULE

[4 7] In Part III of these reasons, I concluded that evidence of the oral representa -
tion was admissible in this case either on the basis that the document did not contain
the whole agreement (the "one-contract" theory), or on the basis that the document
contained one complete agreement, but that the oral representation formed the basic
term of another complete agreement (the "two-contract" theory) .
[48] But I wish to emphasize that these theories are legal analysis only. They are
not real life . So the substantive law ought to be tf1e same, whichever theory is
adopted. It makes no sense to say that if the warranty is cast as part of a single con - ·
tract ("I am selling you a rust-proof car."), the consequence in law is different than if
the warranty is cast as part of a separate collateral contract ("If you buy this car from
me, I will guarantee that it is rust-proof.").
[49] The crucial parol evidence principle of substantive law, for the purposes of
this case, is the principle that forms one of the reasons for decision in Hawrish v. Bank
of Montreal (1969), 2 D.L.R. (3d) 600, [1969] S.C.R. 515, 66 WW.R. '673; Bauer v. Bank
of Montreal (1980), 110 D.L.R. (3d) 424, [1980] 2 S.C.R. 102, 33 C.B.R. (N.S.) 291, and
Carman Construction Ltd. v. C.P.R. Co. (1982), 136 D.L.R. (3d) 193, [1982] 1 S.C.R. 958,
18 B.L.R. 65, all decisions of the Supreme Court of Canada, and also in First National
Mortgage Co. Ltd. v. Grouse Nest Resorts Ltd. (1977), 2 B.C.L.R. 300, a decision of this
court.. That principle was stated in this way by Martland J ., for the Supreme Court of
Canada, in the Carman Construction case, at p. 201 D.L.R., p. 969 S.C.R.: "[A] collateral
agreement cannot be established where it is inconsistent with or contradicts the
written agreement."
[50] I propose to make eight comments about that principle.
[51] The first is that the principle has its root in the parol evidence rule as a rule
of evidence, and in the "two-contract" or "collateral contract" exception to that rule of
evidence. There is no objection to the introduction of evidence to establish an oral
agreement separate from the written agreement and made at the same time : see
Heilbut, Symons & Co. v. Buckleton, (1913] AC . 30. But it is unreasonable to contem-
plate that, at the same time, and between the same parties, two contracts will be
made dealing with the same subject-matter, one of which contradicts the other. So,
since the written one was clearly and demonstrably made, reason requires one to
conclude that the oral one, contradicting it, was never made. This point was set out
clearly by Isaacs J . in the High Court of Australia, in Hoyt's Proprietary Ltd. v. Spencer
(1919), 27 C.L.R. 133 at pp. 145-6, and it is consistent with the reasons of Strong J., in
the Supreme Court of Canada, in Byers v. McMillan (1887), 15 S.C.R. 194. Those are the
two roots which Judson J. relied on in Hawrish v. Bank of Montreal when he framed
the modern restatement of the principle.
[52] The second is that the principle cannot be an absolute one. Let us suppose
that a bank manager, acting within his authority, agrees that, if his customer will
agree to sign and be bound by the bank's standard form of guarantee, then the
guarantee will only be in effect for one year. The customer agrees on the basis of
that assurance and he signs the standard form of guarantee which contains no
mention of the one-year period. Two years pass by. The bank manager is replaced.
The principal debtor goes bankrupt and the bank sues the guarantor, who pleads the
collateral agreement as a defence. At trial, evidence is given by the former bank
manager. He says that he agreed on behalf of the bank that the guarantee would only
be in effect for a year. The second bank manager says that he knows about the agree-
ment made by the first bank manager, but he also knows about the Hawrish case,
which he thinks says that the agreement made by the first bank manager on behalf
of the bank does not bind the bank, and that, if that is so, then he thinks that his duty
to the bank's shareholders is to sue on the written guarantee. I do not consider that

4 87
CHAPTER 5 WRITTEN DOCUMENTS

the bank would succeed in that case. The principle in Hawrish is not a tool for the
unscrupulous to dupe the unwary.
[53] The third comment is that Hawrish, Bauer and Construction illustrate, by the
attention given to the evidence, that the principle is not an absolute one. In Hawrish,
at p. 605 D.L.R., p. 520 S.C.R., Judson J . said:
Bearing in mind these remarks to the effect that there must be a clear intention to create
a binding agreement, I am not convinced that the evidence in this case indicates clearly
the existence of such intention . Indeed, I am disposed to agree with what the Court of
Appeal said on this point.
In Bauer, at p. 431 D.L.R., p. 111 S.C.R., Mcintyre J. said:
For reasons which will appear later in that part of this judgment dealing with the col -
lateral contract argument, I am of the view that there is no evidence which would
support any such finding against the bank.
In Carman Construction, at p . 199 D.L.R., p. 967 S.C.R., Martland J . said:
In any opinion there is no evidence in the present case to establish an intention to
warrant the accuracy of the statement made by the C.P.R. employee to Fielding, i.e., no
promise to make it good.
If the principle were an absolute one, there would have been no need in those cases
to mention the evidence, because the statement alleged in each case, if established
by the evidence, clearly contradicted the document. So the cases could have been
disposed of by the application of the absolute principle, no matter how convincing
the evidence, even if both parties agreed that the oral warranty was given, and was
intended to be binding, and was intended to override or modify the document.
[54] The fourth point is that Bauer v. Bank of Montreal explicitly recognizes a par-
ticular exception to the principle, where, at p . 430 D.L.R., p . 111 S.C.R., Mcintyre J ., for
the Supreme Court of Canada, said:
Various authorities were cited for the proposition that a contract induced by misrepre -
sentation or by an oral representation, inconsistent with the form of the written contract,
would not stand and could not bind the party to whom the representation had been
made. These authorities included Canadian Indemnity Co. v. Okanagan Mainline Real
Estate Board et al. (1970), 16 D.L.R . (3d) 715 at p. 720, [1971] S.C.R. 493 at p. 500, per
Judson, J.; Jaques v. Lloyd D. George & Partners Ltd., [1968] 1 W.L.R. 625 (C.A.), per
Lord Denning at pp. 630-1; Firestone Tyre & Rubber Co. Ltd. v. Vokins & Co. Ltd., [1951]
1 Lloyd's Rep. 32 (K.B.l. see Devlin, J., at p. 39, and Mendelssohn v. Normand Ltd., [1970]
1O.B.177 (C.A.) .
No quarrel can be made with the general provision advanced on this point by the
appellant. To succeed, however, this argument must rest upon a finding of some mis -
representation by the bank, innocent or not, or on some oral representation inconsistent
with the written document which caused a misimpression in the guarantor's mind, or
upon some omission on the part of the bank manage r to explain the contents of the
document which induced the guarantor to enter into the guarantee upon a misunder-
standing as to its natu re.
So, if the contract is induced by an oral misrepresentation that is inconsistent with
the written contract, the written contract cannot stand.
[55] The fifth point is that the rationale of the principle, as discussed in the first
point, above, does not apply with equal force where the oral representation adds to,
subtracts from, or varies the agreement recorded in the document, as it does where

488
 II. PAROL EVIDENCE RULE

the oral representation contradicts the document. As far as "adding to" is concerned,
there i~ nothing inherently unreasonable about two agreements which add to each
other. "Subtracting from" and "varying" represent a half-way stage between "adding
to," on the one hand, which is wholly reasonable, and "contradicting," on the other
hand, which is wholly unreasonable.
[56] The sixth point is that, if Hawrish, Bauer and Carman Construction are properly
considered on their facts, the law in Canada is no different from that stated by K.W.
Wedderburn in h is article "Collateral Contracts," [1959] Camb. L.J. 58 at p. 62, where
he says:
What the parol evidence rule has bequeathed to the modern law is a presumption-
namely that a document which looks like a contract is to be treated as the whole .
contract. This presumption is "very strong" but "it is a presumption only, and it is open
to either of the parties to allege that there was, in addition to what appears in the written
agreement, an antecedent express stipulation not intended by the parties to be
excluded, but intended to continue in force with the express written agreement."

The presumption is always strong. But it is strongest when the oral representation
is alleged to be contrary to the document, and somewhat less strong when the oral
representation only adds to the document.
[57] The seventh point is that, if it is correct to view the principle only as a strong
presumption, which I think is the correct view of Hawrish, Bauer and Carman, then
that presumption would be more rigorous in a case where the parties had produced
an individually negotiated document than it would be where a printed form was
used, though it would be a strong presumption in both cases.
[58] The eighth and final point is that, if it is correct to consider the principle only
as a strong presumption, then the presumption would be less strong where the
contradiction was between a specific oral representation, on the one hand, and a
general exemption or exclusion clause that excludes liability for any oral representa-
tion, whatsoever, on the other hand, than it would be in a case where the specific
oral representation was contradictory to an equally specific clause in the document.
This point is made by Anderson J.A., whose reasons I have read in draft, and I agree
with him that the point is established by the cases to which he refers.
[59] I will return to this principle, on the facts of this case, in Part VII of these
reasons.

VI. IS T HERE A CONTRADICTION BETWEEN T HE ORAL

RE PRESENTATION AND THE SIGNED DOCU MENT?

[60] I propose to set out the oral representation and cl. 23. If the oral representa-
tion is to have effect at all, it can be stated in this way:
Allstate warrants that weeds will not be a cause of loss; the buckwheat will grow up
and smother the weeds.

[61] Clause 23 reads:

23. Allstate gives no warranty as to the productiveness or any other matter pertaining
to the seed sold to the producer and wi ll not in any way be responsible for the crop.

In my opinion, the oral warranty and the printed document do not contradict each
other. Taking cl. 23 without regard to the oral warranty, and having regard to the fact
that the clause does not exclude all warranties, I think that the proper interpretation
of cl. 23, in its context, is that all warranties pertaining to the seed are excluded, and

489
CHAPTER 5 WRITTEN DOCUMENTS

that Allstate is not responsible for the yield. In the context, I think that the word "crop"
means "yield."
[62] But even if I am wrong, and cl. 23, if it stood alone, would bear the meaning
that Allstate was not to be liable for anything that prevented the production and
harvesting of a buckwheat crop grown from the seed, I think it is proper to interpret
cl. 23 in its relationship with the oral representation that was made in this case,
because it is in the light of that representation that the parties would have interpreted
cl. 23 when they read it over before signing the document. If that approach to inter-
pretation is the correct one, then the oral representation and cl. 23 must be interpreted
harmoniously, if that can be done without depriving cl. 23 of a natural and sensible
meaning. Under that interpretation, Allstate would not be responsible for matters
relating to the seed, for the yield, or for matters that might affect the production of
the buckwheat arising from soil conditions or from farming methods and practices,
but Allstate would assume any risk that the crop would be destroyed by weeds. There
is no reason why the usual rule that an harmonious construction should be preferred
to a contradictory construction should not apply.
[63] But, of course, the rationale of the harmonious construction rule is that the
parties cannot have intended to agree to inconsistent obligations. So the rule only
applies where both obligations have contractual force . And that depends on whether
the oral representation was a warranty. But the question of whether it was a warranty
or a bare representation is a question of fact, determined by the objective evidence
of whether it was intended to have contractual force. So the interpretation of the
representation and the document, on the one hand, and the question of whether
the representation is a warranty, on the other hand, are bound together and should
be answered together.

VII. CONCLUSION

[64] The trial judge said:

It is clear on the law that the exclusionary clause in the contract will not avail the defend-
ant, Allstate, if such a warranty is made out on the evidence. Is it so made out7
For the reasons I have set out in Parts V and VI, I think that it is a considerable over-
simplification of the law to say that an exclusionary clause will not avail the defendant
if a collateral warranty is made out on the evidence. Sometimes it will, sometimes it
would not; the court must strive to reach the true contractual intention of the parties,
guided, in the case of contradiction, by the strong presumption in favour of the
document.
[65] But even if the trial judge oversimplified the law, he considered the right ques-
tion on the evidence, namely: Is a warranty made out as a matter of fact? I do not think
that he misdirected himself on the principles to be applied in answering that question
of fact. It involved a nice question of judgment and an assessment of the testimony
and demeanour of the witnesses. Paris J. concluded that Mr. Nunweiler's statement
regarding weed control constituted a warranty. There is ample evidence to support
that conclusion, much of it referred to by Paris J. in his reasons. I do not think that it
is open to me to consider that matter afresh, or, if I were to reach a different conclu-
sion on the facts than Paris J., to substitute my view of the facts for his.
[66] Once it has been decided that the oral representation was a warranty, then,
in my opinion,
(a) evidence accepted on the basis that there would be a subsequent ruling on
admi ssibility, becomes admissible;

490
 Ill. RECTIFICATION

(b) the oral warranty and the document must be interpreted together, and, if
possible, harmoniously, to attach the correct contractual effect to each;
(c) if no contradiction becomes apparent in following that process, then the
principle in Hawrish, Bauer and Carman has no application; and ·
(d) if there is a contradiction, then the principle in Hawrish, Bauer and Carman is
that there is a strong presumption in favour of the written document, but the
rule is not absolute, and if on the evidence it is clear that the oral warranty was
intended to prevail, it will prevail.

[67] Since, in my opinion, there is no contradiction in this case between the spe-
cific oral warranty and the signed standard form Buckwheat Marketing Agreement,
1980, I have concluded that the warranty has contractual effect and that the defendant,
Allstate Grain Co. Ltd., is liable to the plaintiffs for breach of that warranty.
[68] But if it were correct, in this case, to conclude that the oral representation
and the Buckwheat Marketing Agreement, 1980 contradicted each other, then, on
the basis of the facts found by the trial judge and his conclusion that the oral repre-
sentation was intended to affect the contractual relationship of the parties, as a
warranty, I would have concluded that, in spite of the strong presumption in favour
of the document, the oral warranty should prevail.
[69] I would dismiss the appeal.

[Anderson JA agreed. Seaton JA dissented.]

NOTES
1. In consumer transactions within the scope of the Ontario Consumer Protection Act. oral
evidence is admissible to prove an "unfair practice ." See Chapter 6. In British Columbia, s 187
of the Consumer Protection and Business Practices Act, SBC 2004, c 2, has the effect of
abolishing the "parole" evidence rule for proceedings in respect of a consumer transaction.
In Saskatchewan, s 17 of the Consumer Protection and Business Practices Act, SS 2013,
c C-30.2, allows parol evidence to establish the existence of an express warranty in any action
between a consumer and a retail seller or manufacturer. In England, a Law Commission Work-
ing Paper (no 70, 1976) recommended total abolition of the rule, as did the Ontario Law
Reform Commission in its Report on Sale of Goods (1979) . The English Law Commission
reversed its view in its report in 1988. See also McCamus at 193-207; Waddams at paras 315-
35, 344-51; MacDougall, ch 5.
2. In Bhasin v Hrynew, 2014 SCC 71, the Supreme Court of Canada said that the "duty of
honest performance," discussed in Chapter 8, cannot be excluded, even through the use of an
entire obligations clause.

Ill. RECTIFICATION

USA V MOTOR TRUCKS, LIMITED

[1924] AC 196 (Ont PC)

By contract dated May 18, 1918, the respondent company contracted to machine
high-explosive shells for the appellant Government; the contract provided for cancel-
lation by notice in the event of anticipated termination of the war, and for payments
to be made to the respondents thereupon. The payments were to include reimburse-
ment for the cost of buildings, plant, etc., which the respondents had to add to their

491
CHAPTER 5 WRITTEN DOCUME NTS

facilities for the purpose of carrying out the contract. Notice to terminate the contract
was given in November 1918, and the parties thereupon negotiated as to the sum to
be paid to the respondents . Ultimately a sum of $1,653,115 was agreed, which
included $376,496, being the full amount which the respondents claimed in respect
of land and buildings. After deducting from the above total a large sum which had
been advanced by the appellant Government to the respondents, together with
interest thereon, it was agreed that $637,812 was due to the respondents.
The parties accordingly entered into a formal contract dated October 7, 1919, but
not actually signed until November 8. The contract provided that it should supersede
the original contract of May 18, 1918, which was thereby terminated, and that the
appellant Government should pay to the respondents the sum of $637,812 in full
settlement for work and goods delivered and expenses incurred under the original
contract; it further provided as follows: "(4) Title to all property specified in Schedule
A, hereto annexed and made a part hereof, shall vest in the United States immediately
upon execution of this agreement."
The land and buildings were not included in the schedule.
The agreed sum was paid on November 10, 1919, but the respondents subse-
quently denied the right of the appellant Government to possession of the land and
buildings.
The appellant Government brought an action against the respondents in the
Supreme Court of Ontario, claiming rectification of the schedule by the inclusion
of the land and buildings, and specific performance of the contract as so rectified;
alternatively they claimed repayment of the sum paid in respect of the land and
buildings.
The trial judge (Kelly J.) found that the intention was that the land and buildings
should become the property of the appellant Government. He ordered and declared
that the respondents were trustees of the land and buildings for such person as the
appellant Government might direct, with rectification of the schedule, the respond-
ents to convey the land accordingly.
On appeal to the Appellate Division the judgment of Kelly J . was reversed and the
action dismissed, Meredith C.J. dissenting. The judgments of the majority of the
Court were based mainly upon the conclusions of fact.
THE EARL OF BIRKENHEAD: ... The question which requires the decision of the Board
is whether or not it was the intention of the parties that the land and buildings, which
had been paid for as claimed without deduction, should be inserted in schedule A
and whether, if so, they were om_itted therefrom by mutual mistake, so that rectifica-
tion of an incomplete schedule should be ordered, or whether on the true interpretation
of the intentions of the parties the respondents were entitled to receive all that they
had expended upon acquiring the land and erecting the building, and, being so
compensated, to retain both as their own.
The answer to these questions can only be found by reference to some legal
considerations which their Lordships will hereinafter examine. If the parties intended
that the lands and buildings should be included in schedule A, so that the omission
in the instrument was accidental, rectification ought undoubtedly to be decreed.
The Board, therefore, finds it necessary to examine the actions and the words of the
parties at the relevant periods.
Their Lordships have reached the conclusion that both the appellants and the
respondents intended that the land and buildings should be included in schedule A
That the appellants so iri.tended has not been seriously disputed; and upon this point
the Board entertains no doubt. Their Lordships, after giving careful attention to the
matter, are no less confident that the respondents clearly understood that the award

492
 Ill. RECTIFICATI O N

contemplated the transfer as owners to the United States of the land and buildings
for which under its terms that Government had paid the respondents complete and
generous compensation ....
It was further suggested that the ·present action involved an attempt to enforce a
parol contract inconsistently with the principle of the Statute of Frauds. It is however,
well settled by a series of familiar authorities that the Statute of Frauds is not allowed
by any Court administering the doctrines of equity to become an instrument for
enabling sharp practice to be committed. And indeed the power of the Court to
rectify mutual mistake implies that this power may be exercised notwithstanding
that the true agreement of the parties has not been expressed in writing. Nor does
the rule make any inroad upon another principle, that the plaintiff must show first
that there was an actually concluded agreement antecedent to the instrument which
is sought to be rectified; and secondly, that such agreement has been inaccurately
represented in the instrument. When this is proved either party may claim, in spite
of the Statute of Frauds, that the instrument on which the other insists does not
represent the real agreement. The statute, in fact, only provides that no agreement
not in writing and not duly signed shall be sued on; but when the written instrument
is rectified there is a writing which satisfies the statute, the jurisdiction of the Court
to rectify being outside the prohibition of the statute.
The respondents, however, advance still a further point of law. They contend that
a plaintiff was not allowed to sue in the old Court of Chancery for the specific per-
formance of a contract with a parol variation. There seems no reason on principle
why a Court of Equity should not at one and the same time reform and enforce a
contract; the matter, however, has been much discussed in the Court, and the bal-
ance of distinguished authority not unequally maintained. But the difficulty, which
was almost entirely technical, has been, in the view of the Board, removed by the
provisions of the Judicature Act, 1873, s. 24, which are reproduced in s. 16 of the
Judicature Act of the Province of Ontario, ch. 56 of the Revised Statutes of 1914. This
section provides that the Court, which is to administer equity as well as law, is to
grant, either absolutely or on such reasonable terms and conditions as it shall deem
best, an such remedies as any of the parties may appear to be entitled to in respect
of any and every legal and equitable claim properly brought forward by them in such
cause or matter, so that, as far as possible, all matters so in controversy between the
parties may be completely and finally determined, and an multiplicity of legal pro-
ceedings discouraged.
The analogous provisions of the English Judicature Act are stated by Sir Edward
Fry in his book on Specific Performance, 5th ed. para. 816. The learned author holds
(and the Board agrees with him) that the controversy between the Chancery judges
has now become obsolete, inasmuch as since the Judicature Act the Court can
entertain an action in which combined relief will be given simultaneously for the
reformation of a contract, and for the specific performance of the reformed
contract.
Despite some differences in subsequent decisions, in which the principles of s.
24 of the Judicature Act have not been sufficiently considered, it has been held by
P. 0 . Lawrence J., and by the Court of Appeal in the very recent case of Craddock
Brothers v. Hunt, [1922] 2 Ch. 809, that the principle that as laid down by Sir Edward
Fry must now prevail.
Their Lordships are of the same opinion, and conclude that under this head no
difficulty confronts the appellants in the present case.
The board has thought it proper to consider the matters raised in this appeal with
some particularity, partly because of the importance of the case, and partly out of

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respect for the learned judges who took a different view in the Appellate Division.
But on analysis the issue has proved to be extremely simple. Both parties intended
the lands and buildings to be included in the schedule. These were inadvertently
omitted. Rectification must follow unless some exceptional ground for excluding
this remedy is advanced. The respondents have attempted only to show that they
agreed to the schedule in its intended form by reason of an error as to their existing
legal rights. This contention has been rightly negatived on the facts, and would, in
any event, be irrelevant in law.
Their Lordships will, therefore, humbly advise His Majesty that this appeal should
be allowed, the judgment of the Appellate Division of the Supreme Court set aside
with costs, and the judgment of Kelly J . restored. The respondents will pay the costs
of the appeal.

Bercovici v Palmer. (1966), 59 DLR (2d) 513 (Sask CA). [In connection with a written
agreement for the sale of land, both parties claimed relief, but in different ways. The
question arose as to whether their conduct after the agreement was reached could be
used to establish how, if at all, the written agreement should be rectified.] CULLITON CJS
(for the court) said: Learned counsel contended that in an action for rectification the
only evidence that can be considered is the evidence of what took place prior to
the execution of the written document and that in the instant case the learned trial
Judge erred in law in considering the conduct of the parties subsequent to that time.
In support of this argument learne.d counsel relied upon the judgments in Lovell and
Christmas, Ltd. v. Wall (1911), 104 L.T. 85; Earl of Bradford v. Earl of Romney (1862), 30
Beav. 431, 54 E.R. 956, and Brown v. Hillar, [1951] 4 D.L.R. 383, [1951] O.R. 634. With all
deference I must say that I do not think the judgments in these cases advance the
appellant's argument. In each case there is reiterated the established principle that
subsequent declarations of the parties are not admissible for the purpose of constru -
ing a written contract. In this case the learned trial Judge was not faced with the
question of construction but with the question of rectification.
In The M.F. Whalen v. Pointe Anne Quarries Ltd., [(1921), 63 D.L.R. 545], Duff J . (as he
then was), at p . 568: "Where one of the parties denies the alleged variation the parol
evidence of the other party is not sufficient to entitle the Court to act. Such parol evi-
dence must be adequately supported by documentary evidence and by considerations
arising from the conduct of the parties satisfying the Court beyond reasonable doubt
that the party resisting rectification did in truth enter into the agreement alleged. It
is not sufficient that there should be a mere preponderance of probability, the case
must be proved to a demonstration in the only sense in which in a Court of law an
issue of fact can be established to a demonstration, that is to say, the evidence must
be so satisfactory as to leave no room for such doubt. Hart v. Boutilier (1916), 56 D.L.R.
620, at p. 630; Fowler v. Fowler (1859), 4 De G. and J. 250 at p. 264, 45 E.R. 97; Clarke
v. Jose/in (1888), 16 O.R. 68 at p. 78." [The italics are mine.]
In Hart v. Boutilier, supra, it is obvious that Duff J. gave effect to considerations
arising from the conduct of the parties for at p . 636 he said: "The respondent's sub-
sequent conduct is not less difficult to understand." In the same case Idington J .,
makes it clear that in an action for rectification reliance may be placed upon con-
siderations arising from the conduct of the parties. At p. 630 he stated: "The conduct
of the parties and the outstanding features and nature of the transaction must in such
cases often be relied upon as a better guide than what either may merely swear to."

494
 Ill. RECTIFICATION

PERFORMANCE INDUSTRIES LTD V SYLVAN

LAKE GOLF &TENNIS CLUB LTD
2002 sec 19, r2002i 1 scR 678

[As part of a joint venture the parties agreed orally on development of a strip of land
110 yards wide, but when the agreement was reduced to writing the measurement
was stated as 110 feet. The president of the plaintiff corporation (Frederick Bell) signed
the document without reading it. The trial judge granted rectification, and was
upheld on this point by the Alberta Court of Appeal. A further appeal to the Supreme
Court of Canada was dismissed.]
BINNIEJ: ...
[31] Rectification is an equitable remedy whose purpose is to prevent a written
document from being used as an engine of fraud or misconduct "equivalent to fraud.''
The traditional rule·was to permit rectification only for mutual mistake, but rectifica-
tion is now available for unilateral mistake (as here), provided certain demanding
preconditions are met. Insofar as they are relevant to this appeal, these preconditions
can be summarized as follows . Rectification is predicated on the existence of a prior
oral contract whose terms are definite and ascertainable. The plaintiff must establish
that the terms agreed to orally were not written down properly. The error may be
fraudulent, or it 'm ay be innocent. What is essential is that at the time of execution
of the written document the defendant knew or ought to have known of the error and
the plaintiff did not. Moreover, the attempt of the defendant to rely on the erroneous
written document must amount to "fraud or the equivalent of fraud." The court's task
in a rectification case is corrective, not speculative. It is to restore the parties to their
original bargain, not to rectify a belatedly recognized error of judgment by one party
or the other: Hart v. Boutilier (1916), 56 D.L.R. 620 (S .C.C.), at p. 630; Ship M.F. Whalen
v. Pointe Anne Quarries Ltd (1921), 63 S.C .R. 109, at pp. 126-27, 63 D.L.R. 545, at p. 557;
Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. (1996), 133
D.L.R. (4th) 550 (Ont. C.A.), at p . 558; G.H.L. Fridman, The Law of Contract in Canada
(4th ed. 1999), at p. 867; S.M. Waddams, The Law of Contracts (4th ed. 1999), para. 336.
In Hart, supra, at p. 630, Duff J. (as he then was) stressed that "[t]he power of rectifica-
tion must be used with great caution." Apart from everything else, a relaxed approach
to rectification as a substitute for due diligence at the time a document is signed
would undermine the confidence of the commercial world in written contracts.

[35] As stated, high hurdles are placed in the way of a business person who relies
on his or her own unilateral mistake to resile from the written terms of a document
which he or she has signed and which, on its face, seems perfectly clear. The law is
determined not to open the proverbial floodgates to dissatisfied contract makers
who want to extricate themselves from a poor bargain.
[36] I referred earlier to the four conditions precedent, or "hurdles" that a plaintiff
must overcome. To these the appellants wish to add a fifth. Rectification, they say,
should not be available to a plaintiff who is negligent in reviewing the documenta-
tion of a commercial agreement. To the extent the appellants' argument is that in
such circumstances the Court may exercise its discretion to refuse the equitable
remedy to such a plaintiff, I agree with them. To the extent they say the want of due
diligence (or negligence) on the plaintiff's part is an absolute bar, I think their prop-
osition is inconsistent with principle and authority and should be rejected.
[37] The first of the traditional hurdles is that Sylvan (Bell) must show the existence
and content of the inconsistent prior oral agreement. Rectification is "[t]he most

495
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venerable breach in the parol evidence rule" (Waddams, supra, at para. 336). The
requirement of a prior oral agreement closes the "floodgate" to unhappy contract
makers who simply failed to read the contractual documents, or who now have
misgivings about the merits of what they have signed.
[38] The second hurdle is that not only must Sylvan (Bell) show that the written
document does not correspond with the prior oral agreement, but that O'Connor
either knew or ought to have known of the mistake in reducing the oral terms to
writing. It is only where permitting O'Connor to take advantage of the error would
amount to "fraud or the equivalent of ·fraud" that rectification is available. This
requirement closes the "floodgate" to unhappy contract makers who simply made a
mistake. Equity acts on the conscience of a defendant who seeks to take advantage
of an error which he or she either knew or ought reasonably to have known about
at the time the document was signed. Mere unilateral mistake alone is not sufficient
to support rectification, but, if permitting the non -mistaken party to take advantage
of the document would be fraud or equivalent to fraud, rectification may be available:
Hart, supra, at p. 630; Ship /v1.F Whalen, supra, at pp. 126-27.
[39] What amounts to "fraud or the equivalent of fraud" is, of course, a crucial
question. In First City Capital Ltd. v. British Columbia Building Corp. (1989), 43 B.L.R.
29 (B.C. S.C.), McLachlin C.J.S.C. (as she then was) observed that "in this context 'fraud
or the equivalent of fraud' refers not to the tort of deceit or strict fraud in the legal
sense, but rather to the broader category of equitable fraud or constructive fraud ... .
Fraud in this wider sense refers to transactions falling short of deceit but where the
Court is of the opinion that it is unconscientious for a person to avail himself of
the advantage obtained" (p. 37). Fraud in the "wider sense" of a ground for equitable
relief "is so infinite in its varieties that the Courts have not attempted to define it,"
but "all kinds of unfair dealing and unconscionable conduct in matters of contract
come within its ken": McMaster University v. Wilchar Construction Ltd. (1971), 22 D.L.R.
(3d) 9 (Ont. H.C.), at p. 19. See also Montreal Trust Co. v. Maley (1992), 99 D.L.R. (4th)
257 (Sask. C.A.), per Wakeling J.A. ; Alampi v. Swartz (1964), 43 D.L.R. (2d) 11 (Ont. C.A.);
Stepps Investments Ltd. v. Security Capital Corp. (1976), 73 D.L.R. (3d) 351 (Ont. H.C.),
per Grange J. (as he then was), at pp. 362-63; and Waddams, supra, at para. 342.
[401 The third hurdle is that Sylvan (Bell) must show "the precise form" in which
the written instrument can be made to express the prior intention (Hart, supra, per
Duff J., at p. 630). This requirement closes the "floodgates" to those who would invite
the court to speculate about the parties' unexpressed intentions, or impose what in
hindsight seems to be a sensible arrangement that the parties might have made but
did not. The court's equitable jurisdiction is limited to putting into words that-and
only that - which the parties had already orally agreed to.
[41] The fourth hurdle is that all of the foregoing must be established by proof
which this Court has variously described as "beyond reasonable doubt" (Ship M .F
Whalen, supra, at p. 127), or "evidence which leaves no 'fair and reasonable doubt'"
(Hart, supra, at p. 630), or "convincing proof" or "more than sufficient evidence"
(Augdome Corp. v. Gray, [1975] 2 S.C.R. 354, at pp. 371-72, 49 D.LR. (3d) 372) . The
modern approach, I think, is captured by the expression "convincing proof," i.e., proof
that may fall well short of the criminal standard, but which goes beyond the sort of
proof that only reluctantly and with hesitation scrapes over the low end of the civil
"more probable than not" standard.
[42] Some critics argue that anything more demanding than the ordinary civil
standard of proof is unnecessary (e.g., Waddams, supra, at para. 343), but, again, the
objective is to promote the utility of written agreements by closing the "floodgate"
against marginal cases that dilute what are rightly seen to be demanding precondi-
tions to rectification.

496
 Ill. RECTIFICATION

[43] It was formerly held that it was not sufficient if the evidence merely comes
from the party seeking rectification. In Ship M.F. Whalen, supra, Duff J. (as he then
was) said, at p. 127, "[s]uch parol evidence must be adequately supported by docu-
mentary evidence and by considerations arising from the conduct of the parties."
Modern practice has moved away from insistence on documentary corroboration
(Waddams, supra, at para. 337; Fridman, supra, at p. 879). In some situations, docu-
mentary corroboration is simply not available, but if the parol evidence is corrobo-
rated by the conduct of the parties or other proof, rectification may, in the discretion
of the Court, be available.
[44] It is convenient at this point to deal with the trial judge's findings in relation
to these traditional requirements. I will then turn to the appellants' proposed fifth
precondition-due diligence on the part of the plaintiff ....
[45] The appellants' principal argument against rectification is that the alleged
prior oral agreement is void for uncertainty. Reliance is placed on l.C.R.V. Holdings
Ltd. v. Tri-Par Holdings Ltd. (1994), 53 B.C.A.C. 72, where rectification of an agreement
to purchase a recreational vehicle park was refused because, per Finch J.A. (now
C.J.B.C.), at para. 7, the parties never agreed on "the precise location of the eastern
boundary," and Gordeyko v. Edmonton (1986), 45 Alta. L.R. (2d) 201 (0.B.), where
Stratton J. (as he then was) found the evidence uncertain about a notice period
envisaged by the prior oral agreement. See also Kerr v. Cunard (1914), 16 D.L.R. 662
(N.B. S.C.). Appellants' counsel quotes Lord Denning's "pithy" observation that "[a]
mistake made by one party to the knowledge of the other is a ground for avoiding a
contract, but not for making one" (Byrn/ea Property Investments Ltd. v. Ramsay, [1969]
2 O.B. 253 (C.A.), at p. 265).
[46] I agree with the appellants that on this point the trial judge's reasons are
somewhat unsatisfactory, but this appears to be because the "uncertainty" argument
now made against rectification was not before him. The issue of uncertainty of
subject matter was raised neither in the pleadings nor at trial. The trial judge directed
his reasons to the points that he believed were in controversy. As to the appellants'
new arguments, one may echo the words of James V.C. in Rumble v. Heygate (1870),
18 W.R. 749 (Ch.), who said, at p. 750, that the objections to the agreement in that
case on the basis of uncertainty of quantity of land and of its site "are mere shadows
which vanish when examined by the light of common sense."
[47] The Court should attempt to uphold the parties' bargain where the terms can
be ascertained with a reasonable level of comfort, i.e., convincing proof. Here the
trial judge predicated his award of compensatory damages on the finding that the
optioned land could accommodate 58 single family houses located along the 480-
. yard length of the 18th fairway. There is no argument about the 480 yards. O'Connor
himself plucked the 480 figure from the length of play listed on the Sylvan Lake Golf
Club score card. O'Connor's number for the width of the development (110) may also
be accepted. The issue is whether the number was intended to express yards or feet.
The trial judge appears to have concluded that the dispute about the depth of the
residential development (which is all that divided the parties) came down to a simple
choice between Bell's version (Plan A) and O'Connor's version (Plan B). Both plans
were predicated on the length of the 18th fairway, namely 480 yards . Plan B, which
O'Connor had described in the document, contemplated a single row of houses on
a development plan 110 feet deep. Bell's Plan A was based on _two rows of housing
separated by a road allowance, in a configuration similar to that shown in the aerial
photo of the Bayview development discussed by Bell and O'Connor at their Decem-
ber 16-17 meeting. Plan A called for a depth of about 110 yards. If Plan B's 110-foot
depth is tripled to 110 yards, the acreage under option would be roughly tripled from
about 3.6 acres (Plan B) to about 10.8 acres (Plan A), which accommodates the 58 lots

497
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plus the standard municipal road allowance. The problem in l.C.R.V Holdings Ltd.,
supra, was that the parties never agreed on the boundary. Here the trial judge con -
eluded that there was agreement even though the parties did not express themselves
to each other in lawyerly language ....
[48] The trial judge thus found that the parties had made a verbal agreement with
reference to a residential development along the 18th hole. It was more than an
agreement to agree. He concluded that there was a definite project in a definite
location to which O'Connor and Bell had given their definite assent.
[49] Although the parties did not discuss a metes and bounds description, they
were working on a defined development proposal. O'Connor cannot complain if the
numbers he inserted in clause 18 (110 [times] 480) are accepted and confirmed. The
issue, then, is the error created by his apparently duplicitous substitution of feet for
yards in one dimension. We know the 480 must be yards because it measures the
18th fairway. If the 110 is converted from feet to yards, symmetry is achieved, cer-
tainty is preserved and Bell's position is vindicated ....
[50] The notion of "equivalent to fraud" as distinguished from fraud itself, is often
utilized where "the court is unwilling to go so far as to find actual knowledge on the
side of the party seeking enforcement" (Waddams, supra, at para. 342). The trial judge
had no such hesitation in this case. He characterized O'Connor's actions as "fraudu-
lent, dishonest and deceitful" (para. 114).
[51] The trial judge was persuaded not only of the terms of the prior oral agree-
ment and of Bell's mistake but "beyond any reasonable doubt" of O'Connqr's know-
ledge of that mistake. He states (at para. 79):
This court is satisfied beyond any reasonable doubt that O'Connor knew of Bell's mistake
and he chose to permit Bell to sign it in the mistaken belief that it represented the verbal
agreement. He did so with the full intention that he would in the future rely on the terms
of the Agreement to thwart or reduce any plan by Bell to develop an increased area of
the golf course for residential development.

[52] O'Connor thus fraudulently misrepresented the written document as accur-

ately reflecting the terms of the prior oral contract. He knew that Bell would not sign
an agreement without the option for sufficient land to create the "Bayview" layout
· development with two rows of housing as specified in the prior oral contract.
O'Connor therefore knew when Bell signed the document that he had not detected
the substitution of 110 feet for 110 yards. O'Connor knowingly snapped at Bell's
mistake "to thwart or reduce any plan by Bell to develop an increased area of the golf
course for residential development." Bell's loss would be O'Connor's gain, as
O'Connor (Performance) would come into sole ownership of the optioned land as
of December 31, 1994.
[53] Although on occasion the trial judge describes O'Connor's conduct as
"equivalent to fraud," and elsewhere he describes it as actual fraud, his reasons taken
as a whole can only be characterized as a finding of actual fraud ....
[54] It follows from the foregoing that "the precise form" in which the written
document can be made to conform to the oral agreement would be simply to change
the word "feet" in the phrase "one hundred and ten (110) feet in width" to "yards." ...
[55] The trial judge made his key findings in respect of the prior oral agreement,
Bell's unilateral mistake and O'Connor's knowledge of that mistake to a standard of
"beyond any reasonable doubt."
[56] He also found that Bell's version of the verbal agreement was sufficiently
corroborated on significant points by other witnesses (including his wife, his former
partner, his lawyer and, subsequently, the development consultants), and documents

498
 Ill. RECTIFICATION

(including his lawyer's notes and the plan of the Bayview Golf Course development ·
discussed in mid-December 1989) . ...
(57] The appellants seek, in effect, to add a fifth hurdle (or condition precedent)
to the availability of rectification. A plaintiff, they say, should be denied such a rem-
edy unless the error in the written document could not have been discovered with
due diligence .
[58] O'Connor says that Bell's failure to read clause 18 and note the mixture of
yards and feet should be fatal to his claim because the Court ought not to assist
business persons who are negligent in protecting their own interests. Alternatively,
the effective cause of Bell's loss is not the fraudulent document but Bell's failu re to
detect the fraud when he had an opportunity to do so.
(59] I agree that Bell, an experienced businessman, ought to have examined the
text of clause 18 before signing the document. The terms of clause 18 were clear on
their face (even though many readers might have misread a description of land that
mixed units of measurement as clause 18 did here). He had time to review the docu -
ment with his lawyer. He did so. Changes were requested. He did not catch the
substitution of 110 feet for 110 yards; indeed, he says he did not read clause 18 at all.
(60] The trial judge, at para. 76, accepted the evidence of Bell's lawyer who admit-
ted that he had not directed his mind to the limitations of the size of the development
parcel found in clause 18, nor had he made any note of bringing those to Bell's
attention which would have been his normal practice. He could offer no explanation
for why he had not done so other than the fact that his focus on receipt of the Agree-
ment signed by Bell was to ensure the completion and registration of documentation
to facilitate the closing of [the purchase] on or before December 31, 1989. This court
accepts the evidence offered by Mr. Hancock and that of Bell that they at no time
discussed the description of property contained in clause 18.
[61] It is undoubtedly true that courts ought to hold commercial entities to a
reasonable level of due diligence in documenting their transactions. Otherwise,
written agreements will lose their utility and commercial life will suffer. Rectification
should not become a belated substitute for due diligence.
[62] On the other hand, most cases of unilateral mistake involve a degree of
carelessness on the part of the plaintiff. A diligent reading of the written document
would generally have disclosed the error that the plaintiff, after the fact, seeks to have
corrected. The mistaken party will often have failed to read the document entirely,
or may have read it too hastily or without parsing each word ....
[63] One reason why the defence of contributory negligence or want of due dili-
gence is not persuasive in a rectification case is because the plaintiff seeks no more
than enforcement of the prior oral agreement to which the defendant has already
bound itself.

[66] I conclude, therefore that due diligence on the part of the plaintiff is not a
condition precedent to rectification. However, it should be added at once that rec-
tification is an equitable remedy and its award is in the discretion of the court. The
conduct of the plaintiff is relevant to the exercise of that discretion. In a case where
the court concludes that it would be unjust to impose on a defendant a liability that
ought more properly to be attributed to the plaintiff's negligence, rectification may
be denied. That was not the case here.

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CHAPTER 5 WRITTEN DOCUMENTS

NOTE
The Ontario Court of Appeal, in Royal Bank of Canada v El-Bris Ltd (2008), 92 OR (3d) 779
(CA), rejected the four-part test in Performance Industries for cases of common mistake,
preferring the two-part test in Bank of Montreal v Vancouver Professional Soccer Ltd (1987),
15 BCLR (2d) 34 (CA) at 36-37 where Mclachlin JA, as she then was, said a petitioner for rec-
tification of any document must establish:
1. that the written instrument does not reflect the true agreement of the parties; and
2. that the parties shared a common continuing intention up to the time of signature that
the provision in question stand as agreed rather than as reflected in the instrument.

CANADA (ATTORNEY GENERAL) V FAIRMONT HOTELS INC

2016 sec 56, [20161 2 scR no
[In the case of Juliar v Canada (Attorney General) (2000), 50 OR (3d) 728 (CA), it was
held that an agreement could be rectified where it did not achieve the effect the
parties had intended, which was to avoid the payment of certain taxes. Fairmont
Hotels was another tax case. The facts were fairly straightforward. Fairmont Hotels,
through its subsidiaries, helped finance Legacy Hotels' purchase of two hotels. This
financing arrangement was meant to operate on a tax-neutral basis. Because of
ownership changes at Fairmont Hotels, a new plan was put in place that covered
Fairmont Hotels but not its subsidiaries. Still further changes in the arrangement
caused Fairmont Hotels to redeem its shares in its subsidiaries, by resolutions of the
directors. This step resulted, however, in unanticipated tax liability for the subsidi-
aries, revealed through a tax audit. Fairmont Hotels sought to avoid that liability by
rectifying the directors' resolutions.]
BROWN J: ...
[12] If by m istake a legal instrument does not accord with the true agreement it
was intended to record-because a term has been omitted, an unwanted term
included, or a term incorrectly expresses the parties' agreement-a court may exer-
cise its equitable jurisdiction to rectify the instrument so as to make it accord with
the parties' true agreement. Alternatively put, rectification allows a court to achieve
correspondence between the parties' agreement and the substance of a legal instru -
ment intended to record that agreement, when there is a discrepancy between the
two. Its purpose is to give effect to the parties' true intentions, rather than to an
erroneous transcription of those true intentions (Swan and Adamski, [Canadian
Contract Law (3rd ed 2012)] at s.8.229).
[13] Because rectification allows co_u rts to rewrite what the parties had originally
intended to be the final expression of their agreement, it is "a potent remedy" (Snell's
Equity (33rd ed. 2015), by J. McGhee, at pp. 417-18). It must, as this Court has repeat-
edly stated (Shafran v KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR
157, at para. 56, citing Performance Industries Ltd. ... , at para. 31), be used "with great
caution," since a "relaxed approach to rectification as a substitute for due diligence at
the time a document is signed would undermine the confidence of the commercial
world in written contracts": Performance Industries, at para. 31. It bears reiterating
that rectification is limited solely to cases where a written instrument has incorrectly
recorded the parties' antecedent agreement (Swan .and Adamski, at s.8.229). It is not
concerned with mistakes merely in the making of that antecedent agreement:
E. Peel, The Law of Contract (14th ed. 2015), at para. 8-059; Mackenzie v Coulson (1869),

500
 Ill. RECTIFICATION

LR 8 Eq 368, at p. 375 ("Courts of Equity do not rectify contracts; they may and do
rectify instruments"}. In short, rectification is unavailable where the basis for seeking
it is that one or both of the parties wish to amend not the instrument recording their
agreement, but the agreement itself. More to the point of this appeal, and as this
Court said in Performance Industries (at para. 31), "[t]he court's task in a rectification
case is ... to restore the parties to their original bargain, not to rectify a belatedly
recognized error of judgment by one party or the other."
[14] Beyond these general guides, the nature of the mistake must be accounted
for: Swan and Adamski, at s.8.233. Two types of error may support a grant of rectifica-
tion. The first arises when both parties subscribe to an instrument under a common
mistake that it accurately records the terms of their antecedent agreement. In such
a case, an order for rectification is predicated upon the applicant showing that the
parties had reached a prior agreement whose terms are definite and ascertainable;
that the agreement was still effective when the instrument was executed; that the
instrument fails to record accurately that prior agreement; and that, if rectified as
proposed, the instrument would carry out the agreement: ...
[15] In Performance Industries (at para. 31) and again in Shafran (at para. 53), this Court
affirmed that rectification is also available where the claimed mistake is unilateral-
either because the instrument formalizes a unilateral act (such as the creation of a
trust}, or where (as in Performance Industries and Shafran) the instrument was intended
to record an agreement between parties, but one party says that the instrument does
not accurately do so, while the other party says it does. In Performance Industries (at
para. 31), "certain demanding preconditions" were added to rectify a putative unilateral
mistake: specifically, that the party resisting rectification knew or ought to have
known about the mistake; and that permitting that party to take advantage of the
mistake would amount to "fraud or the equivalent of fraud" (para. 38).

[19] ... [R]ectification is available not to cure a party's error in judgment in entering
into a particular agreement, but an error in the recording of that agreement in a legal
instrument. Alternatively put, rectification aligns the instrument with what the par-
ties agreed to do, and not what, with the benefit of hindsight, they should have
agreed to do. The parties' mistake in Juliar, however, was not in the recording of their
intended agreement to transfer shares for a promissory note, but in selecting that
mechanism instead of a shares-for-shares transfer. By granting the sought-after
change of mechanism, the Court of Appeal in Juliar purported to "rectify" not merely
the instrument recording the parties' antecedent agreement, but that agreement
itself where it failed to achieve the desired result or produced an unanticipated
adverse consequence-that is, where it was the product of an error in judgment.

C. TWO FURTHER CONCERNS

[251 Before applying the test for rectification-which test, I emphasize, is to be

applied in a tax context just as it is in a non-tax context-to the facts of this appeal,
I turn to two matters in need of clarification, the first of which was raised by the
respondents.

(1) "COMMON CONTINUING INTENTION" TO AVOID TAX LIABILITY

[261 The respondents argue that, in the case of a common mistake, it is unneces-
sary for the party seeking rectification to prove a prior agreement concerning the

501
CHAPTER 5 WRITIEN DOCUMENTS

term or terms for which rectification is sought. Rather, they say that evidence of a
"common continuing intention" -in this case, their common continuing intention
that the value of the shares in FHIW and FHIS should be transferred in a way that
would avoid immediate tax liability-should suffice to ground a grant of
rectification.

[29] ... Joscelyne [Joscelyne v Nissen, [1970] 2 OB 86 (CA)] should not be taken as
authorizing any departure from this Court's direction that a party seeking to correct
an erroneously drafted written instrument on the basis of a common mistake must
first demonstrate its inconsistency with an antecedent agreement with respect to
that term. In Shafran, this Court unambiguously rejected the sufficiency of showing
mere intentions to ground a grant of rectification, insisting instead on erroneously
recorded terms. As Denning LJ said in Frederick E Rose (London) Ld v William H Pim
Jnr & Co, [1953] 2 OB 450 (CA), at p 461 (quoted in Shafran, at para. 52) :

Rectification is concerned with contracts and documents, not with intentions. In order
to get rectification it is necessary to show that the parties were in complete agreement
on the terms of their contract, but by an error wrote them down wrongly; and in this
regard, in order to ascertain the terms of their contract. you do not look into the inner
minds of the parties-into their intentions-any more than you do in the formation of
any other contract.

[30] This Court's statement in Performance Industries (at para. 31) that "[r]ectifica-
tion is predicated on the existence of a prior oral contract whose terms are definite
and ascertainable" is to the same effect. The point, again, is that rectification corrects
the recording in an instrument of an agreement (here, to redeem shares). Rectifica-
tion does not operate simply because an agreement failed to achieve an intended
effect (here, tax neutrality)-irrespective of whether the intention to achieve that
effect was "common" and "continuing."

[32] It therefore falls to a party seeking rectification to show not o"n ly the putative
error in the instrument, but also the way in which the instrument should be rectified
in order to correctly record what the parties intended to do. "The court's task in a
rectification case is corrective, not speculative": Performance Industries, at para. 31.
Where, therefore, an instrument recording an agreed-upon course of action is
sought to be rectified, the party seeking rectification must identify terms which were
omitted or recorded incorrectly and which, correctly recorded, are sufficiently precise
to constitute the terms of an enforceable agreement. The inclusion of imprecise
terms in an instrument is, on its own, not enough to obtain rectification; absent
evidence of what the parties had specifically agreed to do, rectification is not avail-
able. While imprecision may justify setting aside an instrument, it cannot invite
courts to find an agreement where none is present. It was for this reason that the
Court in Shafran declined to enforce the restrictive covenant covering the "Metro-
politan City of Vancouver." The term was imprecise, but there was "no indication
that the parties agreed on something and then mistakenly included something else
in the written contract": Shafran, at para. 57.

(2) STANDARD OF PROOF

[34] The second point requiring clarification is the standard of proof. In Perform-
ance Industries, at para. 41, this Court held that a party seeking rectification will have

502
 Ill. RECTIFICATION

to meet all elements of the test by "convincing proof," which it described as "proof
that may fall well sho'r t of the criminal standard, but which goes beyond the sort of
proof that only reluctantly and with hesitation scrapes over the low end of the civil
'more probable than not' standard." This, as was observed in Performance Industries,
was a relaxation of the standard from the Court's earlier i"4risprudence, in which the
criminal standard of proof was applied: ...
[35] In light, however, of this Court's more recent statement in F H v McDougall,
2008 SCC 53, [2008] 3 SCR 41, at para. 40, that there is "only one civil standard of
proof at common law and that is proof on a balance of probabilities," the question
obviously arises of whether the Court's description in Performance Industries of the
standard to which the elements of the test for obtaining rectification must be proven
is still applicable.
[36] In my view, the applicable standard of proof to be applied to evidence
adduced in support of a grant of rectification is that which McDougal/ identifies as
the standard generally applicable to all civil cases: the balance of probabilities. But
this merely addresses the standard, and not the quality of evidence by which that
standard is to be discharged. As the Court also said in McDougall (at para. 46), "evi-
dence must always be sufficiently clear, convincing and cogent" A party seeking
rectification faces a difficult task in meeting this standard, because the evidence
must satisfy a court that the true substance of its unilateral intention or agreement
with another party was not accurately recorded in the instrument to which it none-
theless subscribed. A court will typically require evidence exhibiting a high degree
of clarity, persuasiveness and cogency before substituting the terms of a written
instrument with those said to form the party's true, if only orally expressed, intended
course of action. This idea was helpfully encapsulated, in the context of an applica-
tion for rectification of a common mistake, by Brightman LJ in Thomas Bates and
Son Ltd v Wyndham's (Lingerie) Ltd., [1981] 1 WLR 505 (CA), at p. 521:

The standard of proof required in an action of rectification to establish the common

intention of the parties is, in my view, the civil standard of balance of probability. But as
the alleged common intention ex hypothesi contradicts the written instrument con-
vincing proof is required in order to counteract the cogent evidence of the parties'
intention displayed by the instrument itself. It is not, I think, the standard of proof which
is high, so differing from the normal civil standard, but the evidential requirement needed
to counteract the inherent probability that the written instrument truly represents the
parties' intention because it is a document signed by the parties.
[37] In brief, while the standard of proof is the balance of.probabilities, the essen-
tial concern of Performance Industries remains applicable, being (at para. 42) "to
promote the utility of written agreements by closing the 'floodgate' against marginal
cases that dilute what are rightly seen to be demanding preconditions to
rectification."

D. APPLICATION TO THE PRESENT APPEAL

[38] To summarize, rectification is an equitable remedy designed to correct errors

in the recording of terms in written legal instruments. Where the error is said to result
from a mistake common to both or all parties to the agreement, rectification is avail-
able upon the court being satisfied that, on a balance of probabilities, there was a
prior agreement whose terms are definite and ascertainable; that the agreement was
still in effect at the time the instrument was executed; that the instrument fails to
accurately record the agreement; and that the instrument, if rectified, would carry
out the parties' prior agreement In the case of a unilateral mistake, the party seeking

503
CHAPTER 5 WRITTEN DOCUMENTS

rectification must also show that the other party knew or ought to have known about
the mistake and that permitting the defendant to take advantage of the erroneously
drafted agreement would amount to fraud or the equivalent of fraud.
[39] A straightforward application of these principles to the present appeal leads
unavoidably to the conclusion that the respondents' application for rectification
should have been dismissed, since they could not show having reached a prior
agreement with definite and ascertainable terms. I have already noted (1) the cham-
bers judge's finding that, in 2006, Fairmont intended to address the "unhedged
position of [FHIW and FHIS] in a way that would be tax and accounting neutral
although [it] had no specific plan as to how [it] would do that" (para. ~3); and (2) the
Court of Appeal's deseription of Fairmont's intention as being "to unwind [the Legacy
transactions] on a tax free basis" (para. 7). It is therefore clear that Fairmont intended
to limit, if not avoid altogether, its tax liability in unwinding the Legacy transactions.
And, by redeeming the shares in 2007, this intention was frustrated. Without more,
however, these facts do not support a grant of rectification. The error in the courts
below is of a piece with the principal flaw I have identified in the Court of Appeal's
earlier reasoning in Juliar. Rectification is not equity's version of a mulligan. Courts
rectify instruments which do not correctly record agreements. Courts do not "rectify"
agreements where their faithful recording in an instrument has led to an undesirable
or otherwise unexpected outcome.
[40] Relatedly, the respondents do not show how Fairmont's intention, held in
common and on a continuing basis with FHIW and FHIS, was to be achieved in
definite and ascertainable terms while unwinding the Legacy transactions. The
respondents' factum refers to "the original 2006 plan," but that plan was not only
imprecise: it really was not a plan at all, being at best an inchoate wish to protect, by
unspecified means, FHIW and FHIS from foreign exchange tax liability.
[41] The respondents' application for rectification therefore fails at the first hurdle.
They show no prior agreement whose terms were definite and ascertainable.

[43] ABELLA J (dissenting)

[63] Whether a mistake is unilateral or mutual, rectification is, ultimately, an

equitable remedy that seeks to give effect to the true intention of the parties, and
prevent errors from causing windfalls. The doctrine is also "based on simple notions
of relief against unjust enrichment,'' namely, that it would be unfair to rigidly enforce
an error that enriches one party at the expense of another: Waddams, at p. 240. As
Professor Waddams notes, "[t]he doctrine is a far-reaching and flexible tool of justice"
(p. 243).

[66] While I acknowledge that rectifj.cation seems most often to have been
granted in the context of agreed upon terms having been transcribed incorrectly,
since unjust enrichment can also result from a mistake in carrying out the intention
of the parties, the remedy is also available to correct errors in implementation. Courts
have, as a result, granted rectification where a corporate transaction was conducted
in the wrong sequence (GT Group Telecom Inc., Re (2004), 5 CBR (5th) 230 (Ont Sup
Ct J) ), where an underlying calculation in a contract was incorrect (Oriole Oil & Gas
Ltd v American Eagle Petroleums Ltd (1981), 27 AR 411 (CA)), and where the requisite
steps of an amalgamation were not correctly carried out (Prospera Credit Union, Re
(2002), 32 BLR (3d) 145 (BCSC)).
[67] Whether the errors are in transcription or in implementation, courts may
refuse to exercise their discretion where allowing rectification would prejudice the

504
 Ill. RECTIFICATION

rights of third parties (Wise v Axford, [1954] OWN 822 (CA)). But the mere existence
of a third party will not bar rectification. In Augdome Corp v Gray, [1975] 2 SCR 354,
this Court concluded that the presence of a third party is only a bar to rectification
where the third party has actually relied on the flawed agreement. This principle was
subsequently explained by Gray J. in Consortium Capital Projects Inc v Blind River
Veneer Ltd (1988), 63 OR (2d) 761 (H Ct J), at p. 766, aff'd (1990), 72 OR (2d) 703 (CA):
"... the proper test is whether the third party relied on the document as executed and
took action based on that document." ...
[68) This is consistent with one of the underlying purposes of rectification,
namely to prevent unjust enrichment: Waddams, at p. 240; ... Just as rectification
can prevent one party from enforcing an error and being unjustly enriched by the
other's mistake, rectification can also prevent a third party who has not relied on the
agreement from enforcing a mistake and receiving a windfall. This theory was on
display in Love v Love, [2013) 5 WWR 662 (Sask CA). The Saskatchewan Court of
Appeal allowed the rectification of a life insurance contract, in which a husband had
designated his wife as the beneficiary of his life insurance policy. When the couple
divorced, the husband completed a new form to designate his son as the policy's
beneficiary instead of his former wife. He filled the paperwork out incorrectly. After
he died, the former wife and the son both attempted to claim the proceeds of the
insurance policy. The court rectified the contract to reflect what it saw as the hus-
band's true intention, namely to designate his son as the beneficiary.
[69) This brings us to the tax context.

[83) ... Civil law and common law rectification in the tax context are clearly based
on analogous principles, namely, that the true intention of the parties has primacy
over errors in the transcription or implementation of that agreement, subject to a
need for precision anO. the rights of third parties who detrimentally rely on the
agreement.
[84) That means that .there is no principled basis in either the common or civil
law for a stricter standard in the tax context simply because it is the government
which is positioned to benefit from a mistake. The tax department is not entitled to
play "Gotcha" any more than any other third party'who did not rely to its detriment
on the mistake.

[90) Fairmont was found by Newbould J to have always had a clear, continuing
intention to unwind the reciprocal loan structure on a tax-neutral basis and never
to redeem the preferred shares. But, by mistake, the preferred share redemption terms
were included in the directors' resolutions. This is exactly the kind of mistake recti-
fication exists to remedy. Once Newbould J was satisfied of the true intention of the
parties, he was entitled to give effect to it by allowing the replacement loan arrange-
ment terms to be inserted into the directors' resolutions.
(91) To require an exhaustive account of how the transaction was supposed to
have proceeded would amount to imposing a uniquely high threshold for rectifica-
tion in the tax context. As Newbould J explained, denying the application to rectify
the agreement in these circumstances would "give [the Canada Revenue Agency)
an unintended gain because of the mistake": para. 44. There is no basis for permitting
a windfall to the Canada Revenue Agency that no other third party would have been
entitled to.
[Appeal allowed. McLachlin CJ, and Cromwell, Moldaver, Karakatsanis, Wagner and
Gascon JJ agreed with Brown J . Cote J agreed with Abella J 's dissent.)

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CHAPTER 5 WRITTEN DOCUMENTS

PAGET V MARSHALL
(1884), 28 ChD 255

BACON VC: The case before me is in a very narrow compass. The Plaintiff had taken
the lease of a site from the Goldsmiths' Company upon a contract to build upon it a
very valuable and commodious structure. He did so, and his plans are in evidence;
it is quite clear what his intention was. He built two separate ground-floor tenements,
Nos. 49 and 50, to be let to two separate tenants. He kept a third, No. 48, including
ground and first floors, intending to occupy it himself, and the fourth part, that
coloured blue on the model, he had to let when the negotiation commenced with
the Defendant. So that the subject in dispute is beyond all question. The two shops,
Nos. 49 and 50, were separate and distinct things-as separate as if they had been
in some other street-and the third, No. 48, was equally separate and distinct-built
by the Plaintiff for his own occupation, and for carrying on his own business, and
constructed so that those objects might be conveniently performed by him. To that
end he built on the ground floor of No. 48 a staircase communicating with the first
floor of No. 48, and he partitioned off the first floor of No. 48, so that in its turn it
became just as distinct a building-just as distinct a tenement-as Nos. 49 and 50,
and the purpose was distinct. Then, the part coloured blue (which included the whole
first floor of the block except that of No. 48, and all the upper floors without any
exception) being still available, and the Plaintiff willing to let it, he constructed a
staircase which led from the street past the first floor of No. 48, and landed upon the
blue part, I will call it, that is sufficient description,-no communication whatever
either in fact being made, or according to the evidence ever intended to be made,
between the ground or first floor of No. 48 and the part coloured blue. That was the
state of things when these parties met to negotiate. The partition w hich effectually
severed the first floor of No. 48 from the part coloured blue, had been completely
settled and arranged. The Defendant on his first visit looked over all that was then
to let, ascertained what the Plaintiff meant to let, saw the first floor over No. 48, said
that it would make a very handsome warehouse, but knew at the same time that it
was not to be let, because, to use his own expression in his own evidence, the Plaintiff
told him "we mean to use that for ourselves." That is the evidence which the Defendant
has given on this occasion. He says that he was satisfied to some extent with what he
looked at, and desired to acquire it, but he must have a packing-room. He could not
mean the first floor, that which he said was a magnificent warehouse could not be a
packing-room, it could not in the nature of things; and he does not say that that was
in his mind, still he insists more than once on the necessity of having a packing-room.
I am mentioning these facts in order to ascertain, as it is my duty to do, what I must
take to be proved to have been the intention of the parties when they entered into the
negotiation. He asks for a packing-room. The brother goes with him down into a
cellar-a cellar under No. 48, in the basement of No. 48-they look about there, and
the brother comes in and says, "You cannot have it." No wonder, because there can
be no access to it but from the floor of No. 48, and that went off.
Now, it would be impossible for me to connect, and there was a very faint attempt
made to connect, the necessity which was present in the Defendant's mind to have
a packing-room, with the magnificent first floor, which he now says he had in his
mind when he was present. The statement about putting up the inscription by no
means encourages any such notion. The Defendant desired to advertise to the public
by means of a large inscription on the front of that which was to be his tne trade
which he was carrying on. He wished also to have a similar inscription over No. 48.
That was resisted. It was the subject of discussion between them; the reason it was

506
 Ill. RECTIFICATION

resisted was explained to him: "If we granted you that, it would look as if you were
carrying on your business in our warehouse"; but they said, that, in order to accom-
modate him they would be willing to insert a tablet, containing his name and busi-
ness, provided it did not interfere with the architectural decorations of No. 48. These
facts are beyond all question. Both parties are agreed. Then the Plaintiff writes a letter
in which he offers to let, among other things, the first floor of No. 48. This is answered
very readily by the Defendant, who accepts the offer. Instructions are sent to the
solicitors, instructions consisting only of this letter. Mr. Marten made a point that
the Plaintiff, in his pleadings, said they had no other instructions. They must have
had some other instructions. I should read the word "other" used by him in the
pleadings as,. meaning no different instructions, no variation in form or otherwise
from the words that appear in the letter. Then the lease is prepared and executed in
accordance with the letter, including the first floor of No. 48.
Under these circumstances, the facts being as I have stated, am I, because the
lease has been executed under seal, demising to the Defendant that which the Plain -
tiff never meant to let him have, that which the Defendant says he knew at one time
the Plaintiff intended to keep for himself, that which he has never claimed at any
period prior to the letter-am I to say that the agreement is to be held to be irrevocable?
It would be against every principle that regulates the law relating to mistakes, and it
would be directly at variance with the proved facts in this case. On the evidence,
it looks like a common mistake. The Defendant, it is true, says in his defence, that he
took it on the faith that the first floor of No. 48 was intentionally included in the letter
of the 13th of November, 1883. Certainly he never said so until it is said in the defence,
which I am looking at now; but he has not said so in his evidence. He has never said
that he intended to take that. The argument addressed to me has been this:-"The
separation of No. 48 and the blue, is effected solely by means of a brick-on-end parti-
tion; and that is easily removed." People building brick-on-end partitions do not mean
them to be easily removed, unless there is some purpose to remove them, and here,
using the Defendant's own evidence on this occasion, at that time the partition was
effectually finished, and the Defendant knew that the Plaintiff intended to reserve it
for his own use in his own business. The law being such as I have said, it is not neces-
sary to say anything about how easily you can make holes in a partition, and how
you can knock down a partition; you can pull down the front of a house with equal
ease if you have proper appliances and proper workmen to do it. The way it is forced
on my attention is the reason why the partition was first made, why it was found to
be in existence when the Defendant first inspected it, why he knew from that time
as well as he knows now that it was never the intention of the Plaintiff that he should
have that "magnificent" room which formed one of two rooms which constituted
the business place intended by the Plaintiff for his ·own use, and to which the access
was made by one staircase communicating with nothing but the upper room.
But without being certain, as I cannot be certain on the facts before me, whether
the mistake was what is called a common mistake - that is, such a common mistake
as would induce the Court to strike out of a marriage settlement a provision or lim-
itation-that there was to some extent a common mistake I must in charity and
justice to the Defendant believe, because I cannot impute to him the intention of
taking advantage of any incorrect expression in this letter. He may have persuaded
himself that the letter was right; but if there was not a common mistake it is plain
and palpable that the Plaintiff was mistaken, and that he had no intention of letting
his own shop, which he had built and carefully constructed for his own purposes.
Upon that ground, therefore, I must say that the contract ought to be annulled.
I think it would be right and just and perfectly consistent with other decisions that

507
CHAPTER 5 WRITTEN DOCUMENTS

the Defendant should have an opportunity of choosing whether he will submit, as the
Plaintiff asks that he should submit, to have the lease rectified by excluding from it
the first floor of No. 48, whether he will choose to take his lease with that rectification,
or whether he will choose to throw up the thing entirely, because the object of the
Court is, as far as it can, to put the parties into the position in which they would have
been if the mistake had not happened. Therefore I give the Defendant an opportunity
of saying whether he will or will not submit to rectification. If he does not, then I shall
declare that the agreement is annulled. Then we shall have to settle the terms on
which it should be annulled. The Plaintiff does not object, if the agreement is annulled,
to pay the Defendant any reasonable expenses to which he may have been put by
reason of the Plaintiff's mistake; but it must be limited to that. I should like, if it be
convenient for counsel or for the parties, to have an answer to the proposition I have
made, in order that that may be fully before the persons whom it interests. I may say
that I can find no reason for a reduction of the rent. I listened attentively to what Sir
John Ellis said, and to what Mr. Farmer said, and I cannot but think that the rent of £500,
if the lease is rectified, ought not, with any show of justice, to suffer any reduction.
Marten for the Defendant, agreed to strike out the first floor of No. 48 from the
lease; the lease in other respects standing as it was executed.
BACON VC: Then the decree will be, the Defendant electing to have rectification
instead of cancellation of the lease, let the' leas~ be rectified by omitting from it all
mention of the first floor of No. 48. Then as to the costs of the action, the Plaintiff is
not entitled to costs, because he has made a mistake, and the Defendant ought not
to have any costs, because his opposition to the Plaintiff's demand has been
unreasonable, unjust, and unlawful.

NOTES AND PROBLEMS

1.. Compare the approach of the court to a somewhat similar problem in Alampi v Swartz
(1964), 43 DLR (2d) 11 (Ont CA). Paget v Marshall was followed in Deva/d v Zigeuner (1958),
16 DLR (2d) 285 (Ont H Ct J); Stepps Investments Ltd v Security Capital Corp (1976), 73 DLR
(3d) 351 (Ont H Ct J); and Murphy's Ltd v Fabricvil/e Co Inc (1980), 117 DLR (3d) 668 (NSSC
(TD)). See, however, River/ate Properties Ltd v Paul, [1975] Ch 133, and "Comment" (1975) 53
Can Bar Rev 340.
2. You are assisting in the drafting of a new Contracts Code. It is to take the form of statu-
tory text, with each section followed by an official comment explaining the purpose and effect
of the text. Draft the section or sections (with official comment) on the effect of written docu-
ments on contractual relationships.
3. See also McCamus at 587-97; Waddams at paras 336-43; MacDougall at 243-47.

508
 CHAPTER SIX

PROTECTION OF
WEAKER PARTIES

I. Introduction . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509

II. Minors ........ . . . . ... .. . . ..... . . .. ........ . ......... . . . ... : . . . . . . . . . . . . 510
Ill. Forfeitures and Penalty Clauses . .. .... ... .. . ...... .. ......... . ... . . ... . . .. 516
IV. Clauses Excluding Liability . . . .. . . .. ... .. ....... .. : . . . . . . . . . . . . . . . . . . . . . . . 522
V. Unconscionability and Undue Influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551
VI. Duress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607
VII. Consumer Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618
VIII. Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622

I. INTRODUCTION
The materials in this chapter address various categories of situations and correlative legal
doctrines that raise questions about the extent to which the legal system should protect
weaker parties in the contracting process. Section II addresses the doctrine of contractual
incapacity, which renders contracts entered into by minors unenforceable in a wide range of
circumstances. Section Ill deals with the enforceability of forfeiture and penalty clauses in
contracts. Section IV deals with the problem of the enforceability of disclaimer, exclusion, or
limitation of liability clauses in contracts-often standard form contracts-thus raising similar
issues to those addressed in the "ticket" and related cases in Chapter 5, where these terms may
not have been read or fully understood by the party against whom they are sought to be
enforced. Sections V and VI address a wide variety of residual cases that may fall within the
scope of legal doctrines like unconscionability and undue influence, duress, or inequality of
bargaining power. In these cases, legal grounds for relief from contractual obligations may be
granted if the circumstances provided for exploitation of constrained choices, special relation-
ships, or cognitive incapacities between the contracting parties. These circumstances create
asymmetries in the relative abilities of the contracting parties to evaluate information on the
potential impact of a contractual transaction on their respective interests. More general philo-
sophical concepts of coercion, information asymmetries, and paternalism are raised in many
of these cases (see Trebilcock, ch 4, 5, and 7) . Section VI.I sets out some ·relevant consumer
protection legislation and Section VIII deals with restitution.

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

II. MINORS

REXVRASH
(1923), 53 OLR 245 (CA)

ROSE J: The question as put in the stated case is whether the magistrate was right as
a matter of law in holding that a person under the age of 21 years can be convicted
of the offence of removing, concealing, or disposing of any of his property, with
intent to defraud his creditors (the Criminal Code, sec. 417(1)). To that question, put
in that broad way, the answer is: "Yes: an infant, in some circumstances, can incur
debts of certain kinds, and can have creditors; and if he disposes of his property with
intent to defraud those creditors he can be convicted." But upon the whole case it i.s
apparent that the question intended to be submitted for the opinion of the Court is
a much narrower question than the one formally put. It is, in effect: "Are persons
who have supplied goods to an infant trader for the purposes of his .trade, and who
have not been paid, 'creditors' within the meaning of sec. 417?" That is the question
which was argued and which must be answered ....
At common law, certain contracts made by infants are void, in the strict sense,
and incapable of ratification: see Beam v. Beatty (1902), 3 O.L.R. 345; 4 O.L.R. 554;
Phillips v. Greater Ottawa Development Co. (1916), 38 O.L.R. 315.
Others are usually described as valid. Such are contracts for necessaries, although,
considering the fact that the person who supplied necessaries recovers, not the
agreed price, but the value, probably confusion would have been avoided if it had
been recognised that, as pointed out by Fletcher Moulton L.J., in Nash v. Inman, [1908]
2 K.B. 1, an infant, like a lunatic, is incapable of making a contract of purchase in the
strict sense of the words; that, if a man satisfies the needs of an infant or lunatic by
supplying to him necessaries, the law will imply an obligation to repay him for the
services so rendered, and will enforce that obligation against the estate of the infant
or lunatic; that consequently the basis of the action is hardly contract-the obligation
arises re and not consensu.
Contracts of a third (and this the largest) class may be avoided or enforced at the
option of the infant: Bruce v. Warwick (1815), 6 Taunt. 118; 128 E.R. 978, "The law so
far protects him, as to give him an opportunity to consider it when he comes of age;
and it is good or voidable at his election": Holt v. Ward Clarencieux (1732), 2 Str. 937;
93 E.R. 954. These contracts are usually described as voidable. Contracts, such as are
here in question, by which the infant undertakes to pay for goods supplied to him
for use in trade are of this class, and what has to be determined is the precise mean -
ing of the word "voidable" as applied to them-is it correct to say quite generally, as
in Halsbury's Laws of England, vol.17, p. 64, note (l); that "voidable means valid until
repudiated, not invalid until confirmed"; or ought it to be said, as in Anson on Contracts,
15th ed., p. 186, that an infant's "voidable" contracts must be divided under two heads,
(a) those which are valid and binding on the infant until disaffirmed, and (b) those
which are not binding until ratified after majority? If such a division as is suggested
by Anson is justified, there is no doubt that contracts such as we have to deal with in
this case, will fall into the author's class (b); and that it is justified, will, I think, appear
when there are considered, first, some of the cases which have arisen out of contracts
by an infant for the purchase of goods (other than necessaries) or out of other con-
tracts which would clearly be in class (b), if there is such a class, and secondly, some
of the cases that are usually cited in support of the broad general proposition that
voidable means valid until repudiated ....

510
 II. MINORS

[A long discussion of cases is omitted.]

My conclusion accords with that reached, in a civil case, by the Supreme Court of
Mississippi in Edmunds v. Mister (1881), 58 Miss. 765 (cited in 27 Corpus. Juris., p. 476).
There, soon after attaining his majority, a man who, while an infant, had contracted
debts (I use the expression in the popular sense) conveyed his property to his daugh-
ter for life with reversion to himself, the conveyance being without consideration,
and with the avowed intention of defeating "creditors"-although, as the grantor
said, he was unwilling to plead infancy and intended to pay his debts. The Court
held that the conveyance was valid, because the holders of the demands for goods
furnished during the grantor's minority were not creditors .... For these reasons, my
answer to the question submitted is in the negative.
[The concurring opinions of Mulock CJ Ex and Kelly, Masten, and Orde JJ are omit-
ted. See MASTEN J at 253: "If an adult contracts with an infant, the infant can enforc.e
the contract though the adult cannot. This was decided by the Court of King's Bench
in 1813 ... and has ever since been accepted as the law. Such a right of action by the
infant predicates and necessitates as its foundation, an existing valid contract."]

NOTES
1. Compare the following statements in Re Sovereign Bank (1915), 35 OLR 448 (SC (AD)):
Middleton J at 453-"No doubt in ordinary cases. an infant is called upon to repudiate within a
reasonable time after attaining majority"-and Garrow JA at 456-"An infant may by contract
become the holder of shares in a bank. The legal effect of such a contract is the same as that
of other voidable contracts of an infant. namely, that it is va lid until repudiated. See Edwards v.
Carter, [1893] A.C. 360 . . And. the repudiation must, to be effective. take place within area-
sonable time after full age is reached." Notice. however. that the court is here dealing with a
situation of the kind described by Anson as one "whe n an infant acquired an interest in perma-
nent property to which obligations attach, etc."
2. In some jurisdictions. the enforceability of infants' contracts is regulated by statute. See
e.g. the Infants Act, RSBC 1996, c 223.

SALE OF GOODS AGT

RSO 1990, c 5.1

3(1) Capacity to buy and sell is regulated by the general law concerning capacity
to contract and to transfer and acquire property, but where necessaries are sold and
delivered to a minor or to a person who by reason of mental incapacity or drunken-
ness is incompetent to contract, he or she shall pay a reasonable price therefor.
(2) In this section, "necessaries" means goods suitable to the conditions in life of
the minor or other person and to his or her actual requirements at the time of the
sale and delivery.

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

NASHVINMAN
[1908] 2 KB 1 (CA)

The action was brought by specially indorsed writ by a tailor carrying on business
in Saville Row, London, for £145 10s. 3d. for clothes supplied to the defendant while
an undergraduate at Cambridge University between October 29, 1902, and June 16,
1903. The defendant was an infant at the time of the sale and delivery of the goods.
He had been at school at Uppingham, and in October 1902, he went up as a freshman
to Trinity College, Cambridge. He was the son of an architect of good position, who
had a town house at Hampstead, and a country establishment called Wade Court,
near Havant. The clothes supplied to the defendant included, among other things,
eleven fancy waistcoats at two guineas each, or £115s. for cash. Upon an application
for judgment under Order xiv., the defendant set up the plea of infancy, and the action
vvas adjourned into Court and was tried before Ridley J. and in a special jury. At the
trial the plaintiff claimed only £122 19s. 6d., the cash price of the goods, in lieu of £145
10s. 3d., the_credit price. The only witness called on behalf of the plaintiff was a travel-
ler in his employ, who stated that he went to Cambridge and other places to solicit
orders for the plaintiff, and that, hearing that the defendant was spending money
freely and was likely to be a good customer, he called upon him personally at his
lodgings in Cambridge and obtained the first order for clothes; and he gave evidence
as to the goods supplied, and stated that they were charged for at the usual prices.
Counsel for the defendant thereupon submitted that, subject to his formally prov- ·
ing infancy, which was not admitted, there was no evidence to go to the jury, and
he called the defendant's father, who proved the date of the defendant's birth, and
then went on to state that he was satisfied that his son on going to the university
was amply supplied with proper clothes according to his position; and he gave
particulars of his outfit. The learned judge then held that there was no evidence to
go to the jury that the goods were necessaries, and directed judgment to be entered
for the defendant.
The plaintiff applied for judgment or a new trial, on the ground that the judge
himself had decided the issues of fact instead of leaving them to the jury.

COZENS-HARDY MR: This case is undoubtedly one of difficulty and also, I think, one
of importance. It is an action by a tailor against Mr. Inman, who was at the date of
the transactions in-question an infant. There were no pleadings in the action. There
was merely a hint and an application under Order xiv., and the action "was adjourned
into Court, and came on for trial before Ridley J. and a special jury. In substance the
position is this : The plaintiff sues the defendant for goods sold and delivered. The
defendant pleads infancy at the date of the sale, and his plea is proved. What is the
consequence of that? The consequence of that is that the Infants' Relief Act, 1874,
becomes ·applicable. Under that Act all contracts for goods supplied are absolutely
void, the only exception being contracts for necessaries. Then s. 2 of the Sale of
Goods Act, 1893, provides as follows: "Capacity to buy and sell is regulated by the
general law concerning capacity to contract, and to transfer and acquire property."
That, of course, includes the Act of 1874. Then follows this proviso: "Provided that
where necessaries are sold and delivered to an infant, or minor, or to a person who
by reason of mental incapacity or drunkenness is· incompetent to contract, he must
pay a reasonable price therefor:." The section then defines necessaries as follows :
"Necessaries in this section mean goods suitable to the condition in life of such
infant or minor or other person, and to his actual requirements at the time of the
sale and delivery." What is the effect of that? The plaintiff sues for goods sold and

512
 II. MINORS

delivered. The defendant pleads infancy. The plaintiff must then reply, "The goods
sold were necessaries within the meaning of the definition in s. 2 of the Sale of Goods
Act, 1893." It is not sufficient, in my view, for him to say, "I have discharged the onus
which rests upon me if I simply shew that the goods supplied were suitable to the
condition in life of the infant at the time."
There is another branch of the definition which cannot be disregarded. Having
shewn that the goods were suitable to the condition in life of the infant, he must
then go on to shew that they were suitable to his actual requirement at the time of
the sale and delivery. Unless he establishes that fact, either by evidence adduced by
himself or by cross-examination of the defendant's witnesses, as the case may be,
in my opinion he has not discharged the burden which the law imposes upon him.
Our attention has been called by Mr. McCardie, in his very able and learned argument,
to a number of authorities going back for a very long period, which he said estab.-
lished· that the burden on a plaintiff who supplied goods to an infant was simply to
shew that the goods were of a class which might be necessaries, having regard to the
position in life of the defendant and his family, and that, unless the judge withdrew
the case from the jury on the ground that the articles in question could not be neces-
saries, it was for the jury to find as a matter of fact, Aye or No, were these articles
necessaries. It had never, he said, been the law that the plaintiff was required to go
into the question, which might present great difficulties, of whether or not the goods
were actually required by the defendant at the date of the sale, or, in other words, to
say what was the state of the defendant's wardrobe at the time when the goods were
ordered.
I think there is very great force up to a certain point in that argument. But it must
be remembered that the law on this subject has been developed and altered in the
course of the last century. It was until quite recently doubted whether it was even
admissible to prove that the infant was supplied with goods of the class-being goods
which might properly be necessary-at the date when the contract was made, so that
he really did not want any more. It was not until the decision of the Divisional Court
in Barnes v. Toye, 13 Q.B.D. 410, in 1884, overruling the direction given by AL. Smith J.,
that it could be said to be at all established that that was even admissible evidence
unless you went further and proved that the plaintiff knew he was sufficiently sup-
plied. The point arose again in Johnstone v. Marks (1887), 19 Q.B.D. 509, before what
was no doubt a Divisional Court, but it was composed of three members of the Court
of Appeal, Lord Esher M.R., Lindley L.J., and Lopes L.J. In that case the county court
judge had rejected evidence to prove that the defendant was sufficiently supplied
with clothes at the time of the sale. Lord Esher said: "I am of opinion that the evidence
was improperly rejected. It lies upon the plaintiff to prove, not that the goods supplied
belong to the class of necessaries as distinguished from that of luxuries, but that the
goods supplied when supplied were necessaries to the infant. The circumstance that
the infant was sufficiently supplied at the time of the additional supply is obviously
material to this issue, as well as fatal to the contention of the plaintiff w;ith respect
to it." Lindley L.J. said: "If an infant can be made liable for articles which may be
necessaries without proof that they are necessaries, there is an end to the protection
which the law gives him. If he has enough of such articles, more cannot possibly be
necessary to him." Although it may be true that the language which I have just read
from the judgments of Lord Esher and Lindley L.J. goes further than was absolutely
necessary for the decision of the case, that language is perfectly clear and unambigu -
ous, and seems to me to be logically involved in the definition of necessaries ....
The learned judge rule.ct as a matter of law that there was no evidence fit to be
submitted to the jury that these articles, or any of them, were necessaries within the

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

meaning of the statutory definition, and, thinking, as I do that there was no evidence
in support of that which was a necessary issue, I cannot say that the learned judge was
wrong in the view which he took. We have scarcely heard any suggestion that there
was even a scintilla of evidence to support that which is an affirmative issue, that the
goods were suitable to the requirements of the infant. Nay more, I think, if the matter
had been left to the jury, and the jury had found that they were suitable to the require-
ments of the infant at that time, and application.had been made for a new trial, it
would have been the duty of this Court to grant a new trial on the ground that there
was no evidence to support the verdict, and that it was perverse. Under these cir-
cumstances it seems to me that this appeal fails, and that there is no ground for
interfering with the judgment which was entered for the defendant.

FLETCHER MOULTON LJ: I am of the same opinion. I think that the difficulty and at
the same time the suggestion of hardship to the plaintiff in such a case as this disap-
pear when one considers what is the true basis of an action against an infant for
necessaries. It is usually spoken of as a case of enforcing a contract against the infant,
but I agree with the view expressed by the Court in Rhodes v. Rhodes (1890), 44 Ch.
D. 94, in the parallel case of a claim for necessaries against a lunatic, that this lan-
guage is somewhat unfortunate. An infant, like a lunatic, is incapable of making a
contract of purchase in the strict sehse of the words; but if a man satisfied the needs
of the infant or lunatic by supplying to him necessaries, the law will imply an obliga-
tion to repay him for the services rendered, and will enforce that obligation against
the estate of the infant or lunatic. The consequence is that the.basis of the action is
hardly contract. Its real foundation is an obligation which the law imposes on the
infant to make a fair payment in respect of needs satisfied. In other words the obliga-
tion arises re and not consensu. I do not mean that this nicety of legal phraseology
has been adhered to. The common and convenient phrase is that an infant is liable
for goods sold and delivered provided that they are necessaries, and there is no
objection to that phraseology so long as its true meaning is understood. But the
treatment of such actions by the Courts of Common Law has been in accordance
with that principle I have referred to. That the articles were necessaries had to be
alleged and proved by the plaintiff as part of his case, and the sum he recovered was
based on a quantum meruit. If he claimed anything beyond this he failed, and it did
not help him that he could prove that the prices were agreed prices. AU this is very
ancient law, and is confirmed by the provisions of s. 2 of the Sale of Goods Act,
1893-an Act which was intended to codify the existing law. That section expressly
provides that the consequence of necessaries sold and delivered to an infant is that
he must pay a reasonable price therefor.
The Sale of Goods Act, 1893, gives a statutory definition of what are necessaries
in a legal sense, which entirely removes any doubt, if any doubt previously existed,
as to what that word in legal phraseology means .... Hence, if an action is brought by
one who claims to enforce against an infant such an obligation, it is obvious that
the plaintiff in order to prove his case must shew that the goods supplied come
within this definition. That a plaintiff has to make out his case is, I should have
thought, the first lesson that any one studying English law would learn; and the
elaborate argument of Mr. McCardie that if you look at the authorities in the past,
going back nearly a hundred years, you will find cases in which particular defendants
might have taken a higher standpoint and insisted upon a right which they did not
insist on does not appear to me to touch the plain and obvious conclusion that in
order to succeed in the action the plaintiff must shew that he has supplied neces-
saries. That is to say, the plaintiff has to shew, first, that the goods were suitable to
the condition in life of the infant; and secondly, that they were suitable to his actual

514
 II. MINORS

requirements at the time-or, in other words, that the infant had not at the time an
adequate supply from other sources ....
The issue is not only whether the articles in question were suitable to the defen-
dant's condition in life, but whether they were suitable to his actual requirements at
the time of the sale and delivery; and how does the evidence stand? The evidence
for the plaintiff shewed that one of his travellers, hearing that a freshman at Trinity
College was spending money pretty liberally, called on h.i m to get an order for
clothes, and sold him within nine months goods which at cash price came to over
£120, including an extravagant number of waistcoats and other artic;les of clothing,
and that is all that the plaintiff proved. The defendant's father proved the infancy,
and then proved that the defendant had an adequate supply of clothes, and stated
what they were. That evidence was uncontradicted. Not only was it not contradicted
by any other evidence, but there was no cross-examination tending to shake the
credit of the witness, against whose character and means of knowledge nothing
could be said. On that uncontradicted evidence the judge came to the conclusion
that there was no evidence on which the jury might properly find that these goods
were necessary to the actual requirements of the infant at the time of sale and deliv-
ery, and therefore, in accordance with the duty of the judge in an cases of trial by
jury, he withdrew the case from the jury and directed judgment to be entered for the
defendant. In my opinion he was justified by the practice of the Court in so doing,
and this appeal must be dismissed.

[The concurring opinion of Buckley LJ is omitted. See also Waddams, ch 18and19;

MacDougall at 185-88.J

NOTES
1. With the expanding availability of online contracts, courts have had to deal with the
enforceability of these transactions when the signatory who clicks through them is a minor. In
Canada, the law is that contracts with infants are voidable unless they are for "necessaries."
With regard to online contracts and whether they are treated differently, there does not appear
to be any reported decisions in Canada. In the United States, the law is different when dealing
with minors and online agreements. In AV v iParadigms LLC, No 08-1424 (4th Cir 2009), a
group of high school students brought a copyright infringement claim based on the use of an
"online technology system" in its plagiarism detection service. The high school subscribed to
the service, which required students to submit their essays through a web-based system and
which would digitally store the work submitted by students. In order to submit an assignment,
"a student must create a user profile on the web site, a process that requires the student to
click on 'I Agree ' under the 'terms of agreement' or 'Clickwrap Agreement."' Part of the agree-
ment contained a limitation of liability clause, maintaining that the services offered were
"conditioned on [the user's] acceptance without modification of the terms, conditions, and
notices contained herein," and that "[i]n no event shall iParadigms .. . be liable for any ... dam-
ages arising out of or in any way connected with the use of this web site." The district court
had refused to void the contract based on the doctrine of infancy, concluding that the plain-
tiffs could not use the doctrine as a "sword " to void the contract but retain its benefits ("high
school credit and standing to bring this action"). The findings on the copyright infringement
claim were upheld on appeal.
2. Similarly, the court would not allow the infancy defence in EKD v Facebook, Inc, 885 F
Supp 2d 894, 2012 WL 324392, 4 (SDlll). There, Facebook invoked a forum selection clause
found in its terms of service when minors brought a claim against it. With regard to whether
the terms of service were void or voidable on the basis that the plaintiffs were minors, the
court maintained that "[t]he infancy defense may not be used inequitably to retain the benefits

515
CHAPTER 6 PROTECTION OF WEAKER PARTIES

of a contract while reneging on the obligations attached to that benefit" and upheld the forum
selection clause. However, see 18 ex rel Fife v Facebook, Inc, F Supp 2d 989 (NDCal 2012),
where the court distinguished EKD on the basis that it was limited to enforcing a forum selec-
tion clause, and not the entire agreement.

Ill. FORFEITURES AND PENALTY CLAUSES

SHATILLA V FEINSTEIN
[1923] 3 DLR 1035 (Sask CA)

[Feinstein carried on business as a wholesale drygoods merchant in Saskatoon, and

on April 16, 1920, sold his business to Shatilla on the express understanding that
Feinstein and his brother, who were most active in the business, would not compete
within the corporate limits of Saskatoon for five years. They agreed to pay $10,000
on breach of the covenant recoverable on each and every such breach as liquidated
damages and not as a penalty. In 1921 Feinstein became a shareholder and director
of Harley Henry Ltd., which engaged in the wholesale drygoods business. Shatilla
sued to recover on the covenant. The trial judge held the covenant to be a penalty
and unenforceable, but he also held that there had been a breach and directed a
reference to ascertain actual damages. The plaintiff appealed on the ground, among
others not nere material, that the covenant was valid as a genuine pre-estimate of
liquidated damages.]
MARTIN JA (for the court): ...
[9] The main question to be determined is whether or not the sum fixed by the
covenant is a penalty, or whether it is recoverable by way of liquidated damages.
When the damages which may arise out of the breach of a contract are in their nature
uncertain, the law permits the parties to agree beforehand as to the amount to be
paid in ca.s e of breach. Whether such an agreement has been made by the parties or
not, or whether the sum agreed upon is a penalty, must depend upon the circum-
stances of each case. If the sum fixed is in excess of any actual damage which can
possibly arise from the breach of the contract, the sum fixed as damage is not con -
sidered to be a bona fide pre-estimate of the damage. The same principle is applied
when the payment of a larger sum is stipulated in the event of the breach of a coven -
ant to pay a smaller sum. In the case of a contract containing a single stipulation
which, ifbroken at all, can be broken once only-such as a covenant not to reveal a
trade secret-when the parties have agreed to the amount which shall be paid in case
of breach and referred to such sum as liquidated damages, there would appear to be
no reason, on the authorities, why the Court should not treat such sum as liquidated
damages. If, however, the covenant is one which is capable of being broken more
than once, such as an agreement not to solicit the customers of a firm, or an agree-
ment not to sell certain specified articles below a certain price, the question is a more
difficult one. In such a case, however, the damage in the case of each breach is of
the same kind, and the fact that such damage may vary in amount for each breach
has not been held by the Courts to raise a presumption that the sum agreed upon is
a penalty, particularly where the parties have agreed to the sum as liquidated dam -
ages. This, I think, is a fai r deduction from the decision in the House of Lords in
Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co., [1915] AC. 79.
[10] In cases, however, where it is agreed to pay a fixed sum on the breach of a
number of stipulations of various degrees of importance, a presumption is said to

516
 Ill. FORFEITURES AND PENALTY CLAUSES

be raised against the sum so fixed being treated as liquidated damages, even though
the parties have referred to it as such; that is, there is a presumption against the
parties having pre-estimated the damages. The damage likely to accrue from
breaches of various kinds in such a case is different in kind and amount, and a sep-
arate estimate in the case of each breach would be necessary. Such a presumption
may, however, be rebutted if it is shown on the face of the agreement, or on the
evidence, that the parties have taken into consideration the different amounts of
damages that might occur, and had actually arrived at an amount which was con-
sidered proper under all the circumstances. Even then, however, the amount fixed
must not be extravagant or unreasonable.

[24] The covenant in the present case covers a number of matters which would
constitute breach of it. It provides that the defendant shall not
carry on or be engaged in or take part in or be in any way interested in the business of
wholesale drygoods, etc.
[25] This, the main portion of the covenant, is further described by words preced-
ing it:
directly or indirectly, either as principal or agent or as director or manager of a company,
or as a servant in any capacity.
[26] There could be many breaches of this covenant, some of which would be
very important, others of a less important and even trivial character. For instance, if
the defendant had engaged as a clerk with some one carrying on a similar business,
or if he purchased a small amount of stock in a similar business, it could scarcely be
said that such action would cause serious damage to the plaintiffs, nor that it would
constitute an important breach of the agreement; certainly it would seem "extravagant
and unconscionable" that for either one of such breaches he should pay damages
amounting to $10,000. On the other hand, if he actually went into business in part-
nership with some one or carried on a competing business on his own account, or
became manager of a company carrying on a similar business, or purchased a large
interest in a similar concern carrying on business as a company and became a dir-
ector of such company, such breaches would be of an important character and might
conceivably cause serious damage to the plaintiffs. The covenant provides for the
payment of a lump sum upon the occurrence of any one of a number of things dif-
fering in importance, and some of them trivial in character, and where a sum is
stipulated to be paid as liquidated damages, and is payable not on the happening of
a single event but of one or more of a number of events, some of which might result
in inconsiderable damage, the Court may decline to construe the words "liquidated
damages" according to their ordinary meaning and may treat such a sum as a pen -
alty. Lord Dunedin, in the Dunlop case, [1915] A.C . at p. 89, considers that if there are
various breaches to which an indiscriminate sum is applied, "then the strength of
the chain must be taken to be its weakest link," and if it can be seen clearly that the
loss in one particular breach could never amount to the sum stated then the conclu -
sion that the sum is a penalty may be reached. I think this statement of the law is
peculiarly applicable to the facts of the present case.

PROBLEM

Draft a clause for Shatilla that would have achieved his object.

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CHAPTER 6 PROTECTION OF W EAKER PARTIES

HF CLARKE LIMITED V THERMIDAIRE CORP LTD

[1976] 1 SCR 319, 54 DLR (3d) 385

[Clarke agreed to distribute (as sole distributor) a product manufactured by Thermi-

daire and not to sell competing products. He further agreed that "in the event of
breach by Clarke of this covenant pertaining to competitive products, Clarke shall
pay to Thermidaire by way of liquidated damages an amount equal to the gross
trading profit realized through the sale of such competitive products." In breach of
contract (found by the trial judge to be "unscrupulous, brazen and flagrant"), Clarke
did sell competing products. The trial judge and the Ontario Court of Appeal held
the liquidated damages clause to be enforceable, the latter court stressing that there
were elements of Thermidaire's loss that were difficult to calculate, such as loss of
product identification. The Supreme Court of Canada, however, reversed.]
LASKIN CJC: The primary concern in breach of. contract cases ... is compensation,
and judicial interference with the enforcement of what the courts regard as penalty
clauses is simply a manifestation of a concern for fairness and reasonableness, rising
above contractual stipulation, whenever the parties seek to remove from the courts
their ordinary authority to determine not only whether there has been a breach but
what damages may be recovered as a result thereof. ...
I regard the exaction of gross trading profits as a penalty in this case because it
is, in my opinion, a grossly excessive and punitive response to the problem to which
it was addressed; and the fact that the appellant subscribed to it, and may have been
foolish to do so, does not mean that it should be left to rue its unwisdom ....
... The fact that the highest amount put forward by the respondent as its actual
loss was $92,017 [this figure was based on estimated loss of profits] is plainly indica-
tive of the disproportion that resides in the exaction of gross trading profits of
$239,449.05.

STOCKLOSER V JOHNSON
[1954] 1 OB 476 (CA)

The plaintiff agreed to buy certain plant and machinery from the defendant. The
price was payable in instalments, and the agreement provided that in case of default
by the purchaser, the vendor was entitled (after giving notice) to retake possession
of the machinery and to retain all payments made by the purchaser. The purchaser
did default, and now claims the return of the instalments paid.
DENNING LJ: There was acute contest as to the proper legal principles to apply in
this case. On the one hand [counsel for the plaintiff] urged us to hold that the buyer
was entitled to recover the instalments at law. He said that th e forfeiture clause
should be ignored as it was of a penal character; and once it was ignored it meant
that the buyer was left with a simple right to repayment of his money ... subject only
to a cross-claim for damages. In asking us to ignore the forfeiture clause, [counsel
for the plaintiff] relied on the familiar tests which are used to distinguish between
penalties and liquidated damages .... There is, I think, a plain distinction between
penalty cases, strictly so called, and cases like the present.
It is this: when one party seeks to exact a penalty from the other, he is seeking to
exact payment of an extravagant sum either by action at law or by appropriating
to himself moneys belonging to [the other party]. The claimant invariably relies, like

518
 Ill. FORFEITURES AND PENALTY CLAUSES

Shylock, on the letter of the contract to support his demand, but the courts decline
to give him their aid because they will not assist him in an act of oppression ....
In the present case, however, the seller is not seeking to exact a penalty. He only
wants to keep money which already belongs to him. The money was handed to him
in part payment of the purchase price, and, as soon as it was paid, ·it belonged to
him absolutely. He did not obtain it by extortion or oppression or anything of that
sort, and there is an express clause-a forfeiture clause, if you please-permitting
him to keep it. It is not the case of a seller seeking to enforce a penalty, but a buyer
seeking restitution of money paid. If the buyer is to recover it, he must, I think, have
recourse to somewhat different principles from those applicable to penalties, strictly
so called.
On the other hand, [counsel for the defendant] urged us to hold that the buyer
could only recover the money if he was able and willing to perform the contract, and
for this purpose he ought to pay or offer to pay the instalments which were in arrears
and be willing to pay the future instalments as they became due; ... I think that this
contention goes too far in the opposite direction. If the buyer was seeking to re-
establish the contract, he would of course have to pay up the arrears and to show
himself willing to perform the contract in the future, just as a lessee, who has suffered
a forfeiture, has to do when he seeks to re-establish the lease. So also if the buyer
were seeking specific performance he would have to show himself able and willing
to perform his part. But the buyer's object here is not to re-establish the contract. It
is to get his money back, and to do this I do not think that it is necessary to go so far
as to show that he is ready and willing to perform the contract.
I reject, therefore, the arguments of counsel at each extreme. It seems to me that the
cases show the law to be this: (1) When there is no forfeiture clause. If money is handed
over in part payment of the purchase price, and then the buyer makes default as to the
balance, then so long a:o the seller keeps the contract open and available for perform -
ance, the buyer cannot recover the money; but once the seller rescinds the contract
or treats it as at an end owing to the buyer's default, then the buyer is entitled to recover
his money by action at law subject to a cross-claim by the seller for damages: ...
(2) But when there is a forfeiture clause or the money is expressly paid as a deposit (which
is equivalent to a forfeiture clause), then the buyer who is in default cannot recover the
money at law at all. He may, however, have a remedy in equity, for, despite the express
stipulation in the contract, equity can relieve the buyer from forfeiture of the money
and order the seller to repay it on such terms as the court thinks fit. ...
The difficulty is to know. what are the circumstances which give rise to this
equity. ... Two things are necessary: first, the forfeiture clause must be of a penal
nature, in this sense, that the sum forfeited must be out of all proportion to the dam -
age, and, secondly, it must be unconscionable for the seller to retain the money....
In the course of the argument before us Somervell L.J. put an illustration which
shows the necessity for this equity even though the buyer is not ready and willing
to perform the contract. Suppose a buyer has agreed to buy a necklace by instal-
ments, and the contract provides that, on default in payment of any one instalment,
the seller is entitled to rescind the contract and forfeit the instalments already paid.
The buyer pays 90 per cent of the price but fails to pay the last instalment. He is not
able to perform the contract because he simply cannot find the money. The seller
thereupon rescinds the contract and retakes the necklace and resells it at a higher
price. Surely equity will relieve the buyer against forfeiture of the money on such
terms as may be just.
Again, suppose that a vendor of property, in lieu of the usual 10 per cent deposit,
stipulates for an initial payment of 50 per cent of the price as a deposit and part

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payment; and later, when the purchaser fails to complete, the vendor resells the
property at a profit and in addition claims to forfeit the 50 per cent deposit. Surely
the court will relieve against the forfeiture. The vendor cannot forestall this equity
by describing an extravagant sum as a deposit, any more than he can recover a
penalty by calling it liquidated damages ....

[Denning LJ concluded that in this particular case it was not unconscionable for the
vendor to retain the money. Somervell and Romer LJJ agreed in the result, but Romer
LJ expressly dissented from Denning LJ's view of the power of the court to relieve
against forfeiture. He thought that the powers of the court ought to be considerably
narrower. See also Waddams at para 468.I .

NOTES
1. The common law principles dealing with penalties have been generally based on the
House of Lords' judgment in Dunlop Pneumatic Tyre Co, Ltd v New Garage and /vlotor Co, Ltd,
[19151 AC 79, which was based on a clause, where the pre-estimate of damages was a fixed
sum: "We agree to pay to the Dunlop company the sum of 5 pounds for each and every tyre,
cover, or tube sold or offered in breach of this agreement, as and by way of liquidated dam-
ages and not as a penalty." The principles on the distinction between penalty clauses and
liquidated damages we re provided in the judgment of Lord .Dunedin:

1. Though the parties to a contract who use the words "penalty" or "liquidated damages"
may prima facie be supposed to mean what they say, yet the expression used is not
conclusive. The Court must find out whether the payment stipulated is in truth a pen-
alty or liquidated damages ...
2. The essence of a penalty is a payment of money stipulated as in terrorem of the
offending party; the essence of liquidated damages is a genuine covenanted pre-
estimate of damage ...
3. The question whether a sum stipulated is penalty or liquidated damages is a question
of construction to be decided upon the terms and inherent circumstances of each
particular contract, judged as at the time of the making of the contract, not as at the
time of the breach .
4. To assist this task of construction various tests have been suggested .... Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and uncon-
scionable in amount in comparison with the greatest loss that could conceivably
be proved to have followed from the breach ...
(b) It will be held to be a penalty if the breach consists only in not. paying a sum of
money, and the sum stipulated is a sum greater than the sum which ought to have
been paid.
(c) There is a presumption (but no more) that it is penalty when "a single lump sum is
made payable by way of compensation, on the occurrence of one or more or all
of several events, some of which may occasion serious and others but trifling
damage." ...
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage,
that the consequences of the breach are such as to make precise pre-estimation
almost an impossibility. On the contrary, that is just the situation when it is prob-
able that pre-estimated damage was the true bargain between the parties.

2. In Eisley Estate v JG Collins Ins Agencies, [1978] 2 SCR 916, the Supreme Court deter-
mined that when the actual loss is greater than the penalty clause, the amount in the penalty

520
 Ill. FORFEITURES AND PENALTY CLAUSES

clause would be the upper limit on the damage awarded. Speaking for a unanimous court,
Dickson J held :

It is now evident that the power to strike down a penalty clause is a blatant interference w ith
freedom of contract and is designed for the sole purpose of providing relief against oppres-
sion for the party having to pay the stipulated sum. It has no place where there is no oppression .
If the actual loss turns out to exceed the penalty, the normal rules of enforcement of contract
apply to allow recovery of only the agreed sum. The party imposing penalty should not be able
to obtain the benefit of whatever intimidating force the penalty clause may have in inducing
performance, and then ignore the clause w hen it turns out to be to his advantage to do so.
A penalty clause should function as a limitation on the damages recoverable while still being
ineffective to increase damages above the actual loss sustained w hen such loss is less than
the stipulated amount. ... Of course, if an agreed sum is a valid liquidated damages clause, the
plaintiff is entitled at law to recover this sum regardless of the actual loss sustained .
In the context of the present discussion of the measure of damages, the result is that an
agreed sum payable on breach represents the maximum amount recoverable w hether the
su m is a penalty or a valid liquidated damages clause . [at 937]

3. In McKeen v The Mortgage Makers Inc and Libby, 2009 NBCA 61, the court attempted
to resolve the three cases (Dunlop, Thermidaire, and Eisley Estate) by providing the following
summary (at para 38): "One way of resolving this apparent conflict is to reformulate the applic-
able rules as follows : A clause providing a fixed sum representing a genuine pre-estimate of
damages will be deemed enforceable unless at the time of the breach the amount fixed is
deemed extravagant or unconscionable. "
4. Using the doctrine of unconscionability to analyze the enforceability of penalty clauses
in a contract is not new. In 1976, in "Unconscionability in Contracts" (1976) Mod L Rev 369 at
373-75, Stephen Waddams advocated that "clarity, justice and, in the long run, certainty, would
be served by an open recognition of a principle of unconscionability." Cases since then have
also used the doctrine of unconscionability. In Birch v Union of Taxation Employees, Local
70030, 2008 ONCA 809, 93 OR (3d) 1, leave to appeal denied, the issue was whether a union
is entitled to enforce a fine against strike-breaking members pursuant to the provisions in the
union constitution . Instead of approaching the ·issue from the common law rule against penalty
clauses, the Ontario Court of Appeal opted to look at w hether the clause was unconscionable,
thereby adopting an approach suggested in obiter by Sharpe JA in 869163 Ontario Ltd v Torrey
Springs II Associates Ltd Partnership (2005) (sub nom Peachtree II Associates-Dallas LP v
857486 Ontario Ltd) (2005), 76 OR (3d) 362, 200 OAC 159, leave to appeal refused, [2005]
SCCA No 420. See also Kevin E Davis, "Penalty Clauses Through the Lens of Unconscionability
Doctrine: Birch v Union of Taxation Employees, Local 70030" (2010) 55 McGill LJ 151. For other
commentary on the issue, see Yarra Capital Group Pty Ltd v Sk/ash Pty Ltd, [2006] VSCA 109,
which suggests that "unconscionabili ty" is an additional basis on w hich to have a penalty struck
down; Hav-A-Kar Leasing Ltd v Vekselshtein , 2012 ONCA 826, [2012] OJ No 5592 (OL), w hich
upheld the trial judge's findings that "the accelerated amount provided for in the challenged
provision of the Lease ... 'is not excessive or unconscionable' and that it 'merely puts [Hav-A-Kar]
in the position it would have been in if [ZVJ had performed his obligations under the contract"'
(para 49); John Carter and Elisabeth Peden, "A Good Faith Perspective on Liquidated Damages"
(2007) 23 Journal of Contract Law 157; MacDougall at 368-78 ; and S Waddams, "Abusive or
Unconscionable Clauses from a Common La w Perspective" (2010) 49 Can Bus LJ 378.
5. While the majority of penalty clause cases fall within the commercial law context, the
analysis is also applicable in the family law context. See Dundas v Schafer, 2014 MBCA 92.
6. Andrews v Australia and New Zealand Banking Group Ltd, [20121 HCA 30 involved a class
action lawsuit w here customers sued ANZ Bank with regard to "service fees " being charged by
the bank for their account transactions. In a controversial decision, a unanimous High Court

521
CHAPTER 6 PROTECTION OF WEAKER PARTIES

of Australia determined that the penalty doctrine can be applied to bank fees that were levied
on customers for incidences that were not breaches of contract. The UK Supreme Court
declined to follow Andrews in Cavendish Square Holding BV v Ta/al El /Vlakdessi; ParkingEye
Limited v Beavis, [2015] UKSC 67. Similarly, in Paciocco v Australia and New Zealand Banking
Group Limited, [2016) HCA 28, the High Court of Aust ralia dealt with the issue of whether late
payment fees applied to credit cards could be classified as penalties and should be unenforce-
able . A majority of the court held they were not void as penalties, and maintained that costs
outside the "direct costs" of contractual breach can be considered when determining whether
an amount can be classified as a penalty.
7. For further reading, see Prince Saprai, "The Penalties Rule and the Promise Theory of
Contract" (2013) 26 Can JL & Jur 443 and Katy Barnett. "Paciocco v Australia and New Zealand
Banking Group Ltd: Are Late Payment Fees on Credit Cards Enforceable?" (2015) 37 Sydney L
Rev 595.

IV. CLAUSES EXCLUDING LIABILITY

MARGARET J RADIN, Boilerplate, the Fine Print,

Vanishing Rights, and the Rule of Law
(Princeton, NJ: Princeton University Press, 2013)
at 138-40 (footnotes om itted)

It is not unusual for boilerplate to eliminate tort remedies, such as all damages for
personal injury, by means of what are called "exculpatory clauses." For example, many
contracts that you might sign at a fitness studio or at a summer camp to which you
take your children provide that the establishment will not be liable for any injury it
may cause to you or your children, no matter what the cause ... . The question arises
whether such a waiver can be valid.
Courts have tended to look at exculpatory clauses in contracts differently depend-
ing on the level of fault (in tort) of the injurer. Probably no court would enforce the
aspect of a blanket exculpatory clause that would immunize the injurer from harm
inflicted intentionally on a person, because that would allow a boilerplate contract
to excuse a crime-the crime of assault. Nor would most courts enforce the aspect
of a blanket exculpatory clause that would immunize the injurer from paying dam -
ages for harm caused by its own recklessness or gross negligence. Such contractual
clauses would be declared violative of public policy.
In view of these judicial limits on enforcement, why do firms nonetheless use
blanket exculpatory clauses that purport to immunize them against all injuries
including death, and no matter how caused? ... Perhaps the firm hopes (or even
knows) that the clause will deter some people from even thinking about suing them.
Most people, supposing that they read the clause, probably would be unaware that
an over-reaching aspect of the clause would be held invalid in their jurisdiction.
Some who consult an attorney may know that the questiqn whether the clause would
be held invalid as applied to their particular case is in doubt and would be expensive
to adjudicate, because the validity of the clause would have to be litigated in addition
to the particular events that caused the injury.
Although courts would most likely uniformly invalidate as against public policy
exculpatory clauses that immunize intentional harm or reckless or grossly negligent
behavior causing harm (and thus many of the clauses in use today are unenforceable

522
 IV. CLAUSES EXCLUDING LIABILITY

to the extent that they cover harm however caused), some courts now do enforce
exculpatory clauses insofar as they apply to merely negligent behavior. One often
finds such clauses in boilerplate deployed by gyms, training facilities, summer camps,
resorts, and tour companies .... Anecdotal evidence suggests that firms are using these
clauses because their insurance companies make it a condition of their coverage ....
Exculpatory clauses for merely negligent harm-causing behavior are upheld
against public policy challenge in many states, but not uniformly. Some courts now
hold that they are generally enforceable; others that they are enforceable unless they
relate to essential services, or unless the parties have unequal bargaining power. A
few courts still adhere to the older view that such clauses are generally unenforceable
if they fall into the categories delineated in a California case from the early 1960s.
It seems that the argument in favor of exculpation for harm caused by negligence
(which would otherwise subject the firm to tort liability) is that it is efficient to force
clients and customers to bear the risk of harm because it will incentivize them to
bear the cost of insuring against it. Many would see this as a weak rationale for vali-
dating these clauses. For one thing, this practice seems to entail some risk of moral
hazard. ("Moral hazard" refers to the risk that firms may not take the proper level of
precaution against accidents causing harm to customers if no liability ensues for
their negligence.) Also, to the extent that insurance companies require their insureds
to impose these clauses on their clients or customers, insurance companies seem
to be insuring fiims against liability they will not have to cover, since as a condition
of coverage tbe insurance company is requiring the firm to disclaim liability and
shunt it to the client or customer.
If the real argument in support of allowing firms to exculpate themselves from
tort liability for their own negligence is not this weak efficiency argument, but is
simply an argument based on "freedom of contract," one would expect to find courts
making a distinction between how they evaluate such a clause in a commercial
contract between parties who have apparently engaged in cognizant risk allocation
versus how they evaluate it in a boilerplate rights deletion scheme. Some courts will
make this distinction, and some will not.

GEORGE MITCHELL LTD V FINNEY LOCK SEEDS LTD

[1983] OB 284 (CA), affd [1983] 2 AC 803 (HL)

LORD DENNING MR:

THE HEYDAY OF FREEDOM OF CONTRACT

None of you nowadays will remember the trouble we had-when I was called to the
Bar-with exemption clauses. They were printed in small print on the back of tickets
and order forms and invoices. They were contained in catalogues or timetables. They
were held to be binding on any person who took them without objection. No one
ever did object. He never read them or knew what was in them. No matter how
unreasonable they were, he was bound. AU this was done in the name of "freedom
of contract." But the freedom was all on the side of the big concern which had the
use of the printing press. No freedom for the little man who took the ticket or order
form or invoice. The big concern said, "Take it or leave it." The little man had no
option but to take it. The big concern could and did exempt itself from liability in its
own interest without regard to the little man. It got away with it time after time. When
the courts said to the big concern, "You must put it in clear words," the big concern

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

had no hesitation in doing so. It knew well that the little man would never read the
exemption clauses or understand them.
It was a bleak winter for our law of contract. It is illustrated by two cases, Thomp-
son v. London, Midland and Scottish Railway Co. [1930] 1 K.B. 41 (in which there was
exemption from liability, not on the ticket, but only in small print at the back of the
timetable, and the company were held not liable) and L'Estrange v. F. Graucob Ltd.
[1934] 2 K.B. 394 (in which there was complete exemption in small print at the bottom
of the order form, and the companyyvere held not liable).

THE SECRET WEAPON

Faced with this abuse of power-by the strong against the weak-by the use of the
small print of the conditions-the judges did what they could to put a curb upon it.
They still had before them the idol, "freedom of contract." They still knelt down and
worshipped it, but they concealed under their cloaks a secret weapon. They used it
to stab the idol in the back. This weapon was called "the true construdion of the
contract." They used it with great skill and ingenuity. They used it so as to depart
from the natural meaning of the words of the exemption clause and to put upon
them a strained and unnatural construction. In case after case, they said that the
words were not strong enough to give the big concern exemption from liability; or
that in the circumstances the big concern was not entitled to rely on the exemption
clause. If a ship deviated from the contractual voyage, the owner could not rely on
the exemption clause. If a warehouseman stored the goods in the wrong warehouse,
he could not pray in aid the limitation clause. If the seller supplied goods different
in kind from those contracted for, he could not rely on any exemption from liability.
If a shipowner delivered goods to a person without production of the bill ·of lading,
he could not escape responsibility. by reference to an exemption clause. In short,
whenever the wide words -in their natural meaning-would give rise to an
unreasonable result, the judges either rejected them as repugnant to the main pur-
pose of the contract, or else cut them down to size in order to produce a reasonable
result. ...
But when the clause was itself reasonable and gave rise to a reasonable result, the
judges upheld it; at any rate, when the clause did not exclude liability entirely but
only limited it to a reasonable amount. So where goods were deposited in a cloak-
room or sent to a laundry for cleaning, it was quite reasonable for the company to
limit their liability to a reasonable amount, having regard to the small charge made
for the service ....

FUNDAMENTAL BREACH

No doubt has ever been cast thus far by anyone. But doubts arose when in this
court-in Karsales (Harrow) Ltd. v. Wallis [1956] 1 W.L.R. 936-we ventured to suggest
that if the big concern was guilty ·of a breach which went to the "very root" of the
contract-sometimes called a "fundamental breach" -or at other times a "total failure"
of its obligations-then it could not rely on the printed clause to exempt itself from
liability....
But we did make a mistake-in the eyes of some-in elevating it-by inference-
into a "rule of law." That was too rude an interference with the idol of "freedom of
contract." We ought to have used the secret weapon. We ought to have said that in
each case, on the "true construction of the contract" in that case, the exemption
clause did not avail the party where he was guilty of a fundamental breach or a breach
going to the root. That is the lesson to be learnt from the "indigestible" speeches in

524
 IV. CLAUSES EXCLUDING LIABILITY

Suisse At/antique Societe d'Armement Maritime S.A. v. N. V Rotterdamsche Kolen Centrale

[1967] 1 A.C. 361. They were all obiter dicta. The House were dealing with an agreed
damages clause and not an exemption clause and the point had never been argued
in the courts below at all. It is noteworthy that the. House did not overrule a single
decision of the Court of Appeal. Lord Wilberforce, at p. 433, appears to have approved
them. At any rate, he cast no doubt upon the actual decision in any case.

THE CHANGE IN CLIMATE

In 1969 there was a change in climate. Out of winter into spring. It came with the
Law Commission's Exemption Clauses in Contracts. First Report: Amendments to
the Sale of Goods Act 1893 (Law Com. No. 24, H.C. 403) which was implemented in
the Supply of Goods (Implied Terms) Act 1973. In 1975 there was a further change.
Out of spring into summer. It came with the Law Commission's Exemption Clauses,
Second Report (Law Com. No. 69, H.C. 605) which was implemented by the Unfair
Contract Terms Act 1977. No longer was the big concern able to impose whatever
terms and conditions it liked in a printed form-no matter how unreasonable they
might be. These reports showed most convincingly that the courts could and should
only enforce them if they were fair and reasonable in themselves and it was fair and
reasonable to allow the big concern to rely on them. So the idol of "freedom of con-
tract" was shattered. In cases of personal injury or death, it was not permissible to
exclude or restrict liability at all. In consumer contracts any exemption clause was
subject to the test of reasonableness.
These reports and statutes have influenced much the thinking of the judges. At
any rate, they influenced me as you will see if you read Gillespie Bros. & Co. Ltd. v.
Roy Bowles Transport Ltd. [1973] O.B. 400, 416 and Photo Production Ltd. v. Securicor
Transport Ltd. [1978] 1 W.L.R. 856, 865:

Thus we reach, after long years. the principle which lies behind all our striving: the court
will not allow a party to rely on an exemption or limitation clause in circumstances in which
it would not be fair or reasonable to allow reliance on it: and, in considering whether it
is fair and reasonable, the court will consider whether it was in a standard form. whether
there was equality of bargaining power, the nature of the breach, and so forth.

THE EFFECT OF THE CHANGES

What is the result of all this? To my mind it heralds a revolution in our approach to
exemption clauses; not only where they exclude liability altogether [but] also where
they limit liability; not only in the specific categories in the Unfair Contract Terms
Act 1977, but in other contracts too. Just as in other fields of law we have done away
with the multitude of cases on "common employment," "last opportunity," "invitees"
and "licensees" and so forth, so also in this field we should do away with the multitude
of cases on exemption clauses. We should no longer have to go through all kinds of
gymnastic contortions to get round them. We should no longer have to harass our
students with the study of them. We should set about meeting a new challenge. It is
presented by the test of reasonableness.

THE TWO SECURICOR CASES

The revolution is exemplified by the recent two Securicor cases ([1980] A.C. 827 and
1982 S.L.T. 377) in the House of Lords. In each of them the Securicor company pro-
vided a patrolman to keep watch on premises so as to see that they were safe from
intruders. They charged very little for the service. In the first case it was a factory

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with a lot of paper in it. The patrolman set light to it and burnt down the factory. In
the second case it was a quay at Aberdeen where ships were berthed. The patrolman
went off for the celebrations on New Year's Eve. He left the ships unattended. The
tide rose. A ship rose with it. Its bow got "snubbed" under the deck of the quay. It sank.
In each case the owners were covered by insurance. The factory owners had their
fire insurance. The shipowners had their hull insurance. In each case the Securicor
company relied on a limitation clause. Under it they were protected from liability
beyond a limit which was quite reasonable and their insurance cover was limited
accordingly. The issue in l?factical terms was: which of the insurers should bear the
loss? The question in legal terms in each case was whether Securicor could avail
themselves of the limitation clause. In each case the House held that they could.
In the first case ([1980] AC. 827) the House made it clear that the doctrine of
"fundamental b reach" was no longer applicable. They replaced it by the test of rea-
sonableness. That was the test applied by the trial judge, MacKenna J., which I myself
quoted with approval: See Photo Production Ltd. v. Securicor Transport Ltd. [19781 1
W.L.R. 856, 865. He said:
Condition 1, as I construe it, is, I think. a reasonable provision ... Either the owner of the
premises. or the person providing the service, must bear the risk. Why should the parties
not agree to its being borne by the owners of the premises? He is certain to be insured
against fire and theft, and is better able to judge the cover needed than the party provid-
ing the service ... That is only another way of shifting the risk from the party who provides
the service to the party who receives it. There is. as 1.have said. nothing unreasonable,
nothing impolitic, in such a contract.
His judgment was approved by the House of Lords who themselves held that the
limitation clause was valid because it was a reasonable way of apportioning the
risks-as between the insurers on either side. I would set out two passages to prove
it. Lord Wilberforce said in Photo Production Ltd. v. Securicor Transport Ltd. [1980] AC.
827, 846:
Securicor undertook to provide a service of periodical visits for a very modest charge
which works out at 26p. per visit. It did not agree to provide equipment. It would have
no knowledge of the value of the plaintiffs' factory: that, and the efficacy of their fire
precautions, would be known to the respondents. In these circumstances nobody could
consider it unreasonable, that as between these two equal parties the risk assumed by
Securicor should be a modest one, and that the respondents should carry the substantial
risk of damage or destruction.
And Lord Diplock said, at p . 851:
For the reasons given by Lord Wilberforce it seems to me that this apportionment of
the risk of the factory being damaged or destroyed by the injurious act of an employee
of Securicor wh ile carrying out a visit to the factory is one which reasonable business-
men in the position of Securicor and the factory owners might well think was the most
economical. An analogous apportionment of risk is provided for by the Hague Rules in
the case of goods carried by sea under bills of lading .
I do hope, however, that we shall not often have to consider the newfound analy-
sis of contractual obligations into "primary obligations," "secondary obligations,"
"general secondary obligations" and "anticipatory secondary obligations." No doubt
.it is logical enough but it is too esoteric altogether. It is fit only for the rarified atmos-
phere of the House of Lords. Not at all for the chambers of the practitioner. Let alone
for the student at the university. ·

526
 IV. CLAUSES EXCLUDING LIABILITY

In the second case (1982 S.L.T. 377) the House made a distinction between clauses
which excluded liability altogether, and those which only limited liability to a certain
sum. Exclusion clauses were to be construed strictly contra proferentem, whereas
limitation clauses were to be construed naturally. This must be because a limitation
clause is more likely to be reasonable then an exclusive clause. If you go by the plain
natural meaning of the words (as you should do) there is nothing to choose between
them.
As Lord Sumner said 50 years ago in Atlantic Shipping and Trading Co. v. Louis
Dreyfus and Co. [1922] 2 A.C. 250, 260:

There is no difference in principle between words which save them from having to pay
at all [and] words which save them from paying as much as they would otherwise have
had to pay.

If you read the speeches in the second Securicor case, 1982 S.L.T. 377, it does look
as if they were relying on the reasonableness of the limitation clause. They held it
was applicable even though the failure of the Securicor company was a "total failure"
to provide the service contracted for. They also said, obiter, that they would construe
an exclusion clause much more strictly-just as was done in the old cases decided
in the winter time. But I would suggest that the better reason is because it would not
be fair or reasonable to allow the propounder of them to rely on them in the circum-
stances of the case.

NOTES
1. In England, legislative and judicial changes brought to an end the doctrine of fundamen-
tal breach. There, the Unfair Contract Terms Act 1977 (UK), c 50 was enacted, to apply to
clauses excluding liability in consumer and standard form contracts. In cases where the legis-
lation was not applicable, such as in Photo Production Ltd v Securicor Transport Ltd, [1980]
AC 827 (HL), the courts started utilizing the construction approach in place of the doctrine of
fundamental breach, which entails analyzing the exclusion clause as follows: "These words [in
the exclusion clause] have to be approached with the aid of the cardinal rules of construction
that they must be read contra proferentem and that in order to escape from the conse-
quences of one's own wrongdoing, or that of one's servant, clear words are necessary" (Lord
Wilberforce in Photo Production).
2. On the Canadian side, prior to Tercon Contractors Ltd v British Columbia (Transporta-
tion and Highways), 2010 SCC 4, in which the Supreme Court of Canada laid the doctrine of
fundamental breach to rest, the application of the doctrine to exclusionary clauses had been
difficult to predict. The Supreme Court of Canada had an opportunity, before Tercon, to clarify
its position on the application of the doctrine, in Hunter Engineering Co v Syncrude Canada
Ltd, [1989] 1 SCR 426. However, although the court was unanimous in dismissing the plaintiff's
claims, the court rendered two decisions, by Dickson CJC and Wilson J, neither of which had
the majority support of the court. This left lower courts to grapple with which test to apply to
exclusionary clauses, and the application of the doctrine remained unclear until Tercon. In
Tercon, a unanimous Supreme Court discarded the doctrine of fundamental breach and,
instead, laid out a three-step framework to determine the enforceability of exclusion clauses.
However, the Tercon court split on the analysis of the framework and its application to the
facts before it.

527
CHAPTER 6 PROTECTION OF WEAKER PARTIES

HUNTER ENGINEERING CO V SYNCRUDE CANADA LTD

[1989] 1 SCR 426

[Syncrude contracted for 32 gearboxes from Hunter US for its tar sands oil processing
plant in Alberta. Syncrude also contracted with Allis-Chalmers for 4 more gearboxes.
These contracts included a warranty limiting the liability of the suppliers to 24 months
from the date of shipment or to 12 months from th\: date of start-up, whichever
period lapsed first. The warranty by Allis-Chalmers provided that "no other warranty
or conditions, statutory or otherwise shall be implied." A third contract was concluded
between Syncrude and Aco for 11 more gearboxes. The gearboxes turned out to be
poorly designed for their intended purpose and developed cracks necessitating costly ·
repairs after the expiry of the warranties. Syncrude sued for damages on the basis
that the gearboxes were inherently defective, unsafe, and unfit for their intended
purpose and were not of merchantable quality. The BC Court of Appeal awarded
$1 million against Hunter US for the cost of repairs and interest on the basis of breach
of a statutory warranty of fitness in the Ontario Sale of Goods Act, RSO 1990, c S.1,
because the contractual warranty had expired, and found Allis-Chalmers liable for
fundamental breach of contract, because the statutory warranty was excluded by
the terms of the contract. The parties appealed to the Supreme Court. The following
excerpts are from the opinions of Dickson CJ and Wilson J, on the issue of funda -
mental breach.] -
DICKSON CJ (La Forest J concurring): ... I have had the advantage of reading the
reasons for judgment prepared by my colleague, Justice Wilson, in this appeal and
I agree with her disposition of the liability of Allis-Chalmers. In my view, the warranty
clauses in the Allis-Chalmers contract effectively excluded liability for defective
gearboxes after the warranty period expired. With respect, I disagree, however, with
Wilson J.'s approach to the doctrine of fundamental breach. I am inclined to adopt
the course charted by the House of Lords in Photo Production Ltd. v. Securicor Trans-
port Ltd., [1980] AC. 827, and to treat fundamental breach as a matter of contract
construction. I do not favour, as suggested by Wilson J., requiring the court to assess
the reasonableness of enforcing the contract terms after the court has already deter-
mined the meaning of the contract based on ordinary principles of contract inter-
pretation. In my view, the courts should not disturb the bargain the parties have
struck, and I am inclined to replace the doctrine of fundamental breach with a rule
that holds the parties to the terms of their agreement, provided the agreement is not
unconscionable . ...
. In light of the unnecessary complexities the doctrine of fundamental breach has
created, the resulting uncertainty in the law, and the unrefined nature of the doctrine
as a tool for averting unfairness, I am much inclined to lay the doctrine of funda-
mental breach to rest, and where necessary and appropriate, to deal explicitly with
unconscionability. In my view, there is much to be gained by addressing directly
the protection of the weak from over-reaching by the strong, rather than relying
on the artificial legal doctrine of "fundamental breach." There is little value in cloaking
the inquiry behind a construct that takes on its own idiosyncratic traits, sometimes
at odds with concerns of fairness. This is precisely what has happened with the
doctrine of fundamental breach. It is preferable to interpret the terms of the contract,
in an attempt to determine exactly what the parties agreed. If on its true construction
the contract excludes liability for the kind of br~ach that occurred, the party in breach
will generally be saved from liability. Only where the contract is unconscionable, as
might arise from situations of unequal bargaining power between the parties, should
the courts interfere with agreements the parties have freely concluded. The courts

528
 IV. CLAUSES EXCLUDING LIABILITY

do not blindly enforce harsh or unconscionable bargains and, as Professor Waddams

has argued, the doctrine of "fundamental breach" may best be understood as but one
manifestation of a general underlying principle which explains judicial intervention
in a variety of contractual settings. Explicitly addressing concerns of unconscion-
ability and inequality of bargaining power allows the courts to focus expressly on
the real grounds for refusing to give force to a contractual term said to have been
agreed to by the parties ....

WILSON J (L'Heureux-Dube J concurring) (dissenting in cross-appeal): ... I would

reject the concept that an exclusion clause in order to be enforceable must be per se
a fair and reasonable provision at the time it was negotiated. The exclusion clause
cannot be considered in isolation from the other provisions of the contract and the
circumstances in which it was entered into. The purchaser may have been prepared
to assume some risk if he could get the article at a modest price or if he was very
anxious to get it. Conversely, if he was having to pay a high price for the article and
had to be talked into the purchase, he may have been concerned to impose the
broadest possible liability on his vendor. A contractual provision that seems unfair
to a third party may have been the product of hard bargaining between the parties
and, in my view, deserves to be enforced by the courts in accordance with its terms.
It is, however, in my view an entirely different matter for the courts to determine
after a particular breach has occurred whether an exclusion clause should be enforced
or not. This, I believe, was the issue addressed by this Court in Beaufort Realties. In
Beaufort Realties this Court accepted the proposition enunciated in Photo Production
that no rule of law invalidated or extinguished exclusion clauses in the event of
fundamental breach but rather that they should be given their natural and true
construction so that the parties' agreement would be given effect. Nevertheless the
Court, in approving the approach taken by the Ontario Court of Appeal in Beaufort
Realties, recognized at the same time the need for courts to determine whether in
the context of the particular breach which had occurred it was fair and reasonable
to enforce the clause in favour of the party who had committed that breach even if
the exclusion clause was clear and unambiguous. The relevant question for the Court
in Beaufort Realties was: is it fair and reasonable in the context of this fundamental
breach that the exclusion clause continue to operate for the benefit of the party
responsible for the fundamental breach7 In other words, should a party be able to
commit a fundamental breach secure in the knowledge that no liability can attend it7
Or should there be room for the courts to say: this party is now trying to have his
cake and eat it too. He is seeking to escape almost entirely the burdens of the trans-
action but enlist the support of the courts to enforce its benefits.
It seems to me that the House of Lords was able to come to a decision in Photo
Production untrammelled by the need to reconcile the competing values sought
to be advanced in a system of contract law such as ours. We do not have in this
country legislation co:r;nparable to the United Kingdom's Unfair Contract Terms Act
1971 I believe that in the absence of such legislation Canadian courts must continue
to develop through the common law a balance between the obvious desirability of
allowing the parties to make their own bargains and have them enforced through
the courts and the obvious undesirability of having the courts used to enforce bargains
· in favour of parties who are totally repudiating such bargains themselves. I fully
agree with the commentators that the balance which the courts reach will be made
much clearer if we do not clothe our reasoning "in the guise of interpretation." Exclu -
sion clauses do not automatically lose their validity in the event of a fundamental
breach by virtue of some hard and fast rule of law. They should be given their natural
and true construction so that the meaning and effect of the exclusion clause the

529
CHAPTER 6 PROTECTION OF WEAKER PARTIES

parties agreed to at the time the contract was entered into is fully understood and
appreciated. But, in my view, the court must still decide, having ascertained the
parties' intention at the time the contract was made, whether or not to give effect to
it in the context of subsequent events such as a fundamental breach committed by
the party seeking its enforcement through the courts. Whether the courts address
this narrowly in terms of fairness as between the parties (and I believe this has been
a source of confusion, the parties being, in the absence of inequality of bargaining
power, the best judges of what is fair as between themselves) or on the broader policy
basis of the need for the courts (apart from the interests of the parties) to balance
conflicting values inherent in our contract law (the approach which I prefer), I believe
the result will be the same since the question essentially is: in the circumstances that
have happened should the court lend its aid to A to hold B to this clause? ...
As I have noted, this is not the·place for an exposition of the doctrine of uncon-
scionability as it relates to inequality of bargaining power and I do not necessarily
endorse the approaches taken in the cases to which I have just referred . I use them
merely to illustrate the broader point that in situations involving contractual terms
which result from inequality of bargaining power the judicial armory has weapons
apart from strained and artificial constructions of exclusion clauses. Where, however,
there is no such inequality of bargaining power (as in the present case) the courts
should, as a general rule, give effect to the bargain freely negotiated by the parties.
The question is whether this is an absolute rule or whether as a policy matter the
courts should have the power to refuse to enforce a clear and unambiguous exclu-
sion clause freely negotiated by parties of equal bargaining power and, if so, in what
circumstances? In the present state of the law in Canada the doctrine of fundamental
breach provides one answer.
To dispense with the doctrine of fundamental breach and rely solely on the prin-
ciple of unconscionability, as has been suggested by some commentators, would, in
my view, require an extension of the principle of unconscionability beyond its trad-
itional bounds of inequality of bargaining power. The cou·rt, in effect, would be in the
position of saying that terms freely negotiated by parties of equal bargaining power
were unconscionable. Yet it was the inequality of bargaining power which traditionally
was the source of the unconscionability. What was unconscionable was to permit the
strong to take advantage of the weak in making of the contract. Remove the inequal-
ity and we must ask, wherein lies the unconscionability? It seems to me that it must
have its roots in subsequent events, given that the parties themselves are the best
judges of what is fair at the time they make their bargain. The policy of the common
law is, I believe, that having regard to the conduct (pursuant to the contract) of the
party seeking the indulgence of the court to enforce the clause, the court refuses.
This conduct is described for convenience as "fundamental breach." It marks off the
boundaries of tolerable conduct. But the boundaries are admittedly uncertain. Will
replacing it with a general concept of unconscionability reduce the uncertainty?
When and in what circumstances will an exclusion clause in a contract freely
negotiated by parties of equal bargaining power be unconscionable? If both funda -
mental breach and unconscionability are properly viewed as legal tools designed to
relieve parties in light of subsequent events from the harsh consequences of an
automatic enforcement of an exclusion clause in accordance with its terms, is there
anything to choose between them as far as certainty in the law is concerned? Argu-
ably, unconscionability is even less certain than fundamental breach. Indeed, it may
be described as "the length of the Chancellor's foot." Lord Wilberforce may be right
that parties of equal bargaining power should be left to live with their bargains
regardless of subsequent events. I believe, however, that there is some virtue in a

530
 IV. CLAUSES EXCLUDING LIABILITY

residual power residing in the court to withhold its assistance on policy grounds in
appropriate circumstances.
Turning to the case at bar, it seems to me that, even if the breach of contract was
a fundamental one, there would be nothing unfair or unreasonable (and even less
so unconscionable, if this is a stricter test) in giving effect to the exclusion clause.
The contract was made between two companies in the commercial market place
who are of roughly equal bargaining power. Both are familiar and experi enced with
·this type of contract. As the trial judge noted:

Warranty cl. 8 was put forward by Syncrude. Presumably it provided the protection
Syncrude wanted. Indeed, the first sentence thereof is sufficiently all-embraci ng that it
is difficult to conceive of a defect which would not be caught by it. Syncrude freely
accepted the time limitations; there is no evidence that they were under any disadvan-
tage or disability in the negotiating of them. There is no reason why they should not be
held to their bargain, including that part which effectively excludes the implied condition
of s. 15(1) of the Ontario Sale of Goods Act [Syncrude Can Ltd v Hunter Enrg Co (1985).
27 BLR 59 (BCSC) at 77).

There is no evidence to suggest that Allis-Chalmers who seeks to rely on the exclu-
sion clause was guilty of any sharp or unfair dealing. It supplied what was bargained
for (even although it had defects) and its contractual relationship with Syncrude,
which included not only the gears but the entire conveyer system, continued on
after the supply of the gears. It cannot be said, in Lord Diplock's words, that Syncrude
was "deprived of substantially the whole benefit" of the contract. This is not a case
in which the vendor or supplier was seeking to repudiate almost entirely the burdens
of the transaction and invoking the assistance of the courts to enforce its benefits.
There is no abuse of freedom of contract here.

NOTE
If a limitation of liability clause is imposed by statute, shou ld that affect the analysis in the case?
In Beaulieu v Day & Ross Inc, 250 DLR (4th) 533, [2005] NBJ No 77 (OL) (CA), the limitation of
liability clause in a bill of lading , rest ri cting the carrier's liability to $2 per pound unless a higher
value were declared, was upheld after the carrier lost the goods. In finding, inter alia, that to hold
the clause to be unenforceable would be unfair to the consignor, and that the limitation term
in the bill of lading is prescribed under provincial regulation, Robertson JA held (at para 21):

In light of the statutory framework applicable in both Ontario and New Brunswick, I cannot
subscribe to the view that the limitation clause found in the bi ll of lad ing in question is unfair,
unconscionable or unreasonable. Eve n if one were to hold a contrary view, the fact that the
legislatures have imposed a statutory solution to a problem is a sufficient basis on wh ich to
oust the application of the fundamental breach doctrine to the extent that it continues to be
viewed as a rule of law.

See also Anthony Duggan, "Stolen Goods, Disaster. and a Right of Way Gone Wrong: Three
.Unconscionable Contracts Cases from a Law and Economics Perspective" (2004) 40 Can Bus
LJ 3.

531
CHAPTER 6 PROTECTION OF WEAKER PARTIES

DAVIDSON V THREE SPRUCES REALTY LTD

(1977), 79 DLR (3d) 481 (BCSC)

ANDERSON J: The plaintiffs' claims are for damages for breach of contract of bailment
or, alternatively, for negligence.
The three actions were consolidated for the purposes of trial; and it was agreed
by counsel that the evidence of all witnesses and the discovery read in by counsel
for Mr. and Mrs. Farr could be considered by me in reaching my decision in each of
the cases.
The defendant "The Three Spruces Realty Ltd." (hereinafter called the "bailee")
carried on the business and operation of "safety deposit" vaults at 402 West Pender
St., Vancouver, British Columbia. These vaults provided bulk storage space for the
safekeeping of the property of customers. The property of the customers was stored
in the vaults in containers supplied by the customers. The bailee also rented "safety
deposit" boxes to its customers. This aspect of the bailee's business is not in issue
here except perhaps to demonstrate the higher risk involved in placing valuables in
bulk stqrage as opposed to placing such valuables in a safety deposit box.
Each of the plajntiffs entered into an agreement with the bailee whereby the bailee
agreed to keep their valuables in safekeeping. Each of the plaintiffs paid an annual
fee for this service.
In the Farr and Elsdon cases a written agreement was executed by the plaintiffs,
which agreement contained a "limitation of liability" clause. In the Davidson case the
agreement was simply an oral contract whereby the bailee, for a fee, agreed to keep
the Davidsons' valuables in safekeeping ....
The bailee relies on cl. 9 appearing on the back page of the contract, which clause
reads as follows:
9. Neither the lessor nor its officers, agents and servants, shall be in any way liable
directly or indirectly for any theft robbery, embezzlement, loss or destruction of, or any
injury or damage whatsoever to any papers or property which may at any time be
deposited or stored in the box or held by the lessor under clause 11 below, or for any
act, neglect, or omission whatsoever of the lessor or its officers. agents and servants,
or of the tenant or any deputy or any stranger.
The following matters may be relevant in determining whether the limitation
clause is applicable in the circumstances:
(a) The contract is a standard form prepared by the ba ilee.
(b) The contract refers to the rental of a safety deposit box and not to bulk
storage.
(c) A copy of the contract was not given to any of the plaintiffs.
(d) The contract was executed by each of the plaintiffs after representations of
almost absolute safety had been made by the bailee.
(e) The contract was not read by any of the plaintiffs and their attention was not
drawn to the limitation clause.
(f) The rules and regulations made it clear that, in so far as safety deposit boxes
are concerned, access to the box is limited to the ·holder of the box or his
agent, and that the contents of the box are to be examined outside the vault
in rooms specially provided for that purpose .(see rules 2 and 4).
(g) The contract contains a release form whereby the customer may waive the
liability of the bailee.

532
 IV. CLAUSES EXCLUDING LIABILITY

(h) Almost immediately after the contract was signed the plaintiffs were assured
that it was not necessary to insure their valuables against loss by theft or
otherwise . ...
Counsel for the bailee submits that the Courts should not interfere with freedom
of contract. He submits that if the parties to contracts are not held to the t'e rms of
their bargain, however harsh or one-sided, the element of certainty so important in
the commercial world will be eliminated. He submits that the plaintiffs agreed in
writing, in clear terms, that the bailee would not be responsible for any negligence
on its part. He submits that negligence cannot in itself constitute a fundamental
breach or, in any event, the limitation clause protected the bailee in respect of all
acts of negligence.
I agree that as a general rule, apart from fraud, it would be a dangerous thing to
hold that contracts freely entered into should not be fully enforced. It is not correct,
however, to suppose that there are no limitations on freedom of contract. The point
has been reached in the development of the common law where, in my opinion, the
Courts may say, in certain circumstances, that the terms of a contract, although
perfectly clear, will not be enforced because they are entirely unreasonable. I quote
from the judgment of Lord Denning, M.R., in Gillespie Brothers & Co. Ltd. v. Roy
Bowles Transport Ltd. , [1973) O.B. 400 at pp. 415-6, as follows:

The time may come when this process of "constru ing" the contract can be pursued no
further. The words are too clear to permit of it. Are the courts then powerless? Are they
to permit the party to enforce his unreasonable clause, even when it is so unreasonable,
or applied so unreasonably, as to be unconscionable? When it gets to this point, I would
say, as I said many years ago: "there is the vigilance of the common law which, while
allowing freedom of contract, watches to see that it is not abused": John Lee & Son
(Grantham) Ltd. v. Railway Executive [1949] 2 All E.R. 581, 584. It will not allow a party
to exempt himself from his liability at common law when it would be quite unconscion-
,able for him to do so.
I take the view tnat the Courts are not bound to accept all contracts at face value
and enforce those contracts without some regard to the surrounding circumstances.
I do not think that standard form contracts should be construed in a vacuum. I do
not think that mere formal consensus is enough. I am of the opinion that the terms
of a contract may be declared to be void as being unreasonable where it can be said
that in all the circumstances it is unreasonable and unconscionable to bind the
parties to their formal bargain.
In ascertaining whether "freedom of contract has been abused" so as to make it
unconscionable for the bailee to exempt itself from liability, I think regard may be
had to the following :
(1) Was the contract a standard form contract drawn up by the bailee?
(2) Were there any negotiations as to the terms of the contract or was it a com-
mercial form wh ich may be described as a "sign here" contract?
(3) Was the attention of the plaintiffs drawn to the limitation clause?
(4) Was the exemption clause unusual in character?
(5) Were representations made which would lead an ordinary person to believe
that the limitation clause did not apply?
(6) Was the language of the contract when read in conjunction with the limitation
clause such as to render the implied covenant made by the bailee to use rea-
sonable care to protect the plaintiffs' property meaningless?

533
CHAPTER 6 PROTECTION OF WEAKER PARTIES

(7) Having regard to all the facts including the representations made by the bailee
and the circumstances leading up to the execution of the contract, would not
the enforcement of the limitation clause be a tacit approval by the Courts of
unacceptable commercial practices?
In the case at bar, the plaintiffs were not asked to read the contract. They were
not advised of the contents of the contract. They were asked to "sign here" and pay
the annual rental fee. Prior to signing· the contract they were assured that proper
precautions would be taken to secure their valuables. When the plaintiffs asked
whether they should obtain insurance coverage they were advised that it was not
necessary to obtain such coverage. The plaintiffs were not given a copy of the con -
tract. The fact a theft had taken place was not made known to them.
Even if the language of the \imitation clause extends to all acts or omissions on
the part of the bailee, including such negligence as would amount to a fundamental
breach of contract, I hold, in the circumstances here, that the limitation clause is so
unreasonable that it cannot be enforced. It amounts to a clear "abuse of freedom of
contract." :..
[Anderson J also held for the plaintiffs on the basis of strict construction, fundamen-
tal breach, and misrepresentation.]

