Common Law and Contract Law
 
By:
Duhaime & Company
Date:
05/19/2000


Summary of the Common Law and Contract Law


What follows is material prepared by Lloyd Duhaime, Barrister & Solicitor, of Victoria, B.C., in 1996.
This is not legal advice but is general legal information only.

If you need legal advice, you may contact Mr. Duhaime at lloyd@duhaime.org.
You will be required to pay for this service.

What follows is a general summary of the common law and equity principles on contract law. The law of Quebec,
contained in the Civil Code chapter on "Obligations", is very similar but, in some respects, different. For
example, consideration is not required for a binding contract in Quebec. Readers should also be aware that
significant codification and, in some cases, variation of these common law and equity principles has occurred
in individual common law provinces, mostly in sale of goods legislation (see, for example, British Columbia's
Sale of Goods Act). Throughout the articles of Duhaime's Canadian Contract Law Centre, references may be
made to B.C.'s Sale of Goods Act, to serve as examples. Also, there are several alternate sources for
Canadian contract law which are worth your visit. For example, see the Kingston, Ontario Queen's University
Contract Law Page.

Table of Contents

Introduction
Origin and relationship to tort
Privity of contract
Beware the "reasonable man"!
Consent
Children
Mentally-incompetent
Undue influence
Unconscionability
Consideration
Contracts "under seal"
Offer
Acceptance
Mistake
Rectification
Misrepresentation
Restraint of Trade Contracts
Assignment and Novation
Frustration
Interpretation of Contracts
Time Limits on Enforcing Contracts
Breach & Remedies


Part 1: Introduction and Origins

Introduction

Contract law, like so much of English-origin law, is sometimes described in lengthy legalese diatribe, from which it is no easy
task to excise a short, succinct and plain-language description. Consider, for example, the following definition we came across for "contract" in the Canadian Encyclopedic Digest:

"an agreement free from vitiating factors such as mistake or misrepresentation and constituted by the unconditional
acceptance of an outstanding offer involving a reasonably precise set of terms between two or more contractually competent
parties who intend to create mutual and reciprocal rights and duties that may be the subject of judicial sanction if they are
expressed in any required form, are free from the taint of illegality or immorality and are not subsequently discharged by
law, by agreement, by breach or by sufficient supervening circumstances."

Another clarification is in order. The description given in this document is indicative of the common law only. In many
jurisdictions, laws have been implemented which directly alter the common law. For example, the United States of America has a Uniform Commercial Code which codifies much of the contract common law, but also changes much of it. The contract common law still applies in the USA but only to the extent that it has not been changed by the Uniform Commercial Code or, in other words, hardly at all! In Australia, Canada, England and New Zealand, laws have been enacted to change the rules of contract common law in certain areas. For example, contract common law recognizes all contracts whether they are written or verbal. But a Statute of Fraud has been adopted in many common law countries which requires a written document for some contracts (eg. land contracts) (for more on the Statute of Frauds, see Part 7: Interpretation of Contracts). Consumer protection laws are in place in many jurisdictions as well. Therefore, what follows is the general rule of common law which applies only to the extent that it has not been changed by specific laws. Therefore, those readers with a real legal problem should be careful to additional research in their own jurisdiction to verify to what extent, if any, statutes have altered the following summary of contract common law. In addition, the Case Books summaries are those of the author only and may not convey doctrine which, to other readers, may have appeared important. Note also that case names may have been shortened.

Origin and relationship to tort

Contract law has come to us from common law and it is said that it is an offspring of tort law. Both contracts and torts give rise
to obligations. But tort obligations (ie. the obligation to indemnify for your negligence) are imposed by the law; it is not normally a choice one makes. Contracts, on the other hand, are a vehicle by which persons voluntarily create obligations upon themselves.

In some circumstances, you can contract your way out of tort liability. For example, the owner of a sporting event stadium or a
concert hall may have a disclaimer on the back of your ticket (a tiny contract but a contract nonetheless) which says that they cannot be held liable for any accidents on the premises. This is an attempt to contract out of tort liability. In addition, tort liability does not require consideration (see discussion on "consideration" below). It should also be said that the existence of a contract does not necessarily relieve a person of liability under tort law between the contracting parties, unless the contract specifically says so.

