What follows in these pages are my personal condensed notes arising out of my personal studies and researches on Canadian Contract Law. You should read the book of Stephanie Ben-Ishai and David R. Percy, Q.C., the required text for the National Committee on Accreditation (NCA) examination -- at least for the August 2013 exams as well as the cases themselves. Students of Canadian Contract Law may likewise find the material herein contained useful.
The format adopted in these text is Question/Answer, its just a personal taste. It will be divided into the following sections (the same sequence and pattern in the NCA syllabus for contracts -- see the NCA site). The doctrines, which I believe is important enough to deserve attention at least for the NCA exams, will be discussed in relation to a question. The question may be for a concept, a doctrine or any other item that my crop up in the exams. Usually, these are pertinent cases and their citations are provided for the student of law to read further, if needed.
These pages likewise present some mnemonics that will aid the reviewee in recalling concepts, especially concepts which require enumeration of elements.
The format adopted in these text is Question/Answer, its just a personal taste. It will be divided into the following sections (the same sequence and pattern in the NCA syllabus for contracts -- see the NCA site). The doctrines, which I believe is important enough to deserve attention at least for the NCA exams, will be discussed in relation to a question. The question may be for a concept, a doctrine or any other item that my crop up in the exams. Usually, these are pertinent cases and their citations are provided for the student of law to read further, if needed.
These pages likewise present some mnemonics that will aid the reviewee in recalling concepts, especially concepts which require enumeration of elements.
It is my firm belief that by answering direct questions, the mind of the reviewee is more focused and better conditioned. If you find this document useful, send me a note at nca.flsc@gmail.com and don't forget to just come back to this page and check out for any free updates.
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All persons involved in the preparation and presentation of this site disclaim any warranty as to accuracy or currency of the contents hereof. This site is published as is. It is created on the basis that none of the authors involved in its creation shall be responsible for the accuracy or currency of content. We are not in anyway attempting to render professional legal advice. If legal advice or other expert assistance is required, you should seek the services of a competent professional. The analysis contained herein are just our personal thoughts and opinion and do not necessarily reflect the opinion of the government.
I. Formation of Agreement
| Question: | In an ordinary shop wherein goods are displayed and intended that customers should go and choose what they want, when is the contract of sale completed? | ||
| Answer: | The display of the goods is not considered as an offer by the vendor. In a self-service arrangement, the display of goods is just 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 to go up to the cashier and offer to buy what they have so far chosen. The contract is not completed until the customer having indicated the articles that he needs, the shopkeeper, or someone on his behalf, accepts that offer. The mere fact that the customer picks up a bottle of medicine from the shelves does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy and there is no sale effected until the buyer's offer to buy is accepted by the acceptance of the price.
-- Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd.
[1953] Q.B. 401, [1953] 1 All E.R. 482 (C.A.)
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| Question: | Maureen went into a store. There were children's jumpers and blouses on a display rack in the store for sale; in some cases a jumper was combined with a blouse making a two piece outfit, and in other cases the jumpers were alone in a hanger. Maureen took a blouse from a two piece outfit and put in on a single hanger. She then took a single jumper and put it on the hanger also. The single jumper had a price tag of $5.77 on it. The two piece outfit from which she had taken the blouse had a price tag of $9.66 attached to the blouse, this being the price for both the blouse and jumper. Maureen removed this price tag of $9.66 from the blouse, to make it appear that the blouse and jumper which she had combined on the single hanger were to be sold at the price of $5.77 which was the price on the ticket attached to the jumper. There was no price tag attached to the blouse but on a ticket attached to it there was written in pen and ink two pieces indicating that the price attached to the outfit was for both the jumper and the blouse. Maureen then took the two pieces outfit to the checkout counter and paid to the cashier the price of $5.77. There was no concealment of either the blouse or the jumper and it is clear that the cashier thought that the sale price for both the jumper and blouse according to the price tag attached to the jumper was $5.77. Maureen in effect paid the price only of the jumper. In this situation, was she liable for theft? Apply the law on contract in answering this question. | ||
| Answer: | When items are sold to a buyer, the vendor consents not only to the transfer of possession but likewise to a transfer of the property in the goods upon the terms of the contract. However, if the transaction does not provide for the passing of the property either immediately or in the future, then the wrongful conversion will be theft. In sale, the transaction is 'complete' in the sense that the owner consents to the passing of the property in compliance with a term of the contract to that effect. If the vendor of the goods consents not only to the transfer of possession of the blouse but also to the transfer of the property in the blouse, the buyer cannot be convicted of theft. The next issue that logically follows is this: was there any transfer of property? For this it is necessary to resort to the civil law to decide this issue. As in the case of Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ld., 1953 1 Q.B.D. 401 Somervell L.J. said "xxx 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 shopkeeper, or someone on his behalf, accepts that offer. Then the contract is completed." Maureen took the jumper and blouse to the check-out counter and offered to purchase it for the price of $5.77. She represented to the cashier that both articles had been displayed for sale at this price, although she knew it was false. The cashier had authority to accept such offer which she did by accepting the cash proffered. At that point a contract of sale had been made; though it may be voidable contract as having been induced by fraud. The cashier had a general authority to accept such offer and to sell the goods on behalf of her employer. Thus, there can be no theft. CAUTION: This case was overruled by the case R. v. Milne, which we discuss next.
-- see R. v. Dawood, 1975 AltaSCAD 10 (CanLII), [1976] 1 W.W.R. 262 (Alta. S.C., App. Div.)