DELANEY V CASCADE RIVER HOLIDAYS LTD

(1983). 44 BCLR 24, 24 CCLT 6 (CA)

NEMETZ CJBC (dissenting): Dr. Fergus Delaney, an Ontario_veterinarian, visited British

Columbia on business on the weekend of May 5, 1979. While in Vancouver he met
a school friend, Dr. Stein Hoff. Dr. Hoff told Dr. Delaney that he (Hoff) was taking part
in a "white water adventure" down the Fraser River and invited Delaney to join him.
Delaney was enthusiastic about the idea. Inquiries were made and, because the raft
was not full for that trip, Delaney's name was added to the pas;;enger list. The trip
ended in tragedy with the drowning of Dr. Delaney and two other passengers. The
plaintiff (widow), executrix of the estate of Fergus Michael Delaney, brought this
action under the provision of the Family Compensation Act, R.S.B.C. 1979, c. 120, for
the benefit of herself and for three infant children of Dr. Delaney. Her action was
dismissed [reported (1981), 34 BCLR 62, 19 CCLT 78, 16BLR114 (SC)]. She now appeals
to this Court.
The history of the disastrous trip is as follows: The passenger group travelled to
Yale on Friday night. On Saturday morning, May 5, 1979, they assembled in a parking
lot and met with representatives of Cascade River Holidays Ltd. (Cascade) including
the reservations manager, Louella Morrison, and the defendant, Philip Reambeault,
the raftsman. Sometime prior to this meeting Delaney paid $100 to Mr. Sims, pres-
ident of Cascade, for the trip. The other passengers had made earlier bookings and
paid in advance.
It was an overcast, rainy day. As Cascade's van was being loaded with gear and
passengers, and T-shirts were being distributed, Louella Morrison obtained the
signature of the eight paying passengers on a form entitled "Standard Liability
Release." I will discuss the effect of Delaney's signing of this release later. All pas-
sengers, save Delaney, had received brochures from Cascade which contained the
following statement:

534
 IV. CLAUSES EXCLUDING LIABILITY

LIABILITY
Cascade River Holidays Ltd. does not guarantee safe passage and assumes no respon-
sibility for patron's safety or property. Patrons must sign our liability release before
departure. Cascade River Holidays has operated since 1973 without major loss and uses
all the standard safety devices. We recommend the patron purchase personal insurance
to protect himself.

Dr. Hoff had received one of these brochures, but there is no evidence that Dr. Del-
aney saw it. Hoff, who had been on such an expedition before, described the trip to
Delaney as being "not necessarily a terribly adventuresome trip" and said that some
elderly people had been on it the previous occasion. Hoff gave Delaney the impres-
sion that it was a safe thing to do . ...
[The defendant provided life jackets that he knew were inadequate for the Fraser
River. When the raft overturned, Delaney drowned. At trial, the defendant was found
negligent for not using more buoyant life jackets. The majority of the Court of Appeal
held that the plaintiff had failed to prove that Delaney would have lived if he had
been provided with a better life jacket. Nemetz CJBC in his dissent held that the
plaintiff had shown causation of loss and decided that the liability release did not
preclude the action for two reasons:]

(I) PAST CONSIDERATION

It is contended for the plaintiff that notiCe of the terms of the liability release were not
contemporaneous with the entry into the contract; in other words, the terms of the
liability release are not a part of the contract, and since there was no "new" consider-
ation for them, the release is unenforceable. This raises the question whether the
maxim "past consideration is no consideration" is applicable to the facts of this case.
The trial Judge found that Dr. Delaney paid his $100 at or about the time the release
was signed. Since the issue of past consideration was not canvassed by the trial Judge,
it was not essential for him to analyze the timing of the payment. There is evidence
before the Court from Mr. Sims that Dr. Delaney paid his fare to take the trip on the .
morning of May 5, 1979 before the release was presented for signature. Mr. Sims
testified that he received the payment personally and that he was not present later
when the release was signed. Therefore, we know that some time elapsed between
the two events.
The crucial factor is that notice of the terms, or indeed of the existence of a liability
release was not contemporaneous with the entry into the contract evidenced by the
payment of the fare to Sims earlier that morning. At the moment of payment, Cascade
was obligated to take Dr. Delaney on the expedition on the terms existing at that
moment. The subsequent requirement of signing the release was an attempt by
Cascade to impose additional and onerous terms to a contract which had already
been finalized. Although the company policy was that no one could go on the trip
without signing the. release, they had no more right to require him to agree to the
additional contractual terms of the release than they would have had to try to exact
a higher fare from him to secure their performance of the contract (Gilbert Steel Ltd.
v. University Const. Ltd. [see Chapter 3]). Simply stated, there was no consideration
for Dr. Delaney's signature on the release form because Cascade was bound to take
him whether or not he signed.

535
CHAPTER 6 PROTECTION OF WEAKER PARTIES

(II) THE INSUFFICIENCY OF THE NOTICE

I reproduce the principal portion of the liability release:

CASCADE RIVER HOLIDAYS

P.O. Box 65, Yale, B.C., Canada
VOK 2SO
Phone(604)863 -2332
Standard Liability Release
TRIP NAME 2 day Fraser TRIP NO. ClO TRIP DATE May 5-6 1979
DISCLAIMER CLAUSE: Cascade River Holidays Ltd . is not responsible for any loss or dam-
age suffered by any person either in travelling to the location of the trip, before, during
or after the trip, for any reason whatsoever including negligence on the part of the
company, its agents or servants.
AGREEMENT: I agree to assume all risks involved in taking the trip includi ng travelling
before and after, and agree to pay the cost of any emergency evacuation of my person
and belongings that may become necessary. I agree to Cascade River Holidays Ltd . its
agents and servants relieving themselves of all liability for losses and damages of all and
every descriptions. I acknowledge having read this Liability release and that I am of full
age and my acceptancy of the above disclaimer cla use by my signature and seal. (Par-
ents or Guardians please sign for minors.)
(Signatures follow)
This document must be read together with the relevant portions of the brochure ....
[See above. Nemetz CJBC held that there was no evidence that Delaney had read the
brochure.]
On the morning of May 5, Miss Morrison met with the members of the group in the
hotel parking lot at Yale and either singly or in groups presented them with the
release. She asked eac!} to read it and sign it and said that those who would not sign
would not be allowed to embark on the journey on the river. All passengers signed.
It is evident that the releases were signed in a hurried manner. Miss Morrison's evi-
dence is clear and frank. She pointed out that "it always seemed we were always in
a hurry trying to get everybody out." She approached the passengers for signature
when they were busy with other matters, i.e., "getting things out of their car and they
are getting fishing things and things like that. ... " This testimony is amply supported
by a number of the passengers. Dr. Hoff, when asked in cross-examination, "If you
wished to read the release it would not have taken you very long, at all, would it?" He
replied, "It would under the circumstances have taken an inappropriate time." The
reason was, of course, that he was anxious to· get onto the van for the embarkation
place. Mr. Lundie, a chartered accountant, was also a passenger. He described the
signing operation:
As I understood it one of the procedures that we had to do was sign that standard form
of liability and it was done in a rather perfunctory manner by somebody just standing
by the van or sitting at the opening of the side door of the van and thus they could ask
people to come over and they did. I think as we stowed our gear in the van, we signed
the liability document and got a T-shirt.
He did not read the document. He was told it was a standard liability form but-there
was no discussion as to implications. Mr. Steeves, another passenger, confirms that

536
 IV. CLAUSES EXCLUDING LIABILITY

the signing was done "very quickly." He said, "I think I can compare it to signing a
rent-a-car form." Miss Morrison was not sure whether Delaney read the release.
[Nemetz CJBC referred to the Tilden Rent-A-Car case, compared the signing of the
release to the signing of a car rental contract, and held that the release was mislead-
ing in the following two respects.] ·
(1) The use of the adjective "standard" would tend to induce a sense of security in
the passenger asked to sign the release. This is borne out in the testimony of
Lundie, who, having read the word "sta ndard," refrained from reading further.
(2) The clause speaks generally of "loss or damage" but does not mention the risk
of personal injury or death. Cascade's president, Sims, conceded that if he
mentioned the possibility of a fatal accident, his business would suffer....
The release contained provisions so onerous and unusual that it was the duty of
Cascade to see that the provisions were "effectively called to the attention of the other
party under the penalty of their being held non -binding on the latter party." ... It was
not sufficient that a clerk, minutes before passengers were to depart on this unusual
voyage, when the passengers' minds were directed to the voyage and packing their
gear, should place before them this document containing the onerous terms it did.
A reasonably intelligent person was entitled to assume that a form titled "standard"
did not contain the unusual provisions contained in this one. This was indeed what
Professor Waddams has termed "misrepresentation by omission" (see Tilden [18 OR
(2d) 609]). In the case of Delaney, Cascade had not sent him a brochure. They could
not assume that he had a clear idea of the risk of which they had forewarned the
others in the brochure under the heading "Liability" which speaks of Cascade not
guaranteeing safe passage and not assuming responsibility for the patron's safety.
And, a fortiori, the brochure recommended that "the patron purchase personal
insurance to protect himself." Had Delaney been so warned, would he have assumed
the risk to absolve Cascade from negligence of not providing him with the best life-
saving jackets available? I do not think so ....
MCFARLANE JA (Taggart JA concurring): The trial judge held that the c~rporate
defendant was negligent in failing to provide personal flotation devices of greater
buoyancy. While I find it difficult to agree that finding is correct I think I am bound
by decisions of the Supreme Court of Canada to accept it for the purposes of this
appeal.
I am, however, clearly of the opinion that the appellant has failed to show that the
failure to provide a life-jacket of.greater buoyancy caused, or contributed to, the
death of the deceased. Stated in another way, I think the plaintiff has failed to show
on balance that the deceased would have survived if he had worn a 30 or 32-pound
jacket. ...
I think the argument of "past consideration" must fail. It seems clear that the
deceased was informed that unless he signed the release form he would not be taken
on the trip. The immediate consideration which he received was, therefore, that he
was permitted to enter the van and carry on with the venture.
While it is possible to criticize the language of the "Standard Liability Release," I
think it must be interpreted and understood, having regard to the whole purpose of
the relationship between the deceased and the corporate respondent. That purpose,
so far as the deceased was concerned, was to engage in what must have been
intended to be an exciting and thrilling challenge of the power of the Fraser River in
the Canyon. Construed in that way, there is, in my opinion, no doubt of the intent
involved in the language of the release. I think also the trial Judge was correct in

537
CHAPTER 6 PROTECTION OF WEAKER PARTIES

applying the principles stated in L'Estrange v. F. Graucob Ltd. [1934] 2 KB. 394. Having
regard to the nature of the venture involved I think that there is no sufficient ground
for making an exception to the general principles enunciated in that case.
_[The appeal was dismissed. Leave to appeal to the Supreme Court of Canada was
granted, but the appeal was discontinued on September 24, 1984.]

TERCON CONTRACTORS LTD V BRITISH COLUMBIA

(TRANSPORTATION AND HIGHWAYS)
2010 sec 4, r201011 scR 69

[The court was unanimous in laying the doctrine of fundamental breach to rest and
on the approach to be taken in analyzing exclusion clauses. It was, however, divided
on the interpretation of the clause in issue.]
CROMWELL J (Le Bel, Deschamps, Fish, and Charron JJ concurring):

I. INTRODUCTION

[1] The Province accepted a bid from a bidder who was not eligible to participate
in the tender and then took steps to ensure that this fact was not disclosed. The main
question on appeal, as I see it, is whether the Province succeeded in excluding its
liability for damages flowing from this conduct through an exclusion clause it
inserted into the contract. I share the view of the trial judge that it did not.

[5] On Tercon's appeal to this Court, the questions for us are whether the suc-
cessful bidder was eligible to participate in the RFP and, if not, whether Tercon's
claim for damages is barred by the exclusion clause.

Ill. ISSUES

[13] The issues for decision are whether the trial judge erred in finding that:
1. the Province breached the tendering contract by entertaining a bid from an
ineligible bidder. ·
2. the exclusion clause does not bar the appellant's claim for da.mages for the
breaches of the tendering contract found by the trial judge.

IV. ANALYSIS

[The discussion on tendering has been omitted. The court found that the province had
breached the tendering contract by entertaining a bid from an ineligible bidder.]

B. THE EXCLUSION CLAUSE:

1. Introduction

[60] As noted, the RFP includes an exclusion clause which reads as follows:
2.10 ... Except as expressly and specifically permitted in these Instructions to Pro-
ponents. no Proponent shall have any claim for compensation of any kind whatsoever,

538
 IV. CLAUSES EXCLUDING LIABILITY

as a result of participating in this RFP, and by submitting a Proposal each Proponent

shall be deemed to have agreed that it has no claim. [Emphasis added.I

[61] The trial judge held that as a matter of construction, the clause did not bar
recovery for the breaches she had found. The clause, in her view, was ambiguous
and, applying the contra proferentem principle, she resolved the ambiguity in Ter-
con's favour. She also found that the Province's breach was fundamental and that it
was not fair or reasonable to enforce the exclusion clause in light of the nature of
the Province's breach. The Province contends that the judge erred both with respect
to the construction of the clause and her application of the doctrine of fundamental
breach.
[62] On the issue of fundamental breach in relation to exclusion clauses, my view
is that the time has come to lay this doctrine to rest, as Dickson C.J. was inclined to
do more than 20 years ago: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1
S.C.R. 426, at p. 462. I agree with the analytical approach that should be followed
when tackling an issue relating to the applicability of an exclusion clause set out by
my colleague Binnie J. However, I respectfully do not agree with him on the question
of the proper interpretation of the clause in issue here. In my view, the clause does
not exclude Tercon's claim for damages, and even if I am wrong about that, the
clause is at best ambiguous and should be construed contra proferentem as the trial
judge held. As a result of my conclusion on the interpretation issue, I do not have to
go on to apply the rest of the analytical framework set out by Binnie J.
[63] In my view, the exclusion clause does not cover the Province's breaches in
this case. The RFP process put in place by the Province was premised on a closed list
of bidders; a contest with an ineligible bidder wa.s not part of the RFP process and
was in fact expressly precluded by its terms. A "Contract A" could not arise as a result
of submission of a bid from any other party. However, as a result of how the Province
proceeded, the very premise of its own RFP process was missing, and the work was
awarded to a party who could not be a participant in the RFP process. That is what
Tercon is complaining about. Tercon's claim is not barred by the exclusion clause
because the clause only applies to claims arising "as a result of participating in [the]
RFP,'' not to claims resulting from the participation of other, ineligible parties. More-
over, the words of this exclusion clause, in my view, are not effective to limit liability
for breach of the Province's implied duty of fairness to bidders. I will explain my
conclusion by turning first to a brief account of the key legal principles and then to
the facts of the case.

2. Legal Principles

[64] The key principle of contractual interpretation here is that the words of one
provision must not be read in isolation but should be considered in harmony with
the rest of the contract and in light of its purposes and commercial context. The
approach adopted by the Court in M.J.B. is instructive. The Court had to interpret ·a
privilege clause, which is somewhat analogous to the exclusion clause in issue here.
The privilege clause provided that the lowest or any tender would not necessarily be
accepted, and the issue was whether this barred a claim based on breach of an
implied term that the owner would accept only compliant bids. In interpreting the
privilege clause, the Court looked at its text in light of the contract as a whole, its
purposes and commercial context ....
[65] In a similar way, it is necessary in the present case to consider the exclusion
clause in the RFP in light of its purposes and commercial context as well as of its
overall terms. The question is whether the exclusion of compensation for claims

539
CHAPTER 6 PROTECTION OF WEAKER PARTIES

resulting from "participating in this RFP," properly interpreted, excludes liability for
the Province having unfairly considered a bid from a bidder who was not supposed
to have been participating in the RFP process at all.

3. Application to This Case

[66] Having regard to both the text of the clause in its broader context and to the .
purposes and commercial context of the RFP, my view is that this claim does not fall
within the terms of the exclusion clause.

[70] The closed list of bidders was the foundation of this RFP and there were
important competitive advantages to a bidder who could side-step that limitation.
Thus, it seems to me that both the integrity and the business efficacy of the tendering
process support an interpretation that would allow the exclusion clause to operate
compatibly with the eligibility limitations that were at the very root of the RFP.

[74] I turn to the text of the clause which the Province inserted in its RFP. It
addresses claims that result from "participating in this RFP." As noted, the limitation
on who could participate in this RFP was one of its premises. These words must,
therefore, be read in light of the limit on who was eligible to participate in this RFP. As
noted earlier, both the ministerial approval and the text of the RFP itself were unequiv-
ocal: only the six proponents qualified through the earlier RFEI process were eligible
and proposals received from any other party would not be considered. Thus, central
to "participating in this RFP" was participating in a contest among those eligible to
participate. A process involving other bidders, as the trial judge found the process
followed by the Province to be, is not the process called for by "this RFP" and being
part of that other process is not in any meaningful sense "participating in this RFP."
[75] The Province would have us interpret the phrase excluding compensation
"as a result of participating in this RFP" to mean that compensation is excluded that
results from "submitting a Proposal." However, that interpretation is not consistent
with the wording of the clause as a whole. The clause concludes with the phrase that
"by submitting a Proposal each Proponent shall be deemed to have agreed that it has
no claim.'' If the phrases "participating in this RFP" and "submitting a Proposal" were
intended to mean the same thing, it is hard to understand why different words were
used in the same short clause to express the same idea. The fact that the Minister
had approved a closed list of participants strengthens the usual inference that the
use of different words was deliberate so as not to exclude compensation for a depar-
ture from that basic eligibility requirement.
[76] ... In short, limiting eligibility of bidders to those who had responded to the
RFEI was the foundation of the whole RFP. As the judge found, acceptance of a bid
from an ineligible bidder "attacks the underlying premise of the process" established
by the RFP: para. 146. Liability for such an attack is not excluded by a clause limiting
compensation resulting from participation in this RFP.
[77] This interpretation is also supported by another provision of the RFP. Under
s. 2.9, as mentioned earlier, the Province reserved to itself the right to unilaterally
cancel the RFP and the right to propose a new RFP allowing additional bidders. If
the exclusion clause were broad enough to exclude compensation for allowing
ineligible bidders to participate, there seems to be little purpose in this reservation
of the ability to cancel the RFP and issue a new one to a wider circle of bidders. It is
also significant that the Province did not reserve to itself the right to accept a bid
from an ineligible bidder or to unilaterally change the rules of eligibility. The RFP

540
 IV. CLAUSES EXCLUDING LIABILITY

expressly did exactly the opposite. None of this, in my opinion, supports the view
that the exclusion clause should be read as applying to the Province's conduct in
this case.
[78) To hold otherwise seems to me to be inconsistent with the text of the clause
read in the context of the RFP as a whole and in light of its purposes and commercial
context. In short, I cannot accept the contention that, by agreeing to exclude com-
pensation for participating in this RFP process, the parties could have intended to
exclude a damages claim resulting from the Province unfairly permitting a bidder
to participate who was not eligible to do so. I cannot conclude that the provision was
intended to gut the RFP's eligibility requirements as to who may participate in it, or
to render meaningless the Minister's statutorily required approval of the alternative
process where this was a key element. The provision, as well, was not intended to
allow the Province to escape a damages claim for applying different eligibility criteria,
to the competitive disadvantage of other bidders and for taking steps designed to
disguise the true state of affairs. I cannot conclude that the parties, through the words
found in this exclusion clause, intended to waive compensation for conduct like that
of the Province in this case that strikes at the heart of the integrity and business
efficacy of the tendering process which it undertook. .
[79) If I am wrong about my interpretation of the clause, I would hold, as did the
trial judge, that its language is at least ambiguous. If, as the Province contends, the
phrase "participating in this RFP" could reasonably mean "submitting a Proposal,"
that phrase could also reasonably mean "competing against the other eligible par-
ticipants." Any ambiguity in the context of this contract requires that the clause be
interpreted against the Province and in favour of Tercon under the principle contra
proferentem .... Following this approach, the clause would not apply to bar Tercon's
damages claim.

V. DISPOSITION

[80) ... I would therefore allow the appeal, set aside the order of the Court of Appeal
and restore the judgment of the trial judge ....
BINNIE J (McLachlin CJ and Abella and Rothstein JJ concurring):
[81) The important legal issue raised by this appeal is whether, and in what cir-
cumstances, a court will deny a defendant contract breaker the benefit of an exclusion
of liability clause to which the innocent party, not being under any sort of disability,
has agreed. Traditionally, this has involved consideration of what is known as the
doctrine of fundamental breach, a doctrine which Dickson C.J. in Hunter Engineering
Co. v. Syncrude Canada Ltd., [1989 1 S.C.R. 426, suggested should be laid to rest 21
years ago (p. 462).
[82) On this occasion we should again attempt to shut the coffin on the jargon
associated with "fundamental breach." Categorizing a contract breach as "funda -
mental" or "immense" or "colossal" is not particularly helpful. Rather, the principle is
that a court has no discretion to refuse to enforce a valid and applicable contractual
exclusion clause unless the plaintiff (here the appellant Tercon) can point to some
paramount consideration of public policy sufficient to override the public interest
in freedom of contract and defeat what would otherwise be the contractual rights
of the parties. Tercon points to the public interest in the transparency and integrity of
the government tendering process (in this case, for a highway construction contract)
but in my view such a concern, while important, did not render unenforceable the
terms of the contract Tercon agreed to . There is nothing inherently unreasonable
about exclusion clauses. Tercon is a large and sophisticated corporation. Unlike my

541
CHAPTER 6 PROTECTION OF WEAKER PARTIES

colleague Justice Cromwell, I would hold that the respondent Ministry's conduct,
while in breach of its contractual obligations, fell within the terms·of the exclusion
clause. In turn, there is no reason why the clause should not be enforced. I would
dismiss the appeal.

I. OVERVIEW

[86] I accept, as did the courts below, that the respondent Ministry breached the
terms of its own RFP when it contracted with Brentwood ... However, I also agree
with the B.C. Court of Appeal that the exclusion of compensation clause is clear and
unambiguous and that no legal ground or rule of law permits us to override the
freedom of the parties to contract (or to decline to contract) with respect to this par-
ticular term, or to relieve Tercon against its operation in this case.

II. THE TENDERING PROCESS

[95] Tercon is a large and experienced contractor. As noted by Donald J.A. in the
B.C. Court of Appeal, it had earlier "successfully recovered damages from the [Min-
istry] on a bidding default on a previous case" .... Thus Tercon would have been more
sensitive than most contractors to the risks posed by an exclusion of compensation
clause. It nevertheless chose to bid on the project on the terms proposed by the
Ministry.

Ill. TERCON'S CLAIM FOR RELIEF FROM THE EXCLUSIONARY CLAUSE IT AGREED TO

(96] In these circumstances, the first question is whether there is either a statutory
legal obstacle to, or a principled legal argument against, the freedom of these parties
to contract out of the obligation that would otherwise exist for the Ministry to pay
compensation for a breach of Contract A If not, the second question is whether there
is any other barrier to the court's enforcement of the exclusionary clause in the cir-
cumstances that occurred. On the first branch, Tercon relies on the Ministry of
Transportation and Highways Act . On the second branch, Tercon relies on the
doctrine of fundamental breach.

[The discussion of the Act has been omitted.]

B. THE DOCTRINE OF THE FUNDAMENTAL BREACH

[104] The trial judge considered the applicability of the doctrine of fundamental
breach. Tercon argued that the Ministry, by reason of its fundamental breach, had
forfeited the protection of the exclusion of compensation clause.
(105] The leading case is Hunter which also dealt with an exclusion of liability
clause. The appellants Hunter Engineering and Allis-Chalmers Canada Ltd. supplied
gearboxes used to drive conveyor belts at Syncrude's tar sands operations in North-
ern Alberta. The gearboxes proved to be defective. At issue was a broad exclusion of
warranty clause that limited time for suit and the level of recovery available against
Allis-Chalmers (i.e no recovery beyond the unit price of the defective products).
Dickson C.J. observed: "In the face of the contractual provisions, Ants-Chalmers can
only be found liable under the doctrine of fundamental breach" (p. 451).

542
 IV. CLAUSES EXCLUDING LIABILITY

[106] This doctrine was largely the creation of Lord Denning in the 1950s (see,
e.g., Karsa/es (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936 (C.A.)) . It was said to be a rule
of law that operated independently of the intention of the parties in circumstances
where the defendant had so egregiously breached the contract as to deny the plaintiff
substantially the whole of its benefit. In such a case, according to the doctrine, the
innocent party was excused from further performance but the defendant could still
be held liable for the consequences of its "fundamental" breach even if the parties
had excluded liability by clear and express language ....
[107] The five-judge Hunter Court was unanimous in the result and gave effect
to the exclusion clause at issue. Dickson C.J. and Wilson J. both emphasized that
there is nothing inherently unreasonable about exclusion clauses and that they
should be applied unless there is a compelling reason not to give effect to the words
selected by the parties. At that point, there was some divergence of opinion.
[108] Dickson C.J. (La Forest J . concurring) observed that the doctrine of funda-
mental breach had "spawned a host of difficulties" (p. 460), the most obvious being
the difficulty in determining whether a particular breach is fundamental. The doc-
trine obliged the parties to engage in "games of characterization" (p. 460) which
distracted from the real question of what agreement the parties themselves intended.
Accordingly, in his view, the doctrine should be "laid to rest." The situations in which
the doctrine is invoked could be addressed more directly and effectively through the
doctrine of "unconscionability," as assessed at the time the contract was made: ...
Dickson C.J. explained that "[t]he courts do not blindly enforce harsh or unconscion-
able bargains" (p. 462), but "there is much to be gained by addressing directly the
protection of the weak from over-reaching by the strong, rather than relying on the
artificial legal doctrine of 'fundamental breach'" (p. 462). To enforce an exclusion
clause in such circumstances could tarnish the institutional integrity of the court.
In that respect, it would be contrary to public policy. However, a valid exclusion clause
would be enforced according to its terms.
[109] Wilson J. (L'Heureux-Dube J . concurring) disagreed. In her view, the courts
retain some residual discretion to refuse to enforce exclusion clauses in cases of
fundamental breach where the doctrine of pre-breach unconscionability (favoured
by Dickson C.J.) did not apply. Importantly, she rejected the imposition of a general
standard of reasonableness in the judicial scrutiny of exclusion clauses, affirming
that "the courts ... are quite unsuited to assess the fairness or reasonableness of
contractual provisions as the parties negotiated them" (p. 508). Wilson J. considered
it more desirable to develop through the common law a post-breach analysis seeking
a "balance between the obvious desirability of allowing the parties to make their own
bargains ... and the obvious undesirability of having the courts used to enforce
bargains in favour of parties who are totally repudiating su~h bargains themselves"
(p. 510).
[110] Wilson J. contemplated a two-stage test, in which the threshold step is the
identification of a fundamental breach where "the foundation of the contract has
been undermined, where the very thing bargained for has not been provided"
(p. 500). Having found a fundamental breach to exist, the exclusion clause would
not automatically be set aside, but the court should go on to assess whether, having
regard to the circumstances of the breach, the party in fundamental breach should
escape liability: ...
[111] Wilson J . reiterated that "as a general rule" courts should give effect to exclu-
sion clauses even in the case of fundamental breach (p. 515). Nevertheless, a residual
discretion to withhold enforcement [on policy grounds] exists:

543
CHAPTER 6 PROTECTION OF WEAKER PARTIES

[113] The law was left in this seemingly bifurcated state until Guarantee Co. of
North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423. In that case, the Court
breathed some life into the dying doctrine of fundamental breach while nevertheless
affirming (once again) that whether or not a "fundamental breach prevents the
breaching party from continuing to rely on an exclusion clause is a matter of con-
struction rather than a rule of law" (at para. 52). In other words, the question was
whether the parties intended at the time of contract formation that the exclusion or
limitation clause would apply "in circumstances of contractual breach, whether
fundamental or otherwise" (para. 63). The Court thus emphasized that what was
important was not the label ("fundamental or otherwise") but the intent of the con-
tracting parties when they made their bargain. "The only limitation placed upon
enforcing the contract as written in the event of a fundamental breach," the Court
in Guarantee Trust continued,
would be to refuse to enforce an exclusion, of liability in circumstances where to do
so would be unconscionable, according to Dickson C.J., or [note the disjunctive "or"]
unfair, unreasonable or otherwise contrary to public policy, according to Wilson J.
[Emphasis added ; para. 52.J
What has given rise to some concern is not the reference to "public policy," whose
role in the enforcement of contracts has never been doubted, but to the more general
ideas of "unfair" and "unreasonable," which seemingly confer on courts a very broad
after-the-fact discretion.
[114] The Court's subsequent observations in ABB Inc. v. Domtar Inc., 2007 SCC
50, [2007] 3 S.C.R. 461, should be seen in that light. Domtar was a products liability
case arising under the civil law of Quebec, but the Court observed with respect to
the common law: ·
Once the existence of a fundamental breach has been established, the court must still
analyse the limitation of liability clause in light of the general rules of contract interpret-
ation. If the words can reasonably be interpreted in only one way, it will not be open to
the court, even on grounds of equity or reasonableness, to declare the clause to be
unenforceable since this would amount to rewriting the contract negotiated by the
parties. [Emphasis added; para. 84.i
While the Domtar Court continued to refer to "fundamental breach," it notably repudi-
ated any judicial discretion to depart from the terms of a valid contract upon vague
notions of "equity or reasonableness." It did not, however, express any doubt about
the residual category mentioned in Guarantee Trust, namely a refusal to enforce an
exclusion clause on the grounds of public policy.

[116] While memorably described as an unruly horse, public policy is nevertheless

fundamental to contract law, both to contractual formation and enforcement and
(occasionally) to the court's relief against enforcement...
[117] As Duff C.J. recognized, freedom of contract will often, but not always, trump
other societal values. The residual power of a court to decline enforcement exists
but, in the interest of certainty and stability of contractual relations, it will rarely.be
exercised. Duff C.J. adopted the view that public policy "should be invoked only in
clear cases in which the harm to the public is substantially incontestable, and does
not depend upon the idiosyncratic inferences of a few judicial minds" (p. 7). While
he was referring to public policy considerations pertaining to the nature of the entire
contract, I accept that there may be well-accepted public policy considerations that

544
 IV. CLAUSES EXCLUDING LIABILITY

relate directly to the nature of the breach, and thus trigger the court's narrow juris-
diction to give relief against an exclusion clause.
[118] There are cases where the exercise of what Professor Waddams calls the
"ultimate power" to refuse to enforce a contract may be justified, even in the com -
mercial context. Freedom of contract, like any freedom, may be abused. Take the
case of the milk supplier who adulterates its baby formula with a toxic compound
to increase its profitability at the cost of sick or dead babies ....
[119] A less extreme example in the commercial context is Plas-Tex Canada Ltd. v.
Dow Chemical of Ca nada Ltd. [see reference to Plas-Tex in Note 9 below].... What was
demonstrated in Plas-Tex was that the defendant Dow was so contemptuous of its
contractual obligation and reckless as to the consequences of the breach as to forfeit
the assistance of th e cou rt. The public policy that favours freedom of contract was
outweighed by th e public policy that seeks to curb its abuse.
[120] Conduct a,pproaching serious criminality or egregiou s fraud are but
examples of well-accepted and "substantially incontestable" considerations of public
policy that may override the countervailing public policy that favours freedom of
contract .... Such misconduct may disable the defendant from hiding behind the
exclusion clause. But a plaintiff who seeks to avoid the effect of an exclusion clause
must identify the overriding public policy that it says outweighs the public interest
in the enforcement of the contract ... .
[1211 The present state of the law, in summary, requires a series of enquiries to
be addressed when a plaintiff seeks to escape the effect of an exclusion clause or
other contractual terms to which it had previously agreed.
[1221 The first issu e, of course, is whether as a matter of interpretation the exclu -
sion clause even applies to the circumstan ces established in evidence. This will
depend on the Court's assessment of the intention of the parties as expressed in the
contract. If the exclusion clause does not apply, there is obviously no need to proceed
further with this analysis. If the exclusion clause applies, the second issue is whether
the exclusion clause was unconscionable at the time the contract was made, "as
might arise from situations of unequal bargaining power between the parties"
(Hunter, at p. 462). This second issue has to do with contract formation, not breach.
[123] If the exclusion clause is held to be valid and applicable, the Court may
undertake a third enquiry, namely whether the Court should nevertheless refuse to
enforce the valid exclusion clause because of the existence of an overriding public
policy, proof of which lies on the party seeking to avoid enforcement of the clause,
that outweighs the very strong public interest in the enforcement of contracts.

IV. APPLICATION TO THE FACTS OF THIS CASE

[124] I proceed to deal with the issues in the sequence mentioned above.
[The court proceeded with the analysis on the basis that Contract A was breached
by the Ministry.]

B. WHAT IS THE PROPER INTERPRETATION OF THE EXCLUSION

OF COMPENSATION CLAUSE AND DID THE MINISTRY'S CONDUCT
FALL WITHIN ITS TERMS?

[1271 It is at this stage that I part company with my colleague Cromwell J. The
exclusion clause is contained in the RFP and provides as follows:

545
CHAPTER 6 PROTECTION OF WEAKER PARTIES

2.10 ... Except as expressly and specifically permitted in these Instructions to Pro-
ponents, no Proponent shall have any claim for compensation of any kind whatsoever,
as a result of participating in this RFP, and by submitting a Proposal each Proponent
shall be deemed to have agree that it has no claim.
In my view, "participating in this RFP" began with "submitting a Proposal" for con-
sideration. The RFP process consisted of more than the final selection of the winning
bid and Tercon participated in it. Tercon's bid was considered ....
[128] I accept the trial judge's view that the Ministry was at fault in its performance
of the RFP, but the conclusion that the process thereby ceased to be the RFP process
appears to me, with due respect to colleagues of a different view, to be a "strained
and artificial interpretatio[n] in order, indirectly and obliquely, to avoid the impact ·
of what seems to them ex post facto to have been an unfair and unreasonable
clause." ... Accordingly, I conclude that on the face of it, the exclusion clause applies
to the facts described in the evidence before us.

C. WAS THE CLAIM EXCLUDING COMPENSATION UNCONSCIONABLE AT THE TIME

CONTRACT A WAS MADE?

[130] At this point, the focus turns to contract formation. Tercon advances two
arguments: firstly, that it suffered from an inequality of bargaining power and sec-
ondly, (as mentioned) that the exclusion clause violates public policy as reflected in
the Transportation Act.

(1) Unequal Bargaining Power

[131] In Hunter, Dickson C.J. stated, at p. 462: "Only where the contract is uncon-
scionable, as might arise from situations of unequal bargaining power between the
parties, should the courts interfere with agreements the parties have freely con -
eluded." Applying that test to the case before him, he concluded:
I have no .doubt that unconscionability is not an is?ue in this case. Both Allis-Chalmers
and Syncrude are large and commercially sophisticated companies. Both parties knew
or should have known what they were doing and what they had bargained for when
they entered into the contract. [p. 464]
While Tercon is not on the same level of power and authority as the Ministry, Tercon
is a major contractor and is well able to look after itself in a commercial context. It
need not bid if it doesn't like what is proposed. There was no relevant·imbalance in
bargaining power.

(2) Policy of the Transportation Act

[134] The Court should not be quick to declare such a clause, negotiated between
savvy participants in the construction business, to be "contrary to the Act."

D, ASSUMING THE VALIDITY OF THE EXCLUSION CLAUSE AT THE TIME THE

CONTRACT WAS MADE, IS THERE ANY OVERRIDING PUBLIC POLICY THAT .
WOULD JUSTIFY THE COURT'S REFUSAL TO ENFORCE IT?

[135] If the exclusion clause is not invalid from the outset, I do not believe the
Ministry's performance can be characterized as so aberrant as to forfeit the protection

546
 IV. CLAUSES EXCLUDING LIABILITY

of the contractual exclusion clause on the basis of some overriding public policy.
While there is a public interest in a fair and transparent tendering process, it cannot
be ratcheted up to defeat the enforcement of Contract A in this case. There was an
RFP process and Tercon participated in it.

[137) While the Ministry's conduct was in breach of Contract A, that conduct was
not so extreme as to engage some overriding and paramount public interest in
curbing contractual abuse as in the Plas-Tex case. Brentwood was not an outsider to
the RFP process. It was a legitimate competitor. AU bidders knew that the road contract
(i.e. Contract B) would not be performed by the proponent alone. The work required
a large "team" of different trades and personnel to perform. The issue was whether
EAC would be on the job as a major sub-contractor (to which Tercon could not have
objected) or identified with Brentwood as a joint venture "proponent" with EAC. AU
bidders were made aware of a certain flexibility with respect to the composition of
any proponent's "team." Section 2.8(b) of the RFP provided that if "a material change
has occurred to the Proponent since its qualification under the RFEI, including if the
composition of the Proponent's team members has changed, ... the Ministry may
request [further information and) ... reserves the right to disqualify that Proponent,
and reject its Proposal." Equally, "[i)f a qualified Proponent is concerned that it has
undergone a material change, the Proponent can, at its election, make a preliminary
submission to the Ministry, in advance of the Closing Date, and before submitting
a Proposal. ... The Ministry will, within three working days of receipt of the prelim -
inary submission give a written decision as to whether the Proponent is still qualified
to submit a Proposal."

[139] The Ministry did obtain legal advice and did not proceed in defiance of it.
On March 29, 2001, the Ministry noted in an internal e-mail that a Ministry lawyer
(identified in the e-mail) had come to the conclusion that the joint venture was not
an eligible proponent but advised that Contract B could lawfully be structured in a
way so as to satisfy both Brentwood/EAC's concerns and avoid litigation from disap-
pointed proponents.
[140] I do not wish to understate the difference between EAC as a sub-contractor
and EAC as a joint-venturer. Nor do I discount the trial judge's condemnation of the
Ministry's lack of fairness and transparency in making a contract B which on its face
was at odds with what the trial judge found to be the true state of affairs. Tercon has
legitimate reason to complain about the Ministry's conduct. I say only that based on
the jurisprudence, the Ministry's misconduct did not rise to the level where public
policy would justify the court in depriving the Ministry of the protection of the
exclusion of compensation clause freely agreed to by Tercon in the contract.
[141] The construction industry in British Columbia is run by knowledgeable and
sophisticated people who bid upon and enter government contracts with eyes wide
open. No statute in British Columbia and no principle of the common law override
their ability in this case to agree on a tendering process including a limitation or
exclusion of remedies for breach of its rules. A contractor who does not think it is in
its business interest to bid on the terms offered is free to decline to participate. As
Donald J.A. pointed out, if enough contractors refuse to participate, the Ministry
would be forced to change its approach. So long as contractors are willing to bid on
such terms, I do not think it is the court's job to rescue them from the consequences
of their decision to do so. Tercon's loss of anticipated profit is a paper loss . In my
. view, its claim is barred by the terms of the contract it agreed to.

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NOTES

1. Tercon has now clarified this area by supporting Dickson CJ's analysis from Hunter
Engineering. In Tercon, the doctrine of fundamental breach was laid to rest and the court
determined that freedom of contract would prevail unless the exclusion clause was uncon-
scionable at the time the contract was made or there is some overriding public policy concern
to defeat what would otherwise be the contractual right of parties to draft their own agree-
ments. For the effect of Tercon on exclusion clauses in the tendering process, see Jassmine
Girgis, "Tercon Contractors: The Effect of Exclusion Clauses on the Tendering Process" (2010)
49 Can Bus LJ 187. For an analysis of the Tercon decision, see Shannon O'Byrne, "Assessing
Exclusion Clauses: The Supreme Court of Canada's Three Issue Framework in Tercon Con-
tractors Ltd v British Columbia (Transportation and Highways)" (2012) 35 Dal LJ 215.
2. The first prong of the Tercon framework involves analyzing the clause to determine its
applicability to the situation. using the principles of contract interpretation. Courts must do this
in any decision involving limitation of liability clauses, whether or not they explicitly apply
Tercon. See e.g. Niedermeyer v Charlton, 2014 BCCA 165, where the plaintiff was injured when
the bus on which she was riding on her return from a zip-lining tour was overturned. The
plaintiff argued that "the intention of the words 'travel to and from the tour area' were not
intended to exclude liability for negligence in the operation of motor vehicles on highways"
(para 65) . At trial, the j udge dismissed the action, finding that the waiver was a complete
defence to the appellant's claim, and that the accident happened in the circumstances envi-
sioned by the exclusion clause. The judgment was overturned on appeal for public policy
reasons. See note 4 below. In Chamberlin v Canadian Physiotherapy Assn, 2015 BCSC 1260, the
plaintiff was injured when she partook in a continuing education course set up by the defendant.
The judge agreed with the plaintiff's argument, in that she. had understood the waiver to refer
to pain and soreness, and not to the legal risks of the course, which excluded liability for neg-
ligence. The judge applied the principle of contra proferentem to the ambiguity, resolving it
against the drafters of the clause.
3. The test for the traditional doctrine of unconscionability has involved both an inequality
of bargaining power and a grossly improvident transaction. On the second prong of the Tercon
framework, whether there was unconscionability at the time the agreement was made, the
question that arose after Tercon was whether the Supreme Court was referring only to proced-
ural unconscionability, which would focus on the state of the parties at the time the agreement
was made, or whether it also encompassed a substantive element, to enable courts to analyze
the contractual terms for unfairness. Courts have tended to focus on the procedural aspect,
but they do conduct a substantive analysis as well, and it has been noted that Binnie J was not
departing from the traditional test in Tercon (see Roy v 1216393 Ontario Inc, 2011 BCCA 500
at para 30). In 1539304 Ontario Inc v !CIC/ Bank Canada, 2013 ONSC 2737, [2013] OJ No 2132
(OU. the court focused on procedural aspects and looked at whether parties were represented
by counsel at the time the agreements were signed and whether the documents were subject
to negotiation. In Loychuk v Cougar Mountain Adventures Ltd, 2012BCCA122, [2012] BCJ No
504 (OL), the court considered both procedural and substantive factors, and determined that ·
there is no power imbalance where a person engages in a potentially risky recreational activity
that is controlled by another and that it is not inherently unfair for the operator to require that
a customer sign a relea se that bars claims for negligence against the operator or its employees
as a condition of participating in the activity. In Hans v Volvo Trucks North America Inc, 2011
BCSC 1574, the court applied the four-part test set out in Cain v C/arica Life Insurance Com-
pany, 2005 ABCA 437, and again in Titus v William F Cooke Enterprises Inc, 2007 ONCA 573,
which contains both procedural and substantive elements:

1. a grossly unfair and improvident transaction; and

2. victim's lack of independent legal advice or other suitable advice; and

548
 IV. CLAUSES EXCLUDING LIABILITY

3. overwhelming imbalance in bargaining power caused by victim 's ignorance of busi-

ness, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness,
senility, or similar disability; and
4. other party's knowingly taking advantage of this vulnerability.

In Hans, above, the court maintained that the words "grossly" and "imprudent" denote a trans-
action that is more than simply unfair, and that it must be "egregiously unfair" (para 86). In Raabe
v 4042492 Manitoba Ltd, [2011] MJ No 320 (QL) (OB), to determine whether there was uncon-
scionability, the court relied on criteria such as age, education, employment of the claimant,
and the defendant's knowledge of the problem with the product sold to the claimant. How-
ever, as the court noted in Hans, unconscionability does not have a low bar; all four elements
of the test must be met, and each element must be considered in context. For example, the
absence of legal advice does not mean the transaction is unconscionable. Similarly, an imbal-
ance of bargaining power, which wi ll typically exist when consumers dea l with corporations,
does not necessarily give rise to unconscionability, nor will the failure to read the agreement
prior to signing it, if there was an opportunity to read it that was simply not utilized.
4. On the third prong of the Tercon framework, the courts have had to weigh the balance
of enforcing the exclusion clause with overriding public policy concerns, or determine whether
public policy concerns are even triggered. To invalidate an exclusion clause on the basis of public
policy concerns, the behaviour must be so deplorable that it would be contrary to the public inter-
est to allow a party to avoid liability by relying on the exclusion clause, or the matter must be
of such public importance that it should not be left to be adjudicated by an exclusion clause.
In Skypower CL 1 LP v Ontario (Minister of Energy), [2012] OJ No 4458 (OL) (Sup Ct J (Div Ct)),
the court decided that the objectives of a renewable energy program by government were
matters of public policy, not strict commercial dealings. In Niedermeyer (above, note 2), a
majority of the court of appeal determined it was "contrary to public policy to permit the
owner and/or operator of a motor vehicle to contract out of liability for damages for personal
injuries suffered in a motor vehicle accident in British Columbia" (para. 72). The legislature
intended to enact a statutory insurance scheme that provided mandatory and compulsory
coverage when motor vehicles are involved. This means that motor vehicle accidents will trig-
ger public policy interests that can override freedom of contract. Finally, in Roy v 1216393
Ontario Inc., 2011 BCCA 500, the court refused to allow the vendor to escape liability for
fraudulently breaching the contract by relying on the exclusion clause. However, in Felty v
Ernst & Young LLP, 2015 BCCA 445, the court found that avoiding liability for giving erroneous
tax advice pursuant to a limitation of liability clause did not trigger public policy concerns. It
went on to note that if holding accountants to that standard was important, the legislature
could enact provisions similar to those prohibiting lawyers and law firms from relying on limit-
ation of liability clauses. In Loychuk, the court maintained that there were no public policy
concerns where a release for negligence was signed in a contract for a dangerous activity,
even where the safety of the activity was not within the control of the participant.
5. In Oouez v Facebook, Inc, 2017 SCC 33 (see longer note in Chapter 7), Abella J, in a
concurring judgment, found in favour of not enforcing a forum selection clause on the basis
of unconscionability and public policy (though unconscionability was not argued before the
court). She maintained that it would "be contrary to public policy to enforce a forum selection
clause in a consumer contract that has the effect of depriving a party of access to a statutorily
mandated court" (para 108). She also found that the doctrine of unconscionability could be
applied to render the clause unenforceable, procedurally and possibly substantively. There was
inequality of bargaining power between the parties as well as unfairness, given that Facebook
had "the unilateral ability to require that any legal grievances Ms. Douez had, could not be
vindicated in British Columbia where the contract was made, but only in California where
Facebook has its head office" (para 116).

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

6. A broadly worded exclusion clause can be found to cover negligence, even if negligence
is not explicitly mentioned. In /TO-Int '/ Terminal Operators v Miida Electronics, [1986] 1 SCR
752, the Supreme Court of Canada laid out a test for determining when an exclusion clause
that does not expressly exclude negligence can nevertheless extend to negligent action. When
an exclusion clause is worded broadly enough to exclude negligence by implication, the court
must look to the parties' intentions. If negligence can reasonably be construed as being within
the contemplation of the parties in formulating their agreement, then the clause will extend to
liability for negligence. /TO was applied in MacKay v Scott Packing and Warehousing Co
(Canada) Ltd, [1996] 2 FC 36 (CA), in which the defendant invoked an exclusion clause in an
action for losses due to the defendant's non-delivery of goods. The Federal Court of Appeal
held that the exclusion clause extended to negligence. However, in Chamberlin v Canadian
Physiotherapy Assn, above, the judge found that a waiver of liability for a physiotherapy train-
ing course did not include negligence, noting that "a reasonable participant at the Course
would not have understood or expected that he or she was agreeing to such onerous legal
risks, particularly given the general language of the Waiver and its lack of specificity with
respect to negligence" (para 88) .
7. In Canadian Pacific Forest Products Ltd-Tahsis Pacific Region v Be/timber (The), [1999]
4 FC 320, 175 DLR (4th) 449, the Federal Court of Appeal ruled that if an exclusion clause can
reasonably contemplate any head of liability other than negligence, it is generally construed as
not extending to negligence. MacKay was distinguished from Be/ships because the defendant in
Be/ships was a "carrier of goods at sea. " At common law, such a carrier is liable for safe carriage
and delivery and seaworthiness; as such, the exclusion clause could reasonably contemplate
heads of liability other than negligence and did not, therefore, extend to negligence.
8. In Meditek Laboratory Services v Purolator Courier Ltd (1995), 125 DLR (4th) 738 (Man
CA), a customer's package w as delivered by a Purolator employee to the wrong address . Mis-
delivery was concealed by the employee's falsification of documents. When the customer
sued for breach of contract, Purolator relied on its bill of lading, which included a clau se
explicitly limiting lia~ility due to negligence. The Manitoba Court of Appeal held that once a
breach of contract has been established, the onus is on a defendant to prove that the breach
resulted from actions falling within the four corners of the limitation clause. Wilful misconduct
is separate and distinct from negligence, and did not fall within the scope of Purolator's clause.
As a result, Purolator was liable for damages for breach of contract.
9. In Plas-Tex Canada Ltd v Dow Chemical of Canada Limited, 2004 ABCA 309, the
defendant Dow, a large petrochemical company, knowingly sold defective polyethylene resin
to the respondents without advising them . When the pipe cracked because of defective resin,
and the escaping natural gas caused an explosion, the respondents sought assistance from
Dow for the repair, but Dow refused. Picard JA, w riting for the court, found that Dow knew of
the defects before it signed the contract, but, rather than disclosing its knowledge, it protected
itself from liability by inserting clauses limiting liability for loss or damage resulting from the use
of resin in the contract. The conduct was found to be unconscionable because of the potential
danger to people and property and Dow was prevented from relying on the limitation of liabil-
ity clauses.
10. Do you think it is a socially desirable policy decision to allow companies that run
potentially dangerous recreational activities to utilize limitation of liability clauses? See Philip
H Osborne, "The Battle of Contractual Waivers of Liability for Personal Injury in Sporting and
Recreational Activities: An Annotation to Loychuk v Cougar Mountain Adventures Ltd" (2011)
81 CCLT (3d) 100.
11. Most provinces have enacted legislation that provides in all contracts for the sale of
goods implied conditions as to the fitness for purpose and merchantability of the goods involved
(e.g. see the Ontario Sale of Goods Act, RSO 1990, c S.1, s 15). In Ontario, any attempt to
contract out of any implied condition or warranty under th e Sale of Goods Act in a consumer

550
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

agreement is void (see the Ontario Consumer Protection Act, 2002, SO 2002, c 30, sch A, s 9).
See generally on disclaimer clauses Waddams at paras 471-90; Mc Camus at 796-834.

V. UNCONSCIONABILITY AND UNDUE INFLUENCE

MICHAEL J TREBILCOCK, The Limits of Freedom of Contract

(Cambridge, MA: Harvard University Press, 1993) at 115-20

INEQUALITY OF BARGAINING POWER

A provocative approach to this problem has been proposed by Gordley [James

Gordley, "Equality in Exchange" (1981) 69 Cal L Rev 1583]. In contrast to the Paretian
principle, which merely requires in order for an exchange to be Pareto superior that
both parties gain something from the exchange, even if the gains from exchange are
unequal, Gordley's proposal holds that both parties should gain equally, in effect
postulating a principle of commutative or corrective justice as originally articulated
by Aristotle and designed to maintain the pre-existing distribution of wealth. Gordley
argues for an ethical principle of equality in exchange such that inequalities in the
value of the performances exchanged should be grounds for contractual invalidation
or judicial reconstruction of the contract, without examination of the causes of the
disparity. He argues that most legal systems from classical Greek and Roman times
forward, including the medieval theory of the just price, have recognized some such
principle but that in the nineteenth century, courts under the influence of will theories
of contract and theories about the subjectivity of value became much less self-
conscious in applying the principle, despite similar patterns of judicial outcomes
disguised under other principles. Gordley reformulates classical theories of com-
mutative justice and medieval theories of the just price in a modern economic
context as requiring contractual relief where parties have contracted for substantially
more or substantially less than the market price. For example, A buys from a door-
to-door salesman for $1,000 a freezer that commonly sells for $500 at normal retail
outlets (holding constant characteristics of consumers in terms of default risk, and
so on), or, alternatively, A sells his farm to B for $50,000, when its market value is
$100,000. In both cases, it is assumed that A is ignorant of the prevailing market
price, and on Gordley's theory we should not be concerned to inquire whether B did
or did not deliberately take advantage of his ignorance. In cases where the contract
subject matter does not have a readily-ascertainable market price, Gordley's theory
would apparently be more respectful of the parties' valuation unless there is compel-
ling evidence that the price reflects much more or much less than the seller's costs.
The ethical intuition that lies behind Gordley's reformulation of the theory of the just
price appears to be that a party to an arm's-length exchange does not intend to make
a gift to the other party, which is implied by selling for less than the market price or
buying for more than the market price.
Although provocative, Gordley's theory raises a number of questions. From an
individual autonomy perspective, to take a case outside the fungible goods context,
suppose that I am extremely attached to my house for family, sentimental, historical,
or locational reasons and would not contemplate selling it for less than a large pre-
mium over the going market price for otherwise similar houses. A buyer, perhaps
motivated by similar factors to those which weigh with me, agrees to pay me this

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price. Is this price unjust? From a communitarian perspective of the kind adopted
by McPherson, one might imagine a challenge to Gordley's theory along the lines of
asking why we should sanctify or even exalt market prices as the dominant indicia
of fairness. In terms of the practical implications of Gordley's theory, we need to ask
whether a recognition of a reconstituted theory of the just price would yield sub-
stantially different results in particular cases from a Paretian test with the conven-
tional conditions attached. In order to violate Gordley's doctrine of equality in
exchange, he envisages that the disproportionality between contract and market
price must be substantial. Thus, some range of inequalities in values exchanged is
still envisaged, and to that extent, Gordley's theory moves closer to a Paretian theory
of mutually beneficial exchanges but does not completely elide with it, since, pro-
vided that both parties derive any gains from the exchange, however they are shared,
the Paretian test would be met. Moreover, where the disproportionalities are as large
as Gordley apparently envisages in order for the doctrine to be invoked, one would
need to ask whether this would be compelling evidence in many settings of a vio-
lation of the Paretian conditions, including coercion or fraud or misrepresentation.
However, his theory does offer the advantage that one need not investigate the
precise source of procedural irregularities or deficiencies in the contract formation
process-it is a theory of substantive, not procedural, fairness-and may provide
more precision than either Kronman's modified Paretian test or Fried's establisned
conventions test in dealing with cases where, because of asymmetric information,
as the facts are subsequently revealed, there is a major disparity between the contract
price and the market price for the contract subject matter in the fully revealed state
of the facts . It needs to be added, though, that this certainty comes at a price: Gordley
is largely insensitive to the dynamic incentive considerations which emphasize the
welfare gains from the acquisition and utilization of information that moves assets
from less productive to more productive uses. It needs also to be added that whatever
virtues Gordley's theory of equality in exchange might have, the obligations it implies
are certainly not consensually based and entail an appeal to external ethical norms,
which he presumably believes the community widely endorses . ...

INFORMATION PROCESSING DISABILITIES: COGNITIVE DEFICIENCIES

Under this category, I include cases where there has been no misrepresentation of
information by one contracting party to the other and no non-disclosure of some
material fact, but rather where the two parties, while sharing equal access to the
.relevant body of information about the contract subject matter, have sharply differ-
ential capacities to evaluate the implications of that information for their respective
welfare. Eisenberg [Melvin Eisenberg, "The Bargain Principle and Its Limits" (1982)
95 Harv L Rev 741] cites two sub-classes of case, both of which he argues should be
addressed by a modern doctrine of unconscionabi\ity. The first sub-class he char-
acterizes as "transactional incapacity.'' The paradigm case he envisages is one where
A knows or has reason to know of B's inability to deal with a given complex trans-
action, because of lack of aptitude, experience, or judgemental ability to make a
deliberative an d well-informed decision concerning the desirability of entering into
the transaction, and exploits that incapacity by inducing B to make a bargain that a
person who had the capacity to deal with the transa.ction probably would not make.
He cites as an example a very complex real estate proposal put by a commercial
developer to an aging testamentary beneficiary of a commercial building. He also
cites the we\\ -known decision of Lord Denning of the English Court of Appeal in
Lloyds Bank v. Bundy, where an elderly farmer was induced by his son's bank to sign
a guarantee of his son's indebtedness to the bank in circumstances where it was

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 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

highly unlikely that the farmer was able to evaluate prudentially all the implications
of the transaction. The other sub-class of case which Eisenberg identifies is what he
calls "unfair persuasion." By this he means the use of bargaining methods that ser-
iously impair the free and competent exercise of judgement and produce a state of
acquiescence that the promisee knows or should know is likely to be highly transi-
tory. Examples of such situations which he cites are a creditor's obtaining a promise
from a bereaved and distraught widow to pay debts of her husband's business shortly
after his death, or a door-to-door salesman's employing importuning and intrusive
sales tactics .
I believe that both of Eisenberg's sub-classes of cognitive deficiencies fall within
the concerns that in order for contractual promises to be binding, they should in
general arise out of the autonomous consent of the parties and reflect base-line
conditions of voluntariness and information. Thus, they seem entirely appropriate
candidates for a doctrine of unconscionability.

STANDARD FORM CONTRACTS

Standard form contra.c ts have suffered a bad press from both judicial and academic
members of the legal fraternity over many years. At least in a consumer setting, the
hostility to standard form contracts is based on two principal propositions. First, it
is said that the use of standard form contracts is a manifestation of monopoly. Sec-
ond, it is pointed out that the use of standard form contracts is typically characterized
by imperfect information on the part of some of the parties to them. In both cases,
the legal implications are much the same: courts should be extremely cautious about
enforcing such contracts. These two arguments require evaluation.
The monopoly argument essentially rests on the "take it or leave it" character of
most standard form contractual offerings. However, as I have argued elsewhere, the
principal justification for standard form contracts is the dramatic reduction in trans-
action costs that they permit in many contexts. That they may be offered on a take
it or leave it basis is as consistent with the benign transaction cost conservation
rationale for them as it is with a monopoly or collusion rationale. Simply observing
the fact of standard form contracts yields no meaningful implications as to the
underlying structure of the market. Indeed, we observe them being used in many
settings where manifestly the market is highly competitive, for example, in dry-
cleaning stores, hotel registration forms, insurance contracts, and so on. Indeed,
even in ·the absence of standard form contracts, we see many goods being offered
on a take it or leave it basis in some of the most competitive retail markets in the
economy. For example, corner variety stores (mom and pop stores) typically offer
their goods on a take it or leave it basis, presumably to avoid the transas:::tion costs
entailed in haggling over price or product offerings.
The imperfect information argument against standard form contracts is clearly
more substantial. Almost necessarily implicit in the transaction cost justification for
standard form contracts is the assumption that parties will often not read them or,
if they do, will not wish to spend significant amounts of time attempting to renegoti-
ate the terms . Thus, to hold parties bound to standard form contracts which they
had entered into but which they had not read or understood does not rest comfort-
ably with a theory of contractual obligation premised on individual autonomy and
consent. Clearly, in many, perhaps most cases, meaningful consent is absent. Thus,
to justify contractual enforcement of these kinds of standard form contracts requires
us, once again, to move outside the purely internal, non-instrumental basis for
contractual obligation as deriving from the will of the parties and appeal instead to
external benchmarks of fairness . In this respect, I have argued first that problems of

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

unfairness resulting from imperfect information are not so severe as they might
seem at first sight. To the extent that there is a margin of informed, sophisticated,
and aggressive consumers in any given market, who understand the terms of the
standard form contracts on offer and who either negotiate over those terms or switch
their business readily to competing suppliers offering more favourable terms, they
may in effect discipline the entire market, so that inframarginal (less well informed,
sophisticated, or mobile) consumers can effectively free-ride on the discipline
brought to the market by the marginal consumers, although there is the potential
for a collective action problem if every consumer attempts to free-ride on the efforts
of others in effective monitoring of contract terms. In addition, where suppliers are
able either to term or to performance discriminate between marginal and inframar-
ginal consumers, this generalized discipline will be undermined, and there is a clear
risk that the inframarginal consumers will be exploited because of their imperfect
knowledge of the contract terms. Here, I have proposed that courts, in evaluating
the fairness of standard form contracts in particular cases, should investigate
whether a particular consumer seeking relief from the contract or some particular
provision in it has received a deal that is significantly inferior, in relation to either
the explicit terms of the contract or the performance provided under it, to that real-
ized by marginal consumers in the same market, with the economic as opposed to
personal characteristics of consumers in these two Classes held constant. In other
words, where a supplier has deliberately exploited a consumer's ignorance of terms
generally available, in the market for like goods or services, to consumers in an eco-
nomically similar sitµation in order to exact terms substantially inferior to these
generally prevailing terms, the supplier's actions should be viewed as unconscion-
able, perhaps again invoking the equal concern and respect basis for protection of
individual autonomy. In markets which are so badly disrupted by imperfect infor-
mation that there is no identifiable margin of informed consumers from which
appropriate benchmarks can be derived, then judicial sniping in case-by-case litiga-
tion seems less appropriate than legislative or regulatory intervention of the kind
that has occurred in many jurisdictions, for example, with respect to various classes
of door-to-door sales.

NOTE

For a critical analysis of Trebilcock's article, see Marc Ramsay, "The Buyer/Seller Asymmetry:
Corrective Justice and Material Non-Disclosure" (2006) 56 UTLJ 115.

ARTHUR A LEFF, "UNCONSCIONABILITY AND THE CODE:

THE EMPEROR'S NEW CLAUSE"
(1967) 115 U Pa L Rev 485

Let us begin the story the way so many good stories begin, with ritual incantation:
to make a contract one needs (i) parties with capacity, (ii) manifested assent, and (iii)
consideration. This is all very simple. If these criteria are met, a party to the resulting
nexus who has made promises is obligated to carry them out, unless he can maintain
successfully one of the standard contract-law defenses, such as fraud, duress, mis-
take, impossibility or illegality. These "defenses" might be classified in diverse ways
to serve various analytical purposes. For our particular needs, however, there is a
simple way of grouping them which is signally illuminating: some of these defenses

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 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

have to do with the process of contracting and others have to do with the resulting
contract. When fraud and duress are involved, for instance, the focus of attention
is on what took place between the parties at the making of the contract. With illegality,
on the other hand, the material question is instead the content of the contract once
"made." The law may legitimately be interested both in the way agreements come
about and in what they provide. A "contract" gotten at gunpoint may be avoided; a
classic dicker over Dobbin may come to naught if horse owning is illegal. Hereafter,
to distinguish the two interests, I shall often refer to bargaining naughtiness as "pro-
cedural unconscionability," and to evils in the resulting contract as "substantive
unconscionability."
Getting down to cases, section 2-302 of the Uniform Commercial Code provides
in its entirety as follows :
Section 2-302. Unconscionable Contract or Clause.
(1) If the court as a matter of law finds the contract or any clause of the contract to
have been unconscionable at the time it was made the court may refuse to enforce the
contract, or it may enforce the remainder of the contract without the unconscionable
clause, or it may so limit the application of any unconscionable clause as to avoid any
unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof
may be unconscionable the parties shall be afforded a reasonable opportunity to present
evidence as to its commercial setting, purpose, and effect to aid the court in making
the determination.
If reading this section makes anything clear it is that reading this section alone
makes nothing clear about the meaning of "unconscionable" except perhaps that it
is pejorative. More particularly, one cannot tell from the statute whether the key
concept is something to be predicated on the bargaining process or on the bargain
or on some combination of the two, that is, to use our terminology, whether it is
procedural or substantive. Nonetheless, determining whether the section's target is
a species of quasi-fraud or quasi-duress, or whether it is a species of quasi-illegality,
is obviously the key to the bite and scope of the provision ....
Strictly speaking, only one reported case relies upon section 2-302 of the Code
even as an alternative ground of holding. In American Home Improvement, Inc. v.
Maciver, the plaintiff was in the business of selling and installing home improve-
ments. It agreed with the defendant to "furnish and install 14 combination windows
and one door" and "flintcoat the side walls" on defendant's home, all for $1,759.00.
Since the defendant was apparently unwilling or unable to pay cash, the plaintiff
· undertook to arrange long-term financing, and furnished defendant with an applica-
tion to a finance company (apparently in some way allied or affiliated with the
plaintiff). This application was shortly "accepted,'' and defendant was notified in
writing that his payments for the improvements would be $42.81 per month for sixty
months (a grand total of $2,568.60) which included "principal, interest and life and
disability insurance." Plaintiff commenced work, but after it had completed only a
negligible portion of the job it was asked by defendant to stop and it complied,
thereafter suing defendant for damages for breach of contract.
On these facts, the New Hampshire court need never have reached any uncon-
scionability question. There was in effect in the jurisdiction a "truth-in-lending"
statute which applied to the transaction. The court could have relied upon that statute
to strike the contract, and indeed did so as an alternative ground of decision. But the
court most specifically made it a point not to rest its decision solely upon the dis-
closure statute. It said:

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

There is another and independent reason why the recovery should be barred in the
present case because the transaction was unconscionable. "The courts have often
avoided the enforcement of unconscionable provisions in long printed standardized
contracts, in part by the process of 'interpretation' against the parties using them. and
in part by the method used by Lord Nelson at Copenhagen." 1 Corbin. Contracts, s. 128
(1963). Without using either of these methods reliance can be placed upon the Uniform
Commercial Code (U C.C. 2-302(1)) .
Inasmuch as the defendants have received little or nothing of value and under the
transaction they entered into they were paying $1,609 for goods and services valued at
far less, the contract should not be enforced because of its unconscionable features .
This is not a new thought or a new rule in this jurisdiction. See Morrill v. Bank, 90 N.H.
358, 365, 9 A.2d 519, 525: "It has long been the law in this state that contracts may be
declared void because unconscionable and oppressive.
All right, then. As of the time of writing, the only case which has relied upon sec-
tion 2-302 as a b asis of decision has decided that "unconscionable" means "too
expensive." And certainly there is no immutable pr.inciple displayed in fixed stars
that would make that particular meaning of unconscionable inconceivable. I have
earlier suggested that in fact that was the primary meaning of unconscionability in
some of the early drafts of the Code, and that it was its only meaning as used by
courts of equity. Certainly the idea that a strikingly disproportionate exchange should
be voidable has not destroyed the commerce of the many jurisdictions which utilize
a laesio enormis doctrine in one form or another. On the other hand one may cer-
tainly speculate on whether the legislatures which have flocked to embrace the Code
would have been willing to adopt a provision which frankly and openly declared that
overcharges of some large but unspecified degree could be invalidated by courts on
an ad hoc basis, at least as part of a commercial code.
Let us assume, however, that a system of jurisprudence ought to have some way
to deal with transactions in which one party is giving up vastly more than he is get-
ting, and that this purpose is at least one of those that section 2-302 is designed to
serve. Even given that assumption, one has still to ask whether the best way to inject
that supervisory power into the law is to subsume it under a high-level abstraction
like "unconscionability." After all, a laesio enormis type of statute is not very hard to
draft, as either a flat-percentage or a "grossly-too-much" provision ....
As noted earlier, the Maciver case is the only one reported which has relied upon
2-302 as a basis of decision. One very recent case, however, which has attracted
substantial attention from the commentators, clearly would have been decided on
the basis of 2-302 had the statute been in effect at the time of the relevant transaction,
and in fact was decided as if the section were the law of the jurisdiction. In that case,
Williams v. Walker-Thomas Furniture Co., the appellant, a Mrs. Williams, "a person of
limited education separated from her husband," had, during the period 1957-1962,
purchased "a number of household items" from appellee furniture company on
printed-form installment sale contracts (in the transparent guise of leases). One
sentence fo this printed contract, part of "a long paragraph in extremely fine print"
had the net effect of keeping
a balance due on every item purchased .until the balance due on all items, whenever
purchased, was liquidated . As a result, the debt incurred at the time of purchase of each
item was secured by the right to repossess all the items previously purchased by the
same purchaser. .
When Mrs. Williams' outstanding balance was only $164, she bought a $515 stereo
phonograph .set. At the time of this purchase, the furniture company was perfectly

556
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

aware (since the information was endorsed on the back of the installment co[\tract)
that Mrs. Williams' sole income was a government payment (apparently some species
of relief) of $218 per month. The Circuit Court opinion also indicated that the store
knew that Mrs. Williams was supposed to support herself and her seven children on
that amount (though that seems not to have been endorsed ·on the back of the con-
tract). At any rate, the stereo set was apparently just too great a burden for the $218
per month to ·bear. Mrs. Williams defaulted, the store rep levied every item it could
lay its hands on and won in the trial court and the intermediate appeals court. On
appeal to the United States Court of Appeals for the District of Columbia Circuit, the
case was remanded to make findings on the issue of unconscionability.
For those of us who have an instinctive and infallible sense of justice (and which
of us does not), any other result in this case is unimaginable. But there are grounds
for quibbling about the court's (and the Code's) methodology. Judge Wright found
unconscionability easy to describe:
Unconscionability has generally been recognized to include an absence of meaningful
choice on the part of one of the parties together with contract terms which are
unreasonably favorable to the other party.... [In the footnote which supports this state-
ment, citation is to Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69
(1960) and Campbell Soup Co. v. Wentz, 172 F.2d 80 (3d Cir. 1948) only.] In many cases
the meaningfulness of the choice is negated by a gross inequality of bargaining power.

That is, there is immediate recognition that unconscionability has to have two
foci, the negotiation which led to the contract and that contract's terms. As for the
procedural aspect, while there is no finding that this was the only credit furniture
store open to Mrs. Williams, or that even if it were not, they all had substantially the
same contract (which was the situation in the Henningsen case so he.avily relied
upon by the court), one may assume that the form Mrs. Williams signed was essen- ·
tially the only kind of form open to her. A person's "relevant market" may fairly be
the one he can reasonably be expected to know about or dare to use. In other words,
the local stores may be a local person's relevant market because of his ignorance,
and if they are all as one on something, as to him they are a monopoly. And besides,
in this case the court made an almost-finding of contracting procedures which went
beyond the mere use of a form or even of a contract of adhesion, which reached, in
fact, at least some level of quasf-fraud. Judge Wright asks:
Did each party to the contra_ct, considering his obvious education or lack of it, have a
reasonable opportunity to understand the terms of the contract, or were the important
terms hidden in a maze of fine print and minimized by deceptive sales practices?

There was apparently no problem with the answer, for after giving lip service to the
"usual rule" that one who signs an agreement is bound to all of its terms, he said:

But when a party of little bargaining power, and hence little real choice, signs a com-
mercially unreasonable contract with little or no knowledge of its terms ... the usual
rule ... should be abandoned.

It is hard to fault the court's argument on the procedural unconscionability aspects

of this case. While it might sometimes be difficult to decide whether a species or
level of bargaining ought to protect a contract from section 2-302, it is not difficult
here. If the unconscionability section is to be applicable to any contract, it must be
to one "bargained" as this one was.
But there is no need to labor this point. Finding that the bargaining procedure
involved will not insulate the contract from judicial scrutiny unde.r section 2-302 is

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

only the first and less difficult step in the process of using that section. Once one
decides that the contract is vulnerable to judicial meddling, there still remains to be
decided whether the provision or contract is "unconscionable." For that determina-
tion Judge Wright also articulated a test:
In determining reasonableness or fairness, the primary concern must be with the terms
of the contract considered in light of the circumstances existing when the contract was
made. The test is not simple, nor can it be mechanically applied. The terms are to be
considered "in the light of the general commercial background and the commercial
needs of the particular trade or case" [citing "Comment. Uniform Commercial Code
sec. 2-307," but obviously meaning 2-3021. Corbin suggests the test as being whether
the terms are "so extreme as to appear unconscionable according to the mores and
business practices of the time and place." ... We think this formulation correctly states
the test to be applied in those cases where no meaningful choice was exercised upon
entering the contract.

How does that test apply to the Williams facts? What is it about Mrs. Williams' contract
which is "unconscionable"? Surprisingly, the answer is not clear, even about what in
the contract is bad. It seems, however, that there are two possibilities. First, it may
be that the provision by which each item purchased became security for all items
purchased was the objectionable feature of the contract. Or it might be that the
furniture company sold this expensive stereo set to this particular party which forms
the unconscionability of the contract. If the vice is the add-on clause, then one
encounters the now-familiar problem: such a clause is hardly such a moral outrage
as by itself meets Judge Wright's standard of being "so extreme as to appear uncon-
scionable according to the mores and business practices of the time and place." The
lower court in the Williams case called attention, for instance, to a Maryland statute
regulating retail installment sales under which Mrs. Williams might have been
relieved, noting with regret that the statute was not in effect in the District. What was
not pointed out by the lower court (and certainly not by the upper court) was that the
Statute of Maryland had found nothing illegal per se about add-on provisions, in fact
specifically permitting them and setting out to regulate them in some detail. Of the
thirty-seven jurisdictions which have statutes regulating retail installment sales, only
one has a provision making add-on clauses impermissible. In such circumstances
it does seem a bit much to find "so extreme as to appear unconscionable according
to the mores and business practices of the time and place" an add-on clause in the
District of Columbia which is used and statutorily permitted almost everyplace else,
including contiguous Maryland. One's gorge can hardly be expected to rise with
such nice geographic selectivity.
If one is not convinced that the unconscionability inheres in the add-on provi-
sion, it may be argued that it inheres in the contract as a whole, in the act of having
sold this expensive item to a poor person knowing of her poverty. This is quite clearly
the primary significance of the case to some of the commentators. That is the kind
of action which the Maryland statute does not deal with, nor do any of the statutes
like it: the unconscionability of aiding or encouraging a person to live beyond his
means (without much hope of eventual success). Well, why not make that "uncon-
scionable" for purposes of section 2-302? After all, in this case Walker-Thomas did
know for a fact that Mrs. Williams was on relief; they knew her income and needs
with great particularity: $218 per month and seven children. This case does not
present any of the sticky close questions of how much of what a seller would have
to know (or inquire about) before being deemed to know that the buyer shouldn't
buy. Moreover, what Mrs. Williams bought this time was a stereo record player. No

558
 V UNCON SC IONABILITY AND UNDUE INFLUENCE

one could argue that such an article is a "necessity" to a relief client, and thus the
dissenting judge's suggestion that "what is a luxury to some may seem an outright
necessity to others" hardly applies in this case. Who can doubt but that this purchase
was a frill? So in this case all we would have is a holding that one cannot enforce a
contract pursuant to which one has sold luxuries to a poor person (or at least one on
relief) with knowledge or reason to know that he will not be able to pay for them.
This is just another class distinction, and distinctions among persons on the basis
of the "class" to which they belong, that is, on the basis of some common supra-
personal characteristics, are exceedingly common in the law (not to mention life).
Such a process immensely simplifies decision by limiting the required inquiry to the
person's membership in the class. Once that determination is made, a certain legal
result will flow. The classic instance is the majority-minority dichotomy. Persons
under twenty-one cannot, as a general rule, make self-binding contracts. This may
be considered a shorthand form of a syllogism which would go something like
(a) persons lacking sufficient probity ought not to be allowed to bind themselves;
(b) all persons under twenty-one lack sufficient probity; (c) persons under twenty-
one cannot bind themselves. This illustrates some of the strengths and weaknesses
of the class system. The rule is easy to administer because a party's age is much
easier to determine than his probity. The difficulty is that the easier the classification
the less likely it is. to be accurate, because classes are, in fact, hardly ever wholly
homogeneous. In our case, for instance, the "minor premise," is false; not all persons
under twenty-one lack sufficient probity to bind themselves.
When faced with the difficulties inherent in deciding the bargaining fairness of
any given transaction, the equity courts, in working out their unconscionability
doctrine, similarly leaned heavily on relatively gross classifications. In effect, they
seem continually to have taken a kind of sub rosa judicial notice of the amount of
power of certain classes of people to take care of themselves, often without too much
inquiry into the actual individual bargaining situation. And it is arguable that some-
times they were wrong; not all old ladies or farmers are without defenses. Put briefly,
the typical has a tendency to become stereotypical, with what may be unpleasant
results even for the beneficiaries of the judicial benevolence. One can see it
enshrined in the old English equity courts' jolly treatment of English seamen as
members of a happy, fun-loving race (with, one supposes, a fine sense of rhythm),
but certainly not to be trusted to take care of themselves. What effect, if any, this had
upon the sailors is hidden behind the judicial chuckles as they protected their loyal
sailor boys, but one cannot help wondering how many sailors managed to get credit
at any reasonable price. In other words, the benevolent have a tendency to colonize,
whether geographically or legally.
Far more economically significant and widespread as an example of the Chancel-
lors' temptation toward stereotypical jurisprudence is found in the expectant-heir
cases. The most important thing about expectant-heir cases is that there are expectant-
heir cases, classifiable separately as such in treatises. The Chancellors did not find
unfairness in the price and refuse to enforce because they had no conception of
how an expectancy had to be discounted for risk; that kind of sophistication came
early. They just set out to protect heirs from the full effect of their tendency to live
beyond their governors' life expectancies. This was easy to do; it was rare that a judge
had .to enter into too long a discussion of the actual facts, or to face the real basis of
his easy decision in the battle between his (there but for the grace of God) grandson
and the most-likely Jewish moneylender. After all, he had the rubric "unconscion-
able" with which to explain (to himself and to the public) that decision.

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

Thus, when one asks why a court (like the District of Columbia Court in the Williams
case) ought not be allowed to subsume its social decisions under a high-level
abstraction like "unconscionability," one may point to the equity cases so many other
commentators have pointed to, but for a different reason. One may suggest that first
(and less important) it tends to make the true bases of decisions more hidden to those
trying to use them as the basis of future planning. But more important, it tends to
permit a court to be nondisclosive about the basis of its decision even to itself; the
class determination is so easy and so tempting (and often so heart-warming) . More
particularly with respect to the Williams case concept that the poor should be discour-
aged from frill-buying, no legislature in America could be persuaded openly to pass
such a statute, nor should any be permitted to do so sneakily. If the selling of frills to
the poor is to be discouraged, if the traditional middle-class virtues of thrift and child
care are to be fostered in the deserving poor by a commercial statute, if one wants
to protect a class, improvident by definition, from the depredations of another class,
it is at \east arguable that one should just up and do so-but clearly. This is not to
suggest, for a moment, anything as stupid as that some "freedom-of-contract"
concept ought to prevent, for instance, the statutory interdiction of an eleven-hour
day. It is only to say that when you forbid a contractual practice, you ought to have
the political nerve to do so with some understanding (and some disclosure) of what
you are doing.
I have attempted to describe in some detail the pathology, developmental, mor-
phological and functional, of section 2-302 of the Code and its official and unofficial
commentaries. The gist of the tale is simple: it is hard to give up an emotionally
satisfying incantation, and the way to keep the glow without the trouble of the
meaning is continually to increase the abstraction level of the drafting and explain -
ing language. If for one reason or another (in this case the desire to forward the
passage of the whole Code) the academic community is generally friendly to the
drafting effort, a single provision in a massive Code may get by even if it has, really,
no reality referent, and al\ of its explanatory material ranges between the irrelevant
and the misleading. That this happened with respect to 2-302 the few cases using it
are beginning to show more and more clearly. The world is not going to come to an
end. The courts will most likely adjust, encrusting the irritating aspects of the section
with a smooth ing nacre of more or less reasonable applications, or the legislatures
may act if things get out of hand. Commerce in any event is not going to grind to a
halt because of the weaknesses in 2-302. But the lesson of its drafting ought never-
theless to be learned: it is easy to say nothing with words. Even if those words make
one feel al\ warm inside, the result of sedulously preventing thought about them is
likely to lead to more trouble than the draftsmen's cozy glow is worth, as a matter
not only of statutory elegance but of effect in the world being regulated. Subsuming
problems is not as good as solving them, and may in fact retard solutions instead.
Or, once more to quote Karl Llewellyn (to whom, after al\, the last word justly belongs),
"Covert tools are never reliable tools."

NOTES
1. For comme ntary on the effects of Leff's "frontal assault on the unconscionability norm,"
see Jeffrey W Stempel, "Arbitration, Unconscionability, and Equilibriu m: The Return of Uncon-
scionability Analysis as a Counterweight to Arbitration Formalism" (2004) 19 Ohio St J Disp
Resol 757.
2. For a critical analysis of Canada's unconscionability doctrine, see Rick Bigwood, "Antipo-
dean Reflections on the Canadian Unconscionability Doctrine" (2005) 84 Can Bar Rev 171.

560
 V. UNCONSCJONABILITY AND UNDUE INFLUENCE

RICK BIGWOOD, Exploitative Contracts

(Oxford : Oxford University Press, 2003) at 505-10, 514-15
(footnotes omitted)

[T]he area of present inquiry ... is to determine whether, for corrective justice pur-
poses, some lesser form of agency-responsible conduct than "exp\oitation"-in
particular, "legal negligence" -should function as the justificatory paradigm for state
interference with contracts entered into under conditions where exploitation was
at least an eventuality, if not an event. If, as I have argued in this book, the funda-
mental reason for regulation in the precontractua\ bargaining setting is sufficiently
analogous with our ordinary motivations for and style of private law regulation and
responsibility, as exemplified in particular by tort \aw, then we can only profit by
transferring, mutatis mutandis, relevant principles and insights from the tort context
to the present one ....
[I]t makes sense to return to what I argued ... lay as a possible basis for objection
to exploitative contracts, namely, that such contracts involved a certain violation of
a "legal neighbourhood" norm that, properly understood, defines and constrains the
precontractua\ interactions of bargaining parties operating under whatever condi-
tions trigger such a norm ....
To summarize ... "legal neighbourhood" depicts the situation where "serious"
vulnerability or dependency exists on the one side of an interpersonal relationship
or dealing, and where that vulnerability or dependency is sufficiently known to the
party on the other side of the relationship, who enjoys an atypical degree of inter-
personal power as a result. The known possession of such power generates special
responsibilities on the part of the power-holder not to "abuse" his peculiarly advan-
taged position. I enlisted this particular conception of legal neighbourhood in order
to give content to "corrective justice" 'in this area. That is to say, I argued that legal
neighbourhood generates norms of decent treatment toward parties who are known
to be especially vulnerable to or dependent upon the other, more powerful party's
choices and actions within a contract bargaining relationship, and that the violation
of those norms is sufficient to justify state interference with any resulting trans-
actions. As in both morals and tort law, the point of recognizing the neighbourhood
norm is to prevent vulnerable parties from coming to "harm," which can be under-
stood in terms of a vulnerable party's welfare interests, autonomy interests, or both.
Most important, at least in the contract bargaining context, legal neighbourhood
generates two separate (negative) responsibilities-each of which is best viewed ...
in terms of a Hohfe\dian "disability" or a Nozickian "side-constraint," rather than a
full-blown legal duty or independent goal of action or condition vis-a-vis P
["exploited" contracting party].
The first responsibility, which for convenience I shall cal\ "responsibility 1," com -
prises a responsibility not to create serious vulnerability to harm in bargaining. The
second responsibility, which for convenience I shall cal\ "responsibility 2," is a
responsibility not unfairly to derive benefit in virtue of another's known serious
bargaining disadvantage relative to you, even though such disadvantage was not of
your making.
Violation of either responsibility ought to suffice ... to justify state-assisted rescis-
sion of a bargain transaction so resulting ....
Whether negligence should be seen as too rigorous a burden in this area will
depend on what we consider is a just balance between the parties' interests as "agents
in freedom of action" and potential victims in contract formation settings, given al\
that we understand and accept about the liberal conception of contract in modern

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

legal systems .... [W]e ought to consider in this balance the consequences oflowering
the threshold of agency responsibility in this area, not just for the immediate parties
involved (D ["exploiting" contracting party] and P), but also for society generally,
which has a wider interest in the continuance of valuable social activities such as
private contract. Certainly, one reason for requiring exploitation and not merely
neglect on the part of D in this context, and hence for preferring D's contractual
freedom over P's personal and proprietary security, is that such a requirement at
least pays lip-service to "sanctity of contract." ...
But no longer do we operate under a "primitive" conception of contract (if we ever .
really did), under which every moral tie is thought to be submerged in "the icy waters
of egotistical calculation." Ours is reportedly an era in which commerce and com -
mercial law place their "imprimatur on the accepted moral standards and condemn
conduct which fails to match 'the reflection of moral uprightness, of fundamental
honesty, fair play and right dealing in the general business life of members of soci-
ety."' Still, even under such an "enlightened" vision of commerce and commercial
law, sanctity of contract is unlikely to be cast aside lightly, for the stability of our
economic system is ultimately at stake.
Yet for all that, who is really going to believe that a paradigm shift from exploita-
tion to negligence in this area of the law will endanger the general security of
contractual relations? Surely no one reflecting thoughtfully on the matter; for ... such
a paradigm shift would make no difference at all to the doctrinal formulations,
qualifying thresholds, and decisions historically rendered in the name of (especially
passive) "exploitation." Only the nomenclature at the conceptual justificatory level
ought to change. Thus, it should not be thought that the substitution of "negligence"
for "exploitation" as the justificatory paradigm for official interference with certain
species of defeasible bargain transaction would result in more contracts becoming
vulnerable to rescission than is possible under current formulations of law, or would
require radical surgery to existing doctrine. Moreover, the end result of both exploit-
ation and negligence upon their respective victims in this area is the same, as is the
wrongdoer's essential conduct. Under both complaints the wrongdoer .fails to be
influenced by relevant disabilities that attend the parties' bargaining relationship
circumscribed by legal neighbourhood, resulting in his victim being used merely
instrumentally for the advancement of the wrongdoer's own interests. In both events
the wrongdoer fails to meet the legal standard of caring for the relevant interests of
his victim. Only the quality of the will that accompanies such failure, and hence the
consequent receipt of the impugned benefit, varies as 'between the· "exploitative"
merely instrumental user and the "neglectful" merely instrumental user.

POSTV JONES
60 us 150 (1857)
GRIER J (for the court): ... As many of the circumstances attending this case are
peculiar and novel, it may not be improper to give a brief statement of them. The
Richmond, after a ramble of three years on the Pacific, in pursuit of whales, had
passed through the sea of Anadin, and was near Behring's Straits, in the Arctic ocean,
on the 2d of August, 1849. She had nearly completed her cargo, and was about to
return; but, during a thick fog, she was run upon rocks, within half a mile of the
shore, and in a situation from which it was impossible to extricate her. The master
and crew escaped in their boats to the shore, holding communication with the vessel,
without much difficulty or danger. They could probably have transported the cargo

562
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

to the beach, but this ~JOuld have been unprofitable labor, as its condition would not
have been improved. Though saved from the ocean, it would not have been safe.
The coast was barren; the .few inhabitants, savages and thieves. This ocean is navi-
gable for only about two months in the year; during the remainder of the year it is
sealed up with ice. The winter was expected to commence within fifteen or twenty
days, at farthest. The nearest port of safety and general commercial intercourse.was
at the Sandwich Islands, five thousand miles distant. Their only hope of escape from
this inhospitable region was by means of other whaling vessels, which were known
to be cruising at no great distance, and who had been in company with the Rich-
mond, and had pursued the sai:ne course.
On the 5th of August the fog cleared off, and the ship Elizabeth Frith was seen at
a short distance. The officers of the Richmond immediately went on board, and the
master informed the master of the Frith of the disaster which had befallen the Rich-
mond. He requested him to take his crew on board, and said, "You need not whale
any more; there is plenty of oil there, which you may take, and get away as soon as
possible." On the following day they took on board the Frith about 300 barrels oil
from the Richmond. On the 6th, the Panama and the Junior came near; they had
not quite completed their cargoes; as there was more oil in the Richmond than they
could all take, it was proposed that they also should complete their cargoes in the
same way. Captain Tinkham, of the Junior, proposed to take part of the crew of the
Richmond, and said he would take part of the oil, "provided it was put up and sold
at auction." In pursuance of this suggestion, advertisements were posted on each of
the three vessels, signed by or for the master of the Richmond. On the following day
the forms of an auction sale were enacted; the master of the Frith bidding one dollar
per barrel for as much as he needed, and the others seventy-five cents. The ship and
tackle were sold for five dollars; no money was paid, and no account kept or bill of
sale made out. Each vessel took enough to complete her cargo of oil and b.o ne. The
transfer was effected in a couple of days, with some trouble and labor, but little or
no risk or danger, and the vessels immediately proceeded on their voyage, stopping
as usual at the Sandwich Islands.
Now, it is evident, from this statement of the facts, that, although the Richmond
was stranded near the shore upon which her crew and even her cargo might have
been saved from the dangers of the sea, they were really in no better situation as to
ultimate safety than if foundered or disabled in the midst of the Pacific ocean. The
crew were glad to escape with their lives. The ship and cargo, though not actually
derelict, must necessarily have been abandoned. The contrivance of an auction sale,
under such circumstances, where the master of the Richmond was hopeless, help- .
less, and passive-where there was no market, no money, no competition-where
one party had absolute power, and the other no choice but submission-where the
vendor must take what is offered or get nothing-is a transaction which has no
characteristic of a valid contract. It has been contended by the claimants that it would
be a great hardship to treat this sale as a nullity, and thus compel them to assume
the character of salvors, because they were not bound to save this property, especially
at so great a distance from any port of safety, and in a place where they could have
completed their cargo in a short time from their own catchings, and where salvage
would be no compensation for the loss of this opportunity. The force of these argu -
ments is fully appreciated, but we think they are not fully sustained by the facts of
the case. Whales may have been plenty around their vessels on the 6th and 7th of
August, but, judging of the future from the past, the anticipation of filling up their
cargo in the few days of the season in which it would be safe to remain, was very
uncertain, and barely probable. The whales were retreating towards the north pole,

563
CHAPTER 6 PROTECTION OF WEAKER PARTIES

where they could not be pursued, and, though seen in numbers on one day, they
would disappear on the next; and, even when seen in greatest numbers, their capture
was uncertain. By this transaction, the vessels were enabled to proceed at once on
their home voyage; and the certainty of a liberal salvage allowance for the property
rescued will be ample compensation for the possible chance of greater profits, by
refusing their assistance in saving their neighbor's property.
It has been contended, also, that the sale was justifiable and valid, because it was
better for the interests of all concerned to accept what was offered, than suffer a total
loss. But this argument proves too much, as it would justify every sale to a salvor.
Courts of admiralty will enforce contracts made for salvage service and salvage
compensation, where the salvor has not taken advantage of his power to make an
unreasonable bargain; but they will not tolerate the doctrine that a salvor can take
the advantage of his situation, and avail himself of the calamities of others to drive
a bargain; nor will they permit the performance of a public duty to be turned into a
traffic of profit. (See 1 Sumner, 210.) The general interests of commerce will be much
better promoted by requiring the salvor to trust for compensation to the liberal
recompense usually awarded by courts for such services. We are of opinion, there-
fore, that the claimants have not obtained a valid title to the property in dispute, but
must be treated as salvors.

NOTE

See Trebilcock. ch 4, "Coercion." See also Rick Bigwood, Exploitative Contracts (Oxford:
Oxford University Press, 2003) ch 7, "Contracting Under Duress."

MARSHALL V CANADA PERMANENT TRUST CO

(1968), 69 DLR (2d) 260 (Alta SC)

KIRBY J: This is an action for specific performance of an agreement for sale of land.
On January 30, 1967, the plaintiff offered to purchase the S.E. lf4 of section 27, and
the N.W. 114 of section 26, both in township 38, range 14, west of the 4th meridian,
from the defendant for the sum of $7,000 cash, payable immediately upon execution
of a transfer by the vendor. The offer was accepted by the owner of these lands, John
A. Walsh, on the same date. Both the offer and acceptance are in writing. Cash in the
sum of $100 was paid by the purchaser to the vendor. At the time the document was
executed, Walsh was a patient at Bow View Rest Home, Calgary.
The plaintiff, in relating the circumstances under which the transaction was
made, testified that having tried without success to purchase farm lands from Walsh's
brother in the same general area, and on hearing that John Walsh might sell his
half-section of land, he went to see him at the rest home and asked him if he wanted
to sell his farm near Castor. He stated that Walsh said that he did wish to sell for cash,
and felt that he should get between $7,000 and $8,000; that Walsh pointed out that
the land was under a lease; that he offered $7,000 cash and would take over the lease.
He stated that through an employee of the rest home he was put in touch with
Canada Permanent Mortgage Company, who in turn referred him to a solicitor who
drew up the offer to purchase and acceptance. The solicitor, he said, showed him a
copy of the lease. He related that he returned to the home on Monday, January 30th,
with the offer to purchase, which was signed by him and Walsh in the presence of
a witness-a member of the staff, and gave him a chequ~ for $100, which Walsh
signed and instructed him to give to his solicitor for deposit in the main branch of

564
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

the Bank of Montreal, which he did. On February 22nd, he received a letter from a
firm of solicitors, informing him that they were acting in this matter, did not intend
to deliver a transfer, and were in the process of applying for appointment of a com-
mittee for Walsh.
On February 24th, agents for the solicitor for the plaintiff sent a prepared transfer
of the lands from Walsh to the plaintiff, together with a certified cheque for $7,000,
to the solicitors for Walsh. On March 11th, the cheque was returned with a letter
declining to deliver a transfer to the lands in question.
On March 30th, Canada Permanent Trust Company was appointed a committee
for the estate of John A. Walsh, pursuant to the provisions of the Mentally Incapaci-
tated Persons Act, 1955 (Alta.), c. 3.
The defendant seeks a declaration of rescission of the memorandum of agree-
ment on the grounds that the consideration which the plaintiff proposed to pay to
Walsh for the lands in question, was grossly inadequate, that the agreement entered
into between the plaintiff and Walsh was not fair and reasonable, and that the plaintiff
took advantage of Walsh by reason of the inequality of their positions. In the alterna-
tives to specific performance the plaintiff claims damages.
Simply stated, the ground on which the defendant seeks to have the agreement
rescinded is that the transaction was unconscionable. In Knupp v. Bell (1966), 58 D.L.R.
(2d) 466 [aff'd 67 DLR (2d) 256 (Sask CA)], in considering the equitable jurisdiction of
the Court to set aside unconscionable transactions, MacPherson, J. (Saskatchewan
Court of Queen's Bench), refers to an article by Bradley E. Crawford in the Canadian
Bar Review, vol. 44, No. 1(March1966), p . 142, entitled "Restitution-Unconscionable
Transaction-Undue Advantage Taken of Inequality Between Parties,'' which he
accepts as a fair statement of the law in this matter. The author says at p . 143:
The jurisdiction of equity to set aside bargains contracted by persons under [undue]
influence is well known. But what is referred to here is something distinct from that. It
is also technically distinct from the simple refusal of the courts to grant specific per-
formance where the contract has been obtained by sharp practice. In the cases now
under discussion the courts intervene to rescind the contract whenever it appears that
one of the parties was incapable of adequately protecting his interests and the other
has made some immoderate gain at his expense. If the bargain is fair the fact that the
parties were not equally vigilant of their interest is immaterial. Likewise if on e was not
preyed upon by the other, an improvident or even grossly inadequate consideration is
no ground upon which to set aside a contract freely entered into. It is the combination
of inequality and improvidence which alone may invoke this jurisdiction. Then the onus
is placed upon the party seeking to uphold the contract to show that his conduct
throughout was scrupulously considerate of the other's interests.

Applying this law, the learned Justice held that where a senile woman of no busi-
ness experience and who was very easily led was induced to sell her lands to a
neighbour at the grossly inadequate price of $35 per acre without taking independent
advice from competent members of her family, no binding obligation was created.
Hence, no action for specific performance would lie to enforce the contract.
In the Bar Review article, reference is made to the judgment in Waters v. Donnelly
(1884), 9 O.R. 391, in which Boyd, C., said at p. 401:
There is an important decision in 1876, by Sir Edward Sullivan then M.R., and now Lord
Chancellor of Ireland, which was affirmed by the Court of Appeal and in which he thus
defines _the law applicable to this case: "I take the law of the Court to be, that if two
persons, no matter whether a confidential relationship exists between them or not,
stand in such a relation to each other that one can take· an undue advantage of the

565
CHAPTER 6 PROTE CTION O F WEAKER PARTIES

other. whether by reason of distress, or recklessness, or wildness. or want of care, and

when the facts shew that one pa rty has taken undue advantage of the other by reason
of the circumstances I have mentioned, a transaction resting upon such unconscionable
dealing will not be allowed to stand; and there are several cases which shew, even where
no confidential relationship exists. that where parties were not on equal terms, the party
who gets a benefit cannot hold it without proving that everything has been right and
fair and reaso nable on his part: " Stator v. Nolan. Ir. R. 11 Eq . 386.
The method of investigation is to determine first whether the parties were on equal
terms; if not, and the transaction is one of purchase, and any matters requiring explan-
ation arise, then it lies on the purchaser to shew affirmatively that the price given was
the value.

The Chancellor referred to Baker v. Monk (1864), 4 De G.J. & S. 386, 46 E.R. 968, in
which Turner, L.J., referred to Evans v. L/ewellin (1787), 1 Cox 333, 29 E.R. 1191, in laying
down the principle on which the Court acts in cases of purchase, that though there
was no actual fraud, it is something like fraud for an undue advantage was taken of
the vendor's situation, and then proceeded to eliminate moral fraud on the part of
the purchaser, but said that it is enough if the parties are not on equal terms, that an
improvident contract has been entered ipto, in order to invoke the protection of the
Court. The Chancellor then alluded to the doctrine elucidated by Lord Selborne, L.C.,
in Earl of Aylesford v. Morris (1873), L.R. 8 Ch. 484, that if the parties met under such
circumstances as in the particular transaction to give the stronger party dominion
over the weaker, then the principle is applied of requiring the one who gets the
benefit to prove that the transaction was fair, just and reasonable.
Applying these principles, the Court affirmed a decision rescinding an agreement
for the exchange of land and chattels which had been held to be improvident, the
plaintiff having been found to be ignorant, wanting skill in business, and compara-
tively an imbecile of intellect, and the transaction, one into which he would not have
entered had he been properly advised and protected.
On the basis of these principles, in this case, the plaintiff's claim for specific per-
formance must fail, and the defendant is entitled to rescission, if it is established:

(1) That Walsh was incapable of protecting his interests;

(2) That it was an improvident transaction for Walsh .

With respect to (1), it is not material whether Marshall was aware of Walsh's
incapacity; with respect to (2), the onus rests with the plaintiff to show that the price
given for the land corresponded to its fair value.
Was Walsh incapable of protecting his interests?
Marshall, 52 years of age, described himself as a farmer, merchant, auctioneer. It
was quite evident that he was an alert, intelligent businessman.
The rest home records indicate Walsh to have been 68 years of age at the time of
his admission to the home on June 14, 1966. Dr. Mortis, the house physician for the
rest home, referring to the medical records of the home with respect to Walsh, testi-
fied that the symptoms reflected in these records were typical of brain damage due
to hardening of the arteries: that Walsh had beeh from the time of his admission,
given different forms of medication, some, sedative in nature; that Walsh had a minor
stroke on December 14, 1966, and that following such a stroke, ability to think, to
rationalize, to speak, gets progressively worse. He expressed the opinion that after
the stroke Walsh was definitely not capable of transacting business, and that while
it was not surprising that he could read a document, he could not relate to the past
or future.

566
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

On the basis of this medical evidence, I am satisfied, and find, that Walsh was
incapable of protecting his interests at the time the memorandum of agreement was
entered into.
Was it an improvident transaction for Walsh? ...
The evidence of Hunt as to the values of comparable land in the same general
area in 1967 must be taken as more realistic than that of comparable land in th_e same
general area sold in 1958 and 1959. The offer made by Dunkle to Walsh in 1967 for
this half-section is in line with Hunt's valuation of this land at $50 per acre. On the
basis of this evidence I am satisfied, and find, that the price agreed upon by Walsh
was considerably less than the actual value of this land, and it therefore was an
improvident transaction for him.
By virtue of the authorities cited above, the defendant is entitled to rescission of
the agreement, and it is ordered accordingly. The caveat and certificate of /is pendens
will forthwith be withdrawn. The plaintiff has not established that he has suffered,
or is entitled to any damage by reason of the non-performance of the agreement.
There was nothing in the conduct of Walsh on the two occasions when Marshall
visited him in the rest home, and consummated this transaction, as related by him
in his evidence, to suggest that Walsh was suffering from mental incapacity. This is
supported by the evidence of the receptionist at the home, who witnessed the sig-
natures to the offer and acceptance. The house physician testified that Walsh, by the
nature of his disability, could give the impression of reasonable understanding, even
though he was not capable of transacting business. An officer of Canada Permanent
Trust Company accepted instructions from Walsh for his last will and testament, and
pursuant to these instructions a will was prepared by the trust company and executed
by Walsh in the presence of a trust officer of the company, on January 12, 1967. Dr.
Mortis gave as his opinion, that he doubted whether Walsh could have understood
the will at the time of its execution. He testified that he was not consulted by the trust
company as to Walsh's competence to make a will, and was not consulted as to his
mental capacity until March, 1967:
Since Walsh's mental capacity was not evident to the trust officer in the early part
of January, one who could be expected to be observant and cautious in matters of
this kind, and was not evident to the receptionist, who witnessed his signature, it is
reasonable to conclude that it was not evident to Marshall when the transaction was
effected. For this reason there will be no costs.
Action dismissed.

NOTE
See Van De Geer Estate v Penner, [2006] 7 WWR 575 (Sask CA), rev'g in part (2004), 252 Sask R
213 (OB), and Hittinger v Turgeon , 2005 ABQB 257, 30 RPR (4th) 123, where, in each case, the
court held that the seller was not under the power of the purchaser and, in any event, the agree-
ment of sale was not unreasonable or unfair such as to "shock the conscience of the court."

MUNDINGER V MUNDINGER
(1968), 3 DLR (3d) 338 (Ont CA)

SCHROEDER JA (for the court) : This is an appeal from a judgment pronounced by

Hartt, J ., on September 5, 1967, whereby he dismissed the plaintiff's action against
her husband for alimony; for an order declaring that a certain separation agreement

567
CHAPTER 6 PROTECTION OF WEAKER PARTIES

entered into between the parties on June 9, 1965, was null and void and should be
set aside on the ground that the plaintiff was induced to execute it through the hus-
band's fraud and threats and by reason of duress and undue influence, at a time when,
to his knowledge, she was suffering from a serious nervous breakdown and was not
in a mentally competent condition to appreciate the nature and quality of her act;
and further dismissing the plaintiff's claim for an order declaring null and void a
certain conveyance by the wife to the husband of property known and described for
municipal purposes as 23 Oriole Gardens in the City of Toronto, and a conveyance
by the wife to the husband of her interest in a 50-acre parcel of land in the Township
of Uxbridge in the County of Ontario both of which properties had been registered
in the names of the spouses as joint tenants.
The parties were married on April 5, 1939, and resided throughout their married
life in the City of Toronto. There were three children of the marriage who are now
of age and married. The wife complained of many acts of cruelty on the part of the
husband during their married life and more particularly of his conduct to her towards
the end of the period of cohabitation. Her principal complaint was as to an intimate
and adulterous relationship between the husband and one Doris Johnson, which
he stubbornly continued notwithstanding his wife's emphatic objections. She alleged
that her husband's maltreatment had caused her to have a nervous breakdown. She
became so depressed in this unhappy state of affairs that while under the care of her
family physician who was administering tranquilizers to her she took an overdose
of those drugs and became so dangerously ill that she was confined to the hospital
on April 26, 1965, where she remained until May 14, 1968.
During her confinement in the hospital the husband demanded a separation.
This ill-timed and inconsiderate request was a severe shock to the appellant which
aggravated the condition of tension and anxiety under which she was then labour-
ing. Shortly after her return from the hospital the husband presented and asked her
to sign a separation agreement which had been prepared by his solicitor, which
provided, inter a/ia, that in consideration of $5,000 she was to relinquish all rights to
support and maintenance, was to convey to her husband her undivided one-half
interest in the Oriole Gardens property the equity value of which was said to be
$20,000, and to convey her one-half interest in the farm property near Uxbridge,
which was said to have a value of approximately $40,000. Although she was advised
by the respondent that she did not require a solicitor she heeded the advice of a
friend and consulted Mr. Bowden McLean, a solicitor, who wrote a letter dated June
1, 1965, to Messrs. Rowland and Givertz, the respondent's solicitors, expressing his
client's dissatisfaction with the agreement and stating the terms which would be
acceptable to her.
When the husband was apprised of the terms so proposed he flew into a violent
rage and a quarrel ensued, in the course of which he addressed his wife in an abomi-
nable manner and adopted a very threatening attitude towards her. He stated that
he had a solicitor who could look after their affairs and it was not necessary that she
be separately advised. On or about June 9, 1965, the defendant redrafted the agree-
ment as previously prepared by his solicitors in the same terms but substituting for
the sum of $5,000 to be paid to the wife, the sum of $10,000. In the result the appellant
was induced to telephone Mr. McLean, to advise him that she had settled her affairs
with her husband and that he should submit his account for services rendered.
The defendant is the president of the Mundinger Company Limited and related
enterprises which engages in the merchandising of musical instruments and pro-
vides musical instruction. For many years following the marriage the wife took an
active part in the business as an officer and employee of the company and more

568
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

especially in the teaching activity. In 1952 or 1953 the said Doris Johnson entered
the service of the company and almost immediately there.after replaced the wife not
only in the conduct of the company's affairs but apparently, also, in the husband's
affections. The learned Judge found that the continued association between the
defendant and Mrs. Johnson on a personal basis "was such that the defendant wen
knew that it was injurious to the health of the plaintiff." "On this ground alone," he
stated, "I would have found that the plaintiff, Mrs. Mundinger, was entitled to ali-
mony." He held, however, that the separation agreement signed by the wife was a
bar to her cause of action. He stated: "I have given to the evidence prolonged and
anxious consideration, and I have come to the conclusion ·that on the evidence
before me, and having in mind the onus of proof that a case had not been made out"
He found on the evidence of one Jack Souter and Dr. Caroline Hobbs, a resident
intern at St. Michael's Hospital, that the wife was mentally capable of entering into
these transactions, disregarding almost entirely the evidence of her family physician
who had treated her for many years and of Dr. Fischer, an eminent psychiatrist under
whose care she had been for several years prior to the dates with which we are
concerned. Both of these medical witnesses, who were familiar with the unhappy
. situation in which this unfortunate plaintiff was involved, testified that, in their
opinion, she was not in a mental condition to exercise proper judgment in matters
affecting her property rights and temporal welfare. The evidence of the witnesses
. Souter and Givertz, the solicitor, was based on their observation of the appellant
during the short period when she executed the separation agreement and deeds
respectively. The young resident intern formed no settled opinion as to the mental
capacity of the appellant to transact business of such a nature and, in any event, her
testimony upon this point was quite inconclusive. There was no proper ground for
preferring it to the evidence of her general physician and Dr. Fischer.
With deference to the learned Judge's view we are an of the opinion that he arrived
at his decision in this case under the belief that despite the circumstances disclosed
in evidence the onus of proof lay throughout on the plaintiff. The transactions in
question are unconscionable and improvident on their very face as the learned
Judge suggested. The plaintiff, now 52 years of age, has devoted the most important
years of her life to her husband and their three children. She was influenced by her
husband when suffering from the effects of a serious nervous breakdown, while
under the influence of tranquillizers and other forms of sedation prescribed for her
condition and doubtless also while affected by brandy which was liberally provided
by the husband for reasons best known to himself, to surrender an rights to future
support and maintenance and to part with a valuable interest in two pieces of real
estate for the paltry consideration of $10,000. Her condition was such that it can
clearly be asserted that her husband was in a position of dominance and control
over her of which he took full advantage by exercising undue influence upon her to
carry off this improvident and nefarious transaction.
The governing principle applicable here was laid down by this Court in the oft-
cited case of Vanzant v. Coates (1917), 40 O.L.R 556, 39 D.L.R 485. It was there held
that the equitable rule is that if the donor is in a situation in which he is not a free
agent and is not equal to protecting himself, a Court of Equity will protect him, not
against his own folly or carelessness, but against his being taken advantage of by
those in a position to do so because of their position. In that case the circumstances
were the advanced age of the donor, her infirmity, her dependence on the donee; the
position of influence occupied by the donee, her acts in procuring the drawing and
execution of the deed; and the· consequent complete change of a well-understood
and defined purpose in reference to the disposition of the donor's property. It was

569
CHAPTER 6 PROTECTION OF WEAKER PARTIES

held that in those circumstances the onus was on the plaintiff to prove by satisfactory
evidence that the gift was a voluntary and deliberate act by a person mentally compe-
tent to know, and who did know, the nature and effect of the deed, and that it was not
the result of undue influence. That onus had not been discharged; and it was there-
fore held to be unnecessary for the defendant to prove affirmatively that the influence
possessed by the plaintiff had been unduly exercised.
The principle enunciated in Vanzant v. Coates, supra, has been consistently followed
and applied by the Courts of this Province and the other common law Provinces of
Ca!}ada. The effect of the relevant decisions was neatly stated by Professor Bradley
E. Crawford in a commentary written by him and appearing in 44 Canadian Bar
Review 142 (1966) at p. 143, from which I quote the following extract:

If the bargain is fair the fact that the parties were not equally vigilant of their interest is
immaterial. Likewise if one was not preyed upon by the other, an improvident or even
grossly inadequate consideration is no ground upon which to set aside a contract freely
entered into. It is the combination of inequality and improvidence which alone may
invoke this jurisdiction. Then the onus is placed upon the party seeking to uphold the
contract to show that his conduct throughout was scrupulously considerate of the other's
interests.

This correctly sets forth the effect of the decisions bearing upon this and like
problems and I adopt it as an accurate statement of the law. On the evidence in the
present case there was that combination of inequality and improvidence which
justifies the Court in saying that the defendant has failed to discharge the onus
which, in the circumstances, was cast upon him.
The appeal is allowed with costs. The separation agreement shall be declared null
and void and set aside. The deed of the farm property shall likewise be declared
null and void and be set aside. There shall be a declaration that the wife is entitled
to alimony for a sum to be determined on a reference to the Master for that purpose
which shall be payable from the date of the commencement of the action. There
shall also be a reference to the Master with respect to the residential property at Oriole
Gardens which has been sold by the defendant and to fix the proportion of the
proceeds thereof payable to the appellant. Counsel stated that since the conveyance
of the farm property to the husband he has expended certain monies in the making
of improvements thereto. On the reference to the Master there shall also be an
inquiry as to the extent of these improvements and their value, the wife to be allowed
occupation rent for the period d1:lring which she was excluded from enjoyment of
the property. The sum of $10,000 paid by the husband to the wife will, of course, be
taken into account by the Master in determining what is due to the appellant. The
appellant shall have the costs of the trial, the costs of the appeal and the costs of the
reference on a solicitor-and-client basis.
Appeal allowed.

HARRY V KREUTZIGER
(1978), 95 DLR (3d) 231 (BCCA)

[The appellant sold his fishing boat, the Glenda Marion, to the respondent for approxi-
mately $4,000, but the boat, which came with a salmon fishing license, was worth
approximately $16,000. The claim at the Court of Appeal was on the ground of an
unconscionable bargain. The Court of Appeal noted that the appellant "suffers from

570
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

a congenital hearing defect, but is by no means totally deaf. He has [a] grade 5 educa-
tion, and ... is a mild, inarticulate, retiring person, and it would appear from the
evidence that he is not widely experienced in business matters."]
McINTYRE JA (29December1978): .
[11] For this re<;:ital it is at once clear that the appellant made an improvident
bargain .... The question for decision is: Did he enter into this bargain under such
circumstances that the court will exercise its equitable jurisdiction to rescind the
contract and return the parties to their original positions? The trial judge held that
he had not. ...
[12] The principles upon which a court will interfere with a concluded transaction
and nullify it upon the ground that it is unconscionable have found frequent expres-
sion. An early Canadian case is Waters v. Donnelly (1884), 9 O.R. 391. The leading
pronouncement on the subject in British Columbia is to be found in Morrison v. Coast
Finance Ltd. (1965), 54 W.W.R. 257, 55 D.L.R. (2d) 710 (CA), where Davey J.A., speaking
for himself and Bull J.A., said at p. 259:
The equitable principles relating to undue influence and relief against unconscionable
bargains are closely related, but the doctrines are separate and distinct. The finding here
against undue influence does not conclude the question whether the appellant is entitled
to relief against an unconscionable transaction. A plea of undue influence attacks the
sufficiency of consent; a plea that a bargain is unconscionable invokes relief against an
unfair advpntage gained by an unconscientious use of power by a stronger party against
a weaker. On such a claim the material ingredients are proof of inequality in the position
of the parties arising out of the ignorance, need or distress of the weaker, which left him
in the power of the stronger. and proof of substantial unfairness of the bargain obtained
by the stronger. On proof of those circumstances, it creates a presumption of fraud which
the stronger must repel by proving that the bargain was fair, Just and reasonable.

[14] From these authorities, this rule emerges. Where a claim is made that a bargain
is unconscionable, it must be shown for success that there was inequality in the pos-
ition of the parties due to the ignorance, need or distress of the weaker, which would
leave him in the power of the stronger, coupled with proof of substantial unfairness
in the bargain. When this has been shown a presumption of fraud is raised, and the
stronger must show, in order to preserve his bargain, that it was fair and reasonable.
[15] ... The appellant, by education, physical infirmity and economic circum-
stances, was clearly not the equal of the respondent. The evidence supports the
conclusion that the appellant wanted to continue fishing and wanted to retain his
licence or tonnage. It shows as well that the respondent proceeded aggressively with
full knowledge of the value of the licence. He expressed regret at one stage that he
had not acquired three or four more licences, they were so valuable. The appellant
did not wish to sell, and resisted for a time by returning the cheque and delaying a
decision . ... The respondent also knew that the preservation of his licence was a vital
consideration to the appellant. The respondent sought out the appellant and in his
dealings would not take no for an answer. He persuaded the appellant to enter a
bargain after, by his own admission, making assurances which were untrue regard-
ing the chance of the appellant to get a licence. He thereby procured an asset worth
$16,000 for $4,500, which he later chose to reduce by $570. The position taken by the
appellant's counsel was that the appellant's ignorance, coupled with pressures exerted
upon him by the respondent, caused the inequality of the bargaining position. In my
view, the improvidence of the bargain is shown. On the whole of the evidence, it is
also my view that the appellant was so dominated and overborne by the respondent

571
CHAPTER 6 PROTECTION OF WEAKER PARTIES

that he was, in the sense of that term used by Davey J.A. in the Morrison case, supra,
within the power of the respondent in these dealings.·

[18] ... It is true, as [the trial judge] has pointed out, that the appellant could have
sought advice; he could have tom up the cheque; he could have refused to have any
dealings with the respondent; but thi.s will be true of almost any case where an
unconscionable bargain is claimed. If the appellant had done these things, no prob-
lem would have arisen. The fact remains, however, he did not, and in my view of the
evidence it was because he was overborne by the respondent because of the inequal-
ity in their positions, and the principles of the cases cited apply.
[19] I would allow the appeal and direct that the contract be rescinded; that the
respondent deliver the "Glenda Marion" to the appellant upon payment by the appel-
lant to the respondent of the sum of $3,930.
[20] CRAIG JA (19January1979): I agree that this appeal should be allowed for the
reasons given by Mcintyre J.A. and also for the reasons given by Lambert J.A. ...
[21] LAMBERT JA (19 January 1979): I have had the advantage of reading the
opinion of my erstwhile brother Mcintyre . ... I would allow the appeal and make the
order propos~ d by Mcintyre J.A.

[26] In my opinion, questions as to whether use of power was unconscionable,

an advantage was unfair or very unfair, a consideration was grossly inadequate, or
bargaining power was grievously impaired, to select words from both statements of
principle, the Morrison case and the Bundy case [Lloyds Bank Ltd v Bundy,[1974] 3 WLR
501, [1974] 3 All ER 757 (CA)], are really aspects of one single question. That single
question is whether the transaction, seen as a whole, is sufficiently divergent from
community standards of commercial morality that it should be rescinded. To my
mind, the framing of the question in that way prevents the real issue from being
obscured by an isolated consideration of a number of separate questions; as, for
example, a consideration of whether the consideration was grossly inadequate, rather
than merely inadequate, separate from the consideration of whether bargaining
power was grievously impaired, or merely badly impaired. Such separate consider-
ation of separate questions produced by the application of a synthetic rule tends to
obscure rather than aid the process of decision.
[27] The single question of whether the transaction, seen as a whole, is sufficiently
divergent from community standards of commercial morality that it should be
rescinded must be answered by an examination of the decided cases and a consider-
ation, from those cases, of the fact patterns that require that the bargain be rescinded
and those that do not. In that examination, Canadian cases are more relevant than
those from other lands, where different standards of commercial morality may apply,
and recent cases are more germane than those from earlier times when standards
were in some respects rougher and in other respects more fastidious . In my opinion,
it is also appropriate to seek guidance as to community standards of commercial
morality from legislation that embodies those standards in law . .. .
· [28] I have applied the standards derived from those authorities to the facts in
this case, which are that the respondent purchased for $4,500 a boat that he knew
to be worth $16,000 from the appellant, whom he knew to be partially deaf, easily
intimidated and ill-advised, by a process of harassment. In my opinion, the whole
circumstances of the bargain reveal such a marked departure from community
standards of commercial morality that the contract of purchase and sale should be
rescinded.

572
 V UNCONSCIONABILITY AND UNDUE INFLUENCE

NOTES

1. In Williams v Downey-Waterbury (1995), 120 DLR (4th) 737 (Man CA), a separation
agreement provided for the equal division between husband and wife of all assets, including
$350,000 worth of shares held by the husband in a family corporation. The husband challenged
the agreement as unconscionable and brought about by the undue influence of the wife. It was
found as fact that the wife had been extraordinarily dominant during the marriage. Neverthe-
less, the Manitoba Court of Appeal rejected the husband's claim, holding that it was necessary
to focus on the circumstances surrounding the execution of the separation agreement rather
than the circumstances of the marriage. When the husband signed the agreement he was no
longer within the wife's "orbit of influence." There was no longer a dominant-subservient
relationship or an atmosphere of tension. The husband signed because he felt it was the right
thing to do. In Vire v Blair, 2016 ONSC 49, the court maintained that signing the agreement in
stressful circumstances where there has been financial misrepresentation should be distin-
guished from situations in which there is "a power imbalance that impacts a party's ability to
understand and freely assent to a legally binding agreemenf' (para 102).
2. The contract negotiation principles governing commercial relationships are different
from those governing separation agreement negotiations between spouses. In Rick v Brand-
sema, 2009 SCC 10, the validity of a separation agreement was in issue when the wife sought
to set it aside one year after the divorce on the grounds of unconscionability and misrepresen-
tation. Relying on Miglin v Miglin, 2003 SCC 24, [2003] 1 SCR 303 for guidance, the court
found that the uniqueness of the negotiating environment (the breakdown of the relationship)
meant that the principles governing commercial contracts negotiated between parties of
equal strength were inapplicable. Rather, to protect the integrity of the negotiating environment
between spouses, there is a duty to make full and honest disclosure of all relevant financial
information, a duty that "anchors the ability of separating spouses to genuinely decide for
themselves what constitutes an acceptable bargain." And because "[a]n agreement based on
full and honest disclosure is an agreement that, prima facie, is based on the informed consent
of both parties," the court would be less likely to set it aside. The court allowed the appeal and
restored the trial judge's decision, which had determined the agreement to be unconscionable.
At trial, it was found that the husband had failed to provide full disclosure of his finances and
had deliberately exploited his wife's mental fragility, a vulnerability ineffectively compensated
for by the lawyer who was present. The remedy for unconscionability here was equitable com-
pensation, requiring the husband to pay the wife an amount representing the difference
between the negotiated "equalization payment" and the wife's entitlement under the Family
Relations Act [repealed by the Family Law Act, SBC 2011, c 25].
3. Knowledge of financial affairs is a significant component of the analysis involving the
enforceability of separation agreements, but it is not the only one. In C (SL) v C (CJR), 2014
BCSC 1814, the court found that the wife handled the financial affairs of the parties, but that
she had been afraid of her husband at the time she entered into the separation agreement.
"She feared that he would hurt her, at least emotionally, such as through the children, if she did
not sign the Separation Agreement on the terms dictated by the Husband. The Wife knew the
Separation Agreement was unfair to her. She signed it only because of her fear. The Husband
exploited the Wife's vulnerability by insisting that she enter into a profoundly unfair agreement"
(para 427).
4. The environment surrounding the signing of a prenuptial agreement is different from the
"emotional environment that follows the disintegration of a marriage," identified in Rick v Brand-
sema (Dyck v Bashold, 2009 Canlll 65813, 12009] OJ No 4999 (OL) (Sup Ct J), In Melnyk v
Melnyk, 2010 MBOB 121, 12010] MJ No 176 (OL), the wife sought to have the pre-nuptial agree-
ment set aside when the marriage fell apart. The court held that the circumstances in which
she signed the agreement-namely, one month before the wedding date and the request was
sudden-did not amount to duress. Other cases have also found that the embarrassment of

573
CHAPTER 6 PROTECTION OF WEAKER PARTIES

cancelling a wedding (Toscano v Toscano, 2015 ONSC 487) or of having a child out of wed-
lock (Verkaik v Verkaik (2009), 68 RFL (6th) 293 (Ont Sup Ct J)) is not a valid basis for duress.
In Melnyk, the w ife had known of her husband 's assets at the time she signed the agreement,
chose to sign rather than pose questions to a lawyer, and was both young and healthy at the
time and not dependent on her husband-to-be. The court found that the fact that the hus-
band told the w ife that the wedd ing wou ld not proceed if she did not sign the agreement did
not amount to unconscionability. The court determined that the standard for considering the
validity of a pre - nuptial agreement was the usual common law threshold for unconscionability.
It distinguished its decision from Rick v Brandsema because of the different statutory regimes
between Manitoba, where the legislation prescribes an equal division of property, and British
Columbia, which allows the courts to ignore unfair agreements and reapportion marital assets
in a way the court deems fair. The point of a pre-nuptial agreement is to avoid the statutory
regime for the marital division of property, wh ich, the court determined, meant that the legis-
lature did not intend that pre- nuptial agreements be measured against a standard of fairness.
5. Legi slation enables courts to alter agreements between spouses in circ umsta nces that
could encompass unconscionability. For example, in Ontario, the court has express jurisdiction
to set aside a domestic contract (1) if a party failed to disclose to the other sig nificant assets,
or significant debts or other liabilities, existing w hen the domestic contract was made; (2) if a
party did not understa nd the nature or consequences of the domestic contract; or (3) other-
wise in accordance with the law of contract: see Family Law Act, RSO 1990, c F.3, s 56(4) . In
British Columbia, a judge can reapportion property betwee n spouses under their marriage
agreement on the basis of fairness: see Fam ily Law Act, SBC 2011, c 25, s 95.
6. Although misrepresentation was claimed in Rick v Brandsema, the court did not deal
with the claim . Would the results have been different if the case had been treated as one
involving fraudulent misrepresentatio n?

LLOYDS BANK LIMITED V BUNDY

(1975] 1 QB 326

LORD DENNING MR: Broadchalke is one of the most pleasing villages in England. Old
Herbert Bundy, the defendant, was a farmer there . His home was at Yew Tree Farm.
It went back for 300 years. His family had been there for generations. It was his only
asset. But he did a very foolish thing. He mortgaged it to the bank. Up to the very hilt.
Not to borrow money for himself, but for the sake of his son. Now the bank have
come down on him. They have foreclosed. They want to get him out of Yew Tree
Farm and to sell it. They have brought this action against him for possession. Going
out means ruin for him. He was granted legal aid. His lawyers put in a defence. They
said that, when he executed the charge to the bank he did not know w hat he was
doing; or at any rate that the circumstances were such that he ought not to be bound
by it. At the trial his plight was plain. The judge was sorry for him. He said he was a
"poor old gentleman." He was so obviously incapacitated that the judge admitted his
proof in evidence. He had a heart attack in the witness-box. Yet the judge felt he
could do nothing for him. There is nothing, he said, "which takes this out of the vast
range of commercial transactions." He ordered Herbert Bundy to give up possession
of Yew Tree Farm to the bank. Now there is an appeal to this court. The ground is
that the circumstances were so exceptional that Herbert Bundy should not be held
bound. ·
Herbert Bundy had only one son, Michael Bundy. He had great faith in him. They
were both customers of Lloyd's Bank Ltd., the plaintiff, at the Salisbury branch. They
had been customers for many years. The son formed a company called M .J.B. Plant

574
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

Hire Ltd. It hired out earth-moving machinery and so forth. The company banked
at Lloyds too at the same branch.
In 1961 the son's company was in difficulties. The father on September 19, 1966,
guaranteed the company's overdraft for £1,500 and charged Yew Tree Farm to the
bank to secure the £1,500. Afterwards the son's company got further into difficulties.
The overdraft ran into thousands. In May 1969 the assistant bank manager, Mr. Ben-
nett, told the son the bank must have further security. The son said his father would
give it. So Mr. Bennett and the son went together to see the father. Mr. Bennett pro-
dl,!ced the papers. He suggested that the father should sign a further guarantee for
£5,000 and to execute a further charge for £6,000. The father said that he would help
his son as far as he possibly could. Mr. Bennett did not ask the father to sign the papers
there and then. He left them with the father so that he could consider them overnight
and take advice on them. The father showed them to his solicitor, Mr. Tretliowan,
who lived in the same village. The solicitor told the father that £5,000 was the utmost
that he could sink 'in his son's affairs. The house was worth about £10,000 and this
was half his assets. On that advice the father on May 27, 1969, did execute th'i? further
guarantee and the charge, and Mr. Bennett witnessed it. So at the end of May, 1969
the father had charged the house to secure £7,500.
During the next six months the affairs of the son and his company went from bad
to worse. The bank had granted the son's company an overdraft up to a limit of
£10,000, but this was not enough to meet the outgoings. The son's company drew
cheques which the bank returned unpaid. The bank were anxious. By this time
Mr. Bennett had left to go to another branch. He was succeeded by a new assistant
manager, Mr. Head. In November 1969 Mr. Head saw the son and told him that the
account was unsatisfactory and that he considered that the company might have to
cease operations. The son suggested that the difficulty was only temporary and that
his father would be prepared to provide further money if necessary.
On December 17, 1969, there came the occasion which, in the judge's words, was
"important and disastrous" for the father. The son took Mr. Head to see his father.
Mr. Head had never met the father before. This was his first visit. He went prepared.
He took with him a form of guarantee and a form of charge filled in with the father's
name ready for signature. There was a family gathering. The father and mother were
there . The son and the son's wife: Mr. Head said that the bank had given serious
thought as to whether they could continue to support the son's company. But that
the bank were prepared to do so in this way: (i) the bank would continue to allow the
company to draw money on overdraft up to the existing level of £10,000, but the bank
would require the company to pay 10 per cent of its incomings into a separate
account. So that 10 per cent would not go to reduce the overdraft. Mr. Head said that
this would have the effect "of reducing the level of borrowing." In other words, the
bank was cutting down the overdraft. (ii) The bank would require the father to give ,
a guarantee of the company's account in a sum of £11,000 and to give the bank a
further charge on the house of £3,500, so as to bring the total charge to £11,000. The
house was only worth about £10,000, so this charge for £11,000 would sweep up all ·
that the father had.
On hearing the proposal, the father said that Michael was his only son and that,.
he was 100 per cent behind him. Mr. Head produced the forms that had already been
filled in. The father signed them and Mr. Head witnessed them there and then. On
this occasion, Mr. Head, unlike Mr. Bennett did not leave the forms with the father :
nor did the father have any independent advice.
It is important to notice the state of mind of Mr. Head and of the father. Mr. Head
said in evidence:

575
CHAPTER 6 PROTECTION OF WEAKER PARTIES

Defendant asked me what in my opinion the company was doing wrong and company's
position. I told him. I did not explain the company's affairs very fully as I had only just
taken over the account. ... Michael said that company had a number of bad debts. I was
not entirely satisfied with this. I thought the trouble was more deep seated .... It did not
occur to me that there was any conflict of interest. I thought there was no conflict of
interest. I would think the defendant relied on me implicitly to advise him about the trans-
action as bank manager .... I knew he had no other assets except Yew Tree Cott.age.

The father said in evidence: "I always thought Head was genuine . I have always
trusted him .... No discussion how business was doing that I can remember. I simply
sat back and did what they said." The solicitor, Mr. Trethowan, said of the father: "He
is straightforward. Agrees with anyone .... I doubt if he understood a\\ that Head
explained to him."
So the father signed the papers. Mr. Head witnessed them and took them away.
The father had charged the whole of his remaining asset, leaving-himself with noth-
. ing. The son and his company gained a respite. But only for a short time. Five months
later, in May 1970, a receiving order was made against the son. Thereupon the bank
stopped a\\ overdraft facilities for the company. It ceased to trade. The father's solici-
tor, Mr. Trethowan, at once went to see Mr. Head. He said he was concerned that the
father had signed the guarantee.
In due course the bank insisted on the sale of the house. In December 1971 they
agreed to se\1 it for £9,500 with vacant possession. The family were very disappointed
with this figure . It was, they said, worth much more. Estate agents were ca\\ed to say
so. But the judge held it was a valid sale and that the bank could take a\\ the proceeds.
The sale has not been completed because Herbert Bundy is sti\1 in possession. The
bank have brought these proceedings to evict Herbert Bundy.
Now let me say at once that in the vast majority of cases a customer who signs a
bank guarantee or a charge cannot get out of it. No bargain will be upset which is
the result of the ordinary interplay of forces. There are many hard cases which are
caught by this rule. Take the case of a poor man who is homeless. He agrees to pay
a high rent to a landlord just to get a roof over his head. The common law will not
interfere. It is left to Parliament. Next take the case of a borrower in urgent need of
money. He borrows it from the bank at high interest and it is guaranteed by a friend.
The guarantor gives his bond and gets nothing in return. The common law will not
interfere. Parliament has intervened to prevent moneylenders charging excessive
interest. But it has never interfered with banks.
Yet there are exceptions to this general rule. There are cases in our books in which
the courts will set aside a contract, or a transfer of property, when the parties have
not met on equal terms-when the one is so strong in bargaining power and the
other so weak-that, as a matter of common fairness, it is not right that the strong
~, should be a\\owed to push the weak to the wa\1. Hitherto those exceptional cases
have been treated each as a separate category in itself. But I think the time has come
.. when we should seek to find a principle to unite them. I put on one side contracts
or transactions which are voidable for fraud or misrepresentation or mistake. AU
those are governed by settled principles. I go only to those where there has been
' inequality of bargaining power, such as to merit the intervention of the court.
The first category is that of "duress of goods." A typical case is when a man is in
a strong bargaining position by being in possession of the goods of another by virtue
of a legal right, such as by way of pawn or pledge or taken in distress. The owner is
in a weak position because he is in urgent need of the goods. The stronger demands
of the weaker more than is justly due: and he pays it in order to get the goods. Such

576
 V UNCONSCIONABIUTY AND UNDUE INFLUENCE

a transaction is voidable. He can recover the excess: see Astley v. Reynolds (1731) 2
Stra . 915 and Green v. Duckett (1883) 11 Q.B.D. 275. To which may be added the cases
of "colore officii," where a man is in a strong bargaining position by virtue of his
official position or public profession. He relies upon it so as to gain from the weaker-
who is urgently in need-more than is justly due : see Pigott's case cited by Lord
Kenyon C.J. in Cartwright v. Rowley (1799) 2 Esp. 723, 723-724; Parker v. Bristol and
Exeter Railway Co. (1851) 6 Exch. 702 and Steele v. Williams (1853) 8 Exch. 625. In such
cases the stronger may make his claim in good faith honestly believing that he is
entitled to make his demand. He may not be guilty of any fraud or misrepresentation.
The inequality of bargaining power-the strength of the one versus the urgent need
of the other-renders the transaction voidable and the money paid to be recovered
back: see Maskell v. Horner [1915] 3 K.B. 106.
The second category is that of the "unconscionable transaction." A man is so
placed as to be in need of special care and protection and yet his weakness is
exploited by another far stronger than himself so as to get his property at a gross
undervalue. The typical case is that of the "expectant heir." But it applies to all cases
where a man comes into property, or is expected to come into it-and then being in
urgent need-another gives him ready cash for it, greatly below its true worth, and
so gets the property transferred to him: see Evans v. Llewellin (1787) 1 Cox 333. Even
though there be no evidence of fraud or misrepresentation, nevertheless the trans-
action will be set aside .... This second category is said to extend to all cases where
an unfair advantage has been gained by an unconscientious use of power by a
stronger party against a weaker. ...
The third category is that of "undue influence" usually so called. These are divided
into two classes as stated by Cotton L.J. in Al/card v. Skinner (1887) 36 Ch. D. 145, 171.
The first are those where the stronger has been guilty of some fraud or wrongful
act-expressly so as to gain some gift or advantage from the weaker. The second are
those where the stronger has not been guilty of any wrongful act, but has, through
the ·relationship which existed between him and the weaker, gained some gift or
advantage for himself. Sometimes the relationship is such as to raise a presumption
of undue influence, such as parent over child, solicitor over client, doctor over
patient, spiritual adviser over follower. At other times a relationship of confidence
must be proved to exist. But to all of them the general principle obtains which was
stated by Lor,d Chelmsford L.C. in Tate v. Williamson (1866) 2 Ch. App. 55, 61:

Wherever two persons stand in such a relation that, while it continues, confidence is
necessarily reposed by one, and the influence which naturally grows out of that confi-
dence is possessed by the other, and this confidence is abused, or the influence is exerted
to obtain an advantage at the expense of the confiding party, the person so availing
himself of his position will not be permitted to retain the advantage, although the
transaction could not have been impeached if no such confidential relation had existed.

The fourth category is that of "undue pressure." The most apposite of that is Wil-
liams v. Bayley (1866) L.R. 1 H.L. 200, where a son forged his father's name to a promis-
sory note and, by means of it, raised money from the bank of which they were both
customers. The bank said to the father, in effect: "Take your choice-give us security
for your son's debt. If you do take that on yourself, then it will all go smoothly: if you
do not, we shall be bound to exercise pressure." Thereupon the .father charged his
property to the bank with payment of the note. The House of Lords held that the
charge was invalid because of undue pressure exerted by the bank. Lord Westbury
said, at pp. 218-219:

577
CHAPTER 6 PROTECTION OF WEAKER PARTIES

Acontract to give security for the debt of another, which is a contract without consider-
ation, is above all things, a contract that should be based upon the free and voluntary
agency of the individual who enters into it.

Other instances of undue pressure are where one party stipulates for an unfair
advantage to which the other has no option but to submit. As where an employer-
the stronger party-has employed a builder-the weaker party-to do work for him.
When the builder asked for payment of sums properly due (so as to pay his workmen)
the employer refused to pay unless he was given some added advantage. Stuart V.-C.
said: "Where an agreement, hard and inequitable in itself, has been exacted under
circumstances of pressure on the part of the person who exacts it, this court will set
it aside": see Ormes v. Beadel (1860) 2 Giff. 166, 174 (reversed on another ground, 2
De G.F. & J. 333) and 0 . & C. Builders Ltd. v. Rees [1966] 2 O.B. 617, 625.
The fifth category is that of salvage agreements. When a vessel is in danger of
sinking and seeks help, the rescuer is in a strong bargaining position. The vessel in
distress is in urgent need. The parties cannot be truly said to be on equal terms ....
Gathering all together, I would suggest that through all these instances there runs
a single thread. They rest on "inequality of bargaining power." By virtue of it, the
English law gives relief to one who, without independent advice, enters into a con-
tract upon terms which are very unfair or transfers property for a consideration
which is grossly inadequate, when his bargaining power is grievously impaired by
reason of his own needs or desires, or by his own ignorance. or infirmity, coupled
with undue influences or pressures brought to bear on him by or for; the benefit of
the other. When I use the word "undue" I do not mean to suggest that the principle
depends on proof of any wrongdoing. The one who stipulates for an unfair advan-
tage may be moved solely by his own self-interest, unconscious of the distress he is
bringing to the other. I have also avoided any reference to the will of the one being
"dominated" or "overcome" by the otheL One who is in extreme need may knowingly
consent to a most improvident bargain, solely to relieve the straits in which he finds
himself. Again, I do not mean to suggest that every transaction is saved by independ-
ent advice. But the absence of it may be fatal. With these explanations, I hope this
principle will be found to reconcile the cases. Applying it to the present case, I would
notice these points: ·

(1) The consideration moving from the bank was grossly inadequate. The son's
company was in serious difficulty. The overdraft was at its limit of £10,000.
The bank considered that its existing security was insufficient. In order to get
further security, it asked the father to charge the house-his sole asset-to the
uttermost. It was worth £10,000. The charge was for £11,000. That was for
the benefit of the bank. But not at all for the benefit of the father, ~:n indeed
for the company. The bank did not promise to continue the overdraft or to
increase it. On the contrary, it required the overdraft to be reduced. All that
the company gained was a short respite from impending doom.
(2) The relationship between the bank and the father was one of trust and confi-
dence. The bank knew that the father relied on it implicitly to advise him about
the transaction. The father trusted the bank. This gave the bank much influence
on the father. Yet the bank failed in that trust. It allowed the father to charge
the house to his ruin.
(3) The relationship between the father and the son was one where the father's
natural affection had much influence on him. He would naturally desire to
accede to his son's request. He trusted his son.

578
 V. UNCONSCJONABILITY AND UNDUE INFLUENCE

(4) There was a conflict of inter.e st between the bank and the father. Yet the bank
did not realise it. Nor did it suggest that the father should get independent
advice. If the father had gone to his solicitor-or to any man of business-there
is no doubt that any one of them would say: "You must not enter into this
transaction. You are giving up your house, your sole remaining asset. for no
benefit to you. The company is in such a parlous state that you must not do it."

These considerations seem to me to bring this case within the principles I have
stated. But, in case that principle is wrong, I would also say that the case falls within
the category of undue influence of the second class stated by Cotton L.J. in Al/card
v. Skinner, 36 Ch. D. 145, 171. I have no doubt that the assistant bank manager acted
in the utmost good faith and was straightforward and genuine. Indeed the father
said so. But beyond doubt he was acting in the interests of the bank-to get further
security for a bad debt. There was such a relationship of trust and confidence
between them that the bank ought not to have swept up his sole remaining asset
into its hands-for nothing-without his having independent advice. I would there-
fore allow this appeal.

[Cairns LJ and Sir Eric Sachs agreed in the result, but on the narrower ground men-
tioned in Lord Denning's last paragraph. The document executed on December 17
was set aside.]

CREDIT LYONNAIS BANK NEDERLAND NV V BURCH

[1997] 1 All ER 144 (CA)

[The defendant worked for a company whose primary shareholder was Mr. Pelosi.
The company maintained an overdraft facility with the plaintiff bank. Pelosi requested
that the defendant provide the bank with an unlimited guarantee, supported by a
second mortgage on the defendant's home, so that the company's overdraft could
be extended by £20,000. When the company went into liquidation, the bank sued the
defendant for the amount outstanding on the overdraft. The defendant argued that
her guarantee had been procured by the undue influence of her employer, Mr. Pelosi.]
MILLETT LJ: This transaction cannot possibly stand .... It is an extreme case. The
transaction was not merely to the manifest disadvantage of Miss Burch; it was one
which, in the traditional phrase, "shocks the conscience of the court." Miss Burch
committed herself to a personal liability far beyond her slender means, risking the
loss of her home and personal bankruptcy, and obtained nothing in return beyond
a relatively small and possibly temporary increase in the overdraft facility available
to her employer, a company in which she had no financial interest. The transaction
gives rise to grave suspicion. It cries aloud for an explanation ....
In the present case, the excessively onerous nature of the transaction into which
she was persuaded to enter, coupled with the fact that she did so at the request of,
and after discussion with Mr. Pelosi, is, in my judgment, quite enough to justify the
inference, which is really irresistible, that the relationship of employer and employee
had ripened into something more and that there had come into existence between
them a relationship of trust and confidence which he improperly exploited for his
own benefit. ...
I repeat that the mere fact that a transaction is improvident or manifestly dis-
advantageous to one party is not sufficient by itself to give rise to a presumption that

579
CHAPTER 6 PROTECTION OF WEAKER PARTIES

it has been obtained by the exercise of undue influence; but where it is obtained by
a party between whom and the complainant there is a relationship like that of
employer and junior employee which is easily capable of developing into a relation-
ship of trust and confidence, the nature of the transaction may be sufficient to justify
the inference that such a development has taken place; and where the transaction
is so extravagantly improvident that it is virtually inexplicable on any other basis,
the inference will be readily drawn ....
The bank had actual notice of the facts from which the existence of a relationship
of trust and confidence between Mr. Pelosi and Miss Burch could be inferred. It knew
that they were respectively employer and junior employee working in a small busi-
ness, and should have "appreciated that the possibility of influence exist[ed]." ...
The bank submitted that it had discharged its duty to Miss Burch by urging her
to obtain independent legal advice. This does not accurately reflect the legal position.
The bank owed no duty to Miss Burch. If it urged Miss Burch to take independent
legal advice, this was for its own protection. If it had not had cause to suspect that
Miss Burch's agreement to enter into the transaction might have been improperly
obtained, it would have had no need to encourage her to take legal advice. Since it
did have cause to suspect it, it could not avoid the consequences unless two condi-
tions were satisfied: (i) it must have taken reasonable steps to allay any such suspicion;
and (ii) the result of the steps which it took must be such as would reasonably allay
any such suspicion.
The bank urged Miss Burch to obtain independent legal advice. In a letter
obviously written at the instance of Mr. Pelosi and after consultation with him, she
declined to do so. The bank had taken all reasonable steps open to it to allay any
suspicion it might have had that Miss Burch's agreement to the transaction had been
procured by the exercise of undue influence on the part of Mr. Pelosi. But what fol-
lowed could not reasonably have allayed any such suspicion; on the contrary, it
should have confirmed it.
That is sufficient to dispose of this appeal, but I should not be taken to accept that
it would necessarily have made any difference even if Miss Burch had entered into
the transaction after taking independent legal advice. Such advice is neither always
necessary nor always sufficient. It is not a panacea. The result does not depend
mechanically on the presence or absence of legal advice ....
It is first necessary to consider the position as between the complainant and the
alleged wrongdoer. The alleged wrongdoer may seek to rebut the presumption that
the transaction was obtained by undue influence by showing that the complainant
had the benefit of independent legal advice before entering into it. It is well estab-
lished that in such a case the court will examine the advice which was actually given.
It is not sufficient that the solicitor has satisfied himself that the complainant under-
stands the legal effect of the transaction and intends to enter into it. That may be a
protection against mistake or misrepresentation; it is no protection against undue
influence. As Lord Eldon L.C. said in Huguenin v. Baseley (1807) 14 Ves 273 at 300,
[1803-13] All E.R. Rep. 1at13: "The question is, not, whether she knew what she was
doing, had done, or proposed to do, but how the intention was produced ...."
Accordingly, the presumption cannot be rebutted by evidence that the complainant
understood what she was doing and intended to do it. The alleged wrongdoer can
rebut the presumption only by showing that the complainant was either free from
any undue influence on his part or had been placed, by the receipt of independent
advice, in an equivalent position. That involves showing that she was advised as to
the propriety of the transaction by an adviser fully informed of all the material facts . ...

580
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

Some of those cases were concerned with the equity to set aside a harsh and
unconscionable bargain rather than one obtained by the exercise of undue influence,
but the role of the independent adviser, while not identical, is not dissimilar. The
solicitor may not be concerned to protect the complainant against herself, but he is
concerned to protect her from the influence of the wrongdoer. The cases show that
it is not sufficient that she should have received independent advice unless she has
acted on that advice. If this were not so, the same influence that produced her desire
to enter into the transaction would cause her to disregar9 any advice not to do so.
They also show that the solicitor must not be content to satisfy himself that his client
understands the transaction and wishes to carry it out. His duty is to satisfy himself
that the transaction is one which his client could sensibly enter into if free from
improper influence; and if he is not so satisfied to advise her not to enter into it, and
to refuse to act further for her if she persists. He must advise his client that she is
under no obligation to enter into the transaction at all and, if she still wishes to do
so, that she is not necessarily bound to accept the terms of any document which has
been put before her but (where this is appropriate) that he should ascertain on her
behalf whether less onerous terms might be obtained.
It is next necessary to consider the position of the third party who has been put
on enquiry of the possible existence of some impropriety and who wishes to avoid
being fixed with constructive notice. One means of doing so is to ensure that the
complainant obtains competent and independent legal advice before entering into
the transaction. If she does so, and enters into the transaction nonetheless, the third
party will usually escape the consequences of notice. This is because he is normally
entitled to assume that the solicitor has discharged his duty and that the complainant
has followed his advice. But he cannot make any such assumption if he knows or
ought to know that it is false.
In the present case, the bank did not have actual notice of the exercise of undue
influence, or even of the existence of a relationship of trust and confidence between
Miss Burch and Mr. Pelosi. It did not know for a fact that Miss Burch had no incentive
to enter into the transaction. For all the bank knew, for example, the parties might
be intending to set up home together and live off the profits of the company's busi-
ness. It did not, therefore, know (as was the case) that no competent solicitor could
possibly advise Miss Burch to guarantee the company's overdraft.
But it must have known that no competent solicitor could advise her to enter into
a guarantee in the terms she did. He would be bound to inquire, of the bank if neces-
sary, of the reason why it required additional securitY,. Having discovered that it was
to enable the limit of the company's overdraft to be increased from £250,000 to
£270,000, he would be bound to advise Miss Burch that an unlimited guarantee was
unnecessary and inappropriate for this purpose, and that, if she felt that she must
accommodate Mr. Pelosi's wishes, she should offer a limited guarantee with a limit
of £20,000 or (better still) a guarantee of the company's liability in excess of £250,000
with a maximum of £270,000 . The terms of Miss Burch's letters indicate that if she
had been given appropriate advice of the alternatives which were legally available,
she would have chosen one which was less onerous to her while still meeting the
bank's ostensible requirements.
I do not, therefore, accept that a bank, in circumstances where it ought to appreciate
the possibility that undue influence has been exercised, can escape the consequences
by putting forward an unnecessarily onerous form of guarantee and relying on the
failure of the guarantor's solicitor to advise her of the possibility of offering a guar-
antee on less onerous terms and more appropriate to the situation.

581
CHAPTER 6 PROTECTION OF WEAKER PARTIES

In the present case, the bank accepted an unlimited guarantee of her employer's
indebtedness obtained by the employer from a junior employee with no incentive to
give it; and who had, at the instance of her employer, declined to obtain legal advice,
was known to be concerned at the unlimited nature of the obligation which she was
undertaking, and was almost certainly unaware of the alternatives open to her. In
my opinion, the transaction must be set aside and the appeal must be dismissed.
[The judgments of Nourse and Swinton-Thomas LJJ have been omitted.]