Central Trust Co. v. Rafuse (1987)
"Where concurrent liability in tort and contract exists, the plaintiff has the right to
assert the cause of action that appears to be most advantageous to him in respect of any
particular legal consequence" except where the effect of this "concurrent or alternative
liability in tort ... would be to permit the plaintiff to circumvent or escape a contractual
exclusion or limitation of liability for the act or omission that would constitute the
tort."

Sodd Corp. v. N. Tessis (1977)
A trustee in bankruptcy misrepresented the value of inventory of a furniture store he
was trying to sell. The purchaser relied on those statements in executing the contract of
sale. The court found that there was a "pre-contractual negligent misrepresentation
which induced the plaintiff to submit its tender, and the defendant's liability follows."

BG Checo International Ltd. v. British Columbia Hydro (1993)
Canada's Supreme Court recognized that the parties to a contract may "preclude the
possibility of suing in tort for a given wrong where there is an express term in the
contract dealing with the matter.... It is always open to the parties to limit or waive the
duties which the common law would impose on them for negligence." This distinction
made, the court then went on to review "three situations that may arise when contract
and tort are applied to the same wrong."

"Where the contract stipulates a more stringent obligation than the general law
of tort would impose. In that case, the parties are hardly likely to sue in tort."
"Where the contract stipulates a lower duty than that which would be
presumed by the law of tort in similar circumstances. The most common
means is ... a clause of exemption or exclusion of liability in the contract. The
duty imposed by the law of tort can be nullified only by clear terms.... In the
second class of cases, there is little point in suing in tort.... An exception might
arise where the contract does not entirely negate tort liability."
"Where the duty in contract and the common law duty in tort are co-extensive.
The plaintiff may seek to sue concurrently or alternatively in tort to secure
some advantage peculiar to the law of tort, such as a more generous limitation
period."

Promises are what contracts are all about. A contract is made up of a promise of one person to do a certain thing in exchange for
a promise from another person to do another thing. Contract law exists to make sure that people keep their promises and that if they do not, the law will enforce it upon them.

Contract law is based on several Latin legal principles, the most important of which is consensus ad idem, which means a meeting of the minds between the parties or, in other words, a clear understanding, offering and acceptance of each person's contribution. Lawyers say that it is from the moment of "consensus ad idem" that a contract is formed and may be enforced by the courts.

So a contract requires an agreement between the parties. But not all agreements are contracts. Non-business, religious, or
charitable agreements are not always contracts. The same has been said of family or household agreements (in one 1991 case, a casual arrangement between friends to share hockey tickets was held not to be a contract: Eng v. Evans). In fact, there exists a common law presumption against such agreements being contracts, although this presumption can be rebutted. Conversely, where an agreement issues from a commercial relationship, it will be presumed to be a contract.

An example of family agreements or situations not being construed as being contracts arose in Canada several decades ago. At
the time, there were no laws giving common-law spouses any rights to their spouses property even if they had been living together for a long time and both spouses had contributed to the growth of those assets. Rather than construe a contract out of the situation, the Canadian courts preferred using another mechanism, that of unjust enrichment, to resolve the unfairness.

Balfour v. Balfour (1919)
When a husband failed to pay a promised allowance, the wife sued. The court said
"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) arrangements which are made between husband and wife.
They are not contracts because the parties did not intend that they should be attended
by legal consequences. Each house is a domain into which the King's writ does not
seek to run."

Rose and Frank Co. v. J. R. Crompton and Bros. Ltd. (1923)
Two businessmen signed a document which read: "This arrangement is not entered
into, nor is this memorandum written, as a formal or legal agreement ... but it is only a
definite expression and record of the purpose and intention of the ... parties concerned
to which they each honourably pledge themselves with the fullest confidence, based
upon past business with each other, that it will be carried through by each of the ...
parties with mutual loyalty and friendly co-operation." The deal went sour and one of
the parties sued. The court: "It is quite possible for parties to come to an agreement by
accepting a proposal with the result that the agreement concluded does not give rise to
legal relations. The reason of this is that the parties do not intend that their agreement
shall give rise to legal relations. This intention may be 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."