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| Question: | Mr. Milne, through his company National Electronics Security Inc., supplied goods and services to the Hudson's Bay Co. An account for $16,981 was paid by the Hudson's Bay Co., by sending the company a cheque in that amount which Mr. Milne deposited into his company's account. A month later, due to an error by the Hudson's Bay Co., a second check for $16,981 was received and deposited by Mr. Milne into his company's account. He knew that the second checque had been issued to his company by mistake. Mr. Milne then appropriated the money by writing company cheques in his own favour. These cheques were certified by Mr. Milne, and reduced the balance of his company's account to practically nil. Mr. Milne had sole signing authority for the company account. A security officer for the Hudson's Bay Co. was unable to contact Mr. Milne concerning the mistaken payment, despite leaving repeated messages. Did Mr. Milne commit theft? Apply the law of property to the law of theft in answering this question. | ||
| Answer: | s. 322(1) of the Criminal Code, R.S.C., 1985, c. C-46 states: " 322. (1) Every one commits theft who fraudulently and without colour of right takes, or fraudulently and without colour of right converts to his use or to the use of another person, anything, whether animate or inanimate, with intent, (a) to deprive, temporarily or absolutely, the owner of it, or a person who has a special property or interest in it, of the thing or of his property or interest in it; xxx" Where a transferor mistakenly transfers property to a recipient, and the recipient knows of the mistake, property does not pass for the purpose of the criminal law if the law of property creates a right of recovery, no matter whether the original transfer is said to be void or voidable. The distinction between void and voidable transfers has no purpose in the context of the criminal law. In either case, where the law of property provides at least a right of recovery, property does not pass for the purpose of the criminal law. If the recipient then converts the property to his own use, fraudulently and without colour of right, and with intent to deprive the transferor of the property, he is guilty of theft. In this case, Mr. Milne was aware that the second cheque had been issued to his company by mistake, and knew that he had been paid with a prior cheque. Therefore, property in the cheque did not pass to Mr. Milne's company for the purpose of the criminal law. When Mr. Milne wrote cheques to himself on the company's account that reduced the balance to almost nil, this amounted to converting the money to his own use with intent to deprive the Hudson's Bay Co. of its property. This conversion was done fraudulently and without colour of right, since Mr. Milne was aware that the cheque had been issued by mistake. Therefore, Mr. Milne was guilty of theft.
-- R. v. Milne, 1992 CanLII 86 (SCC),
[1992] 1 SCR 697 | ||
| Question: | Freedom of Contract Fred Christie (Fred) is a British subject residing in Verdun near the city of Montreal in the province of Quebec. He came from Jamaica and has been permanently resident in the said province for some twenty years. He is a coloured gentleman -- his own words are "a negro". He appears to have a good position as a private chauffeur in Montreal. He was a season box subscriber to hockey matches held int he Forum in Montreal and in that building The York Corporation operates a beer tavern. Beer is sold by the glass for consumption on the premises. Food such as sandwiches is also served, being apparently purchased when required from nearby premises and resold to the customer. Fred had often on prior occasions to the one in question, when attending the hockey dropped into the tavern and bought beer by the glass there. On the particular evening, Fred with 2 friends, one white man and the other coloured, just before the hockey game went into the premises in the ordinary course. Fred put down 50 cents on the table and asked the waiter for 3 steins of light beer. The waiter declined to fill the order, stating that he was instructed not to serve coloured people. Fred and his 2 friends then spoke to the bartender and to the manager, both of whom stated that the reason for refusal was that Fred was a coloured person. Fred then telephoned for the police. He says he did this because he wanted the police there to witness the refusal that had been made. The manager repeated to the police the refusal he had previously made. Fred and his 2 friends then left the premises on their own accord. Fred says this was to his humiliation in the presence of some 70 customers who were sitting around and had heard what occurred. Fred then brought an action against the owner of the tavern The York Corporation for damages for breach of contract and damages in tort. There was no objection to the suit having been brought both on contract and in tort on the same set of facts and we can assume that this form of action is permissible under the Quebec practice and procedure. Fred claimed the sum of $200 for the humiliation he suffered. Note that in refusing to sell beer, the employees did so quietly, politely and without causing any scene or commotion whatever. If any notice was attracted on the occasion, it arose out of the fact that the appellant insisted in demanding beer after he had been so refused and went tot he length of calling the police, which was entirely unwarranted by the circumstance. The tavern owner asserts that in giving such instructions to its employees and in so refusing to serve Fred, it was well within its rights because its business is a private enterprise for gain and was only protecting its business interests. Was Fred entitled to the damages he claims? | ||
| Answer: | As a general rule, in the absence of any specific law, a merchant or trader is free to carry on his business in the manner he conceives to be best for that business. The general principle of the law of Quebec is that of complete freedom of commerce, i.e.,any merchant is free to deal as he may choose with any individual member of the public. It is not a question of motives or reasons for deciding to deal or not to deal; he is free to do either. The only restriction to this general principle would be the existence of a specific law, or, in the carrying out of the principle, the adoption of a rule contrary to good morals or public order. In this case, either under the law or upon the record, it cannot be argued that the rule adopted by the tavern owner in the conduct of the establishment was contrary to good morals or public order. Nor could it be said, as the law stood, that the sale of beer in the province of Quebec was either a monopoly or a privileged enterprise. The fact that a business cannot be conducted without a license does not make the owner or the operator thereof a trader of a privileged class. The license in this case is mainly for the purpose of raising revenue and also, to a certain extent, for allowing the Government to control the industry; but it does prevent the operation of the tavern from being a private enterprise to be managed within the discretion of its proprietor. The only point to be examined thereof is whether Sec. 33 of the Quebec License Act applies to the present case. The act defines in Sec. 19-2 a "restaurant": "A 'restaurant' is an establishment, provided with special space and accommodation, where, in consideration of payment, food (without lodging) is habitually furnished to travellers. A 'traveller' is a person who, in consideration of a given price per day, or fraction of a day, on the American or European plan, or per meal, a table d'hote or a la carte, is furnished by another person with food or lodging, or both." In this particular case, Fred is NOT a traveller who was asking to be furnished with food in a restaurant. He was not a traveller asking for a meal in a restaurant. He was only a person asking for a glass of beer in a tavern. And because his case is NOT governed by any specific law, it falls under the general principle of freedom of commerce; it must follow that, when refusing to serve Fred, the tavern owner The York Corporation was strictly within its rights. In other words, Fred was rightly refused given his glass of beer and his action for damages must necessarily fail.