ROYAL BANK OF SCOTLAND PLC V ETRIDGE

(NO 2) AND OTHER APPEALS
[2002] 2 AC 773, [2001] 4 All ER 449 (HL)

PANEL

Lord Bingham of Cornhill, Lord Nicholls of Birkenhead, Lord Clyde, Lord Hobhouse
of Woodborough, Lord Scott of Foscote
LORD NICHOLLS OF BIRKENHEAD: ...
[5] My Lords, before your Lordships' House are appeals in eight cases. Each case
arises out of a transaction in which a wife charged her interest in her h ome in favour
of a bank as security for her husband's indebtedness onhe indebtedness of a com-
pany through which he carried on business. The wife later asserted she signed the
charge under the undue influence of her husband. In Barclays Bank pie v. O'Brien
[1993] 4 All E.R. 417, [1994] 1 A.C.180 your Lordships enunciated the principles applic -
able in this type of case. Since then, many cases have come before the courts, testing
the implications of the O'Brien decision in a variety of different factual situations.
Seven of the present appeals are of this character. In each case the bank sought to
enforce the charge signed by the wife. The bank claimed an .order for possession of
the matrimonial home. The wife raised a defence that the bank was on notice that
her concurrence in the transaction had been procured by her husband's undue
influence. The eighth appeal concerns a claim by a wife for damages from a solicitor
who advised her before she entered into a guarantee obligation of this character.

UNDUE INFLUENCE

[6] The issues raised by these appeals make it necessary to go back to first rrin-
ciples. Undue influence is one of the grounds of relief developed by the courts of
equity as a court of conscience. The objective is to ensure that the influence of one
person over another is not abused. In everyday life people constantly seek to influ-
ence the decisions of others. They seek to persuade those w ith whom they are
dealing to enter into transactions, whether great or small. The law has set limits to
the means properly employable for this purpose. To this end the common law
developed a principle of duress. Originally this was narrow in its scope, restricted to
the more blatant forms of physical coercion, such as personal violence.
[7] Here, as elsewhere in the law, equity supplemented the common law. Equity
extended the reach of the law to oth er unacceptable forms of persuasion. The law
will investigate the manner in which the intention to enter into the transaction was
secured: "how the intention was produced," in the oft repeated words of Lord Eldon
L.C., from as long ago as 1807 (Huguenin v. Basely (1807) 14 Ves. Jun. 273 at 300, [1803-
13] All E.R. Rep. 1 at 13). If the intention was produced by an unacceptable means,
the law will not permit the transaction to stand. The means used is regarded as an

582
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

exercise of improper or "undue" influence, and hence unacceptable, whenever the

consent thus procured ought not fairly to be treated as the expression of a person's
free will. It is impossible to be more precise or definitive. The circumstances in which
one person acquires influence over another, and the manner in which influence
may be exercised, vary too widely to permit of any more specific criterion.
[8] Equity identified broadly two forms of unacceptable conduct. The first com-
prises overt acts of improper pressure or coercion such as unlawful threats. Today
there is much overlap with the principle of duress as this principle has subsequently
developed. The second form arises out of a relationship between two persons where
one has acquired over another a measure of influence, or ascendancy, of which the
ascendant person then takes unfair advantage.
[9] In cases of this latter nature the influence one person has over another pro-
vides scope for misuse without any specific overt acts of persuasion. The relationship
between two individuals may be such that, without more, one of them is disposed
to agree a course of action proposed by the other. Typically this occurs when one
person places trust in another to look after his affairs and interests, and the latter
betrays this trust by preferring his own interests. He abuses the influence he has
acquired ....
[10] The law has long recognised the need to prevent abuse of influence in these
"relationship" cases despite the absence of evidence of overt acts of persuasive con -
duct. The types of relationship, such as parent and child, in which this principle falls
to be applied cannot be listed exhaustively. Relationships are infinitely various. Sir
Guenter Treitel Q.C. has rightly noted that the question is whether one party has
reposed sufficient trust and confidence in the other, rather than whether the relation-
ship between the parties belongs to a particular type ... .
[11] Even this test is not comprehensive. The principle is not confined to cases of
abuse of trust and confidence. It also includes, for instance, cases where a vulnerable
person has been exploited. Indeed, there is no single touchstone for determining
whether the principle is applicable. Several expressions have been used in an endeav-
our to encapsulate the essence: trust and confidence, reliance, dependence or vulner-.
ability on the one hand and ascendancy, domination or control on the other. None
of these descriptions is perfect. None is all embracing. Each has its proper place.
[12] In C/BC Mortgages pie v. Pitt [1993] 4 AU E.R. 433, [1994] 1 AC. 200 your Lord-
ships' House decided that in cases of undue influence disadvantage is not a necessary
ingredient of the cause of action. It is not essential that the transaction should be
disadvantageous to the pressurised or influenced person, either in financial terms or
in any other way. However, in the nature of things, questions of undue influence w.ill
not usually arise, and the exercise of undue influence is unlikely to occur, where the
transaction is innocuous. The issue is likely to arise only when, in some respect,
the transaction was disadvantageous either from the outset or as matters turned out.

BURDEN OF PROOF AND PRESUMPTIONS

[13] Whether a transaction was brought about by the exercise of undue influence
is a question of fact. Here, as elsewhere, the general principle is that he who asserts
a wrong has been committed must prove it. The burden of proving an allegation of
undue influence rests upon the person who claims to have been wronged. This is
the general rule. The evidence required to discharge the burden of proof depends
on the nature of the alleged undue influence, the personality of the parties, their
relationship, .the extent to which the transaction cannot readily be accounted for by
the ordinary motives of ordinary persons in that relationship, and all the circum-
stances of the case. ·

583
CHAPTER 6 PROTECTION OF WEAKER PARTIES

[14] Proof that the complainant placed trust and confidence in the other party in
relation to the management of the complainant's financial affairs, coupled with a
transaction which calls for explanation, will normally be sufficient, failing satisfactory
evidence to the contrary, to discharge the burden of proof. On proof of these two
matters the stage is set for the court to infer that, in the absence of a satisfactory
explanation, the transaction can only have been procured by undue influence. In
other words, proof of these two facts is prima facie evidence that the defendant
abused the influence he acquired in the parties' relationship. He preferred his own
interests. He did not behave fairly to the other. So the evidential burden then shifts
to him. It is for him to produce evidence to counter the inference which otherwise
should be drawn.
[15) Bainbrigge v. Brr;iwne (1881) 18 Ch. D.188, already mentioned, provides a good
illustration of this commonplace type of forensic exercise. Fry J. held (at 196) that
there was no direct evidence upon which he could rely as proving undue pressure
by the father. But there existed circumstances "from which the court will infer pres- ·
sure and undue influence." None of the children were entirely emancipated from
their father's control. None seemed conversant with business. These circumstances
were such as to cast the burden of proof upon the father. He had made no attempt
to discharge that burden. He did not appear in court at all. So the children's claim
succeeded. Again, more recently, in Morgan's case [1985] 1 All E.R. 821 at 829, [1985]
AC. 686 at 707, Lord Scarman noted that a relationship of banker and customer may
become one in which a banker acquires a dominating influence. If he does, and a
manifestly disadvantageous transaction is proved, "there would then be room" for a
court to presume that it resulted from the exercise of undue influence ....
[17] The availability of this forensic tool in cases founded on abuse of influence
arising from the parties' relationship has led to this type of case sometimes being
labelled "presumed undue influence." This is by way of contrast with cases involving
actual pressure or the like, which are labelled "actual undue influence" .... This usage
can be a little confusing. In many cases where a plaintiff has claimed that the defend-
ant abused the influence he acquired in a relationship of trust and confidence the
plaintiff has succeeded by recourse to the rebuttable evidential presumption. But
this need not be so. Such a plaintiff may succeed even where this presumption is
not available to him; for instance, where the impugned transaction was not one
which called for an explanation.
[18] The evidential presumption discussed above is to be distinguished sharply
from a different form of presumption which arises in some cases. The law has
adopted a sternly protective attitude towards certain types of relationship in which
one party acquires influence over another who is vulnerable and dependent and
where, moreover, substantial gifts by the influenced or vulnerable person are not
normally to be expected. Examples of relationships within this special class are parent
and child, guardian and ward, trustee and beneficiary, solicitor and client, and med-
ical advisor and patient. In these cases the law presumes, irrebuttably, that one party
had influence.over the other. The complainant need not prove he actually reposed
trust and confidence in the other party. It is sufficient for him to prove the existence
of the type of relationship .
[19] It is now well established that husband and wife is not one of the relationships
to which this latter principle applies . ... Although there is no presumption, the court
will nevertheless note, as a matter of fact, the opportunities for abuse which flow
from a wife's confidence in her husband. The court will take this into account with
all the other evidence in the case ....

584
 V. UNCONSCI O NABILITY AND UNDUE INFLUENCE

INDEPENDE NT ADVIC E

(201 Proof that the complainant received advice from a third party before entering
into the impugned transaction is one of the matters a court takes into accou nt when
weighing all the evidence. The weight, or importance, to be attached to such advice
depends on all the circumstances. In the normal course, advice from a solicitor or
other outside advisor can be expected to bring home to a complainant a proper
understanding of what he or she is about to do. But a person may understand fully
the implications of a proposed transaction, for instance, a substantial gift, and yet
still be acting under the undue influence of another. Proof of outside advice does
not, of itself, necessarily show that the subsequent completion of the transaction
was free from the exercise of undue influence. Whether it will be proper to infer that
outside advice had an emancipating effect, so that the transaction was not brought
about by the exercise of undue influence, is a question of fact to be decided having
regard to all the evidence in the case.

MANI FEST DISADVANTAGE

[21] As already noted, there are two prerequisites to the evidential shift in the
burden of proof from the complainant to the other party. First, that the complainant
reposed trust and confidence in the other party, or the other party acquired ascend -
ancy over the complainant. Second, that the transaction is not readily explicable by
the relationship of the parties.
[22] Lindley L.J. summarised this second prerequisite in the leading authority of
Al/card v. Skinner (1887) 36 Ch. D. 145, [1886-90] All E.R. Rep. 90, where the donor
parted with almost all her property. Lindley L.J. pointed out that where a gift of a
small amount is made to a person standing in a confidential relationship to the
donor, some proof of the exercise of the influence of the donee must be given. The
mere existence of the influence is not enough. He continued:
But if the gift is so large as not to be rea sonably accounted for on the ground of friend-
ship, relationship, charity, or other ordinary motives on which ordinary men act, the
burden is upon the donee to support the gift.

(See (1887) 36 Ch. D. 145at185, [1886-90) All E.R. Rep. 90at100 -101.)

(24) The second prerequisite, as expressed by Lindley L.J., is good sense. It is a

necessary limitation upon the width of. th e first prerequisite. It would be absurd for
the law to presume that every gift by a child to a parent, or every transaction between
a client and his solicitor or between a patient and his doctor, was brought about by
undue influence unless the contrary is affirmatively proved. Such a presumption
would be too far-reaching . ... So something more is needed before the law reverses
the burden of proof, something which calls for an explanation. When that something
more is present, the greater the disadvantage to the vulnerable person, the more cogent
must be the explanation before the presumption will be regarded as rebutted.
[251 This was the approach adopted by Lord Scarman in Morgan 's case .... He
noted that whatever the legal character of the transaction, it must constitute a dis -
advantage sufficiently seriou s to require evidence to rebut the presumption that in
the circumstances of the parties' relationship, it was procured by the exercise of
undue influence . ...
[261 Lord Scarman attached the label "manifest disadvantage" to this second ingre-
dient necessary to raise the presumption. This label has been causing difficulty....

585
CHAPTER 6 PROTECTION OF WEAKER PARTIES

[27] The problem has arisen in the context of wives guaranteeing payment of
their husband's business debts. In recent years judge after judge has grappled with
the baffling question whether a wife's guarantee of her husband's bank overdraft,
together with a charge on her share of the matrimonial home, was a transaction
manifestly to her disadvantage.
[28] In a narrow sense, such a transaction plainly ("manifestly") is disadvanta_-
geous to the. wife. She undertakes a serious financial obligation, and in return she
personally receives nothing. But that would be to take an unrealistically blinkered
view of such a transaction. Unlike the relationship of solicitor and client or medical
advisor and patient, ·in the case of husband and wife there are inherent reasons why
such a transaction may well be for her benefit. Ordinarily, the fortunes of husband
and wife are bound up together. ...
(29] Which, then, is the correct approach to adopt in deciding whether a trans-
action is disadvantageous to the wife: the narrow approach, or the wider approach?
The answer is neither. The answer lies in discarding a label which gives rise to this
sort of ambiguity. The better approach is to adhere more directly to the test outlined
by Lindley L.J. in Al/card v. Skinner, and adopted by Lord Scarman in Morgan's case,
in the passages I have cited.
[30] I return to husband and wife cases. I do not think that, in the ordinary course,
a guarantee of the character I have mentioned is to be regarded as a transaction
which, failing proof to the contrary, is explicable only on the basis that it has been
procured by the exercise of undue influence by the husband ....
[31] I have emphasised the phrase "in the ordinary course." There will be cases
where a wife's signature of a guarantee or a charge of her share in the matrimonial
home does cal\ for explanation. Nothing I have said above is directed at such a case.

A CAUTIONARY NOTE

[32] I add a cautionary note, prompted by some of the first instance judgments
in the cases currently being considered by the House. It concerns the general
approach to be adopted by a court when considering whether a wife's guarantee of
her husband's bank overdraft was procured by her husband's undue influence ....
[W]hen a husband is forecasting the future of his business, and expressing his hopes
or fears, a degree of hyperbole may be only natural. Courts should not too readily
treat such exaggerations as misstatements.
[33] Inaccurate explanations of a proposed transaction are a different matter. So
are cases where a husband, in whom a wife has reposed trust and confidence for the
management of their financial affairs, prefers his interests to hers and makes a choice
for both of them on that footing. Such a husband abuses the influence he has. He
fails to discharge the obligation of candour and fairness he owes a wife who is look-
ing to him to make the major financial decisions. ·

THE COMPLAINANT AND THIRD PARTIES: SURETYSHIP TRANSACTIONS

[35] If the freedom of home-owners to make economic use of their homes is not
to be frustrated, a bank must be able to have confidence that a wife's signature of the
necessary guarantee and charge will be as binding upon her as is the signature of
anyone else on documents which he or she may sign. Otherwise banks will not be
willing to lend money on the security of a jointly owned house or flat.
[36] At the same time, the high degree of trust and confidence and emotional
interdependence which normally characterises a marriage relationship provides
scope for abuse ....

586
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

(37] In O'Brien's case this House decided where the balance should be held
between these competing interests. On the one side, there is the need to protect a
wife against a husband's undue influence. On the other side, there is the need for the
bank to be able to have reasonable confidence in the strength of its security. Otherwise
it would not provide the required money. The problem lies in finding the course best
designed to protect wives in a minority of cases without unreasonably hampering
the giving and taking of security. The House produced a practical solution. The House
decided what are the steps a bank should take to ensure it is not affected by any claim
the wife may have that her signature of the documents was procured by the undue
influence or other wrong of her husband. Like every compromise, the outcome falls
short of achieving in full the objectives of either of the two competing interests. In
particular, the steps required of banks will not guarantee that, in future, wives will not
be subjected to undue influence or misled when standing as sureties. Short of pro-
hibiting this type of suretyship transaction altogether, there is no way of achieving
that result, desirable although it is. What passes between a husband and wife in this
regard in the privacy of their own home is not capable of regulation or investigation
as a prelude to the wife entering into a suretyship transaction.
(38] The jurisprudential route by which the House reached its conclusion in
O'Brien's case has attracted criticism from some commentators. It has been said to
involve artificiality and thereby create uncertainty in the law. I must first consider
this criticism. In the ordinary course a bank which takes a guarantee security from
the wife of its customer will be altogether ignorant of any undue influence the
customer may have exercised in order to secure the wife's concurrence. In O'Brien's
case Lord Browne-Wilkinson prayed in aid the doctrine of constructive notice. In
circumstances he identified, a creditor is put on inquiry. When that is so, the creditor
"will have constructive notice of the wife's rights" unless the creditor takes reasonable
steps to satisfy himself that the wife's agreement to stand surety has been properly
obtained (see (1993] 4 All E.R. 417 at 429, (1994] 1AC.180 at 196).

[401 The traditional view of equity in this tripartite situation seems to be that a
person in the position of the wife will only be relieved of her bargain if the other party
to the transaction (the bank, in the present instance) was privy to the conduct which
led to the wife's entry into the transaction. Knowledge is required .... The law imposes
no obligation on one party to a transaction to check whether the other party's concur-
rence was obtained by undue influence. But O'Brien's case has introduced into the law
the concept that, in certain circumstances, a party to a contract may lose the benefit
of his contract, entered into in good faith, if he ought to have known that the other's
concurrence had been procured by the misconduct of a third party.
(411 There is a further respect in which O'Brien's case departed from conventional
concepts. Traditionally, a person is deemed to have notice (that is, he has "construct-
ive" notice) of a prior right when he does not actually know of it but would have
learned of it had he made the requisite inquiries. A purchaser will be treated as having
constructive. notice of all that a reasonably prudent purchaser would have discovered.
In the present type of case, the steps a bank is required to take, lest it have construct-
ive notice that the wife's concurrence was procured improperly by her husband, do
not consist of making inquiries. Rather, O'Brien's case envisages that the steps taken
by the bank will reduce, or even eliminate, the risk of the wife entering into the
transaction under any misapprehension or as a result of undue influence by her
husband. The steps are not concerned to discover whether the wife has been wronged
by her husband in this way. The steps are concerned to minimise the risk that such
a wrong may be committed.

587
CHAPTER 6 PROTECTION OF WEAKER PARTIES

[43] The route selected in O'Brien 's case ought not to have an unsettling effect
on established principles of contract. O'Brien's case concerned suretyship trans-
actions. These are tripartite transactions. They involve the debtor as well as the
creditor and the guarantor. The guarantor enters into the transaction at the request
of the debtor. The guarantor assumes obligations. On the face of the transaction the
guarantor usually receives no benefit in return, unless the guarantee is being given
on a commercial basis. Leaving aside cases where the relationship between the
surety and the debtor is commercial, a guarantee transaction is one-sided so far as
the guarantor is concerned. The creditor knows this. Thus the decision in O'Brien's
case is directed at a class of contracts which has special features of its own . ...

THE THRESHOLD: WHEN THE BANK IS PUT ON INQUIRY

144] In O'Brien's case the House considered the circumstances in which a bank,
or other creditor, is "put on inquiry." Strictly this is a misnomer. As already noted, a
bank is not required to make inquiries. But it will be convenient to use the termin -
ology which has now become accepted in this context. The House set a low level for
the threshold which must be crossed before a bank is put on inquir}'. For practical
reasons the level is set much lower than is required to satisfy a court that, failing
contrary evidence, the court may infer that the transaction was procured by undue
influence. Lord Browne-Wilkinson said:
Therefore, in my judgment a creditor is put on inquiry when a wife offers to stand surety
for her husband's debts by the combination of two factors: (a) the transaction is on its
face not to the financial advantage of the wife; and (b) there is a substantial risk in trans-
actions of that kind that, in procuring the wife to act as surety, the husband has com-
mitted a legal or equitable wrong that entitles the wife to set aside the transaction.
(See [1993] 4 All E.R. 417 at 429, [1994] 1 A.C. 180 at 196.)
In my view, this passage, read in context, is to be taken to mean, quite simply, that a
bank is put on inquiry whenever a wife offers to stand surety for her husband's debts.

[47] The position is likewise if the husband stands surety for his wife's debts.
Similarly, in the case of unmarried couples, whether heterosexual or homosexual,
where the bank is aware of the relationship .... Cohabitation is not essential. The
Court of Appeal rightly so decided in Massey v. Midland Bank pie [1995] 1 All E.R. 929
at 933, per Steyn L.J.
148] As to the type of transactions where a bank is put on inquiry, the case where
a wife becomes surety for her husband's debts is, in this context, a straightforward
case. The bank is put on inquiry. On the other side of the line is the case where
money is being advanced, or has been advanced, to husband and wife jointly. In
such a case the bank is not put on inquiry, unless the bank is aware the loan is being
made for the husband's purposes, as distinct from their joint purposes. That was
decided in C/BC Mortgages pie v. Pitt [1993] 4 All E.R. 433, [1994] 1 A.C . 200.
[49) Less clear cut is the case where the wife becomes surety for the debts of a
company whose shares are held by her and her husband. Her shareholding may be
nominal, or she may have a minority shareholding or an equal shareholding with
her husband. In my view the bank is put on inquiry in such cases, even when the
wife is a director or secretary of the company. ...

THE STEPS A BANK SHOULD TAKE

[50] The principal area of controversy on these appeals concerns the steps a bank
should take when it has been put on inquiry. In O'Brien's case Lord Browne-Wilkinson

588
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

([1993] 4 A\\ E.R. 417 at 429-430, [1994] 1 AC . 180 at 196-197) said that a bank can
reasonably be expected to take steps to bring home to the wife the risk she is running
by standing as surety and to advise her to take independent advice. That test is
applicable to past transactions. A\\ the cases now before your Lordships' House fa\\
into this category. For the future a bank satisfies these requirements if it insists that
the wife attend a private meeting with a representative of the bank at which she is
told of the extent of her liability as surety, warned of the risk she is running and urged
to take independent legal advice. In exceptional cases the bank, to be safe, has to
insist that the wife is separately advised.

[53] My Lords, it is plainly neither desirable nor practicable that banks should be
required to attempt to discover for themselves whether a wife's consent is being
procured by the exercise of undue influence of her husband. This is not a step the
banks should be expected to take. Nor, further, is it desirable or practicable that banks
should be expected to insist on confirmation from a solicitor that the solicitor has
satisfied himself that the wife's consent has not been procured by undue influence.
As already noted, the circumstances in which banks are put on inquiry are extremely
wide. They embrace every case where a wife is entering into a suretyship transaction
in respect of her husband's debts. Many, if not most, wives would be understandably
outraged by having to respond to the sort of questioning which would be appropriate
before a responsible solicitor could give such a confirmation. In any event, solicitors
are not equipped to carry out such an exercise in any really worthwhile way, and
they will usually lack the necessary materials.

[54] The furthest a bank can be expected to go is to take reasonable steps to satisfy
itself that the wife has had brought li.ome to her, in a meaningful way, the practical
implications of the proposed transaction. This does not wholly eliminate the risk of
undue influence or misrepresentation. But it does mean that a wife enters into a
transaction with her eyes open so far as the basic elements of the transaction are
concerned.

[56] I shall return later to the steps a bank should take .... Suffice to say, these
steps, together with advice from a solicitor acting for the wife, ought to provide the
substance of the protection which O'Brien's case intended a wife should have. Ordin-
arily it will be reasonable that a bank should be able to rely upon confirmation from
a solicitor, acting for the wife, that he has advised the wife appropriately.
[57] The position will be otherwise if the bank knows that the solicitor has not
duly advised the wife or, I would add, if the bank knows facts from which it ought
to have realised that the wife has not received the appropriate advice. In such cir-
cumstances the bank will proceed at its own risk.

THE CONTENT OF THE LEGAL ADVICE

[58] In Royal Bank of Scotland pie v. Etridge (No. 2) [1998] 4 AU E.R. 705 at 715 (para. 19),
the Court of Appeal set out its views of the duties of a solicitor in this context:
A solicitor who is instructed to advise a person who may be subject to the undue influ-
ence of another must bear in mind that [it] is not sufficient that she understc;rnds the
nature and effect of the transaction if she is so affected by the influence of the other
that she cannot make an independent decision of her own .... His duty is to satisfy
himself that his client is free from improper influence, and the first step must be to
ascertain whether it is one into which she could sensibly be advised to enter if free from
such influence. If he is not so satisfied it is his duty to advise her not to enter into it, and to
refuse to act further for her in the implementation of the transaction if she persists ... .

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

[59] I am unable to accept this as an accurate formulation of a solicitor's duties in

cases such as those now under consideration. In some respects it goes much too far.

[61] Thus, in the present type of case it is not for the solicitor to veto the trans-
action by declining to confirm to the bank that he has explained the documents to
the wife and the risks she is taking upon herself. If the solicitor considers the trans-
action is not in the wife's best interests, he will give reasoned advice to the wife to
that effect. But at the end of the day the decision on whether to proceed is the deci-
sion of the client, not the solicitor. A wife is not to be precluded from entering into
a financially unwise transaction if, for her own reasons, she wishes to do so.
[62] That is the general rule. There may, of course, be exceptional circumstances
where it is glaringly obvious that the wife is being grievously wronged. In such a
case the solicitor should decline to act further ....
[63] In Etridge's case ([1998] 4 All E.R. 705 at 722 (para. 49)), the Court of Appeal
said that if the transaction is "one into which no c<;>mpetent solicitor could properly
advise the wife to enter," the availability of legal advice is insufficient to avoid the
bank being fixed with constructive notice. It follows from the views expressed above
that I am unable to agree with the Court of Appeal on this point.
[64] I turn to consider the scope of the responsibilities of a solicitor who is advis-
ing the wife. In identifying what are the solicitor's responsibilities the starting point
must always be the solicitor's retainer. What has he been retained to do? As a general
proposition, the scope of a solicitor's duties is dictated by the terms, whether express
. or implied, of his retainer. ...
[65] Typically, the advice a solicitor can be expected to give should cover the
following matters as the core minimum. (1) He will need to explain the nature of the
documents and the practical consequences these will have for the wife if she signs
them. She could lose her home if her husband's business does not prosper. Her home
may be her only substantial asset, as well as the family's home . She could be made
bankrupt. (2) He will need to point out the seriousness of the risks involved. The wife
should be told the purpose of the proposed new facility, the amount and principal
terms of the new facility, and that the bank might increase the amount of the facility,
or change its terms, or grant a new facility, without reference to her. She should be
told the amount of her liability under her guarantee. The solicitor should discuss the
wife's financial means, including her understanding of the value of the property
being charged. The solicitor should discuss whether the wife or her husband has
any other assets out of which repayment could be made if the husband's business
should fail. These matters are relevant to the seriousness of the risks involved. (3) The
solicitor will need to state clearly that the wife has a choice. The decision is hers and
_h ers alone. Explanation of the choice facing the wife willcall for some discussion of
the present financial position, including the amount of the husband's present
indebtedness, and the amount of his current overdraft facility. (4) The solicitor should
check whether the wife wishes to proceed. She should be asked whether she is
content that the solicitor should write to the bank confirming he has explained to
her the nature of the documents and the practical implicatjons they may have for
her, or whether, for instance, she would prefer him to negotiate with the bank on
the terms of the transaction. Matters for negotiation could include the sequence in
which the various securities will be called upon or a specific or lower limit to her
liabilities. The solicitor should not give any confirmation to the bank without the
wife's authority.
[66] The solicitm's discussion with the wife should take place at a face-to-face
meeting, in the absence of the husband. It goes without saying that the solicitor's

590
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

explanations should be couched in suitably non-technical language. It also goes

without saying that the solicitor's task is an important one. It is not a formality.
[67] The solicitor should obtain from the bank any information he needs. If the
bank fails for any reason to provide information requested by the solicitor, the solici-
tor should decline to provide the confirmation sought by the bank.
[68] As already noted, the advice which a solicitor can be expected to give must
depend on the particular facts of the case. But I have set out this "core minimum" in
some detail, because the quality of the legal advice is the most disturbing feature of
some of the present appeals. The perfunctory nature of the advice may well be largely
due to a failure by some solicitors to understand what is required in these cases.

INDEPENDENT ADVICE

[69] I turn next to the much-vexed question whether the solicitor advising the
wife must act for the wife alone.

[The court concludes that the solicitor can act for both husband and wife, as long as
the solicitor fully discharges his professional duty to look after the wife's interests.
If there is any doubt of his ability to do this, or any conflict of interest, the lawyer
should decline to act for both parties.]

AGENCY

[75] No system ever works perfectly. There will always be cases where things go
wrong, sometimes seriously wrong. The next question concerns the position when
a solicitor has accepted instructions to advise a wife but he fails to do so properly.
He fails to give her the advice needed to bring home to her the practical implications
of her standing as surety. What then? The wife has a remedy in damages against the
negligent solicitor. But what is the position of the bank who proceeded in the belief
that the wife had been given the necessary advice?
[76] Mr. Sher contended that, depending on the facts, the solicitor should be
regarded as the agent of the bank. ...
[771 I cannot accept this analysis ....
[78] In the ordinary case, therefore, deficiencies in the advice given are a matter
between the wife and her solicitor. The bank is entitled to prrnseed on the assumption
that a solicitor advising the wife has done his job properly. I have already mentioned
what is the bank's position if it knows this is not so, or if it knows facts from which
it ought to have realised this is not so.

OBTAINING THE SOLICITOR'S CONFIRMATION

[79] I now return to the steps a bank should take when it has been put on inquiry
and for its protection is looking to the fact that the wife has been advised independ-
ently by a solicitor. (1) One of the unsatisfactory features in some of the cases is the
late stage at which the wife first became involved in the transaction. In practice she
had no opportunity to express a view on the identity of the solicitor who advised
her. She did not even know that the purpose for which the solicitor was giving her
advice was to enable him to send, on her behalf, the protective confirmation sought
by the bank. Usually the solicitor acted for both husband and wife. Since the bank is
looking for its protection to legal advice given to the wife by a solicitor who, in this
respect, is acting solely for her, I consider the bank should take steps to check directly

591
CHAPTER 6 PROTECTION OF WEAKER PARTIES

with the wife the name of the solicitor she wishes to act for her. To this end, in future
the bank should communicate directly with the wife, informing her that for its own
protection it will require written confirmation from a solicitor, acting for her, to the
effect that the solicitor has fully explained to her the nature of the documents and
the practical implications they will have for her. She should be told that the purpose
of this requirement is that thereafter she should not be able to dispute she is legally
bound by the documents once she has signed them. She should be asked to nomi-
nate a solicitor whom she is willing to instruct to advise her, separately from her
husband, and act for her in giving the necessary confirmation to the bank. She
should be told that, if she wishes, the solicitor may be the same solicitor as is acting
for her husband in the transaction. If a solicitor is already acting for the husband
and the wife, she should be asked whether she would prefer that a different solicitor
should act for her regarding the bank's requirement for confirmation from a solicitor.
The bank should not proceed with the transaction until it has received an appropriate
response directly from the wife. (2) Representatives of the bank are likely to have a
much better picture of the husband's financial affairs than the solicitor. If the bank
is not willing to undertake the task of explanation itself, the bank must provide the
1
solicitor with the financial information he needs for this purpose. Accordingly it
should become routine practice for banks, if relying on confirmation from a solicitor
for their protection, to send to the solicitor the necessary financial information. What
is required must depend on the facts of the case. Ordinarily this will include infor-
mation on the purpose for which the proposed new facility has been requested, the
current amount of the husband's indebtedness, the amount of his current overdraft
facility, and the amount and terms of any new facility. If the bank's request for security
arose from a written application by the husband for a facility, a copy of the application
should be sent to the solicitor. The bank will, of course, need first to obtain the consent
of its customer to this circulation of confidential information. If this consent is not
forthcoming the transaction will not be able to proceed. (3) Exceptionally there may
be a case where the bank believes or suspects that the wife has been misled by her
husband or is not entering into the transaction of her own free will. If such a case
occurs the bank must inform the wife's solicitors of the facts giving rise to its belief
or suspicion. (4) The bank should in every case obtain from the wife's solicitor a
written confirmation to the effect mentioned above.
[80] These steps will be applicable to future transactions. In respect of past trans-
actions, the bank will ordinarily be regarded as having discharged its obligations if
a solicitor who was acting for the wife in the transaction gave the bank confirmation
to the effect that he had brought home to the wife the risks she was running by
standing as surety.

TH E CREDITOR'S DISCLOSURE OBLIGATION

[81] It is a well-established principle that, stated shortly, a creditor is obliged to

disclose to a guarantor any unusual feature of the contract between the creditor and
the debtor which makes it materially different in a potentially disadvantageous
respect from what the guarantor might naturally expect. The precise ambit of this
disclosure obligation remains unclear .... It is sufficient for me to say that, contrary
to submissions made, the need to provide protection for wives who are standing as
sureties does not point to a need to revisit the scope of this disclosure principle.
Wives require a different form of protection. They need a full and clear explanation
of the risks involved. Typically, the risks will be risks any surety would expect. The
protection needed by wives differs from, and goes beyond, the disclosure of infor-
mation. The O'Brien principle is intended to provide this protection.

592
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

A WIDER PRINCIPLE

[821 ... The O'Brien decision cannot sensibly be regarded as confined to sexual
relationships, although these are likely to be its main field of application at present.
What is appropriate for sexual relationships ought, in principle, to be appropriate
also for other relationships where trust and confidence are likely to exist.

[84] The crucially important question raised by this wider application of the O'Brien
principle concerns the circumstances which will put a bank on inquiry. A bank is put
on inquiry whenever a wife stands as surety for her husband's debts. It is sufficient
that the bank knows of the husband/wife relationship. That bare fact is enough ....
What, then, of other relationships where there is an increased risk of undue influence,
such as parent and child? Is it enough that the bank knows of the relationship' ...
[A]s with wives, so with other relationships, the test of what puts a bank on inquiry
should be simple, clear and easy to apply in widely varying circumstances. This
suggests that, in the case of a father and daughter, knowledge by the bank of the
relationship of father and daughter should suffice to put the bank on inquiry....
[861 But the law cannot stop at this point, with banks on inquiry only in cases
where the debtor and guarantor have a sexual relationship or the relationship is
one where the law presumes the existence of trust and confidence. That would be
an arbitrary boundary, and the law has already moved beyond this, in the decision
in the Credit Lyonnais case. As noted earlier, the reality of life is·that relationships in
which undue influence can be exercised are infinitely various. They cannot be
exhaustively defined. Nor is it possible to produce a comprehensive list of relation-
ships where there is a substantial risk of the exercise of undue influence, all others
being excluded from the ambit of the O'Brien principle. Human affairs do not lend
themselves to categorisations of this sort. The older generation of a family may
exercise undue influence over a younger member, as in parent/child cases such as
Bainbrigge v. Browne (1881) 18 Ch. D. 188 and Powell v. Powell [1900] 1 Ch. 243. Some-
times it is the other way round, as with a nephew and his elderly aunt in lnche Noriah
v. Shaik1Wie Bin Omar [1929] AC. 127, [19281 All'E.R. Rep.189. An employer may take
advantag~ of his employee, as in the Credit Lyonnais case. But it may be the other
way round, with an employee taking advantage of her employer, as happened with
the secretary/companion and her elderly employer in Re Craig (deed.) [19701 2 All
E.R. 390, [1971] Ch. 95. The list could go on.
[87] These. considerations point forcibly to the conclusion that there is no rational
cut-off point, with certain types of relationship being susceptible to the O'Brien
principle and others not. Further, if a bank is not to be required to evaluate the extent
to which its customer has influence over a proposed guarantor, the only practical
way forward is to regard banks as "put on inquiry" in every case where the relation-
ship between the surety and the debtor is non-commercial ....
[88] Different considerations apply where the relationship between the debtor
and guarantor is commercial, as where a guarantor is being paid a fee, or a company
is guaranteeing the debts of another company in the same group. Those engaged
in business can be regarded as capable of looking after themselves and understand-
ing the risks involved in the giving of guarantees.
[89] By the decisions of this House in O'Brien's case and the Court of Appeal in
the Credit Lyonnais case, English law has taken its first strides in the development of
some such general principle. It is a workable principle. It is also simple, coherent
and eminently desirable. I venture to think this is the way the law is moving, and
should continue to move. Equity, it is said, is not past the age of child-bearing. In
the present context the equitable concept of being "put on inquiry" is the parent of

593
CHAPTER 6 PROTECTION OF WEAKER PARTIES

a principle of general application, a principle which imposes no more than a modest

obligation on banks and other creditors. The existence of this obligation in all non-
commercial cases does not go beyond the reasonable requirements of the present
times. In future, banks and other creditors should regulate their affairs accordingly.

LORD SCOTT OF FOSCOTE: ...

SUMMARY
[191] My Lords I think, given the regrettable length of this opinion, I should try and
summarise my views about the principles that apply and the practice that should be
followed in surety wife cases. (1) The issue as between the surety wife and the lender
bank is whether the bank may rely on the apparent consent of the wife to the surety-
ship transaction. (2) If the bank knows that the surety wife's consent to the transaction
has been procured by undue influence or misrepresentation, or if it has shut its eyes
to the likelihood that that was so, it may not rely on her apparent consent. (3) If the
wife's consent has in fact been procured by undue influence or misrepresentation,
the bank may not rely on her apparent consent unless it has good reason to believe
that she understands the nature and effect of the transaction. (4) Unless the case has
some special feature, the bank's knowledge that a solicitor is acting for the wife and
has advised her about the nature and effect of the transaction will provide a good
reason for the purposes of (3) above. That will also be so if the bank has a reasonable
belief that a solicitor is acting for her and has so advised her. Written confirmation
by a solicitor acting for the wife that he has so advised her will entitle the bank to
hold that reasonable belief. (5) So, too, a sufficient explanation of the nature and effect
of the transaction given by a senior bank official would constitute good reason for
the purposes 'o f (3) above. (6) If there are any facts known to the bank which increase
the inherent risk that the wife's consent to the transaction may have been procured
by the husband's undue influence or misrepresentation, it may be necessary for the
bank to be satisfied that the wife has received advice about the transaction from a
solicitor independent of the husband before the bank can reasonably rely on the
wife's apparent consent. (7) If the bank has not taken reasonable steps to satisfy itself
that the wife understands the nature and effect of the transaction, the wife will,
subject to such matters as delay, acquiescence, change of position etc., be able to set
aside the transaction if her consent was in fact procured by undue influence or
misrepresentation. (8) Subject to special instructions or special circumstances, the
duty of a solicitor instructed to act for a wife proposing to stand as surety, or to give
security, for her husband's debts is to try and make sure that she understands the
nature and effect of the transaction. (9) In all surety wife cases the bank should
disclose to the surety wife, or to the solicitor acting for her, the amount of the existing
indebtedness of the principal debtor to the bank and the amount of the proposed
new loan or drawing facility. (10) Subject to (9) above, a creditor has no greater duty
of disclosure to a surety wife than to any other intending surety.
[192] I am in full agreement with the analysis of the applicable principles of law
and with the conclusions expressed in the opinion of my noble and \earned friend
Lord Nicholls of Birkenhead. I believe the analysis I have sought to give in this
opinion and my conclusions are consistent with them ....

594
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

DISPOSITION

The Harris, Wallace, Moore, Bennett and Desmond Banks & Co. appeals allowed. The
Etridge, Gill and Coleman appeals dismissed.
Decision of the Court of Appeal in Royal Bank of Scotland pie v. Etridge (No 2) [1998]
4 All E.R. 705 reversed in part.
Decision of the Court of Appeal in Barclays Bank pie v. Coleman [200011 All E.R.
385 affirmed.

[The judgments of Lord Bingham of Cornhill, Lord Clyde, and Lord Hobhouse of
Woodborough (concurring in substance with Lord Nicholls) have been omitted.]

NOTES
1. Lord Nicholls spent a significant amount of time discussing the exact nature of the pre-
sumptions to be applied in the spousal guarantor cases. This issue has also caused controversy
in Canada. Compare Bank of Montreal v Duguid (2000), 47 OR (3d) 737 (CA) with C/BC Mort-
gage Corp v Rowatt (2002), 61 OR (3d) 737 (CA).
2. Barclays Bank pie v O 'Brien, discussed above in Etridge (No 2), was cited with approval
by the Supreme Court of Canada in Gold v Rosenberg, [1997] 3 SCR 767 at para 60, 152 DLR
(4th) 385 at 402. Speaking for the majority, Iacobucci J stated that in certain circumstances a
creditor's duty to inquire will extend beyond spousal relationships to other relationships in
which the surety reposes trust and confidence in the principal debtor, such as parent-child or
employer-employee relationships.
3. Spousal relationships are frequently analyzed by the courts in guarantee cases, as courts
commonly see people who guarantee loans for their spouses or partners, but then later seek
to have the transaction put aside (perhaps because of a divorce) on the basis of unconscion-
ability and undue influence. The courts consider many factors, and make assessments based
on the circumstances of the case and the roles occupied by the "parties throughout their
relationship. For example, in Bank of Montreal v Courtney 2005 NSCA 153, 261 DLR (4th) 665,
the court denied relief to the guarantor wife. The husband, who had attended to the couple's
financial affairs, had persuaded his reluctant wife to sign the guarantee. However, the wife had
had considerable work experience, a good educational background, and an appreciation of
financial and business matters. The fact that she had not sought independent legal advice did
not affect the outcome because she already knew and appreciated her rights and obligations
regarding the loans and risks she was undertaking . Similarly, although this case did not involve
a spousal relationship, in DRL Coach/ines Ltd v GE Canada Equipment Financing GP, 2011
NSCA 23, [2011] NSJ No 93 (QL), the court upheld the trial judge's findings that the guarantor,
"despite her limited education ... was a capable and experienced businessperson who under-
stood just what she was signing ." Because she had time to seek advice and ask questions
before signing the personal guarantee, "her bargaining power was not 'grievously impaired by
reason of ... ignorance or infirmity.'" See also Van Der Ros v Van Der Ros (2003), 182 BCCA 211 .
See also Susan Hilary Hurley v The Darjan Estate Company pie, [2012] EWHC 189 (Ch),
where the court had to determine whether a statutory demand for a debt should be set aside
in order to decide whether a bankruptcy order was properly granted. Mr and Mrs Hurley were
joint signatories to a lease for 21 years, but, after they failed to pay the rent, the landlord for-
feited the lease, retook possession of the property, and served statutory demands on the
couple. Mrs Hurley contested the debt, claiming that her signature on the lease was procured
by Mr Hurley's undue influence to enter into the contract. The court questioned whether the
principle of constructive notice from Etridge (No 2) would apply outside the context of a
suretyship to one "where the complainant derives a direct benefit under the contract in the
form of an interest in land." The court went on to consider whether there was "anything about

595
CHAPTER 6 PROTECTION OF WEAKER PARTIES

this case to suggest to [the lessor] that Mrs Hurley was taking on a position akin to a surety and
thus susceptible to pressure from her husband" (at paras 34-35). The court concluded that this
was a standard lease of a licensed premises to spouses and did not require an explanation.
Nonetheless, it went on to consider the principles relating to undue influence and concluded
(at para 39) that Mrs Hurley "was not a lady who was accustomed to entrusting her financial
affairs to her husband. She had her own job, and a measure of financial independence .... Mrs
Hurley must have been well aware that her husband's outburst was just a facet of the height-
ened emotion generally displayed in the course of a domestic argument ... . Indeed it was his
manifest unhappiness that, above all, appears to have made her decide to sign the document
then and there. None of this suggests that her independent judgment as to whether or not she
should sign the Lease was being overborne." Compare to Etridge (No 2), where Lord Nicholls
cited C/BC Mortgages pie v Pitt, [1993] 4 All ER 433, [1994] 1 AC 200. There, the House of
Lords determined (at para 12) that "[i]t is not essential that the transaction should be disadvan-
tageous to the pressurised or influenced person, either in financial terms or in any other way.
However, in the nature of things, questions of undue influence [are] unlikely to occur, where
the transaction is innocuous. The issue is likely to arise only when, in some respect, the trans-
action was disadvantageous either from the outset or as matters turned out."
4. In Garcia v National Australia Bank Ltd, [1998] 155 ALR 614 (Austl HC), the court explained
that the consideration of spousal relations in guarantee cases was not a result of antiquated
notions of female dependency on male partners but, rather, because of the trust inherent in
marital relations. Mr and Mrs Garcia executed a mortgage over their home in order to secure
all moneys owing to the bank, including moneys owing under future guarantees. Mrs Garcia
subsequently guaranteed several loans with the bank in order to secure her husband's business
ventures. After the couple divorced, Mrs Garcia commenced proceedings to void the trans-
actions and the bank cross-claimed for the moneys owing under the guarantees. The High
Court of Australia ruled that it would be unconscionable for the bank to enforce the guaran-
tees because Mrs Garcia did not understand the purport and effect of the transactions she had
entered into. The bank should have understood that, as a wife, Mrs Garcia may have reposed
trust in her husband in matters of business. The bank should have realized that Mr Garcia may
not have fully and accurately explained the transactions to his wife. However, the bank took no
steps to explain the nature of the transactions to Mrs Garcia, or to ascertain whether the effect
of the transactions had been explained to her by a competent, independent, and disinterested
party. The court addressed concerns that the case law governing the setting aside of a wife's
guarantee of her husband's debt were founded on outdated notions of the subservience and
inferior economic position of women . The court held that, instead, the case law recognized the
ordinary trust and confidence between marriage partners. In many relationships, one spouse
might handle the business affairs and might not provide the other spouse with a complete or
accurate description of transactions. That this is the case is not always attributable to decep-
tion, to an imbalance of power within the relationship, or to exploitation due to emotional
involvement. It is often simply a reflection of the trust and confidence that each spouse has for
the other. See also Padden v Bevan Ashford Solicitors, [2012] 2 Costs LO 223, relying on
Etridge (No 2). There, the court maintained (at para 29) that "[w]here a wife provides her inter-
est in the family home (and often other assets) to a bank as security for her husband's liabilities,
there is an obvious risk that she may subsequently allege that the security should be set aside
because it was obtained by her husband's undue influence, of which the bank had notice. In
order to minimize the risk of such a claim being successfully advanced, a bank should ensure
that the wife has proper legal advice."
5. Did the court in Hewett v First Plus Financial Group Pie, [2010] EWCA Civ 312 go too far
in finding that the husband 's concealment of his extramarital affair from his wife amounted to
undue influence against her when she signed a charge against their matrimonial home as
security for his personal debts? In Hewett, Briggs J found that "M rs Hewett reposed a sufficient

596
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

degree of trust and confidence in her husband to give rise to what Lord Nicholls described as
an obligation of candour and fairness owed to her." This finding was made because Mr Hewitt
was in charge of the family finances and this particular transaction required her "to take on
trust his promise to make the instalment payments." With regard to whether Mr Hewett's affair
was something he was required to disclose as a result of his obligation of trust and· candour,
the court found that it was a material fact calling for disclosure, noting that "[t]he issue may be
best addressed by asking whether a solicitor, consulted by Mrs Hewett for advice about the
wisdom of the transaction, would have thought it relevant to know that her husband was,
while asking for her unqualified trust. at the same time conducting a dandestine affair." The
court concluded that "Mrs Hewett's decision to participate in the charge ... was ... vitiated by
his abuse of her trust" and set the mortgage aside.
6. Banks are well advised to ensure guarantors have full knowledge of the documents they
are signing and the potential consequences for them. One of the best ways to protect against
a transaction being set aside at a later date is to require a guarantor to obtain independent
legal advice prior to signing the documents. In McKenzie v Bank of Montreal (1975). 55 DLR
(3d) 641 (Ont H Ct J). aff'd (1976). 12 OR (2d) 719 (CA), the plaintiff was a middle-aged widow
whose intimate companion, Mr Lawrence, had accumulated substantial bad debts with the
defendant bank. The plaintiff attended the bank with Mr Lawrence and signed several docu-
ments about which she was told nothing. One of the documents signed was a mortgage by
the plaintiff to the bank, to be used as additional security for Lawrence's indebtedness. The
Ontario Court of Appeal upheld the trial court's decision to set aside the mortgage. Given the
bank's knowledge of Lawrence's precarious financial situation and of several dubious dealings
in which he was involved, the bank was under an obligation to ensure that in mortgaging her
land the plaintiff was doing what she wanted to do, with full knowledge of the probable con-
sequences. To discharge this obligation, the bank should have required the plaintiff to obtain
independent legal advice or, in the alternative, should have ensured that full disclosure was
made to her of Lawrence's substantial indebtedness to the bank. Similarly, in Canadian Kawasaki
Motors Ltd v McKenzie (1981), 126 DLR (3d) 253, the plaintiff. in granting a dealership to Colin
McKenzie, induced McKenzie's wife and father to sign guarantees for the credit the company
was extending to him. The Ontario County Court held that the plaintiff owed a duty to explain
the effect of the guarantee, to disclose all relevant facts, and to advise the defendants to get
independent advice. The court also held that because McKenzie had so little money and the
timing was unfavourable for starting a business, the plaintiff should have explained to the
guarantors that the chances of success were low, and held that failure to do so was a breach
of a trust relationship. Therefore the guarantees were unenforceable.
7. Family settings, beyond spousal relations, frequently provide a context for guarantee
cases. In these settings, where trust and familiarity form the basis for one party agreeing to
guarantee a loan for another, the same principles will apply. In Bomek v Bomek (1983). 146
DLR (3d) 139 (Man CA), a credit union obtained a home mortgage from the plaintiffs, a hus-
band and wife with grades 3 and 9 education respectively, in order to secure existing loans it
had made to their son's company, on the representation that the loan was for investment by
their son. The credit union applied the money to reduce the company's debt and did not
advance any money to the son. The company went bankrupt a year later. The Manitoba Court
of Appeal set aside the mortgage because the documents were misleading and the transaction
was unconscionable. The court held that the credit union had a duty to ensure that the plain-
tiffs obtained independent legal advice. Similarly, in Berto/av Bank of Montreal (1986), 33 DLR
(4th) 610 (Ont CA), the defendant bank recognized the need for an elderly widow to obtain
independent legal advice before securing her son's indebtedness. However, the legal advice
on which the bank ultimately relied was provided by a member of the same firm representing
the bank and the plaintiff's son. In setting aside the mortgage, the Ontario Court of Appeal
ruled that the plaintiff had never been properly apprised of the nature of the transaction or the

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

extent of her potential liability. The transaction was manifestly disadvantageous to the plaintiff
in that it subjected her to the prospect of losing her only asset-her home. As such, the plain-
tiff's interests conflicted with the interests of the other parties to the transaction, who simply
wanted to complete the deal. Independent legal advice was therefore essential. The bank was,
or ought to have been, aware that the plaintiff had not had the benefit of such advice. See also
Lewis v Central Credit Union Ltd, 2012 PECA 9, where the court commented, "[i]n the present
case, the applications judge found it was apparent that the mother would want to help her son
in the circumstances. The relevant circumstances included her being 77 years of age, not per-
sonally involved in her son's business and having little knowledge of his financial affairs, having
deep regard for her son and relying heavily on his advice and ability, having previously provided
collateral security for his business loans with the creditor, and having received no financial
benefit or remuneration for mortgaging her property interests for her son's benefit. It is plain
to see that the relationship between the son and his mother was such that a potential existed
for the son to exercise persuasive influence over his mother" (para 67).
8. As mentioned above, one significant factor that comes out of all these cases is the
importance of legal advice. As a standing rule, legal advice is not required, but, as the Supreme
Court said in Gold v Rosenberg, above, "[w]hether or not someone requires independent legal
advice will depend on two principal concerns: whether they understand what is proposed to
them and whether they are free to decide according to their own will. The first is a function of
information and intellect, while the second will depend, among other things, on whether there
is undue influence" (para 85). The extent of the solicitor's responsibility (and therefore the
financial institution 's) was specified in Etridge (No 2) (at para 54) as:

[t]he furthest a ba nk can be expected to go is to take reasonable steps to satisfy itself that
the wife has had brought home to her, in a meaningful way, the practical implications of the
proposed transaction. This does not wholly eliminate the risk of undue influence or mis-
representation. But it does mean that a wife enters into a transaction with her eyes open so
far as the basic elem ents of the transaction are concerned.

This principle is currently expressed in legi slation . See e.g. the Guarantees Acknowledgment
Act, RSA 2000, c G-11, s 4, which requires, if a guarantee is to have any effect, that the person
signing it appear before a notary public, who must certify that the person is "aware of the
contents of the guarantee and understands it." For a recent application of Etridge (No 2), see
Lewis v Central Credit Union Limited, above.
9. In Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd,
[2003) HCA 18, the Australian High Court tested the "small business" unconscionability provi-
sions of the Trade Practices Act 1974 for the first time. It held that it was not unconscionable
for a commercial landlord to require its small business tenants to drop legal claims against him
in exchange for the renewal of their lease. Although the landlord knew that his tenants wanted
to sell their business (which they could not do without a lease), the High Court held that the
landlord did not take special advantage of them. In rendering its decision, the court considered
it important that the tenants had no ,legal entitlement to the renewal of the lease and had the
benefit of legal advice and representation . For more, see Anthony Duggan, "The Trumping of
Mateship: Unconscionability in the High Court of Australia" (2003) 39 Can Bus LJ 275. For a
critical analysis of the case, see Rick Bigwood, "Curbing Unconscionability: Berbatis in the High
Court of Australia" (2004) 28 Melbourne UL Rev 203.
10. In Rogers v Lane Realty Corp, 2005 SKQB 330, the court found that the failure to read
an agreement before signing does not, of itself, make the agreement unconscionable.
11. For extended commentary on the issues surrounding financial transactions and family
ties, see Michael Trebilcock & Steven Elliot, "The Scope and Limits of Legal Paternalism: Altru-
ism and Coercion in Family Financial Ar.rangements" in Benson, and Belinda Fehlberg, Sexually
Transmitted Debt: Surety Experience and English Law (Oxford: Clarendon Press, 1997).

598
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

MACAULAY VA SCHROEDER MUSIC PUBLISHING CO LTD

[1974] 1WLR1308 (HL)

[A song writer, aged 21 and unknown, entered into an agreement with music pub-
lishers in their "standard form" whereby the publishers engaged his exclusive services
during the term of the agreement. By clause 1 the agreement was, subject as therein-
after provided, to remain in force for five years. By clause 3(a) the song writer assigned
to the publishers the full copyright for the whole world in all his musical composi-
tions during the term. Clauses 5 to 8 dealt with the song writer's remuneration, which
was to be by royalties on works published. By clause 9(a) if the total royalties during
the term exceeded £5,000 the agreement was automatically extended for a further
five years. By clause 9(b) the publishers could terminate the agreement at any time
by one month's written notice. No such right was given to the song writer. By clause
16(a) the publishers had the right to assign the agreement. By clause 16(b) the song-
writer agreed not to assign his rights under the agreement without the publishers'
prior written consent. The song writer brought an action claiming, inter alia, a dec-
laration that the agreement was contrary to public policy and void. Plowman J. so
held and made the declaration sought, and his judgment was affirmed by the Court
of Appeal.
The publishers appealed to the House of Lords.]
LORD DIPLOCK: My Lords, the contract under consideration in this appeal is one
whereby the respondent accepted restrictions upon the way in which he would
exploit his earning power as a song writer for the next ten years. Because this can
be classified as a contract in restraint of trade the restrictions that the respondent
accepted fell within one of those limited categories of contractual promises in
respect of which the courts still retain the power to relieve the promisor of his legal
duty to fulfil them. In order to determine whether this case is one in which that power
ought to be exercised, what your Lordships have in fact been doing has been to
assess the relative bargaining power of the publisher and the song writer at the time
the contract was made and to decide whether the publisher had used his superior
bargaining power to exact from the song writer promises that were unfairly onerous
to him. Your Lordships have not been concerned to inquire whether the public have
in fact been deprived of the fruit of the song writer's talents by reason of the restric-
tions, nor to assess the likelihood that they would be so deprived in the future if the
contract were permitted to run its full course.
It is, in my view, salutary to acknowledge that in refusing to enforce provisions
of a contract whereby one party agrees for the benefit of the other party to exploit
or to refrain from exploiting his own earning power, the public policy which the
court is implementing is not some 19th-century economic theory about the benefit
to the general public of freedom of trade, but the protection of those whose bargain-
ing power is weak against being forced by those whose bargaining power is stronger
to enter into bargains that are unconscionable . Under the influence of Bentham and
of laissez-faire the courts in the 19th century abandoned the practice of applying
the public policy against unconscionable bargains to contracts generally, as they
had formerly done to any contract considered to be usurious; but the policy survived
in its application to penalty clauses and to relief against forfeiture and also to the
special category of contracts in restraints of trade. If one looks at the reasoning of
19th-century judges in cases about contracts in restraint of trade one finds lip service
paid to current economic theories, but if one looks at what they said in the light of
what they did, one finds that they struck down a bargain if they thought it was uncon -
scionable as between the parties to it and upheld it if they thought that it was not.

599
CHAPTER 6 PROTECTION OF WEAKER PARTIES

So I would hold that the question to be answered as respects a contract in restraint

of trade of the kind with which this appeal is concerned is: "Was the bargain fair?"
The test of fairness is, no doubt, whether the restrictions are both reasonably neces-
sary for the protection of the legitimate interests of the promisee and commensurate
with the benefits secured to the promisor under the contract. For the purpose of this
test all the provisions of the contract must be taken into consideration.
My Lords, the provisions of the contract have already been sufficiently stated by
my noble and learned friend, Lord Reid. I agree with his analysis of them and with
his conclusion that the contract is unenforceable. It does not satisfy the test of fair-
ness as I have endeavoured to state it. I will accordingly content myself with adding
some observations directed to the argument that because the contract was in a
"standard form" in common use between music publishers and song writers the
restraints that it imposes upon the song writer's liberty to exploit his talents must be
presumed to be fair and reasonable.
Standard forms of contracts are of two kinds. The first, of very ancient origin, are
those which set out the terms upon which mercantile transactions of common
occurrence are to be carried out. Examples are bills of lading, charterparties, policies
of insurance, contracts of sale in the commodity markets. The standard clauses in
these contracts have been settled over the years by negotiation by representatives
of the commercial interests involved and have been widely adopted because experi-
ence has shown that they facilitate the conduct of trade. Contracts of these kinds
affect not only the actual parties to them but also others who may have a commercial
interest in the transactions to which they relate, as buyers or sellers, charterers or
shipowners, insurers or bankers. If fairness or reasonableness were relevant to their
enforceability the fact that they are widely used by parties whose bargaining power
is fairly matched would raise a strong presumption that their terms are fair and
reasonable.
The same presumption, however, does not apply to the other kind of standard
form of contract. This is of comparatively modem origin. It is the result of the con-
centration of particular kinds of business in relatively few hands. The ticket cases i.n
the 19th century provide what are probably the first examples. The terms of this kind
of standard form of contract have not been the subject of negotiation between the
parties to it, or approved by any organisation representing the interests of the weaker
party. They have been dictated by that party whose bargaining power, either exer-
cised alone or in conjunction with others providing similar goods or services, enables
him to say: "If you want these goods or services at all, these are the only terms on
which they are obtainable. Take it or leave it."
To be in a position to adopt this attitude towards a party desirous of entering into
a contract to obtain goods or services provides a classic instance of superior bargain -
ing power. It is not without significance that on the evidence in the present case
music publishers in negotiating with song writers whose success has been already
established do not insist upon adhering to a contract in the standard form they
offered to the respondent. The fact that the appellants' bargaining power vis-a-vis
the respondent was strong enough to enable them to adopt this take-it-or-leave-it
attitude raises no presumption that they used it to drive an unconscionable bargain
with him, but in the field of restraint of trade it calls for vigilance on the part of the
court to see that they did not.

600
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

NOTES AND QUESTIONS

1. In "The Doctrine of Inequality of Bargaining Power: Post-Benthamite Economics in the

House of Lords" (1976) 26 UTLJ 359, Michael Trebilcock criticized the Schroeder decision for
its attempt to regulate contractual terms and argued that the decision would not have the
intended effect-namely, to make contracts between music producers and songwriters more
balanced. See also Rick Bigwood, Exploitative Contracts (Oxford: Oxford University Press, 2003)
ch 6, "Exploitation of Special Advantage: Unconscionable Dealing," and Stephen Waddams,
"Unconscionable Contracts: Competing Perspectives" (1999) 62 Sask L Rev 1.
2. At least one commentator has suggested that the doctrines of inequality of bargaining
power, undue influence, and unconscionability reflect the principle of equality in exchange. In
this view, the "bad" behaviour of the parties per se is irrelevan t: see e.g. Peter Benson, "The
Unity of Contract Law" in Benson.
3. In Techform Products Ltd v Wolda (2001), 56 OR (3d) 1 (CA), an independent contractor
signed an employee technology agreement (ETA) that transferred his rights to any inventions
that he created while in the plaintiff's employ. It was the contractor's contention that he did
not want' to sign the agreement, but that he did so because he was afraid that his services
wou ld be terminated if he did not. The Ontario Court of Appeal drew a sharp distinction
between an employee's lack of choice and the illegitimacy of the pressure applied by the
employer, requiring that both be present for a finding of economic duress. In deciding that
there was no economic duress in this case, the court made the following remarks:

The trial judge gave extensive attention to whether the defendant was deprived of choice,
but did not return to the question of whether pressure was illegitimate. In failing to do so,
she erred in law. There were a number of characteristics of this case that required a finding
that the pressure was not illegitimate. First, the defendant was an independent contractor.
The plaintiff could have insisted on something like the ETA as a condition for renewing the
consultancy agreement for the following year. Second, the plaintiff genuinely believed that
it was entitled to ownership of inventions by its employees and consultants . The fact that the
law appears to be that absent an express or implied agreement to the contrary, an employee
or independent contractor owns inventions did not mean that the plaintiff's request or
demand that the defendant execute such an agreement was illegitimate. The plaintiff was
paying the defendant for his work on the various inventions, and, while the plaintiff did not
expressly assign the concept of the 30 Hinge to the defendant, he was generally assigned
to work on hinges. The plaintiff's bona fide belief that it was the owner of the inventions told
strongly in favour of finding that the pressure was not illegitimate. Finally, it was important
that the defendant was not forced to sign the ETA on the spot. He took it away with him and
had ample opportunity to obtain independent advice. Th ereafter, he had many years to
reconsider, obtain the benefit of legal advice, seek a revised agreement or repudiate the
agreement. He did not do so, and the lengthy passage of time told strongly against there
being illegitimate pressure. The trial judge erred in finding that the ETA was unenforceable
on the basis of economic duress.

What should be the determining factors in cases like these: the employer's sincerely held belief
in the legitimacy of the contractual terms, the plaintiff's actual lack of choice, or the contractual
terms themselves (note that the law appeared to allocate the right in question to the independ-
ent contractor)? Does this depend on how you view the purposes of the unconscionability/
duress doctrine? See Leff, "Unconscionability and the Code: The Emperor's New Clause,"
excerpted above.

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

PRIDMORE V CALVERT
(1975), 54 DLR (3d) 133 (BCSC)

[The plaintiff was injured in a motor accident by the defendants' negligence. The
defendants relied on a release signed by the plaintiff.]
TOY J : The final question for determination has given me the greatest concern. The
plaintiff was attended by an insurance adjuster within 48 hours of the accident. After
signing a statement disclosing the circumstances of the accident, the plaintiff then
signed a release of all her claims in favour of the defendants and their insurers. The
defendants' counsel has pleaded and relied on that release as a complete defence to
the plaintiff's claims.
Although the plaintiff's version of the signing of the release-or releases-is in
many respects uncertain and vague, and in some instances she professed not to
remember, I ascribe her lack of recollection to her state of mind and general condi-
tion at that time. The insurance adjuster gave his evidence in an admirably frank
fashion, and I am prepared to accept his evidence as accurate and truthful.
In coming to the conclusion that I have, I have relied on a recent judgment of my
brother Anderson J., in Towers v. Affleck, [1974] 1 W.W.R. 714. Anderson J. at p . 717
said: "... the true question to be determined here is whether the parties were on such
unequal footing in all the circumstances, that it would be inequitable to hold the
plaintiff to her bargain." He said further, at pp. 719-20:
I have reac hed the conclusion that on the whole of the evidence the plaintiff has proved
by a preponderance of evidence that the parties we re on such an unequal footing that
it would be unfair and inequitable to hold her to the terms of the agreement which she
signed. Having reached the conclusion that the defendants [we re] in a dominant pos-
ition, it becomes necessary to consider whether the settlement was fair and reasonable.
I have asked myself the question whether any practising lawye r wo uld have approved
the settlement. The answer is in the negative.
While the Court will not lightly set aside settlement agreements, the Court will set
aside contracts and bargains of an improvident character made by poor and ignorant
persons acting without independent advice unless the other party discharges the onus
o n him to show that the transaction is fai r and reasonable : see Whittet v. Bush (1888),
40 Ch.D. 312. While there is no evidence of poverty or financial distress in this case, I think
that one of the major factors in the Whittet case was that the purchaser's solicitors acted
for all parties and that the ve ndors did not receive any independent advice. An experi-
enced insurance adjuster plays the same role as a practising solicitor. (Italics my own.)

In my view, the plaintiff should not be bound by the release that she signed for
the reasons which I will detail shortly, but which in my judgment are supported by
facts of greater weight than those relied on by my brother Anderson, in Towers v.
Affleck, supra:

1. The plaintiff is a woman of limited intelligence. I do not mean that in a disparag-

ing sense, but she told me -that she started her training as a practical nurse at
age 15. There was no evidence of any later academic training.
2. The pla intiff had worked throughout her married life as a practical nurse and
in 1971 her husband died . The plaintiff had no close personal fr iends to whom
she turned for advice or co unselling qf a confidential nature .
3. At the material time she sought no legal.advice nor any lay advice concerning
the signing of the release.

602
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

4. There was no evidence to suggest that the plaintiff had any business acumen
at all, much less any knowledge of "releases."
5. The defendants' adjuster courteously arranged for an interview with the plaintiff
at her home where she was recuperating on the second day after the accident.
6. The plaintiff's poor physical condition was apparent to the defendants' adjuster,
who observed that the plaintiff was taking pills, that she was suffering from
headaches, that she was in pain, and when walking, she did so in a guarded
fashion .
7. The defendants' adjuster, without having examined the scene of the accident,
without having solicited the plaintiff's doctor's opinion, or even having inter-
viewed the defendant driver, was prepared to assess the claim and settle it "on
the spot" at his first meeting with the plaintiff. There was a second release
executed by the plaintiff two days later which is the operative release, but I do
not attach great significance to that fact, as for all realistic purposes, the plain-
tiff was in the same condition and position of reliance on the adjuster on the
second day as she was on the first. .. .
9. The stated consideration of $331.40 which the plaintiff received "on the spot"
on September 1, 1972, was calculated by the adjuster on August 30th as
follows:

For out -of-pocket expenses, such as torn clothing,

damaged wig, etc .. $131.40
Extra . . . . . . ... . . . . .. . $200.00

The adjuster asked the plaintiff how much she wanted for her "injuries" and
she apparently asked the adjuster's opinion. He volunteered the figure of $200.
That amount, one could only conclude as being in satisfaction of the plaintiff's
whole general damage claim, except her actual loss of earnings, providing
they did not exceed 180 days.
10. The adjuster computed the plaintiff's monthly income and broke it down to a
daily wage loss claim and arrived at the figure of $17.66 per day. That amount
the plaintiff was to receive in addition to medical expenses not otherwise
covered and the above-mentioned sum of $331.40 .
11. The adjuster was a man experienced in his work, and, before me, acknow-
ledged that he had three interests to serve : one, his employer, the insurer; two,
the defendants, namely, the insured persons; and three, the plaintiff, because
she was, in any event, entitled to recei ve no-fault benefits of $50 per week for
as long as she was off work up to a maximum of 108 weeks . I pause here to
note that of the $17.66 daily benefit to be paid , as calculated by the adjuster,
the plaintiff was entitled as of right to receive $7.15 as a result of her entitlement
to no-fault benefits. I find that at the times the plaintiff was solicited to sign
the two releases, she was not advised of her right to claim no-fault benefits of
$50 per week and postpone her claims for general damages and out-of-pocket
expenses until she had effected a complete recovery.
12. I further find that with respect to the $200 extra paid to her as referred to in
para. 9 above, that she advanced no such claim herself, but was induced by
the adjuster to advance such a claim. It is accordingly my opinion that the
figure selected by the adjuster of $200 was not one that could properly be
construed as a fair and reasonable estimate for the plaintiff's pain and suffering
or loss of amenities, but one deliberately designed by the defendants' insurers
to foreclose the possibility of a future claim by the plaintiff from anything in
excess of 180 days of loss of income and her no-fault benefits. The defendants'

603
CHAPTER 6 PROTECTION OF WEAKER PARTIES

adjuster and counsel on the defendan ts' behalf at trial sought to justify the
adjuster's conduct by relating that the plaintiff had told the adjuster that her
doctor had said she would probably be back to work in a couple or three
weeks. If that estimate was entitled to be acted upon, the $200 figure for loss
of amenities and pain and suffering might be construed as reasonable. But if
the agreement and release form ran its full course of $2.000 or a 180 days off
work, could a figure of $200 be justified to compensate a person for suffering,
or continued suffering in the manner that the defendants' adjuster observed
when he attended at the plaintiff's residence?
13. The defendants' adjuster further conceded, with admirable candor that he did
not explain the harshness of the release to the .plaintiff.
Would any lawyer purporting to advise the plaintiff as to her rights have advised
her to accept such a settlement7 Posing the question that Anderson J . did in Towers
v. Affleck brings quickly to mind numerous reasons why a complete settlement and
release under the conditions which existed on both August 30, and September 1,
1972, should not have been made, only a few of which I will mention:
(a) The attending doctor's co ncurrence to settle should have been considered.
(b) Lawyers. and adjusters, exposure to these matters militates aga in st a quick "on
the spot" settlement.
(c) Without a firm , if not.written, medical opinion. no settlement should have been
made.
(d) A doctor's first opinion, or prognosis, many times has been shown to be
inaccurate and the majority of [doctors] are quick to concede the point.
(e) The pa in, headaches and general demeanour of the plaintiff, witn essed by the
defendants' adjuster on the second and fourth days after the accident, should
have been sufficient for any person purporting to give her independent advice
to counsel her against signing such a serious document.
Accordingly, the plaintiff has satisfied me, on the balance of probabilities, that
· she was on such an unequal footing with respect to the defendants and their repre-
sentatives, that in all the circumstances, it would be inequitable to hold her to the
bargain that was made. There will accordingly be judgment for the plaintiff for
general damages, special damages and allowing deductions as previously detailed,
for the net amount of $20,995.11.
Judgment for plaintiff.

HORRYVTATE
[1982] 2 Lloyd's Rep 416 (OB)

[The plaintiff was injured in an accident at his place of employment. The defendants'
insurers, represented by Mr. Oram, the claims inspector of the Iron Trades Associ- ·
ation, had negotiated a contract with the plaintiff, who lacked legal representation,
in which Horry accepted £1,000 in full settlement of his claim. The court rejected
the contract as a defence to Horry's action.]
PETER PAIN J: ... So far as this case goes, I find that the plaintiff did rely on the guidance
or advice of the Iron Trades as to the settlement of his claim. I find that the insurers
knew that he so relied, and I find -this is perhaps almost a glimpse of the obvious-

604
 V. UNCONSCIONABILITY AND UNDUE INFLUENCE

that they had an interest in the figure at which the claim was settled, and their
interest conflicted with the plaintiff's interest.
Further, I find here that there was a quality of confidence between the plaintiff
and the insurers, which extended beyond that inherent in the confidence that can
well exist between trustworthy persons who in business affairs deal with each other
at arm's length.
The relationship existed, of course, between the plaintiff and the Iron Trades, not
between the plaintiff and Mr. Oram personally, although, of course, Mr. Oram was
closely involved, because he was the agent through whom the Iron Trades.acted.
On this basis, there was in my view a duty of fiduciary care lying upon the Iron
Trades. They might have discharged that duty as late as Jan. 28, if Mr. Oram had said
to the plaintiff "Look here, you really ought to get some independent advice about
this before you settle." But, that not having been done, in my view it was incumbent
on the Iron Trades to have offered a figure which was considerably higher and
towards the upper part of the bracket appropriate to hernia claims, in view of the
severity of the hernia in this case.
Secondly, it was their duty to specify what reduction they were making which
was inherent in their offer in respect of contributory negligence; that is to say, they
should have made it clear what they thought the claim was worth in toto and how
much they were deducting in respect of the plaintiff's contributory negligence. That
could have been done, of course, either by way of percentage or by way of figures.
I think that they should have supplied the plaintiff with a copy of the medical
report which was provided by his doctor. It is all very well to read a report out to
someone in an interview, but if he has got it to read it over and consider himself it
makes a great deal more of an impression on the mind. Mr. Oram told me that it was
company policy not to hand such a document over to a claimant in person, although
it would have been disclosed had the plaintiff been legally represented. The company
policy to my mind provides no answer here. There is nothing whatever in this report
which the plaintiff should not have seen and there seems to me to have been no
good grounds for not giving him an opportunity to see exactly what the doctor said
before he settled. I dare say that there was a fairly substantial reading of the report,
but that is not sufficient.
Fourthly, they should have made sure that the plaintiff understood that this settle-
ment, if entered into, was the end of the road and that no further claim could be
made in respect of this accident, and in view of the fact that the risk of recurrence
at 15 per cent was by no means insubstantial, they should have made sure that he
understood that and that nothing further could be taken up if the injury did recur.
As to that, as I have already said, I think they left the plaintiff in a state of considerable
confusion.
Finally, I take the view that they should have advised the plaintiff to think the
matter over and to delay until he had had an opportunity of testing himself back at
work and had had a proper opportunity of considering the offer. I hold that the
defendants were in breach of their duty of fiduciary care, in that they did none of
these things and that therefore, in my view, they are not entitled to rely upon the
settlement, or the alleged settlement of the plaintiff's claim.
In saying this, I ought to make it plain that I do not regard Mr. Oram as someone
who is morally to blame, as having overreached a simple man. He was claims a
inspector settling a claim, but I think he failed to appreciate that if he encouraged
. a layman to act without independent advice, then he, Mr. Oram, put himself in a
position quite different from the position he was in, in the ordinary way, when he is
negotiating a claim with a man's trade union or solicitor.

605
CHAPTER 6 PROTECTION OF W EAKER PARTIES

I also want to say that I am not seeking to lay down any general principle with
regard to insurance companies and claimants who act for themselves. The insurance
company which encourages a layman with no legal knowledge to act for himself
without advice clearly puts itself in a position of risk; but the decision I am giving is
simply an exercise in applying the principles of Lloyd's Bank Ltd. v. Bundy, [1975] O.B.
326 (C.A.), as set out in Sir Eric Sach's judgment, to the facts of the present case.

WOODS V HUBLEY
(1995), 130 DLR (4th) 119 (NSCA)

[The plaintiff was injured in an automobile accident caused by the defendant. Sur-
gery was recommended. A few days before the surgery a representative of the
defendant's insurer offered the plaintiff a small amount of money in settlement for
her claim. The plaintiff accepted and signed a release. In a subsequent action for
damages by the plaintiff, the trial court set aside the release as unconscionable. The
defendants appealed. Chipman JA delive.r ed the judgment of the court on the issue
of the release.]
CHIPMAN JA (dissenting in part): ... In coming to these conclusions the trial judge
was guided by the summary of principles enunciated by Hallet J. (as he then was)
in Stephenson v. Hi/ti (Canada) Ltd. (1989), 63 D.L.R. (4th) 573 at pp. 578-9 ... :
To summarize the principles set out in the foregoing cases, it seems to me that a trans-
action may be set aside as being unconscionable if the evidence shows the following:

(1) That there is an inequality of bargaining position arising out of ignorance, need or distress
of the weaker party;
(2) The stronger party has unconscientiously used a position of power to achieve an advantage;
and
(3) The agreement reached is substantially unfair to the weaker party or, as expressed in the
Harry v. Kreutziger case. it is sufficiently divergent from community standards of com-
mercial morality that it should be set aside.

[The respondent] was ignorant of the legal system, not well educated and ... a person
of limited accomplishments for her age (then 25). In my opinion she was no match
for the adjuster who appears to have had considerable training and a degree of
sophistication in bargaining with people over numbers. The inequality of their
respective positions is clear.
Counsel for the appellants has strongly urged that the agreement reached was
not substantially unfair. He emphasized that the time for testing the value of the
claim was at the time of settlement and not at the time of the trial when it was
obvious that the respondent's condition had deteriorated substantially, leaving her
in a position of permanent disability....
While I agree with counsel for the appellants that the relevant time to evaluate
the bargain is the time of settlement ... [t]o anybody with the slightest experience in
dealing with claims, it would be clear that [at the time of settlement] the respondent
was facing an uncertain prognosis. While an early and complete recovery was a
possibility, chances of long-term problems were so high that the only sound advice
to the respondent would be not to settle the claim at an early stage. Only when the
true extent of the disability was finally measured by expert medical persons after the
effect of the operation and the progress of convalescence became known could one

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 VI. DURESS

seriously entertain the possibility of settlement. It is really for this reason that the
bargain was improvident, substantially unfair and divergent from community stan-
dards of commercial morality. No informed person would countenance settlement
at such an uncertain stage.
I am satisfied therefore that it has not been shown that the trial judge was wrong
in finding that the first and third elements listed by Hallett J. were established. As to
the second, I am of the opinion that the burden fell upon the defence to establish
that the bargain was not brought about as a result of the unconscientious use of the
power to achieve the advantage. It is apparent to me on reading the record and the
trial judge's findings that the adjuster did not overtly pressure the respondent. How-
ever, he must have been we\\ aware of the complete folly of anybody in settling so
uncertain a claim at that early stage, let alone for such a modest amount as $3,s'oo.
He· certainly used tactics designed to make her think that $3,500 was a\\ that she
would ever get. The implication was that she might as we\\ take it now rather than
later. While not overt, it was clearly pressure which meets the test.

There is no suggestion that the adjuster deliberately set up his records to deceive,
or specifically that he ever did deceive the respondent or make any false statements
to her. However, deceit is not a necessary ingredient in the establishment of an
unconscionable transaction. The adjuster was obviously thoughtless or'indifferent
to the position of the respondent and the high risk that she was taking in settling
her claim at the time she did.

VI. DURESS

NAV CANADA V GREATER FREDERICTON

AIRPORT AUTHORITY INC
2008 NBCA 28

[The facts of this case are set out in Chapter 3. The court determined that a variation
to an existing contract (the Airport Authority's promise to pay for the distance-
measuring equipment (DME)), although unsupported by fresh consideration, may
nonetheless be enforceable provided it was not procured under economic duress.
The court set oi.:t the following analysis for economic duress.I
JT ROBERTSON JA (for the court): In the reasons that follow, I conclude that the arbi-
trator erred in finding that the variation was supported by fresh consideration. As a
matter of \aw, however, I am prepared to recognize and adopt an "incremental"
change in the traditional rules by holding that a variation unsupported by consider-
ation remains enforceable provided it was not procured under economic duress.
This refined approach leads us to consider how the contractual variation in issue
was procured. In my view, the Airport Authority had no "practical alternative" but to
agree to pay money that it was not legally bound to pay. Nav Canada implicitly
threatened to withhold performance of its own obligation until the Airport Authority
capitulated to the demand that it pay the cost of the navigational aid. However, the
absence of practical alternatives is merely evidence of economic duress, not con-
clusive proof of its existence. The true cornerstone of the doctrine is the lack of
"consent." In that regard, the uncontroverted fact is that the Airport Authority never
"consented to" nor "acquiesced in" the variation, as is evident from the letter agreeing

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to payment "under protest." But this is not the end of the matter. There is jurispru -
dence that holds that the exercise of "illegitimate pressure" is a condition precedent
to a finding of economic duress. I respectfully decline the invitation to recognize
such pressure as an essential component of the duress do.ctrine, at least in cases
involving the enforceability of variations to an existing contract. It is not the legit-
imacy of the pressure that is important but rather its impact on the victim, unless,
perhaps, one is attempting to establish that a finding of economic duress qualifies
as an independent tort.

V. THE ISSUE OF ECONOMIC DURESS

[33] Accepting that, in law, a variation to an existing contract, unsupported by

fresh consideration, may be enforceable provided that it was not procured under
economic duress, it follows that Nav Canada's appeal falls to be decided on the basis
of that doctrine. It should also follow that the party seeking to enforce the variation
must establish either that it was not procured under economic duress or that the
other party is precluded from raising the duress doctrine for having subsequently
affirmed the variation. Hence, the onus is on Nav Canada to establish that the post-
contractual modification was not procured under economic duress ....

A. THE DEVELOPING DOCTRINE OF ECONOMIC DURESS & ILLEGITIMATE

PRESSURE

[37] Given the paucity of Supreme Court decisions in this area of the law, Can-
adian courts have traditionally turned to the English jurisprudence. Under English
law, and prior to 1975, duress as a ground for holding a contract unenforceable was
limited to the categories of duress to the person (actual or threatened violence) and
duress of goods. With respect to duress fo the person, the "gun to the head" induce-
ment to contract formation has never been acceptable according to the common
law's consensual model of contract formation. As to duress of goods, the classic case
is the one in which a pawn broker demands an excess payment before agreeing to
release goods that are being held: Astley v. Reynolds (1731), 93 E.R. 939 (Eng. KB.).
However, in 1975, the English courts began to recognize economic duress as a form
of coercion that would render "voidable" an otherwise enforceable agreement:
Occidental Worldwide Investment Corp. v. Skibs A/S Avanti, [1976] 1 poyd's Rep. 293
(Eng. O.B.).
[38] In 1979, the Privy Council extended the duress doctrine to include economic
duress in the leading case of Pao On v. Lau Yiu Long, [1979] 3 All E.R. 65, [1980] AC.
614 (Hong Kong P.C.) ....
[39] In Pao On, Lord Scarman defined duress as "a coercion of the will so as to
vitiate consent" and went on to indicate that "in a contractual situation commercial
pressure is not enough." Again, the compulsion had to be such that the party was
"deprived of 'his freedom of exercising his will."' In applying this test, Lord Scarman
indicated, at page 79 (All E.R.), that the following evidence could be relevant: "Amer-
ican judges pay great attention to such evidential matters as the effectiveness of the
alternative remedy available, the fact or absence of protest, the availability of
independent advice, the benefit received, and the speed with which the victim has
sought to avoid the contract." In order to meet the test for economic duress, then, it
must be shown that the conduct coerced did not amount to a voluntary act. Applying

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 VI. DURESS

these criteria to the facts of Pao On, Lord Scarman held that the defendant had
submitted to commercial pressure, but not to coercion in the requisite sense. The
Privy Council accepted the trial judge's finding that the defendant had "considered
the matter thoroughly, chose to avoid litigation, and formed the opinion that the risk
in giving the guarantee was more apparent than real."
[40] While commentators agree that the "overborne will" threshold is either too
difficult to meet or too vague, Lord Scarman soon had the opportunity to revisit his
earlier formation of the doctrine, only this time sitting as a member of the House of.
Lords in Universe Tankships Inc. of /Vlonrovia v. International Transport Workers' Federa-
tion, [1982] 2 All E.R. 67, [1983] 1 AC. 366 (UK H.L). The litigation in that case arose
after the defendant trade union threatened to "black" the plaintiff's ships unless the
latter complied with the union's demands by making certain monetary payments
and entering into collective agreements governing the conditions of employment
for the vessel's crew. The objective was to prevent the employment of cheap labour
on ships flying flags of convenience: The effect of "blacking" is to prevent a ship from
leaving port because of the corresponding refusal by tugboat owners to provide the
necessary services. One of the trade union's demands was that the ship owners make
a payment to the trade union's "welfare fund.'' The plaintiff complied with the
demands but, after leaving port, sought recovery of the amounts paid on the basis
that they were paid under economic duress. By the time the case reached the House
qt Lords, the trade union conceded that the payment to the welfare fund was made
under economic duress but argued that the union was immunized from a restitu-
tionary claim under the Trade Union and Labour Relations Act, 1974. The majority of
their Lordships held that although the legislation conferred immunity against an
action in tort in respect of interference with contractual relations (here, between the
ship owners and the tugboat owners), the legislation did not confer immunity in
respect of a restitutionary action and, therefore, the money was recoverable.
[41] In dissent, Lord Scarman took the opportunity to reform the tenets of the
economic duress doctrine as stated in Pao On. He cited Barton v. Armstrong (1973),
[1975] 2 All E.R. 465, [1976] AC. 104 (New South Wales P.C.) and Pao On for the prop-
osition that the test for economic duress now comprises two elements: "(1) pressure
amounting to compulsion of the will of the victim; and (2) the illegitimacy of the
pressure exerted." With respect to the first branch of the test, Lord Scarman observed
that the requirement is variously stated in the authorities as "coercion or the vitiation .
of consent." In his view, however, "[t]he classic case of duress is ... not the lack of will
to submit but the victim's intentional submission arising from the realisation that
there is no other practical choice open to him." Lord Scarman then proceeded to
consider the matters set out in Pao On as relevant to but not dispositive of this issue.
Thus, even though the ship owners had not protested at the time of entering into
the agreements with the trade union, it was nonetheless clear that they had no prac-
tical alternative but to submit to the arrangement. Having satisfied the first branch
of the test, Lord Scarman held that it was necessary to determine whether the pressure
exerted was '1egitimate." With respect to this branch of the test, he held that two matters
"may" have to be considered. The first is the "nature of the pressure," which in many
cases will be decisive, though not in every case. The second consideration is stated
in terms of the "nature of the demand." With respect to the first branch, the nature
of the pressure, Lord Scarman held that the threat of unlawful action is invariably
regarded by the law as "illegitimate." On the facts, however, the unlawful threatened
action was immunized from suit by the legislation; accordingly, it was a legitimate
exercise of pressure that did not constitute duress. Consequently, Lord Scarman next
examined the "nature of the demand." In that regard, he held that it was necessary

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

to decide whether the demand for contributions to the welfare fund was lawful,
which depended on "whether it was an act done in contemplation or furtherance of
a trade dispute" and, specifically, on whether the contributions were connected with
the terms and conditions of employment as set out in the legislation. Lord Scarman
answered those questions in the positive. The nature of the demand being lawful,
he held that the contributions were not recoverable. In short, Universe Tankships is a
case in which the House of Lords was asked to decide whether contractual conces-
sions procured through the exercise of otherwise unlawful acts were legitimatized
by legislation.
(42] It is of significance to the law that the majority of the House of Lords did not
take issue with Lord Scarman's contention that the economic duress doctrine
includes the concept of illegitimate pressure ....
(43] No one questions that tortious or criminal conduct amounts to unlawful
pressure and that unlawful pressure qualifies as illegitimate pressure. However, it is
equally clear that pressure does not have to be characterized as "unlawful" in order
to be found "illegitimate." This leads one to ask when lawful pressure moves from
the category of legitimate to illegitimate pressure? Regrettably, no one, judge or
commentator alike, has been able to explain how one goes about answering that
question ....
(44] Although Canadian Courts are no longer bound to follow the English author-
ities, regrettably, the criterion of illegitimate pressure has been absorbed into the
fabric of the Canadian jurisprudence without comment. The three most cited deci-
sions on economic duress in Canada are Stott v. Merit Investment Corp. (1988), 63
O.R. (2d) 545, [1988] O.J. No. 134 (Ont. C.A.); Gordon v. Roebuck (1992), 9 O.R. (3d) 1,
(1992] O.J. No. 1499 (Ont. C.A.) and Techform Products Ltd. v. Wolda. In each instance,
the Court applied the tenets of the economic duress doctrine stated in the English
authorities.
[45] No one has been as critical of the introduction of the additional test of illegit-
imate pressure as Professor Ogilvie in "Economic Duress in Contract: Departure,
Detour or Dead-End?" (at pp. 219-220 and 224):
This survey shows the English case law to date on economic duress is characterized by
false starts, pregnant remarks and loose ends .... Defining illegitimacy has proven difficult,
especially after its extension to acts otherwise lawful, requiring yet · another test to
determine when legitimate conduct becomes illegitimate for the purposes of economic
duress. Why legitimacy should be the sole criterion or even a criterion, as Lord Goff
suggests in The Evia Luck, is unclear, especially once it is extended beyond criminal and
tortious conduct.

[46] Like Professor Ogilvie, I am not convinced that the doctrine of economic
duress should incorporate a criterion of illegitimate pressure when it comes to cases
involving a variation to an existing contract. If we apply Lord Scarman's approach
it should follow that most contractual variations will be classified as having been
procured through the exercise of legitimate commercial pressure. Let me explain.
According to Lord Scarman, two matters must be considered when determining
what pressure is illegitimate: (1) the nature of the pressure; and (2) the nature of the
demand. In cases involving the variation of an existing contract, inevitably the nature
of the pressure is the threatened breach of the contract: the "coercer" threatens to
withhold performance under the contract until such time as the "victim" capitulates
to the coercer's demands. Of course, a threatened breach of contract is not only

610
 VI. DURESS

lawful but in fact constitutes aright which can be exercised subject to the obligation
to pay damages and possibly to an order for specific performance: Hit/spring Farms
Ltd. v. Leland Walton & Sons Ltd. (2007), 312 N.B.R. (2d) 109, [2007] N.B .J . No. 19, 2007
NBCA 7 (N.B . C.A.). This takes us to the second prong of Lord Scarman's framework:
the nature of the demand. Once again, the typical variation case is one in which the
coercer demands a variation to the contract. Invariably, the coercer demands that
the victim pay or do more than is required under the existing contract. But once
again there is nothing to support the argument that the nature of this typical demand
should be classified as iUegitimate. In brief, the application of the two-fold test articu-
. lated by Lord Scarman, when applied to cases involving a contractual modification,
should lead to the conclusion that the pressure typicaUy exerted fans within the
"legitimate" category. In other words, courts would be forced to begin their analysis
on the premise that the pressure exerted tans within the category of "legitimate
commercial pressure.''
[47] In my view, the criterion of iUegitimate pressure adds unnecessary complexity
to the law of economic duress, and presently lacks a compeUing juridical justification,
at least with respect to its application in the context of the enforcement of contractual
variations. The law does not provide a workable template for distinguishing between
legitimate and iUegitimate pressure. Admittedly, we know that tortious or criminal
conduct qualifies as illegitimate pressure and I would be prepared to go so far as to
say that a party who acts in "bad faith" in demanding a variation to a contract is
exerting illegitimate pressure. However, without a template for distinguishing
between legitimate and illegitimate pressure in other contexts, litigants and courts
are forced to find that some other aspect of the demand for the variation is unaccept-
able conduct that justifies a finding of iUegitimate pressure. There is already evidence
that this is what is happening under English law: Vantage Navigation Corp. v. Suhail,
[1989] 1 Lloyd's Rep. 138 (Eng. O.B.) and Atlas Express Ltd. v. Kafco Ltd, [1989] 1 AU E.R.
641 (Eng. O.B.).
[48] My concern is that just as the courts developed legal fictions to enforce
otherwise gratuitou01 promises, so too will they spend too much time trying to
explain the difference between illegitimate and legitimate pressure. If we are going
to perm_it the enforcement of gratuitous variations that are not the product of eco-
nomic duress in order to avoid "fictional" attempts to justify the enforcement of such
promises, it foUows that we should not introduce a criterion that may wen lead to
the development of other legal fictions. Moreover, I am afraid that the distinction
between legitimate and illegitimate pressure will soon lead to the understanding
that a plea of economic duress can be defeated by a plea of "good faith" on the part
of the coercer, a point I shall return to in these reasons.
[49] ... [Flor purposes of deciding this appeal, I need only hold that illegitimate
pressure is not a condition precedent to a finding of economic duress where the
remedy being sought is declaratory or restitutionary in nature. It is one thing to have
a contractual variation declared unenforceable or to demand the return of property
extracted under economic duress and quite another to seek damages for the exercise
of illegitimate pressure.
[50] In conclusion, I am not prepared to hold that i\\egitimate pressure is a condi-
tion precedent to a finding of economic duress in cases involving post-contractual
modifications to executory contracts. I am in complete agreement with Professor
Ogilvie when she writes that the legitimacy of the pressure is not what is important
but rather its impact on the "victim": "Forbearance and Economic Duress: Three
Strikes and You're Sti\1 Out at the Ontario Court of Appeal," at para. 26.

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B. ECONOMIC DURESS-THE ANALYTICAL FRAMEWORK

(51) Having rejected illegitimate pressure as a criterion to be applied when decid- ~

ing whether a contractual variation was procured under economic duress, it is
incumbent on this Court to identify the tenets of that doctrine. Once again, I must
reiterate that my analysis applies to the plea of economic duress being raised with
respect to the enforceability of variations to an existing contract and not in regard
to the formation of the underlying contract. Is the distinction a valid one? I have
already indicated as much when it comes to the issue whether the doctrine of eco-
nomic duress also serves as an independent source of tortious liability. As well, the
distinction avoids adding further and unnecessary complexity to the law. I do not
feel that anything is to be gained by infusing into the economic duress doctrine
concepts such as inequality of bargaining power, unconscionability and undue
influence, all of which are key doctrines when it comes to the formation of a contract
and its enforceability. By contrast, cases involving modification of variation of an
existing contract are not decided on the basis of whether the victim is a sophisticated
or unsophisticated party. The critical factor is whether the victim had any practical
alternative but to capitulate to the demand for the contract change . ...
(52) While the jurisprudence continues to speak of the economic duress doctrine
·i n terms of whether the will was overborne, the consent vitiated, or the contract
varied voluntarily, the objective of the exercise is to determine whether the variation
was the product of an agreement. I begin with the premise that the hallmark of every
commercial agreement is a "consensual bargain" and this applies equally to varia-
tions to existing contracts. So far as the element of "bargain" is concerned, that
component is measured according to the consideration doctrine, but as discussed
earlier, a lack of consideration should not inevitably lead to the conclusion that a
gratuitous promise is unenforceable. A gratuitous promise may still be enforceable,
if it is the product of a consensual agreement. Leaving aside for the moment the
issue of whether the contractual variation is supported by consideration and accept-
ing that "consent" or "agreement" remains the hallmark of an enforceable agreement,
I offer the following general framework for deciding whether a 'contractual variation
was the product of "coercion" or "economic duress." I say general framework because
some cases are easier to decide than others. For example, special consideration might
be given to variations extracted in the employment context, some of which are
regulated by the common law or statute or both. What I am dealing with is a com -
mercial contract regulating the business affairs of two corporations that were formed
for purposes of promotion and protecting the public interest.
[53) Subject to the above observations, a finding of economic duress is dependent
initially on two conditions precedent. First, the promise (the contractual variation)
must be extracted as a result of the exercise of "pressure," whether characterized as
a "demand" or a "threat." Second, the exercise of that pressure must have been such
that the coerced party had no practical alternative but to agree to the coercer's
demand to vary the terms of the underlying contract. However, even if those two
conditions precedent are satisfied, a finding of economic duress does not automatic-
ally follow. Once these two threshold requirements are met, the legal analysis must
focus on the ultimate question: whether the coerced party "consented" to the varia-
tion. To make that determination three factors should be examined: (1) whether the
promise was supported by consideration; (2) whether the coerced party made the
promise "under protest" or "without prejudice"; and (3) if not, whether the coerced
party took reasonable steps to disaffirm the promise as soon as practicable. Admit-
tedly, the last two factors are more likely to have a bearing on the ultimate outcome

612
 VI. DURESS

of a case than the first. As well, note that under this general framework, no reference
is made to the supposed victim having "independent legal advice" or to the "good
faith conduct" on the part of the supposed coercer. I shall also deal with these matters
separately. For the moment, I am going to focus on the framework outlined above.
[54] While it might appear trite to hold that, to meet the first threshold require-
ment, the contractual variation must be the product of pressure exerted by the
promisee (the coercer), there may be cases where this is not so. If the variation comes
at the instance of the promisor (the so-called victim), as happened in Williams v.
Roffey Bros. & Nicholls (Contractors) Ltd., it cannot be credibly argued that variation
was coerced. Admittedly, such a case may be rare. In most instances pressure for the
contractual variation will come from the promisee in the form of an express or
implied threat to breach the underlying contract, usually by withholding future per-
formance . I have included implied threats in anticipation of the sophisticated
promisee, aided by astute counsel, who attempts to camouflage the coercive nature
of the variation demand by avoiding the use of combative language amounting to
a threat to withhold promised goods or services until such time as the promisor
capitulates to the demand. In the end, it may be a question of judgment whether the
facts support the contention that the promisee exerted the requisite pressure, such
as by threatening to breach the contract by withholding performance.
[55] Once we accept that pressure has been exerted, we turn to the second condi-
tion precedent: whether the promisor could have resisted the pressure and refused to
agree to the modification. It is a central feature·of the doctrine that a plea of economic
duress will fail unless is it established that the promisor (victim) had no practical
alternative but to capitulate to the demands of the promisee (coercer). Thus, for
example, it is a question of judgment whether the victim could have resisted the
coercer's demands and gone to a third party to obtain the performance promised in
the underlying contract, while suing the coercer for damages for breach of contract.
If the evidence establishes that other practical alternatives were available to the victim,
the plea of economic duress must fail at the threshold stage. On the other hand, if the
evidence establishes a lack of practical alternatives, the law requires the analysis to
continue before a finding of economic duress is warranted. In short, the absence of
practical alternatives is evidence of a lack of consent, but is not conclusive of the
issue. The law is still concerned with the possibility that the contractual variation may
have been consented to for reasons that the promisor alone deems sufficient. This
leads us to ask how one goes about assessing the presence or absence of "consent.''
[56] If the variation is not supported by consideration, in the classical sense, the
court may be more sympathetic to the plea of economic duress. After all, why would
anyone agree to pay more or do more in return for nothing? There is one ready
answer to that question: the promisor had no practical alternative other than to
submit to the coercer's demands. The variation is not the product of an agreement
for which the promisor's "consent" or "agreement" is essential if the variation is to
be deemed enforceable at law. But as we know, even if there is consideration for the
contractual variation, it may still be unenforceable under the doctrine of economic
duress. It is of little consolation to those who have been held to commercial ransom
that their promise is enforceable under the doctrine of consideration because the
variation was procured under "seal" or with the payment of a "peppercorn" in
exchange. In summary, and as a basic proposition, we must accept that a contractual
variation unsupported by consideration in the classical sense bolsters the argument
that it was procured under economic duress. On the other hand, a variation sup-
ported by fresh consideration lends weight to the argument that it was the product
of commercial pressure and not economic duress.

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

[57) There is no doubt that the easiest and most convincing way to establish that
a contractual variation was procured under economic duress and, therefore unen -
forceable, is to show that it was made "under protest" or "without prejudice" to the
promiser's right to insist on performance in accordance with the original contract.
While some American courts have declared that "protest" is an essential component
of the right to avoid a contract under duress (see AL. Corbin, Corbin on Contracts,
rev. ed., vol 2. (St. Paul; Minn.: West Pub. Co., 1993), at 7:21), this is not true according
to English and Canadian law. In brief, a failure to "object" to the variation is not
necessarily fatal to a plea of economic duress. However, the failure of the promiser
to voice any objection at the time that contractual variation was extracted may
ultimately prove fatal to the plea of economic duress . Let me explain.
[58) Assuming that the promiser fails to agree under protest or without prejudice
to existing legal rights, his or her plea of economic duress is weakened as the court
struggles with the promisee's contention that the variation was the product of agree-
ment and not coercion. If the variation is supported by fresh consideration and there
has been no protest, one has to seriously question the validity of the plea of economic
duress. While the failure to agree under protest is not fatal to a successful plea of
economic duress, the plea may become unavailable with the passage of time, whether
or not the contractual variation was supported by consideration. In the absence of
a promise made under protest, the law insists that the victim take reasonable steps
to repudiate or disaffirm the promise as soon as practicable. Generally, this will occur
after the pressure dissipates, which is usually once the threat of breaching the con-
tract has lost its persuasive force. If money has been paid under the variation and
the coercer has performed his or her part of the bargain as outlined in the underlying
contract, then the victim should act responsibly in seeking its recovery. If the varia-
tion-is a bald promise to pay and the coercer performs his or her part of the bargain,
then the victim should continue to resist payment (as happened in this case).
[59) The law is clear that a promiser who, for example, sits back and waits several
years before challenging the enforceability of the variation will be deemed guilty of
acquiescence and though the plea of economic duress may have been made out, it
will fail on this ground. This is what happened in Stott v. /Vlerit Investment Corp.
Although the Court of Appeal found the agreement was entered into under economic
duress, the failure of the defendant promiser to disavow himself of the agreement
until several years after it was signed was fatal to his defence. Once again, it is import-
ant to note that the law will reject a plea of economic duress where commercial parties
make deliberate decisions that they later regret. In "Economic Duress in Contract:
Departure, Detour or Dead-End?," Professor Ogilvie expresses this accurately at p. 204:
The [cases) demonstrate that parties who voluntarily negotiate agreements that they
believe to be advantageous cannot subsequently rely on economic duress to avoid
those agreements .... [E]conomic duress does not function to relieve pa rties from com-
mercia l bargains subsequently perceived or experienced to be burdensome.
[60] To this point, I have not addressed whether "independent legal advice" is a
relevant consideration. According to the Privy Council's decision in Pao On, and
relying on the American jurisprudence, it is a factor that must be examined. On the
other hand, courts have questioned the relevance of this factor. In Gordon v. Roebuck,
McKinlay J.A. adroitly observed that the independent advice is likely to focus on
whether the victim has any practical alternative other than to capitulate to the
demands of the coercer. Indeed, one cannot help but speculate that it would be rare
for sophisticated commercial parties, such as those before us, not to consult legal
counsel and have their solicitors draft correspondence to bolster their clients'

614
 VI. DURESS

respective positions in anticipation of a possible plea of economic duress . The fact

of the matter is that access to independent legal advice on the part of the victim is
not sufficient to overcome the finding that he or she had no alternative but to submit
to the contractual variation demanded by the coercer. As stated earlier, it seems to
me that the notion of "independent legal advice" is more amenable to cases where
a person has entered into an improvident bargain which is attacked on the grounds
of unconscionability, undue influence and duress. Insurance settlements come
_quickly to mind: Permaform Plastics Ltd. v. London & /II/id/and General Insurance Co.
(1996), 110 Man. R. (2d) 260, [1996] M.J. No. 322 (Man. C.A.). These are the cases where
the law favours the consumer and the courts are favourably disposed to scrutinize
the fairness of the bargain. But in most cases where economic duress is pleaded, the
parties are commercial entities with ready access to legal counsel. That said, there
may be cases where independent legal advice becomes a relevant consideration in
cases involving a contractual modification. For example, an unsophisticated prom-
isor is dilatory in disaffirming the contractual variation. The fact that the promissor
did not act as quickly as he or she should have might be forgiven because of a lack
of independent legal advice. At the end of the day, however, I am hesitant to embrace
the notion of independent legal advice as an integral component of the economic
duress doctrine.
[61] Finally, both the literature and jurisprudence make reference to the motives
or reasons underscoring the coercer's demands for a contractual variation, as though
they are a relevant consideration. I label this the "good faith" argument or require-
ment. For example, if the coercer refuses to perform under an existing contract
unless the other party agrees to pay more than the _contract price and the reason for
the demand is that the coercer's supplier has imposed a corresponding increase in
price, it could be perceived that the coercer's demands reflect good faith on his or
her part. More so, if the price increase is critical to the coercer's survival as a com-
mercial enterprise. Implicit in all of this is the understanding that if the promissor is
not acting "opportunistically" one should be less sympathetic to the plea of economic
duress. The question remains whether that fact should have an impact on the finding
of economic duress. In my view, it should not, subject to the following caveat.
[62] I have no doubt that, where the party exerting the pressure is acting in a
commercially reasonable manner, in "good faith,'' a party faced with a demand for a
contractual variation might consent for sound business reasons tied to the financial
crisis that the demanding party faces. In short, the good faith of the supposed coercer
may be a reason why the supposed victim consents to the variation. Thus, the rea-
sons or motives of the promisee for demanding the contractual variation are relevant
so far as they may impact on the decision of the promissor to consent to the demand.
It is in that limited sense that I believe the reasons underscoring the decision to
secure a contractual variation by threatened breach of the underlying contract
become relevant. But I do not believe that a plea of good faith should be regarded as
either a complete defence to a plea of economic duress or a central tenet of the
economic duress doctrine. A person who puts a gun to my head and demands my
wallet should be in no better a legal position because he or she is acting in response
to a third person who placed a gun against his or her head. I am still entitled to be
restored to the position I was in before the gun was put to my head. My wallet must
be returned despite the good faith exercised by my coercer.
[63] In summary, the supposed good faith of the ·coercer should not impact on
the victim's contractual right and expectation to receive performance in accordance
with the original terms of the contract. This is why it is important to reiterate that it
is not the legitimacy of the pressure that is important, but rather its impact on the

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victim. The victim may also regret having agreed to the original terms of the contract.
But neither party has the right to cry "hardship" and demand changes to the underlying
contract in the absence of a contractual provision that provides such relief (e .g. a
force majeure clause) or the application of the frustration doctrine.

C. APPLICATION TO THE FACTS OF THE PRESENT CASE

[64] This is not a difficult case when it comes to adjudicating on the validity of the
plea of economic duress. Once again, the facts as found by the arbitrator are central
to Nav Canada's argument that the promise to pay for the navigational aid (the DME)
was not procured under economic duress. Nav Canada insists that it did not exert
any pressure on the Airport Authority. According to Nav Canada's argument, the
Airport Authority was given the option to relocate the old equipment (the NDB) or
to go with the new DME, but that if it elected the latter it would have to pay for the
DME. Nav Canada argues further that as the Airport Authority was given this option
it could not claim that the promise was given because it had no practical alternative
but to agree to pay the $223,000 acquisition cost. As discussed earlier, those are not
the facts as found by the arbitrator. He held that Nav Canada had the contractual right
to decide whether to relocate the existing equipment or purchase new equipment
and that Nav Canada elected to go with the new. The evidence also established that
Nav Canada had refused to purchase and install the navigational equipment until
such time as the Airport Authority agreed to pay for the DME. Admittedly, Nav Canada
did not word its letter to the Airport Authority in terms of withholding performance
under the ASF Agreement. Nav Canada chose its words carefully when it said that it
was not prepared to provide for the purchase of the equipment when preparing its
fiscal budget for the upcoming year. But the practical effect of that letter was to force
the Airport Authority to promise to pay the $223,000. Nav Canada's threat to breach
the contract by withholding performance arose by implication, but as stated earlier
that is sufficient for purposes of establishing the plea of economic duress.
[65] As to the question of whether there were practical alternatives available to
the Airport Authority, it must be emphasized that Nav Canada exercises a monopoly
when it comes to providing aviation services and equipment to public airports
throughout Canada. In reality, the Airport Authority could not unilaterally withdraw
from the ASF Agreement and tum to another service provider in the industry. The
Airport Authority had already expended $6 million to extend one of its two runaways
and Nav Canada was threatening to hold up the use of the extended runway for at
least another year. In brief, the Airport Authority had no practical alternative but to
submit Nav Canada's demand that it agree to pay the cost of the navigational aid.
[66] The two threshold conditions precedent to a successful plea of economic
duress have been met in this case: Nav Canada exerted pressure to obtain what
amounts to a contractual modification to the ASF Agreement, and the Airport Author-
ity was left with no practical alternative but to capitulate to Nav Canada's demand.
This does not end the legal analysis. It remains to be decided whether the Airport
Authority consented to the variation notwithstanding the circumstances in which
the promise was made. The fact that the promise was not supported by fresh con-
sideration suggests that consent was lacking and, indeed, this inference is confirmed
by the phrasing of the Airport Authority's letter of February 20, 2003: "Your arbitrary
deadline has now forced us to make funds available under protest." Even if those
words had not been used, there is nothing in the record to indicate that the Airport
Authority acquiesced to Nav Canada's demand and pressure by virtue of the lapse
of time. This is not a case where money was paid and the plaintiff did nothing in an
effort to secure its repayment. This is a case in which the victim (the Airport Authority)

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refused to pay from the ver/ outset and has not deviated from that position now that
the coercer (Nav Canada) has fulfilled its contractual obligations under the under-
lying contract (the ASF) in accordance with the analytical framework set out in these
reasons for judgment.
[67] In concluding that the plea of economic duress was established and that the
arbitrator erred in finding that the subsequent correspondence qualified as a separate
and enforceable contract, I have not made reference to the matters of "independent
legal advice" and "good faith." Nav Canada argues that the Airport Authority was in
receipt of independent legal advice over the relevant period of time. I will not specu-
late on whether N av Canada also retained legal counsel in the months leading up to
the exchange of correspondence, other than to state that the correspondence reflects
an awareness of the tenets of the doctrine of economic duress. In any event, this
factor could have no bearing on the determination regarding economic duress.
Finally, it may well be that Nav Canada truly believed that it had no contractual
obligation to pay for the cost of the navigational aid and as such was acting in good
faith. But it is equally plausible, as claimed by the Airport Authority, that Nav Canada
was simply attempting to offload its responsibility to purchase navigational equip-
ment onto an unwilling and unrelenting "victim." If that were its true intent then it
failed to achieve that objective because of the economic duress doctrine. In any
event, "good faith" is not a defence to a plea of economic duress when dealing with
the enforceability of a contractual variation.
[Larlee and Turnbull JJA agreed in dismissing the appeal.]
Appeal dismissed.

NOTES
1. For a critique of the court's reasoning in NAV Canada, see Rick Bigwood, "Doctrinal Reform
and Post-Contractual Modifications in New Brunswick: NAV Canada v Greater Fredericton Air-
port Authority Inc" (2010) 49 Can Bus LJ 256, where Bigwood argues that "the court's new
framework for analyzing economic duress claims in Nav Canada [does not] represent the best
comprehension and rationalization of economic duress in cases involving postcontractual
modifications of executory contracts, even when the claim is merely declaratory or restitutionary
in nature." Rather, he maintains that "Lord Scarman's dual test [in Pao On v Lau Yiu Long, [1980]
AC 614 (PC)) for duress is superior to Robertson JA's new analytical framework precisely because
it responds to both the quality of the conduct of the promisee and the quality of its effect on
the promisor's contractual assent, acknowledging their respective roles in the reckoning ."
2. In Pao On, Lord Scarman held:
Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. ... [l)n a
contractual situation commercial pressure is not enough . There must be present some factor
"which could in law be regarded as a coercion of his will so as to vitiate his consent." ... In
determining whether there was a coercion of will such that there was no true consent, it is
material to inquire whether the person alleged to have been coerced did or did not protest;
whether, at the time he was allegedly coerced into making the contract, he did or did not
have an alternative course open to him such as an adequate legal remedy; whether he was
independently advised; and whether after entering the contract he took steps to avoid it. All
these matters are, as was recognised in Maskell v Horner, [1915) 3 KB 106, relevant in deter-
mining whether he acted voluntarily or not. ... In their Lordships' view, there is nothing
contrary to principle in recognising economic duress as a factor which may render a con-
tract voidable, provided always that the basis of such recognition is that it must amount to a

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coercion of w ill, which vitiates consent. It must be shown that the payment made or the
contract entered into was not a voluntary act.

3. Later English cases have departed from the "overborne will" theory of duress to an
approach that emphasizes the legitimacy of the threat and the availability of reasonable
alternatives. For example, in CTN Cash and Carry Ltd v Gallaher Ltd, [1994] 4 All ER 714 (CA),
the court considered whether a threat to perform a lawful act, when made together with a
bona fide (but mistaken) demand for payment, amounted to economic duress. The court held,
in the context of dealings between two commercial enterprises, that it did not. See also The
Evia Luck, [1993] 2 AC 152 (HL).
4. In Burin Peninsula Community Business Development Corporation v Grandy, 2010
NLCA 69, the Court of Appeal had to consider whether personal guarantees executed by the
Grandys in favour of the corporation were unenforceable for having been obtained under
economic duress. The appellate court maintained (at para 30) that "[t]his appears to be a clas-
sic case where the lender's representative, mindful of the absence of a contractual provision
requiring personal guarantees, coerced the principal shareholders of the borrower who were
under pressure from an existing lender to agree to vary the terms of an existing loan commit-
ment without the provision of further consideration." It upheld the trial judge's findings that the
Grandys were in a "precarious financial position" and lacked alternatives because the corpor-
ation was the lender of last resort and they were being pressured for payment by their existing
lender. In addition, although the Grandys were told they could take time to consider their
position, they were advised by the corporation's executive officer that it was unlikely that the
corporation would be advancing additional funds to the Grandys without the additional security.
Finally, the corporation's counsel (who was found by the trial judge to be, in the minds of the
Grandys, their counsel as well) advised the Grandys to sign the guarantees without advising
them to seek another opinion . There was a finding of economic duress, meaning that the cor-
poration was not entitled to enforce its guarantee against Mr. Grandy.
5. For more discussion of economic duress, see H Stewart, "Economic Duress in Canadian
Law: Towards a Principled Approach" (2003) 82 Can Bar Rev 359; Waddams at paras 509-13;
McCamus at 248-56, 379-402. For a discussion on the doctrines of duress, undue influence,
and unconscionable dealing in New Zealand, see Rick Bigwood, "Ill-Gotten Contracts in New
Zealand: Parting Thoughts on Duress, Undue Influence and Unconscionable Dealing: Kiwi
Style?" (2011) 42 VUWLR 83.

VII. CONSUMER PROTECTION

CONSUMER PROTECTION ACT, 2002

SO 2002, c 30, Schedule A

1. In this Act, ..'.

"consumer" means an individual acting for personal, family or household pur-
poses and does not include a person who is acting for business purposes; ...
"representation" means a representation, claim, statement, offer, request or pro-
posal that is or purports to be,
(a) made respecting or with a view to the supplying of goods or services to
consumers, or
(b) made for the purpose of receiving payment for goods or services supplied
or purporting to be supplied to consumers;
"services" means anything other than goods, including any service, right, entitle-
ment or benefit; ...

618
 VII. CONSUMER PROTECTION

14(1) It is an unfair practice for a person to make a false, misleading or deceptive

representation.
(2) Without limiting the generality of what constitutes a false, misleading or
deceptive representation, the following are included as false, misleading or deceptive
representations:
1. A representation that the goods or services have sponsorship, approval,
performance characteristics, accessories, uses, ingredients, benefits or qualities
they do not have.
2. A representation that the person who is to supply the goods or services has
sponsorship, approval, status, affiliation or connection the person does not have.
3. A representation that the goods or services are of a particular standard,
quality, grade, style or model, if they are not.
4. A representation that the goods are new, or unused, if they are not or are
reconditioned or reclaimed, but the reasonable use of goods to enable the person
to service, prepare, test and deliver the goods does not result in the goods being
deemed to be used for the purposes of this paragraph.
5. A representation that the goods have been used to an extent that is mater-
ially different from the fact.
6. A representation that the goods or services are available for a reason that
does not exist.
7. A representation that the goods or services have been supplied in accord-
ance with a previous representation, if they have not.
8. A representation that the goods or services or any part of them are available
or can be delivered or performed when the person making the representation
knows or ought to know they are not available or cannot be delivered or
performed.
9. A representation that the goods or services or any part of them will be avail-
able or can be delivered or performed by a specified time when the person making
the representation knows or ought to know they will not be available or cannot
be delivered or performed by the specified time.
10. A representation that a service, part, replacement or repair is needed or
advisable; if it is not.
11. A representation that a specific price advantage exists, if it does not.
12. A representation that misrepresents the authority of a salesperson, repre-
sentative, employee or agent to negotiate the final terms of the agreement.
13. A representation that the transaction involves or does not involve rights,
remedies or obligations if the representation is false, misleading or deceptive.
14. A representation using exaggeration, innuendo or ambiguity as to a
· material fact or failing to state a material fact if such use or failure deceives or
tends to deceive.
15. A representation that misrepresents the purpose or intent of any solicita-
tion of or any communication with a consumer.
16. A representation that misrepresents the purpose of any charge or proposed
charge.
17. A representation that misrepresents or exaggerates the benefits that are
likely to flow to a consumer if the consumer helps a person obtain new or poten -
tial customers.
15(1) It is an unfair practice to make an unconscionable representation.
(2) Without limiting the generality of what may be taken into account in deter-
mining whether a representation is unconscionable, there may be taken into account

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that the person making the representation or the person's employer or principal
knows or ought to know,
(a) that the consumer is not reasonably able to protect his or her interests
because of disability, ignorance, illiteracy, inability to understand the language
of an agreement or similar factors;
(b) that the price grossly exceeds the price at which similar goods or services
are readily available to like consumers;
(c) that the consumer is unable to receive a substantial benefit from the subject-
matter of the representation;
(d) that there is no reasonable probability of payment of the obligation in full
by the consumer;
(e) that the consumer transaction is excessively one-sided in favour of some-
one other than the consumer;
(f) that the terms of the consumer transaction are so adverse to the consumer
as to be inequitable;
(g) that a statement of opinion is misleading and the consumer is likely to rely
on it to his or her detriment; or
(h) that the consumer is being subjected to undue pressure to enter into a
consumer transaction ....
18(1) Any agreement, whether written, oral or implied, entered into by a consumer
after or while a person has engaged in an unfair practice may be rescinded by the
consumer and the consumer is entitled to any remedy that is available in law, includ-
ing damages.
(2) A consumer is entitled to recover the amount by which the consumer's pay-
ment under the agreement exceeds the value that the goods or services have to the
consumer or to recover damages, or both, if rescission of the agreement under
subsection (1) is not possible,
(a) because the return or restitution of the goods or services is no longer pos-
sible; or
(b) because rescission would deprive a tnird party of a right in the subject-
matter of the agreement that the third party has acquired in good faith and for
value.
(3) A consumer must give notice within one year after entering into the agree-
ment if,
(a) the consumer seeks to rescind an agreement under subsection (1); or
(b) the consumer seeks re~overy under subsection (2), if rescission is not
possible.
(4) The consumer may express notice in any way as long as it indicates the inten-
tion of the consumer to rescind the agreement or to seek recovery where rescission
is not possible and the reasons for so doing and the notice meets any requirements
that may be prescribed.

(10) In the trial of an issue under this section, oral evidence respecting an unfair
practice is admissible despite the existence of a written agreement and despite the
fact that the evidence pertains to a representation in respect of a term, condition or
undertaking that is or is not provided for in the agreement.
(11) A court may award exemplary or punitive damages in addition to any other
remedy in an action commenced under this section.
(12) Each person who engaged in an unfair practice is liable jointly and severally
with the person who entered into the agreement with the consumer for any amount
to which the consumer is entitled under this section.

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 VII . CONSUMER PROTECTION

UNCONSCIONABLE TRANSACTIONS RELIEF ACT

RSO 1990, c U.2

1. In this Act,
"cost of the loan" means the whole cost to the debtor of money lent and includes
interest, discount, subscription, premium, dues, bonus, commission, brokerage fees
and charges, but not actual lawful and necessary disbursements made to a land
registrar, a local registrar of the Superior Court of Justice, a sheriff or a treasurer of
a municipality; .
"creditor" includes the person advancing money lent and the assignee of any
claim arising or security given in respect of money lent;
"debtor" means a person to whom or on whose account money lent is advanced
and includes every surety and endorser or other person liable for the repayment of
money lent or upon any agreement or collateral or other security given in respect
thereof;
"money lent" includes money advanced on account of any person in any trans-
action that, whatever its form may be, is substantially one of money-lending or
securing the repayment of money so advanced and includes and has always
included a mortgage within the meaning of the Mortgages Act. ·
2. Where, in respect of money lent, the court finds that, having regard to the risk
and to all the circumstances, the cost of the loan is excessive and that the transaction
is harsh and unconscionable, the court may,
(a) reopen the transaction and take an account between the creditor and the
debtor;
(b) despite any statement or settlement of account or any agreement purport-
ing to close previous dealings and create a new obligation, reopen any account
already taken and relieve the debtor from payment of any sum in excess of the
sum adjudged by the court to be fairly due in respect of the principal and the cost
of the loan;
(c) order the creditor to repay any such excess if the same has been paid or
allowed on account by the debtor;
(d) set aside either wholly or in part or revise or alter any security given or
agreement made in respect of the money lent, and, if the creditor has parted with
the security, order the creditor to indemnify the debtor.
3. The powers conferred by section 2 may be exercised,
(a) in an action or proceeding by a creditor for the recovery of money lent;
(b) in an action or proceeding by the debtor despite any provision or agree-
ment to the contrary, and despite the fact that the time for repayment of the loan
or any installment thereof has not arrived;
(c) in an action or proceeding in which the amount due or to become due in
respect of money lent is in question.
4(1) In addition to any right that a debtor may have under this or any other Act
or otherwise in respect of money lent, the debtor may apply for relief under this Act
to the Superior Court of Justice which may exercise any of the powers of the court
under section 2.

5. Nothing in this Act affects the rights of an assignee or holder for value without
notice, or derogates from the existing powers or jurisdiction of any court.

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

VIII. RESTITUTION
In many of the categories of situations considered in this chapter, opportunities for the asser-
tion of restitutionary claims for the value of benefits conferred by one party on the other may
arise. In the main, the doctrines examined in this chapter, if applicable, have the effect of
rendering unenforceable an agreement entered into by parties manifesting an inequality of
bargaining power. As in all cases of ineffective transactions, the possibi lity exists that prior to
an awareness of the unenforceability of the agreement. one party will confer a valuable benefit
on the other. In such circumstances, the party conferring the benefit has no claim to enforce
the contract and, as an alternative, may wish to pursue a claim for restitutionary relief in order
to prevent the unjust enrichment of the other party.
In these contexts, however, there exists some tension between the general policy favouring
recovery of benefits conferred under ineffective transactions in order to prevent unjust enrich-
ment and the policies underlying the rules that have rendered the agreement unenforceable
on the ground of inequality of bargaining power. Nowhere is th is tension more evident than in
the context of restitution for benefits conferred under agreements entered into by minors. If,
for example, restitutionary claims against minors were generally avai lable, the policy of afford-
ing protection to minors that underlies the unenforceability rule might be severely under-
mined. Although, as we have seen in Nash v Inman, above, the common law clearly permits
restitutionary recovery .of the value of necessaries supplied to a minor, and courts have been
generally unreceptive to restitutionary claims against minors. At the same time, an absolute bar
against such relief would provide minors with an opportunity to engage in strategic or, indeed,
fraudulent behaviour in order to exploit their status of contractual incapacity. Thus, claims
against minors have been permitted in circumstances where the minor has acted fraudulently.
See e.g. Stocks v Wilson, [1913 ] 2 KB 235. Although the doctrine on these issues does not yield
to a concise summary, courts have tended to protect minors from restitutionary claims where
the minor has lost or dissipated the benefit or where the adult party has engaged in oppressive
conduct. In some cases, courts have restricted the adult party to recovery of benefits that can
be returned in specie.
Turning to the restitutionary rights of the minor, however, an understandably straight-
forward pattern emerges. It would be consistent with the underlying policy of protection of
minors to grant restitutionary relief to a minor who has conferred value on an adult party.
Canadian courts appear to have embraced the proposition that restitutionary relief should
generally be available to minors, at least in cases where the minor can make restitution to the
other party. See e.g. LaFayette v WW Distributors & Co Ltd (1965). 51 WWR 685 (Sask Dist Ct) .
Presumably, however, the minor wou ld be relieved of the obligation to make coun terrestitu -
tion in any case w here its application would severely prejudice the minor. This, at least. is the
majority rule in American jurisdictions. See e.g. Quality Motors, Inc v Hays, 225 SW 2d 326 (Ark
SC 1949). For more detailed accounts, see generally Waddams, ch 18, and JD McCamus,
"Restitution of Benefits Conferred Under Minors' Contracts" (1979) 28 UNBLJ 98.
In the context of transactions rendered unenforceable on grounds of unconscionability and
undue influence, a different balance is struck between the impulse to afford protection to the
weaker party and the impulse to prevent unjust enrichment by affording restitutionary relief. If
either of these doctrines is applicable to a particular transaction, the only traditional means ·of
relief available to the weaker party is to seek an equitable decree of rescission. Although the
obtaining of such a decree will be coupled with restitutionary relief for the weaker party, equit-
able rescission takes an even-handed approach to restitutionary matters. Thus, in order to obtain
a decree of rescission, the weaker party must meet a number of conditions for the granting of
such relief, the most important of wh ich for present purposes is that the weaker party must be
able to make counterrestitution to the other party. In other words, in order to grant a declaration
that the agreement is unenforceable on grounds of either undue influence or unconscionability,
the court must be satisfied that it is possible to achieve a mutual restitution . As it is sometimes

622
 VIII. RESTITUTION

said, "there must be a giving back and a taking back on both sides." Thus, if the weaker party
has acquired an asset that can no longer be restored to the other party, perhaps because it has
been consumed, the decree of rescission is not available to the weaker party. Similarly, rescission
will be unavailable if, prior to the attempt to rescind, third-party rights have intervened. If, for
example, the subject matter of a purchase from the weaker party has been sold by the stronger
party to a bona fide third-party purchaser who is unaware of the undue influence or uncon-
scionability, rescission will not be decreed .
It is not self-evident, however, that this limitation on relief meets the needs of justice in the
context of inequality of bargaining power. If, for example, in Marshall v Canada Permanent
Trust Co, excerpted above, Walsh had transferred title to his property to Marshall and Marshall,
in turn, had sold the property to an innocent third-party purchaser, a decree of rescission
would not be available and the agreement would remain enforceable. Walsh would have no
ability to recover the value obtained by Marshall through unconscionable conduct. The trad-
itional explanation for this outcome is that equity normally did not award monetary relief,
damages being the special preserve of the common law. Little more than history commends
such a result, however, and it is of interest, therefore, that in recent years both English and
Canadian courts in such circumstances appear to be moving in the direction of allowing mon-
etary relief that achieves a form of restit.utionary relief for the innocent party.
In Mahoney v Purnell, [1996] 3 All ER 61 (OB), the plaintiff, who jointly owned and operated a
hotel business with his son-in-law, Purnell, acting under the undue influence of Purnell, sold his
interest in the business to his son-in-law at a severely undervalued price. Purnell then sold the
business in a rising market, at great profit, to a bona fide purchaser. Under traditional doctrine,
rescissionary relief would be unavailable in such circumstances. Nonetheless, the trial judge
awarded equitable compensation in an amount representing the difference between the value
of the interest Mahoney transferred to Purnell and the purchase price received from Purnell in
return. In effect, then, Mahoney was allowed to recover the amount by which Purnell had
unjustly enriched himself through the exercise of undue influence. Similar results have been
achieved in Canadian cases of undue influence and unconscionability. See e.g. Paris v Machnick
(1972), 32 DLR (3d) 723 (NSSC (TD)); Junkin v Junkin (1978), 86 DLR (3d) 751 (Ont H Ct J);
Treadwell v Martin (1976), 67 DLR (3d) 493 (NBCA). This approach has recently been confirmed
in the unconscionability context by the Supreme Court of Canada in Rick v Brandsema , 2009
SCC 10, [2009] 1 SCR 295, the facts and holding of which have been described above. In
explaining that monetary compensation could be awarded in lieu of rescission, Abella J (for
the court) observed:

Historically, rescission was the remedy when a contract was found to be unenforceable
because of unconscionability. Increasingly, however, when rescission is not available because
restitution, as a practical matter, cannot be made, damages in the form of equitable com-
pensation are imposed to provide relief to the wronged party. This is because [quoting from
the British Columbia Court of Appeal in Dusik v Newton(1985), 62 BCLR 1 at 47 (CA)] "where
rescission is impossible or inappropriate, it would be inequitable for the defendant to retain
the benefits of an unconscionable bargain."

In a case where rescission is unavailable, then, monetary restitution for the value of benefits
wrongfully obtained by the defendant may be awarded as an alternative.
In addition to the requirements that there must be mutual restitution, or, as is said, a resti-
tutio in integrum, and that third-party rights must not have intervened, there are additional
defences or "bars" generally applicable to equitable rescission. Thus, relief will be denied where
the impugned transaction has been affirmed by the weaker party or where undue delay or
"laches" has occurred. One would expect that in the context of inequality of bargaining power,
courts would apply these defences in a manner that is sensitive to the policies underlying the
rules rendering the transaction unenforceable. Thus, for example, it is well established in the

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CHAPTER 6 PROTECTION OF WEAKER PARTIES

context of rescission for undue influence that an affirmation of the weaker party w ill not be
effective unless made after the undue influence has ceased to operate.
In the context of forfeiture clauses, under the ru le in Stock/oser v Johnson, excerpted above,
the striking down of the particular forfeiture clause, rather than the agreement itself, provides
a basis for the restitutionary recovery of the moneys that would otherwise have been forfeited .
When placed in context, the restitutionary claim recognized by Denning LJ in Stockloser
appears boldly innovative. Th e plaintiff in Stock/oser, of course, was in breach of a contractual
obligation to continue making in sta llm ent payments. It may be asked, then, whether a party in
breach of contract may be entitled to recover moneys paid under the agreement with respect
to wh ich no value has been received in return . The general rule is that moneys paid as a
deposit by the party in breach are irrecoverable. It is established that use of the term "deposit"
ind icates that the payment is made as an earnest to bind performance. If the payer refuses to
proceed with the agreement, the deposit w ill be forfeited. See Howe v Smith (1884). 27 Ch D
89 (CA) . Where, on the other hand, the money has been paid by the party in default as a partial
payment of the contract price, the traditional rule is that the money is recoverable in a restitu-
tionary claim . See Dies v British & International Mining Financing Corp Ltd. [1939] 1 KB 724.
Under traditional doctrine. then. an agreement on the part of the party in default to forfeit
moneys paid would normally preclude restitutionary relief. The decision in Stockloser thus
creates a potentially powerful exception to this traditional approach by allowing recovery of
moneys subject to a forfeiture clause in circumstances where the clause is considered by the
courts to be oppressive in its effect. As we shall see in Chapter 8, a sim ilar issue arises in the
context of partia l performance by a party in default who has ag reed to supply goods and
services. In Chapter 8 we examine the traditional authority, Sumpter v Hedges, [1898] 1 OB 673
(CA). which holds that where a builder w ithdraws from an agreement after partia l completion
of the contracted w ork under a contract that provides for payment on completion of the work.
the value of the partial performance is, in effect, forfeited and no restitutionary claim will lie.
When considering the possible reform of Sumpter v Hedges, it will be usefu l to reflect back on
the approach adopted by Denning LJ in the Stockloser case. See generally Maddaugh &
McCamus, ch 5 at 500 (rescission) and ch 19 at 300 (restitution for the party in breach of
contract) .

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 CHAPTER SEVEN

PUBLIC POLICY

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625
II. The Effects of Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626
Ill. Contracts Contrary to Public Policy Expressed in the Common Law . . . . . . . . . . 628
A. Contracts in Restraint of Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632
B. Contracts Related to Gaming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636
C. Contracts in Furtherance of Illegal Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . 638
D. Contracts Conferring Benefits Obtained as a Result of Crime . . . . . . . . . . . 641
IV. Contracts Contrary to Public Policy Expressed in Statute . . . . . . . . . . . . . . . . . . . . 646
A. When a Contract Is Rendered Void by Statute . . . . . . . . . . . . . . . . . . . . . . . . . 646
B. A Common Intent to Perform a Contract Illegally . . . . . . . . . . . . . . . . . . . . . 651
V. Mitigating the Consequences of Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653
A. When the Claim Is Founded on an Independent Right . . . . . . . . . . . . . . . . . 653
B. Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654
C. Severance of Illegal Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664
VI. An Alternative Approach? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669

I. INTRODUCTION
The freedom to contract, to voluntarily enter into agreements enforceable at law, is fundamen-
tal to the law of contracts. That freedom, however, can be overridden in the name of public
policy when it is determined that other social policies are more important, or when it would not
be in the public interest to enforce a contract. This chapter is about contracts that are, on their
face, valid, but that are not enforced for public policy reasons. As Professor Waddams writes
in Dimensions of Private Law: Categories and Concepts in Anglo-American Legal Reasoning
(New York: Cambridge University Press, 2003) at 19: "From one point of view, there is an iden-
tity of meaning [between private law and public policy], because protection of property,
enforcement of contracts, redress of wrongs, and avoidance of unjust enrichment are public
policies but 'policy' is often used to denote the residual or overriding sense of justice betw een
the parties and 'public policy' often indicates enlargement or restriction of liability because of
anticipated salutary effects on the future behaviour of others."
Constricting agreements that have been freely entered into through the vague reference to
the "paramount public policy" has elicited concern, but the concern has fallen on both sides
of the argument. Courts have emphasized both the freedom to contract and to have those
contracts enforced, as well as public interest considerations that protect society-considerations
that should not be disregarded in favour of private interests. Buttough J famously cautioned
against reliance on public policy in Richardson v Mellish (1824), 2 Bing 229 at 252 (CP), saying,
"Public policy ... is a very unruly horse, and when once you get astride it you never know where

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it will carry you. " Similarly, Jessel MR urged caution w hen interfering with freedom of contract
in Printing & Numerical Registering Co v Sampson (1875), LR 19 Eq 462 at 465, maintaining,
"[l]f there is one thing w hich more than another public policy requires it is that men of full age
and competent understanding shall have the utmost liberty of contracting and tha t their con-
tracts w hen entered into freely and voluntarily shall be held sacred and shall be enforced by
Courts of justice."
On the other side, courts have acknowledged that the freedom to contract is not infinite,
and have recognized that constraints are necessary to protect the public. Lord Denning, in
Enderby Town Football Club Ltd v The Football Association Ltd, [1971] Ch 591 at 606, directly
countered Buttough J's concerns: "I disagree. With a good man in the saddle, the unruly horse
can be kept in control. It can jump over obstacles. It can leap the fences put up by fictions and
come down on the side of justice ." The Canadian Supreme Court in Miller Estate, Re, ([1938]
SCR 1 at paras 5 and 15) also recognized that w hile contracts must be given effect, there is
nonetheless the "paramount consideration of public policy which over-rides the interest [of
giving effect to contracts and testamentary dispositions] and what otherwise would be the
rights and powers of individuals ." However, the court went on to urge caution when courts
utilize public interest considerations, and articulated, "two conditions which must be fulfilled
to justify a refusal by the courts on grounds of public policy to give effect to the rule of law
according to its proper application." First, "... such prohibition is imposed in the interest of the
safety of the state, or the economic or social well-being of the state and its people as a
whole ... [and second], the doctrine should be invoked only in clear cases, in which harm to
the public is substantially uncontestable, and does not depend upon the idiosyncratic infer-
ences of a few judicial minds. "
More recently, in Tercon Contractors Ltd v British Columbia (Transportation and Highways),
2010 SCC 4, excerpted in Chapter 6, the Supreme Court emphasized the power of public pol-
icy and urged restraint in its application, saying, "[t]he residual power of a court to decline
enforcement exists but, in the interests of certainty and stability of contractual relations, it will
rarely be exercised" (at paras 117-18). But the court went on to say, "[t]here are cases where the
exercise of w hat Professor Waddams calls the 'ulti mate power' to refuse to enforce a contract
may be justified, even in the commercial context. Freedom of contract, like any freedom, may
be abused." It is against this background that the following cases should be studied.

II. THE EFFECTS OF ILLEGALITY

When a court declares a contract illegal as contrary to public policy, it must then determine
how to treat the parties to that agreement. Usually, one of those parties to the contract is
before the court, seeking to enforce the agreement or to recover some benefit paid under the
now -inoperati ve contract.

HOLMAN V JOHNSON
(1775), 1 Cowp 341, 98 ER 1120 (KB)

Assumpsit for goods sold and delivered: Plea non assumpsit, and verdict for the
plaintiff. Upon a rule to show cause why a new trial should not be granted, Lord
Mansfield reported the case, which was shortly this: The plaintiff, who was resident
at and inhabitant of Dunkirk, together with his partner, a native of that place, sold
and delivered a quantity of tea, for the price of which the action was brought, to the
order of the defendant, knowing it was intended to be smuggled by him into England;
they had, however, no concern in the smuggling scheme itself, but merely sold this

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 II. THE EFFECTS OF ILLEGALITY

tea to him, as they would have done to any other person in the common and ordinary
course of their trade.
LORD MANSFIELD: There can be no doubt that every action tried here must be tried
by the law of England; but the law of England says that in a variety of circumstances,
with regard to contracts legally made abroad, the laws of the country where the cause
of action arose shall govern. There are a great many cases which every country says
shall be determined by the laws of foreign countries where they arise. But I do not
see how the principles on which that doctrine obtains are applicable to the present
case. For no country ever takes notice of the revenue laws of another.
The objection that a contract is immoral or illegal as between plaintiff and defend-
ant, sounds at all times very ill in the mouth of the defendant. It is not for his sake,
however, that the objection is ever allowed; but it is ·founded in general principles
of policy, which the defendant has the advantage of, contrary to the real justice as
between him and the plaintiff, by accident, if I may so say. The principle of public
policy is this: Ex dolo malo non oritur actio. No court will lend its aid to a man who
founds his cause upon an immoral or illegal act. If from the plaintiff's own stating or
otherwise, the cause of action appears to arise ex turpi causa, or the transgression of
a positive law in this country, there the court says he has no right to be assisted. It is
upon that ground the court goes; not for the sake of the defendant, but because they
will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to
change sides, and the defendant was to bring his action against the plaintiff, the
latter would then have the advantage of it; for where both are equally in fault, potior
est conditio defendantis.
The question therefore is, whe\ her in this case the plaintiff's demand is founded
upon the ground of any immoral act or contract, or upon the ground of his being
guilty of anything which is prohibited by a positive law of this country. An immoral
contract it certainly is not; for the revenue laws themselves, as well as the offences
against them, are all positivi Juris . What, then, is the contract of the plaintiff? It is this:
being a resident and inhabitant of Dunkirk, together with his partner, who was born
there, he. sells a quantity of tea to the defendant, and delivers it at Dunkirk to the
defendant's order, to be paid for in ready money there, or by bills drawn personally
upon him in England. This is an action brought merely for the goods sold and delivered
at Dunkirk. Where, then, or in what respect is the plaintiff guilty of any crime? Is there
any law of England transgressed by a person making a complete sale of a parcel of
goods at Dunkirk, and giving credit for them7 The contract is complete, and nothing
is left to be done. The seller, indeed, knows what the buyer is going to do with the
goods, but he has no concern in the transaction itself. It is not a bargain to be paid in
case the vendee should succeed in landing the goods; but the interest of the vendor
is totally at an end, and his contract complete by the delivery of the goods at Dunkirk.
To what a dangerous extent would this go ii it were to be held a crime. If contra-
band clothes are bought in France, and brought home hither, or if glp.ss bought
abroad, which ought to pay a great duty, is run into England, shall the French tailor
or the glass manufacturer stand to the risk or loss attending their being run into
England7 Clearly not. Debt follows the person, and may be recovered in England, let
the contract of debt be made where it will; and the law allows a fiction for the sake
of expediting the remedy. Therefore, I am clearly of the opinion that the vendors of
these goods are not guilty of any offence, nor have they transgressed against the
provisions of any act of Parliament ...
... Therefore, let the rule for a new trial be discharged.
[The three other judges concurred.]

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CHAPTER 7 PUBLIC POLICY

NOTES

1. The principle in Holman v Johnson is that "no court will lend its aid to a man who founds
his cause upon an immoral or illegal act." Thi s principle has been applied and mitigated in
Canadian decisions. Particularly important has been the development of the law of restitution.
See the material below in Section V. B, "Restitution," and, for example, the decision of the
Ontario Court of Appea l in Koliniotis v Tri Level Claims Consultants Ltd (2005), 201 OAC 282,
in which the court allowed a paralegal recovery on the basis of quantum meruit despite a
finding that the contract, which provided for services on a contingency-fee basis, was illegal.
The court found that having a rule absolutely barring quantum meruit wou ld create an injus -
tice that cannot stand, given the public policy underlying the statutory prohibition against
champertous agreements.
2. For a general discussion of public policy in contract law, see Brandon Kain & Douglas T
Yoshida, "The Doctrine of Public Policy in Canadian Contract Law" in Todd L Arch ibald & Randall
Echlin J'J, eds, Annual Review of Civil Litigation, 2007 (Toronto: Carswell, 2007) 1.

Ill. CONTRACTS CONTRARY TO PUBLIC POLICY

EXPRESSED IN THE COMMON LAW
The following cases provide examples of some kinds of agreements that the courts have
refused to enforce on the ground of public policy, including contracts in restraint of trade,
contracts under which a criminal would receive a benefit from his or her crime, and contracts
to defraud a third party. Courts have also refused to enforce sexua lly immoral contracts, con-
tracts to commit a crime or a tort, contracts prejudicial to public sa fety, contracts prejudicial
to the administration of justice or designed to oust the jurisdiction of the court, contracts to
promote corruption in public life, and contracts prejudicial to the status of marriage. One
question is wheth er the "heads of public policy" are closed or may be expanded . Consider the
following excerpts and notes.

Egerton v Brownlow. (1853), 4 HLC 1, 10 ER 359. PARKE B (ER at 409): Public policy
is a vague and unsatisfactory term ... it is capable of being understood in different
senses ... and in that sense there may be every variety of opinion, according to educa-
tion, habits, talents, and dispositions of each person, who is to decide whether an
act is against public policy or not. To allow this to be a ground of judicial decision,
would lead to the greatest uncertainty and confusion .... It is the province of the judge
to expound the law only; the written from the statutes, the unwritten or common
law from the decisions of our predecessors and of our existing Courts, from text
writers of acknowledged authority, and upon the principles to be clearly deduced
from them by sound reason and just inference; not to speculate upon what is best,
in his opinion, for the advantage of the community. Some of these decisions may
have no doubt been founded upon the prevailing and just opinions of the public
good; for instance, the illegality of covenants in restraint of marriage or trade. They
have become part of the recognized law, and we are therefore bound by them, but
we think we are not thereby a4thorised to establish as law everything w hich we may
think for the public good, and prohibit everything which we think otherwise.
POLLOCK LCB (ER at 419) :- My Lords, it may be that Judges are no better able to
discern what i s for the public good than other experienced and enlightened mem -
bers of the community; but that is no reason for their refusing to entertain the
question, and declining to decide upon it.

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 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

NOTES
1. Lord Wright, in Fender v St John-Mildmay, [1938] AC 1at42, said: "[It] is, I think, clear that
this dictum of Pollock C.B. and certain observations in Egerton v Brownlow to a similar effect
cannot be regarded as fixing the modern law, which in my opinion is as stated by Parke B." Why
is it that two centuries ago judges could develop ideas of "public policy," but today the subject is
closed? Compare Samuel Williston, The Law of Contracts, vol 3 (1920), s 1629 at 2864; Williston
"respectfully doubts," as inconsistent with the history of our law, the dictum of Lord Halsbury
in Janson v Driefontein Consolidated Mines, Ltd, [1902] AC 484 at 491: "I deny that any court
can 'invent a new public policy."'
In Bursey v Bursey, 1999 Can LI I 19021 (N LCA), the court urged caution in applying the
doctrine of public policy, "lest it become a catch-all for invalidating too wide a variety of con-
tractual objectives, and unduly impinge on the basic right to enforce engagements freely and
voluntarily made." The court went on to state that "... such restraint [could be observed] by
relating the scope of judicial intervention to precedent, while at the same time not absolutely
foreclosing the doctrine evolving to meet changing conditions" (at para 24).
2. A US view was expressed in Henningsen v Bloomfield Motors, 32 NJ 358, 121 A2d 69 (SC
1960). The court was dealing with a contract for the sale of an automobile, certain clauses of
which severely limited the right of the buyer to recover for damage caused by any defects in
the automobile. The court said: "Public policy is a term not easily defined. Its significance varies
as the habits and needs of a people may vary. It is not static and the field of application is an
ever increasing one. A contract or a particular provision therein, valid in one era, may be totally
opposed to the public policy of another."
3. In Douez v Facebook, Inc, 2017 SCC 33, a majority of the Supreme Court of Canada used
public policy principles to decide that a forum selection clause was unenforceable. The Kara-
katsanis judgment (for three of the judges) determined the clause to be unenforceable on
public policy grounds. Abella J, concurring, also determined the clause could not be enforced,
on public policy and unconscionability grounds. The dissent would have enforced the clause.
In British Columbia, a class action was brought against Facebook, Inc, on behalf of 8.1 mil-
lion people. They alleged Facebook used the names and pictures of certain members for
advertising without their consent, contrary to the Privacy Act, RSBC 1996, c 373. Facebook
sought to stay the proceedings on the basis of a forum selection clause contained in the terms
of use, terms to which all Facebook members must agree before they access the site.
To determine the enforceability of the forum selection clause, the Karakatsanis judgment
applied the two-step common law test, establish_ed by the Supreme Court in ZI Pompey
lndustrie v ECU-Line NV, 2003 SCC 27 (the Pompey test). Under the first step, the party seek-
ing to stay the proceeding must establish that the clause is "valid, clear and enforceable and
that it applies to the cause of action before the court" (Douez v Facebook, at para 28). Basic
principles of contract law apply to the first step of the test, to determine the enforceability and
applicability of the clause, and a plaintiff may use doctrines such as mistake, unconscionability,
undue influence, etc. to argue that the clause is unenforceable, as with any contract claim.
Once the first part is met, the onus shifts to the plaintiff under the second part, to show reasons
the court should nonetheless not enforce the clause. This part of the test is referred to as the
"strong cause" part. Under the strong cause test, the court exercises its discretion to consider
"'all the circumstances,' including the 'convenience of the parties, fairness between the parties
and the interests of justice"' (at para 29). The Karakatsanis judgment found the clause enforce-
able under the first step, but not under the second. The judges determined that, because the
strong cause test has been utilized in commercial contexts, the test should be expanded to
include public policy to account for the consumer context before them.
There were two aspects to the public policy considerations . First, there is an inequality of
bargaining power between the parties, as determined by Facebook's profits, and by consum-
ers' inability to reject Facebook's terms of use. Facebook's argument that customers could

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simply remain offline if they chose, was rejected, as the court found that "there are few compar-
able alternatives to Facebook, a social networking platform w ith extensive reach" (at para 56).
Second, it is important to adjudicate these matters in Canadian courts. "There is an inherent
public good in Canadian courts deciding these types of claims. Through adjudication, courts
establish norms and interpret the rights enjoyed by all Canadians" (at para 58). Given that pri-
vacy legislation is quasi-constitutional, "only a local court's interpretation of privacy rights
under the P~ivacy Act will provide clarity and certainty about the scope of the rights to others
in the province" (at para 59). In sum, the public policy concerns provided a strong cause to not
enforce the clause. The Karakatsanis decision maintained (at para 52):
There are generally strong public policy reasons to hold parties to their bargain and it is clear
that forum selection clauses are not inherently contrary to public policy. But freedom of
contract is not unfettered. A court has discretion under the strong cause test to deny the
enforcement of a contract for reasons of public policy in appropriate circumstances. Gener-
ally, such limitations fall into two broad categories: those intended to protect a weaker party
or those intended to protect "the social, economic, or political policies of the enacting state
in the collective interest" ... In this case, both of these categories are implicated. It raises both
the reality of unequal bargaining power in consumer contracts of adhesion and the local
court's interest in adjudicating claims involving constitutional or quasi-constitutional rights.
In the light of these comments, consider the following US case.