Contract law is said to be a part of "private law" because it does not involve or bind the state or persons that are not parties to the contract. Some legal commentators have described contract law as a miniature legal system which persons establish between themselves; the contract becoming binding upon them as a sort of private and self-imposed law. Thus, contracts are voluntary and require an "exercise of the will of the parties".


Part 2: Privity, Consent and the "Reasonable Man"

Privity of contract

One sure sign of the personal nature of contracts is that no one but one of the parties can go to court and enforce the contract even if the contract was to operate to a third party's benefit. This is known as the "privity of contract" rule. There are exceptions to it (see also From The Case Books below):

Agents, or employees who obviously accept or offer a contract not in their own personal names but on another person's or a corporation's behalf. In these situations, the contract is said to be signed by an "agent". The person employing the agent is called the "principal" and the principal could sue or be sued under contracts entered into by his or her agent even though the principal did not sign the contract directly.

Another exception allowed under special laws is cheques and promissory notes (which are really just miniature contracts but contracts nonetheless). In these cases, enforcement rights are created by special laws between non-signatories as the cheque exchanges hands, from one bank to another or from one person to another.

Contracts that restrict or impact upon the use of land (eg. an easement) may be enforceable upon the next land-owner, even though they were not privy to the original contract. This is an old exception to the rule of "privity of contract" that is still applicable today.

The law of trusts, where a person may contract to the benefit of another, operates to convey certain rights to the third party even though, in fact, this third party was not party to a contract which created the trust.

Tweedle v. Atkinson (1861)
"No stranger to the consideration can take advantage of a contract, although made for his
benefit. Consideration must move from the person entitled to sue upon the contract." This
is the case most commonly cited as at the origin of the rule that a person not party to a
contract cannot sue under it.

Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915)
Dunlop sold its tires to a wholesaler on the condition that they were sold to retailers who
agreed to sell at the specified prices. Selfridge was one such retailer and they sold at prices
below the specified prices. There appeared to be no privity of contract between Dunlop and
Selfridge. The court also noted that there was no consideration flowing from Dunlop to
Selfridge so it was not possible for Dunlop to enforce against Selfridge.

Beswick v. Beswick (1966)
A nephew bought out his uncle's coal business. One of the terms was that the nephew
would pay support to the uncle's wife upon the uncle's death. When the uncle died, the
nephew reneged. The widow sued. The widow was able to sue, not personally, but as
executor of the uncle's estate and on his behalf (the uncle, of course, having been a party to
the contract). "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."

Vandepitte v. Preferred Accident Insurance Co. (1933)
"A party to a contract can constitute himself a trustee for a third party of a right under the
contract and thus confer such rights enforceable in equity on the third party. The trustee
then can take steps to enforce performance to the beneficiary by the other contracting party
as in the case of other equitable rights. The action should be in the name of the trustee. If,
however, he refuses to sue, the beneficiary can sue, joining the trustee as a defendant....
The intention to constitute the trust must be positively affirmed; the intention cannot
necessarily be inferred from the mere general words of the (insurance) policy."

McCannell v. Mabee McLaren Motors Ltd. (1926)
In this case, the issue was the extent to which a contract between a car manufacturer
(Studebaker) and a dealer could be enforced by another dealer, with exactly the same
contract with the manufacturer. The court decided that the manufacturer was "the agent of
the several dealers to bring about privity of contract between them. The consideration is not
moving from the company to the dealer, but from one dealer to another." The court based
its opinion on the fact that the contract between the manufacturer and each dealer was
exactly the same. Nor was the court swayed by the absence of an express designation to
the effect that the manufacturer was the agent of the dealers. "The function which he (the
manufacturer) fills in bringing the parties together and their recognition of the relationship
which his efforts have created is the test of agency."