-- see Fred Christie vs. The York Corporation [1940] S.C.R. 139
CAUTION: This case had been overridden by recent laws on discrimination. | ||
| Question: | For certain construction work, the Water Resources Commission of Ontario (owner) issued a call for tenders and part of the tender documentation, 'Information for Tenderers', paragraph 13 of which, under the heading 'Tender Deposit', stated in part: " Except as otherwise herein provided the tenderer guarantees that if his tender is withdrawn 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 Commission may deem advisable." The 'Information for Tenderer' further provided: " After the execution of the Contract and the receipt by the Commission of the Performance Bond and the Payment Bond the tender deposit of the successful tenderer will be returned." The contractor Ron Engineering & Construction (Eastern) Ltd. submitted a tender for $2,748,000 on or before 3:00 PM July 4th, 1972. Accompanying the contractor's tender was a certified cheque in the amount of $150,000. Hedges was the contractor's employee who filed the tender. She remained for the opening of tenders. Upon learning that the contractor's tender was the lowest out of eight bids and that it was about $632,000 lower that the next lowest bidder, she immediately reported to the president of the contractor Vered. From her prior experience, Hedges felt that there was something radically wrong and wondered if she had made an error... Hedges went to call Vered after the tender opening, around 3:30 PM. As soon as she spoke to Vered he said: "We're low. I made a mistake." She asked if there's anything she could do. Vered told her "No -- come back to Ottawa". She never returned to the Ministry Office. Following the opening of tenders the contractor forwarded a telex at approximately 4:12 PM and read as follows: " Today we submitted our tender for the above project and unfortunately due to the rush of compiling our last figures we omitted to add to our total the sum for our own forces work and general condition in the amount of 750,058.00 which actually should have been added to our lump sum tender amount for a total of 3,498,058.00 dollars. Due to this unfortunate error we would appreciate being given the opportunity to show to you our estimate indicating the error and to hereby request to withdraw our tender and request an apology without being penalized." In subsequent correspondence the contractor has maintained the position that it has not withdrawn its tender but that by reason of the notice of its error, given to the owner prior to the acceptance of the tender, the offer thereafter was not capable in law of being accepted and that the contractor has the right to recover the $150,000 deposit. The owner, after receiving the contractor's notice of the mistake and in response to the contractor's position that the offer was not revoked, submitted the contract in prescribed form for the contractor's signature. When the contractor declined to enter the agreement, the owner, relying on the tender deposit term, decided to retain the deposit and proceeded to accept another tender. The contractor commenced this action to recover the tender deposit. May the contractor recover the tender deposit? | ||
| Answer: | Projects awarded through bidding involves 2 contracts: Contract A is the contract that arises and comes into being upon the submission of the tender; and Contract B is the construction contract, the form of which is set out in the documents relating to the call for tenders. Contract A. This is a unilateral contract, i.e., 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. In the present situation, the call for tenders created no obligation in the contractor or in anyone else in or out of the construction world. When a member of the construction industry responds to the call for tenders, as the contractor 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. 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 Contract Bupon 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. The deposit was required in order to ensure the performance by the contractor-tenderer of its obligation under Contract A. The deposit is recoverable by the contractor under certain conditions set out in the tender documents; however, none of which were met in this instance. The same deposit was subject to forfeiture under the term of the contract, and the provisions of which was met in this case. Contract B. This is the construction contract. This is a mutual contract and for it 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. In this instance, Contract B has not and did not come into existence. We never reached that problem here because the rights of the parties fall to be decided according to the tender arrangements, Contract A; hence, Contract B shall not be discussed in relation to the facts in this case. It must be borne in mind that the integrity of the bidding system must be protected where under the law of contracts it is possible so to do. Likewise, there may be circumstances where a tender may not be accepted as for example where in law it does not constitute a tender, and hence the bid deposit might not be forfeited, simply because Contract A cannot come into being. In other words, 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. The test however, 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. If the tenderer has committed an error in the calculation leading to the tender submitted with the tender deposit, and at least in those circumstance where at that moment the tender is capable of acceptance in 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 suffered by reason of the error in the preparation of the tender. Applying the test to the case at hand, 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 contractor's employee intended to submit the very tender submitted, including the price therein stipulated. Indeed, the President, in instructing his employee, intended the tender to be as submitted. At the point when the tender was submitted the owner has not been told about the mistake in calculation. There was nothing on the face of the tender to reveal the error. There was no inference to be drawn by the quantum of the tender (bearing in mind the estimate by the next lowest bidder) that there had indeed been a miscalculation.