IN THE MATTEROF BABY "M"

537 A 2d 1227 (NJSC 1988)

[Mr. and Mrs. Stem were advised against having children for fear that pregnancy
would exacerbate Mrs. Stem's mild.form of multiple sclerosis. They were considered
unlikely candidates for adoption due to their age (30s) and differing religious com-
mitments. As wen, Mr. Stern's parents were Holocaust survivors and it was important
to him to have a child biologicany connected to him. The couple pursued an ad from
the Infertility Center in New York and was matched with Mrs. Whitehead, who agreed
to serve as a surrogate mother.
The contract provided that Mrs. Whitehead would be artificiany inseminated with
Mr. Stem's sperm and assume the risks of childbirth; submit to a psychiatric exam-
ination at Mr. Stern's expense and to amniocentesis; and, upon the birth of the child,
surrender an parental rights. Mr. Stem agreed to assume the risk of the child being
born with any defects and to pay $10,000 plus all expenses.
After the child was born, Mrs. Whitehead refused to surrender custody. The Stems
sued for specific performance of the contract. At trial, Judge Sorkow concluded that
the contract was enforceable. There was no law against it and he found no evidence
of fraud or unconscionability. Because specific performance is a discretionary rem -
edy, he refused to order it unless convinced that giving custody to the Stems would
be in the best interests of the child. After reviewing the evidence, he concluded that
that was the case. Mrs. Whitehead appealed.
The appeal court decided that the surrogacy contract was void, both because it
was contrary to laws of the state prohibiting money being used in adoptions and
because it was contrary to public policy of the state. However, the court also awarded
custody to the Stems, finding that it was in the best interests of the child. On the
public policy question, the court stated:]
WILENTZ CJ: The point is made that Mrs. Whitehead agreed to the surrogacy
arrangement, supposedly funy understanding the consequences. Putting aside the

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 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

issue of how compelling her need for money may have been, and how significant
her understanding of the consequences, we suggest that her consent is irrelevant.
There are, in a civilized society, some things that money cannot buy. In America,
we decided long ago that merely because conduct purchased by money was "vol-
untary" did not mean that it was good or beyond regulation and prohibition . ... There
are, in short, values that society deems more important than granting to wealth
whatever it can buy, be it labor, love, or life. Whether this principle recommends
prohibition of surrogacy which presumably sometimes results in great satisfaction
to all of the parties, is not for us to say. We note here only that, under existing law,
the fact that Mrs. Whitehead "agreed" to the arrangement is not dispositive.
The long-term effects of surrogacy contracts are not known, but feared-the
impact on the child who learns her life was bought, that she is the offspring of
someone who gave birth to her only to obtain money; the impact on the natural
mother as the full weight of her isolation is felt along with the full reality of the sale
of her body and her child; the impact on the natural father and adoptive mother once
they realize the consequences of their conduct. Literature in related areas suggests
these are substantial considerations, although, given the newness of surrogacy, there
is little information ....
The surrogacy contract creates, it is based upon, principles that are directly con-
trary to the objectives of our laws. It guarantees the separation of a child from its
mother; it looks to adoption regardless of suitability; it totally ignores the child; it
takes the child from the mother regardless of her wishes and her maternal fitness;
and it does all of this, it accomplishes all of its goals, through the use of money.
Beyond that is the· potential degradation of some women that may result from
this arrangement. In many cases, of course, surrogacy may bring satisfaction, not
only to the infertile couple, but to the surrogate mother herself. The fact, however,
that many women may not perceive surrogacy negatively but rather see it as an
opportunity does not diminish its potential for devastation to other women.
In sum, the harmful_consequences of this surrogacy arrangement appear to us
all too palpable. In New Jersey the surrogate mother's agreement to sell her child is
void. Its irrevocability infects the entire contract, as does the money that purports
to buy it.

NOTES AND QUESTIONS

1. Why would the infertility centre try. to use contract law to formalize the arrangement
between surrogate mothers and infertile couples?
2. In both courts, Mrs Whitehead lost custody of Baby M. What if the $10,000 fee had not
been paid to Mrs Whitehead before the appeal? Consider yourself in the role of Mrs Whitehead's
lawyer, explaining to her that, at trial, she lost custody of the baby but would have received
her fee; after her appeal, despite winning on the ground that the surrogacy contract was void,
she now can neither keep the baby nor claim the fee.
3. What if the $10,000 fee had been paid prior to the appeal? The question of what hap-
pens to payments made pursuant to illegal contracts is treated below.
4. The question of surrogacy contracts has also been debated in Canada. See Felicia Daunt,
"Exploitation or Empowerment! Debating Surrogate Motherhood" (1991) 55 Sask L Rev 415;
Angela Campbell, "Law's Suppositions About Surrogacy Against the Backdrop of Social Science"
(2011-12) 43 Ottawa L Rev 29. The Assisted Human Reproduction Act, SC 2004, c 2, s 6 prohibits
paying any consideration to a surrogate mother or to anyone arranging a surrogacy contract.
Sections of the Act relating to surrogacy have been upheld as constitutional under the federal
powers over criminal law, although various other sections of the original act were declared

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beyond the fede ral powers. See Reference Re Assisted Human Reproduction Act, 2010 SCC
61, [2010] 3 SCR 457.
5. The Supreme Court of Canada in Bruker v /v1arcovitz, 2007 SCC 54, [2007] 3 SCR 607
held (at para 64) that a contract to give a get or religious divorce as part of a divorce settlement
was an enforceable contract and not "contrary to public order" because it "harmonizes with
Canada's approach to religious freedom, to equality rights, to divorce and remarriage gener-
ally." The case arose in Quebec where the Quebec Civil Code, LRO, c C-1991 provides in art
1413: "A contract whose object is prohibited by law or contrary to public order is null."
6. See also Canadian Taxpayers Federation v Ontario (Minister of Finance) (2004), 73 OR
(3d) 621 (Sup Ct J), excerpted in Chapter 3.

A. CONTRACTS IN RESTRAINT OF TRADE

Historically, common law courts have been opposed to agreements that reduced competition
and created monopolies in the market, and such agreements were promptly overturned. Now,
agreements creating monopolies and anticompetitive practices are governed by legislation .
What continues to be an issue at common law, however, are contracts in which the restraint
is voluntarily expressed, in clauses called "covenants in restraint of trade." These clauses limit
a party's right to carry on business in the future, and are most notably found in employment
contracts and contracts for the sale of businesses, in the form of non-competition and non-
solicitation clauses. At common law, these covenants are unenforceable on public policy
grounds, but courts are now more permissive with their interpretation depending on the type
of agreement before them. As the cases below will show, courts are stricter in interpreting
these covenants in employment contracts than they are in commercial contracts. See also
Waddams at paras 564-66 and MacDougall at 278-81.

SHAFRON V KRG INSURANCE BROKERS (WESTERN) INC

2009 sec 6, [200911 scR 1s7

[In 1988, Mr. Shafron sold the shares in his insurance brokerage business to KRG
Insurance Brokers ("KRG"). He continued to be employed in the business and as part
of his employroent contract signed a contract that contained a non-competition
clause providing that if he left the employment of KRG he would not carry on a
similar business for three years within the "Metropolitan City of Vancouver." A few
years later, the shares were sold to another purchaser, but Mr. Shafron's employment
continued under a contract containing a similar clause. In 2000, Mr. Shafron left
KRG and began working as an insurance salesman in Richmond for another com-
pany. KRG sued Mr. Shafron for breach of his contract. At trial, the judge held that
there was no clear definition for the "Metropolitan City of Vancouver" and the clause
was unenforceable. The Court of Appeal reversed and Mr. Shafron appealed to the
Supreme Court.]
ROTHSTEIN J (after reviewing the facts and the issues): A restrictive covenant in a
contract is what the common \aw refers to as a restraint of trade. Restrictive coven-
ants are frequently found in agreements for the purchase and sale of a business and
in employment contracts. A restrictive covenant precludes the vendor in the sale of
a business from competing with the purchaser and, in an employment contract, the
restrictive covenant precludes the employee, upon leaving employment, from com-
peting with the former employer.
Restrictive covenants give rise to a tension in the common \aw between the
concept of freedom to contract and public policy considerations against restraint of

632
 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

trade. In the seminal decision of the House of Lords in Nordenfelt v. fV1axim Norden felt
Guns and Ammunition Co., [1894] AC. 535, this tension was explained. At common
law, restraints of trade are contrary to public policy because they interfere with indi-
vidual liberty of action and because the exercise of trade should be encouraged and
should be free. Lord Macnaghten stated, at p. 565:
The public have an interest in every person's carrying on his trade freely: so has the
individual. All interference with individual liberty of action in trading, and all restraints
of trade of themselves, if there is nothing more, are contrary to _public policy, and
therefore void. That is the general rule.
However, recognition of the freedom of the parties to contract requires that there
be exceptions to the general rule against restraints of trade. The exception is where
the restraint of trade is found to be reasonable. At p. 565, Lord Macnaghten continued:
But there are exceptions: restraints of trade and interference with individual liberty of action
may be justified by the special circumstances of a particular case. It is a sufficient justifica-
tion, and indeed it is the only justification, if the restriction is reasonable-reasonable, that
is, in reference to the interests of the parties concerned and reasonable in reference to
the interests of the public, so framed and so guarded as to afford adequate protection
to the party in whose favour it is imposed, while at the same time it is in no way injurious to
. the public. That, I think, is the fair result of all the authorities. [Emphasis added.]
Therefore, despite the presumption that restrictive covenants are prima facie unen-
forceable, a reasonable restrictive covenant will be upheld.
It is important at this juncture to differentiate between a contract for the sale of
a business and an employment contract.
In Nordenfelt, Lord Macnaghten pointed out that there is greater freedom to
contract between buyer and seller than between employer and employee. At p. 566,
he wrote:
To a certain extent, different considerations must apply in cases of apprenticeship and
cases of that sort, on the one hand, and cases of the sale of a business or dissolution
of partnership on the other. A man is bound as an apprentice because he wishes to
learn a trade and to practise it. A man may sell because he is getting too old for the
strain and worry of business, or because he wishes for some other reason to retire from
business altogether. Then there is obviously more freedom of contract between buyer
and seller than between master and servant or between an employer and a person
seeking employment. [Emphasis added .]

Although the comments of Lord Macnaghten focus on apprenticeship, the same

concept has been extended and applied to contracts between employers and
employees.
In the House of Lords' decision of Herbert Morris, Ltd. v. Saxe/by, [1916] 1 AC. 688,
Lord Atkinson made some observations on the difference between contracts of
employment and those for sale of a business. He cited with approval Leather Cloth
Co. v. Lorsont (1869), L.R. 9 Eq. 345, at p. 354, quoting James V.-C. in that case:
The principle is this: Public policy requires that every man shall be at liberty to work for
himself, and shall not be at liberty to deprive himself or the State of his labour, skill, or
talent, by any contract that he enters into. On the other hand, public policy requires
that when a man has by skill or by any other means obtained something which he wants
to sell, he should be at liberty to sell it in the most advantageous way in the market; and
in order to enable him to sell it advantageously in the market it is necessary that he should
be able to preclude himself from entering into competition with the purchaser.

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Lord Atkinson then stated that "[t]hese considerations in themselves differentiate,

in my opinion, the case of the sale of goodwill from the case of master and servant
or employer and employee" (p. 701).
The sale of a business often involves a payment to the vendor for goodwill. In
consideration of the goodwill payment, the custom of the business being sold is
intended to remain and reside with the purchaser. As Lord Ashbourne observed at
p. 555 of Nordenfelt:
I think it is quite clear that the covenant must be taken as entered into in connection
with the sale of the goodwill of the appellant's business, and that it was entered into with
the plain and bona fide object of protecting that business.
And as stated by Dickson J. (as he then was) in Eisley v. J.G. Collins Insurance
Agencies Ltd, [1978] 2 S.C.R. 916, at p. 924:

A person seeking to sell his business might find himself with an unsaleable commodity
if denied the right to assure the purchaser that he, the vendor, would not later enter
into competition.
See also Burgess v. Industrial Frictions & Supply Co. (1987), 12 B.C.L.R. (2d) 85 (C .A.),
per McLachlin J.A. (as she then was), at p. 95.
The same considerations will not apply in the employer/employee context. No
doubt an employee may build up a relationship with customers of the employer, but
there is normally no payment for goodwill upon the employee leaving the employ-
ment of the employer. It is also accepted that there is generally an imbalance in
power between employee and employer. For example, an employee may be at an
economic disadvantage when litigating the reasonableness of a restrictive covenant
because the employer may have access to greater resources (see, for example, Eisley,
at p. 924, and /VJason v. Provident Clothing and Supply Co., [1913] AC. 724 (H.L.), per
Lord Moulton, at p . 745 ....
The absence of payment for goodwill as well as the generally accepted imbalance
in power between employee and employer justifies more rigorous scrutiny of
restrictive covenants in employment contracts compared to those in contracts for
the sale of a business ....
Normally, the reasonableness of a restrictive covenant is determined by consider-
ing the extent of the activity sought to be prohibited and the extent of the temporal
and spatial scope of the prohibition. This case is different because of the added issue
of ambiguity. As indicated, a restrictive covenant is prima facie unenforceable unless
it is shown to be reasonable. However, if the covenant is ambiguous, in the sense
that what is prohibited is not clear as to activity, time, or geography, it is not possible
to demonstrate that it is reasonable. Thus, an ambiguous restrictive covenant is, by
definition, prima facie unreasonable and unenforceable. Only if the ambiguity can
be resolved is it then possible to determine whether the unambiguous restrictive
covenant is reasonable.
The trial judge found that there was no legal or judicial definition of the term
"Metropolitan City of Vancouver." In finding that the spatial area covered by the
restrictive covenant was not clear and certain, the trial judge referred to the evidence
of the principal of KRG Western .... On the basis of this and other evidence, the trial
judge found that the language of the restrictive covenant was neither clear nor
certain and for this and other reasons dismissed the claim of KRG Western against
Shafron.
[The court held that the ambiguity could not be resolved and that the clause was
therefore unenforceable.]

634
 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

NOTES

1. See also MJ Trebilcock, The Common Law Doctrine of Restraint of Trade (Scarborough,
ON: Carswell, 1988).
2. For a discussion of the use of severance in the context of statutory illegality, see below,
Section V.C, "Severance of Illegal Provisions."
3. A covenant prohibiting employees from soliciting customers of the employer, "... in any
manner whosoever, in any business or activity for any client of [the employer] with which he/she
had dealings on behalf of [the employer] at any time within the twelve (12) months preceding"
the date of the employee's departure was found too ambiguous to be reasonable. See G/obex
Foreign Exchange Corporation v Keicher, 2011 ABCA 240. Similarly, a covenant prohibiting a
former employee from providing or soliciting services or products to or from "any business
entity which was a customer of the Company" during the period in which he was employed
with the company, which was 17 years, for a period of one year following termination, was
found to be unreasonable due to being "overly broad and unworkable in practice." See Mason
v Chem-Trend Ltd Partnership, 2011 ONCA 344.
4. Courts interpret restrictive covenants in contracts for the sale of assets in a commercial
context less strictly than restrictive covenants in contracts for employment: Guay inc c Payette,
2013 sec 45. In a commercial context. Wagner J explained that the test for reasonableness
depends on the limitations of the clause, "... as to its term and to the territory and activities to
which it applies, to whatever is necessary for the protection of the legitimate interests of the
party in whose favour it was granted" (para 61). See MED/chair LP v DME Medequip Inc, 2016
ONCA 168, for a discussion about reasonableness and geographical limitations contained in
the restrictive covenant when the business has yet to expand to the area covered.
5. It is not always easy to distinguish between the types of contracts in which restrictive
covenants are contained. The Payette Court quoted Dickson J's distinction in JG Collins Insur-
ance Agencies v Eisley, [1978] 2 SCR 916 at p 924:

The distinction made in the cases between a restrictive covenant contained in an agreement
for the sale of a business and one contained in a contract of employment is well-conceived
and responsive to practical considerations. A person seeking to sell his business might find
himself with an unsaleable commodity if denied the right to assure the purchaser that he,
the vendor, would not later enter into competition. Difficulty lies in definition of the time
during which, and the area within which, the non-competitive covenant is to operate, but if
these are reasonable, the courts will normally give effect to the covenant.
A different situation, at least in theory, obtains in the negotiation of a contract of employ-
ment where an imbalance of bargaining power may lead to oppression and a denial of the
right of the employee to exploit. following termination of employment. in the public interest
and in his own interest, knowledge and skills obtained during employment.

The Payette Court went on to say, "determin[ing] whether a restrictive covenant is linked to a
contract for the sale of assets or to a contract of employment, it is . important to clearly
identify the reason why the covenant was entered into . ... The goal of the analysis is to identify
the nature of the principal obligations under the master agreement and to determine why and
for what purpose the accessory obligations of non-competition and non-solicitation were
assumed" (para 45).

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CHAPTER 7 PUBLIC POLICY

B. CONTRACTS RELATED TO GAMING

BOARDWALK REGENCY CORP V MAALOUF

(1992), 6 OR (3d) 737 (CA)

CARTHY JA: The respondent, a resident of Ontario, borrowed money and built up a
gambling debt at the appellant's casino in Atlantic City, New Jersey, failed to honour
a cheque representing the ultimate debt of $43,000, permitted a default judgment to
be entered in New Jersey, and now resists an action on that judgment in Ontario.
The trial judge, in a judgment reported at (1988), 68 O.R. (2d) 753, found that the
Ontario Gaming Act, R.S.O. 1980, c. 183 (now R.S .O. 1990, c. G.2) and particularly ss. 1,
4 and 5 represent a public policy in Ontario discouraging gambling, and accordingly
that the action based upon the New Jersey judgment should be dismissed. The
appellant says that the loan agreement was not a wagering agreement withins. 4 of
the Gaming Act, that the proper law of the contract is that of New Jersey and s. 1 on
the Act therefore has no application, and, finally, that it is not contrary to public
policy in Ontario to enforce the New Jersey judgment. The respondent takes the
contrary position on each of these three issues.

[Having found that the proper law of the contract was New Jersey law, the court
concluded that the Ontario Gaming Act had no application. earthy JA continued:]

The Saskatchewan Court of Appeal accurately summarized the public policy con-
cerns which may stand in the way of enforcement of foreign contracts or judgments.
In Canadian Acceptance Corp. v. Matte (1957), 9 D.L.R. (2d) 304, Martin C.J.S. states:

In Dicey's Conflict of Laws,- 6th ed., pp. 19-20, the learned author states: "English courts
refuse to give lega l effect to transactions, even when governed by foreign law, which
our tribunals hold to be immoral. Thus a promise made in consideration of future illicit
cohabitation, or an agreement which, though innocent in itself. is intended by the parties
to promote an immoral purpose, or a promise obtained through what our courts con-
sider duress or coercion, champertous contracts and contracts in restraint of trade are
according to English law based on an immoral consideration. Such a promise or agree-
ment. therefore. even were it valid under the law of the country which governs the
contract, w ill not be enforced by English judges."

... The common ground of all expressed reasons for imposing the doctrine of public
policy is essential morality. This must be more than the morality of some persons
and must run through the fabric of society to the extent that it is not consonant with
our system of justice and general moral outlook to countenance the conduct, no
matter how legal it may have been where it occurred. If that be so, the Gaming Act
must be viewed in the context of the community's sense of morality. An important
element of that sense of morality is what the community has consensually deter-
mined is not to be tolerated, as found in the Criminal Code. The Gaming Act may reflect
that general morality or may, upon analysis, appear to have a very narrow focus
related to recovery of debts with no present relevance as a moral statement.
If this case concerned enforcement of a judgment based upon a contract relating
to the corruption of children, our instinctive moral repugnance would find confirma-
tion ins. 172 of the Criminal Code, declaring such corruption a criminal offence. It is
not so easy with gaming laws because of the history of their development and the
unique form they take in the Criminal Code. In an article entitled "Recent Amendments
to Canadian Lottery and Gaming Laws: The Transfer of Power Between Federal and

636
 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

Provincial Governments" (1988), 26 Osgoode Hall Law Journal 19, Judith A. Osborne
and Colin S. Campbell describe the background to our present legislation. It is founded
in English statute law rather than the common law, and one of the earliest of these is
a statute of 1388 prohibiting all games except archery [Gaming Act, 1388 (12 Ric 2, Eng),
c 6). It is said that this prohibition was occasioned by the fear of Richard II that his
skilled archers were losing their talents by spending time playing games of dice. This
general prohibition, in revised form, was incorporated in the Criminal Code of 1892.
In 1956, a joint committee of both Canadian Houses of Parliament recommended
new gaming laws emphasizing supervision and control by workable laws in order
to avoid abuses such as had been experienced under alcohol prohibition laws. In
other words, the prohibitions against gambling. were seen as not being consonant
with the public perception of morality. In 1969, the Criminal Code was amended to
permit the federal or the provincial·government to conduct lottery schemes (encom -
passing gaming enterprises generally) .... Then, in what the authors characterize as
a political contract, the federal government divested itself of the power in 1985,
leaving the provinces as the sole licensors ....
Returning to the example of corrupting children, it is unimaginable to consider
an amendment to make this an offence only if not licensed by a provincial body or
conducted at an annual fair, but that very fact makes the point that the morality of
gambling as a part of our social fibre is very diff~rent from other offences in the
Criminal Code. In 1991, $10 bets were made at blackjack tables at the Canadian
National Exhibition. Those participating cannot be generally viewed as engaged in
an immoral venture, although some persons may so view it. If money is loaned by
a friend to enable another to play the games, which is inevitable in any gaming situ-
ation, is that to be considered immoral? The provincial legislature may bar recovery
of the loan, but the statute doing so can hardly be interpreted as establishing a moral
policy when the same government licenses the opportunity.
In my view, activities occurring in an enterprise licensed by the State of New
Jersey cannot carry a different colour of morality. The federal parliament would be
inconsistent in decreeing that what is licensed by Ontario or under the auspices of
an annual exhibition has moral integrity, while what is licensed and regulated by
New Jersey does not.
It is, therefore, my conclusion that an Ontario court cannot say that a judgment
founded upon a contract related to gambling is tainted by immorality and should
be refused enforcement.

NOTES

1. This case raises two issues that arise with public policy. One is the enforcement of foreign
judgments; the other is the application of foreign laws that may be contrary to public policy in
Canada. The dissenting judgment of Arbour JA is om itted, but it raises both issues. Arbour JA
determined that she did not have to decide the morality issue. For her, it was sufficient that, had
the contract been made in Ontario, it would have been unenforceable. However, that position
is questionable, for the reasons articulated in Atlantic City Showboat Inc v Smith, [1993] OJ No
1561 (OL) (Gen Div), which also involved a gambling debt from New Jersey, where the plaintiff
commenced an action in Ontario, but did not have an existing judgment in New Jersey. The
court, citing Maalouf, maintained, at para 6:
The defence argument, taken to its log ical conclusion, is not without its irony because,
presumably, implicit in the Gaming Act argument is the principle that the courts will not
enforce a contract the moral foundation of which is dubious . The irony lies in the fact that
an Ontario citizen could incur foreign debt, legally enforceable in that foreign jurisdiction,

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without the slightest intention of honouring that debt; rank dishonesty by any standard.
Such an Ontario resident could then return to Ontario and, under the umbrella of the Gaming
Act, crave the indulgence of the court in circumstances where the would-be beneficiary of
the Act so much more richly deserves the court's contempt. Should such a refuge be found
in the courts, a right-thinking citizen may well conclude that the Gaming Act had served to
spawn an evil more heinous than the one, ostensibly, it was intended to guard against.
2. In Di Manno Estate v Valenzisi, 2007 Canlll 57463 (Ont Sup Ct J), the court refused to
aid a plaintiff in various complaints against the defendant because the complaints related to a
cafe business run by the parties in conjunction with an illegal gambling club that provided
about 50 percent of the income from the business. However, the plaintiff was awar~ed dam-
ages for property unrelated to the gaming establishment that had been unlawfully removed by
the defendant from the premises.

C. CONTRACTS IN FURTHERANCE OF ILLEGAL PURPOSES

ZIMMERMANN V LETKEMAN
[1978] 1 SCR 1097 (footnotes omitted)

[The parties entered into an agreement under which Mr. Letkeman was to purchase
Mr. Zimmermann's property for a price of $135,000. By a document signed contem-
poraneously with this agreement, the parties also agreed that the purchase price of
the first agreement was a nullity and the actual price to be paid was $117,500. The
purpose of the two agreements was so that the purchaser could represent to the
mortgage company that the purchase price was higher than it actually was, thus
enabling him to obtain a larger mortgage than he would otherwise have been able
to secure. The representative of the mortgage company testified at trial that he was
aware of the true purchase price. Before the conveyance was completed, the vendor,
Mr. Zimmermann, withdrew from the deal, having received legal advice that the two
documents could constitute a fraud on the mortgage company. The purchaser then
sued for specific performance. At trial, the court held that the transaction was illegal
and denied the claim. The Court of Appeal reversed the trial judgment. After review-
ing the facts, Martland J continued:]
MARTLAND J: ..
The majority of the Court of Appeal held that the appeal of the respondent should
be allowed on two grounds. The first ground was that the case was within the prin-
ciples enunciated by Anglin J ., as he then was, in Elford v. Elford.
In that case a husband had put land into his wife's name, with her knowledge, for
the purpose of defeating his creditors. He held a general power of attorney from her.
A quarrel having occurred between them, the husband registered the power of
attorney and proceeded to transfer title to the land into his own name. The wife sued
to have the title re-transferred into her name.
It was held that the wife was entitled to have the transfer set aside. The wide
general authority conferred by the power of attorney did not embrace the power to
execute a conveyance in favour of the agent himself. Prima facie; the wife was entitled
to have the husband declared a trustee for her. The husband could not display that
right by alleging that her title was acquired in pursuance of his unlawful design to
defeat h is creditors.
The passage from the judgment of Anglin J., relied upon by the majority of the
Court of Appeal, appears at p . 129, as follows :

638
 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

In order to succeed the plaintiff merely requires to establish that in executing the transfer
t.o himself of the property in question, which ~tood registered in her name, her husband
committed a fraud on the power of attorney from her under which he professed to act.
She does not have to disclose the alleged intent to defraud her husband's creditors in
which her own title to the land is said to have originated, or to invoke any of the trans-
actions tainted by that fraud. Simpson v. Bloss (1816) 7 Taunt, 246; Taylor v. Chester
(1869) L.R. 4 O.B. 309, at p. 314; Clark v. Hagar (1893) 22 Can. S.C.R. 510, at p. 525; 20
Ont. App. R. 198, at pp. 221-2 . It is the defendant who brings that aspect of the matter
before the court in his effort to retain the fruits of his abuse of his position as his wife's
attorney; and to him the maxim applies memo allegans turpitudinem suam est audiendus.
Montefiori v. Montefiori (1762) 1 W. Bl. 363 .

After citing this passage, the Court of Appeal went o'.' to say:

In order to succeed here the plaintiff was merely required to establish that the docu-
ments executed by the parties constituted the contract between the parties. In order
to do so he needed only to produce such documents and prove the execution thereof
by himself and the defendant. In the present case this presented no difficulty as the
defendant admitted in his statement of defence the execution of the documents and
did not suggest that they did not constitute the contract between the parties. It is appar-
ent that the defendant alone invoked the suggestion of illegality in order to avoid his
obligation under the contract.

With respect, this statement fails to take account of the fact that in the present
case it is the respondent purchaser who is seeking to enforce the contract whiCh is
tainted with illegality. His position is akin to the position, not of the wife, but of the
husband in the Elford case.
The fact that the documents on their face did not disclose the respondent's unlaw-
ful purpose, which was disclosed by the evidence, does not improve his position.
He is still in the position of seeking to enforce an illegal contract. This point is well
made by Gwynne J. in the case of Clark v. Hagar, supra, mentioned by Anglin J. At
p. 525 Gwynne J. said this:

What is meant in this case, and in all cases as to the application of the test is, that in
every case, whether in indebitatus assumpsit or in an action upon a bond, note or other
instrument, it appears either by admission on the pleadings, or in the evidence given
upon the issues joined upon the pleadings in the case, that the action is connected with
an illegal transaction to which the pla intiff was a party, the question arises whether he
can or cannot succeed in his action without relying upon the illegal transaction. If he
cannot, the action fails; if he can, it prevails. But it never has been held, nor so far as I
have been able to find hitherto contended, that in an action upon a note or other
instrument in security for money requiring prima facie no evidence of consideration
the plaintiff is entitled to recover upon the mere production of the instrument, notwith-
standing that the defence is that the instrument sued upon was executed for an illegal
consideration in respect of a transaction to which the defendant was himself a party.
Such a proposition could not be maintained without reversing a legion of cases from
Guichard v. Roberts, 1 Wm. Black, 445, down to Windhill Board of Health v. Vint, 45
Ch. D. 351, which establish that illegality in the consideration of an instrument, whether
under seal or not, to enforce which an action is brought, not only may be pleaded, but
if it does not appear upon the plaintiff's own pleading must be pleaded .

In the present case, in order to succeed in his suit for specific performance, the
respondent had to rely upon the illegal contract. The wife, in the Elford case, had
acquired title to the land. She was seeking to set aside a conveyance of her land by

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her husband founded on an improper purported exercise of his power of attorney.

She did not have to rely upon an illegal contract.
The second ground stated by the majority of the Court of Appeal was that as the
respondent had abandoned his intention of relying upon the first document in order
to obtain a larger loan, the law would allow him a locus poenitentiae. Reliance was
placed on the statement of Mellish L.J., in Taylor v. Bowers [(1876), 1 OBD 291], at p. 300:
... If money is paid or goods delivered for an illegal purpose, the person who had so paid
the money or delivered goods may recover them back before the illegal purpose is
carried out; but if he waits till the illegal purpose is carried out, or if he seeks to enforce
the illegal transaction, in neither case can he maintain an action; the law will not allow
that to be done. ·
As this passage indicates, the rule as to locus poenitentiae is applicable to enable
a party to an illegal contract, which is still executory, to recover what he has paid or
transferred to his co-contractor, pursuant to the contract, provided he repents in
time before the illegal purpose has been substantially performed. The only payment
made by the respondent to the appellant was the deposit of $1,000, which the appel-
lant returned to the respondent. The respondent in these proceedings is not seeking
from the appellant the return of anything. He is seeking to enforce a contract of sale
and purchase, tainted with illegality, on the basis that the intended deception of
Credit Foncier was not carried through. In my opinion the doctrine of locus poeni-
tentiae has no application in favour of the respondent in the circumstances of this
case. In fact it was the appellant who repented of the transaction, returned the
respondent's deposit and refused to proceed with the transaction.
In my opinion the grounds relied upon by the majority of the Court of Appeal
were insufficient to justify their allowing the appeal from the judgment at trial. I
agree with the dissenting reasons of Bayda J.A., that the trial judge correctly applied
the principle stated in Alexander v. Rayson in the circumstances of this case.
I would allow the appeal, set aside the judgment of the Court of Appeal, and
restore the judgment at trial.

NOTE
In Alexander v Rayson, [1936] 1 KB 169 (CA) (relied on in Zimmermann, above), the Court of
Appeal refused to enforce a lease where the parties signed two documents, one stating a
much lower rent than the other, with the intent to deceive the Westminster City Council as to
the true rateable value of the premises. Similarly, in Stevens Pools Ltd v Carlsen, 2015 BCPC
23, a $50,000 pool purchase was documented in two contracts, one for a contract price of
$35,000 and the other in an addendum, for $15,000 to be payable in cash. The court found that
the only purpose to arrange their dealings as such was to ensure taxes would not be payable
on the $15,000 "under the table" payment. Finding it to be an "immoral" and illegal contract,
and therefore presumptively unenforceable, the court went on to examine whether the pre-
sumption against enforceability could yield under one of the exceptions, namely if the contract
had not yet been executed and one party "repented," or where the parties were not equally
culpable for the wrong. Finding neither exception to apply, nor any way to sever the unen-
forceable bargain from the rest of the contract, the court determined the agreement to be
unenforceable.

640
 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

D. CONTRACTS CONFERRING BENEFITS OBTAINED

AS A RESULT OF CRIME

BRISSETTE ESTATE V WESTBURY LIFE INSURANCE CO;

BRISSETTE ESTATE V CROWN LIFE INSURANCE CO
[1992] 3 SCR 87

[A married couple tookout a life insurance policy in which both were named as "the
insured." The terms of the policy provided that, upon the death of one, the insurance
proceeds would be paid to the survivor. The husband murdered his wife. The hus-
band brought a claim, seeking to be paid the proceeds of his wife's life insurance
policy, and alleged that if he was not personally entitled to the proceeds, then the
estate of his deceased wife was entitled to them. Once he had been convicted of her
murder, the husband surrendered any rights he had had under the policy. However,
the estate of the deceased wife claimed entitlement to the proceeds of insurance
and prior to her death, the wife had appointed her husband as the primary benefici-
ary of her estate .]
SOPINKA J: ... The contract in this case is not reasonably capable of the interpretation
contended for by the appellant. It cannot be construed to require payment to the
estate of Mary Brissette.

Moreover, there is nothing ambiguous about the wording of the contract. The
money is to be paid to the survivor. The problem is that something has occurred that
the parties neither contemplated nor provided for. The survivor acceded to this status
by killing the other party. Public policy prevents the money from being paid in
accordance with the explicit terms of the contract. These terms cannot simply be
rewritten under the guise of interpretation. The resort to a constructive trust to
achieve the result contended for by the appellant is an acknowledgement that this
is so. A constructive trust is ordinarily resorted to when the application for other
accepted legal principles would produce a result that is unjust and that would not
be countenanced by a court applying the principles of equity. The question, there-
fore, is not one of interpretation but whether the result of the application of the rules
of interpretation are unjust so as to require the court to employ a constructive trust
and whether it can do so in accordance with the applicable principles of equity....
In order to determine whether, as a matter of public policy, the Cou rt should resort
to the device of a constructive trust, it is appropriate to consider wh ether the applica-
tion of public policy which denies payment to the felonious beneficiary would work
an injustice if recovery is denied to the appellants. After all, it is this policy that
prevents the contract from taking effect in accordance with its terms . If denial of
recovery by the estate is not inconsistent with this policy, then there is no misuse
of public policy which would warrant a conclusion that its application is unjust.
The results reached in Demeter v. Dominion Life Assurance Co. (1982), 35 O.R (2d)
560 and Cleaver v. Mutual Reserve Fund Life Association, [1892] 1 O.B. 147 define the
parameters of the application of this public policy. In Demeter the assured took out
an insurance policy on his wife's life naming himself as beneficiary. He th en
arranged for her murder. Although the claim for the proceeds of insurance was made
by the daughter of the deceased wife, the court made it clear that it would have been
equally consistent with public policy to deny recover to the wife's estate. MacKinnon
AC.J.O. concluded as follows (at p. 562) :

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CHAPTER 7 PUBLIC POLICY

We are in agreement with the Motions Court judge that the life insured had no interest
in the policy, legal or equitable, which vested in her estate. In our view it could be
stretching equitable principles beyond recognizable limits to grant either the . infant
plaintiff or her mother's estate an equitable interest in the policies and the proceeds of
those policies.

The rationale of the policy which denies recovery to the felonious beneficiary is
that a person should not profit from his or her own criminal act. It is consistent with
this policy that a person should not be allowed to insure against his or her own
criminal act irrespective of the ultimate payee of the proceeds. Denial of recovery in
Demeter to either the daughter or the wife's estate would have been consistent with
public policy. There was nothing unjust about such a result calling for the special
assistance of equitable principles.
On the other hand, in Cleaver the insured took out an insurance policy on his own
life with his wife as beneficiary. The wife-beneficiary who murdered the insured-
husband was not a party to the contract of insurance. By virtue of the Married Women's
Property Act, 1882 (U.K.), the moneys were payable to .the estate of the insured to be
held in trust for the beneficiary. Public policy stepped in to deny payment to the
wife-beneficiary leaving the insurance moneys in the estate. Public -policy was not
allowed to abrogate a right that the estate had by virtue of the statute. The principles
of equity were not resorted to in order to remedy a perceived injustice.
The contract of insurance in this case is not identical to the contract in either
Demeter or Cleaver. It is necessary, therefore, to examine the whole of the contract
in order to determine whether in its essential features it more closely resembles one
or the other of the contracts in those cases so as to attract the policy underlying that
decision. After review of the contract of insurance in this case, I am of the opinion
that it cannot be viewed as two separate contracts with each of Gerald and Mary
insuring their own lives with the other as beneficiary so as to resemble the policy in
Cleaver. The contract lists the two of them together as the "insured" and provides for
payment to "the beneficiary" who is defined as "the survivor." ...
On this basis, the result reached in Demeter is appropriate in this case. There is
nothing unjust in refusing to pay the proceeds of insurance to a beneficiary not
designated by the insurance contract when to do so would allow the insured to
insure against his own criminal act. Moreover, even if the contract of insurance can
be characterized as two separate contracts, as submitted by the appellants, so as to
resemble the contract in Cleaver, the result in Cleaver cannot be achieved in the
absence of a provision, statutory or in the contract, providing for payment to the
estate of the wife . Such a result can only be attained by invoking the equitable prin-
ciple of a constructive trust. Those principles should only be invoked to cure an
unjust application of public policy. There is nothing unjust about the application of
that public policy in this case.
But, even if I had concluded that the denial of recovery to the estate was incon -
sistent with public policy, in my opinion it would be contrary to established principles
of equity to employ a constructive trust in this case. A constructive trust wi11 ordin-
arily be imposed on property in the hands of a wrongdoer to prevent him or her from
being unjustly enriched by profiting from his or her own wrongful conduct.

In fhis case, no claim of unjust enrichment has been made out. It cannot be said
that but for Gerald's act, Mary's estate would have recovered the money. The wrong-
doer does not benefit from his own wrong, nor is the insurer in breach of its duty to
Mary. It is simply complying with the express terms of the contract. Moreover, there
is no property in the hands of the wrongdoer upon which a trust can be fastened .

642
 Ill. CONTRACTS CO NTRARY TO PUBLIC POLICY EXPRE SS ED IN THE COMMON LAW

By virtue of public policy the provision for payment in the insurance policy is unen-
forceable and no money is payable to the wrongdoer. The effect of a constructive
trust would be to first require payment to the wrongdoer and then impress the money
with a trust in favour of the estate. A constructive trust cannot be used to bring
property into existence by determining the liability of the insurer to pay. The situa-
tion would be different, if, as in Cleaver, the insurance money were payable to the
estate to be held in trust for the beneficiary. Public policy would step in to prevent
the execution of the trust leaving the proceeds in the hands of the estate. But where,
as here, there is no provision for payment to the estate, a constructive trust cannot
be used to rewrite the contract which clearly and explicitly provides that the insured
"agrees to pay the Sum Insured at its Head Office to the beneficiary."

NOTES AND QUESTIONS

1. Cory and Gonthier JJ dissented. First, they pointed out that the contract of insurance did
not have an exempting clause for this type of death for one of the insureds, but did have one
for suicide. An ambiguity of this type would be construed against the insurance company,
since it drafts the standard form contract. Second, they maintained that principles of public
policy applied to prevent the husband from benefiting from his crime . However, they went on
to note that those same principles of public policy should not operate to benefit the insurance
company, which wou ld happen if the insurance company were permitted to avoid paying its
contractual obligations. Third, in order for the insurer to not benefit by virtue of the application
of the doctrine of public policy, Cory and Gonthier JJ maintained that the survivor must hold
those funds in trust for the administrator of the w ife's estate . Doing so "ensures the perform-
ance of the contract in compliance with the real intent of the parties" (para 69) . Since the wife
was the co-owner of the insurance policy, she had both a legal and beneficial interest to the
insurance proceeds, an interest upon which her estate could assert its right to the policy.
2. Would an insured likely think that there was a major difference betw een a contract of
insurance with proceeds paid to the deceased 's estate in trust for the heirs of the deceased
and a contract explicitly naming the person likely to be the insured's chief heir?
3. The majority view was that payment to the estate of the deceased would allow the
murderer to insure against his own conduct. Is there any policy objection to requiring the pay-
ment to be made to the husband, but requiring him to hold it in trust for the deceased 's estate?
Who is the beneficiary of the majority decision?
4. A later decision of the Supreme Court of Canada, Oldfield v Transamerica Life Insurance
Co of Canada, 2002 SCC 22, [200211 SCR 742, recognized the arbitrary nature of this decision.
However, the court considered that reform ought to be left to th e legislature. Compare Brissette
with the decision excerpted below.

OLDFIELD V TRANSAMERICA LIFE INSURANCE CO OF CANADA

2002 sec 22, 120021 1 scR 742

[Maria Oldfield was claiming the proceeds of a life insurance policy under which
she was the named beneficiary. The policy was taken out by her husband as part of
their separation agreement, which required him to maintain insurance with her as
the named beneficiary until their two children became 18 years old. The insured,
Paul Oldfield, died in Bolivia from a heart attack when one of 30 condoms in his
stomach containing cocaine burst. It was not contested that Paul Oldfield's actions
were contrary to both Bolivian and Canadian law. The insurer refused to pay on
public policy grounds.

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CHAPTER 7 PUBLIC POLICY

The Ontario Court of Appeal upheld Maria Oldfield's entitlement to payment. After
stating the facts, Major J continued:]
MAJOR J (McLachlin CJ and Gonthier, Iacobucci, Bastarache, Binnie, Arbour, and
LeBel JJ concurring): ...
The public policy rule at issue is that a criminal should not be permitted to profit
from crime. Unless modified by statute, public policy operates independently of the
rules of contract. For example, courts will not permit a husband who kills his spouse
to obtain her life insurance proceeds, regardless of the manner in which the life
insurance contract was worded. As Ferguson J. held in the court below, public policy
"applies regardless of the policy wording-it is imposed because of the courts' view
of social values" (p. 119).
Generally, though, an insurer seeks the shelter of public policy rules because they
have failed to specifically provide for the contingency that gives rise to the dispute.
In the present appeal, the insurance policy did not provide for the result that would
occur if the insured died while committing a criminal act. If the policy specifically
excluded coverage, there would be no need to resort to public policy.
The public policy rule that prevents criminals from profiting from crime has
existed for many years.
[The court reviewed authority from England and Canada to this effect and continued:]
In Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C .R. 87, Sopinka J. held
that "a person should not be allowed to insure against his or her own criminal act .
irrespective of the ultimate payee of the proceeds" (p. 94).
The rule extends to those who claim through the criminal's estate. In Cleaver, Fry
L.J. held that "the rule of public policy should be applied so as to exclude from benefit
the criminal and all claiming under her" (p . 159 (emphasis added)). Technically, the
reason why no distinction is drawn between the criminal and his or her estate is that
the estate's claim is equivalent to a claim brought by the criminal ....
However, innocent beneficiaries are neither criminals nor claim through the
criminal's estate. Because of that, the public policy rule is inapplicable. Section 195
of Ontario's Insurance Act, R.S.O. 1990, c. I.8, states that "[a] beneficiary may enforce
for the beneficiary's own benefit ... the payment of insurance money made payable
to him, her or it in the contract ... ." In Kerslake v. Gray, [1957] S.C.R. 516, the Court
held that insurance money paid to an ordinary beneficiary does not form part of the
insured's estate. In Borins J.A.'s words, Maria Oldfield "has not asserted her right to
the insurance proceeds as a successor of the insured, but as an ordinary beneficiary,
with the result that her claim is not tainted by any illegality on the part of her hus-
band" (p. 748) . ...
In total, Sopinka J.'s decision in Brissette demonstrated that he did not intend to
displace the principle that innocent beneficiaries who do not take through the
criminal's estate should not be affected by public policy. In Brissette, Sopinka J. held
that "[t]here is nothing unjust in refusing to pay the proceeds of insurance to a bene-
ficiary not designated by the insurance contract when to do so would allow the insured
to insure against his own criminal act" (p. 95 (emphasis added)) ....
A universal rule that "a person should not be allowed to insure against his or her
own criminal act irrespective of the ultimate payee of the proceeds" would have
serious repercussions for bona fide creditors who provide value to obtain an interest
in life insurance. Creditors in numerous ·instances such as a mortgage and other
debt instruments will insist on obtaining an assignment of an insurance policy or
being the named beneficiary sufficient to discharge the debt to protect their interest
in the event of the debtor dying insolvent.

644
 Ill. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN THE COMMON LAW

In Brissette, Sopinka J. did not intend to eliminate long-established exceptions to

the public policy rule. Brissette does not bar a claim by an innocent beneficiary where
the insured does not intend the insured loss . ...

(6) RATIONALE FOR THE PUBLIC POLICY RULE

Two reasons have been advanced to support the public policy rule. One is that to
enforce certain illegal contracts would "take away one of those restraints operating
on the minds of men against the commission of crimes, namely, the interest we
have in the welfare and prosperity of our connections" (Amicable Society v. Bolland,
[1824-34] All E.R. Rep. 570 (1830) (H.L.) ("Fauntleroy's Case"), at p. 572) . ...
Over time, courts have criticized the idea that a less than strict application of
public policy would encourage crime. In Hardy ... [v Motor Insurers' Bureau, [1964] 2
QB 745], Diplock L.J. held (at p. 770) :
It seems to me to be slightly unrealistic to suggest that a person who is not deterred by
the risk of a possible sentence of life imprisonment from using a vehicle with intent to
commit grievous bodily harm would be deterred by the fear that his civil liability to his
victim would not be discharged by his insurers. I do not myself feel that by dismissing
this appeal we. shall add significantly to the statistics of crime .
... The second reason for the public policy rule simply recognizes that a court will
not permit injustice ....
It is consistent with justice that innocent beneficiaries not be disentitled to insur-
ance proceeds merely because an insured accidentally dies while committing a
criminal act. Many decisions have recognized the long-standing principle (see e.g.
Cleaver, at pp. 159-60). To deny recovery would penalize the victim for the insured's
anti-social behaviour (C. Brown, Insurance Law in Canada (loose-leaf ed.), vol. 1, at
pp. 8-28 to 8-29) ....

(8) IS THERE A NEED TO REFORM THE PUBLIC POLICY RULE?

For the purposes of the present appeal, it is sufficient to conclude that an innocent
beneficiary named in an insurance policy should not be disentit\ed to insurance ·
proceeds where the insured dies while committing a criminal act and does not
intend the loss. Public policy does not bar Maria Oldfield's claim.
Nevertheless, the distinction between an innocent beneficiary and those who
claim through the criminal's estate should be considered. Public policy has consist-
ently refused to permit the criminal or those who claim through the criminal to
obtain insurance proceeds. Those who claim through the criminal are denied, while
innocent beneficiaries named in the policy are not. Ferguson J . noted and I agree
that the distinction seems arbitrary. As he held, "it is difficult to explain why a crim-
inal can benefit his family by naming them as beneficiaries in an insurance policy
but not by naming them in his will" (p. 128). That there is an arbitrary distinction
suggests the need to loosen the public policy rule rather than restrict it. ...
It might be appropriate to modify the public policy rule so as to permit an inno-
cent person who claims through the criminal's estate to take insurance proceeds.
Indeed, in Hardy, Diplock L.J. thought that the public policy rule could be modified
to permit the criminal to take insurance proceeds, depending on "the nature of the
anti-social act" and "the nature of the right asserted" (p. 768) . Under England's For-
feiture Act 1982, courts can modify the effect of the forfeiture rule even where a
person who has unlawfully killed another seeks to acquire a benefit in consequence

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CHAPTER 7 PUBLIC POLICY

of the killing. I leave the question to be decided either by the legislature or in another
case where the issue arises.

Ill. CONCLUSION

In conclusion, public policy does not apply to bar a claim by an innocent beneficiary
named in an insurance policy merely because the insured dies while 'committing a
crime. Maria Oldfield's claim is not barred by public policy or by any rule of contrac-
tual interpretation.

[The separate, but concurring, opinion of L'Heureux-Dube J is omitted.]

NOTES AND QUESTIONS

1. The common law principle has been expanded by statute in som.e provinces to include
a situation where the criminal seeks to make a profit from his or her criminal activity after the
crime has been committed-for example, by publishing a book about his or her experiences.
See The Profits of Criminal Notoriety Act, CCSM c P141 and SS 2009, c P-28 .1. How far should
this principle extend?
2. The public policy rule that a criminal should not be allowed to profit from crime does
not extend to situations in which a person is found not criminally responsible as a result of
having a mental disorder at the time of the crime. See Nordstrom v Baumann, [1962] SCR 147
and Re Dreger (1976), 12 OR (2d) 371 (H Ct J)

IV. CONTRACTS CONTRARY TO PUBLIC POLICY

EXPRESSED IN STATUTE
In Boardwalk Regency Corp v Maalouf, the court gave a statute, although not directly applic-
able in the circumstances, considerable weight in determining whether a contract should be
considered unenforceable as contrary to public policy. See also In the Matter of Baby "/Vi,"
above. In many modern cases, the problem stems from a contract that is made in contraven-
tion of a statute. The wide range of statutory prohibition and regulation in modern society
raises a variety of difficult questions. The first issue is whether the contract is illegal. But, given
a finding of illegality, even more complex is the issue of what the result should be. The next
cases deal with contracts that are illegal because they are contrary to public policy expressed
in statute. In Section V, "Mitigating the Consequences of Illegality," we turn to the complex
issues surrounding the results of that illegality.

A. WHEN A CONTRACT IS RENDERED VOID BY STATUTE

KINGSHOT V BRUNSKILL
[1953] OWN 133 (CA)

ROACH JA (for the court): The facts of this case are simple but it raises an important
question under The Farm Products Grades and Sales Act, R.S.O. 1950, c. 130, and the
regulations passed thereunder.
The plaintiff operates a fruit and market garden on 34 acres of land in the county
of Peel. On that land he has a small apple orchard. He is not a large producer of apples
and his main income is derived from the operation of greenhouses. In the fall of

646
 IV. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN STATUTE

1950 he had harvested his apple crop and the apples were stored on his premises.
Among these apples were 846 bushels of Spy and Delicious apples. They were in
bushel baskets. No effort had been made by him to grade or sort them, although
there was no mixture of the two varieties in any basket. In harvesting the apples the
plaintiff had taken the empty baskets and marked some of them "Fancy Delicious"
and the others of them "Fancy Grade Spies." It was stated in evidence that the usual
practice is to mark the baskets or hami::ers with the name and quality of the variety
which the producer intends, after grading, that those hampers shall contain. The
hampers were then sent out to the orchard and the apples were picked from the tree
and placed in the appropriate hampers. The plaintiff had no intention of offering
those apples for sale to the public until they were first graded in compliance with
the regulations passed under the Act.
The defendant resides on land about one mile from the plaintiff's premises. His
main business is the growing and marketing of apples and purchasing apples from
other apple growers, grading them and marketing them.
On 14th December the defendant came to the plaintiff's premises and inquired
whether or not the plaintiff would sell his Spy apples. The plaintiff replied that he
would not sell the Delicious and Spies separately and that if he sold them he wanted
to sell the whole lot. It was apparent to the defendant that the apples had not been
graded. After some preliminary discussion, the defendant entered into a contract
with the plaintiff to purchase the apples at $1.10 per bushel and paid the plaintiff a
deposit of $25. As the learned trial judge said in his reasons there was no warranty,
express or implied. The defendant inspected the apples and simply bought what he
saw in the premises where they were stored. Under the terms of the contract it was
the defendant's obligation to remove the apples. From time to time'he removed
quantities of them to his own premises, graded them and sold them. By April, 1951
there were still some hampers of apples which the defendant had not yet removed.
The plaintiff requested the defendant to remove them because he needed the space,
and when the defendant delayed removing them the plaintiff sent them over to the
defendant's premises. During the course of the removal by the defendant he paid the
plaintiff on account the further sum of $200. When the last of the apples had been
delivered by the plaintiff to the defendant, the defendant called an inspector
appointed under the regulations and the inspector marked the last consignment of
delivery with a detention order, as he was permitted to do under the regulations.
Notice of that detention order was given to the plaintiff. The defendant, alleging that
of the total quantity of apples received by him there were certain defective apples,
computed the balance that he owed to the plaintiff and sent him a cheque for $619.80,
being the amount which the defendant considered represented the balance owing by
him. This cheque was marked "in full payment for apples." This cheque was not
accepted by the plaintiff but was returned to the defendant. The plaintiff thereupon
sued the defendant for the sum of $719.60, which sum was made up of $705.60, being
the balance owing for the apples, plus $14.00 being the value of hampers which the
defendant had not returned to the plaintiff.
The defendant pleaded that the apples had not been graded, packed or marked
in accordance with The Farm Products Grades and Sales Act and the regulations
passed thereunder and in particular, regulation 3(a), (c), (d), (f) and (g), and that the
sale of the apples was thereby prohibited by statute and illegal. The learned trial judge
gave effect to that plea and it is with some regret that I feel myself constrained to
agree with that decision.
Section 2(1) of the statute authorizes the Minister of Agriculture, subje ct to the
approval of the Lieutenant-Governor in Council, to make certain regulations respecting

647
CHAPTER 7 PUBLIC POLICY

farm products as defined in the statute. Farm products as there defined include fruit.
The regulations that the Minister may make as aforesaid include ~egulations
(a) establishing grades and classes for any farm product;
(b) providing for the inspection, grading, packages and packing, marketing, handling,
shipping, transporting, advertising, purchasing and selling of farm products within Ontario.

Pursuant to the authority contained in the statute, regulations were made and
they are known as Regulations 87 (1 C.R.0.1950, p. 431). Regulation 3 thereof provides
in part as follows :
No person shall pack. transport. ship, advertise, sell, offer for sale or have in possession
for sale any produce
(a) unless the produce has been graded, packed and marked in accordance with
the provisions of the Act and these regulations;
(b) which is below the minimum grade for the produce but this provision shall not
apply to produce for an establishment [establishment is defined in Regulation 1 as
including any plant, factory or premises where produce is canned. preserved or other-
wise processed];
(c) where the faced or shown surface falsely represents the contents;
(d) in a package unless the package is properly filled and packed; ...
(f) in a package which has been previously marked unless the marks are completely
removed;
(g) which is so immature or so diseased or otherwise affected as to be unfit for
human con sumption.

Bys. 8 of the statute every person who contravenes any of the provisions of the
Act or the regulations is guilty of an offence and liable on summary conviction to
the penalties therein set out.
It must be concluded that the main object of the statute and the regulations
passed thereunder is the protection of the public. The penalty authorized by the
statute is imposed wholly for the protection of the public. Therefore, if the sale here
in question was forbidden by the regulations, then it was illegal and notwithstanding
that the defendant resold the apples after having graded them and made a profit
thereby, the plaintiff cannot recover in an action for the price of those apples. Refer-
ence may be made to Anderson, Limited v. Daniel, [1924] 1K.B. 183, and Little v. Poole
(1829), 9 B. & C. 192.
I have looked in vain for any provision in the regulations that would exempt the
plaintiff in the circumstances of this case from their application. It is not difficult to.
conceive a case in which a farmer who has a small orchard on his farm may have
neither the manpower nor the equipment necessary to grade and pack the product
of his orchard, in accordance with the regulations. His neighbour, with a much larger
orcha,rd and specializing in the growing of fruit, has the necessary help and equipment
for the grading and packing of the produce not only of his own orchard but of others
in the neighbourhood. It would seem not unreasonable that the first of those two
farmers should be permitted to sell his whole crop of fruit to the second of tho.se
two farmers, who, having the necessary help and equipment, could grade it and pack
it in accordance with the regulations before offering it for sale to the public. The
regulations, however, do not appear to provide for such a case. There is no provision
in the regulations that would exempt the first of those two farmers in that hypothet-
ical case from compliance with the regulations. The Court cannot read into the
regulations exemptions which might appear to the Court to be justifiable in a given
set of circumstances.
For these reasons the appeal must be dismissed with costs.

648
 IV. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN STATUTE

QUESTION ON LEGAL METHOD

The court's interpretation of the Act and regulations is obviously possible; however, is it a
necessary one? Consider Still v MNR (below) and the following case.

DOHERTY V SOUTHGATE (TOWNSHIP)

(2006); 214 OAC 30, 271 DLR (4th) 59 (CA)

[The appellant, the Corporation of the Township of Southgate ("Southgate"), entered

into a contract with a developer (Doherty) for sale of a piece of property it had decided
was surplus. Section 268(3) of the Municipal Act of Ontario, SO 2001, c 25 provided
that a municipality had to meet certain conditions prior to selling land. It had to have
a bylaw setting out procedures for the sale, and the bylaw also had to provide notice
to the public. Southgate passed such a bylaw, but did not give the required public
notice prior to entering into the contract with Doherty. The contract stipulated that
Southgate would rezone the land prior to the sale closing. Southgate failed to fulfill
this condition and the sale did not close. Doherty sued Southgate for breach of
contract. Southgate moved for summary judgment, arguing that the contract was
void because public notice as required by the town bylaw and the Municipal Act had
not been given. The motions judge allowed Doherty to proceed with an action for
damages and Southgate appealed. After finding that the Act required public notice to
be given prior to entering into the contract of sale, the court proceeded as follows:]
O'CONNOR ACJO: That then brings me to the second question: Did Southgate's
failure to give that notice render the agreement of purchase and sale void and
unenforceable?
In my view, the answer to that question is in the negative. Not every statutory
breach results in a contract being void or unenforceable. The decision of this court
in Beer v. Townsgate I (1997), 36 O.R. (3d) 136, is instructive.
In Beer, a developer of residential condominiums entered into a number of agree-
ments of purchase and sale when it was not registered under the Ontario New Home
Warranty Program in contravention of s. 6 of the Ontario New Home Warranties Plan
Act. The developer had applied for registration and was subsequently granted regis-
tration. The purchaser.s were at al\ times protected under the Act. This court rejected
an argument that the agreements of purchase and sale were void and unenforceable
because of the breach of the statute at the time they were executed. At page 144,
Brooke J.A., for the court, said:
I think it is significant that while the Act provides for a financial penalty for a breach of
s. 6 it does not expressly provide that the contract so made is unenforceable. If a statute
does not expressly deprive a party of his or her rights under the contract, the question
is whether, having regard to the purpose of the Act, and the circumstances under which
the contract was made, and to be performed, it would be contrary to public policy to
enforce it because of illegality: see the judgment of Devlin L.J. in St. John Shipping
Corp. v. Joseph Rank Ltd., [1956] 3 All E.R. 683 at p. 690, [1957] 1 O.B. 267 (O.B.).

On the same page, Brooke J.A. continued:

As Waddams notes in The Law of Contracts, 3rd ed . (1993), at p. 381:
If every statutory illegality, however trivial, in the course of performance of a
contract, invalidated the agreement, the resu lt would be an unjust and haphazard
allocation of loss without regard to any rational principles.
I think public policy favours that contracts should not be rendered unenforceable merely
because of technical deficiencies.

649
CHAPTER 7 PUBLIC POLICY

There are three reasons why I consider that it would not be contrary to public
policy to conclude that the agreement of purchase and sale in this case was not
rendered void or unenforceable as a result of the non-compliance withs. 268(3)(c)
of the Municipal Act.
First, as was the case in Beer, there is nothing.in the statute under consideration,
here the Municipal Act, expressly providing that a contract made in contravention of
s. 268(3), is unenforceable.
Second, there is nothing in the record to suggest that giving notice to the public
of the proposed sale of the property to Doherty would have resulted in any different
outcome. No one, including Southgate, has suggested that the property was not
surplus to the needs of the municipality. On the contrary, Southgate has passed a
resolution declaring it to be surplus. Nor is there any suggestion that the sale price
in the agreement of purchase and sale was in any way improvident. Significantly,
by the time Doherty agreed to buy the property, it had been on the market for close
to a year. The sale price was 72 percent of the value estimated by Southgate's realtor
and Southgate does not now take the position that it could have obtained any higher
price. On two occasions, Southgate's council approved the sale and no ratepayers
have challenged the sale. Thus, it appears that even if Southgate had given notice
to the public of the proposed sale, it would have ended up selling the property to
Doherty on exactly the same terms as are in the agreement of purchase and sale.
Third, Southgate's position in this litigation with respect to the public notice is a
disingenuous attempt to take advantage of its own failure. Significantly, Southgate's
decision not to complete the sale on March 5, 2004 was based on its unwillingness
to proceed with the zoning amendment called for in the agreement of purchase and
sale and not on the fact that it had not given the public notice required bys. 268(3)(c).
Indeed, had Southgate taken that position prior to closing, it is fair to conclude that
Doherty would have agreed to an extension of the closing date, if necessary, to permit
such notice to be given. While s. 268(3)(c) requires notice to the public before the
municipality enters into an agreement to sell land, giving notice after the agreement
was executed would still have provided an opportunity for the public to register any
objections. As I have said, I do not think that in this case it would.have made any dif-
ference. Be that as it may, Southgate did not raise the notice issue as a reason for not
closing and first raised it in its statement of defence in an attempt to extricate itself
from an action for breach of contract. ·
While it may be said that Doherty should have been aware of Southgate's obligation
to give notice and its failure to do so, there is no evidence to suggest that he did not
act in good faith throughout. Doherty, through his lawyer, took steps necessary to
prepare for a closing of the sale and Southgate's actions would have led him to believe
that Southgate had fulfilled all of the statutory requirements necessary to complete
the transaction.
In summary, I am satisfied that it would not be against public policy to hold that the
agreement of purchase and sale in this case was not rendered void and unenforceable
by the breach of the statute by Southgate. Accordingly, I am satisfied that the motion
judge did not err in making a declaration to that effect.

650
 IV. CONTRACTS CONTRARY TO PUBLIC POLICY EXPRESSED IN STATUTE

B. A COMMON INTENT TO PERFORM A CONTRACT ILLEGALLY

ASHMORE, BENSON, PEASE & CO LTD V AV DAWSON LTD

(1973] 1 WLR 828 (CA)

LORD DENNING MR: In February, 1967 a big piece of engineering equipment called
a tube bank was being carried from Stockton-on-Tees to Hull where it was to be
shipped to Poland. It was very heavy. It weighed 25 tons. It was loaded on an articu-
lated lorry. Halfway to Hull that lorry with its load tipped over. Damage was done to
the load. It cost £2,225 to repair. The manufacturers claim damages from the hauliers.
In answer the hauliers plead that the load was too heavy for the vehicle: and that the
contract of carriage, or the performance of it, was illegal.
The relevant regulations are the Motor Vehicles (Construction and Use) Regula-
tions 1966 (S.I.1966 No. 1288). They were made by virtue of the Road Traffic Act 1960,
section 64. Subsection (2) of section 64 says: "... [I]t shall not be lawful to use on a
road a motor vehicle or trailer which does not comply with any such regulations as
aforesaid ... ." ·
In the present case the vehicle was an articulated vehicle with a tractor and trailer.
Under regulation 73(2) the maximum weight laden was specified a~ · 30 tons. Now
the unladen weight of the vehicle was 10 tons. This load (consisting of the tube bank)
was 25 tons. So the total weight laden was 35 tons. So it was five tons over the regula -
tion weight. Furthermore, the tube bank was top heavy. It had fittings on the top
which made its centre of gravity high. Not only was it in breach of the regulations,
but it was a dangerous and unsafe load to be carried on this vehicle along the roads
of England. The evidence showed clearly that the only vehicle suitable for this load
was a "low loader,'' which is underslung so that it can take heavier weights and bigger
loads. So the expedition was certainly illegal.
I turn now to consider the contract of carriage. The makers of the tube bank were
Ashmore, Benson, Pease & Co. Ltd. of Stockton-on-Tees. Their transport manager
was a Mr. Bulmer. His assistant was Mr. Jones. Two of these tube banks were to be
sent from the works at Stockton-on-Tees to the port of Hull. Mr. Bulmer told Mr. Jones
to arrange for the carriage of the two tube banks and to give the work to AV. Dawson
Ltd. That was a small firm in which the principals were Mr. Arthur Vernon Dawson,
the father, and Mr. Maurice Dawson, the son. This firm had 10 articulated vehicles.
The biggest of them was only a 30 tanner. They had no low loaders. They had worked
for Ashmores for several years . Mr. Jones knew the whole of their fleet well; and
Mr. Bulmer had known it for some six months. On getting the instructions, Mr. Jones
telephoned Dawsons and spoke to Mr. Maurice Dawson, the son. He suggested that
Maurice Dawson should come up and see the nature of the load. Maurice Dawson
did so. The weight of it was shown plainly on the plate and on each tube bank and
on the case. It was "25 tons." It was arranged that Dawson should take the loads. The
price was arranged: it was £55 for the trip for each of the two articulated vehicles. If
it had been on low loaders (which Dawsons had not got), the price would have been
£85 or more for each: but here it was £55. Later that day Dawsons sent two of their
drivers with the articulated vehicles to get the two loads. The tube banks were loaded
on to the trailers. Mr. Bulmer was there for a short time. He saw them loaded, and so
did Mr. Jones. The tube banks were firmly secured in by chains. Early next morning
the two drivers came and set off on the journey for Hull. When they were about
half-way there, the leading vehicle toppled over. It was driven by Mr. Harvey, the
best and most experienced driver that Dawsons had. Mr. Harvey was asked the cause:
"What do you say caused your lorry to topple over?" He answered: "The camber in

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CHAPTER 7 PUBLIC POLICY

the road to the left plus the weight of the load, plus the height of the load." The judge
found that Mr. Harvey made an error of judgment. But that was not the real cause of
the toppling over. The real cause was the overweight. The articulated lorry was a
most unsuitable vehicle on which to carry it. The whole transaction was illegal, being
in breach of the regulations.
Assuming, however, that Mr. Harvey was negligent, the question is whether the
illegality prevents Ashmores from suing for that negligence. This depends on
whether the contract itself was unlawful, or its performance was unlawful.
The first question is whether the contract of carriage, when made, was lawful or
not.
Although I have these misgivings, I am prepared to accept the judge's finding
that the contract was lawful when it was made. But then the question arises : was it
lawful in its performance? The judge's attention does not seem to have been drawn
to this point. Yet there are authorities which show that illegality in the performance
of a contract may disable a person from suing on it, if he participated in the illegality.
This was pointed out by Atkin L.J. in Anderson Ltd. v. Daniel [1924] 1 K.B. 138, 149 in
a passage which was quoted by Devlin J. in St. John Shipping Corporation v. Joseph
Rank Ltd. [1957] 1 O.B. 267, 282:

The question of illegality in a contract generally arises in connection with its formation,
but it may also arise, as it does here, in connection with its performance . In the former
case, where the parties have agreed to do something which is prohibited by Act of
Parliament, it is indisputable that the contract is unenforceable by either party. And I
think that it is equally unenforceable by the offending party where the illegality arises
from the fact that the mode of performance adopted by the party performing it is in
violation of some statute, even though the contract as agreed upon between the parties
was capable of being performed in a perfectly legal manner.

That passage was further approved by Jenkins L.J. in B. and B. Viennese Fashions
v. Lasane [1952] 1 All E.R. 909, 913, where he said: "that illegality in the performance
of a contract may avoid it although the contract was not illegal ab initio."
In this case the parties entered into the performance of the contract when Dawson's
driver took the articulated vehicle (the 30-tonner) up to Ashmore's works to pick up
this load. Mr. Bulmer, the transport manager, came along and saw it. Mr. Jones, his
assistant, was there. Both saw this 25-ton tube bank being loaded on to the articulated
lorry. Mr. Bulmer must have known that this was illegal: and Mr. Bulmer's knowledge
would affect Ashmores. Mr. Jones was asked : "Mr. Bulmer would know the specific
loads for articulated lorries, would he not! (A.) Like the back of his hand, yes." Then
as to these particular lorries, Mr. Jones was asked: "Mr. Bulmer would have had all
the knowledge in the world and would have known what weight these lorries were
permitted to carry but you didn't know?" "Well," said Mr. Jones, "I would say he would
have a good idea what they would carry, yes."
Now Mr. Bulmer was not called to give evidence. The reason was because he left
the employment of Ashmores some years ago and had gone to Zambia. But he had
given a statement in which he had said: "Identical loads to the one in question have
been carried on similar vehicles belonging to G. Stiller (Haulage) Ltd., Middleton
St. George, Darlington, completely without incident."
On that evidence I think that Mr. Bulmer must have known that those articulated
lorries of Dawsons were only permitted to carry 20 tons. Nevertheless, realising that
25 tons was too heavy-much too heavy-for them, he was content to let them carry
the loads because it had happened before without trouble. He was getting the transport
done cheaper too by £30 saved on each trip by each load. Not only did Mr. Bulmer

652
 V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

know of the illegality. He participated in it by sanctioning the loading of the vehicle

with a load in debars Ashmores from suing Dawsons on it or suing Dawsons for
negligence. I know that Dawsons were parties to the illegality. They knew, as well as
Mr. Bulmer, that the load was overweight in breach of the regulations. But in such a
situation as this, the defendants are in a better position. In pari delicto, potior est
conditio defendantis. I would therefore allow the appeal and enter judgment for the
defendants.

V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

The variety of situations in which a contract may be illegal has impelled the development of a
number of exceptions that permit the court to intervene to assist a party to an action. These
exceptions have been frequently criticized as overly technical and lacking in logic and consist-
ency. For an example, see the Law Reform Commission of British Columbia, Report on Illegal
Contracts. The cases below illustrate severa l of the exceptions. In addition, a number of these
technical exceptions may have developed to protect interests that, today, would be seen as a
part of the law relating to restitution.

A. WHEN THE CLAIM IS FOUNDED ON AN INDEPENDENT RIGHT

MISTRY AMAR SINGH V SERWANO WOFUNIRA KULUBYA

[1964] AC 142 (JCPC, on appeal from the
Court of Appeal for Eastern Africa)

[The respondent, an African, who was the registered proprietor of certain "mailo"
lands, purported by three agreements to lease the lands to the appellant, an Indian,
but the consents of the governor and the Lukiko to the transactions were not obtained
as required bys 2(d) of the Buganda Possession of Land Law, c 25 of 1957 Revision, and
s 2 of the Uganda Land Transfer Ordinance, s 114 of the 1951 Revisions, the result of
the omission being that under the above statutes both the respondent and the appel-
lant had contravened the law and committed punishable·offences. On a claim by
the respondent, based on his registered ownership of the lands-his claim for rent
and mesne profits having been abandoned-to possession and eviction of the appel-
lant, the latter pleaded that the agreements by which the lands were leased were illegal
in the absence of the necessary consents and that the respondent could not file an
action on them. The respondent acknowledged that the transactions were illegal.
Lord Morris of Borth-y-Gest stated the facts set out above and continued:]
LORD MORRIS OF BORTH-Y-GEST (for the court):
In the judgments of the Court of Appeal it was pointed out (rightly as their Lord-
ships think) that a rejection of the plp.intiff's claim would have the result that the
defendant, a non-African, would be entitled to remain permanently in possession
of African land, to the exclusion of the registered African owner, and without pay-
ment of any nature whatsoever.
Although, as has been seen, the plaintiff set out in his plaint that he had entered
into agreements to lease the plots of land to the defendant, his right to claim pos-
session did not depend upon those agreements. His claim was in the end based
independently of those agreements. Though the plaintiff did in his plaint claim
mesne profits and damages, he later abandoned those claims and at the trial he made

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CHAPTER 7 PUBLIC POLICY

no claim for rent or for mesne profits. He was able to rest his claim upon his regis-
tered ownership of the property. The defendant did not have and could not show
any right to the property. In view of the terms of the legislative provisions he could
not assert that he had acquired any leasehold interest. For the same reason the
defendant could not assert that he had any right to occupy. As a non-African he had
no right without the consent in writing of the Governor to occupy or enter into
possession of the land or to make any contract to take the land on lease. Quite
irrespective of the circumstance that the plaintiff by giving certain notices to quit
had purported to withdraw any permission to occupy, the defendant was not a11d
never had been in lawful occupation.
The defendant, for his part, could not point to or rely upon the illegal agreements
as justifying any right or claim to remain in possession, and without doing so he
could not defeat the plaintiff's claim to possession.

Appeal dismissed.

NOTES AND QUESTIONS

1. In International Paper Industries Ltd v Top Line Industries Inc, 1996 Can Lil 3340, 135 DLR
(4th) 423 (BCCA), a landlord and tenant had entered into a lease agreement for a term of five
years with a right to renew. Unknown to both, the lease was contrary to s 73 of the Land Title
Act, RSBC 1979, c 219, which stated that no lease for a term of three years for an unsubdivided
parcel of land could be registered. When the tenant claimed the right to renew, the landlord
argued that the lease was illegal. At trial, the judge found that the lease, although it was illegal
and could not be registered, created personal rights between the landlord and tenant. The
Court of Appeal overruled this decision. In later proceedings, the BC Supreme Court awarded
use and occupation rent to the landlord because the tenant had remained in possession pend-
ing the appeal. This too was reversed by the Court of Appeal, which held that the consent to
occupy on which the landlord relied to claim use and occupation rent was given only by virtue
of the illegal lease (see 2000 BCCA 23).
2. The Land Title Act (now RSBC 1996, c 250) was subsequently amended to provide that
a lease in violation of s 73 was not, by that reason alone, unenforceable between the parties.
This may suggest that the Court of Appeal's approach did not reflect the legislative intent of
the statute.
3. There are many similarities between the Singh case, excerpted above, and Top Line, dis-
cussed in note 1. Are the results similarly satisfactory? Are there differences between the two
cases that could have led to differing results7 Consider the policies that underlay the statutes
in the two cases. Consider also that in Top Line the only penalty provided by the statute was
that the agreement could not be registered. Registration under the Land Title Act would have
only one benefit-to protect the registered tenant from parties to whom the landlord might
transfer other interests in the land .
4. Even if the conveyance (by way of the lease) in Top Line was illegal, why could the con-
tract not provide an independent right under which the landlord could claim rent, especially
after the tenant was in possession of the premises by virtue of the holding (reversed on appeal)
by the BC Supreme Court? Was this result possible in Singh?

B. RESTITUTION
As a matter of general principle, where benefits have been conferred by one party on the other
to an agreement that is unenforceable by reason of a doctrine of common law or equity,
restitutionary relief will be available to the conferring party to enable recovery of the value of

654
 V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

the benefit conferred. In the context of an illegal transaction, however, application of this
general approach is complicated by the principle articulated in Holman v Johnson, above. The
common law has generally assumed that Lord Mansfield's statement to the effect that "[n]o
court will lend its aid to a man who founds his cause upon an immoral or illegal act" not only
precludes an action to enforce an illegal agreement but also precludes the bringing of a resti-
tutionary claim for the value of benefits conferred. Although the right to recover benefits
conferred under an illegal contract is recognized to some extent, it is recognized only by way
of exception to the general Holman v Johnson principle. Where such rights are recognized, it
must be emphasized, they do not render the agreement enforceable. Rather, they allow the
party who has conferred benefits under the agreement to seek recovery of their value.
The traditional exceptions to the principle in Holman v Johnson permitting restitutionary
relief are applicable in circumstances, broadly speaking, where the party seeking restitution is
in some sense less at fault than the other party. The consequence of this approach is that a
party who has, for example, acted in contravention of a statutory provision is normally unable
to pursue restitutionary relief. Thus, the plaintiff farmer in Kingshot v Brunskill, above, is not
only unable to enforce the contract to sell ungraded apples, he is unable to bring a restitution-
ary claim for the value of the apples transferred to the defendant. After briefly considering the
traditional restitutionary exceptions to Holman v Johnson, we will return to this point with a
view to considering whether this traditional approach is a satisfactory one.
An obvious case for restitutionary relief is made out in circumstances where the party
conferring the benefit was unaware of the facts that render the transaction illegal. An excep-
tion to Holman v Johnson on this ground is well established, if rarely applied. In Oom v Bruce
(1810), 12 East 225 (KB), the plaintiff was allowed to recover moneys paid for insurance of
goods on board a Russian vessel. The plaintiff was unaware that war had broken out with Russia,
thus rendering the contract unenforceable.
A second exception pertains to circumstances where the defendant has induced the plaintiff
to enter the agreement by oppressive conduct such as fraud or undue influence. Mohamed v
Alaga & Co (a firm), [1999] 3 All ER 699 (CA) suggests that it is not necessary to establish that the
defendant's conduct meets the technical requirements of fraud, duress, or undue influence. In
Mohamed v Alaga, the plaintiff, a Somali speaker, entered into a fee-splitting arrangement with
a law firm under which he was to introduce potential clients to the firm and provide translation
services in return for half the legal-aid fees earned by the firm in providing services to the clients.
Pursuant to this arrangement, the plaintiff introduced several clients to the firm and provided
translation services. Fee-splitting arrangements of this kind are prohibited by the rules of
professional practice of the legal profession on the theory that paying for such referrals is
contrary to the public interest. Accordingly, the fee-splitting agreement was held unenforce-
able as contrary to public policy. The plaintiff was nonetheless entitled to recover for the va lue
of the translation services he had provided on the basis that his conduct was less culpable than
that of the defendant firm. Two further exceptions to the general principle denying restitution
are considered in the following two cases.

KIRIRI COTTON CO LTD V RACHHODDAS KESHAVJI DEWAN!

(1960] AC 192 (JCPC, on appeal from the
Court of Appeal for Eastern Africa)

The facts were simple. The plaintiff came to Kampala in March 1953, and looked for
somewhere to live. At the end of May 1953, he took a flat in Salisbury Road, but he
had to pay 10,000 shillings premium. He now said that the premium was illegal
because it was in contravention of the Rent Restriction Ordinance, and he claimed
the return of it.

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CHAPTER 7 PUBLIC POLICY

The oral evidence was so short that it could be set out in full. Only the plaintiff
gave evidence. He said:

I came to Kampala, Uganda, in 1953-March. I lived with a brother for 11/z months. I took
a flat but I had to pay key money. I was searching for some time.
I got a flat at Kololo but after 2-3 days I had to leave as I had trouble with a co-tenant.
Then I got in touch with C.B. Patel, after having difficulty. I borrowed 10,000 shillings
from the company as my brother was a director.

Cross-examination: "I paid the money by borrowing the money."

It was apparent from that evidence, as the trial judge said, that during the negotia-
tions for the flat the plaintiff was at a disadvantage. He was having difficulty in
obtaining accommodation-and h e o nly got the flat by paying a premium of 10,000
shillings, which he borrowed for the purpose. He took it under a sublease dated
September 17, 1953. This was prepared by lawyers. It contained provisions whereby
the defendant company, in consideration of the sum of 10,000 shillings paid by the
plaintiff by way of premium, subleased to him Flat No. 1 o n the first floor for residence
only, having three rooms, one kitchen, one bathroom and one lavatory. The term
was seven years and one day from May 31, 1953. The rent was 300 shillings a month
payable monthly in advance. And there were several covenants on either side.
The Rent Restriction Ordinance, 1949, of Uganda, provided by section 3(2) : "Any
person whether the owner of the property or not who in consideration of the letting
or subletting of a dwelling-house ... to a person asks for, solicits or receives a ny sum
of money other than rent ... shall be guilty of an offence and liable to a fine not
exceeding Shs. 10,000 or imprisonment for a period not exceeding six months or to
both such fine and imprisonment. ..."
The judgment of their Lordships was delivered by LORD DENNING, who stated the
facts set out above, and continued: Their Lordships desire to point out at once that
neither party thought they were doing anything illegal. The lease was for more than
seven years and it was thought that, on a lease for that le ngth of time, there was
nothing wrong in asking for a premium or receiving it.
This was an easy mistake to make, as will be seen if one reads section 3(1) and (2)
of the Rent Restriction Ordinance:

3(1) No owner or lessee of a dwelling-house or premises shall let or sublet such

dwelli ng-house or premises at a rent wh ic h exceeds the standard rent.
(2) Any person whether the owner of the property or not who in conside ration of
the letting or subletting of a dwelling-house or premises to a person asks for, solicits
o r receives any sum of money other than rent or any thing of value whether such asking,
soliciting or receiving is made before or after the grant of a tenancy sha ll be guilty of
an offence and liable to a fine not exceed ing Shs. 10,000 or imprisonment for a period
not exceeding six months or to both such fine and imprisonment:
Provided that a person acting bona fide as an agent for either party to the intended
tenancy agreeme nt shall be entitled to a reasonable commission for his services:
And provided further that nothing in th is section shall be deemed to make unlawful
the charging of a purchase price or premium on the sale, grant, assignment or renewal
of a long lease of premises where the term o r unexpired term is seven years o r more.

Anyone reading the last proviso to that section-without more-might well think
that a premium could be charged on the lease of this flat for seven years and one
day. He would readily assume that the word "premises" included a flat. But he would
be wr9ng. For if he took pains to look back to the definition section 2, he would find
that in this Ordinance, the word "premises" refers only to business premises .a nd not

656
 V. MITIGATING THE CONSEQUEN C ES OF ILLEGALITY

to residential flats at all. And so this proviso does not apply to this flat-because by
the very terms of the sublease it was let "for residence only." Their Lordships ought
perhaps to set out the material words of the definition clause which produces this
result-it says that "dwelling-house" means any building let for human habitation
as a separate dwelling and "premises" means any building or part of a building let
for business, trade or professional purpose or for the public service.
It was owing to the failure of the lawyers to refer to those definitions-or at any
rate to appreciate the importance of them-that the mistake arose.
Their Lordships also think it right to point out that there was no evidence to show
whether the premium of 10,000 shillings was extortionate or not. Their Lordships
were told that no standard rent had been fixed for this flat because it was a new flat.
It is obvious that if the standard rent were to be fixed at, say 450 shillings a month
for seven years, there would be nothing extortionate in a premium of 10,000 shillings
down and a rent of 300 shillings a month thereafter: for it would come in the long
run to much about the same.
Nevertheless, no matter whether the mistake was excusable or inexcusable, or
the premium fair or extortionate, the fact remains that the landlord received a pre-
mium contrary to the provisions of the Ordinance: and the question is whether the
tenant can recover it back-remembering always that there is nothing in the Uganda
Ordinance, comparable to the English Acts, enabling a premium to be recovered back.
This omission in the Ordinance was considered to be decisive by the Court of
Appeal for Eastern Africa in a case a few years ago . ... The court was then differently
constituted from what it is now. The judges argued in this wise: "We do not know
the reason, but the Uganda legislature in its wisdom has included in the Ordinan<::;e
no provision comparable to section 8(2) of the Rent Restriction Act of 1920 . .. . Without
this statutory right of recovery, the giver of the illegal premium is left in the position
of one who, although he himself has committed no substantive offence, has aided
and abetted the commission of an offence by another. In these circumstances he
could not go to a civil court with clean hands, and the principle stated by Lord
Ellenborough in Langton v. Hughes, (1813) 1 M. & S. 593, would have application: 'What
is done in contravention of an Act of Parliament, cannot be made the subject-matter
of an action."'
In considering the validity of this reasoning, their Lordships would point out that
the observation of Lord Ellenborough was made in a case where a party was seeking
the aid of the court in order positively to enforce an illegal contract. It should be
confined to cases of that description. His observation has no application to cases
such as the present, where a party is seeking to recover money paid or property
transferred under an illegal transaction. In such cases the general principle was
stated by Littledale J. in Haste/ow v. Jackson, (1828), 8 B. & C. 221, "If two parties enter
into an illegal contract, and money is paid upon it by one to the other, that may be
recovered back from the execution of the contract, but not afterwards." In accordance
with this principle, so long as the illegal transaction has not been fully executed and
carried out, the courts have in many cases shown themselves ready to entertain a
suit for recovery of the money paid or property transferred. These were cases in
which it appeared to the court that, even though the transaction was illegal, never-
theless it was better to allow the plaintiff to resile from it before it was completed,
and to award restitution to him rather than to allow the defendant to remain in
possession of his illegal gains .... But so soon as the illegal transaction has been fully
executed and carried out the courts will not entertain a suit for recovery ... unless it
appears that the parties were not in pari delicto ....
It is clear that in the present case the illegal transaction was fully executed and
carried out. The money was paid. The lease was granted. It was and still is vested in

657
CHAPTER 7 PUBLIC POLICY

the plaintiff. In order to recover the premium, therefore, the plaintiff must show that
he was not in pari delicto with the defendant. That was, indeed, the way he put his
claim in the pleadings. After setting out the lease, the payment of the premium and
the entry into occupation, the statement of claim proceeded simply to say: "By virtue
of the provisions of subsection (2) of section 3 of the Rent Restriction Ordinance,
the receipt of the said sum of Shs. 10,000 by the defendant from the plaintiff ... was
illegal but the plaintiff is entitled to recover the same since he (the plaintiff) was not
in pari delicto with the defendant.
The plaintiff claims the sum of Shs. 10,000 as money received by the defendant
for the use of the plaintiff:"
The issue thus becomes: Was the plaintiff in pari delicto with the defendant?
Mr. Elwyn Jones, for the appellant, said they were both in pari delicto. The payment
was, he said, made voluntarily, under no mistake of fact, and without any extortion,
oppression or imposition, and could not be recovered back. True, it was paid under
a mistake of law, but that was a mistake common to them both. They were both
equally supposed to know the law. They both equally mistook it and were thus in
parf delicto. ... ·
Their Lordships cannot accept this argument. It is not correct to say that everyone
is presumed to know the law. The true proposition is that no man can excuse himself
from doing his duty by saying that he did not know the law on the matter. Ignorantia
juris neminem excusat. Nor is it correct to say that money paid under a mistake of law
can never be recovered back. The true proposition is that money paid under a mistake
of law, by itself and without more, cannot be recovered back. ... If there is something
more in addition to a mistake of law-if there is something in the defendant's conduct
which shows that, of the two of them, he is the one primarily responsible for the
mistake-then it may be recovered back. Thus, if as between the two of them the duty
of observing the law is placed on the shoulders of the one rather than the other-it
being imposed on him specially for the protection of the other-then they are not
in pari delicto and the money can be recovered back; ... Likewise, if the responsibility
for the mistake lies more on the one than the other-because he has misled the other
when he ought to know better-then again they are not in pari delicto and the money
can be recovered back. ... These propositions are in full accord with the principles
laid down by Lord Mansfield relating to the action for money had and received. Their
Lordships have in mind particularly ... his celebrated judgment ... on May 19, 1760, in
Moses v. Macferlan, 2 Burr. 1005, when he sat in banco. Their Lordships were referred
to some cases 30 or 40 years ago where disparaging remarks were made about the
action for money had and received: but their Lordships venture to suggest that these
were made under a misunderstanding of its origin. It is not an action on contract or
imputed contract. If it were none such could be imputed here, as their Lordships
readily agree. It is simply an action for restitution of money which the defendant has
received but which the law says he ought to return to the plaintiff. This was explained
by Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943]
AC. 32. All the particular heads of money had and received, such as money paid
under a mistake of fact, paid under a consideration that has wholly failed, money
paid by one who is not in pari delicto with the defendant, are only instances where
the law says the money ought to be returned.
In applying these principles to the present case, the most important thing to
observe is that the Rent Restriction Ordinance was intended to protect tenants from
being exploited by landlords in days of housing shortage. One of the obvious ways
in which a landlord can exploit the housing shortage is by demanding from the
tenant "key-money." Section 3(2) of the Rent Restriction Ordinance was enacted so

658
 V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

as to protect t.e nants from exploitation of that kind. This is apparent from the fact
that the penalty is imposed only on the landlord or his agent and not upon the tenant.
It is imposed on the person who "asks for, solicits or receives any sum of money," but
not on the person who submits to the demand and pays the money. It may be that
the tenant who pays money is an accomplice or an aider and abettor ... but he can
hardly be said to be in pari delicto with the landlord. The duty of observing the law
if firmly placed by the Ordinance on the shoulders of the landlord for the protection
of the tenant: and if the \aw is broken, the landlord must take the primary respon-
sibility. Whether it be a rich tenant who pays a premium as a bribe in order to "jump
the queue," or a poor tenant who is at his wits' end to find accommodation, neither
is so much to blame as the landlord who is using his property rights so as to exploit
those in need of a roof over their heads.
Seeing then that the parties are not in pari delicto, the tenant is entitled to recover
the premium by the common \aw: and it is not necessary to find a remedy given
by the· Ordinance, either expressly or by implication. The omission of a statutory
remedy does not, in cases of this kind, exclude the remedy by money had and
received. That is amply shown by the numerous cases to which their Lordships were
referred, such as those arising under the statutes against usury, lotteries and gaming,
in which there was no remedy given by the statute but nevertheless it was held that
an action lay for money had and received ....
Their Lordships find themselves in full agreement with the judgment of the High
Court of Uganda and of the Court of Appeal for Eastern Africa, and will humbly advise
Her Majesty that this appeal should be dismissed. The appellant must pay the costs.

OUTSON V ZUROWSKI
(1985), 63 BCLR 89 (CA)

[The plaintiffs had been induced by the defendants to enter into a pyramid scheme
that was illegal under s 189(1)(e) of the Criminal Code. The scheme called for each
participant to contribute $2,200 to an "Investment Board" and then to recruit eight
others to do the same. If the board was completed, the return for the original invest-
ors would be $17,600.
The defendants had successfully participated in the scheme twice before. They
promised the plaintiffs that if the board stopped, the defendants would indemnify
the plaintiffs against the loss of their $2,200. This promise was found by the trial
judge to be contractual. The trial judge also found that the plaintiffs were not aware
that the scheme was illegal, but that the defendants knew that to be the case.
Before the plaintiffs had made any serious efforts to recruit their participants to
the scheme, publicity regarding such schemes and investigations by the police
caused the defendants to decide to abandon the plan. The plaintiffs sued on the basis
of the defendants' promise of indemnity to recover the money they had paid.]
TAGGART JA (Anderson JA concurring): ... I regard the contract as one contract with
the parties having disparate obligations. I think the contract is illegal. That gives rise
to the defendants' argument that because the plaintiffs seek to enforce an illegal
contract their action must fail . I do not accept that argument.
Two issues must be resolved. First, I think it is necessary to decide if the parties
are in pari delicto. If they are not and the plaintiffs are blameless, as on the findings
of the judge they are, no further inquiry is necessary and they may recover on the
contract of indemnity. If, however, the parties are in pari delicto, then it is necessary
to consider whether, notwithstanding that, the plaintiffs may recover.

659
CHAPTER 7 PUBLIC POLICY

As I read his reasons for judgment, that is the process of reasoning foUowed by
Laycraft J.A., now C.J.A., in McDonald v. Fellows, [1979] 6 W.W.R. 544. I refer particu-
larly to this passage from his judgment at pp. 554-55:

Where the plaintiff must rely on the illegal transaction, the learned author of Cheshire and
Fifoot's Law of Contract recognizes two true exceptions to the rule of law that there can
be no recovery of money paid under an illegal contract. In the 8th edition at pp. 342-43
it is said:
There are two exceptions to the general rule that a party cannot recover what
he has given to the other party under an illegal contract. These are (a) where the
parties are not in pari delicto and (b) where the plaintiff repents before the con-
tract has been performed .
If the partii=s to an illegal contract are not in pari delicto, thE! court in certain
circumstances will allow the less blameworthy to recover what he may have
transferred to the other. This relief is granted to the plaintiff upon proof that he
has been the victim of fraud, duress or oppression at the hands of the defendant,
or that the latter stood in a fiduciary position towards him and abused it. ...
The second exception to the ban on restitution recognizes the virtue of
repentance in the case of a contract which is still executory. A party to such a
contract, despite its illegality, is allowed a locus poenitentiae, and he may recover
what he has transferred to his co-contractor, provided that he takes proceedings
before the illegal purpose has been substantially performed. If he repents in time,
he will be assisted by the court, but in the present state of the authorities it is not
clear at what point his repentance is to be regarded as overdue.
It is therefore necessary to consider whether in this case the vendors and purchasers
were in pari delicto and, if they were, whether the plaintiffs may nevertheless recover
the deposit because the agreement has not been substantially performed .

... I turn now to consider whether the plaintiffs here were in pari delicto. Certainly
they were unaware the contract they had made committed them to participation in
an illegal scheme. But I think that makes no difference. In J.M. Allan (Merchandising)
Ltd. v. Cloke, [1963] 2 O.B. 340 (C.A.), the plaintiffs hired to the defendants, who were
interested in the management of a proprietary club, a roulette table, a roulette wheel
and a croupier's rake at a weekly rent payable quarterly in advance. A booklet was
provided which contained the rules of the game and which stated the game was
designed to be conducted in accordance with the provisions of the Betting and
Gaming Act, 1960. The defendants did not pay the second instalment of the rent on
the ground that the agreement was illegal, though at the date the agreement was
entered into neither party knew the game was unlawful.
Lord Denning M.R. decided the game was unlawful. He went on to say at pp.
260-61:

... As I read Waugh v. Morris [(1873), L.R . 8 0.8. 202], there was there no participation in
any unlawful purpose and the plaintiff could recover. In this case, however, there was
participation. The common design was that a game should be played which was in fact
unlawful. I hold that such a contract is unlawful; and it is no answer for those concerned
to say that they did not know the law. It would be an easy way round the law if we were
to permit a person to excuse himself by saying that he did not know the law. Here the
judge was, I think, quite right in holding that there was an express purpose of both that
this roulette-table and appurtenances should be used for this unlawful game. The con-
tract was, in my judgment, illegal in its inception, and no action lies to recover the rent.

660
 V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

Danckwerts L.J. did not refer to that aspect of the matter, but Davies L.J. concurred
with Lord Denning.
I think the reasoning of Lord Denning has application on the first issue. I think it
is not open to the plaintiffs to say they are not in pari delicto because they did not
know the law and believed the scheme to be legal.
Then can the plaintiffs bring themselves within the second exception referred to
by the authors of Cheshire and Fifoot's Law of Contract7 In my opinion, they can. I
think this contract was clearly executory. The plaintiffs had each paid $2,200 into
the scheme. But while that enabled the defendants to take their "winnings," the
plaintiffs each had still to find eight persons to join the scheme. The defendants had
succeeded for the second time in obtaining $17,600 for an investment of $2,200 on
their part. But their obligation to indemnify the plaintiffs was a continuing
obligation.
There has been much discussion concerning the scope of the exception. AU
judges and commentators are agreed that the illegal contract must remain executory
if parties in the position of the plaintiffs are to succeed in recovering their money.
But differing answers have been given to the question of the stage at which they
may "repent" by withdrawing from the illegal contract. .
As Laycraft J.A. pointed out at p. 557 of /VlcDonald v. Fellows, Fry L.J. in Kearley v.
Thomson (1890), 24 O.B.R. 742 at 747 (C.A.), sa)d:

I hold, therefore, that where there has been a partial carrying into effect of an illegal
purpose in a substantial manner, it is impossible, though there remains something not
performed, that the money paid under that illegal contract can be recovered back.
That would appear to limit considerably the circumstances in which there is a right
to recovery ....
Whatever may be the limits of the exception, I think even on the basis adopted
by Fry L.J. in Kearley v. Thomson the plaintiffs here are entitled to succeed. They had
taken only the initial step of paying money into the scheme and two of them had
made desultory efforts to persuade others to enter the scheme. The defendants, on
the other hand, had received benefits as a result of the participation of the plaintiffs
in the scheme. ·
On this aspect of the matter I think it is appropriate to consider the relative degrees
of turpitude of the parties. The plaintiffs had barely begun their participation in the
scheme and did not know it was unlawful. The defendants, on the other hand, at the
very least, had doubts about the legality of the scheme but, notwithstanding those
doubts, induced the plaintiffs to participate by assuring them it was lawful.
I am therefore of the view the plaintiffs fall within the second exception and are
entitled to recover from the defendants the amounts which they claim.

NOTES AND QUESTIONS

1. In the typical locus poenitentiae case, or repentance case, as the excerpt from /VlcDonald
v Fellows quoted by Taggart JA illustrates, the relief made available to the party who repents in
time is a restitutionary claim for the value of benefits conferred prior to the repentance. Is that
the type of relief made available in Outson? Should it have been7
2. The separate judgment of Esson JA is omitted. He concurred in the result. He also found
that the plaintiffs had "repented" and noted that the word in this context "is used without any
moral connotation. What is important is that they abandoned their participation in the scheme
before the illegal purpose was carried out in any substantial way, that they entered into it
without knowledge of its illegality and were induced to do so by the defendants who had such

661
CHAPTER 7 PUBLIC POLICY

knowledge." In Bigos v Boustead, [1951] 1 All ER 92 (KB), the plaintiff had entered into an
unlawful agreement with the defendant foreign national for the purpose of evading English
currency controls. The plaintiff had advanced securities to the defendant but the defendant
refused to carry out his side of the bargain. The plaintiff's restitutionary claim was denied on
the basis that his "repentance" was not genuine. The real reason for the claim was that the
defendant's non-performance had frustrated the scheme. Was the repentance in Outson
genuine in this sense? In Tribe v Tribe, [1995] 4 All ER 236 (CA). the English Court of Appeal
suggested that a plaintiff who transferred assets to a defendant under an unlawful scheme to
hide assets from a potential creditor could recover the assets even though the plaintiff sought
relief only after the claim failed to materialize and the need for deception had passed. Millett LJ
observed (at 260) that "restitution should not be confined to the penitent." Which approach do
you prefer?
3. For further discussion of the repentance doctrine, see R Merkin, "Restitution by With-
drawal from Executory Illegal Contracts" (1981) 97 Law 0 Rev 420; J Beatson, "Repudiation of
a Legal Purpose as a Ground for Restitution" (1975) 91 Law 0 Rev 420.
4. Would any of the restitutionary exceptions to Holman v Johnson considered above
provide a basis for granting relief to the plaintiff farmer in Kingshot v Brunskill, above? If not, is
it possible to devise a rule that would provide a basis for recovery in such a case? In Berne
Development Ltd v Haviland (1983), 40 OR (2d) 238 (H Ct J), the plaintiff developer sold a
condominium unit to the defendant, accepting a second mortgage on the unit as part of the
purchase price. The developer refrained from disclosing the existence of the second mortgage,
as it was required to do, to the first mortgagee and a government agency, the CMHC, because the
existence of the second mortgage would have precluded the requisite CMHC approval of the first
mortgage. Although the scheme was initiated and implemented by the plaintiff, the defendant
was also aware of the deception. When the plaintiff sought to enforce the second mortgage,
the defendant raised a defence of illegality. Saunders J noted that the traditional exceptions to the
Holman v Johnson principle would not be available to the plaintiff in these circumstances and
went on to observe (at 250) as follows:

In recent years, there has been a recognition of the desirability [of) balancing the need to
preserve public policy by not enforcing illegal agreements and the need to avoid unjust
enrichment .... [T)he striking of the balance may depend in each case on the extent of the
illegality and the unjust enrichment.

Applying this framework, Saunders J then reasoned that the conduct of the plaintiff devel-
oper, though reprehensible, should not attract the severe consequence of inability to recover
the balance of the purchase price. At the same time, however, the plaintiff was not entitled to
recover further interest or enforce its security or other remedies under the mortgage because
of the illegal nature of the transaction.
Similarly in Koliniotis v Tri Level Claims Consultant Ltd (2005), 201 OAC 282, 257 DLR (4th) 297
(CA), the Ontario Court of Appeal applied the balancing test articulated by Saunders J in Berne
and allowed quantum meruit relief for services rendered by a paralegal under a service agree-
ment rendered illegal by virtue of a provincial statutory prohibition against champertous
agreements. The unlawful contingency fee stipulated for in the agreement was not recover-
able but recovery for the reasonable value of the services rendered was awarded . Sharpe JA,
for the Court of Appeal, observed that "an absolute bar on quantum meruit recovery creates
an injustice that is unacceptable when considered in the light of the public policy informing
the statutory prohibition against champertous agreements." Sharpe JA noted that the plaintiff
was not aware that the agreement w as illegal and had not engaged in sharp or dishonest
practice with the defendant client. The underlying purpose of the legislation-protecting the
administration of justice from abuse-had not been sufficiently undermined by the conduct of
the plaintiff to warrant a complete denial of relief.

662
 V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

Can you fashion an argument for overturning the result in Kingshot v Brunskill on the basis
of these authorities? See, further, the similar analysis provided by Robertson JA at the Federal
Court of Appeal in Still v /vlNR, below. Should we consider this a fifth restitutionary exception
to the rule in Holman v Johnson? See generally Maddaugh & McCamus, ch 15.
5. The approach adopted in Berne Development Ltd v Haviland and Kolionotis v Tri-Level
Claims Consultant Ltd requires, in essence, that one simply ask whether the granting of resti-
tutionary relief in the particular circumstances would undermine or frustrate the policies
underlying the rule or prohibition rendering the transaction unlawful to such a degree that
restitution should be denied. If granting such relief does not offend this principle, restitution will
be allowed . In such cases the burden would be on the plaintiff to establish that the restitution
claim should not be denied on this basis. Once such an approach is clearly adopted, the trad-
itional exceptions to Holman v Johnson permitting restitutionary recovery-such as the protected
class and repentance exceptions-may be seen as applications of that new approach or rule .
That is, in a protected class or repentance case, restitution could be said to be granted because
the plaintiff has successfully established that doing so will not undermine the rule that renders the
transaction invalid. If this approach is accepted, the rule in Holman v Johnson and its excep-
tions could simply be replaced by or absorbed by the new principle.
6. A similar approach to reform of the rule in Holman v Johnson has recently been adopted
by the United Kingdom Supreme Court in Patel v /vlirza, [2016] UKSC 42 (SC). The facts of the
Patel case are not complicated. The plaintiff, Patel, had been persuaded to transfer a substan-
tial sum to the defendant, Mirza, who undertook to engage, on the plaintiff's behalf, in an illicit
insider trading scheme with these funds. In due course, the insider information did not become
available to Mirza and accordingly, it became impossible to proceed with the scheme. Mirza,
however, refused to return the funds to Patel. On traditional grounds, Patel's restitutionary
claim would be precluded by his willing participation in the illicit scheme. None of the trad-
itional exemptions to Holman v Johnson would be available to him. Nonetheless, as between
Patel and Mirza, Patel's claim for restitution appears just.
The English Court of Appeal was able to ground relief for Patel on the basis of what many
would consider an extended application of the locus poenitentiae exception . In the court's
view, the exception could apply where, as here, the impossibility of carrying out the scheme
had the consequence that the scheme was not implemented. This holding may be thought to
be inconsistent with the underlying repentance rationale underlying the locus poenitentiae
doctrine. Mr Patel did not experience a "change of heart" at a time when the illicit scheme
could still be implemented. On the other hand, the holding is consistent with the suggestion
in Tribe, above, that "restitution should not be confined to the penitent."
On appeal to the United Kingdom Supreme Court, however, a majority of the Court upheld
the result on a more radical ground. The majority favoured a reinterpretation of the law grant-
ing restitution of benefits conferred under illegal transactions to the effect that, presumptively,
relief should be granted unless the granting of such relief would stultify the purpose underlying
the prohibition or some other ground of public policy or, alternatively, the withholding of relief
would constitute a disproportionately punitive response to the plaintiff's conduct. In the lead-
ing majority opinion of Lord Toulson, it was suggested that in undertaking this analysis, a
number of factors should be taken into account such as "the seriousness of the conduct, its
centrality to the contract, whether it was intentional and whether there was a marked disparity
in the parties' respective culpability" (Patel , at para 107). Applying this approach to the present
facts, it was the majority's view that there was no consideration of public policy that would
require Mr Patel to forfeit moneys which were never used for the illicit purpose for which they
were paid. A concurring minority of the court would have granted relief essentially on the
grounds that had been adopted by the Court of Appeal.
Although the majority reasoning in Patel appears consistent with the reasoning in the Can-
adian Koliniotis line of authority and current American law, there is an important, if subtle,

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distinction between the new English rule and developments in North America. In order to
understand the new English rule, it is important to draw a distinction between "reasons for
restitution," proof of the existence of which lies upon the plaintiff, and "defences" to restitution,
proof of which lies upon the defendant. Some English scholars have taken the view that the
"i llegality" of a transaction should not be considered to be a reason for restitution but rather,
should be considered to be a "defence" to a restitution claim. Indeed, a number of them have
taken the view that where the plaintiff is a member of a protected class or is entitled to rely on
the locus poenitentiae exception, these constitute "reasons for restitution" that must be estab-
lished by the plaintiff in order to ground relief. Where the plaintiff is a perpetrator of the illegality,
however, no such "reasons for restitution" are available and, under traditional doctrine, relief
would be denied. These scholars also suggest, however, that the traditional rule in Holman v
Johnson should simply be ignored in such cases and that the perpetrator should be presump-
tively entitled to relief, unless the defendant can raise the "defence" of illegality. That defence
should not be available, it is argued, where relief does not result in the stultification of the
rationale underlying the prohibition offended by the transaction or where other considerations
of public policy are not offended and, further, where denying recovery would amount to a
disproportionate response to the plaintiff's conduct. In this rather indirect way, then, the trad-
itional rule of Holman v Johnson is overruled and restitutionary relief is made available to the
perpetrator by adopting a new rule presumptively granting such relief, subject to a "defence"
of illegality that will not invariably be available to the defendant. The odd effect of this manner of
structuring the reform of Holman v Johnson, however, is that in cases where the plaintiff is a
perpetrator or willing participant in the illicit scheme, the burden is on the defendant to estab-
lish a "defence" of illegality on the various public policy grounds making the defence available
to the defendant. The better view, arguably, is that the burden should be on the plaintiff per-
petrator to establish that the various policy factors weigh in favour of relief. That is the
approach taken in the Canadian Koliniotis line of authority and in American law. One difficulty
with the majority reasoning in Patel, then, is that it is not entirely clear whether the reformed
illegality doctrine constitutes, in the court's view, a "reason for restitution" or a "defence."
Although the doctrine appears to be at least assumed to operate as a "defence," the implica-
tions of this characterization for the burden of proof are not explored in the majority opinion.
See further, Maddaugh & McCamus, s 15 800.40.
7. For examples of recent English scholarship suggesting that illegality operates (at least
sometimes) as a defence, see, G Virgo, 'The Defence of Illegality in Unjust Enrichment," in
A Dyson et al, Defences in Unjust Enrichment (Oxford: Hart Publishing, 2016) ch 8; AS Burrows,
A Restatement of the English Law of Unjust Enrichment (Oxford: Oxford University Press,
2012) at 107-10, 136-41. For a review of the latter volume, see, JD McCamus, (2016), 58 Can
Bus LJ 208.

C. SEVERANCE OF ILLEGAL PROVISIONS

One means that the courts have developed to prevent unjust enrichment of one party to an
illegal contract is to sever an illegal part of the contract and enforce the remainder. The ques-
tions of how severance is to be applied and when it will be applied were, at least before the
1980s, little explored. However, in one area, the courts have developed these doctrines. Pursu-
ant to s 347 of the Criminal Code, it is an offence to charge or receive a rate of interest in
excess of 60 percent per annum. Prosecution requires the consent of the attorney general.
The section has been most frequently used in commercial cases in which one party is trying
to recover a loan from another. The defendant pleads the illegality of the transaction. Particu-
larly when both pa rties are sophisticated with access to legal advice, courts have been reluctant
to allow the defendant to retain the principal money of the loan. The following two cases
illustrate the development of the doctrine of severance in these cases. See also MA Waldron,
"White Collar Usury: Another Look at the Conventional Wisdom" (1994) 72 Can Bar Rev 1.

664
 V. MITIGATING THE CONSEQUENCES OF ILLEGALITY

WILLIAM E THOMSON ASSOCIATES INC V CARPENTER

(1989), 61 DLR (4th) 1 (Ont CA)

[The court found that a "facility fee" fell within the definition of interest under the
Criminal Code, making the rate of return on a loan illegal. The loan was made to
Jamestown Resources Inc. The appellants, Carpenter and Martin, were directors
of Jamestown and gave, in connection with the loan, personal guarantees for a
limited amount. When the company failed to repay the loan, the lender called on the
guarantees of Carpenter and Martin. They resisted payment on the ground that
the guarantees were void because the effective rate on the loan exceeded the crim -
inal rate . Only the court's discussion of severance is quoted.]

BLAIR JA: ... I now turn to the question whether the loan agreement can be severed
so that the agreement to repay the principal of the loan can be enforced even though
the agreement to pay a criminal rate of interest is void. Two questions arise. The first
is whether severance is possible, which presents no difficulties in this case. The three
clauses providing for payment of interest referred to above can be excised from the
agreement without affecting the substance of the obligation to repay the principal
of the loan and without making a new agreement for the parties.
The important question is whether public policy prevents the severance of the
agreement because it is tainted by illegality. In deciding whether the agreements in
this case are capable of severance and partial enforcement, a number of principles
from the decided cases must be taken into account. They include the object and
policy of s. 347; whether that object and policy would be subverted by a partial per-
formance of the agreements; whether one or both parties intended to break the \aw;
whether the parties were in an equal bargaining position and were professionally
advised; and whether one party would be unjustly enriched if the contract were not
enforced ....
The first consideration is whether the purpose and policy of s. 347 would be
subverted by severance. The section was enacted to curb the reprehensible practice
of loan sharking. In this case, it does not seem to me that it~ purpose would be
subverted by severing the loan agreements to permit recovery of the principal
amount of the guarantees. The deterrent effect of the punishment it provides is not
undermined by severance for proper reasons. The enforcement of the valid part of
the loan agreement does not absolve the respondent company from criminal respon -
sibility under s. 347.
The second consideration is whether the parties entered into the agreement for
an illegal purpose or with an evil intention .... This is not a case where it can be said
that the agreement was made for an illegal purpose ....
The third consideration is the relative bargaining position of the parties and their
conduct in reaching the agreement. This is not a case of a desperate borrower who
was forced to submit to terms dictated by a sophisticated usurious lender. The parties
to this agreement were all businessmen who bargained from a position of equality
and who, in additions, acted on the advice of their own solicitors. In La Fonciere
Compagnie d'Assurance de France v. Perras, [1943] 2 D.L.R. 129, the Supreme Court of
Canada warned that the maxim ex turpi causa should be applied carefully to persons
who seek to use the rule to avoid performance of contracts for which they have
received full consideration. Davis J . at p. 139, quoted with approval the dictum of
Lord Esher in Cleaver v. Mutual Reserve Fund Life Ass'n, [1892] 1O.B. 147 at p. 151:

No doubt there is a rule that, if a contract be made contrary to public policy, or if the
performance of a contract would be contrary to public policy, performance cannot be

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enforced either at law or in equity; but when people vouch that rule to excuse them-
selves from the performance of a contract, in respect of which they have received the
full consideration, and when all that remains to be done under the contract is for them
to pay the money, the application ·of the rule ought to be narrowly watched, and ought
not to be carried a step further than the protection of the public requires.

There can be no doubt that in this case the appellants are attempting on technical
grounds to avoid performance of an important business obligation. Their conduct
does not entitle them to any favourable exercise of the court's discretion.
The fourth consideration is related to the third in this case. It is whether the appel-
lants can be considered to have been unjustly enriched at the expense of the company:
The principle is expressed by Professor Waddams [The Law of Contracts, 2nd ed] at
p. 420:

[l]t seems inadequate to say of an illegal contract simply that it is "void" without taking
account of the effect that such a holding will have on the particular case and whether
the seriousness of the contravention of public policy justifies the particular conse-
quences, including often the enrichment of one party at the other's expense.

Because of the collapse of Jamestown, the enrichment might not be regarded as

continuing but it remains a consideration which should be taken into account The
words of Krever J . in Menard v. Genereux (1982), 39 O.R. (2d) 55, in a case where a
deposit had been paid under an illegal transaction, are apt and militate against the
avoidance of the agreement to repay the principal and the guarantors' obligation in
this case. He said at p . 72:

As between the plaintiffs and the defendants, there is at work a conflict between two
policies of the law, the first, that unjust enrichment should, where possible, be prevented
and the second, that the law will not come to the assistance of persons who behave
illegally. It is apparent that in these circumstances, to prefer the second policy of the
law would result in the unacceptable situation I have described and, therefore, it seems
to me that the only reasonable recourse is to adopt a position that would return the
deposit to the plaintiffs and thus prevent the unjust enrichment of the defendants.

Whether or not a contract tainted by illegality is completely unenforceable

depends upon all the circumstances surrounding the contract and the balancing of
the considerations discussed above and, in appropriate cases, other considerations.
This careful case by case approach was anticipated more than half a century ago by
Masten J.A in Steinberg v. Cohen, [1930] 64 O.L.R. 545 (H.C.J.), where he said at p . 558 :

It is possible that each case should depend upon its own facts, and upon a balancing
by the Court of the public interest on the one hand and of the private injustice on the
other.

In the present case, J. Holland J. properly exercised his discretion, in my opinion, in

permitting the severance of the loan agreement and the enforcement of the guar-
antees of the principal given by both appellants. The exercise of his discretion
accords with the principles governing the intervention of public policy to strike
down a contract In the result, I agree that the agreements should be severed and
that the appellants should be liable for the principal amounts of their guarantees.

666
 V. MITIGATING THE CONSEQUEN C ES OF ILLEGALITY

TRANSPORT NORTH AMERICAN EXPRESS INC V

NEW SOLUTIONS FINANCIAL CORP
2004 sec 7, 12004J 1 scR 249

[The appellant, New Solutions, had entered into a credit agreement with Transport
North American Express. Under the terms of the agreement, interest was charged
at 4 percent per month, calculated daily; there were also a "monitoring fee," "royalty
payments," and various other fees and charges, all of which fell within the statutory
definition of interest. The monthly interest rate alone, converted to an annualized rate,
produced a rate of 60.1 percent per annum; the various other payments amounted
to 30.8 percent per annum. The application judge, Cullity J, determined that to reduce
the interest rate using the traditional method of severance-that is, by striking out
entire provisions of the agreement with the "blue pencil"-his only option was to
strike the provision for monthly interest, leaving the lender with only 30.8 percent
per annum in interest charges. Instead, while criticizing the blue-pencil test as overly
formalistic and outdated, Cullity J applied a "notional severance" test and permitted
interest to be paid up to the legal rate of 60 percent per annum without identifying
a particular provision of the contract to be struck out. The Ontario Court of Appeal
reversed the judgment and reaffirmed the blue-pencil test as the only acceptable
method of severance. The lender appealed to the Supreme Court of Canada. ]
ARBOUR J (Iacobucci, Major, and LeBel JJ concurring):

I. OVERVIEW

[1] In March 2000, the appellant, New Solutions Financial Corp. ("New Solutions"),
and the respondent, Transport North American Express Inc. ("TNAE"), entered into
a credit agreement pursuant to which New Solutions advanced TNAE the sum of
$500,000. In addition to various other fees and charges, the agreement provided for
interest to be paid at the rate of four percent per month, calculated daily and payable
monthly in arrears. By all accounts, the various payments called for by the agreement
constituted a "criminal rate" of interest as defined ins. 347 of the Criminal Code, R.S.C.
1985, c. C-46 (the "Code"). The payments soon became too onerous for TNAE to meet,
and the company applied to the Ontario Superior Court of Justice for a declaration
that the agreement contained an illegally high rate of interest and should not be
enforced.
[2] The application judge, Cullity J., ruled that he was not confined to the so-called
"blue -pencil" approach to severance in dealing with the statutory illegality of the
contract, whereby only discrete illegal promises could be excised. Using "notional
severance," he read down the offending interest rate so the contract provided for the
maximum legal rate of interest: (2001), 54 O.R. (3d) 144.
[3] Upon appeal to the Court of Appeal for Ontario, Rosenberg J.A., for the major-
ity, concluded that the doctrine of severance only permits the striking of distinct
promises from a contract: (2002), 60 O.R. (3d) 97. He reversed the application judge's
finding that notional severance was an available remedial instrument. Rosenberg J.A.
found that it was appropriate to strike out or blue-pencil the provision calling for
interest at four percent per month, calculated daily and payable monthly in arrears,
leaving the balance of the agreement to be enforced in accordance with its terms.
Sharpe J.A., agreeing with the reasons of Cullity J., dissented.
[4] There is broad consensus that the traditional rule that contracts in violation
of statutory enactments are void ab initio is not the approach courts should neces-
sarily take in cases of statutory illegality involving s. 347 of the Code. Instead, judicial

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discretion should be employed in cases in which s. 347 has been violated in order
to provide remedies that are tailored to the contractual context involved. The primary
issue in this appeal by New Solutions is whether notional severance, as formulated
and applied by Cullity J., is valid in Canadian law and applicable here.
[SJ Given the.desirability of remedial flexibility in cases of statutory illegality aris-
ing in connection withs. 347 of the Code, the evolving nature of the law regarding
statutory illegality generally and the sound policy basis in which the concept is
rooted, I find that notional severance is available as a matter of law as a remedy in
cases arising under s. 347.
[6] A spectrum of remedies is available to judges in dealing with contracts that
violates. 347 of the Code. The remedial discretion this spectrum affords is necessary
to cope with the various contexts in which s. 347 illegality can arise. At one end of
the spectrum are contracts so objectionable that their illegality will taint the entire
contract. For example, exploitive loan-sharking arrangements and contracts that
have a criminal object should be declared void ab initio. At the other end of the
spectrum are contracts that, although they do contravene a statutory enactm!"nt, are
otherwise unobjectionable. Contracts of this nature will often attract the application
of the doctrine of severance. The agreement in this case is an example of such a
contract. In each case, the determination of where along the spectrum a given case
lies, and the remedial consequences flowing therefrom, will hinge on a careful con -
sideration of the specific contractual context and the illegality involved.
[7] The application judge in this case found that (i) the agreement between New
Solutions and TNAE only inadvertently violated s. 347; (ii) the parties were experienced
in commercial matters and negotiated at arm's length; (iii) there was no evidence
that they did not have equal bargaining power; and (iv) they each had the benefit of
independent legal advice in the course of the negotiations leading to the agreement.
Consequently, the application of notional severance to the agreement between New
Solutions and TNAE in this case by Cullity J. was appropriate. I would allow the appeal.

[On the question of the blue -pencil test, the court stated:]
(27] The blue-pencil approach is understood both as a test of the availability of
severance to remedy contractual illegality and also as a technique for effecting sever-
ance. The blue-pencil approach as a test of the appropriateness of severance requires
a consideration of whether an illegal contract can be rendered legal by striking out
(i.e., by drawing a line through) the illegal promises in the agreement. The resulting
set of legal terms should retain the core of the agreement. If the nature or core of the
agreement is disturbed, then on this test the illegal clause in the contract is not a
candidate for severance and the entire contract is void. The 'blue-pencil approach as
a technique of effecting severance involves the actual excision of the provisions lead-
ing to the illegality, leaving those promises untainted by the illegality to be enforced.
(28] The use of the blue-pencil approach to sever one or more provisions from
a contract alters the terms of the agreement between the parties. The only agreement
that one can say with certainty the parties would have agreed to is the one that they
actually entered into. The insistence in the case law that the blue-pencil test derives
its validity from refusing to change or add words or provisions to the contract is
unconvincing. It is doubtful, for example, that the lenders in cases such as Thomson,
supra, or Mira Design .. . would have entered into the agreements at issue had they
been aware ex ante that they would only be entitled to the return of the principal
advanced. The change effected by the blue-pencil technique will often fundamen-
tally alter the consideration associated with the bargain and do violence to the

668
 VI. AN ALTERNATIVE APPROACH7

intention of the parties. Indeed, in many cases, the application of the blue-pencil
approach will provide for an interest -free loan where the parties demonstrated in
the agreement a clear intention to charge and pay considerable interest.
[29] The blue-pencil test was developed in cases where the courts were consider-
ing instruments under seal, where the form of the deed governed and w here the
intention of the parties was irrelevant. It was therefore important that what remained
after severance would be a valid deed:

In the deed form was everything; the actual intention of the parties was immaterial. It was,
therefore, natural that in considering the possibility of severance of promises in a deed,
the cou rt should be concerned to see that what was left remained a valid deed; there
could be no question of implying a promise to take effect if part of the original bargain
was illegal. This is the historical origin of what was later called the "blue-penci l test."

(N.S. Marsh, "The Severance of Illegality in Contract". (1948), 64 L.O.R. 230 and 347,
at pp. 351-52.)
Historically, courts were not concerned with the intention of the parties. The
artificiality of the blue-pencil test arises from the common law constraints imposed
on courts unaided by principles of equity.

[The detailed reasons and the dissenting judgment of Bastarache J are omitted.]

NOTE
In Shafran v KRG Insurance Brokers, excerpted above, the Supreme Cou rt of Canada clarified
the circumstances in which notional severa nce can be applied. The BC Court of Appeal in
Shafran (2007), 64 BCLR (4th) 125 had used notional severance to construe the meaningless
phrase "Metropolitan City of Vancouver" to mean the City of Vancouver, UBC Endowment
Lands, Richmond, and Burnaby. The Supreme Court held that notional severance was not
applicable in this case because there was no "bright line" test for illegality in cases such as this
and to rewrite the clause would encourage employers to include unreasonable clauses
regarding future competition in their contracts in the knowledge that the court would substi-
tute what it considered reasonable.

VI. AN ALTERNATIVE APPROACH?

The technical exceptions to the courts' refusal to intervene to mitigate the consequences of
the inva lidity of a contract found void as illegal have been widely criticized . In the cases we
have seen excerpted above, we can observe numerous inconsistencies. Reviewing the use of
illegality as a defence in contracts, the UK Law Commission recommended that "the courts
should consider in each case whether the application of the illegality defence ca n be justified
on the basis of the policies that underlie that defence" (The Illegality Defence: A Consultative
Report (2009), part 8 at para 8.3). The Commission called for a balancing approach, weighing
the application of the va riou s policies involved. Consider w hether such an approach was used
in Still v MNR, below. The development of the law of restitution, the influence of which can be
seen in the judgment excerpted here, as well as in those included above, is likely to have an
increasingly sig nificant role to play in the modern development of the law of illegal contracts.

669
CHAPTER 7 PUBLIC POLICY

STILLVMNR
[1998] 1 FC 549 (FCA)

ROBERTSON JA (Strayer and Linden JJA concurring) : ...

2. FACTS

The facts are not in dispute. The applicant married a Canadian citizen and immi-
grated to Canada to be with.her husband. She applied for permanent resident status
and on September 22, 1991 was provided with the following document by immigra-
tion officials:

This will verify that, for the person(s) named hereunder, a recommendation has been
sent to the Governor-in-Council for Canada for an exemption pursuant to subsection
114(2) of the Immigration Act.

KATHLEEN STILL

Pending Governor-in-Council approval and provided all other requirements are met,
the above-named will be granted permanent resident status in Canada. The. above-
named is/are hereby eligible to apply for employment and/or student authorizations,
as applicable.

The applicant took the above document to mean that she was entitled, at that
point and without further action on her part, to work in Canada. From May 9, 1993
to October 1, 1993, she was employed as a housekeeper at Camp Hiawatha in Mani-
toulin Island, Ontario. On September 23, 1993 she was granted status as a permanent
resident, which status embraced the right to work in Canada without a work permit.
The applicant was laid off from work on October 1, 1993 and her application for
unemployment benefits was denied on the ground that her contract of service was
illegal and invalid for the period May 9 to September 23, 1993. The period during
which she did work under a valid contract of service, September 23 to October 1,
1993, was not long enough to qualify her for benefits. Ultimately, the applicant
appealed to the Tax Court of Canada [Still v Canada (Minister of National Revenue),
[1996] TCJ No 1228 (OL)].
The Tax Court Judge found that the applicant believed in good faith that she was
lawfully entitled to work in Canada . ...
Specifically, the Tax Court Judge held that the applican t was not engaged in
insurable employment because of a violation of subsection 18(1) .of the Immigration
Regulations, 1978 [SOR/78-172 (as am by SOR/89-80, s 1)] which states:

18(1) Subject to subsection 19(1) to (2.2). no person, other than a Canadian citizen
or permanent resident, shall engage or continue in employment in Canada without a
valid and subsisting employment authorization [a work permit].

There is no express penalty for a breach of this particular provision . ...

It is common ground that the applicant paid the insurance premiums and com-
plied with all other requirements of the Unemployment Insurance Act. However,
because she was not in possession of a work permit, the Tax Court Judge found that
the contract of service with her employer was void for illegality....

[After a thorough review of the common law doctrine of illegality, the court deter-
mined that the contract here was expressly prohibited by statute and continued:]

670
 VI. AN ALTER NATIVE APPROACH?

First, I am of the view that the classical model has long since lost its persuasive
force and is no longer being applied consistently. The doctrine is honoured more in
its breach than in its observance through the proliferation of so-called judicial
"exceptions" to the rule. I am not the first to recognize that these exceptions are truly
a movement away from the doctrine itself ... and Love's Realty & Fin . Services Ltd. v.
Coronet Trust, [1989] 3 W.W.R. 623 (Alta. C.A.), per Kerans J.A., at page 629) ....
In conclusion, the extent to which the precepts of the common law doctrine of
illegality are ill-suited to resolving the issue at hand provides the impetus for this
Court to chart a course of analysis which is reflective of both the modern approach
and its public law milieu. In my opinion, the doctrine of statutory illegality in the
federal context is better served by the following principle (not rule) : where a contract
is expressly or impliedly prohibited by statute, a court may refuse to grant relief to a
party when, in all of the circumstances of the case, including regard to the objects
and purposes of the statutory prohibition, it would be contrary to public policy,
reflected in the relief claimed, to do so.
As the doctrine of illegality rests on the understanding that it would be contrary
to public poiicy to allow a person to maintain an action on a contract prohibited by
statute, then it is only appropriate to identify those policy considerations which
outweigh the applicant's prima facie right to unemployment insurance benefits ....
[The court considered the policy of the statutes and concluded:]
Moral disapprobation is likely to arise in those cases where a person gains entry
to this country through stealth or deception, obtains employment and then seeks
unemployment benefits after losing his or her job. Public policy, of course, qmnot
be equated with public opinion. But there are occasions when community values
are rationally supported and not reflective of a "knee-jerk" reaction to a multi-layered
problem. While moral disapprobation of employment obtained in flagrant disregard
of Canadian laws is not an unreasonable policy consideration, this sentiment should
not be permitted to degenerate into the belief that everyone who gains employment
in Canada without a work permit should be so judged.
In my view, this is a case in which the bona tides of the party seeking relief is of
critical significance. Ms. Still is not an illegal immigrant. In concluding that she acted
in good faith, the Tax Court Judge took into consideration the government docu -
ment provided to her. The significant portion [at paragraph 11 reads as follows : "The
[applicant] is ... hereby eligible to apply for employment and/or student authoriza-
tions." That document can be said to serve one of two purposes. First, it reinforces
the Tax Court Judge's conclusion that the applicant had acted in good faith (in
ignorance of the law). Alternatively, it can be said that the document either induced
or misled the applicant into believing that she could obtain employment without a
work permit. As this argument was not raised before us, I refrain from commenting
further.
There is one other factor I believe to be of significance. It is open to ask whether
the denial of unemployment benefits is a de facto penalty which is disproportionate
to the statutory breach. I note that here is no express penalty for the breach in question
and that a conviction under the general penal provision could not be obtained
because of the requirement that a person knowingly contravene the Immigration Act.
In effect, the applicant is not subject to any penalty under that legislation because
of the statutory breach. If the Immigration Act is only concerned with those who know-
ingly fail to obtain a work permit, why should this Court impose a penalty amounting
to thousands of dollars in benefits? The Tax Court Judge expressed concerns about
the possible depletion of the unemployment insurance fund by "illegal" workers;

671
CHAPTER 7 PUBLIC POLICY

however it should be noted in this case that both the claimant and the employer
contributed to the fund during the period of "illegal" employment, [and] thus the
solvency of the fund was not affected. The Tax Court Judge also concluded that the
"social utility" in denying the applicant unemployment benefits lay in the understand-
ing that it would discourage the employment of "non-citizens and non-residents."
I take the Tax Court Judge's reasons to mean that the purpose of the requirement to
obtain a work permit is to discourage illegal immigrants from undermining the laws
of Canada. In response, I simply note that the applicant, Ms. Still, is not an illegal
immigrant and that the Immigration Act does not seek to discourage her from work-
ing in Canada. Rather it encourages her to seek employment for which there are not
enough qualified Canadians or employment which Canadians are unwilling to
accept. The fabric of many a nation has been woven from the cloth of those who have
fallen into the latter category.
Having regard to objects of the Unemployment Insurance Act, the fact that the ·
applicant is a legal immigrant to this country and that she acted in good faith, I am
not prepared to conclude that she is disentitled to unemployment insurance benefits
on the ground of illegality.

672
 CHAPTER EIGHT

PERFORMANCE AND BREACH

I. Repudiatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673

II. Waiver and the True Condition Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692
Ill. The Duty to Perform Contractual Obligations in Good Faith . . . . . . . . . . . . . . . . . . 696
IV. The Position of the Party in Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707

Non-performance of a contractual obligation may not on ly give rise to an action for damages,
or spec ifi c enforcement, but also have the effect of excus ing the party not in breach from that
party's obligations. The first part of this chapter deals with this effect. We then turn to consider
whether the party in breach might be conside red to have waived the ability to seize on the
other party's breach as an excuse for non-performance. As we shall see, there appear to be
limits on the ability of a party not in breach to wa ive the other party's breach and enforce the
agreement. In the third section, we consider the recently recognized duty to perform one's
contractual obligations in good faith. In the final section, we consider the possible remedies of
the party in breach of contract.

I. REPUDIATORY BREACH

· KINGSTON V PRESTON
(1773), 2 Douglas 689, 99 ER 437 (in argument in Jones v Barkley)

This was an action of debt for non -performance of covenants contained in certain
articles of agreement between the plaintiff and the defendant. The declaration stated:
That, by articles made the 24th of March, 1770, the plaintiff, for the considerations
thereinafter mentioned, covenanted with the defendant to serve him for one year and
a quarter next ensuing, as a covenant servant, in his trade of a silk-mercer, at £200 a
year, and, in consideration of the premises the defendant covenanted that, at the end
of the year and a quarter, he would give up his business of a mercer to the plaintiff,
and a nephew of the defendant or some other person to be nominated by the defend-
ant, and give up to them his stock in trade, at a fair valuation; and that, between the
young traders, deeds of partnership should be executed for fourteen years, and from
and immediately after the execution of the said deeds the defendant would permit
the said young traders to carry on the said business in the defendant's house.
Then the declaration stated a covenant by the plaintiff, that he would accept the
business and stock-in-trade, at a fair valuation, with the defendant's n ephew, or such
other person, & c., and execute such deeds of partnership, and, further, that the
plaintiff should and would, at and before the sealing and delivery of the deeds, cause

673
CHAPTER 8 PERFORMANCE AND BREACH

and procure good and sufficient security to be given to the defendant, to be approved
of by the defendant, for the payment of £250 monthly to the defendant, in lieu of a
moiety of the monthly produce of the stock in trade, until the value of the stock
should be reduced to £4000 . Then the plaintiff averred that he had performed and
been ready to perform and assigned for breach on the part of the defendant, that he
had refused to surrender and give up his business at the end of the said year and a
quarter.
The defendant pleaded: 1. That the plaintiff did not offer sufficient security; and,
2. that he did not give sufficient security for payment of the £250, & c.
And the plaintiff demurred generally to both pleas.
LORD MANSFIELD (for the court): There are three kinds of covenants: 1. Such as are
called mutual and independent, where either party may recover damages from the
other for the injury he may have received by a breach of the covenants in his favor,
and where it is no excuse for the defendant to allege a breach of the covenants on
the part of the plaintiff. 2. There are covenants which are conditions and dependent,
in which the performance of one depends on the prior performance of another, and
therefore, till this prior condition is performed, the other party is not liable to an
action on his covenant. 3. There is also a third sort of covenants, which are mutual
conditions to be performed at the same time; and in these, if one party was ready
and offered to perform h is part, and the other neglected or refused to perform his,
he who was ready and offered has fulfilled his engagement, and may maintain an
action for the default of the other though it is not certain that either is obliged to do
the first act. His Lordship then proceeded to say, that the dependence or independ-
ence of covenants was to be coilected from the evident sense and meaning of the
parties, and that, however transposed they might be in the deed, their precedency
must depend on the order of time in which the intent of the transaction requires their
performance. That, in the case before the Court, it would be the greatest injustice if
the plaintiff should prevail. The essence of the agreement was, that the defendant
should not trust to the persona\ security of the plaintiff, but, before he delivered up
his stock and business, should have good security for the payment of the money.
The giving such security, therefore, must necessarily be a condition precedent.
Judgment was accordingly given for the defendant, because the part to be performed
by the plaintiff was clearly a condition precedent.

RULES OF CIVIL PROCEDURE

Ontario Superior Court of Justice, 1990, as am

25.06(3) Allegations of the performance or occurrence of al\ conditions precedent

to the assertion of a claim or defence of a party are implied in the party's pleading
and need not be set out, and an opposite party who intends to contest the perform ~
ance or occurrence of a condition precedent shall specify in the opposite party's
pleading the condition and its non-performance or non-occurrence.

McDonald v Murray. (1885), 11OAR101 (CA) . PATTERSON JA: ... When people bargain
fogether, whether it is to barter one piece of property for another, or to exchange
property for money, each party ordinarily expects to receive what he bargains for
when he parts with what he is to give. If the intention is that either of them is to part
with his property, and take his chance of the other afterwards performing his part,

674
 I. REPUDIATORY BREACH

or paying damages for his default, it is not the ordinary transaction of sale or
exchange, and when it is intended we may reasonably expect to find some express
declaration of that intention.

BETTINI V GYE
(1876), 1 OBD 183

The defendant was the director of the Roya\ Italian Opera in Covent Garden, London
and the plaintiff was a professional singer who agreed with the defendant as fo\\ows
(in an English translation from the French) :

1. Mr. Bettini undertakes to fill the part of prime tenor. assoluto in the theatres,
halls, and drawing-rooms, both public and private, in Great Britain and in
Ireland, during the period of his engagement with Mr. Gye.
2. This engagement shall begin on the 30th of March, 1875, and shall terminate
on the 13th of July, 1875.
3. The salary of Mr. Bettini shall be £150 per month, to be paid monthly.
4. Mr. Bettini sha ll sing in concerts as well as in operas, but he shall not sing
anywhere out of the theatre in the United Kingdom of Great Britain and Ireland,
from the 1st of January to the 31st of December, 1875, without the written
permission of Mr. Gye, except at a distance of more than fifty miles from
London, and ou~ of the season of the theatre.
5. Mr. Gye shall furnish the costumes to Mr. Bettini for his characters, according
to the ordinary usage of theatres.
6. Mr. Bettini w ill conform to the ordinary rules of the theatre in case of sickness,
fire, rehearsals, & c.
7. Mr. Bettini agrees to be in London without fai l at least six days before the com -
mencement of his engagement, for the purpose of rehearsals .
8. In case Mr. Gye shall require the services of Mr. Bettini at a distance of more
than ten miles from London, he sha ll pay his travelling expenses.
9. Mr. Bettini shall not be obliged to sing more than four times a week in opera.
Mr. Bettini, in order to assist the direction of Mr. Gye, will sing, upon the request
of Mr. Gye, in the same characters in which he has already sung, and in other
characters of equal position. In case of the sickness of other artists, Mr. Bettini
agrees to replace them in their characters of first tenor assoluto.
10. Mr. Gye shall have the right to prolong the period limited above upon the same
conditions, provided that the period does not go beyond the end of the month
of August.

The plaintiff was prevented by temporary i\\ness from being in London before
March 28, although the agreement required him to be there "without fail" by March
24. The defendant terminated the agreement on the ground that the pl aintiff was
\ate in arrival and had given no notice of his inability to be in London for the purpose
of rehearsals. The case was argued on a demurrer to the plea of the plaintiff's \ate
arrival.

BLACKBURN J (for the court): In this case the parties have entered into an agreement
in writing, which is set out on the record.
The Court must ascertain the intention of the parties, as is said by Parke B., in
delivering the judgment of the Court in Graves v. Legg (1854), 156 E.R. 304, "To be
co\\ected from the instrument and the circumstances \ega\\y admissible in evidence

675
CHAPTER 8 PERFORMANCE AND BREACH

with reference to which it is to be construed." He adds: "One particular rule well

acknowledged is, that where a covenant or agreement goes to part of the consider-
ation on both sides, and may be compensated in damages, it is an independent
covenant or contract." There was no averment of any special circumstances existing
in this case, with reference to which the agreement was made, but the Court must
look at the general nature of such an agreement. By the 7th paragraph of the agree-
ment, "Mr. Bettini agrees to be in London, without fail at least six days before the
commencement of his engagement for the purpose of rehearsals." The engagement
was to begin on the 30th of March, 1875. It is admitted on the record that the plaintiff
did not arrive in London till the 28th of March, which is less than six days before the
30th, and therefore it is clear that he has not fulfilled his part of the contract.
The question raised by the demurrer is, not whether the plaintiff has any excuse
for failing to fulfil this part of his contract, which may prevent his being liable in
damages for not doing so, but whether his failure to do so justified the defendant
in refusing to proceed with the engagement, and fulfil his, the defendant's part. And
the answer to that question depends on whether this part of the contract is a condi-
tion precedent to the defendant's liability or only an independent agreement, a
breach of which will not justify a repudiation of the contract, but will only be a cause
of action for a compensation in damages ....
We think the answer to this question depends on the true construction of the
contract taken as a whole.
Parties may think some matter, apparently of very little importance, essential; and
if they sufficiently express an intention to make the literal fulfilment of such a thing
a condition precedent, it will be one; or they may think that the performance of some
matter, apparently of essential importance and prima facie a condition precedent,
is not really vital, and may be compensated for in damages, and if they sufficiently
expressed such an intention, it will not be a condition precedent.
In this case, if to the 7th paragraph of the agreement there had been added words
to this effect: "And if Mr. Bettini is not there at the stipulated time, Mr. Gye may refuse
to proceed further with the agreement"; or if, on the other hand, it had been said,
"And if not there, Mr. Gye may postpone the commencement of Mr. Bettini's engage-
ment for as many days as Mr. Bettini makes default, and he shall forfeit twice his
salary for that time," there could have been no question raised in the case. But there
is no such declaration of the intention of the parties either way. And in the absence
of such an express declaration, we think that we are to look to the whole contract,
and applying the rule stated by Parke B. to be acknowledged, see whether the par-
ticular stipulation goes to the root of the matter, so that a failure to perform it would
render the performance of the rest of the contract by the plaintiff a thing different
in substance from what the defendant has stipulated for; or whether it merely par-
tially affects it and may be compensated for in damages. Accordingly as it is one or
the other, we think it must be taken to be or not to be intended to be a condition
precedent.
If the plaintiff's engagement had been only to sing in operas at the theatre, it
might very well be that previous attendance at rehearsals with the actors in company
with whom he was to perform was essential. And if the engagement had been only
for a few performances, or for a short time, it would afford a strong argument that
attendance for the purpose of rehearsals during the six days immediately before the
commencement of the engagement was a vital part of the agreement. But we find,
on looking to the agreement, that the plaintiff was to sing in theatres, halls, and
drawing rooms, both public and private, from the 30th of March to the 13th of July,
1875, and that he was to sing in concerts as well as in operas, and was not to sing

676
 I. REPUDIATORY BREACH

anywhere out of the theatre in Great Britain or Ireland from the 1st of January to the
31st of. December, 1875, without the written permission of the defendant, except at
a distance of more than fifty miles from London.
The pli,iintiff, therefore, has, in consequence of this agreement, been deprived of
the power of earning anything in London from the 1st of January to the 30th of
March; and though the defendant has, perhaps, not received any benefit from this,
so as to preclude him from any longer treating as a condition precedent what had
originally been one, we think this at least affords a strong argument for saying that
subsequent stipulations are not intended to be conditions precedent, unless the
nature of the thing strongly shows they must be so.
And, as far as we can see, the failure to attend at rehearsals during the six days
immediately before the 30th of March could only affect the theatrical performances
and, perhaps, the singing in duets or concerted pieces during the first week or
fortnight of this engagement, which is to sing in theatres, halls, and drawing-rooms,
and concerts, for fifteen weeks.
We think, therefore, that it does not go to the root of the matter so as to require
us to consider it a condition precedent.
The defendant must, therefore, we think, seek redress by a cross-claim for damages.
Judgment must be given for the plaintiff.

QUESTIONS
Is this decision consistent with Kingston v Preston, above7 What is the test, according to
Blackburn J, for determining whether a breach is of such a nature that it enables the other
party to terminate the contract? If the defendant cross-claimed for damages, as suggested,
would the plaintiff have any defence in the fact that his absence was caused by illness? See
Poussard v Spiers and Pond, below. If the plaintiffs absence had been caused by some capri-
cious delay on his part, would it have affected the decision in the case?