New Zealand Shipping v. A. M. Satterthwaite & Co. (1975)
A stevedore damaged a drill and was sued by the consignee. The stevedore objected to the
liability suit because it was not taken within a year of the damage as required by the bill of
lading. The court decided that the limitation in the bill of lading was available to the
stevedore, that the stevedore was a party to the bill of lading: "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 services by discharging the goods. The performance of
these services for the benefit of the appellant should have the benefit of the exemptions and
limitations contained in the bill of lading."

London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992)
A transformer belonging to London Drugs was stored by the defendant, a storage
company. Their contract had a liability clause limited to $40. When two employees of the
storage company, through their negligence, damaged the transformer to the tune of
$33,955 of damages, London Drugs sued them personally, for the whole amount. The
employees sought to invoke the liability limitation clause. Canada's Supreme Court
recognized that the privity of contract rule prevented beneficiaries from enforcing a
contract to which they were not a party. To this, the court made an outright exception in the
case of employees. "An employer such as Kuehne & Nagel performs its contractual
obligations with a party such as the appellants through its employees. As far as contractual
obligations are concerned, there is an identity of interest between employer and employee."
The court then set two conditions allowing "employees (to) be entitled to benefit from a
limitation of liability clause found in a contract between their employer and the plaintiff: ...
(1) the limitation of liability clause must, either expressly or impliedly, extend its benefit to
the employee(s) seeking to rely on it; and (2) the employee(s) 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 when the loss occurred."


Beware the "reasonable man"!

Another important feature of the law of contract is that where there is a dispute as to whether or not a contract exists, the courts will assess the situation not from the perspective of the parties, but from the perspective of a "reasonable man". In other words, the judge will want to decide if, given all the circumstances, a "reasonable man" would believe there to be a contract. An 1871 English case, Smith v. Hughes, summarized this principle as follows:

"If whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to
terms proposed by the other party and that other party, upon that belief, enters into a contract with him, the man thus conducting himself would be equally bound as if he had agreed to the other person's terms."

Theoretically, then, both parties could deny having entered into a contract but if a third party brought them to court and asked the court if there was a contract, the judge could decide that there was one based on this objective standard.

In the real world, mere conduct will rarely cause a judge to "make" a contract between the parties. This is particularly true if some type of written document has been prepared or exchanged between the parties. Rather than invent a contract, the judges would then take any written document between the parties and try to make sense of it given it's wording, rather than suppose terms. A 1978 Canadian case (Marquest Industries Ltd. v. Willows Poultry Farms Ltd.) sets out the principle as follows:

"... if the real intention of the parties can be collected from the language within the four corners of the instrument, the Court must give effect to such intention by supplying anything necessarily to be inferred and rejecting whatever is repugnant to such real intention so ascertained."

Furthermore, where a key element of the contract has not been negotiated between the parties, then it makes more sense to conclude that there was no contract rather than a court trying to fill in such a huge blank. Such a situation might be an "agreement in principle," but not a contract (see also Interpretation of Contracts below). Letters of intent are not normally held to be binding.

R. Cae Industries Ltd. (1986)
A memorandum signed by three federal ministers was held to be a contract even though it was
somewhat vague. For example, the contract provided that the government would make "best
efforts". The court repeated the principle that the onus of proof is on the person who asserts that
no legal effect is intended, and the onus is a heavy one and that the courts "should make every
effort to find a meaning in the words actually used by the parties in deciding whether an
enforceable contract exists."

Nicolene Ltd. v. Simmonds (1953)
A clause to the effect that "the usual conditions of acceptance apply" was held to be so vague
and uncertain as to be incapable of any precise meaning. The court then severed the clause "but
the contract, nevertheless, remains good."

Hillas and Co. Ltd. v. Arcos Ltd. (1932)
If there are essential terms of a contract of sale undetermined and therefore to be determined by
a subsequent contract, there is no enforceable contract. An agreement to make an agreement is
not enforceable. But if the uncertain parts can be construed from the context of the agreement,
the contract will be binding.

May and Butcher v. R. (1929, reported in 1934)
"An agreement between two parties to enter into an agreement in which some critical part of the
contract matter (eg. price) 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 future agree upon a matter which is vital
to the arrangement between them and has not yet been determined."