-- see R. (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111
1981 CanLII 17 (SCC) | ||
| Question: | By the ship's articles, executed before the commencement of the voyage, Stilk was to be paid at the rate of £5 a month. In the course of the voyage two of the men deserted and the captain Myrick 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 2 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 Stilk and 8 more of the original crew, with whom the agreement had been made at Cronstadt. The agreement here was made on shore, when there was no danger or pressing emergency, and the captain could not be supposed to be under any constraint or apprehension. The mariners were not to be permitted on any sudden danger to force concessions from the captain; however, in this particular case, the captain voluntarily offered them in perfect security for their extra labour during the remainder of the voyage. Myrick insists, that the agreement was contrary to public policy, and utterly void. In West India voyages, crews are often thinned greatly by death and desertion; and if a promise of advanced wages were valid, exorbitant claims would be set up on all such occasions. Citing Lord Kenyon in Harris v. Watson, Peak. Cas. 72, he argued that no action would lie at the suit of a sailor on a promise of a captain to pay him extra wages, in consideration of his doing more than the ordinary share of duty in navigating the ship; if such a promise could be enforced, sailors would in many cases suffer a ship to sink unless the captain would accede to any extravagant demand they might think proper to make. Was Stilk entitled to the higher rate of wages promised by the captain Myrick? | ||||||||||||||||||||||
| Answer: | The citation of Harris v. Watson is misplaced although it was rightly decided. It is not the true principle on which this decision is to be supported. The agreement at Cronstadt 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 that they could under all the emergencies of the voyage. They had sold all their services till the voyage 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 discharged the two men who were wanting, the others might not have been compellable 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 those 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 the agreement, it is void for want of consideration, and that Stilk can only recover at the rate of £5 a month.
-- see Ben-Ishai, Stephanie and David R. Percy, Q.C. "Contracts: Cases and Commentaries Eight Edition", Thomson Reuters Canada Limited: Toronto (2009) pp. 178 - 181 citing Stilk v. Myrick (1809), 2 Camp. 317, 170 E.R. 1168, S.C. 6 Esp. 129 (Eng. K.B.)
-- for exceptions, there is a good note in this link http://www.bailii.org/ew/cases/EWHC/KB/1809/J58.html. | ||||||||||||||||||||||
| Question: | Classical exceptions to Stilk v. Myrick In variation/alteration of contracts, the subsequent agreement that varies or alters the original contract is deemed void if there is a failure of consideration or that there is no fresh consideration given in the formation of the new contract. This rule had been laid down in Stilk v. Myrick. However, courts have developed a number of ways to avoid the application of this classical tenet of the consideration doctrine when the court is convinced that the contractual variation was not procured under economic duress. 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. What are these techniques that courts apply in order to avoid the application of the classical consideration doctrineenunciated in Stilk v. Myrick? | ||||||||||||||||||||||
| Answer: | These techniques 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:
-- see NAV Canada v. Greater Fredericton Airport Authority Inc., 2008 NBCA 28 (CanLII)
229 NBR (2d) 238; 290 DLR (4th) 405 http://canlii.ca/t/1w59d | ||||||||||||||||||||||
| Question: | Novation/Substitution distinguished from Variation/Alteration Morris entered into written contract (A) with Baron to supply him with certain number of pieces of cloth: dispute arose between the parties as Morris demanded payment of supplied pieces of cloth while Baron claimed damages for breach of contract out of delay in supplying rest of the pieces. Parties thereafter, by parole, made an arrangement (B) by which they both decided to withdraw legal proceedings, and Morris agreed to give 30 pounds as damages to Baron for not supplying in time. Further, 3 months were given to Baron to pay Morris due amount, and also an option to demand delivery of the remaining goods, if he pleases. The suit was filed by Morris when Baron consistently refused to pay the due amount while insisting on the delivery of the remaining goods. 1) Did the parties rescind contract A and substitute contract B for it or did they just vary the terms of contract A when they entered into contract B? | ||||||||||||||||||||||
| Answer: | 1) To distinguish rescission from a mere variation of terms, one must look into (a) the intention of the parties and (b) the nature of the new contract. In a novation/substitution, the first contract is extinguished. This is done either expressly or impliedly. It is done impliedly when the subject matter of the original contract had been materially altered. In variation/alteration, the first contract is NOT extinguished. In fact, an altered or varied contract cannot exist without the original contract. Only that the subsequent contract varies the terms of the original contract. In this instant, the parties intended that the original contract (A) be set aside and substituted by a subsequent one (B). This we say because the original contract (A) is completely different from the subsequent contract (B). The offer and considerations in the subsequent contract (B) is the withdrawal of the legal proceedings, the 30 pounds payment of Morris for damages, the 3 months given to Baron to pay Morris the due amount with an option to demand delivery of the remaining goods. To clarify further, when both parties came into a subsequent agreement (B), all the obligations under the original contract (A) were discharged. Hence, taking all matters into consideration, the parties rescinded contract A and substituted in its stead a wholly new contract B for it.