POUSSARD V SPIERS AND POND

(1876), 1OBD410

BLACKBURN J: This was an action for the dismissal of the plaintiff's wife from a
theatrical engagement. On the trial before my brother Field it appeared that the
defendants, Messrs. Spiers & Pond, had taken the Criterion Theatre, and were about
to bring out a French opera, which was to be produced simultaneously in London
and Paris. Their manager, Mr. Hingston, by their authority, made a contract with the
plaintiff's wife, which was reduced to writing in the following letter:
Criterion Theatre, Oct. 16th, 1874.
To Madame Poussard,
On behalf of Messrs. Spiers & Pond I engage you to sing and play at the Criterion Theatre
on the following terms:
You to play the part of Friquette in Lecocq's opera Les Pres Saint Gervais, commenc-
ing on or about the 14th of November next, at a weekly salary of eleven pounds (£11)
and to continue on at that sum for a period of three months, providing the opera
shall run for that period. Then, at the expiration of the said three months, I shall be
at liberty to re-engage you at my option, on terms then to be arranged, and not to
exceed fourteen pounds per week for another period of three months. Dresses and

677
CHAPTER 8 PERFORMANCE AND BREACH

tights requisite for the part to be provided by the management, and the engagement
to be subject to the ordinary rules and regulations of the theatre.
E.P. Hingston, Manager

Ratified:
Spiers & Pond
Madame Poussard, 46 Gunter Grove, Chelsea.
The first performance of the piece was announced for Saturday, the 28th of Nov-
ember. No objection was raised on either side as to this delay, and Madame Poussard
attended rehearsals, and such attendance, though not expressed in the written
engagement, was an implied part of it. Owing to delays on the part of the composer,
the music of the latter part of the piece was not in the hands of the defendants till a
few days before that announced for the production of the piece, and the latter and
final rehearsals did not take place till the week on the Saturday of which the perform-
ance was announced. Madame Poussard was unfortunately taken ill, and though ·
she struggled to attend the rehearsals, she was obliged on Monday, the 23rd of Nov-
ember, to leave the rehearsal, go home and go to bed, and can in medical attendance.
In the course of the next day or two an interview took place between the plaintiff
and Mr. Leonard (Madame Poussard's medical attendant) and Mrs. Liston, who was
the defendant's stage manager, in reference to Madame Poussard's ability to attend
and undertake her part, and there was a conflict of testimony as to what took place.
According to the defendant's version, Mrs. Liston requested to know as soon as
possible what was the prospect of Madame Poussard's recovery, as it would be very
difficult on such short notice to obtain a substitute; and that in the result the plaintiff
wrote stating that his wife's health was such that she could not play on the Saturday
night, and that Mrs. Liston had better, therefore engage a young lady to play the part;
and this, if believed to be accurate, amounted to a rescission of the contract. Accord-
ing to the evidence of the plaintiff and the doctor, Mrs. Liston told them that Madame
Poussard was to take care of herself and not come out till quite well, as she, Mrs. Liston,
had procured, or would procure, a temporary substitute; and Madame Poussard could
resume her place as soon as she was wen. This, it was contended by the plaintiff,
amounted to a waiver by the defendants of a breach of the condition precedent, if
there was one.
The jury found that the plaintiff did not rescind the contract, and that Mrs. Liston,
if she did waive the condition precedent (as to which they were not agreed), had no
authority from the defendants to do so.
These findings, if they stand, dispose of those two questions.
There was no substantial conflict as to what was in fact done by Mrs. Liston. Upon
learning, on the Wednesday (the 25th of November), the possibility that Madame
Poussard might be prevented by illness from fulfilling her engagement, she sent to
a theatrical agent to inquire what artistes of position were disengaged, and \earning
that Miss Lewis had no engagement ti\\ the 25th of December, she made a provisional
arrangement with her, by which Miss Lewis undertook to study the part and be ready
on Saturday to take the part, in case Madame Poussard was not then recovered so
far as to be ready to perform. If it should turn out that this labour was thrown away,
Miss Lewis was to have a douceur for her· trouble. If Miss Lewis was called on to
perform, she was to be engaged at £15 a week up to the 25th of December, if the
piece ran so long. Madame Poussard continued in bed and ill, and unable to attend
either the subsequent rehearsals or the first night of the performance on the Saturday,
and Miss Lewis's engagement became absolute, and she performed the part on
Saturday, Monday, Tuesday, Wednesday, and up to the close of her engagement, the

678
 I. REPUDIATORY BREACH

25th of December. The piece proved a success, and in fact ran for more than three
months.
On Thursday, the 4th of December, Madame Poussard, having recovered, offered
to take her place, but was refused, and for this refusal the action was brought.
On the 21st of January Madame Poussard left England.
My brother Field, at the trial, expressed his opinion that the failure of Madame
Poussard to be ready to perform, under the circumstances, went so much to the root
of the consideration as to discharge the defendants, and that he should therefore
enter judgment for the defendants; but he asked the jury five questions .
The first three related to the supposed rescission and waiver. The other questions
were in writing and were: 4. Whether the non-attendance on the night of the open-
ing was of such material consequence to the defendants as to entitle them to rescind
the contract? To which the jury said, "No." And, 5. Was it of such consequence as to
render reasonable for the defendants to employ another artiste, and whether the
engagement of Miss Lewis, as made, was reasonable? to which the jury said, "Yes."
Lastly, he left the question of damages, which the jury assessed at £83.
On these answers he reserved leave to the plaintiff to move to enter judgment for
£83 .
A cross rule was obtained on the ground that the verdict was against evidence
and that the damages were excessive.
We think that, from the nature of the engagement to take a leading, and, indeed,
the principal, female part (for the prima donna sang her part in male costume as the
Prince de Conti) in a new opera which (as appears from the terms of the engagement)
it was known might run for a longer or shorter time, and so be a profitable or losing
concern to the defendants, we can, without the aid of the jury, see that it must have
been of great importance to the defendants that the piece should start well, and
consequently that the failure of the plaintiff's wife to be able to perform on the open-
ing and early performances was a very serious detriment to them.
This inability having been occasioned by sickness was not any breach of contract
by the plaintiff, and no action can lie against him for the failure thus occasioned.
But the damage to the defendants and the consequent failure of consideration is just
as great as if it had been occasioned by the plaintiff's fault, instead of by the wife's
misfortune. The analogy is complete between this case and that of a ch arter-party
in the ordinary terms, where the ship is to proceed in ballast (the act of God, & c.,
excepted) to a port, and there load a cargo. If the delay is occasioned by excepted
perils, the ship owner is excused. But if it is so great as to go to the root of the matter,
it frees the charterer from his obligation to furnish a cargo; see per Bramwell B.,
delivering the judgment of the majority of the Court of Exchequer Ch amber in
Jackson v. Union Marine Insurance Co. (1874), L.R. 10 C.P. 125 at p. 141.
And we think that the question, whether the failure of a skilled and capable artiste
to perform in a new piece through serious illness is so important as to go to the root
of the consideration, must to some extent depend on the evidence; and is a mixed
question of law and fact. Theoretically, the facts should be left to and found separately
by the jury, it being for the judge or the Court to say whether they, being so found,
show a breach of condition precedent or not. But this course is often (if not generally)
impracticable; and if we can see that the proper facts have been found, we should
act on these without regard to the form of the questions.
Now, in the present case, we must consider what were the courses open to the
defendants under the circumstances. They might, it was said on the argument before
us (though not on the trial), have postponed the bringing out of the piece till the
recover}' of Madame Poussard, and if her illness had been a temporary hoarseness

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incapacitating her from singing on the Saturday, but sure to be removed by the
Monday, that might have been a proper course to pursue. But the illness here was a
serious one, of uncertain duration, and if the plaintiff had at the trial ~uggested that
this was the proper course, it would, no doubt, have been shown that it would have
been a ruinous course; and that it would have been much better to have abandoned
the piece altogether than to have postponed it from day to day for an uncertain time,
during which the theatre would have been a heavy loss.
The remaining alternatives were to employ a temporary substitute until such time
as the plaintiff's wife should recover; and if a temporary substitute capable of perform -
ing the part adequately could have been obtained upon such a precarious engagement
on any reasonable terms, that would have been a right course to pursue; but if no
substitute capable of performing the part adequately could be obtained, except on the
terms that she should be permanently engaged at higher pay than the' plaintiff's wife,
in our opinion it follows, as a matter of law, that the failure on the plaintiff's part went
to the root of the matter and discharged the defendants.
We think, therefore, that the fifth question put to the jury, and answered by them
in favour of the defendants, does find all the facts necessary to enable us to decide
as a matter of law that the defendants are discharged.
The fourth question is, no doubt, found by the jury for the plaintiff; but we think
in finding it they must have made a mistake in law as to what was a sufficient failure
of consideration to set the defendants at liberty, which was not a question for them.
This view taken by us renders it unnecessary to decide anything on the cross-rule
for a new trial.
The motion must be refused with costs.

QUESTIONS

Was illness a material factor in this case? Why can no action lie against M Poussard for the
failure occasioned by Madame Poussard 's illness7 Is there not a breach of the promise to sing?
What terms must the court imply in this contract in order that Madame Poussard be excused?
What reason in policy is there for such implied terms?

CEHAVE NV V BREMER HANDELGESELLESCHAFT GMBH

(1976] OB 44 (CA)

LORD DENNING MR: In 1970, the sellers, a German company, agreed to sell to the buy-
ers, a Dutch company, 12,000 metric tons of U.S. citrus pulp pellets. Those pellets are
a by-product of oranges. The juice is extracted and tinned. The orange rinds are dried
and made into pellets. The pellets are used as an ingredient in making cattle food.
In September 1970, there were two contracts of sale, each for 6,000 metric tons,
delivery in bulk to be made by six instalments of 1,000 tons each over the first six
months of 1971. Under the first contract of September 24, the price was $73.50 per
metric ton. Under the second contract of September 28, the price was $73.75. In each
case c.i.f. Rotterdam. Each contract incorporated the terms issued by the Cattle Food
Trade Association, form 100, for shipment of feeding stuffs in bulk "Talequale c.i.f.
terms ." That form contained two sentences material to this dispute in clause no. 7:
"Shipment to be made in good condition .... [Elach shipment shall be considered a
separate contract."
The first three or four shipments were quite satisfactory. This case is concerned
with a shipment made early in May 1971. It was by the German vessel the Hansa Nord.

680
 I. REPUDIATORY BREACH

She took on about 3,400 metric tons of citrus pulp pellets at Port Manatee in Florida.
Four bills of lading were issued. They were appropriated by the sellers as follows: two
were for 1,000 tons each on the second contract. One for 1,000 tons and one for
419.856 tons on the first contract. But there was no physical appropriation of the
cargo as between the two contracts.
On May 14 the buyers paid the price and got the shipping documents. The Hansa
Nord arrived in Rotterdam on Friday, May 21, and started unloading on Saturday,
May 22. It was finished by May 25. The cargo was discharged into lighters. The out-
turn weights were :
Ex-hold no. 1 .. . . . ... .. .... . . . . .. . . . 1,260 metric tons.
Ex-hold no. 2 ..... . ...... . ...... . .. . 2,053 metric tons.
It is to be noticed that by this time the market price had fallen greatly. The contract
price for these 3,400 tons was (when converted into sterling) about £100,000. But
the market price on May 24 in Rotterdam was, for sound goods, only £86,000. This
may ·give an explanation of subsequent happenings.
The cargo ex no. 2 hold (2,053 tons) was in good condition. But some of the cargo
ex no. 1 hold (1,260 tons) was found to be damaged. On May 24 the buyers rejected
the whole cargo (both no. 2 and no. 1 holds) on the ground that it was not shipped
in good condition and they claimed repayment of the purchase price of £100,000 .
On the next day the sellers refused, saying that the goods were shipped in good
condition: and that the damage must have occurred at sea and that the buyers ought
to lodge their claim with the insurers.
So there it was. The goods were in the lighters with both sellers and buyers dis-
claiming ownership. Now comes an astonishing sequence of events. There was a
Mr. Baas in Rotterdam who was an importer of feeding products (including citrus
pulp pellets). On May 29, 1971, if not before, he inspected the cargo in the lighters.
On June 1, 1971, the lighter owners applied ex parte to the Rotterdam County Court,
the Commercial court I expect, asking it to authorise a sale of the goods. They applied
by their lawyer, a Mr. Driessen. The sellers were not told of this application. But the
buyers were. They were represented by the same lawyer as the lighter owners,
Mr. Driessen. On the same day this court granted the application and authorised the
sale. It appointed agents to make the sale. The agents approached Mr. Baas. They did
not approach any other possible bidders. They sold the whole cargo to Mr. Baas (out
of both no. 2 and no. 1 holds) for a sum equivalent to £33,720. The expenses of sale
were deducted, leaving the net proceeds at £29,903. These were paid into a Dutch bank
"to the order of whom it may concern." On the self-same day, Mr. Baas sold the whole
cargo to the buyers (i.e. the original buyers under the two contracts) at the same price
and upon the same terms as he had himself bought them from the agents of the court.
The board of appeal found: "as a fair inference from the evidence ... that the buyers
and Mr. Baas intended that he (Baas) should acquire the cargo for their (the buyers')
benefit, or on their behalf ...."
Having bought the whole cargo from Mr. Baas, the buyers transported it in the
same way as they would have done if it had never suffered any damage. They took
the lighters by canal to their plant at Veghel, a journey of some 60 miles. The buyers
then used the entire cargo to manufacture cattle food at their processing plant at
Veghel. They used it in the self-same way as they would sound goods except that
they used "smaller percentages in their compound feeds than would be normal with
sound goods ." This difference in manufacture did not cause them any loss. At any
rate, there is no finding that it did. And it was surely for them to prove it.
The upshot of it all was, therefore, that the buyers took the whole cargo and used
all of it for their business just as if they had never rejected it save for the smaller

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percentages. So the ubiquitous Mr. Baas had helped them greatly. They paid only
£33,720 for it instead of the contract price of £100,000. The board of appeal of the
trade association felt it necessary to make this comment:

We wish to record that we are not satisfied that we have been presented with a full
account of how the goods were disposed of in Rotterdam afte r rejection by the buyers.
The witnesses produced by the buyers gave contradictory evidence on this question,
as well as on other less vital issues.

That is a devastating comment. The buyers must have known the truth. But they
did not tell it to the board of appeal. At any rate, not the whole truth.
Nevertheless, despite that devastating comment, the board of appeal made their
award in favour of the buyers. They ordered the sellers to repay the buyers the
£100,000 with interest, and directed the proceeds of sale (£29,903) to be repaid to
the sellers. So the buyers have got the entire cargo and used it for their cattle food,
but instead of paying £100,000 for it, they have only paid £30,000. The judge has
upheld this award [1974] 2 Lloyd's Rep. 216,227. The sellers appeal to this court. They
recognise that they may have to pay something by way of damages for the damaged
goods, but they deny that the buyers had any right to reject the whole cargo.
The board of appeal found a breach of the express clause "Shipped in good condi-
tion." They said: " ... on the balance of probability, not all the goods in hold no. 1 were
shipped in good condition as required by the contract, nor on balance of probability
were they reasonably fit to be carried on the contemplated voyage."
The board of appeal also found a breach of the implied conditions as to merchant-
ability contained in section 14(2) of the Sale of Goods Act 1893. They said:

The goods in hold 1 were "merchantable" on arrival in Rotterdam in a commercial sense,

though at a lower price than would be paid for sound goods: we find and hold, however,
that they were not "of merchantable quality" within the meaning of the phrase when
used in the Sale of Goods Act 1893.

The board of appeal did not find a breach of the implied condition of fitness
contained in section 14(1) of the Act. They found all the elements about reliance and
so forth, but they did not find that the goods were unfit. They could hardly have
found them unfit, seeing that they were in fact used for that purpose.

"SHIPPED IN GOOD CONDITION"

The judge held that, in contracts for the sale of goods, a stipulation must either be a
"condition" or a "warranty" and that there could be no tertium quid. Accepting that
distinction, he held that this stipulation "shipped in good condition" was a "condition"
and not a "warranty" [1974] 2 Lloyd's Rep. 216, 225; so that, for any breach of it by the
seller, the buyer was entitled to treat the contract as repudiated.
Those decisions by the judge are so important that they deserve careful
consideration.

THE GENERAL LAW APART FROM THE SALE OF GOODS

For the last 300 or 400 years the courts have had to grapple with this problem: in what
circumstances can a party, who is in breach himself of a stipulation of the contract,
call upon the other side to perform his part or sue him for non-performance? At one
time the solution was thought to depend on the nature of the stipulation itself, and
not on the extent of the breach or its consequences. Under the old forms of pleading,

682
 I. REPUDIATORY BREACH

a plaintiff had to aver and prove that he had performed an conditions precedent or
that he was ready and willing to perform them. The question, therefore, was whether
the stipulation (which he had broken) was a condition precedent or not: or, in the
terminology of the 18th century, whether it was an independent covenant (the breach
of which did not debar him from suing the other side), or a dependent covenant (the
breach of which did debar the plaintiff because the performance by the other was
dependent on the plaintiff performing his) . This distinction was well stated by Ser-
jeant Williams in his notes to Pordage v. Cole (1669) 1 Wms. Saund. 319, 320b:
... [W)here there are several covenants, promises or agreements, which are independent
of each other, one party may bring an action against the other for a breach of his coven-
ants, etc. without averring a performance of the covenants, etc. on his, the plaintiff's part;
and it is no excuse for the defendant to allege in his plea a breach of the covenants, etc.
on the part of the plaintiff ... But where the .covenants, etc. are dependent, it is necessary
for the plaintiff to aver and prove a performance of the covenants, etc. on his part, to entitle
himself to an action for the breach of the covenants on the part of the defendant. ...
Although that division was treated as exhaustive, nevertheless, when the courts
came to apply it, they had regard to the extent of the breach ....
In short, if the breach went to the root of the matter, the stipulation was to be
considered a condition precedent: but if the breach did not go to the root, the stipula -
tion was considered to be an independent covenant which could be compensated
for in damages: see Davidson v. Gwynne (1810) 12 East 381, 389, per Lord Ellenborough
C.J.; Ellen v. Topp (1851) 6 Exch. 424, 441; and Graves v. Legg (1854) 9 Exch. 709, 716.
Apart from those cases of "breach going to the root," the courts at the same time
were developing the doctrine of "anticipatory breach." When one party, before the
day when he is obliged to perform his part, declares in advance that he will not
perform it when the day comes, or by his conduct evinces an intention not to per-
form it, the other may elect to treat his declaration or conduct as a breach going to
the root of the matter and to treat himself as discharged from further performance:
see Hochster v. De la Tour (1853) 2 E. & B. 678. By his prior declaration or conduct, the
guilty party is said to repudiate the contract. The word "repudiation" should be
confined to those cases of an anticipatory breach, but it is also used in connection
with cases of an actual breach going to the root of the contract: see Heyman v. Darwins
Ltd. [1942] AC. 356, 378-379 by Lord Wright. AU of them were gathered together by
Lord Blackburn in his famous speech in Mersey Steel and Iron Co. Ltd. v. Naylor,
Benzon & Co. (1884) 9 App. Cas. 434, 443-444:

The rule of law, as I always understand it, is that where there is a contract in which there
are two parties, each side having to do something (it is so laid down in the notes to
Pordage v. Cole, 1 Wms. Saund. 319, 320) if you see that the failure to perform one part
of it goes to the root of the contract, goes to the foundation of the whole, it is a good
defence to say, "I am not going on to perform any part of it when that which is the root
of the whole and the substantial consideration for my performance is defeated by your
misconduct." .. . I repeatedly asked Mr. Cohen whether or not he could find any authority
which justified him in saying that every breach of a contract ... must be considered to go
to the root of the contract. and he produced no such authority. There are many cases
in which the breach may do so; it depends upon the construction of the contract.
Those last words are clearly a reference to a "condition" strictly so called, in which
any breach entitled the other to be discharged from further performance. But the
earlier words are quite general. They refer to all terms other than conditions strictly
so called.

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THE SALE OF GOODS ACT

Such was the state of the law when the Sale of Goods Act 1893 was passed on Febru-
ary 20, 1894. I have studied the then current edition of Benjamin, Sale of Personal
Property, 4th ed. (1888), and the little books which Judge Chalmers wrote before
(1890) and after the Act (Chalmers' Sale of Goods Act, 1893, 1st ed. (1894)), and the
proceedings in Parliament. These show that until the year 1893 there was much
confusion in the use of the words "condition" and "warranty.'' But that confusion was
removed by the Act itself and by the judgment of Bowen L.J. in Bentsen v. Taylor,
Sons & Co. [1893] 2 O.B. 274, 280. Thenceforward those words were used by lawyers
as terms of art. The difference between them was that if the promisor broke a condi-
tion in any respect, however slight, it gave the other party a right to be quit of his
obligations and to sue for damages: unless he by his conduct waived the condition,
in which case he was bound to pe.rtorm his future obligations but could sue for the
damage he had suffered. If the promisor broke a warranty in any respect, however
serious, the other party was not quit of his future obligations. He had to perform them.
His only remedy was to sue for damages: see The Mihalis Angelos [1971] 1 O.B. 164,
193 and Wickman Machine Tool Sales Ltd v. L. Schuler AG. [1972] 1 W.L.R 840, 851.
Now that division was not exhaustive. It left out of account the vast majority of
stipulations which were neither "conditions" nor "warranties" strictly so called: but
were intermediate stipulations, the effect of which depended on the breach. The
cases about these stipulations were legion. They stretched continuously from Boone
v. Eyre (Note), 1 Hy. Bl. 273, in 1777 to Mersey Steel and Iron Co. Ltd. v. Naylor, Benzon
& Co. (1884) 9 App. Cas. 434. I cannot believe that Parliament in 1893 intended to
give the go-by to all these cases: or to say that they did not apply to the sale of goods.
Those cases expressed the rules of the common law. They were preserved by section
61(2) of the Act of 1893, which said: "The rules of the common law, including the law
merchant, save in so far as they are inconsistent with the express provisions of this
Act ... shall continue to apply to contracts for the sale. of goods." There was nothing
in the Act inconsistent with those cases. So they continued to apply.
In 1962 in the Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2
0.B. 26, the Court of Appeal drew attention to this vast body of case law. They showed
that besides conditions and warranties, strictly so called, there are many stipulations
of which the effect depends on this: if the breach goes to the root of the contract,
the other party is entitled to treat himself as discharged : but if it does not go to the
root, he is not. In ·my opinion, the principle embodied in these cases applies to
contracts for the sale of goods just as to all other contracts.
The task of the court can be stated simply in the way in which Upjohn L.J. stated
it at p. 64. First, see whether the stipulation, on its true construction, is a condition
strictly so called, that is, a stipulation such that, for any breach of it, the other party
is entitled to treat himself as discharged. Second, if it is not such a condition, then
look to the extent of the actual breach which has taken place. If it is such as to go to
the root of the contract, the other party is entitled to treat himself as discharged: but,
otherwise, not. To this may be added an anticipatory breach. If the one party, before
the day on which he is due to perform his part, shows by his words or conduct that
he will not perform it in a vital respect when the day comes, the other party is entitled
to treat himself as discharged.

"SHIPPED IN GOOD CONDITION"

This brings me back to the particular stipulation in this case: "Shipped in good condi-
tion." Was this a condition strictly so called, so that any breach of it entitled the buyer

684
 I. REPUDIATORY BREACH

to reject the goods? Or was it an intermediate stipulation, so that the buyer cannot
reject unless the breach is so serious as to go to the root of the contract?
If there was any previous authority holding it to be a condition strictly so called,
we should abide by it, just as we did with the clause "expected ready to load": see
Finnish Government (Ministry of Food) v. H. Ford & Co. Ltd. (1921) 6 L\.L.Rep. 188; The
Mihalis Angelos [1971] 1 O.B. 164. But, there is no such authority with the clause
"shipped in good condition." I regard this clause as comparable to a clause as to
quality, such as "fair average quality." If a small portion of the goods sold was a little
below that standard, it would be met by commercial men by an allowance off the
price. The buyer would have no right to reject the whole lot unless the divergence
was serious and substantial: see Biggin & Co. Ltd. v. Permanite Ltd. [19511 1 K.B. 422,
439, per Devlin J. and Christopher Hill Ltd. v. Ashington Piggeries Ltd. [1972] AC. 441,
511, per Lord Diplock. That is shown in this very case by clause 5 in form no. 100
which contains percentages of contamination, below which there is p. price allow-
ance, and above which there is a right in the buyer to reject. Likewise with the clause
"shipped in good condition." If a small portion of the whole cargo was not in good
condition and arrived a little unsound, it should be met by a price allowance. The
buyers should not have a right to reject the whole cargo unless it was serious and
substantial. This is borne out by the difficulty which often arises (as in this case) on
a c.i.f. contract as to whether the damage was done before shipment or took place
after shipment: for in the latter case the buyer would have no claim against the seller
but would be left to his claim against the insurers. So, as a matter of good sense, the
buyer should be bound to accept the goods and not reject them unless there is a
serious and substantial breach, fairly attributable to the seller.
In my opinion, therefore, the term "shipped in good condition" was not a condi-
tion strictly so called: nor was it a warranty strictly so called. It was one of those
intermediate stipulations which gives no right to reject unless the breach goes to
the root of the contract.
On the facts stated by the board of appeal, I do not think the buyer was entitled
to reject these instalments of the contract. The board only said that "not all the goods
in hold no. 1 were shipped in good condition." That does not say how many were
bad. In any case, their condition cannot have been very bad, seeing that all of them
were in fact used for the intended purpose. The breach did not go to the root of the
contract. The buyer is entitled to damages, but not to rejection.

"MERCHANTABLE"

The board of appeal made this finding: "The goods in hold 1 were 'merchantable' on
arrival at Rotterdam in a commercial sense, though at a lower price than would be
paid for sound goods; we find and hold, however, that they were not 'of merchantable
quality' within the meaning of the phrase when used in the Sale of Goods Act 1893."
The board of appeal were not lawyers: but they had a legal adviser. And I am afraid
that in reaching that finding they were not advised correctly. The statute uses the
words "merchantable quality" in a commercial sense. The board should, therefore,
have applied it in the commercial sense. They should not have been persuaded to
give it some other "statutory sense."
Now we were taken through many of the definitions which have been given by
judges of "merchantable quality," particularly that of Dixon J . in Australian Knitting
Milts Ltd. v. Grant (1933) 50 C.L.R. 387, 418; of Lord Wright in Cammell Laird & Co. Ltd.
v. Manganese Bronze and Brass Co. Ltd. [1934] AC . 402, 430, as amended by Lord Reid
in Hardwick Game Farm v. Suffolk Agricultural Poultry Producers Association [1969] 2
AC. 31, 77 and by Lord Guest in B.S. Brown & Son Ltd. v. Craiks Ltd. [197011 W.L.R. 752,

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758. But, as Lord Reid pointed out in that case, at p. 754:" ... [J)udicial observations
can never be regarded as complete definitions: they must be read in light of the facts
and issues raised in the particular case. I do not think it is possible to frame, except
in the vaguest terms, a definition of 'merchantable quality' which can apply to every
kind of case."
For myself, I think the definition in the latest statute is the best that has yet been
devised. It is contained in section 7(2) of the Supply of Goods (Implied Terms) Act
1973. The statute itself only applies to contracts made after May 18, 1973. But the
definition seems to me appropriate for contracts made before it. It runs as follows:
Goods of any kind are of merchantable quality within the meaning of this Act if they are
as fit for the purpose or purposes for which goods of that kind are commonly bought
as it is reasonable to expect having regard to any description applied to them, the price
(if relevant) and all other relevant circumstances; and any reference in this Act to
unmerchantable goods shall be construed accordingly.

In applying that definition, it is as well to remember that, by the statute, we are

dealing with an implied condition, strictly so called, and not a warranty. For any
breach of it, therefore, the buyer is entitled to reject the goods: or, alternatively, if he
chooses to accept them or has accepted them, he has a remedy in damages. In these
circumstances, I should have thought a fair way of testing merchantability would
be to ask a commercial man: was the breach such that the buyer should be able to
reject the goods7 In answering that question the commercial man would have regard
to the various matters mentioned in the new statutory definition. He would, of
course, h ave regard to the purpose for which goods of that kind are commonly
bought. If a buyer buys "waste silk" and it is of no use for the purpose of "waste silk,"
he can reject it: see Gardiner v. Gray (1815) 4 Camp. 144. If he buys dates for food and
they are of no use for food, he can reject them: see Asfar & Co. v. Blundell [1896) 1 O.B.
123, 127. But if he buys groundnuts for cattlefood, and they can reasonably be used
for cattlefood, he may not be able to reject them, even though they are not suitable
for poultry; see Hardwick Game Farm v. Suffolk Agricultural Poultry Producers Associ-
ation [1969) 2 AC. 31. The commercial man would also, of course, have regard to the
description applied to them. If motor horns are sold, expressly or impliedly, as "new"
and then the buyer finds that they are dented and scratched, he ought to be able to
reject them: see Jackson v. Rotax Motor and Cycle Co. [1910) 2 K.B. 937. If they are sold
as "second hand" or "shop soiled," then he must take them as they are: see Bartlett v.
Sidney Marcus Ltd. [1965) 1 W.L.R: 1013; unless there is something radically wrong
with them. He would also have regard to the price. If they are sold at the market price,
the buyer would expect them to be of good quality and condition; and, if they were
not, he would be able to reject them: see Jones v. Just and B.5. Brown & Son Ltd. v.
Craiks Ltd. [1970) 1 W.L.R. 752, 754-755, per Lord Reid : but, if they are sold at a "cut"
price or "bargain" price, or a lower price, he would have to put up with something
less. He would not be entitled to reject them simply because they were not perfect.
The commercial man would also have regard to any other relevant circumstances.
If there was a clause, express or implied, which would give the buyer an allowance
off the price for the particular shortcomings, such that a commercial man would
say: "The buyer is entitled to a price allowance but not to reject them" -again the
goods would be of merchantable quality. The buyer would be entitled to an allowance
or damages in lieu, but not entitled to reject the lot.
Our present case comes within that last illustration. These citrus pulp pellets
were bought for cattle food. That was the purpose for which such pellets are com -
monly bought. They were as fit for that purpose as it was reasonable to expect. That

686
 I. REPUDIATORY BREACH

is shown by the fact that they were actually used for that purpose. Some of them arrived
damaged, but not to such an extent that the buyer was entitled to reject the cargo in
both holds, or either of them. That damage was such as to entitle the buyer to an
allowance off the price for breach of the clause "shipped in good condition": but not
such as to entitle him to reject the lot on the ground that it was not of "merchantable
quality." That is, I think, what the board of appeal meant when they found that the
goods were "merchantable" on arrival at Rotterdam in a commercial sense, though at
a lower price than would be paid for sound goods. In short, the buyers are entitled
to an allowance or damages for the damaged goods, but not entitled to reject the lot.
This makes commercial good sense. It often happens that the market price falls
between the making of the contract and the time for delivery. In such a situation, it
is not fair that a buyer should be allowed to reject a whole consignment of goods just
because a small quantity are not up to the contract quality or condition. The proper
remedy is a price allowance and not complete rejection. I fee\ sure that is what the
board of appeal thought in this case. They only found otherwise because they thought
the \aw constrained them to do so. Their instinct was right. Having found that in a
commercial sense the goods were merchantable, there was no breach of section 14(2).

DAMAGES
In my opinion, therefore, the buyers were not entitled to reject the goods . They are,
however, entitled to damages for the difference in value between the damaged goods
and sound goods on arrival at Rotterdam. The case must be remitted to the board
for this to be determined.
I would allow the appeal, accordingly.
ORMROD LJ: ... We have all been brought up since our student days to ask the question
in the form: "Is this stipulation a condition or a warranty?" But before the Sale of
Goods Act 1893 was passed the question was whether the buyer was bound to accept
the goods . The answer depended, to use modern language, on whether the stipula-
tion "went to the root of the contract," although it was differently phrased, e.g., "the
buyer was entitled to get what he bargained for" or "the seller had failed to perform
an essential term of the contract." The words "condition" and "warranty" were used
in various senses in different cases but the distinction depended largely on the old
rules of pleading. Section ll(l)(b) of the Act was clearly intended to remove this
confusion of terminology but the essential dichotomy was not affected; it was and
is, between the right to reject or the right to damages. The modern form of the ques-
tion tends to put the cart before the horse and to obscure the issue.
If one asks oneself the question in the form, "Did the parties intend that the buyer
should be entitled to reject the goods if they were not shipped in good condition?"
the answer must be that it depends on the nature and effects of the breach. This is
directly in line with Dip\ock L.J.'s approach in the Hongkong Fir Shipping Co. case
[1962] 2 O.B. 26, 69-70, not surprisingly, since there can be very little difference in
principle between whether the ship is seaworthy and whether goods are in good
condition. There is obviously a strong case for applying the general principle of the
HongKong Fir Shipping Co. case to contracts for the sale of goods. The question
remains, however, and it is the kernel of Mr. Hallgarten's submission, whether it is
open to the court to do so. The parties themselves, of course, can do it by express
agreement as, indeed, they have done in the present case in relation to quality. Clause
5 provides that breach of the terms as to quality shall entitle the buyer to an allowance
but that if the goods contain over 5 per cent of sand or in excess of .005 per cent of
castor seed husk, the buyer may reject the parcel. If it can be done expressly, it can

687
CHAPTER 8 PERFORMANCE AND BREACH

be done by implication, unless it is in some way prohibited. Mr. HaUgarten argues

that section ll(l)(b) compels the court to choose between condition and warranty.
I do not think that the subsection was intended to have any prohibitory effect. It is
essentially a definition, defining "condition" and "warranty" in terms of remedies.
Nor is the classification absolutely rigid, for it provides that a buyer may treat a condi-
tion as a warranty if he wishes, by accepting the goods. It does not, however, envisage
the possibility that a breach of warranty might go to the root of the contract, and so,
in certain circumstances, entitle the buyer to treat the contract as repudiated. But the
law has developed since the Act was passed. It is now accepted as a general principle
since the Hongkong Fir Shipping Co. case [1962] 2 O.B. 26 that it is the events resulting
from the bl"each, rather than the breach itself, which may destroy the consideration
for the buyer's promise and so enable him to treat the contract as repudiated.
[See also Waddams at paras 584-95.]

SALE OF GOODS ACT

RSO 1990, c S.1

30(2) Where there is a contract for the sale of goods to be delivered by stated
instalments that are to be separately paid for and the seller makes defective deliveries
in respect of one or more instalments or fails to deliver one or more instalments or
the buyer neglects or refuses to take delivery of or pay for one or more instalments,
it is a question in each case depending on the terms of the contract and the circum -
stances of the case whether the breach of contract is a repudiation of the whole
contract or whether it is a severable breach giving rise to a claim for compensation
but not to a right to treat the whole contract as repudiated.

MAPLE FLOCK COMPANY, LTD V UNIVERSAL

FURNITURE PRODUCTS (WEMBLEY), LTD
[1934] 1 KB 148 (CA)

LORD HEWART CJ: The judgment which I am about to read is the judgment of the
whole Court.
The appellant company are manufacturers of rag flock, and the respondents are
manufacturers of furniture and bedding for which they use such flock. The action
was brought by the appellants for breach by the respondents of a contract in writing,
dated March 14, 1932, for the sale by the appellants to the respondents of 100 tons of
black lindsey flock at £15 2s. 6d. per ton, to be delivered in three loads per week as
required. It was further stipulated that there should be a written guarantee that all
flock supplied under the contract should conform to the Government standard. The
load was l112 tons of 60 bags. The Government standard was that required under the
Rag Flock Act, 1911, which had been fixed by regulation under the Act at not more
than 30 parts of chlorine in 100,000 parts of flock. The Act made it a penal offence
.punishable by fine for any person (inter alia) to sen or have in his possession for sale
or use or to use flock not conforming to that standard. A person charged under the
Act might, however, if he could prove that he bought it from some one resident in
the United Kingdom under a warranty that it complied with the Government stan -
dard, and that he had taken reasonable steps to ascertain and did in fact believe in
the accuracy of the warranty, bring the seller before the Court by information and
transfer the burden of the offence to him.

688
 I. REPUDIATORY BREACH

The appellant company duly gave a written guarantee as required by the contract
and deliveries were at once commenced and continued of 1112 tons each. The sixteenth
of these deliveries was made on April 28, 1932, and, according to the respondent's
evidence, was duly accepted and the stuff put into use; a further delivery was made
on April 29, 1932, and another on May 2, 1932. On that latter date the respondents
notified the appellants that a sample drawn from the delivery of April 28, 1932 had
been analysed and showed a contamination of 250 parts of chlorine, instead of the
maximum allowed by law of 30 parts. The respondents thereupon claimed to rescind
the contract; the appellants protested, and some negotiations took place, during
which two more deliveries were tendered and taken, each of l1/2 tons. Eventually the
respondents adhered to their claim that they were entitled to rescind, and the writ
was issued by the appellants claiming damages on the ground that the refusal of the
respondents to take further deliveries was wrongful.
No complaint is made in respect of the 15 deliveries made before April 28, 1932, or
in respect of the four deliveries made after that date. The respondents made no claim
for damages in respect of the delivery said to be defective, because it had all been
used before the report was received on the sample. The learned Judge finds that the
sample was taken in the usual way-namely, one handful drawn from one bag of
the 60 bags which constituted the delivery, and he held that the respondents were
entitled, applying the ordinary rules of probability, to say that such must be the condi-
tion of the whole or substantially the whole of that delivery of 11/z tons. On the other
hand the appellants produced analyses of the flock they had in store from time to
time, including an analysis dated April 29, 1932, all of which showed percentages of
chlorine well below the Government maximum, though they could not identify any
sample as drawn from the flock actually delivered to the respondents . In their evi-
dence they described the process of manufacture by washing which they used. The
learned Judge finds that it would be quite wrong to make any general criticism at all
of the way in which the appellants conducted their business; he was very favourably
impressed, he said, by the evidence of Mr. Jebb, who gave evidence for them; he
seemed to the Judge a careful, scrupulous and honourable man. Mr. Jebb could give
no explanation of so gross a degree of contamination and was disposed to think
some mistake had been made as to the sample. The learned Judge, however, finding
that the sample must be taken as a fair test of the delivery, held that the defendants,
as prudent traders, could properly say to themselves, in regard to the defective
delivery, "it might happen again." He nowhere finds that it was a reasonable inference
that it would happen again. His conclusion appears to us to be that there was a mere
possibility, not a reasonable probability, that it would happen again. On the contrary,
he finds that the occurrence was a very extraordinary thing. We think that on the
evidence, and the findings of the learned judge, the true inference of fact is that there
was no reasonable probability of any such improper delivery being repeated under
the contract.
The decision of this case depends on the true construction and application of
s. 31, sub-s. 2, of the Sale of Goods Acts, 1893, which is in [substantially the language
of the Ontario Act reproduced above]. That subsection was based on decisions before
the Act, and has been the subject of decisions since the Act. A contract for the sale of
goods by instalments is a single contract, not a complex of as many contracts as there
are instalments under it. The law might have been determined in the sense that any
breach of condition in respect of any one or more instalments would entitle the party
aggrieved to claim that the contract has been repudiated as a whole; or on the other
hand the law as established might have been that any breach, however serious, in
respect of one or more instalments should not have consequences extending beyond
the particular instalment or instalments or affecting the contract as a whole. The

689
CHAPTER 8 PERFORMANCE AND BREACH

sub-section, however which deals equally with breaches either by the buyer or the
seller, requires the Court to decide on the merits of the particular case what effect,
if any, the breach or breaches should have on the contract as a whole.
The language of the Act is substantially based on the language used by Lord
Selbome L.C. in Mersey Steel and Iron Co. v. Naylor, Benzon & Co. (1884), 9 App. Cas.
434, where he said: "I am content to take the rule as stated by Lord Coleridge in French
v. Burr (1874), L.R. 9 C.P. 208, which is in substance, as I understand it, that you must
look at the actual circumstances of the case in order to see whether the one party to
the contract is relieved from its future perfonnance by the conduct of the other; you .
must examine what the conduct is, so as to see whether it amounts to a renunciation,
to an absolute refusal to perform the contract, such as would amount to a rescission
if he had the power to rescind, and whether the other party may accept it as a reason
for not performing his part." In Freeth v. Burr, Lord Coleridge C. stated the true ques-
tion to be: "Whether the acts and conduct of the party evince an intention no longer
to be bound by the contract." These were both cases of breach by the buyer in not
making punctual payment, and in each case it was clear that the buyer had sdme
justification for the course he took. The case of breach by the seller in making defect-
ive deliveries may raise different questions. Lord Selbome in the passage above
quoted did not refer to any question of intention, but said that what is to be examined
is the conduct of the party. Lord Coleridge in Freeth v. Burr, citing Hoare v. Rennie
(1859), 5 H. & N. 19; 157 E.R. 1083, on the question of a seller's breach, states thus one
aspect of the rule: "Where by the non-delivery of part of the thing contracted for the
whole object of the contract is frustrated, the party making default renounces on his
part all the obligations of the contract." In other words, the true test will generally be,
not the subjective mental state of the defaulting party, but the objective test of the
relation in .fact of the default to the whole purpose of the contract.
Since the Act, the sub-section has been discussed by a Divisional Court in Millars'
Karri a/Cid Jarrah Company (1902) v. Weddel, Turner & Co. (1909), 14 Com. Cas. 25, where
the contract being fo r 1100 pieces of timber, the first instalment of 750 pieces was
rejected by the buyers; an arbitrator awarded "that the said shipment was, and is, so
far from complying with the requirements of the said contract as to entitle the buyers
to repudiate and to rescind the whole contract and to refuse to accept the said ship-
ment and all further shipments under the said contract." The Court upheld the award.
Bigham J. thus stated what in his opinion was the true test, "Thus, if the breach is of
such a kind, or takes place in such circumstances as reasonably to lead to the infer-
ence that similar breaches will be committed in relation to subsequent deliveries,
the whole contract may there and then be regarded as repudiated and may be
rescinded. If, for instance, a buyer fails to pay for one delivery in such circumstances
as to lead to the inference that he will not be able to pay for subsequent deliveries;
or if a seller delivers goods differing from the requirements of the contract, and does
so in such circumstances as to lead to the inference that he cannot, or will not, deliver
any other kind of goods in the future, the other contracting party will be under no
obligation to wait to see what may happen; he can at once cancel and rid himself of
the difficulty." Watson J. concurred.
This ruling was more recently applied in Robert A. Munroe & Co. v. Meyer, [1930]
2 K.B. 312, where under a contract for the sale of lSOO tons of bone meal, 611 tons
were delivered which were seriously adulterated. The sellers were middlemen, who
relied on their suppliers, the manufacturers, for correct delivery: when the buyers
discovered that the deliveries di.d not conform to the contract they claimed that they
were entitled to treat the whole contract as repudiated by the sellers. It was held that
they were right in so claiming, on the ground that "in such a case as this, where there

690
 I. REPUDI ATO RY BREACH

is a persistent breach, deliberate so far as the manufacturers are concerned, continu -

ing for nearly one-half of the total contract quantity, the buyer, if he ascertains in
time what the position is, ought to be entitled to say that he will not take the risk of
having put upon him further deliveries of this character." [1930] 2 K.B . 331, per
Wright J . On the other hand in Taylor v. Oakes Roncoroni & Co., [19221 27 Com. Cas.
261, Greer J., as he then was, and the Court of Appeal, declined to hold that the buyers
were entitled to refuse to go on with the contract, but held that the breach was a sever-
able breach, as it was a case "where the instalment delivered failed in a slight but
appreciable degree to come up to the standard required by the contract description."
With the help of these authorities we deduce that the main tests to be considered
in applying the sub-section to the present case are, first, the ratio quantitatively
which the breach bears to the contract as a whole, and secondly the degree of prob-
ability or improbability that such a breach will be repeated. On the first point, the
delivery complained of amounts to no more than 11/z tons out of a contract for
100 tons. On the second point, our conclusion is that the chance of the breach being
repeated is practically negligible. We assume that the sample found defective fairly
represents the bulk; but bearing in mind the judge's finding that the breach was
extraordinary and that the appellant's business was carefully conducted, bearing in
mind also that the appellants were warned, and bearing in mind that the delivery
complained of was an isolated instance out of 20 satisfactory deliveries actually made
both before and after the instalment objected to, we hold that it cannot reasonably
be inferred that similar breaches would occur in regard to subsequent deliveries.
Indeed, we do not understand that the learned judge came to any different conclu -
sion. He seems, however, to have decided against the appellants on a third and
separate ground, that is, that a delivery not satisfying the Government requirements
would or might lead to the respondents being prosecuted under this Act. Though
we think he exaggerates the likelihood of the respondents in such a case being held
responsible, we do not wish to under-rate the gravity to the respondents of their being
even prosecuted. But we cannot follow the judge's reasoning that the bare possibility,
however remote, of this happening would justify the respondents in rescinding in
this case. There may indeed be such cases, as also cases where the consequences of
a single breach of contract may be so serious as to involve a frustration of the con-
tract and justify rescission, or furthermore, the contract might contain an express
condition that a breach would justify rescission, in which case effect would be given
to such a condition by the Court. But none of these circumstances can be predicated
of this case. We think the deciding factor here is the extreme improbability of the
breach being repeated, and on that ground, and on the isolated and limited character
of the breach complained of, there was, in our judgment, no sufficient justification
to entitle the respondents to refuse further deliveries as they did.
The appeal must accordingly be allowed and judgment entered for the appellants,
with costs here and below, for damages for their breach of contract in refusing
further deliveries.

RESTATEMENT OF THE LAW OF CONTRACTS (SECOND)

American Law Institute, 1981

241. In determining whether a failure to render or to offer performance is material,

the following circumstances are significant.
(a) The extent to which the injured party will be deprived of the benefit which
he reasonably expected;

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CHAPTER 8 PERFORMANC E AND BREACH

(b) The extent to which the injured party can be adequately compensated for
that part of the benefit of which he will be deprived;
(c) The extent to which the party failing to perform ... will suffer forfeiture;
(d) The likelihood that the party failing to perform .. . will cure his failure, taking
account of all the circumstances including any reasonable assurances;
(e) The extent to which the behavior of the party failing to perform ... comports
with standards of good faith and fair dealing.

QUESTIONS
Why did the Institute not simply state rules7 Why "significant" or persuasive "circumstances"
rather than binding rules?

II. WAIVER AND THE TRUE CONDITION PRECEDENT

PANOUTSOS V RAYMOND HADLEY

CORPORATION OF NEW YORK
[1917] 2 KB 473 (CA)

By a contract in writing made in London and dated September 27, 1915, which was
made on the printed form of the "London Flour Trade Association, American Flour
Contract," the Raymond Hadley Corporation of New York (herein called the sellers),
who had also a place of business in London, sold to Panoutsos (herein called the
buyer) 4,000 tons of flour to be despatched from the Atlantic seaboard by steamer
or steamers to Greece as per bills of lading dated not later than November 7, 1915;
"each shipment shall be deemed a separate contract"; and there was this clause
written into the contract: "Cash against documents in New York. Payment by con-
firmed bankers' credit." Any dispute arising out of the contract was to be referred to
arbitration according to the printed rules indorsed thereon.
On October 16 the National Bank of Commerce of New York wrote to the sellers
in New York stating that they had been requested to open a credit in favour of the
sellers for about $270,000 in respect of the shipment of 4,000 tons of flour shipped
up to November 7, 1915, and adding: "In advising you that this credit has been opened
we are acting merely as agent for our foreign correspondents and cannot assume
any responsibility for its continuance." This letter showed that the credit was not
irrevocable and therefore was not a "confirmed bankers' credit." The sellers, however,
. on October 21 and again on October 27, 28, 29 and 30 made shipments of flour in
part fulfilment of the contract, for which they were duly paid by the New York bank
in pursuance of the credit exchange for shipping documents. Meanwhile on October ·
27, the sellers took exception to the credit as not being irrevocable. On November 15
they requested the buyer to extend the time for the shipment of the balance of the
flour from November 7 to November 30, and to this the buyer agreed. On November
25 the sellers notified the buyer that the balance of their contract was cancelled on
the ground (so far as material) that the buyer had failed to perform the condition as
to "payment by confirmed bankers' credit." The buyer refused to accept the cancel-
lation, a nd the dispute was referred to arbitration. The arbitrators found that the
credit was not a confirmed bankers' credit within the meaning of the contract, but
that the sellers took no exception to it at the time it was opened.

692
 II. WAIVER AND THE TRUE CONDITION PRECEDENT

Before the arbitrators the sellers contended that the buyer had failed to comply
with the conditions of the contract, as he had failed to open a credit at New York,
yvhich would be irrevocable until November 30; and that the fact that they had i:nade
shipments without insisting on this condition did not release the buyer in respect
of subsequent shipments, especially having regard to the term of the contract that
"each shipment shall be deemed a separate contract." The buyer contended that the
sellers had accepted as satisfactory the credit which has been opened, and, having
made a shipment under it, had waived any possible objection to it and could not
repudiate their obligation to ship the balance of the flour, or could not do so without
giving due notice to him so as to enable him to remove any valid objection and
furnish such a credit as would satisfy them.
The arbitrators awarded that the sellers were in default in not shipping the balance
of the flour in accordance with the contract, and that they should pay a certain sum
as damages.
The question for the opinion of the Court was whether or not upon the above
facts there was any evidence upon which the arbitrators could properly find that the
sellers had waived the term in the contract that payment should be by confirmed
bankers' credit.
If the Court should be of opinion that the question should be answered in the
affirmative, then the award was to stand; if in the negative, then the award was to be
in favour of the sellers.
Bailhache J. held that when the sellers knew that the credit was not in order, and
yet proceeded to act upon it as if it was in order, they must be taken to have waived
the informality so long as they chose to act upon that credit, but that they were not
bound to act upon it to the end merely because they acted upon it at first and waived
the informality up to a point. In his opinion the sellers could at any time insist upon
the credit being put in order, but if they desired to cancel the contract because the
credit upon which they had acted was not in order they must give reasonable notice
to the buyer of their intention to do so; which they had not done. He therefore
confirmed the award. The sellers appealed.
VISCOUNT READING CJ: ... The question put to the Court is "whether or not upon the
above findings of fact" -to which must now be added "coupled with our findings of
fact"-"there was any evidence upon which the arbitrators could properly find that
the sellers had waived the term in the contract that payment should be by confirmed
bankers' credit." It was therefore admitted that there was .no confirmed bankers'
credit, but the buyer contended that there had been a waiver of that condition of the
contract. In answer to that the sellers said that there had been no such waiver, and
if there had been a waiver that they were entitled at any time to insist upon the
condition being performed. The buyer replied that no doubt the sellers were entitled
to insist upon the performance of the condition, but that, having waived its perform-
ance hitherto, they must give reasonable notice to the buyer of their intention to
insist upon its performance in the future so as to give him an opportunity of putting
the credit right. Bailhache J. held that the sellers must be taken to have waived the
performance of the condition, that the buyer was entitled to reasonable notice, and
that such notice had not in fact been given. He therefore answered the question in
favour of the buyer.
In my opinion the learned judge was right. It is open to a party to a contract to
waive a condition which is inserted for his benefit. If the sellers chose to ship without
the safeguard of a confirmed bankers' credit, they were entitled to do so, and the
buyer performed his part of the contract by paying for the goods shipped, though
there was no confirmed bankers' credit, inasmuch as that condition had been waived.

693
CHAPTER 8 PERFORMANCE AND BREACH

If at a later stage the sellers wished to avail themselves of the condition precedent,
in my opinion there was nothing in the facts to prevent them from demanding the
performance of the condition if they had given reasonable notice to the buyer that
they would not ship unless there was a confirmed bankers' credit. If they had done
that and the buyer had failed to comply with the condition, the buyer would have
been in default, and the sellers would have been entitled to cancel the contract
without being subject to any claim by the buyer for damages.
In Bentsen v. Taylor, Sons & Co., [1893] 2 O.B., Bowen L.J. stated the law as to waiver
thus: "Did the defendants by their acts or conduct lead the plaintiff reasonably to
suppose that they did not intend to treat the contract for the future as at an end, on
account of the failure to perform the condition precedent?" Reading sellers for
defendants and buyer for plaintiff in that passage, it applies exactly to the present
case. The sellers did lead the buyer to think so, and when they intended to change
that position it was incumbent on them to give reasonable notice of that intention
to the buyer so as to enable him to comply with the condition which up to that time
had been waived.
The case of In re Tyrer & Co. and Hessler & Co., 6 Com. Cas. 143; 7 Com. Cas. 166
was cited as an authority for the proposition that the moment the sellers chose to
avail themselves of the failure to perform the condition precedent they could put
an end to the contract without giving the buyer an opportunity of remedying the
default which had hitherto been waived. That case is not an authority for that prop-
osition. It shows that, where there was stipulated times in a charterparty for payment
of the hire of a ship and a power to withdraw the ship if the payment is not made at
the stipulated time, the mere fact that there has been default in payment at one or
more stipulated times, of which advantage has not been taken,. does not entitle the
party in default at a subsequent time to a notice so as to enable him to comply with
the condition before the right to withdraw arises. That is a totally different case from
the present. I cannot find any authority to support the proposition that, when one
party has led another to believe that he may continue in a certain course of conduct
without any risk of the contract being cancelled, the first-mentioned party can cancel
the contract without giving any notice to the other so as to enable the latter to comply
with the requirement of the contract. It seems to me to follow from the observations
of Bowen L.J. in Bentsen v. Taylor, Sons & Co. that there must be reasonable notice
given to the buyer before the sellers can take advantage of the failure to provide a
confirmed bankers' credit. That is the decision of Bailhache J .
The only question which remains is whether reasonable notice has been given.
We have more material before us than Bailhache J. had when he came to the conclu-
sion that no reasonable notice had been given. I am not prepared to draw the infer-
ence of fact that reasonable notice had been given before the sellers cancelled the
contract. If notice had been given on October 27, and on November 25 the sellers
had cancelled the contract, I should have thought that that would have been ample
notice to enable the buyer to provide the confirmed credit in New York. But I cannot
find any such notice on the part of the sellers of their intention to insist upon the
performance of the condition ....
The result is that the decision of Bailhache J. is right, and the appeal must be
dismissed.
[Lord Cozens- Hardy MR and Scrutton LJ agreed.]

694
 II. WAIVER AND THE TRUE CONDITION PRECEDENT

NOTE
In Sail Labrador Ltd v Challenge One (The), [1999] 1 SCR 265, 169 DLR (4th) 1, the charterer of
a ship had an option to purchase the ship, conditional on "full performance of all its obliga-
tions" under the charter party. Payment was required in cash or by certified cheque in 35
installments, but the charterer submitted uncertified postdated cheques without objection
from the owner. By bank error, payment of one of these cheques was slightly late, and the
owner asserted that the option was void. The Supreme Court of Canada was unanimous in
holding in the charterer's favour, but there was a division in its reasons. Bastarache J, for the
majority, said that time was not of the essence, that the effect of accepting the cheques had
been to vary the contract, and that substantial performance was sufficient. Binnie J held that
the parties had contracted for full performance, and that "substantial" performance was not
sufficient. But he concurred in the result on the basis that full performance had in fact been
rendered, except as to the banking arrangements where the owner was estopped by its con-
duct from saying otherwise.

TURNEY V ZHILKA
[1959] SCR 578, 18 DLR (2d) 497

[A contract for the sale of "all and singular the land and not buildings situate on the
East side of the 5th Line west in the township of Toronto and known as 60 acres or
more having frontage of about 2046 feet on 5th Line more or less, by a depth of
about ... feet, more or less (lot boundaries about as fenced), being part of west 1h lot
5 Con 5 west" contained the condition: "Providing the property can be annexed to
the Village of Streetsville and a plan is approved by the Village Council for subdivi-
sion." The vendor owned only 62.37 acres, but he thought he had 65 acres and that
he could retain 5 acres around his buildings. The purchaser claimed 60.87 acres,
leaving the vendor 1.5 acres. The Village of Streetsville did not annex the property.
An action for specific performance by the pwchaser was dismissed. As to the defence
of non-compliance with the Statute of Frauds, the court held that not only was there
lack of sufficient certainty of description, "but the evidence makes it quite clear that
the parties never reached any agreement, oral or written, on the quantity or descrip-
tion of the land to be retained or the land to be conveyed." The purchaser was willing
to waive the annexation condition.]
JUDSON J (on this point): The date for the completion of the sale if fixed with reference
to the performance of this condition-"60 days after plans are approved." Neither
party to the contract undertakes to fulfil this condition, and neither party reserves a
power of waiver. The purchaser made some enquiries of the village council but the
evidence indicates that he made little or no progress and received little encouragement
and that the prospects of annexation were very remote. After the trouble arose over
the quantity and description of the land, the purchaser purported to waive this condi-
tion on the ground that it was solely for his benefit and was severable, and sued
immediately for specific performance without reference to the condition and the time
for performance fixed by the condition. The learned trial Judge found that the condition
was one introduced for the sole benefit of the purchaser and that he could waive it. ...
But here there is no right to be waived. The obligations under the contract, on
both sides, depend upon a future uncertain event, the happening of which depends
entirely on the will of a third party-the village council. This is a true condition pre-
cedent-an external condition upon which the existence of the obligation depends.
Until the event .occurs there is no right to performance on either side. The parties

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have not promised that it will occur. In the absence of such a promise there can be
no breach of contract until the event does occur. The purchaser now seeks to make
the vendor liable on his promise to convey in spite of the non-performance of the
condition and this to suit his own convenience only. This is not a case of renuncia -
tion or relinquishment of a right but rather an attempt by one party, without the
consent of the other, to write a new contract. Waiver has often been referred to as a
troublesome and uncertain term in the law but it does at least presuppose the exist-
ence of a right to be relinquished.

QUESTIONS
1. What explanations are offered by Judson J for the conclusion that the condition preced-
ent in this agreement cannot be waived? Would the doctrine of true condition precedent apply
to every situation in which neither party to the contract undertakes to fulfill a particular condi-
tion? Would it apply to every case in w hich the fulfillment of the condition depends on the will
of a third party?
2. Would the doctrine of true condition precedent apply to a financing condition in a real
estate transaction pursuant to which the closing of the transaction is enforceable only if the
purchaser is able to acquire "satisfactory financing"? In Beauchamp v Beauchamp, [19731 2 OR
43 (CA), the Ontario Court of Appeal held that a condition in a real estate transaction to the
effect that the purchaser be able to obtain a first mortgage in the amount of $10,000 at current
rates and a second for $2,500 was not a true condition precedent. Do you agree?
3. In O'Reilly v Marketers Diversified Inc (1968), 1 DLR (3d) 387 (BCCA), the BC Court of
Appeal held that a real estate transaction subject to a condition that the purchaser be able to
purchase an adjacent lot was not a true condition precedent. Do you agree? This decision was
overruled by the Supreme Court of Canada . See [1969] SCR 741 .

BARNETT V HARRISON
[1976] 2 SCR 531, 57 DLR (3d) 225

DICKSON J : The rule in Turney and Turney v. Zhi/ka has been in effect since 1959, and
has been applied many times. In the interests of certainty and predictability in the
law, the rule should endure unless compelling reason for change be shown. If in any
case the parties agree that the rule should not apply, that can be readily written into
the agreement. ·
Laskin C.J.C. and Spence J. dissented on the ground that a party should be entitled
to w aive a condition inserted for his own benefit.

[See also Waddams at paras 607-10 .]

Ill . THE DUTY TO PERFORM CONTRACTUAL

OBLIGATIONS IN GOOD FAITH
In previous sections of this chapter, w e have assumed that the content or nature of the per-
formance obligations imposed by an ag reement are clear and are understood by the parties.
The questions w e have considered in Section I relate to the impact of one party's failure to
perform an obligation upon the other party's obligation to perform . In Section II we have
considered whether the victim of a party in breach might be considered to have waived the

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 Ill. THE DUTY TO PERFORM CONTRACTUAL OBLIGATIONS IN GOOD FAITH

right to rely on the default of that party as an excuse for non-performance of their own con-
tractual obligations. Here we turn to consider the contents of the agreement w hich may be
said to define or delineate the nature of each party's performance obligations. More particu-
larly, we w ill consider w het her every contract must be considered to contain an obligation
imposed on each party, whether explicitly expressed by the parties or not. to perform their
obligations in good faith.
The determination of the nature of the performance obligations imposed by an agreement
may prove to be a complex or subtle issue in many circumstances. Where the parties have
engaged in both written and oral communications concerning the nature of their agreement,
the decision as to whether any or all of the oral communications may be taken into account
in determining the contents of the agreement may prove to be a difficult matter. As we saw in
Chapter 5, making such determinations wi ll normally involve application of the "parol evidence
rule." Once the contents of the agreement, in this sense, have been determined, subtle ques-
tions may arise wi th respect to the proper interpretation of particular terms of the agreement.
Particular provisions may be drafted by the parties or their lawyers in language that is unclear
or ambiguous or for other rea sons difficult to apply to the circumstances of the agreement as
they have unfolded. The drafting of the agreement in question may have failed to anticipate
future circumstances in which the agreement may be required to operate, thus leaving what
now appear to be "gaps" in the agreement. There may be an apparent conflict between the
obligations imposed by two separate terms. Problems of this kind are addressed by the law of
contractual interpretation, a subject that is not explored at length, however, in the present
volume.
One of many devices made available by the law of contractual interpretation to assist in the
interpretation of agreements is the judi cial implication of terms in the agreement. The doctrine
of implied terms is itself extensive, but. for present purposes, may be briefly summarized.
Generally speaking, three different kinds of implication (or sources of implied terms) are per-
mitted by the law of contractual interpretation. First, courts may imply terms in agreements
when they reach the conclusion that such additional understandings fairly represent what must
have been the implicit or tacit understandings of the parties to the agreement w ith respect to
the matter in question. Such implied terms are commonly referred to as terms "implied in fact."
The two tests for implying such terms are, first. that the implication of such a term is necessary
to give "business efficacy" to the agreement or, second, that the need for such a term is other-
wise so obvious that an "officious bystander" or the parties themselves. if asked, would agree
that such an understanding must have been assumed by the parties. A second category of
implied terms-terms "im plied in law" -do not rest on the presumed intentions of the parties.
Rather, they are terms implied by courts to ensure the fair functioning of standard types of
contracts, such as those related to employment. leases of land, and insurance. In the context
of employment contracts, for example, it is well established that in a contract of employment of
indefinite duration, it is an implied term that the contract can be terminated by the employer
only upon reasonable notice to the employee. Employment agreements are also considered
to include implied terms imposing obligations on employees to provide service at a reasonable
level of skill and care and to not disclose to third parties confidential information acquired in
the course of their employment. A third type or source of implied terms-commonly referred
to as terms "implied from custom or usage" -arise from well-established expectations within
a particular trade or commercial context as to the terms on wh ich business is normally con-
ducted. Evi dence of such customs or usage may provide a basis for adding terms to the agree-
ment to give effect to these shared expectations.
In recent decades, Canadian courts have struggled w ith the question as to whether, in addi-
tion to all of the express or implied terms of contractual agreements, every agreement should
be considered to contain an overarching and presumably implied duty on each party to per-
form their contractual obligations in good faith. The recognition of such a duty has been

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CHAPTER 8 PERFORMANCE AND BREACH

recommended by some law reform comm issions and legal scholars. Those who favoured
such recognition typically noted that such duties had been recognized in American law and in
the law of Quebec. Other observers, however, were of the view that recogn ition of such a duty
would introduce an unattractive level of uncertainty into contractual doctrine. What, after all,
is the content of the notion of "good faith contractual performance"? How would one advise
parties to conform with such a vague and uncertain obligation? Would such a concept not
interfere with the concept of "freedom of contract" and the ability of parties to freely negotiate
and understand the nature of their contractual obligations?
A similar division of opinion was manifest in Canadian judicial decisions touching upon the
subject. Some Canadian judges embraced the good faith concept with some enthusiasm.
Thus, in Gateway Realty Ltd v Arton Holdings Ltd and LaHave (No 3) (1991), 106 NSR (2d) 180
(SC (TD)), aff'd (1992) 112 NSR (2d) 180 (CA), for example, Kelly J held that all contracts should
be considered to include a term requiring good faith performance or, what amounted in his
view to the same thing, a term precluding bad faith performance. The concept of bad faith
performance was articulated by Kelly J (at p 197) in the following terms:

In most cases, bad faith can be said to occur when one party, without reasonable justifica-
tion, acts in relation to the contract in a manner where the result would be to substantially
nullify the bargained objective or benefit contracted for by the other, or to cause significant
harm to the other, contrary to the original purpose and expectation of the parties .

Other courts expressed skepticism with respect to the desirability of recognizing such a doc-
trine. (See e.g. /V1artselos Services Ltd v Arctic College, [1994] NWTJ No 4, 111 DLR (4th) 65
(OL) (CA))
It was not unti l the 2014 decision in Bhasin v Hrynew, 2014 SCC 71, however, that the
Supreme Court of Canada resolved this debate in favour of recognition of a general underlying
principle of contract law that requires all parties to agreements to perform their obligations in
good faith.

BHASIN V HRYNEW
2014 sec n

[The controversy in Bhasin v Hrynew concerning the existence of an obligation to

perform contracts in good faith arose in the following circumstances . The plaintiff
appellant, Mr. Bhasin, was a retail dealer or so-called "enrolment director" for the
defendant respondent, Canadian American Financial Corp (Can-Am). Can-Am was
the supplier of education savings plans (ESPs) to investors through its network of
enrolment directors. Under the agreements between Can-Am and its enrolment
directors, the directors received compensation and bonuses for selling ESPs. Enrol-
ment directors were obliged to sell Can-Am products exclusively and owed Can-Am
fiduciary obligations. The agreements stipulated that Can-Am owned directors' client
lists . The agreement with Mr. Bhasin had a three-year term and stipulated that the
contract would automatically renew at the end of the three-year term unless one of
the parties gave six months' written notice to terminate. Mr. Bhasin commenced his
relationship with Can-Am in 1989 and built up a successfUl business in the ensuing
years, winning numerous recognition awards from Can-Am as one of its top enrol-
ment directors in Canada.
The defendant Hrynew was another Can-Am enrolment director. He was a competi-
tor of Mr. Bhasin and there was considerable animosity between them. The principal
source of the acrimony was that Mr. Hrynew wished to, in effect, merge Mr. Bhasin's
business with his own. He planned that Mr. Bhasin would become an employee of the

698
 Ill. THE DUTY TO PERFORM CONTRACTUAL OBLIGATIONS IN GOOD FAITH

newly merged business to be owned by Hrynew. Mr. Hrynew was in a position to

pressure Can-Am into supporting his efforts to absorb Mr. Bhasin's business. Hrynew
was a very successful enrolment director. When he moved his business from one of
Can-Am's competitors to Can-Am, he was promised that he would be given consider-
ation for possible mergers with existing directors and, indeed, a number of mergers
had taken place. Hrynew was Can-Am's largest dealer in Alberta. Moreover, he was
said to have a "good working relationship" (2014 SCC 71 at para 8) with the Alberta
Securities Commission, the regulator of Can-Am's business.
Mr. Bhasin steadfastly resisted Mr. Hrynew's frequent proposals to merge their
two businesses. Nonetheless, Mr. Hrynew enjoyed success in pressuring Cam-Am
to assist in achieving this objective and was said to have made "veiled threats" (2014
SCC 71 at para 9) that he would leave Can-Am if the merger could not be achieved.
Matters came to a head in 1999 and 2000 when Can-Am developed a concern that
the Securities Commission might revoke its licence. In discussions with the com-
_,mission, Can-Am indicated that it was planning to restructure its agencies in Alberta
in a manner that would involve Mr. Bhasin. Mr. Bhasin was not informed of these
plans. In 1999, the commission required Can-Am to appoint a provincial trading
officer (PTO) to audit its enrolment directors with respect to compliance with applic-
able securities laws. Can-Am appointed Mr. Hrynew to this position with the result
that Mr. Hrynew was assigned the task of auditing Mr. Bhasin's business. Mr. Bhasin
resisted the idea of allowing a competitor to have access to his confidential busine~s
records, even though Can-Am assured Bhasin that Hrynew would be subject to a
duty of confidentiality.
When Mr. Bhasin continued to refuse to allow Mr. Hrynew access to his business
records, Can -Am threatened to terminate their agreement and finally, in May of 2001,
gave notice of non-renewal. At the expiry of the term, the majority of Mr. Bhasin's
sales agents were successfully recruited by Mr. Hrynew and Mr. Bhasin lost the value
of his business.
During the period leading up to termination, Mr. Bhasin was misled by Can-Am
in a number of respects. Can-Am did not respond in a forthright manner when
Mr. Bhasin asked in August 2000 whether or not the proposed merger was a "done
deal" (2014 SCC 71 at para 12). The trial judge had held that Can-Am "equivocated"
on this point (2011 ABOB 637 at para 247). Can-Am also advised Bhasin that the
Securities Commission would not permit it to appoint an outsider as the PTO. This
was not true. Further, Mr. Hrynew's contract of employment as PTO did not contain
a requirement of confidentiality, as Bhasin had been assured by Can-Am.
Upon termination, Mr. Bhasin brought an action against Can-Am and Hrynew
alleging that Can-Am was in breach of an implied term to perform its contractual
obligations in good faith. He also claimed that Hrynew had committed the tort of
inducing breach of contract and that the two defendant parties had conducted a
civil conspiracy.
At trial, Moen J held in favour of the plaintiff on all counts (2011 ABOB 637). The
defendant Can-Am had breached its implied duty of good faith performance by
exercising the right to terminate for the improper purpose of.forcing a merger and
by appointing Hrynew to audit Bhasin's business records. As well, the defendants
had engaged in a civil conspiracy, and Hrynew had committed the tort of inducing
breach of contract. Importantly, the trial judge held that if Can-Am had been straight-
forward with Bhasin he would have been able to preserve the value of his business.
The trial judge also made a finding that, notwithstanding any difficulties that might
be encountered by Mr. Bhasin in transferring his business to a new owner, the value
of the business at the date of termination could be assessed as $87,000.

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The decision at trial was reversed, however, by the Alberta Court of Appeal. Can -
adian law did not, in its view, impose a general duty to perform contracts in good
faith and, in any event, the trial judge had erred, in the court's view, by implying a
term requiring good faith in the context of an unambiguous agreement containing
an entire agreement clause. Accordingly, the plaintiff's claims were dismissed.
Against this background and on behalf of a unanimous Supreme Court, Cromwell J
observed as follows:)
[33] CROMWELL J: In my view, it is time to take two incremental steps in order to
make the common law less unsettled and piecemeal, more coherent and more just.
The first step is to acknowledge that good faith contractual performance is a general
organizing principle of the common law of contract which underpins and informs
the various rules in which the common law, in various situations and types of rela-
tionships, recognizes obligations of good faith contractual performance. The second
is to recognize, as a further manifestation of this organizing principle of good faith ,
that there is a common law duty which applies to all contracts to act honestly in the
performance of contractual obligations.

[In support of the view that the existing law was "unsettled and piecemeal,"
Cromwell J provided an account of the notion of good faith as it had appeared over
time in English and Canadian common law. He noted the division of judicial opinion
as to the existence or desirability of the doctrine. He noted, as well, that the notion
of good faith underlies or is present in existing contractual doctrines, such as the
doctrine of unconscionability and the law of implied terms in which the attempt to
give effect to the intentions of the parties is informed by the concept of good faith.
Cromwell J also indicated that there are numerous contexts in which the doctrine ·
appears in more explicit form. These situations h e described as follows:]
[47] There have been many attempts to bring a measure of coherence to this
piecemeal accretion of appeals to good faith: see, among many others, McCamus,
at pp. 835-68; S. K. O'Byrne, "The Implied Term of Good Faith and Fair Dealing:
Recent Developments" (2007), 86 Can. Bar Rev. 193, at pp. 196-204; Waddams, The
Law of Contracts, at paras. 494-508; R. S. Summers, '"Good Faith' in General Contract
Law and the Sales Provisions of the Uniform Commercial Code" (1968), 54 Va. L. Rev.
195; S. J. Burton, "Breach of Contract and the Common Law Duty to Perform in Good
Faith" (1981), 94 Harv. L. Rev. 369. Byway of example, Professor McCamus has identi-
fied three broad types of situations in which a duty of good faith performance of
some kind has been found to exist: (1) where the parties must cooperate in order to
achieve the objects of the contract; (2) where one party exercises a discretionary
power under the contract; and (3) where one party seeks to evade contractual duties
(pp. 840 -56; CivicLife.com Inc. v. Canada (Attorney General) (2006), 215 0.A.C. 43, at
paras. 49-50).
(48) While these types of cases overlap to some extent, they provide a useful
analytical tool to appreciate the current state of the law on the duty of good faith .
They also reveal some of the lack of coherence in the current approach. It is often
unclear whether a gciod faith obligation is being imposed as a matter of law, as a
matter of implication or as a matter of interpretation. Professor McCamus notes:
Although the line between the two types of implication is difficult to draw, it may be
realistic to assu me that implied duties of good faith are likely, on occasion at least, to
slide into the category of legal incidents rather than mere presumed intentions. Cer-
tainly, it would be difficult to defend the implication of terms on each of the cases
considered here on the basis of the traditional business efficiency or officious bystander
test. In the control of contractual discretion cases, for example, it may be more realistic

700
 Ill. THE DUTY TO PERFORM CONTRACTUAL OBLIGATIONS IN GOOD FAITH

to suggest that the implied limitation on the exercise of the discretion is intended to
give effect to the "reasonable expectations of the parties." [pp. 865-66]
[49] The first type of situation (contracts requiring the cooperation of the parties
to achieve the objects of the contract) is reflected in the jurisprudence of this Court.
In Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072, the parties to a
real estate transaction failed to specify in the purchase-sale agreement which party
was to be responsible for obtaining planning permission for a subdivision of the
property. By law, the vendor was the only party capable of obtaining such permission.
The Court held that the vendor was under an obligation to use reasonable efforts to
secure the permission, or as Dickson J . (as he then was) put it, "[t]he vendor is under
a duty to act in good faith and to take all reasonable steps to complete the sale":
p . 1084. It is not completely clear whether this duty was imposed as a matter of law
or was implied based on the parties' intentions: seep. 1083; see also Gateway Realty
and CivicLife.com.
[50] Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187, is an
example of the second type of situation (exercise of contractual discretion). The lease
o(a helicopter included an option to buy at the "reasonable fair market value of the
helicopter as established by Lessor": para. 2. This Court held, at para. 34, that,
"[c]learly, the lessor is not in a position, by virtue of clause 32, to make any offer that
. it may feel is appropriate. It is contractually bound to act in good faith to determine
the reasonable fair market value of the helicopters, which is the price that the parties
had initially agreed would be the exercise price of the option." The Court did not
discuss the basis for implying the term, but suggested that in the absence of a rea -
sonableness requirement, the option would be a mere agreement to agree and thus
would be unenforceable, which means that the implication of the term was neces-
sary to give business efficacy to the agreement.
[51] This Court's decision in Mason v. Freedman, [1958] S.C.R. 483, falls in the third
type of situation in which a duty of good faith arises (where a contractual power is
used to evade a contractual duty). In that case, the vendor in a real estate transaction
regretted the bargain he had made. He then sought to repudiate the contract by failing
to convey title in fee simple because he claimed his wife would not provide a bar of
dower. The issue was whether he could take advantage of a clause permitting him to
repudiate the transaction in the event that he was "unable or unwilling" to remove this
defect in title even though he had made no efforts to do so by trying to obtain the
bar of dower. Judson J. held that the clause did not "enable a person to repudiate a
contract for a cause which he himself has brought about" or permit "a capricious or
arbitrary repudiation": p. 486. On the contrary, "[a] vendor who seeks to take advan-
tage of the clause must exercise his right reasonably and in good faith and not in a
capricious or arbitrary manner": p. 487.
[52] The jurisprudence is not always very clear about the source of the good fai~h
obligations found in these cases. The categories of terms implied as a matter of law,
terms implied as a matter of intention and terms arising as a matter of interpretation
sometimes are blurred or even ignored, resulting in uncertainty and a lack of coher-
ence at the level of principle. '

[Cromwell J further observed that in addition to these types of situations in which

particular good faith duties arise, there are classes of relationships "that call for a duty
of good faith to be implied by law" (para 53). Illustrations provided by Cromwell J
included the employer's obligation to behave in a good faith manner when exercising
its right to terminate the employment relationship (Honda Canada Inc v Keays, 2008
sec 39), the obligation on an insured to disclose material facts at the time of formation
701
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of an insurance contract and the insurer's duty to deal with.its insured's claim fairly
(Fidler v Sun Life Assurance Co of Canada, 2006 SCC 30) and the duty of fair dealing
imposed on parties who conduct tendering processes (MJB Enterprises Ltd v Defence
Construction (1951) Ltd [1991] 1 S.C.R. 619). Cromwell J also provided a survey of
developments in other jurisdictions.
Cromwell J, having concluded that this survey supports the view that the current
Canadian \aw is "piecemeal, unsettled and unclear" (para 59), proposed that recogni-
tion of a duty of good faith performance would be consistent with the rea_sonab\e
expectations of the parties. As he explained:] ·
[60] Commercial parties reasonably expect a basic \eve\ of honesty and good faith
in contractual dealings. While they remain at arm's length and are not subject to the
duties of a fiduciary, a basic \eve\ of honest conduct is necessary to the proper func-
tioning of commerce. The growth of longer term, relational contracts that depend
on an element of trust and cooperation clearly cal\ for a basic element of honesty in
performance, but, even in transactional exchanges, misleading or deceitful conduct
will fly in the face of the expectations of the parties: see Swan and Adamski, at n.24.

[Cromwell J then returned to the proposed two incremental steps to be taken in

clarifying the existing \aw. The first step he described as follows :]
[63] The first step is to recognize that there is an organizing principle of good
faith that underlies and manifests itself in various more specific doctrines governing
contractual performance. That organizing principle is simply that parties generally
must perform their contractual duties honestly and reasonably and not capriciously
or arbitrarily.
[64] As the Court has recognized, an organizing principle states in general terms
a requirement of justice from which more specific legal doctrines may be derived.
An organizing principle therefore is not a free-standing rule, but rather a standard
that underpins and is manifested in more specific legal doctrines and may be given
different weight in different situations : see, e.g., R. v. Jones, [1994] 2 S.C.R. 229, at
p. 249; R. v. Hart, 2014 SCC 52, [2014] 2 S.C.R. 544, at para. 124; R. M. Dworkin, "Is Law
a System of Rules," in R. M. Dworkin, ed., The Philosophy of Law (1977), 38, at p. 47. It
is a standard that helps to understand and develop the \aw in a coherent and prin-
cipled way.
[65] The organizing principle of good faith exemplifies the notion that, in carry-
ing out his or her own performance of the contract, a contracting party should have
appropriate regard to the legitimate contractual interests of the contracting partner.
While "appropriate regard" for the other party's interests will vary depending on the
context of the contractual relationship, it does not require acting to serve those inter-
ests in al\ cases. It merely requires that a party not seek to undermine those interests
in bad faith. This general principle has strong conceptual differences from the much
higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance
does not engage duties of loyalty to the other contracting party or a duty to put the
interests of the other contracting party first.
[66] This organizing principle of good faith manifests itself through the existing
doctrines about the types of situations and relationships in which the law requires,
in certain respects, honest, candid, forthright or reasonable contractual performance.
Generally, claims of good faith will not succeed if they do not fa\\ within these exist-
ing doctrines. But we should also recognize that this list is not closed. The application
of the organizing principle of good faith to particular situations should be developed
where th.e existing law is found to be wanting and where the development may occur
incrementally in a way that is consistent with the structure of the common \aw of

702
 Ill. THE DUTY TO PERFORM CONTRACTUAL OBLIGATIONS IN GOOD FAITH

contract and gives due weight to the importance of private ordering and certainty
in commercial affairs.

[The second step-recognizing a new particularized duty or rule-was made neces-

sary by the fact that the present fact situation did not come within any of the existing
situations or relationships in which good faith duties have been found to exist. The
need for a new duty of honesty to capture the facts of the present case was described
as follows:]
[72] In my view, the objection to Can-Am's conduct in this case does not fit within
any of the existing situations or relationships in which duties of good faith have been
found to exist. The relationship between Can-Am and Mr. Bhasin was not an employ-
ment or franchise relationship. Classifying the decision not to renew the contract as
a contractual discretion would constitute a significant expansion of the decided cases
under that type of situation. After all, a party almost always has some amount of discre-
tion in how fo perform a contract. It would also be difficult to say that a duty of good
faith should be implied in this case on the basis of the intentions of the parties given
the clear terms of an entire agreement clause in the Agreement. The key question before
the Court, therefore, is whether we ought to create a new common law duty under the
broad umbrella of the organizing principle of good faith performance of contracts.
[73] In my view, we should. I would hold that there. is a general duty of honesty
in contractual performance. This means simply that parties must not lie or other-
wise knowingly mislead each other about matters directly linked to the performance
of the contract. This does not impose a duty of loyalty or of disclosure or require a
party to forgo advantages flowing from the contract; it is a simple requirement not
to lie or mislead the other party about one's contractual performance. Recognizing a
duty of honest performance flowing directly from the common law organizing
principle of good faith is a modest, incremental step. The requirement to act honestly
is one of the most widely recognized aspects of the organizing principle of good
faith: see Swan and Adamski, at u8.135; O'Byrne, "Good Faith in Contractual Per-
formance: Recent Developments," at p. 78; Belobaba; Greenberg v Meffert (1985), 50
O.R. (2d) 755 (C.A.), at p. 764; Gateway Realty, at para. 38, per Kelly J.; Shelanu Inc. v.
Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.), at para. 69. For example,
the duty of honesty was a key component of the good faith requirements which have
been recognized in relation to termination of employment .contracts: Wallace, at
para. 98; Honda Canada, at para. 58.
[Cromwell J went on to consider the view expressed by the Alberta Court of
Appeal, below, to the effect that any implied duty of good faith would be excluded
by the "entire agreement clause" set out in the dealership agreement:]
[74] There is a longstanding debate about whether the duty of good faith arises
as a term implied as a matter of fact or a term implied by law: see Mesa Operating, at
paras. 15-19. I do not have to resolve this debate fully, which, as I reviewed earlier,
casts a shadow of uncertainty over a.good deal of the jurisprudence. I am at this point
concerned only with a new duty of honest performance and, as I see it, this should
not be thought of as an implied term, but a general doctrine of contract law that
imposes as a contractual duty a minimum standard of honest contractual perform-
ance. It operates irrespective of the intentions of the parties, and is to this extent
analogous to equitable doctrines which impose limits on the freedom of contract,
such as the doctrine of unconscionability.
[75] Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement
is not an impediment to the duty arising in t_h is case. Because the duty of honesty
in contractual performance is a general doctrine of contract law that applies to all

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contracts, like unconscionability, the parties are not free to exclude it: see CivicLife.com,
at para. 52.
[76] It is true that the Anglo-Canadian common law of contract has been reluctant
to impose mandatory rules not based on the agreement of the parties, because they
are thought to interfere with freedom of contract: see Gateway Realty, per Kelly J.;
O'Byrne, "Good Faith in Contractual Performance: Recent Developments," at p . 95;
Farnsworth, at pp. 677-78 . As discussed above, however, the duty of honest perform-
ance interferes very little with freedom of contract, since parties will rarely expect
that their contracts permit dishonest performance of their obligations.
[77] That said, I would not rule out any role for the agreement of the parties in
influencing the scope of honest performance in a particular context. The precise
content of honest performance will vary with context and the parties should be free
in some contexts to relax the requirements of the doctrine so long as they respect
its minimum core requirements. The approach I outline here is similar in principle
to that in~ 1-302(b) of the U.C.C. (2012):
The obligations of good faith, diligence, reasonableness, and care ... may not be dis-
claimed by agreement. The parties, by agreement. may determine the standards by
which the performance of those obligations is to be measured if those standards are
not manifestly unreasonable.
[78] Certainly, any modification of the duty of honest performance would need
to be in express terms. A generically worded entire agreement clause such as cl. 11.2
of the Agreement does not indicate any intention of the parties to depart from the
basic tenets of honest performance: see GEC Marconi Systems Pty Ltd. v. BHP Infor-
mation Technology Pty Ltd., [2003] FCA 50 (AustLII), at para. 922, per Finn J.; see also
O'Byrne, "Good Faith in Contractual Performance: Recent Developments," at p. 96.
[With respect to the two standard objections made by the recognition of a duty of
good faith contractual performance, Cromwell J responded ii1 the following terms:]
[79] Two arguments are typically raised against an increased role for a duty of
good faith in the law of contract: see Bridge; Clark; and Peden, "When Common Law
Trumps Equity: the Rise of Good Faith and Reasonableness and the Demise of
Unconscionability." The first is that "good faith" is an inherently unclear concept that
will permit ad hoc judicial moralism to undermine the certainty of commercial
transactions. The second is that imposing a duty of good faith is inconsistent with
the basic principle of freedom of contract. I do not have to decide here whether or
not th_e se points are valid in relation to a broad, generalized duty of good faith. How-
ever, they carry no weight in relation to adopting a rule of honest performance.
[80] Recognizing a duty of honesty in contract performance poses no risk to
commercial certainty in the law of contract. A reasonable commercial person would
expect, at least, that the other party to a contract would not be dishonest about his
or her performance. The duty is also clear and easy to apply. ...
[81] Any interference by the duty of honest performance with freedom ofcontract
is more theoretical than real. It will surely be rare that parties would wish to agree that
they may be dishonest with each other in performing their contractual obligations.
[82] Those who fear that this modest step would create uncertainty or impede
freedom of contract may take comfort from experience of the civil law of Quebec
and the common and statute law of many jurisdictions in the United States.

[For Cromwell J, the new duty of honest performance was not to be confused
with a duty of disclosure or the existing doctrines of breach of fiduciary duty, fraud
or estoppel:J

704
 Ill. THE DUTY TO PERFORM CONTRACTUAL OBLIGATIONS IN GOOD FAITH

[86] The duty of honest performance that I propose should not be confused with
a duty of disclosure or of fiduciary loyalty. A party to acontract has no general duty
to subordinate his or her interest to that of the other party. However, contracting
parties must be able to rely on a minimum standard of honesty from their contract-
ing partner in relation to performing the contract as a reassurance that if the contract
does not work out, they will have a fair opportunity to protect their interests. That
said, a dealership agreement is not a contract of utmost good faith (uberrimae fidei)
such as an insurance contract, which among other things obliges the parties to
disclose material facts: Whiten. But a clear distinction can be drawn between a failure
to disclose a material fact, even a firm intention to end the contractual arrangement,
and active dishonesty.
[87] This distinction explains the result reached by the court in United Roasters,
Inc. v. Co/gate-Palmolive Co., 649 F.2d 985 (4th Cir. 1981). The terminating party had
decided in advance of the required notice period that it was going to terminate the
contract. The court held that no disclosure of this intention was required other than
what was stipulated in the notice requirement. The court stated:

... there is very little to be sa id in favor of a rule of law that good faith requires one pos-
sessing a right of termination to inform the other party promptly of any decision to
exercise the right. A tenant under a month-to-month lease may decide in January to
vacate the premises at the end of September. It is hardly to be suggested that good faith
requires the tenant to inform the landlord of his decision soon after January. Though
the landlord may have found earlier notice convenient, formal exercise of the right of
termination in August w ill do. [pp. 989-90]

United Roasters makes it clear that there is no unilateral duty to disclose information
relevant to termination. But the situation is quite different, as I see it, when it comes
to actively misleading or deceiving the other contracting party in relation to per-
formance of the contract.
[88] The duty of honest performance has similarities with the existing law in
relation to civil fraud and estoppel, but it is not subsumed by them. Unlike promissory
estoppel and estoppel by representation, the contractual duty of honest performance
does not require that the defendant intend that his or her representation be relied
on and it is not subject to the uncertainty around whether estoppel can be used to
found an independent cause of action: Ryan v. Moore, 2005 SCC 38, [2005] 2 S.C.R.
53, at para. 5; Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 S.C.R. 50; Waddams,
The Law of Contracts, at paras. 195-203; B. MacDougall, Estoppel (2012), at pp. 142-44. As
for the tort of civil fraud, breach of the duty of honest contractual performance does
not require the defendant to intend that the false statement be relied on, and breach
of it supports a claim for damages according to the contractual rather than the tor-
tious measure : see, e.g., Pama v. G. & S. Properties Ltd., [1971] S.C.R. 306, cited with
approval in Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, [2014] 1 S.C.R.
126, at para. 19.
[Finally, Cromwell J rejected the appellant's argument for the recognition of a
more expansive duty of good faith in the following terms:]
(89] Mr. Bhasin, supported by many judicial and academic authorities, has argued
for wholesale adoption of a more expansive duty of good faith in contrast to the
modest, incremental change that I propose: A.F., at para. 51; Summers, at p. 206;
Belobaba; Gateway Realty. In many of its manifestations, good faith requires more
than honesty on the part of a contracting party. For example, in Dynamic Transport,
this Court held that good faith in the context of that contract required a party to take
reasonable steps to obtain the planning permission that was a condition precedent

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to a sale of property. In other cases, the courts have required that discretionary pow-
ers not be exercised in a manner that is "capricious" or "arbitrary": Mason, at p. 487;
Le/Viesurier v. Andrus (1986), 54 O.R. (2d) 1 (C.A.), at p. 7. In other contexts, this Court
has been reluctant to extend the requirements of good faith beyond honesty for fear
of causing undue judicial interference in contracts: Wallace, at para. 76.
[901 It is not necessary in this case to define in general terms the limits of the
implications of the organizing principle of good faith. This is because it is unclear
to me ho.w any broader duty would assist Mr. Bhasin here. After all, the contract was
subject to non -renewal. It is a considerable stretch, as I see it, to turn even a broadly
conceived duty of good faith exercise of the non-renewal provision into what is, in
effect, a contract of indefinite duration. This in my view is the principal difficulty
in the trial judge's reasoning because, in the result, her decision turned a three year
contract that was subject to an express provision relating to non-renewal into a con-
tract of roughly nine years' duration. As the Court of Appeal pointed out, in my view
correctly, "[t]he parties did not intend or presume a perpetual contract, as they
contracted that either party could unilaterally cause it to expire on any third anni-
versary": para. 32. Even if there were a breach of a broader duty of good faith by
forcing the merger, Can-Am's contractual liability would still have to be measured
by reference to the least onerous means of performance, which in this case would
have meant simply not renewing the contract. Since no damages flow from this
breach, it is unnecessary to decide whether reliance on a discretionary power to
achieve a purpose extraneous to the contract and which undermined one of its key
objectives might call for further development under the organizing principle of good
faith contractual performance.
[Applying the new duty of honesty to the present facts, Cromwell J held that the
duty had been breached in several respects by Cam-Am including misrepresenting
its intentions to Mr. Bhasin, misdescribing the role of the PTO and "equivocating"
when asked directly by Mr. Bhasin concerning its intentions with respect to a merger.
The court further held that if Mr. Bhasin had been dealt with honestly, he could have
taken steps to preserve, to some extent at least, the value of his business. Damages
were therefore calculated on the basis of the loss in value of the business directly
attributable to Can-Am's dishonesty, an amount assessed by the trial judge to be
$87,000.00.]

NOTES AND QUESTIONS

1. Is the new duty of honesty in contractual performance an implied term? Of fact? Of law?
Are the other three existing duties implied terms7 Of fact? Of law7
2. For Supreme Court of Canada authority confirming the existence of three different types
of implied terms-of fact, of law, or of custom and usage-see Canadian Pacific Hotels Ltd v
Bank of Montreal, [1987] 1 SCR 711; /Viachtinger v HOJ Industries Ltd, [19921 1 SCR 986. For
discussion of the law of implied contractual terms, see McCamus, ch 19; G Hall, Canadian
Contractual Interpretation Law, 2d ed (Toronto: LexisNexis, 2016), ch 4.
3. In applying the rules supported by the underlying principle of good faith performance, is
one restricted to relying upon the three pre-existing rules requiring good faith and the new
fourth rule requiring honesty in performance?
4. Is it now a rule of contract law that a party must "have appropriate regard for the legit-
imate interests of the contracting partner"?
5. In Bhasin, Cromwell J suggests that the doctrine of unconscionability can be explained
on the basis of the underlying principle requiring good faith contractual performance. Do you
agree?

706
 IV. THE POS ITION OF THE PARTY IN BREACH

6. Do you agree that the two "steps" taken by the Supreme Court in Bhasin represent an
"incremental change in the law"?
7. Is the underlying principle of good faith performance equivalent to or the same thing as
the "policy" underlying the various good faith duties or rules? Are the terms "rules," "duties,"
"principles," and "policies" easily distinguishable? For discussion of possible meanings of the
terms "principle" and "policy" in this context, see SM Waddams, Principle and Policy in Contract
Law: Competing or Complementary Concepts? (Cambridge: Cambridge University Press,
2011), ch 1 and 2.
8. Cromwell J indicated that he "would not rule out any role for the agreement of the par-
ties in influencing the scope of honest performance in a particular context. " What kinds of
provisions might enjoy success in exerting such influence?

IV. THE POSITION OF THE PARTY IN BREACH

JACOB & YOUNGS, INC V KENT

230 NY 239, 129 NE 889 (CA 1921)

CARDOZO J : The plaintiff built a country residence for the defendant at a cost of
upwards of $77,000, and now sues to recover a balance of $3,483.46, remaining
unpaid. The work of construction ceased in June 1914, and the defendant then began
to occupy the dwelling. There was no complaint of defective performance until
March 1915. One of the specifications for the plumbing works provides that "all
wrought-iron pipe must be well galvanized, lap welded pipe of the grade known as
'standard pipe' of Reading manufacture."
The defendant learned in March 1915, that some of the pipe, instead of being made
in Reading, was the product of other factories. The plaintiff was accordingly directed
by the architect to do the work anew. The plumbing was then encased within the
walls .except in a few places where it had to be exposed. Obedience to the order meant
more than the substitution of other pipe. It meant the demolition at great expense
of substantial parts of the completed structure. The plaintiff left the work untouched,
and asked for a certificate that the final payment was due. Refusal of the certificate
was followed by this suit.
The evidence sustains a finding that the omission of the prescribed brand of pipe
was neither fraudulent nor wilful. It was the result of the oversight and inattention
of the plaintiff's subcontractor. Reading pipe is distinguished from Cohoes pipe and
other brands only by the name of the manufacturer stamped upon it at intervals of
between six and seven feet. Even the defendant's architect, though he inspected the
pipe upon arrival, failed to notice the discrepancy. The plaintiff tried to show that the
brands installed, though made by other manufacturers, were the same in quality, in
appearance, in market value and in cost as the brand stated in the contract-that they
were indeed the same thing, though manufactured in another place. The evidence
was excluded, and a verdict directed for the defendant. The Appellate Division
reversed, and granted a new trial.
We think the evidence, if admitted, would have supplied some basis for the infer-
ence that the defect was insignificant in its relation to the project. The courts never
say that one who makes a contract fills the measure of his duty by less than full
performance. They do say, however, that an omission, both trivial and innocent, will
sometimes be atoned for by allowance of the resulting damage, and will not always
be the breach of a condition to be followed by a forfeiture .... The distinction is akin
to that between dependent and independent promises, or between promises and

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conditions .... Some promises are so plainly independent that they can never by fair
construction be conditions of one another. ... Others are so plainly dependent that
they must always be conditions. Others, though dependent and thus conditions
when there is departure in point of substance, will be viewed as independent and
collateral when the departure is insignificant. ... Considerations partly of justice and
partly of presumable intention are to tell us whether this or that promise shall be
placed in one class or in another. The simple and the uniform will call for different
remedies from the multifarious and the intricate. The margin of departure within
the range of normal expectation upon a sale of common chattels will vary from the
margin to be expected upon a contract for the construction of a mansion or a "sky-
scraper." There will be harshness sometimes and oppression in the implication of a
condition when the thing upon which labor has been expended is incapable of
surrender because united to the land, and equity and reason in the implication of a
like condition when the subject-matter, if defective, is in shape to be returned. From
the conclusion that promises may not be treated as dependent to the extent of their
uttermost minutiae without a sacrifice of justice, the progress is a short one to the
conclusion that they may not be so treated without a perversion of intention. Intention
not otherwise revealed may be presumed to hold in contemplation the reasonable
and probable. If something else is in view, it must not be left to implication. There
will be no assumption of a purpose to visit venial faults with oppressive retribution.
Those who think more of symmetry and logic in the development of legal rules
than of practical adaptation to the attainment of a just result will be troubled by a
classification where the lines are so wavering and blurred. Something, doubtless,
may be said on the score of consistency and certainty in favor of a stricter standard.
The courts have balanced such considerations against those of equity and fairness,
and found the latter to be the weightier. The decisions in this state commit us to the
liberal view, which is making its way, nowadays, in jurisdictions slow to welcome it.
Dakin & Co. v. Lee, [1916] 1 KB. 566. Where the line is to be drawn between the import-
ant and the trivial cannot be settled by a formula. "In the nature of the case precise
boundaries are impossible." 2 Williston on Contracts, p. 841. The same omission may
take on one aspect or another according to its setting. Substitution· of equivalents
may not have the same significance in fields of art on the one side and in those of
mere utility on the other. Nowhere will change be tolerated, however, if it is so dom-
inant or pervasive as in any real or substantial measure to frustrate the purpose of
the contract. ... There is no general license to install whatever, in the builder's judg-
ment, may be regarded as "just as good." ... The question is one of degree, to be
answered, if there is doubt, by the triers of the facts, ... and, if the inferences are
certain, by the judges of the law. ...
We must weigh the purpose to be served, the desire to be gratified, the excuse for
deviation from the letter, the cruelty of enforced adherence. Then only can we tell
whether literal fulfillment is to be implied by law as a condition. This is not to say
that the parties are not free by apt and certain words to effectuate a purpose that
performance of every term shall be a condition of recovery. That question is not here.
This is merely to say that the law will be slow to impute the purpose, in the silence
of the parties, where the significance of the default is grieviously out of proportion
to the oppression of the forfeiture . The wilful transgressor must accept the penalty
of his transgression .... For him there is no occasion to mitigate the rigor of implied
conditions. The transgressor whose default is unintentional and trivial may hope for
mercy if he will offer atonement for his wrong.
In the circumstances of this case, we think the measure of the allowance is not
the cost of replacement, which would be great, but the difference in value, which

708
 IV. THE POSITION OF THE PARTY IN BREAC H

would be either nominal or nothing. Some of the exposed sections might perhaps
have been replaced at moderate expense. The defendant did not limit his demand
to them, but treated the plumbing as a unit to be correcte'd from cellar to roof. In
point of fact, the plaintiff never reached the stage at which evidence of the extent of
the allowance became necessary. The trial court had excluded evidence that the defect
was unsubstantial, and in view of that ruling there was no occasion for the plaintiff
to go farther with an offer of proof. We think, however, that the offer, if it had been
made, would not of necessity have been defective because directed to difference in
value. It is true that in most cases the cost of replacement is the measure. The owner
is entitled to the money which will permit him to complete, unless the cost of
completion is grossly and unfairly out of proportion to the good to be attained. When
that is true, the measure is the difference in value. Specifications call, let us say, for
a foundation built of granite quarried in Vermont On the completion of the building,
the owner learns that through the blunder of a subcontractor part of the foundation
has been built of the same quality quarried in New Hampshire. The measure of
allowance is not the cost of reconstruction. "There may be omissions of that which
could not afterwards be supplied exactly as called for by the contract without taking
down the building to its foundations, and at the same time the omission may not
affect the value of the building for use or otherwise, except so slightly as to be hardly
appreciable." ... The rule that gives remedy in cases of substantial performance with
compensation for defects of trivial or inappreciable importance, has been developed
by the courts as an instrument of justice. The measure of the allowance must be
shaped to the same end.
The order should be affirmed, and judgment absolute directed in favour of the
plaintiff upon the stipulation, with costs in an courts.
McLAUGHLIN J: I dissent The plaintiff did not perform its contract Its failure to do
so was either intentional or due to gross neglect which, under the uncontradicted
facts, amounted to the same thing, nor did it make any proof of the cost of compli-
ance, where compliance was possible ....
No explanation was given why pipe called for by the contract was not used, nor
was any effort made to show what it would cost to remove the pipe of other manu-
facturers and install that of the Reading Manufacturing Company. The defendant had
a right to contract for what he wanted. He had a right before making payment to get
what the contract called for. It is no answer to say that the pipe put in was just as good
as that made by the Reading Manufacturing Company, or that the difference in value
between such pipe and the pipe made by the Reading Manufacturing Company would
be either "nominal or nothing." Defendant contracted for pipe made by the Reading
Manufacturing Company. What his reason was for requiring this kind of pipe is of
no importance. He wanted that and was entitled to it It may have been a mere whim
on his part, but even so, he had a right to the kind of pipe, regardless of whether some
other kind, according to the opinion of the contractor or experts, would have been
"just as good, better, or done just as well." He agreed to pay only upon condition that
the pipe installed were made by that company and he ought not to be compelled to
pay unless that condition be performed . ... The rule, therefore, of substantial per-
formance, with damages for unsubstantial omissions, has no application.

QUESTIONS
L What remedy was available to the party in breach in this easel What remedy was avail-
able to the party not in default?

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CHAPTER 8 PERFORMANCE AND BREACH

2. Was the plaintiffs failure to install the correct pipe a breach of a "condition" of the agree-
ment? If the contract plainly stipulated that payment of the final balance was conditional o n
completion of the work in strict compliance with the specificatio ns, would a different resu lt be
wa rranted?

HOENIG V ISAACS
[1952] All ER 176 (CA)

The plaintiff, an interior designer, was employed by the defendant to decorate and
furnish the defendant's apartment for a flat fee . The terms of payment were "net cash,
as the work proceeds, and balance on completion." The defendant paid some install-
ments but refused to pay the balance on the ground that some of the work done and
some of the articles furnished were defective. The defendant resisted payment on
the ground that the complete performance of the agreement was a condition pre-
cedent to the obligation to pay the balance.
SOMERVELL LJ: ... In a contract to erect buildings on the defendant's land for a fomp
sum, the builder can recover nothing on the contract if he stops before the work is
completed in the ordinary sense-in other words, abandons the contract. He is also
usually in a difficulty in recovering on a quantum meruit because no new contract
can be inferred from the mere fact that the defendant remains in possession of his
land; Sumpter v. Hedges . ...
The question here is whether in a contract for work and labour for a lump sum
payable on completion the defendant can repudiate liability under the contract on
the ground that the work though "finished" or "done" is in some respects not in
accordance with the contract. ...
The learned official referee regarded H. Dakin & Co., Ltd. v. Lee as laying down that
the price must be paid subject to set-off or counterclaim if there was a substantial
compliance with the contract. I think on the facts of this case where the work was
finished in the ordinary sense, though in part defective, this is right. ...
DENNING LJ: ... In determining this issue the first question is whether, on the true
construction of the contract, entire performance was a condition precedent to pay-
ment. It was a lump sum contract, but that does not mean that entire performance
was a condition precedent to payment. When a contract provides for a specific sum
to be paid on completion of specified work, the courts lean against a construction
of the contract which would deprive the contractor of any payment at all simply
because there are some defects or omissions. The promise to complete the work is,
therefore, construed as a term of the contract, but not as a condition ....
I would point out that in these cases the question of quantum meruit only arises
when there is a breach or failure of performance which goes to the very root of the
matter. On any lump sum contract, if the work is not substantially performed and
there has been a failure of performance which goes to the root of it, as, for instance,
when the work has only been half done, or is entirely different in kind from that
contracted for, then no action will lie for the lump sum. The contractor can then only
succeed in getting paid for what he has done if it was the employer's fault that the
work was incomplete, or there is something to justify the conclusion that the parties
have entered into a fresh contract. ...
ROMER LJ: ... In certain cases it is right that the rigid rule for which the defendant
contends should be applied, for example, if a man tells a contractor to build a ten
foot wall for him in his garden and agrees to pay £X for it, it would not be right that

710
 IV. THE POSITION OF THE PARTY IN BREACH

he should be held liable for any part of the contract price if the contractor builds the
wan to two feet and then renounces further performance of the contract, or builds
the wan of a totally different material from that which was ordered, or builds it at the
wrong end of the garden. The work contracted for has not been done and the cor-
responding obligation to pay consequently never arises. But when a man fully
performs his contract in the sense that he supplies an that he agreed to supply but
what he supplies is subject to defects of so minor a character that he can be said to
have substantially performed his promise, it is, in my judgment, far more equitable
to apply the H. Dakin & Co., Ltd. v. Lee principle than to deprive him wholly of his
contractual rights and relegate him to such remedy (if any) as he may have on a
quantum meruit.

QUESTIONS
1. Is there a difference between the reason ing of Denning and Romer LJJ 7 Does Romer LJ
take the view that the plaintiff's promise has been performed? Does Denning LJ share this
view? Which approach would be more satisfactory in a case whe re the contract plain ly stipu-
lates that payment is not to be made until completion of the work7
2. A agrees to supply and insta ll a machine for the manufacture of soap chips on B's prem-
ises, payment to be made on completion of the work. When on ly a few remaining steps were
to be made by A to make the machine functional, A declined to finish the work unless he first
received payment from B. Is A entitled to rely on the doctrine of substantia l performance? See
Fairbanks Soap Co Ltd v Sheppard, [1953] 1 SCR 314 (declin ing to apply the doctrine on the
ground that the work was incomplete rather than complete with defects).

CUTTER V POWELL
(1795), 6 TR 320, 101 ER 573 (KB)

To assumpsit for work and labour done by the intestate Cutter, the defendant pleaded
the general issue. And at the trial at Lancaster the jury found a verdict for the plaintiff
for £3110s. subject to the opinion of this court on the following case.
The defendant being at Jamaica subscribed and delivered to T. Cutter the intestate
a note, whereof the following is a copy: "Ten days after the ship Governor Parry,
myself master, arrives at Liverpool, I promise to pay Mr. T. Cutter the sum of thirty
guineas, provided he proceeds, continues and does his duty as second mate in th e
said ship from hence to the port of Liverpool, Kingston, July 31st, 1793." The ship
Governor Parry sailed from Kingston on the 2nd of August, 1793, and arrived in the
port of Liverpool on the 9th of October following. T. Cutter went on board the ship
on the 31st of July, 1793, and sailed in her on the 2nd day of August, and proceeded,
continued and did his duty as second mate in her from Kingston until his death,
which happened on the 20th of September following, and before the ship's arrival
in the port of Liverpool. The usual wages of a second mate of a ship on such a voyage,
when shipped by the month out and home is four pounds per month; but when
seamen are shipped by the run from Jamaica to England, a gross sum is usually
given. The usual length of a voyage from Jamaica to Liverpool is about eight weeks.
ASHURST J: We cannot collect that there is any custom prevailing among merchants
on these contracts; and therefore we have nothing to guide us but the terms of the
contract itself. This is a written contract, and it speaks for itself. And as it is entire,
and as the defendant:s promise depends on a condition precedent to be performed
by the other party, the condition must be performed before the other party is entitled

711
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to receive anything under it. It has been argued however that the plaintiff may now
recover on a quantum meruit: but she has no right to desert the agreement; for
wherever there is an express contract the parties must be guided by it; and one party
cannot relinquish or abide by it as it may suit his advantage. Here the intestate was
by the terms of his contract to perform a given duty before he could call upon the
defendant to pay him anything; it was a condition precedent, without performing
which the defendant is not liable. And that seems to me to conclude the question:
the intestate did not perform the contract on his part; he was not indeed to blame
for not doing it; but still as this was a condition precedent, and as he did not perform
it, his representative is not entitled to recover.
Postea to the defendant: Unless some other information relative to the usage in
cases of this kind should be laid before the Court before the end of this term; but the
case was not mentioned again.
[The opinions of Lord Kenyon CJ and Gross and Lawrence JJ are omitted.]

NOTE

The rights of sailors in circumstances like those in Cutter v Powell are now governed by the
Canada Shipping Act, RSC 1985, c S-9; see especially ss 195-204.

Stubbs v Holywell Railway Company. (1867), LR 2 Ex 311. Stubbs was appointed

consulting engineer to the defendants, to complete the construction of certain
works. The work was to be completed in fifteen months from Dec. 5th, and Stubbs
was to be paid £500 as his salary, in five equal quarterly installments. Stubbs worked
one quarter and was paid £100 in March. He worked for two more quarters, and part
of the fourth quarter when he died. His administrator sued for £200.
MARTIN B: Suppose a man enters into a contract to do a certain piece of work for a
certain sum, then if he die before he completes it, he can recover nothing, not even if
before his death he had done nine-tenths of it. For the contract was for the whole work,
and not for nine-tenths of it. But suppose that the contract is for performance of a
certain piece of work for a certain sum, to be paid at the rate, say of £50 a month, then
the person employed earns £50 at the end of each successive month. It is true that if,
after doing a portion of the work, he refused to do the rest, he might not be able to
recover, because he could not prove that he was ready and willing to perform his part
of the contract. But such a case as the present has no analogy with that of a refusal
by the person employed to continue performance. The contract, no doubt, is ended by
the death of Stubbs, but only in this sense, that the act of God has made further per-
formance impossible .... No vested right of action is taken away by death. The contract
is at an end, but it is not rescinded, for rescission is the act of two parties, not of one.

APPORTIONMENT ACT
RSO 1990, c A.23

3. All rents, annuities, dividends, and other periodical payments in the nature of
income, whether reserved or made payable under an instrument in writing or other-
wise, shall, like interest on money lent, be considered as accruing from day to day,
and are apportionable in respect of time accordingly.
[See also Waddams at paras 604-6.J

712
 IV. THE POS ITION OF T HE PARTY IN BREAC H

SUMPTER V HEDGES
[1898) 1 OB 673 (CA)

The action was for work done and materials provided. The plaintiff, a builder, had
contracted with the defendant to build upon the defendant's land two houses and
stables for the sum of £565. The plaintiff did part of the work, amounting in value to
about £333, and had received payment of part of the price. He then informed the
defendant that he had no money, and could not go on with the work. The learned
judge found that he had abandoned the contract. The defendant thereupon finished
the buildings on his own account, using for that purpose certain building materials
which the plaintiff had left on the ground. The judge gave judgment for the plaintiff
for the value of the materials so used, but allowed him nothing in respect of the work
which he had done upon the buildings.
AL SMITH LJ: ... In this case the plaintiff, a builder, entered into a contract to build two
houses and stables on the defendant's land for a lump sum. When the buildings were
still in an unfinished state the plaintiff informed the defendant that he had no money,
and was not going on with the work any more. The learned judge has found as a fact
that he abandoned the contract. Under such circumstances, what is a building owner
to do? He cannot keep the buildings on his land in an unfinished state for ever. The
law is that, where there is a contract to do work for a lump sum, until the work is
completed the price of it cannot be recovered. Therefore the plaintiff could not
recover on the original contract. It is suggested however that the plaintiff was entitled
to recover for the work he did on a quantum meruit. But, in order that that may be
so, there must be evidence of a fresh contract to pay for the work already done. With
regard to that, the case of fv1unro v. Butt (1858), 8 E. & B. 738; 120 E.R. 274 appears to
be exactly in point. That case decides that, unless the building owner does something
from which a new contract can be inferred to pay for the work already done, the
plaintiff in such a case as this cannot recover on a quantum meruit. In the case of
Lysaght v. Pearson (not reported except in Times Newspaper of March 3, 1879), to
which we have been referred, the case of fv1unro v. Butt does not appear to have been
referred to . There the plaintiff had contracted to erect on the defendant's land two
corrugated iron roofs. When he had completed one of them, he does not seem to
have said that he abandoned the contract, but merely that he would not go on unless
the defendant paid him for what he had already done. The defendant thereupon
proceeded to erect for himself the second roof. The Court of Appeal held that there
was in that case something from which a new contract might be inferred to pay for
the work done by the plaintiff. That is n ot this case. In the case of Whitaker v. Dunn
(1887), 3 Times L.R. 602, there was a contract to erect a laundry on defendant's land,
and the laundry erected was not in accordance with the contract, but the official
referee held that the plaintiff could recover on a quantum meruit. The case came
before a Divisional Court, consisting of Lord Coleridge C.J. and myself, and we said
that the decision in fv1unroe v. Butt applied, and there being no circumstances to
justify an inference of a fresh contract the plaintiff must fail. My brother Collins
thinks that that case went to the Court of Appeal, and that he argued it there, and the
Court affirmed the decision of the Queen's Bench Division. I think the appeal must
be dismissed.
COLLINS LJ: ... I agree. I think the case is really concluded by the finding of the learned
judge to the effect that the plaintiff had abandoned the contract. If the plaintiff had
merely broken his contract in some way so as not to give the defendant the right to
treat him as having abandoned the contract, and the defendant had then proceeded

713
CHAPTER 8 PERFORMANCE AND BREACH

to finish the work himself, the plaintiff might perhaps have been entitled to sue on a
quantum meruit on the ground that the defendant had taken the benefit of the work
done. But that is not the present case. There are cases in which, though the plaintiff
has abandoned the performance of a contract, it is possible for him to raise the infer-
ence of a new contract to pay for the work done on a quantum meruit from the
defendant's having taken the benefit of that work, but, in order that that may be done,
the circumstances must be such as to give an option to the defendant to take or not
to take the benefit of the work done. It is only where the circumstances are such as to
give that option that there is any evidence on which to ground the inference of a new
contract. Where, as in the case of work done on land, the circumstances are such as
to give the defendant no option whether he will take the benefit of the work or not,
then one must look to other facts than the mere taking the benefi~ of the work in order
to ground the inference of a new contract. In this case I see no other facts on which
such an inference can be founded. The mere fact that a defendant is in possession
of what he cannot help keeping, or even has done work upon .it, affords no ground
for such an inference. He is not bound to keep unfinished a building which in an
incomplete state would be a nuisance on his land. I am therefore of opinion that the
plaintiff was not entitled to recover for the work which he had done. I feel clear that
the case of Whitaker v. Dunn to which reference has been made, was the case which
as counsel I argued in the Court of Appeal, and in which the Court dismissed the
appeal on the ground that the case was concluded by Munro v. Butt.
[The appeal was dismissed. The opinion of Chitty LJ to the same effect is omitted.]

QUESTIONS

1. The claim in quantum meruit is evidently restitutionary in nature. In Chapter 2, Section

IX, we briefly examined the development of the law of restitution and the shift from the implied
contract theory of liability to the explanation offered by the unjust enrichment principle. Is the
reasoning in Sumpter v Hedges inconsistent with the reasoning in Deg/man v Guaranty Trust,
examined in Chapter 27
2. Even if a claim on unjust enrichment grounds might be theoretica lly available on the
facts of Sumpter v Hedges, are there reasons of public policy that weigh against granting this
form of relief?
3. Is a lump-sum o r entire contract either explicitly or implicitly an agreement under wh ich
the contractor has agreed to forfeit the va lue of any work done upon failure to complete the
entire work7 In Chapter 6, we considered the enforceability of forfe iture clauses and noted that,
though they are generally enforceable, the decision in Stockloser v Johnson, excerpted in
Chapter 6, developed an exception to the rule. In that case, the English Court of Appeal held
that where moneys have been paid subject to a clause forfeiting the moneys paid if the payer
is unable to complete performance of the agreement, the clause would not be enforceable in
circumstances where the va lu e conferred on the payee is out of all proportion to the loss
sustained by the payee as a result of the breach of contract. Should a similar rule apply to a case
like Sumpter v Hedges? Is there a difference between the receipt of money and the receipt of a
partially constructed bu ilding that might warrant different results in these two different settings?
From this perspective, is it re levant that the defendant in Sumpter v Hedges had contracted to
acquire the work in question? .see also Waddi)ms at paras 604-5 and Maddaugh & McCamus,
ch 19 at 300.

714
 CHAPTE~ NINE

MISTAKE

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715
II. Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717
Ill. The Relationship Between Contract and Tort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 739
IV. Mistake About Contractual Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
V. Mistake in Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . 762
VI. Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 806

I. INTRODUCTION
Even comm itted proponents of freedom of contract recognize that certain information pre-
conditions must be met for a given excha nge to justify enforcement. For example. Milton
Friedman states: "Th e possibility o f co-ordination thro ugh voluntary co - operation rests on the
elementary-yet frequently denied-proposition that both parties to an econom ic transaction
benefit from it, provided the transaction is bilaterally voluntary and informed" (Capitalism and
Freedom (Chicago: University of Chicago Press. 1962) at 13). Economic justifications for private
exchange assume that both parties to an excha ng e are rendered better off by it-in terms of
th e subjectively perceived impact of the exchange on their respective utility functions-or they
would not have entered into it. But if at least one party inaccurately perceives or eva lu ates the
impact of the exchange o n her utility. we can no lo nger be confident that the exchange will in
fact render both parties better off. However. almost no exchange is entered into with absolutely
perfect information by both parties. Thus. if we were to insist on a blanket requ irement of per-
fect information. very few contracts wou ld be enforceable. Autonomy justifications for freedom
o f contract raise compa rable cha llenges- it is difficult to conceive of a choice as autonomous
without basic information about its implications. but, because information is often costly. it
may be rational to choose to fo rgo the acquisition o f further information where its expected
benefits are less than its expected costs.
It is useful to think of information imperfectio ns affecting the contracting process as falling
into two broad categories: (1) asymmetric information imperfections, where one party to a
contract is substa ntially less well informed about some aspect of the contract subject matter
than the other party. and (2) symmetric inform ation imperfections. where both parties are
mistaken about either material facts at the time of contracting or the possible occurrence of
future events that may affect the value of the contract. There is also a hybrid category w here
both parties have information imperfecti ons but w ith respect to different aspects of the con -
tract. Where o ne party has an info rmat ion im perfect ion. there is sa id to be a unilateral mistake.
Where both parties have information imperfect ions of the same type. there is a common
mistake. Thi s situation is sometimes referred to as a mutual mistake but that term is confusing
because it is also the term used to describe the hybrid category of information imperfection.

715
CHAPTER 9 MISTAKE

The mistake might arise because of a misstatement by another person to the mistaken party.
That other person could be-and often is-the other contracting party. The misstatement can
be a negative rather than a positive in the sense of involving a material non-disclosure rather
than an erroneous statement. The misstatement might also involve contexts of incomplete or
partially false statements or true statements that later become false (or vice versa) In all such
situations, the law on "misrepresentation" deals w ith the consequences of the resulting mis-
take . The maker of the misstatement (i.e. of the "misrepresentation") might have deliberately
made it with intent to deceive the recipient (the "representee") in which case it is called a
fraudulent misrepresentation. A fraudulent misrepresentation, by its very nature, will result in
a unilateral mistake. If such knowledge and intent on the part of the maker of the statement are
lacking, then there is what is called an innocent misrepresentation. An innocent misrepresen-
tation may well be a context of common mistake, the maker's being mistaken and conveying
that mistake to the representee. The maker of an innocent misrepresentation ought in many
cases not to have been mistaken, in which case the innocent misrepresentation is better char-
acterized as a negligent misrepresentation.
Misrepresentation cases typically deal with misstatements made before or at the time a con-
tract is entered into, though there is no reason why a misrepresentation made after the contract
is created cannot affect the contract. (See e.g. Mafo v Adams, [1970) 1 OB 548 (CA) .) Despite
Cromwell J's statement to the contrary, the new "duty of honest performance" recognized in
Bhasin v Hrynew, 2014 SCC 71-a duty of contract parties not to "lie or otherwise knowingly
mislead each other about matters directly linked to the performance of the contract" -can be
seen as a new variant of the law on misstatements. (See B MacDougall, Misrepresentation
(Toronto : LexisNexis, 2016) at pp 60-70.) The duty of honest performance and the Bhasin case
are dealt with in Chapter 8.
Where the mistake of a contracting party is not caused by the misstatement of the other
contracting party, the law on "mistake" proper, rather than that of "misrepresentation," is
applicable. Such mistakes can be about various matters to do with the contract:

a. a mistake about the meaning or existence of a term in a contract;

b. a mistake about the nature of the contract ("non est factum");
c. a mistake about assumptions as to significant facts in existence (or not in existence)
when the contract is entered into;
d. a mistake about the identity of the other contracting party (in fact often a subset of
item (c));
e. a mistake about the future course of events and how they might affect the contract;
and
f. a mistake in the written record of an agreement.

This chapter deals with all contexts of misrepresentation, except the duty of honest performance
(which, as already noted, is discussed in Chapter 8), and also with certain types of mistake from
the above list of six items. The items from that list dealt with in this chapter are items (a) and (c) .
Item (b), non est factum, is dealt with in Chapter 5. Item (d), mistaken identity, is dealt with in
Chapter 4. Item (e) is dealt with in Chapter 10. Item (f) is dealt with in Chapter 5, Section Ill.

716
 II. M ISREPRESENTATIONS

II. MISREPRESENTATIONS

GROTIUS, "WHETHER A PROMISE GIVEN UNDER

A MISAPPREHENSION IS BY THE LAW OF NATURE
BINDING, AND TO WHAT EXTENT" (1625)
in Hugo Grotius, The Law of War and Peace, Book II , ch 11, "On Promises,"
section VI, Francis W. Kelsey, trans (Indianapolis, Ind : Bobbs-Merrill, 1925)

[1] The treatment of agreements based on a misapprehension is perplexing enough.

It is, in fact, customary to distinguish between errors which affect the substance of the
matter and those which do not; to consider wheth er a contract was based on fraud or
not, whether the person with whom the contract was made was a party to the fraud,
and whether the act was one of strict justice or only of good faith. For in view of the
diversity of these cases the writers declare some acts void and others binding, but
in such a way that they may be annulled or changed at the choice of the one injured.
The majority of these distinctions come from the Roman law, not only the old
civil law, but also the edicts and decisions of the praetors; and some of them are not
entirely true or accurate.
[2] Now a method of ascertaining the truth according to nature is furnished to
us bythe fact that as regards the force and effect of laws nearly every one agrees that,
if [the application of] a law rests upon the presumption of a certain fact which does
not actually obtain, then th at law does not apply; for the whole foundation for the
[application of the] law is overthrown when the truth of the [alleged] fact fails . The
decision when a law has been based on such a presumption must be inferred from
the substance, words, and circumstances of the law.
In like manner, then, we shall say that, if a promise has been based on a certain
presumption of fact which does not so obtain, by the law of nature it has no force.
For the promisor did not consent to the promise except under a cer:tain condition
which, in fact, did n ot exist. To this principle should be referred the question in the
first book of Cicero's On the Orator, concerning the man who, falsely believing that
his son was dead, had named another as heir.
[3] If, however, the promiser was careless in investigating the matter, or in
expressing his thought, and another has suffered los.s therefrom, the promiser will
be bound to make this loss good, not from the force of the promise, but by reason
of the loss suffered through his fault, a subject which we shall treat below.
On the other hand, if there was an error present indeed, but the promise was n ot
based thereon, the action will be valid, since true consent was not lacking. But in
this case also, if the person to whom the promise is made has by fraud caused the
error, according to that other principle of obligation he will have to make good
whatever loss the promiser has suffered in consequence of the error. If the promise
only in part was based on error, it will be valid as to the remainder.

HEILBUT, SYMONS & CO V BUCKLETON

[1913] AC 30 (H L)

VISCOUNT HALDANE LC: My Lords, the appellants, who were rubber merchants in
London, in the spring of 1910 underwrote a large number of shares in a company called
the Filisola Rubber and Produce Estates, Limited, a company which was promoted
and registered by other persons about that time. They instructed a Mr. Johnston,

717
CHAPTER 9 MISTAKE

who was the manager of their Liverpool business, to obtain applications for shares
in Liverpool. Johnston, who had seen a draft prospec_:tus in London but had at the
time no copy of the prospectus, mentioned the company to several people in Liver-
pool, including a Mr. Wright, who sometimes acted as broker for the respondent.
On April 14 the respondent telephoned to Johnston from Wright's office. As to
what passed there is no dispute. The respondent said "I understand you are bringing
out a rubber company." The reply was "We are." The respondent then asked whether
Johnston had any prospectuses, and his reply was in the negative. The respondent
then asked "if it was all right," and Johnston replied "We are bringing it out," to which
the respondent rejoined "That is good enough for me." He went on to ask hovy many
shares he could have, and to say that he would take almost any number. He explained
in his evidence in chief that his reason for being willing to do this was that the pos-
ition the appellants occupied in the rubber trade was of such high standing that "any
company they should see fit to bring out was a sufficient warranty" to him "that it
was all right in every respect." Afterwards, as the .result of the conversation, a large
number of shares were allotted to the respondent.
About this time the rubber boom of 1910 was at its height and the shares of the
Filisola Company were, and for a short time remained, at a premium. Later on it was
discovered that there was a large deficiency in the rubber trees which were said in
the prospectus to exist on the Filisola Estate, and the shares fell in value. The respond-
ent brought an action against the appellants for fraudulent misrepresentation, and
alternatively for damages for breach of warranty that the company was a rubber
company Whose main object was to produce rubber.
The action was tried at Liverpool Assizes before Lush J . and a special jury. The
jury found that there was no fraudulent representation by the appellants or Johnston,
but they found that the company could not be properly described as a rubber com-
pany, and that the appellants or Johnston, or both, had warranted that the company
was a rubber company ....
[The trial judge allowed damages at £406 Ss. and the Court of Appeal affirmed the
judgment.)
LORD MOULTON: There is no controversy between the parties as to certain points of
fact and of law. It is not contested that the only company referred to was the Filisola
Rubber and Produce Estates Limited, or that the reply of Mr. Johnston to the plaintiff's
question over the telephone was a representation by the defendants that the company
was a "rubber company," whatever may be the meaning of that phrase; nor is there
any controversy as to the legal nature of that which the plaintiff must establish. He
must shew a warranty, i.e., a contract collateral to the main contract to take the shares,
whereby the defendants in consideration of the plaintiff taking the shares promised
that the company itself was a rubber company. The question in issue is whether
there was any evidence that such a contract was made between the parties.
It is evident, both on principle and on authority, that there may be a contract the
consideration for which is the making of some other contract. "If you will make such
and such a contract I will give you one hundred pounds," is in every sense of the
word a complete legal contract. It is collateral to the main contract, but each has an
independent existence, and they do not differ in respect of their possessing to the
full the character and status of a contract. But such collateral contracts must from
their very nature be rare. The effect of a collateral contract such as that which I have
instanced would be to increase the consideration of the main contract by £100, and
the more natural and usual way of carrying this out would be by so modifying the
main contract and not by executing a concurrent and collateral contract. Such col-
lateral contracts, the sole effect of which is to vary or add to the terms of the principal

718
 II. MISREPRESENTATIONS

contract, are therefore viewed with suspicion by the law. They must be proved strictly.
Not only the terms of such contracts but the existence of an animµs contrahendi on
the part of al\ the parties to escape from the full performance of the obligations of
contracts unquestionably entered into by them, and more especially would have the
effect of lessening the authority of written contracts by making it possible to vary them
by suggesting the existence of verbal agreements relating to the same subject-matter.
There is in the present case an entire absence of any evidence to support the
existence of such a collateral contract. The statement of Mr. Johnston in answer to
plaintiff's question was beyond controversy a mere statement of fact, for it was in
reply to a question for information and nothing-more. No doubt it was a representa-
tion as to fact, and indeed it was the actual representation upon which the main case
of the plaintiff rested. It was this representation which he alleged to have been false
and fraudulent and which he alleged induced him to enter into the contracts and
take the shares. There is no suggestion throughout the whole of his evidence that
he regarded it as anything but a representation. Neither the plaintiff nor the defend-
ants were asked any question or gave any evidence tending to shew the existence
of any animus contrahendi other than as regards the main contracts. The whole case
for the existence of a collateral contract therefore rests on the mere fact that the
statement was made as to the character of the company; and if this is to be treated
as evidence sufficient to establish the existence of a collateral contract of the kind
alleged the same result must follow with regard to any other statement relating to
the subject-matter of a contract made by a contracting party prior to its execution.
This would negative entirely the firmly established rule that an innocent representa -
tion gives no right to damages. It would amount to saying that the making of any
representation prior to a contract relating to its subject-matter is sufficient to estab-
lish the existence of a collateral contract that the statement is true and therefore to
give a right to damages if such should not be the case.
In the history of English law we find many attempts to make persons responsible
in damages by reason of innocent misrepresentation, and at times it has seemed as
though the attempts would succeed. On the Chancery side of the Court the decisions
favouring this view usually took the form of extending the scope of the action for
deceit. There was a tendency to recognize the existence of what was sometimes caned
"legal fraud," i.e., that the making of an incorrect statement of fact without reasonable
grounds, or of one which was inconsistent with information which the person had
received or had the means of obtaining, entailed the same legal consequences as
making it fraudulently. Such a doctrine would make a man liable for forgetfulness or
mistake or even for honestly interpreting the facts known to him or drawing conclu -
sions from them in a way which the Court did not think to be legally warranted. The
high water mark of these decisions is to be found in the judgment by the Court of
Appeal in the case of Peek v. Derry (1887), 37 Ch. D. 541, when they laid down that where
a defendant has made a mis-statement of fact and the Court is of opinion that he had
no reasonable grounds for believing that it was true he may be made liable in an
action of deceit if it has materially tended to induce the plaintiff to do an act by which
he has incurred damage. But on appeal to your Lordships' House, this decision was
unanimously reversed, and it was definitely laid down that, in order to establish a
cause of action sounding in damages for misrepresentation, the statement must be
fraudulent or, what is equivalent thereto, must be made recklessly, not caring whether
it be true or not. The 9pinions pronounced in your Lordships' House in that case
shew that both in substance and in form the decision was, and was intended to be,
a reaffirmation of the old common law doctrine that actual fraud was essential to an
action for deceit, and it finally settled the law that an innocent misrepresentation
gives no right of action sounding in damages.

719
CHAPTER 9 . MISTAKE

On the Common Law side of the Court the attempts to make a person liable for
an innocent misrepresentation have usually taken the form of attempts to extend
the doctrine of warranty beyond its just limits and to find that a warranty existed in
cases where there was nothing more than an innocent misrepresentation. The pres-
ent case is, in my opinion, an instance of this. But in respect of the question of the
existence of a warranty the Courts have had the advantage of an admirable enuncia-
tion of the true principle of law which.was made in very early days by Holt C.J. with
respect to the contract of sale. He says [c 1690]: "An affirmation at the time of the sale
is a warranty, provided it appear on evidence to be so intended." So far as decisions
are concerned, this has, on the whole, been consistently followed in the Courts of
Common Law. But from time to time there have been dicta inconsistent with it which
have, unfortunately found their way into textbooks and have given rise to confusion
and uncertainty in this branch of the law. For example, one often sees quoted the
dictum of Bayley J . in Cave v. Coleman 3 Man. & Ry. 2, where, in respect of a repre-
sentation made verbally during the sale of a horse, he says that "being made in the
course of dealing, and before the bargain was complete, it amounted to a warranty" -
a proposition that is far too sweeping and cannot be supported. A still more serious
deviation from the correct principle is to be found in a passage in the judgment of
the Court of Appeal in De Lassalle v. Guildford, [1901] 2 KB. 215, at p . 221, which was
cited to us in the argument in the present case. In discussing the question whether
a representation amounts to a warranty or not the judgment says: "In determining
whether it was so intended, a decisive test is whether the vendor assumed to assert
a fact of which the buyer is ignorant, or merely states an opinion or judgment upon a
matter of which the vendor has no special knowledge, and on which the buyer may
be expected also to have an opinion and to exercise his judgment."
With all deference to the authority of the Court that decided that case, the prop-
osition which it thus formulates cannot be supported. It is clear that the Court did not
intend to depart from the law laid down by Holt C.J . and cited above, for in the same
judgment that dictum is referred to and accepted as a correct statement of the law.
It is, therefore, evident that the use of the phrase "decisive test" cannot be defended.
Otherwise it would be the duty of a judge to direct a jury that if a vendor states a fact
of which the buyer is ignorant, they must, as a matter of law, find the existence of a
warranty, whether or not the totality of the evidence shows that the parties intended
the affirmation to form part of the contract; and this would be inconsistent with the
law as laid down by Holt C.J. It may well be that the features thus referred to in the
judgment of the Court of Appeal in that case may be criteria of value in guiding a
jury in coming to a decision whether or not a warranty was intended; but they can -
not be said to furnish decisive tests, because it cannot be said as a matter of law that
the presence or absence of those features is conclusive of the intention of the parties.
The intention of the parties can only be deduced from the totality of the evidence,
and no secondary principle of such a kind can be universally true.
It is, my Lords, of the greatest importance, in my opinion, that this House should
maintain in its full integrity the principle that a person is not liable in damages for
an innocent misrepresentation, no matter in what way or under what form the attack
is made. In the present case the statement was made in answer to an inquiry for
information. There is nothing which can by any possibility be taken as evidence of
an intention on the part of either or both of the parties that there should be a con-
tractual liability in respect of the statement. It is a representation as to a specific thing
and nothing more. The judge, therefore, ought not to have left the question of war-
ranty to the jury, and if, as a matter of prudence, he did so in order to obtain their
opinion in case of appeal, he ought then to have entered judgment for the defendants
notwithstanding the verdict.

720
 II. MISREPRESENTATIONS

It will, of course, be evident that I have been dealing only with warranty or repre-
sentation relation to a specific thing. This is wholly distinct from the question which
arises when goods are sold by description and their answering to that description
becomes a condition of the contract. It is, in my opinion, a failure to recognize that
in the present case the parties were referring (as is evident by the written contract)
to one specific thing only that led Farwell L.J. to come to a different conclusion from
that to which your Lordships ought, in my opinion, to come in this appeal.

[Order of the Court of Appeal reversed and judgment entered for the appellants.
Viscount Haldane LC and Lord Atkinson also gave reasons for allowing the appeal.]

NOTES AND QUESTIONS

1. If the defendant had sold his own shares to the plaintiff under the circumstances set out
in Heilbut, could the plaintiff have claimed "rescission" of the contract? If the representation
had been held to be a "term" of the contract, would the answer be different7
2. Heilbut was severely criticized by the US scholar Williston in "Representation and War-
ranty in Sales" (1914) 27 Harv L Rev 1. Williston's view was that a misrepresentation inducing a
sale ought always to give the deceived buyer a remedy, even though the representation was
innocent and no intention to contract could be inferred. Williston was the draftsman of the
Uniform Sales Act (1913), and so it is not surprising to find that the definition of warranty in that
Act includes "[a]ny affirmation of fact or any promise by the seller relating to the goods ... if the
natural tendency of such affirmation or promise is to induce the buyer to purchase the goods,
and if the buyer purchases the goods relying thereon." The Uniform Sales Act is now super-
seded by the Uniform Commercial Code. Section 2-313 of the Code provides:

(1) In this section, "immediate buyer" means a buyer that enters into a contract with the
seller.
(2) Express warranties by the seller to the immediate buyer are created as follows:
.(a) Any affirmation of fact or promise made by the seller to the buyer which relates
to the goods and becomes part of the basis of the bargain creates an express warranty
that the goods shall conform to the affirmation or promise.
(3) It is not necessary to the creation of an express warranty that the seller use formal
words such as "warrant" or "guarantee" or that the seller have a specific intention to make a
warranty, but an affirmation merely of the value of the goods or a statement purporting to
be merely the seller's opinion or commendation of the goods does not create a warranty.
(4) Any remedial promise made by the seller to the immediate buyer creates an obliga-
tion that the promise will be performed upon the happening of the specified event.

3. In 2003, s 2-313 of the Code was amended to explicitly deal with remote purchasers of
new goods, in conformity with pre-existing practice and case law. Section 2-313A of the Code
now deals with the "record packaged with or accompanying goods," creating warranties by
affirmative statements in documentation that is packaged with new goods. Section 2-3138
deals with warranties created by "communications to the public," such as advertisements.
Sections 2-313A and 2-3138 both use the term "obligation," rather than "express warranty," to
avoid the implication that the obligation must arise as part of an actual bargaining process.
4. In Rick v Brandsema, 2009 SCC 10, [2009] 1 SCR 295 (summary provided in Chapter 6),
damages in the form of equitable compensation were provided as relief to the party wronged
in an unconscionable bargain. The court, quoting Dusik v Newton (1985), 62 8CLR 1 (CA) at
47, said: "Where rescission is impossible or inappropriate, it would be inequitable for the
defendant to retain the benefits of the unconscionable bargain."

721
CHAPTER 9 MISTAKE

BENTLEY (DICK} PRODUCTIONS LTD V

SMITH (HAROLD} (MOTORS} LTD
[1965] 1 WLR 623, [1965] 2 All ER 65 (CA)

LORD DENNING MR: The accused plaintiff, Mr. Charles Walter Bentley, sometimes
known as Dick Bentley, brings an action against Harold Smith (Motors) . Ltd., for
damages for breach of warranty on the sale of a car. Mr. Bentley had been dealing
with Mr. Smith (to whom I shall refer in the stead of the defendant company) for a
couple of years and told Mr. Smith he was on the look-out for a well vetted Bentley
car. In January 1960, Mr. Smith found one and bought it for £1,500 from a firm in
Leicester. He wrote to Mr. Bentley and said: "I have just purchased a Park Ward power
operated hood convertible. It is one of the nicest cars we have had in for quite a long
time." Mr. Smith had told Mr. Bentley earlier that he was in a position to find out the
history of cars. It appears that with a car of this quality the makers do keep a complete
biography of it.
Mr. Bentley went to see the car. Mr. Smith told him that a German baron had had
this car. He said that it had been fitted at one time with a replacement engine and
gearbox, and had done twenty thousand miles only since it had been so fitted. The
speedometer on the car showed only twenty thousand miles. Mr. Smith said the price
was £1,850, and he would guarantee the car for twelve months, including parts and
labour. That was on the morning of Jan. 23, 1960. In the afternoon Mr. Bentley took
his wife over to see the car. Mr. Bentley repeated to his wife in Mr. Smith's presence
what Mr. Smith had told h im in the morning. In particular that Mr. Smith said it had
done only twenty thousand miles since it had been refitted with a replacement
engine and gearbox. Mr. Bentley took it for a short run. He bought the car for £1,850,
gave his cheque and the sale was concluded. The car was a considerable disappoint-
ment to him. He took it back to Mr. Smith from time to time ....
[His Lordship referred briefly to some work done on the car and continued:]
Eventually he brought this action for breach of warranty. The county court judge
found that there was a warranty, that it was broken, and that the damages were more
than £400, but as the claim was limited to £400, he gave judgment for the plaintiffs
for that amount.
The first point is whether this representation, namely that the car had done twenty
thousand miles only since it had been fitted with a replacement engine and gearbox,
was an innocent misrepresentation (which does not give rise to damages), or
whether it was a warranty. It was said ... in Heilbut, Symons & Co. v. Buckleton [above] :
An affirmation at the time of the sale is a warranty, provided it appear on evidence to
be so intended.

But that Word "intended" has given rise to difficulties. I endeavoured to explain
in Oscar Chess Ltd. v. Williams [(1957] 1 AU ER 325 (CA)] that the question whether a
warranty was intended depends on the conduct of the parties, on their words and
behaviour, rather than on their thoughts. If an intelligent bystander would reasonably
infer that a warranty was intended, that will suffice. What conduct, then? What words
and behaviour, lead to the inference of a warranty?
Looking at the cases once more, as we have done so often, it seems to me that if
a representation is made in the course of dealings for a contract for the very purpose
of inducing the other party to act on it, and it actually induces him to act on it by
entering into the contract, that is prima facie ground for inferring that the represen -
tation was intended as a warranty. It is not necessary to speak of it as being collateral.

722
 IL MISREPRESENTATIONS

Suffice it that the representation was intended to be acted on and was in fact acted
on. But the maker of the representation can rebut this inference if he can show that
it really was an innocent misrepresentation, in that he was in fact innocent of fault
in making it, and that it would not be reasonable in the circumstances for him to be
bound by it. In the Oscar Chess case the inference was rebutted. There a man had
bought a second-hand car and received with it a log-book, which stated the year of
the car, 1948. He afterwards resold the car. When he resold it he simply repeated what
was in the log-book and passed it on to the buyer. He honestly believed on reasonable
grounds that it. was true. He was completely innocent of any fault. There was no war-
ranty by him but only an innocent misrepresentation. Whereas in the present case
it is very different. The inference is not rebutted. Here we have a dealer, Mr. Smith,
who was in a position to know, or at least to find out, the history of the car. He could
get it by writing to the makers. He did not do so. Indeed it was done later. When the
history of this car was examined, his statement turned out to be quite wrong. He
ought to have known better. There was no reasonable foundation for it. ...
The county court judge found that the representations were not dishonest. Mr.
Smith was not guilty of fraud. But he made the statement as to twenty thousand
miles without any foundation . And the judge was well justified in finding that there
was a warranty. He said:
I have no hesitation that as a matter of law the statement was a warranty. Mr. Smith
stated a fact that should be within his own knowledge. He had jumped to a conclusion
and stated it as a fact. A fact that a buyer would act on.
This is ample foundation for the inference of a warranty.
SALMON LJ: I agree. I have no doubt at all that the learned county court judge reached
a correct conclusion when he decided that Mr. Smith gave a_warranty to the second
plaintiff, Mr. Bentley, and that that warranty was broken. Was what Mr. Smith said
intended and understood as a legally binding promise? If so, it was a warranty and
as such may be part of the contract of sale or collateral to it. In effect, Mr. Smith said:
If you will enter into a contract to buy this motor car from me for £1,850, I undertake
that you will be getting a motor car which has done no more than twenty thousand
miles since it was fitted with a new engine and a new gearbox.
I have no doubt at all that what was said by Mr. Smith was so understood and was
intended to be so understood by Mr. Bentley.
[Danckwerts LJ concurred with Lord Denning MR.]
Appeal dismissed.

REDGRAVE V HURD
(1881), 20 ChD 1 (CA)

[The plaintiff, a solicitor, advertised for "a partner, an efficient lawyer and advocate
about forty, who would not object to purchase advertiser's suburban residence." After
entering into an agreement for the purchase of the house, the defendant discovered
that the law practice was "utterly worthless." He gave up possession and refused to
complete the purchase.
The plaintiff brought this action for specific performance. The defendant denied
liability because he had been induced into making the agreements by the plaintiff's

723
CHAPTER 9 MISTAKE

false representations about the law practice made for that purpose. He counter-
claimed for "rescission." At trial, Fry J held for the plaintiff and dismissed the
counterclaim.]
JESSEL MR: ... It only remains to consider ... so much of the counterclaim of the
defendant as asks to have the contract rescinded ....
As regards the rescission of a contract, there was no doubt a difference between
the rules of Courts of Equity and the rules of Courts of Common Law-a difference
which of course has now disappeared by the operation of the Judicature Act, which
makes the rules of equity prevail. According to the decisions of the Courts of Equity
it was not necessary, in order to set aside a contract obtained by material false rep-
resentation, to prove that the party who obtained it knew at the time when the
representation was made that it was false. It was put in two ways, either of which
was sufficient. One way of putting the case was, "A man is not to be allowed to get a
benefit from a statement which he now admits to be false. He is not to be allowed
to say, for the purpose of civil jurisdiction, that when he made it he did not know
it to be false; he ought to have found that out before he made it." The other way of
putting it was this: "Even assuming that moral fraud must be shewn in order to set
aside a contract, you have it where a man, having obtained a beneficial contract by
a statement which he now knows to be false, insists upon keeping that contract. To
do so is a moral delinquency: no man ought to seek to take advantage of his own
false statements." The rule in equity was settled, and it does not matter on which of
the two grounds it was rested. As regards the rule of Common Law there is no doubt
it was not quite so wide. There were, indeed, cases in which, even at Common Law,
a contract could be rescinded for misrepresentation, although it could not be shewn
that the person making it knew the representation to be false. They are variously
stated, but I think, according to the later decisions, the statement must have been
made recklessly and without care, whether it was true or false, and not with the belief
that it was true ....
There is another proposition of law of very great importance . ... If a man is induced
to enter into a contract by a false representation it is not a sufficient answer to him
to say, "If you had used due diligence you would have found out that the statement
was untrue. You had the means afforded you of discovering its falsity, and did not
choose to avail yourself of them." ...
... [Flor when a person makes a material representation to another to induce him
to enter into a contract, and the other enters into that contract, it is not sufficient to
say that the party to whom the representation is made does not prove that he entered
into the contract, relying upon the representation. If it is a material representation
calculated to induce him to enter into the contract, it is an inference of law that he
was induced by the representation to enter into it, and in order to take away his title
to be relieved from the contract on the ground that the representation was untrue,
it must be shewn either that he had knowledge of the facts contrary to the represen -
tation, or that he stated in terms, or shewed clearly by his conduct, that he did not
rely on the representation. If you tell a man, "You may enter into partnership with
me, my business is bringing in between £300 and £400 a year," the man who makes
that representation must know that it is a material inducement to the other to enter
into the partnership, and you cannot investigate as to whether it was more or less
probable that the inducement would operate on the mind of the party to whom the
representation was made. Where you have neither evidence that he knew the facts
to shew that the statement was untrue, or that he said or did anything to shew that
he did not actually rely upon the statement, the inference remains that he did so rely,

724
 II. MISREPRESENTATIONS

and the statement being a material statement, its being untrue is a sufficient ground
for rescinding the contract. ·
[The opinions of Bagga\\ay and Lush LJJ, who concurred in allowing the appeal, are
omitted.)

NEWBIGGING V ADAM
(1886), 34 ChD 582 (CA)

[The plaintiff was induced by the misrepresentation of the defendants as to the

adequacy of some machinery to contribute £10,024 2s. 7d. to a partnership to which
he was admitted. The business proved unsuccessful and this action was brought to
dissolve the partnership and for, among other claims, an order that the defendants
repay the plaintiff £9,279 6s. ld. and indemnify him against all liabilities to which he
had or might become liable in the partnership name. It was so ordered and the
defendants appealed on the ground that this order amounted to damages for inno-
cent misrepresentation.)
BOWEN LJ: ... If we turn to the question of misrepresentation, damages cannot be
obtained at \aw for misrepresentation which is not fraudulent, and you cannot, as it
seems to me, give in equity any indemnity which corresponds with damages. If the
mass of authority there is upon the subject were gone through I think it would be
found that there is not so much difference as is generally supposed between the view
taken at common \aw and the view taken in equity as to misrepresentation. At com -
mon \aw it has always been considered that misrepresentations which strike at the
root of the contract are sufficient to avoid the contract on the ground explained in
Kennedy v. Panana, New Zealand, and Australian Royal Mail Company (1867), L.R. 2 Q.B.
580; but when you come to misrepresentation it seems to me to be this, and nothing
more, that he is entitled to have the contract rescinded, and is entitled accordingly .
to all the incidents and consequences of such rescission. It is said that the injured
party is entitled to be replaced in statu quo. It seems to me that when you are dealing
with innocent misrepresentation you must understand that proposition that he is
to be placed in statu quo with this \imitation-that he is not to be replaced in exactly
the same position in all respects, otherwise he would be entitled to recover damages,
but is to be replaced in his position so far as regards the rights and obligations which
have been created by the contract into which he has been induced to enter. That
seems to me to be the true doctrine, and I think it is put in the neatest way in Red-
grave v. Hurd (1881) 20 Ch. D. 14 ....
Now those ... [rights and obligations) maybe of two kinds. He may get an advan-
tage in the shape of an actual benefit, as when he receives money; he may also get
an advantage if the party with whom he contracts assumes some burthen in con-
sideration of the contract. In such a case it seems to me that complete rescission
would not be effected unless the misrepresenting party not only hands back the
benefits which he has himself received-but also re-assumes the burthen which
under the contract the injured person has taken upon himself. Speaking only for
myself I should not like to lay down the proposition that a person is to be restored
to the position which he held before the misrepresentation was made, nor that the
person injured must be indemnified against loss which arises out of the contract,
unless you place upon the words "out of the contract" the limited and special mean-
.i ng which I have endeavoured to shadow forth. Loss arising out of the contract is a

725
CHAPTER 9 MISTAKE

term which would be too wide. It would embrace damages at common law, because
damages at common law are only given upon the supposition that they are damages
which would naturally and reasonably follow from the injury done. I think Redgrave
v. Hurd shews that it would be too wide, because in that case the Court excluded from
the relief which was given the damages which had been sustained by the plaintiff
in removing his business, and other similar items. There ought, as it appears to me,
to be a giving back and a taking back on both sides, including the giving back and
taking back of the obligations which the contract has created, as well as the giving
back and taking back of the advantages.
[The decisions of Cotton and Fry LJJ concurring in dismissing the appeal are omitted.]

