Contracts Table of Contents

CONTRACT FORMATION

OFFER

ACCEPTANCE

Postal acceptance rule

CONSIDERATION

Going-Transaction Agreements

UNCERTAINTY IN CONTRACT FORMATION

BIDS/TENDERS

POLICY FACTORS

REMEDIES FOR BREACH

Reliance Damages

Expectation Damages (Wertheim)

Non-Pecuniary Damages

Aggravated Damages

Punitive Damages

Diminution in market value

Cost of performance

Consumer Surplus

Economic waste

Supply and demand

Loss of a chance

Remoteness and Communication of Special Circumstances

General factors for remoteness of damages

Mitigation

DOCTRINE OF ELECTION

EQUITABLE REMEDIES

Specific performance

Injunction

RESTITUTION

Consideration

Compromises

Charitable gifts

Intention

Seals and Deeds

Past consideration

RELIANCE AND ESTOPPEL

UNILATERAL CONTRACTS

Contemporary illustration of unilateral contract: government programs

Revocation before performance complete: how to protect reliance?

Approach #1: Two Contract Approach

Approach #2: Bilateral contract

Approach #3: Implied promise not to revoke offer once performance has started

Third-party beneficiaries and Privity of Contract

Avoidance of the privity problem: Agency, Assignment, Trust

Agency

Employees as 3P Beneficiaries to Limitation of Liability Clauses

London Drugs Criteria Not Limited to Employee Context

Assignment

Legislation regarding 3P beneficiaries

Mistaken Identity of Void and Voidable Contract

The common law non-solution: void and voidable contracts

NON EST FACTUM

CONTRACT INTERPRETATION

THE PAROL EVIDENCE RULE

How to avoid the parol evidence rule: The two-contract approach

Exceptions

Factors influencing application of the rule

Parol Evidence Rule Overridden in consumer context

Fundamental Breach

The Rule of Law Approach

The Rule of Construction Approach

Canadian Approach to Fundamental Breach

Standard Form Contracts and Reasonable Notice

Signed Waivers: Risky Activities

REPRESENTATIONS AND WARRANTIES

Categories of Statements

Distinguishing between innocent misrepresentations and warranties

Misreps and the relationship between contract and tort

Drafting contracts – a short consideration of practical issues

Unconscionability, undue influence and duress

Penalties and forfeitures

Common law illegality

Statutory illegality

Mitigating the consequences of illegality

Mistake

Mistake about contractual terms

Mistake in assumptions

Rectification of documents

Frustration

CONTRACT FORMATION
  • Doctrine of consideration: a valid K must have an offer, acceptance and consideration to be enforceable
  • Purpose: balance the reasonable expectations of the parties and to avoid unfair surprise of liability
OFFER
  • Must be an intent to be bound (compare to an invitation to treat or non-binding gift promise)
  • This is an objective test (Smith v. Hughes)
  • An advertisement, invitation to treat, or statement of price is generally not considered an offer (JohnstonBros) because lack of intent to be bound and limited supply problem
  • Exception: can be an offer if very clear/specific as to terms which amounts to a unilateral contract (Lefkowitz)
  • Was the offer conditional?
  • Standing offers can be revoked (GNR)
  • In the case of astanding offer where no consideration is provided (i.e. no minimum purchase), generally it is only when orders are placed that a K is formed (GNR)
  • Remedy: enter into an option contract
  • Unilateral contract: performance is the acceptance and consideration
  • Courts may imply a promise not to revoke (i.e. if partial performance has occurred) (Errington)
  • Denton: Train schedule = offer, going to the station to buy the ticket = acceptance/consideration. (unilateral contract) Note this case is hard to reconcile with other cases because usually giving money to cashier is considered offer.
  • Ceases to exist if it is rejected or expires after a reasonable time (Manchester Diocesan Council)
  • Can be revoked anytime before being accepted (Dickinson v Dodds)
  • However, unless the offer has expired, effective revocation requires notice of revocation.
  • The sale/contract in a store occurs when the offer is accepted by the cashier. (Boots)
ACCEPTANCE
  • Acceptance has to be communicated
  • Offer can be revoked if acceptance hasn’t been communicated (Larkin)
  • The offeror may make conditions for the means of acceptance (Eliason v Henshaw) Here the means of acceptance (the specific wagon) was not important but the time and place was. A reasonable/equally efficient means of accepting is ok unless clearly stated otherwise (Manchester Diocesan)
  • Generally a court will try to find an exchange of mutual promises/bilateral contract (Dawson)
  • Must be clear intent to be bound
  • Must sufficiently correspond to the offer (mirror image rule)
  • Silence is not acceptance (Felhouse)
  • Acceptance in unilateral contracts:
  • Performance is acceptance and consideration. There is no binding obligation to do anything
  • Carlill v Carbolic Smoke Ball: P has no contractual obligation to use the smokeball, but her performance in accordance with the offer was the acceptance and the consideration of the offer and thus it is binding. The ad was an “offer” to the world, and those who met requirements had accepted.
  • Courts may imply a term that the offeror will not revoke an offer until the other parties have had a fair opportunity to perform