-- see the discussion in http://indiancaselaws.wordpress.com/2013/02/05/morris-v-baron-co/ in its discussion ofMorris v. Baron & Co. [1918] AC 1.
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| Question: | On September 4, 1968, Gilbert Steel Ltd. (GSL) entered into a written contract to deliver to the University Construction Ltd. (UCL) fabricated steel for apartment buildings to be erected at 3 separate sites: "Flavin, Tectate and University projects".The price fixed by the contract was $153 per ton for "Hard grade" and $159 per ton for "Grade 60,000". Deliveries for theFlavin and Tectate projects were completed in August 1969 and October 1969, respectively, and paid for at the agreed-upon price. On the other hand, 2 apartment buildings calling for the supply of 3,000 tons of fabricated steel were to be erected at the University site. However, prior to UCL notifying GSL of its intention to commence construction on the first building, the owners of the steel mill announced an increase in the price of unfabricated steel. They also gave warning of a further increase to come. GSL approached UCL for a new contract on the University project and a written contracted dated October 22, 1969, was entered into for the supply of fabricated steel for the first building. The new price was $156 per ton for "Hard grade" and $164 per ton for "Grade 60,000". 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 completion, the mill owners announced the second increase in price and a further discussion took place between John Gilbert and his brother Harry representing GSL and Mendel Tenenbaum and Hersz Tenenbaum representing UCL with respect to the price to be paid for the steel required to complete the first building. In this discussion, UCL agreed to pay $166 per ton for "Hard grade" and $178 per ton for "Grade 60,000". GSL submitted to UCL a written contract embodying the revised prices, but the contract was never executed. It contained, in addition to the increased prices, 2 new clauses which had not been the subject of any discussion with UCL but were unilaterally imported into the document by GSL. Note that in consideration of the increased price of steel, GSL afforded UCL an increased credit, i.e., whereas previously UCL had outstanding credit for 60 days in the amount owed on the original prices, after the oral agreement, UCL had a credit outstanding for 60 days in the amount owed on the higher prices. From March 12, 1970, until the completion of the first building UCL 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 GSL in accordance with the invoices. GSL argues that the consideration for the "new oral contract" was the mutual agreement to abandon the previous written contract and to assume the obligations under the new oral one. There was 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. Did the discussion on March 1, 1970 between UCL and GSL on the new prices mature into a new binding oral contract that rescinded the old contract or was it void for want of consideration? | ||||||||||||||||||||||
| Answer: | It is impossible to accept GSL's arguments in the face of the facts at hand. The sole reason for the discussions between the parties in March 1970 was the increase in the price of steel by the mill owners. No changes other than the change in price were discussed. The 2 changes sought to be introduced into the written document submitted by GSL for the signature of UCL following discussions had not even been mentioned at the meeting. Although GSL repeatedly referenced that the parties had made a "new contract" in March 1970, it was only to pay the increased price for the steel, i.e., the agreement affected a 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. Having found that the oral agreement made by the parties in March 1970 was merely an agreement to vary the written contract of October 22, 1969, we can dispose of the question by looking into whether there was any consideration for the variation. The increased credit afforded by GSL to UCL as a result of the increased price is inherent in the increased price. It cannot therefore be a fresh consideration independent of the increased price. From the facts as it stands, the purported oral agreement did not contain any consideration. Hence, the oral agreement is unenforceable. The "new contract" is void for want of consideration. -- Ben-Ishai, Stephanie and David R. Percy, Q.C. "Contracts: Cases and Commentaries Eight Edition", Thomson Reuters Canada Limited: Toronto (2009) pp. 178 - 181 citing Gilbert Steel Ltd. v. University Const. Ltd. (1976), 12 O.R. (2d) 19, 67 D.L.R. (3d) 606 (C.A.) |
| Question: | What is the general rule regarding the doctrine of privity? | ||
| Answer: | A contract can neither confer rights nor impose obligations on third parties.
-- Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 CanLII 654 (SCC), [1999] 3 SCR 108
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| Question: | What is the principled exception to the doctrine of privity of contract? | ||
| Answer: | This is the exception to the doctrine of privity that is dependent upon the intention of the contracting parties. As set out in the case of London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 SCR 299, the determination in general terms is made on the basis of 2 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 tot he intentions of the parties? The principled exception limits the principle of freedom of contract but narrowly and only in 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 crystallized prior to any purported amendment.
-- Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 CanLII 654 (SCC), [1999] 3 SCR 108
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| Question: | What is the doctrine of common law illegality (or the illegality defense)? | ||||||||||||||
| Answer: | The concept of illegality and its effect on the contractual rights and obligations of parties to an otherwise enforceable agreement is traced to the following passage of Lord Mansfield's reasons in Holman v. Johnson, (1775), 1 Cowp. 341; 98 E.R. 1120 (K.B.), at page 1121:
-- cited from Still v. M.N.R., [1998] 1 FC 549, 1997 CanLII 6379 (FCA); 154 DLR (4th) 229
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| Question: | What are the 2 categories of the doctrine of illegality? | ||||||||||||||
| Answer: | There are 2 categories of the doctrine of illegality: (1) common law illegality and (2) statutory illegality
-- cited from Still v. M.N.R., [1998] 1 FC 549, 1997 CanLII 6379 (FCA); 154 DLR (4th) 229
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| Question: | What is the doctrine of statutory illegality? | ||||||||||||||
| Answer: | If the making of a contract is expressly or impliedly prohibited by statute then it is illegal and void ab initio. Words to the effect that "no contract shall be entered into unless a person is licensed" fit the express category. Less precise language often attracts the allegation that prohibition cannot even be implied. This was the argument advanced in Cope v. Rowlands (1836), 150 E.R. 707, a decision still cited today and the one which remains the locus classicus of statutory illegality. Parke B. laid down what he considered to be settled law (at page 710):
-- cited from Still v. M.N.R., [1998] 1 FC 549, 1997 CanLII 6379 (FCA); 154 DLR (4th) 229
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| Question: | What are the ways in which a court relieves a party from the consequences of illegality? | ||||||||||||||
| Answer: | In recognition of the rigidity and oft-times unfair application of the classical illegality doctrine, the courts developed several ways in which a party may be relieved of the consequences of illegality where appropriate. For example, where the doctrine of ex turpi causa might otherwise apply, the courts have developed three exceptions to the rule that a court will not order the return of property transferred under an illegal contract. These are:
In situations where a party enters into two related transactions (or makes two promises within an agreement) one of which is illegal and the other legal, courts have been willing to enforce the legal one if convinced that the provisions are "severable" (see: Waddams, supra , at page 390). The difficulty with these exceptions to the doctrine arises from the legal manoeuvring that must take place to arrive at what is considered a just result.
-- cited from Still v. M.N.R., [1998] 1 FC 549, 1997 CanLII 6379 (FCA); 154 DLR (4th) 229
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| Question: | Distinguish the classical model of illegality from the modern approach? | ||||||||||||||
| Answer: | The contrast between the classical model against the modern approach are tabulated below:
-- see Still v. M.N.R., [1998] 1 FC 549, 1997 CanLII 6379 (FCA); 154 DLR (4th) 229 | ||||||||||||||
| Question: | What is the present prevailing law on the doctrine of statutory illegality? | ||||||||||||||
| Answer: | 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. 2 policy considerations to be taken into account: (1) person should not benefit from own wrongdoing; and (2) relief should not undermine purposes, objects of either legislation. As to moral disapprobation, community values must be considered. The bona fides of the party seeking relief is of critical significance. While the object of the statutory prohibition is a compelling one, however the circumstances the penalty imposed must not be disproportionate to the breach.
-- cited from Still v. M.N.R., [1998] 1 FC 549, 1997 CanLII 6379 (FCA); 154 DLR (4th) 229
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| Question: | What is the doctrine of rectification? | ||||||||||||||
| Answer: | In Frederick E. Rose (London) Ld. v. William H. Pim Jnr. & Co., [1953] 2 Q.B. 450 (C.A.), Denning L.J. stated at p. 461:
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | When is rectification applicable? | ||||||||||||||
| Answer: | In Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 (CanLII), 2002 SCC 19, [2002] 1 S.C.R. 678, Binnie J., at paras. 37-40, set out the necessary requirements for rectification:
Rectification is used to restore what the parties’ agreement actually was, were it not for the error in the written agreement. But it cannot be invoked to rewrite the bargain between the parties.
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | What is "the precise form" requirement in the doctrine of rectification? | ||||||||||||||
| Answer: | In Binnie J.’s discussion of the “precise form” requirement, at paras. 31 and 40, he stated:
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | What is the doctrine of severance? | ||||||||||||||
| Answer: | The purpose of severance is to give effect to the intention of the parties when they entered into the contract. Courts are restrained to apply the doctrine of severance because of the right of parties to freely contract and to choose the words that determine their obligations and rights. You must always bear in mind that the court is altering the terms of the original contract between the parties by applying the doctrine of severance, whether blue-pencil or notional. In Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7 (CanLII), 2004 SCC 7, [2004] 1 S.C.R. 249, Arbour J. observed at para. 30, that “[i]ndeed, all forms of severance alter the terms of the original agreement”. Severance, when permitted, appears to take two forms: 1) “Notional” severance involves reading down a contractual provision so as to make it legal and enforceable. 2) “Blue-pencil” severance consists of removing part of a contractual provision. Both types of severance have been applied in limited circumstances to remove illegal features of a contract so as to render the contract in conformity with the law. Notional severance is not an appropriate mechanism to cure a defective restrictive covenant. On the other hand, blue-pencil severance, may only be resorted to in rare cases where the part being removed is trivial, and not part of the main purport of the restrictive covenant.
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | What is "blue-pencil" severance? | ||||||||||||||
| Answer: | Blue-pencil severance was described in Attwood v. Lamont, [1920] 3 K.B. 571 (C.A.), by Lord Sterndale as “effected when the part severed can be removed by running a blue pencil through it” (p. 578). In Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7 (CanLII), 2004 SCC 7, [2004] 1 S.C.R. 249, Bastarache J., in dissent, described this form of severance at para. 57:
-- cited from Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | What is the blue-pencil test? | ||||||||||||||
| Answer: | 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 severance. 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 test was developed in cases where the courts were considering instruments under seal, where the form of the deed governed and where the intention of the parties was irrelevant. It was therefore important that what remained after severance would be a valid deed:
-- cited from Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 SCR 249, 2004 SCC 7 (CanLII); 70 OR (3d) 255; 235 DLR (4th) 385; 18 CR (6th) 1; 40 BLR (3d) 18; 183 OAC 342
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| Question: | What is the blue-pencil technique? | ||||||||||||||
| Answer: | The blue-pencil approach as a technique of effecting severance involves the actual excision of the provisions leading to the illegality, leaving those promises untainted by the illegality to be enforced.