KUPCHAK V DAYSON HOLDINGS LTD

(1965), 53 WWR 65, 53 DLR (2d) 482 (BCCA)

DAVEY JA: The learned trial Judge found that the Kupchaks had been induced by
fraud of the respondents to exchange their Haro Street and North Vancouver prop-
erties for shares of the Palms Motel Ltd., and to give mortgages over land and chattels
of the motel in the sum of $64,500 to Dayson Holdings Ltd. to secure the difference
in the value of the two sets of property. However, he held that the appellants were
not entitled to rescission, because, while they were able to restore to the respondents
the shares in the motel, the respondents could not restore the Haro St. property, as
they had conveyed an undivided one-half interest in it to Marks Estates Ltd. on
October 19, 1960, and as the buildings had been torn down, and a modern apartment
house had been erected . ...
The appellants appeal against the learned trial Judge's refusal to grant rescission,
and the respondents cross-appeal against the finding of fraud and the amount of
damages.
Having read all the evidence of the principal actors in this litigation, I think there is
ample evidence to support the finding of fraud inducing the contract, and there
remains for consideration only the question of the relief to be granted appellants ....
Under the authorities the rE'.spondents' dealing with the Haro St. property, which
they acquired by fraud, ought not to bar rescission of the transaction unless it be
impractical, or so unjust to the respondents that it ought not to be imposed upon a
guilty party.
Equity as an incident of its peculiar remedy of rescission, or under its power to
award compensation, may adjust the rights of the parties by ordering either one to
pay compensation to the other to make good some deficiency in perfect restitution.
It being impractical and unjust to require the respondents upon rescission to
restore the Haro St. property they had acquired from the appellants by fraud, the
respondents ought to compensate the appellants for the property respondents are
allowed to keep, the more so as their dealing with the property was after September
16, 1960, when they had notice of appellants' claim of fraud.
The respondents should also indemnify the appellants against the increase in the
amount of the principal due on the mortgage on the North Vancouver property and
the increase in the rate of interest on the whole principal from 4 1/z% to 7 1/z %: they will
also have to account for the profits realized from the North Vancouver property from
March 31, 1960. On the other hand, the appellants will have to account for any divi-
dends received on the shares of Palms Motel Ltd. and monies, if any, receiyed on the
alleged indebtedness of Palms Motel Ltd. to its shareholders ....

726
 II. MISREPRESENTATIONS

That leads to the question whether the appellants by conduct, word, or silence
have elected to affirm the exchange, and whether their right to rescission is barred
by \aches. If a guilty party intends to allege that his victim has affirmed the contract
or has been guilty of \aches, he must plead and prove those defences to rescission.
But in neither action did the respondents plead these bars to rescission. Nevertheless
these defences were argued before us without objection by the appellants, who did
object, however, that the respondents had not pleaded in bar of rescission that they
could not restore the Haro St. property. Any objection that these defences to rescission
had not been pleaded would fail if the evidence thereon had been fully canvassed
at the trial. But the difficulty is that neither appellants nor respondents directed their
attention at the trial to evidence of election or \aches ....
[Davey JA's discussion of election and \aches has been omitted. The fact that the
Kupchaks retained the shares and continued to manage the hotel did not amount
to an affirmation of the contract, in part because they could not transfer the shares
without the cooperation of the Daysons.]
'
SHEPPARD JA (dissenting): ... In the case at bar the Kupchaks have retained the shares
and have remained on the register which in itself is evidence of affirmation, and the
positive acts of continuing in management of the motel can only be evidence of
asserting rights in respect to the shares and therefore of affirming the transaction.
In Barron v. Kelly (1918), 56 S.C.R. 455, the Court held that there had been an election
to affirm by reason of the purchaser, after learning of the fraudulent misrepresenta -
tions, having made subsequent payments and having made an offer to exchange
whereby he had thereby elected not to rescind. That must be said of the Kupchaks.
[Norris JA concurred with Davey JA.J

NOTES
1. In Samson v Lockwood (1998), 40 OR (3d) 161 (CA), the Ontario Court of Appeal held
that in cases of negligent misrepresentation, a party's lack of awareness of the legal right to
rescind does not necessarily prevent that party from affirming a contract. When the party
affirms the contract after becoming aware of the nature of the misrepresentation, he or she is
bound by the affirmation if the opportunity to seek legal advice was available but was reck-
lessly disregarded.
2. However, in Halleran v O'Neill Brothers Auto Ltd (1971), 1 Nfld & PEIR 455 (CA), the ven-
dors of the car rolled back the odometer to erase 21,000 km before selling it. When the plaintiff
purchaser discovered the fraud, he attempted to sell the vehicle but, when unsuccessful, he
had it fixed to put it in reasonable running order. The court determined that the plaintiff's con-
duct did not amount to affirmation of the contract and was only an attempt to minimize the
damages.
3. In Harrity and Northeast Yachts 1998 Ltd v Kennedy. 2009 NBCA 60, the vendor's agent
represented a boat to be equipped with a "new" engine when. in fact, the engine had been
reconditioned and installed a year earlier to replace the original engine. The agent testified that
when he spoke of "new," he meant "new to the boat." The court reached three findings. First.
the independent survey obtained by the plaintiff (which had not identified any engine prob -
lems) had not been intended to verify the accuracy of the agent's representations and the
purchaser's reliance on the survey did not displace her reliance on the agent's representations.
Accordingly, the agent was liable at common law for negligent misrepresentation. Second, on
the issue of privity (because the agent had not been a party to the contract), the court deter-
mined that the agent would be able to rely on the disclaimer clause. so long as it was found to

727
CHAPTER 9 MISTAKE

be enforceable . This latter point led to the thi rd point, which arose because the disclaimer
clause had not been part of the original contract and was only entered into on the closing of
the transaction . Because no consideration had been provided to the purchaser for its insertion
(and the consequent extinguishment of the purchaser's legal recourse with respect to action -
able misrepresentations). the clause was accordingly declared to be unenforceable.
4. An allegation of fraud is serious and must meet a high burden. In Anderson v British
Columbia Securities Commission, 2004 BCCA 7 at para 29, Mackenzie JA described the stan-
dard of proof for fraud in a civil case :

Fraud is a very serious allegation which carries a stigma and requires a high standard of
proof. While proof in a civil or regulatory case does not have to meet the criminal law stan-
dard of proof beyond a reasonable doubt, it does require evidence that is clear and convincing
proof of the elements of fraud , including the menta l element.

The standard, however, is nonetheless the standard in a civil case, which is on a balance of
probabilities. The Supreme Court of Canada also commented on this standard in FH v /VlcDougall,
2008 SCC 53 , [2008] 3 SCR 41 at para 45, where Rothstein J said :

To suggest that depending upon the seriousness, the evidence in the civil case must be scru-
tinized with greater care implies that in less serious cases the evidence need not be scrutinized
with such care. I think it is inappropriate to say that there are legally recognized different levels
of scrutiny of the evidence depending upon the seriousness of the case. There is only one
legal rule and that is that in all cases. evidence must be scrutinized with care by the trial judge.

Rothstein J went on to say (at para 49):

In the result, I would reaffi rm that in civil cases there is only one standard of proof and that
is proof on a balance of probabilities. In all civil cases, the trial judge must scrutinize the
relevant evidence w ith care to determine whether it is more likely than not that an alleged
event occurred .

(See also Canada (Attorney General) v Fairmont Hotels Inc, 2016 SCC 56, [2016] 2 SCR 720 .)

REDICAN V NESBITT
[1924] SCR 135

[The defendants entered into a contract to purchase a leasehold property from the
plaintiff, represented by Wing, the plaintiff's agent. In due course, an assignment of
lease executed by the plaintiff and assented to by the landlord (the city of Toronto)
was delivered to the defendants' solicitor with the keys to the property; the cheque
of one of the defendants for the purchase money was simultaneously handed to the
plaintiff's solicitor. The defendants also took an assignment of insurance and paid
some arrears of taxes. On inspecting the property two days later, which is said to
have been their first opportunity to do so, they discovered, as they allege, that it had
been misrepresented to them by Wing in several particulars, which they claim are
of such importance that, had they known the truth in regard to them, they would
not have purchased. On learning of these matters they stopped payment of the
cheque given for the purchase money, having first notified the vendor's husband
that that would be done. An action by the vendor was at once begun for the sum of
$2,969 .84, being the balance of account owing under an offer to purchase by the
defendants from the plaintiff and accepted by her.
The defendants by way of counterclaim asked for rescission.]

728
 II. MISREPRESENTATIONS

ANGLIN J: ... In the present case the defendants plead misrepresentation as a ground
both of defence and of counter-claim. They assert that it was fraudulent and, alterna-
tively, that if innocent it was so material as to afford ground for rescission.
The jury negatived fraud and on this branch of the case, if they are not entitled
to have the action dismissed on the other, the defendants ask for a new trial on the
ground of misdirection and refusal by the learned trial judge to submit an essential
element of it to the jury. I defer dealing with that aspect of the appeal.
The jury found that innocent misrepresentations inducing the contract had been
made by the plaintiff's agent, and upon them the defendants maintain they are
entitled to rescission. The trial judge rejected this claim on the ground that the
contract for sale had been fully executed by the delivery of the deed and the accept-
ance of the cheque in payment, and that rescission of a contract after execution
cannot be had for mere innocent misrepresentation unless it be such as renders the
subject of sale different in substance from what was contracted for .... The suggestion
that the property differed so completely in substance from what the defendants
intended to acquire that there was a failure of consideration is not borne out by the
facts. Neither is there any foundation for a suggestion of mutual mistake as a basis
for rescission. Debenham v. Sawbridge [1901] 2 Ch. 98, 109. The trial judge regarded ·
the handing over of the cheque as absolute payment and as a completion of the
contract by the defendants just as the delivery of the conveyance and possession
constituted completion on the part of the plaintiff.
... [The proposition that] "where the conveyance has been executed ... a Court of
Equity will set aside the conveyarn;:e only on the ground of fraud,'' ... is too well
established to admit of controversy, assuming that his Lordship meant where the
contract had been fully carried out. ...
But on the question when a contract will, for the purpose of this rule, be deemed
to have ceased to be "executory" and to have become "executed" the authorities are
not so clear. I have not found any reported case in which it has been determined
whether or not after delivery and acceptance of the conveyance and taking of pos-
session a contract of sale remains "executory" until actual payment of the purchase
money then due; nor indeed have I found any authority in which the contrary has
been categorically determined. In many of the cases it is broadly stated, as it was by
Lord Campbell, that after conveyance rescission will not be granted for innocent
misrepresentation ....

[Anglin J then quoted from a number of text writers and concluded:]

The foundation of the rule that an executed contract will not be rescinded for
innocent misrepresentation appears to be somewhat obscure. In Angel v. Jay, [1911]
1 KB. 666, 671, Darling J . states, apparently without disapproval, the contention of
counsel that "the foundation of the doctrine" is that "when property has passed the
persons concerned cannot be placed in the same position as they were in before
the estate became vested." In numerous cases the vesting of the property has been
referred to as a serious obstacle to rescission. In other cases the supersession of the
contract for sale by the executed conveyance accepted by the purchaser and the
resultant restrict·ion of his rights to those assured by the latter instrument appears
to be the ground upon which rescission of the contract after acceptance of convey-
ance is refused. So far does the court go in maintaining this doctrine that, where
under a court sale the purchase money was still in court, the purchaser who had
accepted the title and taken his conveyance was refused relief in respect of subse-
quently discovered incumbrances.

729
CHAPTER 9 MISTAKE

In the case now before us it is probably unnecessary to determine the effect on

the right of a purchaser to rescission of his acceptance of a conveyance and taking
of possession without making payment. What might have been a formidable obstacle
to the granting of rescission to the defendants was suggested by the trial judge,
namely, the inability of the court to compel the landlord's assent to a re-assignment
of the leasehold to the plaintiff. The effect of the acceptance of the conveyance
assented to by the lessor and of the taking of possession of the property by the
-defendants may have been to give to the lessor rights against them as tenants the
relinquishment of which the court could n ot exact.
Although the execution of the contract does not afford an answer to a claim for
rescission in cases of fraudulent misrepresentation, inability to effect restitutio in
integrum, unless that has become impossible owing to action of the wrong-doer, will
ordinarily preclude rescission. Kerr on Fraud (5th ed.) 387-90. A fortiori is this the case
where innocent misrepresentation only is relied upon ....
But I strongly incline to the view that while the acceptance of the cheque as pay-
ment was in this sense conditional that, if it should be dish onoured, the right to sue
for the money due under the contract would revive, the transaction was, nevertheless,
· intended to be closed and the contract completely executed so far as the purchasers
were.concerned by their taking of the deed and the keys and handing over the cheque.
They had obtained the full consideration for which they contracted and, if the vendor
saw fit to accept the cheque they tendered in payment in lieu of cash, they should not
be heard to say that the contract had not been fully executed. I cannot think that the
vendor's right to have the contract treated as executed and completed can be defeated
by the fact that she took a cheque as the equivalent of a cash payment, and still less by
the accident that the cheque was not presented for payment during the two days
which intervened between the closing of the sale and the stopping of payment.
Without, therefore, necessarily affirming the position taken in the judgment of
the majority of the learned judges of the Appellate Divisional Court, I am of the
opinion that, under all the circumstances of this case, the contract for sale was
executed and that, according to a well-settled rule in equity, rescission for innocent
misrepresentation is not an available remedy for the defendants.
I am clearly of the opinion, however, that a new trial must be directed because
the issue of fraud was not properly presented to the jury. In substance the learned
trial judge charged that, in order to establish fraud, the defendants must show that
Wing actually knew his representations were false. He did not tell the jury that the
representations would be fraudulent if they were false and were made without belief
in their truth, or recklessly, careless whether they were true or false.
[Appeal allowed with costs and a new trial granted; Davies CJ concurred with
Anglin J. The opinions of Idington, Duff, and Mignault JJ are omitted. Although
Idington J agreed in the result he also went beyond the grounds taken by the rest of
the court in that he appeared willing to grant rescission even though the contract
was executed on the apparent ground that the misrepresentation led to an "error in
substantialibus." "I think a difference of a few acres, as therein, is no more important
than the four rooms instead of five as misrepresented and electric light in this case
to the appellants.'']

NOTE

The remedy for agreements that have been induced by innocent misrepresentation is equ it-
able rescission, so long as the contract has not been fully executed (a lthough Canad ian courts
have been lenient with this requirement) and the promisee has moved relatively quickly to

730
 II. MISREPRESENTATIONS

effect a remedy. The Law Reform Act, RSNB 2011, c 184, s 6(1), allows a court to take execution
of a contract into account when determining whether to rescind the contract, but such execu-
tion is not itself to be a bar to rescission. The rule with regard to monetary remedies-namely,
that the victim of an innocent misrepresentation is not able to claim common law damages in
tort-has been problematic at common law. One potential resolution is found in the Principles,
Definitions and Model Rules of European Private Law: Draft Common Frame of Reference,
Outline Edition (Munich: Sellier, 2009) II at 7:201 and 7:212, whic h provides that "a party may
avoid a contract for mistake of fact or law existing when the contract was concluded if ... the
other party caused the mistake," and adds that "the question whether either party has a right
to the return of whatever has been transferred or supplied under a contract which has been
avoided under this section, or a monetary equivalent, is regulated by the rules on unjustified
enrichment."

LEAF V INTERNATIONAL GALLERIES

[1950] 2 KB 86, [1950] 1 All ER 693 (CA)

DENNING LJ: In March 1944, the buyer bought from the sellers an oil painting of
Salisbury Cathedral. On the back of the picture there was a label indicating that it
had been exhibited as a Constable, and during the negotiations for the purchase the
sellers represented that it was a painting by Constable. That representation, the judge
has found, was incorporated as one of the terms of the contract. The receipt for the
price, £85, was given in these terms: "Mar. 6, 1944. One original oil painting Salisbury
Cathedral by J. Constable, £85." Nearly five years later the buyer was minded to sell
the picture. He took it to Christie's to be put into an auction, and he was then advised
that it was not a Constable. So he took it back to the sellers and told them he wanted
to return it and get his money back. They did take the picture back temporarily for
investigation, and they still adhered to the view that it was a Constable. Eventually
the buyer brought a claim in the county court claiming rescission of the contract.
In his particulars of claim he pleaded that the picture had been represented to be a
Constable, and that he had paid £85 in reliance on that representation. The sellers
resisted the claim. After hearing expert evidence the judge found as a fact, and this
must be accepted, that the painting was not by Constable and was worth little.
The question is whether the buyer is entitled to resdnd the contract on that
account. I emphasize that this is a claim to rescind only. There is no claim in this
action for damages for breach of condition or breach of warranty. The claim is simply
one for rescission. At a very late stage before the county court judge counsel for the
buyer did ask for leave to amend by claiming damages for breach of warranty, but
it was not allowed. So no claim for damages is before us. The only question is
whether the buyer is entitled to rescind. The way in which the case is put by counsel
for the buyer is this. He says this was an innocent misrepresentation and that in
equity he is entitled to claim rescission even of an executed contract of sale on that
account. He points out th.a t the judge has found that it is quite possible to restore the
parties to the same position that they were in originally, by the buyer simply handing
back the picture to the sellers in return for the repayment of the purchase price.
In my opinion, this case is to be decided according to the well-known principles
applicable to the sale of goods . This was a contract for the sale of goods. There was
a mistake about the quality of the subject-matter, because both parties believed the
picture to be a Constable, and that mistake was in one sense essential or fundamen -
tal. Such a mistake, however, does not avoid the contract. There was no mistake
about the subject-matter of the sale. It was a specific picture of "Salisbury Cathedral."

731
CHAPTER 9 MISTAKE

The parties were agreed in the same terms on the same subject-matter, and that is
sufficient to make a contract. ... There was a term in the contract as to the quality of
the subject-matter, namely, as to the person by whom the picture was painted-that
it was by Constable. That term of the contract was either a condition or a warranty.
If it was a condition, the buyer could reject the picture for breach of the condition at
any time before he accepted it or was to be deemed to have accepted it, whereas, if it
was only a warranty, he could not reject it but was confined to a claim for damages.
I think it right to assume in the buyer's favour that this term was a condition, and
that, if he had come in proper time, he could have rejected the picture, but the right
to reject for breach of condition has always been limited by the rule that once the
buyer has accepted, or is deemed to have accepted, the goods in performance of
the contract, he cannot thereafter reject, but is relegated to his claim for damages:
see s. ll(l)(c} of the Sale of Goods Act, 1893 .... The circumstances in which a buyer
is deemed to have accepted goods in performance of the contract are set out ins. 35
of the Act which provides that the buyer is deemed to have accepted the goods,
among other things,
... when after the lapse of a reasonable time, he retains the goods without intimating
to the seller that he has rejected them .

In this case this buyer took the picture into his house, and five years passed before
he intimated any rejection. That, I need hardly say, is much more than a reasonable
time. It is far too late for him at the end of five years to reject this picture for breach
of any condition. His remedy after that length of time is for damages only, a claim
which he has not brought before the court.
Is it to be said that the buyer is in any better position by relying on the representa -
tion, not as a condition, but as an innocent material misrepresentation? I agree that
on a contract for the sale of goods an innocent material misrepresentation may in a
proper case be a ground for rescission even after the contract has been executed. The
observations of Joyce J., in Seddon v. North Eastern Salt Co. Ltd., (1905] 1 Ch. 326, are,
in my opinion, too widely stated. Many judges have treated it as plain that an executed
contract of sale may, in a proper case, be rescinded for innocent misrepresentation ....
It is unnecessary, however, to pronounce finally on these matters because, although
rescission may in some cases be a proper remedy, nevertheless it is to be remem-
bered that an innocent misrepresentation is much less potent than a breach of
condition. A condition is a term of the contract of a most material character, and, if
a claim to reject for breach of condition is barred, it seems to me a fortiori that a claim
to rescission on the ground of innocent misrepresentation is also barred. So, assum-
ing that a contract for the sale of goods may be rescinded in a proper case for
innocent misrepresentation, nevertheless, once the buyer has accepted, or is deemed
to have accepted, the goods, the claim is barred. In this case the buyer must clearly
be deemed to have accepted the picture. He had ample opportunity to examine it in
the first few days after he bought it. Then was the time to see if the condition or
representation was fulfilled, yet he has kept it all this time and five years have elapsed
without any notice of rejection. In my judgment, he cannot now claim to rescind,
and the appeal should be dismissed.

732
 II. MISREPRESENTATIONS

O'FLAHERTY V MCKINLEY
[1953] 2 DLR 514 (Nfld CA)

DUNFIELD J: The plaintiff in this case, a young lady who had not owned a car before,
bought a second-hand Hillman sedan in April 1950, from the defendant, who is an
automobile dealer and garageman. She says she wanted and asked for a 1950 model.
He and his staff told her it was a 1950 Hillman, which had gone 4,000 odd miles; that
is admitted. She was charged $1,325, so far as the defendant was concerned.
The defendant says that the previous owner, who traded the car to him against a
Standard "Vanguard" car, for which defendant is agent, told him and his staff it was
a 1950 Hillman, and they accepted that statement. It appears that in 1949 Hillman
redesigned their car. As often happens in a new design, it had some shortcomings,
and these were made good in the 1950 model, but the changes were mostly internal,
and the 1949 and 1950 cars were externally very much alike, and would not be readily
distinguishable except by their own agents. The previous owner, who was in the
witness-box denies that he represented the car to be a 1950 model; but the plaintiff's
counsel accepts the defence position that there was innocent misrepresentation
only. The plaintiff asks for rescission of the contract of sale and the return of her
money including certain collateral expenditures ....
[T]he plaintiff claims a total payment of $1,580.14 with rescission of the contract
of sale . The difference, $255.14, between $1,325 and $1,580.14 is made up of [regis-
tration, insurance, repairs, taxes, and carrying charges].
The defendant counterclaims for $158.53, an unpaid bill for repairs and mainten-
ance done for the plaintiff.
The plaintiff, who was a novice driver, and her two brothers, also novices, drove
the car about 7,000 miles during the summer of 1950. In early September 1950 the
plaintiff happened to can at Adelaide Motors Ltd., who are agents for the Hillman,
and happened to remark that the car was a 1950 model, and was then told that it was
a 1949 model. She forthwith saw her solicitors and instructed them to write repudiat-
ing the contract of sale. The car was not run after that. It was, however, kept out of
doors in the plaintiff's yard, she not having a garage, during the past winter. Defend-
ant says he offered to house the car in his garage for the winter without prejudice
to the rights of either party, but that this offer was refused. Fortunately it was not a
hard winter; but nevertheless a winter in the open is not desirable .
Mr. Furlong K.C., for the defendant, takes the position that rescission cannot be
granted unless the parties can be restored substantially to their original positions,
which is not possible, because the car has done 7,000 miles and been subjected to
a winter's exposure. But as to this, a dealer in the witness-box remarked that mileage
on a second-hand car was not very serious until it began to get up to 15,000 miles.
This car has now done about 11, 700 miles. Again, it is a known fact that a good many
people keep cars in the open during the winter, and most people keep them in
unheated garages. There is evidence that plaintiff's brother started the engine now
and then to keep the battery alive. I hear nothing about the battery freezing ....
A wen-made car ought to be able to go, with proper maintenance, 50,000 to
100,000 miles; therefore it seems to me that the mere increase of the mileage from
4, 700 to 11,700 does not substantially alter the character of the vehicle. It is still a
young car.
But I consider also that the representation as to the year-model of a car is very
material. A car is not just a car. One make may be better than another, and a car of
one year of a certain maker very different in its satisfaction-giving qualities from a
car of the same maker of another year. Evidence in this case indicates that the 1950

733
CHAPTER 9 MISTAKE

Hillman is a much better car than the 1949 Hillman in respect of its internal structure,
regardless of the similarity in appearance; and it may command a better price on
resale. A contract to supply a 1950 model cannot be considered to be satisfied by the
supply of a 1949 model. I think there is what is called an error in substantialibus . ...
I think the contract must be avoided, and that the plaintiff must have her money,
namely, $1,325, back forthwith, without interest, following the Ontario Court of
Appeal in the Addison case; and that the car must be immediately returned to the
defendant. But as to the subsidiary claims of the plaintiff, for registration, insurance,
repairs, tax, and the additional sums paid by her to the finance company, these are
not directly connected with the misrepresentation; she would have had to pay such
charges as these if it had been a 1950 car and not a 1949 car. And on looking over
the bill for repairs and maintenance, after excluding the cost of repairing small dam -
ages which she or her brothers did to the car, I cannot see that there is any excessive
cost; to my mind she paid or is charged no more than anyone might expect to pay
for the maintenance of a second-hand car in good condition running 7,000 miles.
Nor has any effort been made to prove the allegation that the defendant's repair or
maintenance charges are excessive. The defendant must therefore have judgment
for the full amount of his counter-claim on the·repair and maintenance bill.
Let judgment be entered accordingly, with costs to plaintiff on the claim and to
defendant on the counter-claim, the payment into Court not covering the counter-
claim in full.
WINTER J (dissenting): ... The action was based upon innocent misrepresentation, the
statement of th e defendant that the car was a 1950 model. But it is clear that the state-
ment was made in the course of a transaction which resulted in a very simple contract,
a contract of sale, and that it was embodied in the contract as a term thereof. ...
Once the buyer has definitely accepted the goods, he is taken to have elected to
rely upon any claim he may have for damages if any condition is afterwards proved
to have been broken. (I am assuming what cannot be doubted in both cases, that the
representation was a condition and not a mere warranty.) It is too late for him to
claim to repudiate the contract and return the goods. At a certain critical time, before
he finally accepts the goods or notifies the seller to that effect, he is given an election,
a choice between two courses of action. He is supposed to envisage the possibility
of the seller failing to carry out all his promises and any loss he may himself suffer
as a result. He can, if he wish, rely entirely upon his right in that case to recover the
loss. And so he may accept the goods there and then and leave it at that. In a pecuni-
ary sense, in theory at least, he will not suffer. Or he may think it preferable to reject
the goods altogether if they are not what they should be under the contract. For this
purpose h e is allowed a reasonable time in which to satisfy himself on that point,
and that is usually done by an examination of the goods. What is a reasonable time
depends upon the facts and the contract; in the case of unascertained goods it is
usually appreciably longer than where the goods are specific. It follows that if the
reasonable time passes and he does nothing, he is taken to have accepted the goods.
He has m ade his election. He cannot have it both ways.
Applying all this to the present case and to Leaf v. International Galleries, (1950) 1
All E.R. 693, which I purposely include because I can see no essential difference
between them, it is abundantly clear that in both instances the buyer kept the goods
for a much longer time than could be considered reasonable before seeking any
redress. In actual fact, neither buyer made any examination at all. Both clearly elected
to follow the former of the two courses of action I have mentioned. Both chose to
rely entirely upon what the seller had said and both afterwards complained, it seems

734
 II. MISREPRESENTATIONS

to me, almost illogically, that the seller was unreliable and that they should be granted
the election over again ....
I think a distinction must be made between two very different things, though I
have never seen it made in any reported case. It is one thing for a buyer to make a
genuine inspection of goods, or inquiries about them, with a view to satisfying
himself that they are what he wants, and quite another to make up his mind whether
he will choose rejection or damages as a remedy if he should need one. It is the latter,
as I see it, that the Act contemplates when it speaks of a reasonable time, not the
former; or at least, the latter must always be there. The striking feature that I see in
both this case and Leaf v. International Galleries is that they are cases of the latter.
Both buyers made up their minds not to examine at all, and both learned the truth
quite accidentally. In my view both made the election as to the remedy within a very
short time after delivery, if not at that very moment. ...
I have to add one other .observation. It might be argued that, if my view of the
case is correct, the plaintiff is without remedy altogether; that, again as in Leaf v.
International Galleries, she chose to limit her claim to rescission. I think that that view
would be most unfair and in any case is not the true one. The original statement of
claim was confused and it was doubtful whether it claimed rescission or damages.
It was later amended to make it clear that rescission was in fact claimed. I think that,
if there is any doubt whether damages are claimed in the alternative, the Court has
power even now to amend the pleadings to make that clear also. There can be no
doubt whatever, on the facts, that the plaintiff is entitled to damages.

MURRAY V SPERRY RAND CORPORATION

(1979), 96 DLR (3d) 113 (Ont H Ct J)

REID J: This action concerns the purchase by the plaintiff of a forage harvester.
At the relevant times:
(a) Plaintiff was a farmer.
(b) Sperry Rand Corporation was the American manufacturer of the forage harvester.
(c) Sperry Rand Canada Limited was the Canadian distributor of the machine.
(d) Farm Supplies and Services was a business carried on by the late Charles Church
in Barrie, Ontario. It was the New Holland dealer. For convenience I refer to this
company, and the late Charles Church, as "Church."
(e) The forage harvester was the New Holland SP818. "SP" stood for "self-propelled."
A forage harvester simultaneously cuts and chops hay and grass crops. Plaintiff
had been thinking for some time about purchasing a new forage harvester. He
owned one and had used it for some time . It was not a self-propelled type. That is,
it had to be pulled by a tractor. He was particularly interested in a self-propelled type
because he had a back problem. He hoped to avoid having to twist in his seat on the
tractor, a necessary part of pulling a harvester.
He had seen the SP818 in action at a ploughing match and, on a later occasion,
displayed at a stand operated by Church at the 1967 Barrie Fall Fair. He discussed the
machine with Church's salesman Hogarth, who was at the stand. Hogarth gave him
a sales brochure describing the machine. Plaintiff took the brochure home and read
it for several nights. It described the machine's features and performance. He was
particularly interested in the "fineness of the cut," that is to say, the size to which the
machine would chop the crops it harvested. The quality of silage rose as the fineness

735
CHAPTER 9 MISTAKE

increased. He was also interested in the productive capacity of the machine for he
was planning to expand his operations. On these points the brochure said:
You'll fine-chop forage to 3!t6 of an inch ... season after season I
You'll harvest over 45 tons per hour with ease ....
Under test conditions, the big New Holland harvesters have harvested well over
60 tons per hour.
And Micro-Shear cutting action gives you a choice of crop fineness-from 3/i6 of an
inch to 2 114.
In consequence of his interest, Church and Hogarth visited plaintiff's farm. So did
William Hutchinson, a representative of Sperry Rand Canada. In the course of the
conversations that occurred on these visits, plaintiff explained his type of farming
and the operation for which he intended the machine. He received assurances that
the harvester would perform as described in the brochure; that it was ideally suited to
plaintiff's type of farming, and that it would do a better job than his existing machine.
In the result, plaintiff placed an order for the harvester. It was dated September 26,
1967, addressed to Farm Supplies and Services and signed by plaintiff as purchaser.
It was accepted by Hogarth on behalf of Church as vendor. The order was written
out on the date it bears by Hutchinson at plaintiff's farm. This was on the occasion
of a meeting between plaintiff and Hutchinson at plaintiff's farm when the SP818
was discussed at length. The price was $12,600.
The harvester was delivered to plaintiff. He began to use it. This litigation arose
out of his repeated but unsuccessful attempts to operate the harvester at anything
like the promise of the brochure . ...
On the evidence I make the following findings :
(1) Plaintiff was induced to pu rchase the harvester through oral representations
made by the personnel of Church and Sperry Rand Canada and through the
sales brochure prepared and published by Sperry Rand Corporation.
(2) The performance of the machine fell seriously short of that represented in the
sales brochure.
In relation to liability, the real questions in this litigation are not questions
of fact. There is no doubt about the failure of the machine. It was confirmed
very clearly by the evidence of both defendants . Defendants' attempts, par-
ticularly those of Sperry Rand Corporation, to blame the failure of the machine
upon plaintiff were unsuccessful. There is no question in my mind that the
machine failed because of an inherent defect or because the machine was not
suitable for plaintiff's farming conditions, or both . Defe ndant manufacturer
denied that the machine suffered from an inherent defect. Yet it was not able
to explain why in the hands of its own people the machine would not perform
properly.
(3) I find also that the consequence of the machine's failure was damage suffered
by plaintiff.

THE LIABILITY OF CHURCH

Church was a signatory to the purchase-order contract. Plaintiff was induced to sign
that contract by representations made by or on behalf of Church.
Church and his salesman, Hogarth, were familiar with plaintiff's needs. Plaintiff
was given assurances by or on behalf of Church, (1) that the machine was ideal for
his farm and his plans for it, and (2) that it would perform in accordance with the
sales brochure.

736
 II. MISREPRESENTATIONS

There is no doubt in my mind that these representations were fundamental to

his decision to purchase.
There is equally no doubt on the evidence that Church or Hogarth, or both, were
aware of the significance of these assurances. It cannot be suggested that they were
not aware of the conditions in which plaintiff proposed to operate the machine for
they visited the farm and could see for themselves.
I am satisfied that these representations were made with the single purpose of
inducing plaintiff to buy the machine.

THE REPRESENTATIONS AS COLLATERAL WARRANTIES

It has long been the law that an affirmation made with the intention of inducing
contractual relations is a warranty: Heilbut, Symons & Co. v. Buckleton, [1913] AC. 30;
Dick Bentley Productions Ltd. et al. v. Harold Smith (Motors) Ltd., [1965] 2 AU E.R. 65;
Oscar Chess, Ltd. v. Williams, [1957] 1 All E.R. 325, the breach of which creates liability
in damages; Essa Petroleum Co. Ltd. v. Mardon, [1976] 2 AU E.R. 5.
The representations made to plaintiff were, in my opinion, collateral warranties.
The failure of the machine was a clear breach of those warranties. On that ground
Church is liable to plaintiff ....

THE LIABILITY OF THE MANUFACTURER

Sperry Rand Corporation was not a party to the written contract between plaintiff and
Church. It had manufactured the harvester. It had also published the sales brochure.
I refer to it as a sales brochure notwithstanding evidence from an official of Sperry
Rand Corporation that it was not intended to persuade people to buy the machines
it describes . That view is, in my opinion, contradicted by the brochure itself. Its tone
is strongly promotional. It goes far beyond any simple intention to furnish specifica-
tions. It was, in my opinion, a sales tool. It was intended to be one and was used in
this case as one.
The representations contained in it, so far as they related to this litigation, have
already been set out. In the circumstances of this case those representations
amounted to collateral warranties given by the manufacturer.
It is, in my opinion, the law that a person may be liable for breach of a warranty
notwithstanding that he has no contractual relationship with the person to whom
the warranty is given: Shanklin Pier Ltd. v. Detel Products Ltd., [1951] 2 K.B. 854; Traders
Finance Corp. Ltd. v. Haley; Haley v. Ford Motor Co. of Canada Ltd. (1966), 57 D.L.R.
(2d) 15 at p. 18; affirmed [1967] S.C.R. 437, 62 D.L.R. (2d) 329, 60 W.W.R. 497; Andrews
v. Hopkinson, [1957] 1 O.B. 229. See also K.W. Wedderburn, "Collateral Contracts,''
[1959] C.L.J. 48 at p. 68, and Cheshire and Fifoot, The Law of Contract, 7th ed. (1969),
at pp. 54-6.
It has been stressed that the intention behind the affirmations govern. I can see
no difference whether the affirmations are made orally or in writing.
I have given my opinion that the brochure was put out to entice sales. I can see
no other purpose for it. It contained a number of warranties that were proven to be
inaccurate. The breach of these creates liability upon the dealer. I can see no legal
basis for differentiating between dealer and manufacturer in relation to collateral
warranties. The manufacturer initiated the affirmations; it was the manufacturer
who apparently prepared and certainly published the brochure. The dealer would
perforce have to rely on the manufacturer.
The dealer induced a sale through the use of the brochure and thus acquired
liability. Should the manufacturer who published the brochure in an obvious attempt

737
CHAPTER 9 MISTAKE

to induce sales be shielded from liability because it had no direct contact with
plaintiff?
In Shanklin, McNair J. was dealing with a case in which a paint manufacturer
made representations concerning the qualities of its paint to pier owners. Owners
caused the paint to be specified in a contract for painting the pier. The painting
contractors therefore purchased the paint and applied it to the pier. The paint failed.
The owners sued the manufacturers; a mirror image of this case.
McNair J. held that the representations were warranties given by manufacturers
to owners. The defence submitted [at 856] that "in law a warranty could give rise to
no enforceable cause of action except between the same parties as the parties to the
main contract in relation to which the warranty was given."
McNair J . said [at 856]:
In principle his submission seems to me to be unsound. If. as is elementary. the con-
sideration for the warranty in the usual case is the entering into of the main contract in
relation to which the warranty is given, I see no reason why there may not be an enforce-
able warranty between A and B supported by the consideration that B should cause C
to enter into a contract with A or that B should do some other act for the benefit of A.
In other words, manufacturers would have been liable if they had supplied the paint
directly to the owners and were equally liable in supplying the paint indirectly.
I see no significant difference between the oral warranties given by the paint
manufacturer in that case and the written warranties given by the harvester manu -
facturer in this. The intention was the same in both cases, viz., to induce the recipient
of such representations to purchase the product described. I see no real difference
either in the way in which the representations were placed before the prospective
purchasers. Dissemination of a sale brochure through dealers is a wen- known and
normal method of distribution for manufacturers whose products are not sold dir-
ectly to the public. Through the brochure, the manufacturer presents his case to the
potential customer just as directly as he would if they were sitting down together to
discuss the matter.
Plaintiff's purchase from the dealer in this c.a se seems clearly to be "some other
act for the benefit of the manufacturer" contemplated by McNair J .

NOTES
1. In the United Kingdom. the Law Reform Comm ission sought to clarify and simplify the
law of misrepresentation legislatively: see the Misrepresentation Act 1967 (UK). c 7. The Act is
not in force in any Canadian jurisdiction. For a detailed criticism of its provisions. see Atiyah &
Treitel. "M isrepresentation Act. 1967" (1967) 30 Mod L Rev 369.
2. In With v O'F/anagan. [1936] Ch 575 (CA). the vendor physician stated a correct income
for his practice. But. the income became significantly reduced before the contract was con-
cluded because of the vendor's illness. The earlier statement as to income. if made later. would
have been untrue. and Romer LJ thought the vendor had a duty to correct the ignorance of
the recipient of the representation . This result seemed to Romer LJ "so obviously consistent
with the plainest principles of equity." In Xerex Exploration Ltd v Petro-Canada. 2005 ABCA
224. the court said :
Ordinarily in contractual negotiations between sophisticated parties. operating at arm's
length. there is no general duty of disclosure . When a representation is made during the
course of negotiations. however. the party making it must ensure that it is accurate so that
it does not amount to a misrepresentation. This gives rise to a further duty to speak when

738
 Ill. THE RELATIONSHIP BETWEEN CONTRACT AND TORT

silence effectively renders a representation, already made, inaccurate. Having brought a

particular subject up in negotiations, a party assumes a duty to ensure that the other party
is aware of all the material facts relevant to that assertion.

COMPETITION ACT
RSC 1985, c C-34

36(1) Any person who has suffered loss or damage as a result of (a) conduct that is
contrary to any provision of Part VI [s 52 is in part VI] ... may, in any court of competent
jurisdiction, sue for and recover from the person who engaged in the conduct ... an
amount equal to the loss or damage proved to have been suffered by him . ...
52(1) No person shall, for the purpose of promoting, directly or indirectly, the
supply or use of a product or for the purpose of promoting, directly or indirectly, any
business interest, by any means whatever, knowingly or recklessly make a represen-
tation to the public that is false or misleading in a material respect.
(1.1) For greater certainty, in establishing that subsection (1) was contravened, it
is not necessary to prove that (a) any person was deceived or misled ....
(5) Any person who contravenes subsection (1) is guilty of an offence and liable
(a) on conviction on indictment, to a fine in the discretion of the court or to imprison -
ment for a term not exceeding 14 years, or to both; or (b) on summary conviction,
to a fine not exceeding $200,000 or to imprisonment for a term not exceeding one
year, or to both.

NOTES
1. See also the Consumer Protection Act, 2002, SO 2002, c 30, s18, excerpted in Chapter 6,
which may allow damages for innocent misrepresentation. Consumer protection legislation
exists in several provinces-for example, see Alberta 's Fair Trading Act, RSA 2000, c F-2 and
BC's Business Practices and Consumer Protection Act, SBC 2004, c 2.
2. See generally on the law of misrepresentation Waddams, ch 13; McCamus, ch 18; Mac-
Dougall, ch 15; and see B MacDougall, Misrepresentation (Toronto: LexisNexis, 2016).

Ill. THE RELATIONSHIP BETWEEN

CONTRACT AND TORT

HEDLEY BYRNE & CO LTD V HELLER & PARTNERS LTD

[1964] AC 465 (HL)

[The plaintiff, before advancing credit to a third party, asked the defendant banker
for a credit report. The defendant replied, "[Flor your private use and without respon-
sibility on the part of this bank or its officials ... Re [third party]. Respectably constituted
company, considered good for its ordinary business engagements. Your figures are
larger than we are accustomed to see." In reliance on this report the plaintiff advanced
credit and lost a large sum of money when the third party failed to honour its obliga -
tions. The House of Lords held that an action would lie for negligent misrepresentation
causing financial loss, but in this particular case the defendant was protected by the
opening sentence of its report.]

739
CHAPTER 9 MISTAKE

LORD DEVLIN:. The respondents [defendants] in this case cannot deny that they were
performing a service. Their sheet anchor is that they were performing it gratuitously
and therefore no liability for its performance can arise. My Lords, in my opinion this
is not the law A promise given w ithout consideration to perform a service cannot be
enforced as a contract by the promisee; but if the service is in fact performed and done
negligently, the promisee can recover in an action in tort This is the foundation of the
liability of a gratuitous bailee. In the famous case of Coggs v. Bernard (1703), 2 Ld. Raym.
909 where the defendant had charge of brandy belonging to the plaintiff and had spilt
a quantity of it, there was a motion in arrest of judgment "for that it was not alleged
in the declaration that the defendant was a common porter, nor averred that he had
anything for his pains." The declaration was held to be good notwithstanding that there
was not any consideration laid. Gould J. said: "The reason of the action is, the particular
trust reposed in the defendant, to which he has concurred by h is assumption, and in
the executing which he has miscarried by his neglect." This proposition is not limited
to the law of bailment. In Skelton v. London & North Western Railway Co. (1867), L.R. 2
C.P. 631, 636 Willes J. applied it generally to the law of negligence. He said: "Action-
able negligence must consist in the breach of some duty ... if a person undertakes to
perform a voluntary act, he is liable if he performs it improperly, but not if he neglects
to perform it. Such is the result of the decision in the case of Coggs v. Bernard." Likewise
in Banbury v. Bank of /Vlontrea/, [1918] AC. 626, 654 where the bank had advised a cus-
tomer on his investments, Lord Finlay L.C. said: "He is under no obligation to advise,
but if he takes upon himself to do so, he will incur liability if he does so negligently."
The principle has been applied to cases where as a result of the negligence no
damage was done to person or to property and the consequential loss was purely
financial. In Wilkinson v. Coverdale 1 Esp. 75 the defendant undertook gratuitously to
get a fire policy renewed for the plaintiff, but, in doing so, neglected formalities, the
omission of which rendered the policy inoperative. It was held that an action would
lie. In two similar cases the defendants succeeded on the ground that negligence
was not proved in fact. Both cases were thus decided on the basis that in law an
action would lie. In the first of them, Shiells v. Blackburne, 1 H. Bl. 158 the defendant
had, acting voluntarily and without compensation, made an entry of the plaintiff's
leather as wrought leather instead of dressed leather, with the result that the leather
was seized. In Dartnall v. Howard & Gibbs (1825), 4 B. & C. 345 the defendants pur-
chased an annuity for the plaintiff but on the personal security of two insolvent
persons. The court, after verdict, arrested the judgment upon the ground that the
defendants appeared to be gratuitous agents and that it was not averred that they
had acted either w ith negligence or dishonesty.
I agree with Sir Frederick Pollock's note on the case of De La Bere v. Pearson Ltd.
where he said in Contracts, 13th ed., p . 140, that "the cause of action is better regarded
as arising from default in the performance of a voluntary undertaking independent
of contract."
My Lords, it is true that this principle of law has not yet been clearly applied to a
case where the service which the defendant undertakes to perform is or includes
the obtaining and imparting of information. But I cannot see why it should not be:
and if it had not been thought erroneou sly that Derry v. Peek 14 App. Cas. 337 nega -
tived any liability for negligent statements, I think that by now it probably would
have been. It cannot matter whether the information consists of fact or of opinion
or is a mixture of both, nor wh eth er it was obtained as a result of special inquiries or
comes direct from facts already in the defendant's possession or from his general
store of professional knowledge. One cannot, as I have already endeavoured to show,
distinguish in this respect between a duty to inquire and a duty to state.

740
 Ill. THE RELATIONSHIP BETWEEN CONTRACT AND TORT

I think, therefore, that there is ample authority to justify your Lordships in saying
now that the categories of special relationships which may give rise to a duty to take
care in word as well as in deed are not limited to contractual relationships or to
relationships of fiduciary duty, but include also relationships which in the words of
Lord Shaw in Nocton v. Lord Ashburton [1914] AC. 932, 972 are "equivalent to contract,"
that is, where there is an assumption of responsibility in circumstances in which,
but for the absence of consideration, there would be a contract. Where there is an
express undertaking, an express warranty as distinct from mere representation, there
can be little difficulty. The difficulty arises in discerning those cases in which the
undertaking is to be implied. In this respect the absence of consideration is not
irrelevant. Payment for information or advice is very good evidence that it is being
relied upon and that the informer or adviser knows that it is. Where there is no con-
sideration, it will be necessary to exercise greater care in distinguishing between
social and professional relationships and between those which are of a contractual
character and those which are not. It may often be material to consider whether the
adviser is acting purely out of good nature or whether he is getting his reward in
some indirect form. The service that a bank performs in giving a reference is not
done simply out of a desire to assist commerce. It would discourage the customers
of the bank if their deals fell through because the bank had refused to testify to their
credit when it was good.
I have had the advantage of reading all the opinions prepared by your Lordships
and of studying the terms which your Lordships have framed by way of definition of
the sort of relationship which gives rise to a responsibility towards those who act upon
information or advice and so creates a duty of care towards them. I do not under-
stand any of your Lordships to hold that it is a responsibility imposed by law upon
certain types of persons or in certain sorts of situations. It is a responsibility that is
voluntarily accepted or undertaken, either generally where a general relationship,
such as that of solicitor and client or banker and customer, is created, or specifically
in relation to a particular transaction. In the present case the appellants were not, as
in Woods v. Martins Bank Ltd. (1959] 1 O.B. 55 the customers or potential customers
of the bank. Responsibility can attach only to the single act, that is, the giving of the
reference, and only if the doing of that act implied a voluntary undertaking to assume
responsibility. This is a point of great importance because it is, as I understand it, the
foundation for the ground on which in the end the House dismisses the appeal. I do
not think it possible to formulate with exactitude all the conditions under which the
law will in a specific case imply a voluntary undertaking any more than it is possible
to formulate those in which the law will imply a contract. But in so far as your Lord-
ships describe the circumstances in which an implication will ordinarily be drawn,
I am prepared to adopt any one of your Lordships' statements as showing the general
rule; and I pay the same respect to the statement by Denning L.J. in his dissenting
judgment in Candler v. Crane, Christmas & Co. [1951] 2 KB. 164 about the circum-
stances in which he says a duty to use care in making a statement exists.
I do not go further than this for two reasons. The first is that I have found in the
speech of Lord Shaw in Nocton v. Lord Ashburton and in the idea of a relationship
that is equivalent to contract all that is necessary to cover the situation that arises in
this case. Mr. Gardiner does not claim to succeed unless he can establish that the
reference was intended by the respondents to be communicated by the National
Provincial Bank to some unnamed customer of theirs, whose identity was immaterial
to the respondents, for that customer's use. All that was lacking was formal consider-
ation. The case is well within the authorities I have already cited and of which
Wilkinson v. Coverdale is the most apposite example.

741
CHAPTER 9 MISTAKE

I shall therefore content myself with the proposition that wherever there is a
relationship equivalent to contract, there is a duty of care. Such a relationship may
be either general or pa·rticular. Examples of a general relationship are those of solici-
tor and client and of banker and customer. For the former Noc ton v. Lord Ashburton
has long stood as the authority and for the latter there is the decision of Salmon J.
in Woods v. /Vlartins Bank Ltd. which I respectfully approve. There may well be others
yet to be established. Where there is a general relationship of this sort, it is unneces-
sary to do more than prove its existence and the duty follows. Where, as in the present
case, what is relied on is a particular relationship created ad hoc, it will be necessary
to examine the particular facts to see whether there is an express or implied under-
taking of responsibility.
I regard this proposition as an application of the general conception of proximity.
Cases may arise in the future in which a new and wider proposition, quite independ -
ent of any notion of contract, will be needed. There may, for example, be cases in
which a statement is not supplied for the use of any particular person, any more than
in Donoghue v. Stevenson [1932] AC . 562 the ginger beer was supplied for consump-
tion by any particular person; and it will then be necessary to return to the general
conception of proximity and to see whether there can be evolved from it, as was done
in Donoghue v. Stevenson, a specific proposition to fit the case. When that has to be
done, the speeches of your Lordships today as well as the judgment of Denning L.J.
to which I have referred-and also, I may add, the proposition in the American
Restatement of the Law of Torts, Vol. III, p. 122, para. 552, and the cases which exem-
plify it-will afford good guidance as to what ought to be said. I prefer to see what
shape such cases take before committing myself to any formulation, for I bear in
mind Lord Atkin's warning, which I have quoted, against placing unnecessary restric-
tions on the adaptability of English law. I have, I hope, made it clear that I take quite
literally the dictum of Lord Macmillan, so often quoted from the same case, that "the
categories of negligence are never closed." English law is wide enough to embrace
any new category or proposition that exemplifies the principle of proximity.
I have another reason for caution. Since the essence of the matter in the present
case and in others of the same type is the acceptance of responsibility, I should like
to guard against the imposition of restrictive terms notwithstanding that the essential
condition is fulfilled. If a defendant says to a plaintiff: "Let me do this for you; do not
waste your money in employing a professional, I will do it for nothing and you can
rely on me ." I do not think he could escape liability simply because he belonged to
no profession or calling, had no qualifications or special skill and did not hold himself
out as having any. The relevance of these factors is to show the unlikelihood of a
defendant in such circumstances assuming a legal responsibility, and as such they
may often be decisive. But they are not theoretically conclusive and so cannot be
the subject of definition. It would be unfortunate if they were. For it would mean that
plaintiffs would seek to avoid the rigidity of the definition by bringing the action in
contract as in De La Bere v. Pearson Ltd. and setting up something that would do for
consideration. That, to my mind, would be an undesirable development in the law;
and the best way of avoiding it is to settle the law so that the presence or absence of
consideration makes no difference.

742
 Ill THE RELATIONSHIP BETWEEN CONTRACT AND TORT

ESSO PETROLEUM CO LTD V MARDON

[1976] OB 801 (CA)

LORD DENNING MR: "This is," said the judge, "a tragic story of wasted endeavour and
financial disaster.'' It is a long story starting as long ago as 1961, and finishing in 1967.
Since then eight years have been spent in litigation.
In 1961 Esso Petroleum wanted an outlet for their petrol in Southport. They found
a vacant site which was very suitable. It was on Eastbank Street, one of the business
streets of the town. It had already got outline planning permission for a filling station.
Esso thought of putting in a bid for the site. But before doing so, they made calculations
to see if it would be a paying proposition. They made a careful forecast of the "esti-
mated annual consumption" of petrol. This was the yardstick by which they measured
the worth of a filling station. They called it the "e.a.c.'' In this case they estimated that
the throughput of petrol would reach 200,000 gallons a year by the second year after
development. This would accrue to their benefit by sales of petrol. In addition, they
would get a substantial rental from a tenant. On May 25, 1961, the Esso local repre-
sentatives recommended the go ahead. They gave the figures, and said: "We feel
most strongly that this does genuinely represent a first-class opportunity of gaining
representation in the centre of Southport." On that recommendation Esso bought
the site and proceeded to erect a service station.
But then something happened which falsified all their calculations. Esso had
thought that they could have the forecourt and pumps fronting on to the busy main
street. But the Southport Corporation, who were the planning authority, refused to
allow this. They insisted that the station should be built "back to front.'' So that only the
showroom fronted on to the main street. The forecourt and pumps were at the back
of the site and only accessible by side streets. They could not be seen from the main
street. Esso had no choice but to comply with these planning requirements. They
built the station "back to front." It was finished early in 1963.
Now at this point Esso made an error which the judge described as a "fatal error.''
They did not revise their original estimate .which they had made in 1961. They still
assessed the e .a.c. (estimated annual consumption) of petrol at 200,000 gallons.
Whereas they should have made a reappraisal in the light of the building being now
"back to front." This adversely affected the site's potential: because passing traffic
could not see the station. It would reduce the throughput greatly. The judge found
that this "fatal error" was due to want of care on the part of Esso. There can be no
doubt about it.
It was under the influence of this "fatal error" that Esso sought to find a tenant for
the service station. They found an excellent man, Mr. Philip Lionel Mardon. He was
seen by Esso's local manager, Mr. Leitch. Now Mr. Leitch had had 40 years' experi-
ence in the petrol trade. It was on his calculations and recommendations that Esso
had bought this site and developed it. At the decisive interview Mr. Leitch was
accompanied by the new area manager, Mr. Allen. I will give what took place in the
words of the judge:
Mr. Mardon was told that Esso estimated that the throughput of the Eastbank Street site,
in its third year of operation, would amount to 200,000 gallons a year. I also find that
Mr. Mardon then indicated that he thought 100,000 to 150,000 gallons would be a more
realistic estimate, but he was convinced by the far greater expertise of, particularly,
Mr. Leitch . Mr. Allen is a far younger man and, although on his appointment as manager
for the area I am satisfied he made his own observations as to the potentiality of the
Eastbank Street site, in the result he accepted Mr. Leitch's estimate. Mr. Mardon, having
indicated that he thought that a lower figure would be a more realistic estimate, had

743
CHAPTER 9 MISTAKE

his doubts quelled by the experience and the estimate furnished by Mr. Leitch, and it
was for that reason, I am satisfied, because of what he was told about the estimated
throughput in the third year, that he then proceeded to negotiate for and obtain the
grant of a three-year tenancy at a rent of £2,500 a year for the first two years, rising to
£3,000 yearly in the last year.
To the judge's summary, I would only add a few questions and answers by Mr. Allen
in evidence:
0 . Now we know that the person who originally put forward this estimated 200,000
gallons forecast was Mr. Leitch? A. Yes.
0. Would somebody have checked Mr. Leitch's figures before they reached
you? A. Oh, very much so ....
0 . You have told my Lord that you accept that, at that interview ... you might have
said that Eastbank was capable of achieying a throughput of 200,000 gallons after the
second complete year? A. Yes.
0. Would that have been your honest opinion at the time? A. Most certainly.

All the dealings were based on that estimate of a throughput of 200,000 gallons.
It was on that estimate that Esso developed the site at a cost of £40,000: and that the
tenant agreed to pay a rent of £2,500, rising t.o £3,000. A few answers by Mr. Allen
will show this:
0. Would ~ou agree that the potential throughput of a station is an important factor
in assessing what rent to charge a tenant? A Yes ....
0 . The rent would be substantially higher if your estimate was one of 200,000 gal-
lons than if your estimate was one of 100,000 gallons? A. Generally speaking, that is
right. ...
0. You would be able to command a higher rent if the throughput was 200,000
than if it was 100,000? A. Had it been an estimated throughput of 100,000 gallons,
they [Esso] would not have bought it in the first place.
Having induced Mr. Mardon to accept, Mr. Leitch and Mr. Allen sent this telegram
to their head office: "We have interviewed a Mr. Philip Lionel Mardon for tenancy
and find him excellent in all respects . We recommend strongly that he be granted
tenancy." So a tenancy was granted to Mr. Mardon. It was dated April 10, 1963, and
was for three years at a rent of £2,500 for the first two years, and £3,000 for the third
year. It required him to keep open all day every day of the week, including Sunday.
It forbade him to assign or underlet.
On the next day Mr. Mardon went into occupation of the service station and did
everything that could be desired of him. He was an extremely good tenant and he
tried every method to increase the sales and profitability of the service station. Esso
freely acknowledge this .
But the throughput was most disappointing. It never got anywhere near the
200,000 gallons. Mr. Mardon put all his available capital into it. It was over £6,000.
He raised an overdraft with the bank and used it in the business. He put all his work
and endeavour into it. No one could have done more to make it a success. Yet when
the accounts were taken for the first 15 months, the throughput was only 78,000
gallons. After paying all outgoings, such as rent, wages and so forth, there was a net
loss of £5,800. The position was so serious that Mr. Mardon felt he could not continue.
On July 17, 1964, he wrote to Mr. Allen: "I reluctantly give notice to quit forthwith.
This is an endeavour to salvage as much as I can in lieu of inevitable bankruptcy."
Mr. Allen did not reply in writing, but saw Mr. Mardon. As a result he put in a written
report to his superiors recommending that Mr. Mardon's rent should be reduced to

744
 Ill. THE RELATIONSHIP BETWEEN CONTRACT AND TORT

£1,000 a year, plus a surcharge according to the amount of petrol sold. Mr. Allen
telexed to his superiors on several occasions pressing for a decision. It culminated
in a telex he sent on August 28, 1964: "Unless we hear soon the tenant is likely to
resign and we will have difficulty in replacing this man with a tenant of the same
high standard." This brought results. On September 1, 1964, a new tenancy agreement
was made in writing. It granted Mr. Mardon a tenancy for one year certain and
thereafter determinable on three months' notice. The rent was reduced to £1,000 a
year, and a surcharge of ld. to 2d. a gallon, according to the amount sold.
Again Mr. Mardon tried hard to make a success of the service station: but again
he failed. It was not his fault. The site was simply not good enough to have a through-
put of more than 60,000 or 70,000 gallons. He lost more and more money over it. In
order to help him, Esso tried to get another site for him-a "cream" site-so that he
could run the two sites in conjunction to offset his losses. But they never found him
one. Eventually on January 1, 1966, he wrote to Esso appealing to them to find a solu -
tion. He consulted solicitors who wrote on his behalf. But Esso did nothing to help.
Quite the contrary. They insisted on the petrol being paid for every day on delivery.
On August 28, 1966 (by some mistake or misunderstanding while Mr. Mardon was
away), they came and drained his tanks of petrol and cut off his supplies. That put
him out of business as a petrol station. He carried on as best he could with odd jobs
for customers, like washing cars. Esso had no pity for him. On December 1, 1966,
they issued a writ against him claiming possession and £1,333 13s. 9d. for petrol
supplied. This defeated him. On March 7, 1967, he gave up the site. He had tried for
four years to make a success of it. It was all wasted endeavour. He had lost all his
capital and had incurred a large overdraft. It was a financial disaster.
Such being the facts, I turn to consider the law. It is founded on the representation
that the estimated throughput of the service station was 200,000 gallons. No claim
can be brought under the Misrepresentation Act 1967, because that Act did not come
into force until April 22, 1967: whereas the representation was made in April 1963.
So the claim is put in two ways. First, that the representation was a collateral warranty.
Second, that it was a negligent misrepresentation. I will take them in order.

COLLATERAL WARRANTY

Ever since Heilbut, Symons & Co. v. Buckleton [1913] AC. 30, we have had to contend
with the law as laid down by the House of Lords that an innocent misrepresentation
gives no right to damages. In order to escape from that rule, the pleader used to
allege-I often did it myself-that the misrepresentation was fraudulent, or alternac
tively a collateral warranty. At the trial we nearly always succeeded on collateral
warranty. We had to reckon, of course, with the dictum of Lord Moulton, at p. 47, that
"such collateral contracts must from their very nature be rare." But more often than
not the court elevated the innocent misrepresentation into a collateral warranty: and
thereby did justice-in advance of the Misrepresentation Act 1967. I remember scores
of cases of that kind, especially on the sale of a business. A representation as to the
profits that had been made in the past was invariably held to be a warranty. Besides
that experience, there have been many cases since I have sat in this court where we
have readily held a representation-which induces a person to enter into a contract-
to be a warranty sounding in damages . I summarised them fn Dick Bentley Produc-
tions Ltd. v. Harold Smith (/Vlotors) Ltd. [1965] 1 W.L.R. 623, 627, where I said:

Looking at the cases once more, as we have done so often, it seems to me that if a
representation is made in the course of dealings for a contract for the very purpose
of inducing the other party to act upon it, and actually inducing him to act upon it, by

745
CHAPTER 9 MISTAKE

entering into the contract. that is prima facie ground for inferring that it was intended
as a warranty. It is not necessary to speak of it as being collateral. Suffice it that it was
intended to be acted upon and was in fact acted on .

Mr. Ross-Munro, retaliated, however, by citing Bisset v. Wilkinson [1927] AC. 177,
where the Privy Council said that a statement by a New Zealand farmer that an area
of land "would carry 2,000 sheep" was only an expression of opinion. He submitted
that the forecast here of 200,000 gallons was an expression of opinion and not a
statement of fact: and that it could not be interpreted as a warranty or promise.
Now I would quite agree with Mr. Ross-Munro that it was not a warranty- in this
sense-that it did not guarantee that the throughput would be 200,000 gallons. But,
nevertheless, it was a forecast made by a party-Esso-who had special knowledge
and skill. It was the yardstick (the e.a.c.) by which they measured the worth of a filling
station. They knew the facts. They knew the traffic in the town. They knew the
throughput of comparable stations. They had much experience and expertise at their
disposal. They were in a much better position than Mr. Mardon to make a forecast.
It seems to me that if such a person makes a forecast, intending that the other should
act upon it-and he does act upon it, it can well be interpreted as a warranty that the
forecast is sound and reliable in the sense that they made it with reasonable care
and skill. It is just as if Esso said to Mr. Mardon: "Our forecast of throughput is 200,000
gallons. You can rely upon it as being a sound forecast of what the service station
should do. The rent is calculated on that footing." If the forecast turned out to be an
unsound forecast such as no person of skill or experience should have made, there
is a breach of warranty. Just as there is a breach of warranty when a forecast is
made-"expected to load" by a certain date-if the maker has no reasonable grounds
for it: see Samuel Sanday and Co. v. Keighley, Maxted and Co. (1922) 27 Com. Cas. 296;
or bunkers "expected 600/700 tons": see Efploia Shipping Corporation Ltd. v. Canadian
Transport Co. Ltd. (The Pantanassa) [1958] 2 Lloyd's Rep. 449, 455-457 by Diplock J.
It is very different from the New Zealand case where the land had never been used
as a sheep farm and both parties were equally able to form an opinion as to its carry-
ing capacity: see particularly Bisset v. Wilkinson [1927] AC. 177, 183-184.
In the present case it seems to me that there was a warranty that the forecast was
sound, that is, Esso made it with reasonable care and skill. That warranty was broken.
Most negligently Esso made a "fatal error" in the forecast they stated to Mr. Mardon,
and on which he took the tenancy. For this they are liable in damages. The judge,
however, declined to find a warranty. So I must go further.

NEGLIGENT MISREPRESENTATION

Assuming that there was no warranty, the question arises whether Esso are liable for
negligent misstatement under the doctrine of Hedley Byrne & Co. Ltd. v. Heller & Partners
Ltd. [1964] AC. 465. It has been suggested that Hedley Byrne cannot be used so as to
impose liability for negligent pre-contractual statements: and that, in a pre-contract
situation, the remedy (at any rate before the Act of 1967) was only in warranty or
nothing. Thus in Hedley Byrne itself Lord Reid said, at p. 483 : "Where there is a con-
tract there is no difficulty as regards the contracting parties: the question is whether
there is a warranty." And in Oleificio Zucchi S.P.A. v. Northern Sales Ltd. [1965] 2 Lloyd's
Rep. 496, 519, McNair J . said: " ... [A]s at present advised, I consider the submission
advanced by the buyers, that the ruling in ... [Hedley Byrne, [1964] AC. 465] applies
as between contracting parties, is without foundation."
As against these, I took a different view in Mcinerny v. Lloyds Bank Ltd. [1974] 1
Lloyd's Rep. 246, 253 when I said: " ... [I]f one person, by a negligent misstatement,

746
 Ill. THE RELATIONSHIP BETWEEN CONTRACT AND TORT

induces another to enter into a contract-with himself or with a third person-he

may be liable in damages."
In arguing this point, Mr. Ross-Munro took his stand in this way. He submitted
that when the negotiations between two parties resulted in a contract between them,
their rights and duties were governed by the law of contract and not by the law of
tort. There was, therefore, no place in their relationship for Hedley Byrne [1964) AC.
465, which was solely on liability in tort. He relied particularly on Clark v. Kirby-Smith
[1964) Ch. 506 where Plowman J. held that the liability of a solicitor for negligence
was a liability in contract and not in tort, following the observations of Sir Wilfrid
Greene M.R. in Groom v. Crocker [1939] 1KB.194, 206. Mr. Ross-Munro might also
have cited Bagot v. Stevens Scanlan & Co. Ltd. [1966] 1 Q.B. 197, about an architect;
and other cases too. But I venture to suggest that those cases are in conflict with
other decisions of high authority which were not cited in them. These decisions
show that, in the case of a professional man, the duty to use reasonable care arises
not only in contract, but is also imposed by the law apart from contract, and is there-
fore actionable in tort. It is comparable to the duty of reasonable care which is owed
by a master to his servant, or vice versa. It can be put either in contract or in tort: see
Lister v. Romford Ice and Cold Storage Co. Ltd. [1957] AC. 555, 587 by Lord Radcliffe
and Matthews v. Kuwait Bechtel Corporation [1959] 2 Q.B. 57. The position was stated
by Tindal C.J., delivering the judgment of the Court of Exchequer Chamber in Boor-
man v. Brown (1842) 3 O.B. 511, 525-526:

That there is a large class of cases in which the foundation of the action springs out of
privity of contract between the parties, but in which, nevertheless, the remedy for the
breach, or non-performance, is indifferently either assumpsit or case upon tort, is not
disputed . Such are actions aga inst attorneys, surgeons, and other professional men, for
want of competent skill or proper care in the service they undertake to render: ... The
principle in all these cases would seem to be that the contract creates a duty, and the
neglect to perform that duty, or the nonfeasance, is a ground of action upon a tort.
That decision was affirmed in the House of Lords in (1844) 11 Cl. & Fin. 1, when
Lord Campbell, giving the one speech, said, at p. 44: " ... [W]herever there is a contract,
and something to be done in the course of the employment which is the subject of
that contract, if there is a breach of a duty in the course of that employment, the
plaintiff may either recover in tort or in contract."
To this there is to be added the high authority of Viscount Haldane L.C., in Nocton
v. Lord Ashburton [1914] AC. 932, 956: " ... [T]he solicitor contracts with his client to
be skilful and careful. For failure to perform his obligation he may be made liable at
law in contract or even in tort, for negligence in breach of a duty imposed on him."
That seems to me right. A professional man may give advice under a contract for
reward; or without a contract, in pursuance of a voluntary assumption of respon -
sibility, gratuitously without reward . In either case he is under one and the same
duty to use reasonable care: see Cassidy v. Ministry of Health [1951] 2 K.B. 343, 359 -360.
In the one case it is by reason of a term implied by law. In the other, it is by reason
of a duty imposed by law. For a breach of that duty he is liable in damages: and those
damages should be, and are, the same, whether he is sued in contract or in tort.
It follows that I cannot accept Mr. Ross-Munro's proposition. It seems to me that
Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC. 465, properly understood,
covers this particular proposition: if a man, who has or professes to have special
knowledge or skill, makes a representation by virtue thereof to another-be it advice,
information or opinion-with the intention of inducing him to enter into a contract
with him, he is under a duty to use reasonable care to see that the representation is

747
CHAPTER 9 MISTAKE

correct, and that the advice, information or opinion is reliable. If he negligently gives
unsound advice or misleading information or expresses an erroneous opinion, and
thereby induces the other side to enter into a contract with him, he is liable in dam-
ages. This proposition is in line with what I said in Candler v. Crane, Christmas & Co.
[1951] 2 KB. 164, 179-80, which was approved by the majority of the Privy Council
in Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt [1971] AC. 793. And the judges
of the Commonwealth have shown themselves quite ready to apply Hedley Byrne
[1964] AC. 465, between contracting parties; see ... Sea/and of the Pacific Ltd. v. Ocean
Cement Ltd. (1973) 33 D.L.R. (3d) 625; and ... Capital Motors Ltd. v. Beec/'}am [1975] 1
N.Z.L.R. 576.
Applying this principle, it is plain that Esso professed to have-and did in fact
have-special knowledge or skill in estimating the throughput of a filling station.
They made the representation-they forecast a throughput of 200,000 gallons-
intending to induce Mr. Mardon to enter into a tenancy on the faith of it. They made
it negligently. It was a "fatal error." And thereby induced Mr. Mardon to enter into a
contract of tenancy that was disastrous to him. For this misrepresentation they are
liable in damages.

THE MEASURE OF DAMAGES

Mr. Mardon is not to be compensated for "loss of a bargain." He was given no bargain
that the throughput would amount to 200,000 gallons a year. He is only to be com-
pensated for having been induced to enter into a contract which turned out to be
disastrous for him. Whether it be called breach of warranty or negligent misrepre-
sentation, its effect was not to warrant the throughput, but only to induce him to
enter the contract. So the damages in either case are to be measured by the loss he
suffered. Just as in Doyle v. Olby (Ironmongers) Ltd. [19691 2 O.B. 158, 167 he can say:
" ... I would not have entered into this contract at all but for your representation.
Owing to it, I have lost all the capital I put into it. I also incurred a large overdraft.
I have spent four years of my life in wasted endeavour without reward: and it will
take me some time to re-establish myself."
For all such loss he is entitled to recover dam.ages. It is to be measured in a similar
way as the loss due to a personal injury. You should look into the future so as to
forecast what would have been likely to happen if he had never entered into this
contract: and contrast it with his position as it is now as a result of entering into it.
The future is necessarily problematical and can only be a rough-and-ready estimate.
But it must be done in assessing the loss.
[Ormrod and Shaw LJJ agreed.]

NOTES AND QUESTIONS

1. The "special relationships which may give rise to a duty to take care," as articulated in
Hedley Byrne, are not limited to professional advisers, but only in exceptional cases, such as in
Essa Petroleum v Mardon, do they apply "between counterparties in a commercial context,"
because "as between commercial counterparties, a representor is in general less likely to know
that the Claimant is relying upon its representation, and it is less likely to be reasonable for the
Claimant to rely upon the Defendant." See ParOS pie v World/ink Group pie, [2012] EWHC 394
(Comm) at paras 103, 107. Special relationships can arise in a number of different contexts. In
Krawchuk v Scherbak, 2011 ONCA 352, 106 OR (3d) 598, the court found a special relationship
giving rise to a duty of care between vendors of a home who had made particular comments on
the Seller Property Information Sheet with respect to the property. And in Albionex (Overseas)

748
 IV. MISTAKE ABOUT CONTRACTUAL TERMS

Ltd v Conagra Ltd, 2011 MBCA 95, [2011] MJ No 412 (OL), the court found that the Canadian
Wheat Board had a specia l relationship with potential purchasers for whom it prepared an
information letter and type samples "for the express purpose of informing potential purchasers
around the world of the ava ilability and quality of [Wheat- Ex. Special Bin]. "
2. In Esso Petroleum v Mardon, [1976 ] OB 801 (CA). excerpted above, the court held that
Esso was liable on the basis of negligent misrepresentation. It also held that the same facts could
support a claim either in contract or in tort. The view of the majority of the Supreme Court of
Canada in J Nunes Diamonds Ltd v Dominion Electric Protection Company, [1972] SCR 769,
26 DLR (3d) 699, that a tort action is inapplicable in any case where the relationship between
the parties is governed by contract unless the negligence relied on can properly be considered
as an independent tort unconnected with the performance of the contract. appears largely to
have been rejected in later cases: see Central Trust Co v Rafuse. [1986] 2 SCR 147, 31 DLR (4th)
481; BG Checo International Ltd v British Columbia Hydro and Power Authority, [1993] 1 SCR
12, 99 DL R (4th) 577; and Queen v Cognos Inc, [1993] 1 SCR 87, 99 DLR (4th) 626 . However, it
is still the case that a tort claim cannot be used to circumvent a contractual limitation of liabi lity.
In Central Trust Co, the court determined that "[a] concurrent or alternative liability in tort will
not be adm itted if its effect would be to permit the pla intiff to circumvent or escape a contrac-
tual exclusion or limitation of liability for the act or om ission that wou ld constitute the tort.
Subject to this qualification, where concurrent liabi lity in tort and contract exists the plaintiff
has the right to assert the cause o f action that appears to be most advantageous to him in
respect of any particular legal consequence." For what reasons might a party prefer to bring a
suit on the basis of tort rather than contra c t? See also Waddams at paras 412-14; McCamus at
358-64; MacDougall at 201-9.
3. See Sea/and of the Pacific Ltd v Robert C McHaffie Ltd (sub nom Sea/and of the Pacific
Ltd v Ocean Cement Ltd) (1974). 51 DLR (3d) 702 (BCCA). w here the court found that "[a]n
employee's act or om ission that consti tutes .his employer's breach of contract may also
impose a liability on the employee in tort. However. th is w ill only be so if there is breac h of a
duty owed (independently of the contract) by the employee to the other party .... The duty in
negligence and the duty in contract may stand side by side but the duty in contract is not
imposed upon the employee as a duty in tort."

IV. MISTAKE ABOUT CONTRACTUAL TERMS

HOBBS V ESQUIMALT AND NANAIMO RAILWAY CO

(1899). 29 SCR 450

[Hobbs paid the railway company $120 on account of the purchase of a quart er sec-
tion of land at $3 an acre, payment to be made over three years. The receipt described
the l and without reservation and was signed by John Trutch, Land Commissioner
for the Railway. The company claimed that Mr. Trutch had no authority to convey
the minerals and three years l ater offered a conveyance with minerals reserved.
Hobbs asked for specific performance. The trial judge refused it but declared that
H obbs was entitled to a conveyance with the reservation or to repayment of the
purchase money with interest and compensation for improvements. The Court of
Appeal denied him the option of repayment.]

TASCHEREAU J (dissenting): I would dismiss this appeal. The reasons given in the
courts below against the appellant's right to specific performance are, in my opinion,
unanswerable. There has been no contract between this company and Hobbs. The
company thought they were selling the land without the minerals. Hobbs thought he

749
CHAPTER 9 MISTAKE

was buying the land with the minerals. So that the company did not sell what Hobbs
thought he was buying, and Hobbs did not buy what the company thought they were
selling. Therefore, there was no contract between them. Hobbs would not have
bought it if he had known that the company were selling only surface rights, and
the company would not have sold if they had thought that Hobbs intended to buy the
land with the minerals. The ratification by the company stands upon no better ground.
It was nothing but ratification of a sale without the minerals.
The rule that any one dealing with another has the right to believe that this other
one means what he says, or says what he means, is one that cannot be gainsaid. But
it has no application here. Assuming that the agent sold the land with the minerals,
he did what he had not the power to do. However, he did not do it.
I would dismiss the appeal with costs.
KING J: The facts are stated in the judgment of the late Chief Justice Davie before
whom the case was tried.
It is found by him that Mr. Trutch acted beyond the scope of his authority in
agreeing to a sale of the land without reservation of the minerals, but that the con-
tract so made was [ratified] by the company. He, however, was of opinion that, in so
ratifying it, the company were under a mistake as to its legal effect, and upon this
ground he declined to compel performance but left the plaintiff to his common law
remedy for breach of contract.
A first question is as to whether there was, by reason of the alleged mistake, a
contract at all ....
Here the parties were ad idem as to the terms of the contract. It was expressed in
perfectly unambiguous language in the offer of the plaintiff and in the acceptance
of defendants; and the alleged difference is in a wholly esoteric meaning which one
of them gives to the plain words.
Then the legal right existing (as held by the Court below) is it a case (as also held
by it) where a court will leave the party aggrieved by a breach to his common law
remedy7 As already mentioned Stewart v. Kennedy (1895), 15 App. Cas. 75 is not a case
relating to the effect of mistake upon the exercise of the equitable jurisdiction of
English Courts of Equity, but English authorities having been referred to, the juris-
prudence is thus summarized by Lord Macnaghton (p. 105):
It cannot be disputed that the Court of Chancery had refused specific performance in
cases of mistake when the mistake has been on one side only, and even when the
mistake on the part of the defendant resisting specific performance has not been
induced or contributed to by any act or omission on the part of the plaintiff. But I do
not think it is going too far to say that in all those cases-certainly in all that have
occurred in recent times-the court has thought rightly or wrongly that the circum-
stances of the particular case under consideration were such that (to use a well known
phrase) it w ould be "highly unreasonable" to enforce the agreement specifically.

In Tamplin v. James (1880), 15 Ch. D. 215, James L.J. says:

If a man will not take reasonable care to ascertain what he is buying he must take the
consequences. It is not enough for a purchaser to swear: "I thought the farm sold con-
tained twelve fields which I knew, and I find it does not include them all, " or "I thought
it contained 100 acres and it only contains 80." It would open the door to fraud if such
a defence was to be allowed . Perhaps some of the cases on this subject go too far (i.e.
in the direction of allowing such defence) but for the most part the cases where a
defendant has escaped on the ground ofa mistake not contributed to by the plaintiff
have been cases where a hardship amounting to injustice would have been inflicted
upon him by holding him to his bargain and it was unreasonable to hold him to it.

750
 IV. MISTAKE ABOUT CONTRACTUAL TERMS

Hence it may be, as stated in Fry on Specific Performance, that the court considers
with more favour as a defence the allegation of mistake in an agent than in a
principal.
The alleged mistake is given in the evidence of Mr. Dunsmuir, the vice-president
of the company. Speaking of the contract entered into by Mr. Trutch, he says:
It only sold the surface. That is, we term it land in our office. We do not say surface right,
we say land, land minus the minerals.

It is evident, then, that we may put Mr. Trutch aside, and treat the case on this
point as if the company, upon an application by plaintiff for purchase of 160 acres
of land, had entered into an agreement to sell the land in the identical words used
by Mr. Trutch. In effect they say:
We agreed to sell the land, but th is means land reserving the minera ls.

It may well be that in the administration of their varied business a loose but
convenient form of speech may have been used in the office, but it is not stated that
it was supposed to be a correct one, and it appears incredible that a company, a large
part of whose business is that of a land company could reasonably suppose that in
dealings with third persons for the sale of land, the word "land" means land with
reservation of minerals. Mr. Trutch does not say that he misconceived the meaning
of the word. His impression was that he had verbally notified the plaintiff that the
minerals were to be reserved, and if he had done so the plaintiff would be precluded
from obtaining the specific performance he seeks; but it has been found that notice
was not given. The form of the company conveyances expressly reserving the minerals
show that they were aware how to effect such object. The alleged mistake was therefore
an unreasonable and careless one, and in view of the fact that the plaintiff went into
possession under the contract, I do not think that-it can be said to be unconscionable
or highly unreasonable to enforce the specific performance of the contract.
[Appeal allowed with costs. Gwynne, Sedgwick, and Girouard JJ concurred, Gwynne
J with written reasons. In the Appendix of Privy Council Appeals in 31 SCR a note
indicates that the appeal was dismissed upon settlement between the parties.]

RAFFLES V WICHELHAUS
(1864), 2 H & C 906, 159 ER 375

It was agreed at Liverpool that the plaintiff should sell to the defendants 125 bales of
Surat cotton, guaranteed middling fair merchant's Dhollerah, to.arrive ex "Peerless"
from Bombay; and that the cotton should be taken from the quay, and that the
defendants would pay th.e plaintiff at the rate of 17 1/4 d. per pound after the arrival of
the goods in England. The goods did arrive by the "Peerless" but the defendants
refused to accept the goods or pay the plaintiff for them. It was pleaded that the ship
mentioned in the agreement was meant by the defendants to be the ship called the
"Peerless" that sailed from Bombay in October; and that the plaintiff was only ready
and willing and offered to deliver to the d~fendants cotton which arrived by another
and different ship, which was also called the "Peerless," and which sailed from Born -
bay in December. Demurrer and joinder therein.
Milward, in support of the demurrer: The contract was for the sale of a number of
bales of cotton of a particular description, which the plaintiff was ready to deliver.
It is immaterial by what ship the cotton was to arrive, so that it was a ship called the

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CHAPTER 9 MISTAKE

"Peerless." The words "to arrive ex 'Peerless'" only meant that, if the vessel is lost on
the voyage, the contract is to be at an end.
[POLLOCK CB: [I]t would be a question for the jury whether both parties meant the
same ship called the "Peerless."]
That would be so if the contract was for the sale of a ship called the "Peerless," but it
is for the sale of cotton on board a ship of that name.
[POLLOCK CB: The defendant only bought that cotton which was to arrive by a par-
ticular ship. It may as well be said that, if there is a contract for the purchase of certain
goods in warehouse A, that is satisfied by the delivery of goods of the same descrip-
tion in warehouse B.l
In that case there would be goods in both warehouses; here it does not appear that
the plaintiff had any goods on board the other "Peerless."
[MARTIN B: It is imposing on the defendant a contract different from that which he
entered into.]
[POLLOCK CB: It is like a contract for the purchase of wine coming from a particular
estate in France or Spain, where there are two estates of that name.]
The defendant has no right to contradict by parol evidence a written contract good
upon the face of it. He does not impute misrepresentation or fraud, but only says
that he fancied the ship was a different one. Intention is of no avail, unless stated at
the time of the contract. ·
[POLLOCK CB: One vessel sailed in October and the other in December.]
The time of sailings is no part of the contract.
Mellish (Cohen with him), in support of the plea: There is nothing on the face of the
contract to show that any particular ship called the "Peerless" was meant; but the
moment it appears that two ships called the "Peerless" were about to sail from Born -
bay, there is a latent ambiguity, and parol evidence may be given for the purpose of
showing that the defendant meant one "Peerless" and the plaintiff another. That
being so, there was no consensus ad idem, and therefore no binding contract.
[He was then stopped by the court.]
PER CURIAM: There must be judgment for the defendants.

NOTES AND QUESTIONS

1. A offers to sell goods to B ex Peerless from Bombay. B accepts. There are two ships
called Peerless. What is the situation if
a. A knows or has reason to know this fact, but B does not know, or have reason to know;
b. B knows or has reason to know of it, but A does not;
c. both know or have reason to know of it;
d. neither of them knows or has reason to know of it at the time of communication'
2. For illuminating discussions of Raffles v Wichelhaus, see Robert Birmingham, "Holmes
on 'Peerless': Raffles v Wichelhaus and the Objective Theory of Contract" (1985) U Pitt L Rev
183 and AWB Simpson, "Contracts for Cotton to Arrive: The Case of the Two Ships Peerless"
(1989) 11 Cardozo L Rev 287, reprinted in AWB Simpson, Leading Cases in the Common Law
(Oxford: Oxford University Press, 1996)

752
 IV. MISTAKE ABOUT CONTRACTUAL TERMS

STAIMAN STEEL LTD V COMMERCIAL & HOME BUILDINGS LTD

(1976), 71 DLR (3d) 17 (Ont H Ct J)

SOUTHEY J: This is an action for damages for breach of an alleged contract for the
sale of goods from the defendant Commercial & Home Builders Limited ("Commer-
cial") to the plaintiff. The contract was alleged to have been made by the defendant
F. Caldarone Auctions Limited ("Caldarone Auctions") as agent for Commercial at an
auction sale conducted by Caldarone Auctions on the premises of Commercial on
June 15, 1972 ....
When the auctioneer started to offer the lots of used steel, one or two of the buyers
suggested that the items of used steel be sold in bulk, instead of by individual lot. ...
Before the bidding commenced, there was specific agreement that a number of
items in the yard would not be included in the bulk sale, because they were not
structural steel. Most of the items thus excluded were mechanical items ....
At one point, according to some of the witnesses, the auctioneer described the
bulk lot in general terms as being all the steel in th e yard except mechanical items.
When this general description was given, Bernard Staiman, president of the plaintiff,
picked up a piece of scrap steel from the ground and asked "Even this7" The auction-
eer replied "Yes."
The plaintiff was the successful bidder for the bulk lot at a unit price of $32 per ton.
The action relates to a pile of steel beams, doors and other members, which were
the component members of a prefabricated steel building with craneway. This steel
had been sold by Commercial several weeks before the auction sale, but was still piled
in the yard of Commercial on the day of the sale. The plaintiff contended that this
pile of steel was included in the bulk lot, whereas the defendants asserted that it was
never their intention to include this steel in the sale, because it did not belong to
Commercial.
The difference between the parties became apparent soon after the bulk lot was
knocked down to th e plaintiff and the auction sale was disrupted for a substantial
time by a heated dispute between Staiman and the auctioneer as to the contents of
the bulk lot. Staiman asserted that the steel he h ad purchased included the steel
for the prefabricated building (hereinafter called the "building steel"). Commercial
and the auctioneer both took the position that the steel purchased by the plaintiff in
bulk did not include the building steel.
After con sulting its solicitor, the plaintiff agree.ct on the day of the sale to take th e
lot without the building steel, but gave notice that it might bring legal proceedings
to establish that the building steel should have been included in the lot. The auc-
tioneer, acting on instructions from Commercial, required the plaintiff to sign a
waiver to the effect that the lot purchased by it did not include the building steel.
When the plaintiff refused to sign such waiver, the defendants refused to deliver any
of the bulk lot to the plaintiff. The defendants' position was that if the plaintiff
intended to bid for the building steel as part of the bulk lot, when the defendant had
not intended that the bulk lot include such sale, then there was no consensus ad idem
as to the subject of the sale and, therefore, no contract of sale. The positions thus
taken by the parties remained.substantially unchanged at trial.
The first question to be decided is whether the building steel was included in the
bulk lot offered for sale at the auction. There is some conflict in the evidence bearing
on this question and I must first make findings as to the credibility of some of the
witnesses ....
I was not impressed by Staiman's reliance on the question he put to the auctioneer
as to whether the bulk lot included a piece of scrap steel and the answer received

753
CHAPTER 9 MISTAKE

thereto as being of critical significance . ... If Staiman had any question that he genu-
inely wanted answered as to whether the building steel was included in the bulk lot,
he should have made specific inquiries, as did Frank Clark and Irving Greenspoon,
who were present at the auction and also gave evidence at trial.
... Staiman's evidence was that Szillard approached him and said he would like
to buy back the building steel, because it had already been sold. Staiman said he and
Szillard left it that they would try and work out a deal after the entire sale had been
completed. I do not believe Staiman's evidence as to this conversation and accept
instead the evidence of Szillard that when he discovered that Staiman thought he
had bought the building steel, he pointed out to Staiman that it was not part of the
bulk lot, because it had already been sold ....
Returning then to the first question, as to whether the building steel was part of
the bulk lot, I have concluded that it was never the intention of Commercial or
Caldarone Auctions to offer the building steel for sale at the auction. That steel had
already been sold. Furthermore, in my view, the defendants at no time manifested
an intention to offer the building steel for sale. When the auctioneer agreed to sell
the remaining inventory of steel in bulk, he was agreeing, in my view, to include in
one bulk lot the items that had previously been offered for sale in separate lots. Even
if he said that the bulk lot included all the steel in the yard except mechanical items,
as some witnesses said he did, I think it should have been apparent to Staiman and
the others at the sale that the auctioneer was offering only the steel belonging to
Commercial that had been included in the auction sale. It should have been obvious
that the auctioneer was not including the building steel in the bulk lot because that
steel was separately piled from the rest; was not tagged; and was not listed in the
catalogue. It was new steel, painted grey, that had obviously been fabricated for a
particular purpose, whereas the other steel in the yard was all used.
For the foregoing reasons, I find that the bulk lot for which the plaintiff was the
successful bidder, did not include the building steel.
... Frank Caldarone, the auctioneer, acting on the instructions of Commercial,
refused to recognize the plaintiff as the buyer of any of the steel in the bulk lot, unless
Staiman would execute an acknowledgement that the building steel was not
included in the bulk lot.
Counsel for Commercial sought to justify the position thus taken by Commercial
on the ground that if the plaintiff intended to buy a bulk lot containing the building
steel, whereas Commercial intended to sell a lot without that steel, then there was
no consensus ad idem and, therefore, no contract for the sale of any steel.
Counsel for Commercial relied on Raffles v. Wichelhaus et al. (1864), 2 H. & C. 906,
159 E.R. 375, involving two ships named "Peerless" which sailed from Bombay, one
in October and one in December, and Scriven Brothers & Co. v. Hindley & Co., [1913]
3 K.B. 564, where the .purchaser at an auction bid an extravagant price for the bales
of tow in the mistaken belief that they were bales of hemp. In both cases the Courts
held that there was no contract, apparently because there was no consensus ad idem.
Counsel for the plaintiff, on the other hand, relied on the basic rule of contract
law that it is not a party's actual intention that determines contractual relationships,
but rather the intention manifested by the words and actions of the parties . ...
Mr. Catzman submitted that if the Court found that the building steel was not a
part of the bulk lot, then the result should not be a finding that there was no contract.
He contended that there should then be a finding that there was a contract for the
sale of the lot without the building steel, even though it was not the plaintiff's inten-
tion to bid for the lot without the building steel.
In my judgment the plaintiff must succeed on this secondary point. The basis of
the successful defence by Commercial on the first point is that the circumstances

754
 IV. MISTAKE ABOUT CONTRACTUAL TERMS

were such that a reasonable man would infer that the auctioneer, despite his words,
was manifesting an intention to offer for sale the bulk lot without the building steel.
By making the highest bid, Staiman so conducted himself that a reasonable man
would believe that he was assenting to the purchase of that lot. A contract for the
sale of that lot to the plaintiff thereupon came into existence. That contract was never
subsequently repudiated by Staiman. The plaintiff was at all times willing to take
delivery of and to pay for the bulk lot without the building steel, which was what
Commercial and Caldarone Auctions said was the subject of the contract of sale,
although the plaintiff made it quite clear that it might still commence proceedings
to establish that the bulk lot should have included the building steel.
Commercial had the right to insist that the plaintiff take delivery and pay for the
bulk lot excluding the building steel, but Commercial had no right, in my judgment,
to require the plaintiff to give up its claim that the contract included the building
steel as well as the remainder of the bulk lot. By insisting on such waiver or acknow-
ledgement, Commercial was attempting to introduce unilaterally a new term into
the contract of sale.
If, as appears to have been the case, the plaintiff thought the bulk lot he was
purchasing included the building steel and the defendants thought that the bulk lot
they were selling did not include the building steel, then the case was one of mutual
mistake, as that expression is used in Cheshire and Fifoot's Law of Contract, 8th ed.
(1972), p. 221. In such a case, the court must decide what reasonable third parties
would infer to be the contract from the words and conduct of the parties who entered
into it. It is only in a case where the circumstances are so ambiguous that a reason - ·
able bystander could not infer a common intention that the Court will hold that no
contract was created. As pointed out in Cheshire and Fifoot at p. 212:

If the evidence is so con flicting that there is nothing sufficiently solid from w hich to
infer a contract in any final form wi thout indulging in mere speculation. the court must
of necessity declare that no contract whatsoever has been created .

In this case, in my judgment, a reasonable man would infer the existence of a

contract to buy and sell the bulk lot without the building steel and therefore I have
held that there was a contract to that effect binding on both parties, notwithstanding
such mutual mistake.
The case is quite unlike Raffles v. Wichelhaus and Scriven Brothers & Co. v. Hindley
& Co., because, in those cases, it was impossible for the Court to impute any definite
agreements to the parties.
In Raffles v. Wichelhaus, the Court had no more reason to find that both parties
had manifested an intention to deal in cotton shipped on the "Peerless" sailing in
October than to deal with cotton shipped in the "Peerless" sailing in December. In
Scriven Brothers & Co. v. Hindley & Co. , there was no reason to find that both parties
had manifested an intention to buy and sell tow. The purchaser had manifested an
intention to buy hemp, whereas the auctioneer had put tow up for sale.
By refusing ·to deliver any steel from the bulk lot to the plaintiff, Commercial has
clearly breached its contract for the sale of such bulk lot to the plaintiff. It remains to
assess the damages suffered by the plaintiff because of such breach of contract. ...
There will be judgment for the plaintiff against Commercial for $16,436. The
plaintiff is also entitled to recover its costs of the action from Commerc~al.
Caldarone Auctions acted throughout within the scope of its authority as agent
for Commercial. The action against Caldarone Auctions will be dismissed with costs,
but the costs recovered by Caldarone Auctions from the plaintiff will be added to the
costs to be recovered by the plaintiff from Commercial.

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The third party proceedings by Commercial against Caldarone Auctions and by

Caldarone Auctions against Commercial will be dismissed without costs.
Judgment for plaintiff.

HENKEL V PAPE
(1870), LR 6 Ex 7

Declaration for goods bargained and sold, and for goods sold and delivered.
Pleas, first, except as to £7 never indebted; and, secondly, as to £7, payment into
Court. The plaintiffs accepted the money paid into Court, and joined issue on the
first plea.
The plaintiffs are gun manufacturers in London and Birmingham, and the
defendant is a gun-maker at Newcastle-upon-Tyne. On the 4th of June, 1870, the
plaintiffs received from the defendant the following letter: "Send sample, Snider, with
sword-bayonet, forward immediately. I can fix an order for fifty, I think, and it may
lead to many large orders. Can you do them at 34s. net cash on delivery, so as to
secure the order7 I shall have to cut very fine, and several will be in for it." In reply
the plaintiffs wrote: "We have forwarded you this day sample Snider, with sword-
bayonet. We cannot possibly do them for less than 35s. net cash." With this letter the
sample was sent. On the 7th of June the plaintiffs received the following telegram
purporting to come from the defendant: "Send by mail immediately the Snider rifles
same as pattern. Must be here in the morning. Ship sails then." The plaintiffs on
receipt of this communication sent fifty rifles to the defendant. On the 9th of June
they received the following letter from him. "I am surprised that you sent fifty instead
of three rifles. The telegram was to send three." In fact, the clerk who sent the tele-
graph message had by mistake telegraphed the word "the" instead of "three." The
defendant had written "three," and not "the," on the message paper. Under these
circumstances the plaintiffs insisted on the defendant accepting the fifty rifles sent,
but the defendant declined to take more than three. This action was then brought.
The defendant paid a sum into court sufficient to cover the price of three rifles and
their carriage. He denied his liability as to the residue of the plaintiffs' claim, contend-
ing that he could not be made responsible for the mistake of.the telegraph clerk.
The cause was tried before Blackbum J., at the Surrey Summer Assizes, 1870, when
a verdict was directed for the defendant, with leave to move to enter a verdict for the
plaintiffs for the invoice price of the remaining forty-seven rifles.
H. Thompson Chitty moved accordingly: The telegraph clerk was the defendant's
agent to transmit the message, and the defendant is responsible for the mistake in
the transmission. Chitty on Contracts, 6th ed., p. 197. There is no privity between the
plaintiffs and the telegraph clerk, nor can they proceed against the Post-Office, his
employers: Playford v. United Kingdom Telegraph Company, L.P. 4 O.B. 706. Their right
remedy is against the defendant. Suppose in a letter written by himself he had made
the mistake, he would clearly have been liable; and in the transmission of each par-
ticular message the telegraph clerk is the agent of the ,_ sender. Upon the sender
therefore must rest the responsibility of any error committed by the agent in the
course of his employment.
KELLY CB: We are of opinion that in this case there should be no rule. The question
is whether the defendant has entered into a contract to purchase fifty rifles, and there
is no doubt he might have bound himself either by letter or a telegraphic message.
But the Post-office authorities are only agents to transmit messages in the terms in

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 IV. MISTAKE ABOUT CONTRACTUAL TERMS

which the senders deliver them. They have no authority to do more. Now in this case
the evidence is that the defendant agreed to take three rifles, and three only, and he
authorized the telegraph clerk to send a message to that and to no other effect. That
being so, there was no contract between the plaintiffs and defendant for the purchase
of fifty rifles. The defendant cannot be made responsible because the telegraph clerk
made a mistake in the transmission of the message. There was no contract between
the parties such as the plaintiffs rely on. The verdict therefore ought to stand.
[Bramwell, Piggott, and Cleasby BB concurred. Rule refused.]

QUESTIONS

Suppose A writes an offer to buy 60 rifles, which B accepts . A intended to write 6. Is there a
contract? A dictates a letter to his secretary offering to buy 6 rifles. The secretary takes it down
as 60. A signs the letter withou t reading it over. B accepts. Is there a contract' A, after dictating,
tells his secretary to sign the letter and mail it, and B accepts. Is there a contract? In Henkel v
Pape was there a contract for 3 rifles? Suppose the plaintiff were unwilling to sell 3 at the price
quoted. Was any offer for 3 communicated to him7

SMITH V HUGHES
(1871), LR 6 OB 597

[The plaintiff, a farmer, took a sample of some oats to Hughes, the manager of the
defendant, who was an owner and trainer of horses. The plaintiff claimed to have
said "I have some good oats for sale" and when Hughes replied "I am always a buyer
of good oats," offered 40 to 50 quarters at 35s. a quarter. Hughes took away a sample,
and later wrote to say that he would take the oats at 34s. and the plaintiff sent him
16 quarters, which Hughes complained were new oats. The plaintiff admitted they
were and denied that he had any old oats. Hughes claimed that he had replied to the
plaintiff, "I am always a buyer of good old oats," and that the plaintiff had replied, "I
have some good old oats for sale." Hughes insisted that the plaintiff take the oats
back. At the trial the judge put two questions to the jury for their consideration: Was
the word "old" used by the plaintiff or the defendant? If so, they must find for the
defendant. If the word "old" was not used, were they of the opinion that the plaintiff
believed that Hughes believed, or was under the impression, that he was contracting
for the purchase of old oats? If so, they must find for the defendant; otherwise, for
the plaintiff. The jury did not answer the question specifically, but found a verdict
for the defendant. On appeal the question was whether the direction was correct.]
COCKBURN CJ : ... It is to be regretted that the jury were not required to give specific
answers to the questions so left to them. For, it is quite possible that their verdict may
have been given for the defendant on the first ground; in which case there could, I
think, be no doubt as to the propriety of the judge's direction; whereas now, as it is
possible that the verdict of the jury-or at all events of some of them-may have
proceeded on the second ground, we are called upon to consider and decide whether
the ruling of the learned judge with reference to the second question was right.
For this purpose we must assume that nothing was said on the subject of the
defendant's manager desiring to buy old oats, nor of the oats having been said to be
old; while on the other hand, we must assume that the defendant's manager believed
the oats to be old oats, and that the plaintiff was conscious of the existence of such
belief, but did nothing, directly or indirectly, to bring it about, simply offering his

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oats and exhibiting his sample, remaining perfectly passive as to what was passing
in the mind of the other party. The question is whether, under such circumstances,
the passive acquiescence of the seller in the self-deception of the buyer will entitle the
latter to avoid the contract. I am of opinion that it will not. ...
I take the true rule to be, that where a specific article is offered for sale, without
express warranty, or without circumstances from which the law will imply a war-
ranty-as where, for instance, an article is ordered for a specific purpose-and the
buyer has full opportunity of inspecting and forming his own judgment, if he chooses
to act on his own judgment, the rule caveat emptor applies. If he gets the article he
contracted to buy, and that article corresponds with what it was sold as, he gets an
he is entitled to, and is bound by the contract. Here the defendant agreed to buy a
specific parcel of oats. The oats were what they were sold as, namely, good oats
according to the sample. The buyer persuaded himself they were old oats, when they
were not so; but the seller neither said nor did anything to contribute to his decep-
tion. He has himself to blame. The question is not what a man of scrupulous morality
or nice honour would do under such circumstances. The case put of the purchase of
an estate, in which there is a mine under the surface, but the fact is unknown to the
seller, is one in which a man of tender conscience or high honour would be unwill-
ing to take advantage of the ignorance of the seller; but there can be no doubt that
the contract fo r the sale of the estate would be binding. ... ·
Now, in this case, there was plainly no legal obligation in the plaintiff in the first
instance to state whether the oats were new or old. He offered them for sale according
to the sample, as he had a perfect right to do, and gave the buyer the fullest oppor-
tunity of inspecting the sample, which, practically, was equivalent to an inspection
of the oats themselves. What, then, was there to create any trust or confidence
between the parties, so as to make it incumbent on the plaintiff to communicate the
fact that the oats were not, as the defendant assumed them to be, old oats? If, indeed,
the buyer, instead of acting on his own opinion, had asked the question whether the
oats were old or new or had said anything which intimated his understanding that
the seller was selling the oats as old oats, the case would have been wholly different;
or even if he had said anything which shewed that he was not acting on his own
inspection and judgment, but assumed as the foundation of the contract that the
oats were old, the silence of the seller, as a means of misleading him, might have
amounted to a fraudulent concealment, such as would have entitled the buyer to
avoid the contract. Here, however, nothing of the sort occurs. The buyer in no way
refers to the seller, but acts entirely on his own judgment. ...
In the case before us it must be taken that, as the defendant, on a portion of the
oats being delivered, was able by inspection to ascertain that they were new oats,
his manager might, by due inspection of the sample, have arrived at the same result.
The case is, therefore, one of the SC!le and purchase of a specific article after inspec-
tion by the buyer. Under these circumstance's the rule caveat emptor clearly applies;
more especially as this cannot be put as a case of latent defect, but simply one in
which the seller did not make known to the buyer a circumstance affecting the quality
of the thing sold. The oats in question were in no sense defective, on the contrary
they were good oats, and an that can be said is that they had not acquired the quality
which greater age would have given them. There is not, so far as I am aware, any
authority for the position that a vendor who submits the subject matter of sale to the
inspection of the vendee, is bound to state circumstances which may tend to detract
from the estimate which the buyer may injudiciously have formed of its value. Even
the civil law, and the foreign law, founded upon it, which require that the seller shall
answer for latent defects, have never gone the length of saying that, so long as the

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thing sold answers to the description under which it is sold, the seller is bound to
disabuse the buyer as to any exaggerated estimate of its value.
It only remains to deal with an argument which was pressed upon us, that the
defendant in the present case intended to buy old oats, and the plaintiff to sell new,
so that the two minds were not ad idem; and that consequently there was no contract.
This argument proceeds on the fallacy of confounding what was merely a motive
operating on the buyer to induce him to buy with one of the essential conditions of
the contract. Both parties were agreed as to the sale and purchase of this particular
parcel of oats. The defendant believed the oats to be old, and was thus induced to
agree to buy them, but he omitted to make their age a condition of the contract. All
that can be said is, that the two minds were not ad idem as to the age of the oats; they
certainly were ad idem as to the sale and purchase of them. Suppose a person to buy
a horse without warranty, believing him to be sound, and the horse turns out
unsound could it be contended that it would be open to him to say that, as he had
intended to buy a sound horse, and the seller to sell him an unsound one, the con -
tract was void, because the seller must have known from the price the buyer was
willing to give, or from his general habits as a buyer of horses, that h e thought the
horse was sound7 The cases are exactly parallel.
The result is that, in my opinion, the learned judge of the county court was wrong
in leaving the second question to the jury, and that, consequently, the case must go
down to a new trial.

BLACKBURN J: In this case I agree that on the sale of a specific article, unless there
be a warranty making it part of the bargain that it possesses some particular quality,
the purchaser must -take the article he has bought though it does not possess that
quality. And I agree that even if the vendor was aware that the purchaser thought
that the article possessed that quality, and would not have entered into the contract
unless he had so thought, still the purchaser is bound, unless the vendor was guilty
of some fraud or deceit upon him, and that a mere abstinence from disabusing the
purchaser of that impression is not fraud or deceit; for, whatever may be the case in
a court of morals, there is no legal obligation on the vendor to inform the purchaser
that h e is under a mistake, not induced by the act of the vendor. And I also agree that
where a specific lot of goods are sold by a sample, which the purchaser inspects
instead of the bulk, the law is exactly the same, if the sample truly represents the
bulk; though, as it is more probable that the purchaser in such a case would ask for
some further warranty, slighter evide nce would suffice to prove that, in fact, it was
intended there should be such a warranty. On this part of the case I have nothing to
add to what the Lord Chief Justice has stated.
But I have more difficulty about the second point raised in the case. I apprehend
that if one of the parties intends to make a contract on one set of terms, and the other
intends to make a contract on another set of terms, or, as it is sometimes expressed,
if the parties are not ad idem, there is no contract, unless the circumstances are such
as to preclude one of the parties from denying that he has agreed to the terms of the
other. The rule of law is that stated in Freeman v. Cooke ((1848), 2 Ex. 654, 154 E.R.
652]. If, whatever a man's real intention may be, he so conducts himself that area-
sonable man would believe that he was assenting to the terms proposed by the other
party, and that other party upon that belief enters into the contract with him, the
man thus conducting himself would be equally bound as if he h ad intended to agree
to the other party's terms.
The jury were directed that, if they b elieved the word "old" was used, they should
find for the defendant-and this was right; for if that was the case it is obvious that
neither did the defendant intend to enter into a contract on the plaintiff's terms,

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that is, to buy his parcel of oats without any stipulation as to their quality; nor could
the plaintiff have been led to believe he was intending to do so.
But the second direction raises the difficulty. I think that, if from that direction
the jury would understand that they were first to consider whether they were satisfied
that the defendant intended to buy this parcel of oats on the terms that it was part
of his contract with the plaintiff that they were old oats, so as to have the warranty of
the plaintiff to that effect, they were properly told that, if that was so, the defendant
could not be bound to a contract without any warranty unless the plaintiff was misled.
But I doubt whether the direction would bring to the minds of the jury the distinction
between agreeing to take the oats under the belief that they were old, and agreeing
to take the oats under the belief that the plaintiff contracted that they were old.
The difference is the same as that between buying a horse believed to be sound,
and buying one believed to be warranted sound; but I doubt if it was made obvious
to the jury, and I doubt this the more because I do not see much evidence to justify
a finding for the defendant on this latter ground if the word "old" was not used. There
may have been more evidence than is stated in the case; and the demeanour of the
witness may have strengthened the impression produced by the evidence there was;
but it does not seem a very satisfactory verdict if it proceeded on this latter ground.
I agree, therefore, in the result that there should be a new trial.
HANNEN J: ... It is essential to the creation of a contract that both parties should agree
to the same thing in the same sense. Thus, if two persons enter into an apparent
contract concerning a particular person or ship, and it turns out that each of them,
misled by a similarity of name, had a different person or ship in his mind, no contract
would exist between them : Raffles v. Wichelhaus.
But one of the parties to an apparent contract may, by his own fault, be precluded
from setting up that he had entered into it in a different sense to that in which it was
understood by the other party. Thus in the case of a sale by sample where the vendor,
by mistake, exhibited a wrong sample,. it was held that the contract was not avoided
by this error of the vendor: Scott v. Littledale.
But if in the last-mentioned case the purchaser, in the course of the negotiations
preliminary to the contract, had discovered that the vendor was under a misap-
prehension as to the sample he was offering, the vendor would have been entitled
to shew that he had not intended to enter into the contract by which the purchaser
sought to bind him. The rule of law applicable to such a case is a corollary from the rule
of morality which Mr. Pollock cited from Paley [Paley 's Moral and Political Philosophy,
book III, ch SL that a promise is to be performed "in that sense in which the promiser
apprehended at the time the promisee received it," and may be thus expressed: "The
promiser is not bound to fulfil a promise in a sense in which the promisee knew at
the time the promiser did not intend it." And in considering the question, in what
sense a promisee is entitled to enforce a promise, it matters not in what way the
knowledge of the meaning in which the promiser made it is brought to the mind of
the promisee, whether by express words, or by conduct, or previous dealings, or
other circumstances . If by any means he knows that there was no real agreement
between him and the promiser, he is not entitled to insist that the promise shall be
fulfilled in a sense to which the mind of the promiser did not assent.
If, therefore, in the present case, the plaintiff knew that the defendant, in dealing
with him for oats, did so on the assumption that the plaintiff was contracting to sell
him old oats, he was aware that the defendant apprehended the contract in a different
sense to that in which he meant it, and he is thereby deprived of the right to insist
that the defendant shall be bound by that which was only the apparent, and not the
real bargain.

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 IV. MISTAKE ABOUT CONTRACTUAL TERMS

This was the question which the learned judge intended to leave to the jury; as I
have already said, I do not think it was incorrect in its terms, but I think that it was
likely to be misunderstood by the jury. The jury was asked "whether they were of
opinion, on the whole of the evidence, that the plaintiff believed the defendant to
believe, or to be under the impression that he was contracting for the purchase of
old oats? If so, there would be a verdict for the defendant." The jury may have under-
stood this to mean that, if the plaintiff believed the defendant to believe that he was
buying old oats, the defendant would be entitled to the verdict, but a belief on the part
of the plaintiff that the defendant was making a contract to buy the oats, of which
he offered him a sample, under a mistaken belief that they were old, would not relieve
the defendant from liability unless his mistaken belief were induced by some mis-
representation of the plaintiff, or concealment by him of the fact which it became his
duty to communicate. In order to relieve the defendant it was necessary that the jury
should find not merely that the plaintiff believed the defendant to believe that he
was buying old oats, but that he believed the defendant to believe that he, the plain-
tiff, was contracting to sen old oats.
I am the more disposed to think the jury did not understand the question in this
last sense because I can find very little, if any, evidence to support a finding upon it
in favour of the defendant. It may be assumed that the defendant believed the oats
were old, and it may be suspected that the plaintiff thought he so believed, but the
only evidence from which it can be inferred that the plaintiff believed that the defend-
ant thought that the plaintiff was making it a term of the contract that the oats were
old is that the defendant was a trainer, and that trainers, as a rule, use old oats and
that the price given was high for new oats, and more than a prudent man would
have given.
Having regard to the admitted fact that the defendant bought the oats after two
days' detention of the sample, I think that the evidence was not sufficient to justify
the jury in answering the question put to them in the defendant's favour, if they
rightly understood it; and I therefore think there should be a new trial. ·

NOTES AND PROBLEMS

1. In Bell v Lever Brothers Ltd, [1932] AC 161 (HL), Lord Atkin states :
The Court [in Smith v Hughes) ordered a new trial. It is not quite clear whether they consid-
ered that if the defendant's contention was correct, the parties were not ad idem or there
was a contractual condition that the oats were old oats. In either case the defendant wou ld
succeed in defeating the claim .
In these cases I am inclined to think that the true ana lysis is that there is a .contract, but
that the one party is not able to supply the very thing whether goods or services that the
other party contracted to take; and therefore the contract is unenforceable by the one if
executory, whi le if executed the other can recover money paid on the ground of failure of
consideration.
2. More recently, in Statoil ASA v Louis Dreyfus Energy Services LP, [2008] EWHC 2257
(Comm), Mr. Justice Aikens states:
However, if one party has made a mistake about a fact on which he bases his decision to
enter into the contract, but that fact does not form a term of the contract itself, then, even
if the other party knows that the first is mistaken as to this fact, the contract will be binding.
That was the effect of the decision of the Court of Queen's Bench, on appeal from the
County Court, in Smith v Hughes .. . . The correctness of that decision and the analysis in it
has never been doubted.

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CHAPTER 9 MISTAKE

Mr. Justice Aikens went on to determine that there was no jurisdiction in equity to render a
contract voidable for unilateral mistake, especially in light of Great Peace Shipping Ltd v Tsavliris
Salvage (international) Ltd, [2002) 4 All ER 689 (CA), excerpted and commented on below.
3. Able has two racehorses for sale by auction: "Pegasus" worth $10,000, described in the
auction catalogue as "lot l," and "Glanders" worth $500 and described as "lot 2." By mistake
the sale numbers attached to the horses' hips are interchanged and "Glanders" is led in as
"lot 1" and knocked down to Baker for $8,000. "Pegasus" is led in as "lot 2" to Charlie for $500.
Baker and Charlie pay the prices and take delivery respectively of "Glanders" and "Pegasus."
The mistake comes to light the next day. What is the legal position of the three parties? See
Diamond v British Columbia Thoroughbred Breeders' Society (1965), 52 DLR (2d) 146 (BCSC).
4. Able agreed to sell and Baker agreed to buy a house at "300 Spadina" for $50,000. Able's
house was at 300 Spadina Avenue, but Baker mistakenly assumed that it was at 300 Spadina Road
and had inspected the outside of that house. Able's house is worth $25,000; 300 Spadina Road is
worth $75,000. Upon discovering his error, Baker refused to buy Able 's house. Able brings an
action for specific performance, and Baker counterclaims for damages.
The house was accurately described in the document as 300 Spadina Avenue, but Baker
mistakenly thought it was the house at 300 Spadina Road. During the course of negotiations
Baker had said that he was pleased that the new subway would be so close . The new subway
is close to 300 Spadina Road but not to 300 Spadina Avenue. Able wondered at the time what
Baker meant but then dismissed the matter from his mind. See generally on mistake as to
contractual terms Waddams, ch 11; McCamus, ch 13; MacDougall at 223-28.

V. MISTAKE IN ASSUMPTIONS

ANTHONY DUGGAN, "SILENCE AS MISLEADING CONDUCT:

AN ECONOMIC ANALYSIS"
in M Richardson & P Williams, The Law and the Market
(Sydney: Federation Press, 1995) at 207-21 .

ECONOMIC ANALYSIS

According to the economic approach, contractual nondisclosure is subject to two

competing efficiency considerations, and it is the interplay between them that
shapes the pattern of the ~ase law. These considerations are :

1. the desirability of preventing mistakes in the contracting process; and

2. the need to preserve incentives for the discovery and exploitation of socially
useful information.

THE ECONOMIC ISSUES

Preventing mistakes. In the normal case, a contract can be assumed to make both
parties better off (otherwise at least one of them would not have transacted). For
example, if A sells a pai nting to B for $15,000, the indications are that A values the
money more highly than the painting, whereas B's preferences are the reverse. One
result of contracting is therefore to satisfy each party's individual preferences.
Another result is an improved resource allocation (the movement of scarce resources
to more highly valued uses), and this is a social benefit. However, these outcomes
depend on both parties being fully informed, at the time of the contract negotiations,

762
 V. MISTAKE IN ASSUMPTIONS

about all material aspects of the.transaction. If one party is mistaken, the result may
be a net social loss (or misallocation of resources). Assume, for example, that A sells
the painting to B for $15,000 because she mistakenly thinks it is a copy. If she had
known that the painting was an original, she would not have been prepared to sell
it for less than $150,000. B knows the truth, but he would have been prepared to pay
no more than $50,000. The contract therefore results in a gain to B of $35,000
($50,000 - $15,000), but a loss to A of $135,000 ($150,000 - $15,000). The net result
is a loss of $100,000 ($135,000 - $35,000), and this can be counted as the social cost
of A's mistake.
Accordingly, it might be thought that the appropriate thing for the courts to do
is set aside contracts routinely whenever [a] mistake is established. However, while
such a rule might be beneficial in correcting past mistakes, it would also have a
perverse effect on the incentives confronting parties in the future. It would be likely
to result in parties taking too little care in their own interests at the time of contract-
ing, because they will be secure in the knowledge that if they make a mistake, a court
will correct it for them later (given that the courts are publicly subsidised, this out-
come would represent an externalisation of the costs of contracting). Conversely, it
may also result in one party taking excessive precautions to ensure that the other is
not mistaken (for fear that otherwise a court will set the contract aside). Depending
on which of these influences predominates, the end result will be either too much
litigation or too much disclosure .
Given the costs of litigation, a policy which focuses on the prevention of mistakes
will nearly always be preferable to one that concentrates on their correction. (This
ceases to be true only at the point where the cost of additional precautions begins
to exceed the savings from any further reduction in the risk of a mistake occurring.)
Precautions against the making of a mistake might be taken by the party who would
otherwise end up being disadvantaged (for example, in the case of a pricing error,
by taking more care to read the contract before signing it or, in the case of a valuation
error, by the mistaken party having an appraisal made of the contract subject-matter
before transacting). Alternatively, precautions might be taken by the party who would
otherwise end up being advantaged (by disclosing what the other party needs to
know). From an economic perspective, the choice between the two alternatives
depends on which is the cheaper. This suggests that an appropriate rule would be
one which confronts the lowest cost information gatherer with the appropriate
incentive to take the necessary action. In cases where the mistaken party could have
taken the precautions more cheaply, then the contract should be allowed to stand,
despite the mistake. In other cases, there should be a rule making the non-mistaken
party liable for non-disclosure . Where one party (B) knows that the other party (A) is
mistaken then, other things being equal, it will usually be cheaper to require B to
disclose than to leave A to discover the mistake for herself and then make the neces-
sary correction.
Creating incentives to discovery, There is a social benefit in the generation of
information concerning the attributes of assets . Such information is relevant to the
uses to which an asset can be put. If the information is not available, there is a risk
that the asset will be allocated to a use that is less socially valuable than it might be.
For example, if there is an undiscovered oil deposit lying beneath a farm then, for as
long as the information is unavailable, the land is likely to remain devoted to farming
purposes rather than oil production.
The problem is that information is costly to produce, while the gains from its
production are difficult to capture. This is because, typically, the exploitation of
information will result in its disclosure, but once it is disclosed there is nothing to

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prevent others from using it as well. This "public goods" character of information
acts as a natural disincentive to its production. Why would someone invest resources
in search.if there is no way of appropriating the gains from discovery? To return to
the example of the oil-rich farmland, oil exploration is an expensive undertaking.
A prospector is unlikely to incur the cost unless assured of the gains from discovery.
However, once news of the oil deposit gets out, there can be no such assurance
(assuming private ownership of minerals and the like). The farmer will be likely to
insist on a higher sale price for the land (or, alternatively, will offer rights of entry to the
highest bidder), with a view to securing as large a share as possible of the new-found
wealth. The prospect of this occurring will act as a deterrent to exploration in the
first place, so that the oil deposit may remain undiscovered. A solution is to allow
the successful searcher to trade on the information without disclosing it to the other
contracting party. If the law permits the prospector to purchase the farm without
telling the farmer .a bout the existence of the oil deposit, then the gains from explor-
ation and production will be secure, to the encouragement of both activities.
Synthesis. Of course, with full information, the farmer would be likely to decide
differently. She may not agree to sell at all or, alternatively, she might insist on a
substantially higher price. A rule favouring non-disclosure does nothing to ensure
that mistaken contracting decisions will be prevented in future, and in this respect
it involves a misallocation of resources in the sense just mentioned. However, there
would be a greater misallocation if disclosure was required because then it is likely
that the information would not be produced at all. In that event, the individual farmer
might not be any worse off (she would still have her farm), but society as a whole
would be deprived of the oil that the land is capable of yielding, and constrained to
take the farm produce instead (a second-best alternative). There is a "powerful tension"
between the public interest in the free use of information once it is in existence; and
the creation of new information for future use (Easterbrook, 1981, p. 313). As a general
rule, longer-run considerations require that the tension be resolved in favour of the
second because the alternative implies that, while information might be more readily
available, there would be less produced (Easterbrook, p. 313).
On the other hand, not all information concerning asset attributes is socially
valuable in the sense that its discovery is likely to be wealth-increasing. Information
concerning the existence of an oil deposit lying beneath a farm is socially valuable
for the reasons that have just been discussed. By contrast, information concerning
the volume of oil contained in a deposit which has already been discovered is not
socially valuable unless it affects total production or extraction costs. It merely creates
a bargaining advantage that can be used to redistribute wealth in favour of the
knowledgeable party (Shaven, 1991, pp. 1, 2; drawing on Hirshleifer, 1971). Information
that the oil deposit exists is vital to whether it is extracted. By contrast, where both
parties already know that the oil deposit exists, the only matter that will turn on
information about its size is how much the farmer ends up receiving for the land
(Cooter and Ulen, 1988, p. 259). Information of the first kind comprises "productive
facts," whereas information of the second kind comprises "redistributive facts"
(Cooter and Ulen, p. 259). Incentives are required for the discovery of productive
facts, but not for the discovery of purely redistributive facts. On the contrary, to. allow
speculative trading on the basis of purely redistributive facts would induce wasteful
expenditure in the search for them. It would also induce (wasteful) defensive expendi-
ture by parties seeking to avoid the loss of their wealth to more knowledgeable people
(Cooter and Ulen, p. 259). These considerations suggest that in a case involving
purely redistributive facts, disclosure should be required. Mistake prevention con-
siderations will usually point in the same direction ....

764
 V. MISTAKE IN ASSUMPTIONS

BUYER AND SELLER NON - DISCLOSURE

Where a valuation error is made by the seller, the court will not intervene in the absence
of special circumstances. By contrast, where a valuation error is made by the buyer,
the court will often be at pains to discover a misrepresentation or misleading conduct
as a basis for setting the contract aside. Why are buyer and seller non-disclosure
treated differently?
The conventional response is to say that mere passive silence is not actionable,
but since it is more difficult for a seller to behave passively than it is for a buyer the
consequence is that, in practice, a seller is less likely to escape liability. However, this
rationalisation breaks down in the face of the "reasonable expectations" test. This
makes the defendant's liability turn on the court's view as to whether or not it was
reasonable for the plaintiff to expect disclosure. The more liberal the court's view,
the closer the "reasonable expectations" test comes to a general rule that seller non-
disclosure is actionable. There is no corresponding tension in the area of buyer
non-disclosure . This raises the possibility that the court's willingness in cases of
seller non-disclosure to find that the plaintiff had a reasonable expectation of disclos-
ure is not so much a cause as a consequence of the desired outcome (Birmingham,
1988, p. 268).
The economic explanation is sounder. It runs as follows. There is a critical differ-
ence between the dynamics of the buyer and seller non-disclosure cases. A buyer
will have an incentive to withhold favourable information (good news) with a view
to keeping the price down, whereas the seller will want to disclose favourable infor-
mation but withhold unfavourable information (bad news), in order to keep the price
up (Shaven, 1991, p. 29). In both cases, the effect of a disclosure requirement will be
to reduce the likelihood of a trade occurring. This may be a socially undesirable
outcome where it is the buyer who is the knowledgeable party and the undisclosed
good news comprises productive facts . By contrast, where the knowledgeable party
is the seller (and the information is bad news), there is a social benefit in the trade
not going ahead. If the trade does proceed, there is a risk that the buyer will incur
expenditure before discovering the true facts. Furthermore, upon discovering the
truth, the buyer will probably want to dispose of the asset, and this will entail trans-
actions costs. The likely end result is a reversion to at least an approximation of the
status quo, with (wasted) costs being incurred along the way. Therefore, sellers should
be required to disclose. A disclosure requirement is unlikely to inhibit the acquisition
by sellers of productive facts relating to assets for sale. There are an sorts of reasons
why it will be in their interest to have this information, apart from the desire (if any)
to obtain an advantage over potential purchasers. So, for example, the private owner
of a painting may decide to have it appraised for insurance purposes or out of curios-
ity, while an art dealer may do so in order to avoid the risk of underselling the item ....

MISREPRESENTATION AND NON-DISCLOSURE

Introdµction. The distinction between active and passive behaviour is central

to the law governing liability for non-disclosure, and this has been true since ancient
times ("a/iud est celare, aliud tacere"). Accordingly, to ten a lie is nearly always action-
able, while merely to withhold information usually is not. On the other hand, there
is a difference between suppressio veri and suggestio falsi, and the courts will inter-
vene in the latter case. Non-disclosure which implies a falsehood is treated on the
same footing as express misrepresentation, though the willingness of the courts to
make this kind of implication is greater in cases of seller than buyer non-disclosure.

765
CHAPTER 9 MISTAKE

The reasons for the asymmetry between cases of buyer and seller non-disclosure
have already been discussed, but it remains to consider why the courts discriminate
between wilful misrepresentation and wilful non-disclosure. Given that the conse-
quences to the uninformed party are the same in either case, what makes activity
so much worse than passivity in this context? As before, the economic analysis turns
on two sets of considerations, namely: the desirability of preventing mistakes in the
' contracting process; and the need to preserve incentives for productive activity.
Preventing mistakes. As explained earlier, a mistaken contracting decision is
likely to result in a misallocation of resources, on the basis that the loss to the mis-
taken party (A) exceeds the gain to the knowledgeable party (B) .... However, it does
not follow that courts should intervene routinely whenever mistake is established,
because the effect of this would be to encourage contracting parties in future to take
insufficient precautions against their own mistakes, and excessive precautions
against the other party's mistakes. Intervention is only warranted where B is the
lowest cost information gatherer. This condition is most likely to be met where B
knows of A's mistake, because in these circumstances it would usually be cheaper
for B to correct the mistake than for A to discover that she is mistaken, and then
make her own correction ....
Where A's mistake is deliberately induced by B (where B lies to A), the case for
intervention is even stronger. In these circumstances, B will always be the party best
placed to take precautions at lowest cost. AU he has to do is to refrain from lying, and
this is a socially costless option (Darby and Kami, 1973, p. 83). By contrast, if B's lie
was not actionable, A would be induced to take precautions against mistake, and
these will always entail some costs . ...
Creating incentives to discovery. Information is valuable because it serves to
move resources to more productive uses. Accordingly, there is a social benefit in
encouraging the discovery and exploitation of information and this must be taken
into account when deciding whether the \aw should require disclosure. Is there any
corresponding social value in misinformation? The conventional r~sponse to this
question is, "no." Misinformation is likely to result in the allocation of assets to lower
valued uses ... and it lessens the efficiency of the market as an allocative mechanism
because it undermines the signalling function of price movements . ...
Levmore takes a contrary view. He argues that there are cases where lying is
socially productive, and that there is room for a policy of "optimal dishonesty." ... The
law does not reflect a policy of optimal dishonesty.... If dishonesty was allowed
contracting parties would be induced to invest in measures to protect themselves
from being defrauded. The taking of these precautions would require tricksters to
spend resources in devising more ingenious methods of deception, leading in turn
to the adoption of more elaborate precautions . ... These precaution and deception
costs are totally wasteful from a social viewpoint. Moreover, there would be spillover
effects in the form of a lessening of confidence in the contract system overall. People
. would become more reluctant to transact, with adverse implications for the socially
beneficial movement of resources. In short, the costs of a policy favouring dish on -
esty (even selectively) would be likely to exceed the benefits.

NOTE
For an economic analysis on the doctrines of mutual and unilateral mistake and information
that was or was not communicated prior to contracting, see Anthony T Kronman, "Mistake,
Disclosure, Information, and the Law of Contracts" (1978) 7 J Legal Stud 1. See, further,
Anthony Duggan, Michael Bryan & Frances Hanks, Contractual Non-Disclosure (Melbourne:

766
 V. MISTAKE IN ASSUMPTIONS

Longman Professional, 1994); Melvin A Eisenberg, "Disclosure in Contract Law" (2003) 91 Cal
L Rev 1645; "Mistake in Contract Law" (2003) 91 Cal L Rev 1573; and Richard Craswell, "Taking
Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere"
(2006) 92 Va L Rev 565. For a critical analysis of Eisenberg, see James Gordley, "Mistake in
Contract Formation" (2004) 52 Am J Comp L 433.

LAIDLAW V ORGAN
15 US (2 Wheat) 178 (1817)

Organ sued Laidlaw & Co., New Orleans merchants, to recover possession of 111
hogsheads of tobacco, alleged to have been wrongfully taken from him by Laidlaw.
Organ introduced in evidence a written me,m orandum dated February 18, 1815, stating
that he had bought 111 hogsheads of tobacco from Laidlaw & Co. for $7,544.69. Laid-
law denied liability on the ground that the contract had been induced by fraud.
Laidlaw claimed that Organ had learned of the Treaty of Ghent ending the War of
1812, and that the British blockade of New Orleans would be lifted, before Laidlaw
knew. When Laidlaw had asked Organ if he knew of anything which would increase
the value of the tobacco, Organ had remained silent. There was no evidence that
Organ said anything to lead Laidlaw to believe that peace did not exist. The contract
was completed, and Laidlaw delivered the tobacco after the news became public.
The value of the tobacco then rose between 30 and 50 percent. Laidlaw retook pos-
session of the tobacco . At trial the jury was instructed to find for Organ, the plaintiff
(defendant in error), which it did.
C.J. INGERSOLL (for the plaintiffs in error): The first question is, whether the sale, under
the circumstances of the case, was a valid sale; whether fraud, which vitiates every
contract, must be proved, by the communication of positive misinformation, or by
withholding information whe'n asked. Suppression of material circumstances; within
the knowledge of the vendee, and not accessible to the vendor, is equivalent to fraud,
and vitiates the contract. Pothier, in discussing this subject, adopts the distinction
of the forum of conscience, and the forum of law; but he admits that tides est servanda.
The parties treated on an unequal footing, as the one party had received intelligence
of the peace of Ghent, at the time of the contract, and the other had not. This news
was unexpected, even at Washington, much more at New Orleans, the recent scene
of the most sanguinary operations of the war. In answer to the question, whether there
was any news calculated to enhance the price of the article, the vendee was silent.
This reserve, when such a question was asked, was equivalent to a false answer, and
as much calculated to deceive as the communication of the most fabulous intelligence.
Though the plaintiffs in error, after they h eard the news of peace, still went on, in .
ignorance of their legal rights, to complete the contract, equity will protect them ....
KEY (contra): ... The only real question in the cause is, whether the sale was invalid,
because the vendee did not communicate information which he received precisely
as the vendor might have got it, had he been equally diligent or equally fortunate ?
And, surely, on this question, there can be no doubt. Even if the vendor had been
entitled to the disclosure, he waived it, by not insisting on an answer to his question;
and the silence of the vendee might as well have been interpreted into an affirmative
as a negative answer. But, on principle, he was not bound to disclose. Even admitting
that his conduct was unlawful, in faro conscientiae, does that prove that it was so, in
the civil forum? Human laws are imperfect in this respect, and the sphere of morality
is more extensive than the limits of civil jurisdiction. The maxim of caveat emptor

767
CHAPTER 9 MISTAKE

could never have crept into the law, if the province of ethics had been co-extensive
with it. There was, in the present case, no circumvention or manoeuvre practised by
the vendee, unless rising earlier in the morning, and obtaining, by superior diligence
and alertness, that intelligence by which the price of commodities was regulated, be
such. It is a romantic equality that is contended for on the other side. Parties never
can be precisely equal in knowledge, either of facts or of the inferences from such
facts, and both must concur, in order to satisfy the rule contended for. The absence
of all authority in England and the United States; both great commercial countries,
speaks volumes against the reasonableness and practicability of such a rule.
C.J. INGERSOLL (in reply): Though the record may not show that anything tending
to mislead, by positive assertion, was said by the vendee, in answer to the question
proposed by [the seller's representative], yet it is a case of manoeuvre; of mental
reservation; of circumvention. The information was monopolized by the messengers
from the British fleet, and not imparted to the public at large, until it was too late for
the vendor to save himself. The rule of law and of ethics is the same. It is not a
romantic, but a practical and legal rule of equality and good faith, that is proposed
to be applied ....
MARSHALL CH J (for the court): The question in this case is, whether the intelligence
of extrinsic circumstances .. which might influence the price of the commodity, and
which was exclusively within the knowledge of the vendee, ought to have been
communicated by him to the vendor. The court is of opinion that he was not bound
to communicate it. It would be difficult to circumscribe the contrary doctrine w ithin
proper limits; where the means of intelligence are equ ally accessible to both parties.
But at the same time, each party must take care not to say or do anything tending
to impose upon the other. The court thinks that the absolute instruction of the judge
was erroneous, and that the question whether any imposition was practiced by the
vendee upon the vendor ought to have been submitted to the jury. For these reasons
the judgment must be reversed, and the cause remanded to the District Court of
Louisiana, with directions to award a venire facias de novo.
Venire de novo awarded.

NOTES AND QUESTIONS

1. In Bank of BC v Wren Development Ltd (1973), 38 DLR (3d) 759 (BCSC), Monroe J held
that the failure of the plaintiff to disclose material facts was a misrepresentation which ind uced
the defendant Alla n to sign the contract.

On June 21. 1971. he [Allan] went to see plaintiff's credit supervisor who told him that Smith
had recently made satisfactory arrangements for payment of the company loan and had
signed a new guarantee and asked Allan to do likewise, saying it was a routine procedure.
Allan inquired of the credit supervisor as to the collatera l secu rity (shares) held by the bank
and was told by the latter that he did not know particulars thereof but would make an inves-
tigation and report later to Allan. Thereupon Allan signed the new form of guarantee. When
he did so, he did not know that any of the shares had been released or exchanged by the
bank as aforesaid. On the contrary, since he had not been informed of any sale or exchange
of shares and because his signature was requ ired o n banking transactions entered into by
the company, and because neither he nor the company had ever authorized Smith to act as
their agent, he felt reasonably certain that the collateral security pledged by the company
was still held by the bank. In that mistaken belief he executed and delivered the new guar-
antee to the plaintiff..

768
 V. MISTAKE IN ASSUMPTIONS

Upon the evidence I find that the defendant Allan, when he signed the second guarantee,
was misled by the words, acts and conduct of the plaintiff into believing that there had been
no change in the collateral securities held by the plaintiff, and otherwise he would not have
signed it. In short, there was a unilateral mistake on the part of the defendant Allan which
was induced by the misrepresentation of the plaintiff in failing to disclose material facts to
him. In those circumstances, the defendant Allan is not liable to the plaintiff upon the sec-
ond personal guarantee.

Did the "words, acts and conduct of the plaintiff" really amount to a misrepresentation! How
does the holding in this case compare with that of Laidlaw, where silence in response to a
question was held not to be a misrepresentation?
2. American law recognizes an exception to the rule that parties negotiating agreements
have no duty to disclose material facts to each other. The American Law Institute, Restatement
of Contracts (St Paul, Minn: American Law Institute, 1981), s 161(b) recognizes a duty to disclose
"where [the representor] knows that disclosure of the fact would correct a mistake of the other
party as to a basic assumption on which that party is making the contract and if non-disclosure
of the fact amounts to a failure to act in good faith and in accordance with reasonable stan-
dards of fair dealing." Canadian common law has not recognized a comparable doctrine, but
in a recent decision the Ontario Court of Appeal in obiter articulated five factors that would
determine when such a duty should be imposed :

(1) a past course of dealing between the parties in which reliance for advice, etc., has
been an accepted feature;
(2) the explicit assumption by one party of advisory responsibilities;
(3) the relative positions of the parties, particularly in their access to information and in
their understanding of the possible demands of the dealin.g;
(4) the manner in which the parties were brought together and the expectation that could
create in the relying party; and
(5) whether trust and confidence has been knowingly reposed by one party in the other.

978011 Ontario Ltd v Cornell Engineering Co (2001), 198 DLR (4th) 615 (Ont CA), leave to
appeal refused (2001), 158 OAC 195n (SCC), additional reasons at (2001), 148 OAC 250 (CA),
drawing the factors from P Finn, "The Fiduciary Principle" in T Youdan, ed. Equity, Fiduciaries
and Trusts (Toronto: Carswell, 1989) 1at10-24.

BELL V LEVER BROTHERS LTD

[1932] AC 161 (HL)

Lever Brothers, Ltd., holding practically all the stock of the Niger Company, Limited,
entered into an agreement with Bell in 1926 by which the latter was to be employed
by Lever Brothers for five years at £8,000 a year, and to act as chairman of the Niger
Company. In 1929, in view of the amalgamation of the Niger Company with other
companies, Lever Brothers entered into an agreement with Bell on March 19, to pay
him £30,000 in satisfaction of all Bell's claims against them. The money was paid
and the employment terminated.
Later in the year, Lever Brothers discovered that Bell had been, in 1927, dealing
in, and making profits on his own account amounting to perhaps £1,000, in the same
materials that the Niger Company dealt in, and had not disclosed these secret profits.
Lever Brothers thereupon brought action claiming the return of the £30,000 paid
under the agreement of 1929, alleging fraudulent misrepresentation, and breach of
the former employment contracts.

769
CHAPTER 9 MISTAKE

At the trial before Wright J. the jury denied that the agreement of 1929 was
induced by fraud, but found that Bell had committed a breach of the employment
contract by undertaking the private dealings, and that Lever Brothers were entitled
to terminate the employment contract by reason of such breach, and would have
termfoated such contract had the facts been known. They further found that Lever
Brothers did not know of the private dealings in 1929 and would not have entered
into the agreement of March 19, 1929, had such facts been known to them.
On these findings Wright J. gave judgment for the plaintiffs, Lever Brothers, stat-
ing that the agreement was based on a mutual mistake, which in the language of
Kennedy v. Panama Royal Mail Co. (1867), L.R. 2 Q.B. 580, went "to the substance ... or
root of the matter." The mistake was the existence of the previous service agreement.
Bell appealed.
In the Court of Appeal, Scrutton L.J. said, in part: " ... In my opinion, on the facts of
the present case the defendants were under an obligation, before and at the time
of their negotiation of the contracts to terminate their services to disclose their
dealings in breach of their contracts, and the contracts to terminate can be avoided
by this non-disclosure. Wright J.'s ground of decision, with which I agree, is suffi-
cient to support his judgment, but I think it could also be supported on the ground
of failure to disclose material facts.
"I only desire to add that, in my view, the case of Kennedy v. Panama etc. Co. so
far as it decides that an innocent misrepresentation, though material, is not a ground
for rescission unless it is also fundamental, is no longer law, in view of the fusion of
common law and equity by the Judicature Acts, the rule of equity prevailing. Also I
reserve liberty to consider the decision in Seddon v. North Eastern Salt Co., [1905]
1 Ch. 326, so far as it decides that executed contracts cannot be rescinded for inno-
cent and material misrepresentation. The appeal must be dismissed with costs."
Lawrence and Greer L.JJ. agreed with Scrutton L.J. So Bell appealed again. In the
House of Lords, Lords Atkin, Blanesburgh and Thankerton gave reasons for allowing
the appeal. Viscount Hailsham and Lord Warrington of Clyffe dissented, taking the
view that, in the words of Lord Warrington, "the erroneous assumption on the part
of both parties to the agreement that the service contracts were undeterminable
except by agreement was of such a fundamental character as to constitute an under-
lying assumption without which the parties would not have made the contract."
LORD ATKIN: ... Two points present themselves for decision. Was the agreement of
March 19, 1929, void by reason of a mutual mistake of Mr. D'Arcy Cooper and Mr. Bell?
Could the agreement of March 19, 1929, be avoided by reason of the failure of
Mr. Bell to disclose his misconduct in regard to the cocoa dealings?
My Lords, the rules of law dealing with the effect of mistake on contract appear
to be established with reasonable clearness. If mistake operates at all it operates so
as to negative or in some cases nullify consent. The parties may be mistaken in the
identity of the contracting parties, or in the existence of the subject-matter of the
contract. These mistakes may be by one party, or by both, and the legal effect may
depend upon the class of mistake above mentioned. Thus a mistaken belief by A,
that he is contracting with B, whereas in fact he is contracting with C, will negative
consent where it is clear that the intention of A was to contract only with B. So the
agreement of A and B to purchase a specific article is void if in fact the article had
perished before the date of sale. In this case, though the parties in fact were agreed
about the subject-matter, yet a consent to transfer or take delivery of something not
existent is deemed useless, [and] the consent is nullified. As codified in the Sale of
Goods Act the contract is expressed to be void if the seller was in ignorance of the
destruction of the specific chattel. I apprehend that if the seller with knowledge that

770
 V. MISTAKE IN ASSUMPTIONS

a chattel was destroyed purported to sell it to a purchaser, the latter might sue for
damages for non-delivery though the former could not sue for non-acceptance, but
I know of no case where a seller has so committed himself. This is a case where
mutual mistake certainly and unilateral mistake by the seller of goods will prevent a
contract from arising. Corresponding to mistake as to the existence of the subject-
matter is mistake as to title in cases where, unknown to the parties, the buyer is
already the owner of that which the seller purports to sell to him. The parties intended
to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is
naturali ratione inutilis. This is the case of Cooper v. Phibbs (1867), L.R. 2 H.L. 149
where A agreed to take a lease of a fishery from B., though contrary to the belief of
both parties at the time. A was tenant for life of the fishery and B. appears to have
had no title at all. To such a case Lord Westbury applied the principle that if parties
contract under a mutual mistake and misapprehension as to th eir relative and
respective rights the result is that the agreement is liable to be set aside as having
proceeded upon a common mistake. Applied to the context the statement is only
subject to the criticism that the agreement would appear to be void rather than
voidable. Applied to mistake as to rights generally it would appear to be too wide.
Even where the vendor has not title, though both parties think he has, the correct
view would appear to be that there is a contract: but that the vendor has either com-
mitted a breach of the stipulation as to title, or is not able to perform his contract.
The contract is unenforceable by him but is not void.
Mistake as to quality of the thing contracted for raises more difficult questions.
In such a case a mistake will not affect assent unless it is the mistake of both parties,
and is as to the existence of some quality which makes the thing without the quality
essentially different from the thing as it was believed to be. Of course it may appear that
the parties contracted that the article should possess the quality which one or other
or both mistakenly believed it to possess. But in such a case there is a contract and the
inquiry is a different one, being whether the contract as to quality amounts to a condi-
tion or a warranty, a different branch of the law. The principles to be applied are to
be found in two cases which as far as my knowledge goes, have always been treated
as authoritative expositions of the law. The first is Kennedy v. Panama Royal /Vlai/ Co.
In that case the plaintiff had applied for shares in the defendant company on the
faith of a prospectus which stated falsely but innocently that the company had a
binding contract with the Government of New Zealand for the carriage of mails. On
discovering the true facts the plaintiff brought an action for the recovery of the sums
he had paid on calls. The defendant brought a cross action for further calls ....
The Court came to the conclusion in that case that, though there was a misap-
prehension as to that which was a material part of the motive inducing the applicant
to ask for the shares, it did not prevent the shares from being in substance those he
applied for.
The next case is Smith v. Hughes (1871), LR. 6 O.B. 597, the well known case as to
new and old oats . ...
In these cases I am inclined to think that the true analysis is that there is a con-
tract, but that the one party is not able to supply the very thing whether goods or
services that the other party contracted to take; and therefore the contract is unen-
forceable by the one if executory, while if executed the other can recover back money
paid on the ground of failure of the consideration.
We are now in a position to apply to the facts of this case the law as to mistake as
far as it h as been stated. It is essential in this part of the discussion to keep in mind
the finding of the jury acquitting the defendants of fraudulent misrepresentation or
concealment in procuring the agreements in question. Grave injustice may be done

771
CHAPTER 9 MISTAKE

to the defendants and confusion introduced into the legal conclusion, unless it is
quite clear that in considering mistake in this case no suggestion of fraud is admis-
sible and cannot strictly be regarded by the judge who has to determine the legal
issues raised. The agreement which is said to be void is the -agreement contained in
the letter of March 19, 1929, that Bell would retire from the Board of the Niger Com-
pany and its subsidiaries, and that in consideration of his doing so Levers would pay
him as compensation for the termination of his agreements and consequent loss of
office the sum of £30,000 in full satisfaction and discharge of all claims and demands
of any kind against Lever Brothers, the Niger Company or its subsidiaries. The agree-
ment, which as part of the contract was terminated, had been broken so that it could
be repudiated. Is an agreement to terminate a broken contract different in kind from
an agreement to terminate an unbroken contract, assuming that the breach has
given the one party the right to declare the contract ~tan end' I feel the weight of
the plaintiffs' contention that a contract immediately determinable is a different
thing from a contract for an unexpired term, and that the difference in kind can be
illustrated by the immense price of release from the longer contract as compared
with the shorter. And I agree that an agreement to take an assignment of a lease for
five years is not the same thing as to take an assignment of a lease for three years,
still less a term for a few months. But, on the whole, I have come to the conclusion
that it would be wrong to decide that an agreement to terminate a definite specified
contract is void if it turns out that the agreement had already been broken and could
have been terminated otherwise. The contract released is the identical contract in
both cases, and the party paying. for release gets exactly what he bargains for. It
seems immaterial that he could have got the same result in another way, or that if
he had known the true facts he would not have entered into the bargain. A buys B's
horse; he thinks the horse is sound and he pays the price of a sound horse; he would
certainly not have bought the horse if he had known as the fact is that the horse is
unsound. If B has made no representation as to soundness and has not contracted
that the horse is sound, A is bound and cannot recover back the price. A buys a
picture from B; both A and B believe it to be the work of an old master, and a high
price is paid. It turns out to be a modem copy. A has no remedy in the absence of
representation or warranty. A agrees to take on lease or to buy from B an unfurnished
dwelling-house. The house is in fact uninhabitable. A would never have entered into
the bargain if he had known the fact. A has no remedy, and the position is the same
whether B knew the facts or not, so long as he made no representation or gave no
warranty. A buys a roadside garage business from B abutting on a public thorough-
fare; unknown to A, but known to B, it has already been decided to construct a bypass
road which will divert substantially the whole of the traffic from passing A's garage.
Again A has no remedy. All these cases involve hardship on A and benefit B, as most
people would say, unjustly. They can be supported on the ground that it is of para-
mount importance that contracts should be observed, and that if parties honestly
comply with the essentials of the formation of contracts-Le., agree in the same
terms on the same subject-matter-they are bound, and must rely on the stipulations
of the contract for protection from the effect of facts unknown to them.
This brings the discussion to the alternative mode of expressing the result of a
mutual mistake. It is said that in such a case as the present there is to be implied
a stipulation in the contract that a condition of its efficacy is that the facts should be
as understood by both parties-namely, that the contract could not be terminated
till the end of the current term. The question of the existence of conditions, express
or implied, is obviously one that affects not the formation of contract, but the inves-
tigation of the terms of the contract when made. A condition derives its efficacy from

772
 V. M ISTAKE IN ASSUMPTIONS

the consent of the parties express or implied. They have agreed, but on what terms.
One term may be that unless the facts are or are not of a particular nature, or unless
an event has or has not happened, the contract is not to take effect. With regard to
future facts such a condition is obviously contractual. Till the event occurs the parties
are bound. Thus the condition (the exact terms of which need not here be investi-
gated) that is generally accepted as underlying the principle of the frustration cases
is contractual, an implied condition. Sir John Simon formulated for the assistance
of your Lordships a proposition which should be recorded: "Whenever it is to be
inferred from the terms of a contract or its surrounding circumstances that the
consensus has been reached upon the basis of a particular contractual assumption,
and that assumption is not true, the contract is avoided: i.e., it is void ab initio if the
assumption is of present fact and it ceases to bind if the assumption is of future fact."
I think few would demur to this statement but its value depends upon the mean-
ing of "a contractual assumption," and also upon the true meaning to be attached to
"basis," a metaphor which may mislead. When used expressly in contracts, for
instance, in policies of insurance, which state that the truth of the statements in the
proposal is to be the basis of the contract of insurance, the meaning is clear. The
truth of the statements is made a condition of the contract, which failing, the con -
tract is void unless the condition is waived. The proposition does not amount to
more than this that, if the contract expressly or impliedly contains a term that a
particular assumption is a condition of the contract, the contract is avoided if the
assumption is not true. But we have not advanced far on the inquiry how to ascertain
whether the contract does contain such a condition. Various words are to be found
to define the state of things which make a condition. "In the contemplation of both
parties fundamental to the continued validity of the contract,'' "a foundation essential
to its existence," "a fundamental reason for making it,'' are phrases found in the
important judgment of Scrutton L.J. in the present case. The first two phrases appear
to me to be unexceptionable. They cover the case of a contract to serve in a particular
place, the existence of which is fundamental to the service, or to procure the services
of a professional vocalist, whose continued health is essential to performance. But
"a fundamental reason for making a contract" may, with respect, be misleading. The
reason of one party only is presumably not intended, but in the cases I have suggested
above, of the sale of a horse or of a picture, it might be said that the fundamental
reason for making the contract wa's the belief of both parties that the horse was
sound or the picture an old master, yet in neither case would the condition as I think
exist. Nothing is more dangerous than to allow oneself liberty to construct for the
parties contracts which they have not in terms made by importing implications
which would appear to make the contract more business-like or more just. The
implications to be made are to be no more than are "necessary" for giving business
efficacy to the transaction, and it appears to me that, both as to existing facts and
future facts, a condition would not be implied unless the new state of facts makes
the contract something different in kind from the contract in the original state of
facts. Thus, in Krell v. Henry, [1903] 2 KB . 740, Vaughan Williams L.J. finds that the
subject of the contract was "rooms to view the procession": the postponement,
therefore, made the rooms not rooms to view the procession. This also is the test
finally chosen by Lord Sumner in Bank Line v. Arthur Capel & Co., [1919] A.C. 435,
agreeing with Lord Dunedin in Metropolitan Water Board v. Dick Kerr, [1918] A.C. 119,
where, dealing with the criterion for determining the effect of interruption in "frus-
trating" a contract, he says: "An interruption maybe so long as to destroy the identity
of the work or service, when resumed, with the work or service when interrupted."
We therefore get a common standard for mutual mistake and implied conditions

773
CHAPTER 9 MISTAKE

whether as to existing or as to future facts. Does the state of the new facts destroy
the identity of the subject-matter as it was in the original state of facts? To apply the
principle to the infinite combinations of facts that arise in actual experience will
continue to be difficult, but if this case results in establishing order into what has
been a somewhat confused and difficult branch of the law it will have served a useful
purpose.
I have already stated my reasons for deciding that in the present case the identity
of the subject-matter was not destroyed by the mutual mistake, if any, and need not
repeat them.
It now becomes necessary to deal with the second point of the plaintiffs-namely,
that the contract of March 19, 1929, could be avoided by them in consequence of the
non-disclosure by Ben of his misconduct as to the cocoa dealings. Fraudulent con-
cealment has been negatived by the jury; this claim is based upon the contention
that Ben owed a duty to Levers to disclose his misconduct, and that in default of
disclosure the contract was voidable. Ordinarily the failure to disclose a material fact
which might influence the mind of a prudent contractor does not give the right to
avoid the contract. The principle of caveat emptor applies outside contracts of sale.
There are certain contracts expressed by the law to be contracts of the utmost good
faith, where material facts must be disclosed; if not, the contract is voidable. Apart
from the special fiduciary relationships, contracts for partnership and contracts of
insurance are the leading instances. In such cases the duty does not arise out of
contract; the duty of a person proposing an insurance arises before a contract is
made, so of an intending partner. Unless this contract can be brought within this
limited category of contracts uberrimae fidei it appears to me that this ground of
defence must fail. I see nothing to differentiate this agreement from the ordinary
contract of service; and I am aware of no authority which places contracts of service
within the limited category I have mentioned. It seems to me clear that master and
men negotiating for an agreement of services are as unfettered as in any other
negotiation. Nor can I find anything in the relation of master and servant, when
established, that places agreements between them within the protected category.
It is said that there is a contractual duty of the servant to disclose his past faults .
I agree that the duty in the servant to protect his master's property may involve the
duty to report a fellow servant whom he knows to be wrongfully dealing with that
property. The servant owes a duty not to steal, but, having stolen, is there superadded
a duty to confess that he has stolen? I am satisfied that to imply such a duty would
be a departure from the wen established usage of mankind and would be to create
obligations entirely outside the normal contemplation of the parties concerned. If a
man agrees to raise his butler's wages, must the butler disclose that two years ago
he received a secret commission from the wine merchant; and if the master discov-
ers it, can he, without dismissal or after the servant has left, avoid the agreement for
the increase in salary and recover back the extra wages paid? If he gives his cook a
month's wages in lieu of notice can he, on discovering that the cook has been pilfer-
ing the tea and sugar, claim the return of the month's wages? I think not. He takes
the risk; if he wishes to protect himself he can question his servant, and will then be
protected by the truth or otherwise of the answers.
I agree with the view expressed by Avory J . in Healy v. Societe Anonyme Fram;aise
Rubastic, [1917] 1 K.B. 946, on this point. It will be noticed that Ben was not a director
of Levers, and, with respect, I cannot accept the view of Greer L.J. that if he was in
fiduciary relationship to the Niger Company he was in a similar fiduciary relation-
ship to the shareholders, or to the particular shareholders (Levers) who held 99 per
cent of the shares. Nor do I think that it is alleged or proved that in making the
agreement of March 19, 1929, Levers were acting as agents for the Niger Company.