Postal acceptance rule

  • If acceptance is mailed, acceptance occurs/K is created when you put the acceptance letter in the mailbox
  • Instantaneous form of communication should follow the general rule that the K is created when and where acceptance is received. (Eastern Power)
  • Emails/Faxes: the contract is formed once the information has entered the information system of the receiving party and is capable of being accessed (Electronic Transactions Act)
  • Does not apply to the revocation of offers. (Henthorn) Revocations must be communicated. (Byrne v. Leon Van Tienhoven)
  • Does not apply when the contract states that the acceptance “must be received by the offeror” (Holwell Securities)
CONSIDERATION
  • Each party needs to get something (benefit) and give something up (detriment)
  • Can dress up a gift to look like a contract by finding a nominal exchange, i.e. “peppercorn” (Thomas)
  • For a standing offer/grant of exclusive distribution - you generally need to agree to some minimum purchase or pay something for the right to exclusive distribution for it to be enforceable (GNR, Tobias)
  • BUT in Lady Duff Gordon, the court implied the promise/consideration even though A was not obligated to sell any Lady Duff Gordon clothing, i.e. she gives up her right to endorse other lines and in return she gets the reputational benefit of her name on X’s clothes

Going-Transaction Agreements

  • Giving up a legal right can be consideration (Hamer)
  • Seamen cannot quit when onboard a ship, so no consideration for promise to be paid more (Stilk)
  • Gilbert Steel: higher price midway through a contract is agreed to but not enforced because no consideration
  • Counter: consideration could have been the business value of maintaining the relationship, or continued supply
  • Counter case: Roffey Bros, where the continued work provided by the hired carpenter was his consideration for the higher price
  • New direction: “a post-contractual modification, unsupported by consideration, may be enforceable so long as it is established that the variation was not procured under economic duress” Not binding in Canada yet.
  • Acceptance of a lesser sum in satisfaction of a larger debt is not binding (Foakes)
  • Counter: This has been overridden by statutes almost everywhere (Law and Equity Act)
  • Past consideration is not good consideration
  • Courts may imply a request to save (i.e. doctor case) to find consideration, making the promise to pay an annual sum enforceable…
  • The common law traditionally has not enforced these types of gratuitous promises, particularly where there was no reliance or unjust enrichment
  • Evidentiary function, cautionary function, channeling function (everyone knows what it is, easier for judges to enforce something with a seal and for parties to know they have a legally binding obligation)
UNCERTAINTY IN CONTRACT FORMATION
  • Court will generally not enforce an agreement that is missing an essential term or too vague/uncertain
  • Note: principle of effectiveness - court will generally try to find that K is not too vague but will not make a contract for the parties (Hillas)
  • Contract to enter into a contract is OK, different from a contract to negotiate (not OK) (Hillas)
  • 3Ps – parties (must know who they are), property (subject matter of K, specific model, time and method of delivery) and price. (May and Butcher v. The King)
  • Note: If key item missing, such as price, but there is a 3rd party enforcement mechanism, then court may enforce (Foley)
  • Courts will not enforce a mere “framework agreement” (GNR) or agreement to agree/negotiate
  • Exception: Long-term supply relationships or strong reliance (Foley)
  • Exception: Implied term in k to negotiate in good faith with goal of reaching agreement (Empress Towers) Note: This not widely adopted – most courts say that K must have binding renewal clause in order to be enforceable
  • Walford v. Miles: “Duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations.”
  • Martel Building v. Canada: no duty of good faith in context of commercial contractual negotiations
BIDS/TENDERS
  • Last shot rule: Last form wins. CL approach. (Loughton’s decision in Butler) Often the terms of the seller’s form that comes with the delivery of the goods that the buyer signs at delivery.
  • Tendering process: Analyzed as a two-contract approach (Ron Engineering, MJB Engineering)
  • Contract A: The contract governing the tendering process. The call for tenders = offer, bid = acceptance. Bid is also irrevocable offer so if bid accepted, bidder must enter into Contract B for the provision of goods or services. The terms of contract A depend on the call for tenders.