-- cited from Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 SCR 249, 2004 SCC 7 (CanLII); 70 OR (3d) 255; 235 DLR (4th) 385; 18 CR (6th) 1; 40 BLR (3d) 18; 183 OAC 342
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| Question: | What is "notional" severance? | ||||||||||||||
| Answer: | Notional severance involves reading down an illegal provision in a contract that would be unenforceable in order to make it legal and enforceable (see Transport, at para. 2). For instance, in Transport, the contract provided that interest was to be charged at a rate exceeding 60 percent contrary tos. 347 of the Criminal Code. There was no evidence of an intention to contravene this provision, and this was not a case of loan sharking. Arbour J. applied the doctrine of notional severance to effectively read down the interest rate to the legal statutory maximum of 60 percent. IMPORTANT CONDITION FOR APPLICATION OF THE DOCTRINE OF NOTIONAL SEVERANCE In Transport, a condition for application of the doctrine of notional severance appears to have been that what was illegal was easily determined by a bright-line provision in the Criminal Code. At para. 34, Arbour J. stated:
It is apparent that Arbour J. would not have applied the doctrine of notional severance where there was no bright-line test for illegality. (See also Globex Foreign Exchange Corp. v. Kelcher, 2005 ABCA 419 (CanLII), 2005 ABCA 419, 262 D.L.R. (4th) 752, at para. 46.)
-- cited from Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | When is notional severance permitted? | ||||||||||||||
| Answer: | Notional severance should be permitted only where: (1) public policy does not require that the entire agreement be declared unenforceable; (2) severance is found to be warranted; and (3) severance simpliciter — or “blue-pencil severance” — is impracticable or would occasion an unjust result.
-- cited from Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 SCR 249, 2004 SCC 7 (CanLII); 70 OR (3d) 255; 235 DLR (4th) 385; 18 CR (6th) 1; 40 BLR (3d) 18; 183 OAC 342
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| Question: | What considerations are relevant to determine whether or not to allow severance? | ||||||||||||||
| Answer: | In William E. Thomson Associates Inc. v. Carpenter 1989 CanLII 185 (ON CA), (1989), 61 D.L.R. (4th) 1, at p. 8, Blair J.A. considered the following four factors in deciding between partial enforcement and declaring a contract void ab initio: (1) whether the purpose or policy of s. 347 would be subverted by severance; (2) whether the parties entered into the agreement for an illegal purpose or with an evil intention; (3) the relative bargaining positions of the parties and their conduct in reaching the agreement; (4) the potential for the debtor to enjoy an unjustified windfall. He did not foreclose the possibility of applying other considerations in other cases, however, and remarked (at p. 12) that whether “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”. NOTE: Under notional severance, courts will be permitted to literally add new words to the parties’ agreement and by doing so, courts will be substituting their intentions for those of the parties.
-- cited from Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 SCR 249, 2004 SCC 7 (CanLII); 70 OR (3d) 255; 235 DLR (4th) 385; 18 CR (6th) 1; 40 BLR (3d) 18; 183 OAC 342
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| Question: | What is the test whether invalid promises are severable? | ||||||||||||||
| Answer: | Over time, the lower courts in Canada moved away from this strict approach because it was viewed as harsh and inequitable in some cases and could result in a windfall to one party. Courts have come to apply a modern approach when faced with a contract that contains an illegal provision. Under the modern approach to illegality, a contract that violates a statute may be enforceable, but not in its entirety. In Carney v. Herbert, [1985] 1 All E.R. 438, the Privy Council succinctly summarized the principles to be applied. At p. 443 of the decision, their Lordships quoted with approval the following statements made in an Australian case, McFarlane v. Daniell (1938), 38 S.R. 337 (N.S.W. Dist. Ct. App.), at p. 345:
Accordingly, the illegal promise may be severed from the rest of the contract, leaving the remaining promises to be enforced by the court. See G. H. L. Fridman, The Law of Contract in Canada (4th ed. 1999), at pp. 441‑45; S. M. Waddams, The Law of Contracts (4th ed. 1999), at p. 421. This has been referred to as the “blue-pencil” test, a label first used in the case of Attwood v. Lamont, [1920] 3 K.B. 571 (C.A.). In my opinion, the “blue-pencil” test is nothing more than an expression to describe the application of the severance principle. In Canadian American Financial Corp. (Canada) Ltd. v. King 1989 CanLII 252 (BC CA), (1989), 60 D.L.R. (4th) 293 (B.C.C.A.), at pp. 299‑300, Hinkson J.A. referred to Attwood v. Lamont in which Lord Sterndale M.R. captured the essence of the applicable principle, at pp. 577‑78:
Under the blue-pencil test, severance is only possible if the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining. In other words, the offending provision must constitute a separate promise, and one that is not part of the main purport and substance of the contract. The provision must appear severable. See Fridman, supra, at p. 443.
-- cited from Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 SCR 249, 2004 SCC 7 (CanLII); 70 OR (3d) 255; 235 DLR (4th) 385; 18 CR (6th) 1; 40 BLR (3d) 18; 183 OAC 342
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| Question: | What is the law on restrictive covenants? | ||||||||||||||
| Answer: | A restrictive covenant in a contract is what the common law refers to as a restraint of trade. Restrictive covenants 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 competing with the former employer. GENERAL RULE: At common law, restraints of trade are contrary to public policy because they interfere with individual liberty of action and because the exercise of trade should be encouraged and should be free. The reason is because 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. EXCEPTION 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. Lord Macnaghten explains inNordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., [1894] A.C. 535:
Therefore, despite the presumption that restrictive covenants are prima facie unenforceable, a reasonable restrictive covenant will be upheld.