Foley v. Classique Coaches Ltd. (1934)
The issue of price was omitted from a contract that nevertheless ran for three years without a
hitch. When the defendants tried to buy petrol elsewhere, basing their argument that the
exclusivity contract was void for lack of agreement on price, the court disagreed. Each case is
decided on its own merits and for three years, both parties believed they had a contract. The
court implied into the contract a clause to the effect that the petrol was to be of reasonable price
and quality.

Courtney and Fairbairn Ltd. v. Tolaini Brothers (1975))
For a building contract, the absence of agreement on price or a method by which the price is to
be calculated (not dependent on the negotiations of the two parties themselves) means the
absence of an essential term and there is no contract. A contract to negotiate, like a contract to
enter into a contract, is not a contract known to law.

Sudbrook Trading Estate v. Eggleton (1983)
An agreement to purchase property set up a system for determining the price "not being less
than £12,000" involving consultation with assessors appointed by each party. The court decided
that this was a valid contract. "The parties intended that the lessee should pay a fair and
reasonable price to be determined as at the date when he exercised the option."

DeLaval Co. v. Bloomfield (1938)
The contract provided for a total payment of $400, "$200 on November 1, 1937 balance to be
arranged." The court rejected the defence that the contract was void for lack of certainty. "In the
present case, it is not the price but the mode of payment only that is held over."

Empress Towers Ltd. v. Bank of Nova Scotia (1991)
A tenant and landlord had a renewal contract that provided for a rent of "market rental prevailing
... as mutually agreed. If the Landlord and the Tenant do not agree upon the renewal rental
within 2 months ... then this agreement may be terminated." The landlord submitted an
outrageous increase including a sum payable of $15,000. The court was asked if the renewal
clause was void for uncertainty and decided that it was not. The court decided that the contract
used the words "mutually agreed (which) carries with it an implied term that the landlord will
negotiate in good faith .... and ... that agreement on a market rental will not be unreasonably
withheld."

Meyer v. Davies (1989) deal struck by phone
In this British Columbia case, two lawyers had exchanged correspondence related to the sale of a
law practice. One of the letters had concluded: "please call me ... so that we can arrange to draw
up a formal agreement." During a subsequent phone call, the lawyers reviewed and agreed on
outstanding issues. Offering to complete and courier the documents for immediate signature
before the vendor left for vacations, the vendor said "Don't worry about it ... deal with it when I
get back." The court decided that at this moment "a bargain was struck." Quoting precedents, the
case states: "if the documents ... relied on as constituting a contract contemplate ... a further
contract between the parties, it is a question of construction whether the execution of the further
contract is a condition or term of the bargain, or whether it is a mere expression of the desire of
the parties as to the manner in which the transaction already agreed to will in fact go through. In
the former case there is no enforceable contract either because the condition is unfulfilled or
because the law does not recognize a contract to enter into a contract. In the latter case there is a
binding contract and the reference to the more formal document may be ignored."

Knowlton Realty Ltd. v. Wyder (1972)
"If we are successful in negotiating a lease on your behalf on terms acceptable to you, we will be
entitled to a commission." But the lease was never fully executed, just an interim agreement
"subject to execution of the lease documents." Where the words similar to "subject to contract"
appear, they indicate a conditional offer or acceptance only. The court decided that "the event on
which commission became payable never occurred."


Many provinces have sale of goods legislation which provides that a contract for the sale of goods is valid even though no price has been agreed, in which case "the buyer shall pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case." These provincial laws also deal with problems associated with third-party valuations and warranties which are implied in sale of goods cases such as "quiet possession", "free from any charge or encumbrance" and, where representations have been made, that the goods are "durable for a reasonable period of time."

"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 ... the buyer must pay a reasonable price. What is a reasonable price is a question of
fact dependent on the circumstances of each particular case." {Section 12 of B.C.'s Sale of Goods Act.}

Consent

As noted above, a contract involves a "meeting of the minds". For this, all parties must be capable of consent.

It is a common feature of corporation legislation to give companies the ability to contract, as long as their contracts are within the scope of their stated purpose. To get around this, many companies make sure their incorporation documents are very generally worded so as to prevent any restriction on their ability to contract.