  • Note: Contract A does not arise in all circumstances, ie. if the request for proposals specifically states that it is not an offer.
  • Contract A has two implied terms: to treat all bidders fairly and equally and to accept only a compliant bid. (MJB, Double N Earthmovers)
  • Note: The tender can have a complete exclusion clause where they don’t have to accept any bid, i.e. could be an invitation to treat. Problem: No incentive for bidders.
POLICY FACTORS
  • The role of legal formalities in contract law:
  • Evidentiary Function: the need for evidence of the existence of a contract. (witnesses, docs)
  • Cautionary Function: ensure that parties deliberate before they contract. Shows intent to be bound
  • Channelling Function: ensures there is a simple, external test of enforceability.
  • Policy factors as to why certain promises might be enforced:
  • Reliance: has P changed its position to its detriment as a result of the promise? Has anyone lost an opportunity (i.e. time that they could have been searching for another donor)?
  • In gift cases, look at how long the parties have been relying on the money
  • UnjustEnrichment: look at the current situation in the fact pattern to see if there is any unjust enrichment in the current scenario – don’t address potential UE if the K was enforced
  • Can be intangible – i.e reputational
  • Deliberation: or lack thereof
  • Socialutility: is this the type of promise that courts should enforce? Is contract law the appropriate mechanism for enforcing this type of promise?
  • i.e. “As a general rule contract law enforces bargains, not gifts. Enforcement of all gift promises might make donors wary of making gift promises if donors think that all gift promises can be legally enforced through the courts.”
REMEDIES FOR BREACH
Restitution Damages / Prevent unjust enrichment to D / Benefit to D = difference between sale price and market price / Corrective
Reliance Damages / Prevent harm to P, put P in as good a position as before the contract was entered / Loss to P (so include any other money P put in) / Restorative
Expectation (Wertheim Damages) / Secure benefit to P, place P in same position as if contract been fully performed / Expected P benefit or cost of performance / Distributive
  • The general purpose of damages is to protect the reasonable expectations of P without placing an unfair burden on D

RelianceDamages

  • Awarded when expectation measures are too speculative/uncertain(Anglia)
  • Can’t exceed expectation damages (Bowlay)
  • Onus is on the defendant to prove that the reliance damages > expectation damages (i.e. money losing venture from the beginning) (Bowlay)
  • Can include pre-contract expenses if in reasonable contemplation of parties(Anglia)
  • Counter: are they too remote? Would D reasonably assume that P already had the necessary equipment?

Expectation Damages (Wertheim)

  • Include both pecuniary and non-pecuniary harms(Hawkins)
  • Counter: Are expectation damages too speculative? Is something inherently risky?
  • Counter: Just because it’s difficult to award damages doesn’t mean that a court should not award them. Distinguish difficulty with impossibility. (Carson v. Willitts)

Non-Pecuniary Damages

  • General rule: no damages for non-economic interests (Addis, Hobbs)
  • Noted exceptions: Ks for pleasure (Jarvis: holiday), enjoyment (Wilson: wedding photos), entertainment, peace of mind (Warrington: disability), pets (Newell, Ferguson, Weinberg – note in Pezzente the dog was treated as a consumer good, only $ to replace), physical inconvenience or discomfort caused by sensory experience (Wharton - Must be a sensory experience AND must be reasonably foreseeable. No recovery for mere disappointment)
  • Current approach to non-pecuniary damages with respect to employment:
  • Employment contract is not one of peace of mind. No damages for mental distress merely because employer exercises legal right to terminate. (Honda) However there is an implied duty of good faith in the manner of termination
  • Possibility of aggravated damages if mental distress arose specifically from the manner of termination (attacking employee’s reputation; misrepresentations regarding the reason for dismissal; dismissal to deprive an employee of pension benefits etc.) (Honda)
  • Current approach to non-pecuniary damages (Fiddler)
  1. An object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties (from Hadley)
  2. The degree of mental suffering is sufficient to warrant compensation. Consider how a reasonable person would have reacted. Onus is on P to prove this.