774
 V. MISTAKE IN ASSUMPTIONS

In the matter of the release of the service contract and the payment of £30,000 they
were acting quite plainly for themselves as principals. It follows that on this ground
also the claim fails.
The result is that in the present case servants unfaithful in some of their work
retain large compensation which some will think they do not deserve. Nevertheless
it is of greater importance that well established principles of contract should be
maintained than that a particular hardship should be redressed; and I see no way of
giving relief to the plaintiffs in the present circumstances except by confiding to the
Courts loose powers of introducing terms into contracts which would only serve to
introduce doubt and confusion where certainty is essential.
I think therefore that this appeal should be allowed; and I agree with the order to
be proposed by my noble and learned friend, Lord Blanesburgh.

SOLLE V BUTCHER
[1950] 1 KB 671

The plaintiff rented from the defendant an apartment, and took a lease at £250 a year
for seven years. Both parties believed that the apartment was not governed by rent
control legislation, and that £250 was a legal rent. In fact the apartment was con-
trolled by the Rent Acts, and the maximum rent chargeable was £140 a year. But £250
was a fair rent, and by complying with certain formalities before the execution of
the lease, the landlord could have charged that amount. The plaintiff now claims to
be entitled to the lease at £140.
DENNING LJ: ... In this plight the landlord seeks to set aside the lease. He says, with
truth, that it is unfair that the tenant should have the benefit of the lease for the
outstanding five years of the term at £140 a year, when the proper rent is £250 a year.
If he cannot give a notice of increase now, can he not avoid the lease 7 The only
ground on which he can avoid it is on the ground of mistake. It is quite plain that
the parties were under a mistake. They thought that the flat was not tied down to a
controlled rent, whereas in fact it was. In order to see wh ether the lease can be
avoided for this mistake it is necessary to remember that mistake is of two kinds :
first, mistake which renders the contract void, that is, a nullity from the beginning,
which is the kind of mistake which was dealt with by the courts of common law;
and, secondly, mistake which renders the contract not void, but voidable, that is,
liable to be set aside on such terms as the court thinks fit, which is the kind of mistake
which was dealt with by the courts of equity. Much of the difficulty which has
attended this subject h as arisen because, before the fusion of law and equity, the
courts of common law, in order to do justice in the case in hand, extended this
doctrine of mistake beyond its proper limits and held contracts to be void which
were really only voidable, a process which was capable of being attended with much
injustice to third persons who had bought goods or otherwise committed themselves
on the faith that .t here was a contract. In the well-known case of Cundy v. Lindsay,
Cundy suffered such an injustice. He bought the handkerchiefs from the rogue,
Blenkarn, before the Judicature Acts came into operation. Since the fusion of law
and equity, there is no reason to continue this process, and it will be f9und that only
those contracts are now held void in which the mistake was such as to prevent the
.formation of any contract at all.
Let me first consider mistakes which render a contract a nullity. All previous
decisions on this subject must now be read in the light of Bell v. Lever Bros. Ltd. The
correct interpretation of that case, to my mind, is that, once a contract has been

775
CHAPTER 9 MISTAKE

made, that is to say, once the parties, whatever their inmost states of mind, have to
all outward appearances agreed with sufficient certainty in the same terms on the
same subject matter, then the contract is good unless and until it is set aside for failure
of some condition on which the existence of the contract depends, or for fraud, or
on some equitable ground. Neither party can rely on his own mistake to say it was a
nullity from the beginning, no matter that it was a mistake which to his mind was
fundamental, and no matter that the other party knew that he was under a mistake.
A fortiori, if the other party did not know of the mistake, but shared it. The cases
where goods have perished at the time of sale, or belong to the buyer, are really
contracts which are not void for mistake but are void by reason of an implied condi-
tion precedent, because the contract proceeded on the basic assumption that it was
possible of performance ....
Applying these principles, it is clear that here there was a contract. The parties
agreed in the same terms on the same subject-matter. It is true that the landlord was
under a mistake which was to him fundamental: he would not for one moment have
considered letting the flat for seven years if it meant that he could only charge £140 a
year for it. He made the fundamental mistake of believing that the rent he could
charge was not tied down to a controlled rent; but, whether it was his own mistake
or a mistake common to both him and the tenant, it is not a ground for saying that the
lease was from the beginning a nullity. Any other view would lead to remarkable results,
for it would mean that, in the many cases where the parties mistakenly think a house
is outside the Rent Restriction Acts when it is really within them, the tenancy would be
a nullity, and the tenant would have to go; with the result that the tenants would not
dare seek to have their rents reduc~d to the permitted amounts lest they should be
turned out.
Let me next consider mistakes which render a contract voidable, that is, liable to
be set aside on some equitable ground. Whilst presupposing that a contract was good
at law, or at any rate not void, the court of equity would often relieve a party from
the consequences of his own mistake, so long as it could do so without injustice to
third parties. The court, it was said had power to set aside the contract whenever it
was of opinion that it was unconscientious for the other party to avail himself of the
legal advantage which he had obtained ....
The court had, of course, to define what it considered to be unconscientious, but
in this respect equity has shown a progressive development. It is now clear that a
contract will be set aside if the mistake of the one party has been induced by a
material misrepresentation of the other, even though it was not fraudulent or fun-
damental; or if one party, knowing that the other is mistaken about the terms of an
offer, or the identity of the person by whom it is made, lets him remain under his
delusion and concludes a contract on the mistaken terms instead of pointing out
the mistake. That is, I venture to think, the ground on which the defendant in Smith
v. Hughes would be exempted nowadays, and on which, according to the view by
Blackburn J. of the facts, the contract in Lindsay v. Cundy, was voidable and not void: ...
A contract is.also liable in equity to be set aside if the parties were under a com-
mon misapprehension either as to facts or as to their relative and respective rights,
provided that the misapprehension was fundamental and that the party seeking to
set it aside was not himself at fault. ...
The principle so established by Cooper v. Phibbs has been repeatedly acted on ....
It is in no way impaired by Bell v. Lever Bros . Ltd., which was treated in the House of
Lords as a case at law depending on whether the contract was a nullity or not. If it
had been considered on equitable grounds, the result might have been different. ...
Applying that principle to this case, the facts are that the plaintiff, the tenant, was
a surveyor who was employed by the defendant, the landlord, not only to arrange

776
 V. MISTAKE IN ASSUMPTIONS

finance for the purchase of the building and to negotiate with the rating authorities
as to the new rateable values, but also to let the flats . He was the agent for letting, and
he clearly formed the view that the building was not controlled. He told the valuation
officer so. He advised the defendant what were the rents which could be charged.
He read to the defendant an opinion of counsel relating to the matter, and told him
that in his opinion he could charge £250 and that there was no previous control. He
said that the flats came outside the Act and that the defendant was "clear." The
defendant relied on what the plaintiff told him, and authorized the plaintiff to let at
the rentals which he had suggested. The plaintiff not only let the four other flats to
other people for a long period of years at the new rentals, but also took one himself
for seven years at £250 a year. Now he turns round and says, quite unashamedly,
that he wants to take advantage of the mistake to get the flat at £140 a year for seven
years instead of the £250 a year, which is not only the .r ent he agreed to pay but also
the fair and economic rent; and it is also the rent permitted by the Acts on compli-
ance with the necessary formalities. If the rules of equity have become so rigid that
they cannot remedy such an injustice, it is time we had a new equity, to make good
the omissions of the old. But, in my view, the established rules are amply sufficient
for this case.

[Judgment was given for the defendant on terms that the plaintiff must elect between
rescission and paying the full rent.]

MAGEE V PENNINE INSURANCE CO

(1969] 2 OB 507 (CA)

· LORD DENNING MR: In 1961 Mr. Thomas Magee senior, the plaintiff, aged 58, acquired
an Austin car. He signed a proposal form for insurance. In it he said that the car
belonged to him. He was asked to give details of his driving licence "and of all other
persons who to .your present knowledge will drive." These were the details he gave:

(1) "Thomas Magee"-that is himself- "provisional licence aged 58 ."

(2) "John Magee"-that is his elder son-"Police mobile dri ver, aged 35." He had
an annual licence.
(3) "John J. Magee"-that is his yo unger son-"joiner, aged 18-provisional licence."

Mr. Magee signed this declaration: "I ... do hereby declare that the car described
is and shall be kept in good condition and that the answers above given are in every
respect true and correct and I ... hereby agree that this declaration shall be the basis
of the contract of insurance between the company and myself . ..." Those details were
not written in by Mr. Magee himself. They were written in by Mr. Atkinson at the
garage where he got the car. The details unfortunately were completely wrong.
Mr. Thomas Magee had never driven a car himself. He had never had a licence, not
even a provisional one. He was getting the car really for his son of 18 to drive. And
we all know that a young man of 18 has to pay a much higher insurance than a man
of 25 or over. This company said they would not have insured a young man of 18.
The judge found that Mr. Thomas Magee, the father, had not been fraudulent.
He did not himself till in the details. They were tilled in by Mr. Atkinson, the man at
the garage. And then Mr. Thomas Magee signed them. It was Mr. Atkinson who
made some mistake or other. But there it was. A misrepresentation was made and
on the faith of it being true, the insurance company granted an insurance policy to
Mr. Magee.

777
CHAPTER 9 MISTAKE

Thereafter the policy was renewed each year and the premiums were paid. In
1964 that car was replaced by another. The policy was renewed for the new car
without anything further being said about the drivers or the ownership. The com -
pany assumed, no doubt, that the same details applied.
On April 25, 1965, there was an accident. The younger son, John Magee, was
driving the new car at 4 o'clock in the morning. He ran into a shop window. The
plate glass was smashed and the car was a complete wreck. The father, Mr. Thomas
Magee, put in a claim form, in which he said that the car was £600 in value. That
was clearly wrong because the price new was only £54 7 the year before. The insurers
thereupon got their engineer to look at it. On May 12, 1965, the broker wrote to
Mr. Thomas Magee a letter, in which he said: " ... We have today been advised by your
insurers that their engineer considers your vehicle is damaged beyond repair. The
engineer considers that the pre -accident market value of the vehicle was £410 and
they are therefore prepared to offer you this amount, less the £25 accidental damage
excess in settlement of your claim. We should be pleased to receive your confirma-
tion that this is acceptable . ... " There was no written acceptance, but it was accepted
by word of mouth. That seemed to be a concluded agreement whereby the company
agreed to pay £385.
But within the next few days the insurance company made further inquiries. One
of their representatives saw Mr. Magee and took a statement from him. Then the
truth was discovered. Mr. Magee did not drive at all. He had never had a driving
licence, not even a provisional one. He said that the car was never his property but
was his son's car: and that it was his son, the younger son, who had driven the car
and was the only person who had ever driven it. On discovering those facts, the
insurance company said they were not liable on the insurance policy.
They had been induced to grant it, they said, by the misrepresentations in the
original proposal form; and also by reason of non-disclosure of material facts,
namely, that the son aged 18 was normally to be the driver.
Mr. Magee brought an action in the county court in which he claimed the £385.
He said it was payable under the insurance policy, or, alternatively, on an agreement
of compromise contained in the letter of May 12.
The judge rejected the claim on the policy itself, because the insurance was
induced by misrepresentation. He found that the company were entitled to repudiate
the policy because of the inaccuracy of Mr. Magee's answers. That finding was not
challenged in this court. Mr. Taylor, on behalf of Mr. Magee, admitted that he could
not claim on the policy.
But the judge upheld the claim on the letter of May 12. He said it was a binding
contract of compromise. I am not so sure about this. It might be said to be a mere
quantification of the account which should be paid in case the insurance company
were liable: and that it did not preclude them from afterwards contesting liability.
But, on the whole, I do not think we should regard it as a mere quantification. The
letter contains the important words: "in settlement of your claim," which import that
it is to be settled without further controversy. In short, it bears the stamp of an agree-
ment of compromise. The consideration for it was the ascertainment of a sum which
was previously unascertained.
But then comes the next point. Accepting that the agreement to pay £385 was an
agreement of compromise. Is it vitiated by mistake? The insurance company were
clearly under a mistake. They thought that the policy was good and binding. They
did not know, at the time of that letter, that there had been misrepresentations in the ·
proposal form. If Mr. Magee knew of their mistake-if he knew that the policy was
ba.d -he certainly could not take advantage of the agreement to pay £385. He would

778
 V. MISTAKE IN ASSUMPTIONS

be "snapping at an offer which he knew was made under a mistake": and no man is
allowed to get away with that. But I prefer to assume that Mr. Magee was innocent.
I think we should take it that both parties were under a common mistake. Both parties
thought that the policy was good and binding. The letter of March 12, 1968 was writ-
ten on the assumption that the policy was good whereas it was in truth voidable.
What is the effect in law of this common mistake? Mr. Taylor said that the agree-
ment to pay £385 was good, despjte this common mistake. He relied much on Bell
v. Lever Brothers, Ltd., [1932] AC. 161 and its similarity to the present case. He submit-
ted that, inasmuch as the mistake there did not vitiate that contract, the mistake here
should not vitiate this one. I do not propose today to go through the speeches in that
case. They have given enough trouble to commentators already. I would say simply
this: A common m istake, even on a most fundamental matter, does not make a
contract void at law: but it makes it voidable in equity. I analysed the cases in Solle
v. Butcher, [1950] 1 K.B . 671, and I would repeat what I said there, at p. 693: "A contract
is also liable in equity to be set aside if the parties were under a common misap-
prehension either as to facts or as to their relative and respective rights, provided
that the misapprehension was fundamental and that the party seeking to set it aside
was not himself at fault." Applying that principle here, it is clear that, when the insur-
ance company and Mr. Magee made this agreement to pay £385, they were both
under .a common mistake which was fundamental to the whole agreement. Both
thought that Mr. Magee was entitled to claim under the policy of insurance, whereas
he was not so entitled. That common mistake does not make the agreement to pay
£385 a nullity, but it makes it liable to be set aside in equity. •
This brings me to a question which has caused me much difficulty. Is this a case
in which we ought to set the agreement aside in equity? I have hesitated on this
point, but.I cannot shut my eyes to the fact that Mr. Magee had no valid claim on the
insurance policy: and, if he had no claim on the policy, it is not equitable that he
should have a good claim on the agreement to pay £385, seeing that it was made
under a fundamental mistake. It is not fair to hold th e insurance company to an
agreement which they would not have dreamt of making if they had not been under
a mistake. I would, therefore, uphold the appeal and give judgment for the insurance
company.
[Fenton Atkinson LJ agreed. Winn LJ dissented. ]

NOT E
In Toronto-Dominion Bank v Fortin (No 2) (1978), 88 D LR (3d) 232 (BCSC), a fundamenta l
mistake was held to be grounds to set aside a compromise agreement. Fortin contracted to
buy a group of compan ies from a receiver- manager, but subsequently changed his mind and
repud iated the agreement, consenting to pay $10,000 to the receiver-manager in a comprom-
ise agreement in satisfaction of all claims arising from the original contract. Shortly thereafter,
the BC Supreme Court ru led that the receiver did not have authority to offer the compa nies
for sale, and thus the origina l contract had been void. Fortin argued for the return of the
$10,000, because the compromise agreement had been entered into under a mistake of law.
Although the basic rule is that a compromise agreement is valid despite a mistake of law as
long as the claim compromised is bona fide even though invalid, in th is case the pa rties had
not sought legal advice on this point, and therefore were not bound. The court went on to say
that a mistake can be so fundamental that a comprom ise agreement cannot stand, where the
consensus was reached on the basis of a mistaken fundamental assumption. The original
contract was void ab initio, and the compromise agreement cou ld be set aside in equity.

779
CHAPTER 9 MISTA KE

GREAT P:EACE SHIPPING LTD V TSAVLIRIS

SALVAGE (INTERNATIONAL) LTD
[2002] 4 All ER 689 (CA)

The defendants offered salvage services to a vessel which had suffered serious
structural damage in the South Indian Ocean. The offer having been accepted, the
defendants approached London brokers for a tug, but the tug found was five to six
days sailing time away. Fearing for the safety of the crew, the defendants sought a
merchant vessel in the vicinity to assist. The defendants were given the names of
four vessels reported to be in the area, the nearest being the claimant's vessel, which
was believed to be about 35 miles away from the damaged vessel. Negotiations
between the defendants and the claimants resulted in a hire contract fpr a minimum
of five days to escort and stand by the damaged vessel for the purpose of saving life.
The agreement contained a cancellation clause giving a right to cancel on payment
of five days' hire. When it was discovered that the vessels were in fact 410 miles apart,
not 35 miles as previously understood, the defendants did not immediately cancel
the contract but sought a nearer vessel to assist. A fevv: hours later such assistance
was obtained. The defendants then cancelled the contract with the claimants and
refused to make any.payment for the hire of their vessel. The claimants brought an
action claiming US$82,500 as moneys payable under the contract or as damages for
wrongful repudiation. The defendants disputed the claim on the ground that the
purported contract had been concluded by reason of a fundamental mistake of fact
in that both partjes had proceeded on the fundamental assumption that the two
vessels were in close proximity when they were not, and that therefore the contract
was either void at law or voidable and the defendants were entitled to rescission in
equity. The judge gave judgment for the claimants.
LORD PHILLIPS OF WORTH MATRAVERS MR (for the court):

INTRODUCTION

[1] In 1931 in Bell v. Lever Bros. Ltd. [1932] AC. 161 Lord Atkin made a speech which
he must have anticipated would be treated as the definitive exposition of the rules
of law governing the effect of mistake on contract. In 1949 in Solle v. Butcher [1950]
1 KB. 671 Denning L.J. identified an equitable jurisdiction which permits the court
to intervene where the parties have concluded an agreement that was binding in
law under a common misapprehension of a fundamental nature as to the material
f\].cts or their respective rights. Over the last 50 years judges and jurists have wrestled
with the problem of reconciling these two decisions and identifying with precision
the principles that they lay down.
[2] In the court below Toulson J. used this case as a vehicle to review this difficult
area of jurisprudence. He reached the bold conclusion that the view of the jurisdic-
tion of the court expressed by Denning L.J. in Solle v. Butcher was "over-broad," by
which he meant wrong. Equity neither gave a party a right to rescind a contract on
grounds of common mistake nor conferred on the court a discretion to set aside a
contract on such grounds.

THE MISTAKE IN THIS CASE ,

[31] ... In the present case the parties were agreed as to the express terms of the
contract. The defendants agreed that the Great Peace would deviate towards the Cape
Providence and, on reaching her, escort her so as to be on hand to save the lives of

780
 V. MISTAKE IN ASSUMPTIONS

her crew, should she founder. The contractual services would terminate when the
salvage tug came up with the casualty. The mistake relied upon by the defendants
is as to an assumption that they claim underlay the terms expressly agreed. This was
that the Great Peace was within a few hours sailing of the Cape Providence. They
contend that this mistake was fundamental in that it would take the Great Peace
about 39 hours to reach a position where she could render the services which were
the object of the contractual adventure.
[32] Thus what we are here concerned with is an allegation of a common mis-
taken assumption of fact which renders the service that will be provided if the
contract is performed in accordance with its terms something different from the
performance that the parties contemplated. This is the type of mistake which fell to
be considered in Bell v. Lever Bros. Ltd. [1932] AC. 161. We shall describe it as "common
mistake," although it is often alternatively described as "mutual mistake."
[33] Mr. Reeder for the defendants puts his case in two alternative ways. First he
submits that performance of the contract in the circumstances as they turned out
to be would have been fundamentally different from the performance contemplated
by the parties, so much so that the effect of the mistake was to deprive the agreement
of the consideration underlying it. Under common law, so he submits, the effect of
such a mistake is to render the contract void . ... The foundation for this submission
is Bell v. Lever Bros. Ltd.
[34] If the facts of. this case do not meet that test, Mr. Reeder submits that they
none the less give rise to a right of rescission in equity. He submits that such a right
arises whenever the parties contract under a common mistake as to a matter that
can properly be described as "fundamental" or "material" to the agreement in ques-
tion. Here he draws an analogy with the test for rescission where one party, by
innocent misrepresentation, induces the other to enter into a contract-indeed that
is one situation where the parties contract under a common mistake. The foundation
for this submission is Solle v. Butcher [1950] 1 K.B . 671.

BELL V. LEVER BROS. LTD.

[The court quotes extensively from the decision in Bell v Lever Brothers Ltd.]
[50] It is generally accepted that the principles of the law of common mistake
expounded by Lord Atkin in Bell v. Lever Bros. Ltd. [1932] AC. 161 were based on the
common law. The issue raised [here] .. . is whether there subsists a separate doctrine
of common mistake founded in equity which enables the court to intervene in cir-
cumstances where the mistake does not render the contract void under the common
law principles. The first step is to identify the nature of the common law doctrine of
mistake that was identified, or established, by Bell v. Lever Bros. Ltd.
[51] .. . Lord Atkin and Lord Thankerton were breaking no new ground in holding
void a contract where, unknown to the parties, the subject matter of the contract no
longer existed at the time that the contract was concluded.

[55] The position is very different where there is "a mistake as to the existence of
some quality of the subject matter which makes the thing without the quality essen-
tially different from the thing as it was believed to be." In such a situation it may be
possible to perform the letter of the contract. In support of the proposition that a
contract is void in such circumstances, Lord Atkin cited two authorities, in which
he said that the principles to be applied were to be found . The first was Lord Kennedy
v. Panama, New Zealand and Australian Royal /v1ail Co. Ltd. L.R. 2 0.B. 580 .

781
CHAPTER 9 MISTAKE

[60] The other case to which Lord Atkin referred was Smith v. Hughes (1871) L.R.
6 O.B. 597. On no view did that difficult case deal with common mistake and we are
not able to see how it supported the test formulated by Lord Atkin, as set out . . above.
Indeed, Lord Atkin himself commented [1932] AC. 161, 222:
In these cases I am inclined to think that the true analysis is that there is a contract, but
that the one party is not able to supply the very thing whether goods or services that
the other party contracted to take; and therefore the contract is unenforceable by the
one if executory, while if executed the other can recover back money paid on the
ground of failure of the consideration.
[61] We conclude that the two authorities to which Lord Atkin referred provided an
insubstantial basis for his formulation of the test of common mistake in relation to the
quality of the subject matter of a contract. Lord Atkin advanced an alternative basis for
his test: the implication of a term of the same nature as that which was applied under
the doctrine of frustration, as it was then understood. In so doing he adopted the
analysis of Scrutton L.J. in the Court of Appeal. It seems to us that this was a more solid
jurisprudential basis for the test of common mistake that Lord Atkin was proposing.
At the time of Bell v. Lever Bros. Ltd. [1932] AC. 161 the law of frustration and common
mistake had advanced hand in hand on the foundation of a common principle.
Thereafter frustration proved a more fertile ground for the development of this prin -
ciple than common mistake, and consideration of the development of the law of
frustration assists with the analysis of the law of common mistake.

[The court discusses the frustration cases.]

[73] ... What do these developments in the law of frustration have to tell us about
the law of common mistake 7 First that the theory of the implied term is as unrealistic
when considering common mistake as when considering frustration. Where a fun -
damental assumption upon whieh an agreement is founded proves to be mistaken,
it is not. realistic to ask whether the parties impliedly agreed that in those circum -
stances the contract would not be binding. The avoidance of a contract on the
ground of common mistake results from a rule of law under which, if it transpires
that one or both of the parties have agreed to do something which it is impossible
to perform, no obligation arises out of that agreement.
[74] In considering whether performance of the contract is impossible, it is neces-
sary to identify what it is that the parties agreed would be performed. This involves
looking not only at the express terms, but at any implications that may arise out of
th e surrounding circumstances. In some cases it will be possible to identify details
of the "contractual adventure" w hich go beyond the terms that are expressly spelt
out, in others it will not.
[75] Just as the doctrine of frustration only applies if the contract contains no
provision that covers the situation, the same should be true of common mistake. If,
on true construction of the contract, a party warrants that the subject matter of the
contract exists, or th at it will be possible to perform the contract, there will be no
scope to hold the contract void on the ground of common mistake.
[76] ... [T]he following elements must be present if common mistake is to avoid a
contract: (i) there must be a common assumption as to the existence of a state of
affairs; (ii) there must be no warranty by either party that that state of affairs exists;
(iii) the non-existence of the state of affairs must not be attributable to the fault of
either party; (iv) the non-existence of the state of affairs must render performance
of the contract impossible; (v) the state of affairs may be the existence, or a vital

782
 V. MISTAKE IN ASSUMPTIONS

attribute, of the consideration to be provided or circumstances which must subsist

if performance of the contractual adventure is to be possible.

[84] Once the court determines that unforeseen circumstances have, indeed,
resulted in the contract being impossible of performance, it is next necessary to
determine whether, on true construction of the contract, one or other party has
undertaken responsibility for the subsistence of the assumed state of affairs. This is
another way of asking whether one or other party has undertaken the risk that it may
not prove possible to perform the contract, and the answer to this question may well
be the same as the answer to the question of whether the impossibility of perform-
ance is attributable to the fault of one or other of the parties.

[94] [O]n the facts of the present case, the issue in relation to common mistake
turns on the question of whether the mistake as to the distance apart of the two
vessels had the effect that the services that the Great Peace was in a position to
provide were something essentially different from that to which the parties had
agreed. We shall defer answering that question until we have considered whether
principles of equity provide a second string to the defendants' bow.

MISTAKE IN EQUITY

[95] In Solle v. Butcher [1950] 1 KB . 671 Denning L.J. held that a court has an
equitable power to set aside a contract that is binding in law on the ground of com-
mon mistake ....
[96] It is axiomatic that there is no room for rescission in equity of a contract which
is void. Either Lord Denning M.R. was purporting to usurp the common law principle
in Bell v. Lever Bros. Ltd. and replace it with a more flexible principle of equity, or the
equitable remedy of rescission that he identified is one that operates in a situation
where the mistake is not of such a nature as to avoid the contract. Decisions have,
· hitherto, proceeded on the basis that the latter is the true position ....
[971 Toulson J. has taken a different view. He has concluded that it is not possible
to differentiate between the test of mistake identified in Bell v. Lever Bros. Ltd. and
that advanced by Lord Denning M.R. as giving rise to the equitable jurisdiction to
rescind. He has examined the foundations upon which Lord Denning M.R. founded
his decision in Solle v. Butcher and found them defective. These are conclusions that
we must review. If we agree with them the question will then arise of whether it was
open to him, or is open to this court, to rule that the doctrine of common mistake
leaves no room for the intervention of equity.
[98] The following issues fall to be considered in relation to the effect of common
mistake in equity. (1) Prior to Bell v. Lever Bros. Ltd. was there established a doctrine
under which equity permitted rescission of a contract on grounds of common mistake
in circumstances where the contract was valid at common law? (2) Could such a doc-
trine stand with Bell v. Lever Bros. Ltd.? (3) Is this court none the less bound to find that
such a doctrine exists having regard to Solle v. Butcher and subsequent decisions?

[The court answers all of these questions in the negative .]

SUMMARY

[153] A number of cases, albeit a small number, in the course of the last 50 years
have purported to follow Solle v. Butcher [1950] 1 KB . 671, yet none of them defines

783
CHAPTER 9 MISTAKE

the test of mistake that gives rise to the equitable jurisdiction to rescind in a manner
that distinguishes this from the test of a mistake that renders a contract void in law,
as identified in Bell v. Lever Bros. Ltd. [1932] AC. 161. This is, perhaps, not surprising,
for Denning L.J., the author of the test in Solle v. Butcher, set Bell v. Lever Bros. Ltd. at
nought. It is possible to reconcile Solle v. Butcher and Magee v. Pennine Insurance Co.
Ltd. [1969] 2 O.B. 507 with Bell v. Lever Bros. Ltd. only by postulating that there are two
categories of mistake, one that renders a contract void at law and one that renders it
voidable in equity. Although later cases have proceeded on this basis, it is not possible
to identify that proposition in the judgment of any of the three Lords Justices, Den -
ning, Bucknill and Fenton Atkinson, who participated in the majority decisions in
the former two cases. Nor, over 50 years, has it proved possible to define satisfactorily
two different qualities of mistake, one operating in law and one in equity.
[154] In Solle v. Butcher Denning L.J. identified the requirement of a common
misapprehension that was "fundamental," and that adjective has been used to describe
the mistake in those cases which have followed Solle v. Butcher. We do not find it
possible to distinguish, by a process of definition, a mistake which is "fundamental"
from Lord Atkin's mistake as to quality which "makes the thing [contracted for]
essentially different from the thing [that] it was believed to be": [1932] AC. 161, 218.
[155] A common factor in Solle v. Butcher and the cases which have followed it can
be identified. The effect of the mistake has been to make the contract a particularly
bad bargain for one of the parties. Is there a principle of equity which justifies the
court in rescinding a contract where a common mistake has produced this result? ...
[156] [T]he premise of equity's intrusion into the effects of the common law is
that the common law rule in question is seen in the particular case to work injustice,
and for some reason the common law cannot cure itself. But it is difficult to see how
that can apply here. Cases of fraud and misrepresentation, and undue influence, are
all catered for under other existing and uncontentious equitable rules. We are only
concerned with the question whether relief might be given for common mistake in
circumstances wider than those stipulated in Bell v. Lever Bros. Ltd. [1932] AC. 161.
But that, surely, is a question as to where the common law should draw the line; not
whether, given the common law rule, it needs to be mitigated by application of some
other doctrine. The common law has drawn the line in Bell v. Lever Bros. Ltd. The
effect of Solle v. Butcher [1950] 1 K.B. 671 is not to supplement or mitigate the common
law: it is to say that Bell v. Lever Bros. Ltd. was wrongly decided.
[1571 Our conclusion is that it is impossible to reconcile Solle v. Butcher with Bell
v. Lever Bros. Ltd. ·

THE RESULT IN THIS CASE

[162] We revert to the question that we [previously] left unanswered .... It was
unquestionably a common assumption of both parties when the contract was con -
eluded that the two vessels were in sufficiently close proximity to enable the Great
Peace to carry out the service that she was engaged to perform. Was the distance
between the two vessels so great as to confound that assumption and to render the
contractual adventure impossible of performance7 If so, the defendants would have
an arguable case that the contract was void under the principle in Bell v. Lever Bros.
Ltd. [1932] AC . 161.
[163] Toulson J. addressed this issue, at para. 56:

Was the Great Peace so far away from the Cape Providence at the time of the co ntract
as to defeat the contractual purpose-or in other words to turn it into something
essentially different from that for w hich th e parties barga ined7 This is a question of fact

784
 V. MISTAKE IN ASSUMPTIONS

and degree, but in my view the answer is No .... A telling point is the reaction of the
defendants on learning the true positions of the vessels. They did not want to cancel
the agreement until they knew if they could find a nearer vessel to assist. Evidently the
defendants did not regard the contract as devoid of purpose, or they would have
cancelled at once.

[165] ... This reaction was a telling indication that the fact that the vessels were
considerably further apart than the defendants had believed did not mean that the
services that the Great Peace was in a position to provide were essentially different
from those which the parties had envisaged when the contract was concluded. The
Great Peace would arrive in time to provide several days of escort service. The defend-
ants would have wished the cont.act to be performed but for the adventitious arrival
on the scene of a vessel prepared to perform the same services. The fact that the
vessels were further apart than both parties had appreciated did not mean that it was
impossible to perform the contractual adventure.
[166] The parties entered into a binding contract for the hire of the Great Peace.
That contract gave the defendants an express right to cancel the contract subject to
the obligation to pay the "cancellation fee" of five days' hire. When they engaged the
Nordfarer they cancelled the Great Peace. They became liable in consequence to pay
the cancellation fee. There is no injustice in this result.
[167] For the reasons that we have given, we would dismiss this appeal.

NOTES AND QUESTIONS

1. Great Peace was affirmed and applied in the context of a unilateral mistake in Statoil
ASA v Louis Dreyfus Energy Services LP, [2008] EWHC 2257 (Comm). The restriction on the
operation of equity does not, however, apply to a vo luntary disposition in England ; see Sieff v
Fox, [2005] EWHC 1312 (Ch) and Pitt v Holt, [2013] UKSC 26.
2. The decision in Great Peace has been roundly criticized by some commentators: see e.g.
John D McCamu s, "Mistaken Assumptions in Equity: Sound Doctrine or Chimera?" (2004) 40
Can Bus LJ 46 [Mc Cam us, "M istaken Assumptions in Equity"] at 75-76, 85 (footnotes omitted):

Although one must concede that there is some truth in the Court of Appea l's suggestion that
in Solle v. Butcher Denning L.J. attem pted to confine the doctrine of mistaken common law
as articulated by Lord Atkin in Bell v. Lever Brothers, the decision in The Great Peace appears
to be an unfortunate one for a variety of reasons. First, the test for operative mi stake defined
by the Court of Appeal in The Great Peace appears unduly restrictive and is likely, therefore, to
lead to the manipulations characteristic of the earlier narrower versions of the test. Moreover,
by failing to address the very problem identified by Denning L.J . in Solle v. Butcher-the impact
of the common law void for mistake doctrine on the interests of th ird parties-the Court of
Appeal has breathed renewed life into a doctrine that is quite unattractive from a policy
perspective. Further, the attempted suppression of the equitable doctrine carries with it, at
least for the purposes of Engli sh law, the suppression of the remedial flexibility afforded by
that doctrine. Th e result is to leave mistaken assumptions doctrine in a very unsatisfactory
state as, indeed, the Court of Appeal appears to concede in this case. Finally, the handling
of matters of precedent and the impression the reader is given of the Court of Appeal 's
sense of the appropriate role of an appellate court in dealing with matters of this kind may
appear troubling to some observers .... [l)t would be most unfortunate· indeed if Canadian
courts were to embrace the reasoning of the Court of Appeal in The Great Peace.

And see James Edelman, "An Uncommon Mistake7" (2004) 15 KCLJ 127, who also argues that
one of the problems arising from Great Peace is the failure to clarify when a contract will be

785
CHAPTER 9 MISTAKE

void for common mistake. Edelman. however, lists some benefits to be taken from Great Peace
(footnotes omitted):

Lord Phillips was plainly correct to say that it solves the problem of differentiating between
the common law "essentially different" test and the equitable "fundamental " test .... A further
benefit of the Great Peace decision is that the test for common mistake is now identical to
that for frustration. The only difference between common mistake and frustration is timing.
With common mistake the event occurs before the contract automatically discharging all
obligations immediately, with frustration it occurs once the contract is extant, automatically
discharging all future obligations. The decision in the Great Peace case brings common
mistake and frustration together and treats them alike.

See also Kelvin Low, "Coming to Terms with the Great Peace in Common Mistake" in Jason
Neyers. Richard Bronaugh & Stephen Pitel, Exploring Contract Law (Portla nd, Or: Hart, 2009),
who maintains that Great Peace has clarified the law in the area of common mistake and that
"concerns over Great Peace are either unfounded or overstated. "
3. Critics of the result in Great Peace often invoke equity's role in protecting the rights of
innocent third pa rties. See e.g . McCamus. "Mistaken Assumptions in Equity, " above. The para-
digmatic "innocent third party" case can be found in Cundy v Lindsay (1878), 3 App Cas 459
(HL). in which title to property did not pass to an innocent good-faith purchaser because the
initial contract for sale was void. But were there any innocent third parties in Great Peace?
What is the practical effect of the result in the case? As McCamus notes, Lord Denning was
very concerned with the rights of third parties when he founded the equitable jurisdiction to
intervene in cases of mistake in Solle v Butcher. Who were the innocent third parties in Solle?
In Solle, Denning LJ seemed concerned that the tenant sought to benefit from a "fortunate "
mistake : "The plaintiff not only let the four other flats to other people for a long period of years
at the new rentals, but also took one himself for seven years at £250 a year. Now he turns
round and says, quite unashamedly, that he wants to take advantage of the mistake to get the
flat at £140 a year for seven years instead of the £250 a year." Isn't such manipulation of the
"innocent third parties" justification precisely what the court in Great Peace sought to avoid?
4. As McCamus rightly points out later in his article, the court in this case need not have
undertaken an exhaustive review of the conflict between Bell v Lever Brothers Ltd and Solle v
Butcher. According to the court's own decision. once the parties are shown to have allocated
the risk of non-performance, the inquiry should be at an end . Recall that there was exactly such
a provision in the contract in this case. However, if we accept the reasoning of commentators
that Solle v Butcher was meant to protect the interests of innocent third parties, then on their
reasoning should the contractual allocation of risk end the inquiry?
5. The effect of Great Peace decision in England is significant because the Court of Appeal
was of the opinion that Solle v Butcher and Bell v Lever Brothers Ltd could not stand together
and, therefore. that Solle should not be followed . In Canada, the effect of Great Peace is seen
in the following excerpt.

MILLER PAVING LIMITED VB GOTTARDO CONSTRUCTION LTD

2007 ONCA 422

GOUDGE JA (for the court) :

[1] The appellant Miller Paving Limited ("Miller") contracted to supply aggregate
materials to the respondent B. Gottardo Construction Ltd. ("Gottardo"), which then
used the materials for a highway extension it had contracted to build for the owner
of the highway. On December 20, 2001, Miller and Gottardo signed an agreement in
which Miller acknowledged that it had been paid in full for all the materials it had

786
 V. MISTAK E IN ASSUMPTIONS

supplied. Then, on January 31, 2002, it rendered a further invoice after discovering
deliveries for which it had not billed Gottardo. Gottardo relied on the December 20
agreement to resist the claim, although Gottardo had itself been paid by the owner
for most of these materials.

[The trial judge had concluded that the misapprehension as to facts did not justify
setting the contract aside. Miller appealed, arguing that the trial judge erred in failing
to properly apply the doctrine of common mistake to the December 20 agreement.
On appeal, it was determined that it was a case of common mistake. After discussing
the views put forward in Solle and Bell, the court went on to discuss Canada's
response to Great Peace.]
(24] As is well documented by Professor McCamus at p. 68 of his article, I think
it is now undeniable that not just the common law doctrine of common mistake,
but also the equitable doctrine, have been woven into the fabric of Canadian contract
law. Indeed, in this appeal, neither party takes issue with that proposition.
(25] In England, however, the decision of Great Peace Shipping Ltd. v. Tsavliris
Salvage (International) Ltd., (2003] O.B. 679 (C.A. ), may have changed things for that
country. In that case, after a detailed analysis, the Court of Appeal was of the view
that Solle could not stand with Bell and therefore should not be followed . In addition
to apparently eliminating the equitable doctrine, the court also elaborated and
restated the test for declaring a contract void at common law....
(26] Great Peace appears not yet to have been adopted in Canada and, in my view,
there is good reason for not doing so. The loss of the flexibility needed to correct
unjust results in widely diverse circumstances that would come from eliminating
the ... doctrine of common mistake would ... be a step backward.
[In the end, however, the court did not find it necessary to decide on the question
of eliminating the equitable doctrine of common mistake because the outcome
would not be determined by its existence or lack thereof. Rather, it concluded that
the contract itself governed.]
(27] ... [I]t must be noted that Great Peace does provide one useful reminder that
is of significance here, whether or not its approach to common mistake is adopted
in Canada. It is that in considering whether to apply the doctrine of common mistake
either at common law or in equity, the court should look to the contract itself to see
if the parties have provided for who bears the risk of the relevant mistake, because
if they have, that will govern .... When the contract language is read in the context
of this factual matrix, I conclude that the contract clearly allocates to Miller the risk
that payment in full has not been received. I would therefore find that the December
20 agreement itself requires Miller to bear the consequence when that risk transpires,
rather than allowing it to invoke the doctrine of common mistake.
[The court concluded that even if the doctrine of mistake applied, Miller would not
be successful in setting aside the contract.]

LEE V 1435375 ONTARIO LTD

2013 ONCA 516

[A purchaser of a dry-cleaning business attempted to have the sale contract declared

void because the property was not zoned so as to allow a dry-cleaning business to
be a "permitted use." The premises had been used for this type of business, but likely

787
CHAPTER 9 MISTAKE

only as a "legal non-conforming use" which would permit the business to continu e
to oper~te as it had in the past. The court held that there was no common mistake
. because the vendor h ad had no assumptions and had made :r:io assertions as to zon -
ing and in any event if zoning as a "permitted use" was important to the purchaser,
that party ought to have investigated the matter more fully. The matter was said to
be at the risk of the purchaser. The lower court judge applied both common law and
equitable mistake. The vendor argued that the motion judge had erred, not in her
statement of common law mistake-she had simply cited Bell v Lever Brothers-but
that her application of common law mistake to the facts effectively re-allocated the
risk that had been contractually assumed by the purchaser. The Court of Appeal
agreed witn that argument and also with the argument that the onus of establishing
a common m istake is on the party who wants rescission.]
STRATHY JA: .
[77] Related to the issue of onus is the question of risk. The motion judge found
that the Purchaser did not expressly or impliedly assume "the risk that the commonly
assumed facts [that the dry cleaning operation was a permitted use] were untrue."
[78] This had the effect of putting the risk of the Purchaser's erroneous assump-
tion on the Vendor. Instead of caveat emptor, it became caveat venditor.
[79] The law of mistake cannot be used to place a risk on a party where the
contract has allocated that risk to another party....
[80] In this case, the Purchaser did not make the agreement conditional on zon-
ing, notwithstanding the evidence of his solicitor that it was sometimes done. In
fact, the only clause in the agreement of purchase and sale that spoke to the issue
was an acknowledgement that the real estate broker had advised the parties to seek
independent professional advice with respect to zoning changes. In apparently
ignoring this advice, and signing the agreement without any condition as.to zoning,
the Purchaser implicitly assumed the risk that the zoning would not permit his
contemplated use. Having found that there were no representations, warranties or
implied terms concerning zoning, the trial judge should have found that the agree-
ment precluded any "understanding" other than what the parties had expressed in
their agreement and that the risk of any "misunderstanding" had been allocated to
the Purchaser, not to the Vendor.

[The argument that there had been an equitable mistake also failed because it
had not been established that both parties had been mistaken. In any event the
purchaser had been at fault for making the mistake.]
STRATHY JA (continued):
[82] [The Purchaser] was at fault, however. He failed to take reasonable measures
to protect himself, either by investigating the zoning before he signed the agreement
or by making the agreement conditional on zoning. He, not the Vendor, should be
visited with the consequences. There is nothing inequitable in holding him to the
contract, particularly in the absence of any evidence that the use of the premises for
their intended purpose is impossible.
[There had been at best a unilateral mistake here and it was not unjust that the
purchaser should bear the consequences of his mistake .]

Zavarella v Zavarella. 2013 ONCA 720. [The parties entered into settlement agree-
ment on separation. They made mistakes relating to the wife's indebtedness for a car
but the court held that the mistakes were not sufficiently serious to affect the agree-
ment. The entire agreement had to be considered.] GILLESE JA said: ... the mistake

788
 V. MISTAKE IN ASSUMPTIONS

about the car did not go to the root of the Agreement. While the Agreement does not
form part of the record before this court, a review of the tria1 transcript shows that
its terms govern a 1arge number of disputed matters, including cust0dy and access,
as well as various matters related to the parties' NFP [net family property] statements
and equalization. In the circumstances, the car-a single item with a relatively small
dollar value attached to it-cannot be seen to be the "root" of the Agreement. That
is, the mistaken assumption about the car did not change the subject matter of the
Agreement so that it became something essentially different from what it was believed
to be. The parties believed the Agreement to be the reso1ution of a host of matters
relating to the demise of their familia1 relationship. The essential nature of the Agree-
ment remained.

SCOTT V COULSON
(1903] 2 Ch 249

The plaintiff agreed to sell to the defendant an insurance policy on the life of a man
called A.T. Death. Both parties then assumed that Death was living, and the price
agreed to be paid by the defendant was £460, slightly more than the cash surrender
value. Actually Death was dead, so that the policy was worth £777, its face value. The
contract was executed by assignment of the policy, at which time the purchaser had
some reason to suspect the truth. When the vendor later discovered the truth, he
brought an action to set aside the sale.
VAUGHAN WILLIAMS LJ: On the facts of this case, if one takes those which were found
by the learned judge in his judgment, I do not see what room there is for argument
on any question of law. If we are to take it that it was common ground that, at the
date of the contract for the sale of this policy, both the parties to the contract sup-
posed the assured to be alive, it is true that both parties entered into this contract
upon the basis of a common affirmative belief that the assured was alive; but as it
turned out that this was a common mistake, the contract was one which cannot be
enforced. This is so at 1aw; and the plaintiffs do not require to have recourse to equity
to rescind the contract, if the basis which both parties recognized as the basis is not
true. Having regard to the evidence, it seems to be clear that the \earned judge came
to a right conclusion. If it had turned out that the vendors or their agent had
requested Cou1son to find out whether the assured was dead or alive, and Coulson
had come back and said he cou1d not find out, I shou1d have said that, apart from
argument, it would have been almost impossible to arrive at the conclusion that both
parties had entered into the contract upon the basis that the assured was alive. But
it turns out that no such inquiry was requested to be made. The only inquiry requested
to be made was that contained in Cou1son's 1etter of March 15, 1902, in which he
requested inquiry to be made about the assured. Therefore the inference cannot
arise which, if it had arisen, would have been fata1 to the plaintiffs' contention that
this contract was entered into upon the basis that the assured was still alive. If one
gets rid of that, what is there left? We have before us the conditions of the proposed
sale which were before both parties, in which it certain1y seems to be assumed that
the assured was still alive.
All I say with regard to the matter is that the material date all through is the date
of the contract. If at that date a good contract was entered into, I cannot conceive
that it could be rescinded. But it turns out that it was a contract entered into under
·a common mistake existing at the date of it, and therefore it follows that an assign -
ment executed in pursuance of such a contract cannot be supported.

789
CHAPTER 9 MISTAKE

The learned judge has arrived at a right conclusion, and this appeal must therefore
be dismissed, with costs.
ROMER LJ: I agree that this appeal must be dismissed. Upon the facts of the case it
appears to me that the learned judge came to the right conclusion, namely, that the
contract entered into between the parties to the sale and purchase of this policy
rested upon the basis of the assured being still alive. It turns out that, before the matter
was concluded by assignment to the defendants, the fact upon which the contract
was based was not the fact. The defendant Coulson must be taken to have known
that the basis upon which the contract had been entered into, and the common
belief upon which both parties had acted, did not exist. That was a circumstance
which went to the root of the matter, and rendered it improper to insist upon the
completion of the contract. What did Coulson do when he received the information
leading him to the knowledge or belief that the assured was dead? Did he do what
he ought to have done-ten the plaintiffs? Not at an. He allowed the plaintiffs to go
on under the old belief, and to execute the assignment on the footing that the old
basis continued and that the defendants were entitled to an assignment. I need
scarcely say that that was wholly unjustifiable from a legal point of view, and also
from an equitable point of view, and none the less so because the defendants appar-
ently thought they were justified in taking the assignment.
Such a transaction cannot be allowed to stand, and therefore this appeal must be
dismissed.
COZENS-HARDY LJ: I agree. I think the case was argued by Mr. Clerke in the only
possible way it could be put on behalf of the defendants. Having regard to the facts
as found by the learned judge, it appears to me to be quite plain that at the date of
the contract there was a common mistake, both parties being under the belief that
the assured was alive.
It would be quite shocking to say that the defendants have rendered the contract
absolute simply by having obtained from the vendors an assignment after one of
the defendants, Coulson, had full notice that the basis on which the contract has
been entered into ha,d had no existence. Under such circumstances it is impossible
that the defendants can be allowed to derive any benefit from the assignment.
The appeal must, therefore, be dismissed with costs.

SHERWOOD V WALKER
66 Mich 568, 33 NW 919 (Mich SC 1887)

MORSE J: Replevin for a cow. Suit commenced in justice's court. Judgment for plain-
tiff. Appealed to circuit court of Wayne County, and verdict and judgment for plaintiff
in that court. The defendants bring error, and set out 25 assignments of the same.
The main controversy depends upon the construction of a contract for the sale
of the cow. The plaintiff claims that the title passed, and bases his action upon such
claim. The defendants contend that the contract was executory, and by its terms no
title to the animal was acquired by plaintiff. ...
It appears from the record that both parties supposed this cow was barren and
would not breed, and she was sold by the pound for an insignificant sum as com -
pared with her real value if a breeder. She was evidently sold and purchased on the
relation of her value for beef, unless the plaintiff had \earned of her true condition,
and concealed such knowledge from the defendants. Before the plaintiff secured
possession of the animal, the defendants learned that she was with calf, and therefore

790
 V. MISTAKE IN ASSUMPTIONS

of great value, and undertook to rescind the sale by refusing to deliver her. The
question arises whether they had a right to do so.
The circuit judge ruled that this fact did not avoid the sale, and it made no differ-
ence whether she was barren or not. I am of the opinion that the court erred in this
holding. I know that this is a close question, and the dividing line between the
adjudicated cases is not easily discerned. But it must be considered as well settled
that a party who has given an apparent consent to a contract of sale may refuse to
execute it, or he may avoid it after it has been completed, if the assent was founded,
or the contract made, upon the mistake of a material fact, -such as the subject-matter
of the sale, the price, or some collateral fact materially inducing the agreement; and
this can be done when the mistake is mutual ....
If there is a difference or misapprehension as to the substance of the thing bar-
gained for, if the thing actually delivered or received is different in substance from
the thing bargained for and intended to be sold, then there is no contract; but if it
be only a difference in some quality or accident, even though the mistake may have
been the actuating motive to the purchaser or seller, or both of them, yet the contract
remains binding. "The difficulty in every case is to determine whether the mistake
or misapprehension is as to the substance of the whole contract, going, as it were,
to the root of the matter, or only to some point, even though a material point, an
error as to which does not affect the substance of the whole consideration." Kennedy
v. Panama, etc., Mail Co., L.R. 2 O.B. 580, 588.
It has been held, in accordance with the principles above stated, that where a
horse is bought under the belief that he is sound, and both vendor and vendee
honestly believe him to be sound, the purchaser must stand by his bargain, and pay
the full price, unless there was a warranty.
It seems to me, however, in the case made by this record, that the mistake or
misapprehension of the parties went to the whole substance of the agreement. If the
cow was a breeder, she was worth at least $750; if barren, she was worth not over
$80. The parties would not have made the contract of sale except upon the under-
standing and belief that she was incapable of breeding, and of no use as a cow. It is
true she is now the identical animal that they thought her to be when the contract
was made; there is no mistake as to the identity of the creature. Yet the mistake was
not of the mere quality of the animal, but went to the very nature of the thing. A barren
cow is substantially a different creature than a breeding one. There is as much dif-
ference between them for all purposes of use as there is between an ox and a cow
that is capable of breeding and giving milk. If the mutual mistake had simply related
to the fact whether she was with calf or not for one season, then it might have been
a good sale; but the mistake affected the character of the animal for all time, and for
her present and ultimate use. She was not in fact the animal, or the kind of animal,
the defendants intended to sell or the plaintiff to buy. She was not a barren cow, and,
if this fact had been known, there would have been no contract. The mistake affected
the substance of the whole consideration, and it must be considered that there was
no contract to sell or sale of the cow as she actually was. The thing sold and bought
had in fact no existence. She was sold as a beef creature would be sold; she is in fact
a breeding cow, and a valuable one.
The court should have instructed the jury that if they found that the cow was sold,
or contracted to be sold, upon the understanding of both parties that she was barren,
and useless for the purpose of breeding, and that in fact she was not barren, but
capable of breeding, then the defendants had a right to rescind, and to refuse to
deliver, and the verdict should be in their favor.
The judgment of the court below must be reversed, and a new trial granted, with
costs of this Court to defendants.

791
CHAPTER 9 MI STAKE

[Campbell CJ and Champlin J concurred.]

SHERWOOD J (dissenting) : I do not concur in the opinion given by my brethren in

this case. I think the judgments before the justice and at the circuit were right.
.. . I further agree with [my brother Morse) that the plaintiff was entitled to a
delivery of the property to him when the suit was brought, unless there was a mistake
made which would invalidate the contract; and I can find no such mistake .
There is no pretense that there was any fraud or concealment in the case, and an
intimation or insinuation that such a thing might have existed on the part of either
of the parties would undoubtedly be a greater surprise to them than anything else
that has occurred in their dealings or in the case ....
In the spring of 1886 the plaintiff, learning that the defendants had some "polled
Angus cattle" for sale, was desirous of purchasing some of that breed, and, meeting
the defendants, or some of them, at Walkerville, inquired about them, and was
informed that they had none at Walkerville, "but had a few head left on their farm in
Greenfield, and they asked the plaintiff to go and see them, stating that in all probability
they were sterile and would not breed." In accordance with said request, the plaintiff,
on the fifth day of May, went out and looked at the defendants' cattle at Greenfield,
and found one called "Rose 2d," which he wished to purchase, and the terms were
finally agreed upon at five and one-half cents per pound, live weight, 50 pounds to
be deducted for shrinkage. The sale was in writing, and the defendants gave an order
to the plaintiff directing the man in charge of the Greenfield farm to deliver the cow
to plaintiff. This was done on the fifteenth of May. On the twenty-first of May plaintiff
went to get his cow, and the defendants refused to let him have her; claiming at the
time that the man in charge at the farm thought the cow was with calf, and, if such
was the case they would not sell her for the price agreed upon.
The record further shows that the defendants, when they sold the cow, believed
the cow was not with calf, and barren; that from what the plaintiff had been told by
defendants (for it does not appear he had any other knowledge or facts from which
he could form an opinion) he believed the cow was farrow, but sti\\ thought she could
be made to breed. ·
The foregoing shows the entire interview and treaty between the parties as to the
sterility and qualities of the cow sold to the plaintiff. The cow had a calf in the month
of October.
There is no question but that the defendants sold the cow representing her of the
breed and quality they believed the cow to be, and that the purchaser so understood it.
And the buyer purchased her believing her to be of the breed represented by the
sellers, and possessing all the qualities stated, and even more. He believed she would
breed. There is no pretense that the plaintiff bought the cow for beef, and there is
nothing in the record indicating that he would have bought her at all only that he
thought she might be made to breed. Under the foregoing facts - and these are all that
are contained in the record material to the contract-it is held that because it turned
out that the plaintiff was more correct in his judgment as to one quality of the cow
than the defen dants, and a quality, too, which could not by any possibility be posi-
tively known at the time by either party to exist, the contract may be annulled by the
defendants at their pleasure. I know of no law, and have not been referred to any,
which wi\\ justify any such holding, and I think the circuit judge was right in his
construction of the contract between the parties.
It is claimed that a mutual mistake of a material fact was made by the parties when
the contract of sale was made. There was no warranty in the case of the quality of
the animal. When a mistaken fact is relied upon as ground for rescinding, such fact
must not only exist at the time the contract is made, but must have been known to

792
 V. MISTAKE IN ASSUMPTION S

one or both of the parties. Where there is no warranty, there can be no mistake of
fact when no such fact exists, or, if in existence, neither party knew of it, or could
know of it; and that is precisely this case. If the owner of a Hambletonian horse had
speeded him, and was only able to make him go a mile in three minutes, and should
sell him to another, believing that was his greatest speed, for $300, when the pur-
chaser believed he could go much faster, and made the purchase for that sum, and
a few days thereafter, under more favorable circumstances, the horse was driven a
mile in 2min.' 16 sec., and was found to be worth $20,000, I hardly think it would be
held, either at law or in equity, by any one, that the seller in such case could rescind
the contract. The same legal principles apply in each case.
In this case neither party knew the actual quality and condition of this cow at the
time of the sale. The defendants say, or rather said, to the plaintiff, "they had a few
head left on their farm in Greenfield, and asked plaintiff to go and see them, stating
to plaintiff that in all probability they were sterile and would not breed." Plaintiff did
go as requested, and found there three cows, including the one purchased, with a
bull. The COW had been exposed, but neither knew she was with calf or whether she
would breed. The defendants thought she would not, but the plaintiff says that he
thought she could be made to breed, but believed she was not with calf. The defend-
ants sold the cow for what they believed her to be, and the plaintiff bought her as he
believed she was, after the statements made by the defendants . No conditions
whatever were attached to the terms of sale by either party. It was in fact as absolute
as it could well be made, and I know of no precedent as authority by which this Court
can alter the contract thus made by these parties in writing, and interpolate in it a
condition by which, if the defendants should be mistaken in their belief that the cow
was barren, she should be returned to them, and their contract should be annulled.
It is not the duty of courts to destroy contracts when called upon to enforce them,
after they have been legally made. There was no mistake of any such material fact by
either of the parties in the case as would license the vendors to rescind. There was no
difference between the parties, nor misapprehension, as to the substance of the thing
bargained for, which was a cow supposed to be barren by one party, and believed
not to be by the other. As to the quality of the animal, subsequently developed, both
parties were equally ignorant, and as to this each party took his chances. If this were
not the law, there would be no safety in purchasing this kind of stock. .. .
In this case, if either party had superior knowledge as to the qualities of this
animal to the other, certainly the defendants had such advantage.
I understand the law to be well settled that "there is no breach of any implied
confidence that one party will not profit by his superior knowledge as to facts and
circumstances" equally within the knowledge of both, because neither party reposes
in any such confidence unless it be specially tendered or required, and that a general
sale does not imply warranty of any quality, or the absence of any; and if the seller
represents to the purchaser what he himself believes as to the qualities of an animal,
and the purchaser buys relying upon his own judgment as to such qualities, there
is no warranty in the case, and neither has a cause of action against the other if he
finds himself to have been mistaken in judgment.

MCRAE V COMMONWEALTH DISPOSALS COMM

(1951), 84 CLR 377 (Austl HC)

The Commonwealth Disposals Commission contracted to sell to McRae "one oil tanker
including contents wrecked on Jourmand Reef approximately 100 miles north of
Samarai. Price £285." The plaintiffs organized a salvage operation to recover the ship,

793
CHAPTER 9 MISTAKE

but could not locate the tanker. In fact, there was no tanker at the location indicated
in the contract, and there did not seem to be any place known as Jourmand Reef.
DIXON and FULLAGAR JJ: ... In the assumed background of the case lay the facts that
during the war a considerable number of ships, including "oil tankers," became
wrecked or stranded in the waters adjacent to New Guinea, that after the war the
Commission had the function of disposing of these as it thought fit, and that a
purchaser from the Commission of any of these wrecked or stranded vessels might,
but not necessarily would, make a very large profit by salving and selling the vessel,
or the materials of her hull and equipment, or her cargo. The realization of a profit
in this way (and the evidence suggests that a purchaser would not contemplate a
realization of profit by an immediate resale of what he had bought as such) could,
of course, only be achieved after the expenditure of large sums of money. Such a
purchaser would naturally regard himself as acquiring, at best, a chance of making
a profit. But he would not regard himself as acquiring a certainty of making a loss ....
Now, the simple fact is that there was not at any material time any oil tanker lying
at or anywhere near the location specified in the letter of 18th April. There was, at a
point about eleven miles east of the location specified, a wrecked vessel described
as an "oil barge." ... The existence of the wrecked barge in question here is not, we
think, a directly relevant factor in the case, though it may serve to explain to some
extent how a rumour that there was a wrecked tanker somewhere began to circulate
in the offices of the Commission.
We say advisedly that such a rumour began to circulate, because there was indeed
no better foundation for any supposition on the part of the officers of the Commis -
sion that they had a tanker to sell. They had no more definite information than was
derived from an offer by a man named Jarrett to buy for £50 the contents of a
wrecked vessel, which he said was within a radius of 200 miles from Samarai, and
from what can be quite fairly described as mere gossip. The reckless and irrespon-
sible attitude of the Commission's officers is clearly indicated by the description in
the advertisement of the locality of the tanker. In an even worse light appe.a rs an
attempt which was made later, without any foundation whatever, to suggest that at
the time of the making of the contract there had been a tanker in the place specified
but that she had since been washed off the reef in a storm. Unfortunately the plain-
tiffs, for their part, took the matter seriously. They believed, and there is evidence
that they had some reason for believing, that an oil tanker wrecked at the place
indicated was likely to prove a profitable proposition, and accordingly they paid on
23rd April the balance of their purchase money, and then proceeded to fit up a small
ship, which they owned, with diving and salvage equipment, and they engaged
personnel, and proceeded from Melbourne to New Guinea. It is sufficient at this
stage to say that they expended a large sum of money in discovering that they had
bought a non-existent tanker.
The plaintiffs, as has been said, based their claim for damages on three alternative
grounds. They claimed, in the first place, for damages for breach of a contract to sell
a tanker lying at a particular place. Alternatively they claimed damages for a fraudu-
lent representation that there was a tanker lying at the place specified. In the further
alternative, they claimed damages for a negligent failure to disclose that there was
no tanker at the place specified after that fact became known to the Commission ....
The first question to be determined is whether a contract was made between the
plaintiffs and the Commission. The argument that the contract was void, or, in other
words, that there was no contract, was based, as has been observed, on Couturier v.
Hastie [(1856), 10 ER 1065 (HL) ]. It is true that Couturier v. Hastie has been commonly
treated in the text-books as a case of a contract avoided by mutual mistake . ...

794
 V. MISTAKE IN ASSUMPTIONS

The case has not, however, been universally regarded as resting on mistake, and
Sir Frederick Pollock, in his preface to vol. 101 of the Revised Reports, at p. vi, says:-
"Couturier v. Hastie shows.how a large proportion of the cases which swell the rubric
of relief against mistake in the textbooks (with or without protest from the text-writer)
are really cases of construction." And in Solle v. Butcher [above], Denning L.J. observed
that the cases which it had been usual to classify under the head of "mistake" needed
reconsideration since the decision of the House of Lords in Bel/ v. Lever Bros. Ltd.,
[above]. No occasion seems to have arisen for a close examination of Couturier v.
Hastie, but such an occasion does now arise.
The fac;ts of the case were simple enough .... A sold to B "1,180 quarters of Salonica
Indian corn of fair average quality when shipped, at 27 /- per quarter f.o.b., and
including freight and insurance, to a safe port in the United Kingdom, payment at
two months from date upon h anding over shipping documents." At the date of the
contract the vessel containing the corn had sailed from Salonica, but, having
encountered very heavy weather, had put in at Tunis. Here the cargo had been found
to have become so heated and fermented that it could not be safely carried further.
It had accordingly been landed at Tunis and sold there. These facts were unknown
to either party at the date of the contract. On discovering them, B repudiated the
contract. After the expiration of the two months mentioned in the contract, A, being
able and willing to hand over the shipping documents, sued B for the price. The case
came on for trial before Martin B. and a jury. Martin B. directed the jury that "the con -
tract imported that, at the time of the sale, the corn was in existence as such, and
capable of delivery" [(1852), 155 ER 1250 at 1254]. The jury found a verdict for the
defendant, and the plaintiff had leave to move. The Court of Exchequer made abso-
lute a rule to enter a verdict for the plaintiff. This decision was reversed in the Court
of Exchequer Chamber, and the House of Lords, after consulting the Judges affirmed
the decisions of the Exchequer Chamber, so that the defendant ultimately had
judgment.
In considering Couturier v. Hastie it is necessary to remember that it was, in
substance, a case in which a vendor was suing for the price of goods which he was
unable to deliver. If there had been nothing more in the case, it would probably never
have been reported: indeed the action would probably never have been brought. But
the vendor founded his claim on the provision for "payment upon handing over
shipping documents." He was n ot called upo n to prove a tender of the documents,
because the defendant had "repudiated" the contract, but he was able and willing to
hand them over, and his argumen t was, in effect, that by handing them over he
would be doing all that the contract required of him. The question thus raised would
seem to depend entirely on the construction of the contract, and it appears really to
have been so treated throughout. In the Court of Exchequer, Pollock C.B., in the
course of argument, said [(1852), 155ER1250at1254] :- "This question is purely one
of construction. I certainly think that the plain and literal meaning of the language
here used imports that the thing sold, namely, the cargo, was in existence and
capable of being transferred." This was, in effect, what Martin B. had told the jury,
and what it means is that the plaintiff had contracted that there was a cargo in exist-
ence and capable of delivery. ...
The judgment of the Exchequer Chamber was delivered by Coleridge J . The view
that the contract was void is probably derived from certain expressions which were
used in the course of this judgment. But it does seem clear that again the question
of construction was regarded as the fundamental question in the case. In the light
of these passages it seems impossible to regard the expressions [(1853), 156 ER 43 at
46] "[i]f the contract for the sale of the cargo was valid" and "the contract failed as to

795
CHAPTER 9 MISTAKE

the principal subject-matter of it" as meaning that the contract was treated as being
void. All that the passages in which those expressions occur seem in their context
to mean is that the principal subject matter of the contract was a cargo of goods, that
the purchaser did not buy shipping documents representing non-existent goods,
that the consideration to the purchaser had failed, and that he could not therefore
be liable to pay the contract price.
· In the House of Lords again the Lord Chancellor, in giving judgment [(1856), 10
ER 1065 at 1068 and 1069], said:- "The whole question turns upon the meaning and
construction of the contract." A little later he said: - "What the parties contemplated ...
was that there was an existing so"mething to be sold and bought, and, if sold and
bought, then the benefit of ihsurance should go with it." In other words, there was
not an absolute obligation to pay the price on delivery of the shipping documents (as
the plaintiff contended), but an obligation to pay on delivery of those documents
only if they represented at the time of the making of the contract goods in existence
and capable of delivery. And this is all that the Lord Chancellor really had in mind,
we_think, when later he says:- "If the contract of the 15th May had been an operating
contract, and there had been a valid contract at that time existing, I think the pur-
chaser would have had the benefit of insurance in respect of all damage previously
existing." .. .
If the view so far indicated be correct, as we believe it to be, it seems clear that the
case of Couturier v. Hastie does not compel one to say that the contract in the present
case was void. But, even if the view that Couturier v. Hastie was a case of a void
contract be correct, we would still think that it could not govern the present case.
Denning L.J. indeed says in Solle v. Butcher [(1950), 1 KB 671 at 692 (CA)]:-"Neither
party can rely on his own mistake to say it was a nullity from the beginning, no
matter that it was a mistake which to his mind was fundamental, and no matter that
the other party knew he was under a mistake. A fortiori if the other party did not know
of the mistake, but shared it." But, even if this be not wholly and strictly correct, yet
at least it must be true to say that a party cannot rely on mutual mistake where the
mistake consists of a belief which is, on the one hand, entertained by him without
any reasonable ground, and, on the other hand, deliberately induced by him in the
mind of the other party ... even if they [officials of the C9mmission] be credi~ed with
a real belief in the existence of a tanker, they were guilty of the grossest negligence.
It is impossible to say that they had any reasonable ground for such a belief. Having
no reasonable grounds for such a belief, they asserted by their advertisement to the
world at large, and by their later specification of locality to the plaintiffs, that they
had a tanker to sell. They must have known that any tenderer would rely implicitly
on their assertion of the existence of a tanker, and they must have known that the
plaintiffs would rely implicitly on their later assertion of the existence of a tanker in
the latitude and longitude given. They took no steps to verify what they were assert-
ing, and any "mistake" that existed was induced by their own culpable conduct. In
these circumstances it seems out of the question that they should be able to assert
that no contract was concluded. It is not unfair or inaccurate to say that the only
"mistake" the plaintiffs made was that they believed what the Commission told them.
The position so far, then, may be summed up as follows. It was not decided in
Couturier v. Hastie that the contract in that case was void. The question whether it
was void or not did not arise . If it had arisen, as in an action by the purchaser for
damages, it would have turned on the ulterior question whether the contract was
subject to an implied condition precedent. Whatever might then have been held on
the facts of Couturier v. Hastie, it is impossible in this case to imply any such term.
The terms of the contract and the surrounding circumstances clearly exclude any

796
 V. MISTAKE IN ASSUMPTIONS

such implication. The buyers relied upon, and acted upon, the assertion of the seller
that there was a tanker in existence. It is not a case in which the parties can be seen
to have proceeded on the basis of a common assumption of fact so as to justify the
.c onclusion that the correctness of the assumption was intended by both parties to
be a condition precedent to the creation of contractual obligations. The officers of
the Commission made an assumption, but the plaintiffs did not make an assumption
in the same sense. They knew nothing except what the Commission had told them.
If they had been asked, they would certainly not have said: "Of course, if there is no
tanker, there is no contract." They would have said: "We shall have to go and take
possession of the tanker. We simply accept the Commission's assurance that there
is a tanker and the Commission's promise to give us that tanker." The only proper
construction of the contract is that it included a promise by the Commission that
there was a tanker in the position specified. The Commission contracted that there
was a tanker there .... If, on the other hand, the case of Couturier v. Hastie and this
case ought to be treated as cases raising a question of "mistake," then the Commis-
sion cannot in this case rely on any mistake as avoiding the contract, because.any
mistake was induced by the serious fault of their own servants, who asserted the
existence of a tanker recklessly and without any reasonable ground. There was a
contract, and the Commission contracted that a tanker existed in the position speci-
fied . Since there was no such tanker, there has been a breach of contract, and the
plaintiffs are entitled to damages for that breach . ...
The conclusion that there was an enforceable contract makes it unnecessary to
consider the other two causes of action raised by the plaintiffs.

QUESTIONS
What damages should the plaintiffs recover7 Would or should the decision have been different
if an oi l tanker had been on the reef but had been swept away in a storm before the contract
was entered into? Consider why the case was not argued as one of misrepresentation.

WOOD V BOYNTON
64 Wis 265, 25 NW 42 (1885)

TAYLOR J: This action was brought in the circuit court for Milwaukee county to
recover the possession of an uncut diamond of the alleged value of $1,000. The case
was tried in· the circuit court and, after hearing all the evidence in the case, the
learned circuit judge directed the jury to find a verdict for the defendants. The plain-
tiff excepted to such instruction, and, after a verdict was rendered for the defendants,
moved for a new trial upon the minutes of the judge. The motion was denied, and
the plaintiff duly excepted, and, after judgment was entered in favor of the defend-
ants, appealed to this court.
The defendants are partners in the jewelry business. On the trial it appeared that
on and before the 28th of December, 1883, the plaintiff was the owner of and in the
possession of a small stone, the nature and value of which she was ignorant; that on
that day she sold it to one of the defendants for the sum of one dollar. Afterwards it
was ascertained that the stone was a rough diamond, and of the value of about $700.
After learning this fact the plaintiff tendered the defendants the one dollar, and ten
cents as interest, and demanded a return of the stone to her. The defendants refused
to deliver it, and therefore she commenced this action.

797
CHAPTER 9 MISTAKE

The plaintiff testified to the circumstances attending the sale of the stone to
Mr. Samuel B. Boynton, as follows :
The first time Boynton saw that stone he was talking about buying the topaz, or what-
ever it is, in September or October. I went into his store to get a little pin mended, and
I had it in a small box,-the pin,-a small ear-ring; ... this stone, and a broken sleeve-
button were in the box. Mr. Boynton turned to give me a check for my pin. I thought I
would ask him what the stone was, and I took it out of the box and asked him to please
tell me what that was. He took it in his hand and seemed some time looking at it. I told
him I had been told it was a topaz and he said it might be. He says, "I would buy this;
would you sell it?" I told him I did not know but what I would. What would it be worth?
And he said he did not know: he would give me a dollar and keep it as a specimen, and
I told him I would not sell it; and it was certainly pretty to look at. He asked me where
I found it, and I told him in Eagle. He asked about how far out, and I said right in the
village, and I went out. Afterwards, and about the 28th of December, I needed money
pretty badly, and thought every dollar would help, and I took it back to Mr. Boynton and
told him I had brought back the topaz, and he says, "Well, yes; what did I offer you for
it?" and I says, "One dollar," and he stepped to the change drawer and gave me the
dollar, and I went out.
In another part of her testimony she says:
Before I sold the stone I had no knowledge whatever that it was a diamond . I told him
that I had been advised that it was probably a topaz, and he said probably it was. The
stone was about the size of a canary bird's egg, nearly the shape of an egg,-worn
pointed at one end; it was nearly straw color,-a little darker.
She also testified that before this action was commenced she tendered the defend-
ants $1.10, and demanded the return of the stone, which they refused. This is sub-
stantially all the evidence of what took place at and before the sale to the defendants,
as testified to by the plaintiff herself. She produced no other witness on that point.
The evidence on the part of the defendant is not very different from the version
given by the plaintiff, and certainly is not more favorable to the plaintiff. Mr. Samuel
B. Boynton, the defendant to whom the stone was sold, testified that at the time he
bought this stone, he had never seen an uncut diamond; had seen cut diamonds,
but they are quite different from the uncut ones; "he had no idea this was a diamond,
and it never entered his brain at the time." Considerable evidence WiJ.S given as to
what took place after the sale and purchase, but that evidence has very little if any
bearing upon the main point in the case.
This evidence clearly shows that the plaintiff sold the stone in question to the
defendants, and delivered it to them in December 1883, for a consideration of one
dollar. The title to the stone passed by the sale and delivery to the defendants. How
has that title been divested and again vested in the plaintiff? The contention of the
learned counsel for the appellant is that the title became vested in the plaintiff by the
tender to the Boyntons of the purchase money, with interest, and a demand of a
return of the stone to her. Unless such tender and demand revested the title in the
appellant, she cannot maintain her action.
The only question in the case is whether there was anything in the sale which
entitled the vendor (the appellant) to rescind the sale and so revest the title in her. The
only reasons we know of for rescinding a sale and revesting the title in the vendor so
that he may maintain an action at law for the recovery of the possession against his
vendee are (1) that the vendee was guilty of some fraud in procuring a sale to be made
to him; (2) that there was a mistake made by the vendor in delivering an article which

798
 V. MISTAKE IN ASSUMPTIONS

was not the article sold, -a mistake in fact as to the identity of the thing sold with the
thing delivered upon the sale. This last is not in reality a rescission of the sale made,
as the thing delivered was not the thing sold, and no title ever passed to the vendee
by such delivery.
In this case, upon the plaintiff's own evidence, there can be no just ground for
alleging that she was induced to make the sale she did by any fraud or unfair dealings
on the part of Mr. Boynton. Both were entirely ignorant at the time of the character of
the stone and of its intrinsic value. Mr. Boynton was not an expert in uncut diamonds,
and had made no examination of the stone, except to take it in his hand and look at
it before he made the offer of one dollar, which was refused at the time, and after-
wards accepted without any comment or further examination made by Mr. Boynton.
The appe\\ant had the stone in her possession for a long time, and it appears from
her own statement that she made some inquiry as to its nature and qualities. If she
chose to sell it without further investigation as to its intrinsic value to a person who
was guilty of no fraud or unfairness which induced her to seJ\ it for a small sum, she
cannot repudiate the sale because it is afterwards ascertained that she made a bad
bargain. Kennedy v. Panama, etc., Mail Co., L.R. 2 Q.B. 580.
There is no pretense of any mistake as to the identity of the thing sold. It was
produced by the plaintiff and exhibited to the vendor before the sale was made, and
the thing sold was delivered to the vendee when the purchase price was paid. Ken-
nedy v. Panama, etc., Mail Co., L.R. 2 Q.B. 587; Street v. Blay, 2 Barn. & Ado\. 456;
Compertz v. Bartlett, 2 El. & Bl. 849; Gurney v. Womersly, 4 El. & Bl. 133; Ship's Case, 2
De G., J. & S. 544. Suppose the appellant had produced the stone, and said she had
been told that it was a diamond, and she believed it was, but had no knowledge
herself as to its character or value, and Mr. Boynton had given her $500 for it, could
he have rescinded the sale if it had turned out to be a topaz or any other stone of
very small value? Could Mr. Boynton have rescinded the sale on the ground of
mistake? Clearly not, nor could he rescind it on the ground that there had been a
breach of warranty, because there was no warranty, nor could he rescind it on the
ground of fraud, unless he could show that she falsely declared that she had been
told it was a diamond, or, if she had been told, still she knew it was not a diamond.
See Street v. Blay, supra.
It is urged, with a good deal of earnestness, on the part of the counsel for the
appellant that, because it has turned out that the stone was immensely more valuable
than the parties at the time of the sale supposed it was, such fact alone is a ground .
for the rescission of the sale, and that fact was evidence of fraud on the part of the
vendee. Whether inadequacy of price is to be received as evidence of fraud, even in
a suit in equity to avoid a sale, depends upon the facts known to the parties at the
time the sale is made.
When this sale was made the value of the thing sold was open to the investigation
of both parties, neither knew its intrinsic value, and, so far as the evidence in this
case shows, both supposed that the price paid was adequate. How can fraud be
predicated upon such a sale, even though after investigation showed that the intrin-
sic value of the thing sold was hundreds of times greater than the price paid? It
certainly shows no such fraud as would authorize the vendor to rescind the contract
and bring an action at law to recover the possession of the thing sold. Whether the
fact would have any influence in an action in equity to avoid the sale we need not
consider. See Stettheimer v. Ki/lip, 75 N.Y. 287; Etting v. Bank of U.S., 11 Wheat. 59.
We can find nothing in the evidence from which it could be justly inferred that
Mr. Boynton, at the time he offered the plaintiff one dollar for the stone, had any know-
ledge of the real value of the stone, or that he entertained even a belief that the stone

799
CHAPTER 9 MISTAKE

was a diamond. It cannot, therefore, be said that there was a suppression of know-
ledge on the part of the defendant as to the value of the stone which a court of equity
might seize upon to avoid the sale. The following cases show that, in the absence of
fraud or warranty, the value of the property sold, as compared with the price paid, is
no ground for a rescission of the sale. Wheat v. Cross, 31 Md. 99; Lambert v. Heath, 15
Mees. & W. 487; Bryant v. Pember, 45 Vt. 487; Kue/kamp v. Hidding, 31 Wis. 503, 511.
However unfortunate the plaintiff may have been in selling this valuable stone
for a mere nominal sum, she has failed entirely to make out a case either of fraud or
mistake in the sale such as will entitle her to a rescission of such sale so as to recover
the property sold in an action at law.
By the Court.- The judgment of the circuit court is affirmed.

R {ONT) V RON ENGINEERING

(1981] 1SCR111, 119 DLR (3d) 267

IA contractor submitted a bid of $2,748,000 to construct a project, along with a certi-

fied cheque for the deposit of $150,000, in compliance with para 13 of the Informa-
tion for Tenderers:

Except as otherwise herein provided the tenderer guarantees that if his tender is with-
drawn before the Commission shall have considered the tenders or before or after he
has been notified that his tender has been recommended to the Commission for
acceptance or that if the Commission does not for any reason receive within the period
of seven days as stipulated and as required herein, the Agreement executed by the
tenderer, the Performance Bond and the Payment Bond executed by the tenderer and
the surety company and the other documents required herein, the Commission may
retain the tender deposit for the use of the Commission and may accept any tender,
advertise for new tenders, negotiate a contract or not accept any tender as the Com-
. mission may deem advisable.
After the tenders were opened, the contractor discovered that ·its bid was $632, 000
lower than the next lowest bid. The contractor informed the owner one hour after
the tender opening that in its rush to put its bid together, it left out of the total
$750,058 for its own workforce, which would have brought its bid to $3,498,058. The
contractor attempted to withdraw the tender, but the owner offered it the contract.
When the contractor declined to sign, the owner kept the deposit. Subsequently and
throughout the proceedings, the contractor took the position that it had not with-
drawn its tender, but the owner could not accept its tender after it had received notice
of the error and, because the notice had come before acceptance of the tender, the
owner must return the deposit. The contractor sued for the return of the deposit,
losing at trial, but succeeding in the Ontario Court of Appeal. The owner appealed
to the Supreme Court of Canada.]
ESTEY J (for the court): The Ontario Court of Appeal, reversing the trial Judge, directed
the return to the respondent-contractor (hereinafter referred to as the "contractor")
of $150,000 paid by the contractor to the appellant-owner (hereinafter referred to as
the "owner") by way of a tender deposit at the time of filing a bid in response to a call
for tenders by the owner . ...
The core of the submission by the contractor is simply that a mistake by a ten -
derer, be it patent or latent, renders the tender revocable or the deposit recoverable
by the tenderer, notwithstanding the provisions of para. 13 quoted above, so long as

800
 V MISTAKE IN ASSUMPTIONS

notice is given to the owner of the mistake prior to the acceptance by the owner of
the contractor's tende.r. There are subsidiary arguments advanced by the contractor
to which I will later make reference.
We are not here concerned with a case where the mistake committed by the
tendering contractor is apparent on the face of the tender. Rather the mistake here
involved is one which requires an explanation outside of the tender documents
themselves . The trial Judge has so found and there is evidence in support of that
finding. Nor do we have here a case where a trial Court has found impropriety on the
part of the contractor such as the attempted recall of an intended, legitimate bid once
the contractor has become aware that it is the lowest bidder by a wide margin ....
Relying on its decision in Belle River Community Arena Inc. v. W.J.C. Kaufmann Co.
Ltd. et al. (1978), 87 D.L.R. (3d) 761, decided by the Court of Appeal after the trial judg-
ment herein had been handed down, the Court of Appeal concluded "that an offeree
cannot accept an offer which he knows has been made by mistake and which affects
a fundamental term of the contract." The Court, speaking through Arnup J.A., con-
tinued [(1979), 98 D.L.R (3d) 548 at 550]:
In our view, the principles enunciated in that case ought to be applied in this case. The
error in question has been found to be, as it obviously was, material and important. It was
drawn to the attention of the Commission almost at once after the opening of tenders.
Notwithstanding that, the Commission proceeded as if the error had not been made
and on the footing that it was entitled to treat the tender for what it said on its face.
and concluded [at 550-51) :
As I said in the course of the argument, a commission or other owner calling for tenders
is entitled to be sceptical when a bidder who is the low tenderer by a very substantia l
amount attempts to say, after the opening of tenders, that a mistake has been made.
However, when that mistake is proven by the production of reasonable evidence, the
person to whom the tender is made is not in a position to accept the tender or to seek
to forfeit the bid deposit.
In the Belle River case the contractor purported to withdraw the tender before any
action to accept was taken by the owner. In the course of reaching the conclusion
that the contractor was entitled to recover his bid bond, Arnup J.A. in that case found
that the owner was unable to accept the offer once he became aware that it contained
a mistake which affected a fundamental term of the contract. At p. 766 D.L.R., the
learned Justice in Appeal put it this way:
In substance, the purported offer, because of the mistake, is not the offer the offeror
intended to make, and the offeree knows that.
The principle applies even if there is a provision binding the offerer to keep the offer
open for acceptance for a given period .
and continuing on p. 767 D.L.R.:
ln view of the conclusion I have reached as to the inability of the plaintiff to accept the
tender, it does not matter, in my opinion, whether the purported tender cou ld be
withdrawn, or was in fact withdrawn, before the purported acceptance.
If Kaufmann's tender could be withdrawn before acceptance (as occurred in Ham-
ilton Bd. Ed. case ... [Hamilton Bd. Ed. v. U.S.F. & G., [1960] O .R . 594]), then Kaufmann's
tender was so withdrawn, and no contract came into existence. If it could not be
withdrawn for 60 days, it nevertheless could not ·be accepted, for the reason already
stated, and hence no contract came into existence.
This judgment is the basis for that given by the Court of Appeal in these proceedings ....

801
CHAPTER 9 MISTAKE

The revocabi\ity of the offer must, in my view, be determined in accordance with

the "General Conditions" and "Information for Tenderers" and the related documents
upon which the tender was submitted. There is no question when one reviews the
terms and conditions under which the tender was made that a contract arose upon
the submission of a tender between the contractor and the owner whereby the tenderer
could not withdraw the tender for a period of 60 days after the date of the opening
of the tenders. Later in these reasons this initial contract is referred to as contract "A"
to distinguish it from the construction contract itself which would arise on the
acceptance of a tender, and which I refer to as contract "B." Other terms and condi-
tions of this unilateral contract which arose by the filing of a tender in response to
the call therefor under the aforementioned terms and conditions, included the right
to recover the tender deposit 60 days after the opening of tenders if the tender was
not accepted by the owner. This contract is brought into being automatically upon
the submission of a tender. The terms and conditions specified in the tender docu -
ments and which become part of the terms of contract A between the owner and
the contractor included the following provision:

6. Withdrawal or Qualifying of Tenders

A tenderer who has already submitted a tender may submit a further tender at any time
up to the official closing time. The last tender received shall supersede and invalidate
all tenders previously submitted by that tenderer for this contract.
A tenderer may withdraw or qualify his tender at any time up to the official closing
time by submitting a letter bearing his signature and seal as in his tender to the Com -
mission Secretary or his authorized representative in his office who will mark thereon
the time and date of receipt and will place the letter in the tender box. No telegrams or
telephone calls will be considered.
Paragraph 13 ... provides for the return of the tender deposit on the execution of the
construction contract and then goes on to provide ... :
Except as otherwise herein provided the tenderer guarantees that if his tender is with -
drawn ... or if the Commission does not for any reason receive within the period of seven
days ... the Agreement executed by the tenderer ... the Commission may retain the
tender deposit. ...
Paragraph 14 is also relevant:
The tenderer agrees that, if requested so to do by the Commission or anyone acting on
its behalf within 90 days after the date of opening tenders, he will execute a triplicate
and return to the Commission the Agreement in the form found [sic] herein within seven
days after being so requested .
Here the contractor expressly avoided employing any terminology indicating a with-
drawal of the tender, and indeed affirmatively asserted the position throughout that
the offer had not been revoked. The owner did proffer a construction agreement and
this agreement was not executed by the tenderer within the seven-day period . ...
We are then left with the bare submission on behalf of the contractor that while
the offer was not withdrawn it was not capable of acceptance and that by reason
thereof the contractor is entitled to a return of the deposit.
I share the view expressed by the Court of Appeal that the integrity of the bidding
system must be protected where under the law of contracts it is possible so to do. I
further share the view expressed by that Court that there may be circumstances
where a tender may not be accepted as for example where in law it does not consti-
tute a tender, and hence the bid deposit might not be forfeited. That is so in my view,

802
 V. MISTAKE IN ASSUMPTIONS

however, simply because contract A cannot come into being. It puts it another way
to say that the purported tender does not in law amount to an acceptance of the call
for tenders and hence the unilateral contract does not come into existence. There-
fore, with the greatest of respect, I diverge from that Court where it is stated in the
judgmenfbelow [at 551]:
However, when that mistake is proven by the production of reasonable evidence, the
person to whom the tender is made is not in a position to accept the tender or to seek
to forfeit the deposit.
The test, in my respectful view, must be imposed at the time the tender is submitted
and not at some later date after a demonstration by the tenderer of a calculation error.
Contract A (being the contract arising forthwith upon the submission of the tender)
comes into being forthwith and without further formality upon the submission of
the tender. If the tenderer has committed an error in the calculation leading to the
tender submitted with the tender deposit, and at least in those circumstances where
at that moment the tender is capable of acceptance of law, the rights of the parties
under contract A have thereupon crystallized. The tender deposit, designed to ensure
the performance of the obligations of the tenderer under contract A, must therefore
stand exposed to the risk of forfeiture upon the breach of those obligations by the
tenderer. Where the conduct of the tenderer might indeed expose him to other claims
in damages by the owner, the tender deposit might well be the lesser pain to be suf-
fered by reason of the error in the preparation of the tender. This I will return to later.
Much argument was undertaken in this Court on the bearing of the law of mistake
on the outcome of this appeal. In approaching the application of the principles of
mistake it is imperative here to bear in mind that the only contract up to now in
existence between the parties to this appeal is the contract arising on the submission
of the tender whereunder the tender is irrevocable during the period of time stipu -
lated in the contract. Contract B (the construction contract, the form of which is set
out in the documents relating to the call for tenders) has not and did not come into
existence. We are concerned therefore with the law of mistake, if at all, only in con-
nection with contract A.
The tender submitted by the respondent brought contract A into life. This is
sometimes described in law as a unilateral contract, that is to say a contract which
results from an act made in response to an offer, as for example in the simplest terms,
"I will pay you a dollar if you will cut my lawn." No obligation to cut the lawn exists
in law and the obligation to pay the dollar comes into being upon the performance
of the invited act. Here the call for tenders created no obligation in the respondent
or1n anyone else in or out of the construction world. When a member of the con-
struction industry·responds to the call for tenders, as the respondent has done here,
that response takes the form of the submission of a tender, or a bid as it is sometimes
called. The significance of the bid in law is that it at once becomes irrevocable if filed
in conformity with the terms and conditions under which the call for·tenders was
made and if such terms so provide. There is no disagreement between the parties
here about the form and procedure in which the tender was submitted by the
respondent and that it complied with the terms and conditions of the call for tenders.
Consequently, contract A came into being. The principal term of contract A is the
irrevocability of the bid, and the corollary term is the obligation in both parties to
enter into a contract (contract B) upon the acceptance of the tender. Other terms
include the qualified obligations of the owner to accept the lowest tender, and the
degree of this obligation is controlled by the terms and conditions established in
the call for tenders.

803
CHAPTER 9 MISTAKE

The role of the deposit under contract A is clear and simple. The deposit was
required in order to ensure the performance by the contractor-tenderer of its obliga-
tions under contract A The deposit was recoverable by the contractor under certain
conditions, none of which were met; and also was subject to forfeiture under another
term of the contract, the provisions of which in my view have been met.
There is no question of a mistake on the part of either party up to the moment in
time when contract A came into existence. The employee of the respondent intended
to submit the very tender submitted, including the price therein stipulated. Indeed,
the president, in instructing the respondent's employee, intended the tender to be
as submitted. However, the contractor submits that as the tender was the product of
a mistake in calculation, it cannot form the basis of a construction contract since it
is not capable of acceptance and hence it cannot be subject to the terms and condi-
tions of contract A so as to cause a forfeiture thereunder of the deposit. The fallacy
in this argument is twofold. Firstly, there was no mistake in the sense that the con-
tractor did not intend to submit the tender as in form and substance it was. Secondly,
there is no principle in law under which the tender was rendered incapable of
acceptance by the appellant. For a mutual contract such as contract B to arise, there
must of course be a meeting of the minds, a shared animus contrahendi, but when
the contract in question is the product of other contractual arrangements, different
considerations apply. However, as already stated, we never reach that problem here
as the rights of the parties fall to be decided according to the tender arrangements,
contract A At the point when the tender was submitted the owner had not been told
about the mistake in calculation. Unlike the case of fv1cfv1aster University v. Wilchar
Const. Ltd. (1971), 22 D.L.R. (3d) 9 [aff'd 69 DLR (3d) 400n], there was nothing on the
face of the tender to reveal an error. There was no inference to be drawn by the
quantum of the tender ... that there had indeed been a miscalculation.
It was not seriously advanced that this was a case of patent error in the tender
offer and I proceed on the basis that there was not a patent error present.
On the facts as found by the learned trial Judge, no mistake existed which
impeded or affected the coming into being of contract A The "mistake" occurred in
the calculations leading to the figures that the contractor admittedly intended to
submit in his tender. Therefore, the issue in my view concerns not the law of mistake
but the application of the forfeiture·provisions contained in the tender documents.
The effect a mistake may have on the enforceability or interpretation of a contract
subsequently arising is an entirely different question, and one not before us. Neither
are we here concerned with a question as to whether a construction contract can
arise between parties in the presence of a mutually known error in a tender be it, at
least initially, either patent or latent.
It might be argued that by some abstract doctrine of law a tender which could
not form the basis of a contract upon acceptance in the sense of contract B, could not
operate as a tender to bring into being contract A It is unnecessary to consider such
a theory because it was not and could ·not be argued that the tender as actually
submitted by the contractor herein was not in law capable of acceptance immedi-
ately upon its receipt by the owner, the appellant. There may well be, as I have
indicated, a situation in the contemplation of the law where a form of tender was so
lacking as not to amount in law to a tender in the case of the terms and conditions
established in the call for tenders, and it may well be that such a form of tender could
not be "snapped up" by the owner, as some cases have put it, and therefore it would
not operate to trigger the birth of contract A Such a situation might arise in the
circumstances described in Fridman, The Law of Contract in Canada (1976), at p. 81:
"An offer that is made in error, e.g., as where the offeror intended to say $200 a ton

804
 V. MISTAKE IN ASSUMPTIONS

but wrote $20 by mistake, may be an offer that cannot be validly accepted by the
other party." The rule in Foster v. /Vlackinnon (1869), L.R. 4 C.P. 704 (vide Cheshire
Fifoot, The Law of Contract, 9th ed. (1976); pp. 239-40, for a discussion of the non est
factum rule), might also preclude the creation of a contract based upon such an offer.
We d6 not have to decide that question here.
Nor are we concerned with the position of the parties where an action is brought
upon a refusal to form contract B as was the case in /V1c/V1aster, supra. It is true that
the appellant-owner here has made a counterclaim for damages resulting from the
refusal of the respondent to enter into the construction contract but such counter-
claim was dismissed and the appeal herein is concerned only with the claim made
by the respond~nt for the return of the tender deposit.
Left to itself, therefore, the law of contract would result in a confirmation of a
dismissal by the learned trial Judge of the claim by the contractor for the return of
the tender deposit. The terms of contract A, already set out, clearly indicate a con -
tractual right in the owner to forfeit this money.
As the respondent has not raised the principle of the law of penalty as it applies
to the retention of the deposit here by the appellant, it is not necessary to deal with
that branch of the law. .. .
For.these .reasons I would allow the appeal, set aside the order of the Court of
Appeal, and restore the judgment of J. Holland J. at trial with costs, here and in all
Courts below, to the appellant.

Appeal allowed

NOTES AND PROBLEMS

1. The Supreme Court of Canada affirmed the decision in Ron Engineering in /VIJB Enter-
prises Ltd v Defence Construction (1951) Ltd, [1999) 1 SCR 619, 170 DLR (4th) 577. The court
also rejected Estey J's characterization of "Contract A" in Ron Engineering as a unilateral
contract. See /VIJB Enterprises, excerpted in Chapter 3.
2. In bidding situations, sometimes the party making a tender makes a mistake in calculat-
ing its offer. If the other party knows of the mistake, can it snap up the low offer by accepting
the bid? In Imperial Glass Ltd v Consolidated Supplies Ltd (1960), 22 DLR (2d) 759 (BCCA), the
court held that because the mistake was not in the offer, but merely in the information on which
it was based, the offer had been intended and therefore there was a consensus. However, in
/V1c/V1aster University v Wilchar Construction Ltd (1971). 22 DLR (3d) 9 (Ont H Ct J), aff'd without
reasons 69 DLR (3d) 400n (CA), the Ontario High Court held that if one party made an honest
mistake as to a material term of the contract. a mistake of which the other party was aware,
there is no consensus and therefore no valid contract. And in Belle River Community Arena Inc
v WJC Kaufmann Co Ltd (1978), 20 OR (2d) 447, 87 DLR (3d) 761 (CA), the court harshly criti-
cized Imperial Glass and held that if a contractor submits a tender containing a mistake as to
a fundamental term and the other party knows of the mistake, the contractor is not bound:
specifically (at para 13). "In my view, the authorities establish that an offeree cannot accept an
offer which he knows has been made by mistake and which affects a fundamental term of the
contract. Price is obviously one such term ... . In substance, the purported offer, because of
the mistake, is not the offer the offeror intended to make, and the offeree knows that."
3. Is the Ron Engineering solution to mistaken bids satisfactory? It has been suggested that
it tends to provide windfalls to issuers of invitations to bid. For a discussion of two Canadian
appellate courts' articulation of a rule that excuses mistaken bids (Calgary (City) v Northern
. Construction Co, [1986) 2 WWR 426 (Alta CA) and Toronto Transit Commission v Gottardo Con-
struction Ltd (2005), 257 DLR (4th) 539 (Ont CA)), see John McCamus, "Mistaken Bids and

805
CHAPTER 9 MISTAKE

Unilateral Mistaken Assumptions, A New Solution for an Old Problem?" (2008) 87 Can Bar
Rev 1. McCamus says:

In two recent decisions, Alberta and Ontario appellate judges have expressed the view that
mistaken bidders should be excused from their obligations where the burden imposed by
the error is so grossly disproportionate that enforcement of the mistaken bid would be
unconscionable. What is being proposed, in effect, is the recognition of a rule permitting
rescission of the bidder's contractual obligations on the basis of the bidder's unilateral mis-
taken assumption. The error is unilateral in the sense that the calculation error is the bidder's
alone. It is not shared by the issuer. The error pertains to an assumption on the bidder's part
that the calculation of the price was accurate.

There were no grounds for equitable intervention in either Gottardo or Northern Construc-
tion. In Gottardo, the Court of Appeal found that the bidder's mistake, a miscalculation of
approximately 10 percent of the correct bid price, or a $557,000 error, did not preclude the
formation of Contract A. Similarly, in Northern Construction, a calculation error of $181,274 in
a bid priced at $9,342,000 was not found to be so grossly disproportionate to the contract price
such that it would have been unconscionable to hold the mistaken bidder contractually liable.
4. See generally on mistake in assumptions Waddams, ch 12; McCamus at 556-87; Mac-
Dougall at 228-37.

VI. RESTITUTION
In this chapter we have examined the principles on which apparent agreements may be held
unenforceable on grounds of mistake-that is, where the mistake has been induced by a mis-
representation of one party; where the mistake has prevented the formation of a true consensus
ad idem; and where a mistaken assumption concerning the context of the transaction rendered
its enforcement unjust. In each of these, contexts, the party who has transferred va lue to the
other party on the assumption that a ·valid contract was in existence may choose to pursue
restitutionary relief for the value of the benefit conferred. The precise means by which restitu-
tion will be achieved, however, rests, to some extent, on whether the doctrine providing a
basis for the unenforceability of the apparent agreement is one developed by the courts of
common law or the courts of equity.
In order to set aside an agreement on equitable grounds, it was necessary to obtain a
decree of rescission. A decree of rescission could not be obtained unless the parties could
make an effective restoration of benefits received from one to the other. That is, a decree of
rescission required that there be achieved an effective restitutio in integrum . At common law,
this particular form of decree was unavailable. Nonetheless, the courts of common law did
grant recovery of benefits conferred under transactions considered ineffective at common law
in what were once referred to as quasi-contractual claims. Such a claim was advanced, for
example, in Bell v Lever Brothers, above, to recover the moneys paid to Bell. If the House of
Lords had held, in this case, that the agreement was indeed void at common law by reason of
a mistaken assumption that Bell was not dismissible, recovery of the moneys paid would have
been granted. Similarly, if benefits were conferred under an agreement that failed for a lack of
consensus ad idem, a claim to recover their value would lie at common law.
Further, in some contexts, the common law held that where property had been transferred
under an agreement void for operative mistake, property would not pass to the other party,
thus enabling the mistaken party to pursue proprietary relief that, if successful, would have the
effect of restoring the benefit conferred to the party who had conferred it. The mistake of
identity cases examined in Chapter 4, such as Cundy v Lindsay, provide a leading illustration of
the phenomenon. If the transaction was merely vulnerable to rescission in equity, however, the

806
 VI. RESTITUTION

contract, being valid at law, was effective to pass title to the asset in question until such time
as the agreement was rescinded or avoided in equity. Upon rescission, title to the asset would
be revested in the transferor.
Accordingly, an important difference between the effect of rules that render agreements
void at common law and those that render them voidable in equity is their impact on third
parties who may have purchased in good faith an asset initially transferred under an agreement
that is void or voidable for mistake. If the agreement is void at common law, no property would
pass to the third party. The third party would be vulnerable, therefore, to a proprietary claim
brought by the owner of the asset. If the agreement was rendered merely voidable, however,
and the third party purchased the asset prior to rescission of the agreement in equity, title
would have passed at common law to the third party and the decree of rescission would be
denied.
The precise interaction of common law and equitable doctrines, however, and their con-
sequent impact on the means by which restitution is achieved is subtle and, in contexts such
as misrepresentation and mistake, where both common law and equitable doctrines are in
play, may vary from one context to another. In the context of misrepresentatio n, as we have
seen, courts of common law recognized that agreements induced by fraudulent misrepresen-
tation could not be enforced . Nonetheless, courts of common law did not necessarily con-
clude that in such circumstances common law title would not pass where an asset was
transferred to the defrauded party. The differences in the remedial devices available to courts
of common law and equity in the context of fraudulent misrepresentation were described by
Lord Blackburn in Erlanger v The New Sombrero Phosphate Company below.

Erlanger v The New Sombrero Phosphate Company. (1878), 3 App Cas 1218. Baron
Erlanger, a Paris banker, headed a syndicate (or partnership) that on August 30, 1871
acquired for £55,000 a lease of an island in the West Indies believed to contain valu-
able phosphate mines. He proceeded to organize a corporation with directors of his
own choosing and the corporation bought the mines for £110,000 on September 20,
1871. At the first ordinary general meeting of the company on February 2, 1872, a
shareholder queried the sale, which the first directors had already confirmed, but no
action was taken. At the first annual general meeting on June 19, 1872, a committee
was appointed to investigate rumours about the sale. The committee reported on
August 29, and on December 24 the company filed suit against Erlanger and others
asking to have the contract set aside, the £110,000 repaid to the company, the company
to deliver up the island and to \].Ccount for profits (if any) made by working it. It was so
ordered. Most of the judgments are taken up with the question of the duty of promot-
ers in equity to make full disclosure, and with the question of the separate identities
of the promoters, the company, and its handful of shareholders on September 20,
1871 and on June 19, 1872. On the question of restitution, LORD BLACKBURN said:

It is, I think, clear on principles of general justice, that as a condition to a rescission there
must be a restitutio in integrum. The parties must be put in statu quo. It is a doctrine
which has often been acted upon both at law and in equity. But there is a considerable
difference in the mode in which it is applied in Courts of Law and Equity, owing, as I
think, to the difference of the machinery which the Courts have at command . I speak
of these Courts as they were at the time when this suit commenced, without inquiring
whether the Judicature Acts make any, or if any, what difference.
It would be obviously unjust that a person who has been in possession of property
under the contract which he seeks to repudiate should be allowed to throw that back
on the other party's hands without accounting for any benefit he may have derived from
the use of the property, or if the property, though not destroyed, has been in the interval

807
CHAPTER 9 MISTAKE

deteriorated, without making compensation for that deterioration. But as a Court of

Law has no machinery at its command for taking an account of such matters, the
defrauded party, if he sought his remedy at law, must in such cases keep the property
and sue in an action for deceit, in which the jury, if properly directed, can do complete
justice by giving as damages a full indemnity for all that the party has lost. .
But a Court of Equity could not give damages, and, unless it can rescind the contract,
can give no relief. And, on the other hand, it can take accounts of profits, and make
allowance for deterioration. And I think the practice has always been for a Court of
Equity to give this relief whenever, by the exercise of its powers, it can do what is prac-
tically just, though it cannot restore the parties precisely to the state they were in before
the contract. And a Court of Equity requires that those w ho come to it to ask its active
interposition to give them relief, should use due diligence, after there has been such
notice or knowledge as to make it inequitable to lie by. And any change which occu rs
in the position of the parties or the state of the property after such notice or knowledge
should tell much more against the party in mora, than a similar change before he was
in mora should do.

Although, as explained by Lord Blackburn, the defrauded party who desired to revest property
in the party committing the fraud might have no means available at common law to achieve
that objective, we have also seen in Redgrave v Hurd, above, that courts of equity would grant
a decree of rescission in such circumstances, provided that the usual conditions for granting
such decrees were met. Thus, the defrauded party who w ished to achieve a revesting of prop-
erty in the fraudster could resort to equity, provided that a full restitutio in integrum could be
achieved . As a practical matter, then, the rules of equity govern in cases of th is kind where the
defrauded party wishes to revest property in the fraudster in order to achieve a restoration of
the status quo ante. In cases w here the defrauded party does not need to revest property in the
fraudster, as where the defrauded party had simply paid money and has not, as yet, received
anything in return, a simple claim to recover the moneys paid would lie at common law. Some
observers sum up the effect of this interplay of common law and equitable doctrines by sug-
gesting that fraud re nders agreements merely voidable both at common law and in equity.
As Lord Blackburn indicates, courts of equity coupled orders of rescission with an accounting
of profits or allowances for deterioration in order to achieve a result that would be "practically
just. " The application of this principle is well -illustrated by the decision in Kupchak v Oayson
Holdings Ltd, above. The Kupchak decision also illustrates the essentially restitutionary nature
of rescission and the associated monetary awards. The aw.ard of monetary compensation in
substitution for the Haro Street property has the effect of making restitution for the value of
that property. As Newbigging v Adam, above, indicates, however, the giving back and taking
back on both sides may include indemnification for burdens assumed by the misrepresentee.
The restitutionary nature of such relief is neatly illustrated by Whittington v Seale-Hayne
(1900), 82 LT 49. In this case, the plaintiff had leased the defendant's property for the purpose
of breeding poultry on the faith of a false misrepresentation that the premises were sanitary.
The plaintiff sought rescission coupled with a monetary award for expenditures made on
municipal taxes; repairs to the premises ordered by the municipality; damages for loss of
poultry, whose death was caused by the unsanitary conditions; and lost profits. The rescission
decree ordered indemnification only for the first two items. These expenditures conferred
value on the lessor. The latter two constituted claims for damages, a form of relief available
only in a tort claim . As we have seen, such a tort claim may lie w here the statement is either
fraudulently or negligently false .
In addition, Kupchak illustrates the various bars or defences to rescission and, in particular,
the requirement that there be a restitutio in integrum. Although, in Kupch.ak, precise restitution

808
 VI. RESTITUTION

was not possible because of the modification of the Haro Street property and the change in its
ownership, Kupchak also illustrates the traditional view that a complete inability to make resti-
tution would simply preclude rescissionary relief and leave the misrepresentee to whatever
remedies might be available in tort. Thus, in such circumstances, the victim of an innocent
"non -careless" misrepresentation wou ld be entitled to no relief whatsoever. Such an outcome
is difficult to justify and it is therefore not surprising that Canadian courts have suggested that,
even where a return of benefits received is completely impossible, a monetary award may be
substituted for their value. See e.g. Dusik v Newton (1985), 62 BCLR 1 (CA); Bank of Montreal
v Murphy, [1986] 6 WWR 610 (BCCA); Fleischhaker v Fort Garry Agencies Limited (1957), 11
DLR (2d) 599 (Man CA). In such cases, the courts are simply awarding restitutionary recovery
for the value of benefits conferred by the misrepresentee.
When one turns to mistaken assumptions, however, the position of the common law is that
a contract that is unenforceable for this reason is void, with the consequence that no property
passes in assets transferred by virtue of the mistake. The transferor is therefore entitled to pro-
prietary relief at common law, even against a bona fide purchaser of the property who has
purchased the property from the transferee without any awareness of the vulnerability of the
original transaction to rescission on the basis of mistake. As we have seen, it was this potential
difficulty for third-party purchasers that appeared to motivate Lord Denning's attempt, in Solle
v Butcher, above, to develop an equitable doctrine of mistake that would confin e or, indeed,
supplant to some extent the common law mistake doctrine with a view to providing protection
to third-party purchasers through application of the equitable doctrine that the intervention of
third-party rights would preclude rescission. As we have also seen, however, the validity of this
approach has been questioned in the Engli sh Court of Appeal's decision in Great Peace Ship -
ping Ltd v Tsavliris Salvage (International) Ltd, above .
A further innovation in Solle v Butcher, also questioned by the Court of Appeal in Great Peace,
was Lord Denning's suggestion that equity possessed a discretion to impose terms on a rescis-
sionary decree that might, for example, provide one party with an option to enter into a further
agreement on the other party's terms. In Solle, Denning LJ conditioned rescission on a w illingness
of the landlord to offer the tenant a lease for the unexpired portion of the term on the terms
that could have been secured by compliance with the rent control legislation. In Great Peace,
however, Lord Phillips noted that the principal authority on which Lord Denning relied for the
existence of such discretion, the decision in Cooper v Phibbs, described in Bell v Lever Brothers,
above, was a case in which the terms imposed simply achieved a mutual restitution of the par-
ties. According ly, Lord Phillips suggested that a discretion to impose terms for other purposes
was simply not established by precedent. Nonetheless, there does appear to be some merit in
Lord Denning's approach . Apart from the facts of Solle v Butcher itself, there are situations in
which rescission subject to terms of this kind appears to achieve a just result. For example,
illustration 3 to s 152 of the American Law lnstitute's Restatement of Contracts, 2nd reads as
follows:

A contracts to sell and B to buy a tract of land. B agrees to pay A $100,000 in cash and to
assume a mortgage that C holds on the tract. Both A and B believe that the amount of the
mortgage is $50,000, but in fact it is only $10,000. The contract is voidable by A, unless the
Court supplies a term under which B is entitled to enforce the contract if he agrees to pay
an additional appropriate sum, and B does so.

If the deciding court's remedial choice is restricted to rescission with restitution or no rescis-
sion, either the agreement will be rescinded, in which case B is deprived of an opportunity to
purchase the property at the agreed-on price, or the agreement is not rescinded and B is
unjustly enriched by being able to purchase the property at a bargain price. If the court can
cond ition rescission on a requirement that A be w illing to offer the property to B for an addi-
tional $40,000, a palpably fairer result will be achieved.

809
CHAPTER 9 MISTAKE

Should Canadian courts preserve the remedial discretion asserted by Lord Denning in Solle
v Butcher? In Miller Paving Limited v B Gottardo Construction Ltd, above, Goudge JA, for the
court, observed as follows:

Great Peace appears not yet to have been adopted in Canada and, in my view, there is good
reason for not doing so. The loss of the flexibility needed to correct unjust results in widely
diverse circumstances that would come from eliminating the equitable doctrine of common
mistake would, I think, be a step backward.

See generally Maddaugh & McCamus, ch 17 and 20.

810
 CHAPTER TEN

FRUSTRATION

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811
II. Theoretical Perspectives on the Doctrine of Frustration . . . . . . . . . . . . . . . . . . . . . 812
Ill. The Rule of Absolute Promises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817
IV. Relaxation of the Rule of Absolute Promises. . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . 818
V. Relief on Terms: Restitution and Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860

I. INTRODUCTION
The cases on mistake in assumptions set out in Chapter 9 were concerned with agreements
entered into on the basis of a false assumption about past or existing circumstances. This chap-
ter is concerned with false assumptions about future events. In many respects, the problems
are similar. In both contexts, the court must ask: when is it appropriate to terminate a contract
or revise its terms so as to prevent an unexpected loss from being borne by one party or an
unexpected benefit being derived by another? The cases in this chapter are usually classified
under the doctrinal label of "impossibility" or "frustration " or both . Because it is quite clear that
a person may promise the impossible and a court may award damages on his or her inevitable
breach of promise, impossibility is not always a defence. Moreover, what is legally "impossible"
is sometimes capable of performance if the promisor goes to inordinate expense. This label is
therefore somewhat misleading . Equally, "frustration " is far from an illuminating label.
The first difficult issue to arise in the present context is the identification of circumstances
that trigger a case for the release from obligations under the initial contract owing to mistaken
assumptions as to future courses of events. If it is accepted that a major function of contracts
is to allocate various types of risk, then the materialization of an adverse risk cannot per se be
a justification for contractual discharge or excuse . On this basis, all insurance policies would
be invalid. Moreover, the mere fact that a given risk is a low probability risk does not mean that
it has not been foreseen or assigned to one or the other party, reflecting an appropriately
modest expected cost associated with it. Again, many insurance policies cover remote risks.
Thus, courts face the elusi.ve task of identifying risks that cannot reasonably be assumed to
have been assigned to either party under the contract and impounded in the contract terms.
However, assuming that there is some class of risks that contracting parties simply do not
address their minds to at all in the contracting process, thus leaving what has sometimes been
called "gaps" in the contract terms, the second difficult issue that arises is: how to fill in the
gaps? The cases in Sections II and Ill of this chapter raise the first problem: when ought
changed or unforeseen circumstances to provide a basis for release from contractual obliga-
tions? The cases in Section IV raise the question of compensation for partial benefits conferred
and relief of partial losses sustained in the event that some relief from contractual obligations
is found to be warranted.

811
CHAPTER 10 FRUSTRATION

II. THEORETICAL PERSPECTIVES ON THE

DOCTRINE OF FRUSTRATION

GEORGE G TRIANTIS, "CONTRACTUAL ALLOCATIONS OF

UNKNOWN RISKS: A CRITIQUE OF THE DOCTRINE
OF COMMERCIAL IMPRACTICABILITY"
(1992) 42 UTLJ 450 at 464-68 and 483 (footnotes omitted)

Consider the following example. A shipping company contracts with a merchant to

transport a large amount of valuable cargo from the merchant's warehouse in Colom -
bia to consumer markets in California. The usual and cheapest route for the trip is
through the Panama canal and up the west coast of Central America. In the course
of the negotiations, the shipper estimates the cost of the trip, given circumstances
existing at that time. However, changes in the environment occurring after the exe-
cution of the contract may cause the actual cost to exceed the estimated value.
In pricing any risk of cost increase, whether broadly or narrowly framed, the ship-
per must identify and assess state variables and decision variables. Suppose that the
shipper uses the fault tree in the accompanying diagram to organize the state vari-
ables that threaten to increase the cost of performance. For simplicity, the diagram
assumes that decision variables are fixed and that there are no interdependencies
among state variables. The ultimate concern, the probability distribution of the cost
of performance, is placed at the bottom of the tree (on the left side of the diagram).
As one moves up any branch of the tree (from left to right), the event at each level
may be caused by any of the factors listed in the immediately higher level. For instance,
moving from level 1 to level 2 of the uppermost branch, an increase in the aggregate
cost of fuel on the trip may be caused by increased fuel consumption or by a higher
price per unit of fuel. In other words, each level on a given branch defines or frames
risks more narrowly than the lower levels. The risk of an event that causes an increase
in the cost of performance is defined more or less narrowly, depending on its level
on the tree.
Fault trees are rarely complete. Some branches may have been identified but failed
sensitivity tests due to their slight marginal impact on the broader risk assessments.
Other branches are missing because they were not contemplated by the decision
maker. However, an omitted risk, although unanticipated, is in a sense contemplated
and managed at a broader level. For example, the risk of terrorism causing the closing
of the canal is not foreseen (level 4), but the more broadly framed risk is contemplated-
the closing of the canal and increased fuel consumption (level 3). Similarly, the risk
of a nuclear accident in the Middle East that disables oil fields is not foreseen (level 4),
but the possibility of increases in the price of oil is (level 3). Advocates of the doctrine
of commercial impracticability are mistaken when they assert that the risks of unfore-
seen contingencies, like terrorism in Panama and nuclear accidents in the Middle ·
East, are not allocated by contract because they are not contemplated by the parties.
In fact, they are both contemplated and allocated: not specifically, in their narrow
frame, but as part of the package of the broader risks of increases in fuel consump-
tion and of increases in the price of oil.
Although the risk of unforeseen contingencies are indeed allocated by contract,
the failure to anticipate a risk in its narrow frame may nevertheless raise the follow-
ing two concerns. First, the allocation of a risk at a lower (broader frame) level rather
than specifically may not be optimal. For instance, though one party is the superior

812
 II. THEORETICAL PERSPECTIVES ON THE DOCTRINE OF FRUSTRATION

bearer of the risk in its broader frame, the other party is the superior bearer of the
risk in its narrow frame. However, this case is relatively rare. Unknown risks are
typically remote and exogenous. As noted earlier, exogenous risks are often managed
best on a broader level, packaged with other contributing risks. Therefore, the mere
fact that they are not foreseen does not affect the efficiency of the level of risk man-
agement. Moreover, even if a sufficient portion of the risk is controllable and therefore
more effectively managed on a specific basis, the expected benefit from addressing
such a remote risk in its narrow rather than broader frame may be outweighed by
the cost of identifying, assessing, and allocating the risk in its narrow frame. For
these reasons the lower (broader) level of allocation of risks of unforeseen contingen-
cies is not a significant concern.
The second concern is that, even though the unanticipated risk may be more
efficiently managed at a broader level, the failure to foresee the specific contingency
increases the uncertainty of the more broadly framed risk. If the shipping company
does not foresee all the potential events that might lead to the closing of the canal,
the assessment of the risk of the canal closing is less certain. In other words, the
failure to foresee is the failure to identify one of the state variables associated with
the more broadly framed risk. This is due to imperfect information and is therefore
an instance of what Kahneman and Tversky call "internal uncertainty." However,
removal of this uncertainty through the acquisition of additional information may
not be cost-justified. In any event, the recent empirical and theoretical analyses of
such social scientists as Gardenfors and Sahlin and Einhorn and Hogarth suggest
that, as long as the decision maker is aware of the uncertainty caused by the presence
of unforeseen contingencies, she can address such uncertainty rationally by making
adjustments in the determination of broader risk assessments. To illustrate, the
anchoring and adjustment model of Einhorn and Hogarth may be applied to the
assessment of risk in the case where the decision maker is aware of the existence of
unspecified state variables but not of their identity.
The intuitive idea behind the anchor and adjustment strategy in these circum -
stances is analogous to the manner in which a family might plan their vacation
budget. To the sum of specific items, such as transportation and accommodation,
the family adds an amount reserved for unforeseen contingencies. More formally,
the decision maker determines an anchor probability on the basis of contemplated
state variables or scenarios that are presented in the fault tree. Since the decision
maker knows that there are unforeseen scenarios, she is aware of the internal uncer-
tainty that results. Suppose she decides that the investment in additional information
that may reveal the unforeseen contingencies is not cost-justified. Therefore, she
must adjust the anchor probability for the uncertainty that remains unresolved. The
adjustment may be positive or negative and is a function of (1) the level of the anchor,
(2) the amount of uncertainty, and (3) the relative weighting of the contemplated
probabilities that are higher and lower than the anchor, which reflects the decision
maker's preference toward uncertainty.
Suppose that the risk is the closing of the canal and that the decision maker
identifies two potential causes: a hostile regime and a severe earthquake. She is likely
to assess a relatively low anchor probability on this basis. However, she must adjust
for the possibility that other causes are not contemplated. Since the anchor probabil-
ity is low and since the unforeseen contingencies are more likely to increase the
probability of the canal closing than to decrease it, the adjustment is likely to be
positive. Moreover, the magnitude of the adjustment will vary with the decision
maker's aversion to uncertainty.

813
CX> n
....... Fau lt Tree: Risk o f Inc rea se in Shipping C ost I
:t>
~ "()
-I
rn
;o
Hostile p
0
I reg ime I .. .
Closing of
ca nal H I Earthquake I
"
;o
c
Vl
-I
;o
:t>

Increase in fuel
consum ption
H--l Unfavourable
weather
I
-I
6
z

Increase in
total fuel
cost
y Engine
malfu ncti on
L___

Probability
Increase in
distributio n of
increases in
cost of
performance I Increase in
rl world demand
fo r oil

unit price
of fuel rl Middle East
war

Decrease in
world supply
of oil
OPEC
agreement
Increase in
labour cost I. . . I to restri ct
producti on

(Broadest frame (Narrowest

o f risk) Level l Level2 Level 3 Level4 frame of risk)
 II. THEORETICAL PERSPECTIVES ON THE DOCTRINE OF FRUSTRATION

In sum, if information is costly, there is a point at which it becomes efficient for

the decision maker to accept the existence of unknown risks rather than to invest
in additional information. However, contrary to the widely held premise, risks of
unforeseen contingencies are allocated by contract as part of more broadly framed
risks to which they contribute as state variables. The decision maker accounts for
the incompleteness in the specification of state variables in their narrow frame by
adjusting the probability assessment of the more broadly framed risk. The broader
risks are admittedly more uncertain because of the failure to specify all state vari-
ables. However, the discussion in this part suggests that these risks can nevertheless
be priced, allocated and managed in a cost-effective and rational manner . ...
This article dispels the myth that an unknown risk cannot be managed or allo-
cated in a rational manner. The question is not whether a risk is allocated in a
contract, but at what level it is allocated. Since the prominent gap-filling rationales
for the doctrine of commercial impracticability are premised on the myth that
unforeseen risks are not allocated, this article proposes and evaluates alternative
justifications for the doctrine. These justifications are concerned with how well,
rather than whether, unforeseen risks are allocated in contracts. Given the empirical
evidence on cognitive errors and judgmental biases in risk assessments, the intel-
lectual capability of contracting parties to rationally allocate risks under uncertainty
may be questioned. However, the ability of the courts to improve the efficiency of
risk allocation or to redress inequities in compensation for risk bearing is severely
limited. Thus, the intuition exhibited by most courts who decline to apply the doc-
trine of commercial impracticability is well-founded. The continued existence of
the doctrine, even if substantially dormant, only serves to preserve the confusion
and uncertainty as to its application and scope. The role of contract law should be
limited to the interpretation and enforcement of the parties' risk allocations. It might
be argued that, even without the modern doctrine of impracticability, the courts may
effectively reallocate risks through the creative use of implied terms that was com-
mon in the development of the doctrine in the nineteenth century. However, that
is a problem of policing judicial interpretative discretion tha~ must be addressed on
its own terms.

RICHARD A POSNER &ANDREW M ROSENFIELD,

"IMPOSSIBILITY AND RELATED DOCTRINES IN
CONTRACT LAW: AN ECONOMIC ANALYSIS"
(1977) 6 J Legal Stud 83

I. THE ECONOMICS OF IMPOSSIBILITY

The typical case in which impossibility or some related doctrine is invoked is one
where, by reason of an unforeseen or at least unprovided-for event, performance by
one of the parties of his obligations under the contract has become so much more
costly than he foresaw at the time the contract was made as to be uneconomical (that
is, the costs of performance would be greater than the benefits). The performance
promised may have been delivery of a particular cargo by a specified delivery date-
but the ship is trapped in the Suez Canal because of a war between Israel and Egypt.
Or it may have been a piano recital by Gina Bachauer-and she dies between the
signing of the contract and the date of the recital. The law could in each case treat
the failure to perform as a breach of contract, thereby in effect assigning to the prom -
isor the risk that war, or death, would prevent performance (or render it uneconomical).

815
CHAPTER 10 FRUSTRATION

Alternatively, invoking impossibility or some related notion, the law could treat the
failure to perform as excusable and discharge the contract, thereby in effect assign-
ing the risk to the promisee.
From the standpoint of economics-and disregarding, but only momentarily,
administrative costs-discharge should be allowed where the promisee is the
superior risk bearer; if the promisor is the superior risk bearer, nonperformance
should be treated as a breach of contract. "Superior risk bearer" is to be understood
here as the party that is the more efficient bearer of the particular risk in question,
in the particular circumstances of the transaction. Of course, if the parties have
expressly assigned the risk to one of them, there is no occasion to inquire which is
the superior risk bearer. The inquiry is merely an aid to interpretation.
A party can be a superior risk bearer for one of two reasons. First, he may be in a
better position to prevent the risk from materializing. This resembles the economic
criterion for assigning liability in tort cases. It is an important criterion in many
contract settings, too, but not in this one. Discharge would be inefficient in any case
where the promisor could prevent the risk from materializing at a lower cost than
the expected cost of the risky event. In such a case efficiency would require that the
promisor bear the loss resulting from the occurrence of the event, and hence that
occurrence should be treated as precipitating a breach of contract.
But the converse is not necessarily true. It does not necessarily follow from the
fact that the promisor could not at any reasonable cost have prevented the risk from
materializing that he should be discharged from his contractual obligations. Preven -
tion is only one way of dealing with risk; the other is insurance. The promisor may
be the superior insurer. If so, his inability to prevent the risk from materializing
should not operate to discharge him from the contract, any more than an insurance
company's inability to prevent a fire on the premises of the insured should excuse
it from its liability to make good the damage caused by the fire.
The factors relevant to determining which party to the contract is the cheaper
insurer are (1) risk-appraisal costs and (2) transaction costs. The former comprise the
costs of determining (a) the probability that the risk will materialize and (b) the mag-
nitude of the loss if it does materialize. The amount of risk is the product of the
probability of loss and of the magnitude of the loss if it occurs. Both elements-prob-
ability and magnitude-must be known in order for the insurer to know how much
to ask from the other party to the contract as compensation for bearing the risk in
question.
The relevant transaction costs are the costs involved in eliminating or minimizing
the risk through pooling it with other uncertain events, that is, diversifying away the
risk. This can be done either through self-insurance or through the purchase of an
insurance policy (market insurance). To illustrate, a corporation's shareholders might
eliminate the risk associated with some contract the corporation had made by hold-
ing a portfolio of securities in which their shares in the corporation were combined
with shares in many other corporations whose earnings would not be (adversely)
affected if this particular corporation were to default on the contract. This would be
an example of self-insurance. Alternatively, the corporation might purchase business-
loss or some other form of insurance that would protect it (and, more important, its
shareholders) from the consequences of a default on the contract; this would be an
example of market insurance. Where good opportunities for diversification exist,
self-insurance will often be cheaper than market insurance.
The foregoing discussion indicates the factors that courts and legislatures might
consider in devising efficient rules for the discharge of contracts. An easy case for
discharge would be one where (1) the promisor asking to be discharged could not

816
 Ill. THE RULE OF ABSOLUTE PROMISES

reasonably have prevented the event rendering his performance uneconomical, and
(2) the promisee could have insured against the occurrence of the event at lower
cost than the promisor because the promisee (a) was in a better position to estimate
both (i) the probability of the event's occurrence and (ii) the magnitude of the loss if
it did occur, and (b) could have self-insured, whereas the promisor would have had
to buy more costly market insurance.

NOTES

1. For a suggestion that frustration and mistake should be treated under a unified theor-
etical framework, see Andrew Kull, "Mistake, Frustration, and the Windfall Principle of Contract
Remedies" (1991) 43 Hastings LJ 1. See also the discussion of the two doctrines in The Great
Peace, excerpted in Chapter 9.
2. Gideon Parchomovsky, Peter Siegelman & Steve Thel, "Of Equal Wrongs and Half Rights"
(2007) 82 NYUL Rev 738, suggested that fairness and efficiency dictate that parties should split
the windfall loss when parties exchange a va luable interest that turns out to be worthless and
neither party is in a better position to bear the risk of cancellation.
3. For a suggestion that the imposs ibility doctrine "has the potential to improve the effi-
ciency and productivity of a wide range of long-term contractual agreements'" and guidelines
on how the doctrine should be applied to produce these results, see Donald J Smythe,
"Bou nded Rationality, the Doctrine of Impracticability, and the Governance of Relational Con-
tracts" (2004) 13 S Cal Interdi sciplinary LJ 227.
4. For a discussion on the doctrine of impossibility, see James Gordley, "Impossibility and
Changed and Unforeseen Circumstances" (2004) 52 Am J Comp L 513; Shi rley R Brener,
"Outg row ing Impossibility: Exam ining the Impossibility Doctrine in the Wake of Hurricane
Katrina" (2006) 56 Emory LJ 461. For a discussion of the principles that should govern the
tension between unforeseen circumstances on one hand, and allocating risk and securing
transactions on the other, see Melvin A Eisenberg, "Impossibility, Impracticability, and Frustra-
tion" 1 J Legal Analysis 207 (2009).

Ill. THE RULE OF ABSOLUTE PROMISES

PARADINE V JANE
(1647), Aleyn 26, 82 ER 897

[The defendant Jane, failed to pay the rent under a lease, for which this action was
brought against him. The defendant pleaded that Prince Rupert, an alien and an
enemy of the King, had invaded the land with his army and expelled the defendant
from the land, preventing the defendant from reaping profits from the land.]

... [W]here the law creates a duty or charge, and the party is disabled to perform
it without any default in him, and hath no remedy over, then the l aw will excuse
him ... but when the party by his own contract creates a duty or charge upon himself,
he is bound to make it good, if he may, notwithstanding any accident by inevitable
necessity, because he might have provided against it by his contract. And therefore
if the lessee covenant to repair a house, though it be burnt by lightning, or thrown
down by enemies, yet he ought to repair it. Dyer 33.3; 40E. Ill.6.h. Now the rent is a
duty created by the parties upon the reservation, and had there been a covenant to

817
CHAPTER 10 FRUSTRATION

pay it, there had been no question but the lessee must have made it good, notw1th-
standing the interruption by enemies, for the law would not protect him beyond his
own agreement ... . Another reason was added, that as the lessee is to have the
advantage of casual profits so he must run the hazard of casual losses, and not lay
the whole burthen of them upon his lessor; ... that though the land be surrounded,
or gained by the sea, or made barren by wildfire, yet the lessor shall have his whole
rent: and judgment was given for the plaintiff.

NOTE
For a discussion of the historical origins ofParadine v Jane, see D Ibbetson, "Absolute Liability
in Contract: The Antecedents of Paradine v Jayne" in FD Rose, ed, Consensus ad Idem: Essays
in the Law of Contract in Honour of Guenter Treitel (London : Sweet & Maxwell, 1996). For
views that Paradine v Jane has long been wrongly interpreted, see HWR Wade, "The Principle
of Impossibility in Contract" (1940) 56 Law 0 Rev 519 and John D Wladis, "Common Law and
Uncommon Events: The Development of the Doctrine of Impossibility of Performance in
English Contract Law" (1987) 75 Geo LJ 1575.

IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

TAYLOR V CALDWELL
· (1863), 3 B & S 826, 122 ER 309

BLACKBURN J (for the court) : In this case the plaintiffs and the defendants had, on
the 27th May, 1861, entered into a contract by which the defendants agreed to let the
plaintiffs have the use of The Surrey Gardens and Music Hall on four days then to
come viz ., the 17th June, 15 July, 5th August, and 19th August, for the purpose of
giving a series of four grand concerts, and day and night fetes at the Gardens and
Hall on those days respectively; and the plaintiffs agreed to take the Gardens and Hall
on those days, and pay £100 for each day ....
After the making of the agreement, and before the first day on which a concert
was to be given, the Hall was destroyed by fire . This destruction, we must take it on
the evidence, was without the fault of either party, and was so complete that in con-
.sequence the concerts could not be given as intended. And the question we have to
decide is whether, under these circumstances, the loss which the plaintiffs have
sustained is to fall upon the defendants. The parties when framing their agreement
evidently had not present to their minds the possibility of such a disaster, and have
made no express stipulation with reference to it, so that the answer to the question
must depend upon the general rules of law app)icable to such a contract.
There seems no doubt that where there is a positive contract to do a thing, not in
itself unlawful, the contractor must perform it or pay damages for not doing it,
although in consequence of unforeseen accidents the performance of his contract
has become unexpectedly burthensome or even impossible. The law is so laid down
in 1 Roll. Abr. 450, Condition (G), and in the note (2) to Walton (1673), 2 Wms. Saund.
421 a. 6th ed.; 85 E.R. 1234, and is recognised as the general rule by all the judges in
the much discussed case of Hall v. Wright (1859), 120 E.R. 695. But this rule is only
applicable when the contract is positive and absolute, and not subject to any condi-
tion either express or implied; and there are authorities which, as we think, establish

818
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

the principle that where, from the nature of the contract, it appears that the parties
must from the beginning have known that it could not be fulfilled unless when the
time for the fulfilment of the contract arrived some particular specified thing con -
tinued to exist, so that, when entering into the contract, they must have contemplated
such continuing e·x istence as the foundation of what was to be done; there, in the
absence of any express or implied warranty that the thing shall exist, the contract is
not to be construed as a positive contract, but as subject to an implied condition that
the parties shall be excused in case, before breach, performance becomes impossible
from the perishing of the thing without default of the contractor.
There seems little doubt that this implication tends to further the great object of
making the legal construction such as to fulfil the intention of those who entered
into the contract. For in the course of affairs men in making such contracts in general
would, if it were brought to their minds, say that there should be such a condition.
Accordingly, in the Civil law, such an exception is implied [in some obligations] ....
Although the Civil law is not of itself authority in an English Court, it affords great
assistance in investigating the principles on which the law is grounded. And it seems
to us that the common law authorities established that in such a contract the same
condition of the continued existence of the thing is implied by English law.
There is a class of contra.cts in which a person binds himself to do something
which requires to be performed by him in person; and such promises, e.g., promises
to marry, or promises to serve for a certain time, are never in practice qualified by
an express exception of the death of the party; and therefore in such cases the con -
tract is in terms broken if the promisor dies before fulfilment. Yet it was very early
determined that, if the performance is personal, the executors are not liable; Hyde v.
The Dean of Windsor (1597), Cro. Eliz. 552; 78 E.R. 798. See 2 Wms. Exors. 1560, 5th ed.
where a very apt illustration is given. "Thus," says the learned author, "if an author
undertakes to compose a work, and dies before completing it, his executors are
discharged from this contract: for the undertaking is merely personal in its nature,
and, by the intervention of the contractor's death, has become impossible to be
performed.'' For this he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst 1
Tyr. 348, 349, and a case mentioned by Patteson J. in Wentworth v. Cock (1839), 10
A. & E. 42; 113 E.R. 17 at p. 18. In Hall v. Wright, Crompton J., in his judgment, puts
another case. "Where a contract depends upon personal skill, and the act of God
renders it impossible, as, for instance, in the case of a painter employed to paint a
picture who is struck blind, it may be that the performance might be excused.''
It seems that in those cases the only ground on which the parties or their executors
can be excused from the consequences of the breach of the contract is, that from
the nature of the contract there is an implied condition of the continued existence
of the life of the contractor, and perhaps, in the case of the painter of his eyesight.
In the instances just given, the person, the continued existence of whose life is
necessary to the fulfilment of the contract, is himself the contractor, but that does
not seem in itself to be necessary to the application of the principle; as is illustrated
by the following example. In the ordinary form of an apprentice deed the apprentice
binds himself in unqualified terms to "serve until the full end and term of seven years
to be fully complete and ended," during which term it is covenanted that the appren -
tice his master "faithfully shall serve," and the father of the apprentice in equally
unqualified terms binds himself for the performance by the apprentice of all and
every covenant on his part. (See the form, 2 Chitty on Pleading, 370, 7th ed. by Green-
ing.) It is undeniable that if the apprentice dies within the seven years, the covenant
of the father that he shall perform his covenant to serve for seven years is not fulfilled,
yet surely it cannot be that an action would lie against the father? Yet the only reason
why it would not is that he is excused because of the apprentice's death.

819
CHAPTER 10 FRUSTRATION

These are instances where the implied condition is of the life of a human being,
but there are others in which the same implication is made as to the continued
existence of a thing. For example, where a contract of sale is made amounting to a
bargain and sale, transferring presently the property in specific chattels, w ithout the
fault of the vendor, perish in the interval, the purchaser must pay the price and the
vendor is excused from performing his contract to deliver, which has thus become
impossible . ...
It may, we think, be safely asserted to be now English law, that in all contracts of
loan of chattels or bailments, if the performance of the promise of the borrower or
bailee to return the things lent or bailed becomes impossible because it has perished,
this impossibility (if not arising from the fault of the borrower or bailee from some
risk which he has taken upon himself) excuses the borrower or bailee from the per-
formance of his promise to redeliver the chattel ....
In none of these cases is the promise in words other than positive, nor is there
any express stipulation that the destruction of the person or thing shall excuse the
performance; but that excuse is by law implied, because from the nature of the
contract it is apparent that the parties contracted on the basis of the continued exist-
ence of the particular person or chattel. In the present case, looking at the whole
contract, we find that the parties contracted on the basis of the continued existence
of the Music Hall at the time when the concerts were to be given; that being essential
to their performance.
We think, therefore, that the Music Hall having ceased to exist, without fault of
either party, both parties are excused, the plaintiffs from taking the Gardens and
paying the money, the defendants from perf9rming their promise to give the use of
the Hall and Gardens and other things. Consequently the rule must be absolute to
enter the verdict for the defendants.

NOTES
1. In Basic Contract Law (St Paul, Minn: West, 1947) at 666-68, Professor Lon Fuller develops
the notion of "tacit assumptions ." He says:
In Taylor v. Caldwell the court says that when framing their agreement the parties "had not
present to their minds the possibility" of a disaster affecting the Music Hall, and concludes
that the parties "must have contemplated " the "continuing exi stence" of the Hall "as the
foundation of their agreement."
Is there a contradiction here? The court seems to say that the parties did not think of the pos-
sibility of the Hall's burning and therefore assumed it would not burn . But how can the parties
assume that no fire will occur, when the possibility of a fire was never present to their minds?
If this possibility was not present to their minds, would it not be more accurate to say that they
assumed nothing about a fire, either that it would or would not occur? Fuller continues:
The difficulty here does not lie in any dispute about psychological fact, but in the inappro-
priateness of the language ordinarily used to describe certain elementary psychological
truths . Words like "intention," "assumption," "expectation" and "understanding" all seem to
imply a conscious state involving an awareness of alternatives and a deliberate choice
among them . It is, however, plain that there is a psychological state which can be described
as "tacit assumption" that does not involve a consciousness of alternatives. The absent-
minded professor stepping from his office into the hall as he reads a book "assumes" that the
floor of the hall will be there to recei ve him . His conduct is conditioned and directed by this
assumption, even though the possibility that the floor has been removed does not "occur"
to him, that is, is not present in his conscious mental processes.

820
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

Underlying questions of this sort, and indeed. underlying much of contract law generally,
are certain basic problems of psychology that have never been satisfactorily solved . We speak
constantly of things that were "intended " or "assumed" without having a clear conception of
the psychological processes· involved in "intending" and "assuming." The lawyer or judge who
turns to psychology for help in dealing with these problems is likely to be disappointed.
In spite of hopeful beginnings promising a more comprehensive psychological treatment
of human behaviour, for the time being the only methods available for dealing with prob-
lems like that raised by Taylor v. Caldwell are essentially those resting on intuition and
introspection. We "just know" that the burning of a music hall violates a tacit assumption of
the parties who executed a contract for hiring it; we "just know" that a two per cent increase
in the price of beans does not violate a tacit assumption underlying a contract to deliver a
ton of beans for a fixed price.
2. In Fishman v Wilderness Ridge at Stewart Creek Inc, 2010 ABCA 345, the condom inium
that the appellants had contracted to purchase was destroyed by fire. Although the project
was insured and being rebuilt, the appellants sought a declaration that the contract had been
frustrated. The agreement contained a force majeure clause, which stated that the respondent
company wo uld not be in default for a delay caused by forces outside its reasonable control.
While deciding whether the contract was frustrated, the Court of Appeal held that "[a] contract
is only frustrated when it becomes incapable of performance, not just because performance
might be more onerous, more costly, or different from what was anticipated ." It determined
that the late delivery of the condominium would be inconvenient for the appellants, but that
the force majeure clause allocated that risk to them.