With mentally-challenged persons, the contract may be void or voidable at the minor's or mentally-challenged person's option. With children, contracts can be voided at their request if they are not beneficial to the child. One exception exists and that is a contract for necessaries of life. The rule was stated in a 1925 case, Miller v. Smith & Co., in which the judge said an " infant may bind himself to pay for his necessary meat, drink, clothing, medicines and likewise for his teaching or instruction." Remember also that if a minor ratifies a contract upon reaching the age of majority, he or she is then bound to it.

The situation is different with regards to a person judicially declared to be mentally incompetent. Here, the contract is voidable at the option of the incompetent person if the other party knew about the mental incompetency or ought to have known under the circumstances. Again, an exception is made for contracts for the delivery of necessaries of life for which even a mentally incompetent person would be liable.

A totally drunk person also lacks the ability to consent to a contract and has the option of voiding a contract signed while intoxicated, providing it is done at the earliest opportunity upon sobriety.

"Capacity to buy and sell is regulated by the general law concerning capacity to contract, and to
transfer and acquire property; except that where necessaries are sold and delivered to a person who by
reason of mental incapacity or drunkenness is incompetent to contract, he must pay a reasonable price
for them. Necessaries ... means goods suitable to the condition in life of the person, and to his
actual requirements at the time of the sale and delivery." {section 7 of B.C.'s Sale of Goods
Act.}

A contract accepted under threat of physical, mental or economic harm, may be voided by the party so threatened. Acceptance must be freely given. The same is true for contracts entered into between persons in a relationship of power imbalance. The law calls this "undue influence" and it will be presumed in some cases such as parent-child, trustee-beneficiary or doctor-patient contracts. The case law offers two varieties of undue influence. Duress is a common law doctrine and, technically, includes the element of compulsion. Contracts executed under duress are voidable. Undue influence per se is an equity remedy and involves the "unconscientious use by one person of power possessed by him over another in order to induce the other to enter a contract. Duress falling short of the common law requirements may also constitute undue influence in equity (Brooks v.
Alker 1975 DLR 577).

Gordon v. Roebuck (1992)
It was suggested that a contract between lawyers be set aside on the grounds of economic duress. The court
assessed the facts based on the four tests first put forward in the Pao On v. Lau Yiu case (also summarized
in From The Case Books, page 3 of the Canadian Contract Law Centre). Did the party claiming economic
duress protest? Was there an alternative course open to him? Was he independently advised? After entering
the contract, did he take steps to avoid it? The judge concluded that there was economic duress but then went
on to say that "the appellant, in claiming unjustifiable economic duress, had the onus of proving that (the
defendant) was not entitled to the amounts required under the impugned agreement." This was a matter of
evidence and the onus having not been satisfied, "the agreement was not one which could be set aside as one
executed under unjustifiable economic duress."

Geffen v. Goodman Estate (1991)
The Supreme Court of Canada reviewed a case from Alberta where a trust was set up by a "manic depressive
and immature" woman. She went to see a lawyer recommended by her brothers to set up a trust. After her
death, her son was not happy with the trust and tried to have it set it aside arguing that his mother was
unduly influenced by either the brothers or the lawyer. The Supreme Court refused to buy the argument and
allowed the trust to stand. The Court was unable to agree on some fundamental principles but the following
is what Justice Wilson came up with: a presumption of undue influence can arise in certain relationships;
each relationship must be looked at individually; the existence of confidentiality between the parties is not a
absolute requirement; a presumption of undue influence arises between parent/child and solicitor/client; in
commercial transactions, undue disadvantage or benefit must also be shown; that once the presumption
exists, it must be rebutted with evidence that the transaction was entered into "as a result of his own full free and informed thought." Justice La Forest refused to endorse Wilson's "commercial transaction" dicta,
saying that this case did not even involve a commercial transaction. La Forest noted that the deceased had a
"deep-rooted poor relationship" with her brothers which tended to negate the suggestion of undue influence.