Aggravated Damages

  • Damages arising from the manner of breach (i.e. rudeness, callousness, vindictiveness)
  • Not the same as general claims for non-pecuniary damages (i.e. can be awarded in the employment context where the K is not specifically one for psychological benefit)
  • An IAW is not required

Punitive Damages

  • Not compensatory. Purpose: Punishment, deterrence, denunciation.
  • Requirements:
  • Misconduct must be “high-handed, malicious, arbitrary or highly reprehensible” (Whiten)
  • Misconduct must be an IAW(Whiten - breach of implied contractual obligation of good faith, established for insurance Ks)
  • Must be proportionate: to the blameworthiness of the D’s conduct, P’s vulnerability, harm or potential harm directed towards the plaintiff, to the need for deterrence, considering other assessed penalties, to the advantage wrongfully gained by the misconduct. Also: Exceptionality, rationality

Diminution in market value

  • If the cost of performing the contract is not enough to warrant the slight increase in value, P is only entitled to damages for the slight increase in value (Peevyhouse)
  • Rationale: Performing the contract would cause economic waste, windfall argument - P only entitled to the financial position he’d be in if K performed, not more, P wouldn’t even use the money to fix the problem

Cost of performance

  • JohnWunder: P gets full amount of cost to fix land even though it wouldn’t increase the value of his land. Rationale: Sanctity of contract.
  • Radford: courts orders cost of performance to build the fence even though does not affect value of the land because it’s an essential part of KRationale: D may be unjustly enriched if they get to keep the money for unprovided services, there wouldn’t be any unfair surprise

Consumer Surplus

  • Balance between cost of performance and diminution in market value. Damages for loss of pleasure but not the total cost to fix (Ruxley Electronics)

Economic waste

  • Construction to put in pipe specified in contract, but court did not going to order the destruction of the house to put in the right pipe. (Jacob & Young) Measure damages by difference in value when it would be disproportionate to award cost of performance
  • Would be economic waste to rebuild pool that was not perfect (Ruxley Electronics) also applied the difference in value

Supply and demand

  • Thomson v. Robinson: Supply > demand = Car dealer entitled to expectation damages.
  • Charter v. Sullivan: Demand > supply = Car dealer cannot claim lost profits.
  • Note: If buyer was going to pay more than market price, you can still sue for the difference

Loss of a chance

  • P must show on a balance of probabilities that but for D’s conduct, P had a chance to avoid a loss or gain a benefit (Folland)
  • Chance was sufficiently real and rises above mere speculation (i.e. not just a statistical chance to win the lottery) (Folland, Kinkel)
  • The outcome must depend on someone/something other than P(Folland)
  • Exception: Chaplin
  • The loss of the chance had some practical value (Folland)
  • Chaplin: different from Anglia because the prize was known, the probability was not. In Anglia we didn’t know either.
Remoteness and Communication of Special Circumstances
  • Policy: balance between reasonable expectation of P and risk of unfair surprise to D.
  • Entitled to damages if damages arise naturally or damages are in reasonable contemplation of the parties(Hadley)
  • Only ordinary lost profits recoverable if special circumstances not communicated or foreseeable (Victoria Laundry)
  • P assumes more liability for damages when they buy a secondhand good (Economy Tractor)
  • Damages have to be sufficiently likely to result (Heron II)
  • What is reasonable/too remote depends upon the specific industry (Mercator)
  • If you don’t communicate special circumstances, you can’t hold D liable. (Hadley)
  • If you do communicate special circumstances, you can only hold D liable if there was a special contract (Horne)
  • Canadian approach: Even though there was no special contract, D is liable for special losses if the special circumstances are communicated. (Purolator - Created reasonable consumer expectations through its conduct, D could have refused whereas in Hadley the common carrier could not have refused)
  • Communication must be sufficiently specific (Munroe)
  • D just has to foresee the type of damages, not necessarily the extent. (Munroe)

General factors for remoteness of damages