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | How do you determine the reasonableness of a restrictive covenant? | ||||||||||||||
| Answer: | As a general rule, according to Dickson J. in Elsley, at p. 925, the geographic coverage of the covenant and the period of time in which it is effective have been used to determine whether a restrictive covenant is reasonable. The extent of the activity sought to be prohibited is also relevant. However, for a determination of reasonableness to be made, the terms of the restrictive covenant must be unambiguous. The reasonableness of a covenant cannot be determined without first establishing the meaning of the covenant. The onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms. An ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity. As stated at the outset, the main difficulty that arises in this case is the ambiguity of the geographical restriction contained in the covenant. However, before turning to the case at hand, I will discuss the doctrine of severance as it applies to restrictive covenants in employment contracts.
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 | ||||||||||||||
| Question: | Is there a difference in the application of the law on restrictive covenants in employment contracts as against contract of sales? | ||||||||||||||
| Answer: | There is a big difference because of the greater freedom to contract between buyer and seller than between employer and employee. In Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., [1894] A.C. 535, Lord Macnaghten pointed out this difference and although his comments focused on apprenticeship, the same concept has been extended and applied to contracts of employment. At p. 566, he wrote:
This is supported by the observations of Lord Atkinson in the House of Lords’ decision of Herbert Morris, Ltd. v. Saxelby, [1916] 1 A.C. 688. 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:
Lord Ashbourne observed in Nordenfelt that the sale of a business often involves a payment to the vendor for goodwill and by these considerations, the custom of the business being sold is intended to remain and reside with the purchaser. At p. 555 he said:
Likewise, Dickson J. stated in Elsley v. J. G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at p. 924:
However, these same considerations will not apply in an employer/employee context. While employees may build up a relationship with customers, there is normally no payment for goodwill when the employee leaves employment. There is likewise an imbalance in power between employee and employer because the employer have access to greater resources while an employee may be at an economic disadvantage when litigating the reasonableness of a restrictive covenant. 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.
-- cited in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157
2009 SCC 6 (CanLII); 301 DLR (4th) 522; [2009] 3 WWR 577; 52 BLR (4th) 165; 70 CCEL (3d) 157; 87 BCLR (4th) 1 |
| Question: | Richardson Greenshields of Canada Limited (the broker) failed to sell, on behalf of Hongkong Bank of Canada (the bank), Government of Canada bonds having a face value of $10 million. The transactions that transpired are described below:
The trial judge assessed the bank's damages at $482,500 being the difference between the $9,762,500 which would have been received if the there had been a sale on April 9, 1987, and the $9,280,000 actually received on the sale of the bonds on April 23, 1987. The issue was whether the bank ought to have mitigated its damages by selling the bonds on an earlier date. If the bonds had been sold on Monday, April 20, the damages would have been $350,000; if they had been sold on Tuesday, April 21, the damages would have been $300,000; if they had been sold on Wednesday, April 22, the damages would have been $437,500. In other words, applying the law on mitigation, what is the correct assessment of damages in favor of Hongkong Bank of Canada? | ||||||||||||||||||||||||||||||||
| Answer: | General Rule in Breach of Contract Cases seen in light of the Principles of MitigationThe primary rule in breach of contract cases, that a wronged plaintiff is entitled to be put in as good a position as he would have been in if there had been proper performance by the defendant, is subject to the qualification that the defendant cannot be called upon to pay for avoidable losses which would result in an increase in the quantum of damages payable to plaintiff. The reference in the case law to a "duty" to mitigate should be understood in this sense. (Red Deed College v. Michaels, 1975 CanLII 15 (SCC), [1976] 2 S.C.R. 324) A plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is due to his own neglect. But the loss to be ascertained is the loss at the date of the breach. If at that date the plaintiff could do something or did something which mitigated the damage, the defendant is entitled to the benefit of it. Upon the plaintiff learning the true facts concerning his shared he had a duty to mitigate his loss "by selling his shares at once". (A.K.A.S. Jamal v. Moolla Dawood, Sons & Co., [1916] A.C. 175 (J.C.P.C from Burma) cited with approvalby the Ontario Court of Appeal in Burke v. Cory (1959), 19 D.L.R. (2d) 252) On Tuesday, April 21, 1987, Mr. Cathro clearly confirmed to Mr. Dalton that the position of the broker was that it has not agreed to purchase the bonds and that it accepted no liability for damages for the failure of the bonds to have been sold. There was ample time remaining on April 21 to have arranged for the sale of the bonds. They could have been sold within a few minutes. The bank did not lack knowledge of the market for Government of Canada bonds. It was not unfamiliar with the securities market. In other words, the bank should have acted with greater promptitude and sold the bonds on April 21, 1987, and should NOT have waited until April 23, 1987, by which date the market for the bonds had further declined. Hence, the bank's damages should be determined as of April 21, 1987. If it had sold the bonds on that date its loss would have been $300,000 and not $482,500.
-- see Hongkong Bank of Canada v. Richardson Greenshields of Canada Ltd., 1990 CanLII 857 (BC CA)
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