Another category of contract situations where consent seems to be fatally affected are what the law calls "unconscionable" contracts. This is a slippery area of the law which suffers from a lack of judicial unanimity. In essence, the theory is that the court will rescind contracts which are totally unfair and, while just short of being fraudulent, are considered "unconscionable." Although legal academics try to do so, it is difficult to intellectually differentiate this from the theory of undue influence discussed above because, in both cases, it deals with a power relationship imbalance and the taking advantage of this imbalance. Also, opening up the flood-gates of judicial review of contracts on the grounds of "unconscionability" could
result in a plethora of contracts being brought to court as every person who had improperly negotiated a contract would seek judicial relief. Luckily, many provinces of Canada have enacted consumer protection legislation which allows the cancellation of consumer contracts within a certain time. This legislation was designed to cover most of the situations that the contract common law claim of "unconscionability" might have alleviated.

Morrison v. Coast Finance Ltd. (1965)
A 79-year old widow was induced into mortgaging her home to allow two men to buy cars.
"Undue influence attacks the sufficiency of consent ... that a bargain is unconscionable invokes
relief against an unfair advantage gained by an unconscientious use of power by a stronger party
against the 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 these circumstances, it creates a presumption of fraud which the stronger
must repel by proving that the bargain was fair, just and reasonable." The court held the finance
company responsible because they "undertook the preparation of the documents" and took
"advantage of her obvious ignorance and inexperience to further their respective business"
raising a presumption of fraud. The mortgage was set aside.

Marshall v. Canadian Permanent Trust Company (1968)
According to doctors, John Walsh was "definitely not capable of transacting business" having
just suffered a stroke. This did not stop Marshall from seeking and obtaining his signature on an
offer to purchase Walsh's land. Two months later, Walsh's affairs were formally turned over to
the administration of Canadian Permanent Trust, appointed under provincial mentally
incapacitated persons legislation. The trust company refused to close the deal arguing that it was
unconscionable. The court said there were two criteria to be met: "(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 (Marshall) to show that the price given for the land corresponded to
its fair value." The plaintiff succeeded on both accounts and the contract was rescinded.

Lloyds Bank v. Bundy (1975)
In this British case, an old farmer mortgaged his farm to the hilt to help out his son and soon
enough, the bank moved in to foreclose. The court acknowledged that "in the vast majority of
cases a customer who signs a bank guarantee or a charge cannot get out of it. There are many
hard cases which are caught by this rule.... Yet there are exceptions.... where the parties have not
met on equal terms." The court went on to mention that cases of duress of goods are voidable;
when a party is taken advantage of because of a desperate need of the goods. And then there was
the "unconscionable transaction ... when a man comes into property - and then being in
urgent need - another gives him ready cash for it, greatly below its true value.... Even though
there is no evidence of fraud or misrepresentation, nevertheless the transaction will be set aside."
The third category is undue influence where a relationship gives some advantage. Then there
are the cases of undue pressure and the salvage agreements (the latter when a vessel is in
danger of sinking .. and the rescuer takes advantage of his position). The court suggested that all
these instances "run on a single thread: inequality of bargaining power" and that "undue" does
not mean wrongdoing nor "that every transaction will be saved by independent advice but the
absence of it may be fatal." The court then concluded that the bank had a relationship of
confidence with the farmer, a conflict of interest and by failing to suggest that he seek
independent advice, the court disallowed the foreclosure action.

Harry v. Kreutziger (1978)
A fishing boat was sold in a high pressured bid by the defendant. When "a claim is made that a
bargain is unconscionable, it must be shown for success that there was inequality in the position
of the parties due to 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." The court then proceeded to rescind the contract
because the "appellant was so dominated and overborne by the respondent that he was ... within
the power of the respondent in these dealings." Another judge hearing the case agreed but for
slightly different reasons, invoking "community standards of commercial morality." Both
principles prosper in Canadian case law.

This information is provided as a public service by the Victoria, British Columbia law firm of Duhaime & Company.
Duhaime & Company is a full service law firm.

Copyright 1996 Duhaime & Company, Victoria, British Columbia. All rights reserved.


Source:
Duhaime & Company
URL:
http://www.duhaime.org/ca-con1.htm
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