AMALGAMATED INVESTMENT AND PROPERTY

CO LTD V JOHN WALKER & SONS LTD
[1977] 1 WLR 164 (CA)

The plaintiff agreed to buy, and the defendant to sell, a warehouse for £1, 700,000. The
plaintiff intended to redevelop the site. The day after the contract was made the
defendant was informed that the building had been listed as of special architectural
or historical interest, a designation that made redevelopment unlawful and reduced
the value of the building to £200,000. The plaintiff sought rescission.
BUCKLEY LJ [after outlining the facts, continued]: ... Plowman V.-C. found as a fact
that the value of the property with no redevelopment potential was probably 11/z
· million pounds less than the contract price. So the effect of the building being put
into the list was this, that so long as it remained listed and "listed building consent"
could not be obtained, the value of the property was depreciated from the £1, 700,000
odd which was the sale price to something of the order of £200,000. Plowman V.-C.
also found as a fact that the vendors knew at all material times that the purchasers
were buying the property for redevelopment.
On December 12, 1973, the purchasers issued their writ against the vendors claim-
ing rescission of the agreement on the ground of common mistake, a declaration
that the agreement was void and of no effect, and a declaration that the agreement
was voidable, and for an order rescinding the agreement. Those were, of course,
alternative remedies. On December 14, 1973, the vendors issued a writ against the
purchasers claiming specific performance of the contract and alternatively a declar-
ation that the purchasers had wrongfully repudiated the contract, and forfeiture of
the deposit and damages, with ancillary relief. Those two actions were consolidated
on July 19, 1974, and the action came on with the purchasers as plaintiffs and the

821
CHAPTER 10 FRUSTRATION

vendors as defendants. There was a counterclaim raised by the vendors for the relief
sought in their action, specific performance and so forth .... So Plowman V.-C. held
that the contract stood and that the purchasers were liable for the full purchase price,
and that the contract should be carried out.
It has been contended before us that there was here a common mistake of fact
on a matter of fundamental importance, in consequence of which the contract ought
to be set aside. Reliance has been placed upon the decision of the Court of Appeal
in Solle v. Butcher [1950] 1 K.B . 671 and the decision of Goff J. in Grist v. Bailey [1967]
Ch. 532.
Mr. Balcombe, appearing for the purchasers, says that the purchasers bought the
property as property which was ripe for development and that the vendors sold upon
the same basis, and that by reason of the decision to list the property, the property
was not in fact ripe for development. Therefore he says there was a common mistake
as to the nature of the property, and the purchaser is entitled to rescission .. .. So the
alleged common mistake was that the property was property suitable for and capable
of being developed.
For the application of the doctrine of mutual mistake as a ground for setting the
contract aside, it is of course necessary to show that the mistake existed at the date
of the contract; and so Mr. Balcombe relies in that respect not upon the signing of
the list by the officer who alone was authorised to sign it on behalf of the Secretary
of State, but upon the decision of Miss Price to include the property in the list. That
decision, although in fact it led to the signature of the list in the form in which it was
eventually signed, was merely an administrative step in the carrying out of the oper-
ations of the branch of the ministry. It was a personal decision on the part of Miss
Price that the list should contain the particular property with which we are con -
cemed. But there was still the possibility that something else might arise before the
list was signed. Some communication might have been received from some outside
body which threw some light upon the qualifications of this building for listing,
which might have resulted in its being excluded from the list as it was actually signed.
Indeed, the head of the department might himselt had he known of the circum-
stances, have formed a different opinion from the opinion formed by Miss Price, or
Miss Price might I suppose herself have changed her mind during the time between
preparing the list, sending it to the typing pool, and eventually laying it before her
superior for signature. Although she accepts the responsibility for the decision and
says it was her decision, it was (as I say) no more than an administrative step leading
to the ultimate signature of the list, just as the obtaining of the information that was
eventually included in the report of the investigating officer was an administrative
step, or the preparation of the report of the investigating officer. It seems to me that
it is no more justifiable to point to that date as being the crucial date than it is to point
to other earlier dates or later dates. The crucial date, in my judgment, is the date when
the list was signed. It was then that the building became a listed building, and it was
only then that the expectations of the parties (who no doubt both expected that this
property would be capable of being developed, subject always of course to obtaining
planning permission, without it being necessary to obtain listed building permission)
were disappointed. For myself, I entirely agree with the conclusion which Plowman
V. -C. reached on this part of the case. In my judgment, there was no mutual mistake
as to the circumstances surrounding the contract at the time when the contract was
entered into. The only mistake that there was, was one which related to the expect-
ation of the parties. They expected that the building would be subject only to ordinary
town planning consent procedures and that expectation has been disappointed. But
at the date when the contract was entered into, I cannot see that there is any ground

822
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

for saying that the parties were then subject to some mutual mistake of fact relating
to the circumstances surrounding the contract. According, for my part, I think that
the judge's decision on that part of the case is one which should be upheld ....
I now turn to the alternative argument which has been presented to us in support
of this appeal, which is upon frustration. Mr. Balcombe has relied upon what was
said in the speeches in the House of Lords in Davis Contractors Ltd. v. Fareham Urban
District Council [1956] AC. 696, and it may perhaps be useful if I refer to what was
said by Lord Radcliffe there, starting at p. 728:
Perhaps it would be simpler to say at the outset that frustration occurs whenever the
law recognises that without default of either party a contractual obligation has become
incapable of being performed because the circumstances in which performance is called
for would render it a thing radically different from that which was undertaken by the
contract.
That is a passage which was referred to by Plowman V.-C. in the course of his judg-
ment. Then, a little later on, after referring to Denny, f'v1ott & Dickson Ltd. v. James B.
Fraser & Co. Ltd. [1944] AC. 265, 274-275, Lord Radcliffe says, at p. 729:

It is for that reason that special importance is necessarily attached to the occurrence of
any unexpected event that, as it were. changes the face of things. But, even so. it is not
hardship or inconvenience or material loss itself which calls the principle of frustration
into play. There must be as well such a change in the significance of the obligation that
the thing undertaken would, if performed, be a different thing from that contracted for.
Now, the obligation undertaken to be performed in this case by the vendors was
to sell this property for the contract price and, of course, to show a good title and so
forth. The vendors did not warrant in any way that planning permission could be
obtained for the development of the property. No doubt both parties considered that
the property was property which could advantageously be developed and was prop-
erty for which planning permission would probably be satisfactorily obtained. But
there was no stipulation in the contract relating to anything of that kind; nor, as I
say, was there any warranty on the part ofthe vendors. I am prepared to assume for
the purposes of this judgment that the law relating to frustration of contracts is
capable of being applied in the case of a contract for sale of land, though that is one
of the matters which has been debated before us. But, making that assumption, I
have reached the conclusion that there are not here the necessary factual bases for
holding that this contract has been frustrated. It seems to me that the risk of property
being listed as property of architectural or historical interest is a risk which inheres
in all ownership of buildings. In many cases it may be an extremely remote risk. But
it is a risk, I think, which attaches to all buildings and it is a risk that every owner and
every purchaser of property must recognise that he is subject to. The purchasers in
the present case bought knowing that they would have to obtain planning permis-
sion in order to develop the property. The effect of listing under the sections of the
Act to which I.have referred makes the obtaining of planning permission, it may be,
more difficult, and it may also make it a longer and more complicated process. But
still, in essence, the position is that the would-be developer has to obtain the appro-
priate planning permissions, one form of permission being the "listed building
permission." The purchasers, when they entered into the contract, must obviously
be taken to have known that they would need to get planning permission. They must
also, in my judgment, be taken to have known that there was the risk, although they
may not have regarded it as a substantial risk, that the building might at some time
be listed, and that their chances of obtaining planning permission might possibly

823
CHAPTER 10 FRUSTRATION

be adversely affected to some extent by that, or at any rate their chances of obtaining
speedy planning permission. But, in my judgment, this is a risk of a kind which every
purchaser should be regarded as knowing that he is subject to when he enters into
his contract of purchase. It is a risk which I think.the purchaser must carry, and any
loss that may result from the maturing of that risk is a loss which must lie where it
falls. Moreover, the purchasers have not yet established that they will be unable to
obtain all the necessary planning permissions, including "listed building permission."
So it has not yet, I think, been established that the listing of this building has had the
drastic effect which the figures which I have mentioned suggest that it may have
had. It may well turn out to be the case that "listed building permission" will be
obtainable here and the purchasers will be able to carry out the development which
they desire to carry into effect.
For these reasons, I reach the conclusion, as I say, that the necessary facts have
not been established in this case to found a claim that the contract has been
frustrated.
For these reasons, I would dismiss this appeal.
[Lawton LJ and Sir John Pennycuick agreed.]

CAPITAL QUALITY HOMES LTD V COLWYN CONSTRUCTION LTD

(1975), 9 OR (2d) 617 (CA)

EVANS JA: The defendant Colwyn Construction Limited appeals from the judgment
of the Honourable Mr. Justice Keith granting the plaintiff recovery from the defend-
ant of the sum of $13,980 being the return of a deposit paid by the plaintiff pursuant
to an agreement for sale between the parties relative to certain undeveloped land in
the City of Windsor.
The trial proceeded on an agreed statement of facts which was presented orally
to the Court by counsel and which may be briefly summarized as follows: Under an
agreement dated January 5, 1969, the plaintiff, purchaser, agreed to purchase from
the defendant, vendor, 26 building lots each comprising parts of lots within a regis-
tered plan of subdivision. The date fixed for closing was July 30, 1970. Both parties
were aware that the purchaser was buying building lots for the purpose of erecting
a home on each lot with the intention of selling the several homes by way of separate
conveyances. Under the terms of the agreement it was entitled to a conveyance of
a building lot upon payment of $6,000 and, upon full payment, to 26 separate deeds
of conveyance each representing one building lot. It is agreed that no demand for
any conveyance was made prior to the date of closing.
When the sale agreement was executed the designated land was not within an
area of subdivision control and not subject to ·any restriction limiting the right to
convey. On June 27, 1970, certain amendments [1970, c 72, s ll to the Planning Act,
R.S.O. 1960, c. 296, came into effect whereby these lands came under the provisions
of what is nows. 29 of the Planning Act, R.S.O. 1970, c. 349, which in certain circum-
stances restricts ari owner's right to convey and makes necessary the obtaining of
a consent from the relevant committee of adjustment designated in the amending
legislation. In the absence of such consent no interest in part of a lot within a regis-
tered plan of subdivision can be conveyed.
The vendor was accordingly precluded from conveying the 26 building lots in 26
separate deeds without proper consents and while a conveyance to the purchaser
of all lots in one deed may have been permissible, the purchaser in any event would

824
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

be unable to reconvey individual building lots to prospective home buyers as it had

intended without complying with the restrictive provisions of the new legislation.
This substantial change in the law, prohibiting and restricting conveyancing of
the lands, 33 days prior to the anticipated closing date, resulted in some discussion
between the parties relative to possible postponement of the closing date in order
to devise some method of circumventing the restrictions to which the lands were
now subject. No arrangement was made to extend closing. On the agreed date of
closiRg the purchaser insisted that the vendor deliver conveyances for each indi-
vidual building lot with the consents necessary to effectually transfer the lots. The
vendor insisted that it was the responsibility of the purchaser to obtain the necessary
consents. On the closing date the balance of the agreed purchase price was tendered
by the solicitors for the purchaser but no conveyances were forthcoming in the mode
contemplated by the agreement. It is common ground that the purchaser would not
withdraw its demand for 26 individual conveyances with consents attached and that
the vendor did not provide such conveyances. Following failure to close on the
agreed date, the purchaser contended that the vendor was in default and on August
5, 1970, repudiated the agreement and made demand upon the vendor for the return
of the balance of the deposit. ...
The issues for determination, as I apprehend them, are :
(1) Does the doctrine of impossibility of performance of a contract, i.e., frustration,
have any application when the contract is for the purchase and sale of land?
(2) Assuming that frustration is applicable to agreements for sale of land, does
the factual situation in this case permit the doctrine to be invoked?
(3) Assuming that (1) and (2) are both answered in the affirmative what results flow
therefrom?
In order to show the birth and development of the doctrine of frustration it is
necessary to recall that the common law exacted strict performance of contractual
obligations. A promise demanded performance and if performance became impos-
sible, no matter what the reason, the defaulting party was liable in damages. Paradine
v. Jane (1647), Aleyn 26; 82 E.R. 897 restated the principle and it is alleged that the
justification for imposing such onerous obligations was that if contracting parties
voluntarily entered into absolute and unconditional agreements they cannot com-
plain if their lack of foresight in failing to provide against all contingencies created
hardships to them.
English Courts, prior to Taylor et al. v. Caldwell et al. (1863), 3 B. & S. 826; 122 E.R.
309 followed the rule that impossibility of performance of a contract did not relieve
the party unable to perform from liability in damages. Subsequently, that rigid rule
was relaxed and contracts were held to be terminated and the parties discharged
when the events which denied fulfilment of the contract were caused by some cir-
cumstances beyond the control of the contracting parties. In Taylor et al. v. Caldwell,
the subject-matter of the contract was destroyed before the date upon which per-
formance was required. Blackbum J. held that when a music-hall which was rented
for the purpose of holding concerts was accidentally destroyed by fire prior to the
concerts being held, the owner was discharged from his contract and not liable in
damages. The common law doctrine of contract was uncompromising in its insis-
tence on performance and if a party could not actually perform an act because some
event made it physically impossible, then specific performance could not be ordered
but the party failing would be liable in damages for non-performance. The break-
through by Blackbum J . was accomplished by holding that a contract is not to be
construed as absolute if the contracting parties from the beginning must have known

825
CHAPTER 10 FRUSTRATION

that its fulfilment depended upon the continued existence of some peculiar thing
and therefore must have realized that his continuing existence was the foundation
of the bargain. He held that the contract is "subject to an implied condition that the
parties shall be excused in case, before breach, performance becomes impossible
from the perishing of the thing without default of the contract." He implied a term
or condition into the contract. The doctrine of impossibility of performance or as it
is now generally called, the doctrine of frustration, developed rapidly, particularly in
commercial contracts and English Courts sought to do justice by holding that a
contract was discharged when some catastrophic event occurred, the result of which
was to destroy the very basis of the contract.
Krell v. Henry, [1903] 2 K.B. 740 (C.A.) dealt with a hire of premises to view a corona-
tion subsequently cancelled and the Court held that the view of the coronation
procession was the foundation of the contract and the non-happening of it pre-
vented the performance of the contract. Marshall v. Glanvill et al., [1917] 2 K.B. 87, was
concerned with a contract of employment and the liability of the employee to
compulsory military service was held to determine the contract.
In all these commercial contract cases in which the principle is referred to as
"frustration of the adventure" the Court has implied into the contract a term or condi-
tion because the contract itself does not provide for the supervening act which
produces the frustration. Lord Sumner in Cheong Yne Steamship Co. Ltd. v. Hirji Mulji
et al., [1926] 1 W.W.R. 917, [1926] AC. 497, referred to the doctrine of frustration as. "a
device by which the rules as to absolute contracts can be reconciled with a special
exception which justice demands." The legal effect of the frustration of a contract
does not depend upon the intention of the parties, or their opinions or even know-
ledge as to the event that has brought about the frustration, but upon its occurrence in
such circumstances as to show it to be inconsistent with the further prosecution of
the adventure. On the contrary, it seems that when the event occurs, the meaning
of the contract must be taken to be, not what the parties.did intend (for they had
neither thought nor intention regarding it) but that which the parties, as fair and
reasonable men, would presumably have agreed upon if, having such possibility in
view, they had made express provision as to their several rights and liabilities in the
event of its occurrence: Dahl v. Nelson et al., (1880), 6 App.Cas . 38.
The supervening event must.be something beyond the control of the parties and
must result in a significant change in the original obligation assumed by them. The
theory of the implied term has been replaced by the more realistic view that the Court
imposes upon the parties the just and reasonable solution that the new situation
demands.
Lord Radcliffe in Davis Contractors Ltd. v. Fareham Urban District Council, [1956]
AC. 696 at pp. 728-9, stated:
So perhaps it would be simpler to say at the outset that frustration occurs whenever the
law recognizes that without default of either party a contractual obligation has become
incapable of being performed because the circumstances in which performance is called
for would render it a thing radically different from that which was undertaken by the
contract. Non haec in foedera veni. It was not this that I promised to do.
The development of the doctrine briefly referred to above is traced with consider-
able detail in Cheshire & Fifoot, Law of Contracts, 7th ed. (1969), at p. 506, and following.
The Law Reform (Frustrated Contracts) Act, 1943 (U.K.), c . 40, defined the position of
the parties in England when a contract is discharged by frustration and set out those
particular contracts to which the Act did not apply.
The controversial question that is still undecided by the House of Lords is whether
the doctrine of frustration can be applied to a lease of land. Cases involving the

826
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

destruction of a chattel, the subject of the contract, as in Howell v. Coupland (1876),

1 O.B.D. 258, or the destruction of a music-hall, the existence of which was the
foundation of the contract as in Taylor et al. v. Caldwell et al., supra, or those cases in
which the performance of the contract has become illegal because of some super-
vening legislation are to be distinguished from land leases which are considered to
be more than contracts, since they create estates in land which give rise to propri-
etary rights in addition to purely personal rights as found in all commercial contracts.
In the development of the modern law of contracts an increasingly wider conception
of the doctrine of frustration as a ground of discharge of commercial contracts came
into operation but the English Courts have consistently held that the doctrine of
frustration has no application when the contract creates an estate in land.
There can be no frustration if the supervening event results from the voluntary
act of one of the parties or if the possibility of such event arising during the term of
the agreement was contemplated by the parties and provided for in the agreement.
In the instant case the planning legislation which supervened was not contemplated
by the parties, not provided for in the agreement and not brought about through a
voluntary act of either party. The factor remaining to be considered is whether the
effect of the planning legislation·is of such a nature that the law would consider the
fundamental character of the agreement to have been so altered as to no longer
reflect the original basis of the agreement. In my opinion the legislation destroyed
the very foundation of the agreement. The purchaser was purchasing 26 separate
building lots upon which it proposed to build houses for resale involving a reconvey-
ance in each instance. This purpose was known to the vendor. The lack of ability to
do so creates a situation not within the contemplation of the parties when they
entered into the agreement. I believe that all the factors necessary to constitute
impossibility of performance have been established and that the doctrine of frustra-
tion can be invoked to terminate the agreement.
The doctrine _of frustration has been applied to commercial contracts since Taylor
et al. v. Caldwell et al., supra. In Cricklewood v. Leighton 's [[1945] AC 221], Viscount
Simon L.C. and Lord Wright held against the accepted view that leases were outside
the doctrine since a lease in addition to being a contract creates an estate in the land
demised for the period of the agreed term. I adopt the reasoning of Viscount Simon
L.C. and his conclusion that there is no binding authority precluding the application
of the doctrine of frustration to contracts involving the lease of lands. I am also in
accord with his observations that the doctrine is flexible and ought not to be
restricted by any arbitrary formula. I see no reason why the doctrine cannot be
logically extended to contracts involving the purchase and sale of land. If the super-
vening event makes the contract incapable of fulfilment as contemplated by the
parties, then it appears to me illogical and unreasonable to contend that the funda-
mental object of the contract can be effected because the equitable interest in the
land has passed to the purchaser.
I adopt the reasoning of Lord Simon in Cricklewood v. Leighton's, and accept his
conclusion that there is no binding authority in England precluding the application
of the doctrine of frustration to contracts involving a lease of land. I believe the situ-
ation to be the same in Ontario and I am unable to distinguish any difference
between leases of land and agreements for the sale of land, so far as the application
of the doctrine is concerned. Each is more than a simple contract. In the former an
estate in land is created While in the latter an equitable estate arises. There does not
appear to be any logical reason or binding legal authority which would prohibit the
extension of the doctrine to contracts involving land.
If the factual situation is that there is a clear "frustration of the common venture"
then the contract, whether it is a contract for the sale of land or otherwise, is at an

827
CHAPTER 10 FRUSTRATION

end and the parties are discharged from further performance and the adjustment of
the rights and liabilities of the parties are left to be determined under the Frustrated
Contracts Act. In my opinion, on the facts of this case, the contract was frustrated;
the doctrine was applicable and should be invoked with the ,result that both parties
are discharged from performance of the contract and the purchaser is entitled to
recover the full amount paid as it is not claimed that the vendor incurred any ·
expenses in connection with the performance of the contract, prior to frustration,
which would entitle it to retain a portion of the money paid as provided for ins. 3(2)
of the Frustrated Contracts Act. Accordingly, the vendor must refund to the purchaser
the balance of the deposit money, that is, $13,980.
The judgment below is affirmed and the appeal is dismissed with costs.
Appeal dismissed.

NOTES
1. In National Carriers Ltd v Panalpina (Northern) Ltd, [1981] AC 675, the House of Lords held
that a lease could in some circumstances be frustrated, although rarely in the case of a long-
term lease. There, the House of Lords found that a ten-year lease had not been frustrated,
even though developments that were being done to the property temporarily interfered with
the tenant's enjoyment of the land for a two-year period. For a comment on the decision, see
Joseph Robertson, "Frustrated Leases: 'No to Never-But Rarely If Ever"' (1982) 60 Can Bar Rev
619. For a more recent application, see Manufacturers Life Insurance Co v Huang & Danczkay
Properties, 2003 CarswellOnt 2990 (Ont Sup Ct J)
2. In Petrogas Processing Ltd v Westcoast Transmission Co (1988), 59 Alta LR (2d) 118 (OB),
aff'd (1989), 66 Alta LR (2d) 254 (CA), O'Leary J discussed how changes in the law can lead to
the frustration of existing contracts:
Supervening illegality occurs when, after the making of a contract, a change in the law ren-
ders it illegal to perform the contract in accordance with its terms. The change in the law, to
qualify as a frustrating event, must be one which was not foreseen by the parties and for
which no express or implied provision is made in the contract. In addition, the illegality must
not be temporary or trifling in nature when viewed in the context of the contract as a whole.
If these conditions are met, the contract is automatically discharged by frustration the
moment performance in accordance with its terms becomes illegal.

VICTORIA WOOD DEVELOPMENT CORP INC V ONDREY

(1977), 14 OR (2d) 723, 74 DLR (3d) 52€! (HC)

[Victoria Wood and the Ondreys entered into a contract for the purchase and sale of
approximately 90 acres of land in Oakville adjacent to the Queen Elizabeth Way. The
contract was made on April 6, 1973, and the sale was to be completed on or before
October 31, 1973. On June 22, the Ontario legislature passed the Ontario Planning and
Development Act, 1973, c 51 and the Parkway Belt Planning and Development Act, 1973,
each deemed to come into force on June 4, 1973. A regulation made under the Act
(0 Reg 481/73) on August 4, 1973 prohibited any use of land other than for agricultural
purposes in Oakville.
Victoria Wood informed the Ondreys that because it entered into the contract with
the intention to develop or subdivide the land, and this purpose was now prevented
by the regulation, the agreement was frustrated. The plaintiff also demanded the
return of the deposit of $50,000 paid on the signing of the contract.]

828
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

OSLER J (distinguishing Capital Quality Homes Ltd): ... In my view, in the present
instance, "the very foundation of the agreement" has not been destroyed. Though it
was as I have found well known to the vendor that the purchaser intended to make
commercial use of its property by some form of subdivision, the agreement is in no
sense made conditional upon the ability of the purchaser to. carry out its intention.
The "very foundation of the agreement" was that the vendor would sell and the
purchaser ·w ould buy the property therein described upon the terms therein set out.
The only obligations assumed by the vendor were to provide a deed and to join in
or consent to any subsequent applications respecting the zoning and to give partial
discharges of the mortgage it was taking back under certain circumstances. The
only obligation of the purchaser was to complete the cash balance agreed to, execute
and give back a mortgage and to pay such mortgage in accordance with its terms.
Nothing in the supervening legislation affects, in the slightest degree, the abilities
of the parties to carry out their respective obligations.
As it was put by counsel for the Ondreys, a developer in purchasing land is always
conscious of the risk that zoning or similar changes may make the carrying out of his
intention impossible, or may delay it. He may attempt to guard against such risk by
the insertion of proper conditions in the contract and thereby persuade the vendor to
assume some of the risk. In the present case he has not done so and, indeed, there is
no evidence that he has attempted to do so. "The very foundation of the agreement"
is not affected and there is no room for the application of the doctrine of frustration.
Counsel for the Ondreys advanced as a secondary argument the proposition that
there is no absolute prohibition against development as now, some four years after the
passage of the legislation, it has been shown to be possible to make application to a
hearing board set up by the Minister for a recommendation to the Minister that any
land affected by the legislation be exempted from such effect. Had I found that the
ability to develop the land had formed part of the agreement between the parties, I
would not have given effect to this second argument. Under the legislation, no develop-
ment is permitted and the fact that it may, at some future time, become possible to
persuade the Minister ex gratia to exempt the lands, would not, in my view, have affected
the matter if I had found that development was at the heart of the agreement.
[The plaintiff's claim was dismissed and the Ondreys' claim for specific performance
was successful; aff'd (1978), 22 OR (2d) 1, 92 DLR (3d) 229 (CA).]

NOTES AND QUESTIONS

1. In KBK No 138 Ventures Ltd v Canada Safeway Limited, 2000 BCCA 295, 185 DLR (4th) 650,
the BC Court of Appeal ruled that a contract for the sale of land for commercial redevelopment
was frustrated when the director of planning for the city (independently of the parties) rezoned
the property in question, thereby preventing its use as a high-density commercial property.
The court determined that the three -factor test set out in Krell v Henry (excerpted below) was
satisfied, and the unilateral changes made by the city were not foreseeable by the parties. In
distinguishing Victoria Wood, the court stated that because both parties knew of the intended
commercial use of the land, there was "more than 'mere knowledge of the vendor that land was
being bought for development or even for a particular kind of development."' In Troika Land
Development Corp v West Jasper Properties Inc, 2009 ABOB 590, two real estate developers
entered into a purchase and sale agreement for a parcel of land. The purchaser later sought the
return of its $250,000.00 deposit, cla iming the agreement had been frustrated due to changes to
a "neighbourhood structure plan" (NSP) required by the City of Edmonton. The purchaser, relying
on KBK, above, argued the contract was frustrated and that Victoria Wood should be similarly
distinguished on the basis that the vendor "had more than 'mere knowledge' of its intended

829
CHAPTER 10 FRUSTRATION

development." The court disagreed, finding that the changes to the NSP were reasonably fore-
seeable, were not radical, and that the agreement "continued to be capable of performance."
Are these distinctions convincing? Does it seem these cases la!gely turn on the facts7
2. In Ballenas Project Management Ltd v PSD Enterprises Ltd, 2007BCCA166, 66 BCLR (4th)
122, the court ruled that a contract for the.sale of land was not frustrated when the city rescinded
third reading of a zoning bylaw that, if passed, would have allowed the appellant to transfer its
liquor licence. The respondent had agreed to purchase the appellant's hotel for $2 million, but
the appellant wanted to transfer its liquor licence to another location, which required rezoning
of the other location by the city. In accordance with this objective, the purchase agreement
between the parties contained a condition stating that the vendor's (appellant's) obligation to
complete the transaction would be subject to the city giving third reading of a zoning amend-
ment bylaw to allow a liquor store to be located at the new premises. In distinguishing KBK, the
court maintained that the issue here was not at the core of the agreement. It also found that
failure to obtain the zoning was foreseeable, even though it occurred by an unforeseen route.
3. In Dinicola v Huang & Danczkay Properties (1998), 40 OR (3d) 252 (CA), a condominium
developer became embroiled in an unusually heated debate with city officials and neighbour-
hood groups about the redevelopment of harbourfront land in Toronto. The Ontario Court of
Appeal rejected the argument that this "abnormal" municipal approval process for a condo-
minium development frustrated the contract, because the parties contemplated what would
happen in the event of a failed development application. See also John E Dodge Holdings Ltd
v 805062 Ontario Ltd (2003), 63 OR (3d) 304 (CA), where the court found that the doctrine of
frustration was inapplicable because the parties had made provision in the contract for the
event that occurred, making it a foreseeable event.

HOWELL V COUPLAND
(1876), 1 QBD 258

The plaintiff is a potato merchant at Holbeach, Lincolnshire, and the defendant a

farmer at Whaptode in the same county.
In 1872 the defendant, at the proper season, and in the due course of husbandry,
appropriated between eighty and ninety acres of land for the growth of potatoes-
sixty-eight acres at Whaplode, and about twenty at Holbeach.
In March of the same year the plaintiff and the defendant entered intci the following
contract: "A memorandum of agreement, made this ... day of ... 1872, between Robert
Coupland, of Whaplode, and John Howell, of Holbeach, whereby Robert Coupland
agrees to sell, and the said John Howell agrees to purchase, 200 tons of regent pota-
toes grown on land belonging to the said Robert Coupland in Whaplode, at and after
the rate of £3 10s. 6d ..per ton, to be riddled on 1% in. riddle, and delivered at Holbeach
railway station, good and marketable ware, during the months of September or
October, as the said John Howell may direct, and, under his direction, the purchaser
to find riddles. It is further agreed between the said Robert Coupland and the said
John Howell that the said potatoes shall be paid for when and as they are taken away."
At the time of making the contract, out of the sixty-eight acres in Whaplode
twenty-five were actually sown with potatoes, and the remaining forty-three acres
were ready for sowing. The forty-three acres were afterwards sown in due course,
and the whole sixty-eight acres together were amply sufficient, in an ordinary season
and in the ordinary course of cultivation, to produce a much larger quantity than
two hundred tons, the land producing, on an average, seven tons to the acre.
In July and August, without any fault on the part of the defendant, a disease, which
no skill or care on the part of the defendant could have prevented attacked the crop

830
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

and caused it to fail; and when the time for taking it up arrived, the whole marketable
produce of the crop of the lands of the defendant, both in Whaplode and Holbeach
together, amounted to no more than 79 tons 8 cwt., and this quantity the defendant
delivered to the plaintiff. The rest of the crop had perished from the disease.
If the defendant had had other land to plant with potatoes at the time when the
disease was discovered, which in fact he had not, it would have been too late to sow it.
The present action was brought to recover damages for the non-delivery of the
residue of the two hundred tons. The verdict at the trial was entered for £432 5s., but
a rule was obtained to enter the verdict for the defendant, on the ground that he was
not liable to deliver the ungrown potatoes. It was made absolute by the Court of
Queen's bench. The plaintiff appealed.
LORD COLERIDGE CJ: I am of opinion that the judgment ought to be affirmed.
[The Lord Chief Justice read the contract and facts.]
The Court of Queen's Bench held that, under these circumstances, the principle of
Taylor v. Caldwell (1863), 122 E.R. 309 and Appleby v. Myers (1867), L.R. 2 C.P. 651
applied, and the defendant was excused from the performance of his contract. The
true ground, as it seems to me, on which the contract should be interpreted, and
which is the ground on which, I believe, the Court of Queen's Bench proceeded, is
that by the simple and obvious construction of the agreement, both parties under-
stood and agreed that there should be a condition implied that before the time for
the performance of the contract the potatoes should be, or should have been in
existence, and should still be existing when the time came for the performance. They
had been in existence, and had been destroyed by causes over which the defendant,
the contractor, had no control, and it became impossible for him to perform his
contract; and, according to the condition which the parties had understood should
be in the contract, he was excused from the performance. It was not an absolute
contract of delivery under all circumstances, but a contract to deliver so many
potatoes, of a particular kind, grown on a specific place, if deliverable from that place.
On the facts the condition did arise and the performance was excused. I am, there-
fore, of opinion that the judgment of the Queen's Bench should be affirmed.
MELLISH LJ: I am of the same opinion. The words of the contract are clear: the
defendant "agrees to sell two hundred tons of regent potatoes grown on land belong-
ing to him in Whaplode." That is, potatoes which shall be grown in Whaplode . They
are to be grown there, and delivered to the plaintiff provided they are grown there.
Is not that a condition-so that, according to the case on which the Court of Queen's
Bench acted, if the thing perishes before the time for performance, the vendor is
excused from performance by the delivery of the thing contracted for? No doubt
there is a distinction in the present case, that the potatoes, the things contracted for,
were not in existence at the time the contract was entered into. But can that make
any real difference in principle? Suppose the potatoes had been full grown at the
time of the contract, and afterwards the disease had come and destroyed them;
according to the authorities it is clear that the performance would have been
excused; and I cannot think it makes any difference that the potatoes were not then
in existence. This is not like the case of a contract to deliver so many goods of a
particular kind, where no specific goods are to be sold. Here there was an agreement
to sell and buy two hundred tons out of a crop to be grown on specific land, so that
it is an agreement to sell what will be and may be called specific things; therefore
neither party is liable if the performance becomes impossible. The language of this
contract is much easier to imply a condition from than in most former cases where
it has been held to be implied.

831
CHAPTER 10 FRUSTRATION

CANADIAN INDUSTRIAL ALCOHOL COMPANY

V DUNBAR MOLASSES COMPANY
258 NY 194 (1932)

CARDOZO CH J: A buyer sues a seller for breach of an executory contract of purchase

and sale.
The subject-matter of the contract was "approximately 1,500,000 wine gallons
Refined Blackstrap [molasses] of the usual run from the National Sugar Refinery,
Yonkers, N.Y., to test around 60% sugars."
The order was given and accepted December 27, 1927, but shipments of the
molasses were to begin after April 1, 1928, and were to be spread out during the warm
weather.
After April 1, 1928, the defendant made delivery from time to time of 344,083
gallons. Upon its failure to deliver more, the plaintiff brought this action for the
recovery of damages. The defendant takes the ground that, by an implied term of
the contract, the duty to deliver was conditioned upon the production by the National
Sugar Refinery at Yonkers of molasses sufficient in quantity to fill the plaintiff's order.
The fact is that the output of the refinery, while the contract was in force, was 485,848
gallons, much less than its capacity, of which amount 344,083 gallons were allotted
to the defendant and shipped to the defendant's customer. The argument for the
defendant is that its own duty to deliver was proportionate to the refinery's willing-
ness to supply, and that the duty was discharged when the output was reduced.
The contract, read in the light of the circumstances existing at its making, or more
accurately in the light of any such circumstances apparent from this record, does
not keep the defendant's duty within boundaries so narrow. We may assume, in the
defendant's favor, that there would have been a discharge of its duty to deliver if the
refinery had been destroyed ... . We may even assume that a like result would have
followed if the plaintiff had bargained not merely for a quantity of molasses to be
supplied from a particular refinery, but for molasses to be supplied in accordance
with a particular contract between the defendant and the refiner, and if thereafter
such contract had been broken without fault on the defendant's part ... . The inquiry
is merely this, whether the continuance of a special grqup of circumstances appears
from the terms of the contract, interpreted in the setting of the occasion, to have
been a tacit or implied presupposition in the minds of the contracting parties, con-
ditioning their belief in a continued obligation ...
Accepting that test, we ask ourselves the question what special group of circum -
stances does the defendant lay before us as one of the presuppositions immanent
in its bargain with the plaintiff? The defendant asks us to assume that a manufacturer,
having made a contract with a middleman for a stock of molasses to be procured
from a particular refinery would expect the contract; to lapse whenever the refiner
chose to diminish his production, and this in the face of the middleman's omission
to do anything to charge the refiner with a duty to continue. Business could not be
transacted with security or smoothness if a presumption so unreasonable were at
the root of its. engagements. There is nothing to show that the defendant would have
been unable by a timely contract with the refinery to have assured itself of a supply
sufficient for its needs. There is nothing to show that the plaintiff in giving the order
for the molasses, was informed by the defendant that such a contract had not been
made, or that performance would be contingent upon obtaining one thereafter. If the
plaintiff had been so informed, it would very likely have preferred to deal with the
refinery directly, instead of dealing with a middleman. The defendant does not even
show that it tried to get a contract from the refinery during the months that intervened

832
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

between the acceptance of the plaintiff's order and the time when shipments were
begun. It has wholly failed to relieve itself of the imputation of contributory fault ....
So far as the record shows, it put its faith in the mere chance that the output of the
refinery would be the same from year to year, and finding its faith vain, it tells us that
its customer must have expected to take a chance as great. We see no reason for
importing into the bargain this aleatory element. The defendant is in no better pos-
ition than a factor who undertakes in his own name to sell for future delivery a special
grade of merchandise to be manufactured by a special mill. The duty will be dis-
charged if the mill is destroyed before delivery is due. The duty will subsist if the
output is reduced because times turn out to be hard and labor charges high ....
The defendant assigns as error the exclusion of correspondence that passed
between itself and the plaintiff after April 10, 1928, when deliveries began. The letters,
if received, would not have affected the result.
The judgment should be affirmed with costs.
Pound, Crane, Lehman, Kellogg, O'Brien and Hubbs, JJ. concur.

PARRISH & HEIMBECKER LTD V GOODING LUMBER LTD

(1968] 1 OR 716, 67 DLR (2d) 495 (CA), aff'd (1968] SCR viii

MacKAY JA (orally): This is an appeal by the defendant from a judgment awarding

damages to the plaintiff for breach of contracts for the delivery of certain quantities
of corn. The plaintiffs are dealers in grain. The defendant ordinarily is engaged in
the trucking and lumber business and has a number of trucks. His place of operation
or headquarters is Parkhill, Ontario. In that district one Sanderson, an employee of
the plaintiff, had been buying corn from a farmer by the name of Willemse. Willemse
suggested to Sanderson that he would prefer to deal through the defendant in the
sale of his corn. Sanderson thereupon got in touch with the defendant Gooding and
as a result of an oral agreement, certain written documents, which have been filed
as ex. 1 in the action, were entered into by the parties. They are headed "Confirma-
tion," addressed to Gooding Lumber Company Limited, Parkhill, and one of them is
as follows:
Confirmation
Parrish & Heimbecker 43 Scott Street
Toronto 1, Ont.
Nov. 8th, 1965.
Gooding Lumber Ltd .,
Parkhill, Ontario
We confirm purchase from you as follows:
25 loads each about 23 tons #2CE Yellow K D Corn 47.93 per ton
Del'd Owen Sound
Shipping instructions: As available-N_ov. - Dec.
1 load to C.W. Beattie
24 loads to Great Lakes Elevator Ltd.
There are a number of other similar orders, some providing for delivery to Hanover,
some to one other location, but the orders are all in the same form.
It was the intention of Gooding to purchase the corn from three district farmers.
It developed that because of weather conditions the farmers were unable to harvest

833
CHAPTER 10 FRUSTRATION

all of their corn and only part of the orders for corn, which had been accepted by
Gooding, were delivered. The plaintiff thereupon brought action for damages for
failure to deliver. The confirmation orders to which I have referred contained at the
bottom thereof the following clause: "If the above is not correct, please wire or phone
us immediately; failure to do this is understood as acceptance to these terms. Subject
to strikes, embargoes, etc. or other conditions beyond our control."
The learned trial Judge found as a fact that because of weather conditions there
was no corn in the immediate vicinity of Parkhill available for the defendant to
purchase to fill the balance of these contracts. The area referred to by the trial Judge
was an area of within 10 to 20 miles of Parkhill. There was evidence that corn was
available in other areas of the Province that the defendant could have purchased to
fulfil the contracts.
I am in agreement with the conclusions of the learned trial Judge that these were
contracts in writing and that they cannot be varied by any oral understanding. The
submission of counsel for the defendant is that he says Sanderson \earned at some
time or knew who the farmers were from whom Gooding intended to purchase the
corn and that by reason of this knowledge the provision in the orders in relation to
strikes, embargoes or other conditions beyond their control applied and the corn
not being available from these three farmers, there was frustration of the contract.
Like the trial J udge, I am unable to accede to this proposition for the reasons I have
briefly stated, that is that it was not part of the contract that the corn was to be pur-
chased from any particular source. Sanderson, the agent of the plaintiff, said he did
not know two of the farmers and that in making the contracts with the defendant
he was not concerned as to from whom the defendant was to purchase the corn and
that so far as he was concerned, the defendant could have obtained the corn from
any source.
In our view, having regard to the wording of the contracts, it is immaterial that the
plaintiff's agent Sanderson may have known of the defendant's intention to purchase
the corn from particular sources. Therefore, for the reasons given by the learned trial
Judge and accepting his findings, the appeal will be dismissed with costs.
[Kelly JA concurred with MacKay JA.J
LASKIN JA (orally) (dissenting) : I cannot agree that these contracts should be viewed
in the absolute terms in which the majority has treated them. I think it is clear that
the original attitude of the common \aw that a contract duty is absolute has been
considerably modified over the past one hundred years as we have come to recog-
nize that mutual assumptions by parties that underUe their commercial relations
cannot be ignored, and that, in the enforcement of a contract, allowance must be
made if a failure of those assumptions supervenes, without fault of the contracting
parties, after the contract has been made.
In this particular case, the contracts in question originated in oral discussions
initiated by the representative of the plaintiff. They consist of written confirmations
of the oral arrangements, these being sent by the plaintiff to the defendant and
countersigned by the latter. I see nothing in the written documents, all of which are
in common form, that in any way precludes the reliance by the defendant on what to
me was a common understanding on which th~ contracts between them were.made.
The defendant is not in any professional or business sense a grainbroker. It is a \umber
company engaged also in trucking, and this the plaintiff knew. When the plaintiff's
representative approached the president of the defendant company, the conversation
between them indicated that the corn, which was the subject-matter of their relations,
would be coming from three farmers in particular or at the most from the Parkhi11

834
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

area and its environs which the trial Judge himself put at a io to 20 mile radius from
Parkhill.
It is also material to the basis on which these contracts were concluded that the
price to be paid by the defendant for the corn obtainable from the farmers was a
price fixed by the plaintiff and the plaintiff also fixed the trucking charge that would
be paid to the defendant for the transportation of the corn to the specified destina -
tions set out in the written conprmations. It seems to me, therefore, that in the cir-
cumstances it would be changing the fundamental character of the contract to
require the defendant who, for all practical purposes, was in a factoring position as
between the plaintiff and the farmers in the area, to obtain the grain from some other
area and at the same time insist that it accept payment on the basis of a price and
trucking arrangement which contemplated that the grain would come from the area
about which the representatives of the parties had reached an understanding.
I do not think that it is an answer to the defence proposed by the defendant that
the plaintiff would have been prepared to receive grain from any source so long as
it fulfilled the specifications of the contract. This, with great respect, does not meet
the principle upon which I put my judgment. The que~tion is whether the defendant
is entitled to be excused from performance if grain is not available from the specified
area for a reason not attributable to any fault on his part. It is undoubted that it was
impossible to harvest the grain in order to meet the contract delivery dates. I do not
say that the contracts themselves necessarily terminated when performance at the
required time proved impossible, and I am prepared to assume that the plaintiff could
have kept the contract alive and required the defendant to perform at a later time
when it would be possible to harvest corn from the particular area. However, the
plaintiff did not put his case on this basis but rather sued on the basis of the failure
of the defendant to meet the contract delivery dates according to their specific terms.
In my view, the foundation on which the arrangements between the parties pro-
ceeded collapsed. Accordingly, the defendant had a valid excuse for non-delivery.
I would, therefore, have allowed the appeal, set aside the judgment below and
dismissed the plaintiff's action with cos~s, both at the trial and in this Court, to the
defendant.
Appeal dismissed.

KRELL V HENRY
[1903] 2 KB 740 (CA)

The plaintiff, Paul Krell, sued the defendant, C.S. Henry, for £50, being the balance
of a sum of £75 for which the defendant had agreed to hire a flat at 56A Pall Mall on
the days of June 26 and 27, for the purpose of viewing the processions to be held in
connection with the coronation of Edward VII. The defendant denied his liability,
and counterclaimed for the return of the. sum of £25, which had been paid as a
deposit, on the ground that, the procession not having taken place owing to the
serious illness of the King, there had been a total failure of consideration for the
contract entered into by him.
Darling J . held that there was an implied condition in the contract that the procession
should take place, and gave judgment for the defendant on the claim and counter-
claim. The plaintiff appealed. The defendant on the appeal abandoned his counter-claim
for £25.

835
CHAPTER 10 FRUSTRATION

VAUGHAN WILLIAMS LJ: The real question in this case is the extent of the application
in English law of the principle of the Roman law which has been adopt~d and acted
on in many English decisions, and notably in the case of Taylor v. Caldwell (1863),
122 E.R. 309. That case at least makes it clear that "where, from the nature of the
contract, it appears that the parties must from the beginning have known that it
could not be fulfilled unless, when the time for the fulfilment of the contract arrived,
some particular specified thing continued to exist, so that when entering into the
contract they must have contemplated such continued existence as the foundation
of what was to be done; there, in the absence of any express or impliecj. warranty that
the thing shall exist, the contract is not to be considered a positive contract, but as
subject to an implied condition that the parties shall be excused in case, before
breach, performance becomes impossible from the perishing of the thing without
default of the contractor."
Thus far it is clear that the principle of the Roman law has been introduced into
the English law. The doubt in the present case arises as to how far this principle
extends. The Roman law dealt with obligations de cer.to corpore. Whatever may have
been the limits of the Roman law, the case of Nickoll v: Ashton, [1901] 2 K.B. 126 makes
it plain that the English law applies the principle not only to cases where the per-
formance of the contract becomes impossible by the cessation of existence of the
thing which is the subject-matter of the contract, but also to cases where the event
which renders the contract incapable of performance is the cessation or non -
existence of an express condition or state of things, going to the root of the contract,
and essential to its performance. It is said, on the one side, that the specified thing,
state of things, or condition the continued existence of which is necessary for the
fulfilment of the contract, so that the parties entering into the contract must have
contemplated the continued existence of that thing, condition, or state of things as
the foundation of what was to be done under the contract, is limited to things which
are either the subject-matter of the contract or a condition or state of things, present
or anticipated, which is expressly mentioned in the contract.
But, on the other side, it is said that the condition or state 6f things need not be
expressly specified, but that it is sufficient if that condition or state of things clearly
appears by extrinsic evidence to have been assumed by the parties to be the founda -
tion or basis of the contract, and the event which causes the impossibility is of such
a character that it cannot reasonably be supposed to have been in the contemplation
of the contracting parties when the contract was made. In such a case the contract-
ing parties will not be held bound by the general words which, though large enough
to include, were not used with reference to a possibility of a particular event render-
ing performance of the contract impossible.
I do not think that the principle of the civil law as introduced into the English law
is limited to cases in which the event causing the impossibility of performance is
the destruction or non-existence of some thing which is the subject-matter of the
contract or of some condition or state of things expressly specified as a condition
of it. I think that you first have to ascertain, not necessarily from the terms of the
contract, but, if required, from necessary inferences, drawn from surrounding cir-
cumstances recognised by both contracting parties, what is the substance of the
contract, and then to ask the question whether that substantial contract needs for
its foundation the assumption of the existence of a particular state of things. If it
does, this will limit the operation of the general words, and in such case, if the con-
tract becomes impossible of performance by reason of the non -existence of the state
of things assumed by both contracting parties as the foundation of the contract,
there will be no breach of the contract thus limited.

836
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

Now what are the facts of the present case? The contract is contained in two letters
of June 20 which passed between the defendant and the plaintiff's agent, Mr. Cecil
Bisgood. These letters do not mention the coronation, but speak merely of the taking
of Mr. KreU's chambers, or, rather, of the use of them, in the daytime of June 26 and
27, for the sum of £75, £25 then paid, balance £50 to be paid on the 24th. But the
affidavits, which by agreement between the parties are to be taken as stating the facts
of the case, shew that the plaintiff exhibited on his premises, third floor, 56A Pan
Mall, an announcement to the effect that windows to view the Royal coronation
procession were to be let, and that the defendant was induced by that announcement
to apply to the housekeeper on the premises, who said that the owner was willing
to let the suite of rooms for the purpose of seeing the Royal procession for both days,
but not nights, of June 26 and 27. In my judgment the use of the rooms was let and
taken for the purpose of seeing the Royal procession. It was not a demise of the rooms,
or even an agreement to let and take the rooms. It is a licence to use rooms for a
particular purpose and none other. And in my judgment the taking place of these
processions on the days proclaimed along the proclaimed route which passed 56A
Pall Mall, was regarded by both contracting parties as the foundation of the contract;
and I think that it cannot reasonably be supposed to have been in the contemplation
of the contracting parties, when the contract was made, that the coronation would
not be held on the proclaimed days, or the processions not take place on those days
along the proclaimed route; and I think that the words imposing on the defendant
the obligation to accept and pay for the use of the rooms for the named days,
although general and unconditional, were not used with reference to the possibility
of the particular contingency which afterwards occurred.
It was suggested in the course of the argument that if the occurrence, on the
proclaimed days, of the coronation and the procession in this case were the founda -
tion of the contract, and if the general words are thereby limited or qualified, so that
in the event of the non-occurrence of the coronation and procession along the
proclaimed route they would disc!large both parties from further performance of
the contract, it would follow that if a cabman was engaged to take some one to
Epsom on Derby Day at a suitable enhanced price for such a journey, say £10, both
parties to the contract would be discharged in the contingency of the race at Epsom
for some reason becoming impossible; but I do not think this follows, for I do not
think that in the cab case the happening of the race would be the foundation of the
contract. No doubt the purpose of the engager would be to go to see the Derby, and
the price would be proportionately high; but the cab had no special qualifications
for the purpose .which led to the selection of the cab for this particular occasion. Any
other cab would have done as well. Moreover, I think that, under the cab contract,
the hirer even if the race went off, could have said, "Drive me to Epsom; I will pay
you the agreed sum; you have nothing to do with the purpose for which I hired the
cab," and that if the cab man refused he would have been guilty of a breach of con -
tract, there being nothing to qualify his promise to drive the hirer to Epsom on a
particular day.
Whereas in the case of the coronation, there is not merely the purpose of the hirer
to see the coronation procession, but it is the coronation procession and the relative
position of the rooms which is the basis of the contract as much for the lessor as the
hirer; and I think that if the King, before the coronation day and after the contract,
had died, the hirer could not have insisted on having the rooms on the days named.
It could not in the cab case be reasonably said that seeing the Derby race was the
foundation of the contract, as it was of the licence in this case. Whereas in the present
case, where the rooms were offered and taken, by reason of their peculiar suitability

837
CHAPTER 10 FRUSTRATION

from the position of the rooms for a view of the coronation procession, surely the
view of the coronation procession was the foundation of the contract, which is a
very different thing from the purpose of the man who engaged the cab-namely, to
see the race-being held to be the foundation of the contract.
Each must be judged by its own circumstances. In each case one must ask oneself,
first, what, having regard to an the circumstances, was the foundation of the con -
tract7 Secondly, was the performance of the contract prevented? Thirdly, was the
event which prevented the performance of the contract of such a character that it
cannot reasonably be said to have been.in the contemplation of the parties at the
date of the contract? If an these questions are answered in the affirmative (as I think
they should be in this case), I think both parties are discharged from further per-
formance of the contract. I think that the coronation procession was the foundation
of this contract, and that the non -happening of it prevented the performance of the
contract; and,' secondly, I think that the non -happening of the procession, to use .
the words of Sir James Hannen in Baily v. De Crespigny (1869), L.R. 4 O.B. 180, was an
event "of such a character that it cannot reasonably be supposed to have been in the
contemplation of the contracting parties when the contract was made, and that they
are not to be held bound by general words which, though large enough to include,
were not used with reference to the possibility of the particular contingency which
afterwards happened."
I myself am clearly of opinion that in this case, where we have to ask ourselves
whether the object of the contract was frustrated by the non-happening of the coro-
nation and its procession on the days proclaimed, parol evidence is admissible to
shew that the subject of the contract was rooms to view the coronation procession,
and was so to the knowledge of both parties. When once this is established, I see no
difficulty whatever in the case. It is not essential to the application of the principle
of Taylor v. Caldwell that the direct subject of the contract should perish or fail to be
in existence at the date of the performance of the contract. It is sufficient if a state
of things or condition expressed in the contract and essential to its performance
perishes or fails to be in existence of that which was, in the contemplation of both
parties, the foundation of the contract, is not expressly mentioned either as a condi-
tion of the contract or the purpose of it; but I think for the reasons which I have given
that the principle of Taylor v. Caldwell ought to be applied .
... I think this appeal ought to be dismissed.
[The concurring opinions of Romer and Stirling LJJ are omitted.]

ALUMINUM CO OF AMERICA V ESSEX GROUP, INC

499 F Supp 53 (WD Pa 1980)

TEITELBAUM J: Plaintiff, Aluminum Company of America (ALCOA), brought the

instant action against defendant, Essex Group, Inc. (Essex), in three counts. The first
count requests the Court to reform or equitably adjust an agreement entitled the
Molten Metal Agreement entered into between ALCOA and Essex.

COUNT ONE

ALCOA's first count seeks an equitable modification of the contract price for its
services. The pleadings, arguments and briefs frame the issue in several forms.
ALCOA seeks reformation or modification of the price on the basis of mutual mistake

838
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

of fact, unilateral mistake of fact, unconscionability, frustration of purpose, and

commercial impracticability.

The facts pertinent to count one are few and simple. In 1967 ALCOA and Essex entered
into a written contract in which ALCOA promised to convert specified amounts of
alumina supplied by Essex into aluminum for Essex. The service is to be performed
at the ALCOA works at Warrick, Indiana. The contract is to run until the end of 1983.
Essex has the option to extend it until the end of 1988. The price for each pound of
aluminum converted is calculated by a complex formula which includes three vari-
able components based on specific indices ....
In the early years of the contract, the price formula yielded prices related, within
the foreseeable range of deviation, to ALCOA's cost figures. Beginning in 1973, OPEC
actions to increase oil prices and unanticipated pollution control costs greatly
increased ALCOA's electricity costs .... As a result, ALCOA's production costs rose
greatly and unforeseeably beyond the indexed increase in the contract price ....
ALCOA has sufficiently shown that without judicial relief or economic changes
which are not presently foreseeable, it stands to lose in excess of $75,000,000 out of
pocket, during the remaining term of the contract. ...
ALCOA initially argues that it is entitled to relief on the theory of mutual mistake ....
[The discussion of mistake has been omitted.]

D
ALCOA argues that it is entitled to relief on the grounds of impracticability and frus-
tration of purpose. The Court agrees.
In broad outline the doctrines of impracticability and of frustration of purpose
resemble the doctrine of mistake. All three doctrines discharge ah obligor from his
duty to perform a contract where a failure of a basic assumption of the parties pro-
duces a grave failure of the equivalence of value of the exchange to the parties. And
all three are qualified by the same notions of risk assumption and allocation. The
doctrine of mistake of fact requires that the mistake relate to a basic assumption on
which the contract was made. The doctrine of impracticability requires that the
non-occurrence of the "event," Restatement 2d of Contracts n [2611, or the non-
existence of the "fact," Id. n[2631, causing the impracticability be a basic assumption
on which the contract is made. The doctrine of frustration of purpose similarly rests
on the same "non-occurrence" or "non-existence," "basic assumption" equation. id.
nn [265, 2661.
The three doctrines further overlap in time. There may be some residual notion
that the doctrine of frustration and impracticability relate to occurrences after the
execution of the contract while the doctrine of mistake relates to facts as they stand
at the time of execution. But that view has never won general acceptance ....
Conversely the notion that the doctrines of frustration and impracticability apply
only to events occurring after the execution of a contract appear to be drawn more
from common experience with their application than from any inherent limitation
of those doctrines. Nothing in the language of the first Restatement limits the doc-
trine to events occurring after the execution of the contract, though all three illus-
trations involve such supervening events. [Restatement of Contracts (1932). n288.]
The new Restatement recognizes that circumstances existing at the execution of a

839
CHAPTER 10 FRUSTRATION

. contractmay render performance impracticable or they may frustrate the purpose

· of one of the parties so as to excuse his performance.~ [266] .
Thus there is a substantial area of similarity between the three doctrines. Within
that area, tl;le findings and holdings with respect to the claim of mistake also apply
to the claims of impracticability and frustration. It requires no further discussion to
establish tha:t the non-occurrence of an extreme deviation of the WPI-IC and
ALCOA's non-labor production costs was a basic assumption on which the contract
was made. And it is clear that ALCOA neither assumed nor bore the risk of the devi -
ation beyond the foreseeable limits of risk.
The court must still consider those aspects of doctrines of frustration and imprac-
ticability which differ from the doctrine of mistake . ...
The focus of the doctrines of impracticability and of frustration is distinctly on
hardship. Section [261] [of the Uniform Commercial Code] declares a party is discharged
from performing a contract where a supervening event renders his performance
impracticable. Comment (d) discusses the meaning of "impraeticability." The com-
ment states the word is taken from Uniform Commercial Code ~2-615(a) . It declares
that the word denotes an impediment to performance lying between "impossibility"
and "impracticability.''
Performance may be impracticable because .extr,eme and unreasonable difficulty,
expense, injury, or loss 'to 0ne of the parties will be involved ...

A mere change in the degree of difficulty or expense due to such causes as

increased wages, prices of raw materials, or costs of construction, unless well beyond
the normal range, does not amount to impracticability since it is this sort of risk that
a fixed-price contract is intended to cover. Restatement 2nd Contracts~ [261] com. (d) .
, Similarly, ~ [265] declares a party is dischar!!Jed from performing his contract where
his principal purpose is substantially frustrated by the occurrence of a supervening
event. The extent of the necessary frustration is further described in comment (a):
. "(T)he frustration must be s01bstantial. It is not enough that the transaction has
· become less profitable for the affected party or even that he will sustain a loss. The
frustration must be so severe that it is not fairly to be regarded as within the risks
that he assumed under the contract." ...
This strict standard of severe disappointment is clearly met in the present case.
ALCOA has sufficiently proved that it will lose well over $60 million out of pocket over
the life of the contract due to the extreme deviation of the WPI-IC from ALCOA's
actual costs . .. .
Is this, then, a case of impracticability, of frustration, or both? The doctrine of
impracticability and of frustration focus on different kinds of disappointment of a
contracting party. Impracticability focuses on occurrences which greatly increase
the costs, difficulty, or risk of the party's performance. Restatement 2d of Contracts
~ [261].
The doctrine of frustration, on the other hand, focuses on a party's severe dis-
appointment which is caused by circumstances which frustrate his principal purpose
for entering the contract. Restatement 2d of Contracts~ [265]. The doctrine of frustra-
tion often applies to relieve a party of a contract which could be performed without
impediment; relief is allowed because the performance would be of little value to
the frustrated party. ... .
In the present case ALCOA has satisfied the requirements of both doctrines. The
impracticability of its performance is clear. The increase in its cost of performance
is severe enough to warrant relief, and the other elements necessary for the granting
of relief have been proven. Essex argues that the causes of ALCOA's losses are due to

840
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

market price increases to which the doctrine of impracticability does not apply. The
doctrine of impracticability of the new Restatement is one of recent evolution in the
law. The first Restatement used the term as part of the definition of "impossibility."
The interesting legal evolution from the strict standards of impossibility, evident at
least by 0 in Paradine v. Jane, Aleyn, 26 (1647, KB.), to modem standards of imprac-
ticability is traced in Professor Gilmore's The Death of Contracts 35-90 (1974) ....
[The court found actionable ALCOA's frustration of purpose claim. It then addressed
the problem of fashioning an appropriate remedy.]

E
This leaves the question of framing a remedy for ALCOA. Essex argues that reforma-
tion is not available. It cites many Indiana cases declaring that reformation is only
available to correct writings which, through mistake, do not reflect the agreement
of the parties. The declarations to that effect are clear.
But the point is immaterial here. This case does not fall within reformation as a
traditional head of equity jurisprudence. It does fall within the more general rules of
equitable restitution. Courts have traditionally applied three remedial rules in cases
of mistake, frustration and impracticability. In some cases courts declare that no
contract ever arose because there was no true agreement between the parties, Raffles
v. Wichelhaus, or because the parties were ignorant of existing facts which frustrated
the purpose of one party or made performance impracticable. Restatement 2d of
Contracts fi (266]. In some other cases the courts hold that a contract is voidable on
one of the three theories. In these cases the customary remedy is rescission. In both
classes of cases where one or both parties have performed under the supposed
contract, the courts award appropriate restitution in the light of the benefits the
parties have conferred on each other. The aim is to prevent unjust enrichment. The
courts in such cases often call this remedy "reformation" in the loose sense of "modi-
fication." See III Palmer, Law of Restitution fil3 .9 (1978) . ... The same ends can be
achieved under a long term executory contract by a similar remedy. To decree
rescission in this case would be to grant ALCOA a windfall gain in the current alum -
inum market. It would at the same time deprive Essex of the assured long term
aluminum supply which it obtained under the contract and of the gains it legitim-
ately may enforce within the scope of the risk ALCOA bears under the contract. A
remedy which merely shifts the windfall gains and losses is neither required nor
permitted by Indiana law.
To frame an equitable remedy where frustration, impracticability or mistake prevent
strict enforcement of a long term executory contract requires a careful examination
of the circumstances of the contract, the purposes of the parties, and the circum -
stances which upset the contract. For some long term.executory contracts rescission
with or without restitution will be the only sensible remedy. Where developments
make performance of the contract economically senseless or purposeless, to modify
the contract and to enforce it as modified would be highly inappropriate. But in cases
like the present one modification and enforcement may be the only proper remedy.
. See Parev Products Co. v. /. Rokeach and Sons, Inc., 124 F.2d 147 (2nd Cir. 1941). In this
case Essex sought an assured long term supply of aluminum at a price which would
let it earn a profit on its finished products. ALCOA, facing ordinary market risks in
1967, sought a long term, limited risk use for its Warrick Works. A remedy modifying
the price term of the contract in light of the circumstances which upset the price
formula will better preserve the purposes and expectations of the parties than any
other remedy. Such a remedy is essential to avoid injustice in this case.

841
CHAPTER 10 FRUSTRATI ON

NOTES
1. Aluminum Co of America v Essex Group [ALCOA] has been sound ly criticized. See Go/sen
v ONG Western, In c. 1988 OK 26, 756 P 2d 1209, 1221 (Okla 1988). See also Wabash v Avnet
Inc, 516 F Supp 995, 999 n 5 (ND 111, 1981). w here the court maintained that "under the log ica l
consequences of [ALCOA]. there would be no predictability or certainty for contracting parties
who selected a future variable to measure their contract liability. Whichever way the variable
fluctuated, the disappointed party wou ld be free to assert frustrated expectations and seek
relief via reformation."
2. For a discussion of the relation between the "frustration of purpose" doctrine and other
forms of frustration, see Thom as Roberts, "Commercial Impossibility and Frustration of Pur-
pose : A Critical Analysis" (2003) 16 Can JL & Jur 129.
3. Shou ld the doctrine of frustration provide relief where there is a breakdown of relations
between the contracting parties7 In Folia v Trelinski (1997). 36 BLR (2d) 108 (BCSC), the plaintiff
transferred her home to the defendants, her daughter and son- in -law, and, as part of the con -
sideration for the transfer, the defendants promised_they wou ld take care of the plaintiff at their
home for the rest of her life. When relations between them broke down, the defendants
argued that the contract had been frustrated by the parties' inability to live together. In an oft-
quoted excerpt, the court articulated the test for frustration (at para 18):

In order to find that the contract at issue has been frustrated the following criteria wou ld have
to be satisfied. Th e event in question must have occurred after the formation of the contract
and cannot be self-induced. The contract must, as a result. be totally different from what the
parties had intended. This difference must take into account the distinction between complete
fruitlessness and mere inconvenience . The disruption must be permanent. not temporary or
transient. The change must totally affect the nature, meaning, purpose, effect and conse-
quences of the contract so far as concerns either or both parties. Finally, the act or event
that brought about such rad ical change must not have been foreseeable .

Applied to the case. the court found that the conflict between the parties did not "rad ically or
totally [affect] the nature, meaning, purpose, effect and consequences of the contract ...
Although the parties no doubt expected to remain compatible, for the contract to be consid-
ered frustrated there must have been the occurrence of circumstances that could not be said
to have been in the contemplation of the parties. Objectively viewed, the possibility of future
incompatibility for any number of reasons must have been in the parties' contemplation when
the agreement to care for [the plaintiff] was made." Death of a party, however, does frustrate a
con tract, when the contract is one for personal services. See Rickards Estate v Diebold Elec-
tion Systems Inc. 2007 BCCA 246 .
4. In Exelon Generation Co, LLC v General Atomics Technologies Corp, 559 F Supp 2d 892
(US Dist Ct, ND Illinois, Eastern Division, 2008). the court considered the doctrine of com -
mercial impracticability, which has its roots· in the common law doctrine of frustration or
impossibility and which, under New York law, is "based on the notion that, where parties can
reasonably anticipate events that may affect performance, [th e] prudent course is to provide
for such eventualities in their contract" (NY McKinney's Uniform Commercial Codell 2-615(a)).
The court determined that the doctrine, "which is devised to '[sh ift] risk in accordance with the
parties' presumed intentions,"' has no place when a contract explicitly assigns a particular risk
to one of the parties. In this case, the risk of production costs was assigned to the defendant.
who later argued that its obligations should be excused under the doctrine of commercial
impracticability due to a confluence of unforeseeable contingencies.

842
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

EASTERN AIR LINES V GULF OIL CORP

415 F Supp 429 (SD Fla 1975)

KING J: Eastern Air Lines, Inc., hereafter Eastern, and Gulf Oil Corporation, hereafter
Gulf, have enjoyed a mutually advantageous business relationship involving the sale
and purchase of aviation fuel for several decades.
This controversy involves the threatened disruption of that historic relationship
and tf.te attempt, by Eastern, to enforce the most recent contract between the parties.
On March 8, 1974 the correspondence and telex communications between the cor-
porate entities culminated in a demand by Gulf that Eastern must meet its demand
for a price increase or Gulf would shut off Eastern's supply of jet fuel within fifteen
days.
Eastern responded by filing its complaint with this .c ourt, alleging that Gulf had
breached its contract and requesting preliminary and permanent mandatory injunc-
tions requiring Gulf to perform the contract in accordance with its terms. By agree-
ment of the parties, a preliminary injunction preserving the status quo was entered
on March 20, 1974, requiring Gulf to perform its contract and directing Eastern to
pay in accordance with the contract terms, pending final disposition of the case.
Gulf answered Eastern's complaint, alleging that the contract was not a binding
requirements contract, was void for want of mutuality, and, furthermore, was "com-
mercially impracticable" within the meaning of Uniform Commercial Code fi2-615;
Fla. Stat. fifi672.614 and 672.615.
The extraordinarily able advocacy by the experienced lawyers for both parties
produced testimony at the trial from internationally respected experts who described
in depth economic events that have, in recent months, profoundly affected the lives
of every American ....
In short, for U.C.C. fi2-615 to apply there must be a failure of a pre-supposed
condition, which was an underlying assumption of the contract, which failure was
unforeseeable, and the risk of which was not specifically allocated to the complaining
' party. The burden of proving each element of claimed commercial impracticability
is on the party claiming excuse. Ocean Air Tradeways, Inc. v. Arkay Realty Corp., 480
F.2d 1112, 1117 (9th Cir. 1973).
The modern U.C.C. fi2-615 doctrine of commercial impracticability has its roots in
the common law doctrine of frustration or impossibility and finds its most recognized
illustrations in the so-called "Suez Cases," arising out of the various closings of the
Suez Canal and the consequent increases in shipping costs around the Cape of Good
Hope. Those cases offered little encouragement to those who would wield the sword
of commercial impracticability. As a leading British case arising out of the 1957 Suez
closure declared, the unforeseen cost increase that would excuse performance "must
be more than merely onerous or expensive. It must be positively unjust to hold the
parties bound." Ocean Tramp Tankers v. V!O Sovfracht (The Eugenia), 2 O.B. 226, 239
(1964) ....
Other recent American cases similarly strictly construe the doctrine of commer-
cial impracticability. For example, one case found no U.C.C. defense, even though
costs had doubled over the contract price, the court stating, "It may have been
unprofitable for defendant to have supplied the pickers, but the evidence does not
establish that it was impossible. A mere showing of unprofitability, without more,
will not excuse the performance of a contract." Schafer v. Sunset Packing Co., 256 Or.
539 (1970).
Recently, the Seventh Circuit has stated: "The fact that performance has become
economically burdensome or unattractive is not sufficient for performance to be

843
CHAPTER 10 FRUSTRATION

excused. We will not allow a party to a contract to escape a bad bargain merely
because it is burdensome." "(T)he buyer has a right to rely on the party to the contract
to supply him with goods regardless of what happens to the market price. That is the
purpose for which such contracts are made," Neal-Cooper Grain Co. v. Texas Gulf
Sulfur Co., 508 F.2d 283, 293, 294 (7th Cir. 1974)
Gulf's argument on commercial impracticability has two strings to its bow. First,
Gulf contends that the escalator indicator does not work as intended by the parties
by reason of the advent of so-called "two-tier" pricing under Phase IV government
price controls. Second, Gulf alleges that crude oil prices have risen substantially
without a concomitant rise in the escalation indicator, and, as a result, that perform-
ance of the contract has become commercially impracticable ....
[The court held that Gulf's claim of hardship giving rise to "commercial impractica-
bility" failed.]
But even if Gulf had established great hardship under U.C.C. IlZ-615, which it has
not, Gulf would not prevail because the events associated with the so-called energy
crises were reasonably foreseeable at the time .the contract was executed. If a con-
tingency is foreseeable, it and its consequences are taken outside the scope of U.C.C.
Il2-615, because the party disadvantaged by fruition of the contingency might have
protected himself in his contract, Ellwood v. Nutex Oil Co., 148 S.W.2d 862 (Tex. Civ.
App.1941).
The foreseeability point is illustrated by Foster v. Atlantic Refining Co., 329 F.2d 485,
489 (5th Cir. 1964). There an oil company sought release from a gas royalty contract
because the royalty provisions of the contract did not contain an escalation clause,
with the result that the oil company came to receive a far smaller share of the royal-
ties than it would then have been able to obtain on the market. Citing Ellwood, with
approval, the Fifth Circuit answered the oil company's argument as follows:
(O)ne who unconditionally obligates himself to do a thing possible of performance, must
be held to perform it (citing cases); and though performance. subsequent to the con-
tract. may become difficult or even impossible, (this) does not relieve the promiser, and
particularly where he might have foreseen the difficulty and impossibility (citing cases).
The record is replete with evidence as to the volatility of the Middle East situation,
the arbitrary power of host governments to control the foreign oil market, and
repeated interruptions and interference with the normal commercial.trade in crude
oil. Even without the extensive evidence present in the record, the court would be
justified in taking judicial notice of the fact that oil has been used as a political
weapon with increasing success by the oil-producing nations for many years, and
Gulf was well aware of and assumed the risk that the OPEC nations would do exactly
what they have done.
With respect to Gulf's argument that "two-tier" was not "foreseeable," the record
shows that domestic crude oil prices were controlled at all material times, that Gulf
foresaw that they might be de -controlled, and that Gulf was constantly urging to the
Federal Government that they should be de-controlled. Government price regula -
tions were confused, constantly changing, and uncertain during the period of the
negotiation and execution of the contract. During that time frame, high ranking Gulf
executives, including some of its trial .witnesses, were in constant repeated contact
with officials and agencies of the Federal Government regarding petroleum policies
and were well able to protect themselves from any contingencies.
Even those outside the oil industry were aware of the possibilities. Eastern's prin-
cipal contract negotiator advised his superior in recommending this contract to him:

844
 IV. RELAXATION OF THE RULE OF AB SOLUTE PROMISES

While Gulf is apparently counting on crude price increases, such increases are a fact of
life for the future, except as the government may inhibit by price controls, therefore all
suppliers have such anticipation.
1975 is the year during which the full effect of energy shortages will be felt in the
United States according to most estimates.
Knowing all the factors, Gulf drafted the contract and tied the escalation to certain
specified domestic postings in Platt's. The court is of the view that it is bound
thereby. ...
Having found and concluded that the contract is a valid one, should be enforced,
and that no defenses have been established against it, there remains for considera-
tion the proper remedy.
The Uniform Commercial Code provides that in an appropriate case specific per-
formance may be decreed. This case is a particularly appropriate one for specific
performance. The parties have been operating for more than a year pursuant to a
preliminary injunction requiring specific performance of the contract and Gulf has
stipulated that it is able to perform. Gulf presently supplies Eastern with 100,000,000
gallons of fuel annually or 10 percent of Easter!\'s total requirements. If Gulf ceases
to supply this fuel, the result will be chaos and irreparable damage.
Under the U.C.C. a more liberal test in determining entitlement to specific per-
formance has been established than the test one must meet for classic equitable
. relief. U.C.C. ij2-716(1); Kaiser Trading Co. v. Associated Metals & Minerals Corp., 321 F.
Supp 923, 932 (N.D. Cal. 1970), appeal dismissed per curiam, 443 F.2d 1364 (9th Cir.
1971). .
It has previously been found·and concluded that Eastern is entitled to Gulf's fuel
at the prices agreed upon in the contract. In the circumstances, a decree of specific
performance becomes the ordinary and natural relief rather than the extraordinary
one. The parties are before the court, the issues are squarely framed, they have been
clearly resolved in Eastern's favor, and it would be a vain, useless and potentially
harmful exercise to declare that Eastern has a valid contract, but leave the parties to
their own devices. Accordingly, the preliminary injunction heretofore entered is
made a permanent injunction and the order of this court herein.

EDWINTON COMMERCIAL CORPORATION AND

ANOTHER V TSAVLIRIS RUSS (WORLDWIDE SALVAGE
AND TOWAGE) LTD ("The Sea Angel")
[2007] 2 All ER (Comm) 634 (CA)

[Commercial salvagers, Tsavliris, engaged the Sea Angel, a vessel owned by Edwinton,
to assist in the salvage operations of the oil tanker the Tasman Spirit. The Tasman Spirit
had broken in two, causing a significant pollution incident in and around Karachi.
The charter was to last up to 20 days. However, 3 days before Tsavliris was to redeliver
the Sea Angel, the Karachi Port Trust (KPT) alleged negligence in the performance
of Tsavliris' salvage duties and claimed compensation for the pollution cleanup from
Tsavliris. During that time, as a result of the allegations, the Sea Angel was unable to
depart due to the KPT's refusal to issue a "no demand certificate" (NDC), which was
required as a prerequisite for port clearance. Tsavliris ceased paying hire for the Sea
Angel 3 days after the contracted date for redelivery. By the time the court ordered
the KPT to release the Sea Angel, the 20-day charter was exceeded by about 108 days.
Edwinton claimed hire from Tsavliris for the time during which the vessel had been

845
CHAPTER 10 FRUSTRATION

detained. Tsavliris took the position that the unlawful detention of the vessel had
frustrated the charter party and that it owed no additional hire to Edwinton.]

RIX LJ: ... The general context is of course an allegation of frustration of a charter by
reason of a foreseeable risk giving rise to delay, and the special context is that of a
vessel chartered for a short period to assist in providing salvage services.
Two classic modern statements of the incidence of frustration are to be found in
the dicta of Lord Radcliffe in Davis Contractors Ltd v. Fareham Urban Distr:ict Council
[1956] A.C. 696 at 729 and Lord Simon of Glaisdale in National Carriers Ltd v. Panalpina
(Northern) Ltd [1981] A.C. 675 at 700 . Lord Radcliffe said:

... frustration occurs whenever the law recognises that w ithout default of either party
a contractual obligation has become incapable of being performed because the cir-
cumstances in which performance is called for would render it a thing radically different
from that which was undertaken by the contract. Non haec in foedera veni. It was not
this that I promised to do.

Lord Simon said:

Frustration of a contract takes place when there supervenes an event (without default
of either party and for which the contract makes no sufficient provision) which so
significantly changes the nature (not merely the expeRse or onerousness) of the out-
standing contractual rights and/or obligations from what the parties could reasonably
have contemplated at the time of its execution that it would be unjust to hold them to
the literal sense of its stipulations in the new circumstances; in such case the law
declares both parties to be discharged from further performance.

The reference by Lord Simon in that latter passage to the role that the concept of
justice plays in the doctrine has a distinguished pedigree, which he elaborated at 701:

In the first place, the doctrine has been developed by the law as an expedient to escape
from injustice where such would result from enforcement of a contract in its literal
terms after a significant change in circumstances. As Lord Sumner said, giving the
opinion of a strong Privy Council in Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [19261
A.C. 497, 510: "I t is really a device, by which the rules as to absolute contracts are rec-
onciled with a special exception which justice demands." ...
Secondly, in the words of Lord Wright in the Cricklehood Property case [Crickle-
wood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd, [19451 AC
221] at p. 241: " ... the doctrine of frustration is modern and flexible and is not subject
to being constricted by an arbitrary formula ." It is therefore on the face of it apt to
vindicate justice wherever owing to relevant supervening circumstances the enforce-
ment of any contractual arrangement in its literal terms would produce injustice.

Lord Wilberforce (at 696H) and Lord RoskiU (at 712D/E) also referred to the doctrine
of frustration as a means for finding just solutions or avoiding injustice.
In The Super Servant Two [1990] 1 Lloyd's Rep 1, at 8, Bingham L.J. on the same
subject included the following as a proposition established by the highest authority
and not open to question:

The object of the doctrine was to give effect to the demands of j ustice, to ach ieve a
just and reasonable result, to do what is reasonable and fair, as an expedient to escape
from injustice where such would result from enforcement of a contract in its literal
terms after a significant change in circumstances ...

The particular problem of delay as a cause of frustration has to be tested as at the

time it had to be considered by the parties, but on an objective basis. For these purposes

846
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

past and prospective delay has to be taken into account. The issue, if disputed, requires
an informed judgment and the decision on such an issue by the tribunal of fact can -
not easily be upset on appeal (subject of course to any error of law). As Lord Sumner
famously said in Bank Line, Limited v. Arthur Capel & Co [1919] A.C. 435 at 454 :

The probabilities as to the lenQth of the deprivation and not the certainty arrived at after
the event are also material. The question must be considered at the trial as it had to be
considered by the parties, when they came to know of the cause and the probabilities
of the delay and had to decide what to do. On this the judgments in the above cases
substantially agree. Rights ought not to be left in suspense or to hang on the chances
of subsequent events. The contract binds or it does not bind. and the law ought to be
that the parties can gather their fate then and there. What happens afterwards may assist
in showing what the probabilities really were, if they had been reasonably forecasted,
but when the causes of frustration have operated so long or under such circumstances
as to raise a presumption of inordinate delay, the time has arrived at which the fact of
the contract falls to be decided.

To which has to be added an equally well-known passage from the speech of Lord
Roskill (with whom their other Lordships agreed) in Pioneer Shipping Ltd v. BTP
Tioxide Ltd (The ·Nema ") [1982] A.C. 724 at 752:

But in others. where the effect of that event is to cause delay in the performance of
contractual obligations, it is often necessary to wait upon events in order to see whether
the delay already suffered and the prospects of further delay from that cause, will make
any ultimate performance of the relevant contractual obligations "radically different, " to
borrow Lord Radcliffe's phrase, from that which was undertaken under the contract. But,
as has often been said, business men must not be required to await events too long. They
are entitled to know where they stand. Whether or not the delay is such as to bring about
frustration must be a question to be determined by an informed judgment based upon
all the evidence of what has occurred and what is likely thereafter to occur. Often it will
be a question of degree whether the effect of the delay suffered. and likely to be suffered,
will be such as to bring about frustration of the particular adventure in question .... That
tribunal. properly informed as to the relevant law. must form its own view of the effect
of that delay and answer the critical question accord ingly. Your Lordships' House in
Tsakiroglou & Co. Ltd. v. Noblee Thor/ G.m.b.H. [1962] AC. 93, decided that while in the
ultimate analysis whether a contract was frustrated was a question of law, yet as Lord
Radcliffe said at p. 124 in relation to that case "that conclusion is almost completely
determined by what is ascertained as to mercantile usage and the understanding of
mercantile men." ...

There were lengthy submissions before us from both parties as to the role in the
doctrine of frustration of the fact that a risk might be foreseen or foreseeable ....
The significance of foreseen or of unforeseen but foreseeable events is in my
judgment well, if briefly, summarised in Chitty on Contracts, 29th ed, 2004 at paras
23 - 057/8. Para 23-057 which deals with foreseen events can be seen to make the
point that there is no rule of exclusion, at best some prima facie indications. Thus :

While an unforeseen event will not necessarily lead to the frustration of a contract, a
foreseen event will generally exclude the operation of the doctrine. The inference that
a foreseen event is not a frustrating event is only a prima facie one and so can be
excluded by evidence of contrary intention.

However, there is no finding in terms that the detention by KPT which occurred
in this case was actually foreseen (or unforeseen) even by Tsavliris, merely that

847
CHAPTER 10 FRUSTRATION

unreasonable detention by port authorities is a "risk of the industry," and as such

foreseeable. In such circumstances it is para 23-058 which is perhaps particularly
pertinent, which reads:
Event foreseeable but not foreseen. When the event was foreseeable but not foreseen
by the parties, it is less likely that the doctrine of frustration will be held to be inapplic-
able. Much turns on the extent to which the event was foreseeable. The issue which
the court must consider is whether or not one or other party has assumed the risk of
the occurrence of the event. The degree of foreseeability required to exclude the
doctrine of frustration is. however, a high one: '"foreseeability' will support the inference
of risk-assumption only where the supervening event is one which any person of ordin-
ary intelligence would regard as likely to occur, or ... the contingency must be 'one
which the part ies could reasonably be thought to have foreseen as a real possibility."'

DISCUSSION

... In my judgment, the application of the doctrine of frustration requires a multi-

factorial approach. Among the factors which have to be considered are the terms of
the contract itself, its matrix or context, the parties' knowledge, expectations,
assumptions and contemplations, in particular as to risk, as at the time of contract,
at any rate so far as these can be ascribed mutually and objectively, and then the
nature of the supervening event, and the parties' reasonable and objectively ascer-
tainable calculations as to the possibilities of future performance in the new circum -
stances. Since the subject matter of the doctrine of frustration is contract, and
contracts are about the allocation of .risk, and since the allocation and assumption
of risk is not simply a matter of express or implied provision but may also depend
on less easily defined matters such as "the contemplation of the parties," the applica -
tion of the doctrine can often be a difficult one. In such circumstances, the test of
"radically different" is important: it tells us that the doctrine is not to be lightly
invoked; that mere incidence of expense or delay or onerousness is not sufficient;
and that there has to be as it were a break in identity between the contract as provided
for and contemplated and its performance in the new circumstances.
What the "radically different" test, however, does not in itself tell us is that the
doctrine is one of justice, as has been repeatedly affirmed on the highest authority.
Ultimately the application of the test cannot safely be performed without the con-
sequences of the decision, one way or the other, being measured against the
demands of justice. Part of that calculation is the consideration that the frustration
of a contract may well mean that the contractual allocation of risk is reversed. A time
charter is a good example. Under such a charter, the risk of delay, subject to express
provision for the cessation of hire under an off-hire clause, is absolutely on the
charterer. If, however, a charter is frustrated by delay, then the risk of delay is wholly
reversed: the delay now falls on the owner. If the provisions of a contract in their
literal sense are to make way for the absolving effect of frustration, then that must,
in my judgment, be in the interests of justice and not against those interests. Since
the purpose of the doctrine is to do justice, then its application cannot be divorced
from considerations of justice. Those considerations are among the most important
of the factors which a tribunal has to bear in mind.
Mr Hamblen submitted that whereas the demands of justice play an underlying
role, they should not be overstated. He referred the court to Chitty at para 23-008
("But this appeal to the demands of justice should not be taken to suggest that the
court has a broad absolving power whenever a change of circumstances causes
hardship to one of the contracting parties . ... Such a test is too wide, and gives too

848
 IV. RELAXATION OF THE RULE O F ABSOLUTE PROMISES

much discretion to the court.") I respectfully agree. Mr Hamblen also referred to Treitel
at para 16-009 ("The 'theory' does not, in other words, supersede the rules which
determine the circumstances in which the doctrine of frustration operates.") I would
again respectfully agree, as long as it is not sought to apply those rules as though
they are expected to lead one automatically, and without an exercise of judgment,
to a determined answer without consideration of the demands of justice . ...
I turn then to the facts of this case. I agree with Mr Hamblen that the critical
question was whether, as of 13 October ..., the delay which had already occurred and
prospective further delay would have led the parties at that time to have reasonably
concluded that the charter was frustrated .... For these purposes, since on the facts
a delay of some 5 weeks had already occurred and the prospective delay involved in
a revised strategy involving litigating in the Pakistani courts would involve a further
4 to 6 weeks at least, the first question to consider is whether Mr Hamblen is right in
his submission that the Bailhache J. test of comparing the probable length of the
delay with the unexpired duration of the charter is the critical or main and in any
event overbearing test to apply ....
In my judgment it is not. It may be an important consideration, but it is, on our
facts, only the starting point. In the first place, the development of the law shows that
such a single-factored approach is too blunt an instrument .... Secondly, ... in our
case, the consequences of the detention by the port authorities remained very much
a matter for enquiry, negotiation, diplomacy, and, whatever the ordering of the tactics,
legal pressure. Thirdly, where, as in our case, the supervening event comes at the very
end of a charter, with redelivery as essentially the only remaining obligation, the effect
of the detention on the performance of the charter is purely a question of the financial
consequences of the delay, which will fall on one party or the other, depending on
whether the charter binds or does not bind. It is not like the different situation where
the supervening event either postpones or, which may be even worse, interrupts the
heart of the adventure itself .... In our case, the purpose for which the Sea Angel had
been chartered, namely the lightening of the casualty, had been performed.
Fourthly, in general terms the contractual risk of such delay caused by detention
by government authorities was firmly on the charterers, Tsavliris ... it follows from
their obligation to pay hire, subject to the off-hire clause, until redelivery. And even
the off-hire clause itself expressly provided for "detention by the authorities at home
or abroad" but not in terms which were relied on as covering the particular event
here. Fifthly, as was even common ground, the risk of detention by the littoral author-
ities arising out of a salvage situation where there was a concern about pollution
was, at any rate in general terms, foreseeable. This remained the case even if, as
Mr Hamblen submitted, the particular form in which that risk showed itself in this
case was unforeseeable, or only weakly foreseeable, or was even unprecedented.
Sixthly, that general risk was foreseeable by the salvage industry as a whole, and was
provided for by the terms of that industry.... Indeed, in my view the particular risk
which occurred was within the provisions of SCOPIC [Special Compensation Protec-
tion and Indemnity Clause]. As such, those matters were part of the matrix itself of
the charter under enquiry. In this connection, I bear in mind that [the other respond-
ent] ... chartered the vessel to well-known international salvors, to perform salvage
services directly to a casualty, at a high price which reflected the emergencies and
risks of such services: and therefore the foreseeable risks of the salvage context, and
the incidence of those risks subject to SCOPIC, are properly part of the matrix of the
charter. In justice, they bear particularly on Tsavliris, the salvors, themselves.
Seventhly, it is now common ground, on the particular facts of this case, that,
short as the charter was, a mere 20 days, and shorter still as the unexpired period of

849
CHAPTER 10 FRUSTRATION

the charter was, a mere 3 days, there was no frustration until the strategy of com-
mercial negotiation had initially failed (by 13 or 17 October), some five weeks after
the detention began. So, in any event, this is not a case like Anglo-Northern and Tatem
v. Gamboa, where the charters were frustrated then and there by the supervening
event. Ours is one of those "wait and see" situations discussed in other authorities.
In such situations, it is a matter for assessment, on all the circumstances of the case,
whether by a particular date the tribunal of fact, putting itself in the position of the
parties, and viewing the matter in the role of reasonable and well-informed men,
concludes that those parties would or properly speaking should have formed the
view that, in all fairness and consistently with the demands of justice, their contract,
as something whose performance in the new circumstances, past and prospective,
had become "radically different," had ceased to bind. ·
For these reasons, some of which have been sufficiently grounded above, and
others of which I shall elaborate below, it seems to me that the primary point on
which Tsavliris have founded their claim to frustration fails. I turn to discuss par-
ticular aspects of these reasons ....

THE FORESEEABILITY OF THE RISK

... In a sense, most events are to a greater or lesser degree foreseeable. That does not
mean that they cannot lead to frustration. Even events which are not merely foreseen
but made the subject of express contractual provision may lead to frustration: as occurs
when an event such as a strike, or a restraint of princes, lasts for so long as to go
beyond the risk assumed under the contract and to render performance radically
different from that contracted for. However, ... the less that an event, in its type and
its impact, is foreseeable, the more likely it is to be a factor which, depending on
other factors in the case, may lead on to frustration.
In the present case it was both highly relevant that the unreasonable detention
of a vessel participating in salvage services, whether owned or contracted in by the
salvers, could be foreseen and was actually provided for in SCOPIC, and also relevant,
if it be the case, that the actual circumstances of the detention were comparatively
unusual or even unprecedented and lasted for a long time. All such circumstances
would need to be taken into account. ... Once a port authority acts unreasonably, the
precise circumstances and consequences must essentially be variants on a theme.
The foreseeability of this general risk, recognised within the industry, and provided
for in its well-known terms of trade (SCOPIC), provides a special and highly relevant
factor against which the issue of frustration needs to be assessed ....

THE SPHERE OF RESPONSIBILITY

... The way I would therefore prefer to put the factor of the sphere of responsibility
under the charter which the judge had in mind is to emphasise that, generally speak-
ing, the risk of delay under the charter was upon Tsavliris as charterers. This is
because of the essential. structure of a time charter, under which, absent express
provision, time runs. continuously against the charterer until redelivery. Thus an
off-hire clause is the place to find exceptions against the incidence of a continuous
liability for hire, but such a clause did not avail Tsavliris in this case ....

THE DICTATES OF JUSTICE

I have referred to this factor above. It is not an additional test, but it is a relevant factor
which underlies all and provides the ultimate rationale of the doctrine. If one uses

850
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

this factor as a reality check, its answer should conform with a proper assessment
of the issue of frustration. If it does not appear to do so, it is probably a good indica-
tion of the need to think again. The question in this case is whether it would be just
to relieve Tsavliris of the consequences of their bargain, or unjust to maintain the
bargain, in a situation where they have assumed the general risk of delay, and have
done so in a specific context where the risk of unreasonable detention is foreseeable
and has at least in general been actually foreseen, as demonstrated by SCOPIC which,
subject to the limits of frustration, protects the salvor from the financial conse-
quences of the delay; where from the very beginning a solution was considered to
be possible rather than impossible or hopeless, but only after a period of some three
months, and where that solution, although not entirely or even mainly in Tsavliris's
own control, was achievable with the co-operation of the owners of the casualty and
their Club, known to be in principle available, and the assistance of legal action in
the local courts; and where the outcome has confirmed the calculations of the
objectively reasonable participants in the events.
In my judgment, the judge's conclusion, that the charter had not been frustrated
by 13or17 October, shows the doctrine working justly, reasonably and fairly.

NOTES AND QUESTIONS

1. Two instances of a large corporation arguing that unforeseeable future events had ren-
dered the performance of contractual obligations impractical are as follows . In the first case,
Re Westinghouse Elec Corp Uranium Contracts Litigation, 517 F Supp 440, 31 UCC Rep Serv
930, Westinghouse Electric Corporation announced on September 8, 1975, that it would not
fulfill contracts to provide about 70 million pounds of uranium to utilities at a fixed price. West-
inghouse argued that under ~ 2-615 of the Uniform Commercial Code (UCC) it was legally
excused from performance because of "commercial impracticability." It also argued that. due
to the combined effects of the OPEC-induced oil-price shock and the formation of a cartel of
uranium producers, uranium prices had unforeseeably risen to several times the price at which
it had agreed to provide uranium to the utilities. It claimed that performance of its obligations
would result in a loss of up to $2 billion . Twenty-seven utilities launched 14 lawsuits against
Westinghouse for specific performance or damages. Which of the parties were better placed
to insure against the risk of a price increase in the supply o f uranium, Westinghouse or the
utilities? The litigation was settled for about half the losses that Westinghouse claimed would
have resulted from performance under the original contracts .
2. In the second case, Florida Power and Light Co v Westinghouse Electric Corp, 826 F 2d
239 (4th Cir 1987), Westinghouse had agreed to build a nuclear reactor for the utility and
agreed to remove and dispose of spent reactor fuel. Westinghouse had planned to reprocess
the fuel for a profit of $20 million, but changes.in federal government policy discontinued repro-
cessing for commercial nuclear plants after the contract was signed . Westinghouse now stood
to lose over $80 million to dispose of the waste. Florida Power sued for specific performance
or damages. Westinghouse alleged in defence that its non - performance was excused by
impossibility, commercial impracticability under UCC ~ 2-615, frustration, and mutual mistake.
The court held for Westinghouse on the grounds of impossibility and commercial impractica -
bility. Which party in this case could better bear the cost of waste disposal? See Alan Sykes,
"The Doctrine of Commercial Impracticability in a Second-Best World " (1990) 19 J Legal Stud
43 and Trebilcock, ch 6.

851
CHAPTER 10 FRUSTRATION

TSAKIROGLOU & CO LTD V NOBLEE THORL GMBH

[1962] AC 93 (HL)

[On October 4, 1956, the respondents agreed to buy 300 tons of Sudanese groundnuts
from the appellants for shipment from Port Sudan to Hamburg during November or
December. On October 29 the British and French forces began military operations
against Egypt to protect the Suez Canal. The Canal was blocked to navigation from
November 2 until April 9, 1957. The usual route for such a shipment was via the Canal
and the appellants refused to ship the nuts, although it was feasible to have shipped
them via the Cape of Good Hope during November and December. The Cape route
is 11,137 miles. The Canal route is 4,386 miles. Freight surcharges were imposed, first
of 25 percent as from November 10, and then of 100 percent as from December 13.
The rate was £7 10s. per ton. The market price of Sudanese nuts in Hamburg was
about £68 15s. per ton between January 1and13, 1957.
The case was heard by an umpire arbitration proceeding, which awarded £5,625
as damages to the respondents. The board of appeal of the Incorporated Oil Seed
Association upheld the award as did Dip lock Jon a stated case. Dip lock J's decision
was affirmed by the Court of Appeal. Clause 6 of the IOSA standard form contract
provided that "in case of ... war ... and in all cases of force majeure preventing the
shipment within the time fixed ... the perioQ. allowed ... shall be extended by not
exceeding two months. After that, if the case of force majeure be still operating, the
contract shall be cancelled." It was unanimously agreed that clause 6 did not relieve
the defendants : there was no "war" and the "shipment" was not prevented via the
Cape.] ·
VISCOUNT SIMONDS: ... I come then to the main issue and, as usual, I find two ques-
tions interlocked: (1) What does the contract mean? In other words, is there an
implied term that the goods shall be carried by a particular route? (2) Is -the contract
frustrated?
It is convenient to examine the first question first, though the answer may be
inconclusive. For it appears to me that it does not automatically follow that, because
one term of a contract, for example, that the goods shall be carried by a particular
route, becomes impossible of performance, the whole contract is thereby abrogated.
Nor does it follow, because as a matter of construction a term cannot be implied,
that the contract may not be frustrated by events. In the instant case, for example,
the impossibility of the route via Suez, if that were assumed to be the implied con -
tractual obligation, would not necessarily spell the frustration of the contract.
It is put in the forefront of the appellants' case that the contracfwas a contract for
the shipment of goods via Suez. This contention can only prevail if a term is implied,
for the contract does not say so. To say that that is nevertheless its meaning is to say
in other words that the term must be implied. For this I see no ground. It has been
rejected by the learned trial judge and each of the members of the Court of Appeal. ...
I turn now to what was the main argument for the appellants: that the contract
was frustrated by the closure of the Canal from November 2, 1956 till April 1957. Were
it not for the decision of McNair J. in Green 's case, [1959] 1O.B.131, I should not have
thought this contention arguable and I must say with the greatest respect to that
learned judge that I cannot think he has given full weight to the decisions old and
new of this House upon the doctrine of frustration. He correctly held upon the
authority of Reardon Smith Line Ltd. v. Black Sea and Baltic General Insurance Co. Ltd.,
[1939] A.C. 562, that "where a contract, expressly or by necessary implication, pro-
vides that performance, or a particular part of the performance, is to be carried out
in a customary manner, the performance must be carried out in a manner which is

852
 IV. RELAXATION OF THE RULE OF ABSO LUTE PROMISES

customary at the time when the performance is called for." But he concluded that
the continued availability of the Suez route was a fundamental assumption at the
time when the contract was made and that to impose upon the sellers the obligation
to ship by an emergency route via the Cape would be to impose upon them a fun-
damentally different obligation which neither party could at the time when the
contract was formed have dreamed that the sellers would be required to perform.
Your Lordships will observe how similar this line of argument is to that which sup-
ports the implication of a term that the route should be via Suez and no other. I can
see no justification for it. We are concerned with a c.i.f. contract for the sale of goods,
not a contract of affreightment, though part of the sellers' obligation will be to pro-
cure a contract of affreightment. There is no evidence that the buyers attached any
importance to the route. They were content that the nuts should be shipped at any
date in November or December. There was no evidence, and I suppose could not
be, that the nuts would deteriorate as the result of a longer voyage and a double
crossing of the Equator, nor any evidence that the market was seasonable. In a word,
there was no evidence that the buyers cared by what route or, within reasonable
limits, when the nuts arrived. What, then, of the sellers? I recall the well-known pas-
sage in the speech of Lord Atkinson in Johnson v. Taylor Bros. & Co. Ltd., (1920] AC.
144, where he ·states the obligations of the vendor of goods under a c.i.f. contract,
and ask which of these obligations is (to use McNair J.'s word) "fundamentally" altered
by a change of route. Clearly the contract of affreightment will be different and so
may be the terms of insurance. In both these respects the sellers may be put to greater
cost: their profit may be reduced or even disappear. But it hardly needs reasserting
that an increase of expense is not a ground of frustration : see Larrinaga & Co. Ltd. v.
Societe Franco-Americaine de Phosphates de Medulla, Paris (1922), 38 T.L.R. 739.
Nothing else remains to justify the view that the nature of the contract was "fun -
damentally" altered. That is the word used by Viscount Simon in British Movietonews
Ltd. v. London and District Cinemas Ltd., (1952] AC. 166, at p. 185, and by my noble and
learned friend Lord Reid in Davis Contractors Ltd. v. Fareham Urban District Council,
(1956] AC. 696, at p. 723. In the latter case my noble and learned friend Lord Radcliffe
used the expression 1'radicaUy different" and I think that the two expressions mean
the same thing, as perhaps do other adverbs which have been used in this context.
Whatever expression is used, I venture to say what I have said m yself before and
others more authoritatively have said before me: that the doctrine of frustration must
be applied within very narrow limits. In my opinion this case falls far short of satisfying
the necessary conditions. Reluctant as I am to differ from a judge so experienced in
commercial law as McNair J., I am glad to find that my view is shared by Ashworth J.
and all the members of the Court of Appeal. ...
In my opinion, the appeal should be dismissed with costs.
[The opinions of Lords Reid, Radcliffe, Hodson, and Guest dismissing the appeal are
omitted.]

TRANSATLANTIC FINANCING CORP V UNITED STATES

363 F 2d 312 (DC Cir 1966)

WRIGHT J: This appeal involves a voyage charter between Transatlantic Financing

Corporation, operator of the SS CHRISTOS, and the United States covering carriage
of a full cargo of wheat from a United States Gulf port to a safe port in Iran. The
District Court dismissed a libel filed by Transatlantic against the United States for

853
CHAPTER 10 FRUSTRATION

costs attributable to the ship's diversion from the normal sea route caused by the
closing of the Suez Canal. We affirm.
On July 26, 1956, the Government of Egypt nationalized the Suez Canal Company
and took over operation of the Canal. On October 2, 1956, during the international
crisis which resulted from the seizure, the voyage charter in suit was executed
between representatives of Transatlantic and the United States. The charter indicated
the termini of the voyage but not the route. On October 27, 1956, the SS CHRISTOS
sai1ed from Galveston for Bandar Shapur, Iran, on a course which would have taken
her through Gibraltar and the Suez Canal. On October 29, 1956, Israel invaded Egypt.
On October 31, 1956, Great Britain and France invaded the Suez Canal Zone. On
November 2, 1956, the Egyptian Government obstructed the Suez Canal with sunken
vessels and closed it to traffic.
On or about November 7, 1956, Beckmann, representing Transatlantic, contacted
Potosky, an employee of the United States Department of Agriculture, who appellant ·
concedes was unauthorized to bind the Government, requesting instructions concern -
ing disposition of the cargo and seeking an agreement for payment of additional
compensation for a voyage around the Cape of Good Hope. Potosky advised Beck-
mann that Transatlantic was expected to perform the charter according to its terms,
that he did not believe Transatlantic was entitled to additional compensation for a
voyage around the Cape, but that Transatlantic was free to file such a claim. Follow-
ing this discussion, the CHRISTOS changed course for the Cape of Good Hope and
eventually arrived in Bandar Shapur on December 30, 1956.
Transatlantic's claim is based on the following train of argument. The charter was
a contract for a voyage from a Gulf port to Iran. Admiralty principles and practices,
especially stemming from the doctrine of deviation, require us to imply into the
contract the term that the voyage was to be performed by the "usual and customary"
route. The usual and customary route from Texas to Iran was, at the time of contract,
via Suez, so the contract was for a voyage from Texas to Iran via Suez. When Suez
was closed this contract became impossible to perform. Consequently, appellant's
argument continues, when Transatlantic delivered the cargo by going around the
Cape of Good Hope, in compliance with the Government's demand under claim of
right, it conferred a benefit upon the United States for which it should be paid in
quantum meruit.
The doctrine of impossibility of performance has gradually been freed from the
earlier fictional and unrealistic strictures of such tests as the "implied term" and
the parties' "contemplation." Page, The Development of the Doctrine of Impossibility
of Performance, 18 Mich . L. Rev. 589, 596 (1920) . See generally 6 Corbin, Contracts
1320-1372 (rev. ed. 1962); 6 Williston, Contracts 1931-1979 (rev. ed. 1938). It is now
recognized that "[a] thing is impossible in legal contemplation when it is not
practicable; and a thing is impracticable when it can only be done at an excessive
and unreasonable cost." Mineral Park Land Co. v. Howard, 172 Cal. 289, 293 (1916).
The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully
responsive to commercial practices and mores, at which the community's interest
in having contracts enforced according to their terms is outweighed by the com-
mercial senselessness of requiring performance. When the issue is raised, the court
is asked to construct a condition of performance based on the changed circum -
stances, a process which involves at least three reasonably definable steps. First, a
contingency-something unexpected-must have occurred. Second, the risk of
the unexpected occurrence must not have been allocated either by agreement or
by custom. Finally, occurrence of the contingency must have rendered perform -
ance commercially impracticable. Unless the court finds these three requirements
satisfied, the plea of impossibility must fai1 .

854
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

The first requirement was met here. It seems reasonable, where no route is men-
tioned in a contract, to assume the parties expected performance by the usual and
customary route at the time of contract. Since the usual and customary route from
Texas to Iran at the time of contract was through Suez, closure of the Canal made
impossible the expected method of performance. But this unexpected development
raises rather than resolves the impossibility issue, which turns additionally on whether
the risk of the contingency's occurrence had been allocated and, if not, whether per-
formance by alternative routes was rendered impracticable.
Proof that the risk of a contingency's occurrence has peen allocated may be
expressed in or implied from the agreement. Such proof may also be found in the
surrounding circumstances, including custom and usages of the trade. The contract
in this case does not expressly condition performance upon availability of the Suez
route. Nor does it specify "via Suez" or, on the other hand, "via Suez or Cape of Good
Hope ." Nor are there provisions in the contract from which we may properly imply
that the continued availability of Suez was a condition of performance. Nor is there
anything in custom or trade usage, or in the surrounding circumstances generally,
which would support our constructing a condition of performance. The numerous
cases requiring performance around the Cape when Suez was closed, see e.g., Ocean
Tramp Tankers Corp. v. V!O Sovfracht (The Eugenia) (1964), 2 O.B. 226 and cases cited
therein, indicate that the Cape route is generally regarded as an alternative means
of performance. So the implied expectation that the route would be via Suez is hardly
adequate proof of an allocation to the promisee of the risk of closure. In some cases,
even an express expectation may not amount to a condition of performance. The
doctrine of deviation supports our assumption that parties normally expect perform-
ance by the usual and customary route, but it adds nothing beyond this that is proba-
tive of an allocation of the risk.
If anything, the circumstances surrounding this contract indicate that the risk of
the Canal's closure may be deemed to have been allocated to Transatlantic. We know
or may safely assume that the parties were aware, as were most commercial men
with interests affected by the Suez situation, see The Eugenia, that the Canal might
become a dangerous area. No doubt the tension affected freight rates, and it is
arguable that the risk of closure became part of the dickered terms. U.C.C. ll2-615,
comment 8. We do not deem the risk of closure so allocated, however. Foreseeability
or even recognition of a risk does not necessarily prove its allocation. Compare U.C.C.
ll2-615, Comment 1; Restatement, Contracts 457 (1932) . Parties to a contract are not
always able to provide for all the possibilities of which they are aware, sometimes
because they cannot agree, often simply because they are too busy. Moreover, that
some abnormal risk was contemplated is probative but does not necessarily establish
an allocation of the risk of the contingency which actually occurs. In this case, for
example, nationalization by Egypt of the Canal Corporation and formation of the
Suez Users·Group did not necessarily indicate that the Canal would be blocked even
if a confrontation resulted. The surrounding circumstances do indicate, however, a
willingness by Transatlantic to assume abnormal risks, and this fact should legitim -
ately cause us to judge the impracticability of performance by an alternative route
in stricter terms than we would were the contingency unforeseen.
We turn then to the question whether occurrence of the contingency rendered
performance commercially impracticable under the circumstances of this case. The
goods shipped were not subject to harm from the longer, less temperate Southern
route. The vessel and crew were fit to proceed around the Cape. Transatlantic was
no less able than the United States to purchase insurance to cover the contingency's
occurrence. If anything, it is more reasonable to expect owner-operators of vessels
to insure against the hazards of war. They are in the best position to calculate the

855
CHAPTER 10 FRUSTRATION

cost of performance by alternative routes (and therefore to estimate the amount of

insurance required), and are undoubtedly sensitive to international troubles which
uniquely affect the demand for and cost of their services. The only factor operating
here in appellant's favor is the added expense, allegedly $43,972.00 above and beyond
the contract price of $305,842.92, of extending a 10,000 mile voyage by approxi-
mately 3,000 miles. While it may be an overstatement to say that increased cost and
difficulty of performance never constitute impracticability, to justify relief there must
be more of a variation between expected cost and the cost of performing by an
available alternative than is present in this case, where the promisor can legitimately
be presumed to have accepted some degree of abnormal risk, and where impracti-
cability is urged on the basis of added expense alone ....
Affirmed.

DAVIS CONTRACTORS LTD V FAREHAM URBAN

DISTRICT COUNCIL
(1956] AC 696 (H L)

[Davis tendered for the construction of 78 houses within a period of 8 months, at

Gudgeheath Lane, Fareham, for £92,425 . In a letter dated March 18, 1946 (ref. RL/
JEM) accompanying the tender, Davis wrote: "Our tender is subject to adequate
supplies of material and labour being available as and when required to carry out
the work within the time specified." The agreement, which was later signed by Davis,
contained only one reference to the letter. Appendix I to the agreement was headed
"Materials and goods to be purchased directly by the contractor in respect of which
variation of the contract sum is desired in accordance with clause 68B of the condi-
tions of the contract." Under this heading Davis wrote: "As terms of letter attached
dated March 18, 1946, reference RL/JEM." In later negotiations Davis actually supplied
a detailed schedule of prices that was intended to constitute the appendix I schedule.
The tender was made a part of the agreement. The contract took 22 months to
complete, the delay being caused chiefly by the lack of skilled labour. With extras,
the payments by Fareham amounted to £94,424. Davis claimed in this action that
the contract price was inapplicable owing to the delay and asked to be paid a total of
£115,233 on a quantum meruit basis. The arbitrator awarded damages amounting
to £17,258, but the Court of Appeal held that the letter was not incorporated into the
contract and the contract was not frustrated. Davis then appealed to the House of
Lords. The appeal was dismissed. The following excerpt deals only with the question
of frustration.]
LORD RADCLIFFE: ... But, in my opinion, full weight ought to be given to the require-
ment that the parties "must have made" their bargains on the particular footing.
Frustration is not to be lightly invoked as the disso\vent of a contract.
Lord Loreburn ascribes the dissolution to an implied term of the contract that was
actually made. This approach is in line with the tendency of English courts to refer
al\ the consequences of a contract to the will of those who made it. But there is
something of a logical difficulty in seeing.how the parties could even impliedly have
provided for something which ex hypothesi they neither expected nor foresaw; and
the ascription of frustration to an implied term of the contract has been criticized as
obscuring the true action of the court which consists in applying an objective rule
of the \aw of contract to the contractual obligations that the parties have imposed
upon themselves. So long as each theory produces the same result as the other, as

856
 IV. RELAXATI O N O F THE RULE OF ABSO LUTE PRO M ISES

normally it does, it matters little which theory is avowed (see British Movietonews Ltd.
v. London and District Cinemas Ltd., (1952] AC. 166, at p. 184, per Viscount Simon). But
it may still be of some importance to recall that, if the matter is to·be approached by
way of implied term, the solution of any particular case is not to be found by inquir-
ing what the parties themselves would have agreed on had they been, as they were
not, forewarned. It is not merely that no one can answer that hypothetical question:
it is also that the·decision must be given "irrespective of the individuals concerned,
their temperaments and failings, their interest and circumstances" (Hirji Mulji v. Cheong
Yue Steamship Co. Ltd. , (1962] AC. 497, at p. 510). The legal effect of frustration "does
not depend on their intention or their opinions, or even knowledge, as to the event."
On the contrary, it seems that when the event occurs "the meaning of the contract
must be taken to be, not what the parties did intend (for they had neither thought
nor intention regarding it), but that which the parties, as fair and reasonable men,
would presumably have agreed upon if, having such possibility in view, they had
made express provision as to their several rights and liabilities in the event of its
occurrence" (Dahl v. Nelson (1881), 6 App . Cas. 38, per Lord Watson) .
By this time it might seem that the parties themselves have become so far dis -
embodied spirits that their actual persons should be allowed to rest in peace. In their
place there rises the figure of the fair and reasonable man. And the spokesman of
the fair and reasonable man, who represents after all no more than the anthropo -
morphic conception of justice, is and must be the court itself. So perhaps it would
be simpler to say at the outset that frustration occurs whenever the law recognizes
that without default of either party a contractual obligation has become incapable
of being performed because the circumstances in which performance is called for
would render it a thing radically different from that which was undertaken by the
contract. Non haec in foedera veni. It was not this that I promised to do.
There is, however, no uncertainty as to the materials upon which the court must
proceed. "The data for decision are, on the one hand, the terms and construction of
the contract, read in the light of the then existing circumstances, and on the other
hand the events which have occurred" (Denny, Mott & Dickson Ltd. v. James B. Fraser
& Co. Ltd., [1944] AC . 265, at p. 274, per Lord Wright) . In the nature of things there is
often no room for any elaborate inquiry. The court must act upon a general impres-
sion of what its rule requires. It is for that reason that special importance is necessarily
attached to the occurrence of any unexpected event that, as it were, changes the
face of things. But, even so, it is not hardship or inconvenience or material loss itself
which calls the principle of frustration into play. There must be as well such a change
in the significance of the obligation that the thing undertaken would, if performed,
be a different thing from that contracted for.
I am bound to say that, if this is the law, the appellants' case seems to me a long
way from a case of frustration. Here is a building contract entered into by a housing
authority and a big firm of contractors in all the uncertainties of the post-war world.
Work was begun shortly before the formal contract was executed and continued,
with impediments and minor stoppages but without actual interruption, until the
78 houses contracted for had all been built. After the work had been in progress for
a time the appellants raised the claim, which they repeated more than once, that
they ought to be paid a larger sum for their work than the contract allowed; but the
respondents refused to admit the claim and, so far as appears, no conclusive action
was taken by either side which would make the conduct of one or the other a deter-
mining element in the case. .
That is not in any obvious sense a frustrated contract. But the appellants' argu -
ment, which certainly found favour with the arbitrator, is that at some stage before

857
CHAPTER 10 FRUSTRATION

completion the original contract was dissolved because it became incapable of being
performed according to its true significance and its place was taken by a new arrange-
ment under which they were entitled to be paid, not the contract sum, but a fair price
on quantum meruit for the work that they carried out during the 22 months that
elapsed between commencement and completion. The contract, it is said, was an
eight months' contract, as indeed it was. Through no fault of the parties it turned out
that it took 22 months to do the work contracted for. The main reason for this was that,
whereas both parties had expected that adequate supplies of labour and material
would be available to allow for completion in eight months, the supplies that were
in fact available were much less than adequate for the purpose. Hence, it is said, the
basis or the footing of the contract was removed before the work was completed; or,
slightly altering the metaphor, the footing of the contract was so changed by the
circumstances that the expected supplies were not available that the contract built
upon that footing became void. These are the findings which the arbitrator has
recorded in his supplemental award.
In my view, these are in substance conclusions of law, and I do not think that
they are good law. AH that anyone, arbitrator or court, can do is to study the contract
in the light of the circumstances that prevailed at the time when it was made and,
having done so, to relate it to the circumstances that are said to have brought about
its frustration. It may be a finding of fact that at the time of making the contract both
parties anticipated that adequate supplies of labour and material would be available
to enable the contract to be completed in the stipulated time. I doubt whether it is,
but even if it is, it is no more than to say that when one party stipulated for comple-
tion in eight months, and the other party undertook it, each assumed that what was
promised could be satisfactorily performed. That is a statement of the obvious that
could be made with regard to most contracts. I think that a good deal more than
that is needed to form a "basis" for the principle of frustration.
The justice of the arbitrator's conclusion depends upon the weight to be given to
the fact that this was a contract for specified work to be completed in a fixed time at
a price determined by those conditions. I think that his view was that, if without
default on either side the contract period was substantially extended, that circum -
stance itself rendered the fixed price so unfair to the contrador that he ought not to
be h eld to his original price. I have much sympathy with the contractor, but, in my
opinion, if that sort of consideration were to be sufficient to establish a case of
frustration, there would be an untold range of contractual obligations rendered
uncertain and, possibly, unenforceable.
Two things seem to me to prevent the application of the principle of frustration
to this case. One is that the cause of the delay was not any new state of things which
the parties could not reasonably be thought to have foreseen. On the contrary, the
possibility of enough labour and materials not being available was before their eyes
and could have been the subject of special contractual stipulation. It was not _made
so. The other thing is that, though timely completion was no doubt important to
both sides, it is not right to treat the possibility of delay as having the same signifi-
cance for each. The owner draws up his conditions in detail, specifies the time within
which he requires completion, protects himself both by a penalty clause for time
exceeded and by calling for the deposit of a guarantee bond and offers a certain
measure of security to a contractor by his escalator clause with regard to wages and
prices. In the light of these conditions the contractor makes his tender, and the
tender must necessarily take into account the margin of profit that he hopes to obtain
upon his adventure and in that any appropriate allowance for the obvious risks of
delay. To my mind, it is useless to pretend that the contractor is not at risk if delay

858
 IV. RELAXATION OF THE RULE OF ABSOLUTE PROMISES

does occur, even serious delay. And I think it a misuse of legal terms to can in frustra-
tion to get him out of his unfortunate predicament.

[The judgments of Viscount Simonds and Lords Morton of Henryton, Reid, and
Somervell of Harrow, dismissing the appeal, are omitted.]

NOTES

1. In Wells v Newfoundland, [1999] 3 SCR 199, 177 DLR (4th) 73, a senior civil servant
claimed damages for breach of contract from the government of Newfoundland after his ten-
ured position was eliminated pursuant to a newly enacted statute. The government argued that
the statute had frustrated the claimant's employment contract. In rejecting this argument, the
Supreme Court of Canada relied on the principle that self-induced frustration will not excuse
non-performance. Because the government of Newfoundland was itself responsible for the
impugned legislation, it could not rely on the doctrine of frustration.
2. In Naylor Group Inc v Ellis-Don Construction Ltd, 2001 SCC 58, [2001] 2 SCR 943, 204
DLR (4th) 513, the unfavourable results of a pending Labour Board decision did not frustrate
the performance of a construction contract where the contractor knew that compliance with
the pending decision was a condition of the bid .
3. In /V/arshall v Harland & Wolff Ltd, [1972] 2 All ER 715 (NIRC), Sir Donaldson provided a
list of "inter-related and cumulative, but .. . not necessarily exhaustive" factors to be taken into
account when decid ing whether an employment relationship has been frustrated due to the
worker's incapacity caused by ill health, which later came to be known as the "fVlarshall Test. "
The test includes factors such as the nature of the employment, the expected length of future
absence, and the period of past employment. It is now generally accepted that an employment
contract will be frustrated when an employee's illness or disability is permanent in nature. In
Wilmot v Ulnooweg Development Group Inc (2007), 283 DLR (4th) 237 (NSCA), the court,
relying on the /Viarshall factors, determ ined that an employee's mental illness did not consti-
tute a frustrating event, even though the employee had missed 138 days at the office and had
been found to suffer from a "significant illness. " In Altman v Steve's /Viusic, 2011 ONSC 1480,
the court applied the /Viarshall factors and found that an employee's illness did not render her
unable to perform her job. The employee had worked at Steve's for more than 30 years when
she developed lung cancer. She was terminated after she had been on medical leave for six
months and reduced hours for the eight months prior. However, in Trevitt v Blanche Equip-
ment Rentals Ltd, 2006 BCSC 94, when an employee, a licensed heavy equipment mechanic
who was the shop foreman, was involved in a motor vehicle accident and suffered several
injuries that rendered him unable to work, his employer hired someone else to perform his
duties. The court found that the injured employee had been unable to return to work for more
than one year and that while his injuries were not permanent, he was nonetheless unable to
resume the same position he had held. As his disability was "clearly more than temporary," the
court concluded his employment contract had been frustrated .
4. On the subject of how a disability affects an employment contract, the issue turns on
the duration of the disability. In Boucher v Black & McDonald Ltd, 2016 ONSC 7220 , the court
noted that "[p]ermanent disability will frustrate a contract. How ever, employment is not frus-
trated by temporary sickness. The law permits temporary sickness and moreover, allows the
disabled to recover" (at para 34) . These issues do not operate in a vacuum, how ever, as they
are affected by the application of human rights legislation, which may impose a duty on
employers to accommodate disabilities. See Jeffrey v Dofasco Inc (2007), 161 ACWS (3d) 306
(Ont Div Ct).
5. In Wightman Estate v 2774046 Canada Inc (2007), 57 BCLR (4th) 79 (C A), a disabled
employee was terminated without notice but, pursuant to the employment contract, continued
to receive long-term disability benefits for the remainder of his working life. His estate argued

859
CHAPTER 10 FRUSTRATION

that the employment contract had not been frustrated because it had contemplated the dis-
ability by providing long-term disabi lity insurance. The court determined that "foresee[ing] the
possibility of a particular supervening event and [making] some provision for it in their contract
does not necessarily preclude frustration of the contract upon the happening of the event."
Rather, one must ask "whether the parties have provided that their contractual relationship will
continue despite the radical change in circumstances brought about by the event." Here,
although the parties contemplated the possibility of the disabling sickness and hedged their
losses. by purchasing long-term disability insurance, the contract did not provide that the
employment relationship would continue indefinitely despite the change in circumstances.
6. The law is unsettled with respect to whether the employee's medical prognosis in a
frustration context should be assessed as at the date of the dismissal, the date of the trial, or
the date of the dismissal with the benefit of the hindsight available at the date of the trial.

V. RELIEF ON TERMS: RESTITUTION AND RELIANCE

APPLEBY V MYERS
(1867). LR 2 CP 651

This was an action brought to recover £419 for work done and materials provided
by the plaintiffs, engineers, for the defendant, under the circumstances hereinafter
mentioned. The following case was stated, by consent, without pleadings, for the
opinion of the Court:
On the 30th of March 1865, the plaintiffs entered into an agreement with the
defendant, which was headed, "Specification and estimate of engine, boiler, lifts,
etc., for B. Meyers, Esq., Southward Street. Messrs. Tillott & Chamberland, architects,
30th March, 1865." This contract contained ten distinct parts or divisions, viz. 1. boiler;
2. Engine; 3. shafting; 4. lifts; 5. shafting; 6. drying-room; 7. copper pans; 8. tanks;
9. pump; 10. steamboxes; under each of which headings were particular descriptions
of the work to be done in connection with each respectively, and the prices·to be
charged for the same; and the document concluded with these words :
We offer to make and erect the whole of the machinery of the best materials and
workmanship of their respective kinds, and to put it to work, for the sum above named
respectively, and to keep the whole in order, under fa ir wear and tear, for two years from
the date of completion. All brickwork, carpenters' and masons' work, and materials, are
to be provided for us; but the drawi ngs and general instructions required for them to
work to will be provided by us, subject to the architects' approval.
(signed) Appleby Brothers.
The total cost o~ the i3,bove works, if they had been completed under the contract,
would have amounted to £459 .
On the 4th of July, 1865, a fire accidentally broke out on the premises of the
defendant in Southwark Street, which entirely destroyed the premises and the works
which then had been erected by the plaintiffs in part performance of the contract.
At the time of the fire the works contracted for had not been completed.
At the time of the fire, portions of the items Nos. 1 to 8 were erected and fixed,
and some of the materials for the others were on the premises.
The defendant had not completed the carpenters' and masons' work. The tank
had been erected by the plaintiffs, and was used by the defendant by taking water
therefrom for the purpose of his business; but the other apparatus connected with

860
 V. RELIEF ON TERMS : RESTITUTION AND RELIAN C E

it, as specified in No. 8 was not complete. The plaintiff's workmen were still engaged
in continuing the erection and completion of the same at the time of the fire.
The premises ·were the property of the defendant, in his occupation, and under
his entire control. The plaintiffs had access to them only for the purpose of perform -
ing their contract.
The question for the opinion of the Court was, whether, under the above circum-
stances, the plaintiffs were entitled to recover the whole or any portion of the contract
price.
The Court of Common Pleas gave judgment for the plaintiffs for an amount equal
to the value of the work and materials done and provided by them under the agree-
ment. The defendants appealed to the Court of Exchequer Chamber.
BLACKBURN J (for the court): This case was partly argued before us at the last sittings;
and the argument was resumed anci completed at the present sittings.
Having had the advantage of hearing the very able argument of Mr. Holl and
Mr. Hannen, and having during the interval had the opportunity of considering the
judgment of the Court below, there is no reason that we should further delay express-
ing the opinion at which we have all arrived, which is, that the judgment of the Court
below is wrong and ought to be reversed.
The whole question depends upon the true construction of the contract between
the parties. We agree with the Court below in thinking that it sufficiently appears
that the work which the plaintiffs agreed to perform could not be performed unless
the defendant's premises continued in a fit state to enable the plaintiffs to perform the
work on them; and we agree with them in thinking that, if by any default on the part
of the defendant, his premises were rendered unfit to receive the work, the plaintiffs
would have had the option to sue the defendant for this default, or to treat the con -
tract as :rescinded, and sue on a quantum meruit. But we <do not agree with them in
thinking that there was an absolute promise or warranty by the defendant that the
premises should at all events continue so fit. We think that where, as in the present
case the premises are destroyed without fault on either side, it is a misfortune equally
affecting both parties, excusing both from further performance of the contract, but
giving a cause of action to neither.
Then it was argued before us, that inasmuch as this w as a contract of that nature
which would in pleading be described as a contract for work, labour, and materials,
and not as one of.bargain and sale, the labour and materials necessarily became the
property of the defendant as soon as they were at his risk. We think that, as to a great
part at least of the work done in this case, the materials had not become the property
of the defendant; for, we think that the plaintiffs, who were to complete the whole
for a fixed sum, and keep it in repair two years, would have had a perfect right, if they
thought that a portion of the engine which they had put up was too slight, to change
it and substitute another in their opinion better calculated to keep in good repair
during the two years, and without consulting or asking the leave of the defendant.
But, even on the supposition that the materials had become unalterably fixed to the
defendant's premises, we do not think that, under such a contract as this, the plain-
tiffs could recover anything unless the whole work was completed. It is quite true
that materials worked by one into the property of another become part of that prop -
erty. This is equally true, whether it be fixed or movable property. Bricks built into a
wall become part of the house; thread stitched into a coat which is under repair, or
planks and nails and pitch worked into a ship, under repair, become part of the coat
or the ship; and therefore, generally, and in the absence of something to shew a
contrary intention, the brick-layer or tailor, or shipwright, is to be paid for the work
and materials he has done and provided, although the whole work is not complete.

861
CHAPTER 10 FRUSTRATION

It is not material whether in such a case the non-completion is because the ship-
wright did not choose to go on with the work, as was the case in Roberts v. Havelock
(1832), 3 B. & Ad. 404; 110 E.R. 145, or because in consequence of a fire he could not
go on with it, as in Menetone v. Athawes (1764), 3 Burr. 1592; 97 E.R. 998. But, though
this is the prima facie contrad between those who enter into contracts for doing
work and supplying materials, there is nothing to render it either illegal or absurd in
the workman to agree to complete the whole, and be paid when the whole is com-
plete, and not till then: and we think that the plaintiffs in the present case had entered
into such a contract. Had the accidental fire left the defendant's premises untouched,
and only injured a part of the work which the plaintiffs had already done, we appre-
hend that it is clear the plaintiffs under such a contract as the present must have done
that part over again, in order to fulfil their contract to complete the whole and "put
it to work for the sums above named respectively." As it is, they are, according to the
principle laid down in Taylor v. Caldwell (1863), 122 E.R. 309 excused from completing
the work; butthey are not therefore entitled to any compensation for what they have
done, but which has, without any fault of the defendant, perished. The case is in
principle like that of a shipowner who has been excused from the performance of
his contract to carry goods to their destination, because his ship has been disabled
by one of the excepted perils, but who is not therefore entitled to any payment on
account of the part-performance of the voyage, unless there is something to justify
the conclusion that there has been a fresh contract to pay freight pro rata.
On the argument, much reference was made to the Civil Law. The opinions of
the great lawyers collected in the Digest afford us very great assistance in tracing out
any question of doubtful principle; but they do not bind us: and we think that, on the
principles of English law laid down :.. the plaintiffs, having contracted to do an entire
work for a specific sum, can recover nothing unless the work be done, or it can be
shewn that it was the defendant's fault that the work was incomplete, or that there
is something to justify the conclusion that the parties have entered into a fresh
contract.

FIBROSA SPOLKA AKCYNA V FAIRBAIRN

LAWSON COMBE BARBOUR LTD
[1943] AC 32 (HL)

The respondentii were a limited company carrying on at Leeds the business of manu -
facturing textile machinery, and by a contract in writing dated July 12, 1939, the
respondents agreed to supply the appellants, a Polish company, of Vilna, with certain
flax-hackling machines as therein specified and described, at a lump sum price of
£4,800. The machines were of a special kind. The place of erection of the machinery
was not mentioned in the contract, but it was agreed that it was the intention of'the
parties that it was to be erected at Vilna. By the terms of the contract, delivery was to
be in three to four months from the settlement of final details. The machines were
to be packed and delivered by the respondents c.i.f. Gdynia, the services of a skilled
monteur to superintend erection were to be provided by the respondents and
included in the price, and payment was to be made by cheque on London, one -third
of the price (£1600) with the order and the balance (£3200) against shipping docu-
ments . By clause 7 of the conditions of sale attached to the contract: " ... Should
dispatch be hindered or delayed by your instructions, or lack of instructions, or by
any cause whatsoever beyond our reasonable control including strikes, lock-outs,

862
 V. RELIEF ON TERMS: RESTITUTION AND RELIANCE

war, fire, accidents ... a reasonable extension of time shall be granted ... " By clause 10
provisions were made for dispatch and possible storage pending dispatch.
On July 18, 1939, the appellants paid to the respondents £1000 on account of the
initial payment of £1600 due under the contract. On September 1, 1939, Germany
invaded Poland and on September 3, Great Britain declared war on Germany. On
Septem'qer 7, the appellants' agents in England wrote to the respondents : "Owing to
the outbreak of hostilities, it is now quite evident that the delivery of the hackling
machines on order for Poland cannot take place. Under the circumstances we shall
be obliged if you will kindly arrange to return our initial payment of £1000 at your
early convenience." To this request, the respondents replied on the next day refusing
to return the sum and stating that "considerable work had been done upon these
machines and we cannot consent to the return of this payment. After the war the
matter can be reconsidered." There was further correspondence between the parties
or their p.g.e nts which failed to produce agreement, and on May 1, 1940, the appellants
issued a writ and by their statement of claim alleged that the respondents had broken
.the contract by refusing to deliver the machines, while the appellants "are and have
at all material times been ready and willing to take delivery of the said machinery and
pay foi: the same." The prayer of the claim was (a) for damages for breach of contract,
(b) for specific performance or, alternatively, return of the £1000 with interest, and
(c) for further or other relief. The substantial defence of the respondents was that the
contract had been frustrated by the German occupation of Gdynia in September
1939; and that in these circumstances the appellants had no right to the return of the
£1000. Tucker J. dismissed the action on March 7, 1941, and·the Court of Appeal
affirmed his decision on May 15, 1941. The appellants appealed to the House of Lords.
VISCOUNT SIMON LC: My Lords, this is the appeal of a Polish company who were
plaintiffs in the action against the decision of the Court of Appeal composed of
MacKinnon and Luxmoore L.JJ. and Stable J., affirming the judgment of Tucker J.
at the trial in favour of the respondents. After the Court of Appeal's judgment and
before the appeal came to be argued at your Lordships' bar, the town of Vilna, where
the appellants had carried on its business, and indeed the whole of Poland, under
the laws of which state the appellants were incorporated, were occupied by our
enemy, Germany. The question might, therefore, arise whether the appellants should
now be.debarred from prosecuting its appeal .... To obviate any difficulty on this
head, the appellants, at the suggestion of the House, applied to the Board of Trade,
and the department gave to the appellants' solicitors a licence to proceed with the
appeal, notwithstanding that their clients might be in the position of an alien enemy.
The House was content to let the case proceed on this basis .... If, as the result of the
decision of the House, any payment becomes due to the appellants, and if they were
iii. the position of alien enemies within the meaning of the Trading with the Enemy
Act, 1939, the payment would be regulated by the Act.
Mr. Linton Thorp, in conducting the argument for the appellants before us, admit-
ted that, if the point with which I have already dealt was decided against him, the
only other issue to be determined was whether, whe.n this contract became frus-
trated, the appellants could, in the circumstances of the present case, claim back
from the respondents the £1000 which they had paid when placing the order. As to
this, MacKinnon L.J., in delivering the judgment of the Court of Appeal said: "Tucker J .
held that having regard to the principle laid down in Chandler v. Webster [1904] 1 K.B .
493, and other like cases, this claim must fail. We think he was right, and, further,
that that principle must equally bind this court to reject the claim. Whether the
principle can be overruled is a matter that can only concern the House of Lords.''

863
CHAPT ER 10 FRUSTRATION

This alleged principle is to the effect that where a contract has been frustrated by
such a supervening event as releases from further performances, "the loss lies where
it falls," with the result that sums paid or rights accrued before that event are not to
be surrendered, but all obligations falling due for performance after that event are
discharged. This proposition, whether right or wrong, first appears, not in Chandler
v. Webster but in Blakely v. Muller & Co., [1903] 2 KB. 670n, decided in January 1903
by a Divisional Court, which was also a case arising out of the abandonment of the
coronation procession owing to Kind Edward VII's sudden illness. In that case,
Channell J. said: "If the money was payable on some day subsequent to the abandon-
ment of the procession, I do not think it could have been sued for. If, however, it was
payable prior to the abandonment of the procession, the position would be the same
as if it had been actually paid and could not be recovered back, and could be sued
for . ... It is impossible to import a condition into a contract which the parties could
have imported and have not done so. All that can be said is that, when the procession
was abandoned, the contract was off, not that anything done under the contract was
void. The loss must remain where it was at the time of the abandonment. It is like
the case of a charterparty where the freight is payable in advance, and the voyage is
not completed, and the freight, therefore, not earned. Where the non-completion
arose through impossibility of performance, the freight could not be recovered back."
If we are to approach this problem anew, it must be premised that the first matter
to be considered is always the terms of the particular contract. If, for example, the
contract is "divisible" in the sense that a sum is to be paid over in respect of comple-
tion of a defined portion of the work, it may well be that the sum is not returnable if
· completion of the whole work is frustrated. If the contract itself on its true construction
stipulates for a particular result which is to follow in regard to money already paid,
should frustration afterwards occur, this governs the matter. The ancient and firmly
established rule that freight paid in advance is not returned if the completion of the
voyage is frustrated ... should, I think, be regarded as a stipulation introduced into
such contracts by custom, and not as the result of applying some abstract principle.
And so, a fortiori, if there is a stipulation that the prepayment is "out and out." To
take an example, not from commerce, but from sport, the cricket spectator who pays
for admission to see a mak h cannot recover the entrance money on the ground that
rain has prevented play if, expressly or by proper implication, the bargain with him
is that no money will be returned. Inasmuch as the effect of frustration may be
explained as arising from an implied term: see Joseph Constantine Steamship Line,
Ltd. v. Imperial Smelting_ Corporation, Ltd., [1942] A.C. 154, it is tempting to speculate
whether a further term could be implied as to what was to happen, in the event of
frustration, to money already paid, but, if the parties were assumed to have discussed
the point when entering into the contract, they could not be supposed to have agreed
on a simple formula which would be fair in all circumstances, and all that could be
said is that, in the absence of such agreement, the law must decide. The question
now to be determined is whether, in the absence of a term in the contract dealing
with the matter, the rule which is commonly called the rule in Chandler v. Webster
should be affirmed . ...
The locus classicus for the view which has hitherto prevailed is to be found in the
judgment of Collins M.R. in Chandler v. Webster. It was not a considered judgment,
but it is hardly necessary to say that I approach this pronouncement of the then
Master of the Rolls with all the respect due to so distinguished a common lawyer.
When his judgment is studied, however, one cannot but be impressed by the cir-
cumstance that he regarded the proposition that money in such cases could not be
recovered back as flowing from the decision in Taylor v. Caldwell (1863), 122 E.R. 309.

864
 V. RELIEF ON TERMS : RESTITUTION AND RELIAN C E

Taylor v. Caldwell, however, was not a case in which any question arises whether
money could be recovered back, for there had been no payment in advance, and
there is nothing in the judgment of Blackburn J., which, at any rate in terms, affirms
the general proposition that "the loss lies where it falls ." The application by Collins
M.R. of Taylor v. Caldwell to the actual problem with which he had to deal in Chandler
v. Webster deserves close examination. He said: "The plaintiff contends that he is
entitled to recover the money which he has paid on the ground that there has been
a total failure of consideration. He says that the condition on which he paid the
money was that the procession should take place, and that, as it did not take place,
there has been a total failure of consideration. That contention does no doubt raise
a question of some difficulty, and one which has perplexed the courts to a consider-
able extent in several cases. The principle on which it has been dealt with is that
which was applied in Taylor v. Caldwell-namely, that where from causes outside the
volition of the parties, something which was the basis of, or essential to the fulfilment
of, the contract has become impossible, so that, from the time when the fact of that
impossibility has been ascertained, the contract can no further be performed by
either party, it remains a perfectly good contract up to that point, and everything
previously done in pursuance of it must be treated as rightly done, but the parties
are both discharged from further performance of it. If the effect were that the contract
were wiped out altogether, no doubt the result would be that money paid under it
would have to be repaid as on a failure of consideration. But that is not the effect of
the doctrine; it only releases the parties from further performance of the contract.
Therefore the doctrine of failure of consideration does not apply."
It appears to me that the reasoning in this crucial passage is open to two criticisms:

(a) The claim of a party, who has paid money under a contract, to get the money
back, on the ground that the consideration for which he paid it has totally
failed, is not based on any provision contained in the contract, but arises
because, in the circumstances that have happened, the law gives a remedy in
quasi-contract to the party who has not got that for which he bargained. It is
a claim to recover money to which the defendant has no further right because
in the circumstances that have developed the money must be regarded as
received to the plaintiffs use. It is true that the effect of frustration is that, while
the contract can no further be performed, "it remains a perfectly good contract
up to that point, and everything previously done in pursuance of it must be
treated as rightly done," but it by no means follows that the situation existing
at the moment of frustration is one which leaves the party that has paid money
and has not received the stipulated consideration without any remedy. To claim .
the return of money paid on the ground of total failure of consideration is not
to vary the terms of the contract in any way. The claim arises not because the
right to be repaid is one of the stipulated conditions of the contract, but
because, in the circumstances that have happened, the law gives the remedy.
It is the failure to distinguish between (1) the action of assumpsit for money
had and received in a case where the consideration has wholly failed, and (2) an
action on the contract itself, which·explains the mistake which I think has been
made in applying English law to this subject-matter....
(b) There is, no doubt, a distinction between cases in which a contract is "wiped
out altogether," e.g., because it is void as being illegal from the start or as being
due to fraud which the innocent party has elected to treat as avoiding the
contract, and cases in which intervening impossibility "only releases the parties
from further performance of the contract." But does the d istinction between

865
CHAPTER 10 FRUSTRATION

these two classes of case justify the deduction of Collins M.R. that "the doc-
trine of failure of consideration does not apply" where the contract remains a
perfectly good contract up to the date of frustration? This rnnclusion se~ms
to be derived from the view that, if the contract remains good and valid up to
the moment of frustration, money which has already been paid under it cannot
be regarded as having been paid for a consideration which has wholly failed.
The party that has paid the money has had the advantage, whatever it may be
worth, of the promise of the other party. That is true, but it is necessary to draw
a distinction. In English law, an enforceable contract may be formed by an
exchange of a promise for a promise, or by the exchange of a promise for an
act-I am excluding contracts under seal-and thus, in the law relating to the
formation of contract, the promise to do a thing may often be the considera-
tion. but when one is considering the law of failure of consideration and of the
quasi -contractual right to recover money on that ground, it is, generally
speaking, not the promise which is referred to as the consideration, but the
performance of the promise. The money was paid to secure performance and,
if performance fails the inducement which brought about the payment is not
fulfilled .
If this were not so, there could never be any recovery of money, for failure of
consideration, by the payer of the money in return for a promise of future perform-
ance, yet there are endless examples which show that money can be recovered, as
for a <;:omplete failure of consideration, in cases where the promise was given but
could not be fulfilled . ... I can see no valid reason why the right to recover prepaid
money should not equally arise on frustration arising from supervening circum -
stances .as it arises on frustration from destruction of a particular subject-matter.
The conclusion is that the rule in Chandler v. Webster is wrong, and that the appel-
lants can recover their £1000.
While this result obviates the harshness with which the previous view in some
instances treated the party who had made a prepayment, it cannot be regarded as
deci.ling fairly between the parties in al\ cases, and must sometimes have the result
of leaving the recipient who has to return the money at a grave disadvantage. He
may have incurred expenses in connexion with the partial carrying out of the contract
which are equivalent, or more than equivalent, to the money which he prudently
stipulated should be prepaid, but which he now has to return for reasons which are
no fault of his. He may have to repay the money, though he has executed almost the
whole of the contractual work, which will be left on his hands. These results follow
from the fact that the English common law does not undertake to apportion a prepaid
sum in such circumstances-contrast the provision, now contained in s. 40 of the
Partnership Act, 1890, for apportioning a premium if a partnership is prematurely
dissolved. It must be for the legislature to decide whether provisions should be made
for an equitable apportionment of prepaid moneys which have to be returned by the
recipient in view of the frustration of the contract in respect of which they were paid.
I move that the appeal be allowed, and that judgment be entered for the appellants.

[The opinions (allowing the appeal) of Lords Atkin, Russel of Killowen, Macmillan,
Wright, Roche, and Porter are omitted.]

866
 V. RELIEF ON TERMS: RESTITUTION AND RELIANCE

NOTE

The facts of Chandler v Webster, [1904] 1 KB 493 are stated briefly by Lord Atkin in Fibrosa as
follows:
In that case the plaintiff had hired a room to view the coronation procession on Th ursday,
June 26. 1902. On June 10 he wrote to the defendant: "I beg to confirm my purchase of the
first floor room of the Electri c Lighting Board at 7 Pall Mall to view the procession on Thursday,
June 26, for the sum of £141 lSs., which amount is now due. I shall be obliged if you will take
the room on sale, and I authorize you to sell separate seats in the room. for which I will erect
a stand ." It became the subject of controversy whether. in view of certain other terms arranged
between the parties the whole sum became due before the procession became impossible, but
the courts decided, as was clearly the case. that it did so become due. It may be noted that the
defendant had nothing to do under the contract but allow the plaintiff the use of the room. On
June 19 the plaintiff pa id the defendant £100 on account of the price of the room. but had not
paid the balance at the time the procession was abandoned. The plaintiff claimed the return of
the £100 on a tota l failure of consideration. and the defendant counter-claimed for the balance
of £41 lSs. The plaintiff's claim failed, and the defendant's counter-claim succeeded.
For a defence of the view that the loss caused by the frustrating event should simply "lie where
it falls," see A Kull, "M istake, Frustration. and the Windfall Principle of Contract Remedies" (1991)
43 Hastings LJ 1.

FRUSTRATED CONTRACTS ACT

RSO 1990, c F.34

1. In this Act,
(a) "contract" includes a contract to which the Crown is a party;
(b) "court" means the court or arbitrator by or before whom a matter falls to be
determined;
(c) "discharged" means relieved from further performance of the contract.
2(1) This Act applies to any contract that is governed by the law of Ontario, and
that has become impossible of performance or been otherwise frustrated and to the
parties which for that reason have been discharged.
(2) This Act does not apply,
(a) to a charterparty or a contract for the carriage of goods by sea, except a
time charterparty or a charterparty by way of demise;
(b) to a contract of insurance; or
(c) to a contract for the sale of specific goods where the goods, without the
knowledge of the seller, have perished at the time the contract was made, or where
the goods, without any fault on the part of the seller or buyer, perished before the
risk passed to the buyer.
3(1) The sums paid or payable to a party in pursuance of a contract before the
parties were discharged,
(a) in the case of sums paid, are recoverable from the party as money received
for the use of the party by whom the sums were paid; and
(b) in the case of sums payable, cease to be payable.
(2) If, before the parties were discharged, the party to whom the sums were paid
or payable incurred expenses in connection with the performance of the contract,
the court, if it considers it just to do so having regard to all the circumstances, may
allow the party to retain or to recover, as the case may be, the whole or any part of

867
CHAPTER 10 FRUSTRATION

the sums paid or payable not exceeding the amount of the expenses, and, without
restricting the generality of the foregoing, the court, in estimating the amount of
the expenses, may include such sum as appears to be reasonable in respect of over-
head expenses and in respect of any work or services performed personally by the
party incurring the expenses.
(3) If, before the parties were discharged, any of them has, by reason of anything
done by any other party in connection with the performance of the contract,
obtained a valuable benefit other than a payment of money, the court, if it considers
it just to do so having regard to all the circumstances, may allow the other party to
recover from the party benefitted the whole or any part of the value of the benefit.
(4) Where a party has assumed an obligation under the contract in consideration
of the conferring of a benefit by any other party to the contract upon any other person,
whether a party to the contract or not, the court, if it considers it just to do so having
regard to all the circumstances, may, for the purposes of subsection 3, treat any benefit
so conferred as a benefit obtained by the party who has assumed the obligation.
(5) In considering whether any sum ought to be recovered or retained under this
section by a party to the contract, the court shall not take into account any sum that,
by reason of the circumstances giving rise to the frustration of the contract, has
become payable to that party under any contract of insurance unless there was an
obligation to insure imposed by an express term of the frustrated contract or by or
under any enactment.
(6) Where the contract contains a provision that upon the true construction of
the contract is intended to have effect in the event of circumstances that operate, or
but for the provision would operate, to frustrate the contract, or is intended to have
effect whether such circumstances arise or not, the court shall give effect to the
provision and shall give effect to this section only to such extent, if any, as appears
to the court to be consistent with the provision.
(7) Where it appears to the court that a part of the contract can be severed properly
from the remainder of the contract, being a part wholly performed before the parties
were discharged, or so performed except for the payment in respect of that part of the
contract of sums that are or can be ascertained under the contract, the court shall treat
that part of the contract as if it were a separate contract that had not been frustrated
and shall treat this section as applicable only to the remainder of the contract.

NOTES AND QUESTIONS

1. Where a partially completed work product-for example, a building being constructed

on the owner's land-is destroyed by the frustrating event, has a valuable benefit been con-
ferred on the owner "before the parties were discharged"? If so, should a court exercise its
discretion to allow recovery for that value under s 3(3) of the Frustrated Contracts Act? See
Parsons Bros Ltd v Shea (1965), 53 DLR (2d) 86 (Nfld SC) (denying recovery) and c.f. Laurwen
Investments Inc v 8146.93 Northwest Territories Ltd (1990), 48 BLR 100 (NWTSC) (assuming
that such relief is available at common law).
2. In circumstances where expenses have been incurred by a supplier and either no valu-
able benefit has been produced or, perhaps, the frustrating event has destroyed the value of
such a benefit, s 3(2) of the Frustrated Contracts Act appears to assume that one who agrees
to make a prepayment is, in effect, agreeing to assume the risk of losses resulting from frustra-
tion. Is this a sound premise?
3. For a defence of the proposition that where a loss results from a frustrating event for
which neither party is responsible the parties ought to share the loss, see C Fried, Contract as
Promise (Cambridge, Mass: Harvard University Press, 1981) ch 5.

868
 V. RELIEF ON TERMS : RESTITUTION AND RELI AN CE

FRUSTRATED CONTRACT ACT

RSBC 1996, c 166

5(1) In this section, "benefit" means something done in the fulfillment of con-
tractual obligations, whether or not the person for whose benefit it wa~ done received
the benefit. ·
(2) Subject to section 6, every party to a contract to which this Act applies is
entitled to restitution from the other party or parties to the contract for benefits cre-
ated by the party's performClnce or part performance of the contract.
(3) Every party to a contract to which this Act applies is relieved from fulfilling
obligations under the contract that were required to be performed before the frustra-
tion or avoidance but were not performed, except in so far as some other party to
the contract has become entitled to damages for consequential loss as a result of the
failure to fulfil those obligations.
(4) If the circumstances giving rise to the frustration or avoidance cause a total
or partial loss in value of a benefit to a party required to make restitution under sub-
section (2), that loss must be apportioned equally between the party required to make
restitution and the party to whom the restitution is required to be made.
6(1) A person who has performed or partly performed a contractual obligation is
not entitled to restitution under section 5 in respect of a loss in value, caused by the
circumstances giving rise to the frustration or avoidance, of a benefit within the
meaning of section 5 if there is
(a) a course of dealing between the parties to the contract,
(b) a custom or a common understanding in the trade, business or profession
of_the party so performing, or
(c) an implied term of the contract,
to the effect that the party performing should bear the risk of the loss in value.
[See generally on the law of frustration Waddams at paras 362~82; Trebilcock, ch 6;
MacDougall, ch 19; and Maddaugh & McCamus, ch 18.J

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